Beige Book Report: Cleveland
August 3, 1987
Summary
Economic activity in the Fourth District has changed only slightly
from the last report. The region's economy continues to grow at a
very conservative pace. Increases are reported in production and new
orders, but employment is down and inventories are up. Retail sales
continue to grow but at a slower pace than during the previous
month. New housing starts are higher, even though mortgage rates
continue to rise. Demand for consumer and commercial loans has
weakened.
Retail Sales
Retail sales grew at a slower pace in June than in the previous
month. Most of the sluggishness appears to be in hard goods, which
is partly attributable to a drop in housing sales earlier in the
year. Another factor is that consumers appear to be reaching the
limit of their debt capacity. Some retailers report an increase in
delinquency rates, while others note a leveling of credit use. Sales
of soft goods continue to expand. Some retailers note that
inventories are starting to build. However, due to the initially low
inventory levels, few retailers foresee any need to liquidate
inventory in the near future. Price increases are generally expected
to be modest (2 to 3 percent per annum), although import quotas
could provide additional upward pressure on prices.
Domestic auto sales in June are reported to be as much as 40 percent below sales a year ago. Dealers blame sluggish sales on confusing incentive programs, weak real income growth, and the prospect of better deals to come. Foreign auto dealers also report slow sales.
The slowed pace of import sales combined with added production capacity in the U.S. has pushed inventory levels well above those of previous years.
Labor Markets
Total employment in Ohio increased by 44,100 in May. However, an
increase in the civilian labor force of 71,000 over the month pushed
the unemployment rate from 7.2 percent in April to 7.9 percent in
May. The national rate was unchanged at 6.3 percent.
Increases in nonmanufacturing sectors offset continued losses in manufacturing. Retail trade and services accounted for over half the total increase in employment. Much of this increase was seasonal as vacation-related businesses prepared for the summer months. For instance, eating and drinking establishments and amusement and recreation services registered the largest increases.
Manufacturing lost 2,600 jobs over the month, half of which were in primary metals. Electrical and electronics equipment and transportation equipment also experienced sizable job losses. The average workweek edged up slightly to 42.5 hours, helping to raise average earnings of production workers by $4.69 over April's earnings.
Manufacturing
A survey of purchasing agents in Ohio indicates that business
continues to improve at a conservative pace. Positive signs include
increases in production and new orders. Of particular note are
increases in the production of heavy trucks and military orders and
in the outsourcing of machinery work. On the negative side,
inventories and prices are higher, employment lower, and the backlog
of orders has fallen off.
Raw steel production in Ohio fell by 8 percent last month. Despite this recent downturn in production, several major steel producers in the area have reported positive quarterly profits for the first time in several years. They attribute their healthier financial standing to the gains in productivity from reducing employment, closing inefficient facilities, and upgrading more efficient ones.
Domestic automobile production in the region is substantially lower this period, compared to the same period a year ago. Among the Big Three producers, scheduled output will drop by 15.3 percent at GM, 4.3 percent at Ford, and 17.5 percent at Chrysler. Since transportation equipment production is heavily concentrated in Ohio, these cutbacks should have a large impact in the region. Somewhat offsetting domestic cutbacks is the continued expansion of production facilities of foreign manufacturers in the area. For instance, Honda recently announced a $450 million plant expansion project at its Anna, Ohio plant, which will enable Honda to produce 360,000 motorcycle and auto engines a year.
Housing
Housing starts in the region were 14 percent higher in May than in
the previous month. Home mortgage rates have edged up slightly over
the past month to close to 10 percent for 30-year fixed-rate loans.
Nonetheless, many developers are optimistic that housing starts in
the region will continue to grow as the major urban areas continue
to recover and relatively inexpensive land remains available.
Banking District loan demand has weakened in the last month. Total loans outstanding at large banks fell at an annual rate of 15 percent over the last five weeks, following a slight decline in May. Commercial and industrial loans continued to account for the majority of the loan contraction. In addition to the softness in business loan demand, consumer and real estate lending have tapered off considerably. After increasing at a rapid clip in May, consumer installment and real estate loans outstanding fell at annual rates of 14 percent and 6 percent, respectively, over the last five weeks.