Beige Book Report: Cleveland
June 21, 1989
Summary
Most of the forecasters who attended the latest meeting on the
economic outlook at this Bank still expect a slow growth path in
output accompanied by a 4.5 percent rate of inflation well into
1990. District respondents report strengthening in retail sales in
May, although auto sales were less than expected. The pace of
manufacturing appears to be slowing. Interest rates are generally
expected to ease further.
Economic Prospects
Economists who attended the quarterly meeting of the Fourth District
Economists' Roundtable on June 2 still expect a soft landing for
1989-90. The 27 forecasters, who represent industry, trade and
financial institutions inside and outside this district, expect a
1.5 percent growth rate in output into mid-1990, a little less than
they expected at last February's meeting, and a step-up to a 2.5
percent annual rate of increase in the second half of 1990.
Individual forecasts range from a supply-constrained 2.5 percent
growth rate in output to a mild recession beginning in 1989. A few
expect a recession, beginning this quarter or next, similar to the
mild recessions in 1960-61 and 1969-70.
A common thread in most of the forecasts is the persistence of inflation at about an annual average rate of 4.5 percent through the end of 1990. A concern expressed by some of the group is that the rate of inflation will not slow once it builds, and that it will not easily slow unless there is some slack in the economy. Therefore, an issue raised by discussants is whether there is greater cost if the inflation rate climbs to 6% or if the unemployment rate climbs to 6%. Some felt that policy risks must be taken now to lower the inflation rate; otherwise, inflation will build in the absence of slack. A few also cautioned that an easier monetary policy would risk accelerating inflation in a full employment economy.
Consumption
Two large retailers report their sales in Ohio rebounded in May and
that gains are apparently continuing into June. One reports a
sizable year-over-year increase in sales, except for weak sales of
home electronics and appliances. Another retailer reports a better
May, including sales of home electronic products, which may be more
competitively priced because of alternative overseas sourcing when
Japanese import prices rose rapidly. That retailer reports high
inventories and plans to aggressively promote sales in order to cut
stocks. A retail trade economist expects real consumer spending will
increase less than 2% this year. His studies show interest rates now
have little effect on consumer spending for either durable or
nondurable goods.
Auto retailers describe consumer responses to the latest round of incentives as lackluster and worse than expected. Incentives initially boosted new car sales but consumer interest since then has waned. Dealers generally complain of squeezed profit margins partly because of interest costs on unsold inventories, which have also resulted in some dealers offering cars at about cost. Dealers contacted expect that their orders for 1990 models will be conservative because of a likelihood of high inventories of 1989 models going into the new model year.
Manufacturing
Orders and production generally remain strong, although some easing
from full capacity levels is reported, in part because of summer
vacations. Purchasing agents in Cleveland and Cincinnati report a
reduced pace both in manufacturing activity and commodity price
increases. Some also report slower growth in exports.
Capital goods respondents report that business remains strong and has been unaffected by interest rates. One producer expects business spending for durable equipment to be only slightly less this year than last. He expects that capital stock will increase faster than industrial output this year, thereby easing pressure on operating rates and on producer prices. Another producer reports no let up in orders for electrical equipment. Prices might increase a little more this year despite ample capacity as producers attempt to recover some of the higher costs of copper and aluminum. A machinery producer reports production schedules for domestic purchasers are leveling out, availability of materials is improving, and price pressures are showing some signs of easing.
Steel producers also note some let up in activity from consumer durable and capital goods producers. Summer vacations, auto changeovers, and some softening in demand for steel are expected to reduce steel shipments next quarter from this.
Financial Developments
Several respondents believe that the peak in short-term interest
rates for this year will be in the second quarter, and one bank
economist expects that the funds rate could move downward to 9
percent by yearend. Some respondents cautioned, however, that
interest rates could rebound if premature easing by the Federal
Reserve were to result in stronger economic growth and further
acceleration in prices.
Some banks report that loan demand surged in May, despite higher interest rates, and speculated that business loans were being used to finance inventories. The latest decline in the prime rate is not expected to change loan activity much, even though loans tied to the prime rate will also be adjusted slightly downward. Some mortgage lenders and a producer of household appliances expect that recent declines in mortgage rates, which may result in a better-than- previously-expected level of housing sales and starts.