‹ Back to Archive Search

Beige Book Report: Cleveland

August 9, 1989

Summary
Fourth District panelists generally do not expect a cumulative decline in economic activity this year, although a few believe real GNP could decline this quarter. Many also believe that a soft landing will not reduce the core inflation rate. They expect sluggishness in consumer spending to continue this half. Traditional capital goods producers are still operating at high levels, although softening in some industrial markets is occurring. Also, steel activity is easing. Still-lower interest rates are expected to revive overall economic activity.

Output and Inflation
The consensus view among District respondents is still that real GNP growth will average about 1 percent to 1.5 percent over the next few quarters. Nevertheless, a few believe that the odds for a recession have increased in recent weeks. They expect that real GNP will either slightly increase or decline this quarter, but do not expect a cumulative decline in overall economic activity. A few others still believe that real GNP growth will average about a 2 percent annual rate this half.

Most of the respondents doubt that a soft landing will succeed in reducing the inflation rate. They expect that inflation will remain sticky in a 4.5 percent to 5 percent range, even though the growth rate of real GNP is expected to be below the growth rate of potential output for the next several quarters. Most expect that inflation in the second half of 1989 will be less than in the first half because of improving supplies of farm products and energy. An energy economist expects petroleum prices will ease in the second half, and that crude oil prices will fall to the low end of an $18 to $20 per barrel range. All but two respondents believe that a 4.5 percent inflation rate is too high and are concerned that further easing in interest rates might revive economic growth and fuel accelerating inflation.

Consumer Outlook
Producers of consumer goods and retailers generally expect continued sluggishness in consumer spending during the second half. Some expressed a view that the slowdown in consumer spending in the first half was not an aberration, and that continued slow growth in the second half will lead to extensive financing incentives by auto producers. An auto producer expects domestic new car sales to fall to about a 6.5 million annual rate this half, and a tire producer expects a relatively flat volume of sales and production of tires.

A major retailer expects real consumer spending will increase at about a 1.5 percent annual rate this half, and that more "specials" will be offered in order to stimulate sales.

A major appliance producer expects sluggishness in consumer spending for major household goods in the second half in response to the softening in housing. He also noted no favorable consumer response yet to the decline in mortgage rates.

Capital Goods
Traditional capital goods producers report continued high levels of production for most types of machinery and equipment, although easing in orders has occurred in some industrial markets. Demand from the electric utility industry shows no letup, lead times have not changed much, and prices are holding firm. Demand for some types of standard industrial equipment has softened, possibly because of seasonal factors. A producer of small motors expects that second- half business will not be quite as strong as in the first half. He expects that even with a real GNP growth rate of 1 percent to 2 percent over the next few quarters, capital goods will grow at twice that rate. Bearing orders from some capital goods producers, especially machine tool builders, have slowed, and the number of bearings still on allocation has shrunk.

Steel producers foresee a larger than seasonal decline in their business during the third quarter, mostly because of production cutbacks in the auto industry. They believe that the boom in steel is over. Flat-rolled steel products remain on allocation by at least one major producer, although conditions are not as tight as they were earlier this year. Another producer removed all steel from allocation. Second-half steel shipments and production are expected to soften from the first half.

Financial Conditions
Bank and financial economists expect further declines in interest rates this summer. Lower rates so far have not had an effect on loan demand, although most lending rates have not fallen much. However, a bank economist expects that lower mortgage rates, now common at about 9.5 percent for a 30-year fixed-rate mortgage, will soon begin to stimulate demand for mortgages. Lower interest rates later this summer are expected by some of the economists to revive economic growth in a 2 percent to 3 percent range. The recent surge in demand deposits was described by one bank economist as due largely to rebuilding of compensating balances by their business accounts.