Beige Book Report: Cleveland
November 1, 1989
Summary
Economists who attended this Bank's outlook meeting on October 20
expect that growth of output will be sustained at least through the
end of 1990, accompanied by very little moderation in inflation.
Retailers are cautiously optimistic over sales for the balance of
this year. They note consumers are highly responsive to sales
promotions, which supported apparel and new car sales in recent
months. Reports from capital goods firms suggest easing from peak
rates of activity early this year. Growth of bank loans continues to
be relatively slow, and some respondents view the latest easing in
the federal funds rate as being too accommodative, but probably not
enough to result in a reduction in bank lending rates.
Economic Prospects
Economists who met at this bank recently to discuss the economic
outlook for 1990 still expect that the economy will continue to grow
at below its potential growth rate through most of next year, but
the rate of inflation will hardly improve from this year. The 25
forecasters expect real GNP growth this quarter at about a 1.4%
annual rate (a.r.), at a 1.7% a.r. in the first half of 1990, and at
2.5 percent in the second half. The GNP implicit price deflator is
expected to increase at a 4.5% a.r. this quarter, 4.2% in the first
half of 1990, and 4.0% in the second half. Several of the group
asserted that it is difficult to achieve a lower inflation rate
because of regulations that contributed to rapid increases in
services prices. The output and price outlooks were virtually
unchanged from June, except that there appeared to be more
uncertainty over the outlook now than last June. Only two
forecasters still expect a mild contraction in 1990, while the few
who previously expected a contraction now expect mild growth in
output through 1990. The latest drop in stock prices was judged to
have little, if any, negative effect on consumer or business
spending.
Consumer Spending
Most retailers appear cautiously optimistic about sales prospects
for the balance of this year. They pointed out that the better-than-
expected retail sales in recent months were not across-the-board.
Retailers noted the sensitivity of consumer spending to sales
promotions, which stimulated sales of apparel and new cars in recent
months. A national retailer reported year-to-year sales increases in
consumer appliances, but only because of aggressive pricing that
apparently weakened sales of a regional chain of appliance stores. A
national retail chain plans much larger inventories for this holiday
season than last year.
Retailers of domestic and imported new cars reported mixed consumer behavior in August and September. A few dealers of domestic cars reported their sales in September were "very good," which greatly improved their inventory position. A few other dealers, however, reported flat sales and price incentives were insufficient to reduce their inventories. October sales so far have been lackluster, and most auto dealers appear reluctant to carry large inventories of 1990 models.
Capital Goods
Producers of both high-tech and traditional capital goods producers
reported either a slower growth or outright declines in orders and
production in recent months. Orders for office machinery have fallen
from both export and domestic customers, according to a major
producer. A materials supplier to the electronics and office
equipment industries reported that the decline in orders appears to
have leveled out, although orders have not turned up yet. Their
operating rate has been reduced by about 5 percentage points from
last year. A high-tech producer of industrial controls reports that
orders and shipments last quarter were the best so far this year,
partly because of new products and also because of a catch-up in
deliveries from earlier this year, when shortages of computer chips
caused shipment delays. Declines in orders for communication
equipment since mid-1988 apparently ended, but further declines for
electronic components are expected into 1990, according to another
producer.
Some traditional capital goods producers report a more-than-expected slowdown in business. Construction machinery sales have been slackening in response to weakening in residential and nonresidential construction. Heavy-duty truck orders, which were at peak levels late last year and early this year because of anticipated price increases, slumped during the summer months and did not revive in September as much as expected, suggesting a relatively soft first quarter production schedule.
Financial Conditions
Bank directors and economists generally report slow demand for
loans, although loans at a moderate-size bank rose 9% last quarter
from a year earlier. Bank profits last quarter ranged from
satisfactory to very good, according to bank respondents. A bank
economist commented that the Federal Reserve has been very
accommodative in response to the latest stock market decline. The
easing in the federal funds rate was interpreted by one economist as
inconsistent with bringing the inflation rate down. In his view,
interest rates are unlikely to come down much until the inflation
rate is reduced. Some bank economists expect that bank lending rates
not be adjusted downward until the fed funds rate eases to about
8.5%.