December 6, 1989
District respondents are guardedly optimistic that aggressive sales promotions during this holiday season will boost sales about 5 percent to 6 percent from a year ago. Manufacturing output in Ohio has begun to ease recently, following stronger than national growth in production through most of this year. Some financial market participants believe the run-up in the federal funds rate to 8 1/2 percent will delay a prime rate reduction, and that relatively small interest rate reductions would not do much to stimulate demand.
Consumer Spending
Both producers and retailers of consumer goods believe that the
slowdown in consumer spending is largely in new car sales. They
believe that weak auto sales are not a symptom of a contraction in
consumer spending, and that consumers will respond to price
incentives that should boost sales of both automotive and
nonautomotive goods.
Post-Thanksgiving Day sales were generally reported as "good" as last year, although a national chain reported their sales rose less than last year. A retailer reported that promotions so far have been larger than usual. Retailers expect about a 5 percent to 6 percent increase in sales this holiday season from last. Generally good sales have cut inventories to levels still higher than last year. Excess dealer inventories of major household appliances were apparently corrected during the summer months, and orders from dealers improved in both September and October, although at levels below last spring.
Economists with the auto industry report somewhat weaker-than- expected new car sales, and that the "payback" period following high incentives of recent months may be longer than they expected. Price increases of 1990 domestic models, partly reflecting added safety features, have made some imports less expensive than domestic models, and incentives on 1990 models are considerably smaller than recent incentives for 1989 models. Another large buildup of new car inventories in November has led most analysts to expect a wave of price incentives beginning in the next few weeks.
New car dealers report that overall sales have slowed especially in November, but foreign makes have fared better than Big Three lines. Toyota dealers have experienced shortages of their more popular models, primarily the Toyota Camry this fall. Sales of 1990 models have been comparatively slow also, and buyers still exhibit a preference for foreign cars.
Dealers report that consumers continue to perceive foreign models as superior in quality to Big Three cars, although that perception may be waning. They report fewer trade-ins of domestic cars for their dealerships' foreign models, and an increase in the number of foreign-to-domestic trade-ins.
Most dealers do not expect sales for 1990 models to improve until broader and/or more generous buyer incentives are offered by the manufacturers. They report that, to date, incentives on 1990 models have trended more toward dealers' incentives, which apparently lack the advertising value of buyer incentives and are usually less generous.
Manufacturing
The pace of industrial activity in Ohio held up stronger than for
the nation through the first three quarters of this year, but has
apparently receded in recent months, according to this Bank's
estimates of production. The decline has centered in the automotive
industry and its key suppliers, especially primary metals and rubber
and plastics industries. In contrast, output in both electrical and
industrial machinery industries has continued to expand through the
fall months.
Manufacturing employment in Ohio has also been receding slightly from its latest high last January, but employment in the machinery industries has remained steady over the past three quarters. Employment declines have centered in the automotive, primary metals, and fabricated metals industries. Two auto producers recently announced plans for plant shutdowns of one to two weeks involving a total of 7600 workers.
The summer slump in orders and production of heavy-duty trucks appears to have run its course, according to some suppliers. One supplier had a temporary lay-off of a few hundred workers and another plans a 5 percent reduction in its work force through attrition. The revival in truck orders in October leads one analyst to believe that a recovery is now under way. He also expects a slightly stronger increase in overall manufacturing output next quarter compared with this quarter, especially if the auto industry steps up an incentive program over the next few weeks.
Cutting tool orders have fallen between 20 percent to 40 percent from a year earlier practically each month since last spring, mostly because of declines in orders from the automotive and defense industries. A major tool builder expects the order decline to continue into 1990. Shipments have been sustained by reducing the order backlog.
Financial Developments
Market participants were apparently prepared for a 1/2 point
reduction in the prime rate, but some now believe prospects for an
imminent reduction have lessened if the federal funds rate holds at
8 1/2 percent. They also believe that it will take more than a 1/2
point cut in interest rates to stimulate demand for credit, which
has generally softened since mid-year. Fixed rate mortgages at about
10 percent are commonly available from banks and thrift
institutions, but demand is reported to be less than expected.