Beige Book Report: Cleveland
March 14, 1990
Respondents in the Fourth District expect a slightly improved pace at overall economic activity this quarter from last. They expect some let-up in food and energy prices, but a 4 percent underlying inflation rate is expected to persist, at least for the next several quarters. The worst of the slowdown in manufacturing activity is believed to have passed. Interest rates are still expected to ease over the next few months, but not as much as was thought a few weeks ago.
The Economy
Most respondents describe the economy as being sluggish or in a
growth recession, but they expect a gradual strengthening in output
over the next few quarters. Despite mixed signals about the economy,
the respondents generally have not changed their outlook for 1990
and do not believe that prospects for a recession have increased.
They believe that some of the special factors that accounted for the
weakness in overall output in recent months, especially auto output
cutbacks and the Boeing strike, are already providing some impetus
to the economy.
Prices
Respondents believe that the latest surge in food and energy prices
has about run its course. They see encouraging signs in the latest
easing in crude oil and gasoline prices. The spike in those prices
is judged to be temporary, originating from a convergence of special
factors involving supplies. Declines in spot prices for crude oil,
fuel oil, and gasoline are taken as evidence of rapidly improving
supplies that will probably lead to further declines in crude oil
prices over the next several weeks.
The latest spurt in food prices was partly in response to the freeze last December. Produce, milk, and processed fruit and vegetable prices are easing. Some other prices, however, including cereals, some dairy products, and coffee, all rose much more than expected last quarter, and have been sticky on the downside. If those prices ease more, overall food prices could increase in a 4 percent to 4 1/2 percent range this year, similar to recent years, according to an industry source.
Despite the expected easing in food and energy prices, the prevailing view is that inflation will hold at about a 4 percent rate over the next several quarters.
Consumer Spending
Retailers are becoming more optimistic because sales in February
were somewhat better than they expected. Sales are on an improving
trend instead of being flat, according to one retailer. They assert
that retail prices have been flat to moderately higher in recent
months, and are likely to remain under downward pressure as some
retailers cut higher-than-desired inventories.
Manufacturing
Most respondents believe that the worst of the slowdown in
manufacturing output has passed and that a slight decline in
production this quarter will be followed by a slight pickup next
quarter. Production in February is generally believed to have
rebounded from the January decline. Automotive output revived, and
most traditional capital goods industries are still on a slowly
rising trend that is offsetting softening in some high-tech
industries, especially office computers and communications
equipment.
Purchasing managers in Cleveland and Cincinnati report higher output and production for the second consecutive month in February, and commodity prices in the Cincinnati area firmed for the first time in the last eight months.
Some of the cautiously optimistic tone about manufacturing stems from the auto industry. New car inventories have been brought down substantially since year-end 1989 and should be in a normal range by the end of March. Production in February and March is expected to rise to about a 6 million to 6.5 million unit annual rate from the 4.1 million rate in January. Dealers in the Fourth District expect to step up orders for second quarter delivery because of their improving inventory condition. Big Three auto dealers attribute the better sales level of this quarter than last to the incentive programs. Although they report that captive finance companies have been tightening credit standards in response to the high percentage of loan defaults last year, they believe commercial banks are still making credit readily available for both consumers and dealers.
Steel producers continue to operate at about 80% of capacity. Production is expected to increase next quarter because of rising seasonal demands, some pickup in the auto industry, and less inventory liquidation by steel warehouses. Spot prices are described as weak, and prices in export markets are so depressed that some domestic producers have decided to withdraw from that market.
Profit margins in manufacturing have been deteriorating, especially in the auto and related industries and in computer and office machinery industries, and are characterized by some as recession margins. The erosion, however, doesn't necessarily imply a retrenchment in capital spending. A steel producer reported that modernization plans are still on schedule, and a capital goods producer pointed out that cash flow is a key to investment.
Financial Developments
Economists contacted still expect some easing in interest rates as
market fears about inflation lessen and the economy continues on a
slow growth path. Some economists, however, expect that interest
rates may not recede as much as they previously thought because of
rising interest rates abroad. Some banks and thrift institutions in
this District report that their lending policies have been
tightening. Nonperforming loans in this region rose last year but
were still well below the national average. A thrift institution
observed that new regulations that affect lending to any single
builder probably are not constraining new construction because there
appears to be ample funds available to credit-worthy builders.