Beige Book Report: Cleveland
June 20, 1990
Summary
Fourth District respondents are a little more optimistic about
short-term prospects for manufacturing than they were several weeks
ago. Higher motor vehicle output should add to overall output this
quarter. Capital spending plans from the sample of District
manufacturers call for larger spending increases than indicated in
the latest Commerce Department survey, and export growth is expected
to continue at least through the balance of this year. Respondents,
however, appear more cautious about the short-term outlook for
consumer spending. Lenders and borrowers acknowledge tightening in
credit availability and lending standards in real estate, but also
note that other declines in lending are due to easing in demand for
single-family houses and for consumer credit.
Employment and Output
The 5.9 percent unemployment rate in Ohio in April and May has been
relatively unchanged since last fall, despite monthly fluctuations.
Employment in manufacturing has held steady, and services employment
has continued to grow, albeit slowly.
Respondents report that manufacturing output rose in May and expect that second quarter growth in output, particularly in autos, will be stronger than in the first quarter. Higher auto output should add between 0.5 and 1.0 percentage point to the real GNP growth rate this quarter.
Capital Spending
District manufacturers are more optimistic about capital spending
for 1990 than reported in the latest Commerce Department survey.
Respondents plan larger percentage increases in nominal outlays this
year than last, and all but one report that they plan to increase
their capital spending this year by a larger percentage than the
planned 3.4 percent indicated in the latest Commerce survey. A few
manufacturers plan to add capacity for products that were in short
supply during the peak 1987-88 period. Others mentioned the need for
product quality improvement and for further modernization of
facilities. Some also remarked that 1990 may be the peak year in
their multiyear capital spending programs. Most respondents
mentioned that they plan to finance most of their 1990 capital
spending from internally generated funds. They expect that profits
from production will revive this quarter. The run-up in interest
rates earlier this year was not judged to be a deterrent to spending
plans for 1990 because real rates of interest did not change much.
Exports
Multinational firms as well as smaller businesses headquartered in
this District report that overseas markets remain generally strong,
although some expect a slowdown in U.S. export growth later this
year. Capital goods producers were optimistic about export prospects
again this year. Exchange rate changes apparently have not had much
effect on exports so far in 1990. A capital goods producer commented
that costs of parts and sub-assemblies have risen in recent months,
but that changes in exchange rates of even 10 percent to 15 percent
are "swamped" by rapid improvement in technology. An auto parts
producer reports that effects of dollar appreciation relative to the
yen may be less than expected because Japanese auto producers are
attempting to use American-produced products where possible to meet
domestic-content goals for new cars. Several export-sensitive firms
are concerned that anti-inflation policies in Brazil will either
reduce exports to that country or diminish earnings from their
plants located there.
Consumer Spending
Major retailers report disappointing May and early June sales
volumes, especially for apparel, which they attribute to
unseasonable weather, slower income gains, and more competition from
discount stores. Home furnishing sales also weakened. Another
retailer reports good sales over the past several weeks, however,
apparently in response to an upgrading of its merchandise. Two large
retailers contacted report that inventories are high relative to
their objective. They also expect soft sales, at least through the
summer months.
Financial Markets
Most respondents acknowledge that credit standards have tightened,
but report that ample funds are available except for real estate and
for highly leveraged transactions. Some large commercial banks
apparently are not presently interested in development and
construction loans, while some others are still making those loans,
but with terms that could include a few percentage points above
prime, extensive documentation, and personal guarantees.
The problem in real estate appears to be in multifamily housing and in commercial buildings, where developers and builders complain that it is "hard to find lenders." Lenders, for their part, emphasize prudence in their exposure to this sector of the economy. Small builders, especially of single-family units, report funds are still ample, although FIRREA legislation has forced a search for credit away from traditional lenders, generally thrifts. According to one report, the major complaint among single-family builders is a sluggish demand for houses rather than unavailability of credit.
At present, there is little to indicate that credit conditions have tightened in other parts of the regional economy. Bankers report that recent slowing in growth of consumer credit is due to softening demand rather than to tightened supply of credit. A few lenders noted that consumer spending could be dampened if lines of credit based on equity in homes are reduced.