Beige Book Report: Cleveland
September 19, 1990
Summary
Fourth District respondents expect that the economic expansion will
be sustained at least through the final quarter of 1991, despite
short-run effects of the oil-price shock. The worst of the inflation
bubble is expected to occur next quarter. The oil-price shock is
expected to weaken consumer spending further, but District retailers
generally report their August sales turned out to be better than
expected. Manufacturers are cautious about short-term prospects for
output, but generally acknowledge that effects of the oil-price
shock so far have been relatively minimal. Lending activity by banks
and thrifts appears to have slowed further in recent weeks.
The National Economy
District respondents generally expect that the expansion will be
sustained at least through 1991, despite short-term dampening
effects of the oil-price shock. A panel of 21 Fourth District
economists expects that growth in real GNP will slow to about 1%
between 1989:IVQ and 1990:IVQ, which is about one-half the increase
they expected last May. Only a handful expect a two to three quarter
contraction in real GNP, of 1% to 3% at annual rates, beginning
either in 1990:IIIQ or 1990:IVQ, and extending into 1991.IQ. For
1991, the panel expects slow but steadily rising growth in output
from the first quarter through the fourth quarter. The median
forecast of real GNP shows growth of 1.9% for the year, somewhat
less then they expected last May. There are no recession forecasts
for 1991.
Inflation Outlook
The recent jump in crude oil prices is generally expected to have
temporary effects on inflation. An inflation bubble is expected
between 1990:IIIQ and 1991:IQ, with the worst of inflation expected
to be at nearly a 5% annual rate next quarter. Thereafter, inflation
is expected to revert to a 4% rate through the balance of the 1991.
While most of the panel of 21 forecasters expects a temporary burst
in prices at slightly below a 5% rate, several expect that the GNP
implicit-price deflator will rise between a 5% and 9.5% rate into
early 1991 before moderating.
Consumer Spending
The oil-price shock has weakened the near-term outlook for real
consumer spending, according to the Fourth District panel of
forecasters. They now believe that real consumer spending between
1990:IIQ and 1990:IVQ will increase by about 1% instead of the 2%
they expected last May. Nevertheless, sales reported by retailers
and producers of consumer goods in August were generally as good as,
or better than, sales in July.
Department store retailers in this District are less optimistic about sales prospects for the fall season. Most report, however, that sales in August rose from July, but that increases were smaller than in the previous month. Retailers generally expect that price promotions will be necessary to sustain sales over the next few months. Retailers in Cleveland report that their back-to-school sales in August were as good as, or better than, sales last year. Auto retailers report August sales were about as expected, and, in some cases, better than in July. Some report a step-up in consumer interest in fuel-efficient cars, and most dealers report buyers are still leaning toward more expensive rather than mid-priced cars.
According to some auto producers, car sales in August were better than they expected in their pre-oil-shock forecasts. Some believe that the timing of the consumer confidence surveys may have biased the survey results, and expect future surveys to show some recovery in consumer confidence.
Manufacturing
District respondents in manufacturing and utilities are typically
cautious about short-term prospects for production and profits
because of uncertainties over the oil situation. They report no
unusual deferments or cancellations of orders or spending in
response to the oil-price shock. They emphasize a lessened
dependence on oil, a more efficient capital stock that has been
installed in anticipation of even higher real prices for oil than at
present, and the relatively small price increase in crude oil now
compared with episodes in the 1970s.
The steel industry is still operating at close to effective capacity, and producers report a strong third quarter for orders and production. A producer reports that orders for October are being booked at a good pace. There is a tone of less confidence over the short-term outlook because of uncertainty about the effects of the oil situation on the auto and appliance industries. Steel producers point out that their industry is more energy efficient now than even five years ago. Crude-oil costs are a relatively small part of production costs, but the added fuel cost will hurt already squeezed profit margins because additional costs cannot be passed through to steel consumers.
Some capital-goods producers are less optimistic about short-term output and spending plans, because they expect that the uncertainty over the oil situation will temporarily erode business confidence. Some expect that there could be a temporary deferring, or postponing, of short-lead-time equipment from this year into early next year. They also emphasize that capital stock additions in recent years anticipated real oil prices even higher than at present prices.
Auto production next quarter will likely exceed new car sales, barring work stoppages, but dealers caution about holding inventories and deterioration in consumer confidence are likely to be constraints on auto output plans. Light truck output will be hampered by a 100-day inventory. Heavy-duty truck output is reviving slowly from a trough in late 1989 and early 1990, and output this quarter will likely be the best so far this year.
A major electric power utility in Ohio believes that the effect of the oil-price shock is minimal because their facilities have become marginal users of crude oil. Also, more efficient energy use by the utility's industrial accounts have sharply reduced the effects of oil price increases.
Financial Developments
Some banks and thrifts report a further slowing in lending activity
in recent weeks. Mortgage interest rate increases of at least one-
half point on fixed-rate mortgages since early August have dulled
mortgage lending. Some lenders also state that concerns about rising
delinquencies and increasing nonperforming loans that are reported
nationally are contributing to more cautious lending policies. While
some expect near-term cutbacks in consumer spending, they also
believe that consumers will not curtail spending as much as most
forecasters expect.
High office and retail vacancy rates in many metropolitan centers, coupled with tightened lending terms, have moved some developers to shift their operations into other kinds of construction. A large shopping mall developer, for example, will increasingly focus on construction of residential communities. Another developer has been moving into apartment construction from office building.