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Cleveland: December 1990

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Beige Book Report: Cleveland

December 5, 1990

Summary
Nearly all Fourth District respondents expect that real GNP will decline this quarter. A few anticipate, however, that growth will revive in 1991:IQ, and that the economy will avoid recession. Respondents generally believe that the District is not currently in a recession. Manufacturing has held up better here than nationally. Several retailers expect that real consumer spending will decline this quarter from last. Construction appears to be weakening more than seasonally. Funds for qualified borrowers are generally available, but District bankers have become cautious about industrial construction and consumer loans.

National Economy
U.S. economic prospects eroded further in recent weeks. All but one of a panel of 24 Fourth District Roundtable economists expect GNP to decline this quarter. Just a few weeks ago, 6 of the group expected slight growth. Still, a few expect that growth in real GNP will revive next quarter, and believe that the economy is not in a recession, even if real GNP declines this quarter. Most panelists still anticipate a temporary bulge in prices because of the oil price shock, and forecasts of inflation a year from now hover in a 4% zone.

Regional Economy
Most respondents believe that although conditions in this District have softened recently, the economy is not now in a recession. Manufacturing has been the region's strong sector, but construction activity has been weakening. Some District respondents point out that the recent flatness in employment, a rise in Ohio's unemployment rate in September and October, and softness in retail sales all suggest an impending slowdown in the region.

Manufacturing
Fourth District respondents still believe that manufacturing here is holding up better than in the national economy, although same note signs of deterioration in both domestic and export markets.

A supplier of electronic parts reports that year-to-year increases in the firm's exports were shrinking even before the Kuwait invasion. A softening dollar has helped to sustain exports of steel mill products, but one producer notes deterioration in its overseas markets. A capital goods exporter believes that exports should be stronger this quarter than last, partly in response to the dollar's continued decline.

Some steel producers note a recent decline in orders that may prompt some layoffs next month, but another reports that its orders are holding up because customers are hedging against a possible work stoppage when a labor contract expires in January. Producers expect that output this quarter could fall 10% from last quarter.

Capital goods producers report weakened demand in some industries, but flat to rising demand in others. A welding machinery producer comments that domestic orders softened in the last few months, resulting in a cutback in overtime work. A computer industry supplier reports that orders declined recently. In contrast, a supplier to the heavy-duty truck industry is encouraged by a gradual revival in that industry from trough months earlier this year. Auto production this quarter has been cut back to about a 6.2 million unit annual rate. The industry is tentatively planning on a production rate only slightly higher for 1991:IQ.

Consumer Spending
Retailers generally are not optimistic about sales prospects for this quarter. Most expect a decline in real consumer spending relative to last quarter. One retailer noted that spending for big- ticket goods, including home furnishings and appliances, has been weakening. He anticipates that December sales will increase about 5%, in nominal terms, from a year earlier. Another reports its October sales in this area were only 2.5% higher (in nominal dollars) than a year earlier. Still another retailer asserted that spending in this area remains better than spending in some other regions of the country.

All retailers emphasize that advertising and other costs will be cut, and that new hiring this holiday season will be less than usual. Still, one department store official indicates that consumer spending the day after Thanksgiving was better than they expected.

Construction
Residential and nonresidential construction is softening more than seasonally, according to some construction officials.

Builders of single-family homes still have access to borrowed funds, but builders of multi-family units are forced to search extensively for financing. Neither banks nor thrifts are reported to be interested in acquisition and development loans, except to highly qualified builders of single-family units. One builder claims that although credit conditions have changed marginally since last spring, environmental regulations in some areas are now a bigger restraint on residential construction than credit availability.

Loans for commercial real estate are difficult to obtain, except for owner-occupied buildings. A construction official claims that industrial construction is being limited to environmental work and to maintenance and repair. No new speculative office building construction is underway, according to a developer.

Financial Developments
Loan activity continues to be "soft," according to District bankers. Some report continuing growth of loans outstanding, but at a slower pace in recent months. One bank comments that credit card and auto installment loans were rather strong in November, but mortgage loans have been soft. Another reports slower total loan growth in recent months because more loan applications are being rejected. Another bank is cutting back on loans to meet its year-end capital requirements. A few well-capitalized banks claim that ample credit is available for qualified borrowers, but demand is weak.

Several banks report that they are now more cautious about consumer loans, and indicate that more applicants are being turned down than a few months ago. Auto dealers note a marked tightening in bank financing for new cars.

A large mortgage lender reports that the value of its construction and development loans in 1990 will nearly match its 1989 level.