Beige Book Report: Cleveland
May 1, 1991
Summary
Signs of bottoming out are apparent in the Fourth District, even
though the unemployment rate rose and manufacturing production fell
more than nationally in recent months. However, the worst of the
cutbacks in output and employment appear to be over, and District
respondents report some signs of revival in activity. Auto output
and sales apparently are recovering slowly from their depressed
levels. Retail sales strengthened in April, and real consumer
spending is expected to pick up this quarter. Mortgage loan demand
and housing sales have strengthened. Depositories report an ample
supply of funds, but loans are still generally weak, except for
mortgages.
Regional Economy
The unemployment rate in Ohio rose half a percentage point above the
national rate in both February and March, after six months when
performance was better than in the nation, However, the latest
spread between Ohio and the nation was small relative to previous
recessions. Moreover, total employment rose in Ohio, but the
increase was more than offset by a jump in the labor force. Nonfarm
payroll employment has been relatively unchanged since last fall, in
contrast to the nation.
Other information suggests an early end to the recession. The leading economic indicators for Ohio held steady for the third straight month in February, following a five-month decline. Moreover, the March survey of 450 CPAs in Ohio reported that business in the State is close to a trough and is "poised for recovery."
Manufacturing
Cutbacks in manufacturing production in recent months have been
sharper in the District than nationally. Industry sources believe,
however, that the worst of the reductions were in the first quarter.
Auto production has already begun a slow recovery from recent depressed levels, and industry analysts expect gradual improvements in both output and sales through the balance of this year. According to one estimate, weak auto production last quarter trimmed the real GDP growth rate by about one percentage point, and auto output this quarter will contribute either no change or a slight gain to overall output this quarter. Scattered recalls of production workers are also reported, although layoffs of white-collar workers continue. Auto production remains at a pace below sales, but dealers are reported to be satisfied with a smaller-than-usual 60-day supply of inventories.
Steel producers operated at about 70% of capacity in the first quarter, and expect operations in a 70% to 75% range this quarter. Steel inventory liquidation is likely to be somewhat larger than last quarter, according to some industry sources. Some specialty steel producers report that their operations have been faring better than the overall industry, and better than in past recessions.
Producers of traditional capital goods report that contraction in most industry groups has been less than in past recessions. Machine tool business has been holding up better than in previous recessions, but largely because of strong demand from the aerospace industry and exports that have masked weakness in some standard products.
A slide in industrial equipment shipments that began last fall appears to have leveled cut in the first quarter, but the increase in April is less than seasonal, according to one producer. Also, heavy-duty truck output now appears to be bottoming out at extremely low levels, but is expected to gradually revive in the second half of 1991 as the pace of industrial activity quickens.
Construction machinery sales continue to decline and have not yet reached their trough, according to some industry sources. The weakness has been centered in domestic markets, especially in commercial and residential construction.
Most respondents expect a smaller decline in real producers' equipment output in the second quarter than in the first, especially if motor vehicle output increases enough to offset further expected declines in the information processing and industrial machinery industries.
Consumer Spending District respondents are encouraged by the strengthening in retail sales in April, except in those areas affected by auto layoffs. They expect a revival in real consumer spending this quarter, supported especially by a higher volume of car sales than last quarter. One retailer reports a double-digit year-to-year increase in sales in the last two months, apparently because of its more aggressive advertising and sales promotions. Sales of appliances have picked up, according to a major retailer and a producer. Some also cite a step-up in use of consumer credit since March, which one retailer attributed to a no-interest-charge promotion.
New car dealers report that sales have been strengthening slowly over the past several weeks, and they expect continued but slow growth through the year. Dealers believe that new car sales have been dampened by increased credit tightening by banks and auto finance companies in recent months. They also believe that sales of "nearly new" cars purchased at auction from national car rental companies have dampened new car sales.
Credit Market Developments Banks and thrifts generally report that an ample supply of credit is available, but that loan demand is still weak. Thrifts in Ohio are said to be highly liquid and are anticipating a better-than-seasonal pickup in housing sales this spring. Some report a significant revival in home sales since late March, especially in Cincinnati and Columbus. Mortgage loan activity has picked up in recent weeks, but a large volume is for refinancing, as mortgage holders substitute fixed-rate mortgages for adjustable-rate mortgages. Some thrifts also report deposits have risen each month this year.
Banks report ample funds for lending, and note a pickup in mortgage loans in the last two months. So far the rise has been less than seasonal in Cleveland, but more than seasonal in Pittsburgh. Commercial real estate loans are still scrutinized by lenders. Some developers and builders of strip shopping malls claim that tight credit standards since early last summer have choked commercial construction, but acknowledge that financing is available for commercial buildings that are nearly pre-leased to creditworthy tenants, and when developers have an equity interest.