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Beige Book Report: Cleveland

June 19, 1991

Summary
District respondents believe that the recession in both the nation and the Fourth District is about over, although they still expect a slow recovery. Auto and nonautomotive retailers note a strengthening in sales during May, but are still cautious about near-term sales prospects. Manufacturing output also appears to have bottomed, and respondents are generally more optimistic about second-half prospects than they were earlier this year. Demand for and construction of new housing appears to be increasing slowly this spring. There are only scattered signs of a step-up in commercial loans, and banks generally report that mortgage loans, excluding refinancings, have been increasing only slowly.

National Economy
A panel of Fourth District economists expects that recession will end in the second quarter. They expect virtually no change in real GNP from last quarter, with growth at about a 2.5% annual rate in the second half of 1991 and about 3.5% between 1991:IVQ and 1992:IVQ.

These economists are less optimistic about prospects for inflation now than they were in January. Overall prices are expected to increase at an annual rate of 3.7% in the second half of 1991, and at nearly that rate through the end of 1992. These forecasts are about half a percentage point higher than the panel had anticipated in January.

District Economy
There are mixed signs of recovery from the brief contraction in the District. In May, employment in Ohio rose slightly for the third straight month, and the unemployment rate fell below the national average for the first time since February. Also, manufacturing production declined only slightly more in Ohio than in the nation last quarter, after having outperformed the nation throughout 1990. Much of the decline was in auto and auto-related industries. District respondents expect that auto output will gradually strengthen by late this year.

Consumption
Retailers remain cautious about prospects despite the generally improved level of sales in May. Although most report weather-related increases in sales, they are skeptical that this represents a rising trend because there was no pickup in household furnishings. Despite a mixed pattern of sales so far this year, retailers believe that inventories are at about desired levels.

Automakers and dealers expect only a gradual improvement in sales throughout the balance of this year, despite the May increase in sales. Although inventories are lower than usual for this time of year, orders and production schedules for 1992 model cars are being held close to actual sales.

Manufacturing
Fourth District panelists are more optimistic about prospects for recovery in production than they were earlier in the year. They now expect a second-half rebound in production at about a 4.5% annual rate, led especially by a swing in inventories between the first quarter and fourth quarter of this year.

Auto analysts, however, believe that most of that industry's contribution to overall output growth will likely occur in the second quarter. Inventories of trucks are still reported to be excessive.

Steel respondents also expect little change in production from the recent 70% operating rate. Some expect a gradual improvement in domestic steel markets to be offset by softening in export markets. Correction of steel inventories is said to be nearly complete, and warehouse centers are apparently beginning to step up orders, but are hesitant to restock because prices might continue to slide. Some respondents note an erratic but small pickup in orders from auto and appliance producers, but not much change from capital goods producers.

Capital goods respondents expect that most of those industries are close to a trough at present. Orders for heavy-duty trucks apparently have emerged from a first-quarter slump, according to a supplier, with successive monthly increases in April and May. Orders for industrial controls show signs of bottoming. An industrial equipment supplier reports that his order decline has also leveled out, but no signs of a pickup are yet apparent. An office and machinery equipment producer cites a significant upturn in electronic components, although office computer machinery is still in recession.

Construction and Real Estate
The flurry of mortgage loan activity and housing sales earlier this year subsided in May for some mortgage lenders, but continued strong for others. Some report that demand for refinancing also slowed after an unusually strong first quarter. Mortgage lending terms have been relatively unchanged for the past several months. A major lender in the Cleveland market, however, states that May was one of its best months for mortgage loans, in part because of increases in market share for single-family home loans.

Several lenders report more activity for existing home sales than for new homes. In some parts of the District, lack of demand and builder caution have dampened a rise in new home starts.

Financial Developments
Bankers generally report that commercial and industrial loans have remained flat or have risen only slightly since the beginning of spring. In some areas, however, small business loans have picked up in recent weeks. Mortgage loans have continued to strengthen, but some banks report that at least half of the loans have been for refinancing, and that the spring pickup for new loans so far has not been strong. Consumer installment loans continue to increase irregularly. Bankers report no important changes in lending terms or in lending standards in recent weeks, and generally assert that there are ample funds available for creditworthy borrowers and projects.