Beige Book Report: Cleveland
September 18, 1991
Summary
Recovery underway in both the nation and the District appears to be
at a slower pace than in even the mildest of the postwar recoveries,
according to most District respondents. Real consumer spending is
still sluggish, with second-half growth predicted between 1% and 3%
this half. Continued recovery in Fourth District industrial
production, which began last spring, is expected to be supported by
a slowing of inventory liquidation and by revival in most capital
goods industries. The real estate market has weakened. Lenders
report continued softness in bank loans, and recent declines for
mortgage refinancing.
The Economy
Respondents uniformly agree that recoveries in both the nation and
the District are off to a slow start, and most also expect that
output growth, at least for the first year of the upturn, will fall
short of the mildest of the past business recoveries. Most predict
that real GNP will expand this quarter in a 2% to 3% range, but a
few still expect a fourth-quarter real GNP growth rate of about 3%
to 4%.
In Ohio, manufacturing output, which often lags the national recovery, rebounded last quarter, and respondents anticipate continued growth based on the strength of exports coupled with an ending to inventory liquidation.
Consumption
Retail sales in the late sinner months have been relatively flat,
and early September sales were up only a few percentage points from
a year ago, according to a retailer, Still, another retailer managed
to liquidate the bulk of its excess stocks. Retailers are reported
to be very cautious in planning inventories for the Christmas season
in order to avoid large inventory overruns and subsequent
discounting.
Economists associated with consumer goods are uncertain about the short-term outlook for real consumer spending. Some expect about a 3% growth rate this half, but several others anticipate only l% to 2% growth.
Auto industry sources estimate that domestic new car sales will average about a 6.5-million-unit-annual rate this quarter and next, up a few percent from last quarter. New car dealers believe that a shortage of many 1991 models may account for some of the sales declines in August. They uniformly believe that further price incentives will not be necessary to clear the remaining car inventory.
Manufacturing
The District's recovery in manufacturing output, which began last
spring, has continued into the summer, led especially by higher auto
output. Several producers and suppliers expect that auto output will
continue to edge to upward. Domestic car production this quarter is
estimated at about a 5.8-million-unit annual rate; slightly more
than a 6 million-unit rate is expected next quarter. Some concern
was expressed that the slowly rising trend in production might be
interrupted by consumer resistance to higher prices for 1992 models,
which would leave the industry with larger-than-desired inventories.
Steel producers in the District have been operating at about 70% of capacity for most of the year, but they expect a gradual strengthening over the balance of the year. Steel inventory liquidation appears to have run its course sooner than expected because of a recent spurt in orders from the auto and appliance industries, according to steel sources. Recent steel price increases appear to be sticking, an indication of stronger demand, and some workers who were laid off are currently being recalled.
The machinery and industrial equipment industries are probably close to a trough, and prospects for a turnaround have improved since operating rates in manufacturing have begun climbing, according to a capital goods producer. A producer of industrial controls equipment expects that the contraction in industrial equipment will end this quarter. Domestic shipments of commercial aircraft are expected to rebound this quarter from last, and the gradual recovery in heavy- duty truck orders and production should gain strength by year-end in response to rising operating rates in manufacturing. Another capital goods producer reported a sizable pickup in sales and profits for its third quarter, attributable to both domestic and international sales. Finally, a supplier to capital equipment producers reports that its orders from general machinery producers and the steel industry are showing signs of recovery, and that its delivery schedules have begun to lengthen.
The massive reduction of business inventories during the latest recession will be largely completed this quarter, according to an industry economist. The source noted that July's inventory-to-sales ratio for nonauto durable goods was back to its 1987-89 average.
Real Estate
Lenders and realtors generally report that demand for housing has
slowed in recent months, although some lenders experienced a pickup
in new loans in August. Listings are fewer-than-usual for the
summer. Some attribute the less-than-seasonal strength in housing
starts and sales this summer to a lack of consumer confidence. They
claim that mortgage funds are readily available to creditworthy
buyers, and report that mortgage rates eased recently to an 8-3/4%
to 9-1/4% range for a 30-year conventional loan mortgage.
Financial Developments
Most lenders report little change in total loan activity in recent
months, except for declines in mortgage loan refinancing following a
surge in the spring and early summer months. Some sources believe
that continued softness in business loans may reflect low working
capital needs because of the large liquidation of inventories, and
that future growth of business loans may be constrained by
increasing business bankruptcies. Some easing in mortgage loans for
new and existing homes is also noted, but a few banks report some
pickup in auto installment loans in August, and continued growth in
home equity loans. Several depositors acknowledge that they have not
been aggressively seeking loans because of capital constraints or
soft demand for credit. They also report further reductions in
interest rates on deposits in recent weeks.