May 6, 1992
Summary
Retail, manufacturing, and housing respondents in the Fourth
District are more optimistic than in previous months that the
renewed recovery will be sustained. Retailers are still cautious,
however, and do not plan to build inventories. Auto output is
expected to be a small contributor to overall output growth this
quarter. Capital goods producers are uniformly encouraged by the
recent strengthening in orders and profits. Housing appears to be
increasing more than seasonally so far this spring and,
consequently, lenders report a rising demand for new mortgage loans,
but only a scattered pickup in business loans.
National and Regional Overview
The recent stepped-up pace in the economy leads Fourth District
respondents to believe that renewed recovery is now on a more
sustainable growth path than was evident last spring. A few
forecasters have raised their estimates of total output growth to a
3.5% to 4% range late this year, but most still expect about a 3%
growth rate in the fourth quarter of 1992.
In the Fourth District, a more positive outlook is also apparent in view of better-than-expected profits last quarter and the renewed strength in orders, housing, and retail sales. Purchasing agents in Cleveland, Columbus, and Cincinnati report that gains in manufacturing activity during February and March were as strong as or stronger than in the nation.
Consumer Spending
Retailers are now a little more optimistic about near-term sales
prospects in view of the unexpected spurt in sales earlier this
year. They are still cautious, however, and are not planning to
build inventories. Some attribute the January and February surge in
sales to temporary factors, such as aggressive clearance of winter
merchandise and income-tax refunds. Sales in April were reported to
be a little stronger than in March, and have recently been fairly
good across all lines of merchandise.
Economists associated with consumer goods expect that real consumer spending in the second quarter will increase at about a 2% annual rate. Most believe that the recovery in consumer spending will be more lasting than the revival last spring because of pent-up demand and improving household balance sheets, but still do not see much sign of a pickup in auto demand this season.
Most of the Big Three auto dealers contacted were more positive about the spring selling season, while dealers of Japanese nameplate vehicles were less upbeat than in our previous survey. Sales of most of the Big Three dealers have been relatively stronger in recent weeks, partly reflecting another round of price increases for Japanese cars.
Manufacturing
Respondents across several manufacturing industries appear more
confident than in recent months that recovery is again under way.
The improving attitudes of management reflect a strengthening in
orders and profits last quarter. Most manufacturers report that they
are no longer cutting inventories, but neither are they building
their stocks.
Economists associated with the automotive industry estimate that new car sales and production will improve this quarter from last, and that the industry will be a small contributor to overall output. Nevertheless, temporary layoffs may continue this quarter because of excess stocks of specific models or because of model changeovers, according to auto sources.
Capital goods producers are more optimistic about recovery because of' the quickened pace of new orders last quarter. A producer of small motors and electrical equipment notes a long-awaited pickup in new orders last quarter. A machine tool builder reports total orders last quarter were well above those a year earlier, despite a slide in export business, and order backlogs have been rising for the last several months. A midsize producer of plastic products machinery states that sales rose at a double-digit rate last quarter from depressed conditions during most of 199l, and profits of an industrial equipment producer soared on the strength of a rising trend in domestic orders. Heavy-duty truck orders rose sharply in February and March, and inquiries since then suggest another good month in April. Consequently, truck production is expected to rise steadily each quarter this year, according to a major supplier. Recovery for specialized industrial controls apparently began last December, according to a producer who believes that customers are gradually adding to capacity rather than simply ordering for maintenance. A small producer of metal castings is considering hiring more employees in response to a recent strengthening in business, and a small producer of electrical motors and parts for the mass transit industry reports a surge in both orders and profits last quarter.
Economists associated with capital goods industries expect that real investment in producers' goods will increase at annual rates at least 5% to 7% quarterly from this quarter through the balance of the year because of revival in traditional capital goods industries.
Steel
Production and operating rates in the steel industry were somewhat
better than expected last quarter, but that performance was masked
by continued weakness in steel prices and a cutback in steel
capacity by a major steel producer. Industry sources expect steel
orders and production in the second quarter to be marginally higher
than in the first quarter, although recovery is still characterized
as anemic because of weak prices and revenues.
Housing
Housing activity in the District shows signs of a better-than-
seasonal increase, according to several mortgage lenders and
builders. Housing starts in the Greater Cincinnati area in March
were about double the level of a year earlier, and both starts end
sales in the Cleveland area so far this spring are running well
ahead of totals a year ago. A large mortgage lender described the
market for houses below $175,000 as strong. Land acquisition loans
and loans for speculative building are said to be still difficult to
obtain, but lenders apparently have ample funds available for
builders of single-family homes.
Financial Conditions
Banks and thrifts report a step-up in new mortgage loans and
tapering demand for refinancing from earlier this year. A few large
banks also report a pickup in commercial and industrial loans,
especially for auto dealers, but consumer paybacks on installment
loans still exceed new loans. One lender notes that commercial real
estate activity began picking up in April after a slower-than-
seasonal period from last December through March. Several small
banks blame a tepid economy for the weak consumer and business loan
activity.