Beige Book Report: Cleveland
January 21, 1993
Summary
Business activity in the Fourth District was generally stronger in
recent months than was widely anticipated, and manufacturers
forecast a larger increase in production this quarter than last.
Consumer spending during the holiday season rose considerably more
than retailers had estimated last fall, and housing sales in late
1992 showed sizable year-over-year increases. Most manufacturers of
steel, autos, and capital goods forecast higher production this
quarter than last. Still, businesses typically are not planning
increases in employment, least over the next few months. Lenders
report a surge in credit-card use in December, but a slacker pace in
mortgage loan refinancing.
Consumer Spending
District retail sales in December were much stronger than retailers
expected. The surge in sales led many stores to order additional
holiday-type merchandise. Despite the last-minute ordering,
inventories generally have been depleted, and retailers report that
heavy post-season discounting to cut excess stocks will not be
necessary this year. However traditional retailers, facing pressure
from "off-price" competitors, were forced to discount merchandise
prior to Christmas.
New car dealers report a mixed sales performance in December and early January. Sellers of Big Three models generally fared better than Japanese nameplate dealers, and van and light truck sales continued to grow more strongly than those for cars. Dealers claim new car inventories, in a 60- to 70-day range, are slightly larger than desired, but stocks of the new Chrysler products are said to be tight. Dealers also note that consumers are moving toward more options and high-end models within each class.
Housing and the Mortgage Market
Lenders and realtors in Cleveland, Columbus, and Cincinnati report
that home sales were higher in November and December than is typical
for this season. Total year-over-year sales increases in Columbus
were in double digits in December, with homes priced over $250,000
posting strong year-over-year gains.
In Cincinnati, sales and starts rose at double-digit rates in November, and in Cleveland, sales rebounded after two monthly declines and were up 10% from a year earlier.
Manufacturing
District manufacturers expect last fall's upswing in production so
continue into this quarter. Some steel producers predict that
production will rebound this quarter following a decline last
quarter. Several steel customers, especially automotive, have
already placed orders for February and March delivery. Galvanized
sheet production could reach capacity during the first quarter.
Steel analysts estimate that steel operations will average about 85%
of capacity this quarter, up from the 82% rate last quarter.
Automotive sources also estimate a higher production rate this
quarter than last. Domestic auto producers recently raised their
1993:IQ production schedules by a few percentage points from the
previous forecast. If achieved, the production rate will be at least
10% higher than last quarter's pace.
Strong demand for both passenger and truck tires has pushed tire production close to capacity for some producers. According to industry sources, these producers are planning to increase capacity to accommodate the better-than-expected sales.
Capital goods producers note an uneven but steadily rising trend in their businesses. However, uncertainty over a proposed investment tax credit has led to postponements and cutbacks in some orders. A producer of information processing equipment reports that computer orders fell unexpectedly in late 1992, after a strong increase during the summer quarter. A producer of industrial motors claims that some of its customers have delayed placing new orders until more details of a possible tax credit are known.
The strongly reviving heavy-duty truck market is apparently largely unaffected by the tax credit discussion. New orders in December continue to climb at an annual rate that is well above the forecast for this year. Analysts estimate a 20% increase in output this year from last, which will place 1993 production only slightly below the level of the last peak year in 1988.
Other capital goods producers report below-average sales growth. The market for industrial controls is gradually recovering, but is still constrained by the slump in the nonresidential building industry and by weakness in aerospace. Similarly, markets for valves, fittings, and industrial components continue to strengthen erratically.
Employment
District employment shows little sign of a sizable pickup. Most
manufacturers and retailers report that higher-than-anticipated
production and sales can be accommodated with their existing work
force. Although some employees have been recalled in recent weeks,
many manufacturers report that they will take on new workers only
after receiving sustained increases in new orders. Structural
layoffs because of mergers and reorganization in the
telecommunications, utilities, and plastic industries in the
District are likely to result in job losses of about 1,200 workers
during the year.
Financial Developments
Business loans outstanding rose slowly in the District again in
December, according so some bankers. These sources also noted an
unexpected surge in credit-card use in December. Both banks and
thrifts indicate a letup in mortgage loan refinancing in December. A
large thrift reported that its volume of new mortgage loans in early
January had slowed substantially from a year earlier. Several
thrifts and banks in the Cleveland area have been offering 30-year
fixed-rate mortgages at 7.8% plus 2.5 to 3 points.