Beige Book Report: Cleveland
June 23, 1993
Summary
District business activity continues to grow moderately, as retail
sales have improved in recent weeks and production remains strong.
Increased sales of furniture and other household items and
automobiles have sustained a modest recovery in consumer spending.
Manufacturers generally report strong orders, pushing several
producers to operate near capacity. Some producers, particularly
those experiencing production constraints, have been able to sustain
price increases in recent months, but many anticipate that softening
in several commodity markets may help to alleviate further upward
price pressure. A moderate rise in loan demand has been driven
primarily by new mortgage financing and refinancing and some large
banks have noted a seasonal rise in business loan demand.
Consumer Spending
Fourth District retailers report that sales continued to climb
higher in May and early June from the rebound that began in April.
Activity among the various types of outlets was mixed, however, as
department stores generally fared better than apparel chains and
discount competitors.
Apparel sales have been slow to recover from their March decline, partly due to poor weather conditions during spring clothes sales and to consumer resistance to sharply increasing apparel prices. Instead of clothes, the popular items at department stores include hardware-type items and furniture and household goods.
Despite slower-than-expected sales earlier in the year, retail inventories are only slightly above desired levels. Clearance pricing of spring goods, especially apparel, has begun in earnest but is not expected to go beyond the usual discounting. Retailers believe that consumers will respond to clothing sales and that the overall retail market will continue a slow improvement. However, they are optimistic that the Midwest will outperform the national average.
Auto dealers report brisk sales in May, leading many to expect that a sustainable sales recovery is under way. Dealers attribute the increasing vehicle demand mostly to replacement or necessity buying. noting lagging sales of luxury models.
Manufacturing
District respondents report that growth in manufacturing output is
reviving in most industries, except for defense and construction-
related producers that are experiencing further adjustment. A few
large producers in the District are operating near capacity and
express concern about bumping against production constraints.
However, most are confident that they have ample capacity to
accommodate their steadily rising business.
Steel producers indicate that their flat-rolled operations are at capacity. Although incoming orders have eased from the peak rate of the 1993:1Q, a major producer claims to be booked through the third quarter and anticipates a full order book for the balance of the year. Traditional capital goods producers generally expect output to grow at an even faster rate during the second half of the year than it did in the first half. The high rate of truck output has led to capacity constraints among the smaller suppliers in the industry. Auto production is up sharply in several Ohio facilities, which has led to additional shifts and more hiring. However, not all plants have shared in this revival. One production facility of mid-size cars reported output down more than 12% from a year ago. A producer of electronic parts reports a rising pace in orders and production across its markets, except for construction. On the other hand, a producer of aircraft parts posted a sizable decline in orders in April, primarily from defense and international customers, although orders year-to-date were still ahead of a year earlier.
Large manufacturers report no plans to hire additional workers, at least for the next several months. The major exception is steel producers, who have recalled employees recently. However, even the steel industry expects these gains to be offset by layoffs later in the year.
Prices
Respondents believe that the surge in prices earlier in 1993 may be
transitory, although some expect further, less-intense upward
pressure in the second half of the year. Several producers
acknowledge higher prices of materials, including steel, chlorine,
special chemicals, glass, and truck parts in recent months, but
surmise that these were in response to strong market conditions
following several years of declining prices. A capital goods
manufacturer and a chemical producer asserted that their price hikes
this year represent the first such opportunity since the late 1980s.
Other producers contend that the recent declines in industrial
commodity and lumber prices may help to constrain upward price
pressures in the second half of this year.
Financial Developments
The volume of new mortgage loans rose in May, according to banks and
thrifts contacted, and mortgage refinancing rebounded from a letup
in the previous month. Some large banks also report that business
loans rose in April and early May, but they doubt that the rise was
more than seasonal. Bankers still report a runoff of certificates of
deposit, and a few note that savings deposits are down from previous
levels. However, bankers have generally refrained from resorting to
incentives to hold or attract new deposits, because of what they
describe as relatively weak demand for funds.