Beige Book Report: Cleveland
March 9, 1994
General Business Conditions
Despite an evident fall-off from the brisk pace set in the fourth
quarter of 1993, business contacts throughout the Fourth District
remain generally optimistic. By most accounts, economic activity is
continuing to expand solidly--none of the respondents has adjusted
the 1994 outlook downward in response to weather-related problems
experienced in the first few weeks of the year.
Respondents in all sectors discounted a repeat of the disappointing economic performance of the first half of last year, which followed a strong fourth quarter in 1992. This follows from a widespread belief that economic fundamentals are much stronger now than was the case a year ago.
Activity associated with automobile production continues to be a significant contributor to the District's healthy economic condition. Consistent with previous Fourth District reports, the strength in the auto sector has had a positive collateral impact on the capital goods sector, a trend that is expected to continue throughout 1994.
Retail sales, both auto and nonauto, were indeed hampered by bad weather in much of January and several days in February. However, little concern has been expressed about long-term sales losses. Consumer traffic and sales activity are reported to have jumped sharply during periods of improved weather, and most retailers contacted expressed confidence that lost revenues would be recouped over the balance of the year.
Loan demand, especially for consumer loans, continues to be relatively strong, although there is some feeling that growth in this sector will taper off later in the year.
Capital Goods
Capital good producers remain cautiously optimistic. With the
exception of the defense and aerospace industries, orders are
reported to be strong across the board. Several respondents
described new auto and truck orders as being especially robust.
Although European demand is still characterized as spotty at best, overall foreign demand for capital goods is judged to be good, if not spectacular. Some reports indicate that North American industry is seeing some "straining at capacity," and one contact cited an orders backlog of several months.
Auto Dealers
On balance, most sellers have experienced high single-digit or, in
some cases, double-digit year-over-year increases in vehicle sales
in 1994 to date, although several say that there has been a slight
decline in the pace of improvement during the past week or so. This
follows solid year-end sales for most dealers and stands in sharp
contrast to early 1993, when sales declined sharply. Nevertheless,
fleet and other vehicle sales to businesses are not increasing as
rapidly as consumer sales.
Retailers
Retailers relate that, excluding the period of unseasonable weather,
sales rose significantly during January and February. Many retailers
experienced near double-digit year-over-year sales increases for a
broad range of products during the past two months These comparisons
must be discounted by anemic sales during January and February 1993,
but retailers appear optimistic about recent sales gains and their
implications for longer-term consumer demand. However, all of the
respondents did speak of increasingly competitive market conditions
and thinning profit margins.
Housing and Construction
The extremely strong performance of the housing sector in the last
part of 1993 is not seen as sustainable. There is a sense that some
of last year's activity was driven by a belief that interest rates
had reached their trough, triggering some amount of speculative
buying.
Nonetheless, 1994 is expected to be solid, reflecting strong underlying demand due to demographic factors, moderating long-term interest rates, and slight increases in income and employment. Housing markets in the Fourth District have been strong for some time, and more of the same is expected for 1994.
Lending Activity
Consumers are said to "look healthy": Delinquency rates are low and
indexes of borrowing by existing customers are their strongest in
more than two years. Commercial loans, which were down at the end of
1993, picked up somewhat at the beginning of the year.
The rise in interest rates has cooled mortgage refinancings, and slower growth in consumer loans is expected to ensue as a result of mortgage borrowing having reached its peak. However, considerable strength is seen as a result of auto demand, including commercial borrowing for dealer floor plans.