Beige Book Report: Cleveland
August 3, 1994
Overview
Conditions in the District remain favorable. Orders and shipments in
the industrial sector are continuing to expand, and an increasing
proportion of manufacturers report adding workers to their payrolls.
Construction activity is still good, with perhaps less of the new
growth coming from residential and more from commercial and
industrial building. The retail sector appears to have rebounded
from its spring slowdown, although weather and price discounting may
have temporarily propped up apparel sales. Loan demand is holding
solid, with household borrowing reportedly brisk. Commercial
borrowing is also growing, although alternative credit sources have
apparently cut into the business of some commercial banks for this
product.
Industrial Activity
The region's industrial sector continues to exhibit vigorous growth,
particularly in areas related to motor vehicle production and
capital goods. Several District producers report record shipments
and orders for the second quarter, and early third-quarter returns
suggest a continuation of that trend. A few capital goods makers
indicate backlogs of six to eight months, roughly twice the typical
level. While domestic demand for capital goods remains high, foreign
orders are apparently on the rise. Even capital goods orders for
European customers have apparently turned the corner and are now
headed modestly higher.
Vehicle producers are equally upbeat, and this strength is reflected across a range of suppliers. Paints, metals, glass, and components producers are all reporting solid production levels. New hires are becoming increasingly common, and several firms note shortages of skilled labor. Cost pressures remain moderate, although rising prices are noted for metals and paperboard and packaging. Despite the exceptional orders and production numbers, many manufacturers in the District indicate that competitive pressures are still restraining their ability to raise prices.
Consumers
Fourth District retailers report that sales picked up substantially
in June after declines in May and April, and the pace of improvement
apparently increased during the first two weeks of July. Much of the
early July gain appears to have been associated with aggressive
post-holiday clearance sales, and retailers generally expect markets
to settle into a slower, more sustainable growth pattern moving into
the fall.
While electronics, furniture, and building materials continue to sell well, demand has broadened to include "soft" goods such as home furnishings-perhaps a lagged effect of the strong residential building activity earlier in the year. Apparel sales have also improved, although District sources say that hot June temperatures and summer price discounts may have had a temporary influence.
Traditional department stores appear to be the primary beneficiaries of the recent sales gains, with most reporting year-to-year improvements of 5 percent or so. Sales by discounters are being spread over an increasing number of competitors and individual companies have had mixed results. Specialty stores, especially apparel outlets, continue to lose ground in year-to-year comparisons, although monthly declines are diminishing. By contrast, these same companies are reporting growth in their catalog divisions-in most cases double-digit improvements from last year.
Price competition is reported to be severe in most retail markets, and some margins are being squeezed by rising merchandise costs.
Autos
Fourth District motor vehicle dealers are upbeat about their recent
sales performance as well as about the upcoming 1995 model year.
After a brief spring respite, most were again reporting year-to-year
sales gains in June, and although profit margins remain thin, they
have improved as consumer demand has risen.
Dealers report continuing shortages of popular auto and sport utility vehicles. Given demand levels and capacity constraints faced by U.S. motor vehicle manufacturers, dealer association respondents anticipate continuing shortages of certain cars and trucks throughout the remainder of the year.
Area dealers are following the industry trend of increasing leases as a percentage of total sales They note that some automakers are boosting incentives on leases even as they reduce them on straight sales. Lease arrangements have also become more attractive as interest rates have risen 50 to 75 basis points in major Fourth District markets over the past few months. The Japanese automakers have been particularly successful in the leasing segment of the new car market. Even as the rising yen and other factors have pressured purchase prices upward on new vehicles, aggressive leasing plans have allowed them to offer competitive monthly payments.
Overall, respondents say that they expect price increases on the 1995 models to average in the 3 to 6 percent range, as new car demand is expected to remain high. They do not believe sales have been significantly affected by recent interest rates hikes, although cash sales have reportedly picked up.
Lending Activity Lending activity round the District is good, with most borrowing occurring at the household level. Consumer credit demand is up, and some banks report an improving mortgage credit market However, the rise in mortgage rates was generally thought to have lessened the pace of home sales. Also expanding are commercial loans, particularly for small and mid-sized borrowers. A few institutions indicate that the fall-off in residential construction activity has been offset by an increased incidence of commercial building, and at least one banker observed that loan covenants on commercial building had been relaxed. Several banks indicated that nonbank credit sources remain a competitive alternative to commercial banks. While some deposit runoff has been seen, the fund outflows from commercial banks have apparently been modest, and a few institutions report a small rise in retail CD volume.