Beige Book Report: Cleveland
March 15, 1995
General Business Conditions
There has been some slowing in the growth of District business
activity, although outright declines are rare and most industries
are still reporting high levels of production. Capital goods
producers continue to pace industrial growth, led by a strengthening
in export markets. Employment conditions may have actually improved
somewhat, and unemployment in most regions is substantially below
the national average. Nevertheless, significant wage pressures are
not reported. And while industrial materials costs are continuing to
rise at an above-average rate, few manufacturers indicate that these
increases are spilling into finished goods prices in any notable way.
Manufacturing
The District's industrial sector remains strong, with perhaps some
modest slowing in auto and auto-related manufacturing. Capital goods
producers continue to report orders growth, especially from foreign
customers. Indeed, a slight slackening in domestic demand for
capital goods has been more than offset by an acceleration in
exports.
A steady or slightly rising proportion of manufacturers are reporting higher employment levels; only a small and declining number indicate reductions. In many industries and regions, companies are having difficulty finding skilled laborers, and indeed, unemployment rates in the District are among the nation's lowest. Several respondents also reported higher rates of labor turnover. Nevertheless, signs of wage pressure are difficult to find, and most companies are still reporting wage growth at, or perhaps slightly below, the rate of inflation. A major commercial real estate firm reports a shortage of industrial space, and industrial construction activity appears to be on the rise.
Several manufacturers report a moderation in the rise in industrial commodity prices, although the number of goods whose cost has increased is still very large and ranges from wood products (lumber, paper, and wallboard), to plastics (polyester and PVC), to metals (aluminum, copper, and steel).
Retailers
Although February is traditionally a slow month, District retailers
were nonetheless disappointed in this year's performance, and many
are now reporting higher-than-desired inventories. Most notable are
the excess stocks of winter outer wear, a reflection of unseasonably
mild temperatures. While a few large chain stores indicate solid
sales gains, most report flat or declining receipts, and specialty
stores, such as women's apparel and furniture establishments, are
down significantly. Some (if not most) retailers point to higher
interest rates as a key to the slowdown in durable goods sales,
although much of the slippage has reportedly come through a
softening housing market. Retail market analysts are cautious about
the near-term outlook, in part because of the uncertain significance
of the recent sales slowdown. Moreover, they suggest that March
sales will be negatively influenced by a late Easter.
One of the District's largest furniture sellers reports that many suppliers will not quote prices on orders more than 30 days in advance because of the uncertain cost of wood and other furniture construction materials. However, price competition remains severe and retailers say that it is virtually impossible to pass price increases through to consumers.
Autos
Fourth District auto dealers report a downturn in new light vehicle
sales between late January and the end of February. The recent
weakness may have actually begun in November and has become more
pronounced since the beginning of the year. However, demand for some
light trucks and sport/utility vehicles remains strong, and one
market analyst observed an improving market for used vehicles.
Slower auto sales have resulted in a considerable unplanned inventory buildup - a dramatic turnaround from the shortages that dealers complained about through the third quarter of 1994. The buildup of vehicle stocks combined with higher interest rates, has reportedly caused a surge in floor plan costs.
Auto dealers also point to higher interest rates as a pivotal development in the new-car market although bad weather in February may also have hurt sales. Still other sources my that rising interest rates for new-car loans are not reducing sales as much as are the restraining income effects of higher mortgage rates on disposable incomes. These higher rates have virtually eliminated home refinancing while boosting mortgage payments for households with variable-rate agreements. Fourth District auto dealers remain hopeful that sales will improve in the months ahead, but few believe that the gains will rival last spring's performance.
Price increases for 1995 new-car models were bumped marginally higher early this year. However, incentive plans are becoming increasingly common, helping to offset the higher costs.
Banking and Credit
Loan demand remains strong, especially in the commercial lending
categories. Business borrowing has recently broadened to include
mergers and acquisitions, although credit for capital expansion and
inventory floor plans is also rising. While some slowing in the
growth of consumer borrowing is noted, it appears to be centered in
new-auto credit. Household borrowing in other non-real estate
categories is still strong Perhaps the most significant drop-off in
lending activity has been in the mortgage area, where refinancing
activity has slowed to a standstill and new-mortgage extensions are
down substantially from last fall.