Beige Book Report: Cleveland
September 13, 1995
General Business Conditions
Overall, business conditions in the Fourth Federal Reserve District
remain about the same as in the last District report. Although
unemployment increased between July and August, most of that rise is
attributable to auto industry model changeovers that sent
unemployment rates in Ohio and northern Kentucky upward. These
higher rates do not seem to be characteristic of what is, on the
whole, a strong District labor market. Indeed, a recent survey of
business leaders in northeast Ohio reveals that more than half
believe the area is suffering from a shortage of qualified workers.
Among the noteworthy changes in the District in recent months is a rather prominent improvement in construction activity, particularly of single-family homes. Virtually every major real estate market in the District saw an upturn in home sales and construction in July compared to earlier in the year.
Price and wage pressures are reported to be modest. Prices of paper and some plastics are rising, offset by lower steel and aluminum prices. Wage growth is tracking in the neighborhood of what is presumed to be the underlying inflation rate, about 3 percent.
Manufacturing
Industrial activity is holding even at a relatively high level.
Capital goods producers continue to report a steady inflow of new
orders. Production levels for capital goods remain high, and factory
overtime is common. Auto and auto-related production is off from
earlier in the year, partly due to model year changeovers, but also
in response to an inventory overhang earlier in the summer. A few
auto suppliers report improved orders and production levels in late
August. District steel producers cite a modest improvement in orders
recently, despite a still somewhat-soft market and downward price
pressure. Fourth-quarter production cuts in this industry remain a
possibility.
Retailing
Retailers are reporting sales somewhat below expectations for July
and August, but are still hopeful that early fall sales will
improve. Many District retailers attribute the slow start of back-
to-school purchases to unusually warm weather that prolonged sales
of summer apparel items. Sales of home goods, such as furniture and
electronics, are generally soft with one notable exception: air
conditioners, whose inventory stocks are now nearly depleted.
In general, retail inventories have been reduced substantially over the past few months and are currently in a range considered about average for the period. Several District retailers note that computerized inventory management systems and other innovations have helped to monitor stockpiles before any substantive imbalances have developed.
Autos
Auto sales were somewhat mixed in the District in August. Northeast
Ohio dealers report some improvement, with second-quarter sales
generally exceeding levels at this time last year. Similar reports
were heard in southwestern Ohio. However, auto dealers in central
Kentucky and in the panhandle of West Virginia report that sales
only held even with July and were down slightly on a year-over-year
basis.
A majority of the dealers we contacted have a positive outlook for the remainder of the 1995 model year, spurred recently by the introduction of factory incentives. New-car stocks are reported to be near a desired level, although scattered reports of inventory shortages were heard. District sources indicate that price increases for 1996 models are running about 1-1/2 to 3 percent above 1995 levels. Interest rates were not considered to be either a positive or a negative influence on recent auto sales performance.
Banking and Credit
District loan demand remains strong and generally growing.
Commercial loan growth continues to pace the credit expansion, with
both mid-sized and large commercial borrowers participating in the
credit demand upturn. Commercial borrowing activity remains strong
for plant and capital expansion, and for mergers and acquisitions. A
small reduction credit for inventory floor plans is also noted.
Consumer demand for credit appears to be holding at a relatively high level, and in some cases, such as revolving credit, is still expanding. Most major consumer credit components were reported to be strong, with the exception of mortgage refinancing, which has languished over much of the summer.
While several sources noted a further deterioration in the terms and quality of credit covenants, loan delinquency rates in the District remain low.