Beige Book Report: Cleveland
December 6, 1995
Overview
Growth in the District's economy has slowed, dampened in pan by a
manufacturing sector that has been holding mostly level since early
summer. Still, the region's economy remains strong and generally
growing, with labor shortages continuing in many areas and
occupations.
Price pressures remain somewhat light considering the relatively high level of business activity. Presumably, improved productivity levels are contributing to this environment. Furthermore, optimism appears to be relatively high in the District, as evidenced by further expansion in business investment and generally strong consumer spending.
Manufacturing
Overall, orders in the industrial sector are off substantially from
the first half of the year, although from a longer-term perspective,
order levels are seen as sufficient to support continued high
production rates. In some areas, such as heavy truck manufacturing
and certain types of steel, production cutbacks are anticipated by
the end of the year. In most industries, though, high production
levels are seen at least through the first quarter of next year.
Capital goods producers indicate a substantial lessening in orders growth in the past several months, and a few cancellations of earlier orders are noted. Nevertheless, net new orders are still characterized as good, and most industries report plans for capital expansion in 1996. Moreover, export markets are considered quite strong.
While some industries report capacity shortfalls, most indicate that factory overtime has eased. Instead, pressure to restrain the rise in costs through improved productivity and innovation is reported as the driving factor in many business' capital expansion plans.
Wage growth is in the 2% to 3% range, about the rate of inflation. Some worker shortages are reported, such as in engineering. Most manufacturers indicate difficulty finding qualified job applicants, although fundamental changes in the workplace, rather than the current state of the business cycle, are seen as the underlying problem.
Retailing
For the most part, retail sales in October and early November either
met or surpassed retailers' expectations. Furthermore, fall sales
levels appear to have improved over last year's performance.
However, promotions were reported on a range of goods, including
personal computers, compact discs, home theater equipment, household
furniture, domestic goods, and a wide variety of apparel items.
Preliminary information on the bellwether post-Thanksgiving weekend sales is incomplete, but somewhat encouraging. Several respondents report strong traffic and suggest that sales were well above last year's level. These results are consistent with a recent survey suggesting that nearly three-fourths of area households indicate they will spend "at least as much" this holiday season as they did in 1994. Casual apparel was highlighted as an area of particular strength this season.
Retail inventories n moving lower as store traffic has increased. Still, inventory levels are running somewhat higher than desired. Some retailers note difficulty finding qualified seasonal sales help as a consequence of generally strong District labor markets.
Auto Dealers
Auto sales in October and early November were mixed across the
District. However, most dealers seemed optimistic about sales
prospects for the remainder of the year and early 1996. Vehicle
inventories are generally at desired levels, ranging from 30 to 70
days supply, except in central Kentucky, where dealers report a 90
to 120 days supply. Inventory levels are running higher for imports
than for domestic makes, and incentives on import vehicles are
prevalent.
Interest rates are having little or no reported effect on sales, although a few dealers complain that high rates are dampening business. Leasing activity continues on an upward trend, accounting for about 50% of sales at District dealerships.
Banking and Finance
Lending has slowed a bit with the overall moderation in business
activity this year. Borrowing demands are reported to be generally
expanding in most credit categories and are particularly strong for
consumers. Consumer credit levels were still rising sharply through
mid-November, with strength in both the automotive and revolving
credit areas. Mortgage credit originations strengthened in the past
month or two, along with the improvement in construction. Moreover,
refinancing activity, which had been slight, appears to have picked
up a bit recently.
Though generally rising, commercial borrowing has slowed since summer. One source noted a sharp falloff in borrowing to finance inventories. Most banks report a rise in past-due loam, although the present level of loan delinquency is judged to be very low. Competition for deposits remains severe, and deposit levels are reported to be holding about even.