November 2, 1983
Summary
Improvement in labor market conditions in the Fourth District
plateaued in September and unemployment remains high. Retail sales
are improving. Orders, production, and shipments continue to rise
for District manufacturers. Demand for steel continues to increase.
New orders for single-family homes slowed in September because of
high interest rates. Commercial and industrial loan demand increased
at commercial banks while deposit growth stopped.
District Labor Market Conditions
Improvement in labor market conditions stalled in September in this
District, and high unemployment continues. In Ohio, nonagricultural
wage and salary employment (nsa) rose 1.8% in September, but total
employment fell, unemployment rose, and the unemployment rate (nsa)
increased to 11.1% from 10.8% in August. Nevertheless, the
unemployment rate is still below the 12.3% level of September 1982.
Recovery in District employment has been similar to past recoveries
but still lags the national recovery in both manufacturing and
nonmanufacturing.
Food Prices
A national food retailer expects food price increases in 1984 in a
4-1/2% to 5-1/2% range. Upward pressures on grain prices from the
drought and PIK programs are being mitigated by huge carryover of
grains from the previous year, and by the dollar's high foreign
exchange rate that has hampered grain exports. He expects only
moderate price increases for fresh fruits and vegetables, dairy
products, and bakery goods. He expects meat prices to decline in
this year's fourth quarter but to rise by next year's final quarter.
Retail Sales
District retailers once again report broad-based sales gains in
September and early October, after a rather unimpressive sales pace
in August. General merchandise sales by major Fourth District
retailers in September were 9% to 12% above year-earlier levels, as
they have been during most of 1983. Sales of apparel and household
furnishings were particularly strong in recent months. Sales by
District automobile dealers were also well above year-earlier
levels, and have generally accelerated from August as lean
inventories eased with 1984 model deliveries. Sales of used-cars and
import autos continue to suffer from lack of availability. Most
retailers contacted expressed optimism over sales prospects for the
fourth quarter.
Manufacturing
District manufacturing activity continued to expand in September. A
survey of purchasing manufacturers in the Cleveland area reveals
production and new orders continued their strong increases in
September. Inventories of raw materials and finished goods rose
slightly, while employment fell slightly, the first decline since
March. Moderate price increases were reported.
A survey of purchasing managers in the Cincinnati area indicated production, new orders, and backlogs rose in September at an increasing pace. Inventories of finished goods ceased their decline. Employment rose substantially. Price increases continue at the same moderate pace as in August.
This Bank's survey of Fourth District manufacturers shows shipments, new orders, and backlogs expanded in September and are expected to increase in October. Inventories and prices paid are stable. Employment rose a bit in September and is expected to increase substantially in October.
A producer of machine tools reports orders continue to rise, but are still at a low level. The industry's order level hit bottom in third quarter 1982 at only 50% of the previous recession's low. Backlogs are growing, but from a very low level, and the firm is still operating at well below 50% of capacity and plans very little capital spending. The firm expects a minimal profit in 1984 and a good profit in 1985.
A producer of components for capital equipment reports a rising trend of orders from customers in various sectors of the economy. Backlogs are rising, as are production, employment and average hours worked. The firm is increasing its capital spending. Despite the increase in demand, list prices of its products remain flat, although discounts disappeared in spring and early summer. The firm reports prices rising for its purchases of corrugated boxes and aluminum ingots.
A tire producer reports shipments are up strongly and are expected to rise further. Inventories are being built in anticipation of growing demand. Employment is rising at the plant level but not at the white collar level. There has been no acceleration of cost increases, and product prices are rising at about the retail inflation rate. Capital spending is for cost reduction but not new capacity in tire production.
Steel
New orders for steel continue to rise. Demand improvements are
primarily for flat-rolled steel but are spreading to bars and even
pipe, which has been depressed by excessive inventories. Most demand
is from producers of consumer goods, but improvement is starting to
come from producers of business capital equipment and agricultural
equipment, and from the construction industry. Some users are
building inventory. Consequently, steel production and shipments are
expected to continue rising in the fourth quarter. Some pressure on
short-run production capability is being felt in certain product
lines. Immediate capability to produce steel is less than
theoretical capacity because the cash squeeze has led to low
inventories and reduced maintenance of mills. Cash flow is expected
to improve substantially this quarter, so that producers will be
less willing to price at or below cost as they have in recent
quarters.
Construction Activity
Builders of single-family homes report little change in construction
activity from September as new orders continue to decline. Although
the third quarter is typically a slow quarter for new orders, this
year's third quarter new orders were off by about 15% from last
year. Nevertheless, builders report their earnings are stronger for
this third quarter than a year earlier because they are still
working to complete the order backlog accumulated this past Spring.
Realtors attribute the September decline in sales to high mortgage
rates. The only bright spot in the housing sector, according to
builders and realtors, is an increase in traffic—interested buyers —which began near the end of September, and which may eventually
result in actual orders and sales. Vacancy rates in commercial
buildings remain extremely high with declines contingent on an
improved local economy. Despite this high vacancy rate, construction
is continuing on several office building projects throughout the
District.
Commercial Banking
Banks in the Fourth District reduced their holdings of U.S. Treasury
securities, state and local government securities and federal funds
in recent weeks. An increase in loan demand, in conjunction with a
marked slowdown in deposit growth, may explain the reduction in bank
investments. Virtually all of the increase in loan volume at
district banks was in the commercial and industrial loan category.
All categories of deposits were essentially flat. Banks in the
District generally have not been aggressive about the new
deregulated time deposits and hence have not experienced much
shifting of deposits and have not attracted new deposits.