December 6, 1983
Summary
Economic conditions continue to improve in the Fourth District.
Employment is rising and unemployment is falling, but the
unemployment rate remains well above the national average. Retail
sales gains continue and merchants are optimistic about Christmas
sales. Manufacturing activity continues to increase. Steel and
capital goods output is increasing slowly. Sales of existing houses
continue to be hurt by the level of interest rates and customer
confusion about rates, but sales of new houses have improved
recently. Commercial banks have become less liquid as deposit growth
slowed, and loan volume increased sharply.
Labor Market Conditions
Labor market conditions in the District improved further in October,
although unemployment remains high and substantially above the
national average. The number of unemployed workers fell, cutting the
unemployment rate to 10.6% (nsa), which is 2.2 percentage points
above the national (nsa) rate. Nevertheless, Ohio's unemployment
rate has improved substantially from the 13.2% rate of a year
earlier. Unemployment rates in eleven major SMSAs in the Fourth
District in September ranged from 8.5% (nsa) in Columbus to 14.5% in
Youngstown.
Local indexes of leading indicators for Pittsburgh and Cleveland continue to rise, although less rapidly than earlier in the year, suggesting that further improvement in labor market conditions lies ahead.
Despite the substantial pool of unemployed workers, some smaller firms report evidence of a tightening in markets for some skilled employees—an event which some expect to lead to a quickening in the pace of wage increases over the next year.
Prices, Wages, and Earnings
Real earnings of workers in manufacturing have risen sharply in the
last year. Average weekly earnings for production workers in
manufacturing increased 11.4% from a year earlier in Cleveland,
11.4% in Pittsburgh, and 9.6% in Cincinnati. The Consumer Price
Index for urban wage earners rose only 1.1% from a year earlier in
Cleveland, 1.5% in Pittsburgh, and 2.8% in Cincinnati.
Retail Sales
A survey of Fourth District retailers indicates sales gains
continued into November, although the pace of domestic new and used
car sales showed a normal, seasonal slowdown between October and
November. Three major general merchandisers report November sales
increases of roughly 9%-13% from year earlier sales, which compares
favorably with the national average of 9.4% over the same period.
The retailers report a rather broad-based sales improvement,
although most hardgoods and apparel items are selling unusually
well. New and used car dealers in the District report a moderate
sales slowdown from October, which is typical for the season. Of the
domestic new-auto retailers reporting, all indicate inventories are
within an intended 40 to 50 day range. Import car dealers, however,
continue to lose sales because of quota-induced availability
problems. Most retailers contacted are optimistic about holiday-
season sales prospects.
Manufacturing
Manufacturing activity continues to expand in this District. A
survey of purchasing managers in the Cleveland area indicates solid
gains in production and new orders in October; no respondent
reported declines. Raw materials inventories are being increased and
a slight decline in finished goods inventories is attributed to
strong shipments. Employment expanded as firms reported callbacks,
new hiring, overtime, and shift expansions. Respondents are bullish
for the remainder of 1983 and the first half of 1984.
A survey of Cincinnati area purchasing managers reveals production and new orders rose more rapidly in October than in September. Backlogs and employment also rose. Prices paid rose more rapidly in October than in September.
This Bank's survey of Fourth District manufacturers reveals new orders and backlogs increased again in October and are expected to increase in November. Shipments expanded in October but no further gains are expected in November. Inventories are expected to decline in November.
Steel
A major steel firm reports that demand for steel is rising but not
rapidly enough to strengthen prices very much. Because of cash flow
pressures, steel producers are reluctant to build inventory despite
the prospect of rising sales in 1984. The industry is operating at
about 60% of reported capacity, up from 25%-30% for many producers
last December. Actual operating rates are somewhat higher; one firm
estimates actual industry capacity at 143 million tons, instead of
the reported 151 million tons. Despite slack in the industry, there
are some bottlenecks in finishing capacity, as some mills that
produce flat rolled products are operating virtually at capacity.
Capital goods
Capital goods producers report increasing orders and output, but
from a very low base. Machinery producers note that capital goods
production is growing slower here than in the nation because the
District has a very small share of the rapidly growing electronic,
high-tech equipment industry. Traditional capital goods industries,
including machine tools, heavy-duty trucks and industrial and
electrical equipment, have been reviving in recent months but
operating rates are generally well below those of the high-growth
industries.
Real Estate
Realtors report hope sales in recent months have fallen about 30%
from last spring. Most of the decline is attributed to the midyear
increase in mortgage interest rates. Realtors attribute part of the
decline to recent changes in FHA and VA rates, which have caused
customer confusion about the direction and level of rates. The
inventory of listings is rising because of the slowdown in sales.
Nominal transactions prices have not yet fallen but are expected to
decline next spring if demand doesn't recover by then. Realtors
report a recent increase in use of alternative financing
arrangements.
Builders report that sales of new homes picked up in October and November following a third quarter slump, but sales are 13% below this time last year. Overall, 1983 will prove to be a profitable year for most builders, and builders expect the same level of activity in 1984 if mortgage interest rates do not increase.
Commercial Banking
In recent weeks, commercial banks in the Fourth District have become
somewhat less liquid as deposit growth has slowed and loan demand
has strengthened. Demand deposits declined slightly, while savings
and small time deposits increased by small amounts. Loan volume
increased sharply. The bulk of the increase in loans went to banks
in foreign countries, commercial and industrial borrowers, and
brokers and dealers. Banks apparently financed the increase in loans
by reducing their holdings of other earning assets and by issuing
large denomination CD's. In particular, declines were evident in
bank holdings of cash, U.S. Treasury and agency securities,
municipal securities and federal funds sales.