January 20, 1984
Summary
Economic activity in the District continues to improve. The
employment situation is mixed, as firms have been reluctant to
recall workers, and are stressing overtime and productivity
increases. Retail sales were strong in the holiday and post-holiday
seasons. Manufacturing activity continues its strong growth from
recently depressed levels. Production of flat-rolled steel for
consumer goods is strong but demand for other steel products remains
weak. Capital goods production is strengthening from a low base but
imports are hindering recovery for some products. Demand for
automobiles is growing and some parts suppliers have reached
capacity limits. Firms are cautious about increasing capacity;
capital spending is emphasized for modernization rather than
expansion. House construction may have topped out. Loan demand,
especially for commercial and industrial loans, is strengthening.
District Labor Market Conditions
Labor market conditions in this District show mixed trends, and the
unemployment rate remains well above the national average. In Ohio,
the numbers of employed and unemployed workers both declined (s.a.)
in December. The unemployment rate has fallen to 10.42%from 11.5% in
September (s.a.) but remains 2.2 percentage points above the
national rate. Unemployment (n.s.a.) rates in eleven major SMSAs in
the District in November ranged from 8.5% in Columbus, Ohio to 14.1%
in Youngstown.
Production workers in Ohio manufacturing firms achieved record average weekly earnings in November as overtime work continued to increase. Hourly earnings increased slightly but the average workweek increased by one-half hour to 42.5 hours.
Retail Sales
Fourth District retailers report an active holiday season, and
express optimism over the first quarter sales prospects. Some report
sales were unusually strong in the first two weeks after Christmas.
General merchandise sales are roughly 10 to 14 percent above year-
ago levels, according to three major retail chains the district.
Sales gains were achieved in almost all merchandise categories,
especially apparel and household furnishings. Fourth District sales
of both domestic and import cars were also brisk during the holiday
period. Import dealers are not currently experiencing shortages, but
most expect shortages to develop again by early February. Domestic
new-car dealers indicate that inventory positions are near desired
levels.
Manufacturing
Manufacturing activity continues its upward trend in this District.
A survey of Cleveland area purchasing managers for December
indicates production was higher than in the preceding month for a
larger percentage of respondents than any time since April 1977, and
new orders were higher for a greater percentage of respondents than
any time in over ten years. Respondents report rush orders and split
shipments are becoming more common. Finished goods inventories are
rising slowly. Employment is unchanged, suggesting that firms are
using overtime to expand production.
A survey of purchasing managers in the Cincinnati area indicates production, new orders, and backlogs are growing, although less rapidly in December than in October. Strong price pressures are reported for commodities. Delivery time is increasing and split shipments are becoming more common. Finished goods inventories are rising.
This bank's survey of Fourth District manufacturers indicates that firms expect moderate growth of shipments, new orders, and inventories in January. Employment is expected to hold steady while average weekly hours worked is expected to increase.
Steel
Production of flat-rolled steel used in consumer goods is near
capacity but demand for oil-country goods and construction steel
remains weak. A major steel producer reports gradual improvement in
demand from the capital goods sector. Another firm reports December
shipments strengthened as buyers anticipated early 1984 steel price
increases. Industry production is currently about 70% of capacity,
adjusted for plant closings. One firm estimates the new breakeven
point, given present prices, is 68%-70% of capacity, and suggests
that all producers can expect to make a profit in 1984.
Capital Goods
Orders for heavy duty trucks have been strong since August because
of the need to replace the existing fleet of trucks. The recent
surge in demand has caused supplies of some truck components to be
tight. A supplier reports being at full capacity in truck-related
production, partly because his capacity was reduced in 1982 and
1983. Demand for parts for construction machinery is beginning to
improve but parts demand for aircraft and agricultural equipment
remains weak.
A machine tool producer reports orders have doubled from six months ago but nevertheless are still at a low level. Orders are unlikely to reach their previous peak because foreign producers now have 40% of the domestic market. Nevertheless, production of machinery to produce some electronic equipment is at capacity, and a producer expects large productivity gains from electronic equipment to dwarf interest costs as a consideration by purchasers in 1984.
Automobiles
Sales of new cars rose substantially in 1983:IVQ, following a
supply-constrained third quarter. Orders are continuing their
gradual strengthening, but dealers are keeping inventories tight. A
major producer reports some suppliers are at capacity, sometimes
hindering automobile production. A need for additional capacity by
parts suppliers is reported because many suppliers went bankrupt
during the last recession. Nevertheless, suppliers are reluctant to
expand capacity because of uncertainty about the duration of the
current expansion.
Construction
Orders for new houses are down, and are unlikely to match last year.
Builders of single-family homes report that new orders in the fourth
quarter were down by 10% to 12% from a year earlier. The outlook for
housing construction in 1984, according to a major Fourth District
builder, is fairly good, but won't match 1983's performance because
pent-up demand is not as strong as in early 1983, and interest rates
are not expected to fall to the 12 1/2% levels reached in early
1983.
Commercial Banking
Loan demand appears to have strengthened at Fourth District banks in
recent weeks. An increase in loan volume is evident for virtually
all loan categories and especially for commercial and industrial
loans and loans to financial institutions. Demand, saving and time
deposit growth were not exceptionally strong. District banks
apparently funded loan demand by running down their holdings of
liquid assets and by issuing large denomination certificates of
deposit. In particular, bank holdings of short-term Treasuries and
federal fund sales both declined.