March 13, 1984
Summary
District labor market conditions continue to improve but the
unemployment rate remains high. Retail sales gains slowed in
February and are expected to slow further in March. Manufacturing
activity apparently increased less rapidly in February than in
January. Purchasing agents report a few products in short supply,
and firms in several key industries report some operations are at or
near capacity limits. Nevertheless, many firms are reluctant to add
to capacity. Lenders and builders report little increase in demand
for mortgage loans and new houses. Commercial and industrial loan
demand continues to rise.
District Labor Market Conditions
Labor market conditions in this District improved further in
January. The unemployment rate in Ohio fell to 9.3% (s.a.) in
January from 10.4% in December. In the last year Ohio's unemployment
rate fell 4.7 percentage points while the U.S. rate fell 2.2
percentage points. Nevertheless, the Ohio unemployment rate is still
1.3 percentage points above the national rate. Unemployment rates in
eleven major SMSAs in the Fourth District in December ranged from
8.1% (nsa) in Columbus to 13.3% in Youngstown.
Retail Sales
An economist with a national retail chain reports year-over-year
sales gains slowed in February, and March sales should slow further
even after allowance for Easter being later this year than last. He
forecasts consumer spending to grow slower next quarter than this.
Manufacturing
Manufacturing activity continued to increase in February but at a
somewhat slower pace than in January. Surveys of purchasing managers
in the Cleveland and Cincinnati areas for February indicate
production, new orders and backlogs rose from January. Employment
rose from January but firms are increasing overtime, using temporary
help, and only slowly recalling laid-off workers. Inventory levels
for raw materials and supplies rose from January in Cleveland but
fell in Cincinnati while finished goods inventories are unchanged.
Respondents report lead times are lengthening for several products
and suppliers are allocating inadequate supplies of integrated
circuits, circuit breakers, coated paper, and stainless steel rod
and wire. Buyers expect allocations to be imposed for shipping
cartons and some fasteners.
Capacity Utilization
Major firms in several key industries report operations approaching
capacity but few plan to increase capacity or to bring marginal
facilities into production. There is also a preference to use
overtime or to subcontract rather than to recall workers. There is
skepticism that the expansion will continue long enough to justify
new capacity, and a reluctance to add capacity to meet peak demand.
Two major tire producers report operating at capacity (running as many shifts per week as labor unions will agree to), and one is purchasing tires from competitors to meet customer demand. Capital spending is being used to improve efficiency. Some capacity is still available at other domestic tire producers, and growth of imports has restrained price increases. Nevertheless, prices have begun to firm and industry sources suggest that another price increase is likely in the months immediately ahead.
A paper box producer reports the industry's capacity utilization is in the mid-90s%. Some bottlenecks have appeared but the industry can increase production a little more before physical limits of output are reached.
A chemical producer reports ample capacity in that industry, weak prices, and little interest in adding new capacity.
The auto industry has plenty of additional capacity to produce some compact and subcompact cars but is operating close to capacity for mid- and standard-sized cars. The industry doesn't plan to reopen marginal plants because they expect demand to ease as the year progresses.
Truck producers report light truck (particularly 4-wheel drive) production at capacity, and shortages of axles because supplier capacity was cut during the recession. Heavy-duty truck production is at 90% of capacity, but one parts producer expects demand to fall in the second half of the year after a special sales incentive has ended. Medium truck production is at 70% of capacity.
The aluminum smelting industry is operating at about 83% of physical capacity. Prices have been flat since September. Demand for aluminum is stronger than demand for steel because aluminum is used more extensively in consumer products.
The steel industry is operating at 77% of capacity overall but production of flat-rolled steel, used in cars and major appliances, is at full capacity, and flat bar production is at full capacity at some mills. There is ample capacity to expand production of other steel items.
Electrical equipment producers are experiencing weak demand because electric utilities have ample capacity and the machine tool industry, a major customer, is having a relatively mild recovery. Producers of electronics are experiencing very strong demand. Producers of electronic chips and chip-making equipment are operating near capacity and are planning capacity expansions.
Construction
Despite the recent strength in housing activity nationwide, Fourth
District lenders and home builders generally report little increase
in demand for mortgage loans and new houses so far this year.
Although the acceptance of adjustable rate mortgages (ARMs) by
consumers has increased (probably because the spread relative to
conventional mortgage rates has increased to as much as 300 basis
points at some lenders), speculation that government borrowing will
increase interest rates has tempered demand for these instruments.
Refinancing of existing mortgages appears to have slowed sharply
from last year. First-time home-buyers appear to be seeking
financing through builders that offer buydowns and below-market
rates, while banks are servicing more of the move-up market.
Two commercial and industrial building contractors in the Cleveland area expressed optimism for 1984. Although the vacancy rate of newly constructed buildings is still relatively high, they expect that tile glut of space will be substantially reduced by yearend.
Commercial Banking
Loan demand, particularly commercial and industrial loan demand,
continued to increase at banks in the Fourth District in recent
weeks. Demand, savings and small time deposits have increased only
moderately. Banks have funded loan demand by stepping up their
issuance of large denomination negotiable CD's and by reducing their
holdings of short term Treasury securities and sales of Federal
Funds.