June 25, 1984
Summary
The District's economy continues to strengthen but the unemployment
rate remains stubbornly high. Retail sales have been strong.
Manufacturing activity continues to increase but many major steel
producers are not yet generating profits. Coal demand is rising but
remains at a low level. Residential construction and house sales are
slowing. Business lending has not expanded recently but bankers
expect strengthening soon.
District Labor Market Conditions
The labor market is displaying mixed trends and unemployment remains
high. Employment and unemployment have risen in the last three
months and the unemployment rate has risen from 9.3% in February to
10.2% (s.a.) in May. Although the unemployment rate has declined 3.2
percentage points from a year ago, in May it stood 2.7 percentage
points above the national rate.
Unemployment rates in eleven major metropolitan areas in this District in April ranged from 7.8% in Columbus to 12.0% in Youngstown. Manufacturing employment continues to rise but the average workweek in Ohio manufacturing in April, 42.5 hours (n.s.a.), was at the same level as in November 1983.
Retail Sales
Retail sales remained strong in May, with general merchandisers
reporting year-over-year gains of 9% to 13%. Although these
increases represented some moderation from earlier in the year,
several retailers noted that they were above internal projections
for the month. Moreover, the May gains were largely accomplished
without an unusual number of promotions. One retailer however,
suggested that some of the May strength may have been due to demand
for seasonal goods that had been depressed by adverse weather during
the March-April period. The inventory buildup that resulted from the
March-April slowing in sales has been of little concern to District
retailers because inventory-to-sales ratios remain at acceptable
levels. District merchandisers expect retail sales gains to slow
cyclically over the months ahead and are building inventories in
line with those expectations. Most area auto dealers report
virtually no easing in demand for domestic or foreign cars. They
report that consumer lending rates haven't risen enough to have an
effect on sales.
Manufacturing
Orders, employment, output and prices continue to rise. A survey of
northeastern Ohio purchasing managers indicates production,
employment and prices paid rose faster in May than in April and new
orders accelerated in May after three months of slowing gains.
Inventories of supplies and materials continue to grow and some
managers report they are increasing stocks to hedge against price
increases and slower deliveries. A survey of Cincinnati area
purchasing managers indicates production and new orders are rising
at a steady rate, employment growth is slowing, and order backlogs
are falling slightly. Inventories of supplies and finished goods
show little change. Vendor performance continues to worsen, and
prices paid for commodities continue to rise but at a slower pace
than earlier this year. A survey of financial officers of major
midwestern manufacturing firms indicates new orders continue to
increase at the same rate as in the first quarter while inventories
are rising at an increasing pace.
Primary Metals
A major steel producer reports effective capacity has increased
since early spring and customer inventory growth has slowed;
therefore, the industry is no longer producing flat rolled steel at
current effective capacity. Output of flat rolled steal is likely to
be reduced in the third quarter because of further auto industry
model changeovers and because steel service centers will be
reversing their recent excessive inventory buildup. Demand for steel
plate remains weak. Overall, the domestic industry has the ability
to ship 95 million tons of steel per year but is expected to ship
only 77 million tons in 1984 and 83 million tons in 1985. Prices are
not rebounding as they usually do during an economic expansion.
Prices charged by major steel producers remain weak because of
competition from imports and domestic minimills. Major steel
producers had losses in the first quarter and may break even in the
second quarter but little profit is expected before 1985.
A major aluminum producer reports that some softness in order rates has developed recently. Spot market prices for ingot aluminum continue to decline.
Coal
Demand for coal has increased recently because some users are
building stockpiles in anticipation of a possible strike by the
United Mine Workers, but the levels of demand and production remain
low.
Housing
Residential construction activity is showing signs of slowing
significantly from its rapid first quarter pace. Builders are
experiencing a downward racheting in new orders, despite
undiminished buyer traffic. Demand in the move-up market is becoming
quite weak because of recent rises in mortgage interest rates.
Realtors, who were very bullish at the beginning of the year, are
experiencing a steady decline in listings, a moderate rise in the
average length of time a house is on the market, and a significant
increase in closing time.
According to mortgage lenders, prospects for high and climbing interest rates portend a gloomy housing outlook. Borrowers increasingly are becoming wary about adjustable rate mortgage (ARM) instruments because of recent negative publicity. Lenders expect ARM demand to weaken moderately in the next two months, and doubt that ARMs can sustain the robust pace of housing much longer.
Commercial Banking
Loan demand appears to have weakened at Fourth District banks in
recent weeks. Although the demand for consumer installment loans was
robust, there was no further expansion in business lending.
Nevertheless, bankers generally expect both consumer and business
loan demand to be strong throughout the year.
Deposits increased at a strong pace during the last month. It appears that District banks relied primarily on these funds to finance loans since their holdings of large certificates of deposits and borrowed funds did not increase during the last month.