August 6, 1984
Summary
Economic activity in this District continues to improve, with some
signs of slower growth and no indications of accelerating inflation.
Labor market conditions continue to improve. Auto sales remain
strong but general merchandisers report slower growth of sales.
Growth in manufacturing activity is slowing. Inventories are
growing slowly. Housing markets show more signs of weakening.
Business and consumer loan demand, except for home mortgages,
remains strong.
District Labor Market Conditions
Labor market conditions in the District continue to improve and use
of overtime is declining. Unemployment fell and employment rose in
Ohio in June, reducing the unemployment rate to 9.0% (s.a.) from
10.2% in May. Manufacturing employment in Ohio continues to increase
slowly but average weekly hours worked by production workers have
fallen from 42.8 (n.s.a.) in December to 42.2 in June.
Price Pressures
Contacts generally report little upward pressure on prices. A survey
of purchasing managers suggests the rise in commodity prices has
slowed sharply in the last three months. Some contacts report
wanting to raise their own prices to restore historical profit
margins but are unable to make increases stick, even though sales
are rising.
Several contacts report producers of corrugated paper containers are at capacity and raising prices. A producer of television bulbs reports no price increases despite strong sales because of world- wide overcapacity in glass. A producer of railroad ties reports difficulty obtaining raw wood because it is being diverted to the pulp and paper industry, yet wood prices are not rising. Prices of steel remain weak. There has been some easing of shortages of chips and microprocessors.
Retail Sales
District retail sales reports for July were mixed. Auto dealers
continue to report strong sales gains with some sales lost because
of a lack of inventory. Preliminary sales figures for general
merchandisers indicate some weakening in sales. Most reported that
July gains were below expectations because a dip in soft goods
removed some of the strength seen in first and second quarter gains.
One analyst, however, believes the July slowing was due in part to
the large June increase. He expects sales to remain soft in August
and turn up in September.
Manufacturing
Growth of manufacturing activity shows some signs of slowing. This
Bank's survey of District manufacturers indicates they expect
business conditions in July will be little changed from June.
Producers of components for durable goods report orders are
generally strong except for some weakening in orders from producers
of appliances and other consumer durables. Orders from the
industrial sector are strong with no sign of slowing. Orders from
producers of plastics-making machinery and construction equipment
are particularly strong. Orders from heavy truck producers are being
received at a high but slowing rate but orders from producers of
agricultural machinery remain weak. Producers of components for
refrigeration equipment, autos and trucks report production is at
capacity. Production of chlorine for the plastics industry is at
capacity.
A major steel producer reports orders for steel have been falling because of seasonal automobile model changeovers and inventory reductions of flat-rolled products, especially by steel service centers. Mother steel producer reports that the decline in new orders experienced since March appears to have ended in June. Competition from imports remains a key concern of the industry.
Inventories
Contacts generally report strong efforts to keep inventories leaner
than usual. Purchasing managers report general vendor performance
continuing to deteriorate but inventories continue to grow very
slowly. One contact sees producers building inventories of materials
and supplies later than normal in this recovery. Some general
merchandisers report some involuntary inventory accumulation in
July, but auto dealers are unable to build inventory.
Housing
The outlook for housing is gloomier than a month ago as housing
markets exhibit more signs of easing. One market participant
described the current market as a "buyers' market without buyers."
Realtors are experiencing a significant deceleration in the volume of contracts being closed, which is expected to worsen. Adjustable rate mortgages (ARMs) have been sustaining greater-than-typical activity for recent levels of interest rates, but recent negative publicity about the "payment shock" of ARMs is reducing consumers' acceptance. Builders have become extremely cautious and are reducing inventories of unsold homes and undertaking new business by order only.
Mortgage loan activity at banks is slipping; two large banks report activity is 50 percent below last year's pace. Bankers say consumers increasingly are demanding interest rate and payment caps on ARMS. Partially offsetting the effect of higher mortgage rates is the revival of mortgage revenue bonds under the recent deficit reduction legislation.
Commercial Banking
Loan demand has been strong at Fourth District banks in recent
weeks. The business loans category registered the largest rise in
outstandings during the past month. Bankers expect business loan
demand to remain at its current, fairly strong level. Banks report
sizeable gains in consumer loans and expect demand for auto and
credit card loans to remain quite good in the next few months.
Retail deposit growth at Fourth District banks has been relatively flat during the past month. Banks appear to be financing loans by issuing large CDs and reducing their holdings of securities.