December 5, 1984
Summary
Overall, this District's economy is soft and uneven. Labor market
conditions weakened in October. Department stare sales improved
recently after being slow in the first two weeks of November.
Automobile sales were strong throughout November. Manufacturing
production has begun to expand again but orders are growing so
slowly that backlogs are falling. Machine tool and steel producers
continue to suffer from strong import competition. Inventories are
high in several sectors. The housing market is showing moderate
improvement. Commercial bank lending has been flat.
District Labor Market Conditions
Labor market conditions in the District softened in October.
Employment fell and unemployment rose in Ohio, increasing the
unemployment rate to 9.5% (s.a.), 0.8 percentage points above its
July level but 1.6 percentage points below its year-earlier level.
Manufacturing employment is growing at a slower pace. An index of
leading indicators of employment for the Pittsburgh area fell again
in September to its level of February, suggesting that employment
there has peaked.
Retail Sales
Retail sales were relatively slow over the first two weeks of
November but have since improved according to Fourth District
department store representatives. One economist now estimates that
November sales will show a 7-8 percent year-over-year increase.
However, he and others noted that the November retail sales report
period ended on the 24th, missing some of the late-month strength.
As a result, reported November sales figures may be somewhat
understated while those for December will be somewhat overstated.
Nevertheless, no one anticipates a return to double-digit gains for the two-month period. Further, part of the anticipated November- December gain will likely be achieved through price reductions as retailers attempt to cut inventories.
Auto dealers report strong sales throughout November for both domestic and imported cars. One dealer, in particular, noted that his November sales were about even with the October level. Typically, his November sales run about 20% below the October volume. Car buyers apparently have not been deterred by reports of weakened economic activity or by anticipation of tax increases. A major auto producer believes that auto sales are still constrained by shortages of GMC cars.
Manufacturing
Manufacturing activity in the District is growing slowly on balance.
A survey of manufacturers in northeast Ohio indicates production is
expanding once again after a recent brief contraction. New orders
continue to grow at a slow pace. A survey of manufacturers in the
Cincinnati area indicates production and new orders are rising very
slowly, but order backlogs are falling for the first time since very
early in the recovery. Other survey data indicate manufacturers
expect backlogs to continue to decline. Manufacturers report prices
paid for commodities and services are rising very slowly while
prices paid for equipment are flat.
A manufacturer of machine tools expects orders to be slightly higher this quarter than last, with slow growth continuing into 1985. Machine tool orders from the auto and defense industries remain strong while weakness persists in orders from producers of farm, construction, and oil field equipment. Imports remain a major drag on the domestic machine tool industry, and are absorbing about 40% of the market. Japanese producers are reported to be competing fiercely for sales of machining centers and numerically controlled lathes.
A diversified producer of components for capital goods reports that automotive related orders remain solid. Orders for some electronic components have declined but the firm views this as a correction of earlier overbuilding of inventories rather than a decline in underlying demand. Space-related and defense-related orders continue to grow out less rapidly than their previous exceptional pace.
Major steel producers report orders aid production remain sluggish because customers are reducing excessive inventories and imports remain strong. Order backlogs are expected to continue falling throughout this quarter. Capacity utilization in steel production is 50 to 55 percent for integrated producers and 55 to 60 percent for the industry. Prices remain weak because of import competition. Producers expect market demand to be stable in 1985 and their shipments to increase slightly if quotas restrain imports.
Inventories
Department stares report excessive inventory, while some auto dealer
inventories are tight. Inventories of raw materials and finished
goods are reported to be flat among Cincinnati area manufacturers
and rising slowly among northeast Ohio manufacturers. Lead times for
deliveries appear to be stable. Steel producers report customers are
reducing inventories. Petroleum firms are resisting seasonal
inventory growth because of expectations of price declines.
Housing
Housing market participants in this District report a reversal of
the summer's general downward trend. Because of softening mortgage
rates and prospects for even lower rates, there is a consensus among
market participants that housing activity will improve mildly until
at least mid-1985. The possibility of a strong housing rebound is
generally considered to be remote.
As a result of a substantial recovery in listings and contract closings, realtors are reversing their previous plans to scale down operations. Realtors, who are the most optimistic among market participants, now expect that housing activity will improve throughout 1985. Builders expect the rebound may continue to mid- 1985 out are not reversing previous plans to reduce the size of their operations. Builders apparently would rather minimize down- side risk and forego potential profits if the housing market rebound persists. In contrast, lenders expect the housing rebound to be weak and brief. Although inquiries are up slightly, mortgage volume has been only marginally increased by lower mortgage rates.
Commercial Banking
Loan growth was relatively flat at Fourth District banks during the
past five weeks. A few bankers who reported fairly strong business
loan demand in recent weeks expect the demand for business credit to
weaken. Some contacts said that consumer loan demand has been good
and should remain that way for the balance of the year. A few large
banks report that consumer leading rates have not yet been adjusted
downward.
Retail deposit growth has been moderate at district banks in recent weeks. Banks have relied less on large certificates of deposit, but rare on the use of borrowed funds.