January 30, 1985
Summary
The Fourth District economy shows signs of sluggishness with no
clear direction. On the upside, there are reports of strong gains in
retail sales, especially of autos. Employment rose in December, and
commercial bank loans increased in all categories, especially the
consumer sector. On the downside, manufacturing output, orders and
backlogs fell in December and manufacturing employment was
unchanged. House builders remain extremely cautious, although other
housing market participants' outlooks have been buoyed by interest
rate declines. The coal mining, and oil and gas exploration
industries are depressed.
District Labor Market Conditions
Labor market trends in the District were mixed in December. Ohio
employment (s.a.) rose in December after having fallen in October
and November. However, unemployment (s.a.) also rose in December
after falling in November. The unemployment rate in Ohio rose in
December to 9.1% (.s.a.) from 8.7% in November. Unemployment rates
(n.s.a.) in ten metropolitan areas in the District ranged in
November from 6.5% in Columbus to 15.6% in Wheeling. An index of
leading indicators of employment in Pittsburgh has shown little
change since last February, suggesting that employment there will
not grow further.
Retail Sales
Fourth District retail sales registered a further strong gain in
December. Some auto dealers report sales were up as much as 28% over
a strong year-earlier period, apparently aided in part by an easing
in inventory constraints, and the strong sales gains have continued
into early January. Representatives from area department stores
report that December sales more than met expectations. Year-over-
year gains were in the 7% to 11% range. Some merchants report
extensive price reductions while others say price reductions were
quite limited. Most analysts attribute the fourth quarter rebound in
sales to a still-positive consumer attitude. However, an economist
at one department store chain noted that he expects retailers to
continue trimming inventories over the first quarter of the year.
Manufacturing and Energy
Manufacturing activity in the District shows signs of weakening, and
the energy sector is depressed. Surveys of production managers in
Cincinnati and Cleveland show production, new orders and backlogs
fell in December. However, there are some indications that the
falloff may be seasonal, and manufacturing employment was unchanged.
In Cleveland, a substantial majority of respondents expect business
to be better in the first half of 1985 than in the last half of
1984. Price pressures continue to be moderate. Vendor delivery
performance continues to improve. Raw material inventories are
declining slowly, and finished goods inventories are generally flat,
except where order declines have resulted in some involuntary
accumulation. Contacts continue to report very conservative policies
on inventory accumulation.
Many firms in this District report continued strong competition from imports is restraining price increases and keeping profit margins small. A containers producer reports a continued shift from glass containers to plastic and paper substitutes. A producer of personal safety equipment used in industry had strong earnings in 1984 and expects a strong 1985. Some chemicals factories in southern Ohio are operating at capacity.
Major steel producers report some pickup in orders from the automobile industry and steel service centers, but transactions prices remain well below published prices because of excess domestic capacity and strong competition from imports. Steel inventories remain high. A steel mill in western Pennsylvania recently announced a 500-worker layoff.
Capital goods producers have mixed views on the report that domestic firms plan a 6.8% real increase in expenditures on plant and equipment in 1985. One firm, which expects a recession to begin no later than the second half, expects the real change in business fixed investment to be negative, partly because of uncertainty about tax law changes. Another firm thinks the figure is on the mark while a third expects a 10% real increase.
Coal mining remains a depressed industry. Many workers are on a three-day week, and improvement is not expected until late-1985 when excessive stockpiles will have been worked down. Falling oil prices have depressed oil and gas drilling activity in this District.
Housing
Except for home builders, housing market participants in this
District report continued improvement in their housing-related
businesses and cite declining mortgage rates as the primary cause.
The consensus is that housing activity will rebound at a slow,
sustained pace until mid-1985. Housing market participants expect
that the rate on fixed rate mortgages will decline as much as
another 50 basis points, but won't fall below 12%.
Realtors, who remain the most optimistic among market participants, experienced further improvement in December in listings and contracts closed. There are some signs that the move-up market is reversing its flat performance of 1984. Realtors' optimism is reflected in one District firm's plan to open three times as many new franchises during 1985 as in 1984.
Mortgage lending volume is expanding because of lower mortgage rates, and one lender reports that loan volume in December was 50% higher than a year earlier. Lenders anticipate that the resumed popularity of the fixed rate mortgage will persist until the second half of 1985, when they expect rates to rise. Lenders will sell most new fixed-rate mortgages in the secondary market if commitment rates are favorable.
Builders remain extremely cautious. New orders remain sluggish, and buyer traffic, which a major builder reports was up 11% nationally in December, fell 35% in Ohio. Because of poor earnings in 1984, builders are positioning to minimize downside risk.
Commercial Banking
Loan outstandings in all major categories increased at Fourth
District banks during the past month. Contacts report that consumer
loan demand has been quite good, and it should remain relatively
strong on the strength of new car sales. Business lending has
picked-up somewhat, and contacts are generally optimistic about
future demand for commercial loans. One banker, however, thinks that
recent business loan demand has been rather weak and doesn't expect
an improvement before March. Deposit growth has been moderate for
both transaction and nontransaction accounts at District banks in
the past month.