March 12, 1985
Summary
Economic activity in the Fourth District is reviving slowly after
several months of weakness. Employment is rising and unemployment is
falling. Durable goods are selling well but non-durable goods sales
are sluggish. Manufacturing activity is weak but no longer
declining. Housing activity is improving slowly, and business and
consumer loan demands continue to increase.
District Labor Market Conditions
Ohio employment (s.a.) increased in December and January, while
unemployment (s.a.) fell in January by more than it had risen in
December. The unemployment rate (s.a.) fell from 9.1% in December to
8.4% in January. Surveys of manufacturers indicate little change in
manufacturing employment (n.s.a.). Unemployment rates (n.s.a.) in
December in ten metropolitan areas in this District ranged from 6.4%
in Columbus to 15.1% in Wheeling, a steel-producing center. Local
indexes of leading indicators of employment for the Pittsburgh and
Cleveland metropolitan areas have been flat for several months,
suggesting that employment in those areas is unlikely to grow much
in the near term.
Retail Sales
February retail sales trends in the Fourth District have followed
the national pattern. Hard goods, especially autos, continue to sell
well. Car dealers are intentionally carrying higher-than-normal
inventories in expectation of even stronger sales in the spring.
Electronics, especially VCR's, are selling well, and competitive new
imports are keeping prices down. The only weak durable goods are
nonhigh-tech appliances and furniture. Soft goods, especially
apparel, fell prey to bad weather and sales improved only marginally
in the last half of February when Fourth District weather conditions
improved. Nevertheless, department stores do not plan further price
cuts to reduce inventories because their margins are already thin.
Instead, they plan to reduce orders to eliminate excess inventories
of soft goods.
Manufacturing
Surveys of manufacturers in the Cleveland and Cincinnati areas
indicate weakness in manufacturing activity. Manufacturers in
Cleveland and northeast Ohio report their level of production has
stabilized after falling in January and new orders have stabilized
after four months of decline. In Cincinnati, production is rising
slowly, new orders are flat, and order backlogs are declining.
Inventories of raw materials and components are falling in Cleveland
and are flat in Cincinnati while inventories of finished goods are
flat in Cleveland and rising slowly in Cincinnati. Prices paid by
manufacturers continue to rise very slowly.
A major producer of industrial chemicals reports export markets are weakening, while growing shares of strong domestic markets are being absorbed by imports. Producers of parts for the automobile industry report demand is very strong. A large steel producer reports orders for flat-rolled sheet products used by the auto industry have surged to capacity. Steel prices are below published schedules and imports continue to rise.
A survey of manufacturing firms in the midwest indicates they are not changing their plans to increase capital spending this year. A producer of parts for trucks and autos is planning to invest significantly more this year to modernize production facilities and to locate production plants closer to customers to meet growing demands for just-in-time deliveries. The firm reports that sales of smaller trucks are at a record pace but sales growth of heavy-duty trucks has slowed and manufacturers are asking suppliers to delay delivery of components. A major producer of material used in commercial construction reports record demand, and believes that tax incentives must be stimulating construction of office buildings because vacancy rates continue to rise. The firm has pushed back to late-1985 its forecast for a decline in its sales, and expects a 3- year to 4-year slump in commercial construction, especially office buildings, because of excess space.
Housing
Housing activity in Ohio is reviving, hut more slowly than in many
other areas of the country. Market participants generally expect
that sales will improve steadily during the first and second
quarters because of lower mortgage rates, but builders remain
extremely cautious.
A large savings and loan association reports that applications and inquiries in February were substantially higher than a year ago. Fixed-rate mortgages are regaining popularity among borrowers because of the narrowing rate spread between fixed-rate and adjustable rate mortgages and tighter underwriting criteria for adjustable rate mortgages. A savings and loan association reports that its mortgage delinquencies are rising, and higher delinquency rates are likely to persist because slow appreciation of home prices has eliminated the incentive for some buyers to reschedule payments with the mortgagee.
Most builders in this region had laid plans for strong sales in 1984 but had a poor year. Builders are assuming that housing starts nationally will equal 1.5 million units in 1985. They have reduced their geographic market coverage, scaled down production facilities, reduced their inventories to maximize profits in a soft market.
Commercial Banking
Loan demand appears to have strengthened at District banks in recent
weeks. Business loans registered the largest gain in outstandings,
and consumer loan volume continued to grow at a relatively good
pace. Contacts expect additional pick-up of business loan demand and
continued strength in consumer loan demand. The market share of auto
loans held by banks, however, is likely to decline somewhat because
below-market loan rates are being offered on selected models by
captive finance companies of some auto manufacturers.
Overall deposit growth has been moderate at District banks in the past six weeks, Inflows of time and savings deposits have more than a offset reductions in demand deposits. District banks also have increased their reliance on purchased funds including large negotiable certificates of deposit.