May 6, 1985
Summary
Economic activity in the Fourth District continues to improve
slowly. Employment fell in March but there are some indications of a
pickup in April. Retail sales strengthened in mid-April after a
month of weakness. Car dealers report a temporary lull in sales.
Manufacturing orders are strengthening but business is far from
robust. The housing outlook is improving but builders remain very
cautious. Business loan demand is flat.
District Labor Market Conditions
Ohio employment (s.a.) fell slightly in March, while the
unemployment rate (s.a.) rose for the second consecutive month. The
unemployment rate for Ohio rose to 9.2% (s.a.) in March, but is
still below its year-ago level of 10.1% above the national level. A
survey of manufacturing firms in the greater Cincinnati area reveals
their employment increased slightly in March. The local index of
leading economic indicators for Pittsburgh has been essentially flat
from December through February, indicating little prospect for
employment growth in the near term for that city. On the other hand,
Cleveland's index of leading indicators recorded a large increase in
January and a slight increase in February. A survey of Cleveland
area manufacturers is validating the early-year growth in that index
by suggesting that employment rose solidly in April.
Retail Sales
Fourth District retail sales weakened in March and early April, but
recovered markedly in mid-April. Most retailers report that their
March decline was not as severe as the l.9% drop reported nationally
and that the Ohio thrift problem has had no perceptible impact on
their sales. They blame late tax refunds and unfavorable weather for
recent slack. Retailers expect sales to recover strongly in the
second quarter; improved weather has already boosted department-
store sales. In anticipation of strong demand, few prices were cut
in March, and retailers plan even fewer price promotions for future
months. Stores are largely pleased with their inventory positions,
although some report inventories are slightly above desired levels
because of weak March sales.
Car dealers report slightly lower sales, but expect this to be only a temporary lull in the strong trend of auto sales. They have been moving cars at minimal mark-ups and assert that high sales volume is a key factor in allowing them to price competitively. Dealers voice concern that factories cannot keep up with their demand for some popular smaller models and worry that this problem will grow as sales pick up again. Otherwise, most dealers are pleased with their inventory positions and plan to increase stocks over the next few weeks. All dealers remain confident that consumers will continue to assume debt to acquire new cars.
Manufacturing
Local surveys of manufacturers indicate that new orders and
production have improved from early in the year. However, firms are
allowing raw-materials and finished-goods inventories to rise only
very slowly. The chemical industry in southern Ohio continues to do
well.
Machine-tool producers in the District report that demand for machine tools is growing in the aerospace, defense, automotive, and power-generating equipment industries but remains weak in agriculture and construction machinery industries. A major producer of machine tools expects rising sales in the second half of 1985. Despite this growth, orders are weak relative to the previous peak and the firm estimates that 40% to 50% of metal-cutting machinery is now imported.
The steel industry remains in difficulty. One District firm has narrowly averted bankruptcy proceedings, and reports losing money on its carbon steel operations despite operating its mill at 90% of capacity. Another has filed for protection under Chapter 11, and another recently laid off about 350 workers.
Major producers of capital goods believe spending on plant and equipment is not likely to be slower in the second half than the first half of 1985, despite the results of the recent survey of spending plans. Analysts in this District attribute the first quarter softness in PDE spending on computers to be a result of IBM's introduction of two new models, weakness in sales of personal computers, and a reaction to excessive levels of purchases in 1983 and 1984. They expect a pickup in computer purchases this quarter.
Housing
The outlook for housing in this District is more optimistic than a
month ago. Market participants anticipate a moderate rebound in
housing activity during the second and third quarters, but are not
expanding their business operations, nor do they plan to do so even
if housing activity sustains its strength for the next two or three
quarters. The consensus mortgage rate outlook is that rates will
retain relatively flat until autumn.
A nationwide realty firm reports that listings and closings for existing homes in the first quarter matched last year' s record- breaking first quarter pace, and in April exceeded March's higher- than-expected level.
Builders remain extremely cautious, as orders were down 10% to 15% in the first quarter. They have indicated that for the most part they will build only those houses for which they have firm orders.
Fixed rate mortgages will remain popular with borrowers unless fixed rates rise substantially. Because of high rates of mortgage delinquencies and foreclosures, mortgage insurers recently raised down-payment requirements slightly and also raised premiums on insurance renewals. According to the experience of one lender, neither of these actions has materially affected customer ability to buy.
Commercial Banking
District loan demand has been mixed. Loan outstandings in all major
categories at District banks fell over the past month. Consumer
installment loans registered the largest decline and business loan
volume was down marginally. While lenders acknowledge the flatness
of business loan demand they report fairly strong consumer loan
demand. The general decline in consumer loans at banks is attributed
to aggressive nonbank competition for auto loans rather than weak
loan demand. Captive finance companies of some auto manufacturers
have been offering below-market loan rates on several models.
Contacts expects consumer loan demand to remain quite good and
business loan demand to pick-up in the next few months.