June 25, 1985
The pattern of economic activity in the Fourth District has changed little since the last Beigebook. District employment rose slightly in May, although manufacturing employment was unchanged. Cars and soft goods continue to sell well, while big ticket department store hardgoods are beginning to recover from weak sales in mid-spring. Manufacturing production remains flat, with output strong in automobiles and weak in steel. Firms continue emphasis on cost- cutting modernization rather than expansion. Multi-family residential construction remains volatile because of tax law uncertainty while office construction is being reduced because of excess space. Business loan demand has been flat while real estate and consumer installment loan demand has been good.
Labor Market Conditions
Ohio's unemployment rate fell from 9.0 percent sa to 7.7 percent sa
in May. A slight rise in employment was accompanied by a large drop
in the labor force, which is a phenomenon not witnessed in ten years
of data. Therefore, some analysts agree with the direction but not
with the magnitude reported. Pockets of high unemployment in the
District in many cases are attributable to continuing weakness in
mining and agriculture.
Retail Sales
Fourth District retailers report continued sales growth, although
most mention brief periods of weakness in early May. Car sales
remain strong. Dealers continue to have problems stocking popular
domestic models and report no excess inventories. Import dealers
have had an especially difficult time obtaining cars. Some dealers
feel the market is becoming more competitive, but most think little
additional discounting is possible. Although some consumers
purchased new cars in April and May specifically because of below-market interest rates that recently ended, dealers expect strong
sales to continue as long as rates in general do not rise and
personal income does not falter.
In contrast to auto dealers, department stores report that sales of big-ticket items like furniture and appliances have been weak since mid-April. These items are beginning to recover and retailers believe this may be due to the arrival of tax refunds. Apparel and other soft goods continued to move exceedingly well and sellers expect this trend to continue. Retailers are optimistic about the rest of 1985. Inventories are at desired levels and most stores do not expect to cut prices further. They hope to recover some of their margins lost to earlier discounting by a continued drop in their costs for some goods.
Manufacturing and Investment
A survey of manufacturing firms in the midwest indicates new orders
are increasing slightly faster than in the first quarter but
inventories are being decreased. Planned capital spending in 1985
exceeds the amount spent in 1984 but by a substantially smaller
margin than in the March survey. Surveys of manufacturing firms in
the Cincinnati and Cleveland areas show little change in production,
new orders and inventories. The consensus of the three surveys is
that prices paid and received are changing very little.
Manufacturers of automobiles and automobile and truck parts report that their capital spending is almost entirely for modernization rather than expansion of capacity. Even when a new plant is built it is usually to replace an old, inefficient plant. One manufacturer of truck parts reports that orders are being stretched out but not cancelled. The firm's cash flow is weakening, so the firm may cut back its spending on plant and equipment. Despite a sharp increase in imports, an auto producer will not cut prices because it is operating at full capacity. Major steel producers continue in distress. Prices remain soft, imports high, and profits low or negative. Most major steel producers are reducing their costs but the benefits seem to go into lower prices rather than higher profit margins.
Housing and Construction
Housing market participants expect a moderate rebound in housing
activity in this District during the second and third quarters. As a
result of a substantial recovery in listings and closings, realtors
have cancelled previous plans to scale down operations. Although
builders expect at least a two-quarter housing rebound, they have
positioned themselves to minimize downside risk and thus will forego
potential profits if the housing reversal is stronger or longer than
anticipated. Mortgage lenders are less optimistic than realtors
about the duration and strength of the rebound. Builders expect
volatility in multi-family housing to continue in this District
until there is less uncertainty over tax-reform legislation.
Office construction in the District's major cities has been robust since 1980, resulting in an oversupply of office space. Consequently, all of this District's major cities are currently experiencing a substantial downtrending or complete stoppage in new contracts for office construction, which is expected to persist over the next three to four years. Generally speaking, the office construction market is best characterized as an "orderly buyers' market," inasmuch as prices are being discounted 10 percent to 20 percent but suppliers are not panicky.
Commercial Banking
District loan demand has been mixed with loan outstandings at large
banks registering a slight decline over the past month. Business
loan demand has been flat, and contacts anticipate continued
softness for commercial and industrial credit into the Summer. On
the other hand, the demand for real estate and consumer installment
loans has been quite good, and contacts expect consumer loan demand
to remain relatively strong, particularly with lower and falling
interest rates.