October 23, 1985
Summary
The District's economy remains weak overall albeit with pockets of
improvement. The unemployment rate remains high and is exceptionally
high in some areas, while manufacturing employment continues to
decline. Department store sales are disappointing and auto sales
have fallen to typical levels following the end of special financing
programs. Manufacturing activity is increasing in the Cincinnati
area but declining in northeast Ohio. The steel industry continues
in difficulty with another major plant closing recently announced.
The housing industry is showing further strengthening. Commercial
bank loan demand has picked up somewhat.
Labor Market Conditions
Labor market conditions in the District remain soft. The Ohio
unemployment rate was 9.4% (s.a.) in September, up 0.2 percentage
points from a year ago. Manufacturing employment continues to
decline. Some manufacturing firms report they are not laying off but
are not replacing workers who leave.
Retail Sales
Major Fourth District department stores report that sales over the
last six weeks were disappointing. Retailers point to exceptionally
warm weather in September, which discouraged shopping, and an early
Labor Day, which shortened the back-to-school shopping period, as
sources of sluggishness. One analyst asserted that record auto
sales, most of which were heavily financed, hurt department store
sales because monthly car payments reduce disposable income
available for other spending. All major stores expect improved sales
in the fourth quarter, and therefore are not worried about the
moderate inventory accumulation from recent slack sales.
Auto dealers report that, as expected, sales fell during the first week of October as special financing on 1985 models ended. However, this decline was not as severe as many had expected and sales are described as "typical" for October. Expectations for the rest of 1985 are mixed, with some dealers building inventories in anticipation of strong sales through November, while others expect an immediate sharp decline in demand. Several dealers express confidence that major manufacturers are likely to re-establish low financing rates on virtually all models soon because bank loan rates for car purchases are far above the banks' cost of funds and these spreads are unlikely to diminish much in the near term.
Manufacturing and Mining
Manufacturing activity is uneven in the District and mining remains
depressed. Manufacturers in the Cincinnati area report solid gains
in production and new orders, slight increases in employment, and
small declines in inventories. In contrast, manufacturers in
northeast Ohio continue to report declines in production, new
orders, and employment, and slight, probably involuntary, increases
in inventories. A survey of manufacturing firms in midwestern states
shows incoming orders falling for consumer non-durables but rising
for consumer durables and capital goods.
Purchasing managers generally report slight declines in prices paid for materials and components and in prices received for finished goods, and describe the current situation as a buyers' market. They expect no increase in inflation in the next six months.
Demand is improving in the fabricated aluminum products business, but ingot aluminum prices are very low and continue to decline because of excess world smelting capacity. A major aluminum producer recently announced plans to diversify away from supplying the primary aluminum market.
The steel industry continues to face weak demand and prices and strong competition from abroad. A major producer recently announced plans to close a 1,200 employee plant by yearend 1985 because of strong import competition and weak domestic demand for seamless tube. A strike continues at a major steel producer that is in Chapter 11 bankruptcy.
High labor costs are claimed to be hampering some other firms. A major manufacturing firm recently cancelled a $185 million planned renovation of a mill because its union refused to make any concessions. Another firm is moving a plant out of this area because it is unable to obtain any concessions from its union.
The coal mining industry in the District remains in distress with no relief in sight. Unemployment rates in the teens are common in coal mining counties in this District.
Housing
More optimism is evident in midwestern housing markets than last
month because of lower mortgage rates, strong income gains, and
availability of state-subsidized mortgage money. A major builder in
this District reports strong gains in house construction in August
and September, and if fourth quarter earnings are only fair, the
firm will post record earnings for 1985. Despite the gains, the firm
recently reduced slightly its forecast for housing demand in the
fourth quarter and into 1986. Sales of existing houses have been
strong in Dayton and Columbus, Ohio, encouraging builders there to
begin again to construct houses on speculation. Asking prices on
new houses are reported to be much higher than on equivalent
existing houses.
A major real estate firm reports new listings remain very strong and should sustain strong real estate broker activity into 1986. In Pittsburgh, lower interest rates have boosted existing home sales but it is still very much a buyers' market.
A large mortgage lender in this District reports that as mortgage rates have fallen to what many borrowers view as the interest rate trough, the incidence of mortgage refinancings has increased. Mortgage refinancings represent one-third of total mortgage volume at this mortgage lender.
Commercial Banking
District loan demand has picked up somewhat. Loans outstanding in
all major categories at large banks increased over the past month.
Contacts report some pick up in business loan demand and expect a
small increase in commercial and industrial lending during the
fourth quarter. Despite weakness in auto lending due to the
availability of cut-rate financing through auto companies, banks
posted healthy gains in overall consumer loan volume during
September. Unless these special financing deals are resumed on a
broad scale, bankers anticipate further strength in consumer loans
over the next few months.