January 28, 1986
Summary
This District's economy is growing slowly despite weakness in
manufacturing. Unemployment is high but falling. Holiday retail
sales were up moderately from a year ago, and early January new car
sales have responded well to sales incentives. Manufacturing remains
in the doldrums, with new orders, backlogs, and employment falling,
and manufacturers still see little response to dollar depreciation.
Housing activity remains strong. Bank loans outstanding rose
significantly in the last month.
Retail Sales
Despite fewer than usual shopping days, holiday season retail sales
in the District were up moderately from year-ago sales. A sample of
three large general merchandise chains report nominal December sales
increases at roughly 4 to 6 percent from year-ago levels, slightly
more than experienced at the national level. Department store sales
in the District were particularly strong in the apparel and home
improvement categories. None of the retailers contacted express
concern over current inventory positions, although many express
uncertainty over future sales prospects.
Area new-car dealers report strong sales following the typical holiday sales decline. Most auto dealers report the early January sales gains, in some cases as much as 30 percent above year-ago levels, are a consequence at the nationally sponsored interest-rate incentive programs. However, domestic new-car dealers have also noted a moderate improvement in nonqualifying sales categories, such as luxury new-car models. Few new-car dealers expect incentive- induced sales gains to last. Local new-car inventories increased in late-December and early-January, but area dealers note that this is typical as they prepare for the anticipated Spring sales increases.
Labor Market Conditions
Ohio's labor market showed some improvement in the fourth quarter of
1985 as the seasonally adjusted unemployment rate fell from 9.4% in
September to 8.3% in December. Hiring expectations for the entire
Midwest show a slight decline for the first quarter of 1986 compared
to the initial quarters of 1985 and 1984.
Manufacturing
Manufacturing activity in this District remains in the doldrums.
Most firms report manufacturing output was unchanged and those
reporting increases are matched by an equal number reporting
production decreases. Employment is falling at substantially more
than half of the manufacturing firms surveyed. Manufacturers report
new orders and order backlogs have fallen for three consecutive
months. Despite the decline in orders and backlogs, a majority of
firms report they expect l986:IQ to be better for their companies
than 1985:IVQ. Raw materials inventories fell sharply at yearend,
and although some respondents say tax considerations contributed to
the decline, inventories have been on a downtrend for several
months. Finished goods inventories also continued to decline,
falling more sharply at this yearend than at other recent yearends.
Manufacturers report prices paid for commodities are falling but
prices paid for equipment and services are rising.
There is still very little indication of response to dollar depreciation. Of eight major manufacturing firms that export and/or compete against imports, none report having been able to raise their own prices in response to dollar depreciation, only two report any increase in orders or sales, and the remaining six report having no additional inquiries.
Most steel producers continue to face weak prices and stiff competition as imports exceed levels envisioned by the import control program. Major producers have pruned their operations but more surgery may be needed unless price increases are obtained. Nevertheless, some segments of the industry, such as flat rolled steel used by the auto industry, and specialty steel, are doing well. A steel industry analyst expects domestic steel consumption to fall slightly in 1986, offsetting an expected small decline in imports and leaving domestic steel shipments unchanged.
Housing
Realtors, builders, and mortgage lenders in this District report
continued strength in their businesses. Contacts report record
profits in 1985, and expect 1986 profits to be equal or better.
Mortgage lending in the District remains strong, although it has softened in recent weeks because secondary market rates have climbed 65 to 70 basis points. One major mortgage lender's 1985 mortgage volume was up 50 percent on a year-to-year basis. Home loan refinancing represented 50 percent of their loan activity in December. The firm expects a 25 percent increase in its mortgage loan applications in 1986.
Realtors' transactions volume rose 10 percent above 1984 levels, bringing record profits in 1985. One major realtor expects another profit record in 1986. Although his new listings are showing signs of slowing, he plans to increase staff 10 percent in 1986.
A major builder in the District reports record 1985 earnings, despite a small drop in orders. This builder reports a recent surge in traffic, with fewer lookers and more serious buyers. There is little speculative house building, and pre-selling of homes has become a common practice among builders.
Construction
A major real estate developer reports that speculative construction
of office space seems to be excessive in some midwestern cities. He
attributes the excess to the easy availability of construction loans
and is concerned that in six to twelve months the developers may
find too few tenants and no long-term financing.
Commercial Banking
Loan demand at District banks is picking up. Total loans outstanding
at large banks rose significantly over the past month, but much of
the increase was due to seasonal factors. Gains in business and
consumer installment loans more than offset declines in real estate
loans. Although consumer installment lending remains quite strong it
has been increasing at a decreasing rate. Contacts expect consumer
lending to continue to expand at a double-digit but slower pace.
Contacts also expect business loan demand to improve in the first
quarter, as more firms begin to rebuild inventories.