March 20, 1986
Summary
This District's economy continues to improve. Retail sales are
rising but not robustly. Unemployment rates have fallen but remain
high, especially in Ohio. Manufacturers report signs of strength,
but pockets of softness remain. Some oil wells are being closed
because of weak prices. House construction, sales, and mortgage
refinancings are being stimulated by falling interest rates. Banks
are optimistic about business loan demand, but their consumer loan
growth is slowing.
Consumer Spending
Consumer spending in this District continues for the most part to
mirror national economic trends. Major retailers report nominal
sales roughly 4 percent to 7 percent above year-ago levels.
Household nondurable goods and apparel sales are particularly
strong, which is typical for the season. Although most retailers
categorized their February inventory positions as "manageable,"
inventories appear to be somewhat above year-ago levels.
District auto dealers express growing optimism about their 1986 sales prospects, and report that sales to date are good. Surprisingly, local auto-sales data have not reflected the monthly volatility characteristic of the national auto market. During the first two months of 1986, unit sales of domestically made new cars in this area were nearly 5 percent above year-ago levels. Most auto dealers, including some import dealers, report that new-car inventories are high.
Labor Market Conditions
The Ohio and Pennsylvania unemployment rates (s.a.) fell in February
to 8.7 percent and 7.1 percent, respectively. Ohio's unemployment
rate continued on its path of erratic monthly changes, dropping in
February because employment rose while unemployment was essentially
unchanged. Pennsylvania's unemployment rate continued its downward
trend as employment rose while unemployment fell.
Manufacturing
Manufacturing activity in this District shows solid signs of
improvement after several months in the doldrums. New orders and
production are rising but not yet robustly. Despite this good
performance, employment at manufacturing firms continues the slow
decline of the past four or five months. Firms also continue to
reduce raw materials and finished goods inventories. On balance,
manufacturing firms report paying slightly higher prices for raw
materials. A few contacts report that dollar depreciation has begun
to increase their export sales or increase the prices they pay for
imported materials. Carbon steel prices are reported to have begun
to firm and some industry representatives expect the industry
profit/loss results to be better this year than last. Some strength
also is reported for the aluminum industry. Nevertheless, a great
deal of softness remains in many parts of this District; for
example, one contact reports concern that a major manufacturing
plant may shut down temporarily because of weak orders.
Energy
Some oil wells in southern Ohio are being closed because of weak
prices and because buyers are reluctant to purchase oil when they
expect further price cuts. Gas production remains good in southern
Ohio. Some slight declines in steam coal prices are being reported,
but a major producer reports that the price of coal is quite
insensitive to falling oil prices. In many locations coal is still
relatively cheaper than oil, and very large capital costs are
required to convert a coal-fired boiler to oil-fired so conversions
won't be made unless oil prices are expected to remain low for an
extended period.
Housing and Construction
Realtors, mortgage lenders, and builders in this District expect the
current strength of housing markets to be sustained throughout 1986,
but they are skeptical of the rosier national forecasts.
Mortgage lenders report that falling mortgage rates have prompted a deluge of mortgage refinancings by borrowers with high rate fixed- rate mortgages or adjustable-rate mortgages, generating substantial fee income for the lenders. They expect the strong demand for fixed- rate mortgages to persist, particularly as the gap narrows between rates for adjustable-rate and fixed-rate mortgages. Fifteen-year mortgages are popular despite the higher monthly payments.
Housing and commercial construction is doing very well in some parts of this District, although there is some concern about overbuilding. A major home builder doubts that a building boom will result from the evolving single-digit interest rate environment because there is little pent-up demand for housing and lower interest rates are needed merely to keep housing activity at current levels.
Realtors report closings surged in February and the inventory of listings is declining to a low level. Most realtors have no plans to add staff soon because they are wary about how long and strong the housing market rebound will remain.
Commercial Banking
Business loan demand at District banks is improving. Commercial and
industrial loans outstanding at large banks continue to increase.
Loan commitments are generally up, and contacts are fairly
optimistic about future loan demand. Consumer installment lending
remains good but the rate of expansion has fallen. Consumer
installment credit outstanding at large banks is growing at only a
single-digit pace. Bank installment lending continues to be hurt by
cut-rate auto loans being offered by captive finance companies of
domestic auto manufacturers.