May 6, 1986
Summary
The Fourth District economy continues to expand slowly, but
significant sectors of weakness remain. General merchandise sales
are rising slowly while new car sales are high but flat. The
unemployment rate is falling. Manufacturing output and orders are
rising, but manufacturing employment is falling. Price behavior
appears mixed. Oil, and coal prices and production are down.
Problems continue in agriculture. House construction and sales are
robust as is mortgage refinancing activity. Bank commercial and
industrial loans are down and expected to remain weak while consumer
installment lending is growing slowly.
Consumer Spending
Retailers in this District report generally small spending increases
during the first quarter, particularly during the month of March.
General merchandise sales in current dollars, as reported by three
major District chains, were roughly 4-6 percent above year-ago
levels. Although general merchandise inventories have risen since
year-end 1985, none of the chains expressed concern over current
inventory levels.
Auto dealers in the District are showing high, but relatively flat sales trends. Total domestic new-car sales in the Northern Ohio region during the first quarter were up only 1.4 percent from the year-ago level. Unlike the national experience, imported new-car sales in the Northern Ohio region have been accelerating in recent months. Sales of Ohio-made Hondas (included as "imports" by local reporting agencies) have been particularly strong this year. All of the domestic auto dealers contacted report new-car inventories were well above average at the end of March.
Labor Market Conditions
The unemployment rate in Ohio averaged 8.4 percent (s.a.) in the
first three months of 1986, down 0.5 percentage points from a year
earlier. The national unemployment rate remains lower but fell only
0.25 percentage points over the period.
Manufacturing
Output of manufacturers in this District continues to increase, but
the rate of expansion has slowed. Despite this gain, more firms are
reducing than increasing employment. Raw material and supply
inventories are flat while finished good inventories continue to be
drawn down. Firms report prices paid for raw materials and supplies
are falling slowly but transaction prices for manufactured products
sold are rising more rapidly than at any time in the last 12 months.
Incoming orders are rising at an increasing pace.
A major food manufacturer reports his product prices are declining. Paper prices are up. There have been some production cutbacks in the tool and die business, but the plastic molding business is improving. Aluminum prices have risen because inventories have been reduced substantially and demand has improved.
Energy
Oil exploration activity in this District is off sharply, and a
major oil firm is shutting down stripper wells. Coal production is
slowing, and the price of coal is weakening.
Agriculture
The horse industry in Kentucky is in the midst of a shake-out as
demand is weak. Many horse producers are overextended and many large
farms are for sale. Grape and potato producers in this District have
not been as adversely affected as agricultural producers in other
regions.
Housing and Construction
The high level of housing activity in this District continues
unabated, and market participants expect the strong pace to persist
through year-end. A major builder in the District reports that
traffic and new orders are up 25 percent overall and up 50 percent
in some markets. The builder fears that house construction may be
escalating so rapidly that important materials shortages will occur,
but so far the firm has experienced only minor shortages. The
builder also reports that its average price on homes sold is up 10
percent from a year ago despite no increase in list prices, because
many homebuyers are adding amenities now that financing costs have
fallen.
Realtors report that closings surged in March and April and that the inventory of listings is falling to low levels because of a severe drop in new listings. In this region, the composition of homebuyers has continued to shift toward first-time buyers who now constitute over 40 percent of buyers, up from 30 percent a year ago. The trend toward shorter-maturity mortgage loans is growing stronger, as more buyers demand 15-year mortgage loans. The period from application to closing of mortgage loans has increased from a normal range of 30 to 45 days to 45 to 90 days, because of increased volume.
Mortgage lenders in this District report that mortgage lending is up over 100 percent from a year ago. At some institutions, refinancings represent as much as 80 percent of mortgage volume. Few lenders are actively marketing their adjustable rate mortgage loans.
Commercial Banking
Loan demand appears to have weakened at District banks recently.
Total loans outstanding at large banks fell over the past month.
Commercial and industrial loans were down, while real estate and
consumer installment lending inched up. Growth of consumer
installment lending continues to taper off and is now at less than a
6 1/2 percent annual rate at large banks in this District. Contacts
acknowledge the softness in loan demand and do not expect much
improvement in the immediate future, despite the recent cut in the
prime rate. One contact reports underlying weakness in business
lending and expects it to continue over the next several months.