September 10, 1986
Summary
The economy of the Fourth District is continuing its uneven but
overall slow growth. Retail sales growth continues to be strong.
Employment in manufacturing continues to fall while employment in
the services-producing sectors continues its solid growth. The
manufacturing sector is stagnant and the two largest steel firms are
experiencing major shutdowns. The housing boom is moderating, and
overall loan demand at banks has weakened.
Retail Sales
Fourth district retailers generally report strong sales increases,
in the range of 5 percent to 10 percent for July and August. One
major retailer reports particularly strong sales growth for the
Cleveland area for August. The major retailers report that sales
increased steadily throughout their second fiscal quarter and that
the increases have been fairly even among merchandise categories.
Inventory levels appear to be well under control as a result of
strong sales. None of the retailers contacted report much price
impact from dollar depreciation on foreign exchange markets, but one
economist at a major chain expects higher imported prices for
consumer durable goods will be noticeable in the fall as retailers
pass on higher costs to consumers.
Most of the domestic-auto dealers contacted report generally flat sales of new cars. New car inventories remain at slightly higher- than-normal levels, but all of the dealers contacted report the desire to keep a tighter control on inventory levels. All of the dealers reiterate their belief that cut-rate financing incentive programs have lost appeal, but the latest GMC sales incentive program caused a spurt in interest and sales of GMC cars the day following its public announcement. On the import side of the market, local dealers indicate that sales started to soften in August, following strong first-half performances. A few import dealers state that a cumulative 10-11 percent price increase on 1986 model-year cars may be having some adverse affect on their sales.
Labor Market Conditions
The unemployment rate for Ohio fell in July to 8 percent (s.a.), 1.3
percentage points below its level of July 1985. Total employment has
increased 3.1 percent in the last 12 months, as employment in
manufacturing has fallen 1.9 percent and employment in service-
producing industries has risen 4.8 percent.
Manufacturing
Manufacturing activity in this District is stagnant. Both production
arid new orders are down slightly. Order backlogs continue to
decline, and more firms are reducing than are increasing employment.
Firms are reducing their inventories of raw materials, components,
and finished goods. Manufacturers report the prices they pay for
commodities is, on balance, unchanged but transaction prices for
their finished goods are up from a month ago. Manufacturers expect
their sales to be better in the third quarter than in the second
quarter but expect the second half of 1986 to be no better than the
first half.
Cleveland-based LTV Steel Company, whose parent LTV Corporation filed Chapter 11 bankruptcy in July, recently announced layoffs of more than 2,000 workers as the firm closed bar and pipe facilities in Ohio, Indiana and Illinois. The firm cited a continuing weakness of orders, despite a work stoppage at USX.
A strike against LTV over the issue of continuing certain benefits to retirees while the firm is in bankruptcy ended when the payments were resumed.
Steel industry analysts and industry officials predict a long and damaging shutdown as a result of the month-long work stoppage at USX Corporation (the nation's largest steelmaker).
Housing
The housing boom in this District is moderating to a more
sustainable pace. Builders and realtors report that the pent-up
housing demand that propelled the post Memorial Day housing boom has
waned. Housing market participants are confident that housing
activity will stay moderately robust throughout the balance of 1986
and into 1987 if mortgage rates continue to drift downward.
The backlog of mortgage applications was reduced by mortgage lenders in August, and mortgage application processing times have returned to tire normal 60-day period. The volume of real estate listings is still ample and in August there was a resurgence of sales contracts being renegotiated.
Lenders report they expect mortgage rates will drop soon by an additional 1/8 percent to 1/4 percent, which would bring the 30-year fixed rate mortgage to approximately 9 3/4 percent. Relent declines in mortgage rates have had less effect on mortgage demand than did comparable declines in the spring and early summer because of the lack of pent-up demand and because demand for mortgage refinancing has been weak.
Builders in this District report a seasonal slowing of single-family home building during August. Traffic and new orders are down about 10 percent from July. Builders anticipate that tax reform will reduce apartment construction, which eventually should have a positive effect on single-family construction.
Commercial Banking
Overall local demand has weakened at District banks. Total loans
outstanding at large banks fell over the past six weeks. The
contraction in loan volume was primarily in commercial and
industrial loans and reflected the recent softness in business loan
demand. The demand for mortgage and installment credit, however,
continues to be strong. Both real estate and consumer installment
loans at large banks have been growing at an annual rate of more
than 15 percent thus far in the third quarter.