Beige Book Report: Cleveland
May 3, 1989
The economy shows some mixed signs of slowing, led by consumer spending and residential construction. The worst of the surge in food and energy prices is probably over, assuming improved supplies. Higher interest rates are generally not considered to have had much effect on housing and other construction, or on capital goods industries. Thrifts continue to experience deposit outflows, although the April outflow apparently was not as severe as in previous months this year.
Consumer Spending
Several retailers report sales were better-than-expected over the
past 6 weeks, and better than what has been reported in national
data. Some retailers expect sales to soften this quarter, especially
because of higher gasoline prices. An upscale retailer, however,
noted a double-digit increase in spending last quarter and believes
his upper-income customers are not much affected by a rise in
interest rates.
The automotive industry apparently is successfully offsetting higher interest rates by offering special financing rates and cash rebates that are the broadest and, in some cases, the most generous yet offered. Incentives are not as broad for foreign cars. Auto dealers report strengthening sales in early April. They generally are guardedly optimistic over spring and summer sales but are more cautious than dealers surveyed in early March. Dealers and consumers appear concerned over the course of the economy and interest rates, and dealers are cautious in placing orders that may add to their inventory. Moreover, liberalized lending terms have been attracting higher credit-risk buyers.
Construction
Interest rate effects on construction activity appear to be
marginal. Some realtors report sales of existing houses fell in
April for the second successive month, which some attribute to
sizable price increases over the past year. Two nonresidential
builders acknowledged that interest rates may be having a dampening
effect on construction but assert that is a relatively small factor
in investment decisions. Respondents report no shortages of labor or
supplies, except for engineers and some construction steels.
Capital Goods
Producers of durable goods remain optimistic about sales prospects
for 1989 and report no apparent effects from higher interest rates.
Metal cutting tool orders slid in January and February but rebounded
since then; orders for the year are still expected to at least match
those of 1988. Orders for industrial controls also rebounded in
March following softness in late 1988, and lead times have been
reduced because of an improved supply of computer chips. A
semiconductor and electronics supplier also reported a rebound in
their orders since last February, which they believe is consistent
with their forecast of record sales again this year. In general,
capital goods producers report capacity is still available, and they
expect selective price increases to restore eroded profit margins.
Steel operations are still at full capacity for cold-rolled and galvanized sheets, but producers report capacity is available for some other types of steel products. Some producers also note recent softening for bar products (for machinery and automotive industries) and structural steels (for buildings).
Inflation
Food prices are expected to moderate by summer, following the first-
quarter surge. Prices are expected to increase 4 percent to 4 1/2
percent in 1989, although beef prices may rise by late summer,
according to a national food chain. A food processor reports a
substantial increase in corn sweetener costs since late 1988 because
of the drought, but they expect prices to ease by late summer.
Packaging costs, however, have been increasing recently because of
higher energy costs. Food industry respondents report no buyer
resistance to the jump in food prices.
Gasoline prices are probably close to a peak, barring additional supply constraints, and crude oil prices will probably be under downward pressure over the next few months as difficult additional supplies become available. The Alaska pipeline is already back to capacity, although deliveries are still limited.
Financial Institutions
Net deposit outflows continued in April, but were not as severe as
earlier in the year. Some of the larger thrifts are deliberately
reducing their brokered deposits. A few thrifts that experienced
large inflows in March will apparently show either a small inflow or
small outflow in April because they have become less competitive on
rates. A small well-capitalized thrift reports that deposits rose in
April because they were able to sell their CDs in other parts of the
country where interest rates are lower than in local markets. Most
thrifts report little consumer resistance to higher interest rates,
but mortgage loans have softened probably because prices of new and
existing homes have risen rapidly relative to incomes over the past
year.
Banks report a softening in consumer installment and mortgage loans in recent weeks, and a reduced volume of commercial and industrial loans.