September 20, 1989
Summary
Retailers appear more optimistic about sales prospects for the
balance of this year, although sales patterns have been mixed.
Manufacturing activity remains at high levels, but softening is
apparent even in some capital goods industries. Steel operations
have been reduced largely because of inventory liquidation.
Commercial and industrial loans continue to soften. Money market
rates are expected to ease over the next few months, and the thrift
bailout has resulted in lower rates on CDs issued by thrifts.
Retail Sales
Department store retailers have become more optimistic about fall
and holiday-season sales prospects apparently because of better-
than-expected sales so far this summer. Apparel sales in particular
revived from the slump in 1988, and profits and profit margins
improved last quarter without more than usual sales promotions.
Retailers plan to hold larger inventories than they did late last
year.
A chain department store, however, believes that retailers are too optimistic and that inventories will become a growing problem over the next few months.
Another major chain retailer reports a spurt in July and August sales of household furnishings and home improvement products, but large inventories will require cutbacks in orders from some manufacturers. This retailer also expects a better fall and Christmas sales season this year than last. It has been attempting to hold the line on prices for imported goods by shifting sources of supply, and, in the case of apparel, by increasing purchases from domestic producers.
A surge in car sales in late July and August helped to cut inventories, but current levels of stocks of 1989 models are still slightly above normal for this time of the year, according to auto dealers. The latest round of incentives and public awareness of excess stocks boosted sales, especially of domestic luxury cars. Dealers are concerned, though, that the high level of sales will borrow from future markets. Most dealers report that their initial orders for 1990 models will be well below the level for 1989 models at a comparable period.
Manufacturing
District respondents report high levels of operations in
manufacturing, but slowing is apparent even in some capital goods
industries and in steel. Purchasing agents in Cleveland report that
industrial activity continues to soften. Production and new orders
declined in August, but the number of managers who reported price
increases was half as large as those who reported decreases.
Cincinnati purchasing agents, however, report that new orders and
production rose, but backlogs, vendor performance, and commodity
prices all suggest that industrial activity in that area is
softening.
A machine tool builder reports that both its domestic and export orders have been holding up better than for the industry. Lead times, therefore, have not shortened. The builder is neither hiring nor adding capacity because of the highly cyclical nature of the business.
Heavy-duty truck shipments will likely remain at peak levels through the balance of this year but new orders in recent months have not revived as much as expected by some suppliers.
The decline in steel production in the quarter is a little more than seasonal, according to steel producers. Lead times have shortened and allocation of steel products has largely ended, except for some selected products, such as galvanized sheets used especially by the automotive industry. The steel industry will probably be operating at about 75 percent of capacity through the balance of this year, which is well below the near-capacity operations reported by most producers earlier this year. Inventory liquidation is expected to curtail steel output over the next few quarters. Spot prices for selected steel products have dropped considerably in domestic markets and even more in export markets in the past few months.
Financial Developments
Some large banks in the District report continued softening in
commercial and industrial loans, although mortgage loan demand is
strong apparently because of refinancing. Bank economists generally
expect that short term interest rates will ease over the balance of
this year, aided by the thrift bailout, which will require long-term
financing. Lower interest rates and narrowing of spreads between
money market rates and deposit components of Ml and M2 will revive
growth of deposits and will support somewhat larger growth in M2
this quarter and next than in the first half of 1989.
Thrift institutions report that since the bailout legislation, some thrifts have been selling their mortgage-backed securities in order to meet new capital standards. Also, easing from premium rates paid on CDs by some thrifts in the District should help them to absorb the higher cost of deposit insurance.