May 2, 1990
Summary
Respondents in the Fourth District are increasingly concerned that
the inflation rate for 1990 will exceed 4%. Consumer spending in
recent months has been better than any retailers expected. A
strengthening in manufacturing output is generally expected to be
mild. Respondents suggest there is little evidence of a "credit
crunch" in the Fourth District, although credit standards are said
to have tightened.
Inflation
The surge in consumer prices in March has led many respondents to
believe that the 4% rate of inflation they expected for 1990 may be
too low. Some expect that the increase in the GNP implicit price
deflator was in a 5 percent to 6 percent range last quarter,
although moderation in price increases is widely expected this
quarter. A common concern seems to be that commodity prices continue
to firm gradually, and service prices have been accelerating. Some
point out that the hike in the minimum wage will add to wage costs
especially in the trade sector of the economy. Moreover, food prices
this year could increase more than the average in recent years
because of environmental restrictions on use of herbicides that can
constrain yields and output.
Consumer Spending
Retailers' descriptions of sales in recent months range from "better
than expected" to "very strong." One retailer reported that even
furniture and appliance sales were "good," although consumers are
resisting higher prices. Apparel sales were especially strong
despite the surge in prices in February and March. A retailer
asserted that the price hikes were associated with consumers buying
higher quality goods and with new fashions. Others stated that
retailers are trying to restore profit margins that deteriorated
badly during the Christmas season. In addition, higher raw materials
prices and the increase in the minimum wage have added to retail
costs and prices.
With both the level of sales and profits better than expected last quarter, retailers appear guardedly optimistic about near-term prospects. There is some concern, however, that some sales last quarter may borrow from the second quarter, and that demand for household goods may soften because of further weakening in housing. In general, retail economists still expect about a 2% increase in real consumer spending this year from last.
Auto producers and dealers have mixed reports on sales and prospects. For some, retail sales in February and March rebounded enough to bring inventories down to a desired level. April sales so far have been soft despite generous incentives. Dealers report floor plan costs have been held down because of smaller inventories this year than last, and some report shortages for some mid-sized cars. Profits are still being strained because incentives and marketing costs are said to average as much as $1200 per car and are considerably higher for mid-sized cars. Incentives on some Japanese cars have increased by about $500.00.
Manufacturing Conditions
District respondents generally agree that the worst of the
production cutbacks are over, although most expect strengthening
this quarter and next will be mild. Low-technology producers of
industrial and electrical machinery equipment expect only a few
percent increase in output over the next few quarters. Auto
production is rebounding from a poor first quarter, and cutbacks in
second quarter plans are being rescinded, although output is still
expected to be slightly below a year ago. Steel producers are
raising their forecasts of production slightly for 1990 from earlier
this year. Auto bookings for the second quarter have picked up from
the first quarter, and steel warehouses have stepped up orders,
probably in anticipation of a small increase in sheet steel prices
announced for July. Also, the volume of imports has been less than
expected and exports a little larger than expected.
Production and shipments of machine cutting tools continue to rise but solely on the strength of backlogs that have been dwindling rapidly because of the lag in orders.
An expected revival in heavy-duty truck business has been slow to develop. Orders in February fell below the low of last August, and a comeback in March only matched the relatively low average of last fall.
Cincinnati Purchasing Agents report orders and production rose for the third successive month in March, and commodity prices firmed again after several months of decline. A commercial bank shows that durable goods manufacturers expect a rebound in their business following declines in the previous three-month period
.Financial Conditions
Respondents suggest there is little evidence of a credit crunch in
this District. There are, however, reports of some tightening of
credit standards. Nonetheless, lenders report that credit is
available to qualified borrowers.
Small business firms in the District reported no awareness of credit restraints, although perceptions are that some lenders are tightening credit standards. Only one small business firm reported that banks are not lending, especially for commercial real estate because of depressed prices due to high vacancy rates. Several new car dealers reported some tightening in credit standards by both banks and thrifts.
Small builders apparently have not been shut off from credit, although FIRREA legislation has made it more difficult to obtain sufficient credit from a single lender. Thrifts contacted assert there is no lack of funds in the mortgage market for qualified builders and buyers, and reported that their loan volume so far this year exceeds the same period last year. They acknowledged that the 15% limit on loans is an inconvenience to some builders and developers. Several banks in the District also reported that their loans so far this year exceed last year, although some tightening in credit standards has taken place in view of rising office vacancy rates, foreclosures, and nonperforming real estate loans.