August 8, 1990
Summary
Consumer spending appears to have emerged from its slump earlier
this year. and District retailers are cautiously optimistic about
sales prospects for the fall season. Fourth District business
activity is supported by a revival in manufacturing output, and
respondents expect that activity in the second half will match or
exceed the first half. There appears to be no abatement in price
pressures this half from the first half. Housing construction in
Ohio has eased somewhat less than in the nation, but housing prices
continued to rise through mid-year. Ample funds are available for
single-family units, but lenders are extremely cautious about loans
for multifamily and commercial construction.
Consumer Spending
The consumer spending slump appears to have bottomed in May,
according to District retailers. They report moderate sales growth
in June that continued into July. Spending on household durables,
particularly furniture, was reported to be soft, with the possible
exception of small appliances. Apparel sales, a sluggish performer
during the spring, seem to have improved so far this summer. Retail
inventories remain high, but are generally reported to be falling,
with most of the excess inventory expected to be gone by late August
or September. The consumer spending outlook is guardedly optimistic
for the fall, although major retailers report that orders for fall
delivery were less than typical for the season. Consumer prices are
reported to be stable, with little beyond seasonal discounting
expected.
Manufacturing
District activity has been supported by a somewhat better-than-expected revival in manufacturing output in recent months.
Strengthening in output has come from continued growth in exports, a
mild comeback in auto output, and some buildup of inventories.
Steel output has held up better than expected. Operating rates of some flat-rolled steel producers have been hovering at about 90% of capacity, and order books at one mill are reported to be full, although lead times are not as extended as last year. Orders and shipments in July are reported to be stronger than usual. Orders for construction steel, however, have been weakening. Some of the unexpected strength in overall steel output has occurred because the volume of imported steel has fallen in response to weak domestic steel prices and strong demand abroad.
Auto output this quarter is expected to be sustained at last quarter's rate, barring a work stoppage in the industry because of labor contract negotiations. The cautious optimism for the third- quarter production outlook apparently is based on strong dealer demand for light trucks during much of the 1990 model year. Auto dealers in the District report a significant slowdown in new car sales in July from June. Dealers are not as optimistic about near- term sales prospects as they were in our previous survey. They note less showroom traffic, a perception that consumers are concerned about a slow-growth economy, and the price increases announced by the Big Three auto producers.
A capital goods producer is slightly more sanguine about over business spending for producers' equipment this half than they were a few months ago, because manufacturing output is better than he expected.
District surveys and respondents suggest cautious optimism that second-half production will be as good as or better than the first half. The latest survey of CPAs in Ohio shows that 87% of the 600 respondents expect that business in Ohio will equal or exceed the first half, which is slightly higher than in the previous survey. The latest survey of purchasing managers in Cleveland shows that 73% of the respondents expect a similar scenario.
Prices
There are no signs that inflation pressures are abating. The latest
purchasing agents' survey in Cleveland shows that their "inflation
forecast has increased slightly," and that 76% of respondents expect
an inflation rate in a 4% to 5% range by year-end 1990. Economists
in the District also expect inflation within that range at least
well into 1991. Near-term prices may be jarred upward by higher
crude oil and gasoline prices if OPEC cuts back production, or if
state and federal governments increase taxes on gasoline. Some metal
producers will attempt to raise prices this half in response to
higher labor compensation costs, and some capital equipment
producers and their suppliers will attempt small price increases
over the next several months, following a period of virtually no
change.
Construction
The tone of comments from District respondents suggests a continued
slackening pace of construction, especially for commercial
buildings. New housing starts in Ohio during the first half of 1990
were slightly below the pace of a year earlier. New home sales in
Pittsburgh and Cincinnati rose during the first half, but fell
slightly in Cleveland. Home prices in those cities rose between 6%
and 8% in the first half. Lenders report that ample funds are
available for single-family housing. Funds for multifamily
construction are more difficult to obtain, according to builders.