October 31, 1990
Summary
The economic outlook has deteriorated further in recent weeks
because of the surge in crude oil prices, but Fourth District
respondents do not believe this District is in a recession. Near-
term prospects for inflation have worsened. Non-automotive retail
sales have weakened but auto sales have been better than-expected
since the oil-price shock. Growth in the District's economy
continues to be supported by manufacturing, but housing is weakening
more than usual for this time of the year. Loan activity remains
weak, and some lenders believe that credit tightness is now
affecting some lending in the District.
The National Economy
A stronger-than-expected surge in crude oil prices has contributed
to a further deterioration in the near-term outlook for the economy.
About three-fourths of a panel of forecasters now expect at least
two successive quarterly declines in real GNP beginning this
quarter, compared with about one-third only six weeks ago. Others
still expect sustained growth in real GNP at annual rates of about
l% to 2% this quarter and next.
Oil and Inflation
The downward revisions in output projections is accompanied by a
step-up in expected inflation rates. Many respondents attribute
their higher inflation forecast to higher crude oil prices than was
assumed in their forecasts of six weeks ago. The rise in oil prices
into a $35 to $40 per barrel range was judged to be based on fears
of further disruptions in oil supply. Respondents generally assume
the price of crude oil to settle in a $25 to $30 range next quarter.
The surge in the price indexes is still expected to be short-lived,
moderating to a 4% to 5% rate by next spring.
Regional Economy
District respondents generally believe that the economy in the
Fourth District is not in a recession, but they are cautious about
short-term prospects. They are encouraged by the steadiness in
manufacturing output and employment in the District. Some others are
concerned over weaknesses in retail sales and construction, and a
below-expected level of activity even before the oil-price shock. In
Ohio, nonfarm employment in September virtually matched the latest
peak in August, and manufacturing employment, unchanged in the last
three months, was only slightly below its peak in early 1989. The
unemployment rate in September was 5.2%, and for the third quarter,
the average rate moved slightly below the national average.
Some public officials are concerned that Ohio could have a budget deficit of as much as $300 million for the fiscal year ending June 30, 1991, partly because of a revenue shortfall.
Consumer Spending
Retail sales since the oil-price shock have been mixed but generally
better than widely expected, especially for new cars. Some retailers
report sales fell in the last two months because of uncertainties
over an auto strike and the Gulf situation. Expected sales during
the late fall and the holiday season are being scaled down from pre-
oil shock forecasts.
Auto dealers in the District report, however, that new car sales in September were slightly better than in August, probably because of year-end clearance of 1990 models, and they also report rather "good" sales of 1991 models. Dealers do not note a marked shift in consumer buying toward more fuel-efficient cars. Orders for 1990:IVQ are reported to be at least equal to 1989:IVQ, and many anticipate order increases in late November and December for 1991:IQ delivery.
Manufacturing
Production last quarter held up a little better than many
respondents expected, supported especially by the automotive,
machinery, and steel industries. Nonetheless many respondents appear
skeptical over near-term prospects. Auto production plans for the
fourth quarter are being sustained at nearly the late July
projections, according to some auto makers. Exports are still a
major source of growth for capital goods, although some export-
sensitive producers report a slump in export orders in August and
September. Some producers also note a pickup in cancellations and
deferrals, but not to the extent of suggesting a scaling back of
capital spending plans. Despite some recent buildup, inventories are
still believed to be at desired levels, and manufacturers do not
plan to build inventories as a price hedge.
Steel operations have continued at nearly 85% of capacity, supported by a continued decline in steel imports, and strength in machinery and agricultural industries that have compensated for softness in autos and appliances. Domestic production has also been supported by a strike in the steel industry in Canada.
Construction
Homebuilders in northern Ohio report a slowdown in building that is
more than seasonal. They attribute this partly to a lack of buyers.
Small builders of single-family units apparently still have access
to borrowed funds, but builders of multi-family units complain about
difficulties in obtaining financing.
Home sales in the $150,000 to $200,000 price range have slowed, but are still generally strong in the $250,000 to $400,000 range, although some builders and lenders report a virtual standstill in activity in some high-growth suburban communities. In general, sales of existing homes averaged about 95% of the asking price in September, which has hardly changed from a year earlier.
Financial Developments
Loan activity is weak across the board, and has softened further
since early August, according to some bankers. The reduced pace of
loans reflects a sluggish economy and tight lending policies. Loan
delinquencies and nonperforming loans have risen at several banks,
and a few bankers now perceive a credit squeeze having spread to
small businesses and consumers in the District. Some ascribe credit
growth restraint to a need to meet higher capital requirements.