January 23, 1991
Summary
The worst of the contraction in real GNP and industrial production
occurred last quarter, according to a panel of 23 Fourth District
economists. Labor markets in Ohio have held up better than for the
nation in recent months, but the unemployment rate is expected to
rise more rapidly in the next few months. Manufacturing in the
Fourth District has also fared better than in the nation, but
conditions in the automotive, capital goods, and steel industries
have deteriorated in recent weeks. Most retailers report that sales
in late December and early January picked up from the weak
performances in October and November. Lower interest rates have not
had a visible effect on loan demand, which remains weak.
The National Economy
All but two of a group of 23 economists with the Fourth District
Roundtable believe that the worst of the contraction in real GNP and
industrial production occurred last quarter. They estimate that real
GNP declined at about a 2.7% annual rate in 1990:IVQ, and will
decline at rates of 1.7% and 0.2% in the first and second quarters
of this year. Growth in real GNP is expected to rebound at a 2.7%
annual rate in the second half of 1992 and a 3% rate in the first
half of 1991. The forecasts assume no outbreak of war in the Middle
East.
The panel also believes that the worst of the latest inflation bulge was in 1990:IVQ, when overall prices rose at an estimated 4.9% rate. Prices are expected to increase by about a 3.3% annual rate between 1991:IIIQ and 1992: IIQ.
The Regional Economy
Labor market conditions in the District have remained better than in
the nation. Nonfarm employment in Ohio inched up in December, and
was slightly higher than a year earlier. The unemployment rate rose
0.3% in December but averaged 5.7% in the latest three months. Some
labor market officials believe, however, that the unemployment rate
will rise more rapidly toward the national average in the next few
months, especially because of further layoffs in the automotive and
steel industries.
Manufacturing
Output and employment have been stronger in the District than in the
nation, but deterioration occurred in key industries during
December, resulting in sizable layoffs in mid- and late January
especially in the automotive industry. Auto production this quarter,
however, is expected to increase by about 5% to 10% from the weak
fourth quarter, according to several auto analysts. A similar
increase in production is expected for next quarter, assuming
revival in consumer confidence if the instability in the Persian
Gulf is resolved.
Some capital-goods producers have marked down their forecasts of output for this year because of a weaker-than-expected economy. Nevertheless, a common view is that capital spending will hold up better than it did in past periods of business weakness. A machine tool builder reports that orders have been declining in each of the last three months, but the declines have been far less than in previous episodes of business slowdown.
Heavy-duty truck business sagged unexpectedly in November and apparently in December, following a brief revival through mid-autumn when orders were pulled forward into 1990 because of new environmental regulations effective in 1991.
Steel producers report a sharp deterioration in orders and operations in recent weeks. The drastic cutback in auto output last month and higher-than-expected volume in steel imports last quarter cut the operating rate in the domestic steel industry to about 70% of capacity late last month from an 84% rate in November. Operations are expected to average in the low 70s this quarter.
A defense contractor noted substantial pickup in the last few months for special military goods destined for the Middle East. They anticipate, however, no reversal in the decline of defense spending, and have not experienced a revival in defense orders.
Consumer Spending
Most retailers report that sales in late December and early January
improved from a weak October and November, but sales were widely
mixed among retailers. Consequently, inventories for some retailers
are in better balance now than before the Christmas season, while a
little higher than desired for others. Retailers see little prospect
that sales will improve much, at least until the Gulf situation is
resolved. Improved real income, especially because of lower gasoline
prices, is a positive sign for near-term sales, but most retailers
expect consumer spending will be lackluster through midyear.
New car dealers in the District report that sales have weakened sharply for this time of year, but that inventories of new cars are lower than a year ago. Dealers have no trouble obtaining financing for inventory, but report that consumers are finding financing more difficult than a few months ago. Dealers of domestic nameplates are not ordering for additional inventories, but Honda and Toyota dealers apparently are adding to inventories in anticipation of higher sales in the spring.
Financial Developments
Latest interest rate declines have had no visible effect on demand
for credit by consumers or businesses. Lenders assert that rising
concerns over employment and uncertainty about the Persian Gulf
situation are constraints on consumer demand. Rates on conventional
30-year fixed-rate mortgages in the Cleveland area average about
9.5%, with some lenders offering mortgages as low as 9.0%, but
without much consumer response.
Builders of new homes claim that construction is off more than usual for this time of year, and a major developer cancelled plans for a shopping mall because of the uncertain economy and increased difficulties in funding from his usual sources of credit.
A reasonably well-capitalized bank with a large portfolio of real estate loans is shifting away from commercial loans toward consumer loans. Some other well-capitalized banks still report that they have an ample supply of credit available to qualified borrowers, but loan demand remains weak.