March 13, 1991
Summary
The end of the Persian Gulf war has not altered the outlook for a
brief and mild recession, although some respondents believe that the
probability of recovery by summer, along with prospects of
moderating inflation, has improved. Manufacturing conditions in the
Fourth District have deteriorated in recent months, but the overall
unemployment rate in Ohio in January was still below the national
average. The worst of the production cutbacks in manufacturing,
especially in autos and steel, appear to be over. Retailers note a
recent pickup in sales. Credit is still available to qualified
borrowers in the District, and banks and thrifts report a recent
flurry of activity for mortgage loans.
National Economy
Respondents have not changed their view that the recession will last
two to three quarters and will be milder than the average of post
World War II recessions. The end of the Gulf war, raises the
probability of growth instead of decline in real GNP by 1991:IIlQ,
according to some respondents. Real GNP is expected to decline by
nearly the same rate this quarter as last, based on the weakness
already seen in January. Also, an overall annual inflation rate of
about 3.5% for the balance of 1991 appears more probable now that
oil prices have fallen to the pre-Kuwait-invasion level.
Regional Economy
The District's unemployment rate, although rising slowly in recent
months, remained below the national average again in January.
Manufacturing continues to outperform the nation, but showed some
signs of weakening in late 1990. This Bank's estimate of industrial
production in Ohio fell in both November and December, and
employment in manufacturing has been edging downward since late last
fall. Additional layoffs in late January and February, especially in
the auto and steel industries, suggest that the unemployment rate in
Ohio will rise closer to the national average over the next few
months, according to some analysts.
Consumer Spending
Retail sales in February apparently strengthened from January, and
retailers are encouraged that the pickup in sales will carry into
March and the spring season. One retailer, who ordered goods based
on his anticipation that weak sales since mid-1990 would continue
through the spring, now believes that the season could be better
than he expected.
Nevertheless real consumer spending this quarter will likely show about a 1% annual rate of decline from last quarter because of the weak January performance, according to some retail analysts.
Retail inventories are judged to be about in line with desired levels. There appears to be little concern that retail inventories are excessive, except for new cars. A few retailers assert that even a mild pickup in sales would result in prompt increases in orders and production.
Manufacturing
Most Fourth District respondents still believe that the worst of the
slump in industrial production occurred last quarter, and that
production cuts this quarter will be smaller than last.
Inventory reduction is not expected to be quite as large this quarter. Auto stocks will be reduced again this quarter, but not as much as last. In general, the inventory buildup prior to the economic contraction was relatively small, and manufacturers have been promptly reducing stocks because of the weakness in sales.
Auto output in 1991:IQ was cut back more than expected as recently as a month ago, and production this quarter is now estimated at a 5.0 to 5.4 million annual rate compared with a 5.5 million rate last quarter. Industry analysts report that auto dealers cut orders below sales because of weak sales in January. New car sales strengthened in February, and dealers apparently have stepped up orders. As a result of recent production cutbacks, the auto industry is operating at slightly less than 60% of capacity. New car production in 1991:IIQ should be higher than in the current quarter if orders are placed at or above sales levels.
Capital goods output has been holding up better than is typical for a business slowdown. However, heavy-duty truck output has slumped more than expected, although the bulk of that decline reportedly has already occurred. Some producers of electrical and industrial machinery are encouraged by the way orders have been holding up relative to past recessions, apparently supported by continued strength in exports and closely controlled inventories. One analyst expects that a slight reduction in real producers' equipment output this quarter will be followed by a slight pickup next quarter. A capital goods supplier also expects that its business will not slide as much as in the "average" recession.
Steel operations have fallen to about 65% of capacity this quarter in response to cutbacks in consumption and steel inventories. Steel exports have fared relatively well, While the bulk of the inventory correction is expected to be completed by the end of this quarter, reduction in stocks will continue into the second quarter, constraining output.
Credit Market Conditions
There is still little indication that qualified borrowers in the
District are being denied credit, although borrowers may have to
search harder and meet higher terms for loans than they did last
year.
Banks and thrifts report that lower mortgage interest rates have stimulated activity for home loans, especially for refinancing, in recent weeks. Some thrifts report a surge in mortgage loan activity since about mid-February, and are hoping for at least a seasonal pickup in mortgage loans this spring. Lenders report that ample funds are available for mortgage loans. Housing affordability is judged to be the best in several years.
Lower interest rates have not yet stimulated activity for commercial and industrial loans. Some banks experienced either a slight decline or a slight increase in loans in January, because of a weakened economy.
Banks generally are avoiding construction loans, but they are still being made available to qualified borrowers. A well-capitalized thrift also reports making construction loans, including for apartments, industrial warehouses, and shopping strip malls, to qualified borrowers who were refused loans by some commercial banks.