August 7, 1991
Summary
Activity in the Fourth District continues to improve gradually.
Consumer spending for automotive and nonautomotive goods slowed in
July, but retailers and producers of consumer goods remain
cautiously optimistic for a continued, mild recovery in spending.
Most manufacturers, except for some producers of construction
machinery and machine tools, believe that they are in the early
stages of a recovery. Builders of high-priced new homes report that
demand is weak but note that lenders recently have been more
actively seeking loans, including construction loans. Loan activity
remains generally soft, with scattered signs of increases in
business loans.
Regional Economy
The economy in the Fourth District continues to improve gradually.
In Ohio, employment has risen in three of the last four months, and
in June was nearly back to its latest peak in December 1990. The
unemployment rates in Ohio and in the District's top four
metropolitan centers were all below the national average in May and
June. While respondents believe that the recession in the District
is over, they continue to expect that recovery will be mild.
Consumption
Retailers report a slowdown in consumer spending in the past month,
which some attribute to the unusually hot weather, but which others
blame on tight inventories of summer-related goods, especially
apparel, fans, and air conditioners. They are cautious about near-term sales prospects because they believe that revival in consumer
spending in spring and early summer was partly weather-related and
because they anticipate only moderate gains in employment and income
in the coming months.
Auto dealers report that car sales have eased since early July, which some believe was due to the heat wave of recent weeks. They nevertheless are encouraged about sales prospects for the 1992 model year, because initial orders for the new models are said to be at or above levels at comparable periods in the past. Dealers report about a 60-day inventory of new cars, with higher consumer and dealer incentives likely to slash the stocks of models in excess supply. "Nearly new" cars are still selling well and may be a substitute for new cars, according to some dealers.
Auto producers believe that fleet sales in June were higher than usual, and consequently are cautious about the strength of new car sales. One producer expects a sales pickup of about 10 percent in the second half of the year.
Manufacturing
Recovery in production has been mixed, and respondents anticipate
continued but slow growth. Major producers of consumer durable goods
believe the trough in their orders and output was in late 1990 and
early 1991, but capital goods industries are marked by mixed
patterns.
Auto producers acknowledge that new car production will not be a drag on GNP and industrial production as it was earlier this year, but are cautious about whether auto production will contribute as much to total output in the second half of 1991 as it did last quarter.
Production of major home appliances is on a rising trend, according to a producer, because sales to dealers have strengthened and inventories are being rebuilt following a liquidation in late 1990 and early 1991.
Capital goods producers uniformly expect a revival in output in the second half of this year, but some still believe that their business is in a declining phase. One forecaster will trim his second-half outlook for producers' durable equipment because industrial and transportation equipment production last quarter was less than he expected. Heavy-duty truck orders revived moderately last quarter from a 1991:IQ trough, and by year-end are expected to be about twice the level of the weak first quarter, according to a supplier. A producer of electric motors and industrial equipment reports signs of revival in that industry late last quarter. The worst of the decline in the construction machinery industry is over, according to a producer, but recovery has not yet begun because construction activity, except for housing and highways, remains in recession. Finally, a machine tool producer believes that the decline in orders is close to bottom and expects a revival in the second half of this year.
Steel analysts see little change from the current 70 percent operating rate over the next few months. Orders from the auto industry have picked up, but not so from the capital goods and construction industries. Steel inventory liquidation by customers is said to have run its course last quarter.
Construction and Real Estate
Some builders of new homes priced at $250,000 and higher complain
that demand has weakened since early June, and that second-half
construction appears to be limited to replacing homes that were sold
earlier this year. One builder reports that banks are now-
interested in making development loans that were not accepted just a
few months ago. A major lender agreed that demand and new
construction for the high end of the housing market is weak, and
that his firm is now looking at custom home builders that previously
were not its customers.
Financial Developments
In general, loan activity remains soft. There are only scattered
signs of a pickup in business loans, despite the revival in economic
activity. Some lenders note that commercial and industrial loans in
recent business recoveries declined for several quarters before
strengthening. Lenders insist that loan standards have not tightened
in recent months, but neither have they been relaxed. Some bankers
note a small pickup in consumer loans, especially for cars. One
banker reports that business, consumer, and mortgage loans were off
slightly in June, but that loan officials continue to search for
creditworthy borrowers because loan growth so far this year has been
disappointing.