October 23, 1991
Summary
Economic activity in the Fourth District continues to recover,
albeit slowly, and business sources generally expect further
improvement over the near term. Consumer spending has shown little
sign of sustained strengthening, and retailers remain cautious about
their order and inventory plans for the balance of the year. The
revival in manufacturing continues to lead activity in the District,
with the automotive and steel industries expecting their output this
quarter to be the best of the year. Manufacturers' inventories are
judged to be close to desired levels. Loan activity, except for
mortgage refinancing, remains soft, and small businesses report
credit is available.
The Region
Recovery in the Fourth District continues slowly. Total employment
in Ohio rose in September for the fifth of the last seven months. A
further but slow expansion in employment is suggested in the latest
Ohio composite index of leading indicators, which rose for the sixth
consecutive month in July.
In a recent survey of small businesses by a commercial bank in the District, nearly half of the 600 respondents expect business to improve further over the next three months, and a roughly similar proportion expect no change. Only 8 percent expect a worsening. Manufacturers are the most optimistic about the short-term outlook, while fewer then one-half of retail, finance and service respondents expect better conditions.
Consumer Spending
There is little indication of a step-up in retail sales, although
several retailers believe that their sales have been better in the
District than in some other regions. September sales fell from
preceding months, resulting in some unwanted inventories, according
to a few retailers. Some others believe that they were able to clear
stocks of summer merchandise, and that their inventories are at
about desired levels. Several complain about excess retail capacity,
and do not expect much improvement in retail sales until employment
and income improve. Consequently, they are cautious in purchase and
inventory plans for the upcoming holiday season.
Auto dealers contacted appear to be a little more optimistic about near-term sales prospects than they were late this summer. Several report that orders for new model cars have been slightly above a year ago. A late September, early-October rise in new car sales, apparently aided by widespread and generous price incentives, encouraged dealers who were concerned earlier that consumers might resist the latest price hikes.
Manufacturing
Most manufacturers report a continuation of the recovery in output
that began last spring. Auto producers are reported to be planning a
higher rate of car production this quarter than last, although
schedules of some producers have recently been trimmed because of
fewer-than-expected dealer orders. Still, production plans include
some inventory rebuilding in view of the lower than usual levels of
car inventories for this time of year, but output will be closely
geared to dealer orders, according to auto sources.
Steel mill operations in the District have been boosted in recent weeks to the best levels of the year because of the higher auto and appliance orders and some rebuilding of depleted steel inventories. Although the operating rate in the steel industry has climbed to a recent 77 percent of capacity nationally, some mills in the District are reporting operating rates in the mid-80s. A nearly-full order book for flat-rolled steel products has lengthened deliveries to late 1991 and early 1992. Steel warehouse centers have also stepped up orders, possibly because of the recently announced price increases that are expected to be sustained, following a declining trend in steel prices in recent years.
Recovery in the tire industry has been mixed and less-than-expected, especially for original equipment tires. The weak market leads some producers to believe that the September tire price increases will not last very long.
Generally, capital goods producers believe that the trough in their industries probably occurred in the spring, although revival has been slow. Machine tool builders complain that orders continue to drift downward, although at a reduced pace from earlier in the year. A supplier of industrial equipment to the machinery industries reports that orders bottomed last May, but have not improved enough to materially change operations. Orders for industrial controls also reached a trough in the spring quarter, and sales rebounded last quarter and are expected to rise even more this quarter, according to a large producer. Another capital goods manufacturer reports a slow revival in orders from a 1991:IQ recession low for both machinery and industrial consumable products. Finally, heavy-duty truck orders continue on a jagged, upward trend since early this year, according to a major supplier to this industry.
Manufacturers' inventories are generally believed to be close to desired levels. Except for some spotty rebuilding in steel and tire inventories, however, most respondents do not anticipate much of a buildup of inventories in the near term.
Financial Developments
There is still little sign of a pickup in business or consumer
installment loans, although further recent declines in mortgage
rates have induced a revival in mortgage loan refinancing. In
general, thrifts report that loan commitments outstanding during the
late summer declined from earlier in the summer, and that loans for
speculative building of single-family and multiple-family units are
virtually non-existent. Depositories have continued to cut interest
rates on deposits.
Banks generally report no pickup in commercial and industrial loans, but installment loans have spurted for those banks that have offered rates competitive with auto finance companies. Some banks report they are still not soliciting new commercial construction loans, although inquiries have also "dried up" this summer, according to a lender that specializes in small commercial developments.
A number of small businesses in the District state that credit is available. lending standards have not tightened in recent months, although some report that banks appear to be less aggressive in seeking loans. They also believe that there is an adequate number of lenders available to small businesses in their regions. Auto dealers report that floor plan financing for 1992 models has not been more difficult to obtain, although some report that banks are looking more closely at their financial condition than in the past.