Beige Book Report: Cleveland
December 4, 1991
Summary
District respondents revised downward their expectations for growth
this quarter and next, but still do not expect a double-dip
recession. Retail sales continue to be mixed and generally flat, and
retailers remain cautious about sales, inventory, and employment
prospects for the holiday season. Growth in manufacturing in the
District may slow, as a result of trimmed auto production schedules,
but capital goods producers note an increase in orders in October.
Bank loans continue to be sluggish, except for mortgage refinancing
and home equity loans, despite lower lending rates.
The Economy
The Fourth District panel of economists from manufacturing, trade,
and financial services remains cautiously optimistic that the
national economy will continue on a slow growth path, despite an
apparent stalling in recent months. The panel of 25 economists who
met at this Bank on October 25 predicted a 3 percent real GNP growth
between 1991:IVQ and 1992:IVQ, and an inflation rate of 3.1 percent.
A telephone survey of most of the Roundtable members in late November shows a downward revision to real GNP growth to about a 1 percent annual rate this quarter, and to about a 2 percent rate next quarter; however, but growth in the second half of 1992 has been revised upward to a 3 percent to 4 percent range. None of the respondents expects a double-dip recession, although a few acknowledge that growth in a zero to 1 percent range this quarter is possible.
Several respondents cite a slower-than-expected recovery, and a common perception that the economy is still in recession, as causes for the deterioration in business and consumer sentiment in recent months.
Latest information for the Fourth District is somewhat more encouraging than for the nation. Industrial production in Ohio rose again in September. In October, employment held steady, and the unemployment rate was again below the national average. Purchasing managers in Cleveland and Cincinnati report that orders and production strengthened in October.
Consumer Spending
Retailers continue to cite a relatively flat level of sales over the
past several weeks, with some department stores reporting somewhat
better sales in October than in the summer, but others posting
declines. Sales of major appliances, furniture, and home electronics
products fell in October and early November, but sales of soft goods
strengthened, according to several sources.
Retailers remain cautious in their outlook for sales during the Christmas season. The expected improvement in sales ranges from zero to about 4 percent higher than a year earlier, with most of the strength in soft goods. A retail economist estimates that real consumer spending this quarter will increase at about a 1 percent rate from last quarter, with all of the increase in services.
Retailers have been cautious about inventories, but less-than- expected sales growth, or even declines in some cases, have apparently resulted in larger-than-desired stocks, especially for hard goods and apparently for apparel. Consequently, retailers expect aggressive price promotions throughout the holiday season. Part-time hirings for the season are said to be much fewer than usual, which analysts warn will depress employment in November and December.
New car dealers in the District report that November sales were slower than a year ago. As a result, most dealers have higher than desired inventories, and have cut factory orders for the balance of the year.
Manufacturing
The pace of manufacturing activity in the District, which has been
stronger than in the nation since the recovery began, is likely to
abate, according to some forecasters. Auto production schedules are
being trimmed, capital goods revival is still uneven, and businesses
will keep inventory building below levels that are usual for this
stage of recovery.
The revival in auto sales and production that began early this year has lost momentum in recent months. Automotive economists have lowered their estimates for both sales and output this quarter, and next, because the recent flattening in new car sales has left larger-than-desired inventories. Auto producers now forecast output at about 1.5 million cars this quarter and next. Total automobile and light truck sales this quarter are now estimated to fall a few percent from 1991:IIQ. Auto sources believe that significantly larger price incentives will be needed than at present in order to stimulate sales. Bank lending rates are reported to have been lowered in recent weeks, but with little effect on sales.
The surge in real producers' durable equipment output last quarter was unexpected by capital goods respondents, who look for a much reduced pace this quarter. Orders for recently introduced new computer machinery were disappointing, according to a producer. Some believe that a strike in the construction machinery industry will dampen output for the next few months. A large parts supplier for heavy-duty trucks reports that new orders rose strongly in October, following a mixed but slowly rising trend since early this year. Several small business equipment producers in northern Ohio note a marked pickup in business in both September and October. A hand tool producer reports that October was the second best shipment month in recent history. A supplier of plastic parts for commercial aircraft and a small machine tool builder also report that October orders were the best in several months.
Steel operations have been reviving gradually to about 80 percent of capacity from 70 percent earlier in the year. Order books for flat- rolled steel products are full through 1992:IQ, and operations are virtually at capacity, according to some sources. Output has been rising gradually, especially because of increased orders from the auto and appliance industries and from steel warehouses. Some rebuilding of steel inventories is occurring, but steel sources are apprehensive about how long the present level of operations will be sustained because orders appear to have leveled out. They are also concerned about whether the auto industry will take delivery of all of the orders now on the books in view of the trimming of auto production schedules.
Financial Developments
Large and small commercial banks in the District report no pickup in
new loans in recent weeks, either for commercial and industrial
loans or for total loans. A large bank notes that loan activity,
while little changed from September, was better than during the
summer months. Large and small banks have had a surge in mortgage
refinancing, which one lender described as being at capacity, and
home equity loans have also been rising sharply. Recent declines in
mortgage interest rates, to about an 8 percent to 8-1/2 percent
range for 30-year fixed-rate mortgage, are believed to have come too
late in the season to strengthen housing sales, but some thrifts
report a burst in new loan activity in recent weeks.
Most bankers contend that credit remains available to creditworthy borrowers, and that lending standards have neither tightened nor eased in recent months. Some large banks are still restricting loan growth because of possible losses that would affect their capital. Several small banks report constraint in lending, especially to gasoline stations, dry cleaning establishments, and auto garages because EPA and OSHA regulations place lenders at risk for compliance.