January 22, 1992
Summary
There is still little sign of a renewed recovery in the Fourth
District. Major retailers experienced a sales gain during the
Christmas season from levels a year earlier, but the increases were
less than expected. Industrial activity in the District slowed
recently, led especially by the auto industry. Revived growth in
industrial production could occur this quarter, if auto production
strengthens as generally expected. Lower interest rates have boosted
refinancing of mortgage and business loans, but new business and
consumer lending still shows little indication of growth.
Consumer Spending
Retail sales during the Christmas season were reported between 2%
and 4% above levels a year earlier. A few retailers cited better-
than-expected sales, but others described sales as disappointing or
"below plan". Sales in a large upscale shopping center were said to
be better than in 1990, but ranged widely between retailers who
posted large gains and those who had declines from a year earlier. A
retailer with stores throughout the District reported that sales in
Cleveland, Pittsburgh, and Cincinnati were stronger than nationally
and than a year ago, but sales in some smaller metropolitan centers
of the District were weak. Despite the uncertain outlook going into
the holiday shopping season, price discounting was no greater than a
year earlier, according to some retailers.
At year-end 1991, inventories were larger than desired by some retailers. They generally have shaved their sales goals for the spring months, but uniformly expect a stronger second half than first half of 1992.
According to economists associated with consumer goods industries, real consumer spending last quarter rose between zero and a 1% annual rate, and is expected to rise between a 1% and 2% annual rate this quarter. There is little support among them for a temporary cut in personal income taxes to stimulate spending.
Automotive
Most automotive analysts anticipate that the auto industry will
contribute to growth of industrial production and total output this
quarter, following a decline in auto output last quarter. Auto
production is expected to increase a few percent this quarter from
last. Industry analysts do not expect additional production layoffs
this quarter, although temporary plant shutdowns could occur if
inventories rise more than desired. New car stocks are said to be
larger than desired for some cars, but low for a few popular models.
Auto dealers in the District are a little more optimistic about short-term sales prospects than they have been in recent months, because their December sales improved from November and from a year earlier. That helped to cut some of their excess inventories, and most dealers contacted now expect that they will slightly increase their factory orders this quarter from last.
Manufacturing Conditions
Weakened automotive output has set back auto-supplying industries.
Steel producers note a letup in orders for delivery during the rest
of this quarter, and consequently a shortening in lead times. Also,
some cutback in steel inventories this quarter, following a larger-
than-desired buildup last quarter, will likely result in a trimming
of steel output. Orders for auto paints and coatings and glass have
softened since last fall, but are no longer deteriorating, according
to a major supplier. Some auto tire analysts expect that both
original equipment and replacement tire demand in 1992 will be up a
few percent from 1991, but no pickup from the present weak demand is
expected until after the first quarter.
Several capital goods producers report a softening in orders in the past month or two following a revival that began last spring. The upturn in heavy-duty truck output flattened in recent months after several months of irregular but rising activity, according to a supplier. The daily average of orders for an industrial equipment producer in December fell after a steady climb through November. Customer inventories are believed to be low, however, because orders have been more frequent but smaller. A parts supplier to the office machinery industry reported a further rise in orders through last quarter. He expects that spending for real producers' durable equipment last quarter rose at about a 5% annual rate, led by the computer and aerospace industries, with most other capital goods industries showing little change from the previous quarter.
Manufacturers in general do not anticipate an increase in their capital spending in 1992 from 1991, although spending plans vary widely by industry. Some producers expect higher outlays this year, particularly for equipment, to improve product quality, broaden product lines, and increase productivity. Some plan less spending this year than last because of cutbacks in business structures. A tool producer plans a step-up in spending this year for further modernization of existing facilities. Although the primary metals industry is apparently anticipating some cutback in spending this year, a producer plans a large capital expenditure for quality and cost improvement. A mineral resources producer expects his firm and industry to cut back spending in 1992 because of prospects for weak prices for their products.
Capital spending plans are not being delayed, although some may be stretched out, and discussion of a possible tax change is not yet affecting spending plans. A common view among manufacturers seems to be that an investment tax credit, although less beneficial over the long run than a cut in corporate tax rates, would be a temporary stimulus to investment.
Financial Developments
There is still little sign of strengthening in new business or
consumer loans, according to banks and thrift institutions. Lenders
report, however, heavy demand for refinancing of mortgage loans, and
more businesses are refinancing bank loans. Some lenders have only
recently begun to lower borrowing rates on consumer installment
loans, but interest rates on a 30-year fixed-rate loan have been
easing steadily and are now common at 8%, with some mortgage bankers
offering rates at about 7.5% plus points. Many mortgage lenders
anticipate a sharp rise in demand for new loans during the spring.
Some thrifts report that mortgage holders are shifting from
adjustable-rate to fixed-rate mortgages.