June 17, 1992
Summary Economic activity in the Fourth District continues to expand slowly. District respondents believe that economic growth will be sustained in both the District and the nation, despite the recent slowdown in retail sales and housing. Retailers attribute the flatness in May and early June sales to unseasonably cool weather. Manufacturing output has been reviving and is expected to strengthen further next quarter as a result of inventory rebuilding and a broad-based pickup in capital goods and automotive industries. New mortgage loan activity eased in May and early June, following a stronger-than-seasonal rise earlier this year, and business loan demand is shoving only scattered signs of strengthening.
Recovery in the District continues to be mild and uneven, but respondents expect a stepped-up pace of business over the next few months, led especially by manufacturing. In Ohio, the unemployment rate rose to 7.3 percent in May, because the labor force increased more than employment. The composite leading indicator for the state rose for the third straight month in March, which suggests to some analysts that the pace of activity in coming months will accelerate.
Nationally, total output is forecast to increase at about a 3 percent rate accompanied by a similar rate of inflation, from 1992:IIIQ to the end of 1993, according to the June survey of Fourth District economists. The group anticipates a gradually improving consumer sector, but has shaded predictions for nonresidential construction from last January because of a longer-term correction in commercial building.
Consumer Spending Retail sales in May and early June were generally flat, but several retailers believe that the unusually cool weather this spring has dampened sales of seasonal goods, including women's and men's apparel and garden supplies. Some are concerned that inventories of seasonal merchandise may expand more than desired, which will result in greater-than-usual clearance sales before and after the July 4 holiday. Nevertheless, most retailers believe that consumer spending will continue on a slowly rising trend through the balance of the year. Except for the disappointing showing of seasonal products, a large retail chain reports that sales of home furnishings and major appliances in the last two months have posted sizable year-over-year gains.
Manufacturing
Fourth District respondents estimate that production in 1992:IIQ
will rebound from declines in the last two quarters. Some of the
revival is attributed to an ending of the runoff in inventories, and
in some industries, to a slight rebuilding of stocks in response to
improving sales. Only scattered recalls of workers who were laid off
have taken place in recent months, and several manufacturers, while
more optimistic about their sales outlook than earlier in the year,
still have not lifted a freeze on hiring. More anticipate, however,
that they will add rather than lay off workers in the third quarter.
A variety of "traditional" capital equipment producers report recent increases in profits, production, and orders, although unfilled orders have begun to increase in only a few industries. Producers of components for heavy-duty trucks, industrial controls, industrial equipment, and electrical motors and equipment all report a slowly reviving order book in recent months that is boosting production this quarter from last, and that is anticipated to support a somewhat stronger pace of industrial production next quarter than this.
Steel producers in the District estimate their operating rates at about 83 to 85 percent of capacity, which is a little better than their predictions for this quarter a few months ago. They note improving orders from the appliance, automotive, and steel warehouse centers, but demand for construction steel remains weak. A steel producer reports that higher domestic content in new cars and a higher share of domestic steel consumed by the transplant firms are supporting a rise in orders from the auto industry.
New car sales and production in the third quarter are anticipated to rise to a 6.5 million to 6.7 million annual rate, and to a 7 million zone in the fourth quarter, according to some automotive analysts. Factory orders are said to be somewhat higher than dealer sales, although dealers contacted acknowledge that they will promptly cut back orders if sales prove to be slower than they now anticipate.
Housing
Lenders in the District report a less-than-seasonal increase in new
mortgage loans in May and early June. Nevertheless, new loan
applications are generally well ahead of the pace of a year earlier.
A few major thrift institutions have recently lowered interest rates
for a 30-year fixed-rate mortgage to 8-1/4 percent, and a few
lenders are offering even lower rates. Mortgage loans for new and
existing homes are said to be strong for houses in the $150,000 to
$200,000 price range, but are described as being "very weak" for
homes priced over $400,000. Loan refinancing has accounted for about
20 percent of loans recently written, which is well below the
proportion earlier this year.
Financial Developments
Bankers contacted report growing loan demand for mortgage and home
equity loans, but only scattered evidence of strengthening in
commercial and industrial loans. Those few banks that are reporting
slowly rising demand for business loans also expect an accelerating
pace in the months ahead in response to an anticipated step-up in
inventory building.