August 5, 1992
Summary
There is still little indication of a step-up in business activity
in the Fourth District, although many respondents believe that the
third quarter began stronger than the second quarter ended.
Manufacturing continues to lead the recovery in the District, with
respondents generally anticipating that production this quarter will
at least match last quarter's increase. Retailers report that a
recent spurt in sales helped to keep inventories near desired levels
without the need to resort to the usual large summer clearance
sales. Auto sales and production this quarter are expected to be
slightly higher than last, despite scattered production cutbacks by
some producers. Lower mortgage interest rates have contributed to
another boost in loan refinancing, but have not yet added much to
new loan activity.
Manufacturing
Despite the recent setback in manufacturing output in both the
District and the nation, manufacturers anticipate that this
quarter's performance will match or exceed that of the second
quarter. Nevertheless, worker recalls, if any, are on a highly
selective basis.
Chemical and plastics producers report sales increases for coatings, plastics, and special chemical products last quarter were at double- digit rates, and some producers anticipate that strong demand will continue through the balance of 1992. A small producer of chemical and metal products notes that record sales last quarter came from a variety of industries.
Respondents remark that capital spending is still primarily geared to productivity and product quality improvement. However, a tire producer notes that rising demand for replacement tires has boosted output and profits sufficiently to support adding to production capacity.
Capital goods producers cite continued unevenness in business. Order backlogs have been inching up in the machine tool industry, although net new orders softened in recent months, according to some producers. A diversified manufacturer reports that their June orders rose strongly following weak months in April and Nay, but a producer of industrial components indicates that its order increases flattened in recent months. A producer of financial service products describes domestic demand as strong, and anticipates that production of office equipment machinery will continue near last quarter's high rate. Factory sales of heavy-duty trucks recovered substantially in the spring, and a rising trend is anticipated through the second half of the year, according to a major parts producer.
Consumer Spending
Retail sales in July showed little, if any, increase over June,
according to District retailers, despite a recent sales flurry. Some
retailers report a step-up in sales of consumer durable goods, but
continued softness for nondurable goods. Because their inventories
are either at or slightly higher than desired levels, they do not
anticipate summer clearance sales will be as large as in recent
years. Some retailers are apparently promoting fall merchandise,
because of a dearth of summer goods.
Retailers are planning a less-than-usual inventory buildup of fall merchandise, not only because of uncertainty over sales prospects, but also because of improved inventory and sales techniques.
Automotive Prospects Third quarter motor vehicle sales and production are expected to be slightly higher than in the second quarter, despite a recent cutback in production by Honda. Sales next quarter are expected to be the best of the year, according to several automotive sources. They also note, however, that July sales were only at or slightly below anticipated levels but inventories are still described as being generally balanced. According to some producers, production next quarter could falter from this quarter if sales do not continue to improve.
Auto dealers appear to be more cautious in their sales outlook than in recent contacts. The level of July sales may fall somewhat short of June's. Those dealers that have begun to order 1993 models are planning to carry a smaller inventory than they had last fall.
Residential Construction The latest reduction in mortgage interest rates has not yet sparked a revival in demand for new mortgage loans in most parts of the District. Mortgage rates in the Cleveland area have been lowered to between 7.6% and 8.6% for a 30-year, fixed-rate loan. While thrifts and banks report a strong revival in demand for loan refinancing, some major lenders expect new loan applications in July to fall short of the June level and even below that of a year earlier. In the Cincinnati area, however, where 30-year, fixed-rate mortgages average about 8.3%, demand for new loans is reported to be strong.
Banking
Major lenders report no significant change in net growth in business
or consumer loans since the interest rate cuts earlier in July. They
attribute continued softness in business loans in part, to a faster
growth in loan pay-offs than in new loans. They also note a recent
pickup in home equity credit and mortgage refinancing. They
acknowledge that other lending rates, such as for new cars, have
been reduced only marginally.