November 4, 1992
Summary
Business activity in the Fourth District continues to edge upward
unevenly. Respondents anticipate further slow growth in both
consumer spending and manufacturing over the next few months. A
strong revival in manufacturing output is being checked by
persistent tight management of inventories and by volatile sales and
production of cars. Residential construction still outpaces last
year, but nonresidential construction is generally weak, and
builders anticipate little near-term improvement. Strength in bank
loans remains centered in mortgages, with only scattered signs of a
pickup in business loans.
Consumer Spending
Retail sales in the District strengthened in mid-September and have
improved markedly in October, according to several sources The
recent revival followed less-than-expected sales volume during the
summer, which caused some retailers to resort to aggressive price
promotion to liquidate seasonal merchandise. A retailer notes
stronger sales for a broad range of merchandise, except for women's
apparel, which he speculates as reflecting a shift in consumer but
from discount to department and specialty stores.
Some retailers now anticipate that sales will post further small increases through the balance of this year, and that the 1992 holiday season will show larger year-over-year gains than they forecast just a few months ago. Consequently, they plan on carrying larger inventories, and have begun to step up factory orders.
Auto dealers, however, report that sales of new cars flattened in October following a September rise. Several dealers state that aggressive pricing of 1992 models at below cost brought their inventories down to desired levels. Stocks of 1993 models are said to be between 60 and 70 days, and dealers are generally holding back on new factory orders. Substitution of light trucks, especially minivans, for cars appears to be unabated, but several dealers indicate that stiffening competition from Japanese producers may have peaked the market share for U.S. vehicles.
Manufacturing
Shipments and production in the District are rising at a slow and
uneven pace. A commercial bank survey of 500 midsize and small
business firms located manly in Ohio shows that their business is
still rising, but by less than expected in their spring survey and
at a slower pace than last spring. Capital spending plans are
virtually unchanged since that time, but businesses plan to cut
instead of build inventories.
The latest Cleveland purchasing agents' survey also shows a slower pace of expansion in September, and preliminary information for October suggests a marginal increase. Little growth in employment is anticipated over the next few months.
Most manufacturers contacted report a slow but steady rise in orders and shipments again last quarter, which combined with further cost- cutting and lower interest rates, boosted earnings. With few exceptions, order backlogs are not accumulating, primarily because of a tendency toward smaller but more frequent placement of new orders. New hirings continue to be selective.
Several capital goods producers report that orders last quarter continued to climb, although their anticipations for the fourth quarter range from "excellent" to "flat." A heavy-duty truck supplier comments that a surge in the annual rate of new orders last quarter exceeded the 1988 peak and that a sizable order backlog is being built. Production this quarter should match or exceed last quarter's pace A producer of medical equipment reports a farther steady improvement in business last quarter that should be followed by another increase this quarter. Shipments of industrial metalworking equipment and supplies also rose a little in the third quarter, with further improvement expected in the final three months of the year, even though export orders are expected to fall again. Another producer of industrial parts also expects its domestic business to expand this quarter from last because of strong demand for maintenance and repair work. Machine tool orders surged in September and in the third quarter, although a producer speculates that pace may not be matched this quarter or next because of weakness in the aerospace industry and uncertainty in the auto outlook.
Domestic auto producers estimate new car sales at about a 6.3 million-unit annual rate this quarter, up from a 6.15 million-unit rate in the third quarter. Little, if any, pickup in production is anticipated because of generally adequate inventories of 1993 model cars. Better-than-expected sales of the Jeep Cherokee in recent weeks have helped to retain a 700-worker second shift at an assembly plant in Toledo that was scheduled for a cutback.
Real Estate
A recent private survey of more than 100 builders in Ohio shows that
the bulk of the respondents anticipate no pickup in construction for
another year. A lender that specializes in small construction
projects, such as shopping strip malls, notes scant demand for
construction loans. In Pittsburgh, however, the newly opened $750
million airport has already generated a boost in both retail stores
and residential development in the adjacent area.
Residential contracts in the District continued to climb in August, well ahead of the pace a year earlier, but recent growth slowed from earlier in the summer. In Cincinnati, new home sales in August rose at less than a double-digit rate for the first time so far this year.
Banking
Only a few large banks in the District indicate a step-up in
business loans in recent weeks, but little change in demand is
generally noted even among small and midsize business firms.
The most active part of the loan market continues to be in residential mortgages. Banks and thrifts report strong but easing demand for mortgage refinancing. Thrifts say that many 30-year fixed-rate mortgages are being refinanced with 10- to 15-year mortgages, and one thrift reports that a one-year adjustable-rate mortgage has become more popular than the 30-year fixed-rate loan. According to a major lender in Cleveland, new mortgage loans through most of October held up better than usual for the month.