January 19, 1994
General Business Conditions
The indicators of economic activity in the region remain decidedly
positive. Employment, production, consumer spending, and credit
demands all improved during the fourth quarter with considerable
strength in the construction and industrial sectors. Capital goods
producers in the District report continued strong growth in orders
and production, despite softness in European markets. Although few
manufacturers report plans to hire additional workers in the
immediate fixture, many are operating at, or very near, capacity.
In Ohio, employment grew by nearly 3-1/2% in 1993, outpacing the 2% increase nationally. However, virtually all of the state's employment gains occurred during the final two months of the year. Jobs growth in Pennsylvania was a more moderate 1% last year. Unemployment in the District was just below the national rate (6.2% and 6.3% in Ohio and Pennsylvania, respectively, compared with 6.4% nationally). The jobless rates are all down about I percentage point from a year ago.
Manufacturing
Though showing increases for three consecutive months ending in
October, manufacturing production growth in Ohio continued to trail
the nation for the year as a whole, rising 3.3% compared with 5.1%.
Purchasing managers report rising new orders and production through
November. In Cleveland, 55% stated that new orders were higher
during the month, compared with 29% in Cincinnati and 33%
nationally.
Virtually all of the District's major capital goods producers were reporting continued strong orders, particularly in the automotive area. However, defense-related cutbacks have been felt in the region, and export markets, particularly western Europe, have slackened considerably. The performance of the District's export markets remains an important question mark in the outlook for 1994. Nevertheless, domestic capital-goods demand remains very strong, and most firms were thought to be operating near capacity. All of the producers we contacted noted rising backlogs.
While some manufacturers indicated little upward price pressure, most were reporting higher costs, particularly for materials such as steel scrap, and many expected planned 1994 price increases to stick.
Consumers
Nonauto retail sales in the Fourth District continue to outperform
the nation. Most observers say consumer attitudes were better this
year than last, and consumers were more willing to use credit cards
or to finance purchases.
Somewhat in contrast to the 1992 holiday season, much of the recent increase in Ohio retail activity appears to have occurred at department stores, although performance varied considerably by establishment. While discounters and off-price stores achieved small sales gains, and furniture and appliance stores did well, only specialty retailers seemed to actually lose sales on a year-over- year basis. Apparel sales here, as nationally, were noted to be particularly weak.
Retailers are still reporting thin profit margins-many reduced prices significantly prior to Christmas. Although retailers were not caught short on inventory this holiday season (as most were last year), many described stocks as merely adequate.
Retailers appear to be optimistic about consumer spending this year. Even apparel sellers believe that retail sales will likely strengthen in the first quarter.
Autos
Fourth District motor vehicle dealers are considerably merrier than
they were a year ago with year-end sales, profit margins, and
inventory positions all reported to be improved. Although the end of
the year has traditionally been slow for motor vehicle sales, many
District auto dealers reported double-digit increases over 1992. The
strongest postings belong to the domestic model dealers, although
sales of Japanese models were also significantly higher. Dealers
note that sales gains are being achieved with fewer price discounts
than in the previous few years, and many managers report that profit
margins are up and that buyers are seeking more options.
Dealers cite a variety of reasons for their strong year-end performance. Most say that improved income and jobs prospects resulted an more consumer optimism than at any time since the recession. Domestic model manufacturers say that price increases on many of the 1994 models have been modest and that interest rates continue to be very favorable. Leasing is still a popular option.
Banking and Credit
Loan demands around the District were apparently rising at year's
end, with virtually every major credit category showing some
improvement. While refinancing activity is still high, it seems to
have dropped off a bit during the last several weeks. Net new loan
activity, even for mortgages, was reported to have improved.
Consumer loan demand was characterized as solid, particularly for automobiles. The overall increase in consumer borrowing furthers a strengthening pattern that became evident last summer. Commercial credit is reported to have picked up surprisingly in the fourth quarter, although some of the improvement may be a result of increased floor-plan activity due to the rise in retail sales.