August 9, 1995
General Business Conditions
The District economy continues to operate at a high level, although
the industrial sector has slowed from its exceptionally strong
growth pace earlier in the year. Capital goods producers continue to
lead the local economy's advance, and commercial construction
appears to have gained strength very recently. No significant
layoffs have been observed, but several sources have noted a drop-of
in factory overtime. Indeed, unemployment rates remain low relative
to the national average. Price pressures appear to have eased a bit
from earlier in the year; no significant cost increases have been
reported.
Manufacturing
The District's industrial sector, which had been growing at an
exceptionally strong rate, has since slowed to a more average pace.
Many capital goods producers have seen a drop-off in new orders, and
in a few extreme cases, such as heavy truck manufacturing,,
production levels an being sustained by a rather formidable orders
backlog. Sources for this industry anticipate a drop in production
by year-end if orders growth does not improve. Machine tool makers
continue to report a solid level of new orders, and production is
thought to be nearing capacity. Only a few manufacturers have seen
an acceleration in business activity recently. Some unexpected
strength has come from aerospace-related products, and steel orders
and production have also improved following a relatively slow second
quarter. Export markets, by most accounts, are still favorable.
No indications of an inventory imbalance at the manufacturing level are noted, and virtually all sources consider current production and employment levels high by historical comparison. Labor appears to be amply available, with only a few, scattered shortages of skilled workers, notably in the northern Kentucky region.
Retailers
Retail sales are generally reported as normal for the season, having
strengthened from an overall lackluster first half District sales
are still running somewhat below levels as this time last year; only
one department store reported summer sales were better than last
year. Optimism for the remainder of 1995 is mixed-about half of the
retailer, we contacted expect the recent strengthening in consumer
spending to continue. A large share of the run-up in retail
inventories during the past few quarters appears to have dissipated.
District retailers' reports on inventory levels range from "on plan"
to "slightly higher than planned."
Retail price increases remain moderate, with apparel prices actually declining during the past several months. Women's apparel prices have been especially depressed. Despite observations that demand for home-improvement products has been soft, furniture prices are expected to rise as higher materials costs are pushed through to retailers. Some labor shortages are occurring in the retail sector, especially in larger cities. Several retailers also note plans for capital expansion and renovation.
Autos
July auto sales in the District were mostly positive. In northern
Ohio, sales levels were much improved-in some cases 45% higher on a
year-over-year basis-and well in excess of general expectations.
Southern portions of the District gave more subdued sales reports:
Auto sales in eastern Kentucky during July were down about 20% from
last year.
District auto dealers report that mid- and -large car sales have surpassed small-car sales, and one dealer notes that sport-utility vehicle sales have quadrupled from last year. Demand for options has also strengthened during the summer months. Virtually all dealers report lower new-car inventories from the District report of two months ago, but new car inventories vary substantially by model, ranging from a 35 to 90 days' supply.
Manufacturer incentives have helped sales when used. One dealer reports that incentives have offset the effects of high interest costs, although a few sources noted that new car loan rates have begun to edge lower from their recent cyclical peaks.
Banking and Credit
Major District banks report a further, but moderate, growth in their
deposit base. Moreover, several sources note a lengthening in
deposit maturities. Deposit expansion is reported to be the means
for the continued growth in lending activity, although the extent of
deposit growth is mixed by institution and region.
Bank lending remains especially strong in the commercial credit area, where loan demand for plant and equipment expansion, mergers, and inventory floor plans has increased substantially from the spring. Household borrowing is also reported to have strengthened, with an improvement in consumer and new mortgage credit over the past several months. Despite the continued rise in debt levels, however, District banks are reporting exceptionally low delinquency rates, particularly for consumer-related credit. Several institutions cite delinquency rates of less than 1 percent.