March 13, 1996
Overview
The District economy has marginally improved since the last report,
although only construction activity has shown any broad-based growth
since the first of the year. Housing sales are reported to be strong
in many areas, commercial construction activity has been especially
vibrant, and suppliers of commercial construction materials and
equipment have seen decidedly higher order and production numbers.
Unemployment in the District has been trending mostly upward since last spring, particularly in the manufacturing-intensive regions such as northern Ohio. In more diversified economies, including central Ohio and eastern Kentucky, labor markets have generally been steadier. Still, most regions continue to post jobless rates that are under the national average and low relative to historical averages. Survey data suggest new hiring plans are running about the same as this time last year -- perhaps a sign that labor markets are expected to firm a bit this spring.
Although some firms continue to see labor shortages, wage and cost pressures are reportedly light. Wage growth appears to be comparable to the rise in the cost of living--in the 2% to 3% range. Area purchasing managers are noting only moderate (and limited) commodity price increases.
Manufacturing
After showing little net growth during the second half of 1995,
industrial activity in the region appears to have strengthened a bit
in early 1996. District manufacturers report small gains in orders
and production, although the growth rate varies by industry. Where
production cuts have occurred, the reductions have resulted in a
paring of overtime hours. Indeed, none of our contacts is reporting
layoffs, and many plants are still operating at rates equal to or
above their historical averages.
Auto and auto-related manufacturing is still soft, and inventories remain somewhat high. Industry sources anticipate additional production cuts unless a sustained improvement in consumer auto sales occurs. Heavy truck manufacturing, which has shown a 10 percent drop in production since last summer, has recently posted small gains in orders.
Other capital goods industries are reporting stronger numbers. Many of the industries we contacted saw double-digit sales growth last year, and early indications for 1996 suggest a continuation of that trend. Firms with significant export markets are noting particularly large orders growth.
Retailing
Retail sales in the District were hurt by bad weather in January and
saw only a modest overall improvement in February. Both January and
February sales appear to have surpassed last year's comparable
monthly rates, which were weak. Apparel sales, particularly of
clearance items and spring-season casuals, are reported to be
stronger than sales of formal apparel and hard goods.
Inventories are near desired levels, however, and although retailers are reluctant to predict future performance based on activity over the past two months, many still report a positive near-term outlook.
Auto Sales
Despite the negative effect of poor weather during the first weeks
of January, auto sales in the District improved throughout the month
and into February, giving dealers reason for optimism. Many reported
that January sales were slow and below expectations, particularly in
the southern portion of the District. However, they also noted that
despite the sluggishness, sales were up from January 1995. Low
interest rates are reported to have positively affected sales.
Inventories are "desired" to "slightly heavy," ranging from a 40- to 90-day supply. However, many dealers are anticipating March to be a stronger month, so heavier inventories are not particularly disconcerting.
Banking
All of the District banks we contacted indicated a significant
slowdown in borrowing activity, with the possible exception of
mortgage refinancing. The drop-off in commercial borrowing has been
especially severe. While consumer borrowing has moderated in most
regions and institutions compared with the previous report, consumer
credit demands are still generally expanding.
Delinquency rates continue to rise, though, and several banks are expressing concerns about credit quality. Deposit growth remains moderate, with transaction deposits basically flat. Some drain of deposits to money market funds was noted. Major-market banks have witnessed a further shrinking in margins and are anticipating a substantial slowdown in profitability this year compared to 1995.