August 9, 1972
Reports from businessmen, directors, and economists indicate that recovery is continuing in the District, but remains short of BOOM proportions. Construction continues to lend support to overall activity, and the manufacturing sector now appears to have entered a clear-cut phase of inventory accumulation. Steel industry economists expect greater inventory building by their customers during the second half and a strengthening in new orders stemming from the capital goods sector. Business loan demand at District banks has been good.
Among the principal economic indicators for the District, residential construction contracts remained at near-record level in June, following a temporary setback earlier in the year: nonresidential construction contracts are still at a relatively low level, but are recovering. Insured unemployment remained unchanged in July, following a slight reduction in June (the first monthly decline of the year). Preliminary results of our monthly survey of District manufacturers indicate that new orders, shipments, and backlogs continued to rise in July. Manufacturers reported inventory accumulation for the third consecutive month. Gains in employment and hours showed signs of tapering off. Thus far this year, our survey has detected no easing in the percent of firms reporting higher prices paid. For the month of August, survey participants expect gains in most key series, but little change in employment and hours.
Several of our industrial directors mentioned improvement in labor utilization. One director noted a lot of overtime at his office machinery company and that they are now hiring people after having had a labor surplus.
Another director in the machine tool business stated they are beginning to rehire, but nothing major yet. An appliance firm in Dayton, whose union recently agreed to forego wage increases in order to keep the company competitive, has started to recall laid- off workers. Elsewhere, continuing efforts are being made to end an 18-week-old strike at the Chevrolet assembly plant in Cincinnati. Several directors commented on the growing toughness of the Price Commission, and they felt it would have an adverse impact on business sentiment.
There was some discussion at a recent meeting of our branch directors that businessmen have made great efforts to reduce inventories and they have better management tools today to keep inventories low. Therefore, we should not expect to see a return to previous normal inventory-sales ratios.
Economists from three major steel companies in the District report a seasonal pickup in new orders, although there is little sign of an upturn in orders for heavy construction. (One economist noted that if heavy construction had been normal, 1972 would have been a record year for steel shipments.) The steel companies are beginning to see increased buying of plates and structurals from the capital goods industry, and further impetus from that sector is expected during the second half. Recent high levels of steel consumption have concentrated in farm machinery, appliances, and motor vehicles. These manufacturers will probably have to increase their inventories this fall to maintain their high consumption rate. As the steel mills become busier and delivery time is extended, customers tend to carry higher inventories. The economists believe that if a steel price increase is announced for January 1, there may be additional inventory building during the fourth quarter.
Net imports of steel are likely to be higher in the second half than in the first half. Because of dock strikes, Japanese steel exports to the U.S. during the first half were 700,000 tons below the year-earlier level, but their quota for the full year calls for a reduction of only 400,000 tons from 1971. Japan is expected to make up the 300,000 ton differential during the second half. Steel imports from the EEC and UK were off 1.1 million tons in the first half compared with the year-ago level. Their quota calls for a 500,000 ton reduction for the entire year. (Steel price increases in the European countries have contributed to the decline of imports.) The economists generally did not expect the EEC and UK to make up all of the quota differential during the second half.
On the financial side, large banks report that growth in loan demand during July was slightly stronger in the District than in the U.S. Business loans grew substantially at District banks, with the increase concentrated in the trade and services industries; loans to manufacturers were weak.