September 13, 1972
Key indicators of economic activity in the District reveal some signs of hesitation in recent months. Nonfarm payroll employment declined slightly in June and again in July; the insured unemployment rate continued to improve in August, however. Residential construction contracts appear to have peaked in the May-June period, and declined sharply in July; nonresidential construction remains sluggish. Our electric power indexes of manufacturing activity are reflecting temporary leveling tendencies or slower rates of increase in a number of metropolitan areas. The performance of the manufacturing sector should begin to improve as inventory building gathers momentum. Steel-industry economists see evidence of near-term improvement in their industry.
Preliminary returns from our monthly survey of manufacturers indicate that new orders, shipments, and backlogs continued to rise in August, but at somewhat slower rates than earlier in the year. Inventory accumulation continued for the fourth consecutive month, with the largest percentage of firms reporting higher stocks since early 1970. (Our survey has detected no decline in new orders in more than a year, no decline in shipments since the end of the recession, and no decline in backlogs since last autumn. Inventories, however, were being liquidated through the month of April.) Firms also reported little change in labor utilization in August, a lengthening in delivery time, and no easing in price increases.
An economist from a large retail concern headquartered in the District reported that areas producing consumer durables have experienced very strong department store sales in recent months, while areas specializing in producers' goods have had sluggish retail sales. In general, sales of sportswear, cosmetics, and household furnishings have been good, recreational goods mediocre, and air conditioning terrible. His opinion is that consumers are highly price conscious and appear to be displaying much resistance to price increases.
Several major machine tool companies in the Cleveland area indicate that orders are rising sharply, although they have a long way to go before reattaining previous peak order levels.
According to several steel industry economists in the District, third-quarter shipments are registering only the normal seasonal pattern-a disappointment to some analysts who expected a pickup. Orders have not been outstanding. Steel ordering for heavy construction and industrial construction (still below normal) seems to have bottomed out. There are signs of a modest improvement, but the real strength from this sector is not expected to come until 1973. The economists say the order outlook from the consumer sector promises to be very strong for the fourth quarter. Some hedge buying in anticipation of a steel price increase on or after January 1 could occur over the next few months. According to one steel industry economist, competitive factors, rather than the Price Commission, have held down steel prices. The industry is in a position to raise prices on January 1 (when its self-imposed price freeze ends) if market conditions are favorable. The economists expect the steel industry to have a better year in 1973, with capital goods providing the stimulus and consumer goods demand about level with this year.