January 10, 1973
Economic activity in the District ended the year on a strong upward trend. Retail sales surpassed expectations. Manufacturers have been experiencing increased inventory building on the part of customers. Payroll employment continues to expand at a more rapid rate in the District than in the nation, and residential building remains at a high level. There are, however, some indications of constraints on production stemming from physical capacity limitations, fuel and labor shortages, and difficulty in obtaining supplies. Bankers report strong deposit flows at the year-end.
Retail sales over the holiday period are reported to have been very strong. The improvement in the Cleveland area was much better than anticipated by retail merchants. They were particularly surprised by the surge in shopping between Christmas and New Year's Day, and by the continued boom in sales during the first week of January. The Pittsburgh area also had an excellent volume of retail trade over the holidays. According to one bank economist, Pittsburgh's economy came back from the recession only in the fourth quarter of 1972. The area's steel industry is finally showing year-to-year gains in employment, while other durable goods industries that had been sluggish since 1970 are beginning to demonstrate signs of increased activity.
Steel industry economists report strong order demand, with recovery in those product lines that had been relatively weak. Steel users are beginning to accumulate inventories more aggressively. One steel company is becoming concerned about their ability to ship all of the orders currently scheduled for March delivery. They are approaching capacity limits on some products in certain plants. One of our directors reported that another large steel company in his area is operating at full capacity. A third steel company mentioned a surge of inventory accumulation by their customers, stemming partly from attempts to beat price increases, partly from a greater willingness of users to hold larger inventories to ensure continuity of production, and partly because the cash positions of their customers has improved.
Several of our industrial directors mentioned that the fourth quarter was outstanding for their businesses, particularly in the areas of office equipment and motor vehicle equipment. Delivery times are stretching out, and there are reports of difficulty in hiring skilled employees and in one instance high quality unskilled workers. One of our directors, a university president, commented that for the first time in years the employment situation is much better for their graduates, based on the increased number of recruiters and job offers.
Machine tool companies in the area are expecting a boom in new orders. Some are having difficulty in getting supplies that could have been purchased off the shelf a few months ago. Others are having difficulty in obtaining skilled labor. An economist from a large machine tool firm in Cleveland said they are deliberately stretching out backlogs rather than attempting to increase output by hiring more workers (which they are not sure of finding even if they tried). The firm is running down its inventory of cutting tools built during the previous slack period, and their customers have begun to accumulate inventories in earnest.
Economists from several major oil companies headquartered in the District report bottlenecks in physical plant, with operations running over 100 percent capacity. Even though fuel oil is in short supply, oil refineries are tending to concentrate on producing gasoline, which (because of price ceilings) is more profitable than fuel oil. One economist expects a shortage of transportation fuels by spring. The oil companies are having difficulty in satisfying the demands of their regular customers, and they are reluctant to take on new customers. In some instances, fuel shortages have constrained manufacturing output in the District. In recent weeks, some plants have had to shut down and others have had to reduce operations because their supplies of natural gas were curtailed and they could not obtain alternative fuel sources such as crude oil.
Bankers report a strong flow of deposits at the year-end, reflecting the rapid pace of business activity. Mortgage loan demand continues to be strong, while the volume of residential construction contracts in the District (as of November) was only a shade below the record high reached last May. Business loan demand has shown signs of further strength in recent weeks.