August 10, 1973
Comments from our directors, businessmen, and economists indicate that the pace of business activity remains at a very high level. There are, however, numerous reports of distortions, including complaints of production bottlenecks stemming from capacity constraints and labor and materials shortages. A major retailing firm expects consumer spending to slow appreciably in the year ahead. In the financial area, some savings and loan associations in the District are experiencing heavy deposit losses as a result of interest rate differentials.
The comments of our industrial directors at a board meeting held on August 9 indicate that the pace of business activity remains strong, but shortages of certain raw materials, particularly in the chemical area, are becoming an increasing problem. Two directors, whose firms are important producers of consumer goods, reported that, while orders remain strong, shortages of raw materials are impeding production. One of these indicated that about 10 percent of the firm's facilities are idle because they cannot get raw materials and the other is attempting to secure foreign sources of supplies. A director whose firm is a large supplier of chemical products reported that their customers are on an allocation basis. Two other directors—one from a large diverse manufacturing firm and one from a large office equipment manufacturing firm—reported that new orders remained strong and that all of their production facilities were operating at full capacity. Both firms are viewing 1974 with caution, especially in the case of their capital spending plans. Finally, a large and diversified manufacturing and construction firm indicated that it expects a continuation of at least nine months of upward activity. As a result, its capital spending plans are on the upswing; it will not be borrowing to finance these additional outlays because of a strong internal cash flow.
Early returns from our monthly survey of manufacturers reveal considerable strength in certain key indicators and signs of stress in others. In July, the largest proportion of firms reported gains in new orders since January. Peak capacity operations and shortages of materials have limited the ability of many firms to increase shipments, however. Thus, backlogs are continuing to rise and delivery times are growing longer. Our survey also shows stepped-up inventory accumulation during July. Buyers in the Cleveland area say it is difficult to build inventories of finished goods, however, in the face of numerous shortages and limitations on production. Finally, it now appears that payroll employment in the District is leveling off following strong gains through the first quarter.
One of the District's capital goods producers received in July an order in excess of $275 million for six nuclear power systems. This is reported to be the largest order ever placed in the nuclear industry. To achieve economies in design, licensing, and construction, five electric utilities acted together (with Federal approval) to order standardized nuclear power plants.
Economists with three major steel firms in the District report no sign of any easing in the demand for steel. Customers' orders are being allocated because of capacity limitations, and orders are booked solid through the fourth quarter. Nevertheless, production and shipments during the second half of 1973 will not be so high as in the first half of the year. Approximately 4 million tons of the 56 million tons shipped in the first half came from steel mill inventories--something the steel companies cannot repeat. Production at a major steel firm in Cleveland is currently being cut back until October in order to reline blast furnaces. The tight steel situation is underscored by a comment from one economist to the effect that, for the first time since World War II, steel consumption (in the second half of 1973) will equal total domestic capacity plus imports. The world market for steel is similar to the United States situation. With steel prices generally higher abroad, there is now less incentive to import. In fact, steel imports in June dropped below the year-ago level for the first time this year.
The economist from a major retail food chain is extremely pessimistic with regard to near-term prospects for relief from rising food prices. He does not expect an immediate boost in beef supplies when the freeze is lifted because of the time it will take to get cattle off the farms into feedlots, processed, and distributed. He does not expect a drop in retail beef prices until January.
The economist from a major retailing firm with headquarters in the District reported that they have a pessimistic forecast for consumer spending for the next four quarters and that recent developments have increased their confidence in this projection. Their current view is that the peak growth rate for consumer spending was reached in early 1973 and that an appreciable decline in the rate of expansion in consumer spending will materialize between mid-1973 and mid-1974. Their outlook is based on a number of factors, including the rapid rise in prices, especially food prices, declining consumer confidence, the consumer credit situation, and high interest rates. All of these factors are thought to have a negative influence on discretionary expenditures.
On the financial side, the economist at one of the two Federal Home Loan Banks in the District reported that savings and loan associations in the area have suffered sizable withdrawals of funds since early July, and there are indications that the outflows have continued thus far in August. In the past month, mortgage rates have increased 25 to 50 basis points at both savings and loan associations and banks. In addition, mortgage loan demand is being discouraged by requiring larger downpayments and shorter maturities.