October 10, 1973
Supply shortages appear to be constraining output in the district. Retail sales are leveling off. Reports from purchasing agents and the machine tool industry indicate that capital spending will be strong next year. S&Ls continue to experience deposit outflows, and housing is declining. Business loan demand is still strong, and commercial banks have sharply reduced rates on large CDs.
Several of our directors along with economists and financial officers representing steel, machine tools, chemicals, and ceramic industries regard supply constraints as the main source of the recent moderation in economic activity, especially within their own industries. Two of our industrial directors, who have been indicating that shortages were hampering production, noted that the problem has become more severe in recent weeks. One director reported that his firm has shut down numerous glass production lines as a result of a severe shortage of soda ash. Suppliers of this critical material for the glass industry are apparently telling customers that the supply will not increase until new production facilities are put in place, which could be a year or longer. A second director reported that supply limitations in a broad range of plastic materials have caused a cutback in production. He noted that the firm is importing some of its raw materials, but at prices considerably above those paid to domestic suppliers. He also reported that supply problems have caused the firm to reexamine its capital spending plans for 1974, but at present, they are going ahead. with an important expansion of production facilities.
Steel industry economists say the industry is still rationing steel. The order books for most steel products are full and have been closed for the balance of the year according to one large steel producer. Another major firm is not yet accepting orders for 1974 delivery, although it is assuring customers they will get their share of steel next year. The tight domestic supply situation is forcing steel consumers to purchase foreign steel at premium prices. Consequently, steel imports are not declining as much as the industry had expected earlier this year.
Purchasing agents in the Cleveland area report that shortages of parts and materials have held down output during September. The Canadian newsprint and rail strikes adversely affected some manufacturing operations in the area. Buyers are complaining about failures of vendors to maintain delivery schedules. With the list of shortages, one of the longest in the past two decades, firms are experiencing difficulties in building inventories. According to the purchasing agents, the forward commitment position for capital expenditures is the longest it has been in years. In recent months, almost half the firms surveyed have reported buying lead times of one year or more for capital goods.
The president of a major department store in Cleveland and the economist with a large retail chain in the district both report a progressive slowing in their sales since last spring. Furniture sales, in particular, have not regained previous highs of late spring. Trade sources expressed the view that retail sales are softening because of inflation, especially in food and gasoline, as well as consumers' fears of poorer business conditions in prospect.
Machine tool firms in the area are still inundated with new orders. With the workweek at the limit, firms are taking on more workers as they become available. One large machine tool firm in Cleveland reports the attrition rate is very high because things are so good. They may hire 20 workers and net ten after a month. Even though the peak in new orders appears to have been passed, the order backlog in machine tools is high enough to sustain full-capacity operations well into 1974 according to one economist.
There is considerable concern among firms in the area that energy shortages could hamper production during the winter. Representatives from a large steel and large chemical firm report they are stockpiling fuel in the event of shortages in the coming months.
A Federal Home Loan Bank economist says that S&Ls in this district very likely experienced further deposit losses in September. Most S&Ls in large metropolitan areas have issued wildcard certificates, but purchases of these CDs largely represented transfers from existing savings accounts rather than new money. S&Ls in the area generally are fulfilling past mortgage commitments, but only a few are making new ones. District residential construction contracts are declining; the dollar volume in August was down considerably from the peak in January.
In recent weeks, business loans by major banks in Cleveland rose sharply, partly because of a tax settlement date. One of the largest banks reported its business loans were nearly as large as its peak volume in May. The banks also reported that mortgage loans were at a high for the month of September. Major banks in the district cut their rates on large CDs dramatically in the past three weeks. Rates on all maturities are now lower than at the beginning of August, with the largest declines (as much as 225 basis points) in the longer-term maturities. Some of the smaller banks that offered wildcard certificates with guaranteed rates between 8 percent and 9 percent have reached their limits. Some of the larger banks, which were issuing certificates at around 7 percent, have not been soliciting funds in recent weeks as actively as they were in August.