December 12, 1973
In recent weeks, discussions of business developments in the Seventh District have been dominated by problems, current or potential, associated with the cutback in petroleum supplies. On balance, it is clear that reduced fuel availability is strongly negative, but many business sectors will benefit—not only in the near future, but for years to come. The passenger car industry (more specifically standard-size cars) and the airlines must now be added to residential construction and recreational vehicles as sectors where activity is declining with no early reversal in sight. In most areas, however, employment is holding up well. Sales of general merchandise appear to be strong. The farm community is extremely prosperous, although beset by rising costs and limited availability of supplies and equipment. Demands for capital equipment and components for nonresidential buildings remain extremely strong.
The fuel shortage has now adversely affected District employment in the auto, airline, recreational vehicle, petroleum distribution, and plastics fabricating industries. More layoffs are certain in January. There are expectations that fuel shortages will require cutbacks in output of hardboard, gypsum board, and, perhaps, steel.
The auto industry is striving to rapidly increase production of small cars which are in short supply and which are in strong demand by fleet buyers as well as individuals. (Interestingly, sales of the three major luxury autos have been excellent.) There appears to have been a moderate dip in demand for lighter trucks. Sales of heavy-duty trucks and diesel engines have not weakened, however, and deliveries are stretched out to the third quarter of 1974.
A leading manufacturer of diesels sharply criticizes a nationally- syndicated columnist who wrote that trucks are most efficient at 50 miles per hours. Actually, this company's studies indicate that the most efficient speed depends on the engineering of particular trucks and the type of driving. Optimum speeds can range from 45 to over 60.
There is great concern over the impact of employment reduction in Southeastern Michigan, especially on minority groups. Unemployment rates have remained high in the Detroit area, even at the peak of the auto boom.
Some businesses emphasize that shortages of parts, materials (including fuel), and skilled manpower were so extensive prior to the Arab oil embargo that it will be difficult to sort out the effects of fuel availability as such. Resources of steel, plastics, and nonferrous metals made available by cutbacks in standard-size autos and recreational vehicles will readily be absorbed elsewhere—unless, of course, reductions in income and reduced confidence lead to a cumulating decline in general activity. The most common view in this region is that a snowballing recession will not occur in 1974.
The capital goods industries are still overwhelmed by orders. A typical comment is, "I have never seen our economy stretched so tight." There are many reports of used equipment, e.g., farm equipment and machine tools, selling for more than identical new equipment. Suppliers of materials and equipment for nonresidential equipment also are hard pressed to meet demand. Capital expenditures by utilities, auto firms, railroads, coal mines, and oil companies are likely to be even stronger in 1974 because of the energy crisis than would otherwise be the case.
Our contacts with major firms with diversified operations indicate they had been preparing for fuel shortages for the past year by laying in additional stocks and by arranging for future supplies. They have been more concerned about their suppliers and their customers. (Some major firms are purchasing fuel and materials for use by their suppliers.) But the situation is still far from clear. An oil expert says, "there is no such thing as a firm contract in this industry." Attempts are being made to allocate available supplies of oil as equitably as possible. But there have been increasingly frequent reports of black market prices, particularly by stations selling gasoline and diesel fuel.
Sharp declines in farm and wholesale beef prices since last August have not been fully reflected at retail as marketing margins have widened. In recent weeks, beef supplies have about equaled year-ago levels. Capital spending by farmers is exceptionally strong, partly reflecting tax strategies related to record levels of income. Field preparations are ahead of normal seasonal patterns as farmers gear up for another rise in spring plantings. This should moderate the usual spring surge in demand for fuel and fertilizer.