December 12, 1973
Activity in the District's manufacturing sector remains strong, although shortages of fuels and raw materials seem to have become more severe in the past month. Two major tire companies may reduce their capital spending plans for next year as a result of the energy situation. Retail trade is showing signs of weakness. Housing continues to decline sharply. S&L's are experiencing a recovery in net savings inflows, but remain cautious about making mortgage commitments.
In recent weeks, there have been scattered reports of industrial layoffs as a result of fuel shortages. Total employment in the District is still rising, however, and conditions in the manufacturing sector generally remain strong. Early returns from our monthly survey of manufacturers and the latest report from purchasing agents in the Cleveland area indicate a pickup in new orders and production during November. Shortages of fuels, raw materials, and parts have worsened in the past month. Firms are experiencing difficulty accumulating inventories. Our survey shows a continued lengthening in delivery time for orders placed, and purchasing agents report further extension of buying lead times for both production materials and capital equipment. Manufacturers of capital goods are reported to be having difficulty in shipping completed equipment because of parts shortages.
An economist from a major rubber and chemicals firm reports that output of chemicals has been seriously affected by supply shortages.
One of our directors, whose firm manufactures rubber and plastic goods, reported that the company is on an allocation basis with several suppliers of petroleum-based raw materials. He indicated that there is evidence that increasing quantities of feed stocks (benzene and styrene) for the plastics industry are being sold abroad in response to higher prices. The firm is also out of titianaux—a basic raw material for white rubber products—and they are unsure when supplies of this material will be available again.
According to this source, the chemicals industry is not able to secure enough of its raw material requirements. Most shortages are attributed to price controls, which are thought to have led to the disappearance of certain items from domestic markets. Firms in the rubber and chemical industries are re-evaluating capital spending plans for next year, and a substantial cutback from previous projections may be in store.
Steel industry economists report that demand remains strong. Orders continue to be controlled to reduce the carryover of shipments past due. Auto manufacturers are beginning to reduce orders; but steel released can be reallocated easily to other industries. The economists expect about a 25 percent increase in the steel industry's capital spending next year. A considerable amount will be spent on pollution controls, and a major portion of the rest will go toward eliminating bottlenecks in existing equipment. Reduction of bottlenecks is expected to add about 10 million tons of capacity at less cost and in much faster time than attempting to increase capacity by starting from scratch. The steel economists are reasonably confident that demand for steel will remain at a high level throughout 1974, if energy supplies are adequate. One steel producer is concerned over the increased use of oil as a substitute for coke, which has been in short supply. Another steel producer foresees production curtailments if the steel industry is not exempt from proposed plans to limit industries to 90 percent of 1972 oil consumption.
Our contacts in the auto industry are expecting a decline in total new car sales to about 10 million units in 1974; sales of recreation vehicles are also expected to drop sharply. An auto industry economist reported that the industry has already shifted as much production as possible from large to small cars for 1974 models.
A major retailing firm headquartered in the District reports
a
flattening in sales of general merchandise, apparel, and furniture
since September. Sales and bargains are more widespread this
Christmas season than last. The firm is expecting a mild recession
in the first half of 1974 with virtually no growth in GAF sales.
An economist from a large retail food chain reports a recent drop in meat prices as a result of West Coast transportation strikes, which left a big supply in the Midwest, and a slight decrease in demand from institutional buyers. If prices remain depressed and feed costs continue at present levels, there will be a severe cut in beef production by mid-1974.
Residential construction contracts in the District continue to decline sharply, while nonresidential building remains strong. S&Ls report a rebound in savings flows during November and early December. However, an FHLB economist in the District is concerned over prospects for savings flows early in 1974 when a large volume of CD's is scheduled to mature. He felt if rates were 8 percent or higher on Treasury bills, funds would again shift from the S&L's into the money market.