February 12, 1975
Economic conditions in the District deteriorated significantly last month, and further weakness is expected. Layoffs and shortened workweeks are widespread. It appears many industries are liquidating inventories, although some steel and machine tool firms say they need to rebuild stocks. Signs of weakness are spreading in the capital goods sector, and demand for steel is softening. S&Ls continue to have savings inflows, but mortgage loan demand is weak and housing is still declining.
Early returns from our monthly survey of District manufacturers indicate a further sharp deterioration in business during January. Many companies reported declines in new orders, shipments, and backlogs; and inventory liquidation, underway last month, apparently continued. The proportion of firms paying higher prices eased for the fourth consecutive month. One clothing manufacturer said sales and new orders are so low, and inventories so high, that it is not purchasing and therefore cannot take advantage of lower prices quoted by its suppliers.
Employment and hours worked continued to drop in January, and
unemployment seems likely to rise further in February. Several large
firms announced temporary or indefinite layoffs beginning in late
January or February. In the Pittsburgh area, a 40 percent reduction
in the amount of natural gas available for industrial use (effective
January 1) has caused some layoffs—concentrated in the stone, clay
and glass industries. Other firms are shortening workweeks. In the
Akron area, for example, many tire company employees who usually
work a
6-day week of 6-hour days have gone to a 5-day week and some
to 4-day and even 3-day weeks.
An economist for a major tire company reports that further weakened sales have lifted inventories of tires to a 9-month supply compared with 6 months recently. Production has finally been cut below sales and additional layoffs are likely, although the worst seems to be over. Demand for chemical products has dropped sharply since November, resulting in a rapid buildup of stocks. Production has been cut in line with reduced sales and output appears to be leveling off. One firm intends to reduce planned 1975 capital spending by stretching out some programs. The firm wants to avoid any further depression of its debt-equity ratio.
Signs of weakening in the capital goods sector are spreading. A major heavy-duty truck manufacturer in Cleveland recently closed its plant for a week, and reopened with operations reduced by one-third. Truck suppliers and some machinery firms are laying off workers. A major machine tool company in Cleveland said cancelled machine tool orders exceeded new orders in January for the third consecutive month. The firm's economist noted that backlogs through mid-1976 and the need for inventory rebuilding preclude any decline in employment. This economist, a highly regarded analyst of capital spending, added that he expects the rate of decline in real capital spending to continue during the first half and to increase in the second half.
Another major machine tool producer reported that new orders have weakened recently but are still running close to the firm's shipping rate. Although cancellations have increased, back orders stand at 15 to 18 months. The firm has not changed its capital spending plans. Its inventories have improved but are still unbalanced, partly because of continued shortages of some materials, notably castings. This firm is still hiring and working a 48-hour week.
A major electronic and printing press producer reports orders for presses fell sharply in January following a strong volume of bookings throughout the second half of 1974. The decline was attributed to uncertainties over the investment tax credit. Demand for the firm's electronics products, such as radio and TV broadcasting equipment and computer components, is still strong, with January bookings 10 percent above December 1974 levels. Capital spending plans for 1975 have not been curtailed because of the recession, although the firm may stretch out as much as $1 million of its $16 million increase planned for this year. Stocks are being reduced gradually and are in better balance than they were at the end of the third quarter. No drastic cutbacks in stocks are anticipated because order backlog is 15-20 percent higher than last year.
The treasurer of a multinational firm that produces office equipment reported orders have fallen sharply recently, from both domestic and foreign sources. The firm has laid off about 1,000 of its 16,000 workers since December 1 because of declining sales and large inventories. Inventories are considered excessive, but production is thought to be near the bottom of a "U"-shaped pattern.
Demand for steel is weakening, according to three major steel firms. Customers are canceling or deferring delivery on old orders, and pushing back delivery on new orders. However, there is still substantial strength in the steel industry stemming largely from oil, coal mining, railroad, and farm equipment producers. One steel firm heavily dependent on the automotive and appliance industries has begun laying off workers and reducing the workweek. Steel output in Cleveland has declined recently because a blast furnace at one mill cracked last month. It will probably be March before repairs are completed. The firm is receiving poor quality metallurgical coal resulting in production inefficiencies. Another large steel firm reports bottlenecks in production because of natural gas shortages and because they have operated at full capacity for 2 years without sufficient maintenance.
Demand for mortgage loans is seasonally weak, according to some banks and S&Ls in Cleveland. Officers attribute weak loan demand in part to a lack of consumer confidence but also apparently to little easing in mortgage terms. One major bank requires 40 percent down on a 20-year loan, with an interest rate of 9 1/4 percent. Loans with less than 40 percent down are not encouraged. In contrast, some S&Ls are actively soliciting mortgage loans, following 3 successive months of net deposit growth. A $150 million deposit institution that offers a variable rate mortgage is actively seeking loans but has found fewer takers than it wants. Housing starts continue to plummet.