April 9, 1975
In general, economic activity in the District continued to decline in March. Signs of falling prices and more price competition are increasing. Retail sales of durable goods remain weak, but sales of nondurables are improving. There is considerable evidence of inventory liquidation at both retail and manufacturing levels. Near-term prospects for a recovery in capital spending are not particularly encouraging. Increased deposit inflows have put financial institutions in a better position to help promote recovery in residential construction.
In the consumer sector, new car sales weakened significantly last month, following a surge in February. Car sales in Ohio were depressed, partly because a bill was proposed in the state legislature that would have suspended the sales tax on motor vehicles until June 30. Legislators debated the bill during most of March before finally defeating it.
One of our directors in the consumer recreational business commented that revenue from TV and radio advertising is up substantially. Consumer spending for recreation has been exceptionally good.
Some major retailers in the District report scattered signs of a pickup in soft goods. Sales of big-ticket items remain poor with little prospect of recovery until early next year, according to one source. An executive with a major department store said that he is encouraged by somewhat better than expected sales around Easter, and by collections above estimates in recent weeks. An economist with a department store chain believes that retail sales, except for household goods, bottomed out in January and February. He sees progressive strengthening in sales of soft goods and a completion of inventory liquidation of these goods by May. Continued weakness in appliance and furniture sales is expected until next spring, because of a 9 to 12 month lag between recovery in housing and recovery in household goods. All retailers report excessive inventories of appliances and furniture. Liquidation is not expected to be completed until July or August, according to one source. The treasurer of a financially troubled retail chain said that it has had difficulty building inventories of summer merchandise because its suppliers have held back credit. All firms contacted say that retail prices definitely are moderating—some fall merchandise will be priced below current levels, and price increases for other lines will be much smaller than last fall.
According to purchasing agents in the Cleveland area, production cutbacks were more widespread in March than in previous months. Lower prices became more pervasive, with 40 percent of firms paying lower prices and only 5 percent paying higher prices. (The higher-lower percentages were roughly equal in February.) Our own Survey of District Manufacturers confirms the continued weakening in business during March. For the month of April, firms expect some moderation in the rate of decline in new orders, shipments, backlogs, and employment, but an accelerated rate of inventory liquidation. Auto firms have started to recall some workers, and some automotive suppliers report a pickup in business.
Steel companies report a dramatic decline in new orders. Several major steel firms emphasized that their customers are rapidly liquidating steel inventories. The run-off is expected to continue throughout the second quarter and possibly beyond. Steel shipments will drop sharply this quarter. One firm estimates a decline of 20 to 25 percent from the first quarter. Production, however, will not decline as much because steel mills still need to rebuild their inventories.
The situation in the capital goods sector is mixed, and the outlook is uncertain. An executive with a large industrial machinery firm believes it may step up its capital spending somewhat in light of the more favorable investment tax credit, ITC. Its customers are expected to place orders previously deferred because of expectations that the tax credit would be liberalized. One of the area's major electric utilities said the increase in the ITC is unlikely to increase its spending plans this year. Several of our industrialist directors expressed the view that an acceleration in depreciation allowances would do more to stimulate capital spending than the higher ITC. A highly-regarded economist in the machine tool industry does not expect the ITC to stimulate capital goods much this year, and he continues to forecast no recovery in real capital spending during the second half. His own firm booked four new orders for machine tools in March, whereas cancellations had exceeded new orders during the previous four months. Another machine tool firm said new orders continue to be depressed, but offers to bid on contracts are increasing. A director reports excellent business in his capital goods firm which produces equipment for oil exploration and drilling and coal mining machinery.
In the District's construction sector, the decline in residential construction contracts resumed in February, following some improvement in January. Nonresidential building remains depressed. Construction firms in the region are said to be hungry for business, a report that tends to be confirmed by more competitive bidding for public projects. Recently, Ohio awarded the contract for a new bridge to a firm whose bid was almost 25 percent below state engineers' estimated cost. Last month, other bids below estimates were reported for road construction, school remodeling, and a recreation center. One banking director in southern Ohio reported that a home builder, anticipating a recovery in demand by late spring, has started 50 homes without any sales contracts so far.
In the financial area, banks report that demand by residential construction builders for new loan commitments has been unchanged. Limited improvement is expected during the second quarter. Some banks that adopted restrictive loan policies for residential construction last year say funds are now available. Ohio's 8 percent usury ceiling on mortgage loans is discouraging some state-chartered banks from lending. Several large S&Ls in Cleveland report excellent deposit inflows in March. But more deposits are in the form of passbook savings and short-term certificates, as savers expect higher yields in the months ahead.