April 9, 1975
Despite a boom in output of oil field equipment and related products, industrial production in the Eleventh District has continued to decline at a moderate pace. In anticipation of the dollar-a-barrel tariff imposed February 1, imports of crude oil were accelerated in January. But, due to unseasonably mild weather and the recession, demand for petroleum products has fallen and refiners have trimmed operations. Petroleum refining is running at 84 percent of capacity, down 10 percentage points since early January. In spite of lower output, refiners report that stocks of finished products are pressing storage capacities.
Chemical production has also trended downward since late last year with a sharp falloff in new orders. Manufacturers attribute the drop in bookings to inventory liquidation by many customers that made large purchases last year as a hedge against possible shortages. One of the District's leading producers of industrial chemicals reports output has dropped to 50 percent of capacity. Despite reduced demand, producers have been reluctant to lower prices. One firm attributes the reluctance to an industry-wide concern that price controls may be imposed later this year.
Operations of District steel producers primarily engaged in supplying residential and commercial construction, continue to be depressed. Manufacturers of reinforcing steel bars have cut production as much as half. Still, a buildup of inventories has forced them to substantially reduce prices. One of the largest producers of re-bars, for example, has lowered prices by roughly 20 percent across the board and still reports record high inventories.
In addition, the falloff in demand has left many steel dealers flush with high priced foreign steel that was ordered last year when domestic mills could not keep pace with demand. During the fourth quarter of 1974, foreign steel—priced well above domestic levels—poured into the District at record rates. Now, with prices down, dealers will have to take losses estimated at $150 per ton to liquidate their inventories. Nevertheless, foreign producers have remained active in District markets by aggressively cutting prices. Steel ordered in March, scheduled to reach the Gulf Coast this summer, is priced roughly a tenth below quotes by District mills. One official reports his firm cannot compete at current prices, since quotes on foreign products are now lower than his cost of production.
Manufacturers of truck trailers are experiencing drastic reductions in new orders and production. To avoid the added cost of an anti-skid braking system that became mandatory on January 1, major fleets bought ahead last year. As a result, new orders have been "practically nonexistent" this year. Production by one of the largest manufacturers in the District is down 75 percent from the level in the fourth quarter of 1974. And at one assembly plant where 400 workers have been laid off since mid-December, output has been cut from 35 to 8 units per day. In addition, the slowdown in business activity late last year prompted a sharp decline in hauling and forced the cancellation of many orders. This has contributed to large inventories of finished trailers—in the case of one firm between 700 and 800 units.
Apparel manufacturers—many operating on reduced workweeks—report orders have picked up recently. One major garment maker said salesmen are now getting orders they would not have gotten a few weeks ago, indicating that most retailers have run off large post- Christmas inventories. Nevertheless, buyers remain extremely cautious. To control inventories, retailers are ordering smaller quantities and are reordering more frequently. In addition, they are largely confining their purchases to staple items—basic styles, sizes, and colors—and are carefully avoiding "fad" items.
Producers of oil field equipment—including offshore drilling platforms—continue to operate under a deluge of orders. Backlogs of three to five years are common. In addition, firms engaged in supplying steel and fabricated metal products to equipment manufacturers are hard pressed to meet demand. One of the District's largest materials suppliers, for example, reports a two year backlog of unfilled orders for steel castings. Shortages of skilled labor are also impeding equipment production. Many firms have started recruiting nationwide, especially in the Detroit area. Moreover, several large producers have established schools to train unskilled workers for skilled positions.
A survey of new car dealers indicated sales have fallen sharply since the cash rebate program ended. Respondents said sales in March were, on average, down 50 percent from the level in February. Dealers admit the downturn seems to indicate that the cash rebates simply borrowed from future sales. Nevertheless, they regard the program as having been successful, as they were able to liquidate large inventories of new cars—even to the extent of selling entire stocks of some small models. Since dealers expected sales to be sluggish after rebates ended, they have held down new orders, thus keeping inventories manageable.