Beige Book Report: Cleveland
May 14, 1975
Comments from our directors and from other business executives suggest that economic activity is still declining. They indicated that although there are scattered signs of recovery in some industries, inventory liquidation will be heavy again this quarter. Conditions in the industrial sector are mixed with some firms continuing to produce at high rates, others beginning to recover, and some continuing to experience weak or declining demand. The decline in residential construction appears to have ended and a moderate recovery is under way. S&Ls, however, are being cautious in their mortgage lending.
New car sales in Cleveland rebounded last month from a sharply depressed level in March. (Some purchases in March were postponed because consumers believed the Ohio sales tax on motor vehicles might be suspended for a time.) Nonautomotive retail sales have held steady, according to a director with a national retail concern. He does not expect tax rebates to create a significant surge in consumer demand. Another director in the consumer entertainment business said motion picture revenues are very good and per capita expenditures in amusement parks are up 28 percent from 1974. All of the increase reflects discretionary spending rather than higher gate fees.
Purchasing agents in Cleveland and our own monthly survey of manufacturers indicate the rate of decline in new orders, production, and employment slowed during April. However, inventory liquidation proceeded at a faster rate than in the first quarter. Firms anticipate a continued high rate of inventory reduction in May. There is evidence of further abatement in inflation. The percent of purchasing agents paying lower prices exceeded the percent paying higher prices for the second consecutive month.
Market conditions for producers of capital goods and consumer goods are mixed. Demand for some types of capital goods continues to be very strong and a few previously depressed industries are beginning to recover, but conditions in some industries appear to be growing worse. Generally, firms producing materials, equipment, and machinery for coal mining, air pollution control, oil country goods, drilling rigs, rail cars, pipelines, and gas storage tanks are enjoying strong demand. District firms also report good sales of heavy duty power transmission components, but they caution that there may be more deferments, cancellations, and declining orders from major electric utilities due to uncertainties in the industry.
Signs of improvement among auto producers and suppliers are spreading, as some laid-off workers continue to be recalled. Automotive tire sales have started to improve, and industry sources say a massive adjustment in tire stocks has occurred in recent months. A director in the rubber and plastics business said inventories at his company and among its retailers are approaching normal levels; production is expected to increase soon. Chemical shipments have begun to recover according to one major firm. A large paper company and an appliance producer recalled some laid-off employees and lengthened the workweek. An industrial machinery firm reports that orders are starting to turn up, though slowly. The nation's leading machine tool producer recently received its first orders for machine tools from China, and it has been receiving large orders from Mideast and Eastern European countries.
On the less encouraging side, two major machine tool builders in Cleveland report no pickup in new orders, and they are continuing to work down their backlogs. One firm experienced a new wave of cancellations in April. A top executive in the heavy-duty truck industry reports that the industry is in its worst sales slump in many years. In Cleveland, a manufacturer of large trucks previously cut output from 60 units a day to 40 units. Now it is producing 24 units a day, following a recent three-week shutdown. Six hundred additional workers were laid off early in May. Truck and bus tire shipments are very weak, and further layoffs will likely occur in this segment of the tire industry. In central Ohio, a large firm is eliminating its recreational vehicle line and permanently reducing its work force by 1,500. Bankers in the area are extremely concerned.
Large and small steel companies continue to lay off workers, temporarily suspend some operations, and reduce their workweeks. Heavy liquidation of steel inventories by steel users is in process. Steel mills, however, are still rebuilding their own inventories. Economists from several steel firms say production should begin to recover in the fourth quarter, with demand from auto and appliance producers expected to lead the recovery. A large steel firm in Youngstown will furlough 2,000 workers for five weeks beginning June 8 while new equipment is being installed.
A number of our directors strongly emphasized the need for policies to stimulate capital spending. In their view, the recent liberalization of the investment tax credit is of only limited help. The directors believe that tax rules limiting depreciation to original cost rather than replacement cost, and long depreciation schedules, are inhibiting growth of the nation's plant capacity and will lead to new shortages. Several directors in energy-related businesses said they were certain that there would be severe energy shortages in the 1980s.
Among other comments from our directors, a university president said jobs are very scarce this year for all except the few best graduates. A director from a large bank in Cincinnati commented on the large increase in job applications at his bank.
In the construction sector, nonresidential building remains depressed, but housing is beginning to edge up. Mortgage lending activity by district S&Ls increased in April, following a very sluggish first quarter. Many S&L officials believe interest rates will rise sharply by year-end and, therefore, are not aggressively seeking mortgage loans. Net savings inflows showed some signs of slowing in April.