June 11, 1975
The decline in district economic activity has been slowing, but signs of recovery in overall economic activity have not yet been pronounced. Inventory liquidation at the manufacturing level accelerated. Nonautomotive retail sales improved. Inflationary pressures continued to abate. Output and employment have been recovering in some industries such as autos, tires, and chemicals. Other industries, notably steel, have still been reducing operations. Residential construction edged up. Some major banks were reported to have been following conservative loan policies.
In the retail sector, the treasurer of a large discount store chain said sales have improved in recent weeks and inventories have been brought under better control. He noted that price markdowns, which have been used to entice consumers, will not be as extensive in the months ahead because profits have been squeezed and inventories reduced. The treasurer of a major Cleveland department store also reported that sales picked up in May and early June, although big-ticket items still have not begun to move. Its inventories also have been whittled down.
Latest reports from Cleveland purchasing agents and early returns from our survey of district manufacturers indicated further slowing in the decline of new orders, production, and employment during May. Most companies said they are letting attrition reduce their work forces. Inventory liquidation of raw materials, supplies, and finished goods was greater than for any other month this year. Inflationary pressures continued to ease as purchasing agents reported that they have been negotiating lower prices, higher discounts, and improved terms. For the third consecutive month, twice as many purchasing agents have been paying lower prices as higher prices.
Among favorable industrial developments, auto companies continued to recall some laid off workers. An economist with a major tire firm said the tire industry, on balance, has started to recall workers. Sales and production have been recovering. The economist estimates that during the next four or five months the industry will reduce inventories further by allowing tire sales to increase at a faster rate than production. A chemical industry spokesman said chemical products that were depressed in the earliest part of the recession have rebounded, with output now up to 70 percent of capacity, compared with 50 percent in December-January.
In the steel industry, many large and small firms throughout the district recently announced temporary or indefinite employment cutbacks; thousands of workers are being affected. One large firm has decided against reopening its idled Ohio facilities, and 1,250 jobs are being eliminated. An economist with a major steel company said new orders declined somewhat more than expected but have been showing signs of leveling off. Some customers that had not ordered for months (for example, appliances) have begun to come back. Several steel firms reported uncertainties developing among oil country producers because of new depletion allowance rules. In particular, independent drillers have no longer been so bullish. Energy-related industries, which had been strong steel buyers throughout the recession, have now been reducing orders and cutting inventories. Steel sources say customer inventory liquidation has not yet run its course. Steel sheet has been the largest part of the excessive inventories, especially at the steel service centers.
According to the chief executive officer of a major utility in northeastern Ohio, business from industrial accounts, especially steel, machine tools, and other machinery goods, has been pointing down. He also indicated that they have been experiencing some collection problems in higher income neighborhoods.
There have been scattered signs of improvement in the capital spending sector, amidst still basically weak market conditions. Dollar awards for nonresidential building edged up slightly but have remained well below last autumn's level. Printing press orders have improved, following softness for several months. A major machine tool firm reported a significant rebound in new orders booked during May, following a wave of cancellations in April. On the less encouraging side, an Ohio office equipment producer announced it will lay off 700 employees during the remainder of the year. A major supplier to the heavy duty truck market has scheduled an extended shutdown this summer because of poor business. Weak auto sales have caused a large steel firm in Ohio to postpone indefinitely its plans to expand plant capacity for producing steel sheets used by the auto industry.
Residential construction contracts have improved moderately during the past few months. An economist with a Federal Home Loan Bank in the district said that net deposit inflows at S&Ls were very strong again in May and that the supply of funds available for mortgages far exceeds demand.
Economists from three major Cleveland banks said their banks have been following conservative loan policies in order to build liquidity and capital. They also expressed the view that conservative loan policies could inhibit a sharp recovery in economic activity. One stated that his bank has been accepting as little credit or interest risk as possible.
Another mentioned that the president of his bank instructed loan contact officers not to be aggressive in seeking loans. All three banks have been making term loans based on a floating rate or a periodic reappraisal that allows for rate adjustments.