July 9, 1975
The pace of economic activity in some sectors of the District is continuing to improve, particularly retail sales of nondurable goods, housing, and several manufacturing industries. Employment and production are still sluggish in a number of areas of the industrial sector, however. Some manufacturing firms have been liquidating inventories at a rapid pace and plan to continue their inventory reduction programs in the near future. Capital spending, in real terms, is not expected to recover until next year.
A major retail chain in the District reported unit sales of nondurable goods picked up strongly during the past two months. Strengthening of hard goods sales is expected later in the year. The firm's buyers note prices for fall and winter merchandise have declined. Price markdowns on apparel and white goods will be less extensive than in recent months because inventories have been cut to desired levels.
The latest report of Cleveland purchasing agents suggests that production and new orders continued to decline in June at about the same pace as in May. Inventory liquidation accelerated last month, and employment and prices continued to decline. Those developments are consistent with early returns from our June survey of District manufacturers, except that our survey shows an increase in new orders last month, the first gain since last August.
A large producer of consumer packaging materials said orders have improved in recent months. The firm's inventories rose through April, and it plans to liquidate excess stocks until year-end. An appliance industry supplier views its inventories of finished and semi-finished goods as slightly above desired levels. A major chemical firm reports its stocks of chemical products in balance with sales, but plastics inventories are still high.
A tire industry source said tire shipments to wholesalers and retailers have recovered strongly. No further inventory liquidation or price-cutting at the retail level is expected because dealer inventories are low. (Shortly after reporting this item to us, the tire firm announced a price increase averaging 5 percent on its tires and tire products.) Tire producers plan to reduce inventories for the remainder of the year by allowing tire production to increase at a slower rate than sales.
In the capital goods sector, economists from several machinery companies said they do not foresee a recovery in real capital spending until early 1976. One economist said cancellations of machine tool orders appear to have run their course. New orders received by his firm were level in June, following some improvement in May. Another large machinery company has laid off workers at three plastics machinery plants in Ohio. New orders for certain types of gears have softened recently, according to a director in the capital goods business: On the positive side, a major steel firm reported it will spend $20 million for new plant and equipment in one of the District's most obsolete steel producing areas. A director in the office equipment business said sales turned up sharply last month.
A supplier to the truck industry said he foresaw no prospect for recovery this year in the depressed market for heavy-duty trucks. Inventories are very high. Sales of off-road heavy trucks used in oil-drilling areas have picked up slightly, and the firm expects more sales if oil prices are deregulated. The medium-sized truck market is improving; light trucks are recovering significantly, partly reflecting strength in demand for vehicles used on the farm and for recreation.
Steel industry sources said the decline in new orders has leveled off during the past few months. However, recovery in steel output is not expected until the fourth quarter. An economist with a major steel company commented on the nationwide increase in May's new orders for durable goods, which is largely attributable to a rise in steel orders. Steel orders received in May, seasonally adjusted, may be overstated because delivery is usually during the low shipping month of July. Thus, May's increase in durable goods orders may be more a reflection of inadequacies in the seasonal adjustment process than changes in underlying market condition. Steel producers have been offering price concessions to stimulate demand. Steel service centers, which have far more inventory than needed to handle current orders have also cut some prices. Inventories at steel mills are near desired levels, but warehouses and steel users are expected to continue cutting inventories into the fourth quarter.
Executives from several oil companies based in the District reported the nation's gasoline inventories are tight. They commented that spot shortages could develop in the months ahead, particularly on the East coast. Right now, oil refineries are maximizing gasoline production and are raising prices to recover some past cost increases. The major concern about the availability of petroleum products is during the fall and winter. If the expected shortages of natural gas occur, cutbacks of natural gas to industrial users will force some companies to convert to fuel oil. This could cause serious disruptions of petroleum product supplies. (As an indication of impending natural gas shortages, a gas company recently announced that it will cut off all natural gas to industries in Central Kentucky effective November 1.)
In the housing market, residential construction contracts continued to recover in May. The economist at the Federal Home Loan Bank of Cincinnati said preliminary data from their sample of savings and loans indicate near-record deposit inflows during June. Loan commitments have been rising, but a few savings and loans are still cautious in their lending policies because of low liquidity and the possibility of savings outflows later this year.
Several banks in the Fourth District have reported weak growth of total demand deposits, which is a normal seasonal development in this District. Rapid increases in individual demand deposits have been offset by declines in public deposits.