Cleveland: August 1975

Conversation with manufacturers point out a dichotomy between producers of consumer goods and producers of business and industrial equipment. Production and shipments of consumer goods generally have been recovering, as the worst of inventory reduction has been completed. An economist for a tire producer reports that business reached a trough around January-February and that output has been rising since then. In the case of passenger tires, the shape of the recovery has been nearly a "V", as production has been increased in line with sales. A supplier of glass to the auto industry and an executive with a fastener firm also reported that orders and production have picked up in recent weeks. A financial officer with a household appliance maker reports a turnaround in sales of vacuum cleaners, although another producer reported plans to continue to cut stocks of electric and gas ranges in addition to the 25 percent reduction since last December. According to an economist with a leading producer of soap, detergents, and household products, sales in recent weeks have risen above year-earlier figures for the first time this year.

Chemical and plastic producers in the District also report a rather sharp recovery, owing to drastic liquidation of stocks in recent months. A major producer of plastics stated that operations last month soared to 75 percent of capacity from the 50 percent rate in May. A petrochemical producer reports that operations have picked up to about 70 percent of capacity, compared with 50 to 60 percent during the trough in January-February. Steel and capital goods producers continue to report weak or declining trends in orders, although steel orders in July were probably at the low for the year, according to steel economists. For one firm, orders for August delivery are slightly better than for a comparable period in July, and orders for September are stronger than for August. One economist estimates that liquidation of steel will be about as severe this quarter as last, while another estimates that the bulk of the liquidation occurred last quarter. A financial officer with a major aluminum producer reports that orders and production have been rising slowly since the March low. Several capital goods producers and suppliers report weak and declining order activity. A chief financial officer with a firm that produces farm machinery reports easing in activity, while sales of heavy trucks picked up in recent weeks from dismal levels earlier in the year. Sales of truck tires remain weak, and no pickup is expected until the fourth quarter. A major roller-bearing firm reports that orders from farm implement producers and freight car manufacturers turned down, and a director with a gear firm reports orders receded from advanced levels last year.

In general, financial officers and economists contacted do not expect shortages of materials or capacity to hamper early stages of recovery. Two directors, however, fear that capacity shortages will retard a recovery in their industries because long depreciation schedules hold down replacement and modernization of obsolescent facilities. Our contacts in the steel, aluminum, coal, chemicals, and rubber industries indicated there is ample room for expansion of output before approaching peak capacity operations that would cause bottlenecks and shortages of supplies. An economist with a steel producer reported operations were no more than 60 percent of capacity, an aluminum producer reports present utilization of 74 percent, and two chemical producers are operating in a range of 70 to 75 percent, all of which are well below the peak rates of 1974. Moreover, none expect recovery in their industries to be much higher than 80 to 85 percent by the end of 1976.

Shortages in natural gas supplies represent a potential obstacle to recovery in steel and other industries dependent on this energy source. Three steel economists report that curtailed supplies of gas—as little as 40 percent of normal usage beginning November—would impede a recovery in steel. One major steel producer said limited supplies would force shutting their plants one week each month during this winter and that his firm is beginning to stockpile propane as an alternative energy source. Another has begun to stockpile gas supplies and is also drilling wells in northeast Ohio in areas close to steel-producing locations. A third producer will attempt to substitute oil for natural gas if allocations are as severe as now indicated. A large forging producer in northern Ohio plans to drill forty wells for his own use rather than convert to oil.

Employment in the District has not yet shown any improvement from the latest low in March. Nonmanufacturing employment has risen gradually in recent months, but employment in durable goods industries, especially steel, is still weakening. There are only isolated cases of recalls among firms contacted, mainly related to consumer goods industries. A producer of household goods is recalling 400 workers, and a producer of flat glass for automotive is recalling 145 workers. For most firms that have reported a recovery under way, employment has stabilized, and no plans for large-scale recalls are in prospect until sustained improvement is experienced. Steel firms continue to lay off workers, and one large producer furloughed 1,000 workers on August 1.

Upward price pressures have surfaced, especially in those industries where recovery has been under way. Several directors expect that the rate of inflation will accelerate. One fears "roaring inflation" will slow a recovery, and another expects resumption of double-digit inflation in 1976. A small producer of copper products raised prices 2 to 3 cents per pound, and a major producer of aluminum raised prices 2 cents per pound to offset labor and materials cost increases that occurred when their markets were weaker. An economist with a coal company remarked that coal prices are likely to increase later this year or early next year as demand strengthens. A steel economist justified the publicized increases on steel because of higher prices for materials (ore, nickel, chrome) and labor costs; he expects competitive forces will hold the overall increase down to 4-5 percent.

Residential construction contracts continued to recover in June. Deposit inflows to savings and loan associations slowed somewhat more than seasonal in July, while mortgage loans closed rose to the best level for any month in the past two years, according to a financial economist at the Federal Home Loan Bank of Cincinnati. An executive with a savings and loan association reports a slower growth in deposits, coupled with strengthening in commitments, will sharply reduce their liquidity by the end of August and may result in some need for borrowing. Another official reported an unusually good volume of deposits occurred in July and August, with the bulk in certificates. Mortgage rates in the Cleveland area rose about 1/4 percentage point and averaged about 9 percent for an 80 percent loan.