Cleveland: September 1975

Financial officers and economists in the appliance, automotive, glass, and machinery industries reported production and orders have risen from winter and early spring lows. A producer of electrical and gas ranges reported significant increases in sales since June had led to a 16 percent increase in output in September and had boosted their operating rate to 70 percent of capacity. Another appliance producer noted production of small appliances had picked up sharply in July and August, because of relatively short supplies at the retail level; but sales and orders of major appliances were still weak. He expects only a 10 percent increase in sales of major appliances in 1976 because of continued weakness in housing. A director with a machine tool firm reported incoming orders were very strong in August. A major glass producer that is a chief supplier of the auto industry reported that orders have picked up strongly since the trough in January-February 1975, but that future gains will slow unless automotive output rises more than is projected. An economist with a machine tool firm stated its recovery appeared to be V-shaped. Its net orders rose 11 units in August while net orders declined 25-35 units a month at the trough last winter. He expects orders for small cutting tools to increase about 25 percent over the next 12 months, or typical for the first year of recovery. An executive with a machinery firm reported printing press orders began to pick up late in the second quarter after a fourth-quarter low. A financial officer for a truck and construction and agricultural machinery producer stated orders for heavy duty trucks have picked up rapidly each month since spring, but orders for earthmoving machinery and mining machinery softened in August. An economist for a major producer of electrical machinery reported orders this quarter will be above depressed second-quarter levels because of special export orders this quarter.

Conditions in steel have changed abruptly in the past month as a result of customer efforts to beat the October 1 price increase. Economists with three major steel firms in the District report that September order books are full, especially for the flat rolled products. One producer expects hedge buying will boost September shipments 20-25 percent from the July low. October shipments are now expected to fall back to or slightly above the July level. No real recovery is expected until the first quarter of 1976.

The wildcat coal strike caused coal production to slip 7-8 million tons. An economist with a major coal producer reported that many miners have returned to work. He expects a moderate rise in coal output in 1976 (up about 5 percent from 1975) and a small price hike in coal around year-end. In his view, the industry has ample capacity to accommodate a stronger rise in demand. EPA regulations that restrict use of high sulphur coal represent the main short-run problem for management.

As reported last month, most of our contacts do not expect capacity or material shortages to hinder the early stages of recovery, except those industries (especially steel and chemicals) heavily dependent on natural gas. The wildcat coal strike will not hinder utility or steel operations where ample stocks of coal are reported. Contacts in machine tools, electrical machinery, heavy duty trucks and steel expect no capacity constraint for their products at least until early 1977 because of current low utilization. A steel firm and a capital goods producer are concerned that they will not generate enough cash flow to support long-run capital expenditure plans.

Our Monthly Survey of District Manufacturers shows that most respondents experienced increases in new orders and shipments in August and are still liquidating inventories. For September, continued improvement in orders and shipments, and a slower rate of inventory liquidation than in recent months are anticipated. The proportion expecting expansion in employment and hours worked also rose.

Employment and unemployment have not improved much since the trough in April despite improvements in several key District industries. Recalls have been confined largely to automotive and household goods. A glass producer has recalled the bulk of workers laid off during the recession. Scattered recalls in steel are largely attributable to the bulge in September order books rather than any fundamental improvement in market conditions. Generally, rubber, chemical, and capital goods have had few recalls despite reported rising trends in orders and output in recent months.

Consumer spending continues to climb, although real gains are apparently relatively small. A director in the consumer recreation business commented that their revenues are 11 percent above last year. A financial officer for a large department store stated sales in August were better than in previous months as well as a year earlier although big-ticket items remained rather weak. He noted no deterioration in collections. Auto sales in the District have been climbing gradually for the last several months, but two large dealers reported inventories higher than a year ago. Both reported customers are buying fully-equipped cars, although customers show more interest in the top-of-the-line smaller cars rather than standard size cars. A director reported his bank lengthened maturity on car loans to 48 months because of the high price of cars.

Several directors and chief executive officers again expressed apprehension that current renewed cost-price pressures would inhibit overall economic recovery. However, our Monthly Survey of Manufacturers shows that the percent of respondents who expect no change in prices for September exceed the percent who expect further increases in prices. The only concrete comments on price increases came from an official in the rubber industry who reported higher costs of synthetic fibers and certain raw materials, and a container and glassware producer who reported that glassware prices were increased 5 percent in August. On the other hand, weak market conditions have inhibited price increases for machine tools and certain other types of machinery.

Some bankers noted continued weakness in commercial and industrial loans, and one expects no sizable pickup until early 1976. Another banker reported higher demand for credit from a paper and container company that plans a sizable buildup of stocks in the fourth quarter of 1975. A small banker commented that raising the usury rate ceiling in Ohio resulted in additional mortgage loans by his bank. Mortgage loan demand is generally reported to be strong, and a financial officer with one of the largest savings and loans in the District remarked that mortgage rates were increased again to discourage demand.