March 10, 1976
Businessmen and economists in the Fourth District are growing more confident that the recovery now under way will be sustained through 1976 and continue into 1977. Retailers have been buoyed by recent strengthening in household durable goods sales. Auto producers expect substantially improved sales, and steel producers report demand is recovering now that liquidation of steel stocks is virtually completed. Economists who met at the Bank early in March raised their forecasts of real gross national product (GNP), industrial production, and business fixed investment from estimates made last fall.
Recent strengthening in sales of appliances and other household goods has led both retailers and producers of these goods to raise their estimates of sales and output. An official with a national chain of department stores headquartered in the District expects an increase in real dollars of 9 percent in soft goods sales and 10 percent in hard goods sales this year, compared with a 4 percent gain and a 4 percent decline, respectively, in 1975. A rise in employment, expansion in the workweek, reduction in the savings rate, an increase in the use of installment credit, and small increases in consumer prices are among factors retailers see boosting consumer confidence and supporting steady strengthening in consumer spending. He pointed out that real retail sales of soft goods have been rising since early 1975, but hard good sales turned up only recently. Retailers are not expected to build their inventories until late this year. A $400 million discount department store chain that was close to bankruptcy early last year reported a sharp turnaround in earnings that improved its liquidity and its relationships with creditors.
An economist for a major auto producer now estimates domestic new car sales for 1976 at 8 1/2 million units, considerably above his estimate late last fall. Consumer tendency to upgrade during an economic recovery, disillusionment with small cars, and lower gas prices are among factors cited for the recent shift from small to large cars. He expects imported cars to account for no more than 14 percent of the new car market again this year because of the price advantage and improved fuel economy of domestic cars. He expects a banner auto year of $11 million in sales in 1977 but is very uncertain over prospects for 1978 and beyond because of legislation affecting emissions and fuel economy. Economists associated with steel and rubber industries expect that sales of domestic new cars will range from 8.3 million to 8.5 million units this year.
Steel-industry economists expect orders to improve 10 to 15 percent this quarter because of rising steel consumption and an end to the year-long liquidation of inventories. Two economists expect output to rise 35 percent this year over last year's depressed volume, and one expects that operations in the fourth quarter of 1976 may be close to capacity depending upon the extent of recovery in capital goods and the extent to which steel consumers rebuild inventories.
The capital goods sector continues to lag the recovery. Several producers report some pickup in orders from depressed levels in 1975, but none expect a sharp recovery until 1977. An economist with a major machine-tool builder reports orders in recent months were 50 percent greater than in the first quarter of 1975 but were still 60 percent below the peak in the second quarter of 1974. He noted that environmental and conservation regulations are holding down orders from the automotive industry. Another economist expects only a 5 to 6 percent increase in capital spending for 1976 because of a lack of orders from the transportation and utilities industries. Orders for industrial materials began to strengthen in recent months, but demand for motors and generators is still weak. A producer of frames for heavy-duty trucks expects a pickup in orders for the second quarter of 1976 in line with a rising trend in industrial production, reduced inventories of these trucks, and growing confidence on the part of truck producers. A director reports their capital spending plans for 1976 will remain unchanged from 1975 and about 15 percent below the recent high in 1974. A mining-machinery producer also expects that their capital expenditures this year will be about the same as in 1975, although sharply above the 1974 level.
Twenty-six economists representing major and industrial corporations in the Fourth District met at this Bank on March 5. They raised forecasts of real growth in economic activity during 1976 from levels that they had estimated at a similar meeting late last fall. The median forecast of the group shows real GNP increasing 6.2 percent and industrial production rising 9.3 percent from 1975. Only seven participants expected stronger real growth in the first half than in the second half of 1976. Inflation, measured by the GNP price deflator, is expected to average 6 percent and unemployment, 7.6 percent. Both estimates are virtually unchanged from estimates last fall. Several of the participants expressed the view that inflation will moderate more than indicated in the median forecast. A bank economist expects the deflator to rise at a 4 percent later this year, an economist with a major consumer goods producer expects a range of 4 to 5 percent, and an economist with another industrial firm expects a range of 5 to 6 percent. Two economists, who represent capital-equipment-producing firms, expect the prices for capital equipment will rise about 5 to 6 percent instead of the 9 percent predicted by the United States Department of Commerce. Retail price increases for OAF merchandise are expected to average about 4.4 percent at the end of 1976, compared with 4 percent in the fourth quarter of 1975 and 11 percent for the fourth quarter of 1974.
Preliminary results of our monthly survey of manufacturers for February show improvement in labor utilization for the first time since last fall. Also, more firms reported higher prices than in recent months. Improvement in labor market conditions is expected to be sustained this month, and some relaxation in price increases is expected.