July 14, 1976
Activity in the Fourth District is marked by slowing gains in manufacturing, some revival in retail sales, and spotty recovery in capital goods. Directors and other respondents still report no shortages nor are any expected in the near future, although supplies of some types of steel, plastics and packaging materials have tightened. Deposit inflows at thrift institutions have slowed sharply, and expectations are that mortgage interest rates will rise unless deposit growth strengthens.
Retailers report a pickup in June sales, following two monthly declines. Although they view the revival with some skepticism, they remain cautiously optimistic that near-term prospects for consumer spending remain favorable. A director associated with a major national retail chain said orders placed by department stores are reportedly very high, but a few retailers apparently have lowered their commitments for future delivery. An economist associated with a major retailer is skeptical about the June recovery because of the spotty nature of the pickup (apparel and soft goods still weak, furniture sales strong) and the need for sales promotions to induce consumer response. He expects sales gains will not be as large as he estimated a few months ago.
In contrast, an economist with a large producer of major appliances views the recent decline in retail sales as temporary and expects a second wave of rapid expansion later in 1976. He attributed the spring slowdown to emerging price resistance by consumers, flattening in housing starts and an ending to the effects of tax cuts early in 1975.
Recovery in capital goods remains mixed. Two large producers of machine tools report orders in recent months have exceeded shipments for the first time since mid-1974. Heavy-duty truck sales picked up last quarter from near trough lows, according to a major supplier in the industry. A producer of earthmoving equipment for mining, construction and logging industries continues to lay off workers and will suspend operations for at least a month over July and August for lack of orders. Another major capital goods producer, where orders so far in 1976 have risen only about 3 percent from 1975, reports inquiries have increased, indicating a step-up in orders later in 1976. That firm's capital spending plans for this year are below last year's outlays. Its major capital investment program includes purchasing a mining company as a hedge against expected rising prices for basic materials. Projections of a high rate of inflation, relatively slow growth in economic activity, and adequate capacity in its industry are among the reasons cited for its conservative spending plans over the next few years. A director with a diversified firm also indicated his company's capital spending for 1976 will be considerably less than previously anticipated, but can be boosted quickly depending upon the strength of customer demand.
There is yet little indication of shortages or bottlenecks in any of the key manufacturing industries in the District, although steel, plastics and packaging industries are tight in some product lines. Major steel producers in the District report order books for flat rolled products are full for the third quarter. One mill apparently turned away some business that was later placed with other domestic sources. Demand for other steel products, such as plates, structural steel and pipe, remains weak. Steel operations will drop less than usual for the summer months; operations will likely remain close to 90 percent of capacity, except that some mills may temporarily shut down for needed repairs. One of the largest producers does not expect to boost capital outlays until 1977.
A director described the supply of raw materials as adequate for the near term. Coke and iron ore are potential sources of problems for steel producers. One steel economist expects no shortages of raw materials this year, but said a coke shortage may surface in 1977 because of environmental constraints. Another economist said that inability to meet environmental standards may require his company to shut down ore mines in Minnesota. Three domestic steel producers and a prominent ore producer announced joint plans to sharply boost pellitized ore capacity, but production would not be available until late 1979 or early 1980.
The 2 1/2-month-old rubber strike is still not expected to shut down the auto industry, according to an economist associated with a major tire producer. The rubber industry continues to operate at about 50 percent of capacity but is expected to operate at 100 percent for at least a year following contract settlement. Contract talks appear deadlocked, but he pointed out that loss of medical, life insurance, and accident benefits, which expire next week, might speed up settlement.
Supplies of several types of nondurable goods, including food, packaging and paperboard, are judged to be adequate but supplies of glass containers and plastics are tightening. A director remarked that capacity in the food processing industry is adequate. Glass container producers are expected to operate close to capacity in 1976, although supplies of these containers are described as tight but not critical. No shortage is expected in 1976 or 1977, in part because of the substitution of metal for glass containers. The paperboard industry is operating at about 91 percent of capacity, well below the 1974 peak, but supplies are expected to tighten as the industry approaches 100 percent operations later next year. Capacity additions in packing and paperboard industries in the last few years have been small because of the high cost of building new plants.
Polyvinyl chloride is in tight supply. One major producer is operating at about 90 percent of effective capacity compared with 80 percent in the first quarter of 1976. Effective capacity of the industry, although higher than during the peak in 1973-1974, has been reduced because of environmental constraints. Sources associated with the industry expect no shortages such as were experienced during the last peak.
Financial officers associated with savings and loans report a seasonal to larger-than-seasonal slowing of deposit inflows in June. Mortgage loan demand is described as heavy. The view of two officials is that mortgage rates will rise unless demand softens or deposits grow as rapidly as they did earlier in 1976.
Business loan demand at banks is described as flat to weak by two directors. A director with a large bank attributes continued weak loan demand to corporate use of long-term debt and equity markets, the sluggish pace of capital spending and tight inventory control by business firms.