September 15, 1976
Recovery in the Fourth District, as in the nation, continues at the moderated pace of the past few months. Directors, financial officers and economists, although somewhat more skeptical than they were a few months ago, are still generally optimistic that recovery will be sustained into 1977. Skepticism in part reflects erratic behavior in consumer spending, modest revival in capital goods and some scaling down in steel orders and output.
Directors and financial officers appear somewhat apprehensive over prospects for the economy, but economists expect recovery in real GNP to continue at a rate of 4 1/2 to 5 1/2 percent during 1977. Directors view the recovery as from "very healthy" to moderate. They expect errors in projections to be on the downside. Economists appear less concerned that recovery will slow further from the pace of recent months. Except for an economist associated with a retail chain, there is little fear that the recovery will peak in 1977. Economists view recent weaknesses in retail sales and steel as transitory and the slower pace of output in recent months as typical for the second year of the recovery.
Erratic behavior of consumer spending is one of the key uncertainties expressed by some of the directors and economists in the District. Shifting in consumer spending from autos and apparel to services, travel and food was cited by some respondents to explain recent consumer behavior. Sales of food, meat, laundry and personal care items did not slump in recent months, according to directors and economists associated with food processing and consumer goods manufacturers. Home remodeling continues very strong, according to a director with a major producer of those products. Another director and manufacturer of consumer housewares expected retail sales to remain stable in the months ahead. Most of the concern and uncertainty comes from retailers of department store goods. An economist with a national department store chain noted that apparel sales did not pickup in August and expressed concern that the slump in real GAF sales has been caused by a continued squeeze on consumer purchasing power. A director with a national retail chain noted that the slowdown in retail sales has been widespread and has caused an unanticipated buildup in inventories.
Recovery in capital goods continues to be gradual and spotty, and comments from directors and economists with these producers tend to reflect different patterns in timing and magnitude of recovery in their respective industries. Orders for machine-cutting tools rose about 70 percent so far this year compared with the same period last year, but backlogs are still not rising, according to one major tool producer. Orders for another large tool builder were up sharply in July and August, to a level nearly double their average for the first half of 1976; but this volume is still about 75 percent of their desired operating rate. A major supplier to heavy-duty truck producers notes its orders have gains strength since the trough early this year. Orders rose 10 percent in recent months, largely because inventory liquidation of heavy-duty trucks is finally over and inventories are back to a normal level. A major bearing producer and supplier to capital goods firms notes its orders from railroad and construction machinery firms bottomed out in recent months, but there is yet no evidence of an upturn. The decline in orders for some type of construction machinery, such as wheel loaders and bulldozers bottomed out last spring, and demand is "just limping along," according to one economist. Demand is expected to improve gradually during the balance of this year but is not expected to recover to previous peaks during this business expansion. Another official with a capital goods firm that produces hydraulic excavators and cranes also sees little prospect for any significant improvement over the next year because of high inventories held by distributors, lack of funds for sanitation, waterworks and other public construction, and squeezed profit margins that prevent contractors from purchasing new construction machinery. Bids for heavy construction work are still running below a year-ago, and contractors are frequently bidding below engineer costs in order to get business.
The recent slide in steel output has reduced utilization of capacity to nearly 85 percent of capacity, compared with the second quarter average of close to 90 percent. Steel producers have lowered their estimates of output for the balance of this year to an 80-85 percent of capacity range. Demand for hot-rolled steel products, which some producers were informally allocating last quarter, has softened; one economist commented that the psychology of steel buyers shifted rapidly from fear of shortage to fear of excess inventories. Rescinding of a schedule of price increases on October 1, price hedging that ballooned orders for hot-rolled products last quarter, and lagging revival in capital goods are among reasons cited for scaling down of projections for steel production next quarter. On the other hand, steel economists were not apprehensive that the overall recovery would soon peak, and still expect real growth in 1977 at about 4 1/2 to 5 1/2 percent. One economist expects the industry to operate at 90 to 95 percent of capacity during the first half of 1977 but commented that shortages of steel are unlikely.
Production in the rubber industry is expected to reach about 75 percent of capacity in the first month of resumption in work, 90 percent in the second month and 100 percent in the third month, according to an economist with a major tire producer. Therefore, spot shortages may appear, especially for snow tires.
Manufacturers generally seem to express less concern over shortages than they did a few months ago when the pace of recovery was more rapid. Capacity for a variety of capital goods appears more than ample at least through 1977, although some spot shortages, such as castings, can develop as machinery production approaches higher utilization rates. Some chemical products, including polyvinyl chloride, polypropylene, and chlorine, now in tight supply, could be in short supply by yearend if demand continues to strengthen as much as it has in recent months.
A small sample of savings and loan associations in the District shows savings inflows during August slowed, and mortgage lending and mortgage terms were relatively unchanged from July. Liquidity of associations was somewhat lower than in July, as some S&Ls stepped up borrowing from FHLBB, partly because deposit flows during the summer months were less than needed to meet commitments.