November 10, 1976
A mixed pattern of recovery persists in the Southeast. Production in the textile and apparel industry is weak while paper output is high. Fears of wage and price controls have fostered price hikes; but some leveling of prices is reported following earlier increases. A shortage of coking coal exists, while a future shortage of beef appears likely to occur. Capital investment remains weak in the Southeast. Business has improved for hotels and motels. Strength in consumption is chiefly confined to autos and hard goods, although colder weather has stimulated apparel sales to some degree. Some recent evidence suggests that spending growth may be occurring primarily among relatively affluent consumers, while less well-heeled customers remain cautious.
Production in the textile and apparel industries is flat, except for denim. Weak demand is attributed to higher prices in the absence of any major style changes. Stores in several areas report reluctance to build inventories in the face of recent slackness in demand. Some price reductions have been made by manufacturers to reduce inventories. Synthetic yarn prices are expected to remain stable, but cotton yarn will rise in price. Constant restyling has maintained strong demand for denim fashion jeans. Manufacturers are forced to import fabric to meet demand. Labor is short in some parts of the industry; plants located in smaller towns enjoy a more abundant supply of labor.
The paper business appears to be lagging behind changes in the general economy. Newsprint sales have increased slightly because of increased use of advertising inserts. Plants in the South and the rest of the U. S. are running near full capacity, but Canadian mills have excess capacity. A price increase of about 10 percent is anticipated in response to higher energy costs. Demand for supermarket bags is strong, but sales of textile industry packing material are weak. Converters who use paper to make finished goods, such as envelopes, tablets, and cigarette packages, are operating at about 70 percent of capacity. They are experiencing a cost-price squeeze. In contrast, a manufacturer of flexible packaging material for the food industry has experienced strong sales increases but reports cost pressures for raw materials such as cellophane.
Several reports of price increases mention fear of wage and price controls as a precipitating factor. One manufacturer's transaction price is 16 percent below his list price because he wants to avoid being tied to a low price. He also notes that many of his suppliers are selling below quoted list prices. A steel manufacturer also remarks that the threat of price controls is increasing prices. His company is experiencing weak demand and is operating at 85 percent of capacity. Yet he anticipates a 10-percent increase in prices in early 1977.
A major producer of synthetic fiber reports that dacron is still being sold below cost. High profits attracted new entrants, and overcapacity has prevented recovery of increased raw material costs. This plant now operates at two-thirds of maximum capacity, but inventories have been reduced and price increases are anticipated. Timber prices, which had risen above the highs reached in 1972-1973, have softened in recent weeks.
A producer of coking coal for steel manufacturing notes a shortage of its product. Prices for coking coal, unlike other coal prices, have not been depressed but are being forced up because safety regulations have reduced productivity and have entailed substantial compliance costs. Producers of beef and sugar cane remain faced with such an adverse cost-price squeeze that they are likely to shift into production of other crops. Future shortages of beef appear likely.
Capital investment in southeastern industries remains weak. In the paper industry, investment for expansion is considered unprofitable at present price levels. Most of its spending is for pollution abatement. Some textile manufacturers are replacing inefficient equipment in addition to making necessary pollution control outlays. A pipe manufacturer notes that "the capital goods sector is dead," although he expects his business to increase as housing and capital investment expand. Coal producers in Alabama require substantial additional capital investment to meet an expanding demand for coal, but question whether the return is adequate to compensate investors for their risks. A manufacturer of boilers reports the lowest sales, nationally, since the depression. Utilities and manufacturing firms are reluctant to purchase boilers for existing plants because they are uncertain about the type of fuel they will be using.
Business has grown for hotels and motels, as business travel, corporate meetings, and conventions have picked up. Rate resistance is limited, the more luxurious rooms are in demand, and higher-priced meals are being ordered. Still, higher costs are creating difficulties in restoring profitable operations. Increased minimum wages and energy costs are primary factors. Overcapacity in various areas has limited the opportunity for price increases. Despite these problems, certain areas remain attractive for hotel investments. In New Orleans, one large chain is building a new hotel while another is adding a second tower to its present facilities. In addition, a new $.5-billion development combining office, hotel, condominium, and retail space will be built in New Orleans.
In the consumption sector, apparel sales remain weak, but sales of autos and hard goods are strong. The onset of colder weather has begun to boost retail clothing sales. Reports that better quality merchandise is in greatest demand echo recent evidence that buying of homes and boats is concentrated in the higher-priced lines, while sales of less expensive lines remain weak. They suggest that much of the strength in consumption spending may be confined to a relatively affluent upper stratum. These fragments are also consistent with the hotel industry trends noted above.