November 10, 1976
In the past month there has been a tendency to moderate forecasts for various industries and for the economy as a whole. Capital expenditures are probably heading up, but the picture varies substantially by industry. Inventories are being held under very close rein. Some firms are cutting inventories, notably of steel, counting on short lead times. Large retailers are pleased with recent sales of seasonal merchandise. Redesigned cars are selling very well. Appliance sales are far below expectations. Agricultural harvests are ahead of normal schedules. Lenders of all types have ample funds. Many firms experienced losses as a result of the devaluation of the Mexican peso.
Although forecasts of the rate of expansion are more subdued and cautious, there seems to be no expectation that a recession is imminent. In fact, more analysts now anticipate that the upswing will continue into 1978. The recent slowdown suggests to them that satisfaction of various demands is being pushed into the future.
Sales of heavy trucks and trailers are well above last year and further gains are expected for 1977, but the size of the expected increase in sales has been reduced. Orders for large outdoor cranes and some other types of construction equipment have picked up recently from depressed levels. Orders for mining equipment are sharply lower than last year, but inquiries have been at a high rate. Builders of large machine tools have experienced an improved rate of orders, especially from the auto industry for use in production lines to produce new engines and other components. Some small or medium-sized industrial and commercial building projects, postponed during the recession, have been reactivated.
There are many comments concerning lower inventory/sales ratios. Most companies hope to hold inventories at these reduced ratios. Fears that lead times would stretch out have been replaced with a conviction that there is no need to stock ahead. There are a few exceptions, such as components for repairing used equipment, special types of castings, and certain electrical components.
Demand for steel has picked up recently after a period when orders were well below shipments. Instead of increasing steel inventories as expected earlier this year, steel users have been reducing inventories. In addition, steel mills have begun to reduce their own inventories. End usage, however, is not much below expectations. Orders for plates used in heavy equipment, and, especially, structural steel continue quite weak.
Retailers, like manufacturers, report inventories in good balance. Major chains were quite pleased with sales in October and early November. Sales of apparel, which had been depressed, rose with cooler weather. Apparel manufacturers have been cutting prices on winter clothing and retailers are offering special promotions. Appliance sales—especially washers, dryers, freezers, and refrigerators—have been poor and manufacturers have scheduled additional downtime.
General Motors' newly-designed cars have been selling very well in the Chicago area. Many dealers say they could sell significantly more cars if they had them. Inventories of most Ford vehicles are low because of the recent strike. Most Ford assembly plants did not achieve full production until late October, because of various local problems. Heavy overtime is scheduled by Ford through year-end. Demand for vans continues to outrun supply, and light trucks, generally, are selling at record rates. In contrast, the smallest car producer has been forced to close its assembly plants (temporarily), because of poor sales and heavy inventories.
Various surveys of consumer sentiment have been yielding sharply different results, which confuse analysts. Consumer use of installment credit has been at a relatively high rate and this is taken as evidence that confidence is relatively firm, despite verbal responses to the contrary. Delinquency experience on consumer debts has been favorable.
UAW negotiations with producers of motor vehicles, and also farm and construction equipment, apparently are following the lead of the agreement with Ford. Although most published reports indicate that the Ford contract will increase compensation by 10 percent per year for three years, Ford executives say the cost will be 13 percent in the first year. They had assumed an 8.8 percent increase when prices of 1977 models were determined.
Harvests of corn and soybeans are ahead of schedule. No unusual problems have been encountered in storage or transportation, despite some news stories concerning slower movements of barge traffic as a result of low water levels on the Mississippi.
District farmland values increased substantially again in the third quarter, in contrast to a slowing in increases in many areas of the country. On average, district farmland values rose 8 percent during the third quarter.