November 10, 1976
Overall economic activity in the Fourth District during the past month has not picked up much from last quarter. Retail sales, excluding automobiles, spurted in October, and some capital goods producers report further gains in orders, but recovery is not broadly based. The moderated activity was partly caused by an inventory correction in some key materials producing industries, including steel, chemicals, and paper, as well as in consumer goods, especially apparel and household goods. Consequently, operating rates in these industries have eased, and expected spot shortages and bottlenecks have not developed this year and are not anticipated for most of next year.
Retail sales remain mixed, and retailers are still not certain if consumer spending will strengthen without larger gains in real income. A financial officer with a large discount chain noted a sales spurt in the past several weeks, mainly for outerware. An economist with a national retail chain in the District noted a surge in sales of apparel during October, the first monthly gain since early this year. He was not convinced that this pickup is a sign of strengthening in consumer spending, because sales of major appliances have been sagging and furniture sales have flattened recently. His explanation is that slow growth in real income during this expansion accounts for sluggishness in consumer spending, and he expects a tax cut of about $15 billion will be needed to trigger higher consumer spending in 1977. An economist with a major auto producer remarked that the slippage in domestic new car sales in October to an annual rate of 7.6 million units was partly due to effects of the auto strike but also to some softness in the market. He expects total new car sales to increase to about 10.8 million units in 1977. Another auto economist was satisfied with sales of 1977 models of larger size cars but noted that sales of small cars have not picked up as expected.
Recovery in capital goods continues but is not broadly based. Machine tool builders in the District are increasingly optimistic about 1977 prospects for shipments and profits because of the sharp rebound in orders, especially from the auto industry, and the growth in backlogs since late last summer. Several major producers of heavy duty trucks and truck components expect recovery in output of about 10-15% this year from 1975, and another 20-25% gain in 1977 from this year. A financial officer with a communication and information handling equipment firm reports that their net orders in the last 4 months averaged about 30% higher than shipments, and that orders have been strong for printing presses and satellite communication equipment. The firm is operating at about 85-90% of capacity, against a desired rate of 92-95%, and will more than double its capital spending for 1977 for semiconductors, offset presses and other types of communication equipment. In contrast, some other capital goods producers report recovery has been weak, especially for certain types of construction machinery, such as excavators and shovel loaders, medium-size trucks used for local delivery, and industrial lift trucks. Although recovery in shipments of lift trucks so far in this expansion has been negligible, one producer notes an acceleration in orders last quarter.
Two economists associated with major banks in the District still expect capital spending in 1977 to rise about 15% from this year. One attributes the lagging recovery to low operating rates, and low real rates of return on investment of about 9% compared with an average of 15% during the 1950's and 1960's.
A theme that surfaces in contacts with materials producers as well as some consumer goods producers is that inventories were built too rapidly early this year and are being adjusted downward. Inventories of steel, plastics, appliances and apparel are being cut, which accounts for some of the slide in output in recent months. Steel operations have fallen somewhat below 75% of effective capacity in recent weeks, compared with nearly 90% in May and June; and economists associated with major producers in the District expect production this quarter will be the lowest for any quarter this year. Steel producers, who were concerned over possible shortages of natural gas and coking coal this winter, if operations were maintained at rates as high as late last spring, now view supplies as adequate. A large plastics producer also noted a recent drop in output because of inventory correction. Orders bulged earlier this year in anticipation of shortages that did not surface.
Some producers of consumer goods and retailers report inventories were rebuilt too rapidly, partly involuntarily, which have forced cutbacks in production and orders. One producer described the market for all but small appliances as weakening. Output for major appliances has been slashed, although this producer expects stocks will be brought into balance by yearend. Two retailers noted that slow sales of apparel since last spring necessitated large markdowns to cut inventories, and both agreed that apparel inventories are now at desired levels, although stocks of household goods are high. One retailer expects excess stocks of furniture and appliances can be liquidated in about one quarter.