February 9, 1977
Energy shortages, aggravated by the coldest winter in the past 100 years, have hampered production, employment, income and sales in the Fourth District. Our latest monthly survey shows that more manufacturers expect curtailment in output in February than last month. Lost output of automobiles, glass and appliances caused by natural gas shortages are expected to be made up in the second and third quarters, although some steel producers express uncertainty that the steel market will revive as much as was expected just a month ago. Economists who attended this Bank's meeting on the economic outlook on February 3 still expect the expansion to continue through 1977, despite constraints on fuel supplies. Interest rates on passbook savings, which were lowered in several major metropolitan areas of the District last month, were raised by several thrift institutions in the Cleveland area.
The worst winter since the 1870's has caused scattered shutdowns especially in steel, automotive, glass and fabricating metal industries, widespread school closings during January and early February, and reduced retail shopping hours. Temperatures in northern Ohio, for example, have been 33 percent below normal so far this winter. Demand for energy, especially natural gas, has been well above supply. Bottlenecks in transportation have aggravated the shortages. Natural gas has been in short supply, and supplies of alternate fuels have been available but tight. According to an official with a major utility in Ohio, daily flows of natural gas into Ohio equal only 81 percent of the State' s requirements. Prospects for the longer term should improve. With higher prices for natural gas, demand and supply would likely be in balance by 1982, and prices would decline after the mid-1980's because of excess supplies.
Because supplies of natural gas into Ohio have been curtailed each year since 1972, some manufacturers have switched to alternate fuels, including coal, oil and propane. These fuels are currently available, but bottlenecks in transportation have hampered deliveries. Despite the higher mix of heating fuel to gasoline, shortages of gasoline this summer are not likely, according to one source. Refinery capacity has been increased 18 percent since 1973 and larger supplies of imports are available now than during the gasoline shortage in 1973.
An estimated 15 million tons of a projected 55 million tons of coal production was lost in January as a result of heavy snows, cold, and absenteeism, according to an economist with a major coal producer. Frozen coal piles held by utilities and barges of coal that could not move on the Ohio River worsened the situation. Utilities had an estimated 65- to 70-day supply of coal at the end of January. Major coal producers apparently do not expect a coal shortage this year even though they expect the mineworkers union to reopen its contract later this year. The industry's capacity to produce is estimated at 100 million tons above the recent 675 million ton annual rate of output.
Estimates from a variety of reliable sources suggest that as of early February, about 110,000 manufacturing workers were laid off, or about 2 percent of total employment in the District. Many of those workers have since been recalled. Primary metals, automotive, glass and pottery, and fabricating industries appear to be hardest hit by the natural gas curtailment, although a variety of smaller industries ranging from greenhouses to forging producers, is also affected. At least 500,000 tons of steel ingot production was lost in January because of energy problems, according to one estimate. One steel producer laid-off 1,000 workers, or 14 percent of its workforce, for several days because its barges of fuel oil were frozen on the Ohio River, and coke oven gas supplies were cut because of frozen pipes. Another large steel producer experienced only minimal losses because of extensive oil storage capacity which was built in recent years. Although steel economists expect steel shipments and production this quarter will increase about 5 percent from last quarter, they are now apprehensive that a recovery will not begin this quarter.
A major producer of flat glass indicated its firm laid off 2,600 of its 5,000 employees for a few days in mid-January, but all have since been recalled. The firm switched to oil and propane but still requires natural gas for some types of fabrication.
Developments in the automotive industry are mixed. Two major auto parts suppliers report energy shortages have had only minimal effects on their operations, but both are concerned over slow deliveries by some of their suppliers. Ford lost about 35,000 to 40,000 autos and trucks in January because of energy shortages and slow deliveries of supplies to their assembly plants. Nearly 26,000 of 33,000 GMC workers in the Dayton area were laid off January 16-18, and 20,000 were recalled January 19. Another 4,200 workers were laid off at a GMC assembly plant near Cincinnati, but since then, all GMC employees in Ohio except 280 were recalled.
Despite fuel problems, overall economic expansion is still expected to be sustained through 1977, according to the 29 economists who attended a recent meeting held at this Bank. The median forecast of the group expects real GNP to increase about 5.7 percent from the fourth quarter of 1976 to the fourth quarter of 1977. They expect the rate of inflation to average 5.4 percent in 1977, and the rate of unemployment to show only gradual improvement from 7.9 percent in the first quarter to 7.2 percent in the fourth quarter of 1977. The group reduced its forecast of fixed investment to a 13.9 percent gain from last year, compared with a 15.0 percent gain they expected at the October 1976 meeting. On the other hand, they were slightly more optimistic with respect to residential construction than they were last fall. At a capital goods seminar in Cleveland sponsored by the local chapter of the NABE, a Townsend-Greenspan official forecast a 13 percent increase in fixed investment (7 percent to 8 percent in real terms) from 1976.
Some savings and loan associations, which only last month lowered rates paid on passbook savings accounts and on savings certificates, reverted to the 5 1/4 percent rate of passbook accounts. A few associations also raised rates to maximum ceilings on shorter maturing certificates, but kept the 7 percent rate on 6-year certificates. A $400 million deposit association apparently lost $2 million in deposits during January to competitors who did not reduce passbook rates. The prime rate for mortgage loans is expected to remain at about 8 1/4 percent for a 70 percent loan.