May 10, 1977
The sharp rebound in economic activity in the Fourth District appears to have slowed in recent weeks. Auto retailers report continued strong gains, but sales of other consumer goods slowed from the rapid March pace. Withdrawal of the tax rebate has resulted in some scaling down of consumer spending projections for the balance of 1977, but retailers are still cautiously optimistic over sales. Primary metals producers indicate the February-March surge in orders has tended to flatten. Recovery in capital goods appears to be broadening. The Administration's energy proposals are unlikely to have much affect on capital spending plans for 1977. Energy intensive consumers, as well as energy producers, generally feel the Administration's energy proposals have added to the list of uncertainties facing private decision-makers. Despite a recent drop in consumer confidence reported in the Sindlinger survey, auto dealers uniformly describe last month's new car sales as being as strong as in March. Cancellation of the tax rebate and announcement of the energy program had no effect on new car sales according to three dealers. One dealer noted an increase in small-car sales following announcement of the President's energy program, another dealer noted a tendency by buyers to trade down from standard- to intermediate-size cars, but not to compact or subcompact cars as they did following the oil embargo. Dealers also felt the standard-size cars continued to sell well because most of these cars would qualify for a rebate; the proposed tax on less energy-efficient luxury models would not be large enough to deter high-income buyers.
Retailers report mixed consumer goods sales for April. An economist with a large national department store chain headquartered in the District tended to dismiss the recent drop in consumer confidence as having little predictive value. However, he lowered estimates of GAF sales in 1977 by 1 1/2 percentage points because of cancellation of the rebate, the bulk of which was expected to have been used for food and CAF merchandise. He expects strengthened real sales of furniture and appliances this fall. Another official with a large department store chain described sales as good, adding that he had not detected signs of consumer reaction to the rebate cancellation. Nor does he see indications that consumers are less confident or more hesitant in their buying. He noted that consumers responded favorably to the President's energy message through increased purchases of storm doors, insulating materials, and other types of energy-related merchandise.
Officials of two national food chains headquartered in the District reported softness in food sales during April. Sales for groceries, meats, and bakery products, have not improved despite several promotional programs. They did not believe slower sales were related to cancellation of the rebate, nor have they adjusted expectations of 1977 sales downward.
Primary metals producers report orders have tended to flatten, following a sharp rebound since February. In part, this is associated with a full-order book through June for both flat-rolled steel and aluminum products. The steel industry is expected to operate at about 85 percent capacity this quarter, compared with the low 70's last quarter. Operating rates in the aluminum industry may slip to the mid 80's this quarter because of cutbacks in power in the West. Steel sources indicate that some price hedging and inventory rebuilding account for this quarter's strengthening in orders and production.
More capital goods producers are experiencing recovery. Printing and communication equipment orders continue to accelerate and one large producer noted orders were nearly 50 percent above his firm's current shipping rate. A parts supplier for heavy-duty trucks and off-highway equipment reports that orders have expanded strongly since February. Machine tool orders apparently have strengthened after leveling out earlier in the year. Sales of excavators and other construction machinery are increasing. On the other hand, orders from utilities, especially for generators and turbines, remain weak; demand is also slack for intermediate-size trucks, farm tractors, and oil field equipment for secondary recovery.
Consumers and producers of energy commented uniformly that the Administration's energy program is unlikely to spur capital spending plans for 1977, but some felt that it could delay spending. Respondents were reluctant to consider effects on spending plans for 1978 and future years because of inadequate information and widespread belief that the program stands little chance of Congressional approval in its present form. At a meeting of 18 chief financial officers from Pittsburgh-based firms held by this Bank on May 6, several officials contended that the Administration's program adds another uncertainty to investment decisions. Threat of controls over intrastate gas prices, uncertainty over whether EPA standards on use of coal will be relaxed, and lack of incentive to stimulate energy supplies were among major aspects of uncertainty cited by these officials. Short-run bottlenecks in electric power and other energy sources will likely surface over the next few years because of uncertainties and lack of investment incentives that have held back spending.
Energy intensive users, especially in primary metals, forgings and chemicals stressed that adoption of conservation practices since OPEC have gradually reduced their consumption of energy. Some steel producers commented that for the last four years they have been working toward improving supplies and reducing consumption of energy by building coal reserves, by installing new coke ovens which produce greater amounts of coke-oven gas, by drilling for natural gas, and by building storage facilities for oil and propane. In view of limited cash flow and increased debt, some producers see insufficient incentive in present proposals to accelerate plant and equipment expenditures. An official with a major aluminum producer said his firm can convert some plants from natural gas to coal, but it may not be economically feasible because of pollution control requirements. He acknowledged the need for both conversion and replacement of facilities, but said this is expensive relative to the price of aluminum products. He also indicated his firm has experimental plans to use lignite as a source of power. An economist with a major plastics producer, who stated his firm also has adopted energy conservation measures, fears that the proposed price control on intrastate gas will continue to limit natural gas supplies.
Similarly, several energy producers in the District report they see little in Administration proposals that will spur investment in the near-term. Officials with two oil producers in the District and one small natural gas producer commented that while the program's emphasis on conservation is necessary and desirable, it lacks incentives to expand supplies and introduces more, rather than fewer, controls and regulations. They, too, indicated their firms have adopted measures to improve fuel consumption. One official cited improvements in petrochemical and refining facilities since 1973, noting that the tax credit will not hurt acceleration of that trend. He questioned, however, the amount of additional savings that can be realized. Two natural gas producers said that the roll-back in natural gas prices and proposed regulation of intrastate prices adds new uncertainties to investment decisions. One commented, however, that even if wellhead prices of natural gas were set at $1.85 per thousand cubic feet, his company would still increase the number of new wells to be drilled this year to 70 (compared with 60 last year), assuming drilling and exploration costs do not increase any faster than currently anticipated. An oil producer feared that if conservation efforts failed to curb consumption, mandatory controls and additional regulation would be instituted. The shift to coal is too sudden. It is unlikely according to this official, that his firm's capital budget for 1977 will be changed because of present energy proposals. According to estimates derived from its energy model, the oil producer estimates that real investment in 1978 would be about $1.5 billion less than expected without the energy program and $2.7 billion less in 1979, that real GNP would grow by 1 percentage point less in 1980, and that the rate of inflation in 1980 would be 1 percentage point higher than estimates without the energy program.
The goal of 1.1 billion tons of coal can be met by 1985, according to an official with one of the nation's largest mines headquartered in the District. He pointed out that this year the industry will produce about 675 million tons of coal with capacity for about 775 million tons, and that output has been rising steadily since the oil embargo. While acknowledging short-run shortages in freight cars, he expects this problem will be overcome as demand increases. He also noted a growing effort in research and development to improve coal technology, and that one large company has already found a way to remove sulphur from coal at about one-half the cost of present scrubbers.