July 13, 1977
A moderated rate of growth in economic activity, during the second half of 1977 is generally expected in the Fourth District. A reduced pace in consumer spending, lower output in steel, and a slower rate of inventory accumulation account for the expected moderation in overall activity. Capital goods recovery continues rather mixed. Bankers report strong loan demand and a few expect liquidity pressures may develop in the months ahead.
Directors, financial officers, and economists contacted generally expressed confidence that the economy will continue to expand for the next several quarters but at a moderated pace from the first half of 1977. Auto sales and housing are expected to either ease or show smaller gains in the second half of the year as consumers take on new debt less rapidly than they did during the past several months.
Opinions vary on whether consumer spending will be sustained at recent high rates. Automobile retailers remain optimistic for this year. One bank economist expects 1978 new car sales to increase 5 per cent from. this year. The. home remodeling business continues very strong, although an economist with a major department store chain headquartered in the District commented that gains in general merchandise sales remain below those previously experienced at this stage of an expansion.
Steel economists expect production in the third quarter will drop about 5 to 10 per cent from second quarter levels. They are optimistic, however, that output this half will be much stronger than in the second half of last year because steel consumption is stronger and inventories are not nearly as large as last year's. One economist expects the industry's operating rate to average about 80 to 82 per cent capacity this quarter and in the mid- to high-80's next quarter.
Expectations are that the recent overall inventory buildup will slow this half. The buildup in recent months has been both voluntary and involuntary according to a number of economists. Firms with rising sales trends expect to continue rapid buildup in the months ahead, if not into early 1978, to protect higher production schedules. Steel inventories, increase last quarter partly as a hedge against price increases, are not judged to be as excessive as they were last summer. On the other hand, last quarter's rapid building in crude oil and motor gasoline have placed inventories well above a year ago. Refinery output may be cut back unless demand increases. A retailer estimates that general merchandise inventories, especially in apparel and home furnishings, have been built up too rapidly in recent months, with the result that adjustment of these inventories will last through the fall. Inventories of conventional tires have been rebuilt following depletion caused by the rubber strike last fall. Radial tire stocks still remain low.
Some capital goods producers experiencing a sharp rebound in orders earlier in the recovery have noted a flattening in recent months. This is especially the case with a large machine tool builder who expects that 12 to 13 per cent gains in plant and equipment this year and again next year are about the maximum that can be expected. On the other hand, orders for printing, communications, and electronic components business are running about 25 per cent ahead of shipments according to one producer, and demand for new technology and labor-saving equipment will remain strong. Late-comers in the capital goods recovery, including construction machinery and overhead cranes, are gaining strength in response to improving dealer inventories and increased construction activity.
Several bankers in the District expressed a view that continued strength in all types of loans, including commercial and industrial, would lead to upward pressure on short-term rates. Some report that recent increases in loan demand are unlikely to taper off in the summer months as is typically experienced. Therefore, for the first time since 1974, liquidity may be run down and banks will likely step up issuance of CD's. Inability to roll over CD's could squeeze the liquidity of small banks in farm areas of southwestern Ohio and northern Kentucky. Some of these banks have loan-deposit ratios of 70 to 80 per cent that reflect farm loans in support of the high cost of farm machinery. One banker also noted a recent switch by correspondent banks from sellers to buyers of Federal funds.
Upward price pressures appear to have lessened in recent weeks. Several directors and economists commented on the moderation of prices in glassware, containers, some petrochemical products, and raw materials used by the construction industry. Preliminary results from this bank's latest monthly manufacturers' survey show that the proportion of respondents who expect price increases in July is the lowest in several months. The latest labor contract settlement completed by a firm in the District includes an 8 per cent yearly wage hike, which was generally better than expected.