October 11, 1977
Depressed steel operations and a slowdown in inventory investment have hindered economic expansion in the Fourth District. Retailers are more optimistic for this quarter's sales prospects as a result of a recent strengthening in sales. Capital spending continues to expand, although industrial and public works construction are still weak. Early indications are that natural gas and coal supplies will be adequate for this winter.
Perhaps the major District development in the past month concerns the well-publicized projected closing of a steel plant and the layoff of about 5,000 workers in the Youngstown area. This layoff would lower total nonagricultural employment by less than 0.5 percent, but would account for about 2.5 percent of total employment in the Youngstown-Warren metropolitan area and an unemployment rate by year-end of about 9.3 percent.
Short-term prospects for steel again have been scaled downward by steel economists with the nation's largest producers. They expect an operating rate of between 75 percent and 80 percent of capacity, which is similar to last quarter. However, this is difficult to pinpoint because as much as 3-to-5 million tons of an estimated 160 tons of capacity have been or are scheduled to become permanently retired. These economists expect cash flow, and especially profits, will be badly depressed again this quarter. One economist expressed the view that the break-even point in steel is even higher than 80 percent of capacity because energy costs to produce a ton of steel have risen from $18 to $80 and have not been recovered in prices. Therefore, the industry could face further layoffs, closing of marginal facilities, dropping of unprofitable products, and perhaps shutdowns of some middle-sized producers.
These steel economists have mixed views about the future for domestic steel producers. One believes that the domestic industry will continue to shrink because of its inability to operate profitably against Japanese competition, to finance new capacity, or to meet pollution abatement standards. He predicts that domestic producers will specialize in a few product lines and will diversify into non-steel products. Another economist contends that domestic producers are competitive with European steel but Japanese mills can produce steel for about $25 to $65 per ton below U.S. costs. When transportation, duties, and other charges are added to production costs, the cost of Japanese steel is higher than domestically produced steel. The current problem is triggered by a surge of imports that reflects a worldwide surplus of steel supply. Imports in the last few months have risen to about a 20-million-ton annual rate which amounts to about 22 percent of domestic shipments. The increase in imports was widespread, including not only EEC countries but Finland, South Africa, Canada, Korea, Mexico, Spain, and India.
Strong September sales have prompted optimism about near-term sales among some retailers. However, executives and economists who were contacted suggest a mixed pattern of spending. Recent strength has been broadly based but especially marked in apparel. Retailers acknowledge that a step-up in sales promotions has been an important factor in the revival of sales. But some economists take a less sanguine view of consumer spending prospects. One associated with a major retail chain emphasizes that consumers have shifted from purchases of durable goods, especially automobiles, to nondurable ones. Recent sales gains have been registered mostly in general merchandise, especially apparel, which was soft earlier in the year. After seasonal adjustment, retail sales, excluding autos, probably were not much stronger in September than in August. He cautions that gains in October would not be as large as in recent months and that sales will continue to show monthly swings. Another economist with a major producer of personal and home-care products indicated a flattening in grocery store sales of their products in recent months, perhaps in response to unexpectedly rapid growth rates in late 1976 and early 1977. He expects consumer outlays for those products will be stepped up in line with historical growth rates.
Capital goods producers comment that demand continues to expand. Still, the pace is not accelerating nor is demand more broadly based than previously reported. Major machine tool builders report orders in August and September picked up sharply following a midsummer sag. Demand for business equipment, especially computer terminals and communications equipment, continued strong throughout the summer, in contrast to a usual slowing. Demand for overhead cranes and excavation machinery has been increasing steadily from a trough earlier this year. But one producer does not expect a strong pickup until accelerations of public works programs, such as construction of highways, bridges, sewers, and waterworks. Industrial construction is also recovering slowly. A major design and engineering firm reports its backlog has been flat for the last several months because of little demand from steel, nonferrous metals, chemicals, and oil refineries.
Supplies of natural gas are not expected to be as tight this winter as in 1976-77. The largest natural gas utility in northeast Ohio lifted all curtailments last June and expects to be able to take on new industrial and residential users for the first time in several years. The utility is prepared for a colder-than-normal winter but not one as severe as last year. The encouraging forecast is based on reduced demand—stemming from the partial closing of a steel plant and conservation programs of industrial and residential users—and increased supplies as a result of self-help programs, imported natural gas, and an increase in the number of wells drilled.
Officials with a major coal producer believe supplies should be adequate even if there is a coal strike which lasts as long as 45 days. Nearly an 80-day supply of coal should be in inventory by the end of November. However, these officials hold that chances for a lengthy strike have diminished considerably because of a shift in key issues from the right of local unions to strike to a larger package of benefits for miners. It is unlikely that the entire industry would be affected by a strike since only 60 percent of Eastern mines are unionized and an even smaller percentage in the West. These officials maintain that the industry can produce 1.0 to 1.2 billion tons of coal by 1985 even with existing environmental constraints. Still, producers are not stepping up expansion programs until an energy program is legislated.
Residential and consumer loans continue strong, but business loan demand is still somewhat sluggish and below expectations. S&Ls also indicate continued strong demand for mortgage loans, and some expect a record year for mortgage loans and commitments. There is also some softening in prices of existing homes, although an official with a large builders' association in Ohio expects that prices for new houses will continue to rise because of higher costs of insulation and shortages of skilled construction workers.