March 15, 1978
The coal strike and unseasonably cold weather have continued to hamper production, sales, income, and distribution in the Fourth District. Indirect effects of the coal strike on employment have been minimal. Economists who attended this Bank's recent meeting on the economic outlook still expect growth in output at about a 3.8 percent annual rate and a 6 percent rate of inflation from the fourth quarter 1977 to the fourth quarter 1978. Retailers have experienced spotty sales for the past several weeks but remain relatively optimistic that sales will pick up from recent low levels. Savings and loan associations have not cut back commitments or loans despite continued softening in deposit flows.
Electric power shortages have affected employment in the District minimally and far less than indicated in widely publicized estimates. Some manufacturers, as in the case of steel, have had to stretch out production to protect energy supplies. More typically, they have cut back on hours, lighting, and heating. In some cases, they are diverting production to other plants not affected by the power shortage. Moreover, many manufacturers have resorted to alternate power sources, especially their own power generators. Estimates indicate that industrial layoffs have affected perhaps 3,5000 to 5,000 of the 1,650,000 manufacturing workers in the District. Utilities in Ohio still have coal stocks that range from 35 to 55 days' supply, not much less than a month ago, and the only utility that has a mandatory curtailment is the smallest one in the state that serves portions of southern Ohio. Utilities in the Pittsburgh area have the lowest coal supplies and are operating with mandatory curtailment, ranging from 10 percent to 25 percent. Other utilities are reluctant to estimate when mandatory controls might be imposed, given the highly fluid supply situation and. flexibilities of large industrial users. Manufacturers generally claim they can continue to operate without major layoffs even if 25 percent power cutbacks are mandated, and some assert they can adjust to as much as a 50 percent cutback because of backup power and conservation measures.
Economists who attended this Bank's quarterly meeting on the District's economy earlier this month were unconcerned about the long-range effects of the weather and coal strike. The median forecast of 29 economists shows continued expansion throughout the year, with a 4.3 percent annual rate of gain in real GNP during the first half of 1978, followed by a 3.4 percent rate in the second half. Although the economists do not expect a credit crunch in 1978 despite increased demand, some viewed the probability of a crunch and recession in 1979 as very high. Several also expect continued upward pressure on interest rates in 1978, with the Federal funds rate rising to 8 percent in the fourth quarter of 1978.
Retailers still anticipate some spring rebound that would boost sales from weakened first-quarter levels, although expected gains are not likely to be as strong as in the final quarter of last year. Strengthening from lows in January has been spotty partly because of frigid weather in February. Some retailers also point out that a letup in sales was expected after last quarter's surge in sales. Inventories have been raised to unacceptable levels because of unexpectedly slow apparel sales, according to an economist with a major department store chain.
Eight automotive producers and suppliers forecast that domestic new car sales in 1978 would range from 8.3 million to 9.0 million units, with imports amounting to 1.7-1.9 million. Another economist placed total new car sales this year at 10.9 million units. He acknowledges that sales have been running somewhat below that projection because of bad weather, the coal strike, and low public response to GMC styling of intermediate cars. Still, he is reluctant to revise his expectations downward at this time. For the longer term, he expressed concern that imports from Japan may seriously threaten domestic producers and sees little prospect for relief from a high level of auto imports from Japan over the next few years. According to his estimates, Japan has a large capacity to build cars especially for the export market and has a sizable cost advantage estimated at $650 per car over United States auto producers. This year, for example, Japanese motor vehicle production is expected to be stepped up to about 9.3 million, an increase of 800,000 from 1977. Virtually all this increase can be exported.
Bad weather depressed housing activity in the District again in February, but demand for mortgage money continues to be strong. Although savings and loan associations are increasingly concerned over further slowing in deposits last month, they are not cutting back on commitments. Liquidity continues to shrink, and a few associations indicate that they are virtually at the ceiling of reserve requirements. They will be required to step up their borrowing and to increase their use of the secondary mortgage market to support mortgage loan activity. Some lenders are less apprehensive about commitments and lending prospects because they hold a higher volume of certificates than they did in 1973. An economist with a Federal Home Loan Bank in this District believes that certificates are providing some protection against rising interest rates. His estimates show that, if savings and loan associations had the same deposit mix as prevailed at the beginning of 1973, the slowdown in savings deposits would be at least $3.5 billion larger than otherwise. He expects 1.8-1.9 million new housing starts this year.
Several District officials and economists consider inflation of greater concern than the power shortage. Despite some potential benefit to domestic steel producers, reference pricing of steel will raise prices, according to some producers of steel fasteners and metal products. Higher priced steel would cause users to raise prices for finished products, which already are at a competitive price disadvantage with foreign supplies.
Coal prices are expected to rise sharply this year. An economist with a large coal producer estimates that a 37 percent contract settlement for the coal industry would raise the price of utility and industrial steam coal about 9.4 percent in 1978 and another 4.6 percent next year. In addition, environmental regulations will boost coal cost by $2 per ton. On the other hand, prices of crude oil, according to an oil economist, can be expected to increase less than the assumed 6 percent underlying rate of inflation this year because of ample capacity and slow growth of demand.
Steel economists are still relatively optimistic that production and shipments of steel products will be about 10 percent stronger than last year. Because production at some mills is being stretched out to protect coke supplies, orders for this quarter are running ahead of production and shipments. While uncertain about the effects of reference pricing of steel, economists expect steel imports to fall from 19 million tons last year to about 14-18 million tons this year. One economist, who sees signs of accelerating orders from capital producers, believes the industry may be operating close to capacity by the year-end.