May 10, 1978
Officials and economists in the Fourth District have expected a surge in income, production and sales this quarter, but recent high rates of inflation have raised uncertainty over continued expansion for another year. Auto producers and suppliers anticipate some letup in sales from recent high rates, and retailers see little prospect for improvement in sales of nondurable goods. Steel production is expected to rise to about 90 percent of capacity this quarter; coal production has rebounded virtually to capacity. Mortgage loan demand continues strong, and mortgage rates have firmed in response to weak growth in deposits.
A vigorous recovery in output is widely expected this quarter, with some economists forecasting real GNP gains as high as a 9 percent annual rate. Even at this higher rate, however, real GNP for the first half would fall short of expectations held earlier this year. One frequently cited reason for this anticipated shortfall is a higher than expected rate of inflation. Some economists believe the sharpness of the recovery is conducive to price increases in those industries that have not been able to raise prices because of relatively weak markets. Also mentioned as an additional factor in inflation is the increasing use of marginal labor that has added to costs.
The recent sharp pickup in consumer spending has not been uniform. While auto sales surged, consumer spending for nondurable goods has been relatively flat. The March-April surge in new car sales is explained as a make-up from the poor economy and severe winter weather. Although pleased by the comeback in sales, economists with major auto suppliers expect some letup from the recent 12 million annual rate to about 10.8 million units for the year. An economist with a major producer expects that sales this quarter will range between 11.4 to 11.7 million units (2.0 million imports) and average at least 11.1 million sales for the year.
Strength in auto sales has not been matched by increased sales for some other types of consumer goods. An economist with a national retail chain states that despite recent impressive gains, sales increases only equaled their earlier expectations for an 8 percent year-over-year gain for the February-April period. There was little recouping of earlier sales losses. Apparel and soft goods sales have been sluggish for the past several months and inventories are more than ample. In his view, retailers face a sharp reduction in profits for the next few quarters with general merchandise sales increases of about 3.5 percent in real terms from the fourth quarter of 1977 to fourth quarter of 1978. Similarly, retail sales of personal care products and packaged foods have shown little if any gain in real terms compared with a year earlier.
Steel industry economists expect production to increase to about 90 percent of effective capacity this quarter from last quarter's 80 percent rate. Order cutbacks are not evident yet, but one economist expects a usual seasonal slump in orders and production next quarter as steel consumers realize that inventories are ample and supplies are readily available. Imports last quarter were at a record high level for that quarter, and it is unlikely that the full impact of trigger pricing of steel will be felt until the third quarter, according to one steel economist. Profits are expected to improve sharply this quarter following another weak performance last quarter. Still, higher profits will not result in increased capital spending.
Coal production is rebounding rapidly from the strike. Output recently has been boosted to more than 15 million tons weekly, compared with a low of 5 million tons during the strike. An economist with a major coal producer expects production will soon reach pre-strike levels of 16 million tons weekly and may rise to 17 million tons by yearend. Coal stocks at the end of April were at a 67-day supply but should be much higher to meet seasonal demand in July and August. Consequently, a shortfall in stocks would concern utilities which may be forced to purchase coal at higher prices in the spot market.
Capital goods producers are growing more confident over prospects for 1978 and early 1979 than they were at any time in this expansion. Expectation of at least a 7.5 percent real gain seems common. Orders for electrical equipment, communication and printing equipment have been rising more rapidly than shipments for the past several months, although the rate of increase in new orders has not accelerated. Machine tool orders revived strongly and set new highs last quarter, according to machine tool builders.
Mortgage terms continue to firm in response to softness in deposit flows and strong level of demand. S&Ls raised rates at the beginning of May by 1/4 percent to 91/2 percent for an 80 percent loan, and some are charging 101/4 percent for a 95 percent loan. Some associations no longer are making 95 percent loans and also are cutting back lending in national markets. While a number of officials state it is too early to determine whether double-digit mortgage rates will curtail demand, some feel prospective homeowners are willing to pay high rates because of inflationary expectations. Deposit flows continue to fall short of projections, but some S&Ls have been aggressively attracting deposits by raising interest rates to maximum levels on all types of deposit accounts. A major S&L reported that deposit flows in April exceeded their projection and so far in May deposits have equaled projections. S&Ls have hesitated to issue mortgage-backed securities because of the high costs relative to lending rates in this region.