August 9, 1978
Area retail sales began to soften in July after the high levels earlier this year. An economist with a major department store group expects real consumer outlays to increase about 2 percent in the second and third quarters because of slow real income growth, high debt accumulation, and anticipatory buying. Consumers appear to be more price conscious, and retailers, particularly the large discount chains, are aggressively competing for market shares. Not much, if any, improvement in profits is likely this quarter. Inventories of a wide range of merchandise are characterized as very unfavorable.
Despite some decline during July, new car sales are still above year ago levels and better than many industry analysts had anticipated. Industry economists do not believe the anticipatory buying thesis satisfactorily explains the recent high levels of auto sales. Inventories, which appeared large and unbalanced last month, seem more manageable at present. Observers would be surprised if the robust pace of auto sales experienced in recent months were maintained through the fourth quarter. Light truck sales continue at high-levels and inventories are being worked off.
There is some evidence that the District housing market may have plateaued but activity remains at the high level. Respondents said houses are remaining on the market longer, and the scattered reports of sales above the asked price are no longer heard. While housing activity may be leveling, most area lenders do not perceive any slowing in commitments or loan applications. Area S&Ls report good deposit flows in June and July, but at insufficient levels to meet existing demand. High-yield money market certificates are responsible for these strong flows, with about 55 percent of the funds now attributable to new money. Borrowing from the FHLB, at record levels in recent months, should subside as starts moderate.
District economists expect that business fixed investment will remain strong through the year. Machine tool orders are reported at very high levels. Though the industry is near capacity, bottlenecks have not surfaced. Various capital goods producers report that orders are strong from the aerospace, automobile, construction and railroad industries. Orders from the steel utility and mining industries show weakness. Exports, too, are sluggish.
Steel orders have also been strong largely because of demand from auto producers and some inventory building in anticipation of August 1 price increases. Still, production over the next two quarters may be slow, depending on the auto industry needs and the rate at which recently accumulated inventories are depleted. The industry, operating near capacity, does not anticipate capacity constraints in the near future. Aluminum tonnage fell slightly in the second quarter, but the level of backlogs speaks favorably for production through year-end. Overall, the industry is below capacity, but flat-rolled capacity is being added to meet growing auto demand.
Steel imports fell in May and June largely in response to the trigger pricing and inventory building prior to its effective date. Imports equaled 1.36 million tons in June, down almost 38 percent from April. The steel industry, however, took little comfort in the decline; it had hoped imports would fall to 1.0 million tons. Industry officials are also concerned about the growing market share held by non-EEC and non-Japanese producers. Their share has risen to about 40 percent recently from a normal 20 percent. While formally bound by the trigger price program, these countries are claiming to produce at costs below the Japanese who form the benchmark for the trigger prices. Overall, the steel industry still is maintaining a wait and see attitude toward trigger prices. One industry economist believed that the appreciation of the yen was now just beginning to blunt Japan's competitive edge in specialty steel.
The city of Cleveland continues to move toward insolvency while the administration is preoccupied with an August 13 recall election. To finance the city's estimated $2.2 million deficit per month, the city has been transferring bond retirement revenues to current operating funds. Four developments threaten a major financial crisis in September: Cleveland is under court order to repay a $20 million debt to the Cleveland Electric Illuminating Company; funds to meet the $2 million bimonthly police and fire payrolls are expected to be depleted by September 20; the bond retirement funds, the last major revenue source available to finance the existing operating deficit, is depleted and finally, the city must roll over $3.34 million in notes on September 9. Recently Moody's downgraded and Standard Poors suspended Cleveland's rating on bonds and notes. The action taken by these investment services makes the refinancing of Cleveland's paper virtually impossible without an audit.