September 13, 1978
Consumer spending in the Fourth District has been spotty, and retailers, except for automotive, are uncertain over prospects for the balance of the year. Scattered signs of inventory adjustment are apparent in major appliances, steel and some soft goods. Steel prospects next quarter are also uncertain because of imports. Capital goods spending still lacks pervasive strength but mortgage loan demand remains strong.
Consumer spending continues strong in automotive buying while spending for other consumer goods has either shown little movement or has tapered in recent months. Automotive producers and suppliers are reasonably optimistic over sales and production prospects at least until the 1979 models are in abundant supply. Auto suppliers, including steel, glass, and tires, report orders are strong into next quarter. Uncertainty marks responses of retailers and producers of other consumer goods. Retail sales have not shown much movement in recent months, according to an economist with a major department store chain. He expects that year-over-year increases in retail sales will probably fall from a recent 10% rate to as low as 7% to 8% by year-end as the personal savings rate rises by about 0.5%. Sales of some major appliances fell in the last few months. Another official with a large department store chain noted lack of sales strength in their northeast Ohio store and remarked that consumers have responded to higher prices by moving down to lower priced, mass merchandising chains. Difficulty in gauging consumer buying attitudes has led to scaling down in inventories and buying plans this fall. An official with a major grocery chain noted a consumer shift to lower priced, generically labeled products.
Some adjustment of business inventories appears in the making. Stocks of some major appliances, steel and soft goods are probably more than ample and may tend to hold down production gains. Apparently the unusual strength of appliance sales last quarter resulted in some false perceptions of underlying market strength, according to a major appliance producer. Recent weakness in sales, however, has not been across the board. Steel stocks have been built more rapidly than expected as a result of the continued surge in imports, and some adjustment has been underway. On the other hand, stocks of petroleum products are expected to be built again, in response to an expected OPEC price increase and to a need to build home heating and other fuel stocks.
Steel economists have revised downward their expectations for steel production for the balance of this year. Orders have slowed and the operating rate has eased to about 85% of capacity, down from about 90% in the second quarter. Auto orders are strong and are likely to continue so through most of the fourth quarter unless production schedules are cut back. Though orders from machinery and aircraft industries are satisfactory, they have weakened in the shipbuilding and appliances industries, the latter apparently because of large inventories. Steel imports are a major uncertainty in the outlook. One steel economist said if imports continue at July's high volume, this will be a record year and will cause a sharp drop in steel production similar to the second half of 1977 when the operating rate fell to the range of 70% to 75% of effective capacity. Another economist believes, however, that the bulge in imports may be over and if the yen continues to rise, trigger prices will be pushed above domestic prices.
There is still little indication that gains in capital spending this half will be as large as during the first half of this year. An economist with a major capital goods producer, whose forecast of P&E spending called for a real gain of 6.5% this year, is now skeptical because of the higher cost of capital and slower growth in the economy than originally anticipated. Strength in producers' durable goods is in railroads, aircraft, and trucks. Industrial and commercial construction orders are strong. Heavy construction work remains a mixed bag, according to an official with a major design construction and engineering firm. Orders from steel and chemical industries continued weak but awards for terminals and barges for hauling grain rose sharply last quarter. Energy-related business has not been up to expectations because of continuing uncertainty over energy legislation.
Mortgage demand continues strong, although some seasonal weakening is noted by lenders. One S&L reported a record volume of loans in August but believes last month represented the peak in both lending and mortgage rates. Some others report loan activity so far this month equals that of the past two months and that unless there is a let-up in commitments, they may have to discourage new applications by raising rates. Mortgage rates in some areas are as high as 101/2% for an 80% loan, although 10% appears to be the most common rate.
S&L interest in six-month certificates has not waned, although some complain of the higher cost of funds associated with the new certificates. Another view, however, is that S&Ls are better off in the current market than a year ago when mortgage rates were about 1 percentage point lower but many were paying 7 3/4% for long-term certificates.