October 11, 1978
Economic prospects for the Fourth District this quarter are mixed; retailers are cautious over sales prospects, while steel shipments and production will likely match those of last quarter. Inventories of some types of retail goods and steel are generally higher than desired, but cutbacks are not expected to affect output and employment. Some letup in business loan demand is noted, though mortgage loan demand remains strong.
Retailers and producers of consumer goods remain cautious in their expectations for consumer spending over the next few months. Sales have been described as disappointing, and some retailers expect further deterioration during the balance of this year. Another official with a national chain still expects year-over-year gains to slip to a 7- to 8-percent range, down from 10-percent gains during the summer and 9 percent in September. However, a major producer of soaps, detergents and personal products notes larger year-over-year gains for its products, although total retail sales have been disappointing and are expected to continue to be so because of steady erosion of purchasing power. According to an official with a major appliance producer, sales have picked up sharply in the last several weeks, partly in response to promotions. Still, mass merchandisers—especially Sears, Penney's and Ward's—have cut back orders for early 1979 in expectation of reduced consumer spending.
Pockets of excessive inventories of some retail goods have surfaced in recent months. Retailers are concerned over heavier-than-desired inventories of general merchandise, despite efforts to tighten control of stocks.
Consumer response to the 1979 model automobiles cannot be ascertained for another several weeks until the newly designed Ford and Chrysler cars have been on the market. Some GMC dealers are pleased with the initial consumer response to downsized cars, on the market only since early October. Some dealers report a short supply of 1978 standard-size cars.
Prospects for steel production this quarter remain uncertain because of imports and inventories. Nevertheless, steel economists expect that shipments and production this quarter will be only slightly below the third quarter. Mills have recently been operating between 85 and 90 percent of capacity. Orders from the auto industry are heavy. However, demand from the construction industry has eased seasonally, and demand from steel distributors has weakened because of large inventories, especially of imported steel. Liquidation of these inventories depends on the next round of trigger pricing. One steel economist expects that a 10-percent trigger price increase might prompt distributors to cut their stocks of lower priced steel. Such a price increase would push foreign steel prices above some domestic levels, probably resulting in a long-awaited drop in steel imports.
Commercial and industrial loan demand has tended to flatten recently, according to a few of the largest banks in the District. Increased competition from commercial paper is largely believed responsible for this slowdown. In a related matter, two of the nation's largest tire producers had their ratings on commercial paper lowered from Al to A2 because of a highly leveraged capital structure in one case and a possible recall of some tires for the other producer.
Mortgage lenders remark that the volume of mortgage applications is still relatively strong, although softening seasonally. The prevailing mortgage rate for an 80-percent loan is about 9 3/4 percent plus 1 point although rates in some areas are as high as 10 1/4 percent. Deposit flows at S&Ls have been strong, particularly because of the 6-month certificate. This unanticipated strength has improved the liquidity position of several S&Ls in recent months. A $500 million association reported that deposit flows in September were the best so far this year, although passbook savings have been negative for the past several months. S&Ls apparently will continue to promote the certificates, even with a runup in the cost of funds, as long as mortgage loan demand remains strong.
There is little sign that consumer or business spending is being curtailed as a result of further increases in interest rates. Mortgage lenders are generally pleased that higher rates have not shut off availability of credit, although there are some scattered signs that mortgage rates above 10 percent have hampered demand. A large District bank notes that higher interest rates have had no impact on sales of big-ticket goods. Rates on installment loans for autos have shown little increase because of competition from auto finance cost. Borrowing terms have not tightened, and may in fact have eased as maturities are lengthened. Businesses have not curtailed spending for inventories or capital equipment, especially where cash flows are still sufficient for the bulk of financing needs. Some comment, however, that continued increases in rates could hinder acquisition plans or spending plans in another 6 months.