January 31, 1979
The unexpectedly strong pace of economic activity last quarter has led some District observers to postpone the timing of a recession, now expected to occur later this year. Retailers and producers of consumer goods are cautious in their appraisal of near-term sale prospects. On the other hand, manufacturers expect to operate at or near capacity at least this quarter. S&Ls are concerned that supplies of mortgage funds may be sharply reduced if latest deposit experience continues. Financial prospects for the City of Cleveland remain uncertain.
Several economists who had forecast a recession in early or mid-1979 have pushed back their expectations to late 1979 in response to the better-than-expected pace of activity last quarter. Some raised estimates of the level of output for the year, but still expect a recession late in 1979. A few economists indicated unwillingness to change their recession forecast because of uncertainty over how long the recent sluggish behavior in monetary aggregates will last. Also, a few others do not expect a recession this year. They point out that consumer spending may not be as weak as perceived and that fixed investment will likely be stronger than indicated in latest surveys.
Retailers and producers of consumer goods are still cautious in comments on short-term sales prospects. They explained that department store sales in December and the fourth quarter showed little improvement in real terms. An economist with a major national department store chain remarked that year-over-year sales gains amounted to about 8 percent last quarter, considerably less than indicated in preliminary estimates of national product accounts. Widespread markdowns and extensive sales promotions in major metropolitan centers of the District during December are expected to dampen sales gains in January, although retailers report sales have been running well ahead of a year-ago, when sales were depressed by frigid weather throughout the District. Some retailers expect modest, if any, sales gains this quarter and have held tight control over orders to their suppliers. An apparel producer, for example, notes that sales to large retailers continue to run behind a year- earlier volume. A major auto producer, which late last fall projected total new car sales for 1979 at 11.1 million cars, recently reduced its forecast to 10.8 million units.
Manufacturing activity in the District has been sustained by high operating rates, at or near effective capacity, in capital goods, primary metals, automotive products, rubber, plastics and glass industries. Machine tool builders are operating at capacity and expect to continue at capacity through most of this year as backlogs are still expanding. Orders in January have apparently rebounded from a drop in December. In steel, expectations are that the industry will be operating at or near effective capacity this quarter and perhaps next. Millers are generally booked this quarter and orders for second quarter are reported to be heavy. Steel orders from appliance producers have been sluggish but more than offset by sizable demand from the automotive industry and increasing demand from capital goods producers, including machinery and construction. The January 1st increase in trigger prices for steel is not expected to result in any meaningful reduction in steel imports until March at the earliest. One economist attributes the unexpectedly high level of demand to a fear of shortages and believes inventories are being built rapidly. Another believes that a rapid buildup of steel inventories is occurring only at the distributor level.
Retailers and manufacturers generally are still cautious over inventory policies. Retailers of general merchandise have managed to trim stocks through aggressive promotion last month but apparently some still have higher than desired inventories. Stocks of major appliances, which were trimmed by recent production cutbacks by some large producers, have been reduced to a more normal range. According to one producer, last quarter's adjustment reflects expectations of little or no sales gain this year. Relatively low profit margins, lack of growth over the next few years, the need to revamp appliances for energy conservation, and continuous labor strife are said to be among the reasons for an impending March 1st shutdown of a major appliance producer in the District that employs about 7,500 workers. A few manufacturers, especially in capital goods industries, plan to step up inventory building in response to further increases in backlogs and rising prices. Tire producers are finding it difficult to build inventories of radial tires because of high demand. One cautionary note is that inventories are actually higher than suggested in customary inventory-sales ratios because many businesses switched from fifo to lifo. Housing demand has been slowing, probably more than seasonally, although causes are uncertain. One source suggests a problem that might be shaping up is the lack of availability of mortgage funds. Some S&Ls have not been offering money market certificates and others have a capped rate below the maximum because of a profit squeeze. Also, S&Ls are investing a sizable proportion of money market certificates, especially in bank CDs. Consequently, mortgage commitments are being held back. One of the largest S&Ls in the District reports a sizable runoff in deposits during January, the second successive month deposit flows have been below expectations. The association attributed outflows to the 2-year Treasury bill they believe has attracted interest because of the longer maturity than savings certificates. Home builders in most parts of the District are said to be cautious in their building plans in order to avoid repetition of the 1972-1973 housing boom.
Cleveland's financial prospects for 1979 remain uncertain as the campaign on a referendum to raise taxes and to sell the municipal light and power gets underway. Recent polls show for the first time voter approval for both the 0.5 percent tax increase and the sale of municipal light. However, growing fears that revenues will not be sufficient to balance the budget or to deal with over $90 million in accumulated debt has prompted State legislation that could lead to a Yonkers-style plan to control the City's financial management. While fighting off attempts at State controls, the City administration continues to defer payment on employee pension funds and has stopped construction projects because of a shortage of funds.