April 11, 1979
Automotive production and employment in the Fourth District is being hampered by the Teamsters strike, but other key manufacturing industries are operating close to effective capacity. High operating rates and fear of shortages have stimulated some inventory building. Manufacturers see little sign of let-up in price pressures in the near-term. Retailers still view short-term sales prospects cautiously and some expect smaller gains in sales this quarter than last. Deposit flows at S&Ls in recent weeks have slackened, and officials are uncertain over future deposit flows and mortgage lending.
Except for the automotive industry, the Teamsters strike has not yet had disruptive effects on employment and production, although sizable cutbacks are likely if the strike lasts beyond mid-April. Auto production so far this month has been cut nearly 8 percent from the scheduled 825,000 units. GMC has already shortened the workweek at plants in Cincinnati and last week furloughed 7,400 workers for one week at the Lordstown assembly plant and another 6,000 workers at a nearby electrical equipment plant. Production losses were reported at about 7,500 passenger cars and vans. Ford Motors expects a cutback of about 55,000 passenger cars this month, nearly 25 percent of their planned schedule, even if the strike ends this week. They expect that two-thirds of the production loss will be made in May and June, but 10 percent or more will not be recovered in this model year because of poor sales of certain models. In addition, Chrysler announced a shutdown of six plants in Ohio beginning April 9. However, the shutdown probably stems from excess inventories rather than the Teamsters strike.
Nonautomotive industries, including primary metals, machine tools, trucks, rubber and plastics and paper and paperboard, are reported to be at high or near peak operating rates. Effects of the Teamsters strike on employment and production in these industries have been minimal, although steel, glass and auto components producers expect disruptions should the strike continue much longer. Steel and aluminum industries are operating at effective capacity. Steel is expected to operate at about 95 percent capacity this quarter, a presumed maximum rate, unless hindered by the Teamsters strike. A shortage of domestic coke has boosted imports. One economist expects some domestic steel users to step-up imports because of fear of shortages and lengthening lead times at domestic mills. A major flat glass supplier to GMC reports a full order book through this summer. An axle and transmission producer also reports no cutbacks in production have yet resulted because of the Teamsters strike and remarked that should the auto industry be shut down, this producer would continue at full production in order to relieve a shortage in axles. Some softening is noted in sales of vans because of higher fuel prices. A shortage of polyvinyl chloride has led some producers to allocate production. Tire producers have been operating at capacity partly because of high demand and also because of expiration of the labor contract on April 20. An economist with a tire producer expects that the probability of a strike in the rubber industry will be heightened if the Teamsters strike continues through April 20. Paperboard capacity has tightened because U.S. producers have stepped up exports in response to higher prices abroad than in U.S. markets.
Businesses assert they are still cautious in inventory policies but are more willing to step up inventory building because economic activity in the fourth quarter of 1978 and again in the last quarter was better than some expected, which has given rise to a feeling that the widely discussed recession is not yet apparent. An automotive parts suppliers note that their inventories are at record levels but in terms of day's supply, stocks at the end of last month fell because of further increases in sales.
Intense price pressures show little sign of abatement in the near- term, nor are they expected to let up as long as manufacturing activity continues to operate at or near peak rates. Some officials remarked that only recently have markets for their products been strong enough to absorb price increases. Only scattered signs of moderation in price pressures are indicated. For example, additional FVC capacity is expected to be in operation within the next two to three months, which should end allocation of that product and ease strong upward price pressures. Also, steel scrap prices in some regions fell recently but this was not expected to spread to all steel producing regions.
Unlike ebullient remarks from manufacturers, retailers remain cautious in their appraisal of consumer spending prospects. The Easter season does not appear to have stimulated GAF sales so far this month. A department store official notes that consumers respond well to bargains and heavy promotions. An economist with a major department store chain expected April sales will increase about 9 to 10 percent from a year-ago, but he expects only an 8 percent year- over-year increase in sales this quarter compared with a 9.5 percent increase last quarter.
S&L reports on deposit flows and consumer responses to recent changes in money market certificates are mixed. Some feel that the March 15 changes that set maximum rates on certificates may not have much adverse effect on deposit flows. An economist with a FHLB in this District perceives that associations are not strapped for funds, at least as suggested by an increase in paybacks instead of in new borrowings in recent weeks. On the other hand, some others feel associations have not been successful in rollover of maturing certificates. Nevertheless, some officials believe they can still draw down liquidity and step up borrowing to support mortgage demand, which is typically described as rising seasonally but not as strong as a year-ago. Prices of new houses continue to rise rapidly, although prices of new houses have tended to increase less rapidly than last year, according to some lenders.