May 16, 1979
Manufacturing activity in the Fourth District is rebounding from effects of the teamsters strike last month, and major industries are producing at or near effective capacity. Consumer spending has been sluggish except for autos, but business spending has been sustained by further increases in orders and backlogs. Officials claim little sign of speculation or excessive inventory buildup. They uniformly see little sign of price relief for industrial products. Gasoline supplies are tight but have not disrupted business activity. Deposit inflows into S&Ls fell sharply in April. The city of Cleveland remains in default.
Employment, production and shipments in the automotive and steel industries, the main industries affected by the teamsters strike, are recovering. However, some production losses of large cars will not be recouped because of poor sales. Also, steel haulers in the Youngstown Steel Producing Center are still not back to work. As much as 10 percent of steel production schedules in April were curtailed, in addition to cutbacks in steel shipments. Presently, steel is operating at practical capacity, which is expected to continue through the balance of this quarter because of strong demand from the construction and capital goods industries. Steel economist expect some easing next quarter, partly from lower demand from the auto and appliance industries, and also because some facilities will be shut down for repairs during the summer months. Aluminum is operating at about 94 percent of capacity and an even higher operating rate is expected next quarter.
District officials continue to report a widening dichotomy between the consumer and business sectors. Some retailers and producers of consumer goods believe a cyclical turning point is near unless consumer spending shows a pickup in real terms. Remarks about consumer resistance to higher prices, increased consumer substitution, especially of food products, lack of strength in most department store type-goods, and moderation in credit card usage, are increasingly common. Although one retail economist expects retail sales in May will show a larger increase than in April, most of the expected gain would be absorbed by higher prices. In his opinion, retail sales are on a plateau similar to 1974. He expects deceleration in income gains this quarter, which along with continued double-digit rates of inflation, would further reduce real spending. Because of uncertainty over sales prospects, retailers have been cutting their fall orders by at least 15 percent in real terms, according to a producer of men's apparel.
Capital goods producers are still bullish over sales prospects, and some have pushed back their expectations for a decline in orders to the second half of this year or early next year. Their comments emphasize continued increases in orders and backlogs, but they generally report no sign of double-orders because shortages are not prevalent as they were in 1974. Aerospace and machine tool builders report backlogs at the end of last quarter were at least 50 percent higher than a year earlier. Strength in machine tool orders has been widespread because of growing need for modernization and for additional capacity, according to one builder.
With few exceptions, district officials assert there is little sign of speculative building of inventories, although most acknowledge some buildup in stocks in line with higher production and backlogs. A ball bearing producer notes some speculative buying that has been triggered by his firm's allocation of production. Limited supplies of domestic steel, coupled with a curtailed volume of steel imports in recent months, have held the buildup in steel inventories to normal levels relative to current usage, although one economist believes that some steel users must hedge in order to protect production schedules. Similarly, an economist asserted that the low volume of imports and strong domestic demand have prevented a buildup of aluminum inventories. Tire inventories held by retailers are believed to be consistent with industry targets, especially in view of the strike against one tire producer.
Officials uniformly report little sign of relief from recent intense price pressures for industrial products. Some complain about COLA cost pressures. However, a steel economist notes that guidelines will limit future steel price increases this year to about 4 percent, although the market can absorb a much larger increase. Also, a machine tool builder indicated price increases are being held down to some extent by wage-price guidelines. A scheduled increase in aluminum prices was recently scaled downward because of guidelines, although domestic prices are said to be far below world prices.
Gasoline supplies in the District are tight but apparently not as serious as some other regions of the country. While business activity has not yet been hampered by spot shortages, some economists believe short supplies of diesel fuels may disrupt industrial activity later this year. Production and sales of recreational vehicles and light trucks for personal use have been curtailed rather sharply in response to higher prices and reduced availability of gasoline.
S&Ls report a sharp drop in deposits since the change in money market certificates last March. However, they acknowledge that April is typically a poor month for deposits and that some rebound has occurred in early May, even in passbook accounts. Apparently, a large part of the decline in April was the result of depositors failing to roll-over maturing certificates and placing funds into passbook accounts for temporary liquidity. Mortgage loan demand is reported to be rising seasonally but is not as strong as a year-ago. Some association officials expect a further increase in mortgage lending rates because of reduced availability of mortgage funds.
As Cleveland enters its sixth month in default, local banks that hold $14.5 million in notes are becoming increasingly critical of the city's inability to present an acceptable repayment plan. One local bank, which has not received information about the city's budget revenues and expenditures during 1979, has threatened to seek a court ruling on the city's obligation to begin repaying the notes. The mayor has responded to the bank's concern by stating that, if state aid is not obtained soon, the city would begin re-payment in July and would repay the total amount by the end of the year. Whether such a repayment schedule could be attained without further cutbacks in operating expenses is uncertain. Indeed, it is unclear whether the city is currently able to meet operating expenses other than payrolls and debt service.