July 5, 1979
The sentiment of several directors, officials, and economists in the Fourth District is that business is at or near a peak. Most District economists expect a recession beginning in the third quarter. Except for automobile production, manufacturers continue to operate near capacity, but expectations are for a let-up later this summer. Capital goods producers, especially machine-tool builders, remain optimistic over the near-term. Mortgage loan demand has eased but apparently exceeds the availability of mortgage credit.
Economic activity is close to a peak, according to the prevailing view of a number of officials and economists in the District. Some believe, however, that a peak in consumer spending has already been past. One retailer expects real sales will decline through the fourth quarter of 1979 and then turn up early next year in response to a likely tax cut. He estimates that real retail sales this year will decline by 1.5 percent, compared with a 3.5- percent increase in 1978. A large producer of major appliances, who only recently felt that a recession would not begin until the third quarter, now feels that weakening in consumer spending has already triggered a recession.
The prevailing view seems to be that a recession will begin in either the third or fourth quarter of 1979. Of the 28 economists who attended the Fourth District economists round table meeting held at this Bank on June 1, 13 expected real GNP would decline in the third quarter and 12 expected real GNP would decline beginning in the fourth quarter. Although the median forecast of the 28 showed a decline in real GNP of less than 1 percent between the second quarter of 1979 and the first quarter of 1980, a small group anticipates about a 2-percent decline in real GNP. These forecasts were not much changed from expectations last March, but the group was more certain now of a recession than they were three months ago. They pointed to contractions in consumer spending and in housing already under way that would lead to a mild adjustment of inventories beginning next quarter and continuing until early 1980. A higher rate of inflation than previously expected, coupled with growing uncertainty over the gasoline situation will prevent an early comeback in consumer spending.
Except for automobile production, manufacturing activity in the District continues on a high level, although expectations are for a let-up by late summer. The strike by independent truck haulers has curtailed shipments in some industries. Neither shipments nor production has been hampered by limited gasoline supplies. Steel shipments in June were curtailed by as much as 15 percent for one large steel producer, but steel production has held at about effective capacity. Some steel officials feel orders peaked last March (when orders exceeded capacity to ship by 30 percent) and are now running at a rate below the last two months. One producer reports relatively full order books for July and August, but some openings exist for September delivery. At the moment, only a normal seasonal slowdown in operating rates is expected for the third quarter. Steel industry economists are skeptical over fourth- quarter prospects. They uniformly expect a recession in the fourth quarter will depress steel consumption and orders, especially from the auto industry, and that the volume of imports, if sustained at the May surge, would result in a sharp liquidation of inventories and a serious downward adjustment in steel production. Tire shipments have also been curtailed by the truckers' strike, and operations in the industry have been cut to about 86 percent of capacity since the strike settlement. Some industry economists expect a weak fourth quarter because of sagging consumer demand for autos and tire inventories that are judged relatively high. A major glass supplier to both the auto and construction industries reports some easing from capacity operations because of a cutback in glass for new houses. They expect a larger-than-usual seasonal drop in orders and production after September because of a further slowdown in the auto and housing industries. Production of major appliances is holding steady in response to a high level of housing completions, according to one economist; however, as completions fall, production will be cut back, probably over the next two quarters. Sales to retailers have begun to weaken but are still stronger than expected.
Despite widespread expectations of a recession, officials in the District still expect fixed investment will provide some near-term support to overall economic activity. Year-to-year increases in real investment this year are still expected to about match last year. Capital goods producers, especially those associated with machine tools, transportation equipment, materials handling and communications equipment, remain optimistic over shipment and production prospects at least for the next few quarters. However, irregular behavior in new orders in recent months leads one economist to expect real investment to decline early next year. Suppliers to the heavy-duty truck industry report their business has peaked and expect production to be cut back later this year.
Some adjustment of inventories is expected over the next few months by officials in a number of industries, including steel, food processing, tires, and large and intermediate cars. Major appliance stock held by retailers are reported to be above a year earlier (which were regarded exceptionally low) but in balance with sales at a manufacturing level. According to one producer, heavy-duty truck producers expect a sizable adjustment of inventories later this year.
Bankers, S&L officials, and realtors generally report some let-up in demand for mortgage credit. S&Ls consider demand is still stronger than their ability to make mortgage credit available. Some lenders have been shutting off loans while others continue to tighten terms. Some expect to increase mortgage rates still further in the next few weeks in order to curb demand. Mortgage rates are between 10.5 percent and 11 percent for a prime rate mortgage loan and as high as 12.5 percent for a 95-percent loan. S&Ls expect to have difficulty in their July roll-over of six-month certificates, and some are aggressively issuing jumbo certificates to meet commitments. In recent weeks, some lenders report loan applications have eased because of heightened consumer uncertainty. An official with a larger realty association in northern Ohio reports demand in June was off considerably from a month earlier, especially because of the energy problem. They note a change from a sellers to a buyers market is possible.