January 29, 1980
Most respondents in the Fourth District still expect a recession in 1980, but are less certain over the timing and depth than they were in recent months. Retail sales in December and early January, especially of non-durable goods continue to be somewhat better than expected, apparently in response to heavy sales promotions. Auto sales have picked up in the early weeks of January, although most respondents expect production in the first quarter to remain weak. Fixed investment, except automotive, continues to be a major source of strength in the economy, despite some loss of momentum noted by capital goods producers. Housing demand is weak, and S&Ls report adequate funds to meet current levels of demand despite some decline in savings flows into thrift institutions.
Some economists are skeptical of recently reported estimates of consumption expenditures and retail sales for December. They are therefore uncertain about the timing of a recession. In view of unexplained behavior by consumers, some now feel a recession will be shallow and brief. A retail economist attributes much of the strength in retail sales to widespread promotions, which should continue to support sales through January. However, discount stores in Ohio did not do as well as those department stores that cut prices, according to an area retailer, and sales of smaller merchants were off 2%-3% from year-earlier levels. A consumer goods producer believes that durable goods sales have flattened because appliance prices have been rising below the rate of inflation, which lessens the buy-in-advance behavior of consumers. A major appliance producer reports sales are holding up better than expected, and that dealers in some areas report spot shortages of ranges refrigerators and a surplus of dishwashers. Sales of nondurable goods appear to have benefited from the slow growth in durables and lower-than-expected energy bills. An area clothing producer reports no drop in orders yet and expects sales to remain relatively strong for the next five months. Growth in real sales of food has slowed, according to an economist with a food store chain, in contrast to a decline in sales of fast-food restaurants. He expects food price increases in 1980 to be in the 8%-9% range because of reduced demand associated with slower growth in disposable income and improved supplies, except for beef.
Consumer buying of autos has picked up after several weeks of weakness, but production is expected to remain depressed until inventories are in better balance. A local auto dealer reports January auto sales have risen 10% from December, but are still below January 1979. Reasons for the increased sales range from advanced-buying brought on by the mild winter to increased supplies of X-body cars. However, an auto economist reports that dealers are ordering cars without special features for faster turnover. He expects total new car sales to be somewhat above 9.2 million in 1980. A tire economist reports that sales were poor in the fourth quarter of 1979, and expects that the first quarter of 1980 will continue to be weak both in the original equipment and replacement markets.
Fixed investment should continue to be strong at least through the first half of 1980. One official expects the strength in capital spending to come from relatively good profits and high utilization rates among most industries, especially aerospace and petroleum. An economist with an aluminum producer states that capital spending in that industry remains strong. A capital goods supplier notes weakness in agricultural and heavy construction machinery, and a steel economist states their order pattern suggests that electrical and non-electrical machinery industries may be losing some momentum. However, several respondents note a change in the underlying factors affecting capital spending which make it less susceptible to cyclical swings. Investments are more short-term because of increased uncertainty; many are limited to replacement for cost-saving in labor and energy which have a quick pay-off; and many are mandated by government regulations. Defense spending will eventually boost economic activity, but several defense subcontractors expect little significant upward thrust for most of this year. Defense goods suppliers are concerned that a skilled labor shortage and severe capacity constraints will hold down real spending for defense from the Administration's proposed 5.8% increase this year. An electronics producer cites bottlenecks in computer chips and aluminum castings that will stretch out production and delivery schedules.
Housing starts in December held up better than expected, but several S&L officials and economists attribute the strength to a record level commitments built up earlier in 1980. Moreover, a mild winter may be distorting the housing numbers. An S&L official states that the seasonal adjustment may have overstated actual starts in December and may understate strength in January. One S&L official expects a drop in starts below 1.5 million units in January. He cites a persistent decline in sales of new and used houses that will lead to a drop in starts this quarter. Mortgage funds are generally available to meet the present low level of demand. Most of the weakness in housing is attributed to weak demand. Therefore, several mortgage lenders have lowered their mortgage interest rates in recent weeks. Officials do not expect rates to fall much below 121/2% because of the high cost of funds associated with the steadily rising proportion of deposits held in savings certificates and "jumbo" CDs. One S&L official estimates profit margins for most S&L associations at 1% or lower and slipping fast. Some S&Ls expect to show losses during the first quarter of 1980, and one S&L official expects 1980 to be the "toughest" year for thrifts in the post-World War II period.