October 14, 1980
Summary
Recent improvements in Fourth District business activity
are expected to be dampened by rising interest rates, according to
this month's respondents. Despite real improvements, several
business economists express doubts that third quarter figures have
yet to reflect the extent of inventory liquidation. Steel orders,
however, continue to receive an impetus from inventory re-stocking.
Capital spending is continuing on a gradual downward trend, but
backlogs appear to be strong enough to sustain shipments until a
recovery begins in mid-1981. Retailers and automobile dealers report
some rebound in sales from the abnormally low levels brought on by
the March credit restraint program. Bankers report that business
loans have benefited from inventory investment, but consumer loans
continue to be weak. Mortgage lending has virtually halted as a
result of interest rates that are at or above 13%.
Outlook
While most respondents now acknowledge that real GNP may be
slightly positive in the third quarter of 1980, they have not
changed their earlier forecast of a slow recovery over the next
three quarters. Because this decline was associated with a severe
cutback in consumer spending rather than inventories, the recovery
will be sluggish. Several economists concur that the consumer's
balance sheet is not strong enough to support a strong resurgence in
either consumer spending or overall economic activity. They expect
little improvement in consumer spending once the catch-up from
credit controls is completed. Rising interest rates are expected to
weaken a recovery, but most respondents place a low probability on a
double-dip recession. A most likely scenario is for real GNP to
alternate between small positive and negative changes through the
second quarter of 1981.
Inventories
Several business economists, while encouraged by the
turnaround in production and employment, remain cautious with
respect to the outlook because of inventories. Although inventories
were generally in better shape going into the recession than in past
pre-recession periods, a steel economist believes that there has
been substantial liquidation of inventories in manufacturing in
addition to steel. Several economists state that either third
quarter inventory data will show liquidation, or the fourth quarter
GNP. GNP forecasts will have to be adjusted downward to allow for a
liquidation phase in the inventory cycle.
Steel
Significant improvements in steel orders, following heavy
inventory liquidation especially by service centers and declining
import commitments, are reported by industry economists. New orders
in September rose consistent with almost an 80 percent operating
rate, but actual fourth quarter operating rates will probably be
closer to 70 percent. Steel economists report some pickup from the
auto industry, but auto production schedules so far have remained
conservative.
Capital Goods
Because of a seventeen month backlog in metal cutting
tool orders, machine tool expenditures in real terms have increased,
while new orders have continued to decline. However, machine tool
producers state that order cancellations are becoming a bigger
problem, although not yet comparable to past recessions. September
orders may have picked up slightly because of very low August levels
and a response to the annual machine tool show. Although a capital-
goods producer expects a recovery in capital spending to begin in
the first quarter of 1981 at the earliest, several expect the
recovery to be centered among small OEM suppliers. Auto suppliers
especially have been hurt by weakness in the auto industry and have
curtailed purchases of machine tools and parts.
Consumer Spending
Most of the recent improvement in consumer
spending is associated with a rebound from the second quarter credit
controls. A durable goods producer believes that if it were not for
the severe cutback in consumer spending in the second quarter,
consumer spending would still be declining. An economist for a major
retail chain states that unseasonably warm weather in September
caused consumers to postpone fall and winter apparel purchases.
Sales in the first week of October soared, suggesting that the
September slump was partly a weather phenomenon.
Auto sales in the first week of October have been the best in months for area dealers. Ohio dealers have benefited substantially from a state sales tax reduction from 4 percent to 2 percent since mid- September. (K cars did not qualify for the tax reduction). Several dealers are encouraged by favorable initial response to 1981 models, but they believe that improved sales represent buying ahead and that November and December sales may weaken as a result. Several dealers are concerned about consumer response to the higher prices of 1981 models. Interest rates on auto loans, which in some areas has moved up to 16 percent, have not yet hindered auto sales partly because company financing is available at below market rates.
Banking
Rising interest rates have not had a significant effect on
business or consumer lending over the past month. Business loans
continue to be relatively flat, according to several bank
economists, with most of the demand coming from inventory financing
for companies with large declines in profits. Loans to medium-sized
businesses continue to be on a plateau. Although consumer lending
rates have moved upward in recent weeks, a bottoming out pattern of
consumer loans does not appear to have been altered. Credit card
usage rebounded significantly in August from July levels, according
to both bankers and retailers.
Mortgage Lending
Increasing mortgage rates have again resulted in a
substantial decline in mortgage lending, according to District S&Ls.
Current rates charged by S&Ls range from 121/2 percent to 13 percent
for an 80% loan, while banks generally are already above 13 percent.
An S&L official believes that the volatility of mortgage rates over
the past year has been more important than the level in reducing
demand. Buyers are still very inflation conscious and perceive real
estate as the best inflation hedge. Currently, most of the lending
activity is at the lower end of the price range of houses. An
economist with a regional FHLB in this District expresses concern
that the second half profit outlook for S&Ls may be worse than the
first half. Unless rates fall drastically, many S&Ls in the District
will suffer net losses. So far liquidity is adequate to meet
commitments without relying on advances. Several S&L officials doubt
that interest rates will fall back to 12 percent before spring.