November 12, 1980
Summary
Respondents in the Fourth District anticipate a 1.5 percent increase
in real GNP in 1981 from 1980, despite rising interest rates.
Inflation continues to be the major threat to the recovery. A
boomlet has developed in steel orders, but may reflect price hedging
that is borrowing from orders in 1981. Consumer goods producers
expect little near-term improvement in consumer spending, but auto
dealers are encouraged by new model sales. Bankers report business
and consumer loan demands are weak, but not worsening since the
latest interest rate increases. However, S&L officials and home
builders report a substantial decline in buyer interest and
applications as mortgage rates average nearly 14 percent.
Outlook
Economists who attended the Fourth District Economists Round Table
Meeting held at this Bank on November 7 expect the recovery to be
sluggish and a typical for the early stages of an expansion. The
median of 28 forecasts, made shortly before the election, shows real
GNP increasing at annual rates of 1.5 percent, 2.7 percent, 4.6
percent and 3.4 percent from the first quarter of 1981 through the
fourth quarter, respectively. Most of the step-up after mid-1981 is
expected to come from higher consumer spending, residential
construction and a recovery in business fixed investment. Mild
inventory liquidation is expected to continue into 1981. Real GNP
this quarter is expected to increase by about the same rate as last
quarter, because of smaller gains in consumer spending and net
exports. Five of the economists expect real GNP to decline in the
first quarter of 1981 before resuming growth, and one expects a
decline in the fourth quarter of 1981.
Prices
Inflation is reaccelerating and is the key factor underlying a slow
recovery, according to several district economists. The latest run-
up in food prices stems partly from increased grain exports and a
shortfall in farm output, according to a bank economist. Despite oil
price increases in spot markets, the Iranian-Iraqi war should not
have a significant effect on prices, according to a petroleum
industry economist, unless damage to production facilities is
substantial and OPEC allows the spot market to run prices up.
However, several energy economists expect oil production losses to
be made up by other countries. Some economists who expect a small-V
shape recovery in 1981, anticipate that accelerating inflation will
contribute to a softening economy late in 1981 and another recession
in 1982. Several expressed preference to check inflation
expectations now even at the expense of retarding a recovery.
Steel
The steel industry has made a sharp turnaround recently, with order
levels currently at 75 percent of operating capacity and possibly
reaching 90 percent in November or December. Steel economists
believe this bubble in demand will be temporary, and represents, in
part, a slight improvement in consumption (mostly from autos), a
decrease in imports, but mostly a vigorous shift in inventory
replacement by steel service centers. Imports have been dampened by
the reinstatement of trigger pricing at levels above domestic mill
prices. Shipment levels could reach as high as 23 million tons in
the fourth quarter and 85 million tons in 1980, depending on the
ability of plant facilities to shift from a shut down condition.
After January, steel operations will likely fall back into the 70
percent to 80 percent range, according to a steel economist, unless
the economy is stronger than currently expected.
Consumer Spending
The improvements in consumer spending in the early part of the third
quarter have leveled out in recent weeks, according to several
consumer-goods producers. An appliance producer reports his firm has
not yet experienced a recovery in either shipments or orders, and a
bank economist anticipates no increase in purchasing power until
after a tax cut in the second quarter of 1981. While nondurable
goods remained flat in recent months, sales of food-store items have
held up well relative to past recessions, even during the sharp
decline in the second quarter, according to a producer of consumer
soft-goods. However, year-to-year volume on consumer-packaged
products is currently increasing at only a 2 percent rate, compared
to a normal 4 percent rate during a recovery. Fourth District
economists expect about a 2 percent gain in real PCE between the
fourth quarter of 1980 and fourth quarter of 1981. A typically
cautious economist with a major retail chain in the district expects
a somewhat larger gain. According to a bank economist, the financial
position of households remains weak for a recovery; the debt-
repayment burden is still high, liquidity is low, and delinquency
rates are rising.
Autos
Although auto sales should gradually improve throughout 1981, no
major comeback is expected before 1981, according to an auto
industry economist. Auto sales are expected to average a 9.0 million
unit annual rate in the fourth quarter of 1980 and 9.6 million units
in 1981. Small cars are selling well, reports an area dealer, but
sales of larger cars are sluggish despite improved mileage ratings.
Capacity of domestic small cars is limited currently by engine and
transmission production. An area dealer reports that 1980 models are
closing out satisfactorily, but not at the expense of 1981 models.
Ohio consumers continue to benefit from a $600 average savings on
select new models as a result of the temporary tax cut,
manufacturers' rebates and the temporary price freeze.
Housing
Loan commitments are weaker than last month, and larger-than-seasonal declines are expected in December, January and February,
according to several S&L officials. Mortgage lending rates, which
rose further in recent weeks, range from 13.5 percent to 14.5
percent and are expected to reach 15 percent soon, according to an
Economist for a regional FHLB in the District. However, rates are
already close to a point of shutting off demand, with loan
applications in November falling behind last month's pace. Deposit
flows have weakened, but even large inflows are unlikely to cause
mortgage rates to differ from other long-term rates, according to an
S&L official, as more S&Ls operate like mortgage brokers.
Consequently, affordability of mortgages is an increasing problem.
An area builder reports housing starts are down drastically and the
volume of shoppers is now beginning to fall substantially.
Banking
Business and consumer loans continue to be weak, according to
several district bankers, but lending rates continue to rise. A bank
economist, however, cites uncertainty and declining real income in
the local economy as more important factors in discouraging
borrowers than higher interest rates. Auto loans may not pick up
much for another six months because of a usual lag in recovery in
local economies, according to a banker. Also, usury ceilings tied to
the discount rate have made auto loans unprofitable in Pennsylvania.
Business loan demand from large national firms is stronger than from
smaller local firms, partly because large firms have substituted
short-term financing for long-term until bond markets turn around,
according to a bank economist. Interest rates are expected to
continue under upward pressure in the near-term, according to
several economists, because financial markets anticipate further
tightening actions by the system.