November 10, 1981
Summary
The recession in the Seventh District accelerated in the
past six weeks. Virtually all sectors showed new weakness—producer
and consumer goods manufacturing, construction, retail trade,
transportation, services, and government. Perhaps the only sector
reporting real growth is medical care, including the manufacture of
hospital supplies and equipment. Signs of financial stringency in
business and agriculture are widespread. Inventories are being
reduced, because of poor sales in some cases, but primarily to
reduce cash needs. Demand for workers may be at the lowest level
since the 1930s. Price discounting is common in wholesale markets,
but much less so at retail. Capital expenditure programs are being
curtailed, and many equipment producers plan reduced operations and
extended Christmas shutdowns. Retailers report disappointing sales
of both hard and soft goods. Auto and truck output is being slashed.
Housing is near rock bottom and most nonresidential construction is
weak. Excellent harvests are pulling downward pressure on farm
prices and farm income. Recent declines in interest rates are
helping to boost sagging morale, but substantial further declines
are needed to stimulate depressed sectors.
Pessimism prevails
Our last Redbook contribution emphasized the
failure of expected improvements in demand to materialize. Now
attention centers on cutbacks in output and spending plans. Fourth
quarter shipments of motor vehicles, steel, building materials, and
various producer and consumer durables will be significantly below
last year's unsatisfactory rates. Reports of layoffs and plant
closings, temporary or permanent, are widespread. The heaviest blows
are scheduled for the mid-December/mid-January period, preceding and
following the normal Christmas shutdowns. Unlike most earlier post-1945 slowdowns, declines are not balanced by increases in employment
in services and government, or by prosperity in the farm sector. In
fact, these sectors are reinforcing weakness elsewhere. Despite
general pessimism, most businessmen and analysts expect a revival in
the future, but the timing has been pushed back to next spring or
early summer.
Foreign competition
The high value of the dollar is encouraging
imports and discouraging exports of various items, but particularly
motor vehicles, steel, and machine tools. Demand from Europe for
district producer goods is depressed. However, some companies,
especially construction equipment producers, report increased demand
from the Southern Hemisphere and the Middle East, partly reflecting
stepped-up sales efforts.
Labor negotiations
Many district employers are demanding
concessions by labor unions on wages, COLAs, medical insurance,
pensions and other fringes. Some are emphasizing changes in work
rules to improve productivity. Results of these efforts have been
mixed, with success usually dependent on a realization that plants
would be closed or activities drastically curtailed if agreement was
not reached. Foreign and nonunion competition play large roles in
these negotiations. Confrontations will be frequent and prolonged,
especially in trucking, motor vehicles, steel, and meat packing.
Prices and inventories
Price discounting is reported in various
wholesale markets, notably in steel, nonferrous metals, and building
materials. Company analysts insist that the "pipelines are virtually
empty". With output reduced and capacity being withdrawn, a revival
in demand could bring a resurgence in price increases in these
sectors. Profit margins of manufacturers, retailers, and utilities
are low or nonexistent, and prices will be raised as soon as supply
and demand come into balance.
Capital expenditures
Many companies are canceling or postponing
major capital spending projects. Most prominent is the auto
industry, where spending plans have been scaled down drastically. A
sizable drop in interest rates would reactivate plans for many
smaller commercial and industrial buildings, but the adjustment in
auto industry plans reflects inadequate cash flow resulting from
poor sales. Given an uptrend in demand the 1981 Tax Act will aid the
eventual recovery in capital spending.
Cars and trucks
Motor vehicle sales in October dropped to new lows,
and resulted in further cutbacks in production schedules for late
1981 and early 1982. Output of heavy-duty trucks has been cut very
sharply. The auto industry blames high interest rates for poor
sales, but high prices, lack of appeal of heralded new models, the
depressed economy, and consumer caution are probably more important.
Retailing
Sales of both hard and soft goods are weak except when
pushed by heavy promotions and price cuts. Credit buyers are being
screened more closely. Some analysts believe that All Savers CDs and
the new IRA accounts will adversely affect consumption of
nonessentials. Stores have ordered cautiously for the Christmas
season.
Housing
Builders see a ray of light in the recent, slight easing of
mortgage rates, but even a substantial cut in rates will not help
the extremely low level of construction activity this year. However,
builders would begin to make commitments for materials for a fast
start in 1982. Conventional financing is virtually nil. Most
creative financing, in effect, cuts asking prices on homes by as
much as 20 percent, but this does not show up in published data.
Government
State and local governments have been postponing
construction projects, curtailing services, restricting hirings, and
even laying off workers, (unprecedented since the 1930s). The
reasons include reduced tax collections, less federal aid, increased
welfare claims, high interest rates, and union demands. On November
3, moreover, voters rejected 75 percent of the proposed tax
increases, usually by wide margins.
Agriculture
Corn and soybean harvests are rapidly nearing
completion, and production estimates have been raised further.
Prospects for a large crop carryover suggest no improvement in
prices, now about 20 percent below last year. Soybean exports are
above last year but corn is down. Market speculation centers on the
probable size and composition of Soviet purchases.
Farm land prices rose one percent in the third quarter and were 8.5 percent above last year, according to our survey, but there are signs that demand for land is weakening. Bankers report slower repayment on production loans and more extensions and renewals. Credit is available to farmers at current rates, but loan demand is slow.