November 10, 1981
Summary
Economists and officials in the Fourth District see signs
that weakness in economic activity is spreading, and most
respondents have lowered their forecasts of real GNP growth to show
sizable decline for the fourth quarter. Despite reports of spot
weaknesses in capital spending, orders are still relatively strong.
However, steel orders continue to be weak, apparently because
inventories are being liquidated. Consumer spending in the District
has deteriorated in recent months, and several respondents are
concerned that pre-Christmas inventories are too high. Commercial
bank lending is relatively strong for C&I loans, but is virtually
flat for consumer loans. S&Ls have attracted a limited amount of new
funds with the All-Savers certificate, but continue to experience
weak or negative net savings flows.
Outlook
Economists who attended the Fourth District Round Table on
October 30 at this bank scaled down their forecasts of economic
activity for the fourth quarter of 1981 and the first quarter of
1982 from their June forecasts. The median of 31 forecasts shows
only a 0.5% annual rate of decline in real GNP this quarter.
However, nearly a third of the group indicated that the decline is
more likely to be between 3 percent to 5 percent (a.r.), because
signs of weakness are spreading and deepening. They expect some
downward adjustment in inventory investment, and continued (though
less severe) declines in residential construction and net exports
this quarter from last. All of the forecasters expect revival of
growth in real GNP by next spring; the median forecast shows annual
rates of increase of 4.5 percent to 5 percent in the second half of
1982, in response to further moderation in inflation and the second
stage of personal income-tax cuts. From the fourth quarter of 1981
to the fourth quarter of 1982, the median forecast shows an increase
in real GNP of 4.0 percent and an increase in the GNP implicit-price
deflator of 7.6 percent. About two-thirds of the forecasters now
expect money stock (M-1B) growth in 1981 will remain below the
target range, and most have scaled upward their estimates of the
Federal deficit for FY 1982 by $10 to $20 billion from their June
range of $45 billion to $55 billion.
Capital Goods
Capital-goods producers report mixed conditions, with
no recent significant decline for some goods but depressed business
for others. Capital spending plans are still near their planned
levels of a year-ago, according to several respondents, despite high
interest rates and a weakening economy. A capital-goods producer
states that heavy-duty trucks and farm equipment remain depressed.
However, energy and electronics industries are expected to continue
to be strong, while nonresidential construction is holding up
reasonably well. Capital-goods orders, according to an economist for
a major capital-goods manufacturer, are still strong, except in
railroad-related equipment, auto-related metal cutting, and
construction equipment. However, a small producer of industrial lift
trucks reports that incoming orders are the lowest in the company's
history.
Steel
Current operating rates in steel average less than 70 percent
of capacity, according to an industry economist, with order intake
rates equivalent to slightly above half of operating capacity. Steel
consumers are attempting to liquidate inventories at a time when
imports remain relatively high. The high level of orders last spring
and summer was supported by a 3 million ton inventory buildup and
strong demands from the oil industry. However, steel consumers are
expected to liquidate 1.5-2.0 million tons of inventory this
quarter. Some forecasts of domestic steel consumption and production
in 1982 show increases of a few percent from 1981, but not until
after the liquidation phase is completed by next spring.
Consumer Goods
Round Table participants expect that consumer
spending will weaken again in the fourth quarter of 1981, following
the spurt last quarter. Some see signs that the weakness in consumer
spending has spread into major household goods and even into some
consumer nondurable goods. Weakness in auto sales has been
complicated by the lack of new models this season, according to an
auto industry economist. He also pointed out that deterioration in
consumer balance sheets and a weak economy for another six months
will hinder a rebound in new car sales. He asserted that high
interest rates have only cost the industry about half a million
sales during 1981, but that the main cause of weakness has been
inflation. A local auto dealer reports sales down 20 percent over
year-ago levels and down 65 percent from 1978 levels. District
retail sales have deteriorated somewhat in September and October,
according to a bank economist. Merchants are anticipating a pick-up
in sales as the Christmas shopping season approaches, but sizable
inventories may require considerable discounting before the end of
the year. A producer of consumer-durable goods reports that order
cancellations are occurring, resulting in substantial layoffs in
some appliances. Another economist pointed out that the decline in
real nondurable goods, excluding gasoline sales, coupled with a
substantial drop in corrugated box shipments in the last two months,
suggests weakness in the economy is spreading and that an upper
turning point in the business cycle may have occurred in August or
September.
Banking
Business lending activity in the District continues to be
supported in part by inventory financing, rather than merger-related
activity. Bank loans are increasingly important to both large and
small companies, according to a bank economist, because trade credit
is scarce. Large and small companies have slowed payments, forcing
some to borrow because of delinquent payments. A banker is concerned
that firms may be borrowing to pay interest on previous loans.
Lending activity, however, is expected to fall in the fourth quarter
of 1981, as the economy weakens and businesses reduce year-end
inventories. Consumer lending has been flat for the last three
months, according to an area banker, and remains well below the peak
of March 1980. A rise in delinquent rates on loans is causing some
concern.
Savings Flows
The All-Savers certificate, intended to ease both
liquidity and earnings pressures, has not worked as well as
expected. A large S&L in the District reports another substantial
quarterly loss in the third quarter, associated with a further rise
in costs and a sharp decline in mortgage loans (55 percent below a
year earlier). Nevertheless, the S&L reports that revenues exceeded
year-ago levels and the All-Savers certificate experienced strong
growth in early October. A bank economist reports some shift to All-Savers from money-market certificates, but cautions that much of the
All-Savers growth is derived from passbook savings accounts. An
economist for a FHLB in the District notes that growth of All-Savers
dropped 80 percent from the first ten-day period to the second ten-day period in October. Retail repos, which have been tied to the
All-Savers, were negligible in October. All-Savers is not having
much adverse effect on money-market funds, according to a bank
economist, and S&Ls are unlikely to achieve sizable net savings
inflows until an instrument is created to compete with money-market
funds.