Beige Book Report: Cleveland
June 17, 1970
Economic conditions in this District appear to have stabilized at a depressed level. There is little evidence that a general upturn is in progress, although most of the strike-related distortion seems to have been eliminated. In retail stores consumers appear to have become more price conscious, but softness of demand is selective rather than general. The mood of our directors has recently shifted from cautious optimism to deep pessimism. They now believe that the current economic contraction will be more prolonged and deeper than most economists and public policy makers are currently expecting.
Recent terminations of strikes in the trucking and rubber industries resulted in a peaking in mid-May in the sharp rise in the District's insured unemployment rate. The rate has subsequently declined moderately although it remains roughly three times as large as the low point of last autumn. Our regular monthly survey of District manufacturers conducted during the first two weeks of June revealed further distortions caused by strikes and lockouts. Some of the major metal-producing and metal-working firms expect to be shipping in June partly from inventories that they were unable to ship in May. The survey accordingly showed an anticipated rebound in shipments and in employment during June, coupled with a sharp decline in inventories. Other anticipatory data for the current month do not suggest an immediate general recovery in the District's manufacturing sector.
Discussion with an economist from a major department store chain doing nationwide business revealed that consumers have sharply curtailed their purchases of high-price luxury items and certain appliances. On the other hand, bargain basement business is extremely good for many items such as ready-made apparel. Confirmation of the fact that sales of big-ticket items (refrigerators, televisions, and other durable goods) have suffered came from one of our directors who is on the board of a major department store in Cleveland. Most of our directors, especially those associated with large industrial firms and banks, are now extremely pessimistic. They believe that real economic activity will show little, if any, recovery in the second half of 1970, and they are deeply concerned by their inability to counter labor's monopoly position in collective bargaining negotiations. A number of directors expressed reservations about the Administration's economic policies although most of them endorsed our current monetary policy of moderate growth in money and bank credit. There was a general feeling that senior executives in a broad range of industries shared this pessimism and were as a result lowering their sights for capital spending and employment.
One director who was formerly quite optimistic emphasized concern about growing weakness in new orders in his industry: auto and aircraft components. Another director representing a very large office equipment manufacturing firm reported that many firms were limiting or reducing expenditures for computers and related equipment and that he expected further cutbacks over the months immediately ahead.
The following comments were received about the machine tool industry, which is important in this District. A director who is the president of a substantial machine tool manufacturing firm mentioned that, although his competitors are experiencing a slowdown in new orders for machine tools, his company's business continues to be good. The chairman of a very large machine tool company headquartered in the District informed this Bank that, in contrast to poor domestic business, his company's plants in European countries are booking some 30 percent more orders than a year ago. An economist from another large machine tool company said he believed there was definite evidence that business has bottomed out in his firm, although he saw no signs of an upturn and did not expect one until after Labor Day. The same economist, who is highly regarded in the profession, volunteered the information that there is "across-the-board weakness" in his firm's prices. For example, prices of metal cutting machine tools, for which there are no official Bureau of Labor Statistics price data, are declining. Similar price reductions not reflected in the BLS data were reported by a director currently engaged in consulting work in the aluminum industry.
Other comments of interest from the directors included mention of the fact that the supply situation in the coal industry is so tight that some utilities are currently importing coal at prices above domestic rates. A director from a large reserve city bank noted a recent sizable increase in business loans for current working capital—i.e., for "paying the bills". One director, the chairman of a large rubber company, reported a highly front-loaded labor compensation settlement for his firm. The contract calls for increases of 12 percent in the first year, 8 percent the second year, and 4 percent the third year.