Beige Book Report: Cleveland
September 9, 1970
Signs of recovery in the District's economy are becoming more numerous, although there is still weakness in the capital goods area, especially machine tools. Our directors remain concerned about inflation and hope that the Fed will permit only moderate growth in the money and credit aggregates over the near term.
Nonfarm payroll employment in the District rose in July, following declines in the three preceding months. The regional index of manufacturing output, which began to recover in June, rose sharply in July, largely due to gains in rubber, machinery, and primary and fabricated metals. Steel production, although stronger in the District than in the nation, appears to have risen less than seasonally in August. During the latter half of August, the District's insured unemployment rate, on a seasonally adjusted basis, was down significantly (by 0.4 percent) from the July average. Both residential and nonresidential construction contracts seem to be in recovery phases.
At a meeting of our Cincinnati branch directors on September 8, a director associated with a large electrical firm reported improvements in the firm's consumer-related products, but continued sluggishness in sales to heavy industry. The appliance industry is picking up slowly, but there has been considerable price cutting to reduce excessive inventories at both the manufacturing and retail levels. Bank directors report a considerable improvement in liquidity in recent weeks.
The directors of our Pittsburgh branch, at a meeting held in late August, expressed strong feelings that controlling inflation should have top priority for the Federal Reserve System in determining the proper course of monetary policy. One director, a professional economist, views the economy as being in "an underemployment equilibrium"—a situation that he views as desirable to correct inflation. An industrialist director placed great importance on improving productivity in both the manufacturing and services industries. He is concerned that the growing importance of services in the economy may build inefficiencies into the system unless strenuous efforts are made to improve productivity in that area. Another director expressed a strongly held view that Treasury projections of receipts from income taxes in fiscal 1971 are unrealistic, particularly corporate taxes, which he believes are grossly, overestimated by not taking account of large increases in pre-tax costs in recent years.
Last month, a major machine tool company in Cleveland sparked a wave of price reductions in the metal cutting section of the machine tool industry. The price reductions took the form of substantial increases in official discounts by manufacturers to their distributors, through whom most of the industry's products are sold. The spokesman for the company stated that the metalworking machinery industry will continue for many months to feel the impact of cutbacks in defense industries, particularly aircraft, which is an important user of machine tools. Commercial aircraft production, which is also weakening, will have a similar effect. These and other weaknesses in the demand for metalworking machinery stemming from capital goods producers are not expected to be offset in the near term by the expected recovery in the consumer durable goods sector.