Beige Book Report: Cleveland
October 14, 1970
The direct and indirect effects of the auto strike, coupled with weakness in the capital goods sector, are dampening economic activity in the Fourth District. On the other hand, shortages of freight cars and coal are providing support to some manufacturing and mining sections of the District. Barring a prolonged auto strike, the members of the Fourth District business economists round table expect continued real economic growth in the current quarter and throughout 1971.
At a joint Board meeting held in Erie, Pennsylvania on October 8, several of our directors commented on repercussions of the auto strike on their companies or in their areas, and also on the continued weakness in capital goods. One director representing a large paint, glass and chemical concern reported recent strength in residential construction materials and industrial chemicals, although production of glass and coating materials used for autos has been adversely affected by the GM strike. Another director, representing a medium-sized packaging firm, also noted a recent upturn in activity in glassware and other packaging products, but suggested that part of the improvement may be artificial since buyers are anticipating a possible strike in that industry. A third director, from a large capital goods producing firm, reported that demand for most of his firm's industrial goods is sluggish, with the exception of production of parts for large trucks and railroad cars, where demand remains strong. Finally a director from a small bank in eastern Kentucky noted that the low-sulphur coal shortage has helped to restore near-boom conditions in that area. Mines that were idle for many years have been reopened and employment and income have been bolstered. However, coal supplies are beginning to catch up with demand, and as a result, coal prices declined in early October.
About 40 business economists attended the regular meeting of the Fourth District round table held at the Cleveland bank on October 2. Most of the economists submitting forecasts assumed that the auto strike would last approximately six weeks and accordingly predicted a continued improvement in the real growth rate during the current quarter. The median forecast of the group also projected a 3.0 percent gain in real GNP and a 3.7 percent increase in the price deflator for 1971. Assistant Secretary of Commerce, Harold Passer, who attended the meeting, noted that fourth quarter current dollar GNP could be expected to remain unchanged from the third quarter level if the auto strike were prolonged and lasted for the entire fourth quarter.
One economist, representing an auto and truck parts company, discussed his projections that linked the recovery in output and sales of new cars to the length of the strike. The results indicated that the adverse income effect on new car sales in 1971 will depend to a considerable extent on the length of time that the auto workers are on strike as well as on the length of time of secondary unemployment of other workers.
Another economist, associated with a machine tool company, reported that new orders for machine tools recently have been at the lowest level since 1962, and that recovery in the industry is not expected to begin over the foreseeable future. This economist's analysis indicates that the manufacturing sector is at least 12 to 18 months ahead of its need for installations of new capacity.
The consensus of the business economists was that, with the capital goods sector weakening, the strength of business activity in 1971 would depend largely on a continuation of the current uptrend in residential construction, and stronger gains in consumer and government spending, especially at the state and local levels. Inventory building during the first half of 1971, particularly by steel users in anticipation of a possible steel strike next year, was also expected to provide some thrust to the recovery (and also to obscure underlying trends in the economy).