Beige Book Report: Cleveland
November 11, 1970
The level of economic activity in the Fourth District declined in October, largely as a result of the auto strike and partly from cutbacks by some of the area's major capital goods producers. Manufacturing activity fell in September, and our most recent survey of District manufacturers indicates an acceleration of the decline in October. Steel production dropped 9 percent in October to a level nearly 17 percent below a year ago. Secondary effects of the General Motors strike were also reflected in the continued increase in insured unemployment in the District. (The insured unemployment rate in the Fourth District rose from 2.3 percent in August to 3.3 percent in October.)
Extended discussions were held with representatives of two important capital goods producers, two large consumer oriented firms, and four leading banks in the District in an attempt to provide some additional insight into the underlying trends in the economy beyond the obviously dominant effects of the auto strike. (General Motors has large plants in seven of the District's ten major metropolitan areas.) One director, associated with a large computer and office equipment manufacturer, reported that his firm is continuing to experience considerable resistance to capital spending by regular customers, with uncertainty about future business developments mentioned frequently as the reason for the delay. Computer sales have been particularly affected; the firm's new order pattern is far below projections made at the beginning of 1970. The director also reported that his own firm is keeping tight control on inventory, and all deferrable capital projects have been halted.
The second capital goods producer contacted is the largest machine tool producer in the U. S. with annual sales of approximately $300 million. The firm's financial representative reported a definite softening trend in new orders for machine tools throughout 1970. The auto strike, in their view, is simply an added factor contributing to an otherwise sluggish business situation. The firm's internal projections call for gradual recovery in machine tool orders in 1971. One major precondition for a return to a full employment growth path, in this company's view, is a change in tax laws to promote capital goods expenditures.
At the consumer level, an economist for a large chain of department stores with the corporate head office in the Fourth District reported that the firm's sales have been sluggish since the beginning of the third quarter. Sales of all types of goods have been slow, and durables have been particularly weak. The auto strike has, of course, had pronounced effects on retail sales in certain areas where large General Motors production facilities are located, although sales have held up better in other areas. In Columbus, for example, sales have been level through October. The firm has reduced employment by 6.5percent since the beginning of 1970, in response to the sluggish sales, but labor costs are still rising. The firm's forecast calls for some increase in sales when the auto strike is settled and as expected steel inventory buildup begins; after that, a nearly flat trend is expected through the remainder of 1971.
An economist for a second consumer-oriented manufacturer of household food and nonfood products reported that their business has been unaffected by the auto strike. For example, sales in the third quarter of 1970 were 9 percent above the year-earlier level, and third-quarter earnings were up 13 percent from the 1969 level. The economist indicated that inventory levels are being watched carefully, but capital spending plans are being changed drastically: investment plans are geared to longer-term considerations.
The firm's internal forecast includes a little less strength in the consumer sector than the "conventional" outlook. Their view is that a real consumer buying spree—especially in the area of durable goods—will not materialize until there is more concrete evidence that inflation is under control.
On the financial side, most District banks contacted indicated that they are using CD funds to repay Eurodollar borrowings because of the rate differential. Two of the largest banks reported that loan demand is weak, while one reported it is still strong. As a result of the weak business loan situation, one of the banks has recently reconsidered its municipal bond investment policy and is on the verge of a sizable build-up in municipal holdings.