Beige Book Report: Cleveland
January 12, 1971
There has been a rebound in economic activity in the Fourth District as a result of the settlement of the auto strike and an improvement in steel orders; however, there is evidence of persistent underlying weakness reflecting the slowdown in capital goods. The machine tool industry remains in the doldrums, and non-residential building awards continue their sharp decline. The recent recovery in residential construction, however, is continuing. One of our directors expressed the need for policy measures designed to stimulate capital investment and productivity gains.
Purchasing agents in the northeastern Ohio area reported a further deterioration in new orders, production, employment, and inventories in December. There were small increases in the per cent of purchasing agents reporting gains in new orders and production last month, but much larger increases in the proportion of firms showing a decline in both those categories. Significantly, December was the first month since late 1962 in which the per cent of purchasing agents in northeastern Ohio reporting price declines outnumbered the per cent reporting increases.
Economists from three major steel companies reported that new orders have increased sharply since mid-December. The orders, however, generally call for delivery in February or later. Extended strikes at three General Motors plants have slowed steel shipments to GM; some of the steel orders placed last fall by GM will not be delivered until February. All of the steel industry economists felt that the big pickup in shipments would begin about March and that the second quarter would be much stronger than the first. They also commented that the probability of a steel strike occurring this year is the highest it has been since 1959.
Among our directors, one who is associated with a larger rubber firm indicated that the firm's 1971 capital budget contains authorized plant and equipment appropriations equal to 60 per cent of the level of actual expenditures in 1970. He noted that an investment tax credit would have an immediate effect on the firm's cash flow, but would not have a drastic impact on the actual level of capital outlays in 1971. In all likelihood, he added, the major effect of such a program would be to cause the firm to relax slightly the degree of austerity built into its capital budget. The firm would not undertake additional large capital spending programs, however. This director indicated that he is moderately optimistic about the business outlook for 1971, but he did note a recent near-collapse in demand for the firm's nontire products, particularly chemicals and industrial materials. He indicated that the firm is uncertain whether this is a temporary phenomenon or a reflection of a continued downward trend in general business activity.
A second director, who is a management consultant for firms in several industries, reported that the senior management in many of the firms he is associated with remain pessimistic about a substantial recovery in business activity in 1971. This director strongly urges that some form of accelerated depreciation is necessary to stimulate capital spending. In particular, he suggested that accelerated depreciation schedules be instituted for capital expenditures that would result in an immediate improvement in productivity and lead to further cost reductions.
On the retail side, the economist for a large department store chain reported that the firm's Christmas sales volume was 5 to 6 per cent above the 1969 level and nearly 3 per cent more than the firm's internal projections. He also noted that advertising and promotion outlays were increased substantially during the Christmas season. Because of an unchanged number of employees, the improvement in the volume of sales in the fourth quarter should protect the firm's profit margins.