Beige Book Report: Cleveland
December 8, 1971
Sluggish conditions in the steel industry and labor-management disputes are among the major factors impeding economic recovery in the District. High imports and low domestic consumption are prolonging the steel inventory liquidation. Several of our directors are concerned about international financial uncertainties, and domestic uncertainties regarding congressional legislation and Phase II. Finally, many District bankers report recent high rates of consumer-type savings inflows, but general reluctance to cut interest rates on those savings.
The depressed state of the steel industry and
labor-management
disputes (coal mining, office machinery, and glass, among others)
were largely responsible for District nonfarm payroll employment
dropping to a new cyclical low in October, following an upturn in
September. Declines occurred in both the manufacturing and
nonmanufacturing sectors. Our electric power index of manufacturing
output, which had started to recover in September, also declined
sharply in October. The index has declined in four out of the past
six months and is now about 5 per cent below the level of last
spring. Even after allowance for strikes, the pace of recovery in
the District remains sluggish. As of October, total nonfarm payroll
employment and manufacturing employment were both below the levels
recorded at the trough of the past recession. In mid-November, the
District's insured unemployment rate was still high by historical
standards (more than three times the pre-recession level). With
further layoffs in the steel industry reported after mid-November,
especially in the Pittsburgh-Wheeling-Steubenville area, overall
unemployment is likely to remain at a high level through yearend.
Economists from three major steel companies informed us that the inventory liquidation phase is being prolonged, partly because of a high rate of steel imports since the steel settlement, and also because of a lower-than-expected level of steel consumption in the current quarter. All the steel economists said orders are gradually improving, but the auto industry is still not placing normal orders. Imports are expected to exceed 17 million tons this year, compared with the 15.4 million ton voluntary quota. (Countries that did not agree to the quota, such as Canada, Sweden, and Great Britain, are partly responsible for the excess of steel imports; some EEC countries have also overshipped; but Japan is still within her quota.) The steel economists expressed the opinion that general confusion about prices has resulted in very little price-hedge buying of steel.
The reports of some of our directors also indicate that the current economic situation is sluggish and that the outlook—to the extent one can compensate for uncertainties—is somewhat brighter. The directors believe that the new economic policy has been deflationary thus far. Uncertainties about congressional legislation and implementation of Phase II have resulted in a postponement of decisions regarding capital spending projects. Uncertainties with respect to foreign exchange rates, according to one director, are seriously hampering his firm's export orders. Another director, however, reported that his company recently received a $300 million contract to provide nuclear reactors for Spain. Much of the work, including designing, engineering, and manufacturing, will be done in the Pittsburgh area over the next five years.
Bankers report renewed growth of consumer time and savings deposits since October, which they attribute to the lower level of competing market interest rates. However, there appears to be little likelihood of a cut in bank interest rates on consumer time instruments. (One banking director and several officers of smaller banks and savings and loan associations noted that the savings inflow is too heavy to justify current interest rates paid, but no bank has been willing to take the lead in adjusting rates downward.) No change in business loan demand has been detected. Real estate, consumer installment, and commercial and industrial loans to local customers are all growing rapidly; but business loans to large corporate customers, especially those with access to the commercial paper market, continue at their recent slow pace.