February 9, 1972
According to reports from our directors, business economists, and bankers, the pace of economic activity in the District is showing some signs of recovery from the depressed level of activity last fall. Insured unemployment has declined, nonfarm employment has increased, steel orders have risen recently, and residential construction remains strong. Near-term prospects for a significant improvement in manufacturing employment are not particularly good: major firms are counting mainly on productivity gains to achieve higher output. The steel industry, which is beginning to experience a sharp recovery, is a case in point. Capital goods producers are experiencing some increase in activity, but as yet there are no signs of a broadly-based recovery in this industry. In the financial area, commercial bankers report that they are reluctant to reduce their rates on consumer time and savings deposits because of competition from savings and loans, which appear to be uniformly paying the maximum rates permitted.
The District's insured unemployment rate peaked last September and has been declining since then. The drop in January was almost one percentage point. Nonfarm payroll employment has recovered moderately from its cyclical trough of last October. Employment in the District was lower in October 1971 than during the trough of the nation's recession in November 1970. Prospects for a substantial gain in manufacturing employment during 1972 are not encouraging, however. Many of our industrial directors and a number of economists representing large manufacturing firms in the District reported that they plan to increase output this year with their existing labor force, or with only modest increases. In some instances, firms are planning employment reductions, even though output is expected to rise.
The steel industry, in particular, plans to achieve sharp increases in output and shipments through productivity gains. Economists from three major steel companies in the District expect this quarter's steel shipments to rise at least 25 percent from the depressed level of the fourth quarter of 1971. In recent weeks, there has been a pickup in steel orders from a number of industries, although orders for steel products from capital goods producers and from the auto industry remain disappointing. Termination of steel inventory liquidation, probably in February, is the main reason for the pickup in orders and shipments: consumption of steel products has been relatively unchanged over the last few months. The three steel economists report that their respective firms plan little increase in their work force, and that non-production workers (especially supervisory and management employees) are still being cut back. Despite the recent alignment of foreign currencies, none of the steel economists expects an appreciable improvement in the nation's foreign trade deficit in steel products, which rose to a record high in 1971. The reasons mentioned include nontariff barriers to steel trade, sluggish world demand for steel, and continuation of a sizeable cost-price differential vis-a-vis foreign steel producers.
Reports of capital goods producers are mixed. Directors and economists mentioned a recent improvement in some product lines and continued weakness, or a slowdown, in other lines. Our industrial directors say their firms plan little or no increase in capital expenditures during 1972, citing little need for additional productive capacity as the main reason. In addition, the directors were nearly unanimous in reporting that they expect to be able to finance the planned level of capital outlays from internal sources of funds and, therefore, have no plans for major external financing in 1972.
Commercial bank contacts in the District report that they would welcome a reduction in rates paid on consumer time and savings deposits, because of the unfavorable margin between deposit rates and the prime rate. However, competition from savings and loans, which are uniformly paying maximum permitted rates, prevents the banks from cutting their deposit rates. Several banks indicated that a further reduction in the prime rate would probably force them to cut their deposit rates, regardless of whether other institutions followed. Most banks maintained that they could not successfully cut deposit rates unless they were convinced that savings and loans would follow, but they see no reason to expect savings and loans to reduce deposit rates as long as mortgage rates remain at current levels.