May 17, 1972
District manufacturers, our industrial directors, and economists attending a recent meeting of the Fourth District Roundtable report continued improvements in business conditions, although there were indications of some recent slowing in steel and retail sales. Residential construction in the District has weakened recently. Business economists in the District are now just a shade less optimistic with regard to the business outlook than they were at the beginning of the year.
Our latest survey of District manufacturers reveals a slight moderation in the rate of increase in new orders and shipments during April (reflecting what is thought to be a temporary lull in steel orders, following a surge earlier this year). Moderating tendencies are expected to continue during May. Manufacturers still seem reluctant to accumulate inventories, according to our survey, but they have been increasing employment moderately and lengthening the workweek.
Our industrial directors report that consumer-related business has been strong, particularly those portions reflecting the housing and automotive markets. Some hesitation in packaging, however, was noted. Directors also mentioned improvement in cutting tools and defense business.
Residential construction contracts in the District leveled off in December, declined moderately in January and February, and dropped sharply in March (30 percent below their November 1971 peak).
On May 12, about 40 business economists attended the regular Roundtable meeting held at the Cleveland Bank. The median forecast of the group called for a $98 billion gain in this year's GNP, with real growth at 5.5 percent, and the price deflator rising 3.7 percent. There was widespread agreement that it would be difficult to reduce the rate of inflation to below 3.5 percent for any sustained period during the next year or so. (Estimates of the Federal deficit for fiscal year 1973 in the $35 to $40 billion range were viewed as an adverse factor in the price situation.) Unemployment was expected to average 5.6 percent during 1972, with the rate declining to 5.3 percent by the fourth quarter.
Professor John Kendrick, a guest speaker at the meeting, forecast a 3.5 percent, or better, gain in productivity in the private economy during 1972, and a tapering in the rise for 1973. He indicated that as more companies reach their profit ceilings, there would be less incentive to hold down costs; as a result, productivity would be adversely affected. Over the longer run, Kendrick predicted a lower rate of productivity growth (conventionally measured) in the 70's than in the 60's-reflecting a significantly higher share of capital spending devoted to ecological controls.
Business economists whose firms are in the consumer market expressed some concern over recent weakness in retail sales of general merchandise, apparel, and furniture. It was thought that these sales may be suffering in part because of consumers' adverse reactions to rising prices of food and utilities. There was also concern that recent developments in Indochina may be a disruptive influence on consumer spending. Economists associated with the automobile industry said consumers have increased their new car purchases in response to price reductions and income changes in line with past experience. The economists forecast domestic new car sales of 9 million units in 1972, and imports of 1.6 million units. For the consumer sector as a whole, the business economists scaled down their forecast of the 1972 gain in PCE (from $57 billion at the previous meeting in January to $52 billion currently).
The business economists also reduced their forecast of inventory investment for 1972, and their forecast of net exports. No further gain in residential construction outlays for the balance of the year was expected. On the other hand, their forecasts for government expenditures and business fixed investment are now higher than they were in January. With respect to capital spending, there was a feeling that we need more confirmation by way of new orders and appropriations than has recently been the case to expect plant and equipment outlays to exceed a gain of 9 percent for the year. (In recent months, surveys have projected gains of 10-14 percent.)
Steel industry economists noted a lull in orders from capital goods users recently, and the steel industry is expected to use less steel this year in its capital spending. Overall, customer stocks of steel are beginning to rise, following liquidation through the first quarter. The steel industry is continuing to recall its furloughed workers, but because of the stretched out "call back" period, it will be some time before employment recovers to the level prior to last year's liquidation phase. The recent steel import quota arrangements have improved the outlook for the steel industry.