June 13, 1973
Business activity in the District is still strong, although there are a few scattered signs of slowing in the pace of the expansion. Some softening is detected in retail trade, residential construction is declining, gains in employment have slowed, and manufacturers are experiencing some difficulties in increasing output.
The chief executive officer of a major department store in Cleveland informed us that retail sales were not as strong in May as in previous months of the year. Sales of home furnishings and soft goods remain at a high level, but the appliance business has slowed. There is no evidence of consumer resistance to higher prices by way of a downgrading in purchases; that is, the sales volume of color TV sets remains at a high level and there has been no unusual pickup in budget department sales. There is no sign of an increase in payment delinquencies; in fact, collections were up in May, probably because of tax refunds. With respect to prospects in the period ahead, the department store official expects that each succeeding quarter will probably show reduced rates of growth, and the fourth quarter may be a difficult one for retail sales.
An economist from one of the nation's largest department store chains also expects consumer spending to slow sharply by late this year or early next year—mainly because of the extraordinary pace of debt accumulation and the effects of the recent surge in consumer prices. Both consumer expenditures and borrowings have been growing faster than recent historical averages. The economist reports no evidence of consumer downgrading or rising delinquencies.
Residential construction contracts in the District seem to have peaked in January of this year; since then, the decline has been more pronounced in the District than in the nation. Nonresidential construction, on the other hand, is on a strong upward trend.
Overall business conditions in the District's manufacturing sector remain strong, although there have been a growing number of reports in recent months indicating problems of physical capacity limitations, material shortages, lengthening delivery times, and widespread price increases. Early returns from our monthly survey of manufacturers reveal a moderate decline in the proportion of firms reporting gains in new orders during May. The proportion of firms reporting higher shipments has also slowed recently. Some manufacturers are finding it more difficult to increase output because of material shortages; delivery time continues to lengthen for the majority of firms. The diffusion index for prices paid by District manufacturers, which had hovered around the 60 percent level during most of Phase II, moved to the 80 percent level between February and April, and jumped to 85 percent in May—the highest figure in the nine-year history of our survey. In recent months, gains in manufacturing employment have slowed markedly compared with the increases that occurred late last year and early this year.
Remarks from some of our industrial Directors tend to support the general conclusions of the manufacturers' survey. Three of our industrial Directors (industries: consumer goods, producers durable goods and office equipment) noted that new orders had leveled off in the last month in contrast to the continuous monthly increases recorded earlier in 1973. All three also reported some problems in increasing output because of capacity limitations. The Director of the office equipment industry said that they had experienced a sharp backup in shipment schedules because of the high level of orders and the need to hire and train additional employees; this situation has been complicated by the introduction of a new line of their basic equipment, however. The Director in the producers durables industry reported continued problems in finding high-quality skilled and semi-skilled labor.
Steel firms mentioned that new orders were down in May, reflecting order limitations imposed by the mills rather than any decline in underlying demand. Steel demand is said to be at peak and is expected
to stay high for the rest of the year. One steel firm notes that further increases in output are impossible due to capacity constraints. Comments from our Directors in other industries indicate they, too, are operating at capacity. Capital spending to expand capacity in their firms is underway, with no plans for cutting back in 1974 as long as new orders and profits warrant such expenditures.