Cleveland: April 1974

The economic situation in the District is still characterized by a mixture of soft spots coupled with sectors of strength. In the retail area, nonautomotive consumer spending has been soft and signs of a pickup are inconclusive. Steel and capital goods industries continue to operate at peak capacity, but weakening tendencies in automotive and other consumer goods persist. Widespread shortages and long delivery times continue to plague manufacturers, although the lifting of economic controls in certain industries has helped in some instances. The severely depressed housing sector shows a few signs of improvement. S&Ls are becoming increasingly concerned about the possibility of deposit losses.

The president of a major department store in Cleveland reported a pickup in consumer spending since mid-March, following sluggish sales in January and February. He noted across-the-board improvement and states that customers seem to be taking higher prices for apparel in stride. He expressed some concern about a trend toward accounts receivable delinquencies. This executive believes the worst of the retail trade slowdown is over, and he is more optimistic over the near-term sales outlook than he was earlier in the year. On the other hand, an economist with a major retail chain headquartered in the District sees no sign of a pickup in his firm's business. The real volume of their sales in the first quarter was up only 1 percent from a year ago. Further softening in sales of general merchandise, apparel, and furniture (GAF) may be in store as the rate of increase in these retail prices begins to accelerate. The firm's buyers are seeing increasing prices on GAF-line items as a result of higher prices for natural and synthetic fibers at the wholesale level.

Capital goods markets remain strong, but automotive and related industries continued to show signs of weakening through March. There are no indications of a let up in new orders for steel, printing and business equipment machinery, machine tools, and other metalworking machinery.

In recent months, about two-thirds of the purchasing agents in the Cleveland area have been reporting lead times of one year or more for capital equipment. (A year ago, only about one-fifth reported such lead times.)

Representatives from three major steel firms emphasize the tight supply situation for steel; demand continues to exceed productive capacity, and no let-up in demand is in prospect. All three steel firms are hampered by coal shortages. They have been trying, unsuccessfully so far, to build coal inventories to carry them through coal miners' two-week vacation this summer. Steel mill inventories cannot be reduced much further, which may cause steel users to start drawing upon their stocks to maintain output. One steel firm reports that auto companies still have not fully cut back their steel orders in line with current production and inventories.

Complaints of materials shortages and long delivery times continue to be widespread. Some of our industrialist directors, in fact, believe that the most serious economic problem, after inflation, is long delivery time. One director said his firm's lead time in obtaining castings and forging and cutting tools runs one year or more. Another director, in the machine tool business, notes that his firm will not be able to make delivery on any big order until early 1976. He mentioned that machine tool buyers are anxious to get their orders on the books, even without firm price commitments. This director also complained about the difficulty in obtaining castings (64 weeks lead time). A financial officer for a "stripper well" operation in Ohio reports serious problems in obtaining mechanical parts, which is holding down their output of natural gas. An official with a petrochemical firm reports that selected decontrol of products in that industry has tended to alleviate tight supplies for some items, although there are still severe shortages of some products, such as benzene. At least the incentive to export certain products has been lessened as domestic prices were decontrolled. One director also noted that it has been easier to obtain plastics recently.

In the District's housing sector, residential construction contracts have edged up moderately in the past few months, following a precipitous decline in 1973. Sources close to the industry are hesitant to conclude that a solid turnaround has occurred, in view of the high level of interest rates, the relatively mild winter, and seasonal adjustment problems. Banks and S&Ls seem to be cautious in making loan commitments because of uncertain prospects for deposit flows. One of the District's largest banks has raised the minimum down payment on home loans from one-fifth to
one-third and has shortened the maximum maturity from 25 to 20 years. An economist with a Federal Home Loan Bank said S&Ls experienced some deposit losses as a result of the recent 8 percent Treasury note offering. He reports that S&Ls are very concerned over possible disintermediation because of present money market rates. The S&Ls have made substantial withdrawals from their overnight accounts with the FHLB, and they are placing the funds in short-term money instruments.