Beige Book Report: Cleveland
January 15, 1975
Comments from our directors and other executives in the District reflect the deepening recession. Retail trade has been poor, and consumers are extremely pessimistic. Layoffs have been widespread and widely publicized. The underlying situation in the capital goods sector is deteriorating. The steel industry which has been a major source of strength, says a decline in demand is imminent.
Retailers in the Cleveland area generally experienced a late spurt in sales during the week just prior to Christmas (when the two daily newspapers resumed publication following a seven-week shutdown). Sales for the holiday season as a whole were considered poor. Some major department and discount stores reported the dollar volume of sales on a par with the previous year's sales. Retailers noted a change in buying patterns as consumers bought more functional gifts (e.g., pocket calculators) and did much more comparative shopping than usual. A director with a national retail concern said that both low-priced items and high-priced luxury goods (e.g., furs) sold well, while middle-priced items moved sluggishly. Their inventories are in good shape. This director expressed the view that consumer confidence is at the lowest level since the mid-1930's; he also believes that consumers' real purchasing power will continue to decline for three or four more quarters. Another director noted that gloom and pessimism among consumers in western Ohio is thick. Farm implement dealers are said to have heavy inventories of goods, although there are selective items in tight supply.
In the industrial sector, economic conditions are deteriorating rapidly. The December report of Cleveland purchasing agents shows the largest decline in new orders since December 1957, accelerated declines in employment and output, continued reduction of raw materials inventories, and the beginning of inventory liquidation of finished goods. On the encouraging side, purchasing agents reported a further slowing in the rate of inflation; many are paying lower prices. Early returns from our survey of manufacturers also reflect a deepening of recessionary forces, with declines in new orders and employment spreading among industries throughout the District. Layoffs have been pervasive, particularly among the auto companies and suppliers. (Widespread publicity given to the depressing situation in the auto industry may be contributing to adverse consumer psychology.) However, one of our directors in the automotive supply business stated that the effects of unemployment in the auto-related areas are cushioned because of supplemental unemployment benefits.
Sharp reductions in natural gas supplies to industrial firms throughout the District are contributing further to cutbacks in employment and output. Truck component manufacturers are cutting employment in response to an increasing number of cancellations of heavy truck orders. All the tire companies in the District have cut their work forces in an attempt to reduce heavy inventories of tires, estimated by one industry source to be seven months' supply. But sales are falling faster than output can be reduced. One major tire firm said their tire replacement sales in December were off 25 percent from the depressed year-earlier volume. Tire dealers say customers are postponing purchases and wearing tires down to the bare bones. Tire sales for trucks plummeted in December; the only strength remaining in tires stems from farm machinery and mining equipment producers. Despite weakness in the tire market, manufacturers are holding list prices, but consumers are negotiating with dealers at below list.
Two major steel firms say the recession thus far has had little impact on their order rate. The companies are shipping everything they can produce. However, a sharp drop in demand is expected this quarter. Raw steel output recently has been below capacity because of shortages of coke and coal, but deliveries are returning to normal. Steel output during 1975 is not expected to decline as much as shipments, because steel-mill inventories have been depleted and will be rebuilt. One industry source expects a surge in steel imports this year to a record level.
The machine tool industry continues to experience a weakening in demand, according to three large producers in the Cleveland area. New orders and backlogs are declining, while cancellations have risen sharply (largely from auto firms and suppliers to the auto industry). One producer reported that cancellations in December again exceeded orders (orders fell to two units while cancellations rose to 38, about equal to one month's production). Another firm, which does not rely heavily on the auto market, said it has a large enough machine-tool backlog for producers of agricultural and oil-drilling equipment to sustain operations through this year. But new orders have slowed; if there is no pickup soon, the firm will cut employment in 1976 (reflecting the long engineering lead time).
Virtually all of our industrialist directors report that their firms are experiencing a deterioration in business. This is being reflected in new orders, prices, and some easing in materials costs, but rising labor costs, coupled with poor productivity, is a major problem. Some directors expressed deep concern over the lack of capital formation (particularly among utilities) and the long-run inflationary implication of this situation. In general, the directors believe a fundamental economic correction is under way. In their view, anti-inflationary policies are wrong and the Fed should not move to provide massive stimulus to offset unemployment. The likely outcome of too stimulative a policy would be a rekindling of inflation.
In the financial sector, one of our Bank directors noted a sizable decline in consumer and business loans at the year-end. Another said that reports from their loan officers indicated that auto dealer customers had large loan losses in December.