Beige Book Report: Cleveland
March 12, 1975
District economic activity continues to decline generally, although new car sales have been exceptionally strong. Firms report considerable further slowing in prices they pay for materials and supplies. Few companies see any near-term improvement in business. Many industries expect further weakness in the months ahead, although there are scattered reports of bottoming-out for a limited number of products. Numerous layoffs have been reported thus far in March. Nonresidential construction is declining, and residential construction remains severely depressed.
New car sales rebounded in February much more in the Cleveland area than in the nation. Compared with year-ago figures, sales in Cleveland were down 22 percent in January, but up 13 percent in February. This reflected the effects of not only the manufacturers' rebates but also bonuses offered by a number of firms in the Cleveland-Akron area to employees who purchased a new car. These included a steel company, two advertising agencies, an auto producer, several large banks, a radio station, two major tire companies and various auto suppliers. In addition, some banks helped promote auto sales by advertising reduced interest rates on auto loans. Many firms will continue the rebates until late spring or early summer. Cleveland auto dealers report that sales have slowed thus far in March; but their inventories are down, and they are placing orders for April delivery.
Early returns from our survey of manufacturers indicate additional widespread weakening in manufacturing activity during February. New orders, shipments, backlogs, inventories, employment, and hours all continued to decline sharply. In addition, price pressures continue to ease. The proportion of firms reporting price decreases has risen significantly in recent months and is now roughly equal to the proportion paying higher prices. On balance, no improvement in general business conditions is expected this month.
Several industrialists believe the worst of the decline in a few product lines may be over. One chemical producer said its business has been sliding, but the decline in pigments (for industrial, commercial, and household appliance uses) appears to have bottomed out. Another chemicals firm said its inventory excesses are rapidly dwindling, and it expects to increase production in March. A machine tool executive is hopeful that signs of a bottoming-out in its declining order bookings are appearing (cancellations exceeded new orders by only one machine in February, compared with a significant volume of cancellations in excess of new orders in the previous three months).
Other firms indicate further adverse developments may be in store. A major tire producer said the tire replacement business remains weak. Tire inventories held by the industry are massive and still rising. More production cutbacks and layoffs will be necessary. Shipments of household appliances are described as "miserable". A large appliance firm said it will take three to five months to bring inventories into balance. Sales are not expected to improve until midyear, assuming tax rebates become effective in late spring. Several large glass companies laid off a substantial number of additional workers in late February and early March. A major truck producer in Cleveland, which cut output one third last month, is closing its Cleveland plant for two weeks in March and three weeks in April.
In the steel industry, new orders are tapering off slowly. The decline in steel demand thus far has centered mainly in stainless and specialty steels and in carbon steel sheet and strip. The result has been cutbacks and fairly substantial layoffs at a number of steel plants in the District. Further curtailments and layoffs are likely over the next two months unless there is an unexpected quick improvement in steel demand. Much of the raw steel currently being produced is going into mill inventories to rebuild stocks run down last year when demand was extraordinarily strong.
An economist with a major steel company said he was invited to visit with purchasing agents of three auto producers in recent weeks. The auto firms were looking for price cuts and were wondering who was buying all the steel they were not taking. (Some of the sheet metal that would normally be purchased by the auto companies is being used for storage tanks, which are in strong demand.) The economist noted that the auto firms are torn between wanting lower steel prices and wanting the steel industry to generate profits sufficient to expand capacity so as to avoid future bottlenecks in supply. The auto companies still have large inventories of steel even though they have sold some flat-rolled steel that has age hardened. They are not expected to be ordering steel until the model changeover this summer.
In the construction sector, nonresidential building contracts have been declining sharply since the peak reached in the third quarter of last year. Residential construction contracts turned up moderately in January but are still at a severely depressed level. The dollar value of residential contracts is down about 50 percent from the peak of early 1973. Some local savings and loan associations report continued net gains in deposits in February and early March. Mortgage rates continue to slide, but there has been no recent pickup in loans.