Cleveland: October 1975

Recovery in manufacturing has been under way for several months but is still relatively slow. This bank's index of manufacturing activity shows a pickup since the March low that is somewhat slower than for a comparable period of recovery from the 1970 recession. Most of the strength in the present recovery in manufacturing is coming from nondurable goods producers. Tire production picked up sharply in response to a pickup in sales as well as smaller declines in inventories. Chemical and plastics firms, where inventories have been cut to desired levels, also report a gradual pickup in orders and output from early 1975 levels. A large supplier to the auto industry reports medium-sized trucks are beginning to sell well and that car frame orders have picked up. Steel orders have weakened sharply in recent weeks, and economists with three major producers expect little real improvement until early next year. Orders and shipments bulged in September to beat the October 1st price increases. One economist expects orders and production are at the low point of the year because inventories will have to be liquidated at the same high rate as last quarter. They expect that the October price increases will hold, despite a $30 to $50 per ton advantage foreign producers have over domestic prices. Orders from capital goods producers remain weak.

A recovery in capital goods typically lags an overall recovery and latest reports from capital goods firms in the district suggest no significant upturn until next year. A large machine tool builder notes that incoming orders have risen moderately from a trough in the first quarter of 1975, and he expects a 50 percent increase in new orders for 1976. A manufacturer of printing presses reports an increasing number of inquiries in recent weeks that he expects will result in a rising trend in new orders. Several tool and die producers note a small but definite upswing in orders since June, mainly from appliance and farm implement producers. A financial officer of a major firm that produces material handling equipment, auto parts, and trucks reports that its business low occurred early last spring. He does not expect much improvement in its automotive products until next year. A heavy duty truck producer reports production and orders have been climbing slowly from a low in March, while its construction machinery remains on a high plateau.

Consumers remain cautious, especially with respect to durable goods. According to a major chain headquartered in the district, real sales of soft goods have risen 4 to 5 percent since the spring of 1975. Sales of major appliances are still weak, although the decline from 1974 levels will narrow to 1 or 2 percent in the present quarter, and sales are expected to exceed year-earlier performance in the first quarter of 1976. Retail stocks of major appliances were brought into balance by midsummer, and retailers have begun to place orders for early 1976 sales. Markdowns over the next several months are unlikely to be as prevalent as they were during most of 1975. An executive with a major discount chain also reported that soft goods and home improvement products have picked up in recent months. An economist with a national food chain in the district noted customers are still very selective and cost conscious. Consumers will pay high prices for quality food and meat but are buying less.

Residential construction awards in the district rose at about the rate they rose in the United States in the first eight months of 1975, but mortgage lenders are apprehensive over prospects because of the net outflows of savings experienced by some savings and loans. Of the four S&Ls contacted, two reported net outflows of funds in September (both have had net gains so far in October), one reported net inflows, and one reported net inflows only because of successful promotional programs for opening of a branch. One of the largest S&Ls in the district reported net outflows of $1.0 million, in contrast to a $1.7 million increase in August and a recent high of $6.0 million in March. Liquidity in each of these associations has been cut from an 11 to 12.5 percent range during the summer to as low as 7.5 percent. These associations expect to take on new commitments cautiously, and generally expect that mortgage rates will rise another 1/4 point within the next few weeks. Bankers contacted also expect another rise in mortgage rates shortly after usury rate ceilings are raised. Several banks expect heavier mortgage loan demand in coming months as S&Ls cautiously take on new commitments, but these same bankers state that restricted portfolios may hold down their mortgage lending.