November 12, 1975
Manufacturing activity in the Fourth District improved, except in steel where a sharp liquidation of steel inventories was underway. Retailers reported that consumers were still buying cautiously. Deposit inflows early in November were described as excellent by S&Ls contacted, and some S&Ls expressed concern that the supply of mortgage credit will be greater than demand. Forecasts submitted to this Bank by economists with firms in this district showed larger gains in real GNP in the second half than in the first half of 1976 and continued high rates of inflation throughout 1976.
Manufacturing activity in the district improved, and in some industries recovery was strong. Rubber and chemical industries rebounded strongly, while recovery in household appliances was slow. Tire production and sales also rebounded strongly from the first-quarter low. One producer reported that sales in the last quarter were 50 percent higher than in the first quarter. A petrochemical producer reported that orders for chemical products rose 15 to 25 percent since the trough earlier this year, and another expected that sales this quarter will exceed year-ago levels for the first time this year.
Production of major appliances was recovering slowly. One producer reported that output rose 6 percent in the last three months compared with the three preceding months, but further gains are heavily dependent upon a recovery in housing. Another appliance producer stated that production of most appliances was boosted about 20 percent in recent months because of the best volume of orders in two years.
Comments from capital goods producers suggested that some recovery is under way, but from the very low levels of last spring. A major machine tool builder who reported that backlogs were cut by one-half over the past year also said that while orders were rising for the past several months, it will take many months of further improvement just to get back to the recession lows of 1960-1961. An economist with a heavy-duty truck producer also reported that orders were picking up from the low of early last spring and that he expects it may not be until well into 1977 before orders will recover to the peak levels of 1973-1974. A director with an office equipment producer reported business was below expectations, following very good months in May and June.
Steel orders and production, which were boosted in September by hedge-buying, sagged since then with little indication that improvement may come before next quarter. An economist with a major steel producer said that orders for November were up a little from a depressed October and that December order books were weak. Another steel economist stated steel inventory liquidation was cutting demand about four million tons this quarter and another two million tons next quarter. Production was expected to rise 15 to 20 percent next quarter as inventory liquidation nears completion.
Both economists reported that recent steel price increases were holding, despite weak steel markets. One commented that customers were not fighting for price concessions typical of past recessions because of concern over inadequate steel capacity that can only be increased by higher steel prices.
There was still no indication of a sharp rebound in retail sales in this district. Automobile sales rose mildly since last spring, but the new 1976 models were not yet generating much consumer interest. In Cuyahoga County (Cleveland) a dealers association reported that sales in October—considered a weak month—rose 7 percent from a year earlier. A director with a bank in southwest Ohio reported that auto sales and financing picked up substantially in recent weeks, and another director reported some pressure from auto companies to extend loan maturities to 60 months.
An economist with a national department store headquartered in the district reported that soft goods sales were improving since May and that unit sales of hard goods this quarter were expected to exceed year-earlier sales for the first time this year. A financial officer with another department store reported consumers were still cautious. Business at that store was boosted last month by an anniversary sale, but sales were less than expected. A large producer of soaps and detergents reported improvement in sales since late last summer, and further but moderate gains were expected in the fourth quarter. Some upgrading in consumer purchases of food since August was noted by the president of a large national grocery chain, but he remarked that consumers were selective, cautious, and bargain-hunting.
Net deposits rebounded in October, and all savings and loan associations contacted reported that deposit inflows were excellent so far in November. Fears of disintermediation dissipated for the time being. An officer with one association reported a possible need to borrow in order to finance their aggressive lending policy, but two others reported liquidity was higher than desired. They commented that the supply of mortgage credit will probably exceed demand, at least until next spring. High mortgage rates have deterred some borrowers, according to two of our directors.
Twenty-one economists associated with firms in the Fourth District indicated that between the fourth quarter of 1975 and the fourth quarter of 1976 real GNP will increase about $45 billion (5.5 percent), industrial production will increase 8.5 percent, and the unemployment rate will ease from 8.2 to 7.5 percent. The group, which will meet at this Bank on November 14, expected the rate of inflation to rise by 5.9 percent in 1976. The vast majority of participants expected that gains in real GNP will be larger in the second half than in the first half of 1976.