February 11, 1976
Stimulus from consumer goods and a slowing in inventory liquidation continue to strengthen manufacturing activity in the Fourth District. Capital goods, while still weak, are picking up. Manufacturing employment has recovered very little from lows last spring. Residential and nonresidential construction activity sagged last quarter. Thrift institutions report excellent net deposit inflows in January and early February.
Producers and retailers of consumer goods are more optimistic about sales than they have been in recent months. A major appliance producer noted its orders of major appliances so far this year are at least 30 percent above a year ago and orders of housewares are at least 20 percent higher because of the surge in retail sales and bottoming out of inventory liquidation. The same factors account for the steady improvement in shipments and sales of passenger car tires, according to an economist from a major tire producer. Retailers report that January and February sales are about equal to the November and December 1975 average after allowance for the usual seasonal drop. One retailer reports that sales of major appliances last month were better than expected and that sustained improvement through 1976 is now likely. His management has become more optimistic because consumer sales have consistently exceeded expectations since last fall. Another retailer, although cautiously optimistic, pointed out that use of charge accounts in their branch stores located in depressed auto and steel centers has picked up in recent weeks, reversing several months of decline. A director noted advertising revenue from television and radio will be up sharply this quarter, and that consumer spending for recreation has picked up.
Financial officers and economists with several firms report that inventory reduction for their products has about run its course. One director noted that sales of fertilizers and herbicides are soaring. A major plastic producer reports that sales of polyvinyl chloride rebounded sharply in December and January and that rebuilding of stocks will boost output further in coming months. Also, retail and manufacturers' stocks of passenger tires decreased last quarter, although inventories in this industry are typically built in the final quarter of each year. A supplier of frames for trucks reports that the big inventory reduction of heavy duty trucks is about completed. Economists with major steel producers in the District expect reduction of steel inventories will be virtually completed by the end of this quarter.
Capital goods industries are still generally weak. Producers of farm machinery and mining equipment report their business has held up relatively well but is below peak levels in late 1974. Orders for metal cutting and for forming tools have risen for several months but from very depressed levels in early 1975. A producer of industrial equipment reports orders so far this year are 20 percent below a year ago and not much improvement is expected until the second half of 1976. A major supplier of frames to the automotive industry expects heavy duty truck sales to rise by 11 percent this year in contrast to a 27 percent drop in 1975. He reports orders from truck producers have begun to pick up slowly.
Steel economists in the District report that orders and shipments this quarter will be about 20 percent higher than depressed levels last quarter. Demand for tubing and drilling pipe used in the petroleum industries has softened, but demand for flat roll steel products from automotive and appliance producers has strengthened gradually. Orders from capital goods producers are not expected to pick up until the second half of this year.
Employment in the District has risen very little since last spring. Scattered cutbacks in manufacturing employment are still occurring in primary metals, electrical machinery, and machine tool industries. Employment in fabricated metals and rubber and plastic products has stabilized. A large machine tool builder reports that it may layoff 1,000 of its 6,000 workers by year-end if orders don't pick up strongly. Many manufacturers continue to stretch out the workweek and hold down additions to their work forces.
Contracts for both nonresidential and residential building activity fell sharply in the District in recent months. Nonresidential contracts last quarter followed the mild declining trend that began in early 1975. Residential contracts also slumped last quarter following a rebound in the second and third quarters of last year. Multi-family units remain depressed with little builder-developer interest because of existing high vacancies and relatively low rental rates. However, one director noted that sales of cabinet and counter-top materials rose to a record last month, and a major lumber and home-modernization retailer also noted sharp increases in sales of home building materials. Mortgage loan demand is seasonally weak in most centers of the District. Net savings inflows in January were described as excellent by several savings and loan executives. These sources describe savings inflows in February as strong despite small losses in deposits to the 8 percent Treasury note. Mortgage rates in Cleveland were recently reduced 1/4 percent to 8 1/2 percent for a 30-year, 70 percent loan.
Price developments are mixed. Weak markets for cutting tools and steel fasteners have prevented price increases for these products despite higher steel and wage costs. On the other hand, recent price increases for steel products are holding, and a major plastics producer reported price increases for polyvinyl chloride in January and February are holding because of the recent strong rebound in demand. Our latest survey of manufacturers shows some abatement in prices last month but more respondents in February than in January expect price increases.