Beige Book Report: Cleveland
April 14, 1976
Directors, businessmen and economists in the Fourth District are increasingly optimistic about the recovery and have been raising their estimates of output and sales for 1976. Retailers and producers of durable goods are encouraged by a surge in sales and profits in their industries. Capital goods and steel, among the lagging sectors in the District, show signs of reviving, and contacts in those industries report orders and shipments have strengthened in recent weeks. Liquidity of several retailers, manufacturers and thrift institutions has improved sharply in recent quarters.
Retailers and producers of consumer goods are especially encouraged by the sustained rise in consumer spending for automobiles and household goods as well as soft goods. A director with a consumer household products firm reported that sales have been rising faster than expected, and another director indicated that strong demand for materials for home improvement and repairs boosted earnings to their highest level since 1954. Several banker-directors reported installment loan demand is strong, especially for the purchase of large cars. A financial officer for a major discount store chain reported sales and profits for each month this year were well above levels a year earlier. An economist with a soaps and detergents firm noted a recent pickup in several consumer products that had been lagging the recovery in consumer spending. Reports from auto dealers in the Youngstown area, which has one of the highest employment rates in the District, indicate March sales of new cars rose faster there than in the nation, in contrast to a year-over-year decline in both January and February.
Despite widespread strength in consumer goods sales, inventories apparently will be kept under tight control. A retailer noted their inventories are adequate but not much higher than late last year. One producer, while reporting inventories of some product lines are probably lean, is apparently willing to err on the conservative side. In contrast, inventory demand for automotive tires has ballooned, partly because stocks are considered too low relative to sales and partly as a hedge against a strike in the rubber industry.
Capital goods producers are also more encouraged over prospects for recovery in their industry because of better than expected incoming orders. A director, with an electric typewriter firm, reported that orders increased more than expected last month and that their new copiers introduced recently have been well received by the trade. An electronics equipment and printing press producer reported that incoming orders during the first quarter of 1976 were the highest on record and that orders for all types of printing equipment are now recovering. Orders last quarter were 50 percent ahead of shipments, and will require a boost in output as well as employment in the months ahead. Orders for bearings turned up from a broad range of customers. An economist, usually one of the most bearish in capital goods, recently scaled upward his estimates of real capital spending from a decline to virtually no change from last year. Upward revision of estimates for shipments of excavating machinery and cranes, from an expected 15 percent pickup last fall to the latest 20-25 percent, was reported by another capital goods producer in the District. This expected improvement reflects more rapid completion of liquidation of excavators at the distributor level as well as higher spending for construction by some State and local governments. Machine tool orders continue to climb, although the year-old rebound has recovered only about half of the drop in orders that occurred during 1975.
Steel inventory liquidation has been virtually completed, and little if any change is expected this quarter. Inventories of flat rolled products are likely to be built and offset some further liquidation of steel held by firms in capital goods industries. An economist with a major steel company revised upward his 1976 forecast for steel shipments and production because auto and truck production is running stronger than their earlier expectations. Another firm reported that delivery schedules for some of its lines are lengthening from 2 weeks to as much as 2 months.
Improved liquidity and debt structure for a variety of financial and nonfinancial firms is increasingly mentioned by directors and other respondents in support of a more optimistic view of economic activity. A banker-director termed as "very liquid" an office equipment firm that had been considered financially weak in recent years. His corporate customers are borrowing in long-term markets. Another banker-director reported banks and thrift institutions in his area are highly liquid. S&Ls in the District generally report continued strong growth in deposits, and several are eager to cut rates paid on passbook deposits in view of high liquidity. A major discount store chain in the District that was near bankruptcy in 1975 has boosted its current ratio from 1.7 to 2.1 in recent quarters, and cut back its long-term debt by at least 10 percent. A large producer of consumer products, whose usually large excess working capital was run down in 1974-1975, has again sharply boosted its liquid asset position to a point where it can finance all of its capital spending plans for 1976. An official with a major machinery firm reports a dramatic shift in its financial situation from a net borrowed position to a surplus over the past 12 to 15 months, partly because of record cash flow last quarter. For some other firms, concerns seem to have shifted from working capital shortages and financing problems to building inventories and increasing production schedules.
The rising optimism that seems to permeate the attitude of businessmen in the District is tempered somewhat by inflationary wage settlements. One source indicated that the total increase in compensation in the first year of the Teamsters contract amounted to 15 to 20 percent. A director viewed as "not too explosive" his firm's recent labor settlement for a 9 percent increase in compensation. Rubber works are expected to settle for less than the Teamsters, although a cost of living catch-up is expected to be a result of a settlement, with a short strike likely to affect at least one of the major tire producers.
Recovery in employment in the District remains sluggish and continues to lag the nation. The small improvement that has occurred has been mainly in rubber and plastics, trade, and fabricated metals. Employment in steel, machinery and construction industries has tended to stabilize in recent months, while earlier gains in automotive industry have been held down by recent layoffs at the GMC Lordstown plant, where compact cars are assembled. Since late March, over 2,000 workers were placed on indefinite layoff.