Beige Book Report: Cleveland
May 12, 1976
Consumer spending continues strong except for small cars. One Director noted continued strong consumer demand for household materials for remodeling, and a banker Director described retail sales and installment lending as extremely good. Delinquencies are the lowest on record, repayments are strong, and consumers show no reluctance to incur debt. The sharp rise in appliance production in recent months has been an important factor in the recent surge in steel orders. Recovery in consumer goods, however, is not without some weak spots. A major producer of TV tubes reports that while orders have been picking up they are still well below the peak of late 1973. Also, operations at the GMC assembly plant at Lordstown, Ohio remain curtailed because of excessive inventories of Vegas.
The primary metals industry, which has lagged the overall recovery is rebounding strongly. Operating rates in steel, which late last year and early this year hovered around 70 percent, are now at about 90 percent of capacity. The surge in steel demand, however, is confined largely to flat rolled products. Hedge buying against price increases, coupled with strong demand from automotive and appliance producers, ballooned orders this quarter, but some steel sources expect orders next quarter will subside. One steel producer is allocating orders for some sheet steel because of tight demand and curtailed output stemming from relining of blast furnaces. Delivery time on flat roll products has lengthened from 1 month to 3 or 4 months. Demand for structural steel and plates and other products consumed by capital goods producers remains relatively weak and is not expected to pick up until the fourth quarter. Orders for aluminum also have been rising recently in response to higher demand from automotive and packaging industries. The industry is operating at about 75 percent of capacity, but steady improvement is expected throughout the year.
The capital goods sector is showing signs of a comeback. A variety of producers report a revival in orders from depressed levels in early 1975. Heavy-duty truck orders spurted between the fourth quarter 1975 trough and March 1976, although the March level was 60 percent of the peak in early 1975. Demand for bearings has increased in recent weeks, reversing a declining trend in orders that lasted into the early months of this year. One of the nation's largest producers of machine tools reports orders in the first 4 months of 1976 rose 40 percent from a year earlier and exceeded shipments for the first time in the last 18 months. An economist with a machine tool builder doubts the 13 percent increase in capital spending projected in the McGraw-Hill survey. According to him, time is running out for 1976 delivery. Additionally, the spring survey in recent years has been about 5 to 7 percent above actual spending.
Tightening supply conditions are noted by several nondurable goods producers in the District, especially the paperboard, plastics and chemical products, and glass containers industries. Operations have been boosted to 90 percent of capacity or higher for these industries. Delivery schedules have tightened, but shortages have not yet appeared. According to one source, shortages are not likely to appear in paperboard and glass containers until capacity reaches about 95 percent. Demand for plastics has boosted operations in recent months close to the pre-recession peak. A petrochemical producer reports that some of the industry's capacity has been lost because of environmental restrictions.
A flurry of price increases has accompanied strengthening in markets. Prices for flat roll steel products will rise in June and apparently some bar mill products are likely to increase, according to one steel economist. Industry sources justify price increases because of the high cost of additional capacity. A major bearings producer announces a large price increase effective May, and aluminum ingot prices are scheduled to rise about 6 percent early in June. Several nondurable goods firms also report actual or anticipated price increases for their products in order to finance additional capacity. A plastics producer expects a 10 percent increase in polypropylene this fall to support its new plant that will double capacity by late 1977. Another source speculates that paperboard prices are likely to rise in the third quarter.
Effects of the rubber industry strike, according to an economist with a major tire producer, may be less widespread than generally reported. He said 35 to 40 percent of the industry is still affected by the strike. He expects that the auto industry will attempt to adjust for the strike by eliminating spare tires in new trucks and cars, accepting tires that were previously considered blemished, upgrading tire quality, and increasing imports wherever possible.
Savings and loans generally report deposit inflows are stronger than loan demand. At least two large associations no longer offer savings certificates yielding 7-1/4 and 7-3/4 percent, and two others have extended maturities on 7-3/4 percent certificates to 8 years. One large association lengthened the maturity on 4 and 6 year certificates to 10 years. As a result, net savings deposits have declined since mid-April. Loans for multi-family housing remain weak, and mortgage rates have eased to around 8 1/2 percent for a 70 percent loan although one association with a variable rate mortgage lowered its rates to 8 1/4 percent. There is no indication of any reduction in the passbook rate, although financial officers of several associations are eager for such action.