Beige Book Report: Cleveland
June 16, 1976
Economists who attended the June meeting of the Fourth District Round Table at this Bank forecast more improvement in output, prices, and employment in 1976 than they did at a similar meeting last March. Several retailers and directors remain optimistic and have not yet lowered their sales forecasts, although another month of declining sales may bring about this result. Reports on key industries in the District suggest ample capacity for most industries during 1976 and 1977, but supplies have been tightening in steel, rubber, and chemicals.
Economists who attended the recent meeting at this Bank raised their forecasts of output and lowered their estimates of inflation and unemployment in 1976. The median forecast of real GNP for 1976 was revised to 6.6 percent from 6.2 percent in March, the GNP price deflator was revised to 5.3 percent from 6.0 percent, and the unemployment rate was lowered to 7.3 percent from 7.6 percent. The median forecast of the group also showed considerable slowing in the rate of recovery from the first quarter. Recovery in business fixed investment during the second half of the year is still not expected to be much stronger than during the first half. Some members were skeptical over projected gains in personal consumption expenditures because of the recent drop in retail sales. However, all eight economists who submitted auto sales forecasts raised their estimates for the March meeting, with the median forecast at 10.3 million units for 1976.
Retailers still appear optimistic that sales will rebound despite the drop since April. A director with a national retail chain headquartered in the District commented that retail inventories are huge. He fears a continued drop in consumer spending may trigger a double bottom recession, such as in 1957-1958. An economist with a retail chain reported its sales have declined for the last seven weeks, an unusually long period. Declines were largely in apparel and appliances, but sales of carpeting, draperies, and housewares were sustained through May. He speculates that abnormal weather and smaller tax refunds in 1976 compared to 1975 account for the unexpected decline in sales. Other retailers and producers of consumer goods remain optimistic. A director associated with home remodeling and modernization materials commented that demand is still strong and that its plants in Ohio are still operating seven days a week for the first time in five years. Another director reported his company's consumer business is still good, that capacity will be increased about 15 percent this year, and that it is advancing its planned expansion for plastic housewares from next year to this. The chairman of a large department store commented that sales leveled off to a rational and sustainable level. Finally, a major discount chain reported that sales in the last two weeks picked up, following a decline that began in mid-April. It expects the pickup to continue, although at a less vigorous rate than in the first four months of 1976.
>Manufacturing capacity is expected to be ample to accommodate projected increases in output during 1976 and 1977, according to reports from directors, financial officers, and economists in the District. Shortages, such as experienced during 1973 and 1974, are not likely to surface, although tight supplies will again mark some key industries, especially steel, rubber, and chemicals. Metalworking industries, which recently were operating at an estimated 75 percent of capacity, are not expected to reach the October 1973 peak for another two and one-half years, according to an economist associated with a major durable goods producer.
Steel is one industry where supplies have tightened, lead times have lengthened, and operations have rebounded close to desired levels of capacity. Steel operations, which rose from 80 percent utilization in the first quarter of 1976 to 90 percent in May, are expected to hover around 90 percent by year-end, according to several steel economists. The industry should have about 159 million tons of capacity available by the end of this year, compared with 153 million tons in 1975. Flat-roll products are in very tight supply, but structural steel, plates, and line pipe are in ample supply. Steel economists expect supply conditions for a broad range of products to tighten by early 1977, as the industry operates close to capacity. One economist expects steel shipments at 105 million tons in 1977, compared with 110 million tons of finished steel capacity. A director who is a raw material supplier to the steel industry states that capacity limitations in steel stem from tight supplies of raw materials, such as ore, and that steel producers will sharply step up expansion of mining and materials facilities. A director with a steel company agrees that capacity problems in steel lie in basic raw materials.
Tire producers are likely to operate at capacity for 12 to 15 months after a labor settlement in the rubber industry, according to an economist with a major tire producer. Operations last quarter were at about 90 percent of capacity, in contrast to a recent low of 65 to 70 percent in the first quarter of 1975. Prior to the strike, spot shortages of truck tires and radial tires for passenger cars surfaced. The industry has adequate capacity for passenger car tires until 1980, but capacity for truck tires is reported to be tight.
Petrochemical producers in the District expect adequate capacity of feedstocks to produce chemicals for 1976 and 1977. Demand for petrochemicals in 1976 will approach or surpass record levels of 1973 and 1974, and supplies are expected to be adequate to meet demand. Demand for plastics has rebounded sharply over the past year. Polyvinyl chloride sales in 1976 are estimated at about 10 percent below peak levels in 1974. Plastics producers were operating at about 80 percent of capacity last quarter and expect to be in an 80- to 85-percent range during 1977. One industry economist noted that capacity for polyvinyl chloride rose about 30 percent between January 1974 and January 1976, but effective capacity rose only 20 percent because of OSHA restrictions. Analysts expect that the industry has adequate capacity through 1978.
Sources associated with energy producers in the District—oil and coal—foresee little problem meeting anticipated demands for their products over the near term. An oil economist commented that there are no shortages of oil but expressed concern about the increasing U. S. dependence on foreign sources of crude oil. His estimates show crude oil demand is likely to increase 5.5 percent from last year (7 percent if growth in the economy exceeds the standard forecast). The industry can accommodate an 8-percent increase in gasoline demand in 1976, but supplies, although adequate, will tighten, especially for lead-free gasoline. Refineries are operating at 86 percent of capacity and should remain in the high 80's for the balance of 1976. Crude capacity by year-end 1976 will be increased about 1 million barrels from the end of 1972, but not much additional capacity is scheduled for 1977. For the longer term, capacity expansion plans are uncertain because of high costs of refining crude oil and stringent Federal regulations that have had the effect of reducing rig activity in the U. S. in recent months. Capacity for producing coal is more than ample, at least for the short run. The industry is now operating at about 10 percent below its desired rate. Capacity is expected to increase from 740 million tons in 1976 to 880 million tons in 1981, with half of the growth to come from low sulfur coal in western states. This predicted growth in capacity assumes that the industry can meet environmental standards.
Other industries for which capacity appears to be more than ample are aluminum, automotive, and metalworking. An economist with a major aluminum producer reports that its projections indicate output is not likely to reach capacity before 1979 or 1980, if then. Operations by year-end are expected at about 84 percent, compared with 80 percent currently. The only bottlenecks that may surface are in sheet rolling capacity and in melting capacity, the latter due to OSHA and pollution controls. Similarly, the auto industry is currently operating at about 80 to 85 percent of capacity, about 10 percent below optimum levels. Finally, there is ample capacity in metalworking industries, according to an economist associated with the industry. Utilization is projected to be 80 to 85 percent of capacity in 1976 and 1977.