Beige Book Report: Cleveland
August 11, 1976
Plant shutdowns and summer vacations have slowed economic activity in the Fourth District. Consumer spending for automobiles, recreation, home remodeling, and new houses continues relatively strong, but sales of department store goods were soft again in July. Recovery in capital goods continues to be spotty. Neither the rubber strike nor the coal strike has disrupted operations of their consumers. Tightness in supplies of certain steel and chemical products appears to have eased as a result of a recent slowing in orders. Several thrift institutions report some deposit losses as a result of last week's 8 percent Treasury note but less than in previous periods of comparable yield spreads.
Consumer spending continues to be selective and spotty. Car sales, recreation and amusement spending, and home improvement expenditures remain strong. Auto sales in July, especially of medium-size cars, held up relatively well in the largest metropolitan centers of the District. Home improvement business continues to flourish according to banker directors and a director associated with a building materials firm. Another director reported new attendance and spending records for amusement by consumers. Some retailers of department store goods complained that sales were again soft last month. A financial officer with a large department store that caters to middle- and upper-income earners reports that sportswear is selling well, accessories are still selling better than a year earlier, but ready-to-wear apparel is selling poorly. Collections have not been a problem. A financial officer with a large discount chain describes sales of both hard and soft goods as flat.
Consumer demand for single-family housing is strong, and directors as well as officials with thrift institutions report brisk loan demand. One director expects new housing starts to average 1.5 million units in 1976 and projects an increase to 1.7 million units in 1977. High costs of single-family units have boosted demand for mobile homes. Construction of multifamily dwellings remains weak, according to several mortgage lenders, although one director noted that gradually improving vacancy rates are contributing to a pickup in demand.
Capital goods are still marked by sluggish recovery and ample capacity. Some producers do not expect to reach their pre-recession peak until 1978. Sales of heavy-duty trucks and industrial lift trucks have been recovering, but significant improvement is not expected until 1977. One official expects that the next peak for these capital goods is unlikely to be as high as the 1974 peak; even if it were, shortages are unlikely to appear because of recent expansion in capacity for trucks, axles, and other material handling equipment. An electronics and printing press firm reports both orders and backlogs last month were at their highest volume in recent years. Capacity for producing printing equipment is judged to be adequate for the next few years because of the large amount of unused capacity, but a shortage of capacity for semiconductors, radio- and TV-broadcasting equipment and other communication equipment will require the firm to double its capital spending beginning this year.
Financial officers and economists in the steel and chemical industries view their capacity as adequate to accommodate demand this year and most of 1977, although spot shortages may surface later this year. Steel economists with major producers in the District report that orders and shipments slumped more than usual in July and August. One economist expects a strong rebound in the late summer and fall months and has revised his estimates of shipments for 1976 slightly upward. However, an economist with another steel company has recently revised his forecast downward because of continued sluggishness in capital goods and a lack of inventory buildup by steel users. Tightness in flat-rolled products has eased, although some steel mills are apparently still informally allocating orders. Coke is expected to be in tight supply in 1977 because of environmental standards that are restricting production from some existing coke-oven facilities in the District.
Chemical producers report that operating rates for their firms continue to climb moderately. Output in July and August softened because of plant shutdowns of customers. PVC, polypropylene, and chlorine are among products in tight supply, and some spot shortages can surface by the year-end.
Neither the rubber strike nor the coal strike has hampered output of users. According to an economist with a major tire producer, the rubber strike can continue for another few months without curtailing auto production. He cited the sustained operations by nonstruck suppliers and small independent tire producers who have been selling the bulk of their output directly to auto producers rather than in the replacement market. According to his view, the replacement market will be affected more seriously than the original equipment market, if the strike continues much longer. The wildcat strike in the coal industry, which has caused an estimated 10 million ton loss in coal output, will have little if any effect on coal consumers because inventories were already well above the normal 65-day supply before the strike. Metallurgical coal will be in tight supply because of restricted coal output, but steel economists do not expect that supplies will hinder a rebound in steel operations.
Financial officers with savings and loan associations commented that the full extent of deposit losses resulting from last week's 8 percent Treasury note will not be known until the final payment date on August 16. An official with one of the largest savings and loan associations in the District expects heavy withdrawals on that date. Several small- and medium-size associations detected no significant withdrawals of deposits, but they noted that net deposit growth for the last several weeks has wavered between losses and modest gains. Despite some runoff in deposits, none of the savings and loan associations expect to curtail commitments or loans. Liquidity is still above minimum requirements, and deposit growth is expected to recover beginning in September, although at rates below the rapid growth earlier in 1976.