Beige Book Report: Cleveland
December 15, 1976
Economic activity in the Fourth District remains sluggish. Inventory corrections in the steel and chemical industries apparently are nearing completion, but manufacturers stocks of major appliances remain excessive. Among materials producers, only the rubber industry is rebounding strongly and rebuilding stocks. Recovery in capital goods is still not pervasive. Reports from retailers remain cautious. Savings and loan executives expect downward pressure on mortgage interest rates as well as rates paid on deposits.
Inventory adjustments continue to curtail production in the District. An exception is the rubber industry, where production is rising rapidly as an aftermath to the long strike that slashed inventories of tires and of industrial rubber products. An economist with a major tire producer expects capacity operations for conventional tires through the first quarter of 1977, after which inventories are likely to be either adequate or too large. Capacity operations for radial tires are expected for most of 1977. Liquidation of steel inventories is apparently nearing completion, according to economists with major steel producers in the District. Operating rates fell below 70 percent of capacity in recent weeks, but a moderate pickup in steel orders for December and January delivery suggests an end to the 6-month slide in production and shipments. Steel economists reduced their forecasts of domestic steel shipments for 1977 from 105 million tons to about 100 million, compared to an estimated 89 million tons in 1976. Chemical and plastics producers report operations have steadied in recent weeks at about 82 percent of capacity. Inventory correction for some products, including polyvinyl chloride, has apparently ended, and orders for December are higher than for November. Another producer, however, expects some further decrease in stocks in December as users trim stocks for balance sheet and tax valuation purposes. Excess stocks of major appliances held by manufacturers are likely to carry inventory correction in that industry into the first quarter of 1977, according to an economist with a major appliance producer. Its stocks at the end of November were 20 percent higher than planned and 10 percent higher than for the same month a year-ago. The producer commented that without a $10 to $15 billion permanent tax cut and further improvement in new housing starts, the inventory adjustment could carry into the second quarter of 1977.
Recovery in capital goods remains selective. Machine tool builders continue to report steady improvement in orders and backlogs, which will be reflected in a sharp improvement in shipments in 1977. Orders for motors have also picked up; and one manufacturer reports a sharp boost in orders for industrial equipment during November, especially for international and defense-oriented business. Its trend in orders has been climbing somewhat faster than suggested in the latest Department of Commerce plant and equipment survey. On the other hand, an official with a construction machinery producer reports irregular improvement in orders for construction machinery, especially hydraulic cranes and excavators. Inventories held by dealers are still judged about twice normal size. Business this year will be about 50 percent below its peak in 1973, and a projected 14 percent increase for 1977 implies capacity utilization will not be much higher than rates that prevailed in the early 1970's.
Reports from retailers continue mixed. A director associated with a department store chain notes that sales gains over a year earlier continue to narrow and that it may take longer than one quarter to work off excess inventories. Another director associated with houseware products describes business as good and backlogs as rising. November retail sales hold about even with October, according to an economist with a major retailer. He expects aggressive promotional selling during the remainder of the Christmas season if merchants are to realize an expected 10 percent gain from last year.
Preliminary results of this Bank's latest monthly survey of manufacturers show the highest proportion of respondents reporting price increases since late 1974, with little indication of let-up expected for December. The recent 6 percent increase in flat-rolled steel prices is expected to hold, according to several economists associated with major steel firms. Among reasons for this expectation, they cite the following: flat-rolled steel products are still the best selling products; relative prices of flat-rolled products have not increased as much as other steel products since wage-price decontrols; major users, especially auto producers, have not resisted the increases. Chlorine and chlorine solvent prices were increased December 1 in response to strong demand, but a financial officer with a chemical firm was uncertain if the increases will stick. He indicated that discounting from list prices is most prevalent now than 3 months ago. A major plastics resin producer also reported that transactions prices for its products have weakened in the last 3 months.
Thrift institutions are adopting different strategies in response to continued strong deposit flows and easing in interest rates. Some are concentrating on controlling costs of funds while others seek to stabilize future flow of funds. One S&L raised the minimum on savings certificates from $1,000 to $5,000 and withdrew offering certificates with less than 2-year maturities, which they consider hot money. Another association lowered rates on 1-year certificates to 6 1/4 percent and on 6-year certificates to 7 percent. It discontinued offering certificates of less than one-year maturity and will limit deposits on certificates over $10,000. A third association also lowered rates to a maximum of 7 percent for a 6-year certificate, and reduced its mortgage rate to 8 percent for a 29-year loan. None of the associations changed their rates on passbook savings. Officials at these associations took as a sign of further downward pressure on both mortgage rates and rates paid on savings the recent actions of two large Cleveland banks that reduced interest on corporate savings to 4 1/2 percent.