March 9, 1977
Economic activity in the Fourth District is rebounding rapidly from effects of the severe winter and fuel shortages that sharply curtailed production, employment, construction and retail sales in January and early February. Layoffs in manufacturing are now a negligible portion of total manufacturing employment because alternate fuel sources and some easing in natural gas curtailments have improved energy supplies. Most financial officers and economists who were consulted expect that losses in output and sales will be recouped in the second and third quarters, providing extra thrust to real GNP. Inventories are likely to spurt during the next few months. Concern over inflation has intensified, as various sources expect high costs of substitute fuels, coupled with expected large increases in food and medical costs, to boost the rate of inflation in 1977. Business loan demand is still relatively soft for this stage of an expansion.
Although relaxed somewhat above plant protection levels, natural gas curtailments continue to cause layoffs in manufacturing. Firms without alternate or sufficient fuel supplies have not fully regained in output and employment levels. This is especially the case of small businesses, ranging from refactories to greenhouses. As of late February, an estimated 15,000 to 20,000 manufacturing workers, about 1.0 percent of total manufacturing employment in the District, were laid off because of natural gas shortages, a vast improvement over the estimated 110,000 workers laid off early in the month.
Industries hardest hit by fuel shortages, including steel, automotive, appliances and glass, are rebounding rapidly and, with few exceptions, expect losses in output to be recouped over the next few months. Economists with three major steel companies indicate that steel output has recovered to early January levels and losses in output in the last two months will be made up in March and April. Two economists expect first quarter steel shipments to increase by about 5 percent from last quarter, although the improvement will not be reflected in earnings because of high costs of alternate fuels. All report that orders have increased sharply in recent weeks, which should boost shipments and output next quarter. Most order pick up can be attributed to a bottoming-out of customer inventories rather than to higher steel consumption. Flat rolled products are expected to be in strong demand at least through midyear. The economists also expect that next winter's steel output will not be affected by fuel shortages because dependence on natural gas is being reduced to minimum levels. A major aluminum producer reports output has not completely recovered from for January-February shutdowns, and that inventories were drawn down sharply during that period.
A major household appliance manufacturer has restored production to capacity levels following a shutdown caused by natural gas shortages. Inventories which were drawn down are expected to be rebuilt to desired levels by late April.
Auto producers expect to make up most production losses during this model year. One producer does not anticipate losses for this model year because plants will be on overtime schedules, while another expects losses of less than 10,000 units because plants producing large cars have been operating at capacity.
Major glass producers in the District have recovered fully from the drop in output because of natural gas shortages. One of the largest flat glass producers that had laid off half of its work force for several days has recalled all workers and recouped production losses.
Retailers and producers of consumer goods experienced a drop in sales during the most severe winter months but generally expect a revival in consumer spending. One major national retailer headquartered in the District commented that retail sales strengthened sharply in recent weeks and recovered all sales losses of late January and early February. Current forecasts of gains in total retail sales for 1977, about 10 1/2 percent higher than in 1976, remain virtually unchanged from those of late last year. However, the retailers now expect larger gains in food sales and smaller gains in department store items and auto sales. Automotive producers apparently have not adjusted sales forecasts downward because of possible effects of fuel prices on durable goods spending. One economist does not believe higher fuel bills will have much adverse affect on consumer expenditures for automobiles, and, therefore, is holding to his forecast of 11.2 million new car sales for 1977. Another expects consumers to reduce their saving rate instead of cutting back new car purchases. A retailer with a major national food chain reported consumer response to higher prices has been to buy down rather than cut back spending. Moreover, he noted that higher coffee prices led initially to stockpiling by customers, who since have not shifted to coffee substitutes.
Twenty financial officers who met at this Bank on March 4 viewed the sluggish recovery in capital spending as stemming largely from inadequate profits and cash flow and uncertainty over the rate of return on investment. They acknowledged that the high cost of capital may also be a deterrent but asserted that inflation and environmental regulations have heightened business risk. They view tax relief as a necessary stimulant to investment, but see little long-term benefit from changes in accounting rules even though these changes may tend to increase cash flows.
Many economists and producers expressed concern that the rate of inflation in 1977 has intensified, as suggested by strong upward price pressures in metals, fuel, food, and medical costs. Steel sources reported a price hike for tin mill steel products effective this month and noted that alternate fuels and modes of transportation sharply boosted costs this quarter. Retailers expect consumer prices to accelerate this year, especially for apparel and food. One source indicated that forecasts for retail food prices in 1977 were increased from 6.5 to 7.7 percent because of the drought in the West. Another retailer does not expect leveling off of rising prices for fresh fruit and vegetables until the California harvest is marketed. Current moderation in beef prices should be followed by higher prices later in the year. Health care costs are expected to jump 15 to 18 percent this year, according to an executive with a major health insurance agency in the District. Increased cost and usage of medical services account for the expected acceleration in health care charges this year.
Business loan demand in the District remains soft and generally below expectations of some of the Districts major banks. Several bank officers expect only gradual pick up in loan demand until recovery in capital goods strengthens. Consequently, most of these banks have been actively soliciting business loans. An executive with one of the largest banks explained his firm's relatively sharp growth in both take downs and unused commitments is in response to the bank's program to refinance cap loans that will begin to run off early in 1978. Customers with the highest credit ratings are offered 5- to 7-year loans at rates somewhat above those of insurance companies, which have stepped up solicitation in term loans over the past year.