Beige Book Report: Cleveland
April 12, 1977
Strengthening in capital goods, steel, and housing is boosting output and employment in the fourth district this quarter. Additional thrust is coming from some rebuilding of inventories. Capital goods producers generally seem more optimistic that production and spending will accelerate this year, although none expect a boom. Auto retailers are optimistic that 1977 will be a strong year for sales, but other retailers are still cautious over prospects. Upward price pressures remain about as intense as they have been since last fall.
Output and employment in district manufacturing should strengthen this quarter in response to completion of inventory liquidation or to a buildup of inventories. Steel economists report that a good recovery in orders in the last two months is likely to boost production this quarter to within an 85-90 percent operating rate, compared with about 73 percent last quarter. Price hedging and inventory rebuilding account for only a small part of the improvement, according to two steel sources.
Some major appliance producers in the district are rebuilding inventories that were depleted late last year and early this year. For one firm, the inventory buildup is expected to bring inventories up to desired inventory-sales ratios, while another producer expects a buildup of in-process materials of about 10 percent above expected sales.
Capital good producers seem to be gaining confidence that plant and equipment spending in 1977 will increase at least as much as indicated in the latest Department of Commerce survey, despite erratic behavior in new orders. While none expect a boom in capital spending in 1977, some indicate that their forecasts of a 12 to 15 percent increase in spending now appear to be reasonable. They also indicate emphasis is on modernization of facilities rather than on expansion. Two large machine tool builders remain optimistic that orders, shipments, and backlogs will improve from 1976. They note that their orders in February continued to increase (in contrast to a drop reported in national data) and doubt that their industry has reached a cyclical peak in orders. An economist with a major producer of motors, generators, and general industrial equipment noted that since last November orders began to pick up for a broad line of products, with the exception of equipment used by utilities. He indicated there is a lack of major projects but feels his forecast for a 13 to 14 percent increase in capital spending this year will be realized. His firm will boost capital spending by 20 percent from a depressed 1976 level, with expenditures allocated largely for modernization rather than expansion, except for a few high technology items and new products. Similarly, a financial officer with a large capital goods producer reports its projected increase in spending for 1977 will be for modernization, except for completion of some plants that will produce products different from those originally intended when the plants were started a few years ago. He noted further strengthening in orders for heavy-duty trucks and materials-handling equipment for the lumber industry but continued weakness for industrial-purpose lift trucks and shovel loaders used in construction. Recent demands for communication equipment, presses, mini-computers and terminals have been at a rate well above shipments in recent months, according to one producer. A bank economist noted several capital goods clients commented that it is now easier to get finance committees to approve appropriations for all but large projects. Welding equipment and electrode producers expect record sales in 1977 with real gains of at least 7 percent from last year.
Two soft spots in capital goods are utilities and steel. Spending by utilities remains weak, with little sign of improvement, according to several major suppliers. Some steel economists expect that capital spending by their firms will be no higher than last year because of continued inadequate cash flow and a loss in profits last quarter. A major steel producer is expected to allocate expenditures primarily for replacement, repairs, and pollution control equipment.
Retailers' views of consumer spending range from mild optimism to confidence that real sales will improve this quarter further from last quarter. Several auto retailers and producers are encouraged by the sharp comeback in sales last month and do not expect much consumer resistance to recent price increases in new cars. Auto plants in the district, except for the GMC Lordstown plant which produces the slow-selling Vega, are expected to work overtime or six days a week to meet projected high demand for standard and intermediate size cars. On the other hand, department store executives comment that although sales have been good, they have not increased across-the-board. Some note considerable strength in sales in recent weeks, in part because of a make up for winter losses.
Demand for new and used housing is reported to be strong, according to directors and mortgage lending officials. Higher prices are not a deterrent in the present market, which is described as a sellers market. One director expects new starts to reach 1.8 million units this year and 2 million units in 1978. Multi-family starts remain weak in the district. An official with a savings and loan association in northeast Ohio expects mortgage rates will increase by at least a quarter of a percent before the end of May. Liquidity of several savings and loans is well above the required rate and can amply support a considerably higher volume of commitments than a year ago. Some directors associated with banks note substantial growth in passbook savings accounts and slow growth in time deposits relative to a year ago. S&L officials report continued strong flows in deposits that in some cases still exceed demand in this area.
There appears to be little relaxation in upward price pressures. In addition to increases for some steel prices expected by next month, price increases have been announced in recent weeks for glassware, polyvinyl chloride, polyester resins, aluminum and publishing paper. Recent steel price increases appear to be sticking; however, producers of stainless steel withdrew increases that were scheduled to take effect early this month. On the other hand, an official with a petroleum refinery expects that motor gasoline prices, which tend to rise during peak demands in the summer months, may not increase this year if inventories continue well above normal as they have been in recent weeks.