Beige Book Report: Cleveland
August 10, 1977
Comments from Directors, financial officers, and economists suggest a reduced pace of activity in the Fourth District this half, although it is generally believed that business will be considerably stronger than in the second half of 1976. Retailers remain cautious about sales prospects despite July's surge in sales. Although total inventories are not considered to be excessive, ample stocks of some products probably will dampen inventory growth this quarter. Capital goods producers do not expect acceleration in business for the balance of the year. Several banks experienced little or no growth in total deposits last quarter. Most expect to roll-over maturing 4-year certificates.
Last month's surge in retail sales has not bolstered retailers' expectations for future sales. Retail executives and economists are apprehensive that consumer spending in the second half will not be as strong as in the first half although none expects a sag in sales similar to last year. A chief executive officer with a major department store chain remarked that consumers are cautious and are expected to remain so. An economist with another major chain tended to discount double-digit sales gains in July. He pointed out that sales last year were weak, and that retailers had to resort to larger than usual promotions last month to stimulate sales. He expects year-over-year gains this quarter to be about the same as last quarter. An official with a large discount chain, which did not record double-digit sale increases, was cautious about sales prospects because extensive markdowns failed to spark sales as strongly as expected. A major appliance producer expects second half sales gains will amount to about 14% higher than the second half of 1976. This compares to a 20% gain experienced during the first half of 1977 over the same period in 1976. A lag in housing completions relative to new starts accounts for expected smaller gains.
Economists with two major auto producers expect total new car sales during the second half to range between an 11.0 to 11.4 million annual rate compared to the 11.6 million rate during the first half of 1977. The reduced pace of sales in July probably resulted from heavy sales contests in June, according to one economist. Another did not believe new car sales would be weakened by the rapid growth in consumer debt or by easing in used car prices.
Some executives and economists expressed a view that inventories will not increase as rapidly this quarter as last quarter. Growth in business stocks generally will be dampened by ample inventories of such goods as oil, steel, household, and automotive products. Crude oil and gasoline stocks at midyear, 10 to 12% above a year earlier, were judged to be ample. But, stocks of distillate and residual fuels are less than desired, according to key oil producers in the District. Steel inventories are somewhat larger than necessary and may be run off this quarter although not to the extent of last year's liquidation. Retailers believe stocks are now generally balanced and in much better condition than a year-ago. Still, one large retailer expects there may be some reduction in certain consumer goods during the summer and fall months. One of the largest producers of appliances viewed inventories at both manufacturers' and distributors' levels as a "little heavy," which could result in production slowdowns this fall. Although auto inventories are also larger than a year ago, industry economists expect little difficulty in working off these stocks. The rubber industry has rebuilt tire stocks to normal levels and production schedules will now be aligned to match sales.
Capital spending probably will not accelerate from this year's first half pace. Some capital goods producers report orders continue to improve gradually while others state recovery remains slow. In the foundry industry some producers of large castings are operating near capacity, while steel foundries are at 70% of capacity with little expectation for improvement this year. Machine tool builders report continued strong gains from a year earlier period. For example, both a large and small producer in machine tools reported that orders last quarter rose 40% and 55%, respectively, from the same period in 1976. On the other hand, a major producer of industrial bearings expects decreased gains in orders for the third and fourth quarters because of weak recovery in industrial construction and railroad freight-car building. Continued softness in heavy construction, including sewer, water, and utility projects, is dampening recovery in construction machinery, particularly excavators and cranes. Similarly, a major construction and engineering firm that designs and builds chemical, steel, and power plants expects no surge in heavy industrial construction, at least for the balance of this year. A large producer of steel mill equipment and textile machinery reports that orders remain weak because of poor profit performance for these industries.
Steel economists expect production this quarter will decrease from last quarter despite recent increases in steel prices. Profits are expected to show little improvement over last quarter. Some economists believe that the break-even point in profits is as high as 80% because of steady increases in fixed costs. Steel firms are expected to operate at about 85% capacity next quarter. Major producers do not expect the iron ore strike to interrupt steel operations because mills have as much as a 4-month ore supply in stock. A survey of 4 large banks with deposits of $1 billion or more and 6 intermediate-size banks with deposits of $300 to $800 million indicates that 7 banks have experienced little or no growth in time and savings deposits during the second quarter, and deposits in 2 of the largest banks declined during July. Both passbook and time deposits failed to grow, primarily because of interest rate differences, especially with savings certificates offered by savings and loan associations that are generally at Regulation Q ceilings. Seven banks also reported that they have been able to roll-over 4-year certificates, although most indicated that the majority of those certificates will mature beginning in August. One bank reported that it has retained about 55% of matured certificates, and that it will make little effort to retain the balance of these funds. Two others indicated they probably will not retain these funds because rates on 4-year and 6-year certificates, which are below Regulation Q ceilings, are not expected to be raised. Other banks, however, have taken such steps to retain funds.