November 9, 1977
Growth in real GNP is expected to continue to moderate throughout 1978, according to economists who met at this Bank on November 4. The economists are skeptical that gains in any major spending sector next year will exceed 1977. Steel output may be considerably improved from recent levels, if imports are curtailed as a result of Treasury rulings on dumping. Thrift institutions report no evidence of disintermediation.
Economists who attended the November 4th economic outlook session held at the Federal Reserve Bank of Cleveland shaded their forecast of real GNP growth to an annual rate of 4.6% from the fourth quarter 1977 to second quarter 1978. Moreover, they expect real GNP to increase at only a 3.2% annual rate in the second half of 1978. The economists were skeptical that any major spending sector, except for Government, would provide more thrust to overall activity in 1978 than in 1977. They anticipate consumer spending to exceed 1977 totals only slightly, but residential construction and business fixed investment are expected to show smaller gains over the period ahead than in 1977. While several members pointed out that stimulative monetary and fiscal actions should result in strong economic growth in 1978, others expressed concern that these actions would result in higher prices rather than higher output. Although the group as a whole seemed convinced over prospects for limited growth, only one of the 27 economists forecast an outright decline in real GNP, expected in fourth quarter 1978.
The group's view on fixed investment typifies its scaled-down expectations for economic growth. In contrast to last June when accelerating gains in spending in several industries were expected, a leveling out or reduced gains are now anticipated for 1978. The median forecast anticipates a 13.2% increase in fixed investment from the fourth quarter 1977 to fourth quarter 1978, a considerable slowing from the 16% rise for the comparable year earlier period. One economist pointed out that his company's orders for capital equipment this year have not been uniformly strong and that a forecast of slow growth in output, especially in the second half of 1978, would tend to dampen real gains in capital spending in 1978. Similarly, the upswing in machine tool orders in this expansion has not been broadly based and will apparently peak this year largely because next year's orders for retooling of autos have already been placed. According to one economist, capital spending by steel producers is likely to decline because of negligible growth in retained earnings, inadequate depreciation allowances, and the industry's inability to raise funds in either debt or equity markets. Weakness in capital spending by a producer of glassware and packaging reflects a low return in investment, lack of confidence about current and future economic conditions, weak prices, and uncertainty over Government tax and energy policies.
Increased October sales have encouraged retailers and producers of consumer goods, although they are still cautious over near-term sales prospects. Department store officials report a sizable sales pickup last month following September's drop, but they point out that sales levels were not much above August. Slow growth in real income should continue to cause month-to-month fluctuations in sales, according to an economist with a major department store chain. He also indicated recent sales promotions may have the effect of borrowing from sales in the fourth quarter. More than usual sales promotions this quarter will likely be needed to stimulate consumer spending, according to some officials. Auto producers are guardedly optimistic over sales for 1978. An economist for a major producer expects domestic new car sales to amount to 9.3 million units in 1978, about the same as in 1977. Although sales in October rebounded from September, this economist expressed some uncertainty because of softer-than-expected sales of Chrysler and AMC cars, which in turn led to plant shutdowns. In addition, some 1978 intermediate-size GMC cars have not sold as well as expected.
Some of the gloom that has dominated the steel industry in recent months appears to be eroding as a result of a recent Treasury ruling that affirmed dumping of steel in the U.S. by Japanese producers. An immediate effect of the ruling has been a sharp increase in steel plate orders by domestic producers. According to an economist with a major steel producer, a higher volume of orders is booked for November than at a comparable period in October, and orders for December delivery are higher than at a comparable period in November. Four large steel producers in the District have filed separate dumping complaints involving a variety of steel products. Because Treasury rulings probably will be made by the end of March 1978, some Japanese steel producers will not make commitments on steel prices after February 1978. The result of these rulings could sharply curtail steel imports, which could fall to 10-to-12 million tons in 1978 compared with an estimated 20-million-ton annual rate of imports in recent months. Should this occur, one steel economist predicts steel earnings in 1978 would improve, and steel operations would rise to close to capacity in the second half of 1978, compared with the present operating rate of about 73% of capacity. Some steel officials also seem buoyed by the recent bottoming out in steel operations this quarter, in contrast to the continued slide that occurred late last year.
Thrift institutions report no signs of disintermediation in recent
weeks, despite narrowed yield spreads between rates on time deposits
and money market instruments. Deposit flows in October and early
November have been strong in both passbook and time accounts.
Although some officials anticipated lessened growth in deposit flows
next year, they have not cut back commitments. Loan demand for
single-family dwellings remains strong, and revival in
multi-family
units, especially apartments, seems to be strengthening as a result
of recent boosts in rent prices. Some S&L officials believe the
higher proportion of deposits in certificates will enable them to
cope with the effect of disintermediation better than they did in
1973 and 1974.
Also, liquidity for some is still considerably higher
than legal requirements, and several indicate ample opportunity to
increase borrowings, if needed.