Beige Book Report: Cleveland
December 14, 1977
Financial officers and economists in the Fourth District generally are more optimistic than a month ago, although they are reluctant to increase forecasts of output. Retailers of general merchandise are cautiously optimistic that Christmas sales will show larger gains than a year ago, but softness in auto sales concerns suppliers. Capital-goods producers believe capital spending for the first half of 1978 will exceed latest estimates by the Department of Commerce. Steel operations are picking up gradually. Although material shortages are delaying new housing completions, mortgage loan demand remains strong.
Despite the recent spate of favorable business news, economists have not revised upward their projections of output for either the first half of 1978 or the entire year. Those who look for stronger gains than 4 to 5 per cent annual rates of increase in real GNP feel that the latest data corroborate their more optimistic projections. Others, who are less optimistic, believe developments that would accelerate consumer and business spending have not improved sufficiently to justify scaling up their projections. Skepticism centers on sales prospects for the auto industry and on acceleration of fixed investment.
Retailers view Christmas sales with cautious optimism. One department store executive believes that sales gains this season will exceed last year's increase. Prior to recent heavy snowfalls, sales were strong. Unconcerned that consumer debt was burdensome, this economist indicated that the retailer will continue to encourage credit sales, which now make up about 58 per cent of total sales. An economist with a major national chain of department stores had expected November retail sales to fall from October levels because of weakness in auto and general merchandise sales. He now estimates that December sales will rise by 1 to 1.5 per cent over November and that PCE will increase at an annual rate of 8.5 per cent this quarter, not much more than last quarter's increase. Growth in real sales is being limited because consumers are saving a higher proportion of their disposable income. The strongest retail gains have been in lumber and building materials, reflecting home maintenance and remodeling.
Auto producers and auto suppliers view recent softening in auto sales differently. An economist with a major producer still forecasts a 9.3 million rate of sales for 1978. GMC officials project domestic new car sales of 9.7 million, but one supplier reported GMC recently has shaved its production schedules for the first quarter 1978 by 21/2 per cent. Some suppliers, skeptical of what they consider to be unrealistic sales forecasts of producers, expect auto sales in 1978 at around 8.8 to 9.0 million units. While suppliers of flat glass, tires, steel and body frames report little or no cutbacks in orders from Ford, a major tire producer reported that GMC has cut back orders for tires for intermediate-size cars. Chrysler also has reduced tire orders as a result of production cutbacks because of excessive new car inventories.
Officials and economists associated with capital-goods industries generally believe that real capital spending during the first half of 1978 probably will increase more than the latest Department of Commerce survey indicates. Although no one expects a boom in capital spending, some contend that the Department of Commerce estimates are too conservative for even the moderate growth in output expected next year. Still others thought that the timing of the survey may have affected business expectations. One producer who earlier predicted a 6 to 7 per cent increase in real spending in 1978, now believes only a sizable business tax reduction, enacted early in the year, could bring about such increased spending. Some expect a slower rate of gain in fixed investment next year because of a moderated pace of spending by the utilities and petroleum and automotive industries. A producer of transmissions and axles for heavy-duty trucks looks for a slower rate of expansion in both output and shipments next year, in spite of record orders. Similarly, machine tool orders and shipments are not expected to rise as rapidly in 1978 as this year. Others expect gains in spending early next year to be at rates at least equal to or stronger than 1977, especially in such nondurables as food, paper, and chemicals and some nonmanufacturing, especially communication. Lack of confidence and uncertainty are hindering fixed investment and more rapid economic growth, according to one of this Bank's directors.
Steel sources remain more optimistic than just a few months ago. Orders continue to strengthen, as indicated by a higher volume for December deliveries than received for a comparable period in November. January orders are also somewhat stronger than for a comparable period in December. This quarter's steel shipments will approximately match last quarter's, and shipments next quarter should rise about 5 to 10 per cent from the fourth quarter, according to one steel economist. Steel sources attribute strengthening primarily to termination of steel inventory liquidation and to a drop in imports, one that is partly seasonal and partly because of the problems relating to recent charges of dumping. One steel economist projects that production could rise to as much as 85 per cent of capacity next quarter, compared with about a 75 per cent operating rate this quarter. Some economists suggest that domestic industry is being forced to accept the reference pricing of steel as an alternative to enforcement of anti-dumping laws.
Inventories are not judged to be excessive, but excess stocks of some types of automobiles, chemical products and petroleum products will likely restrain gain in output. One retailer estimates that stocks of consumer goods are about 5 per cent higher than warranted by sales, but he expects that aggressive pre-Christmas sales promotions will help bring stocks into line with actual and projected sales.
Some coal producers appear less certain about the duration of the coal strike than they did a month ago. One director of this Bank expects a strike of at least two but not more than three months, at which time union funds will be exhausted. The work stoppage is not expected to affect users for at least two months, since half the industry is unaffected by the strike and coal inventories are adequate.
Bankers note continued strength in deposits, while S&Ls still are experiencing a reduced flow of deposits, especially for savings accounts. Mortgage loan demand remains strong and has contributed to firming in mortgage rates in some areas, according to one director. Building materials shortages have hampered completion of new housing starts, and one mortgage lender reported that builders have noted easing in lumber prices from last summer's highs.