Beige Book Report: Cleveland
January 11, 1978
Nonautomotive retailers and steel producers in the Fourth District are increasingly optimistic over sales prospects. Auto suppliers are skeptical that domestic new car sales will pick up much from recent rates. Steel production will be boosted this quarter partly because of price hedge buying. Capital goods producers still expect a good but not boom year. Continued slow growth in deposit flows is noted by banks and thrift institutions.
Nonautomotive retailers describe sales during December as excellent and generally above expectations. Some department store officials had expected year-over-year gains of 9 to 10 percent, but actually recorded larger gains. An economist associated with a large department store chain reported even larger gains for merchandise. These retailers are increasingly optimistic in view of the sustained rise in sales since last fall, but also point out that by spring consumer preferences can again shift from general merchandise to automobiles. Retailers are also pleased that sizable increases in sales have pared inventories.
Prospects for new car sales and production are highly uncertain. Two contrasting scenarios have surfaced: one views the reduced pace of sales as temporary and associated with down-sizing of intermediate cars by GMC; the other views the softening as a result of consumer substitution of other goods for automobiles. According to the former, as expressed by an economist with a major auto producer, consumers are either buying smaller GMC cars or are holding on to their cars a year longer. If sales in January do not pick up, auto producers will sharply cut back production schedules for the balance of this quarter. Some GMC auto dealers confirm consumer disinterest for even the highly popular Oldsmobile Cutlass, which one dealer described as smaller, lighter and 6 percent lower in price than the 1977 models.
Auto suppliers, especially steel and tire producers, have not experienced major setbacks in orders from auto producers, except from Chrysler and AMC. A major tire producer reported, however, that GMC's January projection of car production this quarter was shaved 100,000 units to 2,485,000 cars. This tire maker has been skeptical of sales and production projections by auto producers and has pared the estimate to 2,250,000 million this quarter. They expect total new car sales of 10.7 million this year and feel a comeback in auto sales is unlikely because of the ample stock of new cars over the past few years and the rapid buildup of consumer debt.
The turnaround in steel operations that began last month has accelerated under the impetus of price hedge buying. The February 1 increase in steel prices caused the bulge in orders for January deliver. According to one steel economist, orders for February and March shipments have not fallen as they usually have done after a price increase. The steel price increases scheduled for February and March have also had the effect of ending the most recent phase of steel inventory liquidation. First quarter steel shipments are expected to increase about 10 percent from the fourth quarter 1977. Even at this higher level of shipments and production, however, industry profits will probably be negligible this quarter. Generally, steel economists were noncommittal about reference pricing of steel, pending additional information. One executive with a major steel producer, however, views the announced trigger prices as low; and an industry economist is skeptical that these prices will result in much of a rollback in steel imports. Another source indicated that the talk about reference pricing may have deterred some users from placing foreign orders beyond the first quarter of 1978. If anything, reference prices are more likely to have an adverse effect on European steel producers than on the Japanese, who still have a quality and price advantage over most steel producers.
Capital goods producers expect business this year to be as good or better than 1977, although there is still little sign that spending for new plant capacity is accelerating. Exceptions are in technically oriented industries, such as aerospace and communications, where producers indicate a sharp step-up in spending for new capacity. A communications and printing press producer has been experiencing an order rate of about $1 billion compared with sales of around $900 million and will boost capital expansion this year. An aerospace and electronics producer expects to boost capital spending by 40 percent from last year. On the other hand, a medium- sized chemical producer reported that they had no additional need for capacity over the next few years in view of softness in prices, ample capacity, and completion of expansion programs that were begun a few years ago. Rubber producers will accelerate capital spending this year because of need for additional radial tire capacity to replace obsolete facilities and to improve productivity. A large machinery producer reported the excavator machinery business is still slow to recover and that increased orders for machine tools are replacements for existing inefficient equipment with computer-controlled machinery.
There is no sign of early settlement of the coal strike. More than a third of the industry in Eastern Kentucky, one of the largest coal mining centers in the country, is shut down, and about 90 percent of the mines in Ohio, West Virginia and Pennsylvania are down. A director, who describes the strike as bitter, does not expect a settlement before mid-February, although there will be growing pressure to end the strike because pensions funds will be depleted. Another source associated with a major coal producer expects the union may drop the right-to-strike issue in return for increased contributions by mine operators to the health and welfare fund.
Banks and thrift institutions report no signs of disintermediation, although growth in time deposits and passbook savings accounts has slowed. A large S&L is concerned that outflows from passbook savings accounts could occur if yields on 3-month Treasury bills exceed 7 percent. S&Ls have been increasingly active in the secondary mortgage market to support the high volume of mortgage loans. One association reported that it sold over $50 million of mortgages in 1977, or 10 percent of its portfolio, in the secondary market. Lenders, builders, and producers of home maintenance and building materials continued to be cautiously optimistic over prospects for new housing starts in 1978. One director expects new starts at 1.8 million units this year.