Beige Book Report: Cleveland
February 21, 1978
Blizzards and the effects of the coal shortage have distorted District economic activity for the past several weeks. Retail sales have weakened partly in response to prolonged sub-freezing temperatures throughout most of the District. The coal shortage has hampered manufacturing in some areas, and while layoffs have been minimal, mandatory curtailments in electrical power will cause considerable layoffs when imposed. Savings flows into savings and loans continued to soften in February and while commitments are not being cut back, officials are cautious over prospects for both commitments and mortgage loans for 1978.
Retailers of general merchandise and automobiles attribute some of the weakness in retail sales to severe winter weather. While recent poor performance of sales has not discouraged retailers, some appear less confident than they were a month or two ago. One official of a large department store chain, who remains optimistic for the short run, expects a 15 percent gain in first quarter sales over last year. Sales increases are expected to taper off as the year progresses. An economist with a national retail chain expected some let-up in sales this quarter following an unsustained rate of increase in the fourth quarter of 1977. Despite the large drop in sales during January, he still expects a 9 to 9 1/2 percent increase for the year. A banker noted that retail sales had been depressed directly and indirectly by the coal strike.
Auto producers and auto suppliers differ on expectations for auto sales and output this year. An economist with a major auto producer expects new car sales of 10.9 million units in 1978, only slightly below his original forecast of 11.2 million last fall. He believes that bad weather over a larger part of the country this year than last has been an important factor in holding down car sales. Auto suppliers, including producers of flat glass, tires and auto components, expect sales in a range of 10.5 to 10.7 million units this year. While suppliers generally note some easing and setbacks in orders from auto producers, none consider this of consequence.
The coal shortage has resulted in only scattered production cutbacks and layoffs, but worsening conditions can be expected if mandatory controls on electricity are imposed this week in some large metropolitan centers of the District. Of 9 major utilities in the District, all but 3 have plans calling for mandatory cutbacks in power usage that range from 25 to 50 percent when coal stocks fall to a 40-day supply. Three utilities that serve Toledo, Cleveland and Dayton have coal stocks that range from 52 to 60 days. Three utilities that have a mandatory cutback when stocks fall to a 40-day supply have a 43 to 50 day supply. Three utilities have coal stocks that range from 25 to 33 days' supply and plan mandatory cutbacks of 50 percent perhaps early this week. One of these utilities serves the Pittsburgh area and another serves northern Ohio.
The situation is of course fluid because of daily changes in supply conditions. A principal problem is that several utilities cannot physically increase purchased-power, and supplies of non-union mined coal has either dwindled sharply or has virtually ended. Although coal production this month is estimated at about 25 million tons, compared with a typical monthly average of 60-65 million tons, utilities claim these supplies are not available.
Several manufacturers have indicated that they can manage their operations with a 25 percent cutback in electrical power possibly by diverting production to other plants, reducing overtime, reducing the number of shifts, and perhaps, using small generator facilities. Larger cutbacks would result in sizable decreases in both production and employment.
Supplies of other fuels range from adequate to excessive. A large natural gas supplier in northeast Ohio expects supplies are adequate to accommodate continued below normal temperatures into mid-March, unless temperatures fall much below zero. Another supplier has requested voluntary conservation by its largest customers in order to assure adequate supplies for the coming month. Despite recent cutbacks in refining, inventories of crude, distillate fuels and gasoline are still well above normal levels.
Steel operations this quarter appear to be much improved from last quarter. Capacity utilization will probably rise to the mid-80's compared with about 75 percent last quarter. The improvement in part represents price hedge buying, stronger than expected orders for March represent some hedging against the possibility that steel operations will be curtailed by severe cutbacks. Recent steel price increases have been holding, which again is viewed as customer concern over steel supplies. The record volume of steel imports in December is the result of efforts to ship as much steel as possible before the effective date of reference pricing of steel on February 21. One steel economist estimates that the selling price of EEC steel shipped into the U.S. should be about $60 per ton higher than the U.S. price, rather than $80-$90 below U.S. prices.
Executives with thrift institutions are cautious about the outlook for mortgage credit. They have not cut commitments on new mortgage loans and do not expect to curtail commitments unless net savings flows deteriorate further. Officials generally feel there is room for further reduction in liquidity. The main source of concern is volatility of deposit flows, especially in passbook accounts. Most associations had a small gain in net deposits during January, although some larger associations had negative flows. Inflows so far in February are generally positive although outflows were experienced around February 16 when the two-year 7.7 percent Treasury note was offered. Despite positive inflows, several officials noted cash flow this year has been falling behind expectations and in some cases below the volume of commitments.
Mortgage loan demand in the District is described as strong or stronger than last year and one official explained the recent 1/4 percent rise in mortgage lending rates in Cleveland (generally 9 percent for an 80 percent loan) as an effort to restrain demand. Some associations expect to maintain lending by tapping the secondary mortgage market, and some others plan to either step-up or undertake sale of mortgage backed securities as an additional source of capital.