Beige Book Report: Cleveland
April 12, 1978
Businessmen and economists anticipate that the expansion will continue through 1978, despite the slow start in the first quarter. Retailers, however, are skeptical that first-quarter sales losses will be recouped. Industrial production should further rise this month as a result of a sharp comeback in coal production and a continuing pickup in steel and machine tools. Housing starts should recover sharply this quarter, but savings and loan associations are limiting mortgage commitments.
Financial officers and economists have not altered expectations for the economy in 1978, although their forecasts on inflation have been revised upward. There is some doubt, however, that a pickup in output and spending this quarter will fully recoup earlier losses. Moreover, several express concern that the overall rate of inflation will increase to about a 7 percent annual rate by the fourth quarter as higher coal prices, utility rates and recent steel price increases are passed on to final users. A few Directors emphasized that the accelerated rate of inflation is a dominant topic to their customers and should be considered a deterrent to business confidence.
Some retailers of general merchandise report substantial improvement in sales in March from February, but others indicate little improvement, because their pickup in sales occurred in February. Generally, none anticipate more than a seasonal gain this quarter. Spring merchandise has not been selling as well as expected, and apparel sales have slumped since last December. Inventories, especially of apparel, are judged as higher than desired and are being watched carefully. An economist with a major department store chain was disappointed that the increase in March sales was no larger than it was in view of Easter and sales promotions. The 8.8 million annual rate of new car sales last quarter was consistent with the expectations of several Fourth District economists associated with the auto industry. But sales fell about 5 percent short of the projections of an economist with a major auto producer who pointed out producers cannot easily make major downward adjustments in production schedules this late into a model year.
Coal production is increasing rapidly since the strike settlement. Output in the second full workweek following the settlement rose to nearly the record pace of last October. The industry expects to operate at capacity—16 million tons weekly—on a sustained basis. A Director cautions shipments from mines are a problem because of the poor condition of some highways in Appalachia and inadequacy of rail facilities that can also be a deterrent to new mine capacity. According to an economist with a major coal producer, the first year of the coal contract will result in a 10.2 percent increase in the price of utility and industrial coal, a 7.3 percent increase in the price of steam coal, and a 4.6 percent increase in metallurgical coal prices. Increases of about half as large are expected in the second year.
Steel operations continue to strengthen despite earlier expectations of a drop in orders following the coal settlement and price increases in February and March. March shipments were unusually strong, partially in response to weather-induced delays earlier this year. One steel economist expects production this quarter will rise to about 90 percent of effective capacity, compared with nearly 80 percent last quarter. Substitution of domestic for foreign steel because of the trigger price system is apparently providing this unexpected strength. Steel service centers which have purchased at least a third of their requirements abroad have sharply increased orders from domestic producers in recent weeks. Economists have been skeptical that this price system would curtail steel imports, but some now feel that imports after April will begin to drop sharply from recent peak volumes.
Officials and economists have not changed their forecasts that the increase in real capital spending this year will at best equal last year's increase. One official described his company's position for 1978 as still cautious. He attributed this to ample capacity, memories of high debt and low liquidity during the last recession, Government safety regulations and his company's phasing out a 25 million dollar investment for a new automotive product.
Recovery in medium trucks used especially by small businesses is still well below peaks reached in 1973, and inventories are judged to be ample because sales have fallen short of expectations. Machine tool builders, however, have become more optimistic following a peak in new orders last quarter and further gains are expected this quarter. One builder said backlogs for some highly technical lines have expanded to 85 weeks compared with 50-60 weeks a few months ago. They are operating near 90 percent of capacity.
Housing starts are expected to recover sharply from weather- depressed activity earlier this year. Last quarter's losses should be recouped this quarter. Some S&Ls claim demand for loans is even stronger than last summer because some banks appear to be less interested in mortgage lending than they have been. Mortgage rates have risen 1/4 to 1/2 point since March. To attract funds, a few S&Ls have instituted continuous compounding of interest on all deposits. Several report that they do not plan to limit mortgage lending in coming months, despite slowed growth in deposit flows, which, for some institutions, strengthened in late March and early April. Liquidity at some associations has fallen to reserve requirement limits. In view of tightening cash flows, a few are no longer writing loans for new customers or for multiple dwellings and are not lending to marginal builders. Some S&Ls also have eliminated 95 percent loans.