Beige Book Report: Cleveland
June 14, 1978
Fourth District economists who met recently at this Bank expect that the expansion will continue at least into the first half of 1979 unless economic policies become restrictive. Auto producers remain optimistic over sales prospects for that industry although some retailers expect a sharp slowing in consumer spending next half. Only scattered signs of bottlenecks and shortages are reported, despite operating rates in some key industries approaching effective capacity. Though bankers are satisfied with consumer response to the six-month savings certificates, the bulk of certificates represents a shift of funds from existing deposits rather than new money.
Twenty-five economists attending the bank meeting on the economic outlook slightly scaled down expectations for growth in output but raised them for inflation this year. The median forecast of the group indicated second-half gains in real GNP at about a 3.5 percent annual rate, followed by a 2.5 percent annual rate of increase in the first half of 1979. They expect the rate of inflation to increase by about a 6.5 percent annual rate from the third quarter of 1978 to the first quarter of 1979 and moderate to 6.1 percent in the second quarter of 1979. While the expansion is expected to continue into 1979, one economist forecasts a mild decline for two successive quarters during the first half of 1979 and three of the group expect either no growth or a small decline in early 1979, followed by a pickup the second quarter.
Expectations for consumer spending are mixed. An economist with a major automotive producer expects that total auto sales this year will amount to 11.3 million units and moderate to about a 10.8 million annual rate during the first half of 1979. He explained that consumer installment repayments relative to disposable income are not high by historical standards and that consumers have been using capital gains in housing to help finance purchases. New car sales have held up longer and at a higher rate than he expected in part because of prebuying in anticipation of rising prices and the belief that 1978 models represent the last of the big cars. A less optimistic viewpoint was expressed by an economist with a major national department store chain. He expects considerable slowing in the pace of consumer spending during the second half of 1978. A further gradual pickup in the personal saving rate, continued high rates of inflation at about a 7.5 percent annual rate by the end of this year, and an expansion of consumer installment debt are expected to contribute to a reduced rate of spending.
Economists expect generally that the rate of increase in fixed investment over the coming four quarters will be about the same as in the past four quarters. Some pointed out that orders in their industries, including heavy-duty trucks, printing and communication, and electrical equipment, are no longer accelerating, even though the volume of orders is well above a year earlier. Machine tool orders this year are well above a year earlier but are not accelerating. However, one economist expects larger gains in fixed investment over the next four quarters because commercial and other nonmanufacturing building contracts have been rising rapidly.
Officials and economists report only scattered shortages of labor, plant capacity, or materials, although operating rates are at or near effective capacity in a number of key industries, including primary metals, machine tools, building materials, and paper and paperboard. While shortages are not widespread, backlogs have been rising and delivery schedules have been lengthening in several industries.
Most shortages are in construction, particularly for insulating materials and drywall. There are complaints of railcoal car shortages. A capital goods producer complained about extended delivery in machine tools hindered his company's expansion program. Despite scattered shortages, several economists caution that demand and price pressures can surface anywhere along a supply schedule and not necessarily when operating rates are at capacity. Production of paper is at capacity and paperboard operations are at about 98 percent of effective capacity, but no shortages of labor and materials are reported. Some auto producers are operating above capacity on popular models without bottlenecks.
Others caution that effective productive capacity is often different from published capacity. For the past month, steel has been operating at about 92 percent of effective capacity, a level that approaches full capacity because a higher operating rate would require violation of environmental regulations. A major aluminum producer also has been operating virtually at capacity. On the other hand, a major producer of fiberglass insulation is operating at 105 percent of capacity and expects to operate at full capacity at least until additional new capacity becomes available later this year. He points out that the 600 additional suppliers of cellulose since the end of 1977 are providing new capacity for insulating materials. But the relevance of this capacity is unknown since government standards on insulation are being tightened.
Public response to the new savings certificates was rather mixed, according to officials with major district banks. S&Ls appear to have promoted the certificates more aggressively than the banks. Generally, all ten banks contacted are offering six-month certificates at maximum rates, with a few compounding daily and the others compounding monthly or quarterly. All banks are offering maximum rates on eight-year certificates. Some are compounding quarterly for deposits of $5,000 or less and others monthly for deposits exceeding $5,000. All but two of the banks described their advertising as heavy, but some feel their programs are not as aggressive as S&Ls. Consumer response to the six-month certificate is described as very good or favorable by most banks. On the other hand, response to the eight-year certificate has been slow. Still, one of the largest district banks reported that the eight-year CDs made up about 20 percent of its total volume of certificates. Bankers do not plan to change their promotional programs, except for one bank that indicates that after the June 30 interest payment date they will more aggressively promote six-month certificates. Only two banks reported that the bulk of the certificate sales represented new money. Some of the largest banks state that as much as 75 percent to 90 percent of funds obtained represented a shift from existing deposits. Most bankers feel the new certificates will not do much to improve the net flow of deposits over the next six months.