July 12, 1978
Summer vacations and the model changeover in the automotive industry are hampering this quarter's production of autos, steel, and coal in the Fourth District. Retailers are facing a larger than usual liquidation of stocks of new cars and of general merchandise. Capital spending still lacks a broad-based expansion, and demand for mortgage credit continues strong despite higher interest rates.
Retailers in the District are still cautious in their appraisals of consumer behavior. Car sales have been sustained at near-record rates since spring. Still, some auto producers expect annual rates of sales this half to fall about 6 percent from the 10 million annual rate of domestic sales last quarter. Inventories are large and still imbalanced, but a larger than usual summer runoff of stocks is expected (especially with a longer Ford shutdown for model changeovers because of downsizing of Ford and Mercury cars). Uncertain over sales prospects, officials with department stores expect smaller gains in real sales for the second half of this year as compared to the first half. Strength in sales has not been broadly based, and inventories of summer goods are heavy. Thus, retailers of general merchandise will be forced to vigorously promote goods throughout the summer with the result that some department and variety stores will likely experience either no improvement or another decline in profits this quarter. Also, some retailers apparently will be cautious in ordering fall and winter merchandise. An official with a major appliance producer reports a strong increase in unit sales of appliances, especially freezers. He reports some excess stocks of ranges and laundry equipment at the distributor level and believes stocks of appliances, except freezers, are large, although masked by a high volume of sales.
Steel production this quarter is not expected to fall as much as usual during the summer months, and industry economists expect the operating rate for the industry to hold close to 90 percent of effective capacity. Order books for July are full, in part because of another steel price hike at the end of this month, and order volume for August and September is better than expected in view of uncertainties over auto production and ample availability of world steel supplies. Steel economists are somewhat concerned over an unexpectedly large buildup of inventories held by distributors. While this buildup has not hampered orders, inventories may be more than ample later this year. Also, a common complaint is that the trigger price system does not seem to be working as evidenced by the much stronger than expected volume of steel imports in May. Steel price differentials have narrowed in favor of U.S. producers and have contributed to a sharply reduced volume of imports from Japan and Western European producers. But imports this year from Third World nations, including Korea, South Africa, and Spain, have risen sharply from a year earlier. Unless imports in June and succeeding months abate from the 18 million ton annual rate in May, some domestic producers may consider filing dumping charges.
The rebound in coal production following the long strike is being temporarily hampered by usual summer vacation shutdowns of mines. Production has failed to reach peak levels of late last year, which according to an industry economist, reflects weaker than expected demand for coal. Coal stocks apparently were not run down as badly as reported during the strike, and utilities are not rebuilding stocks as much as expected. According to some utilities, electric power consumption since the coal settlements has not risen in line with industrial activity because of conservation programs.
The continued lack of broad-based strength in capital goods industries is hampering a robust expansion in spending. For example, capital goods producers of rolling mills and steelmaking facilities still see no meaningful strengthening in sales this year. They report that their order backlogs so far this year have trended downward. A producer of turbines, generators, and nuclear systems reports sales to utilities are still soft, although industrial equipment business continues to be strong. On the other hand, a producer of computers, point-of-sale terminals, and electronics business machines reports sales and backlogs continue to rise, although not at an accelerating rate. A producer of printing and communication equipment reports a spurt in orders in June following a May drop and that backlogs are still growing but less rapidly than last winter.
Builders and mortgage lenders concur that demand for housing and mortgage credit remains strong, although there are some scattered signs of buyer resistance to high prices and tightened mortgage terms. Consumer resistance to higher mortgage rates is not as strong as during the tightness in mortgage markets in 1974, according to a financial officer with a major national builder of new houses. He expects housing starts to remain strong at least through the fourth quarter of 1978 regardless of sales. His firm's backlog has been stretched out because of bottlenecks in skilled labor and materials. Mortgage lenders, particularly S&Ls, report little sign of easing in demand despite rising mortgage rates. In Cleveland, for example, the rate of 80-percent loans is generally 9 3/4 percent, but a few S&Ls are charging 10 percent. Some are no longer making 95-percent loans or investment loans on land, apartments, and multifamily units.
S&Ls are quite pleased with response to the six-month savings certificate and indicate no waning in consumer interest since the initial offering in early June. These S&Ls, however, have been aggressively promoting certificates. Their view is that these certificates helped boost deposits in June to the best volume so far this year and have enabled these associations to meet strong loan demand. Some report that at least 60 percent of the certificates represent new money.