Beige Book Report: Cleveland
August 7, 1979
The majority view among area businessmen and economists is that the recession began in the second quarter and will continue through the second quarter of 1980. The recession will be slightly deeper and longer than previously believed, mainly because of recent energy developments. Most manufacturers continue to operate close to capacity on the strength of backlogs. Capital goods producers report that capital spending has lost some momentum, but most do not expect a decline in spending until the fourth quarter. A slight rebound during the third quarter is expected in the consumer sector, but not enough to reverse the negative second quarter numbers. Gasoline flows are improving and may aid in the deceleration of price increases. Mortgage loan demand remained strong over the last few months. The city of Cleveland may be unable to meet its own repayment schedule on defaulted notes.
Several area economists have revised their forecast to show a slightly deeper and longer recession lasting through the second quarter of 1980 in the absence of fiscal stimulus. They attribute the downward revision primarily to recent energy developments. An economist in the energy industry is optimistic that consumers will adjust quickly to the higher energy costs. A producer of major appliances expects that the decline will be gradual with a relatively mild inventory adjustment occurring primarily in the fourth quarter.
Among primary metals producers, production continued at "effective" capacity, but with emerging signs of a slowdown. Steel economists report only small declines in production over the past few weeks and backlogs are still high. However, steel orders booked three months in advance have slowed considerably and backlogs are expected to be declining by September. The aluminum industry has not experienced a severe turndown in demand, but production is slightly slower than last month. Modest declines have occurred in production lines related to housing, auto and other consumer sectors. An aluminum economist reports that the industry is still below its optimal level of inventories and is expecting a record year in shipments.
A mild recession forecast is based upon the capital goods sector remaining strong at least until the fourth quarter. An official in the machine tool industry reports that production at his plant has returned to a more normal capacity with the recent elimination of overtime. He feels that capital goods spending is no longer in an expansionary phase, but that production should remain steady through the third quarter on the strength of order backlogs. Most manufacturers report that investment projects already underway should continue, but projects where money has not been appropriated are being postponed. Exceptions are aerospace and energy industries.
The Fourth District, especially Ohio, fared better than most of the U. S. during the energy crisis. An economist in the petroleum industry explained that access to Alaskan crude oil provided adequate supplies that could be traded for better gasoline-making crude. Refineries have been operating over 100% of capacity for the last six weeks. No closings or disruptions were reported by industries due to fuel shortages.
Prices remained strong, but many officials expressed optimism that price pressures would be weakened by the recession. Improved gasoline supplies should contribute to a slowing in the rate of gasoline price increases. However, an economist in the consumer durables sector calculated the underlying rate of inflation (less food and energy shocks) at 10%. He expects double-digit inflation for the remainder of the year, but some moderation in 1980.
The consumer sector may experience a marginal rebound in the third quarter, but not enough to reverse the negative growth in the second quarter. Retail sales started to soften in May and continued through June. Although July sales are slow, they are still almost even with the pace during July of last year. However, a supplier to the auto and appliance industries feels that consumers are glutted with cars and appliances because of heavy anticipatory buying between August of 1978 and May of 1979. Manufacturers fear that auto inventories are too heavy and that other durable goods will soon follow.
District officials were encouraged by the strength of the housing sector. A severe downturn is not anticipated because the underlying demand f or housing remains strong. Although housing sales have slowed and mortgage demand is down relative to last year, mortgage demand has stabilized in recent months and still exceeds supply. Consequently, S&Ls report some tightening of terms of mortgage loans. S&Ls continue to report difficulty in raising money since March, although the overall amount of savings has been quite strong over the first half of 1979. Barring further rises in money market rates and severe disintermediation, S&Ls anticipate a relatively mild housing turndown.
Cleveland's financial situation has shown little improvement despite the optimism after the March income tax hike. Rescue legislation has slowed in the State Senate and is unlikely to emerge before the mayoral campaign begins this fall. City financial records show that four special divisions in the city's budget have overspent by $4 million so far this year. Most sewer and street repairs have been halted. A special ordinance was required to allow a last minute roll-over of city notes using Water Department improvement funds. The city's own plan to repay the $14.5 million in defaulted notes with $1.5 million installments beginning in August may have to be abandoned due to the lack of funds on hand.