Beige Book Report: Cleveland
May 14, 1980
Respondents in the Fourth District generally agree that the economy is in the early phases of a deep recession, but opinions vary on the depth of the recession and the extent of the recovery. Perhaps the most optimistic comments came from the machine tool officials who still report better-than-expected strength in new orders. However, the business sector as a whole is apprehensive amid signs that the slump in automobiles and auto-related products is spreading to other consumer goods. District banks have experienced declines in consumer loans, mostly concentrated in auto loans, and a dramatic decline in the growth of C&I loans as a result of high interest rates and credit restraints. Housing continues to slump despite declining mortgage rates.
The economic outlook continues to deteriorate, with rising prospects for a worse than "average" recession. An auto industry economist states that April figures will show that the recession is no longer concentrated in autos and housing. A durable-goods producer is concerned that the sharp decline in April may be a harbinger of a recession rivaling 1973-1975. He, along with several other economists, expects the second quarter decline in economic activity to be about the worst of the recession. However, the decline is so sharp and so sudden that several respondents now see a recovery to be sluggish. An economist for the steel industry states that firms have not had time to adjust to the collapse in orders, so that no firm or industry will be in a position to lead a recovery. A bank economist notes that even the decline in interest rates is unlikely to provide much stimulus because the decline has been so sharp that it has raised expectations of further declines in the near term. A few economists, however, expect a sharp rebound in response to the rapid decline in interest rates, a tax cut, and completion of inventory liquidation.
The machine tool industry has not exhibited any major softening in orders in recent weeks, according to several industry spokesmen. Orders in nominal terms have held up better-than-expected. Effects of the recession on the industry will be delayed until the profit squeeze among customers is intensified and evidence of the severity of the recession is apparent. A capital-goods producer reports that capital spending plans have not yet been canceled. However, a major auto producer recently announced plans to cut back capital spending over the next few years, except for retooling, and a steel producer is petitioning the EPA to allow stretching of compliance deadlines until cash-flow improves. Nevertheless, an economist for a machine tool builder states that a decline in machine tool orders (in nominal or real terms) is unlikely to be as serious as in 1974-1975 because of continued need for retooling in the automotive industry, strength in the aerospace industry, a buildup in defense spending and a tendency for some companies to look beyond the current recession.
Some retailers are uncertain over where the trough in consumer spending is, and see little happening to build consumer confidence in the near-term. Among nondurable goods, consumers are reacting to high prices by reducing usage and shifting to generic names, according to a producer of household products. Several retailers note a majority of consumer purchases since February has concentrated on sale items. A spokesman for a major food chain reports that consumers are shifting to fresh rather than prepared foods, although frozen food discount stores are thriving. The decline in retail business is not expected to result in layoffs, but will lead to a reduction of hours worked, according to an area retailer.
Automobiles and auto-related products continue to be the hardest hit consumer goods. Spring car sales, according to an industry economist, are dismal. One official blamed high interest rates, credit restraints, and shift in consumer preference to 4 cylinder cars for the drop in domestic new car sales. Some improvement is expected by fall because of new small cars by Ford and Chrysler. If interest rates drop further and credit restraints are lifted, auto dealers are not expected to carry large inventories and are unlikely to discount as heavily as in recent weeks. Several auto dealers report that the slump in sales also includes used cars, which is unusual for recessions. Tire shipments, which are 30% below year-ago levels, reflect the slump in auto sales, although an industry economist states that inventories are at a two-month level, compared to a nearly three-month supply in 1974-1975. Gasoline sales are off as much as 10% from year-ago levels as a result of a shift to more fuel-efficient cars and higher prices, according to a petroleum economist.
Weakness in consumer spending has led to sharp production cutbacks among consumer-goods manufacturers and their suppliers. A major producer of household appliances reports that a weak replacement market, coupled with the housing slump, has contributed to a widespread decline in consumer durable goods orders. Order books for steel, according to an industry economist, have collapsed, with order entries now 50% below month-ago levels and cancellations well above normal. Except for oil field drilling equipment, the decline in orders is pervasive and would sustain only 50% of existing steel capacity. Although still relatively strong, orders in the aluminum industry also dropped substantially in the last two weeks of April, according to an industry economist.
District bankers report little problem staying within credit restraint guidelines. High interest rates have finally discouraged C&I loans, according to a bank economist. Several bankers report that funds are available and an area manufacturer reports that some banks are initiating offers of expanding credit lines. An economist in the capital goods industry notes that declining interest rates have resulted in replacement of old debt, but not much new borrowing. Several auto dealers report an inability to sell commercial paper to banks because of bank restrictions on the growth of credit. A bank economist reports that credit card purchases have also declined and bank credit card cash advances are off 5% from a January peak.
Mortgage lending rates by S&Ls dropped sharply in recent weeks. Several S&Ls report lowering mortgage notes from a 16-17% range to a 14-15% range, with some to 13%, because of weakening demand and declining marginal cost of funds. However, some officials feel that a 12-13% range may be insufficient to stimulate housing demand. The severe slump in new housing sales continued through April and a major regional builder of new houses reports net sales are 25% of year-ago levels and cancellations have been heavy.