March 25, 1981
Summary
Respondents in the Fourth District expect output next
quarter will probably weaken from the first quarter and indeed may
decline, but they forecast a more rapid recovery in the second half
of 1981 than projected by the Reagan Administration. Near-term
inflation may also improve more than indicated in the Administration
scenario. Retail sales in the District remain weak, except for auto
sales, which have improved in response to widespread rebate
programs. Steel orders and shipments are holding up well. Although
capital-goods spending has not yet turned around, some signs of
bottoming out are reported. Housing is weak, but industry officials
foresee declining mortgage rates in the second quarter of 1981.
Outlook
The Fourth District Round Table forecasts of 28 economists
on March 13, 1981, were generally more optimistic for 1981 than
indicated in the Reagan scenario. The median forecast shows growth
in real GNP of about 2.4% between the fourth quarter of 1980 and the
fourth quarter of 1981, but with an increase in the implicit price
deflator of 9.4% and an unemployment rate of 7.5% in the fourth
quarter of 1981. Only one of the group expects a two-quarter decline
in real GNP, as a result of strains in financial markets, while 11
expect a one-quarter decline in real GNP next quarter of less than a
1% annual rate. Rates of change in real GNP, according to the median
forecast, are expected to accelerate to about 4% and 5% in the
fourth quarter of 1981 and the first quarter of 1982, respectively.
Prices and Output
Round Table economists were sympathetic with, but
doubtful of, the Reagan scenario for prices and output into the mid-
1980s. A bank economist pointed to an inconsistency between a
projected decline in money stock growth and double-digit growth
rates in nominal GNP during 1981-84, implying faster-than-trend
growth in velocity. He acknowledged that even his projections of
growth in output of 3% to 31/2% and 4% to 5% in the GNP price
deflator by 1984 imply somewhat above-trend growth in velocity.
Another economist asserted that the Administration's projected
growth in output might be achieved and that price performance may be
somewhat better than in the Reagan scenario until 1983-84, when
supply constraints would reverse the near-term moderating trend in
prices. Optimism over the price outlook stems from an expected
cyclical recovery in productivity, supported by deregulations that
will improve cost performance and by less intense pressure from COLA
clauses as inflation begins to unwind.
Consumer Spending
Recovery in real retail sales in the Fourth
District has been weak and well below the national average because
of softness in the District's economy. An economist associated with
a major national department store chain expects retail sales in the
District to continue to be sluggish. Nationally, he expects nominal
retail sales to increase 101/2% from the fourth quarter of 1980 to
the fourth quarter of 1981. Department store sales will increase
only 9% because of an expected slow recovery in furniture and
appliance sales. In 1982, an 11% increase in retail sales is
expected, with real growth between 4% and 41/2%. Inflation and the
latest Social Security tax increases will slow but not stop the
recovery in consumer spending.
Auto sales in this District picked up because of the recent rebate programs, which an industry economist estimates boosted new car sales 150,000 units nationally. A foreign car dealer reports a 12% increase in sales since the beginning of the year, but does not expect imports to gain market share during 1981. An auto economist notes that high interest rates have not deterred auto sales as much as expected, but have constrained dealer purchases and inventories. He cites a big shift in auto financing from banks and credit unions to auto finance companies, which are offering lower interest rates.
Steel
Steel orders over the past four weeks have been running
higher than expected, according to several industry economists. Even
sheet steel has been relatively strong in recent weeks, partly
because auto production schedules in March were above February's.
Steel shipments in the first quarter will be marginally higher than
in the fourth quarter of 1980 and are expected to increase by two
million tons in the second quarter, mostly because of seasonal
factors. Forecasts for 1981 show a 7% increase in shipments from
1980, with the volume of imports no higher than in 1980. The bulk of
the improvement in steel shipments during 1981 stems from an end to
inventory liquidation.
Capital Goods
Capital-goods spending appears to have troughed.
Noting some firming of orders during the first quarter, a durable
goods producer expects a recovery in factory sales of nonelectrical
machinery throughout 1981. Factors contributing to the recovery
include an expected 2% real growth in durable and nondurable goods
consumption, a better-than-expected level of construction outlays, a
slowly rising trend in capacity utilization rates, and a declining
user cost of capital. Heavy-duty truck sales are expected to
increase about 8% during 1981, with deregulation having no adverse
affect on overall truck buying. However, metal cutting orders have
continued to slip throughout the first quarter, according to a
machine tools producer, and as yet have shown no sign of turnaround.
Backlogs have been reduced to less than 14 months from a peak of 18
months in July 1980. Capital spending should accelerate over the
next few years because of proposed tax policies and capacity
constraints that may surface by 1982. However, economists with steel
and rubber producers assert proposed business tax changes will not
speed investment until enough cash flow is generated to support
higher spending.
Housing
The bulk of the thrift institutions in the District may
show losses through the first half of 1981, but the industry will
remain viable, according to an economist with a regional FHLB. Rates
on jumbo CDs and money market certificates have declined from three
months ago and should allow some easing in the cost of funds and
mortgage rates in the second quarter of 1981, according to an S&L
official. In addition, deposit flows are expected to be positive,
although weak, in 1981. Another S&L official reports that NOW
accounts have surpassed expectations, but remain a small portion of
total deposits.
Housing starts are expected to fall below 1980's pace, according to a major area builder, with funds for speculative building virtually shut off at the present time. A bank economist reports that small builders are under severe financial strain and have contributed to bankruptcies among their subcontractors and to income problems of several area S&Ls that financed speculative building. A bank economist believes that mortgage rates may decline to 13% in the near future if the cost of funds continues to ease.