Beige Book Report: Cleveland
September 30, 1981
Summary
Respondents in the Fourth District generally report scaling
down their GNP forecasts for the third and fourth quarter of 1981
because of sustained high interest rates. Current interest rates are
expected to prevent improvement in capital goods spending over the
remainder of the year. Steel orders have experienced across-the-board weakness in September, caused by a weaker-than-expected
economy and ample availability of steel. Although retail sales have
been virtually flat, retailers and manufacturers expect some
improvement in household appliances at the expense of auto sales.
Housing construction remains at a standstill, with S&Ls continuing
to experience heavy outflows in September.
Outlook
Several economists now expect real GNP in the third quarter
of 1981 to have declined at a 1% annual rate. One, however, expects
a slight gain from higher consumer spending. A capital-goods
producer forecasts a slightly positive growth in real GNP in both
the third and fourth quarter of 1981 because further declines in
already depressed cyclical industries, especially autos and housing,
are unlikely. Some expressed concern that loss in consumer
confidence could have more serious dampening effects on spending
than now anticipated in most forecasts. A financial economist
expressed the view that interest rates are two to three percentage
points higher than warranted in view of the federal funds rate, and
expects money market rates to ease further as commercial credit
demands weaken. Several revised forecasts of real GNP show a
reduction in real GNP growth from over 3% to about 2% in 1982. Most
of that growth is expected to occur in the second half of 1982, in
response to lower interest rates and further tax cuts.
Capital Goods
A major reason for the weakness in capital goods
spending is the sustained high level of interest rates, according to
several respondents. However, several report that low utilization
rates and low profitability are equally important in restraining
capital spending programs. A capital goods producer notes that a
large share of investment funds is going into acquisition rather
than new capital. A machine tool producer reports that shipments of
cutting tools in 1981, which have been supported by substantial
reduction in backlogs, will exceed 1980 by about 15% in nominal
terms and 6% in constant 1972 dollars. The oil field equipment
industry remains among the few bright spots in capital expenditures,
as even auto producers are canceling or delaying machine tool
orders. A motor vehicle supplier reports that truck-related orders
are very weak, and truck sales are projected to fall 3% below last
year's depressed level.
Steel
A slight pickup occurred in steel orders during August and
early September, but orders have since flattened. Orders, according
to a steel economist, are now falling behind expectations, as the
economy fails to strengthen and customers become less concerned
about steel availability. Operating rates are currently between 75%
and 80%, with the order intake equal to about 70% to 75% of
capacity. Shipments in the second half of 1981 are expected to
decline 10% from the first half levels. Some inventory building
appears to be occurring at the warehouse level, apparently because
of a sharp increase in steel imports. An industry economist is also
concerned that a typical year-end inventory liquidation could reduce
shipments below the expected 90 million tons in 1981. Shipments in
1982 are expected to increase about 3%.
Consumer Spending
Retailers generally report sluggishness in sales.
Some are still optimistic over prospects for the next quarter, while
some expect smaller year-to-year gains. Sales of household
appliances, such as dishwashers and ranges, are weak, while
microwave oven and air conditioner sales are among the few bright
spots. A weak housing market will prevent much of a recovery in
production and sales of consumer household goods, according to an
appliance producer, but some improvement is likely in the fourth
quarter if consumers decide to shift their spending pattern from
autos to other durable goods. Several respondents report that
inventories of consumer durable goods are low. A major national
retailer, however, asserts that retail inventories in the third
quarter were boosted across-the-board involuntarily because
retailers generally over-anticipated sales gains. Therefore, he
expects curtailment of stocks in the fourth quarter in response to
moderate increases in sales and price promotions. Retail sales in
the Pittsburgh area so far this year have amounted to about 1% below
the national rate, according to a bank economist.
Higher auto sales since the August rebates have reduced inventories substantially, according to some area auto dealers. However, an economist with an auto producer reports that sales in September were well below their expectations. Even though inventories were reduced in recent weeks, dealers are unlikely to build stocks of 1982 models because of sluggish sales and high cost of floor plans. He expects a 5.7 million annual rate of sales for at least the next two quarters, with little prospects for recovery until the second round of tax reductions next summer. A local dealer reports that dealer margins have held steady because of less willingness to negotiate price. An import dealer reports a well-balanced 30-day supply of new cars.
Housing
Housing construction remains depressed, reports a major
regional builder, with orders for custom houses well below half of
year-ago levels. Consumer traffic has been off only about 10-15%,
but many applicants fail to qualify for mortgage loans. A local
builder has reduced his work force to a fraction of last year's
levels, and fears the prospect of closing when his current line of
bank credit ends in October. Several respondents expect no
improvement in residential construction for the remainder of 1981,
and a consumer durable goods economist is forecasting new housing
starts at 1.5 million units in 1982. A housing analyst anticipates a
recovery beginning mid-year 1982, even if mortgage rates were to
fall to 14%.
S&Ls continues to be hard pressed by heavy outflows of funds, despite some success in attracting funds away from banks through repurchase agreements, jumbo CDs, and 30-month certificates. Losses in passbook accounts, certificates of deposit, and money market certificates have more than offset gains from repos, according to an economist for a regional FHLB in the District. September outflows are expected to be worse than August, but not as bad as the near-record losses in July. Several respondents expect the "all savers" certificate to improve the cost position of S&Ls, along with the recent decline in interest rates. Nevertheless, a sharp step-up in merger activity is expected over the next few quarters.