January 27, 1982
Summary
Most Fourth District respondents expect the economy to
reach its trough near the end of the first quarter, and anticipate
recovery in real CNP by year-end in a 3%-4% zone. Capital-goods
producers are generally pessimistic, citing low capacity utilization
and high interest rates. Steel shipments should begin to rise near
the end of the first quarter, as the current phase of rapid
inventory liquidation by steel users about runs its course. Some
relief from steel imports should also boost shipments in the second
quarter. Department store sales fell sharply in January, and bank
installment loans show weakness. A little improvement is expected in
national car sales but car sales locally are very weak. Prospects
for house construction, house financing, and savings and loan
associations in the District remain dismal.
Outlook
Most respondents expect the recession to reach its trough
near the end of the first quarter, as inventory adjustment is
largely completed, although one bank economist expects the trough
near the end of the second quarter. All respondents expect the
recovery to be sluggish by historical standards with perhaps 3% or
4% (a.r.) growth in real GNP in the fourth quarter. No respondent
looks for either consumer or business spending to surge in 1982. An
economist with a major automobile producer asserts that if the July
tax cut was canceled or delayed consumer confidence and auto sales
would fall sharply. He asserts Chrysler and Ford would go bankrupt,
and General Motors would have to sell some non-automotive assets to
obtain cash.
Capital Goods
Capital-goods producers are generally pessimistic,
rejecting the notion that capital goods could lead the recovery. To
the contrary, some expect a trough next quarter and cite low
capacity utilization, sluggish sales of consumer goods, and high
interest rates as reasons for expecting a mild second half recovery.
One producer sees no sign of higher business spending in response to
changes in the tax code, and notes that rising interest rates in the
second half could choke off recovery in capital-goods production. A
producer of machine cutting tools notes that his shipments are being
supported by backlogs, but backlogs are falling rapidly because
shipments to customers exceed new orders by a ratio of 3 to 1. Users
of his capital goods are still laying off workers and he expects it
may be 1983 before real spending on capital goods increases. Another
capital-goods producer reports that the long decline in his orders
seems to have bottomed out in recent months, but he expects a "U"
shaped instead of a "V" shaped recovery.
Steel
An economist for a major steel producer reports that
shipments, new orders, backlogs, and employment at his firm are
expected to fall again in January. He expects more layoffs and
shorter work weeks in the first quarter. An economist for another
major steel producer notes that steel mill inventories are still
high, and the near-term production outlook is dismal. Steel users
currently are engaged in a very rapid inventory liquidation that he
believes will be largely completed in the first quarter, permitting
an upturn in shipments at the end of the first quarter. He expects
some relief from imports in the second quarter because of anti-
dumping and countervailing duty petitions and he expects some
stimulus in the third quarter from an increase in steel consumption.
He notes some weakness in demand for oil country goods used in
shallow wells, although demand for deep well goods is still firm.
Inventories
Excess inventories of new autos, auto-related products,
steel, and aluminum will hold down operating rates to 60% or lower
at least this month and next. A retailer, however, believes sales of
department store-type goods were underestimated in December and that
inventories thus were overstated. Consequently, inventory adjustment
this quarter should be less than last. A major appliance producer
reports that the sharp production cutbacks in recent months were
associated more with effects of declining housing starts than with
excess retail inventories.
Consumer Spending
Some respondents believe the trough in real
consumer spending occurred in October, although recovery will be
sluggish this half year. Sales of department store goods apparently
fell sharply in January. One economist notes that price promotions
usually held in January were moved to pre-Christmas, causing
December to borrow from January sales. Another economist believes
January sales were depressed by unusually bad weather. He expects
growth in real consumer spending this year of about 2% or 2 1/2%.
Some local bankers report a collapse of demand for installment
loans.
Automobiles
An economist for a major producer looks for slowly
rising sales in 1982, from 7.8 million (a.r.) (including imports)
this quarter, to 10.0 million (a.r.) in the fourth quarter, assuming
no change in the scheduled tax cut and no price reduction from
GM/UAW bargaining. First quarter sales should be helped by price
promotions (Chrysler and Ford) and introduction of some new models.
A large domestic automobile dealer notes that his sales in the first 19 days of January were the worst he has ever experienced. Sales are retarded by high interest rates and customers waiting for price reductions from GM/UAW negotiations. Another dealer of both domestic and foreign automobiles reports that traffic in his import showroom has slowed as much as in his domestic showroom.
Housing and Thrifts
Officials associated with the thrift industry
in the District anticipate a very sluggish recovery in housing
starts in 1982. Very little loan business has been transacted
because of prevailing mortgage rates. Some officials believe
mortgage rates no higher than 14% will induce substantial demand,
because inflationary psychology is no longer a factor since prices
of houses have stopped increasing. They are also skeptical that
nonconventional financing will support a recovery, and assert that
neither some lenders nor buyers are yet adjusted to variable rate
mortgages or other kinds of nonconventional financing. Thrifts are
very cautious about commitments and loans because of uncertainty
over deposit flows. Many aggressively promoted the new IRA account
but one thrift official claims that IRA deposits in January amounted
to only three-fourths of one percent of their deposits. He also
complains that the new accounts are adding further to their cost of
funds, which in 1981 was about 10.9% and which he expects will rise
to 11.8% in 1982. Some officials are also concerned that cash flow
generated from repayments of existing mortgages has been cut by
almost one-half in the past two years. A few savings and loan
associations that made slight profits last year expect losses in
1982. They assert that costs cannot be cut much further because
substantial reduction in employment and salaries has already taken
place. A major regional builder of houses in the District plans to
respond to the bleak outlook by building smaller houses in 1982. He
expects mortgage interest rates to be higher in the second half of
this year than the first, and will build and market as many new
houses as possible this half.