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Beige Book Report: Cleveland

March 23, 1982

Summary
Economists have scaled down their forecasts of economic activity for 1982. The steel industry is being squeezed between weak demand and strong imports. Business construction is mixed. Steel and petroleum product inventories are falling. Home appliance production has been curtailed. Bankers are lending cautiously as their customers' financial positions weaken. Usury laws are limiting bank automobile financing. Pressures on labor and parts suppliers for cost reductions are substantial. Unemployment rates are high and rising amidst a rapid pace of plant shutdowns.

Outlook
Economists who attended the Fourth District Roundtable Meeting on March 12 at this Bank scaled down their forecasts of economic activity for 1982 from their late-October forecasts. The median of 33 forecasts now shows a 3.3% annual rate of decline in real GNP this quarter, a small upturn next quarter, and growth rates between 4 and 4 1/2% (a.r.) in the final two quarters. All but three forecasters expect positive growth in the second quarter. The median forecast shows the GNP implicit price deflator rising at a 6.6% rate in the first half and a 7.0% rate in the second half. The unemployment rate is expected to peak at 9.2% next quarter and ease to 8.7% in the fourth quarter.

Capital Goods
A major steel company reports "the first glimmers" of improvement in orders for a few products, but total orders are still damped by users' inventory liquidation. That firm's profit margins are being squeezed between rising costs and the decline in product prices that was aggravated by the January jump in steel imports. Another steel firm reports that imports are "demoralizing" markets, and prices are "extremely weak and unstable." Both firms expect their inventories and employment to decline again in March. Another steel firm reports orders have recovered almost to their December level following a decline prompted by the early-year increase in interest rates. Three major steel firms' forecasts of 1982 domestic steel shipments range from 82.5 to 89.0 million tons, compared to 87.0 million in 1981.

A major producer of machine tools reports order cancellation rates are high and sales of consumable cutting tools and supplies are down. He has furloughed workers in the last month, expects to lay- off more, and foresees no upturn this year.

Construction
A fabricator of aluminum cans and a producer of polymers both recently announced major expansions of their production facilities. Cleveland and Pittsburgh are experiencing booms in office building construction. Oil and gas drilling activity in southern Ohio is down 12% from "a fantastic level" in 1981. A petroleum company economist expects no increase in total domestic drilling this year. A major steel firm announced deferral of plans to double its capacity to produce pipe for the oil and gas drilling industry.

Inventories
A petroleum industry economist reports that petroleum product inventories are being liquidated but crude inventories are not being liquidated. Two major steel firms report their inventories fell in February and will fall again in March. An aluminum producer reports that fabricator inventories are extremely low while producer inventories are high.

Durable Consumer Goods
A major manufacturer of home appliances reports appliance production has been sharply curtailed in the last three months in a lagged response to the decline in house construction. He expects more layoffs of appliance workers and notes these may be permanent because appliances are no longer a growth industry. Nevertheless, he expects retail sales of appliances to be better in the second half.

Commercial Bank Lending
A banker in a small city expects many failures in agriculture, construction, and automobile agencies and sees weak markets for resale of property acquired from bankrupt clients. His bank will have to curtail loans to firms whose net equity has disappeared. Banks will no longer extend credit to tenant farmers without a signature from the land owner. Some farmers are selling their cattle to finance their spring planting. A Pittsburgh banker reports that Ford and Chrysler captive credit companies are no longer extending credit in Pittsburgh. Local bankers do not want to make automobile loans because the state usury law ceiling is too low, so the automobile dealers are having great difficulty financing sales. An auto producer estimates that with a prime rate of 16.5%, usury laws make bank lending for automobile loans unattractive in 21 states accounting for 37% of the U.S. car market.

Cost of Production
A petroleum company economist expects the cost of drilling oil and gas wells to rise by 10% this year after rising between 20% and 30% annually in the last two years. A food industry economist expects sizeable commodity price increases in 1982.

Pressures on labor and parts suppliers for cost reductions are substantial. A meat packer in Cincinnati is threatening to move unless labor concessions are granted. An auto industry economist reports that because of recent union concessions, his firm's labor costs will rise by 15%-18% instead of 25%-30% over the life of the contract. A truck parts manufacturer has eliminated COLA for all non-union employees. A tire manufacturer has eliminated COLA for white collar workers. A Pittsburgh electrical contractor reports electricians' union acquiescence to time and one-half pay for overtime instead of the area tradition of double time. A bearing manufacturer has received demands from six Fortune 100 customers in the last 30 days for price reductions ranging from 2% to 7 1/2%, and believes his competitor is yielding to similar demands.

Unemployment and Plant Closings. Recession effects have spread and deepened throughout the Fourth District. Unemployment rates are higher in the Fourth District than national average. For the top 11 SMSAs in this District, the January NSA unemployment rates range from 8.8% in Columbus to 13.8% in Toledo and 15.7% in Youngstown.

The rapid pace of plant shutdowns continues in the District. The most recent is the closing of a 65 year old rubber plant in Akron that will result in a permanent job loss for nearly 1,300 salaried and hourly workers. The plant was the sole surviving producer of auto passenger tires in Akron, once the tire- producing capital of the U.S. (Since 1979, 14 tire plants in U.S. have closed.) Also, in mid-February, GMC announced the closing of a stamping plant in Cleveland that employs 1,200 workers. The announcement that a second Cleveland plant, employing 1,700 workers, would be closed apparently will be rescinded as part of the recent GM-UAW agreement.