Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, April 18, 1978 : Redbook

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CONFIDENTIAL

(FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the
F e d e r a l O p e n M a r k e t Committee
by the Staff

A p r i l 1 2 , 1978

T A B L E OF CONTENTS

SUMMARY page i
First District-Boston page 1
Second District-New York page 4
Third District-Philadelphia page 7
Fourth District-Cleveland page 10
Fifth District-Richmond page 14
Sixth District-Atlanta page 17
Seventh District-Chicago page 21
Eighth District-St. Louis page 24
Ninth District-Minneapolis page 27
Tenth District-Kansas City page 30
Eleventh District-Dallas page 33
Twelfth District-San Francisco page 36

SUMMARY*
[Asterisk: Prepared by the Federal Reserve Bank of Philadelphia.]
Reports from the twelve District Banks this m o n t h u n a n i m o u s l y indicate
a n expanding e c o n o m y .

The effects of a severe w i n t e r a p p e a r to h a v e b e e n

largely o v e r c o m e , and economic activity in the regions affected by the nowsettled c o a l strike has returned to n o r m a l l e v e l s .
s t r o n g , as is the manufacturing s e c t o r .

R e t a i l sales a r e generally

Crop prospects f o r this y e a r are

g o o d , b u t spring planting is reported to b e behind s c h e d u l e , a result of the
harsh winter weather.

C o n s t r u c t i o n activity is strong o v e r a l l .

Mortgage

demand is m a i n t a i n i n g its s t r e n g t h , but business loan demand is m i x e d .

The

f e a r of accelerating inflation is p e r v a s i v e , and is seen as a m a j o r stumbling
b l o c k to continued r e a l g r o w t h .
R e t a i l sales are a m a j o r source of strength in the renewed e x p a n s i o n ,
according to this month's r e p o r t s .

B o s t o n and Cleveland observe some softness

in this s e c t o r , but v i r t u a l l y a l l of the other Districts indicate a strong uptick this m o n t h .

Chicago notes that big*-ticket items are the best s e l l e r s .

In a d d i t i o n to gains in department store s a l e s , automobile purchases are also
reported to be up s u b s t a n t i a l l y .

T h i s , h o w e v e r , stems partly from suppressed

d e m a n d in the first q u a r t e r .
E x p a n s i o n i n the goods-producing industries is evident in a l l D i s t r i c t s
w i t h a sizable m a n u f a c t u r i n g s e c t o r .
strong.

Durable goods industries a r e particularly

C a p i t a l goods production is said to be on the upswing in B o s t o n , N e w

Y o r k , and C h i c a g o , w h i l e R i c h m o n d indicates consumer goods output to b e strong
also.

Improvement in the s t e e l industry is cited across the b o a r d , a result

of b o t h the surprisingly effective trigger-price s y s t e m , instituted by the

A d m i n i s t r a t i o n earlier this y e a r , and a generally rising demand f o r s t e e l in
recent months.
C o n s t r u c t i o n activity is generally strong i n A p r i l .

A t l a n t a and

C l e v e l a n d report optimism among builders that 1978 w i l l b e a good y e a r f o r housing.

N o n r e s i d e n t i a l c o n s t r u c t i o n is expected to f i l l any gap that m a y o c c u r

in the housing m a r k e t l a t e r this y e a r .

C h i c a g o , o n the o t h e r h a n d , expects com-

m e r c i a l and i n d u s t r i a l c o n s t r u c t i o n to lead the w a y , and h o u s i n g starts to d e c l i n e .
Economic conditions in the a g r i c u l t u r a l s e c t o r a r e f a v o r a b l e .

Kansas

C i t y , A t l a n t a , and R i c h m o n d a l l report s t r o n g e r farm p r i c e s , and farm income is
projected to increase in 1 9 7 8 .

A d v e r s e w e a t h e r conditions h a v e d e l a y e d spring

p l a n t i n g to some d e g r e e , but this is not thought to b e a serious s e t b a c k .
In the banking s e c t o r , District reports show b u s i n e s s b o r r o w i n g to b e
m i x e d this m o n t h .

M i n n e a p o l i s , R i c h m o n d , and B o s t o n say demand f o r C & I loans

is s t r o n g , w h i l e N e w Y o r k and P h i l a d e l p h i a banks show s o f t n e s s .
d e m a n d projections are no less v a r i e d .
m o s t D i s t r i c t s is s l a c k .

F u t u r e loan

A t the same t i m e , d e p o s i t g r o w t h in

A l t h o u g h c a s h flows are said to b e tightening in some

a r e a s , d i s i n t e r m e d i a t i o n doesn't a p p e a r to b e a m a j o r cause f o r c o n c e r n at this
time.

T h e m o r t g a g e m a r k e t is reported to b e generally t i g h t .

San Francisco and

Cleveland say some S&Ls are n o w refusing m o r t g a g e s o n c e r t a i n types of d w e l l i n g s .
M o r t g a g e rates h a v e r i s e n recently and n o w stand in the 9 1 / 4 - 9

3/4 percent

range.
S e v e r a l Districts commented o n the w i d e s p r e a d fear of a c c e l e r a t i n g
inflation in the n e a r f u t u r e .

Boston, Cleveland, Minneapolis, and Atlanta a l l

indicate concern among b u s i n e s s m e n about a h i g h e r r a t e of p r i c e i n f l a t i o n l a t e r
this y e a r .

H i g h e r p r i c e increases a r e deemed a d e t e r r e n t to b o t h c o n s u m e r and

b u s i n e s s c o n f i d e n c e , and therefore to continued economic e x p a n s i o n .

Moreover,

half of the District reports indicate that inflation i s , in f a c t , expected.to
heat up as w e m o v e into the second half of 1 9 7 8 .

O n e r e a s o n for the u p w a r d

r e v i s i o n of p r i c e forecasts is the c o a l s e t t l e m e n t .

A s Chicago points o u t ,

m a n y consider the pact to be inflationary in i t s e l f , and expect it to set the
tone for l a b o r negotiations in the f u t u r e .

O t h e r factors feeding the fires

of inflation are recent s t e e l p r i c e h i k e s and u t i l i t y rate i n c r e a s e s .

F I R S T DISTRICT - B O S T O N

Directors and o t h e r R e d b o o k respondents of the F e d e r a l Reserve Bank
of B o s t o n report continued h e a l t h y economic growth b u t expressed m u c h concern
about i n f l a t i o n .

S e v e r a l respondents are of the opinion that the economy is

growing significantly f a s t e r than the p u b l i s h e d data i n d i c a t e .

P r o d u c t i o n in

the District's factories is expanding and there has b e e n a h e a l t h y increase
in c o m m e r c i a l l o a n d e m a n d .

R e t a i l sales m a y b e beginning to s o f t e n .

The chief economist of a large e l e c t r i c a l m a c h i n e r y m a n u f a c t u r e r
reports that sales of a l l lines are v e r y strong w i t h b a c k orders g r o w i n g .
Orders f o r m a j o r appliances are up about 20 percent o v e r last y e a r although
some s l o w d o w n is anticipated if the demand f o r h o u s i n g d e c l i n e s .

Orders and

sales of producers durables are also increasing strongly except f o r e l e c t r i c a l
power systems.

D e s p i t e this strong p e r f o r m a n c e , this m a n u f a c t u r e r is s t i l l

operating at less than 80 percent of capacity and h a s no m a j o r c a p i t a l outlays
of its own s c h e d u l e d .

The chief executive o f f i c e r of a diversified c h e m i c a l

company reports that a l l industries h e is associated w i t h h a d a v i g o r o u s M a r c h .
The chairman of a large m o n e y c e n t e r b a n k reports strong increases in
c o m m e r c i a l loan demand b o t h in N e w E n g l a n d and n a t i o n a l l y .
expected to continue throughout the y e a r .

This trend is

This b a n k e r anticipates some u p w a r d

pressure o n interest rates b u t feels that continued strong c o m p e t i t i o n for loan
business w i l l have a moderating effect.

D e p o s i t inflows r e m a i n h e a l t h y

a l t h o u g h there has b e e n some indication of a m o v e out of savings b y sophisticated
depositors.

N o r t h e r n N e w England bankers also report strong c o m m e r c i a l loan

growth as w e l l as significant increases in c o n s u m e r b o r r o w i n g and in c o n s t r u c t i o n
lending a c t i v i t y .

R e t a i l sales present a somewhat m i x e d p i c t u r e , remaining fairly
strong in some areas b u t b e g i n n i n g to slow in o t h e r s .

The Chairman of the

B o a r d of a large department store chain expects the r e a l rate of increase in
r e t a i l sales to f a l l b y about one-half this y e a r .

H e expects auto sales to b e

affected m o s t , w i t h significantly s m a l l e r drops in soft g o o d s .

A c c o r d i n g to

this s o u r c e , retailers expect a decline in c o n s u m e r confidence l a t e r this y e a r
caused b y w o r s e n i n g i n f l a t i o n , and as a result are b e c o m i n g increasingly
pessimistic themselves.
A l l R e d b o o k respondents expressed growing concern o v e r inflation
and s e v e r a l r e p o r t e d that m o s t b u s i n e s s m e n they talk to are b e c o m i n g increasingly w o r r i e d .

Inflationary expectations are increasing and some industries

are said to b e considering defensive price increases b e c a u s e of a fear of
controls.

N o n e of those contacted reported any difficulties w i t h b o t t l e n e c k s

o r s h o r t a g e s , a l t h o u g h there is some concern about a l u m i n u m and p a p e r next y e a r .
Professors E c k s t e i n , H o u t h a k k e r and Samuelson w e r e available f o r comment
this m o n t h .

N o n e saw a contradiction i n striving f o r b o t h f u r t h e r gains in

employment and lower i n f l a t i o n .

Samuelson and E c k s t e i n n o t e d the relatively

low capacity u t i l i z a t i o n r a t e , the lack of shortgages of m a t e r i a l s o r skilled
l a b o r , and the ready availability of intermediate inputs as evidence against
the v i e w that the economy is n e a r f u l l e m p l o y m e n t .

Samuelson especially deplored

the p r a c t i c e of redefining the n a t u r a l rate of unemployment to always e q u a l the
current rate in the absence of confirming indicators of labor market t i g h t n e s s .
N o n e of the three w a s particularly concerned about the recent runup in the
inflation r a t e , n o t i n g that m o s t of the increase is due to pressure from the
h i g h l y volatile food p r i c e s e c t o r and to adjustments emanating from acts of
Congress.

They felt that the m o n e t a r y authority should b e c a r e f u l n o t to overreact

to the inflation u p t i c k , since n e i t h e r of its proximate causes are amenable to
correction through aggregate d e m a n d management p o l i c y .
H o u t h a k k e r cautioned against intervention o n the foreign exchange m a r k e t
to support the v a l u e of the d o l l a r , a l t h o u g h h e p r e f e r r e d m a s s i v e gold sales if
a support operation w e r e to b e a t t e m p t e d .

In his v i e w , m o n t h l y offerings of a

few h u n d r e d thousand ounces of gold w o u l d b e u s e l e s s , n o r did h e f a v o r the sale
of E u r o p e a n currency denominated T r e a s u r y b i l l s as a support d e v i c e .

Houthakker

is n o t convinced that m o r e inflation w i l l result from the d e v a l u a t i o n , as
evidenced b y the stability of d o l l a r prices of those raw m a t e r i a l s traded in
international markets.
Rebounding from a slow first q u a r t e r , the economy should grow at a
7.5 percent rate this q u a r t e r , according to E c k s t e i n , a l t h o u g h a m i l d slowdown
during the rest of this y e a r and into 1979 is l i k e l y .

E c k s t e i n sees a decline

in h o u s i n g as a v i r t u a l certainty at current interest rates a n d , n o t i n g that
there is no example of s u c c e s s f u l g r a d u a l i s m , cautions that using m o n e t a r y p o l i c y
to produce a decline in inflation w o u l d p r o b a b l y lead to a credit c r u n c h and an
even m o r e severe h o u s i n g c y c l e .

It is v e r y dangerous f o r the G o v e r n m e n t to

pursue a one-objective p o l i c y , therefore E c k s t e i n advocates

top-of-the-range

m o n e y growth as a b a l a n c e d , cautious a p p r o a c h .
Samuelson also fears that the n e x t r e c e s s i o n w i l l b e caused b y a preoccupation w i t h i n f l a t i o n .

H e argues that the recent slow g r o w t h in the m o n e t a r y

aggregates brought about b y slow r e a l GNP growth allows the Fed some leeway to
p u r s u e a n e a r term m o n e t a r y p o l i c y a little less tight than m i g h t otherwise have
been appropriate.

O n the o t h e r h a n d , H o u t h a k k e r feels that f u r t h e r progress on

b o t h the inflation and the unemployment front c a n b e a c h i e v e d w i t h m o n e y growth
a v e r a g i n g n e a r the midpoints of the current r a n g e r s .

SECOND D I S T R I C T - N E W Y O R K

Business activity i n the Second District has largely recovered from
the w i n t e r doldrums and is expected to grow at a m o d e s t pace in coming m o n t h s ,
according to recent accounts of Directors and o t h e r business l e a d e r s .
Retailers r e p o r t e d t h e i r sales h a d r i s e n sharply in recent w e e k s , rebounding
from the l a c k l u s t e r performance of the first two m o n t h s of the y e a r .

While

m o s t m e r c h a n t s are looking forward to gains i n the m o n t h s a h e a d , they generally
expect these increases w i l l b e of m o d e r a t e p r o p o r t i o n s .

Auto dealers, too,

h a v e lately e x p e r i e n c e d a n u p s u r g e in n e w c a r s a l e s , b u t m u c h of the rise is
b e l i e v e d to b e a b u l g e d u e to d e f e r r e d p u r c h a s e s .

W h i l e r e t a i l inventory

stocks s t i l l s e e m to b e o n the h i g h s i d e , m e r c h a n t s do seem to h a v e m a n a g e d to
w h i t t l e d o w n these e x c e s s e s , m o r e o r less according to p l a n .

Outside of

r e t a i l i n g , the o t h e r sectors of the r e g i o n a l economy seem to b e i m p r o v i n g .
Inventory stocks are lean; inventory spending remains cautious; and n e w orders
for durable m a n u f a c t u r e d goods a r e expanding at a fairly b r i s k p a c e .

O n the

f i n a n c i a l s c e n e , business loans at large N e w Y o r k City b a n k s continue to b e
sluggish.
C o n s u m e r spending i n the District strengthened appreciably in M a r c h
and early A p r i l .

I n N e w Y o r k C i t y , department store executives reported sub-

s t a n t i a l gains i n sales as compared w i t h the depressed levels of January and
February.

The improvement i n r e t a i l activity w a s aided b y the earlier-than-

usual Easter holiday.

Auto dealers also reported a s u b s t a n t i a l pickup i n n e w

c a r sales in recent w e e k s .

N e v e r t h e l e s s , n o n e o f t h e dealers sounded exuberant

about t h e o u t l o o k f o r the rest of this m o d e l - y e a r .

A p p a r e n t l y , they w o u l d b e

satisfied if t h e i r c a r sales for 1978 w e r e just to m a t c h those for last y e a r .

In c o n t r a s t , the o t h e r r e t a i l m e r c h a n t s a r e m o r e upbeat in their f o r e c a s t s .
This w i l l b e , as one retailer put i t , a "good solid y e a r , " but n o t h i n g
"dazzling."
The p i c k u p i n r e t a i l sales h e l p e d to trim inventory stocks at r e t a i l
establishments.

E a r l i e r in the y e a r , m e r c h a n t s h a d said that they w e r e

counting o n strong spring sales to enable them to p a r e t h e i r excess inventories.

To a large extent this h a s o c c u r r e d , although a few retailers are

s t i l l saying t h e i r stocks are h i g h e r than they w o u l d l i k e .

Elsewhere in the

r e g i o n a l e c o n o m y , inventory stocks a p p e a r to b e lean in r e l a t i o n to s a l e s .
T h e g e n e r a l f e e l i n g seems to b e that inventories a r e e i t h e r " a d e q u a t e " o r
running a b i t o n the low s i d e .

W h i l e there m a y b e s o m e rebuilding of inven-

tories i n coming m o n t h s , businesses do seem to b e in a fairly cautious m o o d
and are keeping a tight rein on t h e i r s t o c k s .
In o t h e r sectors of the D i s t r i c t e c o n o m y , the p a c e of b u s i n e s s a c t i v i t y
seems to h a v e p i c k e d up in recent w e e k s .

I n d e e d , there are w i d e s p r e a d r e p o r t s

of sizable gains in n e w orders for m a n u f a c t u r e d intermediate g o o d s — r a n g i n g
from p a p e r to forged iron and s t e e l to m a c h i n e t o o l s .

This could b e a n a d v a n c e

i n d i c a t o r of a speedup in the recovery of the D i s t r i c t e c o n o m y .

It seems

l i k e l y , h o w e v e r , that s o m e part of these recent gains in orders is simply the
result of the r e s u m p t i o n of n o r m a l b u s i n e s s patterns following the end o f the
p r o l o n g e d c o a l strike and the u n u s u a l l y severe w i n t e r w e a t h e r .

I n any e v e n t ,

the o v e r a l l t e n o r of the responses suggests that the o u t l o o k f o r c a p i t a l
spending remains c a u t i o u s .
B u s i n e s s loan d e m a n d at large N e w Y o r k City b a n k s h a s y e t to show any
sustained s t r e n g t h .

S e n i o r lending p e r s o n n e l at five large N e w Y o r k C i t y

banks w e r e q u e r i e d concerning the reasons f o r this p h e n o m e n o n .

A l l five

respondents emphasized t h e importance of corporate liquidity o f large firms
that h a v e e x p e r i e n c e d strong c a s h flow a n d , w i t h fresh m e m o r i e s of credit
stringency in 1 9 7 3 - 7 4 , h a v e secured long-term financing unusually far ahead of
anticipated needs.

L o o k i n g at various competitive sources of f u n d s , there

w e r e m i x e d opinions as to the quantitative importance of E u r o d o l l a r b o r r o w i n g
by large m u l t i n a t i o n a l c u s t o m e r s .

O n e respondent c i t e d h e i g h t e n e d c o m p e t i t i o n

from the c o m m e r c i a l p a p e r m a r k e t , w h i l e two stated that they h a d n o t s e e n
increased c o m p e t i t i o n from that source l a t e l y .

T h e r e w e r e also m i x e d percep-

tions o f the importance of c o m p e t i t i o n for large customers from r e g i o n a l b a n k s ,
w i t h three respondents claiming m o r e a g g r e s s i v e r e g i o n a l c o m p e t i t i o n w h i l e two
others d i d n o t rate it a very important f a c t o r .

A m o n g less p u b l i c i z e d f a c t o r s ,

two respondents cited c o m p e t i t i o n for term loans from insurance c o m p a n i e s ,
w h i l e a n o t h e r reported s t i f f e r c o m p e t i t i o n from finance c o m p a n i e s .

All

respondents indicated that a n a c c e l e r a t i o n i n c a p i t a l spending w o u l d certainly
h e l p l o a n d e m a n d , a l t h o u g h they differed concerning the relative significance
of this versus competitive and liquidity f a c t o r s .

P e r s o n n e l at the two b a n k s

doing a n appreciable amount of l o c a l b u s i n e s s lending o b s e r v e d that loan
demand b y s m a l l e r Second District customers w a s s t r o n g e r t h a n that of the
large n a t i o n a l firms.

THIRD D I S T R I C T - PHILADELPHIA

Reports f r o m the Third D i s t r i c t indicate that economic a c t i v i t y is
generally e x p a n d i n g .

R e t a i l sales are up substantially o v e r year-ago levels

according to area m e r c h a n t s , and l o c a l m a n u f a c t u r e r s say b u s i n e s s is o n the upswing.

A l t h o u g h retailers expect the pace to slow s o m e w h a t , b o t h groups l o o k for

e x p a n s i o n to continue over the n e x t six m o n t h s .

The now-settled bituminous coal

strike h a d little effect o n the Third D i s t r i c t e c o n o m y .

L e s s than o n e - q u a r t e r

of the firms responding to a s p e c i a l survey r e p o r t e d p o w e r c u t b a c k s w h i c h forced
them to reduce o u t p u t .

D e s p i t e these optimistic r e p o r t s , c o m m e r c i a l b a n k e r s

say business l o a n demand is s o f t .

A l t h o u g h loan v o l u m e is above A p r i l 1977

l e v e l s , it is lower than anticipated for this p e r i o d .

F o r the l o n g e r t e r m ,

bankers a r e generally b e a r i s h .
D i s t r i c t i n d u s t r i a l activity is o n the rebound a c c o r d i n g to the A p r i l
Business O u t l o o k S u r v e y .

T h i r t y - e i g h t percent of this m o n t h ' s r e s p o n d e n t s n o t e

a n improvement in g e n e r a l business c o n d i t i o n s , w h i l e o n l y 6 percent say the
p a c e of business has s l o w e d .

This "margin of improvement" of 32 percentage

points is the h i g h e s t in almost a y e a r .

L o o k i n g to their o w n f i r m s , r e s p o n d i n g

m a n u f a c t u r e r s indicate upticks in n e w orders and s h i p m e n t s , w h i l e inventories
remain stable.

A t the same t i m e , the employment p i c t u r e is r e p o r t e d to b e a

little b r i g h t e r in A p r i l , w i t h b o t h a s m a l l increase in the size of factory
payrolls and a slight lengthening of the average w o r k w e e k r e p o r t e d .
L o o k i n g ahead six m o n t h s , about half of the r e s p o n d i n g m a n u f a c t u r e r s
anticipate continued e x p a n s i o n , along w i t h h i g h e r levels of n e w orders and
shipments.
October.

Inventories are expected to increase somewhat b e t w e e n n o w and
D e s p i t e this relatively optimistic o u t l o o k t h o u g h , e x e c u t i v e s polled

h a v e reservations about employment and c a p i t a l spending o v e r the n e x t six m o n t h s .
Only a slight increase in the n u m b e r of factory employees i s f o r e c a s t , and the
length of the average w o r k w e e k is expected to r e m a i n u n c h a n g e d .

Concurrently,

less t h a n one-third of those polled report plans to h i k e p l a n t and equipment
expenditures over the next two q u a r t e r s — d o w n from the levels of the last few
months.
Price increases in the i n d u s t r i a l sector are no m o r e w i d e s p r e a d than
they w e r e last m o n t h .

Half of the respondents to the A p r i l survey say they a r e

paying h i g h e r prices f o r i n p u t s , w h i l e slightly less than o n e - t h i r d report
increases in the p r i c e of their finished p r o d u c t s .

A D i r e c t o r of this B a n k in

the m a n u f a c t u r i n g sector says his firm is feeling cost p r e s s u r e s p r i m a r i l y
from the energy industry and l a b o r , and that such rising p r o d u c t i o n costs are
starting to put a p i n c h o n p r o f i t s .
T h e c o a l strike had l i t t l e effect o n the Third D i s t r i c t e c o n o m y ,
according to m a n u f a c t u r e r s responding to a s p e c i a l survey m a d e in the l a t t e r
part of M a r c h and early A p r i l .

Only 1 out of 5 of those surveyed said

they'd had to r e d u c e output as a result of p o w e r cuts stemming f r o m the c o a l
strike.

M o r e o v e r , p r o d u c t i o n cuts that w e r e n e c e s s a r y w e r e m i n o r , generally

less than 10 p e r c e n t .

W h a t little impact there w a s t h o u g h d i d find its w a y

into employment n u m b e r s , as m a n y of the m a n u f a c t u r e r s forced to cut output
trimmed payrolls as w e l l as h o u r s .

A l t h o u g h the output loss w a s s m a l l , prospects

for catching up are not g o o d , w i t h o v e r 60 percent of the executives w h o cut
p r o d u c t i o n saying they expected to m a k e up n o n e of the lost p r o d u c t .
Current d o l l a r r e t a i l sales are reported to b e b e t w e e n 10 and 15 percent ahead of last y e a r , according to area m e r c h a n t s c o n t a c t e d this m o n t h ,
w i t h d o w n t o w n P h i l a d e l p h i a stores doing b e t t e r than t h e i r s u b u r b a n b r a n c h e s

overall.

T h e s e figures m a y be exaggerating a c t u a l conditions t h o u g h .

At this

time last year, the large p r i c e cuts of a m a j o r competitor going out of business
cut into the sales of o t h e r area r e t a i l e r s .
also h e l p e d to keep the lid o n s a l e s .
slightly b e t t e r than p l a n n e d .

A public transit strike last A p r i l

N e v e r t h e l e s s , business is said to b e

Retailers attribute the pickup to s e v e r a l f a c t o r s ,

including a n early E a s t e r and b e t t e r w e a t h e r c o n d i t i o n s .
F o r the longer t e r m , area merchants see slower growth o v e r the next
six m o n t h s , w i t h current d o l l a r sales projected to b e b e t w e e n 5 and 8 percent
ahead of y e a r - e a r l i e r f i g u r e s .
A r e a bankers report the v o l u m e of C & I loans in A p r i l to b e higher than
it w a s for the corresponding period last y e a r by 3 to 4 p e r c e n t .
generally below planned v o l u m e .

This is

Some banks in the r e g i o n are m a k i n g fixed rate

loans and lending at "lower than usual" rates in a n effort to keep l o a n v o l u m e
up.

T h e primary p r o b l e m , according to c o n t a c t s , is w i d e s p r e a d u n c e r t a i n t y

among entrepreneurs about future business c o n d i t i o n s , and p a r t i c u l a r l y about
the future course of i n f l a t i o n .

B u s i n e s s m e n appear to b e u n w i l l i n g to commit

themselves to investment projects in the face of such economic u n c e r t a i n t y .
Bankers are not optimistic about future business b o r r o w i n g .

Although

one b a n k e r looks for loan v o l u m e six m o n t h s d o w n the road to b e about 7 percent
o v e r y e a r - e a r l i e r l e v e l s , m o s t l o o k for little o r no improvement in 1 9 7 8 .
Short-term interest rates remain steady in A p r i l , w i t h the p r i m e at
a l l of the b a n k s contacted at 8 p e r c e n t .

Interest rate projections for the

n e x t six m o n t h s are w i d e l y v a r i e d , w i t h forecasts for the O c t o b e r p r i m e rate
ranging from 8 1/4 to 9 p e r c e n t .

F O U R T H DISTRICT - CLEVELAND

B u s i n e s s m e n and economists anticipate that the expansion w i l l continue
through 1 9 7 8 , despite the slow start in the first q u a r t e r .

Retailers, however,

a r e s k e p t i c a l that first-quarter sales losses w i l l b e r e c o u p e d .

Industrial

p r o d u c t i o n should further r i s e this m o n t h as a result of a sharp c o m e b a c k in
c o a l p r o d u c t i o n and a continuing pickup in s t e e l and m a c h i n e t o o l s .

Housing

starts should r e c o v e r sharply this q u a r t e r , b u t savings and l o a n associations
are limiting m o r t g a g e c o m m i t m e n t s .
F i n a n c i a l officers and economists h a v e n o t altered expectations f o r
the economy in 1 9 7 8 , a l t h o u g h their forecasts o n inflation h a v e b e e n r e v i s e d
upward.

There is some d o u b t , h o w e v e r , that a p i c k u p in output and spending

this q u a r t e r w i l l fully recoup e a r l i e r l o s s e s .

M o r e o v e r , s e v e r a l express con-

c e r n that the o v e r a l l rate of inflation w i l l increase to about a 7 p e r c e n t a n n u a l
rate b y the fourth q u a r t e r as h i g h e r c o a l p r i c e s , u t i l i t y rates and recent s t e e l
p r i c e increases are p a s s e d o n to f i n a l u s e r s .

A few Directors emphasized that

the accelerated rate of inflation is a dominant topic to their customers and
should b e considered a deterrent to b u s i n e s s c o n f i d e n c e .
Some retailers of g e n e r a l m e r c h a n d i s e report s u b s t a n t i a l improviement
in sales in M a r c h from F e b r u a r y , b u t others indicate little i m p r o v e m e n t , b e c a u s e
their pickup in sales occurred in F e b r u a r y .
a s e a s o n a l g a i n this q u a r t e r .

Generally, none anticipate more than

Spring m e r c h a n d i s e has n o t b e e n selling as w e l l

as e x p e c t e d , and a p p a r e l sales h a v e slumped since last D e c e m b e r .

Inventories,

especially of a p p a r e l , are judged as h i g h e r than d e s i r e d and are b e i n g w a t c h e d
carefully.

A n economist w i t h a m a j o r d e p a r t m e n t store c h a i n w a s d i s a p p o i n t e d

that the increase in M a r c h sales w a s n o l a r g e r than it w a s in v i e w of E a s t e r

a n d sales p r o m o t i o n s .

T h e 8.8 m i l l i o n a n n u a l rate of n e w car sales last q u a r t e r

w a s consistient w i t h the expectations of s e v e r a l F o u r t h District economists
a s s o c i a t e d w i t h the auto i n d u s t r y .

But sales f e l l about 5 percent short of the

p r o j e c t i o n s of a n economist w i t h a m a j o r auto p r o d u c e r who p o i n t e d out producers
cannot easily m a k e m a j o r downward adjustments in p r o d u c t i o n schedules this late
into a m o d e l y e a r .
C o a l p r o d u c t i o n is increasing rapidly since the strike s e t t l e m e n t .
O u t p u t i n t h e second f u l l w o r k w e e k following the settlement r o s e to n e a r l y the
r e c o r d p a c e of last O c t o b e r .

The industry expects to operate at c a p a c i t y — 1 6

m i l l i o n tons w e e k l y — o n a sustained b a s i s .

A D i r e c t o r cautions shipments from

m i n e s a r e a p r o b l e m b e c a u s e of the p o o r c o n d i t i o n of some highways in A p p a l a c h i a
a n d inadequacy of r a i l facilities that can also b e a deterrent to n e w m i n e capacity.

A c c o r d i n g to a n economist w i t h a m a j o r c o a l p r o d u c e r , the first y e a r of

the c o a l contract w i l l result i n a 10.2 percent increase in the p r i c e of utility
a n d i n d u s t r i a l c o a l , a 7.3 percent increase in the p r i c e of steam c o a l , and a
4.6 percent increase in m e t a l l u r g i c a l c o a l p r i c e s .

Increases of about h a l f as

large a r e expected in the second y e a r .
S t e e l operations continue to strengthen despite earlier expectations
o f a d r o p in orders following the c o a l settlement and price increases in February
and March.

M a r c h shipments w e r e unusually s t r o n g , partially in response to

w e a t h e r - i n d u c e d delays earlier this y e a r .

O n e s t e e l economist expects p r o d u c t i o n

this q u a r t e r w i l l r i s e to about 90 percent of effective c a p a c i t y , compared w i t h
n e a r l y 80 percent last q u a r t e r .

Substitution of domestic for f o r e i g n s t e e l

b e c a u s e of the trigger p r i c e system is apparently providing this unexpected
strength.

S t e e l service centers w h i c h have purchased at least a third of their

requirements abroad h a v e sharply increased orders from domestic producers in

recent w e e k s .

Economists h a v e b e e n s k e p t i c a l that this p r i c e s y s t e m w o u l d

c u r t a i l s t e e l i m p o r t s , b u t some n o w f e e l that imports a f t e r A p r i l w i l l b e g i n
to drop sharply from recent p e a k v o l u m e s .
Officials and economists h a v e n o t changed their forecasts that the
increase i n r e a l c a p i t a l spending this y e a r w i l l at best e q u a l last year's
increase.

O n e o f f i c i a l described h i s company's p o s i t i o n f o r 1978 as s t i l l

cautious.

H e attributed this to a m p l e c a p a c i t y , m e m o r i e s of h i g h debt and low

liquidity d u r i n g the last r e c e s s i o n , Government safety regulations and h i s
company's p h a s i n g out a 25 m i l l i o n d o l l a r investment for a n e w automotive
product.
R e c o v e r y in m e d i u m trucks u s e d especially b y s m a l l b u s i n e s s e s is s t i l l
w e l l b e l o w peaks reached in 1 9 7 3 , and inventories are judged to b e ample because
sales h a v e fallen short of e x p e c t a t i o n s .

Machine tool builders, however, have

b e c o m e m o r e optimistic following a p e a k in n e w orders last q u a r t e r a n d further
gains are expected this q u a r t e r .

One b u i l d e r said b a c k l o g s for some h i g h l y

t e c h n i c a l lines h a v e expanded to 85 w e e k s compared w i t h 50-60 w e e k s a few m o n t h s
ago.

They are operating n e a r 90 percent of c a p a c i t y .
H o u s i n g starts are expected to r e c o v e r sharply from w e a t h e r - d e p r e s s e d

activity e a r l i e r this y e a r .
quarter.

L a s t quarter's losses should b e r e c o u p e d this

Some S&Ls claim demand f o r loans is e v e n stronger than last summer

b e c a u s e some banks a p p e a r to b e less interested in m o r t g a g e lending than they
have been.

M o r t g a g e rates h a v e r i s e n 1/4 to 1/2 p o i n t since M a r c h .

To attract

f u n d s , a few S&Ls h a v e instituted continuous compounding of interest o n a l l
deposits.

S e v e r a l report that they do n o t p l a n to limit m o r t g a g e lending in

coming m o n t h s , despite slowed growth in deposit f l o w s , w h i c h , for some institut i o n s , strenghtened in late M a r c h and early A p r i l .

L i q u i d i t y at some associations

has f a l l e n to reserve requirement l i m i t s .

In v i e w of tightening cash f l o w s ,

a few are n o longer w r i t i n g loans f o r n e w customers o r f o r m u l t i p l e dwellings
and are not lending to m a r g i n a l b u i l d e r s .
percent l o a n s .

Some S&Ls also h a v e eliminated 95

F I F T H D I S T R I C T - RICHMOND

Business activity in the F i f t h D i s t r i c t picked up substantially
during M a r c h .

Particularly in W e s t V i r g i n i a , w h e r e c o a l p r o d u c t i o n h a d b e e n

m o s t severely c u r t a i l e d , the end of the m i n e r s ' s t r i k e apparently created a
b u r s t of a c t i v i t y .

A r o u n d the District m a n u f a c t u r e r s indicate a w i d e s p r e a d

increase in shipments and n e w o r d e r s .

Backlogs of orders continued to

expand m o d e r a t e l y and inventory a c c u m u l a t i o n slowed s o m e w h a t .

Manufacturing

employment showed l i t t l e change o v e r the m o n t h w h i l e the w o r k w e e k lengthened
only slightly.

P r i c e s generally continued to r i s e across a b r o a d f r o n t .

Bank

credit activity i n the F i f t h D i s t r i c t h a s b e e n w e a k i n r e c e n t w e e k s , a l t h o u g h
the s l o w d o w n appears to b e largely s e a s o n a l i n n a t u r e .
spring planting is generally behind last y e a r .

Land preparation for

S m a l l grains a r e r e p o r t e d l y i n

f a i r to good c o n d i t i o n and are responding to the w a r m e r w e a t h e r and t o p - d r e s s i n g .
O f m a n u f a c t u r e r s responding to o u r m o n t h l y survey one-third r e p o r t
increases in shipments and i n the v o l u m e of n e w orders o v e r the p a s t m o n t h .
Increases i n i n v e n t o r i e s , of b o t h m a t e r i a l s and finished g o o d s , w e r e less
w i d e s p r e a d than i n the p r e v i o u s two m o n t h s , b u t current stocks continued to
grow relative to desired l e v e l s .

T h e g e n e r a l improvement i n m a n u f a c t u r i n g

activity w a s w i d e l y d i s p e r s e d among i n d i v i d u a l i n d u s t r i e s , b u t the strongest
performances seem to h a v e b e e n i n the t e x t i l e , a p p a r e l , and b u i l d i n g m a t e r i a l s
groups.

Reports from the furniture i n d u s t r y , o n the o t h e r h a n d , suggest some

w e a k n e s s , i n apparent conflict w i t h indications from b r o a d l y b a s e d industry
associations and r e t a i l o u t l e t s .
Reports from retailers and from o u r Directors s u g g e s t s o m e improvem e n t i n r e t a i l sales during t h e past m o n t h .

This improvement has apparently

extended into c o n s u m e r durables w i t h improvement n o t e d in sales of f u r n i t u r e ,
a p p l i a n c e s , and a u t o m o b i l e s .

Some of the recent activity is being attributed

to aggressive m a r k e t i n g , particularly on the part of automobile d e a l e r s .
Prices continued their b r o a d advance i n M a r c h .

In p a r t i c u l a r , 60 p e r c e n t of

the m a n u f a c t u r e r s surveyed report paying h i g h e r prices in M a r c h than in F e b r u a r y .
Increases i n prices received and in employee compensation w e r e less w i d e s p r e a d
than for prices p a i d and w e r e also slightly less common than in the preceding
month.

Comments b y o u r D i r e c t o r s , h o w e v e r , suggest that recent p r i c e increases

h a v e h a d n o significant effect o n p r i c e expectations to d a t e .

T h e g e n e r a l out-

look of o u r manufacturing respondents has improved somewhat during the past m o n t h
b u t s t i l l has n o t regained the firmly optimistic tone w h i c h prevailed early
in the year.

M o r e than one-fourth of these m a n u f a c t u r e r s n o w anticipate some

improvement in business activity in their respective m a r k e t areas and i n d i v i d u a l
firms o v e r the next six m o n t h s .

N o n e t h e l e s s , the prevailing v i e w seems to b e

that current p l a n t and equipment capacity and expansion p l a n s are in line w i t h
d e s i r e d levels o r slightly a b o v e .
In the banking s e c t o r , consumer and r e a l estate lending h a v e continued
their sluggish p a t t e r n but show signs of picking u p .

P e r s o n a l loans for auto-

m o b i l e financing are reported w e a k in some a r e a s , w h i l e financing of big ticket
r e t a i l items is somewhat offsetting this w e a k n e s s .
note that u s e of credit cards is h e a v y .

Bankers in s e v e r a l areas

A l s o , our contacts suggest that r e a l

estate construction lending is beginning to r e v i v e .

Bankers expect larger

demands for such credit i n the n e a r f u t u r e .
T h e pattern of business l o a n demand m a y be changing s o m e w h a t .

Commercial

and i n d u s t r i a l lending at the l a r g e r D i s t r i c t banks has been strong of l a t e , and
there is some evidence that n a t i o n a l accounts are becoming m o r e a c t i v e .

A t the

same t i m e , demand f o r short-term credit shows signs of rising r e l a t i v e to
intermediate- and longer-term l o a n s .
as r o b u s t , it is certainly h e a l t h y .

While the picture here cannot b e described
Deposit inflows at large b a n k s seem to

h a v e w e a k e n e d , w i t h time deposits o n the plateau reached e a r l i e r .

Nevertheless,

credit demands h a v e n o t b e e n strong enough to cause any appreciable r i s e in
negotiable CD's.
Stronger farm p r i c e s , coupled w i t h probable continued h e a v y u s e of
the g o v e r n m e n t loan p r o g r a m , helped to improve farmers' cash receipts from
farm m a r k e t i n g s in J a n u a r y .

Compared w i t h a y e a r a g o , t o t a l cash receipts w e r e

up 3 percent in the District and 1 1 percent n a t i o n a l l y .
tures h a v e delayed fruit tree b l o o m i n g .

B e l o w - n o r m a l tempera-

A s a r e s u l t , b u d k i l l from w e a t h e r

extremes has b e e n relatively m i n o r to d a t e .

SIXTH D I S T R I C T - A T L A N T A

The District economy has bloomed w i t h the w a r m e r w e a t h e r .
tourism w a s extremely good through the spring h o l i d a y s .
h a v e reopened in T e n n e s s e e .

Florida

Finance companies

Consumers spent freely in M a r c h , but retailers

are reserving judgment o n spring sales for the time b e i n g ; auto sales h a v e
continued to i m p r o v e .
tion.

There's no letup in sight for o i l and gas explora-

H o u s i n g reports h a v e frequently m e n t i o n e d extensive h o m e improvement

activity.

The o u t l o o k f o r n o n r e s i d e n t i a l c o n s t r u c t i o n h a s b r i g h t e n e d , but

uncertainties about energy supplies and prices t e m p e r o p t i m i s m .
prices for farm products have b o o s t e d farm i n c o m e s .

Higher

B u s i n e s s m e n are

u n i v e r s a l l y concerned about i n f l a t i o n .
A l l parts of Florida enjoyed a n excellent h o l i d a y tourist b u s i n e s s ,
w i t h h o t e l and m o t e l occupancy rates n e a r o r at 100 p e r c e n t .

Tampa n o t e d

the best season since 1973; v i s i t o r s to n o r t h w e s t Florida set a record;
Eastern A i r l i n e s ' p a s s e n g e r arrivals and departures at M e l b o u r n e R e g i o n a l
Airport surpassed previous highs by a sizable m a r g i n .

D i s n e y W o r l d closed

its gates early o n s e v e r a l days w h e n a t t e n d a n c e r e a c h e d c a p a c i t y .

In

southeast F l o r i d a , c a r r e n t a l s , restaurant b u s i n e s s , and race track attendance passed E a s t e r 1977 levels by n e a r l y 20 p e r c e n t .
W h e n the r e m o v a l of Tennessee's c o n s t i t u t i o n a l usury ceiling took
effect o n A p r i l 1 , finance companies reopened to face a flood of credit
applications.

They're n o w loaning at 18-27 p e r c e n t .

The state's b a n k s

seemed relieved to get out of the s m a l l l o a n b u s i n e s s , and s e v e r a l set
minimums of $ 1 , 0 0 0 .

It's generally expected that the b a n k s w i l l r e t u r n

to pre-August c o n s u m e r lending p r a c t i c e s , a l t h o u g h some h o p e to m a i n t a i n

the stricter standards f o r s m a l l borrowers that developed in the sevenm o n t h credit s l o w d o w n .

M a n y lenders w a n t to resume charging interest

rates in excess of 10 percent o n loans m a d e p r i o r to the court ruling
that declared them unconstitutional; the State Securities D i r e c t o r h a s
said n o , but the State Department of Banking w i l l rule o n the issue
shortly.
R e t a i l sales h a v e apparently b e e n fairly b r i s k in m o s t a r e a s .

But

since the early E a s t e r stimulated M a r c h s a l e s , m a n y retailers are w a i t i n g
f o r A p r i l sales figures b e f o r e they j u d g e the strength of spring s p e n d i n g .
C a r sales h a v e revived quickly in the past few w e e k s ; m o d e s t to m o d e r a t e
gains from the strong y e a r - e a r l i e r pace are i n d i c a t e d .

A few d e a l e r s ,

m a i n l y in F l o r i d a , h a v e complained that low stocks h a v e r e s t r a i n e d sales
a l l through the first q u a r t e r , but current D i s t r i c t - w i d e inventories a p p e a r
to b e at n o r m a l l e v e l s .

Some expect a shortage of l a r g e m o d e l s by early

summer; G M dealers h o p e that their "big season" (May a n d J u n e ) w i l l h e l p
m a k e up f o r the styling resistance they've encountered thus f a r in the
model year.

U s e d c a r m a r k e t s remain active; the reopening of finance com-

panies i n Tennessee has spurred these sales to a p i t c h that o n e d i r e c t o r
characterized as "wild."

Sales of t r u c k s , b o t h s m a l l a n d l a r g e , a r e h e a v y .

The onshore drilling b o o m continues in L o u i s i a n a .

R i g activity in

the first q u a r t e r w a s the heaviest since 1957; completions a n d w o r k o v e r s
w e r e a c t u a l l y s t r o n g e r than d r i l l i n g .
limit activity this y e a r .

Only the rig supply is likely to

Offshore in the G u l f , drilling has b e e n intense

b u t p r o b a b l y won't r e a c h b o o m p r o p o r t i o n s f o r a y e a r o r s o , d e p e n d i n g o n
w e l l h e a d prices of n a t u r a l g a s .
prisingly active.

Pipe-laying and c o n s t r u c t i o n are sur-

T h e turnout f o r the recent sale of Atlantic Coast leases

w a s s m a l l , as expected; $ 1 5 1 m i l l i o n w a s b i d for 57 of the 224 sites o f f e r e d .

H o m e builders remain optimistic that 1978 construction w i l l surpass
the 1977 p a c e .

The o u t l o o k f o r single-family homes is g o o d , but apartments

and condominiums are expected to b e the g r o w t h sectors in m e t r o p o l i t a n a r e a s .
Climbing prices have p r o m p t e d some builders to b e g i n omitting frills o n n e w
homes in the M i a m i a r e a .

S e v e r a l directors from throughout the District

commented o n the strength of r e p a i r s , r e m o d e l i n g , and additions to existing
homes.

Funds f o r h o m e improvement loans are p l e n t i f u l and being pushed by

banks.

Sales o f g a r d e n s u p p l i e s , nursery p l a n t s , "do-it-yourself 1 1 i t e m s ,

a n d furniture h a v e b e e n reported as h e a v y , t o o .
C o m m e r c i a l and i n d u s t r i a l construction is expected to take up any
slack that m a y o c c u r in h o u s i n g in late 1 9 7 8 .

In s e v e r a l m a j o r c i t i e s ,

o f f i c e v a c a n c y rates h a v e d e c l i n e d to the point w h e r e r e a l estate analysts
foresee a r e v i v a l of b u i l d i n g in the n e a r t e r m .

In some a r e a s , particularly

A l a b a m a , the prospect f o r utilities construction is r a t h e r d i m , as the investment required f o r n e w facilities is b e c o m i n g prohibitively h u g e .

The

inadequacy o f present capacity f o r large i n d u s t r i a l users has already deterred p r o s p e c t i v e plant relocations in the s t a t e .

H o w e v e r , the construc-

tion of a giant $135-million t e r m i n a l to receive imported liquefied
n a t u r a l gas off the coast of Georgia w i l l help ensure District supplies
of that f u e l .
Builders continue to experience shortages of construction m a t e r i a l s —
c e m e n t , i n s u l a t i o n , f a b r i c s , s h e e t r o c k , and b r i c k s .

Deliveries have b e e n

extended for p i p e s , v a l v e s , and construction e q u i p m e n t .

The only over-

supply p r o b l e m of late has b e e n farm m a c h i n e r y .
A shortage of r a i n f a l l has delayed plantings in m a n y areas of the
District a n d p r o v o k e d forest fires in the timberlands of M i s s i s s i p p i .

Beef

and soybean prices h a v e shown p a r t i c u l a r s t r e n g t h .

H i g h e r s o y m e a l and corn

prices h a v e put u p w a r d pressure o n feed c o s t s , but fertilizer prices h a v e
been falling.

C o t t o n prices turned d o w n in late M a r c h w h e n the early re-

sponses to n e w land-diversion provisions indicated that they w o u l d b e
i n e f f e c t u a l in reducing a c r e a g e .

Florida grapefruit growers recently

approved a n e w tax to raise advertising funds in hopes of shoring up slow
demand.

In contrast to the decline reported a m o n t h a g o , o r a n g e juice

d e m a n d appears n o w to b e n e a r n o r m a l l e v e l s , though p r i c e s continue at a
record h i g h .

South Florida v e g e t a b l e growers h a v e expressed concern o v e r

dumping of M e x i c a n p r o d u c e .
Georgia-Pacific projects a n 8 to 10-percent increase in plywood and
l u m b e r prices in 1978 w i t h o u t the erratic m o v e m e n t s of last y e a r .

A

Tennessee d i r e c t o r remarked that p a p e r prices a r e rising so rapidly that
m i l l s w o n ' t quote prices u n t i l orders are r e c e i v e d .

She blames limited

supplies and a n advance in demand generated b y a n u p t r e n d in a d v e r t i s i n g .
Consumers a r e p a y i n g h i g h e r spring electric b i l l s , as utilities pass on the
costs incurred in providing n o r m a l services during the c o a l s t r i k e .

Infla-

t i o n is f a r and away the greatest w o r r y of t h e D i s t r i c t ' s b u s i n e s s l e a d e r s .

S E V E N T H DISTRICT

- CHICAGO

I n f o r m e d observers in t h e S e v e n t h D i s t r i c t expect n o d o w n t u r n in
g e n e r a l a c t i v i t y b e f o r e 1 9 7 9 a t the e a r l i e s t .
p r e s s u r e s a r e seen as the g r e a t e r d a n g e r .

A c c e l e r a t i n g inflationary

Sales o f a u t o s , f a r m e q u i p m e n t ,

a n d h o u s i n g s t a r t s , h o w e v e r , are e x p e c t e d to d e c l i n e .

T h e direct effects o f

the h a r d w i n t e r a n d t h e long c o a l strike are "being overcome r a p i d l y , b u t
h i g h e r costs w e r e incurred to m a i n t a i n p r o d u c t i o n .

T h e c o a l p a c t is d e e m e d

inflationary in i t s e l f , a n d also b e c a u s e o f its e f f e c t o n o t h e r n e g o t i a t i o n s .
R e t a i l sales are g e n e r a l l y f a v o r a b l e , "but strength v a r i e s b o t h b y p r o d u c t a n d
among r e t a i l e r s .

C a p i t a l expenditures continue to r i s e a t a g o o d , b u t unspec-

tacular, pace, with much variation b y product.
above p r o j e c t e d l e v e l s .

Airline travel has been w e l l

Railroads a r e h a v i n g serious p r o b l e m s m o v i n g g o o d s .

D e m a n d f o r s t e e l is vigorous a g a i n .

Housing starts are e x p e c t e d to d e c l i n e , t

b u t n o n r e s i d e n t i a l c o n s t r u c t i o n is c e r t a i n to r i s e s u b s t a n t i a l l y .
c r e d i t terms h a v e t i g h t e n e d f u r t h e r .
the u p t r e n d .

Mortgage

Business l o a n d e m a n d is n o w c l e a r l y o n

F a r m income p r o s p e c t s a r e b r i g h t e r b e c a u s e o f h i g h e r p r i c e s f o r

crops a n d a n i m a l s , a n d c o n c e r n o v e r f a r m c r e d i t has l e s s e n e d .
T h e c o a l strike d i r e c t l y a f f e c t e d a c t i v i t y (other t h a n m i n i n g a n d
t r a n s p o r t a t i o n o f c o a l ) i n t h e D i s t r i c t o n l y in I n d i a n a , a n d e v e n t h e r e the
impact w a s s l i g h t .

Some c o m p a n i e s w e r e able to m a i n t a i n p r o d u c t i o n despite

shortened w o r k w e e k s .

M a n y companies incurred a d d i t i o n a l e x p e n s e s , h o w e v e r ,

e s p e c i a l l y f o r self-generated p o w e r .
T h e generous l a b o r settlement in t h e c o a l industry p r e s a g e s e m u l a t i o n
b y other unions.

Observers h e r e a r e d i s a p p o i n t e d that m i n e operators w e r e n o t

a b l e to reassert b e t t e r c o n t r o l o v e r p r o d u c t i v i t y , w h i c h h a s b e e n d e c l i n i n g in

recent years in u n i o n m i n e s .
pay to

$8.63

A n e w pact for Chicago C T A b u s drivers boosts

p e r h o u r n o w , w i t h f u r t h e r gains i n b e n e f i t s o v e r two y e a r s —

plus an uncapped, quarterly COLA clause.
The r a i l unions are w o r k i n g w i t h o u t a c o n t r a c t a n d a n y n e w p a c t s
w i l l be costly.

A s in t h e case o f c o a l , t h e railroads h a v e b e e n h a v i n g trouble

m a i n t a i n i n g p r o d u c t i v i t y , p a r t i c u l a r l y the E a s t e r n r o a d s .

Movements of grain

a n d o t h e r commodities h a v e b e e n h a m p e r e d b y "critical" shortages o f h o p p e r cars
a n d , o n some l i n e s , locomotives as w e l l .
t r a c k a g e are w i d e s p r e a d .

Problems c a u s e d b y p o o r l y m a i n t a i n e d

Orders f o r freight cars a n d locomotives are s t r o n g .

Some plants h a v e b e e n c o n v e r t e d t o p r o d u c e h o p p e r c a r s .
It is difficult t o g e n e r a l i z e o n r e t a i l sales f r o m v a r y i n g reports o f
individual retailers.

"Pierce" p r i c e c o m p e t i t i o n o n g e n e r a l m e r c h a n d i s e is

hurting some c h a i n s t o r e s .

The strongest p r o d u c t lines are a u t o p a r t s , h o m e

improvement i t e m s , a n d a p p l i a n c e s .
Sales of p i c k u p trucks a n d vans continue to l e a d o t h e r m o t o r v e h i c l e s .
The r e c r e a t i o n a l v e h i c l e m a r k e t h a s b e e n w e a k , b u t the industry expects a r i s e
in sales f o r the y e a r as a w h o l e .
A i r l i n e traffic has b e e n w e l l above p r o j e c t e d trends w i t h g a i n s o f
10-12 p e r c e n t o v e r y e a r a g o .

Orders f o r l a r g e r a i r c r a f t a n d m o r e efficient

aircraft w i l l r e m a i n s t r o n g .
Orders are running 15-25 p e r c e n t above l a s t y e a r f o r various diversif i e d c a p i t a l goods p r o d u c e r s .

S t r e n g t h in c a p i t a l g o o d s is a l s o indicated b y

large gains in orders f o r e l e c t r i c a l a n d m e c h a n i c a l c o m p o n e n t s , c a s t i n g s , a n d
steel plates.
smaller u n i t s .

C o n s t r u c t i o n equipment is the s t a r p e r f o r m e r , especially
One large p r o d u c e r o f earth-moving e q u i p m e n t is s a i d t o b e

operating at virtual capacity.
ing.

L e a d times on m a c h i n e tools h a v e b e e n lengthen-

Shortages o f s k i l l e d w o r k e r s , e . g . , m a c h i n i s t s a n d w e l d e r s , h e l p sales of

sophisticated m a c h i n e s .

T h e f a l l in t h e d o l l a r is h e l p i n g c a p i t a l goods pro-

d u c e r s , b o t h b y encouraging exports a n d b y discouraging i m p o r t s .

Nevertheless,

m o s t c a p i t a l g o o d s producers c o u l d h a n d l e a s u b s t a n t i a l rise in v o l u m e .

Most

have n o t increased employment o r o v e r t i m e , preferring to l e t backlogs b u i l d u p .
C a p i t a l outlays b y the two largest m o t o r vehicle producers are p r o j e c t e d t o
r e m a i n v e r y h e a v y f o r s e v e r a l y e a r s t o c o m e , w i t h n e w plants accounting f o r a
l a r g e r share o f t o t a l s p e n d i n g .
S t e e l orders h a v e i m p r o v e d in recent m o n t h s .

One c o m p a n y expects

industry shipments to r e a c h 97 m i l l i o n tons this y e a r , u p f r o m 9 1 m i l l i o n tons
last y e a r w i t h imports d o w n 3 m i l l i o n t o n s .

L o w e r i m p o r t s , t h e n e e d to replen-

ish inventories at b o t h the m i l l a n d u s e r l e v e l s , a n d a p i c k u p in equipment
needs p r o v i d e the b a s i s f o r o p t i m i s m .
ing a t n e a r c a p a c i t y r a t e s . )

(One leading s t e e l p r o d u c e r is operat-

Sales o f s t e e l t o the auto industry are e x p e c t e d

to d e c l i n e , h o w e v e r , b e c a u s e o f b o t h l o w e r p r o d u c t i o n in u n i t s a n d a l o w e r
average weight p e r car.
I m p r o v e d a u t o sales in M a r c h e n c o u r a g e d p r o d u c e r s to increase output
schedules o f t h e i r m o r e p o p u l a r m o d e l s .
sales m o n t h s a h e a d .

Inventories w i l l b e ample in t h e p e a k

A l t h o u g h the w i n t e r ' s g l o o m is o v e r , m o s t forecasts f o r

auto sales this y e a r a r e l o w e r t h a n l a s t f a l l .
The desire f o r b e t t e r gas m i l e a g e is e x p e c t e d to increase the s p e e d
o f replacement o f the existing stock of cars in the n e x t f e w y e a r s .

Some ex-

p e r t s b e l i e v e that a sharp curtailment o f o i l i m p o r t s , h o w e v e r c a u s e d , w o u l d
soon require g a s r a t i o n i n g , w h i c h , in t u r n , c o u l d l e a d t o panic b u y i n g o f
smaller c a r s , a s in e a r l y 1 9 7 ^ .

E I G H T H D I S T R I C T — S T . LOUIS

Business managers in the E i g h t h District report that economic
activity h a s increased in recent w e e k s .

Retailers in S t . L o u i s n o t e d that

sales b e g a n to improve around m i d - M a r c h , and the excess inventories b u i l t up
e a r l i e r in the y e a r are expected to b e w o r k e d off i n the n e x t few w e e k s .
C o n s t r u c t i o n activity has increased sharply w i t h the improved w e a t h e r
conditions.

Home sales r e m a i n at a relatively h i g h l e v e l .

Manufacturing

a c t i v i t y has also gained m o m e n t u m w i t h the settlement of the c o a l s t r i k e .
In the f i n a n c i a l s e c t o r , n e t saving inflows into savings and l o a n
associations have slowed further in recent w e e k s and w i t h continued strong
demand f o r m o r t g a g e l o a n s , interest rates have m o v e d u p .

In the a g r i c u l t u r a l

s e c t o r , field w o r k is somewhat behind s c h e d u l e , b u t this is n o t a serious
problem at this time of y e a r .
A c c o r d i n g to area r e t a i l e r s , sales p i c k e d up strength around
m i d - M a r c h , a f t e r a relatively severe w i n t e r s l u m p .

A major St. Louis

department store representative reported that M a r c h sales w e r e about 5
percent a b o v e a y e a r a g o , a n d that the sales w e r e accelerating i n the l a s t
half of the m o n t h .

Inventories are excessive in some soft goods i t e m s ,

b u t the excess is expected to b e w o r k e d off w i t h i n a few w e e k s .

W h i l e some

retailers w e r e fairly optimistic about sales in the n e x t few m o n t h s , others
remain apprehensive a b o u t the future course of c o n s u m e r s p e n d i n g .

One

representative n o t e d that fear of inflation by consumers m a y inhibit their
spending w h i l e a n o t h e r observed that consumers are "nervous" a n d s e e m only
w i l l i n g to b u y a t s p e c i a l sale e v e n t s .
Construction w o r k has accelerated i n recent w e e k s as w e a t h e r

conditions have i m p r o v e d .

O r d e r backlogs for n e w homes r e m a i n a t a h i g h

l e v e l a n d n e w orders continue to come in a t a b r i s k p a c e .

W i t h the large

backlog of orders as w e l l as the n e w orders e x p e c t e d , builders look forward
to a high l e v e l of construction activity this y e a r .
Manufacturing activity apparently has picked up some m o m e n t u m in a
n u m b e r of industries r e c e n t l y .

One m a j o r m a n u f a c t u r e r of appliances and

c a p i t a l goods reported improvement in sales throughout its line of products
in the p a s t m o n t h .

A l s o , a m a j o r c h e m i c a l firm reported o v e r a l l improvement

in sales in M a r c h , w i t h strong sales for a g r i c u l t u r a l c h e m i c a l s , p h o s p h a t e s ,
and p l a s t i c s .

A s t e e l industry representative reported that orders o n the

books for the second q u a r t e r are very s t r o n g , especially from c a p i t a l goods
f i r m s , a n d that o v e r a l l s t e e l shipments a r e estimated to b e up from last
year's l e v e l .

It w a s pointed o u t , h o w e v e r , that w o r l d w i d e , the s t e e l

industry is suffering from excess c a p a c i t y .

A representative o f the p a i n t

and coatings industry reported v e r y strong sales i n recent m o n t h s , up 15
percent from a y e a r a g o , and that a strong second q u a r t e r is expected f o r
this i n d u s t r y .

P r o d u c t i o n i n this industry is n e a r c a p a c i t y .

A firm

m a k i n g c o n n e c t o r plates used in construction reported p o o r sales early this
y e a r , b u t that sales recovered nicely in M a r c h and are expected to m a k e up
for the e a r l y 1978 losses l a t e r in the y e a r .

O t h e r firms reporting

strong business activity included m a n u f a c t u r e r s of a i r filtration e q u i p m e n t ,
lighting f i x t u r e s , a n d cutting t o o l s .
Savings a n d l o a n institutions reported some f u r t h e r slowing i n n e t
deposit inflows during recent w e e k s f r o m the January-February

levels.

Gross inflows of deposits continue at a relatively h i g h l e v e l , b u t
w i t h d r a w a l s have i n c r e a s e d , leaving smaller gains in n e t s a v i n g s .

S and L's

a r e increasing n o n p r i c e competition f o r funds by boosting advertising budgets
and premium offerings.

Representatives of the industry point o u t that 4 - y e a r

c e r t i f i c a t e s , first offered a b o u t 4 years a g o , are n o w subject to w i t h d r a w a l
and these funds a r e beginning to m o v e into alternative i n v e s t m e n t s .

Counter

to the experience of the S and L ' s , t o t a l time deposits at large c o m m e r c i a l
banks i n the District h a v e continued to increase i n recent w e e k s .
W i t h the demand for home mortgages continuing quite s t r o n g , a n d
w i t h slowing in savings g r o w t h , interest rates have risen f u r t h e r .
T h e prevailing m o r t g a g e rate in the S t . Louis a n d Memphis areas is n o w
9 percent for a n 80 percent l o a n .

N o t only are loan rates increasing b u t

in some cases m o r e rigorous loan policies a r e being i m p l e m e n t e d .

Some

institutions n o w require prospective m o r t g a g e customers to h o l d savings a t
their institution b e f o r e being granted a l o a n .

O n e S a n d L representative

reported a reluctance to m a k e n e w loans o r loan commitments at current
interest rates since he b e l i e v e d that rates w i l l go h i g h e r in the n e a r
future.

D e m a n d f o r m o s t o t h e r types of loans also remains a t a h i g h l e v e l .

C o m m e r c i a l banks reported large increases in c o m m e r c i a l a n d i n d u s t r i a l loans in
M a r c h , and the d e m a n d f o r farm loans continues up from the very h i g h levels
of a y e a r a g o .

N I N T H DISTRICT - MINNEAPOLIS

Economic activity in the N i n t h District continues to i m p r o v e ,
b u t there is a growing uneasiness over w a g e and.price i n c r e a s e s .

The

encouraging economic signals evident last m o n t h s t i l l show up in r e t a i l
s p e n d i n g , labor m a r k e t c o n d i t i o n s , and l o a n d e m a n d .

H o w e v e r , directors

b e l i e v e inflationary expectations have b e e n revised u p w a r d , although no
significant changes in inventory a c c u m u l a t i o n , investment p l a n s , o r
c a p i t a l goods sales h a v e occurred y e t .

M o s t directors think that the

c o a l settlement w i l l set the tone for subsequent labor n e g o t i a t i o n s
here.
A c c o r d i n g to o u r recent s u r v e y s , r e t a i l sales are doing w e l l ,
and retailers are fairly o p t i m i s t i c .

M o s t auto distributors i n the

region report that sales in M a r c h w e r e ahead of last y e a r , w i t h fullsize and subcompact models b o t h selling b r i s k l y .

D e a l e r inventories a r e

adequate b u t could b e c o m e tight f o r certain "hot-sellers" by s u m m e r .
Retailers of o t h e r goods also are p l e a s e d w i t h current s a l e s , report no
serious inventory d i f f i c u l t i e s , and expect a good s u m m e r s e a s o n .
Resort owners report that inquiries and reservations are up from last
year; they expect a n excellent s u m m e r t o o .

No gasoline shortages are

showing up; in f a c t , prices h a v e dropped in M o n t a n a and South D a k o t a .
Reflecting strength i n manufacturing and h o m e b u i l d i n g , the
district's u n e m p l o y m e n t rate has improved dramatically in recent m o n t h s .
Seasonally adjusted unemployment f o r the first two months of the y e a r
averaged 4.5 p e r c e n t , compared to 5.2 percent in the fourth q u a r t e r of
1977 and 5.6 percent a y e a r a g o .

A l t h o u g h the l a b o r f o r c e increased 4

percent o v e r the past twelve m o n t h s , jobs increased at a 5.5 percent

rate.

As a r e s u l t , the number of people looking for w o r k declined 17

percent.

Substantial increases in the help w a n t e d advertising index and

reductions in i n i t i a l claims for unemployment compensation both suggest
no deterioration in joblessness in the next few m o n t h s .
District loan demand has been strong again this year, and banks
have been responding in several ways.

Some apparently are selling off

some loans; others are raising interest rates and tightening other
credit terms.

Large city banks, however, which are experiencing strong

business borrowing, seem to be slightly easing price and nonprice terms
on those loans.
Heavy demand is expected for all types of loans this year,
according to directors.

Agricultural bankers who may have been re-

luctant to lend last year expect ag lending to pick up this year in
response to recent improvements in grain and livestock prices.
One large regional bank in the Twin Cities is currently showing
good increases in all major loan categories but expects some slowing
this year in two types of loans.

It thinks consumer loan growth may

slow as consumer's debt repayment schedules become more burdensome and
real estate loan growth may slow as interest rates rise and mortgage
credit tightens.
The major concern in the district right now is inflation.
Almost all respondents report that businesses have revised inflationary
expectations upward.

Food price increases, higher import costs due to a

weakened dollar, and increased unit labor costs are all cited as reasons
for this revision.

The revised inflation expectations have not y e t shown up in
business a c t i o n s , h o w e v e r .

A few isolated examples of inventory accumu-

l a t i o n e x i s t , b u t there is no evidence of w i d e s p r e a d attempts to increase
inventories in o r d e r to beat future p r i c e i n c r e a s e s .

In f a c t , s e v e r a l

respondents n o t e d that b u s i n e s s e s , apparently fearing a s l o w d o w n later
this y e a r , are very cautious about increasing inventories n o w .

Similarly,

inflation has not caused cautious businesses to change investment p l a n s ,
a l t h o u g h one respondent suggested that business spending plans a p p e a r to
h a v e b e e n revised upward b e c a u s e of economic strength in the fourth
quarter.
M o s t respondents b e l i e v e that g e n e r a l p r i c e increases plus the
c o a l settlement and the increase in the m i n i m u m w a g e w i l l push up w a g e
demands in this a r e a .

They think g o v e r n m e n t a l pleas for voluntary

restraint w i l l probably b e disregarded since the A d m i n i s t r a t i o n h a d a
m a j o r role in the c o a l s e t t l e m e n t .

Those who do not see any immediate

w a g e consequences from the c o a l settlement expect it to set a p a t t e r n
for w a g e negotiations in future y e a r s .

T E N T H D I S T R I C T — K A N S A S CITY

Current and anticipated sales are generally g o o d , inventory levels
are m o s t l y s a t i s f a c t o r y , and delivery times f o r items purchased are not
l e n g t h e n i n g , according to purchasing agents at a n u m b e r of leading Tenth
District firms.

Prices of materials and other inputs are rising in the 5 per-

cent to 6 percent r a n g e f o r m o s t b u y e r s , but s e v e r a l report increases of
6 percent to 8 p e r c e n t .

Spring planting o f feed grains is b e i n g delayed in

the D i s t r i c t b y w e t s o i l c o n d i t i o n s .

M a r k e t prices for grain h a v e strength-

e n e d , p a r t l y due to n e w farm p r o g r a m m e a s u r e s .
of loans at T e n t h District c o m m e r c i a l b a n k s .

Demand is strong for a l l types
Deposit growth is s l a c k , but

bankers expect to find funds from nondeposit sources to m e e t loan d e m a n d .
A large m a j o r i t y of Tenth District purchasing agents surveyed report
n o significant recent changes in delivery times or availability of items purchased.

The greatest e x c e p t i o n w a s in the case of s t e e l , w i t h s e v e r a l re-

spondents noting some lengthening of lead t i m e s .

M a n y firms experienced slight

delays in deliveries during the w o r s t of the w i n t e r w e a t h e r , but it is no
longer a problem for t h e m .

Reports of any large impact on p r o d u c t i o n from

materials shortages and transportion p r o b l e m s , or of back-orders and lost
s a l e s , w e r e few in n u m b e r .
M o s t respondents report prices of their m a t e r i a l s and other inputs
to b e rising in the 5 percent to 6 percent r a n g e , but s e v e r a l n o t e increases of 6 percent to 8 p e r c e n t .

Expectations of price increases for

the rest of the y e a r a p p e a r to c e n t e r on the 6 percent to 8 percent r a n g e .
Only a v e r y few purchasing managers stated that their m a t e r i a l s inventories w e r e other than s a t i s f a c t o r y .

A paint m a n u f a c t u r e r reported

h e a v y inventories due to sales b e i n g w e a k e r than e x p e c t e d .

O t h e r firms w i t h

slightly h i g h or slightly low inventory positions expect to take n o s p e c i a l
action to adjust t h e m .
Satisfactory inventory l e v e l s , or the lack of s p e c i a l e f f o r t s to adjust
for s m a l l discrepancies t h e r e f r o m , probably reflect the generally good sales
p i c t u r e — b o t h current and a n t i c i p a t e d — f o r m o s t firms s u r v e y e d .

Exceptions

to the generally good sales picture include the paint m a n u f a c t u r e r already m e n t i o n e d , s e v e r a l firms w h o s e m a r k e t s are in the agribusiness s e c t o r , and at least
one s t e e l firm w h i c h is feeling the effects of w e a k n e s s in private investment
in n o n r e s i d e n t i a l s t r u c t u r e s .

A m a n u f a c t u r e r of private aircraft n o t e s that

its sales abroad are sluggish in spite of the f a l l in p r i c e of t h e i r planes
because of the w e a k e r d o l l a r .

One respondent is concerned that the "constant

refrain" h e h e a r s from b u s i n e s s m e n — " t h a t the fourth q u a r t e r w i l l b e b a d and
1979 w i l l b e l o u s y " — m a y b e c o m e a self-fulfilling p r o p h e c y .

H e b e l i e v e s the

p e s s i m i s m is u n w a r r a n t e d , certainly for his firm and elsewhere as w e l l .
M e l t i n g snow and recent r a i n f a l l h a v e delayed spring fieldwork throughout m u c h of the T e n t h D i s t r i c t .

Barley and oat seeding is r e p o r t e d to be about

30 percent complete in the D i s t r i c t , although 60 p e r c e n t is considered n o r m a l
f o r this time of y e a r .

M o r e o v e r , field preparations for corn and soybeans are

as m u c h as 4 w e e k s behind schedule in some a r e a s .

G e n e r a l l y , if c o r n is not

p l a n t e d b y M a y 1 0 , large y i e l d losses are frequently e x p e r i e n c e d .

Although

they can p e r f o r m field operations q u i c k l y , farmers are likely to reduce their
feedgrain planting and increase the p r o d u c t i o n of o t h e r c r o p s , p a r t i c u l a r l y
s o y b e a n s , if w e a t h e r conditions do n o t soon i m p r o v e .
F a r m p r o g r a m m e a s u r e s announced recently by the D e p a r t m e n t of
A g r i c u l t u r e are expected to boost 1978 net farm income $3-4 b i l l i o n above

the 1977 l e v e l of $20.4 b i l l i o n , according to o f f i c i a l r e p o r t s .

Farmers w i l l

b e a l l o w e d to graze cattle on some of their w i n t e r w h e a t and to take addit i o n a l f e e d g r a i n and cotton c r o p l a n d out of p r o d u c t i o n , f o r w h i c h G o v e r n m e n t
p a y m e n t s w i l l be m a d e .
sidered.

H i g h e r target prices f o r w h e a t are also b e i n g con-

P a r t l y as a r e s u l t of these m e a s u r e s , m a r k e t p r i c e s f o r g r a i n s

have strengthened.

T h e s e d e v e l o p m e n t s , coupled w i t h any n e w l e g i s l a t i o n that

C o n g r e s s m a y p a s s , are likely to k e e p u p w a r d p r e s s u r e s on r e t a i l food p r i c e s
f o r the r e s t of 1 9 7 8 .
T e n t h D i s t r i c t b a n k e r s contacted report that d e m a n d h a s b e e n v e r y
s t r o n g f o r a l l types of l o a n s , p a r t i c u l a r l y agriculture and a g r i b u s i n e s s

loans.

S e v e r a l b a n k e r s r e p o r t that e l e v a t o r companies are b o r r o w i n g h e a v i l y b e c a u s e
r a i l c a r s h o r t a g e s h a v e d e l a y e d shipment and sale of g r a i n .

C a t t l e loans

h a v e i n c r e a s e d at m o s t b a n k s , and so h a s lending to c o u n t r y b a n k s b y correspondents for agricultural financing.

Loans for n a t u r a l r e s o u r c e d e v e l o p -

m e n t a n d to e n e r g y - r e l a t e d industries continue s t r o n g .

R e a l estate and

c o n s t r u c t i o n loans h a v e increased s h a r p l y , and auto loans are p i c k i n g up in
m o s t p a r t s of the D i s t r i c t .
D e p o s i t g r o w t h is slack at m o s t b a n k s , and m a n y b a n k e r s r e p o r t
m o d e r a t e outflows in c o n s u m e r time and savings d e p o s i t s .

Although most

b a n k e r s expect to h a v e sufficient funds to m e e t loan d e m a n d in the n e a r
t e r m , they are p l a n n i n g to p u r c h a s e funds in the m o n e y m a r k e t and to
arrange f i n a n c i n g t h r o u g h large correspondent b a n k s to m e e t the a n t i c i p a t e d
c r e d i t d e m a n d s ; some p l a n to b o r r o w from the F e d e r a l R e s e r v e u n d e r the
seasonal borrowing privilege.

L a r g e b a n k s contacted report that m a n y

c o u n t r y b a n k s are a l r e a d y h e a v i l y loaned u p .

E L E V E N T H DISTRICT-—DALIAS

The r e t u r n o f w a r m w e a t h e r has q u i c k e n e d t h e pace o f economic activity
in the E l e v e n t h D i s t r i c t , according to the Directors a n d b u s i n e s s m e n interviewed
in this month's s u r v e y .

Spring sales at department stores a n d auto dealerships

are u p s h a r p l y , and t h e goods-producing industries show advances following a
l a c k l u s t e r performance d u r i n g t h e first quarter o f t h e y e a r .

T h e r e is c o n c e r n

among m a n y r e s p o n d e n t s , h o w e v e r , that r e s i d e n t i a l c o n s t r u c t i o n m a y w e a k e n as
deposit inflows continue t o slow at b o t h savings a n d l o a n associations a n d
banks.

M u c h o f the current s t r e n g t h in b u s i n e s s loan d e m a n d is a t t r i b u t e d t o

a growing n u m b e r o f plant acquisitions a n d b u s i n e s s t a k e o v e r s .

Although financial

conditions o f farmers remain t i g h t , p r i c e increases have i m p r o v e d the situation
for ranchers a n d d a i r y m e n .
The p a c e o f c o n s u m e r spending during the first w e e k s o f spring has
surpassed t h e expectations o f m a n y r e t a i l e x e c u t i v e s .
excellent E a s t e r s a l e s .

Department stores r e p o r t e d

Some o f t h e sales g a i n s , h o w e v e r , w e r e due t o p r o m o t i o n a l

efforts b y retailers t r y i n g to draw down h i g h inventory levels a c c u m u l a t e d d u r i n g
the c o l d w i n t e r m o n t h s .

M a n y stores n o w find themselves s l i g h t l y u n d e r s t o c k e d .

Department store executives say that sales are e x p e c t e d t o r e m a i n strong t h r o u g h
the s u m m e r .

Auto dealers describe recent sales as "exceptional."

Domestic a n d

foreign cars o f a l l makes a n d sizes a p p e a r to b e selling w e l l , a n d inventories
a r e generally b e l o w d e s i r e d l e v e l s — e s p e c i a l l y stocks of f o r e i g n c a r s .
Output in the goods-producing industries p i c k e d u p i n m i d - M a r c h w i t h
the return o f v a r a w e a t h e r .

The largest gains are in m i n i n g a n d c o n s t r u c t i o n ,

but only m o d e r a t e gains a r e r e p o r t e d b y the industries supplying the m i n i n g
and construction i n d u s t r i e s .

D u r i n g t h e w i n t e r m o n t h s , m a n y suppliers d i d not

reduce p r o d u c t i o n levels to m a t c h a slackening in n e w o r d e r s .

Consequently,

m a n u f a c t u r i n g a c t i v i t y w i l l not rise in step w i t h the recent increase in b o o k i n g s .
A i d e d by the trigger price s y s t e m , domestic s t e e l producers report
a growing demand f o r t h e i r p r o d u c t s .

Some producers a r e optimistic that trigger

pricing w i l l enable them to pass o n p r o d u c t i o n cost increases m o r e easily and
thus improve t h e i r profit m a r g i n s .

Inventories of scrap a r e b e l o w desired l e v e l s ,

and scrap p r i c e s a r e expected to continue to r i s e .

S a n d , g r a v e l , and cement

p l a n t s a r e allocating output to users because of the s t r e n g t h in c o n s t r u c t i o n
activity.

O n e respondent believes that r e s i d e n t i a l construction m a y h a v e

reached a p e a k , but increased n o n r e s i d e n t i a l c o n s t r u c t i o n activity is expected
to take up a n y slack that m a y d e v e l o p .
Increased concern o v e r inflation and talk of recession is discouraging
some firms from m a k i n g n e w plant and equipment e x p e n d i t u r e s .

O i l - r e l a t e d in-

dustries and electronics firms continue to account for m u c h of the plant and
equipment s p e n d i n g , w h i l e m a n y outlays a r e f o r p o l l u t i o n c o n t r o l equipment o r
plant m o d e r n i z a t i o n .

Investments b y oil-related firms are said to account f o r

nearly h a l f of a l l plant a n d equipment expenditures in the H o u s t o n a r e a .
In nondurable goods m a n u f a c t u r i n g , the growing popularity of suburban
newspapers and r e g i o n a l m a g a z i n e s continues to account for m u c h of the increase
in printing and p u b l i s h i n g .

P e t r o l e u m refiners report that the s e a s o n a l increase

in inventories of gasoline is w e l l a l o n g , and m a n y h a v e b e g u n to post price
increases in advance of the summer v a c a t i o n s e a s o n .

C h e m i c a l p r o d u c t i o n con-

tinues to g r o w at a m o d e r a t e p a c e , but capacity u t i l i z a t i o n remains slightly
b e l o w 90 percent at m o s t p l a n t s .

T h e a p p a r e l industry m a y b e g e t t i n g a b o o s t

if t h e activity at the early f a l l m a r k e t of the D a l l a s A p p a r e l M a r t is a n
indicator.

Buyers report orders a r e up 10 to 15 percent o v e r last y e a r .

Net savings inflows at District S&L's are r u n n i n g 50 percent "below
year earlier levels.

S&L's are expecting a reaj. test t h i s m o n t h w h e n a b l o c k

of "wildcard" certificates m a t u r e s .

Increased advertising o f large certificates

o f deposit is b e i n g u s e d to attract f u n d s .

T h e d e m a n d f o r m o r t g a g e funds con-

tinues to outpace t h e supply o f n e w funds as r i s i n g m o r t g a g e rates h a v e slowed
d e m a n d only s l i g h t l y .

One m a j o r S & L recently r a i s e d its c o n v e n t i o n a l rate to

9 3 A p e r c e n t , but most continue to h o l d to 9 1 / 2 p e r c e n t .
Deposit inflows at b a n k s also continue at a slow p a c e .

Many bankers

report demand deposit and savings accounts are d e c l i n i n g , w h i l e certificates
o f deposit remain s t r o n g .

L i q u i d i t y remains a d e q u a t e , a n d asset growth has

not b e e n adversely a f f e c t e d b y t h e slower growth i n d e p o s i t s .

S o m e large "banks

report increasing t h e i r holdings o f m u n i c i p a l s , a n d l o a n g r o w t h continues
p a r t i c u l a r l y r e a l estate a n d construction l o a n s .

strong,

Commercial and industrial

loans also continue to grow at a fast pace w i t h m u c h o f t h e g r o w t h a t t r i b u t e d
to a growing n u m b e r o f plant acquisitions a n d b u s i n e s s t a k e o v e r s .
F i n a n c i a l conditions o f E l e v e n t h District farmers r e m a i n t i g h t , but
h i g h e r cattle a n d m i l k prices h a v e improved the situation for ranchers a n d
d a i r y m e n , according t o p r e l i m i n a r y findings o f o u r A p r i l survey o f a g r i b a n k e r s .
A l t h o u g h the availability o f loanable funds at r u r a l b a n k s i n c r e a s e d s l i g h t l y
since J a n u a r y , repayments o f outstanding loans r e m a i n s l o w , a n d referrals to
n o n b a n k credit agencies continue t o edge u p w a r d .

S e v e r a l b a n k e r s note t h a t

because o f dry w e a t h e r a n d l o w crop prices m o r e farmers and ranchers a r e s t a r t i n g
the 1 9 7 8 c r o p y e a r w i t h a h i g h e r volume o f c a r r y o v e r loans t h a n has b e e n experienced before.

TWELFTH DISTRICT - SAN FRANCISCO
The Twelfth District economy continues to emit signs of health.
Retail sales continue to grow, especially from earlier rain-depressed
levels in Southern California.

Most firms report that inventories are

at desired levels, though two note that policy changes have lowered their
target inventory-to-sales ratios.

Very strong real estate demand has

resulted in recent increases in mortgage rates throughout the West and
some observers anticipate even further increases.
Retail sales continue generally strong in the West.

In Southern

California, March retail sales rebounded from the rain-depressed February
levels (by 18 percent unadjusted, according to one survey).

Auto sales

in that area appear to be much stronger than they have been nationally.
Auto sales are also reported to be strong in the Pacific Northwest.

An

Oregon-based distributor who supplies foreign cars to a five-state area
reports that March was his best month since last August.
however, reports of slow domestic auto sales.

There were,

While the depressed farm

economy has seriously retarded sales of farm machinery, retail sales in
rural areas are said to be respectable.
reported record sales in March.

One Seattle-based food distributor

Another Seattle observer forecast continued

strong retail sales in that area due to the immigration stimulated by the
Boeing expansion.

The only pessimistic note on retail sales comes from

Alaska where the economy is said to be adjusting to the post-pipelineconstruction era.
Inventories appear to be at desired levels at all stages of
production in most parts of the West.

Exceptions to this include:

larger

than desired inventories of domestic autos, many raw farm commodities

(like potatoes and beans), some processed farm goods (like canned tomatoes),
coal (due to pre-strike stockpiling), building materials (due to bad
weather), and petroleum distillates.

Leaner than preferred inventories

are reported by a clothing manufacturer and a lift-truck manufacturer.
Two firms reported a change in inventory policy, the result in both cases
being lower inventory-to-sales ratios.

One is an electronics manufacturer

which attributed the change to a new accounting procedure, and the other
is a large diversified firm which claims that "aggressive inventory management techniques" have enabled it to operate with less inventory than in the
past.
Among major manufacturers, Boeing reports increased inventories
to accomodate its rising rate of production.

Kaiser Aluminum notes that

aluminum industry inventories are currently at desired levels, but there
is concern about shortages in the near future.
Within the past few weeks, most Western states have experienced
increases in the prime residential mortgage rate and most observers and
bankers attribute the increase to very strong demand, sometimes accompanied
by a slowing in the rate of consumer savings deposits.

California appears

to be leading the District with 80-percent loans currently costing 9 3 A
percent; up from 9 1/2 percent only a few weeks back.

Demand is reported

to be so strong in Central California that SSL's are refusing loans to
buyers who do not plan to occupy the house.

In the Pacific Northwest

mortgage rates have recently risen from 9 1/4 to 9 1/2 percent and are
expected to rise even further since they typically lag the California
market by 3 - 6 months.
during the year.

Some observers expect rates to reach 10 percent

While a couple of bankers noted increased cost of funds

as a partial reason for the rise, most appeared to feel that this cost
increase was inconsequential, and the major reason was that the demand
for funds was growing more rapidly than the supply of loanable funds.