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CONFIDENTIAL (FR) CURRENT ECONOMIC COMMENT BY DISTRICT Prepared for the Federal Open Market Committee by the Staff August 5, 1980 TABLE 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 25 Ninth District-Minneapolis page 28 Tenth District-Kansas City page 31 Eleventh District-Dallas page 34 Twelfth District-San Francisco page 38 SUMMARY * [Asterisk: Prepared at the Federal Reserve Bank of St. Louis.] While a number of Reserve Banks (Boston, Philadelphia, and Richmond) report further slowing i n overall business a c t i v i t y i n J u l y , others (Chicago, S t . L o u i s , and Kansas C i t y ) report a leveling o f f , and New Y o r k , Cleveland, M i n n e a p o l i s , and San Francisco report signs of recovery. Economic weakness characterizes the Atlanta D i s t r i c t , Dallas D i s t r i c t continues products, to expand slowly. and activity i n the W i t h the exception of farm prices continue to increase but at a slower rate than previously (New York, Cleveland, and Kansas C i t y ) , and some price cutting was noted wholesale markets i n recent months. (Boston, A t l a n t a , (Chicago). Farm conmodity prices have increased Although commercial in rapidly loan demand is either flat or weak S t . L o u i s , and Kansas C i t y ) , sane D i s t r i c t s (Chicago, Minneapolis, and San Francisco) reported that mortgage lending is increasing. Consumer spending apparently began to increase i n J u l y . An upturn i n retail sales was reported in about one-half of the D i s t r i c t s (New Y o r k , Cleveland, Chicago, M i n n e a p o l i s , and Kansas C i t y ) , w h i l e most of the others reported that sales were unchanged. Automobiles and air conditioners among the items that gained during J u l y . were R i s i n g credit sales were apparently a factor i n the increased sales i n J u l y . Three Federal Reserve Banks (New York, Cleveland, and Chicago) reported the beginning of a slowdown i n the capital goods sector. the first indication of a decline i n this sector at New York and This is Cleveland. Chicago reported that capital goods are weakening on a broad f ront. Most D i s t r i c t s report that retail inventories are at satisfactory levels with the exception of San Francisco where such inventories high. remain Some inventory excesses were also reported by purchasing agents the Kansas City area. I n contrast, remains plagued by materials commercial construction i n the West shortages. Manufacturing activity continues Districts. in to decline i n most of the Orders are down i n numerous sectors such as consumer steel and other primary m e t a l s , and some nondurables. reported another large drop i n industrial Philadelphia a c t i v i t y this month, Boston reported some declines i n manufacturing, and Richmond foresees decl ines over the remainder of the y e a r . durables, further Some l e v e l i n g o f f , however, was reported by S t . Louis and some rebound i n manufacturing was reported by Minneapolis and by manufacturers of construction supplies i n D a l l a s . R e s i d e n t i a l building is beginning construction continues at a high level (Dallas and San F r a n c i s c o ) . is described as booming. to recover, and commercial i n those D i s t r i c t s where mentioned I n the l a t t e r D i s t r i c t conmercial Residential construction construction rose somewhat i n J u l y i n several D i s t r i c t s from the r e l a t i v e l y low level of May and June, remains low when compared to year ago l e v e l s . but Of those D i s t r i c t s commented, all except Chicago reported an upturn i n that residential construction i n J u l y . R i s i n g unemployment was reported by most D i s t r i c t s on the subject. that commented Further layoffs were reported by P h i l a d e l p h i a , Cleveland, A t l a n t a , and Richmond, and unemployment is expected to r i s e further i n the Twelfth D i s t r i c t Layoffs, as the recession affects a wider range of however, have slowed i n the Minneapolis remained at a r e l a t i v e l y low 6 . 0 percent industries. a r e a , where unemployment rate i n the second quarter. Unusually hot and dry weather conditions i n July over most of the nation have reduced current and future prospects for production. P a r t i a l l y i n response to these developments, prices have r i s e n , and overall agricultural farm income prospects have improved. Livestock production has been affected by substantial chickens agricultural deaths of broiler (Richmond, A t l a n t a , and S t . L o u i s ) and by cutbacks i n livestock herds due to poor pasture and range conditions (Kansas City and D a l l a s ) . These cutbacks have led to some increase i n current meat s u p p l i e s , but w i l l reduce future supplies. prospects Extreme heat and drought have also reduced crop throughout the major growing areas of the n a t i o n . FIRST DISTRICT — BOSTON Economic activity i n the F i r s t D i s t r i c t is slowing further. However, the character of the slowdown is e s s e n t i a l l y the same as described in earlier reports. Among manufacturers, firms which produce consumer goods or which are associated with the housing and auto industries experiencing weak s a l e s . High technology companies and those i n the defense business are doing w e l l . Retail sales are up s i g n i f i c a n t l y over year ago levels which were depressed by the gasoline shortage. been a s l i $ i t revival are i n housing There has activity. Surveys of manufacturers show fewer and fewer firms with increases in new orders and more and more with reductions. Declines i n production and shipments are less common, but in one recent survey of purchasing managers 40 percent of the respondents reported lower production compared to 20 percent reporting increases. far has been f e l t by manufacturers The brunt of the slowdown thus of consumer goods, automotive and items associated with the housing industry. recovery since then. Production is down Sales of siding and roofing material although the worst occurred i n March and A p r i l ; products The tire manufacturers in New England are having a particularly d i f f i c u l t time. at the r e g i o n ' s sawmills. levels are weak there has been some On the other h a n d , many of New E n g l a n d ' s high technology f i r m s , p a r t i c u l a r l y those i n instruments and equipment, continue to operate at high l e v e l s . electrical The defense business remains very strong. Aside from those firms associated with the auto industry and housing, the recession seems to be f a l l i n g most heavily on firms which were already i n some d i f f i c u l t y . are attributed recession. Frequently, weak sales and financial problems to inadequate management i n the past rather than to the One respondent i n northern New England reports several of older, high cost operations of national the recession r e s p o n s i b l e . closings companies; he does not consider However, such reports are more common than during the expansion p e r i o d . The retail sales situation i n the F i r s t D i s t r i c t is d i f f i c u l t to assess because sales a year ago were very adversely impacted by the gasoline shortage. Most retailers have seen a s i g n i f i c a n t increase i n s a l e s , and those respondents with national year over year affiliations report that sales i n New England seem to be stronger than i n the country as a whole. Even s o , sales are probably not keeping pace with i n f l a t i o n . respondents observe that discount than traditional stores; recession-induced price operations are f a r i n g somewhat Two better this pattern is seen as a sign of consciousness. In the banking s e c t o r , loan demand declined e a r l i e r i n the year and is now holding steady at the reduced volume. Two smaller banks say that they are putting more emphasis on collections than s e l l i n g l o a n s . repondents feel that the quality of loans has deteriorated. deterioration recession. prevalent is attributed to special factors These This rather than to the However, as mentioned, special factors seem to be more and more acute than i n the p a s t . Mortgage demand has increased slightly. Professors E c k s t e i n and Samuelson were a v a i l a b l e for comment this month. policy. Both remarked on the widespread confusion about current monetary Both interpreted Chairman V o l c k e r ' s congressional testimony as "backing away from true monetarism." E c k s t e i n describes current monetary policy as "rudderless and fears that policy has returned superior alternative to interest rate management. is known he hopes that policy w i l l aim at at sea" Until a reasonable growth i n the aggregates. Professor Samuelson f e e l s i t is too early i n the recession for interest rates to r i s e . He is concerned that policy has returned to the late 1950s mode of concentrating on restraining the expansion before the recession is over. He is encouraged by the recent pick-up i n monetary growth and acknowledges becoming v i s i b l e . against that " t h e light at the end of the tunnel" Nevertheless, he warns against a "Thatcher-like i n f l a t i o n " with several years of below-trend growth. has many counter-productive consequences. elsewhere. crusade Such a policy For example, i t may encourage protectionism by i n v a l i d a t i n g the counterargument can find employment is that displaced workers SECOND DISTRICT — NEW YORK Business activity i n the Second D i s t r i c t although there were some scattered remained weak i n J u l y , Consumer spending strengthened at several higher-priced department stores, but sales remained soft at other r e t a i l e r s . signs of improvement. Merchants anticipate some near-term pickup i n demand due to the dismantling of the credit control program. Outside the consumer sector, new orders declined further and several respondents are reassessing their capital spending plans. current downturn, capital goods producers orders. For the first reported a slowdown in new But with large backlogs of u n f i l l e d orders, are planned. pressures reported time i n the no production cutbacks Price pressures appear to be a b a t i n g , although strong wage still persist. On the financial s c e n e , some business lending is to be taking place below the prime r a t e . Consumer spending i n the Second D i s t r i c t the improvement was not widespread. strengthened i n J u l y , but Department stores catering to upper income customers registered moderate to strong gains. At mass marketers and discount c h a i n s , however, sales gains were n e g l i g i b l e , although most of these retailers expect a pickup this f a l l from back-to-school purchases. Credit card usage has been weak at these stores but r e l a t i v e l y normal at higher^priced declined. retailers. Catalogue sales of specialty apparel also have While domestic and foreign tourists are a source of strength at Manhattan stores, most retailers expect sales to be largely unaffected by the i n f l u x of visitors associated with the Democratic Convention. Inventories are reported to be i n line with sales at all District. stores across the Domestic automobile sales i n the Second D i s t r i c t July, rose moderately although dealers report some weakening in recent weeks. in Foreign car sales during this period were e x c e l l e n t , however, w i t h unusually heavy floor t r a f f i c . Used car sales also have been strengthening. The relaxation of credit controls has had a varied impact on automobile sales thus f a r . Several respondents report that although financing is now more available i n New York S t a t e , many customers believe that credit is scarce and rather than risk being refused c r e d i t , automobile purchases. continue to postpone I n New York C i t y , greater credit a v a i l a b i l i t y was cited by respondents as an important factor i n the sales upturn. Automobile inventories are lean with reports of shortages of models — both compact and full-sized — and causing dealers conditions has been noted. particular hampering sales in some instances to swap among themselves i n other Outside of r e t a i l i n g , of chemicals, still cases. l i t t l e improvement i n overall New orders slackened business further at manufacturers steel products and photographic and optical equipment. with few exceptions, inventories have been well-managed and excessive buildup appears l i n e s , such as p l a s t i c s , that orders are beginning to have occurred. Other r i s e i n orders as a result of customers' little I n d e e d , for some product fibers and f e r t i l i z e r s , to r i s e . But inventories are so low firms also expect to see a modest depleted inventories. On a positive note, some moderation of price pressures has been reported due to easing i n the cost of raw m a t e r i a l s . Heavy energy u s e r s , however, are not b e n e f i t i n g from lower costs all that much. Wage pressures have shown l i t t l e abatement and one chemical producer is bracing for a strike even though workers i n the industry are being l a i d o f f . Capital investment plans at several companies are under review and w h i l e spending in 1 9 8 0 w i l l go ahead as scheduled, investment outlays are l i k e l y to be reduced i n 1981. Many companies plan to stretch out and defer rather than actually slash investment. manufacturers, which until beginning As a r e s u l t , capital to see a slowdown in new orders. Moreover, these companies expect orders In general, the overall Their backlogs are outlook of respondents banks, while of pessimistic The dismantling of the direct impact on individual s i d e , business sufficiently necessary. is less credit control program is viewed as contributing to overall On the financial are to bounce back i n the f i r s t h a l f than it has been for the past several months. although having l i t t l e goods now have been unaffected by the r e c e s s i o n , large at present, however, that production cutbacks are not 1981. spending demand, companies. loan demand at large New York C i t y stronger than i n recent months, remained below the levels posted i n the first quarter. shift from bank loans Most of this weakness is attributed to a to the corporate bond market and to the generally lean inventory s i t u a t i o n . Some short-term loans to low-risk borrowers are being made at rates below the prime, although there are significant differences among the banks as to non-price lending terms. Over the remainder of the y e a r , senior loan o f f i c e r s are unsure about the strength i n loan demand because of the great uncertainties over the outlook for the economy. T H I R D DISTRICT - P H I L A D E L P H I A Indications from the Third District in July point to a slowdown in business activity. Manufacturers in the District say industrial activity has taken another large drop this month, and retailers report sales to be even with a year ago. As for the future, manufacturers anticipate an upward swing six months from now, but retail merchants expect sales to remain flat through year-end. In the financial sector, C & I loan volume is up, but remains below plan. Forecasts indicate little change through year-end as the recession bottoms out. Manufacturers responding to the July Business Outlook Survey report another significant drop in area industrial activity. July seasonal factors have combined with the continuing downturn to produce the largest one-month drop in general business activity since December 1974. Both new orders and shipments have taken a sharp dip and producers' backlogs continue to shrink. Inventory trimming has resumed, after a temporary halt last month, and the employment situation has worsened somewhat. Both payrolls and the average workweek have declined significantly. For the longer term, survey participants expect an upward swing in general business activity six months from now. New orders and shipments are expected to increase and manufacturers are planning to add to inventories although only marginally. The brightened outlook may be good news for labor as respondents expect to maintain the current level of factory employment and lengthen the average workweek. Prices are up again in July in the industrial sector. Input costs are higher for about 40 percent of the survey participants and approximately 30 percent report charging higher prices for their finished goods. As for the future, nearly 80 percent of the respondents expect to be paying more for raw materials and 70 percent plan price hikes for their products. Area retailers report no change in sales in July as compared to the sales levels of July 1979. Local merchants had anticipated this slowdown though, and planned conservatively, so inventory-sales ratios are "in line." Sales of soft goods, particularly men's and women's apparel, are strong while big ticket items are still very sluggish. An exception to this, however, is air conditioners which, owing to the recent heat wave, are in high demand. Suburban stores are doing a little better than the center city stores with sales up slightly over last year, owing to longer operating hours and a differing market. Credit sales are down slightly but area retailers expect a turn-around of credit sales as the credit situation is resolved and stabilizes. Retailers continue to plan cautiously as sales are expected to remain flat through year-end, despite December Christmas buying. Local merchants plan no changes in inventories. A steady, no-growth schedule will be followed as retailers hope to keep their inventory-sales ratios healthy. Area bankers report mixed activity in July. Reports of C & I loan volume range from 3 to 11 percent over year ago figures, but are generally below plan. Consumer loans, on the other hand are down, and are expected to decline even further. Looking ahead to the next six months, most contacts are forecasting little change between now and year-end as the recession bottoms out. Banks in the Third District are currently quoting a prime rate of 11 percent. Projections of the prime indicate a continued drop, leaving the rate 100 to 200 basis points below its current level by year-end. Deposits are up moderately at commercial banks as corporate customers increase their deposits. Summer business at Pennsylvania and N e w Jersey vacation spots' is reported to be very strong this year as compared to 1979, according to spokesmen from the N e w Jersey shore, Pocono Mountain resorts, and area theme parks. Excellent fishing and high gas prices have kept vacationers close to home this year, benefiting the local resort areas. Tourist volume at the New Jersey shore is up 20 to 25 percent over 1979, with occupancy running 90+ percent. Pocono Mountain tourist trade is reported to be between 30 and 50 percent higher than last year and executives at the area's major amusement parks report that their business is up also, about 9 percent over last year. Despite the increase in the number of vacationers, however, less money than expected is being spent at most resorts, owing to the current recession and the drain to the Atlantic City casinos. The total effect of the casinos is unclear though. Many food and service dollars that might be spent widely over South Jersey are going to Atlantic City instead. However, Atlantic City cannot offer adequate accommondations for all its customers, and the spillover is often absorbed by the surrounding shore spots, giving their business a boost. A spokesmen from the Pocono Mountain Vacation Bureau reports a loss of their market to Atlantic City, as well, mainly senior citizens, but the gap is filled by more families and single people who are still keeping their business strong. As for the rest of the season, officials at the summer vacation resorts are optimistic and expect to continue to increase their volume as they head into the peak of the summer season. Advance reservations in the shore area are booked as far ahead as late September to mid-October and the convention trade in Atlantic City looks good. Given continued good weather, entertainment park operators are striving to maintain the strong and steady trade they are presently experiencing. FOURTH DISTRICT - CLEVELAND The sharpness of the second quarter decline in real GNP has not altered the outlook among most Fourth D i s t r i c t respondents that the recession w i l l bottom out i n the late f a l l and a sluggish recovery w i l l begin in the fourth quarter. The increase in PCE during June is generally viewed as a sign that a trough for some types of consumer spending has past, but spending patterns may be until early next spring. irregular Residential construction appears also to have reached a trough in the D i s t r i c t , but b u i l d e r s are s t i l l discouraged by high mortgage rates. The business sector has begun to f e e l the impact of the consumer-centered recession beyond the already weak steel-rubber-glass i n d u s t r i e s . Respondents expect a sharp slowing i n the pace of i n f l a t i o n during the next quarter, see l i t t l e abatement i n the underlying rate of i n f l a t i o n . in the steel industry, Layoffs, but especially appear to have peaked, with unemployment rates through June that were s t i l l below 1973-1975 levels. The current recession is in the process of s h i f t i n g from the consumer and construction sectors to the business sector, according to several in the Fourth D i s t r i c t . However, the need for long-delayed capital officials expansion and continued auto retooling should provide some underlying strength to the business sector. Despite the sharpness of last month's decline in real GNP, several business economists are more confident that the recovery w i l l begin in the fourth quarter than they were early this summer. generally expected to be sluggish, Although the recovery is an auto parts supplier asserts that new car models w i l l provide stimulus needed for a slow recovery. A steel economist cites the need to rebuild steel inventories by the fourth quarter, along with renewed orders from the auto industry, as providing additional strength to the economy. According to a bank economist, however, the current level of consumer debt, along with job insecurity and scheduled increases in social security taxes in 1 9 8 1 , w i l l prevent a strong rebound i n consumer spending, housing and appliances, especially for until next spring. Several consumer goods producers and r e t a i l e r s b e l i e v e that the strength of the recovery in r e t a i l sales remains uncertain, but are more confident the trough in real PCE is past. in furniture, appliances, Some b e l i e v e , that however, that further declines and housekeeping goods (such as paper products because of their soaring prices) are l i k e l y at least until Christmas. A major appliance producer reports that demand from dealers has been a l i t t l e better than expected, partly because housing starts did not decline as much as expected and partly because hot weather induced sales of refrigerators and air conditioners. He expects the contraction i n production and inventories of major appliances to end no later than next month. A supplier of packaging materials notes that nondurable goods and some durable goods, such as color TVs have held up better-than-expected. chain expects a 1-2% (annual r a t e ) An o f f i c i a l for a major department store increase i n real PCE during the fourth quarter as auto sales strengthen, but expects a mild recovery in real PCE because of continued high inflation. Record low levels in mortgage commitments in recent months suggest to several S&L o f f i c i a l s have reached a trough. that r e s i d e n t i a l construction in the D i s t r i c t may Although s u f f i c i e n t funds are a v a i l a b l e to meet loan demand, consumers are s t i l l unwilling to accept current mortgage r a t e s . A bank economists b e l i e v e s that a rate below 11% is required to produce a significant improvement i n home buying. An S&L o f f i c i a l notes that one home builder has been unable to attract customers with a 9 . 7 5 % mortgage r a t e . An area banker expects construction a c t i v i t y to be limited to completion of homes in progress, with v i r t u a l l y no speculative b u i l d i n g . Mortgage rates, according to an economist with a regional FHLB in this D i s t r i c t , have s t a b i l i z e d between 11-12%. However, some S&Ls have raised their rates s l i g h t l y and more are expected to adjust their rates upward i f demand r i s e s much during the summer season. The business sector, especially capital goods, has begun to s o f t e n . Despite a five month backlog, a small machine tool producer reports new orders down 30% from year-ago levels and expects at least three more months of downturn. A producer of highway and nonresidential construction materials states that new orders in June were down 10% from year-ago levels and backlogs were 13% below last year. However, the declines seem now to be leveling o f f as the com- pany moves into i t s peak sales period. An o f f i c i a l for an industrial construction company notes that capital goods typically lag the business c y c l e , but the sharpness of the declines in April and May suggests the lags may shorten in this recession. New orders for steel probably bottomed out in May, according to a steel economist, and are now r i s i n g irregularly toward consumption, which has been weakening. Steel consumption should s t a b i l i z e when an upturn begins in auto- motive production, probably in the fourth quarter. The consumer price index is expected to moderate to as low as 8% by year-end, but several respondents expect accelerated i n f l a t i o n in 1 9 8 1 . An o f f i c i a l for a major food store chain expects the July CPI to be discouraging because of food price increases, steady. although August through October should be Industrial prices w i l l be held down by the severity of the recession and may help o f f s e t food price increases. An S&L o f f i c i a l notes that increases in housing prices have slowed and some builders are o f f e r i n g rebates. Several business economists expect i n f l a t i o n to r i s e to 11-12% rates through 1 9 8 1 . Further increases in layoffs comparable to the second quarter are generally not expected. A spokesman for a steel company states that layoffs currently represent 30% of their work force that serves the auto industry and 10% for specialty s t e e l . Layoffs continue i n coal mining in southern Ohio where high sulfur steam coal is restricted by environment regulation, to an area banker. according Layoffs are also being affected by business closings among auto and real estate d e a l e r s , according to a bank o f f i c i a l . However, a state labor market analyst reports that about 50% of unemployed workers in Ohio are receiving supplemental income. Unemployment rates among major D i s t r i c t SMSAs ranged from 5 . 8 % to 1 3 . 2 % in May, but s t i l l average about a half percentage point below the highs in the 1974-1975 recession. FIFTH DISTRICT - RICHMOND Most indications are that business a c t i v i t y in the F i f t h D i s t r i c t continued to decline through J u l y . Manufacturers responding to our monthly survey experienced further declines in shipments, new orders, and order backlogs. Manufacturing employment also d e c l i n e d , as did the average workweek. Inventories continued to r i s e r e l a t i v e to desired levels as stocks of finished goods rose broadly and materials on hand showed l i t t l e change. Retailers around the D i s t r i c t also report continued slowing of a c t i v i t y . Total sales and relative sales of big ticket items declined in J u l y . Manufacturers see further declines in activity over the remainder of the year w h i l e fore- retailers are coming to expect a turnaround of some magnitude in that time frame. Large banks have experienced a slight decline in total loans in recent weeks as lower volumes of commercial and i n d u s t r i a l and personal expenditures loans were only p a r t i a l l y offset by gains in loans secured by real e s t a t e . current outlook for many segments of the D i s t r i c t s ' While the agricultural economy is far from rosy, farm credit conditions have improved. Of manufacturers contacted recently over one-third experienced declines in shipments and new orders over the past month. Much of this weakness was concentrated in such industries as chemicals, primary metals, and machinery and equipment lines. Other i n d u s t r i e s , particularly t e x t i l e s , apparel, furniture, and building materials and supplies appear to have held their own in recent weeks while paper lines made some g a i n s . backlogs over the month. Nearly half of the respondents reduced order Inventories were up from the previous survey period as finished goods were accumulated by nearly half the firms and stocks of materials were essentially unchanged. stocks as excessive, Nearly half of our respondents view current a somewhat lower proportion than a month a g o . Manufacturing employment and the length of the manufacturing workweek continued to f a l l sharply. Approximately one-quarter of the respondents f i n d current plant and equipment capacity in excess, but we found no sentiment whatever for cutting back current expansion plans. On balance, r e t a i l sales among survey respondents were down but the performance of individual firms suggests that in some areas sales a c t i v i t y was stable to slightly improved from June. Relative sales of big ticket items were also down, but this movement, too, was not widespread. Most r e t a i l e r s report further inventory accumulation in recent weeks, but generally find current stocks about r i g h t . Employment at r e t a i l establishments shows no s i g n i f i c a n t change from the previous survey period. Most respondents remain s a t i s f i e d with the current number and s i z e of o u t l e t s . Some respondents continue to encounter customer resistance to regular p r i c e s . There was also some mention of receivables building as customers take longer to pay b i l l s . Over one-third of our manufacturing respondents expect further in a c t i v i t y , n a t i o n a l l y , of the year. locally, declines and in their respective f i r m s , over the rest On the other hand approximately one-fifth now see improvement taking place over that period. A l l r e t a i l e r s surveyed, however, expect con- d i t i o n s to be at least as good in s i x months as they are now. Price increases, increasingly uncommon among manufacturers, became more widespread among r e t a i l e r s over the past month. Drought and searing temperatures have cut crop prospects and broiler output, adding to the f i n a n c i a l troubles of many farmers. But interest on farm l o a n s , though s t i l l w e l l above a year ago, have dropped markedly, ducing the cost of farm credit s i g n i f i c a n t l y . rates re- Bank supplies of farm loan funds, which remained r e l a t i v e l y ample throughout the period of the expected crunch, have improved from both the spring quarter and year-ago l e v e l s . Both loan repayment rates and the number of renewals or extensions showed improvement over the previous quarter, and c o l l a t e r a l requirements were sharply lower. Farm loan demand at banks continued to be substantially weaker than u s u a l , thus helping to ease the l i q u i d i t y pressures that had faced some banks heavily involved in farm lending. Loan-to-deposit ratios of banks reporting in our latest survey of D i s t r i c t farm credit conditions averaged fractionally higher than in the spring quarter but w e l l below a year earlier. SIXTH DISTRICT - ATLANTA Although economic weakness s t i l l characterizes business a c t i v i t y the D i s t r i c t , in record-setting temperatures and the e f f e c t s they have caused received the most attention this month. to items needed. Consumers are holding spending only Residential housing construction is s t i l l weak; however, savings and loans report renewed consumer interest in loan applications. Manufacturers of carpet, steel, and aluminum have had substantial layoffs. Parts of Georgia and M i s s i s s i p p i were declared disaster areas due to droughtcaused losses by farmers. Layoffs and threat of l a y o f f s , declining real incomes, and very high energy b i l l s have a l l led to cautious consumer spending. store sales are about even with year-ago f i g u r e s , terms. Department implying a decline in real Durable goods sales for the most part remained weak; however, chases of window a i r conditioners and fans are up sharply. pur- Several movie theaters reported long lines as patrons seek refuge from record-setting temperatures. T e l e v i s i o n sales and servicing were thriving as more people stayed home in an attempt to avoid the heat and conserve money. Consumers continued to search for bargains and limited their use of credit cards. Sales promotions are becoming more prevalent in an effort to reduce inventories. A spokesperson for the Southern Company, a holding company for utilities in the Southeast, said that e l e c t r i c i t y demand was expected to reach a new high for the entire system in J u l y . Generating capacity was said to be adequate, with most generating plants in good condition. Automobile sales are s t i l l very weak. Florida, eastern Tennessee, improvement in s a l e s . However, our central and central Alabama directors reported recent The used car market has become more a c t i v e , heightened demand for both small- and large-sized used At least temporarily, tomed out. with cars. the downturn in r e s i d e n t i a l housing has bot- Home sales have turned up in various parts of the D i s t r i c t . Applications are increasing considerably at savings and loans, particularly in F l o r i d a , but builders of single-family houses are not yet convinced that the housing slump is over. Residential construction is especially weak in areas with r i s i n g unemployment such as central and northern Alabama. Loan demand is soft at many banks due to uncertainty about the duration and severity of the current recession. ing but not enough to warrant concern. effort by businesses Delinquency rates are ris- There appears to be a discernible to reduce their outstanding loans and r e f r a i n from borrowing new money. A substantial weakening in employment has become evident the D i s t r i c t . The latest declines have been concentrated throughout in manufacturing, but slower growth and declines are also occurring in other sectors. Layoffs have been high in the North Georgia carpet industry, which has been harder hit than in the 1974 recession because of the construction and credit squeeze. Sixty-five percent of carpet sales are on c r e d i t . In addition to the steel plant cutback, northern Alabama has had recent layoffs in its aluminum industry due to declining demand for aluminum from the auto industry. Jobless claims have accelerated rapidly in most D i s t r i c t states but seem to be leveling off. The tourist trade can be characterized as mixed. While attendance at state parks is booming, more expensive commercial campgrounds are almost empty. T r a f f i c counts along major tourist arteries have sunk appreciably since last summer. Occupancy rates at a chain of "economy motels" are only matching that of last year, and a higher priced chain reports lower occupancy rates. More families are driving at night and lodging during the day because of the heat and lower day rates. Capital spending projects of note include plans for " L i t t l e England," a huge tourist attraction reproducing English history from the Stone Age to modern time. The $500-million complex w i l l be constructed near Disney World and is expected to attract more than 9 m i l l i o n v i s i t o r s per year and employ more than 1 0 , 0 0 0 workers by completion in the late An expansion of the Port of Miami, 1980s. announced recently, the largest projects in South Florida history. is one of By doubling its s i z e , estimated direct and indirect economic effect of the port w i l l the ultimately add about $ 3 . 8 b i l l i o n of income to the port. Lockheed-Georgia Company was selected as the primary contractor r e t r o f i t t i n g the wings of C-5A " G a l a x y " transports. for A spokesman for Lockheed- Georgia reported that the r e t r o f i t program w i l l permit the " r o l l i n g over" of 2 , 0 0 0 company employees currently working on the C-141 program. The Federal Farmers Home Administration declared parts of Georgia and M i s s i s s i p p i disaster areas because of the heat and drought damage in June and J u l y , making farmers e l i g i b l e for low interest losses are valued at $450 m i l l i o n . losses, followed by corn, loans. Georgia crop Hay and pasture suffered the largest soybeans, and peanuts. Record temperatures and high humidity have also damaged the poultry industry in Georgia and Mississippi. Broiler prices had just begun to climb to break-even levels M i s s i s s i p p i before the bird losses began. The losses are expected to result in an increase in broiler prices at the retail that vegetables in Florida have done very w e l l ; crop was harvested there. in level. A brighter picture is a record tomato and watermelon SEVENTH DISTRICT - CHICAGO Evidence is increasing that some of worst hit consumer sectors will level off or improve moderately in the third quarter. Capital goods, however, are weakening on a broad front. Consumer and business borrowing activities are assuming more normal patterns. kets. Price cutting is common in wholesale mar- Housing transactions axe picking up. Farm income prospects have improved with higher prices. Sectors that appear to have touched bottom in May, June, or July include retail sales of general merchandise, passenger cars and light trucks, RVs, manufactured housing, gypsum board, cement, and steel. In no case, how- ever, has a dramatic reversal occurred. Also, the improvements are largely associated with the consumer sector. Most business managements are pushing stringent programs to cut costs to a point that may impair their ability to respond to increases in final demand later in the year. Cost-cutting measures include layoffs (even of valued, experienced people), hiring freezes, short weeks, suspension of COLAs and various nonwage benefits, halting contributions to pension funds, paring of inventories (even to the point that standard items are not stocked), using only the most efficient equipment, deferral of all but the most essential maintenance and repair, and delaying payments of hills. Clearly, these measures will adversely affect long-term competitive strength, but they are undertaken in a spirit of quiet desperation. Complaints of slow pay on outstanding debts by both businesses and consumers are widespread. Actual inability to pay on time is responsible in some cases, but more commonly debtors are attempting to avoid interest costs by shifting the burden to their suppliers. Delinquencies on consumer credits have increased significantly, but are still not at the high level of 1975. Personal bankruptcies are becoming a much more serious problem, partly because of the new law. Businesses complain of a surge in bad checks, and a rise in shoplifting (already historically high). Bank robberies in the Chicago area have tripled from last year's rate. Retail sales appear to have improved moderately since the May low. Consumers continue to buy cautiously and tend to patronise discount stores. (If K-Mart sales increase relative to Sears at the rate of the past 12 months, K-Mart will be the nation's top retailer a year hence.) Some old-line chains axe expanding their discount type operations to meet competition. Vehicle dealerships, small builders, and trucking companies continue to close their operations, seme filing for bankruptcy, in numbers unknown since the early 1930s. Dealership closings, many large and long-established, will have far-reaching consequences. Not only are numerous employees involved, but a healthy dealer organisation is essential for mass marketing of new and used vehicles and for servicing new cars under warranty. High interest costs for carrying inventories of slow-selling models have been a large factor in the dealer crisis. Captive finance companies have stretched their resources to help stronger dealers to survive. Dealer mergers have been tolerated and even encouraged by manufacturers. With short lead times and unused capacity in virtually all lines, price-cutting is common in wholesale markets, including steel, nonferrous metals, and cement. Vendors are ready to negotiate prices on such items as office equipment and heavy trucks. temporary reaction to weak markets. Such concessions are thought to be a Steel shipments tire believed to have reached a low point at about 50 percent of capacity around midyear, down from 83 percent in April. Since then, there has been a slight uptrend. A smaller Chicago steel company has closed permanently. One of the largest Chicago-area mills is operating only one of six blast furnaces. Customer inventories of steel are said to be "extremely low," and any strengthening of final demand must quickly be reflected in orders for steel. The farm and construction equipment industries continue in a slump, but there are hopes that demand will revive with the prospective improvements in farm income and residential construction. very weak. Demand for heavy trucks remains Order backlogs for rail cars are eroding. for capital goods has been slipping on a broad front. Since March, demand Notable exceptions sure metal-cutting machine tools, and items related to oil and gas well drilling. A producer of large castings is operating at only 50 percent of capacity and demand for forgings, in tight supply a few months ago, has dropped sharply. Home mortgage lending has picked up with rates in the 11-12 percent range plus 2-3 points. Housing starts remain at a postwar low for the summer months, but the unsold inventory is small and some rise in starts is seen before year end. Several large commercial buildings nearing completion in Chicago's Loop area are virtually 100 percent leased. Starts on several additional large commercial buildings will occur in the fall. Farm income prospects improve as crop prices rise substantially in response to growing evidence that harvests will be affected adversely by weather-related damage. Crops look good in most of the Cornbelt, but pollination problems apparently will reduce yields. Hot weather also has adversely affected prospective meat supplies because of increased mortality, mainly of chickens, and poor weight gains for hogs and cattle. Loan demand at rural banks in the district continues soft. Partly, this reflects lagging declines in the interest rates they charge. At midyear rates on farm loans averaged about percent, down only 3 points from the end of the first quarter. Our surrey of farmland values shows an average decline of 2 percent in the second quarter which followed a similar decline in the first quarter. Values still averaged about 3 percent over the year-ago level. EIGHTH DISTRICT — ST. LCUIS The rate of decline in economic activity i n the Eighth D i s t r i c t moderated i n J u l y , according to reports from area businessmen, and some expressed the opinion that the bottom of the recession is n e a r . automobile and home sales are s t i l l below year ago l e v e l s , both showed improvement i n July compared with J u n e . below year ago levels i n real Although Department store sales remain terms, but did not decline further i n J u l y . Manufacturing of consumer durables and primary metals has generally leveled off at well below year ago l e v e l s , after d e c l i n i n g the f i r s t h a l f year. Capital goods manufacturing continues the financial sector, mortgage interest percent i n the past month. to hold up f a i r l y w e l l . rates have declined about Bankers report recent weeks but somewhat higjher interest of the little In 1/2 change i n loan demand in rates at the end of J u l y . agricultural s e c t o r , hot and dry conditions have adversely I n the affected agricultural production prospects i n much of the D i s t r i c t . Retailers continue to report sluggish s a l e s . Department representatives note that sales are below year ago levels i n real but that J u l y sales were about the same as i n J u n e . low-priced items are reported to be s e l l i n g b e s t . store terms, Q u a l i t y items and very Retail margins are under extreme pressure as heavy sale promotions have been necessary to move inventories. On the other hand, automobile dealers report improved in recent weeks. sales J u l y sales were about 80 percent of the year ago l e v e l , compared to 60 percent in the previous two months. Substantial declines in manufacturing activity have occurred i n the past three months among consumer durables, primary metals, and some nondurables. W h i l e most manufacturers of these products report that are s t i l l well below year ago l e v e l s , incoming orders have not further i n recent weeks. stabilize in July. fallen For example, automobile manufacturing tended to A major appliance manufacturer reported that sales are expected to remain about 20 percent below normal for the next quarters. sales Representatives three of paper and chemical manufacturers, however, noted some further declines i n sales over the past month. Capital goods manufacturing continues firm contacted reported a cutback i n capital to hold up w e l l , as only one expenditures. Included among items i n strong demand were oil and gas d r i l l i n g equipment, railroad and barge equipment, h i ^ i - e f f i c i e n c y motors, hydroelectric t u r b i n e s , and environmental equipment. Manufacturing of commercial airplanes also continues to be strong, based on a large backlog of orders b u i l t up during the past three years. No cancellations of these orders has occurred as y e t , despite some decline i n a i r l i n e t r a f f i c . Manufacturing of military equipment is also r i s i n g and is expected to be boosted further as a result of projected increases i n next y e a r ' s defense budget. Homebuilding activity has increased over the past two months, but remains at a r e l a t i v e l y low l e v e l . Housing starts i n the S t . Louis metropolitan area were only about 25 percent of normal i n J u n e , up from about 10 percent in May. further improvement. Starts i n J u l y , however, are expected to show F a l l i n g mortgage interest the major factor underlying the upturn. rates are reported to be Mortgage rates have continued downward i n the past month, and two of the largest S & L ' s i n the S t . area are now o f f e r i n g mortgages at 11-1/2 percent. rates is reported to be very b r i s k , Loan demand at p a r t i c u l a r l y for purchases of Louis these older homes. Business loans at commercial banks i n the D i s t r i c t have remained unchanged i n recent weeks. reported. Fewer loans at below prime, however, were Loan demand for real unchanged. estate and consumer purposes was also Deposit inflows into financial moderate p a c e . i n s t i t u t i o n s continues, but at a The increase i n passbook savings accounts, noted i n J u n e , has continued i n recent weeks. Abnormally hot and dry conditions have adversely affected agricultural production i n the D i s t r i c t . period i n J u l y , about 20 percent For example, during a two-week of the broilers Arkansas were lost due to higji temperatures. ready for market in In a d d i t i o n , a small portion of the laying f l o c k for broiler eggs was l o s t , which i s l i k e l y to have adverse effects on broiler production later i n the y e a r . These weather conditions have also adversely affected crops over much of the D i s t r i c t , but the most seriously affected areas are confined to southwestern Missouri. Very dry conditions were also reported i n the soybean and cotton producing areas of Arkansas; however, recent rains have reduced the severity of the drought conditions there. Most areas report that and hay crops are also in poor condition and that livestock weight have been slowed by both the hot weather and poor pasturage crops. pastures gains NINTH DISTRICT — MINNEAPOLIS Economic a c t i v i t y has slowed somewhat i n the Ninth D i s t r i c t , not nearly as much as i n the nation as a w h o l e . economy showed signs of And i n J u l y the but district strengthening. Slcwer D i s t r i c t Growth — But O n l y Moderately The district has had its troubles l a t e l y . prices have been hurting farm income. Drought and low crop Consuners have been hesitant much of anything, but especially homes and cars. to buy Firms i n some industries have thus been r e c e i v i n g fewer orders and have responded by cutting back output and laying off workers. district banks and savings As a r e s u l t , lending has weakened at and loan associations. D e s p i t e these t r o u b l e s , though , the district has been outperforming the n a t i o n . In the second quarter, the seasonally adjusted rate was 6 . 0 percent i n the district nation. Consistent unemployment compared to 7 . 5 percent i n the with t h a t , most Bank directors report that a c t i v i t y has been considerably stronger i n their ccnmunities nationally. Much of this difference than can be traced to the smaller the depressed auto industry has had l o c a l l y . economic a c t i v i t y , J u l y ' s S i g n a l s of Strength: The district district's but a f u l l impact Measured by the nunber of people the industry employs, auto production accounts for j u s t the d i s t r i c t ' s economic 6 percent of the Higfter Crop Prices . . 2 percent nation's. . economy may stop slowing soon, f o r i n J u l y all the trouble spots showed some improvement. The farm sector is s t i l l s u f f e r i n g from the drought. Some of the of d i s t r i c t ' s crops and grazing lands have been i r r e v e r s i b l y damaged by the hot, dry weather. North Dakota farmers, for example, are expected to harvest only 15 b u s h e l s of durim wheat per acre, about h a l f as much as year. The d i s t r i c t ' s good i f last corn and soybean crops, however, could s t i l l be quite they get adequate moisture i n A u g u s t . I n s p i t e of the drought, farm income i n the district has stopped falling. This is mainly because the prices their products leaped between June and J u l y . average cash prices that farmers are getting for I n Minneapolis , f o r i n s t a n c e , (per bushel) increased from $ 2 . 5 2 to $ 2 . 8 2 f o r corn, from $ 4 . 1 9 to $ 4 . 5 5 for w h e a t , and from $ 5 . 9 5 to $ 6 . 9 4 f o r soybeans. Farm income was also buoyed i n J u l y by the a d m i n i s t r a t i o n ' s increased price supports for these . . products. . Freer Spending, Fewer L a y o f f s District . . . consuners seem to have started to recover i n J u l y , Although not yet considered strong, sales r e t a i l e r s i n Minneapolis-St. reportedly improved l a s t month at Paul and other parts of the d i s t r i c t . buying a l s o picked up i n J u l y , according to Bank d i r e c t o r s . and truck buying did not — The freer boost. though it didn't fall any further larger-than-seasonal But new car either. Paul manufacturers report a increase i n new orders between June and J u l y . While at those firms may not be back up to the level a year a g o , the district production cutbacks have slowed and so have l a y o f f s . Minnesota, for example, the average nuaber of i n i t i a l unemplojment July, Heme consumer spending has given manufacturing a c t i v i t y a Two large Minneapolis-St. business too. across In claims for dropped from 6 , 4 0 0 to about 5 , 0 0 0 per week between June a time of the year when these claims usually don't change at and all. . . . and More Lending at S&Ls This improved a c t i v i t y has not yet reached banks; remained e s s e n t i a l l y unchanged i n the l a s t month. savings and l o a n s . applications and J u l y . their lending It h a s , however, reached Reflecting the pickup i n home s a l e s , mortgage loan at Minneapolis-St. Paul S&Ls increased 63 percent between June TENTH DISTRICT—KANSAS CITY Business a c t i v i t y in the Tenth D i s t r i c t remains s l u g g i s h , but the rapid declines experienced during spring have not continued into summer. R e t a i l e r s report that sales strengthened somewhat in June and July and that inventories are at s a t i s f a c t o r y l e v e l s . Purchasing agents report that prices have s t a b i l i z e d , materials are e a s i l y o b t a i n a b l e , to be reduced. and inventory l e v e l s need The hot, dry weather has a f f e c t e d the a g r i c u l t u r a l sector by reducing expected crop y i e l d s and forcing increased c a t t l e marketings. Bankers throughout most of the D i s t r i c t report that loan demand remains weak, w h i l e d e p o s i t s have been l e v e l or r i s i n g in recent months. A majority of Tenth D i s t r i c t r e t a i l e r s report that nominal sales for the year to date are greater than for the same period l a s t y e a r , primarily to a rebound in sales during June and J u l y . due The recent surge in r e t a i l sales i s due in large part to the strong impact the summer heat wave has had on the s a l e of such items as f a n s , and f r e e z e r s . Most r e t a i l e r s are continuing to i n c r e a s e , air conditioners, i n d i c a t e that t h e i r merchandise though at a moderate r a t e . refrigerators, costs Most of these cost increases are b e i n g passed on to consumers so that p r o f i t margins are being maintained. Inventories are reported by most r e t a i l e r s as at s a t i s f a c t o r y Tight inventory control p l u s recent s a l e s gains have kept i n v e n t o r i e s very low l e v e l s , which r e t a i l e r s levels. at intend to maintain throughout the remainder of the year. Over h a l f the purchasing agents contacted report that input prices have r i s e n by less than 1 0 per cent over the last 12 months. agents i n d i c a t e that p r i c e s have recently s t a b i l i z e d , and that p r i c e s are expected to remain s t a b l e throughout the rest of the year. materials have become more e a s i l y Most purchasing Almost all obtainable. Due to the slowdown i n b u s i n e s s a c t i v i t y , about half the purchasing agents contacted say that their materials inventories are too h i g h , they plan to reduce f u t u r e orders to compensate. maintain cautiously low inventory l e v e l s . and that The remainder plan to Most companies contacted are running at lower than normal production l e v e l s , and half the firms have laid off some workers in recent months. Sustained h o t , dry weather has placed s u b s t a n t i a l s t r e s s on spring seeded crops throughout the Tenth D i s t r i c t . Reductions in y i e l d s are antici- pated for d r y l a n d — a n d p o s s i b l y for i r r i g a t e d — c r o p s . Estimates of corn and soybean production for 1980 continue to be reduced. The continuing drought has caused pasture and range leading cattlemen to increase marketings s u b s t a n t i a l l y deterioration, in recent weeks. Yearlings and c u l l cows make up the bulk of the recent increase in marketings. The movement of c a t t l e to market i s expected to return to more normal levels in August, unless a c o n t i n u a t i o n of the h o t , dry weather causes further range deterioration. Early marketings combined with slow herd buildup t h i s year w i l l probably keep beef s u p p l i e s near current l e v e l s throughout 1 9 8 1 . Other meat production w i l l probably d e c l i n e due to cutbacks i n production by both b r o i l e r and hog producers. A l l of these factors point toward a significant reduction in total meat supplies next y e a r , putting upward pressure on meat prices. Loan demand has recently remained f l a t or weakened somewhat at most Tenth D i s t r i c t banks contacted this month. The exceptions are some banks in Wyoming and Oklahoma where energy-related loans remain buoyant. loans show the greatest weakness. Consumer Agricultural and real estate loans are also generally level to down, due i n part to the heat and drought recently a f f e c t i n g the Midwest. A l l but one of the banks contacted lowered their prime or base lending rates in the last month. Some of the metropolitan area bankers currently have prime rates of 10 3 / 4 to 11 per cent, following the lead of the large money center banks. Others, however, are at 11 1 / 2 per c e n t . fees at some country banks remain r e l a t i v e l y h i g h , 14 to 16 per cent. Base Most bankers contacted expect further d e c l i n e s i n the prime rate of 1 to 2 percentage points by yearend. Loan demand i s generally anticipated l e v e l to up s l i g h t l y over the next few months. Deposits at Tenth D i s t r i c t banks have been l e v e l or r i s i n g i n recent months. Six-month and 2 1/2-year c e r t i f i c a t e s show the greatest Demand deposits, other small time d e p o s i t s , firm. strength. and savings deposits also appear Large C D ' s , however, have softened r e c e n t l y . expect f l a t deposit growth i n the near f u t u r e . Most bankers contacted A few bankers in Oklahoma and New Mexico are more optimistic due to t h e i r r e l a t i v e l y robust regional economies. One banker expressed concern over a p o s s i b l e runoff next f a l l in the large number of high-yielding money market c e r t i f i c a t e s he issued last spring. Other bankers, however, expect their spring MMC's to be r o l l e d over at current interest rates. ELEVENTH The economy In the current of DISTRICT—DALLAS the Eleventh recession. A District survey of continues department to expand slowly stores showed little Improvement 1n unit s a l e s , while sales of new cars have picked up from their previously residential building is underway, and nonresidential Its relatively very depressed strong pace. levels. Some pickup Interest speculative construction Lending at most S 4 L ' s showing slight response to declining in slightly continues and commercial rates. banks 1s Manufacturing output 1s s o f t , with some Improvement 1n orders from suppliers to the construction industry. Drought conditions are having substantial impact on agricultural production in the D i s t r i c t . Unit remain lackluster, increases low sales although from l a s t y e a r ' s level sales at department following than in the stores stores in the Houston levels. March 14 previous but throughout most of Credit remains year. and Austin sales a the District areas report are rebounding from smaller proportion of Department stores continue to the total rely heavily on sales and promotions to generate store t r a f f i c and move merchandise. Inventory few retailers outlook for levels are have excess the rest of generally stock where sales the year push planned for the Christmas New car below last increased year's sales sales described in levels, is as desirable, although have not met projections. optimistic, with an aggressive a The sales season. the D i s t r i c t but in recent weeks. a few are dealers still are as much reporting Foreign auto manufacturers as 50 percent substantially have signifi- cantly expanded market share in the last year, scribe the sales of larger models as currently cars. Dealers attribute the improved sales but domestic surpassing those of volume to the of new cars are lean, and recent declines in the prime While 1 9 7 9 ' s level interest limited dealers' floorplan costs construction permits are numbers of Most Invento- have 32 and many unsold homes remain on the market, and avail- eased with rate. residential rates de- smaller Increased a b i l i t y of funds and the lower interest rates on auto l o a n s . ries dealers improved home speculative sales starts have in led Dallas below recent declines some and percent builders Houston, to in begin while such activity appears considerably stronger 1n San Antonio and in the Rio Grande area. Commercial residential construction activity has offset much of the slump in the sector. Eleventh District levels. Commercial Dallas-Ft. is The number of non-residential has and Worth area, important. continued declined industrial as well Nonbuildlng strength. less than building construction Projects formerly Demand for mortgage remains brisk. cent for loans last y e a r ' s residential except levels, construction are positive activity year's and gas and being in the industry utilities shows reconsidered as feasible. Dallas-Ft. Worth, and loan where associa- lending is mortgage commitments are 9 only per- but much of with are last strongest the oil highways shelved 1s savings 1n rather at S & L ' s , for from at D i s t r i c t In the south of the D i s t r i c t , below Inflows sluggish, percent as in areas where interest rate drops make financing more tions 9 projects underway in the than this the strength purchase most of the funds of is due to homes. loans Savings going into 30 month and jumbo c e r t i f i c a t e s of deposit. With y i e l d s on money market certifi- cates currently not competitive, 30-month C D ' s are attracting a rising proportion of recently as well savings. accumulated S&L's by are reducing repaying advances the high levels from the Federal as attempting to Increase mortgage lending. of liquidity Home Loan Bank In D a l l a s , rates have moved up slightly from 11 5 / 8 to 12 percent 1n response to the strength mortgage loan demand. Elsewhere in the D i s t r i c t , the outlook of 1s for lower rates on mortgage loans. Loan construction demand at commercial lending to the oil banks remains f l a t , and gas tinues to be soft and is declining industry. except for Consumer Interim lending 1n some areas of the D i s t r i c t . con- Consum- ers are expressing greater interest 1n auto loans, but many are not w i l l i n g to pay the currently high rates. Manufacturing output 1n the Eleventh D i s t r i c t continues to slump, despite a recent rebound in orders from the construction Industry. zation at of capacity for most steel manufacturers c e n t , while producers of aluminum, chemicals, foresee eries no changes 1n are at 75 percent buildup in the G u l f . however, currently or less Suppliers per- and primary nonferrous metals low production of capacity, about 50 levels. Oil due to substantial of construction steel and air refin- Inventory conditioning report a 3 0 to 50 percent rebound in orders from the low levels at the f i r s t of the y e a r . ogy their remains Utili- electronic Manufacturers equipment have had of computers and other sales growth of 30 hlgh-technol- percent over last y e a r ' s l e v e l s , while sales for producers of fabricated metals and machinery to the oil are lean and gas for Industry most of have grown 25 percent from 1 9 7 9 . the D i s t r i c t ' s manufacturers. Inventories Electrical companies report few problems 1n meeting demands created by the current heat wave. The toll ricultural of the unusually hot, production Is becoming dry weather on the D i s t r i c t ' s substantial. Feedgraln output may agbe reduced by one-third or more, while livestock herds are being trimmed heavily in Southwest Texas impact on the D i s t r i c t ' s as serious, will decline to levels 1f dry most important crop, although much of rapidly that the the crop current is grasslands cotton, can support. The 1s not yet described under stress and y i e l d potential conditions continue. one-half of the n a t i o n ' s cotton acreage is in the Eleventh Approximately District. TWELFTH DISTRICT — SAN FRANCISCO The recession continued to affect Twelfth D i s t r i c t s t a t i s t i c s during the early-summer p e r i o d , although a few signs o f an upturn have been seen i n homebuilding and certain other sectors. remained h i g h , and manufacturers' Retail sales remained s l o w , inventories orderbooks became slimmer during t h i s Unemployment remained h i g h , and it may continue to increase as the affects a wider range o f industries throughout the D i s t r i c t . period. recession Most observers now expect prices to s t a b i l i z e in many non-food s e c t o r s , but in contrast, they expect food prices to rise substantially because o f nationwide weather problems. Some directors b e l i e v e that the sharp declines i n housing and auto sales have not yet been f u l l y r e f l e c t e d throughout the econoncr. As a r e s u l t , unemployment may continue to r i s e in durable-goods manufacturing and r e t a i l trade. Auto d e a l e r s , i n p a r t i c u l a r , C a l i f o r n i a and other regions. appear to be in trouble i n Southern Some dealers have survived only because o f the equity they hold in t h e i r dealership real estate. In the r e t a i l a r e a , many small businesses are in trouble. However, several large Southern C a l i f o r n i a department-store chains posted 12 percent year-to-year gains i n June — far above the national-average increase — Southern C a l i f o r n i a fast-food chains also reported good r e s u l t s . increased cancellations and I n tourism, are plaguing the Northwest hotel and motel industry, despite the rapid clean-up a f t e r the Mt. S a i n t H e l e n s ' areas untouched by ash — such as the Oregon coast — f a l l o f f i n tourist t r a f f i c , eruptions. Resort also are experiencing a due to the recession and high energy costs. Western r a i l c a r loadings f e l l about 10 percent below year-ago levels i n J u n e , because o f a downturn i n i n d u s t r i a l production and a softness in the forest-products industry. One major aircraft producer reported a decline in sales because of the nationwide weakness in a i r l i n e t r a v e l . Meanwhile, major aluminum producer recorded i t s second highest earnings figures history during the second quarter, despite the recession. a in However, aluminum sales and earnings probably w i l l weaken in the second h a l f because o f a downturn in orders. Homebuilders i n C a l i f o r n i a report a paradoxical s i t u a t i o n : a strong demand e x i s t s for r e s i d e n t i a l d w e l l i n g s , but home construction remains i n the doldrums. Potential buyers are experiencing f i n a n c i a l while the inventory o f available homes is d e c l i n i n g . difficulties, Meanwhile, commercial construction is s t i l l booming throughout most o f the W e s t , although it remains plagued by materials shortages. Construction costs are expected to increase further in Southern C a l i f o r n i a , because o f very large wage increases recently negotiated. The Northwest lumber industry reported improved inflows o f orders i n the early-summer p e r i o d , but production remained f a r below normal. A l s o , the unemployment rate i n lumber-oriented Oregon counties remains i n the range o f 20-25 percent. The short-term energy picture i n C a l i f o r n i a and elsewhere remains relatively b r i g h t , mainly because o f reduced consumption during an abnormally warm winter plus adequate current supplies. Plenty o f gasoline is now available for consumers, but the region s t i l l faces the long-term problem of import-dependency. The Northwest, meanwhile, reported a current surplus o f hydro-electric power. Most agricultural leaders reported soaring prices o f farm products, such as c a t t l e , g r a i n s , fruits and v e g e t a b l e s . Weather-caused shortages elsewhere in the country suggest that farm prices w i l l remain h i g h , to an upsurge i n consumer food prices l a t e r i n the y e a r . the Mt. Saint H e l e n ' s eruptions created s i g n i f i c a n t and hay crops — leading I n the Northwest, damage to a p p l e , pear although recent damage estimates are far below those reported just after the eruption. Financial i n s t i t u t i o n s throughout the West reported an increase passbook savings. in For example, one major bank i n Southern California witnessed a savings inflow o f $10 million per day in l a t e June. I n this a r e a , certi- ficates with 2 to 3-year maturities were also s t r o n g , although some weakness was evident i n the sale o f money-market c e r t i f i c a t e s . Commercial-loan demand remained weak i n C a l i f o r n i a , except from construction firms. Some improvement was evident i n real-estate loan a p p l i c a t i o n s , which should l a t e r be t r a n s l a t e d into an upturn i n housing s t a r t s . Many small business about borrowing plans. firms throughout the West are s t i l l veiy cautious The first-half interest-rate v o l a t i l i t y , as well as the abrupt recession-caused decline i n demand, have reduced borrowing needs o f such firms. Small businesses apparently have been increasing t h e i r commercial-loan demand only slowly in response to lower interest rates.
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