View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.




Prepared for the

Federal Open Market Committee

by the Staff

August 7, 1979

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 20
Eighth District-St. Louis page 23
Ninth District-Minneapolis page 26
Tenth District-Kansas City page 29
Eleventh District-Dallas page 32
Twelfth District-San Francisco page 36

[Asterisk: Prepared, at Federal Reserve Bank of Chicago.]
This month's R2DBG0K reports carry a clear message:

a general softening

in activity began in the second quarter, and no early reversal is in sight.


decline has centered in housing and consumption spending, but attempts to prevent
buildups of inventories, and dimming prospects for capital spending are also factors.

Despite weaknesses, total activity is still at or near record levels and

job markets remain surprisingly strong.

Motor fuel supplies have improved, but

sectors affected by shortages are not returning to normal.

Credit is tight, but generally available.

Inflation continues

Agriculture is prosperous,

but transport problems are hampering movements of grain.
Pessimism is widespread as reflected in consumer attitudes, surveys of
executives, and opinions of directors.

The main causes of pessimism are con-

tinued inflation and concerns associated with the long-term availability of
Philadelphia's survey of manufacturers shows a decline in activity
after "three months of no growth."

Richmond's survey reveals declines in

shipoents, new orders, and order backlogs.
Most districts reported that gasoline and diesel shortages had eased
significantly in the past month, because of both increased supplies and conservation induced by sharply higher prices and concern over availability.


main direct adverse impact of fuel shortages has been on low-mileage vehicles
and tourism.

A number of districts, notably Atlanta and Dallas, remarked that

tourism had recovered significantly as fuel supplies improved, but summer
tourism certainly will be off substantially nationwide except for some favorably
located areas.

- ii


Although scattered layoffs have occurred, most districts reported demand

for labor still strong.

San Francisco finds that layoffs in some manufacturing

industries have been offset by continued gains in other manufacturing industries.

Virtually all districts reported sluggish retail sales, especially of
items adversely affected by energy.

New York was particularly concerned.


districts, for example Richmond, found offsets in increased sales of items used
in and around the home.

Consumer credit use has been curtailed along with pur­

chases of big-ticket items.

St. Louis reported an increase in instalment credit

delinquencies and personal bankruptcies.
Residential construction and sales of existing homes are off almost
everywhere, but the impact varies substantially.

Chicago reports residential

permits down 40 percent, while Cleveland is "encouraged by the strength of the
housing sector."
Shortages of materials have eased as activity has slowed, particularly

in the case of building materials.

Inventories are not generally excessive

except for products such as big cars where sales have dropped sharply.


steps taken to prevent the buildup of burdensome inventories are reflected in

reduced demand for manufactured products.

Both Cleveland and Chicago report a

decline in new orders for steel, but output prospects are favorable for the

short term.

Vigorous activity in nonresidential construction contrasts with the

residential picture.

San Francisco mentions a shortage of office space.

Demand for capital equipment remains strong overall, but some weak

spots are appearing.

Boston, New York, and St. Louis report some manufacturers

scaling back expansion plans.

Among the capital goods sectors that remain




strong are commercial aircraft, railroad equipment, electronic controls, machine
tools, and energy-conserving items.
Demand for most types of credit remains strong.
good risks are readily accommodated.

Terms are stiff, but

Usury ceilings which had limited activity

in Texas and Louisiana are being liberalized.

Business loan demand is reported

as "exceptionally strong" by both Boston and New York, but Philadelphia says
business loan demand is


Several districts comment on the lack of

deposit growth.
Farm income prospects are favorable with high prices and excellent
yields indicated for wheat, corn, and soybeans.

Kansas City believes that

"outstanding" wheat yields imply the USDA has underestimated the crop.
ties to move and store grain are fully utilized.


Minneapolis fears that a

strike at the port of Duluth will cause loss of one-third of the area's wheat

- 1 -


Redbook interviews in the First District indicate that business con­
ditions continue to be mixed but that signs of softness are becoming more

Bank loan demand remains very strong.


Orders for products of

most of the region's factories are still quite healthy although some manu­
facturers are scaling back expansion plans in anticipation of a later


Retail sales range from soft to very poor with inventory ac­

cumulation beginning to become a problem.

Although a variety of specialized

materials and electronic components remain in short supply, lead times for

deliveries are beginning to stabilize.

A large money market bank reports exceptionally strong loan demand

across all segments of its business.

The chief executive officer of this

bank feels that much of this expansion is accounted for by more firms

borrowing short-term now in the anticipation of lower long-term rates in the


Deposit growth at most large banks in New England has been slow

resulting in increased reliance on purchased funds to finance expanded loan

Smaller northern New England banks also report strong loan demand


but have resorted to rationing credit because of slow deposit growth.

Reports from the region's manufacturers are varied.

A supplier of

wiring harness to the auto industry has experienced significant reductions

in orders.

Similarly a furniture manufacturer indicates that new orders have

fallen dramatically in the last few months as a result of dealers attempting

to drastically reduce inventories.

A large tire manufacturer reports that

sales are very slow in the replacement market as well as to Original Equip­
ment Manufacturers.

Furthermore the improvement in gasoline supplies does



not seem to have brought about an increase in tires or auto accessory sales.

On the other hand, both current sales and new orders are very strong

for the region's electronics and mini-computer manufacturers.


both military and commercial demand for aircraft engines and

related components is brisk.


orders are an important source of

strength by both electronics and defense goods producers, a pattern that is

expected to continue.

Despite the fact that many of the regions high technology

manufacturers expect to be little affected by the national recession, uncertainty

has caused some of them to scale back expansion plans.

For example, one director

has cancelled the construction of a new plant even though his own sales remain


The Chairman of the Board of a large department store chain reports

that sales are lower now in nominal dollars than in the same period last


While other retailers have not seen this degree of deterioration they

also report a general softening in sales.

Most retailers believe the increase

in gasoline availability is bringing some improvement in sales but not enough

to affect a significant deterioration in buyer confidence.
levels are beginning to become a problem.

Retail inventory

Bankers, manufacturers and retailers

also report substantial increase in bad debts and other collection problems.

Professors Eckstein, Houthakker, Samuelson, and Solow were available for

comment this month.

Eckstein feels that the forecast announced by Chairman

Miller and the one "leaked" from the Administration are so "unwarranted by

current evidence" that it is "irresponsible [for] a government or a central

bank [to issue them]."

On the basis of the current data, he feels it would be

"a grievous error to launch a $20 billion tax cut in the near future."


his view, "the economy had been overstimulated, ran into supply problems

which produced a 'supply recession,' so that to apply traditional stimulus

would be damaging."

Solow's "best guess" is that this recession will be

"at least average," though not as severe as 1974-75.

However, in his

judgment the downside risks are much greater than those on the upside.

The primary downside risk is that the anticipatory consumer buying binge,

which was atypical anyhow, will be reversed and that the savings rate will

rise dramatically.

An additional risk is the danger of "policy overkill"-­

the possibility that monetary and fiscal policy will remain tight throughout

the recession.

Solow emphasized that fiscal policy has become increasingly

For example, with a roughly constant unemployment rate, the federal

deficit has declined dramatically over the past year.

The implication is

that monetary policy need not shoulder the entire burden of restraint.

Samuelson warns that we cannot have full confidence in either the "mild"

Policy should

recession or the "worse than average" recession viewpoints.
aim for small, but positive real growth.

He notes that problems originating

He reminds

on the supply side have secondary impacts on aggregate demand.
us that no one is expecting a generalized demand pull situation.


feels the economy is "in a relatively mild, rather prolonged recession."

He anticipates no major changes in the rate of inflation.

Houthakker feels

there has been no serious weakness in the dollar and sees no terrible problems


He grants that there has been some shift into sterling because it is

backed by oil. Houthakker would be sympathetic to an increase in short-term




Business activity in the Second District appeared to weaken in

July, according to recent comments of directors and other business leaders.

The weakening was most pronounced in consumer spending, with department store

sales and new car sales falling well short of respondents' expectations.

Outside of retailing, new orders have slowed and inventory stocks have grown.

The unintended inventory accumulation generally appears to be relatively

modest and only a few manufacturers plan to lower production levels.


theless, some businesses have responded to the weakening in business activity

by curtailing planned capital spending.

On the financial front, the demand

for bank credit has burgeoned, apparently bolstered by the need to finance

higher stocks of inventories and by reduced corporate cash flow.

Consumer spending in the Second District slowed in July.


without exception, merchants reported that department store sales were well

below planned levels.

While the impact of the gasoline shortage was generally

considered to have been concentrated in June, respondents judged that some

effects spilled into July.

Reflecting the lingering effects of the gasoline

shortage, sales of stores located in suburban shopping malls have been

noticeably weaker than at city branches.

Retailers also noted a drop in

Sunday sales and an increase in the average size of each transaction as

consumers consolidate their shopping trips.

Inventories of most general

merchandise stores appear to be on the high side relative to sales, but

most respondents professed little concern over the level of stocks.



exception appeared to be apparel lines that had experienced an unusual

softening in demand.

For these lines merchants are considering additional

markdowns and clearances.

The directors of the Buffalo Branch were little

concerned with the effect of the availability of gasoline on consumer


They were anxious over the longer term effects of the energy

problem on inflation and the impact of higher fuel bills on discretionary


New car sales in the District remain weak.

While small cars

are selling briskly, sales of larger cars and trucks are stagnant.
inventory situation reflects these divergent sales patterns.


New car

dealers report that small car stocks are almost nonexistent, while large

car inventories are bulging.

In order to spur sales and reduce the

backlog of unsold large cars, dealers in New York and New Jersey noted

that substantial price breaks were being offered on new large cars.

Outside of retailing, respondents expect the slowdown in economic

activity to continue, but most see little immediate impact on their

Most respondents reported that they are attempting to keep


inventories at "lean" to "reasonable" levels.

While there apparently was

some unintended accumulation of inventories, most felt that inventories

were not excessive at the present time.

Confirming this viewpoint, a senior

official of a major New York City bank noted that manufacturing inventories

have grown, but maintained that they were still generally in balance.

Because of a growing cautiousness on the part of business, capital spending

plans in several industries have been reduced as a result of the business


In other industries, however, plans have been unaffected.


A major steel producer and an upstate machine tools manufacturer reported

no change in capital spending.

In addition, the Buffalo Branch directors

noted that planned capital expenditures were going ahead on schedule in

the Buffalo and Rochester areas.

In New Jersey, however, a machine tools

manufacturer and a diversified chemicals company announced cutbacks in

spending plans.

Some of the directors at the head office reported that

businesses were reassessing their capital spending programs, while others

had not detected any deferral of previously planned outlays.

Business loan demand at New York City banks has been exceptionally

strong in recent weeks.

Officials at the banks contacted cited firms' needs

to finance higher levels of inventories as an important factor underlying

the rapid growth of loan demand.

Other factors mentioned included weakened

corporate cash flows, continued capital spending, and mergers and acquisitions.

Most respondents expected growth in loan demand to continue strong for

most of this year before moderating or even declining in late 1979 and

early 1980.


Third District - Philadelphia
Third District economic activity is mixed this month. Industrial executives
report a decline in manufacturing which follows three months of no growth in that
sector. Retail sales have improved slightly, however, after the gasoline shortage induced
a June lull.

Area bankers report moderate loan demand.

As for the future,

representatives from all three sectors agree that the next six months will bring a
substantial decrease in business activity.
Manufacturers responding to this month's Business Outlook Survey report a
decline in area industrial activity during the month of July. Thirty percent of the firms
polled indicate a decrease in overall business activity, the largest drop recorded in over

1/2 years. However, this figure may somewhat overstate the actual decline inasmuch

as July is typically a slow month for local industry.
Turning to specific indicators of current business activity, shipments were
reported to be fractionally higher, but new orders remained unchanged and inventories
slipped substantially, marking the ninth month in a row of declining inventory levels. As
far as local labor is concerned, factory employment grew slightly during the month but
this gain was offset by a fractional shortening of the average workweek.
The gasoline shortage experienced in the region during late June does not
appear to have contributed significantly to July's slowdown in manufacturing activity.
Responses to a special gasoline-effects inquiry indicate that local manufacturers felt
little or no impact on shipments, deliveries, or overall production levels as a result of the
gasoline crunch.

The majority of respondents expect tight gasoline supplies throughout

the summer and the balance of 1979, but again anticipate minor effects, at most, on



Over the longer term, survey participants predict a further dropoff in
business within the next six months.

A substantial number of manufacturers surveyed

foresee decreases in both new orders and shipments between now and January and are
planning to decrease inventories accordingly. The situation does not appear favorable for
local labor either, inasmuch as survey respondents indicate plans to reduce payrolls and
cut the length of the workweek within the next six months.
On the price front, inflation continues as 67 percent of the respondents
report paying higher prices for inputs again in July and nearly 50 percent are charging
more for their products. No relief is foreseen over the next six months with 90 percent
of the manufacturers anticipating higher raw materials costs and 64 percent intending to
raise the prices of the goods they sell. Survey participants feel that gasoline shortages
and rising fuel prices will be at least partially to blame for upward pressure on prices in
Area retail activity has improved somewhat this month after a sluggish
June. Reports of current dollar sales for late July indicate volume to be approximately 5
percent above the corresponding period in 1978.

Sales are generally reported to be on

target and, consequently, inventory levels are good.

Suburban branches of department

stores appear to have returned to normal business volume once again, after a slow June
owing to gasoline problems.

Merchants feel the odd-even rationing plan in effect in all

three states in the Third District has helped suburban sales somewhat.
Looking ahead to the next two quarters, retail merchants are generally
pessimistic. Caution is being exercised and merchants predict that they will be fortunate
to meet last year's sales levels as they expect to end the year on a sluggish note.
Business in the banking sector is generally good this month, according to
area bankers. Total loan volume is about 5 percent above late July 1978 levels. Most of


this strength comes from consumer loans though, while business loan activity is mixed.
Bank executives contacted foresee a decline in both business and consumer loan demand
over the next six months as the overall economy slips into a recession.
The prime rate in the Third District is back to 11 3/4 percent after a drop to
11 1/2 percent last month. Projections for the future indicate a decline in the prime by
January 1980, possibly to as low as 11 percent. There is some speculation that the prime
may increase 25 basis points before the drop begins though.

- 10 -


The majority view among area businessmen and economists is that the

recession began in the second quarter and will continue through the second

quarter of 1980.

The recession will be slightly deeper and longer than

previously believed, mainly because of recent energy developments.


manufacturers continue to operate close to capacity on the strength of


Capital goods producers report that capital spending has lost

some momentum, but most do not expect a decline in spending until the fourth


A slight rebound during the third quarter is expected in the

consumer sector, but not enough to reverse the negative second quarter


Gasoline flows are improving and may aid in the deceleration of

price increases.

Mortgage loan demand remained strong over the last few

The city of Cleveland may be unable to meet its own repayment

schedule on defaulted notes.

Several area economists have revised their forecast to show a slightly

deeper and longer recession lasting through the second quarter of 1980 in

the absence of fiscal stimulus.
to recent energy developments.

They attribute the downward revision primarily

An economist

in the energy industry is

optimistic that consumers will adjust quickly to the higher energy costs.

A producer of major appliances expects that the decline will be gradual with

a relatively mild inventory adjustment occurring primarily in the fourth


Among primary metals producers, production continued at "effective"

capacity, but with emerging signs of a slowdown.

Steel economists report

only small declines in production over the past few weeks and backlogs are

- 11 ­

still high.

However, steel orders booked three months in advance have slowed

considerably and backlogs are expected to be declining by September.


aluminum industry has not experienced a severe turndown in demand, but

production is slightly slower than last month.

Modest declines have occurred

in production lines related to housing, auto and other consumer sectors.


aluminum economist reports that the industry is still below its optimal level

of inventories and is expecting a record year in shipments.

A mild recession forecast is based upon the capital goods sector

remaining strong at least until the fourth quarter.

An official in the

machine tool industry reports that production at his plant has returned to a

more normal capacity with the recent elimination of overtime.

He feels that

capital goods spending is no longer in an expansionary phase, but that

production should remain steady through the third quarter on the strength of

order backlogs.

Most manufacturers report that investment projects already

underway should continue, but projects where money has not been appropriated

are being postponed.

Exceptions are aerospace and energy industries.

The Fourth District, especially Ohio, fared better than most of the

U. S. during the energy crisis.

An economist in the petroleum industry

explained that access to Alaskan crude oil provided adequate supplies that

could be traded for better gasoline-making crude.

Refineries have been

operating over 100% of capacity for the last six weeks.

No closings or

disruptions were reported by industries due to fuel shortages.

Prices remained strong, but many officials expressed optimism that

price pressures would be weakened by the recession.

Improved gasoline

supplies should contribute to a slowing in the rate of gasoline price


However, an economist in the consumer durables sector calculated

- 12 ­

the underlying rate of inflation (less food and energy shocks) at 10%.

He expects double-digit inflation for the remainder of the year, but some

moderation in 1980.

The consumer sector may experience a marginal rebound in the third

quarter, but not enough to reverse the negative growth in the second quarter.

Retail sales started to soften in May and continued through June.


July sales are slow, they are still almost even with the pace during July

of last year.

However, a supplier to the auto and appliance industries feels

that consumers are glutted with cars and appliances because of heavy anticipatory

buying between August of 1978 and May of 1979.

Manufacturers fear that auto

inventories are too heavy and that other durable goods will soon follow.

District officials were encouraged by the strength of the housing


A severe downturn is not anticipated because the underlying demand

for housing remains strong.

Although housing sales have slowed and mortgage

demand is down relative to last year, mortgage demand has stabilized in recent

months and still exceeds supply.
of terms of mortgage loans.

Consequently, S&Ls report some tightening

S&Ls continue to report difficulty in raising

money since March, although the overall amount of savings has been quite strong

over the first half of 1979.

Barring further rises in money market rates

and severe disintermediation, S&Ls anticipate a relatively mild housing


Cleveland's financial situation has shown little improvement despite

the optimism after the March income tax hike.

Rescue legislation has slowed

in the State Senate and is unlikely to emerge before the mayorial campaign

begins this fall.

City financial records show that four special divisions

in the city's budget have overspent by $4 million so far this year.



13 ­

sewer and street repairs have been halted.

A special ordinance was required

to allow a last minute roll-over of city notes using Water Department improve­
ment funds.

The city's own plan to repay the $14.5 million in defaulted notes

with $1.5 million installments beginning in August may have to be abandoned

due to the lack of funds on hand.

- 14 -


Our latest survey of Fifth District business conditions suggests a

marked slowing of activity over the past month. Manufacturers report month­
to-month declines in shipments, new orders, and order backlogs.


generally expanded both in absolute terms and relative to desired levels.

More than two manufacturing respondents in five view current stocks as excessive.

Retail sales showed little change over the month, but a majority of our directors

feel that real sales are down slightly from a year ago.
little change in sales over the remainder of the year.

The directors anticipate

Aggregate credit de­

mand in the region continues to weaken, with consumer nonmortgage credit

leading the decline.

Business borrowings have been moderate in recent weeks.

Our second quarter survey of farm credit conditions, however, reflected strong

demand for agricultural loans, a continued rise in interest rates, and renewed

pressures on liquidity at some banks.

Of manufacturers responding to our latest survey more than one-third

experienced a decline in the volume of new orders and nearly as many had re­
duced levels of shipments during the past month.

Backlogs of orders declined

Respondents also report significant inventory accumulation during

Over one-third indicate larger stocks of finished goods now on

hand and over one-fifth report similar gains in materials inventories.


tionally, over 40 percent view current inventory levels as excessive while

only six percent consider them inadequate.

Nonetheless, a large majority of

these manufacturers still feel current plans and equipment capacity and current

expansion plans are at or near desired levels.

Employment among District manu­

facturers declined slightly in recent weeks, and reductions in the length of the

work week were widespread.

- 15 -

The District retail sales experience has been mixed in recent weeks

although pervasive weakness in some consumer durables, notably autos, has

given the entire retail sector a negative tone.

It is the view of our directors

that real retail sales are down only slightly from year ago levels, and most

of them cite automobiles as a significant depressant.

Weakness is also per­

ceived in sales of recreational vehicles, boats, and tourist related lines.

Recreational items for home use have shown some compensating strength and

department store sales continue to hold up well in some areas.

Pessimism has become pervasive among our manufacturing respondents. More

than ninety percent expect the general level of business activity nationally

to worsen over the next six months and nearly two-thirds are anticipating

further slowing of activity in their respective market areas.

Over one-third

expect the level of production in their own firms to decline over that


There is less agreement among retailers as to the outlook for the

rest of the year, but on balance they do not expect any improvement and seem

to be preparing for some further weakening of sales.

Our directors generally

expect retail sales to be essentially unchanged for the rest of the year.

Price increases continue widespread as over three quarters of all respondents

report paying higher prices in the past month.

On a brighter note, survey

responses suggest a possible slowing of price increases in building materials


As noted, aggregate credit demand in the region continues to weaken.

It is in consumer lending that banks have noticed a clear softening in the demand

for credit.

Installment lending in particular has slowed as auto sales, and

especially sales of recreational vehicles and power boats, continue weak.


over, there are some reports that consumer revolving credit is softening.


the same time, second mortgage loans are doing well, with debt consolidation

being a major factor explaining demand for such credits.
loans, however, are also fairly strong.
loans is somewhat confused.

Home improvement

The market for residential mortgage

Both banks and thrift institutions report strong

to moderate demand for residential mortgages.

At the present time banks appear

more willing to extend such credit than do the thrifts.

In fact, real estate

has been the strongest lending category at large District banks in recent


Commercial and industrial lending is moderate, with utilities, con­

struction related businesses, and both wholesale and retail trade accounting

for a major share of new loans at larger banks.

Some longer term loans for

fixed investment are being made, but short-term lending predominates.


flows are adequate to support the current demand for funds, although recent

changes in Regulation Q do not appear to have significantly strengthened the

deposit gathering power of financial institutions.

The second quarter survey of farm credit conditions in the Fifth

District indicates that loan repayment rates and requests for renewals were

running about normal.

Supplies of farm loan funds at banks declined further,

and there was a slight increase in the proportion of lenders having difficulty

meeting the credit needs of their farm borrowers.

Moreover, there was a fairly

sizable decline in the share of banks who were actively seeking

new farm loan

Loan-to-deposit ratios of reporting banks rose to an average of 68.1

percent, only fractionally below the record level a year ago.

Bankers who

indicated they were requiring more collateral than usual rose to a new high.

- 17 -


The gasoline crunch hit hard in only a few parts of the District

but adversely affected much of the tourist sector.

Now that gasoline

supplies are adequate, some recovery in tourism is in prospect.


spending has been soft, and there have been some layoffs in manufacturing.

Residential construction continued its shallow decline, except for Florida

and Georgia.

Mortgage credit remains in good supply.

Bank lending is

growing at good, but less than boomy, rates, and commercial construction

continues at a brisk pace.

Gasoline availability problems, which eased several weeks ago,

left a negative imprint on the District's important tourist sector.

Florida's Governor stated the gasoline crunch cost the state 20 percent

of its normal tourism, the state's number one industry, from mid-June to


In Georgia, many motel operators with businesses along the major

north-south route through the state reported an appreciable drop in occupancy

rates compared to last year.

Nashville businessmen involved in tourism

estimated a decline in business anywhere from 10 to 35 percent.


long distance driving was down, resort areas along the Georgia coast and

within a day's drive from surrounding metropolitan areas received a near­
record influx of tourists.

Also, Latin American tourists have been coming

to Miami in record numbers and staying longer because of actual or perceived

inadequate gasoline supplies throughout the rest of the state.

Near-term prospects for tourism have improved.

A massive and

apparently successful campaign to boost tourism in Florida began in mid-


Also, many hotel and motel operators in central Tennessee report

- 18 ­

reservations are already up for August.

Thus, sagging tourist trade within

the District seems to have bottomed out.

Considerable softness in consumer spending was evident in most

sections of the District.

However, a notable exception was a real increase

in sales at most large shopping malls in the Atlanta area where consumers

substituted trips to area shopping malls for out-of-town weekend trips and

consolidated several shopping trips into one.

Automobile sales were sluggish

because of continued slackened demand for mid- and large-sized cars; interest

in fuel-efficient compacts remained intense.

Because of sagging sales, over 1,400 workers in the Atlanta area

were placed on indefinite layoff, some with long seniority, at the Ford LTD

assembly plant.

U. S. Steel in Birmingham recently announced a severe

cutback and the possibility of closing a plant there.

Inventories appear to be at manageable or even lean levels.

Expectations of recession and, therefore, flat or slightly declining real

sales in the third and/or fourth quarters of this year induced many retailers

to trim stocks well in advance of the downturn.

The single-family residential construction pattern continued


Florida and Georgia, specifically the Atlanta area, recorded

increases in building permits; the other District states experienced declines.

Mortgage money remained generally available.

Nonetheless, high mortgage

rates dampened demand except for the more active areas in Florida and


And while some potential customers were priced out of the market,

inventories of single-family dwellings are nowhere uncomfortably high.

Business and consumer loan demand continued on a stable path, with

most District bankers experiencing satisfactory increases.

However, a large

- 19 -

Georgia bank reported that demand for business and consumer lending has not

been particularly strong, as businessmen are delaying future plans because

of the recession.

Weakness in consumer loan demand resulted from a downturn

in automobile loans.

Some bankers report an increase in applications for

debt consolidation loans, but it is too early to tell whether a trend is


Savings inflows to banks since April have been positive but slight,

supported primarily by moderate but stable increases in money market certifi­

Two recent financial developments within the District concern the

raising of the usury ceiling on mortgages in Louisiana from 10 to 12 percent

and the offering of variable rate mortgages by two Florida banks.

The two

banks offering VRMs report very active interest and substantial additional

business from this innovation.

The brightest spot with respect to commercial and industrial

investment continues to be Florida.

Projects included a five-year, $200­

million downtown redevelopment in Jacksonville and new pharmaceutical and

paper bag manufacturing facilities and a large convention center and condo­
minium complex in the Tampa Bay area.

- 20 -


Although total business activity is probably slipping moderately in

the Seventh District, trends are mixed from one sector to another and often

within sectors.

Weakness in the residential sector is contrasted with strength

in nonresidential construction.

Most types of capital goods remain vigorous.

Consumer spending on lower priority goods and services is sluggish, especially

for low mileage vehicles.

Demand has eased for steel, nonferrous metals,

building materials, and paperboard.

Shortages have eased in sectors where

demand has declined, but inflation is as strong or stronger than before.

Lenders are cautious and selective but credit remains available to sound bor­

Prospects for farm income are favorable.

Despite level or declining total activity, labor markets remain rela­

tively tight.

Reductions in

employment have occurredin the motor vehicle and

RV industries, but such workers are not readily absorbed elsewhere.


residential construction is down sharply, experienced building trades workers

are in demand for nonresidential projects and repair and modernization.

All eyes are focused on the upcoming UAW/Big Three labor negotiations.

Labor's demands and initial company offers are said to be far apart.


700,000 workers are involved in contracts expiring September 14, and about as

many more will follow their lead.

The "word from Detroit" assigns a 30 percent

probability to a strike of some duration, but such guesses have proved to be of

little value in the past.

Aside from heavy demands for compensation, many

local issues and the prestige of various personalities present roadblocks to

a timely settlement.

Most unions representing private and public workers are emphasizing

- 21 ­

demands for full COLA adjustments plus other contract "improvements."
COLA adjustments are raising many incomes each month.
a further 5 percent pay boost in



(The Teamsters will get

Some contracts are tied to local

CPIs, despite problems of accurate measurement.

The national CPI was 10.9

percent above year ago in June, but the Chicago index was up 12.1 percent.


Milwaukee bimonthly index was 15.1 percent above year ago in May.
Consumers turned cautious in recent months--particularly on purchases
of large cars, trucks, and RVs. They are spending more on goods and services
used at home.

Demand for bicycles and roller skates is straining capacity.

Discount stores and catalog sales are doing relatively better than the tradi­
tional retailers.

Some tourist areas have been hard hit, but those closer to

population centers have done well.
rapid growth aided by fare cuts.

Airline travel has leveled off after very
Slowing sales of fast food chains are attri­

buted to fuel stringencies, higher prices, and market saturation.

Some bank

credit card plans and some individual banks report increased consumer delin­

but big retail

chains and big auto finance companies observe little

or no deterioration.

Supplies of gasoline and diesel fuel have improved.

Hours of some

gas stations have been extended, but the situation is still far from what had
been normal.

Higher prices (in the Chicago area gas is generally $1 and up)

and continued concern about availability have curtailed longer auto trips.
Improvement in availability of diesel fuel, at much higher prices, partly
reflects a significant fall-off in tonnage hauled by truck.
Local oil experts believe that "serious" oil product shortages will
be avoided through year end assuming (1) no new disruption of supply, (2) con­
tinued conservation, (3) a leveling or decline in general activity, and

- 22 ­

(4) freedom for market forces to work.

Natural gas availability is believed to

be adequate assuming a normal winter and the absence of a stampede by industry
to convert back to gas from oil.

Heavy residual fuel is in good supply.


of all fuels will move up further from current levels, even if no new boost is
decreed by OPEC.

A move is gathering strength to subsidize fuel bills of lower

income families on a broad scale.

Public transport charges are almost certain

to rise substantially soon.
Aside from retail trade, industries that have noticed a slowing in
demand lately include steel, nonferrous metals, airlines, trucking, motor
vehicles, and paperboard.

Inventories had not been excessive overall, but new

buying has become increasingly cautious.

Forty percent of the Milwaukee pur­

chasing managers, many capital goods oriented, reported new orders in July to
be lower than in the previous month, compared to 20 percent reporting higher


The proportion reporting lower order backlogs in both June and July

was twice as great as the number reporting higher backlogs, thereby reversing
their reports for May 1979 and July of 1978.

Over 80 percent continued to

report paying higher prices.
District crops (concentrated in corn and soybeans) range from "good" to

"excellent" following recent beneficial rains.

Bumper harvests appear likely.

Probable record grain and soybean shipments for the next several months imply
that transportation and distribution facilities will be under stress.


shipments out of the Great Lakes region have been slowed in recent weeks by
labor disputes at the ports of Chicago and Duluth/Superior.

District farmland values rose 3 percent in the second quarter and were
13 percent above year-ago levels.
help sustain the uptrend.

Prospects of high farm earnings this year

- 23 -



According to Eighth District businessmen, sluggish economic

conditions continue in a number of important area industries.

Real consumer

spending and manufacturing output remain unchanged from a month ago.
of automobiles, appliances, and some chemicals remain quite slow.


On the

other hand, capital goods manufacturing and nonresidential construction

continue strong.

Some reports, however, indicate a reduction in the growth

of demand for capital equipment.

Although layoffs of industrial workers have

occurred in the automobile and certain durable goods industries, layoffs are

not generally contemplated by most businessmen at present.

Consumer spending remained relatively low in recent weeks.


balance, July department store sales in real terms were about the same as in
June but down from July 1978.

Department store representatives noted that

sales of big-ticket items were well off their 1978 pace.
items, such as products for home repair, registered gains.

Only selected
A major retail

chain representative noted that sales at large conventional stores were
holding up better than at discount stores.

Retail representatives also noted

increased difficulties in collecting accounts and a sharp rise in personal
Automobile sales are down from year-ago levels, but reports from
some dealers indicate that sales improved somewhat in the past two weeks.
Sales increases at fast food establishments were also reported to have slowed
substantially in recent weeks.

An industry representative blamed this

slowdown on the recent sharp increases in their product prices rather than
the gasoline problem.

Spending on tourism was also reported to be well below

- 24 ­

normal, having adverse impacts on local areas largely dependent upon this


Tight gasoline supplies and consumer uncertainty over gasoline

availability are blamed for the decline.

However, the gasoline supply

situation in the District has eased considerably in recent weeks.


station hours have increased and the long lines of a few weeks ago have


Output in the manufacturing sector, on balance, appears to have

remained unchanged in recent weeks.

Declines have occurred in automobile and

related industries, appliances, home furnishings, and building products.


production of chemicals used by the oil industry and agriculture and a number

of home supplies remain strong.

One major chemical firm reported that the

recent slowing in sales probably indicates a recession.

This firm is cutting

back on production schedules to avoid a buildup of inventories.

A firm

manufacturing apparel for a major retail chain noted that orders have been

lower than expected and that production schedules have been trimmed.

Capital goods manufacturing activity is still quite strong and large

order backlogs remain unfilled.

However, one large capital goods firm noted

that the outlook for this sector is not as favorable as two or three months


Some manufacturing firms in the chemical and appliance industries have

trimmed their capital expenditures budget in expectation of a sluggish


So far only a few industries have announced a layoff of workers.

Among the most affected by layoffs have been the automobile and related


Scattered reports of layoffs were also reported in the appliance

and apparel industries. However, most firms with sales declines apparently

are coping with this situation by reducing hours .worked.

- 25 -

Construction activity continues at a high level in the District

despite sizable declines in residential housing.

The volume of

nonresidential construction continues well above year-ago levels in most of

the District, although some weakness has apparently developed in the St.

Louis area.

Here, nonresidential contracts let in the second quarter were

well below year-ago levels.

Representatives of the residential housing

market noted that home sales in recent weeks have also been well below

year-ago levels.

Homebuilders report that current traffic looking for new

homes is very light, but that more of those looking are serious home buyers.

Housing permits issued in the St. Louis area so far this year are down about

one-fourth from a year ago.

Carpenter hours worked were reported to be down

only about 10 percent from a year ago, which indicates that builders are

working on earlier orders.

In the financial sector, some net savings inflows into financial

institutions occurred in July, but the rate of increase remains at a much

slower pace than a year ago.

Savings and loan officials report that money

market certificates are the primary means of attracting new funds.


they have been less successful in attracting these funds since the regulation

change removed the differential rate paid by S and Ls over similar

instruments issued by banks.

The new usury law in Missouri, which was passed

by the state legislature in June and which permits higher interest rates on

loans, became effective in early July.

Home mortgage rates in St. Louis have

subsequently increased to a range of 10-7/8 to 11-1/4% for 80 percent loans,

in line with national rates.

Subsequently, availability of mortgage funds

was reported to have improved and the terms of loans relaxed somewhat.

- 26 -


The Ninth District economy is still not in a recession, but problems in

several industries continue to threaten it.

District nonagricultural output

continues to expand, and the region's labor markets have not softened.


energy-related problems, a slowdown in consumer spending, and a softening in

housing markets remain troubling.

And agricultural earnings are now worrisome.

The district economy is still not in a recession

The decline in nonagricultural output that accompanies a recession has

yet to occur in the Ninth District.


in the Upper Peninsula of

Michigan, Wisconsin, Minnesota, and South Dakota say that industrial output in

their areas remains strong.




Considerable investment spending is also occur­


of 1979,


construction contract

awards in these areas were up about 25 percent from a year earlier.

And in

Montana and North Dakota, energy exploration and mining are boosting output.

Furthermore, the softening in labor markets that characterizes a re­
cession has not happened here.

Layoffs at Minneapolis/St. Paul firms are no

higher than a year ago when the number of initial
compensation was


In fact,

many district

claims for


employers are still


workers, for district newspapers continue to carry a record amount

of help

wanted advertising.

But last month's threats to the economy are still here

All of the troubling developments reported last month remain, however.

Even though the trucking strike has ended and fuel supplies are more

plentiful than last month, concern about energy is still restricting activity in

two district industries.

The energy situation continues to hold down travel.

- 27 -

Although business is now better than in early July, directors from tourist areas

report that anxiety about gasoline availability is
tourist-related businesses

from even matching

continuing to keep many

last year's sales.

In South

Dakota, for example, this summer's tourist business is expected to be down about

35 percent from a year ago.

The energy situation also continues to hurt auto

Worries about gasoline availability and price are still causing large

car sales to sag, and dealers' inventories are mounting.

Two directors believe

that the situation is serious enough to start driving dealers out of business.

But, just like last month, cars aren't the only thing people have been

hesitant to buy.

In recent weeks about 10 percent fewer customers than a year

ago have been shopping at the Minneapolis/St. Paul area's major shopping cen­

And directors from other areas say


communities' retail


continue to be weak.

The housing industry is still slowing too.

Fewer people are buying

homes; Minneapolis/St. Paul area mortgage loan applications are down substan­
tially from a year ago.

As home sales slow, the number of new and used homes on

the market continues to climb.

And a few homebuilders are beginning to run out

of work.

A new concern

Since last month, a new problem area has developed in the district:

farm income.

Grain producers' earnings have been hurt by a recent labor dispute.


month-old strike by Duluth/Superior grain handlers is seriously aggravating an

already seriously strained grain transportation system.

Thus, at a time when

grain prices are high, district farmers are having trouble moving their crops to


The situation will worsen as farmers attempt to store and market what

- 28 ­

is expected to be a good harvest.

According to Minnesota's governor, one-third

of the Upper Midwest's wheat crop could be lost because of overtaxed storage and
transportation facilities if the strike isn't settled soon.
The earnings of other ag producers have been hurt lately too.


ing to Montana and South Dakota directors, recent drops in

cattle prices are

significantly reducing livestock producers' profitability.

And a Minnesota

director says

that recent

producers' earnings.



are also cutting hog and poultry

- 29 -


Nonfarm business in the Tenth District is beginning to show some

of the nation's general weakness in economic activity, but the farm sector

remains strong.

Retail sales are generally weak, and input availability

problems in manufacturing are lessening.

Farm income will be high be­

cause of high grain prices and good crops.

Deposit growth at commercial

banks is weak, but loan demand continues strong.

According to Tenth District retailers, sales in current dollars

are generally down about 10-12 per cent over this time last year.


the second quarter of this year, sales improved on a month-to-month basis,

but remained below second quarter 1978 levels.

In recent months homefurnish­

ings, ready-to-wear, ladies sportswear, do-it-yourself items, bicycles, and

garden supplies have recorded the strongest sales gains, while large ticket

durable goods have shown the slowest gains.

Tenth District retailers have mixed views of their inventory levels,

with many being led by the prospect of a recession to move to a lower accept­
able level of inventories.

But most District retailers expect sales to be

strong this fall, because they believe the midwest is less sensitive to re­
cessions and because farm income will be good this year.

One of the Bank's directors who is close to the energy business

reports there should be no more than isolated spot shortages of gasoline and

diesel fuel through the center of the nation for the rest of this year.

Another director notes that the tourist business has suffered significantly

this summer in the mountain states of the Tenth District.

Tenth District purchasing agents report that major input prices

- 30 ­

are up significantly over this time last year.

Even without petroleum

product increases, raw materials have generally risen about 8-10 per cent,

and some exceptional increases were noted in chemicals prices.

For the re­

mainder of this year, input prices are anticipated to increase very little.

Most purchasing agents contacted felt that the major increases had already

occurred for this year since many of their prices are locked in by contracts.

Input availability for most industries contacted has been a problem

throughout this year, but has been easing through the summer months.

For the

second half of 1979, a continuation of the improving availability trend is

anticipated by a majority of District purchasing agents.

Overall, material

inventory levels are satisfactory for the industries contacted.

Most industries

have been either maintaining or trimming their inventories throughout the

second quarter of the year in an effort to keep them in line with recent sales


For the rest of the year, inventory levels are anticipated to remain

unchanged unless the predicted recession alters fall sales dramatically.

Reported yields in most Tenth District wheat areas have been outstand­
ing, which implies that total U.S. wheat production may exceed the USDA's most

recent estimate of 2.1 billion bushels.

With the sharp runup in grain prices,

the income prospects of the District's wheat farmers have improved greatly

for the 1979-80 period.
of recent rainfall.

The picture for other grains is also promising because

Crop supplies for the 1979-80 marketing year should remain

ample, and the high prices will boost crop income well above year-ago figures.

Recent reports on livestock numbers point to reasonably stable prices

for the rest of 1979.

Beef supplies will continue to shrink, but a substantial

gain in pork production will temper any upward price pressures in the meat


Furthermore, data from the July 1 cattle inventory report provides

- 31 ­

solid evidence that breeders are beginning to rebuild their herds, which

may produce greater price stability in cattle markets next year.

Agricultural credit conditions in the District appear to be tight­
ening somewhat.

Loan demand remains quite brisk, but adequate funds can

generally be found to meet credit requests.

Nevertheless, the average loan­

deposit ratio of rural banks moved up to 64.1 per cent as of July 1, which

compares with 62.8 per cent on April 1 and 62.6 per cent a year ago.


rates on farm loans moved up about 30 basis points in the second quarter.

Tenth District bankers contacted report that deposit growth has been

weak during the past month, with demand deposits as a major source of weakness.

Demand deposits have apparently been affected by high short-term interest rates

and by a below normal tourist season in resort areas.
report moderate growth in money market CD's.

On average, bankers

All bankers contacted are offer­

ing the new ceiling rate on both savings accounts and the 4-year variable

ceiling account, but savings deposit growth is weak throughout the District.

Some banks are requiring minimum balances ranging from $500 to $1,000 on the

4-year deposits.

Inflows to the 4-year account have been from all types of

deposits, with savings deposits the most frequently mentioned source.

Loan demand is reported to be strong throughout the District.


bankers note that a strong demand for commercial loans reflects a slowdown in

receivables and an increase in inventories.

Both real estate and consumer

loans-except instalment loans for automobiles-are reported to be fairly


Some bankers report that in spite of strong loan demand agricultural

loans were down, due to selloffs of participations to correspondents.


bankers contacted have recently increased their lending rates, and are still

trying to improve the quality of their loan portfolios.

- 32 -


Signs of a slowing economy continue to appear in the Eleventh

District, but most Directors and businessmen think the Southwest will be

affected only mildly by recession.

Retail sales are lackluster as auto

and department store sales remain largely unchanged from last month.


facturers report further sharp increase in production costs and slower output


Mortgage lending activity is slow but is likely to improve following

easing of usury ceilings in Texas and Louisiana.

Lending activity at large

banks continues at a brisk pace, but rural banks report slower loan demand.

The effects of the gasoline shortages, declining consumer confidence,

and shrinking real incomes are all combining to hold down retail sales

according to respondents.

Modest gains in large car and recreational vehicle

sales are noted, contributing to a small increase in unit sales in recent


Small cars remain in short supply.

Year-to-year gains in real

department store sales are small but steady, although unit sales of home

furnishings and apparel are slowing.

Tourist trade in District resort areas is returning to more normal

patterns following an easing in the gasoline shortage.

Amusement and

recreational establishments currently report good attendance levels.


Texas trade is being enhanced by a growing number of tourists from Mexico.

Manufacturing activity generally continues strong, with cost

increases of greater concern to most respondents than a drop in sales due to

- 33 ­

the recession.

Reports of large increases in labor, material, and trans­

portation costs are widespread.

Although most manufacturers expect some

slowing in their own industries nationally, they expect the overall impact

to be milder in the Southwest.

Aluminum producers in the region continue

to expand capacity as demand strengthens.

Output is being sold on an

allocation basis, and the backlog of orders is growing.

The strong growth

in the region's aircraft industry is contributing significantly to demand.

Demand for steel appears to be off slightly from a year ago, but production at

District plants remains at a high level.

Producers report less foreign

competition and greater demand for steel products from foreign buyers.
few respondents report a runup of fabricated steel inventories.


The smelting

and refining of cooper, zinc, and lead appears to be on the upswing, and

demand continues to improve.

The number of active rotary rigs continues to increase, but remains

well below last year's peak.

Gains are lagging in East and South Texas

where natural gas remains in surplus.
slowed by a lack of drilling prospects.

Drilling activity in Oklahoma is

Rigs capable of drilling deep and

offshore wells are in strong demand.

Heavy rains from tropical storm Claudette caused some damage to rice

and soybean crops, disrupted transportation, and significantly slowed

residential construction activity in the affected coastal areas.

The full

extent of the damage to agricultural crops is not yet known, but preliminary

estimates place losses at $26 million.
after minor disruptions of service.

Railroads are turning to normal

- 34 -

New and used home sales appear to be down 20 to 25 percent from

a year ago in many areas of the District.

The value of residential

construction contracts in the four southwestern states is down about 8 percent

from a year earlier.

The value of nonresidential construction contracts in

the first several months of 1979 is approximately 15 percent ahead of the

same period a year ago.

Builders note some recent softening in the non­

residential market although much strength remains.

High materials and

financing costs are said to be contributing to the recent slowing in


Mortgage lending activity by savings and loan associations in Texas

remains slow prior to the lifting of the 10-percent usury ceiling on August


The availability of mortgage credit will improve substantially after

that date, and mortgage lending is expected to increase significantly.

However, the amount of new mortgage commitments lenders are making at the

higher interest rates permitted with the new ceiling show only moderate

increases over the level of commitments made in recent months.


lending has improved somewhat in Louisiana following the raising of its

usury ceiling to 12 percent on July 6 although borrower resistance to the

higher mortgage rates was much stronger than lenders had anticipated.


new savings at S&L's continue to improve but remain slightly below the

volume of last year.

S&L's have lost a large segment of MMC's to banks

since the elimination of their 1/4-percentage point advantage.

Bank lending activity continues at a fast pace.

Many banks report

- 35 ­

some recent easing in the rapid pace of consumer and real estate lending.

The demand for auto loans and interim construction loans on multifamily

projects is down slightly from the levels of recent months.

Deposit inflows

continue to make moderate gains.

Our July survey of agribankers indicates that agricultural credit

conditions are easing in the District.

Although the supply of loanable

funds remains tight, bankers report a slowing of loan demand growth, higher

rates of repayment, and fewer renewals or extentions of agricultural loans.

The improvement in the financial condition of many farmers and ranchers in

the District is due to above average wheat yields and higher grain and

cattle prices.

A large number of respondents noted that Small Business

Administration and Farmers Home Administration loans continue to play an

important role in meeting the credit requirements of area agriculture.


36 -

While recent national statistics suggest that the economy is in a
recession, 12th District states are experiencing only scattered layoffs and
cutbacks in output.

Most regional industries are continuing to post gains

in production, sales and employment.

From Utah's Wasatch Front up to the

Pacific Northwest and down to San Diego County in California, strengths are
noted in such major industries as aerospace,

electronics, pulp and paper,

aluminum and agriculture.
Trade and service industries continue to expand in line with the
demands of an ever-increasing population.

Retail sales in convenience and

fast-food stores have increased from dips of May and June.
newspaper advertising

always a good business barometer,

And classified

is up in volume and

Some layoffs have occurred in the Northwest, as for example in
Spokane's recreational vehicle and heavy-duty truck industries,
sugar-beet refineries.

and also in

But these layoffs are offset by continued gains in

other manufacturing industries.
The Southern California region is experiencing weakness in the auto
and auto-related industries, with General Motors furloughing 1,700 workers at
its plant producing full-sized Chevrolets and Cadillacs, and Firestone laying
off 475 workers at an auto-tire facility.
are adversely affected by less shop work

Also, service-station employees
and shorter hours worked.


stations in Southern California are open only to pump gasoline three to five
hours a day.

- 37 -

Scattered signs have occurred of weaker retail sales and resultant
production cutbacks, as manfactuers and retailers attempt to avoid
unintended inventory accumulation.

Most firms remain very cautious in

ordering, and are keeping inventories under control and in balance.
some excess

inventory accumulation is

evident in automobiles,



appliances, furniture and clothing.
Retail sales in Oregon are up some eight percent over a year ago,
while California sales also continue to show gains.
retailing can be traced to energy shortages -

Problems in Washington

vith sluggish sales and an

unwanted accumulation of large-car inventories, with lower gasoline sales
due to rising prices and lessened availability, with slightly lessened weekend
traffic at suburban shopping malls, and with a dropoff in business at resort
restaurants and shops.

Tourism is off considerably in Utah, due to both the

fear of gas shortages and the present stress on conservation.
The gasoline situation in Los Angeles County has increased the usage
of public transportation in that freeway-happy region.
California Rapid Transit District reports that it

The Southern

averaged 1.37 million daily

riders last month, more than 15 percent above the previous month's figure
and almost 25 percent above the year-ago figure.
The market for industrial and commercial properties in


California is very strong, with shortages of office space a pressing problem.
Sales of larger homes in that area have slowed down, with owners/builders
refusing to lower their prices.

In Seattle, sales have remained steady, with

a large inventory of homes available.
continues to be very tight.

The market for apartments in that area


38 -

New home construction in Utah is

off about 30 percent from a year

but non-residential starts are up 60 percent over last summer's figures.

Idaho's housing starts are off 40 to 50 percent from year-ago levels.
homes in

the Boise area, priced in


the $100,000 to $125,000 bracket, have

remained on the market for up to a year.
Oregon's single-family housing market,

A slowdown is

also evident in

but multi-family housing continues

Throughout the 12th District, increases in

bank borrwing have been

prompted by expanding business activity and inflation anticipation of continued inflation.

as well as the

And this inflationary pressure is

causing businesses to purchase now those capital items
need for expansion and/or efficiency in

the future.

that they expect to
Borrowers generally

expect that inflationary price increases will continue to outpace interest