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Prepared for the
Federal Open Market Committee
by the Staff

August 12, 1970


SUMMARY page 1
First District - Boston page 1
Second District - New York page 3
Third District - Philadelphia page 6
Fourth District - Cleveland page 8
Fifth District - Richmond page 11
Sixth District - Atlanta page 14
Seventh District - Chicago page 17
Eighth District - St. Louis page 20
Ninth District - Minneapolis page 22
Tenth District - Kansas City page 25
Eleventh District - Dallas page 28
Twelfth District - San Francisco page 31

The concensus of the reports by the twelve Federal Reserve Banks
is that the economy is in a side wise movement with few signs of strength
in any sector.

Businessmen have generally become more cautious with respect

to plans for the remaining months of the year.

Instead of an early vigorous

recovery as envisaged by some in earlier reports, business leaders now view
the outlook less optimistically.

Profits have declined and many firms have

responded with cost cutting measures, including employment cutbacks, reduced
inventories, and in some instances a reduction in planned capital investment.
Most Districts report "sluggishness" in sales with few optimistic

Although total retail sales appear to be holding their own, the

volume is generally below expectations, and inventories are being evaluated

Consumer durables are generally the sector hardest hit, with

television sets and large appliances moving very slowly.

Both New York and

Minneapolis mention retarded sales of newer clothing fashions, while St. Louis
and Boston indicate that the shoe industry is facing declining sales.


Districts report that consumers are switching to lower quality merchandise
in response to rising prices.

The lower sales in some lines were apparently

offset by a continued uptrend in sales of food and a few other products, such
as steel, domestic oil, and automobiles.
Most Reserve Banks report that although labor markets are relatively
weak, unions have won major wage increases.

Unemployment appears to be rising

Most reductions in labor usage are taking place through normal attri-

tion, unpaid vacations, and shorter workweeks.

Some of the unemployment,

however, has resulted from plant closings and layoffs.
labor is reported in short supply.

In Richmond, skilled

Unemployment of skilled workers is re-

ported by both Boston and Chicago.
Rising prices, expectations of higher prices, and wage costs continue
to plague most business respondents despite the weaker labor market.

There is

virtually total agreement that prices are rising and will continue to do so as
labor unions continue to secure higher wages.
than half the Reserve Banks.

This factor was mentioned by more

Cleveland specifically indicated the high con-

struction wage settlements, which point to further increases in home prices.
Price "shading" is reported by some Reserve Banks, but such practices are apparently of only limited extent.

Nevertheless, cautious optimism is expressed by

some that the fight against inflation is making progress, and one bank reports
prospective weakness in livestock product prices in the coming months.
Reports of the Reserve Banks are varied concerning credit


There is increasing caution on the part of lenders with respect to both large
and small borrowers.

Over half the reports mention the rising concern by com-

mercial banks for borrower liquidity.

Philadelphia reports a more comfortable

feeling by businessmen with respect to liquidity while San Francisco reports
neither improvement nor worsening of liquidity


Although most firms are carrying out announced expansion programs,
there has been a decline in new announcements.

Nearly every District


cates that capital spending is expected to decline in the coming year.
Caught between wage and salary hikes and a more-or-less


level of demand, there is increasing pessimism regarding recovery of business



Cautious optimism over the prospects for a sustained economic
recovery is now more apparent among our respondents than at the time of
the last Red Book report.

Nothing in the way of substantive new informa-

tion was detected, however.
For the most part, District I commercial bankers continue to
report a good, and improving deposit picture.

While conditions in the

banking sector remain very tight, things are much improved from earlier
in the year, and respondents report satisfaction with the orderly pace of
developments over recent months.
The level of manufacturing activity in the region shows no signs
of significant change in either direction, with luxury consumer items and
housing-related products continuing to show the greatest weakness.


facturers uniformly report an improved availability of parts and other
inputs, as well as shrinking backlogs of orders.

Several of our directors

report a somewhat improved outlook for corporate profits in the second half
of the year in the sense that the sharp declines of the first half are not
likely to be repeated.
The severe localized unemployment associated with the shoe, textile,
and tool industries continues to worsen, and businesses of all types seem to
be experiencing a marked increase in the rate of job applications by skilled

With the exception of automobiles —

retail sales remain generally

which are picking up noticeably


Professor Eckstein remains optimistic.

Second quarter GNP revisions

have now been run through the DRI model, and cause no significant change in
the forecasts for coming quarters.
likely nominal GNP for the year.

$980 billion is now suggested as the
Eckstein sees the housing comeback as

developing more quickly than anticipated, and expects third quarter starts
to run a seasonally adjusted annual rate of 1.45 million units.


ment is expected to rise slowly to a maximum of 5.4 per cent in mid-1971.
Eckstein asked to be recorded as very dubious that the basic cost-push
element in the economy has been slowed.

He sees no proof of any abate-

ment, and attributes the Spring respite in wholesale prices to sensitive
materials and foods, not to basic industrial inputs.
Professor Henry Wallich is similarly satisfied with the current
economic position, although perhaps for different reasons.

He sees the

current trend of interest rates and monetary aggregates as acceptable,
and would recommend no alteration of current monetary policy.

On the real

side, he expects only a modest decline in business fixed investment next
year, and assesses the prospects for a housing recovery as good.

He ex-

pressed the hope that the economy will continue to simmer at about current
levels for the next 2 or 3 quarters rather than pick up momentum, stating
that inflationary pressures will otherwise soon be out of hand again.


also offered the neutral observation that time is running out for the
Administration, from the point of view of political timing.

If the economy

were to fully recover by late 1971, it is unlikely that unemployment will
have dropped to normal levels by the Fall 1972 elections, given the lag
in that series.

He does not suggest current policy be altered on these

grounds, however.



Sentiment was mixed among Federal Reserve Bank Directors regarding
the business outlook and inflationary pressures.

Consumer spending was

assessed by leading retail merchants as showing few signs of real strength.
The chairman of a large manufacturing corporation believes that
anxiety among businessmen has moderated somewhat, and does not think plant
and equipment spending will be depressed for very long.

A banker from upstate

New York reported that people in his locality seem more optimistic about the
business outlook than two or three months ago.

He noted they are not hesita-

ting to request bank credit, and remarked that a number of national business
firms operating in his area are making strong efforts to hold their workers
through such techniques as spacing vacations.
The upstate banker thinks "the worst is over" so far as a liquidity
crisis is concerned.

However, the head of a big merchandising


reported that there is considerable concern in the Rochester area about
liquidity problems, and that more business failures are expected in the
coming months.

He noted that many jobbers, in many fields, have informed

foreign manufacturers they are unable to pay for goods ordered earlier for
future delivery.

The financial situation of retailers is also a source of

worry to domestic suppliers.
Retailers belittled the significance of the substantial July increases reported in the press for some retail chains.

They commented that

most of the reported strength reflected consumer response to very intensive
"off-price" promotions, and that much of the big jump in year-to-year
figures resulted from the opening of many new stores.



catalogue business, and bargain basements are continuing to do comparatively well.

An example was cited of a new store that opened around the

end of July with a basement division occupying 15 per cent of the area;
this would normally have been expected to account for 10-15 per cent of
total sales but actually was accounting for 35 per cent.

Style goods are

"deader than a church mouse," with drastic fashion changes considered a
factor in the sorry situation.
ances are also very slow.

Sales of television sets and large appli-

One nationwide retailer reported that the only

geographic areas where business is not poor are New England and


agricultural areas" such as Idaho and South Dakota.
The representative of a retail organization that had released
July figures showing a very large year-to-year increase commented that
his organization regarded consumer confidence as being at an all-time
low and was expecting this confidence to drop lower yet.

He and other

retailers mentioned lay-offs as well as depressing noneconomic news as
factors influencing consumer confidence and producing the mental attitude
that is leading to a higher savings rate.

Although the retailers have

seen no beneficial effects on sales from the ending of the tax surcharge
and the increase in Social Security payments, two of them made special
mention of what they regard as a slight improvement in the collection
As for expectations concerning inflation, one Federal Reserve
Bank Director questioned how inflationary pressures could be slowed if
wages are rising at their "current rates."

Another Director suggested

there has been some improvement in the war against inflation "if you close
your eyes to some of these recent wage settlements."

A third, from upstate

New York, noted that despite the very low unemployment rate in his area,
two major labor contracts had been settled recently without strikes and

with "reasonable" wage increases, and declared he had detected a definite
trend "among the public" toward more optimism regarding the battle against



Intelligence for this report was obtained from our Board of
Directors, from city bankers, and from a preliminary tabulation of
returns from a poll of large manufacturers in the Third District.


major findings are: (1) capital expenditures are likely to be sluggish
into 1971; (2) some pick-up in business activity is expected


year end; (3) concern for liquidity positions of firms is still widespread.
Although the outlook for capital expenditures is mixed, the
majority of respondents to our August survey of large manufacturers in
the District expect no change or a decline in capital expenditures six
months out.

One large firm in the chemical industry plans to hold 1971

capital expenditures to this year's level.
to be plagued by excess capacity.

The paper industry continues

Allowing for price increases, real

capital investment plans for 1971 are even more modest than these projections would suggest.
No one with whom we talked is very optimistic about the level
of business activity in the months immediately ahead.

One Director reports

a slowdown in commercial orders for electric storage batteries.
that new orders are running 10 per cent below a year ago.

He reports

Another Director

reports that firms in the paper industry are being caught in a tightening
cost-price squeeze.

The chemical industry generally is in the doldrums.

Nonetheless, a majority of large manufacturers in the District are expecting some increase in new orders, in prices paid and received, and in the
general level of business with respect to capital outlays in 1971.

Lack of

enthusiasm, however, with respect to capital outlays in 1971 suggests that
expectations of any upturn in business activity are on the modest side.

As we reported last time, the feeling is widespread that the
economy is in a more comfortable position insofar as liquidity is concerned.
Nevertheless, quality of the borrower's credit has assumed more important
dimensions in the past several months.

A number of people with whom we

talked thought it is premature for the Federal Reserve to begin to unwind
from the position it adopted and announced after the Penn Central insolvency.
Several of the bankers with whom we talked believe that many commercial
banks are overdue in reassessing their own liquidity positions.
Two of our Directors who recently returned from Europe report
that businesses there are experiencing troubles similar to our own.


England, for example, there is a widespread fear that many businesses may
be pricing themselves out of the market.



The limited data available for July suggest that economic activity
in the District remained at about the improved June level.

Steel production

for the third quarter, largely reflecting demand from auto companies, is
expected to be slightly above the second quarter after allowance for the
normal summer slowdown.

Several local labor-management disputes in the

Cleveland area have been settled at high cost.

District bankers report they

expect loan demand to remain strong and money market conditions to stay comfortable in the immediate future.

Several of our Branch Directors expect the

economy to remain sluggish in the foreseeable future.
Economic activity in the District improved significantly in June
after the termination of major strikes, and preliminary and limited data
suggest that activity remained at about the same level in July.

The Dis-

trict's insured unemployment rate was essentially unchanged in July, and
steel production rose moderately.

Economists in the steel industry report

that auto companies have placed orders at normal levels for steel deliveries
for July, August, and September, despite auto strike possibilities.


firms regularly place a normal level of steel orders before contract negotiations, and this year will ask steel firms to take finished steel into
inventories if a strike materializes in mid-September.

Furthermore, if a

strike occurs, production should not decline as much as shipments because
inventory building will probably occur at the mills late in the year.
Trade sources report that auto companies are unable to get commitments for
Japanese steel to be delivered next year.

Apparently, Japan will not accept

steel orders above the voluntary quotas, and will not divert steel to automotive companies from regular customers.

Steel industry economists in our

area report export demand is declining rapidly.

Striking sheetmetal workers and plumbers in Cleveland settled
their disputes at the end of July and in early August.
union —

pipefitters —

Only one major

remains on strike, but this is enough to keep

construction at a reduced level in the Cleveland area.
unresolved issue is the hiring of minority workers.

The principal

A $3 per hour in-

crease over three years (raising journeyman rates by 1972 to $9.41 for
painters, $10.20 for iron workers, and $10.81 for sheetmetal workers,
for example) appears to be the pattern of settlement accepted by all of
the other construction crafts in the area.

The increases will further

widen the local-national differential in average hourly earnings for
journeymen and helpers in all construction trades

(last year, $5.99 in

Cleveland and $4.78 in the nation).
Economists and senior investment officers at several of the
largest banks in the District were recently surveyed informally regarding
their current views and expectations about the economy, the banking situation, and money market conditions.

Almost all of the respondents

indicated they expect the economy to remain sluggish during the second
half of 1970, although most of the economists look for a modest increase
in real activity.

All of the major banks in the District are experiencing

strong loan demand and demand is expected to remain brisk over the foreseeable future.

Respondents felt that the present comfortable tone of

the money market would continue and that funds would be readily available
to banks at interest rates equal to or slightly below current levels.


investment officer from a large bank reported that they had just reduced
the rate on 60-89 day money to 7 3/4 per cent and would now pay a uniform
rate across the board in the 30-89 day maturity range.

The same bank

anticipates another reduction in the CD rate in the near future.

All of

the banks are much more concerned about the credit worthiness of borrowers
than formerly, and expressed the view that this concern would persist.
Several of our Cincinnati Branch Directors, at a meeting of
the Board last Monday, commented about the continued sluggishness of the

One Director, representing a major electrical equipment


that produces jet engines, consumer durables, and a broad range of electrical products, mentioned that the firm's internal forecast projects
continued sluggishness and limited real growth during the remainder of
1970 and for most of 1971.
considerable pressure.

The firm also expects profits to remain under

Another Director, who is associated with a large

machine tool firm, reported that machine tool order backlogs are down
substantially, and will probably remain at reduced levels for some time.



Surveys of businessmen and bankers in the Fifth District


general agreement on the following points: (1) continued weakness in manufacturers' shipments, but some improvement in new orders; (2) improved retail
sales and considerable improvement in automobile sales;

(3) continued weakness

in employment and shortened work weeks, as well as further increases in
unemployment; (4) further upward pressure on prices and wages, especially
coal prices;

(5) some improvement in construction activity; (6) weaker demand

for bank loans; (7) increased evidence of cutbacks in planned capital spending;

(8) difficulty in reducing excessive levels of business


While District manufacturers report their shipments to have slipped
further, some improvement in volume of new orders and backlogs of orders is

A mixture of reports is common, however, within most manufacturing

industries important to this District, and the slight improvement is due to
fewer reports of further declines rather than to any significant


of orders.
Recent improvement in retail sales, especially in automobiles, is

Reports from West Virginia, however, indicate that business has

been seriously affected by the current coal miners' strike.


inventories, while apparently being reduced somewhat, are still reported
to be higher than desired.
The District employment situation apparently remains weak.


some further employment declines are reported in textiles, chemicals, metals,
and electrical equipment, the declines do not appear as widespread as they
were two or three months ago.

The length of the work week, however, is

reportedly still decreasing in manufacturing


Reports of increasing unemployment are common throughout the
Fifth District, and available labor supplies are generally regarded as

Respondents in manufacturing as well as trade and services

report skilled labor to be in relatively short supply, but they feel
that there are adequate numbers of unskilled workers available.
Reports indicate that, on balance, prices continue to rise in
the District.

Coal, fabricated metal items, and electrical machinery are

among the District's manufacturing Industries in which prices are reported

Large increases in coal prices are of considerable concern

in the region because of Implications they have for electric utility rates
as well as other services.

Few instances of actual declines in list prices

are reported, although respondents continue to report evidence of price

Continued upward pressure on wages is reported in nonferrous

metals and furniture manufacturing.
Residential construction, which has been severely depressed in
the District, is reported somewhat improved in recent weeks.

Though still

on the down side, some improvement is reported in residential building
activity in certain areas of North Carolina, Virginia, and West Virginia,
and in the Baltimore area.

Nonresidential building, which has fared better

in recent months, apparently is continuing to improve throughout the District
Loan demand of all types at banks in the District apparently has
failed to keep pace with last month's reported rise.

Demand for business

loans is reported essentially unchanged, and consumer loan demand has increased only slightly.

Increases in mortgage loan demand were reported to

be significant in May and June, but began to taper last month, and were
only marginal in the most recent four-week period.

The number of respondents reporting that they expect further
decline in general economic activity diminished substantially in the most
recent survey.

Evidence of optimism, however, remains spotty, and appar-

ently no general expectation of an immediate recovery exists yet in the
Fifth District.
Respondents in the District have been far from unanimous in their
evaluations of their capital spending plans.

While some respondents have

indicated reductions, planned capital spending apparently has not been
substantially reduced in recent months.

The latest survey, however, indi-

cates somewhat more widespread reductions than before, especially in textiles,
chemicals, and furniture manufacturing.
Inventories in manufacturing and in trade and services remain
on the high side.

This is reported in such manufacturing industries as

textiles, chemicals, furniture, metals, electrical machinery, and building

Efforts are being made to reduce inventories or to hold them at




This report is based on a special poll made of ex-Directors,
a telephone survey of selected retailers, and reports of the Directors
from the only Board meeting in August.

The main findings emerging from

the survey of ex-Directors were: (1) price shading was not widely practiced; (2) there was significant business retrenchment, and only isolated
instances of improved production following reduced operations;

(3) can-

cellations of capital spending plans were few and announcements of new
ones moderate; and

(4) there was a lack of consensus on business pros-

pects, and reportedly few increases in loan repayment schedules at banks.
Directors serving on the Birmingham Branch Board confirmed many of the
same findings for their own area.

Most of the retailers that were

specially polled expected no upsurge in consumer buying.
Conforming to the conclusion drawn from last month's reports
of present Directors, only a few of the ex-Directors knew of instances
of price shading from official indices.
mentioned discounts in certain plastics.

One who did notice this practice
Another reported price discounts

for capital equipment items used in textiles.

A large apparel manufacturer

mentioned price reductions on heavy inventory stocks.

All ex-Directors,

however, reported recent and significant price increases by suppliers.
Almost virtually universal mention was made of business retrenchment, taking the form of production cutbacks and of
in employment practices and expense cutting.
the rapid growth areas of Florida.


These practices extended to

In one Florida area, even the telephone

company reportedly had joined other companies in retrenching.

One ex-

Director observed, however, that expense-cutting and employment reductions
were limited to firms with significant profit declines.
In manufacturing, excess inventories reportedly have proved
troublesome only in isolated instances.

One large apparel manufacturer

w h o had experienced inventory troubles reported that many retailers were
afraid to stock the new fashions; therefore, manufacturers were slow to

Only a few ex-Directors mentioned increases in the level of

manufacturing operations after a period of reduced operations.

One noted

that his company was getting over its cutbacks and shortly would be in a
position to increase production.

Another mentioned that several large

contractors who build manufacturing plants throughout the United States
reportedly had an increase in backlogs.
Few could come up with specific instances of cuts, cancellations,
or postponements in outlays on new plant and equipment, although several
mentioned stretch-outs and delays or cancellations in commercial and large
construction projects.

A far greater number cited significant


ments of new or expanded plans for capital investment but, generally
speaking, these were only on a moderate scale.
Attitudes toward economic prospects varied widely, with about
an equal division between those expecting an upturn in the near future
and those seeing recovery delayed until the winter and next spring.
Several bank Directors answered affirmatively to whether requests were being made of them to alter loan payment schedules because of
a cash squeeze.

However, the number of such requests cited was small.

The number of increases in loan demands coming from borrowers to carry
inventories and accounts receivable or to replace former financing from
nonbank sources was also small.
Directors now serving on one of our branch Boards confirmed
the ex-Directors' reports of production cutbacks and layoffs and the goahead on previous plans for new plants.

In the soil pipe market, there

are indications that closings will continue.

Similarly, another company

is reducing its operations because of an order cancellation by Penn

On the other hand, an influx of orders in cast iron pipe has

surprised most manufacturers.

While mention was made of various new

plant announcements, one Director observed that "there was more caution
evident in project planning than was prevalent in 1969."
A special contact made of retailers indicated that while they
expect increases in consumer buying, no upsurge is likely.


speaking, they expected sales over the next four months to range from
no gain from a year ago to 3 per cent.



Confidence in the overall stability of the financial markets
appears to have strengthened in the past few weeks, despite sane problem
areas indicated below.

Convincing evidence of a significant uptrend in

total output and employment is still lacking, however.
Last week's 7.5 per cent Treasury Note offering which attracted
thousands of small investors to the Chicago Reserve Bank aroused widespread
concern among banks and savings associations that feared large losses of
savings deposits.

Interest in the issue was sparked by an article origin-

ating in a Chicago newspaper that also appeared in papers in New York and

At present, large Chicago banks indicate that the first reports

of the impact on their savings departments were exaggerated.


associations, on the other hand, apparently have raised their estimates
of the volume of withdrawals used to buy the notes and expect August to be
a red month in contrast to normal experience.
Some smaller banks complain that their deposits and earnings have
been adversely affected by the lifting of Q ceilings on large CDs in the
30-89 day maturities.

Some large banks find the supply of funds available

for investment in certificates ample, but are reluctant to pay the prevailing 8 per cent rate.
Overall loan demand apparently has eased somewhat since midyear.
There are reports of banks de-emphasizing consumer loans, with greater
apprehension as to the quality of this paper.
There are widespread complaints over the slowness of payments on
receivables by business creditors, but it is generally recognized that,
in most cases, the situation reflects the high cost of funds and restricted
liquidity, rather than actual distress.

Price increases for durable goods continue to be about as
numerous as in recent months, and there is no clear evidence of a
diminution of the rate of rise of prices of finished goods.


costs and unsatisfactory volume are causing transportation firms to
push regulatory authorities for appreciable increases in rates in hopes
of improving earnings.
Job markets continue to soften as indicated by unemployment
compensation claims, and reports of restricted hiring practices.


ingly, skilled workers such as machinists, teachers, and other professional
types are listed among those seeking work.

Lists of unfilled job openings

are the smallest since the early Sixties.
Despite the improved labor supply picture, wage and pension
demands continue large and are backed by militant worker organizations
in state and local governments as well as in factories, utilities, and
transportation companies.

Local strikes are frequent and prolonged.


likelihood of a major strike this Fall, not only in the auto industry,
but also in the farm and construction machinery industries, is taken
virtually for granted.
Demand for construction equipment and for various types of industrial equipment remains disappointing.

In the case of consumer durables,

demand for furniture and TV sets remains depressed, while demand for most
household appliances has improved in recent months, and is surprisingly
strong in view of the continued low level of housing


On the bright side, some of our Directors associated with food
merchandising, recreational vehicles, home maintenance products, and
laundry equipment report that sales have been excellent and above budgeted

Farm equipment purchases increased from a year ago in June, the

first rise recorded in 1970.

Some centers producing auto parts are

experiencing a revival of activity as 1971 models go into production.

Complaints of increased foreign competition are more prevalent
both for producer and consumer goods.

A shoe factory that started opera-

tions in an Illinois town in 1968 has ceased operations, blaming import

Resort business in vacation-oriented areas is said to be poor.

A number of older manufacturing plants in the District have been closed
recently because of Government pressures to renovate facilities to reduce

The outlays required to comply were deemed excessive.



Expectations of an early upturn in business activity in the
Eighth Federal Reserve District have dampened in recent weeks.


increasing amount of skepticism with regard to business recovery forecasts for later this year stands in sharp contrast with an earlier more
optimistic attitude.

More comments of "belt-tightening" are noted as an

increasing number of firms plan a reduction in their work force, mostly
through attrition, although a few are laying off some employees.


financial agencies report some easing in credit demands relative to supply,
but no major declines have been noted in rates charged to borrowers.
A few months ago most of the officials interviewed were looking
"across the valley" to the time when a resumption of the uptrend of recent
years was anticipated.

Since there is little indication that the uptrend

will soon be resumed, businessmen appear to have become resigned to a substantially slower rate of expansion.

One major exception to the downtrend

is commercial banking, where deposits and earnings are reported up, with
promising future prospects.
Sales at all levels have been disappointing in recent weeks.
Department store sales have been well below expectations since late July.
A number of manufacturers, including shoe and box companies, likewise report
a low sales level compared to other recent years.

Of those interviewed,

only the beer company officials reported sales conforming to trend patterns.
Great concern for inflationary tendencies continues.


worrisome in the face of a business slowdown and declining profits are the
rising wage costs.

With the decline of expectations of an early upturn and

no relief in sight from the current profit squeeze, business has now begun
a number of belt-tightening operations.
scrutiny of inventories than heretofore.

Retail stores report a closer
Most firms are either holding

constant or are gradually reducing their work forces.

The reduction is

primarily by attrition, although a few firms reported some layoffs in
recent weeks.

The major manufacturing industries still indicate no reduc-

tion in long-run expansion plans; however, some postponement in security
sales for financing expansion plans has been noted.
The real estate financing agencies report that funds for financing home building and purchases are somewhat more plentiful.

They add,

however, that this is not the result of larger inflows of savings, but
instead reflects the slowdown in demand for such credit.

Builders report

little demand for large homes.
Although the prospects for business expansion and new plant
construction have declined in St. Louis and other large Eighth District
centers, expansion continues at a healthy pace in the outlying areas,
especially in the southern portion of the District where earnings of
smaller companies continue at satisfactory


The outlook for agriculture is mixed.
Eighth District are making little or no profit.

Cattle feeders in the
Hogs have been profitable

during the past year, but the prospects for the rest of this year and
early next year are less promising.

Although broilers are unprofitable

at the moment, the situation can change rather rapidly for broiler producers.

Egg and milk producers are doing quite well.

Crops are very late

and much land was not planted, but with a late frost a high level of crop
production is still possible.
Prices of meat and other livestock products are likely to
average somewhat lower in the year ahead than in the past twelve months,
pointing to somewhat less upward pressure on food prices.



Ninth District business economists feel that the national economy
is turning around and that a pickup in consumer spending will lead to improved
business conditions during the latter part of 1970.

A vigorous recovery,

however, is not anticipated, and the rate of inflation is not expected to
slow appreciably.

Although they do not foresee large increases, reports from

bank directors and officers reveal that District retailers expect their sales
to improve during the second half of the year.

Manufacturing sales, on the

other hand, are expected to continue sluggish.

Corporate profits in the

District have suffered and Ninth District firms are cutting costs in order
to restore earnings.

Recent large wage concessions to construction workers

and Teamsters are impeding efforts to cut labor costs.

Several cases of

unwanted inventory accumulation were reported in the District.
The consensus of opinion among local business economists is that
the economy is turning around and business conditions will improve during the
latter half of 1970.

They do not, however, expect a vigorous recovery, and

one economist described the current slowdown and expected recovery as being
"saucer" shaped.

He said that the current slowdown has not been as rapid or

deep as in earlier post-World War II downturns and that the recovery will not
be as sharp as in previous upturns.

The rate of inflation is not expected to

slow appreciably and interest rates are not expected to fall significantly
before the end of the year.

They also look for businessmen to continue to

revise downward their capital spending plans this year.

A major Minneapolis

scientific instrument and ordnance manufacturer, for example, reduced its
original increase in capital spending plans by 20 per cent.

These economists

do not think that total Government spending will change noticeably.


quently, they see the stimulus for recovery coming from consumer spending.
A business economist representing a national retailer felt that consumer
confidence would be recovered during the last half of the year.

He also

stated that consumers financially are in better shape than in previous
downturns and it w i l l be easier for them to resume spending.
In spite of their relatively optimistic outlook, they felt that
the economy was not out of the woods yet.

One economist, for example,

stated that another "Penn Central" could have a disastrous effect on
business activity.
Reports from bank directors and officers confirm local business
economists' expectations that retail sales will improve during the second
half of the year.

They do not look for an unusually large increase in

retail sales, but they do expect it to be better than during the first

Women's apparel and automobile sales are big unknowns.


disclose that a major Minneapolis retailer is having trouble selling midilength styles.

A report from one director indicates that consumers are

buying cars now to avoid the price Increases on 1971 models this Fall.
District manufacturers responding to our latest industrial expectations
survey feel that the rate of advance in District manufacturing sales will
continue sluggish during the remainder of 1970.
In responding to a question on corporate profits, bank directors
and officers indicated that profits in the Ninth District suffered or at
best held steady during the second quarter, although there were notable

In response to this situation numerous examples of cost cutting

were cited.

An economist for a large national manufacturer stated that

attitudes have changed in his company on what constitutes a necessary cost.
One large brewery in the Twin Cities cut its current advertising budget by

District employers have curtailed their utilization of labor

through layoffs and overtime reductions, and a large Minneapolis computer
manufacturer instructed each employee to take ten days of unpaid vacation
before the end of the year.

Cost cutting is also manifesting itself in

reductions in capital spending and inventory


Although reports indicate District businessmen are trying to
cut inventories, several cases of unwanted inventory accumulation were

One large Twin City manufacturer's inventory increased because

of overly optimistic sales projections.

Reports reveal that the large

retailers and a national mail order house have accumulated inventories
because of the trucking strike.

They are receiving this summer's seasonal

merchandise late and are being forced to cut its price to avoid carrying
it over.
One factor, however, that will impede cost cutting efforts by
District businessmen is the recent large wage concessions granted to the
construction workers and Teamsters.

As a result of these settlements, bank

directors indicate that unions in their areas are becoming very aggressive
in their wage demands, making the settlement of some current negotiations

One director reports that construction companies are cutting

overtime because of the large wage settlements.



The effects of the national economic recession continue to be
felt in the Tenth District.

Weakness appears to be fairly widespread,

both geographically and by type of business, and there is a general air
of uneasiness and apprehension.

Although activity remains fairly strong

in much of the Rocky Mountain, Nebraska, and Oklahoma areas, unemployment,
strikes, rapid increases in personal bankruptcies, and a slowing down in
payment of accounts were referred to frequently by Board members, bankers,
and other businessmen.

In addition, the existence of hot weather and a

number of exceptionally dry areas in this agriculturally oriented region
give rise to locally gloomy moods and pockets of especially slow business
Most commercial banks reported some success in efforts to improve
their liquidity position during the past month.

Country banks generally

enjoyed increasing deposits because of an excellent wheat harvest and a
large influx of Government payments.

City banks have had a slower growth

rate during this period, with all of the increase being in time deposits.
Demand deposits have declined, with decreasing individual, corporate, and
U. S. Government demand accounts in city banks more than offsetting a
slight increase in interbank accounts.
Loan demand continues to remain strong in city banks, but is
generally nominal in country banks where deposits have increased rather

City banks report many requests from corporate borrowers to

back their commercial paper 100 per cent with lines of credit.


city banks believe the commercial paper market has stabilized and these
lines will not be called upon if additional catastrophes can be avoided.

Several large banks In the Kansas and Western Missouri region
reported increasing collection difficulties and a marked increase in
voluntary individual bankruptcies.
frequent among credit card users.

The voluntary bankruptcies were most
In these cases individuals tend to

maximize their borrowings from all sources, including credit cards, and
then file for bankruptcy.

This region includes Kansas City, which con-

tinues to be plagued with a prolonged construction strike, now in its
fifth month.

The slowdown in the aerospace and air transport industries

also has had the severest impact on the Kansas-Missouri region.
Commercial and industrial construction activity appears to be
slowing in the District, thus supporting the notion of reduced business
fixed investment spending.

Several large firms have reported cutting

proposed capital investment plans substantially during the past few months
to make sure that they would live within their cash flow.

Although firms

may not be able to do all the capital spending they would like, there
continues to be a need to replace and update equipment in order to improve
productivity - and such spending received first priority.

While business

construction is off, homebuilding appears to be showing some evidence of
The petroleum industry is confronted with a unique problem.
Until recently, imported crude could be delivered on the east coast at
substantially lower prices than could domestic crude.
ential discouraged domestic exploration for oil.

This price differ-

With the recent


in the mid-east, tanker rates have increased by as much as 300 per cent,
and imported crude now sells at about 75 cents per barrel above domestic
crude on the east coast.

Thus, domestic crude prices are under pressure,

and at least one oil company has announced price increases in the Tenth

Business is slow for District farm implement dealers.


tories are relatively large, and cases of price cutting are not uncommon.
Collections on credit sales are reported to be noticeably slower than
last year.
The interrelatedness of Tenth District economic activity with
both national and international business conditions is illustrated by the
experience of a Kansas City manufacturer of bottling and automatic vending

This firm's total business is about unchanged from a year

ago, with increasing international business about offsetting a definite
decline in domestic sales.

The decline in domestic sales is attributed

to reduced overtime and lower employment in factories with vending machines,
as vending machine operators drop routes and defer the purchase of new

There is some concern within the firm that their growing

international business will be hurt by retaliations against U. S. restrictions on imports.
The aircraft industry is having trouble from production down
through the transport phases.

Unemployment in Wichita, where the aerospace

industry is important, is reported in excess of 10 per cent.
reports difficulties in the industry.

Tulsa also

The air transport industry, which

is important in several District centers, reports continued problems in
revenue and unemployment.

Although pleasure travel appears to be holding

up reasonably well, business travel has been off sharply.

Most airlines

have found it difficult to operate much above year-earlier levels and,
with the introduction of the 747*s which were contracted for on the basis
of an average 10-15 per cent increase in passenger traffic, it has been
difficult to meet costs.
in July improved.

Preliminary data indicate that passenger


But substantial improvement over an extended period of

time will be necessary to solve current air transport problems.



The responses of corporate executives of 15 of the larger firms
in the Eleventh District to questionnaires in late July and early August
provided the basis for much of this report.

They indicated that business

sales are slightly ahead of a year ago, and inventories of most firms are
"about right."

Some excess capacity is reported.

ently peaked in 1969 and is currently declining.

Capital spending


Capital spending is

expected to increase somewhat in 1971 but to remain below the current-doliar
level of 1969.

Employment cutbacks are reported by more than half of the

responding firms, but wages and salaries are up considerably.


Celia hit the West Gulf Coast of Texas and caused damage estimated in
excess of $500 million.
Most of the corporate executives reported that sales were a little
higher so far in 1970 than in the same period a year ago.

One electronic

firm indicated that sales this year had lagged behind the level of a year
ago, and another noted some softness in their recent orders.

One firm in the

computer industry reported that sales so far this year were up from a year
ago but weakness is expected in the months ahead.

One firm particularly

noted an increase in price consciousness among their customers.
Although sales have not been particularly strong, most of the firms
indicate that they are about in line with expectations.

This would suggest

that the business slowdown was correctly anticipated by most.

Because the

correct sales trend was anticipated by most firms, current inventory
are considered "about right" by the majority.


Three firms did indicate that

their inventories were somewhat too high at the present


More than half of the firms represented in our sample project
capital spending for the year 1970 to be less than in 1969.

The dollar

value of capital spending by these firms will likely be down about 14 per
cent in 1970 from the 1969 level.

Much of the weakness in capital spending

apparently stems from a trimming back of earlier plans.

Half of the respond-

ents indicated that the dollar value of their capital appropriations for the
second half of 1970 was less than earlier preliminary plans.

Not a single

firm reported that capital appropriations for the second half of this year
would be larger than their preliminary plans.

These declining capital

spending plans are consistent with the report of "a little" excess capacity
at four firms while one reported much excess capacity.
reports of capacity shortage.

There were no

Some of the decline in capital spending from

the high 1969 level is accounted for by electronic and computer firms that
have been affected by the trimming of the defense budget, as well as by the
overall business slowdown.

Another major factor in the capital spending

decline is the tapering off of construction by a large national gas pipeline

The lack of new gas supplies has reduced their need to expand the

transmission system.

The only real strength in 1970 capital spending


from one electric utility and some oil drilling and refining firms.
Capital spending for 1971 for this group of firms is now planned
to be up slightly from the expected 1970 level but still about 7 per cent
below the realized 1969 level in current dollars.

Two-thirds of the firms

actually expect capital outlays to be less in 1971 than in 1970.

A substan-

tial increase in capital spending is projected by a large oil company.
Every firm responding to this questionnaire reports that employee
wages and salaries are up this year.

The most common increase was 6 to 7 per

cent while the range was from 3.5 to 8 per cent.

More than half of the firms

have cut back their employment level this year with the cutbacks ranging
from as low as 1 per cent to as high as 25 per cent.

One firm indicated

that all of its work force reduction had been achieved by gradual attrition
rather than outright layoffs.

Employment cutbacks were most noticeable

among the electronic and computer firms.
Hurricane Celia struck the western Gulf Coast region of Texas
on Monday, August 3.

Damage estimates range from $500 million to $1 billion.

Banking services were halted for two days and then reopened on a limited

About 3 per cent of the U. S. oil refining capacity is located in

the area struck by the hurricane.
electric power is restored.

None of this capacity can operate until

Some of the plants suffered wind and fire damage

that may take considerable time to fully repair.

More than 250 small busi-

nesses in the Corpus Christi area were destroyed by the storm.
state disaster aid is being made available to the affected area.

Federal and



Twelfth District businessmen are talking increasingly in terms
of "running a tight ship" and "putting their house in order."

With the

Penn Central example in mind, corporate directors are much more careful
than heretofore in reviewing the financial operations of the firms with
which they are affiliated.

In the words of one corporate director, "I have

recently participated in discussions which were more searching, more extended,
and more concerned than any before in my memory."

Western firms generally

are tightening their credit controls, holding down inventories, and making
every effort to economize.
Retail sales remain spotty, especially in those areas which have
been affected by aerospace and construction cutbacks.

Consumers are neglect-

ing higher-priced merchandise in favor of cheaper lines —

or in favor of

In Southern California, for example, appliance sales continue weak

(especially TV and stereo) and auto sales are very slow (except imports and
cheaper used cars).
Pacific Northwest, Southern California and Arizona aerospace firms
report continuing layoffs, and Oregon mobile home manufacturers report increased credit problems and sharp cutbacks in order backlogs.

Food manufac-

turers report a narrowing of profit margins in almost every line, since the
need to meet competitors' prices makes it difficult for them to offset current
wage increases.

Lumber firms report a slight strengthening of lumber prices

but not plywood prices.

Petroleum firms say that the industry's


here as elsewhere, have been distorted by the disruption of Middle East oil

Agricultural conditions were generally reported favorable, but
with local spottiness.

Commodities whose prices were indicated as strong

(or good compared with last year) include potatoes, apples, wheat, and
cattle, and harvests (or harvest prospects) are bright.

On the other hand,

the outlook is pessimistic for processing vegetables, strawberries, and
some grains.
Most bankers are encountering a mixed picture in loans and deposits.
Some banks in Southern California and Arizona report heavy loan requests for
interim financing on industrial properties.

A Pacific Northwest bank recently

increased its credit lines to several large transportation and manufacturing
firms, but refused requests from several finance firms for increased credit

No bank reported an unwelcome degree of loan decline.

For the economy as a whole, liquidity conditions generally remain
tight —

neither improving nor worsening to any significant degree —

District bankers report a number of problem cases.


Several "go-go" land develop-

ment firms in Southern California have encountered serious liquidity problems,
which forced them to sell off subsidiaries to raise funds to meet their credit

Liquidity problems have also been severe for some auto dealers,

residential builders, and lumber brokers in the Northwest, as well as for
small airlines and heavy equipment suppliers in Alaska which had expanded
operations in anticipation of a quick start on the now-delayed Alaskan pipeline.

Some firms in Southern California and elsewhere are "riding their

suppliers," taking 60 days to pay accounts that were formerly on a 30-day
In summary, Twelfth District businessmen report a continuation of
the sluggish business conditions and difficult liquidity conditions of the
recent past.

Recent developments have led business firms to adopt a cautious

attitude towards buying inventories or hiring new workers, and have led
consumers to postpone purchases of high-quality or big-ticket items.
respondents anticipate a major shift in business conditions (in either
direction) over the next several months.