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Prepared for the
Federal Open Market Committee
by the Staff

December 12, 1973


SUMMARY page i
First District - Boston page 1
Second District - New York page 4
Third District - Philadelphia page 7
Fourth District - Cleveland page 9
Fifth District - Richmond page 12
Sixth District - Atlanta page 15
Seventh District - Chicago page 19
Eighth District - St. Louis page 22
Ninth District - Minneapolis page 24
Tenth District - Kansas City page 28
Eleventh District - Dallas page 32
Twelfth District - San Francisco page 35


Energy shortages are beginning to cause considerable concern,
but as yet the pace of economic activity continues to be strong.
Retailers in most Districts anticipate good Christmas sales, and
agricultural earnings continue to climb.

Capital expenditures are

another source of strength, and although considerable variation is
reported for business investment plans for 1974,. the prospects are
that capital spending will remain high.

Weaknesses are most ap-

parent in residential housing and automobile sales.
The impact of petroleum shortages varies considerably from
region to region, and from industry to industry.

The prospective

gasoline shortages are one cause of reduced demand for regular-size
domestic automobiles which has resulted in layoffs in several Districts
(Atlanta, Chicago, Kansas City and San Francisco).

Sales of compact

cars are excellent, and so, interestingly enough, are sales of luxury

Diesel fuel, in particular, appears to be in short supply and

black markets for this fuel are reported to be developing in some

Other industries affected include petrochemical-based plastics,

manufacturers of recreational vehicles, and plywood mills. Airlines
are laying off employees in several Districts, and tourism-related
manufacturers are being hurt according to reports from Minneapolis,
Kansas City and San Francisco.

Atlanta, in contrast, notes optimism

about Florida's tourist business.
Shortages of natural gas are causing problems for the manufacturers
who are forced to cut production or shift to high-priced fuels such

[Asterisk: Prepared at the Federal Reserve Bank of San Francisco ]

as propane.

Electrical shortages are not prevalent.

New England,

whose utilities rely relatively heavily on residual oil, appears
to face the most serious problems and may have power blackouts this

In other areas, conditions have improved. The Pacific

Northwest's power shortage has been relieved by heavy rainfall in
The view expressed in most Districts is that the uncertainty
caused by the energy shortages is disrupting transportation and
causing shortages.

This is likely to slow economic activity in 1974.

However, there is considerable variation in opinions as to the net

Some respondents do not think that the shortages will be

so severe as to cut into expected capital expenditures or to cause
serious layoffs, but others think a serious recession is likely.
Directors in the Boston District seem to be most pessimistic in this
As to the proper government response, opinion is divided between
those favoring rationing and those wishing to rely upon voluntary

In the St. Louis District, there is less concern about

energy shortages and more concern about inflation and the effects of
government price controls as a factor causing materials shortages.
Similar views are noted by Cleveland.
Chicago, Philadelphia and New York Districts report little
change in current investment plans.

For example, Chicago

describes capital goods manufacturers as being overwhelmed by orders,
but St. Louis reports reductions in investment plans. Although there
is some reluctance to project trends, there is considerable support

for expecting continued heavy investment expenditures.

Retail sales

in most Districts are equal to or exceed last year's levels but retailers are more uncertain about 1974 and are more cautious about
their spring orders. A survey by Richmond indicates 70 percent of
its respondents expect a lower rate of economic activity.
High agricultural income is stimulating the heavy expenditures
by farmers.

Dallas reports harvests and plantings equal to or ex-

ceeding last year's schedule for all crops.

On the other hand,

cattlemen are more uncertain about beef markets.

Prices have declined

and supplies of beef for slaughter are abundant.
Residential construction is continuing to fall off and it is
only being partially offset by commercial construction.


in flow of mortgage funds, reported in several Districts, may help
but the prospect is for a continued decline.
Dallas reports that oil drilling has responded strongly to
the incentives of higher prices and is at the maximum level for
the existing availability of crews and rigs.

But production from

Texas fields is expected to decline because these fields are past
their peak in production capacity.
In summary, despite local problems the economy is continuing
to expand but uncertainty caused by worry about energy shortages may
contribute to a revision of spending plans by businesses and consumers .


Our directors fear that in the near term the energy crisis will
push the economy into a recession, but they also see the energy situation as stimulating large capital outlays.

They feel that both fiscal

and monetary policies must be geared to encouraging investment in
energy-related areas.

For New England as a whole, and Massachusetts

in particular, shortages of residual oil (needed to run utilities)
and home heating oil will be critical, carrying real threats of rolling
blackouts by the electric utilities this winter.
Looking at the supply of oil at the national level, one of our
directors,who is an independent oil and gas driller in Louisiana and
Texas,states that increasing prices at the wellhead will not substantially increase oil and natural

gas production.

It is much more

important, he said, to increase acreage released by the Federal
government for offshore drilling.

Other productive measures, according

to the director, are stepped-up licensing of nuclear plants and
building six oil refineries yearly in the U.S.

Our directors pointed

out that the proportion of investment in energy-related areas must be
raised from the 20 percent of total business investment spending of
the last decade to 30 - 40 percent of total capital outlays.


believe that higher energy prices have rendered obsolete much of the
current capital stock, which was based on low energy costs, and that
appropriate fiscal and monetary policies are needed to help finance
the tremendous new investment needs.
On the demand side, one director noted that an internal company

study showed it would not be difficult to cut energy use by 20 percent by simply taking energy-saving steps which they should have used
all along. Another director from a large conglomerate which manufactures general aviation planes and boats said that material shortages
of aluminum and fiberglass would cut his output more than the expected
drop in demand.

He reported that these companies are "scared to death"

over the outlook.
While most New

England industries are not energy-intensive, the

total dependence of our electric utilities on imported residual oil
makes the oil shortage very critical for the economy here.


power production is a necessary, if not sufficient, condition for all

Our utilities are forecasting a 25 - 40 percent short-

fall in needed residual oil for 1974.1.

There is currently no operating

allocation program at the Federal level for residual oil, and, even
if there were, there are great doubts that logistically the supplies
could be brought to New England. Under these conditions, the
Governor of Massachusetts has asked for emergency powers to close
schools, put state employees on a four-day workweek, limit retail establishment hours, etc., in order to decrease demands on the electric

The electric utilities in Massachusetts have announced

that without these measures, they will have to have rolling blackouts
which will cut different users off about 20 percent of the time.
Professors Samuelson, Shapiro, and Wallich were contacted this

Dr. Shapiro now sees 1974 as a year of no output growth, with

the unemployment rate above 6 percent by year-end.

Due to lower in-

comes, the budget may not show the surplus which had been hoped for.
Shapiro's main concern is that the Fed doesn't loosen too much, and

feels this is an opportunity to try to wipe out excessive demands
and price expectations.
aggregates —

He proposes an even keel policy for the

4 to 5 percent growth in money, 7 percent in the

monetary base —

even if short-term interest rates were to rise.

Noting the rise in new orders for durables, Wallich believes
there is no evidence of a serious downturn.
difficulties always lead to expansion —

He stated that supply

large cars, houses and some

business equipment have become obsolescent and now need to be replaced.
He doubts there will be a cutback from the 14 percent increase in
business investment reported in the McGraw-Hill survey.

Wallich grants

there may be a downturn in the first quarter but expects the expansion
to begin again,

if the embargo is ended by mid-year.

With prices

rising faster than the money stock, he pointed out "the situation is
tightening itself."

He advocated a continued, moderately tight policy

until the downturn is seen.
Samuelson argued that "when an exogenous microeconomic event
(i.e., the energy shortage) raises the price level, that inflation
is limited by the event itself and is not recurring." Accordingly,
it is not the duty of the Fed to roll back those prices but instead
its duty is to provide for the limited structural increase in prices.
He favored a "supportive" monetary policy, focusing on interest rates,
between now and next Easter.

The policy target should be to bring

short rates down slowly, tolerating shifts in the demand for money
such as the upward shift which recently occurred.


Second District directors and other business leaders contacted
recently expressed considerable concern over the energy crisis.


ages of petroleum were viewed as affecting a wide range of industries
and as likely to lead to a marked reduction in the growth of economic
activity next year and, perhaps, to a recession.

For the most part,

however, business capital spending plans were expected to hold up in
spite of the energy situation.

The business inventory picture was

but on balance pointed to attempts to increase inventories

that may well not succeed because of shortages.

The respondents

expected retailers to enjoy a relatively good holiday season, but
anticipated a leveling off in sales over the coming months.
The respondents continued to feel that the shortages and rising
costs of petroleum products, both as fuel and as raw material, were
going to have a pronounced adverse effect on virtually all segments
of the economy.

Typical of their assessments of the situation was

the expectation that supply constraints on output will eventually
result in a drop-off in demand owing to growing unemployment and
reduced corporate and individual earnings.

Several respondents fore-

cast zero or negative growth in real GNP in 1974. A New York City
banker, a head office director, saw possibilities that the shortages
might lead to a significant decline in GNP.

In his view, efforts

to curtail industrial and consumer energy consumption might ease the
problem but not solve it.

Similar sentiments regarding the overall

impact of the energy crisis were expressed by a number of other
respondents, and senior officials of a wide range of manufacturing

as well as retail firms complained of specific problems the petroleum
shortage was having on their respective firms.

Several respondents

noted that the energy crisis had been building up for some time, and
would have emerged in the not too distant future even without the
Arab embargo, in good part as a result of insufficient investment by
the oil industry in past years in the face of rising worldwide demand.
Against this background, the Buffalo directors generally felt
that the Government's allocation program did not go far enough and
that a system of rationing was needed.

Other respondents variously

called for tougher and more clearcut allocation measures that would
give priority to the maintenance of industrial and agricultural output, and for severe cutbacks in non-essential use.

Efforts to in-

crease domestic fuel supplies were urged, but as several respondents
noted, a fairly long lead time and very large capital investment
would be necessary before a significant increase could be expected.
Regarding business investments, those respondents commenting on
business capital outlays reported that either their firm or the firms
of most of their business contacts intended to implement current
plans with no cutbacks.

One respondent, however, qualified his

remarks by stating that "all bets are off" because of the energy

With respect to inventory policy, the retailers stated that

they intended to keep their stocks on hand under close scrutiny in
view of the expected leveling off in consumer demand.

Other respondents,

however, felt that businessmen were actively attempting to strengthen
inventory positions,reflecting fears of increasing shortages and higher
prices, as well as lower than normal inventory positions.

Some felt

that existing shortages of both raw materials and finished goods

might well frustrate these efforts, with only a slight or no increase in inventories.

Several Buffalo branch directors, however,

believed many businessmen would find substitute products to meet
their requirements and that such shifts in demand might mitigate
somewhat the unemployment situation.

Some respondents mentioned the

possibility of a rise in inventory-to-sales ratios —
voluntary inventory accumulation —

even of in-

if the expected decline in

business activity materializes.
Concerning consumer spending, senior officials of retail firms
who were contacted looked for a fairly good holiday season, comparable
or somewhat better than last year's.
by a number of other respondents.

These expectations were shared

However, the respondents in

general were markedly less ebullient than at this time last year.
Moreover, most realized that there were "clouds ahead" for the retail
sales industry.

Shortages of goods were expected to become more

acute as stocks on hand for the holiday season were drawn down. On
the demand side, tapering off in consumer outlays was expected to
accompany the anticipated economic slowdown.

In addition to the rise

in unemployment, worries over the economic outlook, resistance to
high prices and curtailment of automobile use to reach shopping centers
were also cited as factors likely to affect sales adversely.


Business activity in the Third District is tapering off in some
areas and the six-month outlook is not very bright. One in five of
the firms contacted report a decrease in their current level of
business activity and over 60 percent expect decreases by late spring
of next year.

Employment opportunities are stable at last month's

Investment in inventories is down slightly, but plant and
equipment spending plans are strong.

In the retail sector, sales

are currently running slightly below expected levels.
activity has leveled off in most areas —


especially residential

Area bankers report that credit is tight because de-

posits are only trickling in.

Finally, price increases are wide-

spread and expected to continue over the next six months. Manufacturers
in the Third District responding to this month's business outlook
survey report slight decreases in their output.

Though roughly two-

thirds of the firms report no change in their new orders, shipments,
and unfilled orders, most of the remainder experienced declines.


months from now the responding executives expect more significant

Approximately half the executives contacted foresee drops

in new orders, shipments, and unfilled orders by May.
Current employment opportunities are not significantly different
from last month.

The few firms reporting layoffs are about equal to

the number that are hiring.

However, the length of the average work-

week has been trimmed at a few factories.

By next summer, however,

over one-fourth of the responding firms expect to be laying off

workers and cutting dotfn the length of their workweek.
Business investment in inventories is unchanged at most firms
contacted this month.

But, over 40 percent expect to cut their

inventories in the first half of next year.

In contrast, invest-

ment in plant and equipment is expected to be up strongly.


sales are not as high as might he expected for the Christmas season
according to area department store executives.

Most stores' dollar

volume for the year-to-date is up because of inflation, but their
physical volume is down slightly. Accessories, like handbags,
jewelry, and sportswear,are selling well.
blankets are in strong demand too.

Blankets and electric

Shoppers are showing preference

for lower priced models when given a choice of prices.
Construction activity in the Third District has leveled off

Residential housing starts are about flat.

works projects are up significantly.

But public

Price increases are prevalent

as over 60 percent of the firms report paying higher prices, and
almost 90 percent expect to be paying higher prices in the next half
Bank credit is tight in Philadelphia as the loan-to-deposit
ratio for all of the local reserve city banks hovers around 99 percent. Demand for mortgage and commercial and consumer loans remains
strong according to the bankers surveyed.

But, loans are not growing

faster because deposits are coming in slowly at the banks contacted,
and loan applications are not being encouraged.
about flat.

Demand deposits are

Time deposits rose slightly in the last two weeks at

some of the city banks, but high short-term market rates are keeping
deposit funds scarce. Most banks aren't increasing their outstanding

On balance total deposits remain unchanged at most banks.


Activity in the District's manufacturing sector remains strong,
although shortages of fuels and raw materials seem to have become
more severe in the past month. Two major tire companies may reduce
their capital spending plans for next year as a result of the energy

Retail trade is showing signs of weakness.

tinues to decline sharply.

Housing con-

S&L's are experiencing a recovery in net

savings inflows, but remain cautious about making mortgage commitments.
In recent weeks, there have been scattered reports of industrial
layoffs as a result of fuel shortages.

Total employment in the

District is still rising, however, and conditions in the manufacturing
sector generally remain strong.

Early returns from our monthly sur-

vey of manufacturers and the latest report from purchasing agents
in the Cleveland area indicate a pickup in new orders and production
during November.

Shortages of fuels, raw materials, and parts have

worsened in the past month.


Firms are experiencing difficulty
Our survey shows a continued lengthening

in delivery time for orders placed, and purchasing agents report
further extension of buying lead times for both production materials
and capital equipment. Manufacturers of capital goods are reported
to be having difficulty in shipping completed equipment because of
parts shortages.
An economist from a major rubber and chemicals firm reports
that output of chemicals has been seriously affected by supply

One of our directors, whose firm manufactures rubber and
plastic goods, reported that the company is on an allocation basis
with several suppliers of petroleum-based raw materials.

He in-

dicated that there is evidence that increasing quantities of feed
stocks (benzene and styrene) for the plastics industry are being sold
abroad in response to higher prices.
titianaux —

The firm is also out of

a basic raw material for white rubber products — and

they are unsure when supplies of this material will be available
According to this source, the chemicals industry is not able
to secure enough of its raw material requirements.

Most shortages

are attributed to price controls, which are thought to have led to
the disappearance of certain items from domestic markets.

Firms in

the rubber and chemical industries are re-evaluating capital spending
plans for next year, and a substantial cutback from previous projections may be in store.
Steel industry economists report that demand remains strong.
Orders continue to be controlled to reduce the carryover of shipments past due. Auto manufacturers are beginning to reduce orders;
but steel released can be reallocated easily to other industries.
The economists expect about a 25 percent increase in the steel industry's capital spending next year.

A considerable amount will

be spent on pollution controls, and a major portion of the rest will
go toward eliminating bottlenecks in existing equipment.


of bottlenecks is expected to add about 10 million tons of capacity
at less cost and in much faster time than attempting to increase
capacity by starting from scratch.

The steel economists are reason-

ably confident that demand for steel will remain at a high level throughout 1974, if energy supplies are adequate.

One steel producer is con-

cerned over the increased use of oil as a substitute for coke, which
has been in short supply. Another steel producer foresees production
curtailments if the steel industry is not exempt from proposed plans to
limit industries to 90 percent of 1972 oil consumption.
Our contacts in the auto industry are expecting a decline in total
new car sales to about 10 million units in 1974; sales of recreation
vehicles are also expected to drop sharply. An auto industry economist
reported that the industry has already shifted as much production as
possible from large to small cars for 1974 models.
A major retailing firm headquartered in the District reports a
flattening in sales of general merchandise, apparel, and furniture since

Sales and bargains are more widespread this Christmas season

than last. The firm is expecting a mild recession in the first half
of 1974 with virtually no growth in GAF sales.
An economist from a large retail food chain reports a recent drop in
meat prices as a result of West Coast transportation strikes, which left
a big supply in the Midwest, and a slight decrease in demand from institutional buyers.

If prices remain depressed and feed costs continue at

present levels, there will be a severe cut in beef production by mid-1974.
Residential construction contracts in the District continue to
decline sharply, while nonresidential building remains strong.


report a rebound in savings flows during November and early December.
However, an FHLB economist in the District is concerned over prospects
for savings flows early in 1974 when a large volume of CD's is scheduled
to mature.

He felt if rates were 8 percent or higher on Treasury bills,

funds would again shift from the S&L's into the money market.


Results of our most recent survey of businessmen suggest that
business activity in the District continues to expand. The energy
shortage has resulted in a high level of uncertainty, however, and
respondents are pessimistic about the outlook for business activity.
Reports of raw material and labor shortages continue to be widespread.
Retail sales showed further increases during the month of November.
Employment increased further, despite a number of scattered lay-offs
related to the energy shortage.
Survey responses suggest that the pace of activity in the District
manufacturing sector moderated during the month of November. Although
reports were mijfed, a consensus of the responses indicates that
shipments, backlogs and new orders were essentially unchanged.


clines in shipments,new orders and backlogs were reported by textiles
and furniture producers while chemical, primary metal and machinery
producers reported increases.

As in recent surveys, numerous res-

pondents commented on the disruptive impact of raw material and labor
shortages, and uncertainty over the potential impact of the energy
shortage is widespread.

In general, manufacturing respondents re-

ported that inventories had declined in recent weeks, and more than
one-third believed that inventory levels were too low in view of
sales prospects.
Employment in the District apparently increased further since
the last survey.

Both manufacturing and retail respondents reported

additions to their work forces, and hours worked per week in manufacturing were unchanged.

Scattered reports indicate some lay-offs

related to the energy shortage. A number of automobile dealerships
have released workers, and a sizable number have reduced their hours
of operation.

At least one parts manufacturer has cut back its work

Additional price increases were reported by the majority of
manufacturing and retail respondents.

Nearly 80 percent of the

manufacturing respondents indicated an increase in prices paid, and
one-fourth reported an increase in prices received.

Increases in

prices paid were reported by 100 percent of the retailers, and 70
percent reported increases in prices received.
Reports from major retailers in the District suggest that retail
sales remain strong.

Sixty percent of the retail respondents reported

increased sales during November, with many of these noting that consumers are more price conscious because of the uncertain economic

The energy crisis is apparently causing some retailers to

go slow on spring orders.
Judging from the experience of large commercial banks in the
District, the demand for consumer and commercial and industrial loans
declined in November while the demand for real estate loans increased
Record high prices for most grades of flue-cured tobacco highlighted the 1973 marketing season.

Quality of the tobacco was

generally better than last year, and the general average price soared
to a new all-time high of $88.13 per hundred.

Volume was up 17 percent

and value of gross sales hit a record $905 million, topping the value
of the 1972 crop by 20 percent.

The sharply improved farm income situation has continued through
the first three quarters of 1973.

The District gain of 23 percent,

however, is considerably less than the 34 percent recorded nationally.
In general, survey respondents are pessimistic about the economic
outlook. More than 70 percent believe that the level of business
activity nationally will worsen during the next six months,and more
than 50 percent believe that local business activity will decline.


Reports from area businessmen indicate that energy shortages
are beginning to affect the District's economy. A wide range of industries has already or is expected to be affected by direct shortages
of energy or petrochemical by-products.

Labor shortages and order

backlogs also remain acute in most industries.

Some stockpiling of

materials which are in short supply was noted. The effect of currency
realignments has improved demand for many products while causing
shortages of some materials.

In general, area businessmen expect a

marked slowing of the District's economy next year.
Manufacturers of automobiles, boats, chemicals, textile and
apparel goods, along with poultry producers, advertising firms,
telephone companies, airlines, residential builders specializing in
second homes, and the tourist industry have all been affected or
will be affected by the energy shortage.

The two large Atlanta area

General Motors auto assembly plants have announced that more than
6,000 workers will be temporarily laid off beginning December 17 to
permit retooling for smaller cars.

Further reductions in schedules

and employment have been announced by airlines headquartered in
the District.

Miami-based Eastern Airlines has announced that nearly

5,000 employees will be laid off, partially because of fuel shortages.
Several boat manufacturers in Florida and Tennessee have closed
temporarily because of a shortage of petroleum derivatives needed in
making fiberglass.

Telephone companies are having trouble getting

commitments for gasoline deliveries this year and next.

This will

curtail the large repair fleets of cars and trucks operated by these

companies. Advertising has also been hit by the energy shortage.
One Florida broadcasting company reports that weeks ago major oil
companies cancelled all long-term advertising contracts; airlines
and most national auto producers soon followed.

An Atlanta area

advertising firm indicates that while most national advertisers have
reduced their budgets, local advertising has taken up the slack.
There is also much speculation about the effects of the energy
shortage on other industries. Man-made fibers, a petrochemical byproduct, are in short supply and limiting the output of the textile

Besides fuel shortages, one textile manufacturer noted

that wool is in short supply and that he cannot supply customers
with sweaters this winter.

Fuel shortages may also cause serious

cutbacks in Georgia's $800 million poultry industry, affecting transportation, production of feed, and heating of broiler houses.


fuel shortage is apparently hurting the resort and second-home
markets and, in general, changing home-buying patterns, favoring
inner city locations over more suburban neighborhoods.
Although some knowledgable observers still express optimism
about Florida's tourist industry, economists for the state reportedly
forecasted a rise in Florida's unemployment rate, from the present
2.5 percent to the 6.5 percent range. Motel occupancy along Georgia's
interstate highways, where customers are mainly out-of-state tourists,
is down, and they are expected to be severely hurt by the gasoline
Shortages of other materials are plaguing many District manufacturers, and there are attempts to stockpile.

One large chemical manu-

facturer has reduced deliveries of polyesters by 10 percent because

of a shortage of raw materials made from petrochemical feed stocks.
Shortages of steel and boxes are also delaying delivery time, and
his customers have attempted to stockpile some of these materials
in short supply.

The owner of a truck leasing firm felt that tires

(again produced from petrochemical by-products) would soon be in
short supply and indicated that he was now trying to stockpile a
60-day supply.
Area businessmen indicate that the currency realignments have
had a beneficial effect on demand for their products.

One textile

manufacturer indicated that he could sell his products at higher prices
overseas and make greater profits in the short run. The representative
of a hosiery mill reports requests for such products as ski and sweat
suits that were formerly bought in Hong Kong. A bicycle manufacturer
also noted that foreign bicycles are now more expensive than U.S.
bicycles and that his company's sales were increasing.

The currency

realignments may be heightening the shortage of materials, however.
One textile manufacturer indicated that textile material shortages
have been aggravated because foreign countries have stopped selling
to the U.S. now that the foreign price is higher.
ments also have Intensified the steel shortage.

Currency realign-

One commercial con-

tractor notes that wire mesh and bar steel are in short supply and
that foreign countries will not sell to the U.S. now. Many U.S. scrap
dealers are now selling in foreign rather than domestic markets because of the currency realignments, thus intensifying the steel shortage.
Most businessmen contacted were concerned over acute labor

Without exception, they were unable to find labor, parti-

cularly skilled labor.

However, they expected labor shortages to

ease somewhat next year, since the general consensus was a marked
slowing of the District economy, with shortages of energy and energyrelated by-products largely responsible.


In recent weeks, discussions of business developments in the
Seventh District have been dominated by problems, current or potential,
associated with the cutback in petroleum supplies.

On balance, it is

clear that reduced fuel availability is strongly negative, but many
business sectors will benefit — not only in the near future, but
for years to come.

The passenger car industry (more specifically

standard-size cars) and the airlines must now be added to residential
construction and recreational vehicles as sectors where activity is
declining with no early reversal in sight.
employment is holding up well.
to be strong.

In most areas, however,

Sales of general merchandise appear

The farm community is extremely prosperous, although

beset by rising costs and limited availability of supplies and equipment.

Demands for capital equipment and components for nonresidential

buildings remain extremely strong.
The fuel shortage has now adversely affected District employment in the auto, airline, recreational vehicle, petroleum distribution, and plastics fabricating industries.
tain in January.

More layoffs are cer-

There are expectations that fuel shortages will re-

quire cutbacks in output of hardboard, gypsum board, and, perhaps,
The auto industry is striving to rapidly increase production
of small cars which are in short supply

and which are in strong

demand by fleet buyers as well as individuals.

(Interestingly, sales

of the three major luxury autos have been excellent.) There appears
to have been a moderate dip in demand for lighter trucks.

Sales of

heavy-duty trucks and diesel engines have not weakened, however,
and deliveries are stretched out to the third quarter of 1974.
A leading manufacturer of diesels sharply criticizes a nationallysyndicated columnist who wrote that trucks are most efficient at 50
miles per hours. Actually, this company's studies indicate that the
most efficient speed depends on the engineering of particular trucks
and the type of driving.

Optimum speeds can range from 45 to over 60.

There is great concern over the impact of employment reduction
in Southeastern Michigan, especially on minority groups.


ment rates have remained high in the Detroit area, even at the peak
of the auto boom.
Some businesses emphasize that shortages of parts, materials
(including fuel), and skilled manpower were so extensive prior to
the Arab oil embargo that it will be difficult to sort out the effects
of fuel availability as such.

Resources of steel, plastics, and

nonferrous metals made available by cutbacks in standard-size autos
and recreational vehicles will readily be absorbed elsewhere — unless, of course, reductions in income and reduced confidence lead
to a cumulating decline in general activity.

The most common view

in this region is that a snowballing recession will not occur in
The capital goods industries are still overwhelmed by orders.
A typical comment is, "I have never seen our economy stretched so

There are many reports of used equipment, e.g., farm equip-

ment and machine tools, selling for more than identical new equipment.

Suppliers of materials and equipment for nonresidential

equipment also are hard pressed to meet demand.

Capital expenditures

by utilities, auto firms, railroads, coal mines, and oil companies
are likely to be even stronger in 1974

because of the energy crisis

than would otherwise be the case.
Our contacts with major firms with diversified operations indicate they had been preparing for fuel shortages for the past year
by laying in additional stocks and by arranging for future supplies.
They have been more concerned about their suppliers and their customers.
(Some major firms are purchasing fuel and materials for use by their

But the situation is still far from clear. An oil expert

says, "there is no such thing as a firm contract in this industry."
Attempts are being made to allocate available supplies of oil as
equitably as possible.

But there have been increasingly frequent

reports of black market prices, particularly by stations selling
gasoline and diesel fuel.
Sharp declines in farm and wholesale beef prices since last
August have not been fully reflected at retail as marketing margins
have widened.

In recent weeks, beef supplies have about equaled

year-ago levels.

Capital spending by farmers is exceptionally strong,

partly reflecting tax strategies related to record levels of income.
Field preparations are ahead of normal seasonal patterns as farmers
gear up for another rise in spring plantings.

This should moderate

the usual spring surge in demand for fuel and fertilizer.


Business activity in the Eighth Federal Reserve District
generally continues at a high level, although a slower rate of activity in recent weeks was reported by a number of District businessmen.

Slowing was particularly noted in retail trade and in the

construction industry. Manufacturing activity continues strong, but
shortages caused by government continue to hamper the production process.

In the agricultural sector, crop harvesting has been largely

completed with good crop yields being reported.
Businessmen seem to be more uncertain than usual about the
future course of economic activity.

"Shortages" of many materials,

inflation, and the course of government actions are all contributing
to this uncertainty.

Our contacts

with business indicate that at

the present time the shortages and distortions caused by the controls
are of greater concern than the energy problem.

One result of the

uncertainty is that capital spending plans for 1974 are being pared

Some firms are stretching out their capital investment pro-

jects much longer than anticipated earlier.
Several major retail stores reported that sales have slowed in
recent weeks.

Retailers are generally optimistic about Christmas-

oriented sales.

However, the current slower rate of sales is having

an impact on 1974 plans and a number of retailers are re-evaluating
planned orders for the spring season.

They report that such orders

will likely be reduced somewhat from earlier plans.

Rumors of cir-

cumvention of price and wage controls were also reported.

Construction activity has declined throughout the District. Residential construction has been the most affected, although commercial
construction is also beginning to slow.
Manufacturing activity continues at a high level. Current demand
for manufactured goods remains strong, but several firms anticipate
some slowing in the spring. Many firms still report a backlog of
orders and smaller inventories than desired.

Shortages of many items

continue to be reported and are expected by some firms to contribute
to the slowdown in business activity in 1974.
Net inflows of savings at saving and loan institutions and commercial banks have improved further recently following small increases
in July and August. Mortgage interest rates are generally holding
steady, despite the reports that mortgage demand is weak.
The farm situation in the District is generally good.
has almost been completed except in some isolated areas.


Large crops

have been harvested, which coupled with relatively high farm commodity
prices, have led to record high farm incomes.

At the retail level,

food prices are tending to level off, representing one of the brighter
spots in the inflation picture.

The lack of fuel has not yet seriously disrupted District
business activity, but businessmen are worried about the future.
All District industrial sectors are likely to feel the impact of fuel
shortages to some extent, but at this point, the District's travel
and winter recreational industries appear to be especially vulnerable.
District residents are cooperating with the Administration's efforts
to conserve energy, and bank directors hope that gasoline rationing
can be avoided.

Several directors expressed the view that it ip too

early to see if the Administration's fuel allocation plans are workable.
Public concern over fuel shortages is not expected to dampen Christmas
spending in general, but businessmen are concerned about their 1974
sales prospects.

District manufacturers look for sizable fourth

quarter sales gains and expect further increases during the first
half of 1974.
Fuel shortages have not yet curbed District business activity,
but businessmen are concerned about the future.

A Northeastern

Minnesota banker indicated that his area's cement and wood products
plants may have to reduce operations and his area's important winter
recreational industry is seriously threatened.

Furthermore, he

believed his area's businessmen have reduced hiring and business
spending plans. A South Dakota director disclosed that fuel shortages
will adversely affect his state's travel industry. Area motels, for
example, are canceling expansion plans and reducing their work forces.
Also, transportation problems are being encountered in shipping
agricultural products.

A Minnesota director whose firm manufactures

products for the construction industry was very concerned about
fuel shortages, but was even more concerned about obtaining adequate
steel and cement supplies.
Major twin cities manufacturers surveyed by this Bank are worried
but hopeful that they will have adequate fuel supplies to get through
the winter. A Wisconsin director revealed that his community's industries presently have adequate fuel supplies, but their operations
could be jeopardized if fuel shortages persist. Montana directors
indicated that their state's recreational and tourist industries
could be seriously affected by fuel shortages.
According to director responses, District businessmen and consumers are complying with the Administration's request to conserve
energy, but is is too early to judge the effectiveness of the
Administration's fuel allocation plans. Most directors indicated
that their area's residents are driving slower, turning down their
thermostats, and eliminating unneeded lighting.

Two major utilities

serving the District, for example, disclosed that their sales in
November were less than normally would have been expected, given
temperature conditions.

With regard to fuel allocation plans, a

major twin cities area retailer indicated that a 25 percent reduction of fuel from a year ago could cause his firm to reduce operations
after January 1.

Several Minneapolis/St. Paul area manufacturers,

on the other hand, stated that the fuel allocation plans should provide them adequate fuel through the winter.

Directors expressed

general dislike for gasoline rationing and are hopeful that existing
measures to curb gasoline usage will suffice.

In general, public concern over fuel shortages is not expected
to adversely affect Christmas spending, but District retailers are
concerned about 1974 business prospects. A newspaper survey of
Minneapolis/St.Paul retailers revealed that they are still hopeful
for a good Christmas season.

With regard to the first six months

of 1974, however, they foresee their sales increasing 5 to 8 percent
from a year ago as compared to 13 to 15 percent gains realised in
A large Twin Cities area retailer disclosed that his firm has
not yet noticed that fuel shortages have had an impact on his firm's

In the District's agricultural regions, retailers feel this

year's high farm income points to a good Christmas season. Two
directors indicated, however, that retailers in their area are having
difficulty obtaining inventories and could sell more merchandise if
it was available.

A director from the upper peninsula of Michigan

indicated that fuel shortages and the weather may have already
dampened his area's consumer spending. Minneapolis/St. Paul automobile sales data disclosed that District consumers are turning to
small- and intermediate-sized cars, shunning purchases of full-sized
According to the results of our fourth quarter industrial expectations survey, taken in early November, District industrial activity
continued to expand.

Third quarter District manufacturing sales are

up 20.1 percent from a year ago and are expected to advance 14.1
percent in the fourth quarter and about 10.5 percent during the first
half of 1974.

These gains are larger than respondents anticipated

three months ago, and recent price increases are probably one factor

which caused respondents to revise their sales expectations upward.
A breakdown of manufacturing sales into durable and nondurable goods
sales shows that durables increased 23.7 percent in the third quarter
and are anticipated to rise 19.5 percent in the current quarter. A
14 percent year-to-year sales increase is expected during the first
half of 1974.

Nondurable goods sales rose 16.3 percent from a year

earlier in the third quarter and an 8.2 percent fourth quarter advance is anticipated; sales gains of 7.0 percent are expected in the
first and second quarters of 1974.


The Tenth District economy appears to be slowing down. Eoan
demand has flattened or is declining; real retail sales are off visa-vis a year ago; and, the dislocations and depressing effects of the
energy shortage are now clearly beginning to be felt.

Retailers are

pessimistic about the year ahead. Among District livestock feeders
and bankers the prolonged period of lower meat animal prices is a
source of increasing concern.

In addition, a strike involving TWA

has seriously affected the Kansas City economy.
A six-week strike by TWA cabin attendants has resulted in a cutoff of much of the $12.8 million monthly payroll to the metropolitan
area and reduced convention and tourist business by about 15 percent,
according to estimates of the City Development Department.

In addi-

tion, the energy shortage has resulted in pilot layoffs to accommodate
reduced flight scheduling.

The decreased demand for standard-sized

automobiles has led to layoffs for 6,600 workers at the local GM
assembly plants as of December 17, and there are increased reports
from small local manufacturers of shortages of petrochemical-based
plastics which have caused them to curtail operations and reduce employment . Several rural school districts using natural gas on an
interruptible basis have received notice of curtailment of supplies
and have switched to alternate, but more expensive propane systems.
Department stores are ringing up Christmas sales at about last
year's pace in dollar volume.

Selling especially well are apparel

items, and stay-at-home durables, such as stereos, and T.V.'s, do-it-

yourself merchandise, and gardening equipment.

While most store

executives expect to finish the year strongly, many doubt that 1974
will be very good.

Their pessimism in many cases stems from the

energy crisis, which they think may require closing earlier, may discourage the driving shopper,

and may interfere with shipments of

merchandise to the stores.
Reports from auto dealers show car buying behavior here to be
similar to that for the nation as a whole.

New and used intermediates

are selling poorly; luxuries and compacts are moving well. Judging
from the sample of those contacted, about half of the dealers would
prefer rationing to an increase in the price of gasoline.

Few would

say how they felt about the year ahead, although one Buick dealer
thought sales could be off as much as 50 percent.
Retail sales and other business in the Kansas City metropolitan
area cannot help but suffer from a continuation of the TWA strike.
Not many months ago, the reports coming out of Wichita were especially
rosy, thanks in part to a booming light aircraft industry.


however, the energy pinch on general aviation is having severe repercussions.

In the District's western states of Colorado, New Mexico,

and Wyoming, the skiing season is getting underway.

If there is com-

pliance with the voluntary controls, ski areas will surely be hurt,
although it is too soon to tell by how much. As one of our Bank's
skiers observed, "It now will take three or four hours longer for the
bus to reach Colorado from Kansas City, so I end up with less skiing
and more riding fatigue at the same price•" Looking further into the
future, regional analysts are observing that the probable loss in

tourism in the western part of the District will be largely offset
by the accelerated development of major deposits of oil shale,
uranium, and coal in those states, although such help will be some
time in coming.
Continuing a recent trend, farm prices declined another 11/2
percent during the month ended November 15.

Lower prices for cattle,

calves, broilers, and soybeans contributed most to the decrease.
This prolonged period of lower meat animal prices has caused much
concern among livestock feeders and bankers in the District, since
profits have fallen sharply.

Several weeks ago, it was expected

that beef slaughter rates would accelerate to year-earlier levels
reflecting the buildup in numbers during the freeze period. Once
this backlog was worked off, prices were expected to strengthen.
Instead, slaughter rates have generally continued to run below yearago levels, and the market is still receiving fleshy animals which
has kept prices down longer than expected.
Also contributing to this phenomenon has been a widening of the
farm-retail price spread on beef.

Very little of the sharp decline

in the farm price has been reflected at retail, which has resulted
in a lackluster consumer demand for beef. Although some of this
price stickiness can be justified by higher costs for labor, transportation, packaging, and electricity, the recent surge in beef
margins seems unusually large under the Phase IV guidelines.


fore, for a large part of the District's cattle industry, these developments, when combined with the uncertainty over the energy shortage,
have greatly dimmed the outlook for the period ahead.

Tenth District bankers contacted report that total demand is
either stable or declining, The only exception is one bank in the
Kansas City area which says its loan demand is exceptionally strong.
Our weekly reporting bank figures suggest an even weaker loan demand
picture for the District than is indicated by our telephone survey.
Rates charged on loans by most banks appear to be uniform and
unchanged from last month except for one bank whose rate was lowered
and then raised to the previous level.
The picture for deposits appears to be somewhat mixed throughout the Tenth District, with no pattern emerging between loan demand
and total deposits. Most bankers also report CD rates below those
of New York, some were experiencing small runoffs, and most expected
CD rates to rise in the future.


Refining operations in the District slowed in November in
response to the Arab oil embargo.

For the month ending November 23,

capacity utilization declined from near 100 percent to 94 percent.
Part of the oil refined in November was of Arab origin shipped before the embargo was imposed, and as this source is fast drying up,
refining operations are expected to be even more severely curtailed.
Information obtained from a drilling contractors' association in
Texas indicates that oil drilling in the District has responded
strongly to the incentive of higher prices.

Drilling is currently

at the maximum level allowed by the availability of drilling rigs,
crews, pipe, and other materials.

Last month's concern that pro-

visions of the fuel allocation program would prevent rigs from obtaining the needed diesel fuel for operation has abated due to changes
in Administration policy.

Nevertheless, production from Texas fields

by late 1974 is expected to decline from rates reached in the third
quarter of this year by as much as 200,000 barrels per day. This
anticipated decline reflects the fact that most oil fields in Texas
are past their peak in production capacity.
Seasonally adjusted registrations of new passenger automobiles
in the four largest metropolitan counties of Texas rose 12 percent
in October. Several dealers in the District attribute the increase
largely to the filling of fleet orders placed earlier in the year.
Most likely the increase does not signal a reversal in the decline of
new car sales which began last March.

Dealers feel that sales are

down due to tight credit conditions and a changing preference for
smaller cars which are in limited supply. The controller of a large
assembly plant in the Dallas area, which produces intermediate and
compact cars, expects a good winter for car sales.

However, he is

concerned that labor contract awards will require higher car prices
and that fuel shortages may force a cutback in production.
The seasonally-adjusted value of total construction contracts
in the five southwestern states increased by 22 percent in October,
reflecting a more than doubling in the value of nonbuilding contracts.
Residential contracts have declined since May but experienced a 7
percent increase in October.

However, this probably does not represent

a turning point in the southwest housing decline.

The marketing re-

search director of the largest residential builder in Dallas revealed
that sales for most builders are now down 50 to 60 percent from last
year's level.

He feels that high interest rates and spiraling home

prices have forced many people out of the market.

But he is optimis-

tic about a recovery in 1974 if interest rates decline.
At the same time, representatives of two large savings and loan
associations in Dallas are less optimistic with regard to increased
residential construction in 1974 and they anticipate further declines
in home building through the remainder of 1973.
institutions have begun to grow recently —
middle of the year —

Deposits in their

after falling since the

and more mortgage credit is expected to be

However, they anticipate that mortgage interest rates

will be "sticky" in the downward direction and that increases in home
prices will further hamper home sales.

District farmers made excellent progress during November, and
for the first time this year, they are either attaining or surpassing
last year's schedule for harvesting or planting all crops.


there are problems in beef production stemming from price controls
imposed earlier.

During the period of controls, the amount of beef

marketed declined, and fewer additional cattle were placed on feed.
Therefore, supplies might be reduced somewhat in the first half of
1974, although there is currently an abundant supply of beef ready
for slaughter.


The mood of our directors has become much more uncertain about
the future course of the economy because of the energy crisis that
may, in the view of some directors, cause a recession in 1974. At
present, consumer demand, with some exceptions, and private capital
expenditures are still high.

Residential construction continues to

fall off and layoffs are occurring in some industries. Banks report
little change in financial conditions.
The energy crisis is a major concern of our directors.


of uncertainty about its seriousness, most are not able to forecast
the impact on general economic activity, but continued expansion is

The pessimistic view is that a serious recession is pos-

sible along with more inflation.

On the other hand, continuing

strong consumer demand and private capital expenditures are thought
by many to insure a lower, though still acceptable, rate of expansion
next year.

Export activity is another important source of demand,

but there is some sign of a reduction in Japanese purchases, and
the fuel crisis may also have an adverse effect on foreign demand.
Consumer spending for most nondurables and services is still
high in most District states, but there are reports that purchases of
durables are lower.

Reports from merchants indicate excellent

Christmas sales are likely.

Sales of automobiles, especially the

larger models, are much lower. Dealers are cutting their sales forces
and several automobile assembly plants have been closed in California.
Energy shortages are causing problems particularly for the lumber
industry and plastic manufacturers.

Plywood mills in the-Pacific North-

west have, or are likely, to cut production because of a shortage of
natural gas for drying and glues for bonding wood. Diesel fuel
appears to be in short supply in most areas.

In southern California,

one director reported that a black market is developing for this fuel.
The gasoline shortage, although not severe as yet, is causing problems for tourism throughout the District and for products such as
recreational vehicles and pleasure boat manufacturers.
On the other hand, heavy rains in November have relieved much
of the hydroelectric power shortage in the Pacific Northwest, and
public utilities now expect to meet existing levels of demand this

The only area in this District where an electricity shortage

appears likely is in southern California.
Agricultural prospects remain good, farm receipts are forecast
to be up to 40 percent higher in Oregon, and similar optimism prevails
in other District states.

The energy crisis may affect agriculture

primarily through shortages of diesel fuel and nitrogen fertilizers.
Some food processors may also experience difficulties where they are
dependent upon interruptible supplies of power.
Residential construction continues to decline, especially multiple units.

However, this decline is offset in many areas of California

and the Pacific Northwest by strength in commercial activity.

A large

manufacturer of building hardware thinks that the energy shortage
on top of the high cost of money and material shortages will hurt
construction more than recent industry forecasts indicate.
Investment prospects, according to our directors, remain strong.
Backlogs of orders encourage efforts to expand and capital appropri-

ations remain high, while inventory holdings are judged to be below
desired levels. One large bank optimistically forecasts that the
need to expand capacity and restock inventories will dominate problems arising from energy shortages.
Bankers report little change in monetary conditions. Deposits
continue to grow and there is now little disintermediation.


loan demand has weakened at some banks, but in general it remains

Demand for term loans to be used for capital investment has

increased at some California banks,demand for residential mortgages
has increased despite the fall in construction, and some banks are increasing their mortgage lending to build up their portfolio at
current high rates.

Consumer borrowing has slowed from the pace

achieved earlier this year.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102