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Prepared for the
Federal Open Market Committee
by the Staff

January 10, 1973


SUMMARY page i
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 13
Seventh District - Chicago page 15
Eighth District - St. Louis page 18
Ninth District - Minneapolis page 20
Tenth District - Kansas City page 23
Eleventh District - Dallas page 26
Twelfth District - San Francisco page 29


The overall impression conveyed by the District Banks' reports
is that the economic expansion of 1972 continued undiminished at the turn of
the year and was perhaps gathering additional momentum.

Retailers generally

enjoyed a very good Christmas season, and many were reported to be quite
optimistic about sales prospects over the months ahead.

Business confidence

improved further, as evidenced by increased actual or planned outlays on
plant and equipment.

Manufacturing activity has quickened, with increases

reported in new orders, shipments and backlogs.

And while housing construction

on balance appears to have peaked out, it remains at very high levels.


unemployment situation improved somewhat further, and there were frequent
reports of a growing shortage of skilled and semi-skilled labor.

On the dark

side, however, concern continued to be voiced over the outlook for further
One of the brightest spots in the latest District reports was the
strength in consumer spending over the Christmas season.

Moreover, retail

sales were reported as continuing strong during the post-holiday period.


be sure, the phrases used to describe the strength of Christmas sales varied
somewhat, from the "continued to expand", "were generally reported good" or
"continued strong" (Richmond, Kansas and Dallas, respectively) to "extremely
vigorous"; "very strong" and reaching "record levels" (Chicago, Cleveland and
San Francisco).

It thus appears that nationwide consumer spending was well

above that of the 1971 holiday season, frequently surpassing retailers'

An optimistic outlook regarding sales over the months ahead,

moreover, was mentioned by a number of districts, including Minneapolis,


at the Federal Reserve Bank of New York.]

St. Louis and San Francisco.

Boston also reported an unusually high rate of

reordering from retail stores for this time of the year.
Another bright spot was the apparent further heightening of businessmen's confidence, as reflected in reports of increases in actual or planned
capital outlays.

The Chicago Bank thus reports that capital expenditures may

be heading for a boom, as additional firms increase appropriations.

St. Louis

and Boston note that orders for capital goods are rising, and Cleveland
reports that machine tool companies in the area are expecting a boom in new

Indications of rising plant and equipment outlays were also mentioned

by other Banks, including Dallas, Philadelphia and New York.
Against this background, reports from a number of Banks, including
Cleveland, St. Louis, Richmond and Chicago, pointed to a further improvement
in the industrial production picture, with manufacturers' new orders, shipments,
and backlogs on the rise.

Cleveland reports strong demand for steel, and that

output in certain other durable good industries that had been sluggish since
1970 is beginning to rise.

St. Louis notes that all manufacturing industries

in that District reported higher levels of output in recent months.
production index reached record levels.

The Texas

A number of Districts, including

Cleveland, reported constraints on production stemming either from capacity
limitations, difficulties in obtaining supply, fuel shortages (in part due to
cold weather), or from a shortage of skilled labor.
Most reports on construction suggest that total activity in that
industry, on balance, has stabilized at or near recent high levels.


certain areas, including the Richmond and St. Louis Districts, a rise in
nonresidential construction offset declines in residential building activity.
There were indications that the employment picture has continued to
improve somewhat.

Boston reports tightness in some labor markets in the mist

of pockets of high unemployment.

Cleveland notes that employment in that

District continues to expand at a more rapid rate than in the nation.
Richmond reports a severe shortage of textile workers, and Chicago, St. Louis
and Dallas all note increases in employment in their areas.
Concern over inflation remains in evidence.

Philadelphia reports

that over one-half of the respondents in its monthly business outlook survey
expect to pay higher prices over the next six months.

Atlanta states that

the main concern of businessmen is that inflationary pressures will mount.
Dallas, St. Louis and Boston respondents voiced expectations of further
price increases.

Respondents in a number of Districts remarked that the rise

in certain farm products would eventually be reflected at the retail level.


Our directors reported business continues to be very good in all
areas—consumer goods, industrial materials, and capital goods.

Tightness in

labor markets was noted as well as the continuation of substantial pockets of

Fears of a cost squeeze in 1973 were voiced as well as the

belief that inflation is not completely behind us.
Orders and sales of consumer goods remained very good later into
the fourth quarter than is usual, noted a director of a diversified conglomerate.

Reordering from retail stores has also been at unusually high rates

for this time of year.

In the capital goods area, manufacturers of machine

tools expressed the belief that the investment cycle is finally on the upturn
and that backlogs and orders for substantial pieces of equipment were rising.
Even the aerospace industry appears to be improving.

An important manufacturer

of helicopters reported a substantial new order from Iran.
Despite the universal picture of an improving economic scene, a new
director from Connecticut reports that there continue to be pockets of substantial unemployment in his state (areas with rates in excess of 15 percent) due
to the depression in the brass and clock industries.

Moreover, while the

Connecticut economy finally got into an upswing early in 1972, this director
sees only a moderate rate of expansion for Connecticut in 1973, to be followed
by a mild recession in Connecticut in 1974.

Slower growth in Connecticut is

connected with a slowing of the influx of new corporate headquarters out of
New York City to Connecticut.
Continued price increases or unavailability of industrial raw
materials, especially paper and natural gas, were mentioned as putting severe
pressure on prices and creating cost squeeze conditions.

Among our academic correspondents, Professors Eckstein, Samuelson,
and Wallich, there was a universal call for monetary restraint.


stressed that most economic forecasts of 1973 have been revised upward by
$5 billion to $10 billion since Thanksgiving.

He felt the economy is

excessively strong from the standpoint of the expansion lasting.
favored tightening wage and price standards.


He reasoned that the current

standards when combined with increased demand pressures will produce the
expectation that a 3.5 percent rate of inflation is the minimum to be expected.
He favored a 6 percent monetary growth target, even at the expense of rising
interest rates.

To postpone the rise in interest rates, Wallich stated, would

mean only that the rise will be greater at a later date.

The only exception

would be if the economy were forecast to soften, and we cannot count on that
At the same time, considerable caution was expressed about the
degree of tightening until there has been a careful postmortem of the yearend bulge in the aggregates.

Samuelson urged flexibility, rejecting any money

growth, interest structure, or path of interest rate increase shibboleth.
Eckstein warned against basing actions on the extremely high December retail
sales performance, suggesting that fine tuning has not proved successful.
Eckstein recommended a study of "what failed in the system that produced the
result of grossly excessive growth" in the monetary aggregates.

His prescription

was, "having sinned, do not flagellate; just stop sinning slowly".


An optimistic tone regarding the economic outlook characterized
the views expressed by Second District directors and other leading businessmen
contacted recently.

Retailers enjoyed a very good Christmas season.


confidence was reported to have strengthened further, but no signs of an
emerging "boom" psychology were detected.

Apart from isolated instances,

industrial product markets have not tightened any further of late, and in
general industrial prices have risen only in response to production cost

The unemployment picture has improved on balance, and growing

shortages of skilled and semi-skilled workers were reported.
Most respondents reported that holiday sales in their area had been
exceptionally good—well above year-ago levels and also generally well above
earlier expectations.

The president of a large retail concern with nationwide

outlets said his firm's sales during this period had exceeded expectations
which were already "very high to begin with".

One director observed that sales

during the week after Christmas were also unusually good, presumably indicating
that consumers were still in a bargain-hunting mood.
The Buffalo branch directors felt the current well-balanced expansion
has given businessmen an optimistic outlook, with expectations now widespread
that growth would continue throughout 1973.
upstate manufacturer, who felt that

A senior official of a large

business confidence had improved greatly

of late, said this development was now being translated into increased orders,
inventories and plant and equipment outlays.

The president of a large retail

firm also felt that strength in the overall business situation was likely to
continue over the months ahead.

Generally similar sentiments were expressed by

other directors and business leaders.

Concern, however, continued to be

voiced by some of the respondents over the uncertainties surrounding wage-price
controls and Government spending.
Regarding the raw materials and industrial products markets, a
majority of the directors detected no widespread tightening in these markets
at this time, although there were reports of scattered tight spots.


the senior official of the large upstate industrial firm did state that while
the most outstanding example of tightness so far was in the lumber industry,
conditions in other industries might become tighter if price controls prevent
normal market forces from expanding supplies.

Several other directors also

reported that building materials were in short supply, and an upstate owneroperator of a large agricultural enterprise commented that paperboard and some
textile products seemed harder to obtain.

It was also reported that delivery

of raw materials in the automotive parts business has stretched out from the
normal three to four weeks to seven to eight weeks.

The New Jersey banker

reported that several firms in his area were adding second and third shifts to
keep output in line with incoming orders.
On the price front, respondents expressing an opinion stated that
they were not aware of any increases in industrial prices which did not appear
to be directly related to cost increases.

With respect to agricultural prices,

however, an upstate director engaged in agriculture noted that short supply and
high demand had resulted in "drastically" increased prices for apples and for
livestock and poultry feeds, the latter being reflected in higher milk and egg
According to most respondents, there is no general shortage of labor
in the Second District, but conditions are tight in scattered localities and
widespread shortages of skilled workers exist.

The labor market in the Rochester

area was said to be quite tight, with a large number of vacancies open for
skilled labor.

Labor conditions in Albany also were described as tight,

reflecting in part the continued growth in government-related employment.
A New Jersey banker not only reported a shortage of skilled blue-collar
workers in his area, but noted that there was some difficulty in obtaining
employees in the banking field as well.
shortages of skilled workers.

Most other directors also mentioned


Most Third District businesses which were contacted report continued
healthy expansion.
moving upward.

Production activity has leveled off a bit but is still

Employment opportunities are currently static but are expected

to be better in the months ahead.

Retail sales are high.

Inventory invest-

ment is increasing a bit and is expected to accelerate, and many firms are
increasing their plant and equipment outlays.

Construction activity is pro-

gressing at a moderate rate with residential building ahead of other types of

Area bankers report rising deposits.

consumer and mortgage loans being the strongest.

Loan demand is good, with

On the darker side, infla-

tionary expectations continue high.
Production activity has leveled off somewhat at most of the firms
responding to this Bank's monthly business outlook survey.

The majority of

firms report no current change in new orders and shipments; most of the remaining
firms are experiencing increases, however.

Over half the firms have rising

production schedules for the next six months.

This represents slightly less

production growth than was reported last month.
Current employment demand is holding steady with over three fourths
of the surveyed firms reporting no changes in their number of employees or
their average workweek.

However, almost one third of the business outlook

survey respondents do expect to hire more workers within the next six months.
Retail sales are high.

Area department stores and auto dealers both report

strong consumer demand.
Business inventories are currently being increased at about one third
of the firms surveyed, while over half of them report no change in inventories.

During the next six months the picture is better, with 50 percent of the
firms reporting plans to increase their inventories.
Almost half the firms contacted in this District are increasing
their plant and equipment during the next six months, and nearly all the rest
of the firms are maintaining their present plant and equipment facilities.
Home construction activity in the Third District is expanding,
particularly in the suburbs and at the beach-resort areas.
construction remains flat at a high level.
moving at all.


Public works projects are hardly

In the Third District, total construction outlays are expanding

but at a slower rate than the national average.
Inflationary expectations remain high.

Almost one third of the

responding firms report paying higher prices, while only 10 percent of them
are charging higher prices.

Looking ahead six months, over one half expect

to pay higher prices and almost one third plan on increasing the prices they
Local banks report that deposits are increasing a bit more rapidly

Some demand deposits are coming in.

The local bankers report that time

deposits can be easily increased if the bank is willing to pay a high enough
savings rate.

Loan demand is good.

consumer and mortgage loans.

Most banks report strong demand for

But, one large bank reported that its rate of

consumer loan delinquencies is at an all-time high.

The senior officer

reporting this fact attributed it to easier consumer loan criteria and a change
in public morality.

Business loans are increasing at most of the banks contacted.


Economic activity in the District ended the year on a strong upward

Retail sales surpassed expectations.

Manufacturers have been exper-

iencing increased inventory building on the part of customers.


employment continues to expand at a more rapid rate in the District than in
the nation, and residential building remains at a high level.

There are,

however, some indications of constraints on production stemming from physical
capacity limitations, fuel and labor shortages, and difficulty in obtaining

Bankers report strong deposit flows at the year-end.
Retail sales over the holiday period are reported to have been very


The improvement in the Cleveland area was much better than anticipated

by retail merchants.

They were particularly surprised by the surge in shop-

ping between Christmas and New Year's Day, and by the continued boom in sales
during the first week of January.

The Pittsburgh area also had an excellent

volume of retail trade over the holidays.

According to one bank economist,

Pittsburgh's economy came back from the recession only in the fourth quarter
of 1972.

The area's steel industry is finally showing year-to-year gains in

employment, while other durable goods industries that had been sluggish since
1970 are beginning to demonstrate signs of increased activity.
Steel industry economists report strong order demand, with recovery
in those product lines that had been relatively weak.
to accumulate inventories more aggressively.

Steel users are beginning

One steel company is becoming

concerned about their ability to ship all of the orders currently scheduled for
March delivery.

They are approaching capacity limits on some products in certain

One of our directors reported that another large steel company in his

area is operating at full capacity.

A third steel company mentioned a surge of

inventory accumulation by their customers, stemming partly from attempts to
beat price increases, partly from a greater willingness of users to hold
larger inventories to ensure continuity of production, and partly because the
cash positions of their customers has improved.
Several of our industrial directors mentioned that the fourth quarter
was outstanding for their businesses, particularly in the areas of office
equipment and motor vehicle equipment.

Delivery times are stretching out, and

there are reports of difficulty in hiring skilled employees and in one instance
high quality unskilled workers.

One of our directors, a university president,

commented that for the first time in years the employment situation is much
better for their graduates, based on the increased number of recruiters and
job offers.
Machine tool companies in the area are expecting a boom in new

Some are having difficulty in getting supplies that could have been

purchased off the shelf a few months ago.
obtaining skilled labor.

Others are having difficulty in

An economist from a large machine tool firm in

Cleveland said they are deliberately stretching out backlogs rather than
attempting to increase output by hiring more workers (which they are not sure
of finding even if they tried).

The firm is running down its inventory of

cutting tools built during the previous slack period, and their customers have
begun to accumulate inventories in earnest.
Economists from several major oil companies headquartered in the
District report bottlenecks in physical plant, with operations running over
100 percent capacity.

Even though fuel oil is in short supply, oil refineries

are tending to concentrate on producing gasoline, which (because of price
ceilings) is more profitable than fuel oil.
of transportation fuels by spring.

One economist expects a shortage

The oil companies are having difficulty in

satisfying the demands of their regular customers, and they are reluctant to
take on new customers.

In some instances, fuel shortages have constrained

manufacturing output in the District.

In recent weeks, some plants have had

to shut down and others have had to reduce operations because their supplies
of natural gas were curtailed and they could not obtain alternative fuel
sources such as crude oil.
Bankers report a strong flow of deposits at the year-end, reflecting
the rapid pace of business activity.

Mortgage loan demand continues to be

strong, while the volume of residential construction contracts in the District
(as of November) was only a shade below the record high reached last May.
Business loan demand has shown signs of further strength in recent weeks.


According to our latest survey of businessmen and bankers, most
Fifth District economic indicators either have recorded further gains or have
shown no significant change.

Manufacturers' shipments, backlogs, and new

orders increased again in the past month, while retail sales, including sales
of automobiles, continued to expand.

Following increases in the last several

months, manufacturing employment and residential construction have apparently
stabilized at high levels.

Severe labor shortages, reported in several areas

of the District, have restricted the output of textiles and furniture.


concerning the economic outlook remains high among District businessmen and
Manufacturing activity in the District continues in a strong advance,
with further gains in shipments, new orders and backlogs reported.


strength appears to be widespread, textile producers in particular seem to be
benefiting from the economic expansion under way.

Further declines in inventory

levels were reported, but on balance manufacturing respondents believe that
inventory levels relative to desired levels are now about right.

A sizable

number of manufacturing firms continue to report that current plant and equipment
capacity is at lower than desired levels.
Our latest survey shows a strong employment picture in the District.
Manufacturing respondents indicated no change in employment but sizable increases
in hours worked per week.

Trade and service respondents reported increases in

both employment and hours worked per week, and most banking respondents believe
that employment has increased in their areas.

A severe shortage of labor,

reported in several areas of the District, is particularly troublesome to

textile and furniture producers and has apparently restricted output increases.
Both manufacturers and retailers continue to report increases in wages and
prices received.
Survey responses indicate further increases in retail sales throughout the District.

More than 85 percent of the banking respondents reported

that retail sales rose on a seasonally adjusted basis during the last month.
One half of the trade and service respondents reported gains in general retail
sales, while increases in automobile sales were reported by three fourths of
the banking respondents.
Loan demand at reporting banks appeared to be of greater than
seasonal strength, with increases reported in business, mortgage, and consumer

More than 85 percent of the banking respondents indicated further

increases in consumer loans.

One large banking respondent reported business

loan demand at an all-time high for his institution.

For the first time in

several months, banking respondents reported a slight decline in residential
construction in their areas.
to be reported, however.

Increases in nonresidential construction continue

Nonresidential construction has benefited from new

industries locating in the District and from sizable plant expansions by
several manufacturing firms.
District farmers' cash receipts from farm marketings during JanuaryOctober 1972 were 8 percent above those a year earlier, compared with a 10 percent
gain nationally.
Most businessmen and bankers in the District remain optimistic about
the general economic outlook.

More than 60 percent of the banking respondents

expect an improvement in business activity in their areas in the immediate

Optimism about the business outlook among textile producers seems

especially high.


Economic activity is brisk in the District, and the outlook is

Numerous year-end newspaper articles and editorials highlighted

the strong economic gains of 1972 and predictions of prosperity in 1S73.


special survey of Tennessee businessmen shows an optimistic outlook for 1973.
With wage and other cost pressures and labor shortages being major concerns,
higher grain prices are increasing the cost of some food items.

Many state

and local governments in the District ran surpluses in 1972 and are flush with

Some feel that these funds will be expended in relatively short order,

adding to demand and inflationary pressures.
The following is a sample of optimistic headlines appearing in local
newspapers around the turn of the year:

"Atlanta businessmen see strong 1973

economy", "Florida's economic picture is bright", "Dade County (Miami) economy
still rising", "Mississippi economy is on the move with big gains indicated in
1973", "Major economic boom forecast", "Drop in unemployment and rise in income
mirror state (Mississippi) gains", "Tampa jobless rate tumbles", "Unemployment
is low in Meridian", and "Textile industry optimistic".

These headlines both

reflect: and reinforce the optimistic mood of businessmen, bankers, and the general
The main concern of businessmen is that inflationary pressures will

There is a shortage of labor in Tennessee, and 70 percent of Tennessee

businessmen participating in a recent survey think that wage demands in 1973
will exceed those of 1972.

Corporate leaders expect many costs to rise, including

costs of utilities and fuel, pollution abatement, taxes, and raw materials.
this reason, there is sentiment for the continuation of controls.


Increases in

the price of milk and bread in New Orleans are blamed on higher grain prices.
A Louisiana egg and poultry producer says that his feed costs have risen by

180 percent in the past year.

Three telephone companies and three other

utilities have been granted rate increases in the past month.

The foundry and

coke industries in the Birmingham area are taxed to capacity.

The demand for

coal is also strong.

Controls, however, are constraining the development of

needed capacity in the coal industry.
Three New Orleans-area savings and loan associations report strong
demand for mortgage funds and dwindling excess lending capacity.

A similar

sampling of New Orleans consumer finance companies indicates especially good
business in November and December.
Retail and tourist activity is generally reported good, but the New
Orleans hotel business is an exception.
town hotels was as low as 50 percent.

During November,

occupancy in down-

Occupancy at a recently opened hotel

has been averaging a disappointing 83 percent.
Banks in New Orleans and Mobile report decided increases in demand
deposits around the year-end.


The Seventh District economy retains a strong upward momentum.
Employment is increasing, retail sales have been extremely vigorous, order
backlogs are building, and lead times are stretching out.

Inflationary pres-

sures are increasing as indicated by the recent rise in farm prices, higher
prices charged by small firms exempt from controls, and requests of utilities
and regulated public transport lines for substantial increases in rates and

Increases in production are impeded by lack of availability of fuel,

skilled labor, parts, and components.

The most serious supply problems relate

to availability of fuel, both natural gas and heating oil.
Fuel shortages have been reported in all five states of the Seventh
District in the past month.

Much colder weather this year has increased fuel

usage for home heating by 20 percent to 25 percent over last year.
of propane gas are widespread.


Utilities have shut off "interruptible" natural

gas customers in a number of cases.

There have been reports of temporary shut-

downs of manufacturing facilities and of apparatus for drying corn and soybeans.
Suppliers of heating oil and diesel fuel have stopped taking new customers, and
have reduced allotments to established customers.

On January 8, the largest

supplier of these products in the Midwest announced it was cutting deliveries
to established customers to 75 percent of last year's January level.


controls are blamed, in part, for fuel oil shortages because of an artifically
low price for home heating oil and lack of flexibility in prices in wholesale

The Midwest is a deficit refining area, and the price mechanism

normally allows area oil firms to bid additional supplies away from the Gulf

Employment apparently would be increasing faster and output would be
rising faster if sufficient numbers of qualified workers were available.


firms are having difficulty rebuilding work forces reduced during the recession.
Affected industries include steel, machine tools, capital goods components, and

Apprenticeship programs are being expanded, but results will take

District businessmen do not appear to worry about a second-half

For example, Milwaukee purchasing managers are said to "show concern,

not for the future, but rather for the deterioration of deliveries and quality,
and the growing list of shortages of materials and skilled labor".
Steel firms

expect a record year in 1973.

One large area firm is

operating at effective capacity and order books are filling for future months.
Recent months have seen a revival of orders for fabricated structural steel,
including orders for manufacturing buildings.
Capital expenditures may be heading for a boom as additional firms
increase appropriations.

Foreign demand also has increased substantially in

the past several months.

The improvement is broadly based and includes

Communist countries.
Among the supplies and components requiring longer lead times currently are electric motors, fluid drives, axles, diesel engines, bearings,
castings, forgings, cutting tools, dies, and molds.

In several cases the

delivery situation deteriorated very rapidly in the final months of 1972.


course, shortages and delays tend to cumulate as precautionary measures are

There are reports of growing imbalance in inventories of supplies.
A number of reports indicate that manufacturers are planning production

at levels that will permit them to weather strikes in 1973.
struction machinery, farm machinery, and motor vehicles.
that their orders will reflect these plans.

Examples are con-

Steel firms expect

Housing experts are gradually raising their forecasts for 1973,
although most still see a significant decline from 1972 to 2.0-2.1 million

Demand for used homes is strong, and a large Chicago area real

estate, firm projects an average rise in prices of existing homes of at
least 6 percent this year.

Supplies of many building materials are tight.

Gypsum board is being substituted for high-priced plywood and fiberboard.
Farm prices continue to strengthen, suggesting a continuance of
relatively high farm income, and also higher prices at retail, especially
for meat.

Both cattle and hog prices rose even more sharply than expected

in December, reflecting reduced production and weather-delayed marketings.
Wholesale meat prices are now above the peak reached near mid-1972.


10 percent of the corn and soybean crops remain in the fields, but current
reports indicate that losses will be small and much less than had been

Businessmen in the Eighth Federal Reserve District continue to be
optimistic as to business prospects in the year ahead.

Christmas sales were

generally ahead of expectations despite some unfavorable shopping weather,
and retailers expect sales in the coming months to be up on a seasonally
adjusted basis.

Most manufacturing firms report that operations are at or

near capacity levels; thus, plant expansion is expected to pick up in the
current year.

Residential construction may have peaked, but any decline in

home building is expected to be offset by gains in industrial construction.
Employment continues to rise moderately in the District and the unemployment
rate to decline.

Growth in loan demand continues to outpace the growth in

supply of loan funds, and interest rates continue their persistent uptrend.
A large portion of the cotton and soybean crops remained in the field at the
year-end, which will result in deterioration of quality and reduced harvests.
An increasing number of businessmen indicate that a higher rate of inflation is
in prospect for 1973.
Christmas sales by major department stores in the Eighth District
generally exceeded expectations and in some instances exceeded year-earlier
sales by 10 percent.

As a result, fewer after-Christmas bargains are to be

This higher level of sales occurred despite unfavorable shopping weather.

Thus, retailers are generally optimistic as to the outlook for the months ahead.
All manufacturing industries report higher levels of output in recent

An increasing number of industries report operations at or near capacity

levels and plans for plant expansion.

These reports are consistent with the

fact that orders for capital goods are rising sharply.

Steel representatives

report that heavy construction has finally turned upward, that railroad demand
for steel is coming back, and that farm equipment and appliance demands for steel

are strong.

Capital goods industries are thus very optimistic as to the prospects

for business in the months ahead.
Construction remains at a high level, and the outlook is optimistic
for 1973.

Reports on the residential sector are diverse, however, with some

areas reporting gains and others sluggishness.

The sluggishness is generally

confined to St. Louis, where some slowdown has occurred in recent months, and
to those rural areas where crops remain in the field.

Residential construction

generally remains at a relatively higher level in other parts of the District,
and industrial construction is believed to be gaining momentum.
Most firms in the Eighth District report further moderate gains in

Higher wage rates, however, have raised the marginal returns to

labor-saving devices and cost-reducing practices.

In retailing, for example,

one firm reported that all full-time employees who resign are replaced with
part-time help, thereby avoiding many fringe benefit costs.

The unemployment

rate continues downward, and the labor market is reported to be tighter in most
parts of the District.
Interest rates continue their persistent uptrend of recent months.
Commercial banks report that all commercial loan rates have generally moved up
with the rise in the prime rate.

Instalment and real estate loan rates have

likewise increased somewhat.
Crop harvesting problems are a major economic factor over much of the

Twenty percent of more of the cotton and soybean crops were estimated

to remain unharvested at the year-end in the Mississippi Valley area.


quality of the cotton has deteriorated substantially and much of the unharvested
beans are lying on the ground and cannot be harvested with combines.


losses are thus in prospect for many farmers despite the higher prices for farm


Although warmer weather in late December temporarily alleviated
District fuel shortages, the problem reappeared with the return of colder
weather in early January and currently threatens District economic activity.
District grain shippers are now experiencing difficulty in obtaining boxcars,
and this problem will probably persist until spring.

District retailers

enjoyed a very good Christmas season and are very optimistic about their
sales prospects for the first six months of 1973.
Although economic activity was not seriously hampered, unseasonably
cold weather in December revealed severe fuel shortages in the District,
especially in the Minneapolis-St. Paul metropolitan area.

No major District

manufacturing facility was shut down due to fuel shortages, but several large
manufacturers' fuel supplies were strained and a number of smaller manufacturing plants actually did shut down or reduce operations.

A steel plant in

St. Paul, for example, lost forty-eight production hours in December due to
lack of fuel, and two metal-treating plants in Minneapolis curtailed operations.
A South Dakota director reports that fuel shortages interrupted crop-drying
operations in his area and, as a consequence, many farmers will be forced to
sell their crops at a considerable discount.
Warmer weather in late December temporarily alleviated District
fuel shortages, but they reemerged as colder weather returned in early January.
Minnesota's state civil defense director indicated that some fuel oil users
currently are having difficulty obtaining needed supplies.

Also, in order to

meet residential heating requirements, a major fuel supplier in Minnesota
reduced January's fuel allotments of airlines, railroads, and trucking firms
by 20 percent to 25 percent, which could result in District transportation

services being curtailed.

In addition, in North Dakota, the Governor has

instituted emergency measures in order to avoid closing some public facilities
because of a lack of heating fuel.
Several directors report the District is currently experiencing a
boxcar shortage.

A major grain merchant in the Twin Cities

reports difficulty

obtaining cars and currently could use an additional 1,000 hopper cars.


firm has resorted to using coal and refrigeration cars and does not expect the
problem to improve until the Great Lakes shipping season starts this spring.
Although rail transportation was available to fill all ships before shipping
on the Great Lakes ceased, a Duluth banker reports that sufficient boxcars are
not available to ship grain currently stored in Duluth, especially sunflower
seeds destined for Gulf ports, and his area's shippers have had to use coal

In South Dakota no boxcar shortage had yet occurred, but the potential
A large amount of grain in South Dakota is currently stored under the

Government loan programs from the 1968, 1969, and 1970 growing seasons, and
the United States Department of Agriculture recently announced these storage
contracts will not be renewed.

Much of this grain will be shipped out of South

Dakota when these contracts expire in 1973, and a South Dakota director anticipates
problems in obtaining needed boxcars.

A North Dakota director reports that

grain elevators in his area are full and are refusing to buy grain because
boxcars are not available for shipping it.

No grain is piled outdoors, how-

ever, and as long as the grain prices remain high no one is losing money because
of the lack of boxcars.

In contrast to the rest of the District, directors from

Montana indicated that their state, for the first time in several years, is
not experiencing a boxcar shortage.

District retailers enjoyed a very good Christmas season and have a
very optimistic sales outlook for the first six months of 1973.

A major

Minneapolis-St. Paul area retailer revealed that his firm enjoyed excellent
business in 1972 and achieved its largest year-to-year relative sales gains
in December.

His firm estimates that department-discount store sales in the

Minneapolis-St. Paul metropolitan area will be up 12 percent from a year
earlier in 19 73.

Other reports from the Twin Cities are that retailers indicated

that they also enjoyed a very good fourth quarter and expect business to remain
strong during the first six months of 1973.

In addition, directors from

outside the Twin Cities metropolitan area disclosed that their area's merchants
had an excellent Christmas season and are very encouraged about their business
prospects in 1973.

A South Dakota director, however, stated that many farmers'

incomes will be curtailed because they were unable to dry their crops in
December, and this could curb his area's retail spending.

Although retailers

are optimistic about business in 1973, the consensus was that inventory rebuilding will be in line with year-earlier levels.

December sales at leading retail outlets in Tenth District metropolitan areas were, in most instances, well above those of a year earlier.
Although the picture varies from firm to firm and place to place, it appears
that District retail sales increases may not have kept pace with those of the

However, District sales activity was strong enough to support large

demand deposit inflows at District commercial banks, and strong increases in
consumer instalment and credit card loans as well.

Adverse weather conditions,

which had some restraining influence on District retail sales growth, are
contributing (along with other factors) to a farm products-and-food price
situation that is not favorable to stability in consumer prices.
Adverse weather conditions in several metropolitan areas appear to
have held down December retail sales growth in the District, at least by
comparison with the record increases experienced by national retail chains.
However, most District retailers interviewed reported very solid gains in
sales over December 1971.

Descriptive adjectives ranged from "favorable" to

"very nice" to "anywhere from tremendous to fantastic".

Although sales increases

generally ranged across the board, some retailers noted particularly strong
gains in furniture, home improvement items, and sportswear.
Tenth District bankers described recent demand deposit inflows in
terms ranging from "above average" to "spectacular" and "greatly beyond expectations".

These rapid increases in demand deposits were attributed to very strong

retail sales activity during the holiday season.

Large increases were reported

in consumer instalment and credit card loans, probably due also to Christmas

Increases in time and savings deposits were much more modest, with

CDs appearing to decline despite inflows by governments investing tax revenues.

Bankers made few changes in CD rates during December; some banks in large
District cities reported that they are paying maximum interest rates on most
classes of deposits.

Most, however, did not appear to be concerned about

possible disintermediation, at least in the near term.

Few banks changed in

the prime lending rate in December since most were already charging 6 percent
or more to prime customers.
A few bankers expressed concern that the recent rise in short-term
interest rates would bring on some form of controls.

Most, however, did not

anticipate controls unless interest rates rose substantially further.


all the bankers interviewed thought that controls, whether in the form of
limitations on bank profits or interest rate ceilings, would not be effective,
particularly in the long run.

One banker expressed the view that, if effective,

controls would discriminate against the banking industry, since he anticipated
that interest rates on bank assets would be controlled, while those on bank
liabilities would not.
Continued adverse weather conditions, sharp boosts in farm commodity
prices, reports about smaller increases in prospective pork supplies than
earlier anticipated, and unusually brisk consumer demand have all combined to
place food prices in the national headlines once more.

The above developments

greatly dim the chances that food prices will prove less troublesome as a source
of inflation in 1973.

Farm prices, led by upturns for wheat, cattle and hogs,

jumped 5 percent for the month ended December 15, thus pushing the level
18 percent above a year ago.

Despite higher prices, profit margins in live-

stock feeding have narrowed owing to the sharp increase in feed costs.

As a

result, red meat supplies will probably be smaller this year than earlier
expected, since producers likely will reduce the weights at which the animals
are marketed and at the same time curb or revise downward their plans for


The most recent hog report—showing a smaller than expected

increase in pork supplies for 1973—attests to the likelihood of this development. .
Several retail food chains reported that, while their prices on
average have been fairly stable, the recent spurts in wholesale food prices will
likely result in upward adjustments at retail.

Egg prices have already moved

up sharply, and further increases in milk prices are contemplated.

Rather than

raising meat prices, the merchants have elected to let their margins suffer
but, unless wholesale prices fall off soon, retail meat prices can be expected
to rise, perhaps sharply.

On balance, then, the prospects of holding food

price increases within tolerable limits are not particularly bright under the
present form of wage-price controls.


Most recent indicators of economic activity in the Eleventh District
continue to show growing strength.

Both the Texas industrial production index

and total employment in the five-state area reached record levels in November.
New car registrations were also up, and department store sales continued
strong in December.

Construction activity, however, was lower in November.


recent: survey of the directors of this bank representing the nonbanking sector
revealed that most of them expect 1973 to be another good year but with some

The directors generally agreed that 1973 would be a good year

for sales and plant and equipment investment, but they expected increasing upward pressures on prices and wages.
Our responding directors were generally optimistic about the prospects
of their own firms in 1973.

Sales, for example, were expected to increase an

average of about 10 percent, and most firms expected to increase their investment in plant and equipment—in one case, possibly by as much as 100 percent.
The respondents were not so optimistic about prices.


was expected to accelerate moderately despite the consensus that wage and
price controls would remain through 19 73.

Judging from our responses, the

pace of inflation might rise even more if controls were to be lifted.


of our directors, for example, indicated that their firms would raise prices
if the controls were lifted.

The majority, however, indicated that competition

would prevent such increases.

Wage increases, too, were expected to accelerate

slightly next year.

And like prices, some directors saw wages rising more

rapidly for their firms if the controls were eliminated.
Looking at their current positions, two thirds of our respondents
expressed satisfaction with their profit margins.

Inventory levels were also

judged to be about normal.

But interest rates had risen 1/4 percent to 1/2

percent for some of them over the last month.
The seasonally adjusted Texas industrial production index rose in
November to a record level.

All major industry sectors shared in the rise.

Output of utilities, paced by a substantial rise in the distribution of
electricity, rebounded strongly in November after declining sharply in

Within manufacturing, production of durable goods recorded the larger

gain as all durable goods industries posted gains over October.

Mining also

increased slightly, as small increases in the production of crude oil and
natural gas liquids more than offset declines in output of natural gas and
metal, stone, and earth minerals.

The regulatory commissions of District

states are continuing to permit maximum production of crude oil except for
a few fields in Texas that are partially restricted for conservation reasons.
Several manufacturing plants in Texas, relying on natural gas for fuel,
suffered supply cutbacks in early December and were forced to suspend operations

However, the weather improvement toward the end of the month helped

to ease the situation.
The weather has also forced suspension of cotton harvesting on the
high plains.

Harvesting had already been delayed by early-December storms and

had just begun to pick up around Christmas week when another severe storm
stopped all field activities.

It is now feared that additional losses of

both quantity and quality will occur in this area.

Despite this, cash

receipts from farm marketings through October continued sharply ahead of
last year, and farm income in 1972 for the District should be a record, given
the continuing higher prices for cattle and grains.

As of December 1, Texas

and Arizona had nearly 2.9 million head of cattle to feed, unchanged from the
month earlier but 27 percent above December 19 71.

Seasonally adjusted total employment in the five southwestern states
rose in November for the fifth consecutive month.

This increase, coupled with

a decline in the labor force, caused the employment rate to drop from 4.4
percent to 4.0 percent.

Gains in manufacturing employment were responsible

for most of the rise in employment, as substantial increases were reported
in both the durable and nondurable goods sectors.
Recent indicators of consumer spending also continued to advance.
Department store sales rose again in December and were especially strong in
Dallas and Houston.

Automobile registrations were also higher in November,

particularly in Dallas.
Construction activity, as measured by the value of contracts awarded,
decreased in November for the third consecutive month.

Both residential and

nonresidential construction fell in November, but nonbuilding construction
did increase slightly.

The cumulative value of contracts for the District

states through November, nevertheless, was still almost 25 percent ahead of
the corresponding period last year.


Business activity in the Twelfth District continues to be strong,
and our directors are optimistic about continued strength in 1973.


sales reached record levels in the District during December, and consumers
are expected to maintain a steady demand for goods and services during the
coming year.

Banks report year-end gains in deposits and steady loan demand.

December retail sales were reported to be 10 percent to 12 percent
higher than in previous years in most areas.

This demand was broadly based,

but sales of furniture and other durables were noted as being particularly

One director in California reported that jewelry stores in his locality

had sales increases of up to 20 percent.
automobile sales.

A similar situation exists for

New car dealers had excellent sales during December, and

at the same time dealers' inventories are at more satisfactory levels.
result, dealers are expecting an excellent year for automobile sales.

As a

general, consumers are regarded as being in a more confident mood and likely
to be a major stimulus for the economy in 1973.
At present, construction activity is being maintained at recently
established levels.

In a few areas, such as Utah, there has been a seasonal

decline, but in other areas, such as Phoenix and San Diego, there has been
greater activity.

In California, there remains some uncertainty about the

impact of required environmental studies, but this problem should be reduced
as experience is gained in preparing the necessary studies.

As has been the

case in recent months, higher vacancy rates in apartments are exerting a
restraining influence on multi-unit construction in many areas.
The overall level of construction activity is sufficiently high that
our directors single it out as the principal industry where there exists a

shortage of labor.

The demand is highest in the skilled trades, such as

plumbers and electricians.

The timber industry is another industry operating

at near capacity and experiencing difficulties in finding some classes of
In most other industries, the supply of labor both skilled and unskilled is sufficient for expected needs in 1973, even though shortages of
specific skills do exist.

In a few cases, layoffs are adding to unemployment.

For example, Lockheed is laying off 1,000 people at its Sunnyvale, California,
plant and many of these workers are in skilled trades.

The consensus of our

directors is, despite their optimistic view of the economy, the rate of expansion in 1973 will not result in a substantially lower unemployment rate.
Most banks in the District appear to have had substantial gains in

Both savings and demand deposits are higher, and the banks expect

to be able to meet most demands for credit without difficulty.

Some interest

rates, such as those on commercial loans, are moderately higher, but mortgage
rates are described by one banker as being softer.

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