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Prepared for the
Federal Open Market Committee
by the Staff

January 14, 1976


SUMMARY page i
First District - Boston page 1
Second District - New York page 4
Third District - Philadelphia page 7
Fourth District - Cleveland page 10
Fifth District - Richmond page 13
Sixth District - Atlanta page 16
Seventh District - Chicago page 19
Eighth District - St. Louis page 22
Ninth District - Minneapolis page 24
Tenth District - Kansas City page 27
Eleventh District - Dallas page 30
Twelfth District - San Francisco page 33

[Asterisk: Prepared by the Federal Reserve Bank of New York.]
This month's Red Book reports suggest that economic activity is
continuing to expand, but that the upward impetus is narrowly based.

The most

optimistic sector is retail trade, where Christmas sales as well as automobile
sales in several Districts were stronger than expected.

However, only a modest

recovery in inventory spending is anticipated as retailers maintain tight inventory
control and as some durable manufacturers continue to trim excessive stocks.
Caution characterizes the capital spending outlook, with weakness expected in
some sizable industries.

Led by activity in the single-family area, construction

is generally expected to continue its modest rate of recovery.

Although most

respondents did not foresee any near-term acceleration in inflation, some
concern was expressed over construction costs and the outcome of the heavier
bargaining calendar in 1976.

One favorable aspect of the price outlook comes

from the agricultural sector where there are generally expected to be increased
supplies of pork and beef.
to remain sluggish.

Loan demand at commercial banks is generally expected

Strong gains in consumer spending were reported throughout the twelve

Sales far exceeded expectations in several districts including

New York, Atlanta, Chicago, Minneapolis, and Dallas.

Very strong sales were

reported even in some areas in the Boston and Cleveland districts where high
unemployment was expected to have adverse effects on consumer buying.

Some reluc-

tance toward the purchase of "big-ticket" items was reported in New York and
Richmond, but Philadelphia, Cleveland, and Minneapolis all reported increases in
this category.

Auto sales were surprisingly strong in Atlanta, Chicago, St. Louis,

Minneapolis, and San Francisco, while tourism was thriving in both the Atlanta
and the Minneapolis Districts.

While the brisk pace of retail activity has significantly pared
stocks, some progress remains to be made in trimming manufacturing inventories.
For example, respondents from the Atlanta, Boston, and Chicago Districts
reported that Christmas sales were so strong that stocks are now fairly low.
However, retailers and purchasing managers in the Minneapolis and Kansas City
Districts foresaw fears of overstocking as motivating tight inventory control

At the manufacturing level, respondents in the Philadelphia and Richmond

Districts noted that durable manufacturing inventory liquidation had yet to be

Purchasing agents from the Kansas City District suggested that the

rather modest outlook for inflation for most products precluded much in the way
of speculative buildups.

In view of these considerations, the typical outlook

was for only a moderate first-half upturn in inventory spending.
A large measure of caution seems to surround the prospects for a
recovery in capital spending in 1976.

For example, respondents in the New York

and Chicago Districts among others did not foresee more than a modest recovery
until at least the second half of the year.

One of the problems emphasized in

the Dallas and Cleveland Districts was the considerable proportion of capital
expenditures represented by pollution abatement requirements in the petroleum
refining and steel industries.

In the energy sector, Dallas respondents report

that fixed investment in the drilling area remains strong.

However, investment

in petroleum refining is expected to be below last year's level reflecting, in
part, refiners' expectations that higher petroleum costs will result in a longterm flattening out in demand for many refinery products.

In the San Francisco

District another sizable area of concern was the aircraft industry where a decline
in new orders for commercial jets has prompted a significant cutback in plant
and equipment expenditures for 1976.
Construction and real estate activity remain generally depressed,
although there were a few signs of strengthening.

Atlanta and Minneapolis both

report continued sluggishness in new residential construction but increased
interest in the existing housing stock.

San Francisco reports that the anti-

cipated improvement in residential construction has not yet materialized.
St. Louis presents a somewhat brighter picture, reporting a strengthening in
single-family dwellings as well as in non-residential construction.

Chicago and

Dallas also report a continued improvement in residential construction activity.
But commercial construction, with few exceptions, is still weak.

Also, a large

number of condominiums remain vacant in the Atlanta District, and the construction of multi-family dwellings in the St. Louis District is at a virtual standstill.

In a number of Districts, however, sizable inflows to thrift institutions

and the possibility of mortgage interest rate declines were cited.
Reports from agricultural areas are generally favorable.


Atlanta, Minneapolis, and Kansas City all expect increases in hog production and
pork supplies.

Improved conditions for cattle producers are anticipated in the

Atlanta District as they are in Minneapolis, Kansas City, and San Francisco.
Only the Dallas District is somewhat pessimistic, expecting placements of fed
cattle to fall as their prices continue declining.

Minneapolis reports cash farm

receipts were up from the first half of the year, led by record prices for dairy

Cash receipts for grain, however, were below 1974 levels.
The widespread remaining slack in manufacturing coupled with the

generally expected near-term sluggishness of capital spending and rather modest
inventory rebuilding were often mentioned as factors holding down inflation at
least over the first half of the year.

Nevertheless, the possibility of uncomfort-

ably large price increases in some sectors was recognized by some respondents.
For example, a Cleveland director reported sharply rising costs for concrete and
lumber, while one of the nation's largest homebuilders expected a 10 percent
rise in new home prices in 1976.

Respondents in the Cleveland District also reported

that the October 1 rise in steel prices appeared to be sticking fairly well,

although divergent views were expressed elsewhere on the firmness of the
aluminum price increase.

Some concern was voiced over the possible price

impact of the potential terms of settlements of major wage negotiations in
A rather broad consensus emerged that loan demand was weak and that
no strong near-term recovery was in the offing.

A number of respondents cited

tighter inventory control policies as a major reason for the prospective sluggishness in loan demand.

Reflecting this outlook, bankers in the Philadelphia

District expected the prime rate to edge down somewhat further before starting
to move up gradually beginning in the second quarter.

Bankers from the Boston

and San Francisco Districts, among others, emphasized the much increased concern
over quality of credit.

With respect to bank earnings, these bankers foresaw

a weak profit picture for 1976.


Directors of the First District are very encouraged by Christmas
retail sales.

This spending surge has provided essential confirmation that the

recovery has not waned.

In spite of the lively retailing atmosphere, the pros-

pects for a solid, continuing recovery remain tenuous since most other areas of
activity are sluggish.

Once again, many directors report postponing dates of

expected rebound in their lines of business.
The retailing experience for December is typically described as excellent.

Volume at large urban stores rose 12 percent, despite the high unemploy-

ment rate and particularly bad weather just before Christmas.

Many retail

trade associations and bankers comment that the increased volume was not
accompanied by a comparable increase in consumer financing throughout the

Unit volume significantly depleted inventories during the month, and

manufacturers reported unusually strong December orders.

Retailers are more

optimistic than last month; their biggest problem is finding stock for January
clearance sales.
Banking directors continue to report no activity in loan demands; all
categories are seasonally weak.
they seek quality customers.

Banks are beginning to look for business, but

The workouts are so numerous, and profits have

been burned so badly, that loan officers remain very discriminating.

One direc-

tor reports that other banks are beginning to compete actively for his customers'

Furthermore, banks are competing much more widely to place international

loans; spreads are narrowing, and qualified personnel are being hired away from
established lenders by banks seeking to expand their activities abroad.
One banking director also reports that increased costs of doing business
are leading to reinstituting service charges on individual checking accounts,

which comprise 25 percent of demand deposits.

Also, thrift institutions'

entry into the personal loan market is placing downward pressure on instalment

The outlook for bank profits foretells that this source of demand for

municipal securities will remain weak into 1977 at least.
The machine tool industry will be worse in 1976 than 1975.
of tools which require long planning leads is being reduced.


Although it is

expected that orders for the short-lead tools will recover in the first quarter,
overall output will continue to decline for some time.
There is a wide disparity in the policy prescriptions of the Boston
Bank's academic advisers.

For the first time in eighteen years, Professor

Eckstein feels that monetary policy is too easy.

Specifically, he opposes

lowering the Federal funds rate below 5 percent.

Eckstein argues that the

major uncertainties of 1975—energy legislation, the New York City financial
crisis, the tax cut extension, the reemergence of double-digit inflation—have
all been resolved on the side of prosperity.

As a result, he is confident that

the economy will be strong in 1976 and therefore will not require additional
monetary stimulus.

He is skeptical about the accuracy of the money stock

figures and regards a monetarist approach as a highly risky one in this environment.
Professors Houthakker, Samuelson, Solow, and Tobin feel that monetary
policy is overly restrictive.
lowered to 4 percent.

Houthakker and Tobin want the Federal funds rate

Houthakker is worried about the outlook for 1976.


cause of lagging money growth, he feels the prospect is for only 8 percent
gross national product growth in 1976, with a maximum of 4 1/2 percent real

Professor Tobin feels it is disgraceful to settle for a recovery that

takes five years to make up the ground lost in one year.

He criticizes real

growth targets as low as 6 to 7 percent and advocates a target of up to 10

percent in the early stage of the recovery from such a severe recession.


is no evidence, Tobin points out, that so rapid a recovery would ignite inflationary pressures in view of the amount of excess capacity available, according to all possible measures.
Professor Samuelson favors aiming money growth at the top end of the
target range and does not fear exceeding that limit over the next few months.
He points out that the moderate consensus forecast assumes money growth at
the high end of the range or above.

Policy should not remain tight under the

illusion that it would lessen the settlements reached in the labor contract
negotiations this year.

Professor Solow feels that 6 percent growth in 1976 is

a good prospect but that the major risks are on the down side.

He favors short-

term money growth targets of 6 to 10 percent and feels that a Federal funds rate
below 5 percent would be necessary to achieve that range.
Professor Houthakker was puzzled by the recent weakness of the dollar
and still expects it to strengthen in 1976.

He argues that domestic policy

should have priority in the present circumstances.


The business outlook for 1976 on balance is relatively good, in
the views of Second District directors, other business leaders, and financial
economists who were contacted recently.
is expected to grow over the year.

Real gross national product (GNP)

The Christmas and post-Christmas retail

selling seasons have been successful.

While retail sales continue to provide

the main prop under the recovery, some respondents expected some reinforcement
from the inventory accummulation now underway and, after mid-year, from business
capital spending.

The outlook for corporate profits was, for the most part, regarded

as good.
We recently requested our directors and a number of financial
economists for their appraisal of the business outlook for 1976.
degrees, the respondents in general were cautiously optimistic.

In varying
Among others,

the president of a large nationwide department store chain expected real GNP
to grow by about 5 1/2 percent over the year.

He expected consumer spending to

continue to provide the principal stimulus during the first half of 1976, and
to be reinforced by a pickup in capital spending by mid-year.

He felt unemploy-

ment would decline throughout the year, but would remain above 7 percent.


his view, barring poor crops, there was hope that the rise in consumer prices
could be held in a 5 to 7 percent range.

The chairman of a large New York City

bank also felt business capital spending might pick up after mid-1976.


Buffalo branch directors generally agreed that the business outlook was
reasonably good at this time, with "attractive interest rates" and generally
good consumer confidence as factors supporting this favorable outlook.


senior economist at a large New York City bank expected a "good, balanced,
and sustainable" expansion this year, with real GNP growing by 5 to 5 1/2 percent.
As yet, however, he saw no evidence of any significant pickup in capital spending

in real terms.

He expected such outlays to rise by 8 to 10 percent in dollar

terms, with a token increase in real terms in the last part of the year.
This economist also expressed "some worry" over the possible impact on inflation
of the potential terms of the settlements of the many wage negotiations coming
up in 1976.

Another bank economist stated he was cautiously optimistic on 1976,

and that the recovery was taking hold and should result in a rate of real growth
of 5 to 6 percent, in his view a very reasonable performance under present
As noted, consumer spending continues to provide the main thrust to
the current economic recovery.

In this regard, the president of the large chain

of retail stores mentioned above reported that the Christmas selling season had
been "good to excellent," with sales exceeding expectations, even in New York
City where sales have lagged behind the nationwide performance.

The chairman

of a large New York City department store reported the holiday season had ended
on a very strong note, with sales intensifying the closer Christmas approached.
Similar observations were made by a number of other New York City retailers.
A survey of large New York City department stores revealed that Christmas and postholiday consumer buying had lifted their December sales to a level 8 percent
above December 1974, the largest increase in 16 months.

The performance in the

suburbs was even better, with sales in the metropolitan area nearly 11 percent
over the comparable period of 1974—the biggest increase in 23 months.
sales outside the New York City area were also strong.


An upstate banker

noted that holiday sales in his area had substantially exceeded expectations.
The Buffalo branch directors were in general agreement that the Christmas
selling season in Western New York had been good, with sales, in dollar terms,
running 8-10 percent above year-earlier levels.

These directors, moreover,

reported that the holiday season increase in retail buying has been followed by
good sales so far in 1976.

In their view, however, the mood of consumers appears

to be mixed.

Consumers have discretionary spending money and seem to show

little resistence to spending for recreation, travel, and small-ticket items.
Inflation, job insecurity, and economic uncertainties in general, however,
tend to be reflected in a more cautious attitude toward the demand for bigticket items.
Regarding corporate profits, the great majority of the respondents
looked for an increase in 1976.

Among others, the president of the retail chain

stated that the outlook for such profits was "excellent", as productivity was
improving dramatically while the volume of sales was rising.

Against this

background, he expected profits after taxes to gain about 30 percent next year.
For the same reasons, one of the bank economists expected profits to rise
throughout 1976, also by 30 percent for the year.

All of the Buffalo branch

directors also expected corporate profits to increase in 1976, in reflection of
emphasis on expense control coupled with increased consumer spending.


estimates, however, ranged from rather modest increases to as high as 25 percent
above 1975.

Exceptions to the rather optimistic profit outlook were voiced by

directors associated with the petroleum and the metal industries, who did not
expect these industries to fare well during 1976.


Economic recovery in the Third District has still not developed any
consistent strength.

The manufacturing sector reports business activity

virtually unchanged from last month, while retailers are enjoying brisk sales.
Area manufacturers note that new orders are about the same as in December, and
there is no measurable expansion or contraction in employment or the average

Prices paid and received in this sector are higher, however, and

there is some evidence that the rise in price is picking up.

Despite the

current sluggishness in business activity, manufacturers are optimistic in
their outlook for the next two quarters.

Retailers report very good sales,

and they expect this to continue in the first quarter.

Bankers in the area

indicate that deposits are growing at more than a seasonal pace, but loan
volume is soft.
Manufacturers responding to this month's business outlook survey
report that business conditions are unchanged from last month.

This represents

a substantial slowdown from the pace of recovery in the regional economy
last summer and early fall.

In November 42 percent of the respondents re-

ported an improved business climate, but in December this declined to 24 percent.

This month only 14 percent of the executives surveyed feel that economic

activity is at a higher level, while 66 percent observe no change.

New orders

are holding steady, with over half of the respondents indicating no change
during the last month.

Both employment and the length of the average work-

week are also the same as last month.

At the same time, liquidation of in-

ventories—especially durables—continues, with over a third of those polled
reporting fewer stocks on their shelves.
Despite the sluggishness in current activity, manufacturers remain
optimistic for the next six months.

Three fourths of the businessmen surveyed

anticipate expansion.

New orders are expected to be higher by July, and net

accumulation of inventories is projected.

The proportion of respondents

looking for higher levels of inventories exceeds those expecting lower levels
by 23 percentage points.

This "net increase" in the six-month outlook is the

largest since the middle of 1973.
grow as well.

At the same time, employment is expected to

More than a third of the respondents plan to add to their work

forces, and one fifth expect to lengthen the average workweek.

In addition,

one out of every three businessmen surveyed plans to increase spending for
plant and equipment over the period.
Retailers in the area report that the strong surge experienced in
Christmas sales has carried over into this month, and all of the merchants
contacted expected it to continue at least through March.

Traditional promo-

tions on white goods and furniture are taking place, but all of the merchants
contacted agree that the markdowns on many nontraditional lines that took
place at this point last year are not necessary this year since sales are
stronger and inventories are in better shape.

One merchant notes that there

is little evidence that shoppers are concentrating on lower priced items. "It's
hard to believe, but we have sport shirts priced at $34 and they're selling
like hot cakes".

Some big-ticket items such as color TVs are also reported

to be selling well.
On the inflation front, manufacturers report paying and charging
higher prices this month, and the pace of inflation in this sector may be
picking up.

One half of the manufacturers polled report paying higher prices

for their supplies this month, compared with a third noting increases last

On the output side, 37 percent of those surveyed report receiving

higher prices this month, compared with 28 percent in December.

The outlook for the next two quarters is for additional inflation.
Almost 90 percent of the respondents expect to be paying more for their
supplies over the period, and 60 percent anticipate higher price tags for the
products they sell.

Retailers report that prices continue to move up but

at a moderate pace, and they look for this trend to continue over the next few
Area bankers report that loan volume remains sluggish.
contact put it, "Loan volume is as soft as at any time in 1975".

As one
There is

general agreement that no big pickup is in the cards through the first half
of 1976.

One banker expects total loans at his bank to grow about 7 percent

this year.

Bankers look for short-term interest rates to decline and then

start moving up gradually around March.

They anticipate a drop in the prime

rate to 7 percent or below within the next few weeks before turning back up.
The consensus is for this rate to average in the 7.75 to 8 percent range for
the year as a whole.

None of the bankers contacted foresee any problems in

accommodating the expected increase in the demand for credit as the recovery

There is agreement that uncertainty over the staying power of the

recovery is inhibiting many customers from making long-range borrowing commitments at this time.

However, one banker reports that some of this uncertainty

appears to be dissipating among his bank's corporate customers.


Our directors and businessmen in the District are still cautious
about prospects for business spending in the year ahead.

Steel operations

are recovering, and retail sales rose strongly during the Christmas season.
Recovery in employment in the District remains weak.

Deposit inflows continue

strong, while loan demand—especially for business and mortgage loans— is
still weak.
Capital goods producers report conditions are generally soft,
although they note some improvement from lows early last year.

One director

and chief executive officer of an electrical machinery firm expects capital
equipment markets will remain sluggish in 1976, and another director reports
both capital goods and construction equipment markets are weak.

Demand for

mining machinery and other energy related equipment is still good.

A bearings

producer reports their business, which held up relatively well through the
recession, has softened because of weaknesses in capital equipment, freight cars,
and more recently energy-related markets.

Heavy duty truck orders have picked

up mildly from depressed levels of last year, but no significant improvement
is expected until later this year.

Several directors associated with manufacturing

firms see little need for speculative buildup of inventories in 1976.


director associated with consumer products reports his inventories are back
to normal.
Steel orders and production are recovering from the lows of last

Steel economists expect orders this quarter will be at least 15

percent higher than last quarter.
Hedging against the February 1 increase in the tin plate prices,
strengthened demand from auto producers, and a reduced rate of inventory
liquidation are among factors that should boost steel operations this quarter.

Last fall's steel price increases are holding well, with only scattered
deviations from published prices by some small steel producers.

Some steel

economists apparently have adjusted their 1976 forecasts downward because of
an expected slow recovery in capital goods.

High costs of pollution equipment

and uncertainty over environmental regulations that affect steel and some of
its major customers, such as utilities, are hindering recovery in capital
goods industries, according to one economist.
Recovery in manufacturing employment in the District is as about
as slow as it was in the early stages of the 1971 recovery.

There are still

some scattered layoffs in the steel industry, but economists for major steel
producers expect a steady but modest pickup in employment this quarter.
Layoffs among capital-goods-producing industries appear to have stabilized,
but one large producer, lacking orders, furloughed several hundred workers
from late December to late January.

The bulk of improvement in manufacturing

employment has been in the rubber and plastics, glass, metal stamping, and
automotive industries.
Retail sales during the Christmas season are described as very
strong and best since 1973.

Retailers in Youngstown, which has one of the

highest unemployment rates in the District, report that the dollar volume of
sales was at least 15 percent higher than a year


A director

associated with a major retail chain stated a sharp pickup in sales had reduced its inventories, and an economist with a national department store
chain reported sales for December were very strong and, in real terms, equal
to the December 1973 volume.

He noted a pickup for appliances and furniture

as well as further improvement in apparel.

According to a financial officer

with a $500 million discount chain, sales last month were higher than in 1974

but not back to prerecession levels.

He commented that major appliances picked

up for the first time since the decline late in 1973.
Net deposit inflows into banks and savings and loan associations
were strong again in December, while business and mortgage loan demand was
generally weak.

A large mortgage banker and a production loan officer with

one of the nation's largest banks commented that the supply of mortgage funds
exceeds demand and that their lending rates are likely to be pared shortly.
An officer with a large savings and loan expects mortgage lending to be slow
for most of 1976 and also anticipates a reduction in their 8 3/4 percent
lending rate in order to attract borrowers.

One of the nation's largest

builders of houses expects that new starts in the U.S. will rise to about 1.3
million to 1.5 million units in 1976 and that the average price of new houses
will be up by about 10 percent from last year.

A director reports construction

costs, especially for concrete and lumber, have been rising sharply.


Our January survey of Fifth District business conditions yielded
mixed results.

Manufacturers' responses indicate little or no change in their

level of activity during December, while retailers were unanimous in reporting
increased sales.

Among manufacturing firms, shipments and new orders were es-

sentially unchanged from the previous month while backlogs of orders were down

Inventories of both manufacturers and retailers showed little change

in December.

Inventories at retail have apparently been brought into line with

desired levels, while among manufacturers they remain in excess.


including employee compensation, continued to rise across a broad front.


outlook for business during the next six months remains bright, as most respondents expect improvement over that time period.

Our directors also noted im-

provement in the confidence of consumers as well as of businessmen in the

Bank credit in the Fifth District advanced moderatly in December, with

a slight negative movement in loans offset by continued investment in United
States Government securities.

Gains were posted in both demand and time deposits,

and purchases of large certificates of deposit (CDs) showed special strength.
District farmers' cash receipts from marketings during January-October 1975 recorded a 3 percent increase over a year earlier, compared with a 3 percent decline nationally.
Of manufacturers responding to our January survey, slightly over
30 percent reported an increase in sales while almost as many reported a decrease.
Among individual industries, the increases in shipments were concentrated in
textile mill products, apparel, and lumber and wood products.
primarily in chemicals and machinery and equipment.

Reductions occurred

Overall, the volume of new

orders looked much the same as shipments, although manufacturers reporting

declines slightly outnumbered those reporting increases.

Industries showing

increases in new orders include primary metals and apparel, while declines were
noted in transportation equipment.

Overall, machinery and equipment manufac-

turers showed some decline in new orders, but some firms in this industry
reported gains.

Backlogs of orders declined somewhat at District manufacturing

Inventories were essentially unchanged, although materials seem to

have declined slightly, while finished goods edged upward.

One third of our

respondents continue to view current inventory levels as excessive.
Responses suggest a slight decline in manufacturing employment, the
first since May.

Hours worked per week held firm, while employee


in terms of average hourly earnings—rose at nearly one third of the firms

Prices paid and received were also up across a broad range.


one third of the manufacturers continue to view current plant and equipment as
excessive, but nearly all are satisfied with current expansion plans.
District retailers apparently had a very good Christmas season.
branch director called it "exceptional".


All survey respondents reported in-

creased sales in December; one called it the greatest change noted in a number of

The improvement in total sales has not spread to big-ticket items, how-


Retail inventories were unchanged from a month earlier and are now in line

with desired levels.

Retailers are generally optimistic about the near future,

hoping that the recent surge in sales will carry over into 1976.
Commercial and industrial loans at weekly reporting banks declined
from November, primarily reflecting seasonal influences such as repayment of
loans by retailers.

Loans to durable goods manufacturers showed small but steady

increases, but these were offset by declines in loans to nondurable goods

Business loans in December were 7.7 percent below the year-ago


Consumer loans recently have advanced at a very gradual rate, while

real estate loans here declined.

Total investments by weekly reporting banks

posted strong gains in December, led by a surge in purchases of Treasury bills
and longer maturity Treasury issues.

Holdings of municipals fell slightly from

Total investments in December were 19.5 percent above a year ago,

while total assets posted a year-to-year gain of 3.3 percent.

Steady gains in

time deposits continued during December, and CDs increased by 3.5 percent from
the previous month.

Demand deposits were 3.2 percent above the year-earlier

Net purchases of Federal funds by member banks over the first four weeks

of December dropped to their lowest level since January 1973.

Discount window

borrowings by member banks remained at the near zero level reached in November.
In the agricultural sector,

a buildup in the inventory of hogs held

for breeding purposes and a sizable upturn in intended farrowings during the
December 1975-May 1976 period strengthenprospects for larger pork supplies in
the second half of 1976.

Indications point to a somewhat larger increase in the

Fifth District than in the nation.


Reports from directors, purchasing agents, and other contacts
confirm a brightening in the Southeast's economy.

At the year-end, depart-

ment store and auto sales are strong throughout the Sixth District.
is the most vibrant sector.


Construction and real estate activity remain

depressed, but various manufacturing industries are experiencing greater

Developments in the agricultural sector offer hope for continued

moderation of price increases.
Consumer spending is leading the recovery.
holiday sales have surpassed expectations.

Department store

Many merchants reported the

finest Christmas season in their experience, including such banner years as
1972 and 1973, although in some areas sales did not equal 1974's.


tories of many stores were so depleted by the rapid pace of holiday selling
that merchandise for post-Christmas sales was scarce.

There were no indica-

tions of overstocking and several sources report strong reordering of merchandise.

The most successful retailers seemed to be those who used active


The proportion of cash sales was reportedly up from 1974.

Auto dealers likewise reported a sharp increase in sales—the best
December in years for certain dealerships—and in some areas inventories were

Aggressive promotion was again mentioned as a key element of success,

and a high proportion of cash sales were reported.

Several lenders expressed

disapproval of the trend toward longer maturities on automobile instalment
credit contracts.
Tourism remained the most ebullient sector in the Southeast's
economy, even exceeding retail sales activity.

Record numbers of tourists

were reported at Louisiana, Tennessee, and Florida tourist attractions, hotels,
and motels.

Trailer and camping facilities in southern and central Florida

were operating at maximum capacity.

In late December, the influx of visitors

to Florida caused major traffic congestion as far north as Atlanta.


conditions forced major Florida tourist attractions to close their gates from
time to time.
In contrast to tourism, construction and real estate remain depressed,
particularly in Florida.

The resale of existing single-family residences was

the only segment showing significant improvement.

New home construction re-

mained in a slump in most areas, and nonresidential construction was generally
dormant except for sporadic plant or public sector construction.


reports of gains in residential construction were received, but they were mostly
interpreted as evidence of bottoming out.
residential units persists in Florida.

A large overhang of available new

Many major projects remain in financial

Some slight reduction of the inventory of houses and condominiums

was reported, but the absorption rate is low relative to remaining stock.


is particularly true for condominiums, of which 37,000 units in south Florida
remain in stock; 3 percent are sold each month.
greatest for expensive units.

The vacancy rate is reportedly

Various sources indicate that the speculative

and second-home market segments have largely evaporated, leaving primary residences as the only source of demand.

Experienced construction laborers are

migrating from Florida to Louisiana in response to job opportunities.
Demand, prices, and output in various"manufacturing industries have

A major aluminum producer is maintaining a recent price increase

and expects increased production.

Demand for forest products, including poles,

paper, boxes and lumber, continues to improve.

Contrary to the usual seasonal

pattern, lumber demand increased steadily from October through December.
creased prices for paper products are being maintained successfully.



prices for spring and summer apparel merchandise are steady but are expected

to rise this fall.

Demand is reportedly good for a manufacturer of pleasure

boats and a maker of appliance timers.

A major railroad company reports the

return to service of railroad cars and engines withdrawn to storage in the
first half of 1975.

A large steel manufacturer reports some growth in orders

but expects no sizable increases until late in the year.
Georgia purchasing agents, responding to a survey in November and
December, indicate expectations consistent with a continuing slow economic

Higher prices are unanimously anticipated.

A large and growing

proportion expects no change in delivery times on orders.

A large majority

plans to keep finished good inventories unchanged, while the proportions
expecting larger, the same, or smaller raw material inventories are about

The number of respondents expecting lower production has steadily

declined, while the proportion looking forward to higher sales and profits
has risen.

Employment is reported to be essentially stable, while indications

of constant or declining order backlogs are evenly balanced.

Delivery lead

times are evenly divided between thirty days and sixty days.
In the agricultural sector, lower feed costs offer some hope for
improved conditions to hard-pressed cattle producers, so that the size of the
cattle herd should cease declining.
bright spot in agriculture".

Hog production is described as "the only

Larger supplies of inputs, including fertilizer,

fuel, pesticides, and agricultural equipment, should cause a further slackening of price increases.
ward cost pressure.

However, the higher minimum wage will exert some up-

Food procesing and retailing industries in recent years

have been unable to offset rising costs of fuel, labor, machinery, and
packaging through productivity increases; in the 1950's and early 1960's,
substantial productivity gains helped to limit price


One direc-

tor notes that the average price per ton of sugar cane declined from $47 in
1974 to $15 in 1975 but that this differential has not been felt by the consumer.


Although great caution prevails among business executives and lenders
in the Seventh District, there is general acceptance of the view that activity
will be substantially higher in 1976 than in 1975.

The big news of the past

several weeks has been the strength of retail buying in the Christmas period
and also in the post-Christmas period.

Layoffs of workers are at a much re-

duced rate in virtually all centers, but new hiring is still at a slow pace.
Sales of autos and some other hard goods have been better than expected.
Steel shipments are expected to improve significantly this quarter.


expenditures are likely to remain slow, overall, in the first half.


estate transactions, mainly on residential properties, have increased substantially in recent months.
Despite widespread uneasiness, virtually all observers appear to
accept the view that the general economy will improve throughout 1976, with

gross national product (GNP) up about 6 percent.

Various surveys in-

dicate that the expansion is expected to continue at a disappointingly slow
pace in the first half with a significant acceleration in the second half.
Among the specific recent projections by District business leaders for 1976

airline passenger traffic up 6.5 percent, steel shipments up 22 percent,

color TV up 20 percent, major appliances up 15 to 20 percent, autos up 10 percent, trucks up 20 percent, and housing starts up 25 percent, all in physical

A big boost is expected for recreational vehicles and mobile homes.

None of these projections suggest that new record highs will be achieved.
Producers of most capital goods are very reluctant to offer specific forecasts.
Gains in Christmas sales over year-ago levels were large and exceeded
the expectations of most retailers.

In fact, a number of reports suggested

that sales would have been even stronger if retailers had not"run out of goods".

The post-Christmas period has not witnessed the heavy markdowns noted last

Nevertheless, dollar volume apparently has continued at a relatively

high level.
New layoffs have been at much lower levels in recent weeks than
last year.

However, a larger number of plants than usual were shut down for

two weeks or so of "vacation" over the holidays to help bring inventories into

Most employers are very cautious on new hiring.

One exception is a

major airline, which is actively recruiting new cabin attendants for the first
time in three years.
Sales of new autos were larger than expected in December, but there
was great variation by model.

Some models are virtually out of stock.


2.1 million car production schedule for the first quarter is said to be "very

with a close rein on shipments from suppliers of components.

Motor vehicle employment may rise somewhat further, but unemployment in the
manufacturing centers is almost certain to remain very large.
Demand for major appliances and TV sets was below expectations in
November and December, but some improvement was reported in recent weeks.
Producers are fairly confident of substantial gains in sales in 1976.


ventories are low, especially if sales pick up.
Recreational vehicle (RV) producers enjoyed a surge in orders late
in 1975, as dealers decided to start rebuilding depleted inventories.


of the RV producers who survived the severe "shake-out" of the past two years
are now operating at full capacity.
Steel shipments were low in the fourth quarter, partly because of
the October 1 price boost and partly because of a reluctance to build inventories before the turn of the year.

Orders booked for the first quarter

indicate that shipments will rise substantially, especially for lighter steel
Capital goods producers report some improvement in orders recently,
especially for products that were very depressed last year, such as light
construction equipment and materials handling equipment.

No general turn-

around in capital goods is expected until after midyear.

Many firms are re-

evaluating capital expenditure programs with an eye to cancellations or delays.
Unprofitable operations often have been sold or are slated for sale liquidation.
Retail chains have stepped up closing of marginal stores, especially smaller
stores in older sections.

Auto producers will be ordering a large amount of

equipment to make smaller cars in 1976 and in the next several years, but this
equipment will be installed, almost entirely, in existing plants.
Real estate circles are encouraged by the continued strong inflow
of savings to the savings and loan associations.

Loans are more available,

and prices of existing residential properties have remained firm.

A large

title company reports that its title volume (in dollars) returned to the May
1973 level late last year.
on the West Coast.

Business is weakest in the Southeast and strongest


The economy continues to expand moderately, according to recent
reports from District businessmen.

Considerable optimism and confidence

about further economic gains in 1976 were expressed, although boom conditions
are not expected.

Retailers reported a sharp increase in sales during the

recent Christmas season from year-ago levels, and most manufacturing firms
have experienced improvement in orders.

Construction activity has also

strengthened in recent months, and prospects for construction in 1976 have

Although employment continues to increase and unemployment rates

are somewhat below peak levels in 1975, resource use in many industries remains well below capacity levels.

Bank loan demand remains sluggish, but

demand for mortgage funds at savings and loan associations is reported to be
increasing moderately.
Consumer spending has increased significantly in recent weeks.
Department store representatives described their sales as very good during
the Christmas season.

December sales of a wide range of items were generally

well above year-earlier levels.
sales, and automobile

Appliance dealers noted improvement in their

sales have continued to improve recently, although a

few reports were counter to the general upturn.

Despite the generally brighter

retail picture during the Christmas season, however, some businessmen are not
expecting much strength in consumer durables expenditures this year.
Most manufacturing activity in the District continues upward.
Representatives of the steel, chemicals, metal fabrication, wood, shoe, and
furniture industries reported improvement in business activity, and most of
those interviewed were generally optimistic about prospects for 1976.


craft output is also expected to be strong this year on the basis of private
and government contracts.

In contrast to these reports, a manufacturer of

capital equipment reported orders were on the decline, with not much prospect
for improvement until the second half of the year.

District businessmen in-

dicate that employment has continued to increase in recent weeks.


rates have moderated from their peaks last year in most parts of the District
but remain considerably higher than in previous years.

Most firms also re-

ported rising productivity.
Construction industry representatives have recently become more
optimistic about prospects for 1976.

Single-family home construction has

strengthened somewhat, although building activity is in a seasonal decline
at the present time.

A St. Louis representative of the home-building industry

expects a 20 percent increase in construction of single-family units in 1976.
On the other hand, construction of multifamily units was virtually at a standstill last year.

Government programs aimed at improving this sector are

expected to have only a small impact.
Other kinds of construction are also showing expansion.

Some pro-

jects shelved for the past couple of years, such as shopping centers, hospitals,
and industrial plants, are beginning to move forward again according to construction industry representatives.

It was noted that with the slack in con-

struction, contractors are generally very competitive and are operating on
substantially lower margins than normal.
Financial institutions continue to report rising deposits but only
weak to moderate loan demand.

Bank loan demand remains sluggish, partially

reflecting the reluctance of many businessmen to expand inventories.


and loan associations report moderate loan demand, with demand for financing
older homes the strongest.


Year-end economic indicators in the Ninth District remained mixed.
Consumer spending advanced, but recovery was not evident in the District's
manufacturing sector.

Overall employment increased through the second half,

but growth in the labor force kept the unemployment rate high.

Savings in-

flows into financial institutions were strong, but business lending was weak
and much mortgage lending was being used to finance existing housing.


sumer instalment credit turned up from the low levels of early 1975, and
real personal income growth improved as a result of a slowdown in the rate
of price increase.
from 1974.

Tourist spending was good; auto sales were up sharply

New residential construction was still sluggish.

Cash farm

receipts were up from the first half but down from 1974's pace.
Most retailers say that December retail sales were good.
over December 1975 reportedly ranged from 10 percent to 35 percent.

Many re-

tailers characterized December sales in such terms as "better than expected",
or "very good".

One said that sales during Christmas week were especially

Another reported good sales of big-ticket items.
But not all retail lines experienced strong sales.

Winter apparel

sales lagged until late in the year because of warm weather.

Many retailers

say that consumers were "value-conscious" and "very practical" in their purchasing decisions.

Retail inventories were kept tight through the Christmas

Even retailers experiencing good sales were hesitant to rebuild in-

ventories; many appeared content to run out of some items rather than risk
extensive overstocking.
Consumer spending also appeared strong in the tourist industries,
except in winter resort areas with only light snow covers.

Montana resorts

say that sales of ski lift tickets were good to excellent, and a Minnesota

resort says that current-dollar sales were up 10 to 15 percent over last year.
All auto dealers surveyed by this bank reported better sales than
in 1974's depressed fourth quarter.
than 100 percent.
full-sized models.

Increases ranged from 8 percent to better

Buyers showed renewed interest in both intermediate and
Inventories of automobiles on dealer lots were being kept

at normal or low levels.
There was little evidence of recovery in the District's manufacturing

Manufacturing employment bottomed out in June 1975 and has been

virtually flat since then.

Nonetheless, survey results indicate that manu-

facturing sales expectations are improving.
The overall employment picture was somewhat brighter than in the
manufacturing sector.

Since June, employment has been increasing steadily.

Nonetheless, the year-end unemployment rate remained high due to labor force
The construction sector was giving little impetus to the economic

Home-building activity, as measured by new permits issued, failed

to sustain earlier strength, and total 1975 permits seemed likely to fall
short of even the low 1974 level.

Nor was there much activity in nonresidential

the only bright spot in the District was accounted for by power

and light projects or other public projects.
Gross cash farm marketings held strong throughout the second half
following a slow first half.
slightly below 1974's pace.

At the year-end, cash receipts were running only
Livestock receipts were increasing, but cash

receipts for grain continued to run below 1974 levels.

The record prices

being paid farmers for dairy products have bolstered farm incomes in the

Prices of slaughter hogs and slaughter cattle, though down from

midsummer peaks, are still better than last year.

Feeder cattle prices remain

fairly low, though demand in the fourth quarter picked up somewhat from
earlier rates.
As had been true throughout 1975, savings inflows at District
banks and savings and loan associations remained substantial in the fourth
quarter due in part to high levels of savings in both the consumer and
business sectors.
Business lending by commercial banks in the District closed the year
on a flat note.

Savings and loan associations' mortgage loans made and loan

commitments rose sharply during the year, even though new home construction
remained depressed.

Much new mortgage lending was apparently being made on

existing housing; another factor was a higher rate of spending on home improvements .


Judging from the responses of bankers and of manufacturers'
purchasing agents, little has developed of late in the economy that
gives cause for either excitement or concern.

Bankers once again report

flat loan demand except for seasonal increases.

Over the first quarter,

they expect real estate loans to weaken, consumer loans to improve
moderately, and business loans to change little.

They see continued

strong consumer saving and moderate business saving.

For some responding

bankers, this all adds up to further declines in interest rates, although
others foresee small increases in the coming months.
inventories from purchasing managers is "low".

The word on materials

Buyers for major manufacturers

expect to be able to find materials easily this year at prices pretty near
where they are now.

With a heavier collective bargaining calendar ahead,

the usual preliminaries to negotiations have picked up, but little talk of
strikes is heard.

In the agricultural sector, the cattle feeding and hog

industries are expanding, so that supplies of beef and pork are likely to
Purchasing managers plan to hold down inventories of all materials
in the year ahead, reflecting their expectations of plentiful supplies and
only modest price increases in 1976.

Without exception, buyers are sticking

to very tight inventory control policies.

A sample of responses: "We are

keeping our inventories as low as we possibly can" (luggage, folding furniture);
"our inventories are very tight although we expect a great year" (audio and
visual tape equipment); and "we dropped our materials inventories way down
last year and we will keep them there"

(greeting cards).


agents expect price increases to average between 5 and 6 percent.
the future trend of petrochemical prices as the big question mark.

They see
The prices

of textiles, expecially cotton, will rise at double-digit rates, say the agents,
and plastics will show sizable gains.
papers and metals.

But only minor increases are expected in

Said one purchasing manager, "Aluminum has just gone up

5 percent, but they may not be able to make that stick".

The buyers see no

crunches developing in materials, citing "excess capacity" and "soft markets"
in most supplies.
The local bargaining calendar, as well as the national, is heavier this

The contract of a local carpenters' union expires April 1.

carpenters in two states are affected.

About 6,000

The union spokesmen already have begun

jockeying for bargaining position, with statements like "we are now behind with
the crafts".

Contracts with utility workers are due to be renegotiated later

this year, with higher rates a foregone conclusion.

The upcoming auto

negotiations will affect 10,000 workers at three major plants in the Kansas
City area.
Recent reports continue to provide evidence of a strong expansion
in the cattle-feeding industry.

As of December 1, the seven major feeding states

had 25 percent more cattle on feed than a year ago, due largely to a 47 percent
increase in November placements.
entered the expansion phase.

Furthermore, the hog industry apparently has

Hog producers recently reported that they plan

to increase December-May farrowings by 8 percent above year-ago levels, the
first such increase for this six-month period since 1971.

These developments

signal a return to larger red meat supplies during the second half of 1976.

although a likely reduction in nonfeed cattle marketings will temper the increase
in beef output.

Livestock prices are presently relatively low and may stay

that way, but the significant drop in feed costs during the past year should
permit producers to expand red meat output at a profit.

Tenth District bankers report little change in loan demand in

Business loan demand increased seasonally with gains in loans

to retailers, agribusinesses, and others.

Few bankers expect any marked

improvement in business loans in the first quarter of 1976.

Consumer loan

growth in December was also about seasonal, but signs of a pickup are
appearing in loans for autos and other consumer durables.


improvement in consumer loans is expected in the first quarter.


weakness in real estate loans, however, is anticipated as existing projects
near completion.
Bankers expect either further declines or only small increases in
market interest rates in coming months.

Because of this and their belief that

consumer spending will rise only moderately, most expect continued strong
inflows of consumer savings. Moderate inflows of business savings are also

Reflecting these expectations, the bankers contacted are not

attempting to lengthen further their CD maturity structures at this time.


The year-long recovery in department store sales in the Eleventh
District was capped by a big surge in Christmas buying.

Most merchants

found December sales far exceeded their earlier expectations and, as a result,
unit sales were up significantly.

Sales statistics were especially robust

in Dallas and Houston, where many outlets reported sales revenues were up a
fifth or more from a year earlier.

In general, stores selling better quality

merchandise recorded the biggest sales increases.
sales were abnormally high.

Retailers also noted cash

For example, many stores reported half their sales

were in cash, or more than twice the normal share.

The current wave of buying

is expected to continue into spring, with merchants expressing sales prospects
as good to very good.

Current inventory levels are generally considered to be

adequate in light of current sales forecasts.
Lending activity at District savings and loan associations continues
to increase.

The volume of mortgage loans rose steadily last year, and loan

officers expect continued growth throughout 1976.

In addition, several associa-

tions recently reported substantial increases in interim construction lending
to home builders.
Mortgage lenders see no letup in the strong pace of savings inflows
that they have experienced since early 1975.

Thus, they expect to be able to

accommodate increased loan demand without tightening lending terms.

In fact,

nearly half of the associations contacted predicted conventional loan rates
will drop a quarter of a point by April.

A leveling-off

in the overall cost

of savings also eased the upward pressure on loan rates, as maturing certificates
of deposit are being rolled over at substantially lower interest rates.
Mortgage lenders expressed optimism that their cost of funds would remain relatively stable throughout the year.

Changes in the petrochemical industry are having diverse effects
on capital spending by the District's largest industrial complex.


the rollback in domestic oil prices, the drilling boom and heavy demand for
oil field equipment should continue in 1976.

Manufacturers of this equipment

are operating near peak capacity and plan to step up outlays for plant and

Two large equipment producers have announced major plant expansions,

while several other firms will modernize existing facilities.
Chemical producers will also continue to invest heavily.


chemical plants valued at an estimated $3 billion are currently under construction on the Texas Gulf Coast, the strength of the current recovery is
expected to strain existing facilities by the year-end.

Capacity utilization

by the largest chemical firm, for example, is expected to reach 84 percent,
up from 72 percent in early 1974.

When capacity utilization was above 85

percent in 1973, widespread production bottlenecks occurred.
Investment by refiners, on the other hand, will be below last
year's level of spending.

As a result of higher costs for petroleum products,

particularly gasoline, refiners see a long-term flattening-out in demand for
many refinery products, and this has led to the downward revision in future
refinery capacity needs.
past few years

A number of expansion projects announced over the

have been canceled.

Moreover, a sizable share of this year's

outlays are for pollution-abatement equipment rather than for expanding
production facilities.
Although steel manufacturers are planning large capital outlays
in 197 6, most spending will be to comply with EPA guidelines, rather than
for much needed improvements in production facilities.

The District's largest

producer, for example, will not spend anything for "productive purposes"
this year but will continue to sp^nd $1 million a month for pollution-control


A Fort Worth mill scrapped plans for a new furnace but will lay

out $3 million for pollution-abatement equipment.
A recent severe cold snap forced natural gas utilities to cut off
supplies to low-priority industrial users throughout a wide area of the

Gas supplies to high-priority customers, such as residential

and commercial users, were largely unaffected, although schools were forced
to close in one large service area.

Almost all of the industrial plants

affected by the cutback in gas service were able to switch to standby energy
supplies, and very few facilities opted to shut down their operations

With a return to more seasonable temperatures, full gas service

was restored to all customers.
Placements of calves in Southwestern feedlots were up nearly 50 percent in late 1975 over the level of the year before.

But bankers engaged in

financing cattle feeders expect placements to fall throughout the first half
of 1976, because feed cattle prices have continued to edge downward since

In the past, declining prices would have only a modest effect on

placements, since many feeders would speculate that prices might improve while
their calves were on feed.

But following the turbulent developments in the

industry during the past two years, cattle feeders and their bankers are much
more cautious.

A shortage of feeders' calves is also expected to hold down

future placements.

Fall and winter grazing has been extremely limited, forcing

ranchers to market or slaughter calves earlier than normal and thus laying the
foundation for the future shortage.


In the opinion of our directors, the recovery is proceeding unevenly,
with caution still the common attitude.

Even though the strong burst of holiday

consumer spending was in line with sales expectations, the pickup in new orders
has been slow, especially for forest products and transportation equipment.
A brighter pace of activity is reported in the food-processing, chemicals,
steel, and petroleum industries.

Agriculture is doing well, with lower feed

costs reversing the profit picture for calf-cattle operators.

Twelfth District

banks have recently experienced good business loan demand in the fields of
energy, utilities, agriculture, and consumer finance.
Retail sales rose to all-time highs in many areas over the holidays.
Demand for new automobiles was exceptionally strong, and the market is expected
to remain active.
last month.

One large food chain reported that it ran short of inventory

Cautious inventory policy continues to hold sway, however, as re-

tailers attempt to assess consumer sentiment.
On the industry level, inventories are reported to be back to normal
rates except for wood pulp where a large overhang


Demand for forest

products as a whole bottomed out in April-May 1975 and is now showing slow

as it responds to orders from the construction industry.

area of concern is the manufacture of aircraft.


A director from Boeing Co.

reports that his company laid off some 8,000 people last year, despite the
fact that it sold over half the share of market on commercial jets, 75 percent
of which were sold overseas.

A decline in new orders for commercial jets has

prompted a significant cutback in plant and equipment expenditures for 1976.
On the other hand, business is expanding at satisfactory rates in the food
processing, chemicals, steel, and petroleum industries, although all express

concern over rising costs.

Demand for aluminum is increasing at a modest

rate, and a director reports that aluminum shipments in 1976 are expected
to be 30 percent higher than in 1975.

The same director anticipates plant

and equipment expansion of 25 percent this year.

Copper demand, however,

remains in the doldrums.
The construction industry appears to be looking forward to another
slow year.

In southern California, expenditures are expected to be off 5 to

10 percent from 1975.

Although improvement in residential construction has

been anticipated, there have as yet been no signs of a pickup.
materialsf however, are steadily on the rise.

Costs of

In Orange County, California,

the average home sale price increased to $55,950 by the end of 1975, up
$5,120 from the first quarter of that year.
For agriculture, the 1976 outlook has improved because of cheaper

The cow-calf operators are on a break-even level.

Some profit is being

shown in feeder cattle, and feedlot operators have picked up a substantial
part of their last two years' loss.

There is great demand for farm land-develop-

ment money which is used for clearing land, irrigation water, sprinkler systems,
and operating expense.
Overall loan demand by business has held steady over the past two
months, as increased cash flow lowered borrowing requirements or resort
was made to the commercial paper market and because of cautious inventory policy.
Consumer and mortgage loans are increasing in number and size.

Special areas

of recent strength in business loan demand would include energy, utility,
agricultural and consumer finance industries, whereas general nanufacturing
and other industries, particularly transportation, have continued static or
have shown recent weakness.

Concerning banking as an industry, a director from the West's
largest bank predicts that 1976 will probably be the worst year from a profit
standpoint since the depression.
banks will have to cut dividends.

There is speculation as to just how many
Price-earnings ratios will stay down, making

if difficult for banks to access the equity market.

The slower growth pattern

envisaged for the economy as a whole should help the industry in working out
its problems.

However, this director cautions against backing away from loans.

He favors greater emphasis on determining the quality of the loan and pricing
it according to its risk.