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Prepared for the
Federal Open Market Comalttee
by the Staff

May 9, 1973


In May, as in April, the 12 Redbook reports paint a picture of
an overheated economy that retains strong upward momentum.

Concern over

inflation and the impact that increases in the cost of living will have
on union negotiations is reported by several banks.

Shortages of materials

and manpower are widespread and are growing worse. Agricultural areas in
the Midwest and South have been hard hit by heavy rains and floods. Capital
expenditure programs are gathering strength in all districts.

Some banks

reported views of respondents who believe that real GNP will rise at a
slower rate in the second half because of declines in residential construction and in purchases of consumer durables. The business loan increase has slackened in major centers, but credit growth, overall, continues at a rapid pace.
Most banks found capital expenditures gathering strength. A
group of Cleveland economists expects gains in capital outlays to continue in 1974, with the year as a whole up 10 percent from 1973. San
Francisco found commercial aircraft orders up sharply. Atlanta listed
major new projects in a variety of fields. Philadelphia could find no
firm that was reducing capital outlays.
Most banks commented on growing stringency in local labor markets. Only Boston was worried about continued high rates of unemployment.
In the Chicago district, employment standards have been lowered and
training programs have been reactivated.
Shortages of materials and components were emphasized by Boston,
Chicago, Richmond, New York, and Minneapolis.

Tight supplies of oil

[Asterisk: Prepared at Federal Reserve Bank of Chicago.]

products, steel, nonferrous metals, electricity, lumber, and components
and shortages of freight cars were holding down increases in output.
Cleveland, Richmond, and St. Louis reported that manufacturers' inventories of finished goods were being reduced to meet customer demands.
Consumer purchases remain at very high levels everywhere, but
a number of businessmen in the New York and Cleveland districts believed
that consumers were buying in advance to beat price increases.

Sales of

autos and appliances, at least, were thought to be at unsustainable levels.
Gasoline shortages were emphasized by Atlanta, Chicago, and

Dallas reports output of crude oil to be declining despite

the elimination of controls.

Persian oil has been brought to the Texas

area for the first time.
Host banks appear to accept the view that residential construction
will decline significantly in the second half.

But a number of banks,

Including Minneapolis, New York, and Atlanta, found that the residential
sector remains very strong currently.
The agricultural situation probably has never before received as
much space in the Redbook reports. Heavy rains have slowed plantings in
the Kansas City, St. Louis, Chicago, Dallas, and Atlanta districts.
Francisco reports a drought in the Northwest!)


Plantings of corn, soy-

beans, cotton, rice, and sugarcane all are behind schedule.

In addition,

beef supplies have been held down by losses of cattle, poor gains in weight,
and the recent order to stop use of the DES hormone drug that stimulates

But farmers are generally optimistic about Income prospects. Pur-

chases of farm equipment are at very high levels, and farmland values in
the Corn Belt have Increased by a record amount in the past year.

Some banks reported slower growth In business loans, but loan
growth, overall, continues at a rapid pace. Upward pressures on shortterm Interest rates continue.

Funds for farm, consumer, and residential

mortgage loans remain in good supply.

One Boston professor expects con-

tinued strength in activity because of rising capital expenditures, while
another expects slower growth because of reduced consumer demands. Both
professors think the situation calls for a tighter monetary policy.

SUMMARY page i
First District - Boston page 1
Second District - New York page 4
Third District - Philadelphia page 8
Fourth District - Cleveland page 10
Fifth District - Richmond page 13
Sixth District - Atlanta page 15
Seventh District - Chicago page 18
Eighth District - St. Louis page 22
Ninth District - Minneapolis page 25
Tenth District - Kansas City page 28
Eleventh District - Dallas page 31
Twelfth District - San Francisco page 35


Our directors stress both that new orders are very strong and
that there are difficulties in getting supplies because of the overheated economy.

Industrial price Increases are seen as reflecting a

demand-pull overheating in those sectors of the economy outside of
Phase III controls.

Despite buoyancy in some sectors due to the na-

tional recovery, unemployment rates in New England averaged 6.2 percent, seasonally adjusted, in February.
The prime growth area is currently industrial capital goods.
The machine tool industry Is doing very well.

The long lead times

Involved In this industry and the high orders and backlog levels ensure
continued strong activity

in 1974. One large conglomerate manufac-

turer notes that despite heavy orders, Inventory levels have risen only
about 7 percent over the last year.
Consumer durable manufacturers Indicate excellent business, but
there is some concern that the gloom in the stock market will affect
buying in 1974.
A bank director from a large Boston bank reports that money is
not as tight as it was a month ago and loans have been lower than projections since early April.

This director felt that the 7 percent prime

rate simply represented a catch-up and that the prime should be 7 1/47 1/2 percent. He did not foresee a credit crunch because he felt that
there were plenty of long-term funds around. A director associated with
an insurance company also expressed the opinion that there was a large
amount of Investment funds available, and that this would moderate increases in long-term rates.

The unemployment picture In New England is not Improving at the
same: pace as nationally.

In 1972, of the seven states with the highest

unemployment rates, three were in New England.

In Connecticut, the

unemployment rate in March fell to 5 1/2 percent, but this was due to
declines In the labor force which are not expected to be permanent.
In Massachusetts, the unemployment rate in February was 6.7 percent, seasonally adjusted, and the unemployment rate in Boston, which has been
rising for over a year, is 6.4 percent, up from 5.8 percent a year ago.
Of our regular academic correspondents, only Professors Samuelson and Eckstein were available for comment this month. Noting the
strong first quarter and citing the very strong McGraw-Hill survey results, Samuelson expressed considerable skepticism about the consensus
forecast of svibpotential real growth by the fourth quarter. All of
the risk lies on the upside.

Thus, he explicitly rejected a policy of

easing off now "as a prudent way of forestalling a mini-recession."
Nevertheless, in light of the unanimity of the view that a significant
slowdown in real growth will occur, and the view of some that there
will be a recession in 1974, Samuelson suggested a moderation in the
degree of tightness.

In contrast to last month's recommendation of a

monetary growth rate of less than 3 percent for the next two months, he
advocated a rate of 4 percent for the next two months. He added that
short: rates should be permitted to rise and that the FOMC should remain ready to go back to a tighter policy should the signs of weakness
not materialize.

As a supplement to monetary restraint, he suggested

serious consideration of direct qualitative controls on instalment
sales credit. He also believed that some squeezing of the housing sector "Would not be bad," and expressed the hope that monetary tightness
would not be largely offset by FNMA and GNMA.

Professor Eckstein states unequivocably that "this cycle is at
Its top; It's just a question of how it will turn down." The downturn
will center In the housing sector and in auto sales. By year-end, auto
sales will be down to 11 million units and housing starts to 2 million.
Eckstein argues the housing starts figures have been held up by unseasonably good weather in the north central and northeast areas; he feels
there is now a glut of new single-family homes as attested by the high
level of the stock which is unsold.

He feels there is mounting risk of

a credit crunch, and in fact suggested we may be two months into a
crunch. Here he points to the outflows of funds from savings institutions and to the high volume of long-term commitments by life insurance

Life insurance companies report they are now as vulnerable

as they were in 1966, i.e., more vulnerable than in 1969. Eckstein
grants that the price outlook is "murky," but argues it is not primarily
a matter of generalized excess U. S. aggregate demand since much is
attributable to the worldwide boom.
a restrictive policy at present.

Eckstein finds no way to justify

Policy actions must be based on some

forecast, so that policymakers must either accept the unanimous forecast that the economy will slow, or base their policy on a pure guess.
For the near term, Eckstein would focus attention on interest rates,
where he feels to permit the federal funds rate to rise to 8 percent
for a week or more would be "a colossal error."


According to Second District directors and other business leaders
contacted recently, consumer spending continues strong, in part stimulated
by expectations of higher prices.

Residential construction also remains

at a high level, on balance, although signs of tapering off have emerged.
Shortages of raw materials, of energy, and of some semi-finished and
finished products appear to be growing.

The further recent devaluation

of the dollar, combined with the previous devaluation, in general was
expected to bring about an improvement in the country's international
trade balance.
Most respondents reported continued strength in consumer spending despite increased consumer uncertainties regarding the economic outlook „ notably a growing concern over inflation.

It was the consensus of

the Buffalo branch directors that the deterioration in consumer confidence
had in fact been reflected in a "rather broad-based" increase in retail
sales, which some of the directors viewed as an attempt by consumers to
"beat" anticipated price increases.

In the case of automobiles, the

desire to avoid paying for the additional safety and pollution-control
devices mandated for 1974 was noted as a factor pushing up current sales.
The president of a large nationwide chain of retail outlets stated that
despite surveys showing a decline in consumer confidence, retail sales
continue very strong, with sales of durable goods leading the way. And
the president of a chain of department stores in the New York City area
similarly reported a good demand for durable goods, which he also linked
to a desire to avoid paying anticipated higher prices.

This respondent,

however, felt that in general the pickup in business on the East Coast
was lagging behind the national performance.

The respondents in general continued to find the homebuilding
picture strong although a number saw some evidence of a tapering off.
A Rochester banker, who reported construction in his area was still
booming, said that there has been a significant shift from apartment
building to condominium and town house construction, and that construction of single-family residences was proceeding at an active,
but more selective pace.

The chairman of the board of a multinational

oil corporation and the president of a large nonferrous metal-producing
corporation both reported they saw no evidence of a cutback in residential construction.

A senior official of a large Rochester multi-

national firm, however, reported some decline in residential building,
characterizing last year's national high housing start rate as "not

Another director felt that the housing boom gave in-

dication of tapering off.

In regard to nonresidential construction,

an upstate banker mentioned the high level of commercial construction
that was still related to the rebuilding of businesses destroyed by
Hurricane Agnes last June.

However, a New Jersey banker reported a

glut of office space in his area, while the president of a New York City
real estate firm reported that at least 20 million square feet of commercial and industrial building space was currently vacant in the city.
As in recent previous months, the respondents referred to a
growing list of shortages of certain resources.

The official of the

Rochester multinational firm stated that raw material shortages were
widespread, including such items as wood products, coal tar derivatives, and other products.

A Buffalo manufacturer expressed concern

that a period of tight supply was imminent, as evidenced by the fact
that his firm was being confronted with 20- to 30-week lead times for
many raw material items.

A New Jersey banker reported inventories

of firms in his area to be low, with six- to eight-month delivery
times for new orders.

The owner of a large upstate agricultural enter-

prise mentioned a shortage of protein in all forms, which was increasing
the cost of feed items for poultry and livestock.

A number of respon-

dents commented on the petroleum products shortage.

According to the

chairman of the international oil company, worldwide supplies of crude
oil remain tight, and U. S. production of fuel oil has peaked and is
expected to decline.

The recent relaxing of oil import restrictions

should help, but he felt that environmental controls were hindering
domestic output.

Similar sentiments were expressed by a senior official

of a firm producing a wide variety of petroleum products.

The president

of the nonferrous metals producer noted that power shortages in certain
areas were adversely affecting aluminum output.
The dollar devaluation was viewed as likely to improve this
country's international trade position, both on the import and export

True, the higher dollar costs of oil and nonferrous metal imports

were cited as adverse factors.

The New Jersey banker, however, said that

export sales have increased substantially—although he felt it was difficult to estimate the extent of the basic improvement due to price increases and sales to Russia and China.

The Buffalo branch directors

generally agreed that the exchange rate realignments would have a
"positive" impact on our trade bal?~ice.

One director specifically men-

tioned that a Rochester machine tool firm, which exports about 70 percent of its output, now expects its overall sales to increase substantially.

On the import side, the president of the. large nationwide

chain of retail outlets expected the devaluation to slow the growth in
the dollar amount of imports of his firm.

He stated that in terms of

cost, the balance had now been swung in favor of certain domestic goods,
for example, some types

of consumer electronics.

Also, a Buffalo di-

rector felt the devaluations have made it easier for this country's
automobile industry to compete with imported cars.

He also noted that

the domestic shortages noted above in part reflected a switch by many
buyers from foreign to domestic sources.


General business conditions remain favorable in the Third District.
Production activity is maintaining strength and is expected to keep on
its present upward course.

Etaploymer.t opportunities are holding fairly

steady this month but are expected to increase as production continues to

Inventory investment is stable at present levels, while increases

in capital expenditures are planned at many fims.

Bankers cite rapid

growth of consumer loans as a bright spot in otherwise flat loan demand.
Deposit levels remain unchanged at most banks.

On the dark side, however,

inflationary expectations remain high.
Continued strength is evident in production activity.


seven percent of the respondents to this month's Business Outlook
Survey of Manufacturers in the Third District report increases in their
sales; 59 percent report increased shipments.

Only a small minority of

the local manufacturers are currently experiencing production cutbacks.
On the six-month horizon, the increases are expected to continue, with
over 40 percent of the respondents anticipating both increased sales and

Employment in the Third District is generally holding steady.

Over 70 percent of the firms sur\eyed report no change in their number
of employees, and almost 80 percent said that their average workweek had
not changed.

Looking ahead, anticipated production increases in the

months ahead are prompting a small but increasing minority of firms
to plan increases in the average workweek.
Capital expenditures plans remain steady at last month's reported
high level; over 40 percent of the firms contacted expect to increase

No respondents intended to cut back plant and equipment spending.

Half of the area respondents are holding current inventory investment
levels constant and anticipate no changes in the coming months. The
remaining businessmen are equally divided between increasing and decreasing inventory for both the current month and six months from now.
Upward price pressures continue high, with virtually no relief
expected by local businesses.

Over two-thirds of the respondent firms

cite increased raw materials costs. The majority reported no change
from last month in the prices they charge.

But during the next six

months, over 65 percent of the firms contacted fear rises in both the
prices they pay and prices they charge.
Area bankers report that overall loan demand continues near the
same levels as in past months.

Consumer loans are mentioned as the fast-

est growing category in the past month by several Philadelphia banks.
Business loans and real estate loans are flat at the banks which were

But business loan demand for plant and equipment spending

is expected to increase in future months according to several bankers.
Deposits at most banks are about flat.

Checking accounts, low interest

savings accounts, and other deposit categories which are not sensitive
to interest rates are reported holding steady at most banks.

But time

deposits paying Regulation Q interest ceilings are being closed out to
purchase U. S. Government bonds at some places.

One banker said this

disintermediation is not yet a real problem because loan demand is
currently steady.

However, he said strong loan demand would tighten

credit rapidly and cause a credit crunch.


The consensus of about 40 economists—primarily from major
industrial firms and commercial banks in the district—who attended the
Fourth District economists round table meeting at the bank on May 4 is
that both the rate of real growth and the rate of inflation will moderate
beginning in the current quarter.

The economists project real growth

to be less than 4 percent during the second half of 1973 and the rate
of Inflation to average about 4 percent.

Looking ahead to 1974, there

was general agreement that there would be sufficient strength in
capital spending to prevent an outright recession, although the consumer
and housing sectors would weaken.
The median forecast of the economists indicates gains in GNP
of $29 billion, $24 billion, and $23 billion during the second, third,
and fourth quarters, respectively (and a GNP of $1,275 billion for the

The projected slowdown in economic activity is based largely on

the expectation of progressively smaller gains in personal consumption.
Most of the economists hold the view that part of the exuberance in
consumer spending during the first quarter reflected buying in anticipation of higher prices—particularly for autos, but for other durable
goods as well—and therefore represented some borrowing against future

Other factors suggesting a retrenchment in consumer spending

include the waning impact of Income tax refunds, a slowdown in real
spendable earnings, the recent explosive rise of instalment credit which
is increasing the burden of debt repayment, large stocks of durable goods

in the hands of consumers, and the dramatic deterioration in consumer
confidence that has occurred in the past few months.

There was unanimity

among eight economists whose firms depend heavily on the auto market
that new car sales, both foreign and domestic, would decline during the
second half.

The median forecast for the year calls for total sales of

11.3 million units, compared with a rate in excess of 12 million units
thus far this year.

A projected decline in residential construction

during the second half is expected to contribute to a slowdown in sales
of appliances and household furnishings.
The business economists were conservative with regard to prospects for inventory investment; the median forecast calls for the change
in business inventories to reach a $12 billion rate by the third quarter,
and then level off.

Economists from the steel industry reported that

steel users have been accumulating inventories of steel products in
recent months, but that some liquidation would occur during the second
half in response to the projected slowdown in consumer durables.
Gains in nonresidential fixed investment are projected to
slow somewhat during the remainder of the year.

Current high operating

rates in certain industries could begin to constrain the rise in plant
and equipment spending.

Although the economists discussed some negative

factors in the investment outlook for this year and next (such as proposals to eliminate the investment tax credit, belief that monetary
policy would remain tight through mid-1974, and poor prospects for equity
markets which may adversely affect investment decisions), there was general
agreement that the capital spending boom would continue throughout 1974.
Recent environmental legislation and the Administration's energy policies
should have a positive effect on manufacturers of pollution-control equipment
and on domestic investment in the petroleum industry, and gas and electric

utilities .

(Economists with the rubber and steel industries, for

example, noted that outlays for pollution-control equipment would
absorb roughly one-quarter of capital spending in their industries
next: year.) The business economists projected a gain in capital spending on the order of 10 percent for 1974.

(One of our industrialist-

directors Informed us that orders for machine tools produced by his
firm are strong, but that some traditional big buyers—autos, steelusers, and firms producing equipment for public utilities—are not buying

They appear to be keeping a strong hand on purchases of new

equipment in view of their concern over the economy in 1974.)
At the round table meeting, a number of economists spoke of a
"Growth Recession" in 1974, but nobody forecast a classical recession.
Median estimates of 21 economists submitting forecasts for 1974 showed
real growth of 3.6 percent, a price rise of 3.8 percent, and an average
unemployment rate of 4.8 percent.
A staff member from the CEA also attended the meeting and told
the group confidentially that, whereas six weeks ago the council was
forecasting close to a zero rate of increase in retail food prices by
year-end, recent adverse developments have caused him to expect a 3 to 5
percent rate of increase by year-end.


Results of our most recent survey of district businessmen and
bankers show further advances in business activity during the past

A majority of the manufacturing respondents reported increases

in shipments, backlogs, and new orders.

Inventory levels declined and

are at somewhat lower-than-desired levels given current sales prospects.
Loan demand continues at a very high level.

In particular, banks ap-

pear to be experiencing a brisk demand for business loans. Survey
results and other contacts with district businessmen indicate that a
high level of optimism concerning the economic outlook prevails.
Responses from manufacturers indicate that the district economy
continues to advance at the robust pace evident in recent months.


stantial gains in shipments, new orders, and backlogs were reported by
survey respondents.

The level of optimism among manufacturing respon-

dents concerning the general economic outlook appears to be quite high.
Manufacturing inventory levels reportedly declined further since
the last survey, and for the first time in several months inventories
were reported to be at somewhat lower-than-desired levels.

Retail re-

spondents Indicated that Inventory levels were in line with sales prospects. Most manufacturing respondents believe that current plant and
equipment capacity is inadequate in view of sales prospects.
The level of employment in the district continued at recent
high levels, with a slight Increase over last month.

Reports from most

areas of the district indicate that the labor situation remains very

Both trade and service and manufacturing respondents reported

an increase in hours worked per week. New plants locating in the

district continue to be a major factor providing employment.

In Virginia,

for example, plans for 28 new plants employing a total of approximately
3,000 people were announced during the first quarter of 1973. Labor unrest and stricter federal health and safety requirements have adversely
affected employment and output in district coal mining.

Wage and price

increases were widespread, with more than one-third of manufacturing and
trade and service respondents reporting increases.
Respondents from all areas of the district reported increases in
retail sales.

More than 50 percent of the banking respondents indicated

that retail sales had Increased in their areas, and all retail respondents indicated that sales were up.
Business and consumer loan demand is especially strong in the
district, with more than one-half of the banking respondents reporting
increases in these items.

Increases in the demand for mortgage loans

were also reported, but the demand for this type of loan does not appear to be as strong as that for business and consumer loans. Even so,
more than one-third of the banking respondents reported that residential
construction had increased in their areas. Activity in nonresidential
construction also remains brisk.
Farm real estate values per acre jumped 12 percent during the
year ending November 1, 1972, scoring the sharpest advance since 1951.
Higher farm prices and delayed marketings of many 1972 crops combined
to bring about a 25 percent Increase in January-February cash receipts
from farm marketings.
Businessmen and bankers remain optimistic about the general
economic outlook.

More than one-half of the banking respondents expect

Improvement In business conditions in their areas in the next two or
three months.


General economic activity Is expanding rapidly, and businessmen Are optimistic about the near-term outlook.

A pickup In planned

commercial construction and plant and equipment outlays continues.
Adverse weather conditions have caused severe damage to some crops
and have hindered planting.
The outlook for commercial construction continues to improve.
Still another huge project has been proposed for downtown Atlanta.
The $150 million project would include high-rise residential and commercial buildings and a 1,000-room hotel. Other recent announcements

a $70 million commercial and residential complex in Nashville;

a $25 million residential and commercial complex in Macon, Georgia;
a $12 million civic center In Huntsvllle; a $10 million office tower
and parking garage complex in Chattanooga; a $10 million naval training complex In Meridian, Mississippi; a 25-story hotel In Nashville;
a 14-story hotel in an Atlanta office park; a $4 million bank building
in Montgomery; three new shopping centers in middle Tennessee; and two
$1 million motels and a $1 million shopping center In east Alabama.
The growth of residential construction may be slowing, but
activity is at a very high level. A $100 million planned unit development is slated for the Miami area. A $2.5 million apartment complex
is planned for east Alabama, and a $2 million apartment complex is
planned for Jackson, Mississippi.

In spite of a 63 percent gain in

residential building permits in the Jackson area in 1972, Interest in
constructing additional units in that area is still reported to be


A Louisiana businessman reports that factory production of

building materials such «s cement and brick ace up, and that the demand for lumber is causing some producers to plea, new mills and expand
existing ones.
There continues to be a large number zi announcements of plans
for new plants or expansions. The breadth of the recent announcements
is indicated by the following list of projects;

t saw $50 million paper

mill for north Alabama; $50 million in expansions of existing paper mills
in north Alabama; an $18 million airplane maintenance facility in Atlanta;
an $1.1 million plywood mill in north Alabama; a $10 million plywood plant
in south Georgia; a $10 million soybean-processing plant in central
Alabama; a $5 million expansion of a filter production plant in east
Tennessee; a plant to make aluminum castings in Mobile, Alabama; a $4 million shipping container plant in Jackson; a $3.2 million expansion of an
electrical equipment plant In Atlanta; a $2.3 million carpet finishing
plant In north Georgia; and a $1.6 million plant that will manufacture components for automatic transmissions in central Alabama.

A chemical firm

has purchased an option to buy 1,500 acres on the Georgia coast as a
site for a plant that would eventually employ 600. A vacant manufacturing
facility in Alabama, purchased by a nationally known firm, will eventually employ 750 after conversion. Two companies are reportedly considering locating oil refineries in Lake Charles, Louisiana.


large electrical generating plants have also been announced In the last
The strength of the district economy is reflected in state
revenue collections.

Florida sales tax collections in March were 16 per-

cent above a year earlier, and Tennessee collections in the first three

months of 1973 were 15 percent above a year ago.

In the first ten

months of fiscal 1973, Georgia's tax collections were running 14 percent: above a year earlier.
Gasoline shortages have plagued Independent retailers in
Georgia; Sears stores In the Atlanta area have begun limiting sales
to ten gallons per customer and have reduced the hours that pumps are
open. The metropolitan Atlanta rapid transit authority has finally
succeeded in obtaining a one-year fuel contract, but at increased cost.
Fuel shortages are also reported to be responsible for reductions In
fertilizer production.
Adverse weather conditions have caused severe damage to crops
and hindered planting.

Heavy rains and flooding severely reduced rice

planting In Louisiana and will also reduce cotton, soybean, and sugarcane production in that state.

Flood waters have also contaminated

Gulf Coast oyster beds and forced the closing of hundreds of gas and
oil wells. Weather conditions have destroyed one-half of Georgia's
peach crop and one-third of its apple crop. Heavy rains In south
Georgia have severely damaged corn and tobacco In some areas and have
hindered the harvesting of pulpwood.


Virtually all sectors in the Seventh District are continuing
to report rapid gains in orders, output, employment, sales, and profits.
In many cases, these increases have been well above earlier projections
that had been deemed optimistic.

Many businessmen view the strength

of demand as excessive and unhealthy.

Output would be higher in a

wide variety of hard and soft goods lines were it not for capacity
and manpower limitations.

Although meat prices have edged down, al-

most all other prices are rising and are expected to rise further.
Capital expenditure plans are being revised upward.

Some observers

expect a slowing in economic growth in the second half, but these
views are not generally supported by information on shipments and

Field conditions have slowed plantings to a marked degree.

Business loan growth has eased significantly, but, overall, demand for
credit remains very strong.
Two exceptions to the extremely robust picture are motor home
output and airline traffic.

The largest producer of motor homes (in

Iowa) has cut production sharply because sales, although substantially
above last year, have been below expectations.

(This development is

not to be confused with the situation in mobile homes where, in contrast to weakness expected by some analysts, shipments have been far
above last year's record.) A major airline finds that growth in
traffic this year has only been about half as great as the 10 percent
year-to-year rise expected earlier.
Demand for labor continued to rise throughout the district,and
labor shortages are reported almost everywhere—even in Detroit.


firms have reopened training centers shut down in 1969 or 1970.


many factories, average weekly hours are about as long as can be scheduled effectively.

Absenteeism and turnover have increased.

standards have been lowered.


New hires of many large firms include a

large proportion of veterans, minority types, and women in an attempt
to fill prescribed quotas ("quantified objectives").
Union demands are expected to go far beyond the guidelines in
most negotiations.

Six months ago, union leaders were telling truck

drivers that little, if any, basic wage boost would be sought.


demands are for an 8 percent rise in wages and a variety of other items
that are said to add up to a 20 percent first-year boost.

Steel in-

dustry executives appear to believe that the arbitration agreement
will permit a settlement in 1974 without a strike or an inventory
buildup, but this may simply mean that steel will follow the pattern
set in the auto industry without a fight.
Responding to a special question, 40 percent of Milwaukee purdiasing managers said recently that material shortages will severely
reduce ability to produce by midsummer.

The most serious problems

involve fuel, electricity, steel, castings, fasteners, and wood.


all areas, buyers continue to report lengthening lead times, and in
recent months they have noted a sharp deterioration in overall vendor
reliability and in quality of items received.

Almost all are paying

higher prices each month for some major items.
The gasoline and fuel oil supply problem has worsened with
supplies curtailed or shut off to independent dealers and distributors.
State governors are calling for emergency measures to meet farm needs.
Lead times on all types of steel have lengthened further, and
new orders for hot and cold rolled sheet are now scheduled for delivery

in August and September.

A Chicago-area mill that expects to operate

at capacity through the year is attempting to arrange vacations to reduce the slimmer decline in output.

There is no way to increase steel

output in the near future because of limitations of basic facilities,
especially slabbing mills.

Steel users appear to be building inven-

tories, while mills have reduced their holdings of finished and intermediate products.
Orders for most types of capital equipment are running 25-50
percent above last year's improved level.
if all orders were accepted.

Orders would be even higher

Freight car shortages are widespread,

and orders for new cars at last are rising significantly.

Sales of

all types of farm equipment are excellent and some types, especially
large tractors, are in short supply.

The motor vehicle industry, both

autos and trucks, is operating at capacity.

Expansion plans are being

pushed, but availability of various components will limit output for
some time to come.

All major foreign markets for capital equipment

are now vigorous again.
A recent survey by this bank shows that district farmland values
rose nearly 6 percent during the first quarter and are up 11 percent
from a year ago—the largest gains registered since this survey started
in 1958.

Farm mortgage loans are readily available.

District rural

banks are meeting strong loan demand from farm borrowers, especially
for capital investments.
As of late April, only 35 percent of the corn and soybean acreage in Illinois had been plowed, as opposed to 78 percent a year ago and
95 percent in 1971. While these conditions could improve rapidly with
drier weather, delayed plantings typically result in lower yields.
seed, and fertilizer continue in short supply. With more acreage to


be planted, needs will be especially large.

Many Midwest observers

anticipate little further decline in livestock prices this year.


weather has boosted feed prices, and losses of calves, poor weight
gains, and the banning of DES will hold down meat supplies.


Business activity continued to expand vigorously in April
according to a group of businessmen in the Eighth District. The
sharp uptrend in retail sales established in the first quarter of
the year continued.

Manufacturing activity maintained a high rate

of expansion, and manufacturing inventories at current prices are
declining as a result of strong demand.

Construction activity on

a seasonally adjusted basis was generally unchanged at the relatively
high level of recent months.

Employment continued to inch up.

Farming operations are lagging behind their normal seasonal pattern
because of excessive rainfall and flooding, but income prospects
for farmers remain good except for the relatively small number who
may not be able to plant crops because of flood water.


remains a major worry among businessmen.
Retail sales at major department stores in the Eighth
District rose sharply from March to April on a seasonally adjusted

Some of the inner-city stores in St. Louis had month-to-

month sales gains in April for the first time In several years.
Most lines of manufacturing activity have continued to gain
momentum in recent weeks. Among those manufacturers in the Eighth
District reporting gains in output and orders were producers of
steel, aluminum, paint and coatings, clothing, machine tools, and
synthetic fibers.

Some firms reported that the pace of shipping

cannot be maintained at current levels as inventories are being
pulled down to meet orders. A representative of the synthetic fiber
business reported that fiber demand is "unrealistically" high.

Lack of capacity is a common complaint, and, in response, a strong
upward movement in capital spending is apparently under way.
Those firms interviewed reported further moderate increases
in employment and "tighter" labor markets than earlier in the year.
Most representatives reported that both skilled and unskilled workers
were in very short supply and that those workers who can be hired
at current wage rates are less efficient than their current employees.
Extremely wet weather and floods have retarded farming operations over most of the central Mississippi Valley.

The situation

is not yet serious except for those individual farms that are under
water and are likely to remain flooded for several more weeks.
If the rains continue for another week, it could become critical
for the 1973 corn and cotton crops, as further delays in land
preparation and planting could lead to a reduction in output.
Significant freezing damage has occurred in a number of apple and
peach orchards in the district, but the impact on national output
is difficult to assess at the moment.

Farmers, however, remain

optimistic about their 1973 income prospects. Livestock and livestock products are being sold at profitable prices, and the outlook
is for relatively high prices for the current year's crop.
Inflation remains one of the major concerns of businessmen
in the district.

They invariably reported "excessive" demand at

current prices for both final product and productive resources.
Typical comments were "inflation is getting worse," "the price
increases are alarming," "the FPC is causing or contributing to the
'energy crises' because they suppress incentive to explore for gas

and the prices of alternative sources will be higher," and "buildings
are being revalued for insurance purposes by 20 percent due to rising
The quantity of credit demanded continued to expand faster
than the supply of loan funds at current interest rates.


savings and loan associations, and insurance companies all reported
a strong loan demand.

Consequently, interest rates on all types of

credit instruments and with all maturities are apparently rising.


Bank directors expressed dissatisfaction with Phase III, but
their views varied on how to contend with the economy's current inflationary pressures.

Gasoline rationing has begun in the district,

and businessmen fear fuel shortages could hamper district economic

Although some overbuilding exists in the Minneapolis/St.

Paul metropolitan area, bank directors generally indicated that in their
areas the outlook for residential and nonresidential construction was

District agricultural loan demand was strong in the first

quarter and is expected to remain vigorous in the second quarter.
Bank directors expressed various views on how to control the
inflationary pressures currently confronting the economy.


directors advocated eliminating the investment tax credit, while others
favored retaining it. A variable investment tax credit, which could
be adjusted in response to changing business conditions, was favored
by some directors.

A South Dakota director indicated that his area's

farm implement dealers

would oppose eliminating the investment tax

credit which has significantly boosted their business.


opinion was that abolishing the investment tax credit would not dampen
consumer demand and would have a delayed effect on the economy. Bank
directors felt that an increase in the personal income tax was not
politically feasible, and one indicated that his area's businessmen
believed increased taxes would only result in increased government

A cutback in government expenditures was advocated by several

directors, and one director spoke out for tighter monetary policy.
Allowing interest rates to reach their own level, one director stated,
would help dampen economic activity. Directors generally felt Phase III

had not been effective and favored firmer controls.

Although one

director welcomed the Administration'* recent move to strengthen Phase III,
he felt it may not be sufficient to curb inflationary pressures.
Although no director reported any disruption in business activity
due to fuel shortages, businessmen are concerned about a lack of gasoline
dampening district economic activity. Two major oil companies have
begun rationing gasoline at the retail level in Minnesota, and in March
104 Minnesota independent gasoline stations were forced to close because
of gasoline shortages.
Minnesota customers.

Also, two oil companies plan to stop servicing

Furthermore, several large Minnesota fuel users

have reported difficulties obtaining fuel supplies, and Minnesota's
state civil defense department estimated that Minnesota's gasoline
supplies may be about 10 percent short of anticipated needs by the end
of 1973.

Another director reported gasoline rationing in South Dakota

and indicated dealers were taking steps to prohibit gasoline hoarding.
Also, dealers have stopped giving trade discounts which has noticeably
increased fuel costs. A North Dakota director disclosed concern over
fuel shortages in his state and revealed his firm recently had trouble
purchasing diesel fuel. Directors from Minnesota, North Dakota, and
South Dakota indicated gasoline shortages could curb their areas'
tourist business this summer. Montana directors and a director from
the upper peninsula of Michigan, on the other hand, revealed that gasoline shortages are not yet a problem in their areas.
With the exception of the Minneapolis/St. Paul metropolitan area
and Duluth, the outlook for residential and nonresidential construction
in the district is quite favorable.

In the Minneapolis/St. Paxil area,

overbuilding exists in both residential and nonresidential markets.
Single-family construction, however, has remained quite strong but could
be curtailed by rising prices.

Two directors located on the fringe of

the Minneapolis/St. Paul metropolitan area indicated strong construction
activity in their areas.

In Duluth, a director disclosed a lack of

new construction projects, and some construction material shortages.
A Montana director reported strong construction activity throughout his
state but indicated that the Administration's impounding of highway
funds has hurt highway construction.

Many directors indicated that

rising prices had not discouraged new home purchases, but one director
revealed that his area's residents were turning to prefabricated homes
in order to hold down new home prices.
Our second-quarter Agricultural Credit Conditions Survey showed
that the demand for farm loans increased substantially during the first
quarter and is expected to remain strong In the second quarter.
Stronger first-quarter loan demand was due to greater spending by
farmers and to difficulties in selling wheat in currently clogged
marketing channels.

An inability to market wheat postponed income and

forced farmers to borrow to meet current operating expenses.


spending was primarily associated with this year's planned increased
crop plantings and a general expansion in farm operations.


farmers' outlays for machinery, land, and cattle were up noticeably.
Higher prices for cattle, fertilizer, seed, and equipment also raised
agricultural borrowing this spring.

Survey respondents look for these

same factors to result in strong second-quarter agricultural loan demand,
especially as some items, such as fuel and fertilizer, become increasingly


The present state of the economy is very strong, and the outlook
for the remainder of the year is for continued strength, according to
a number of the home office and branch directors of the Kansas City
Federal Reserve Bank.

However, these opinions were tempered by concern

over recent price behavior and the prospects for further price inflation and excessive wage demands during the course of this year.


tations of a temporary dip in meat animal prices (reported in the April
Redbook) were corroborated by the most recent farm price report, but
severe weather resulting in heavy losses of cattle and calves and substantial impairment to weight gains, as well as the recent banning of
"DES," may further aggravate the rise in future feed costs.


banks continued to report heavy business loan demand in April. They
expect loan demand to remain strong over the next three months, with
commensurate upward pressure on loan rates.
Telephone interviews with a number of Tenth District nonbank
directors of the home office and its three branches elicited a general
consensus as to the present and expected future strength of the economy.
Despite their generally optimistic views, however, a number of the
directors expressed concern over present and expected inflation, particularly insofar as it would affect the terms of settlement of future
collective bargaining agreements.

At the same time, expressions of

concern were voiced as to the longevity of the present boom beyond
this year, given the rapid pace of present activity, and given what a
number of directors viewed as a general uneasiness on the part of the
public which might impair consumer confidence.

Thus, while present

signs in the district, particularly the strength of the agricultural
sector, all tend to encourage optimism regarding the outlook, the
directors were almost unanimous in tempering their optimism in looking
much beyond the end of this year.
Farm prices dropped 1.5 percent during the month ended April 15,
the first decline in 12 months.
third higher than a year ago.

But prices still averaged nearly one-

More recently, meat animal prices,

which led the downturn last month, have been steady to weak, while
grain prices have been generally stronger.


grain stocks as of April 1 and continued uncertainty about spring
planting have sparked a new round of speculation in the grain markets.
Weather conditions within the district appear to be somewhat more conducive for field work than in many other regions.

Some planting has

occurred, and with favorable weather the prospects are reasonably good
that most crops will be planted on a timely schedule.

The wheat crop

reportedly is in excellent condition, particularly in Kansas where a
record harvest is expected.
The weather, however, continues to plague the livestock industry.
An April snowstorm resulted in heavy losses of cattle and calves in
localized areas of the district.

A recent survey of five counties

in southeast Colorado showed death losses this winter of 40,000 head,
of which more than one-half were young calves. When compared to the
January 1 inventory, however, this represents a loss rate of less than
2 percent.

More serious is the effect that the adverse weather has had

on weight gains.

Rates of gain have been reduced significantly in many

feedlots, and the recent banning of "DES" will probably further aggravate the rise in costs as well as the slowdown in beef supplies.


ever, while death losses and slow gains may seriously impinge on individual producers, there may be a tendency to overestimate the effect
on total meat supplies in the United States.
District banks continued to report heavy business loan demand
during April.

Reflecting this demand, and in accordance with the

guidelines announced by the committee on Interest and dividends for
the dual prime rate, all survey banks joined with the nation's larger
banks in raising their prime rate to 6 3/4 percent.
Moreover, with current business loan demand being exceptionally
strong, most bankers felt that the prime rate would more than likely
rise to 7 percent in the next few weeks.

District bankers also expected

loan demand to remain strong over the next three months, thereby resulting in continued upward pressure on bank loan rates.

Because de-

posit growth had not kept pace with loan demand, most banks contacted
were relying heavily on borrowings from the Federal Reserve banks, purchases of federal funds, and sales of CDs to supply additional loanable funds.

A few banks also had permitted investments to decline to

levels where most of their remaining securities were pledged to match
public funds.


The economy of the Eleventh District continues to expand at a
fairly rapid pace. Although industrial production in Texas fell slightly in March, employment in the five district states continued to rise.
Construction activity rebounded sharply in March, and new automobile
registrations Increased substantially.

Sales of district department

stores continued to advance In April.

Furthermore, a recent survey of

business economists in district states revealed them to be quite optimistic about economic conditions in the second half of 1973.
Our respondents generally expected economic activity in the second half of 1973 to be higher for their states than for the nation as
a whole.

They were particularly optimistic about the prospects for

consumer spending and plant and equipment investment. They also felt
that inventory investment would continue strong.
In line with this general optimism, the majority of the respondents expected further employment gains in the second half of the year.
Most expected growth In employment to be greater in the district than
in the nation.

The respondents anticipated particularly strong employ-

ment: advances in the retail trade and service industries, and in state
and local government.

Despite the outlook for rising employment, less

than half saw the unemployment rate declining significantly.
Most of the respondents viewed prospects for corporate profits
in the second half of 1973 to be about the same as in the first half.
And although there were wide differences of opinion among the respondents, the majority felt that consumer prices would rise at least as
fast in the second half of the year as In the first half.


there was unanimous agreement that there would be a continuation of
wage-price controls throughout 1973, and a number of respondents expected some further strengthening in the controls program.
The seasonally adjusted Texas industrial production index
eased slightly in March, receding from its record February level.
Output in both the manufacturing and mining sectors declined slightly,
while utilities rose.

In manufacturing, durable goods production con-

tinued to rise mainly as a result of increases in fabricated metal
products, furniture and fixtures, and lumber and wood products. Nondurable goods output fell in March due primarily to decreases in food
and food products, apparel, and paper and paper products. Mining also
fell as declines in crude petroleum and natural gas production more
than offset small Increases in the mining of metal, stone, and earth
minerals and natural gas liquids. Utilities increased in March as
both electricity and gas distribution surpassed February levels.
Although state oil regulatory agencies continue to permit maximum production consistent with conservation limitations, district oilproducing states are still pressed to meet all demands for their oil
and gas. As buyers have not been able to find all of the domestic
crude they need, some refineries have had to operate at less than full
capacity. To fill part of the supply gap, Persian Gulf oil was imported into Texas and, for the first time, piped inland to be refined.
Seasonally adjusted total employment in the five district
states rose in March for the ninth consecutive month.


the monthly increase in the labor force outpaced the employment growth,
and the unemployment rate edged up to 3.7 percent from 3.6 percent In

February. Both manufacturing and nonnanufacturlng employment rose
in March as significant increases were reported in finance, construction, transportation and public utilities, and government services.
Mining was the only industry group to show a decline. All industries
reported year-to-year employment gains.
The value of construction contracts awarded in the five district states rose sharply in March after falling slightly in February.
While all three major types of construction increased, nonresidential
building showed the largest gain, reaching a record high. The cumulative value of contracts awarded through March of this year reached
a level over 17 percent higher than the corresponding period last year.
Sales of department stores in the district continued to rise
above year-ago levels in April.

Cumulative sales for the first four

months of the year were significantly above the level for the corresponding period last year in all five metropolitan areas for which
data are regularly published.

The total number of new automobile

registrations for the four largest metropolitan areas of Texas—Dallas,
Fort Worth, Houston, and San Antonio—rose sharply in March over
February's level, as Houston and San Antonio reported increases of
more than 40 percent.

Cumulative new car registrations through March

were over one-fifth higher than in 1972.
Weather continues to slow all agricultural activities in the
Eleventh District.

Field preparation and planting activities have been

severely limited and the situation is becoming critical.

Cotton plant-

ing is barely under way in Texas and Louisiana, a situation much different from this time last year, when about one-third of the planting

In these two states had been completed.
plantings are also lagging.

Soybean, sorghum, and rice

Widespread livestock losses due to the

severe weather have also been reported, and Arizona has had numerous
losses from poisonous weeds.

However, the number of cattle and calves

on feed in the four western states on April 1 was still nearly onefifth larger than a year ago.


Economic expansion throughout the Twelfth District continues to
be paced by consumer spending and business fixed investment.

Strong de-

mand is keeping production near capacity in most industries, but investment expenditures appear to be directed more toward modernization of
existing equipment than toward construction of new plants.

In some cases,

such as forest products, new capacity is not being added because of an
expected turndown in demand later this year.

Banks report strong loan

demand and upward pressure on Interest rates.
Consumer spending is maintaining the high levels established in
the first quarter, but a few directors expect that spending for durables
will be lower in the second half of the year.
demand is fixed investment by industry.

The other major source of

Many industrial firms are not

able to keep up with new orders, and the backlog of orders continues to

Aerospace and forest products are facing particularly strong de-


In Washington, Boeing continues to expand its work force due to

increased orders, and the forest products industry is running at full

Other industries operating at capacity include electronics,

pollution-control equipment, and recreational vehicles.
In agriculture, increased production of most crops and livestock is expected, despite such local problems as lack of rain (eastern
Oregon) and cold weather (Idaho).
near record.

The wheat crop is expected to be

In the opinion of one director, world demand for exports,

rather than domestic demand, will determine final wheat prices. Both
grain and food crop production should be higher this year and prices
somewhat lower, although weather conditions may adversely affect prices

of individual crops.

Current high prices should stimulate pork and poul-

try production and bring about lower prices this fall.

On the other

hand, it will take another year to increase the number of cattle, and
two years to have greater numbers available for slaughter.

None of our

directors expects any major decline in beef prices this year.
Against this expansionary background, loan demand has been very
strong, and has resulted in upward pressure on interest rates.


is divided, however, whether large Increases in long-term rates are

Generally, the commercial banks have been able to hold their

deposits, and in some areas have even gained funds.

However, they have

had to rely heavily upon CDs with maturities under 90 days, and some
bankers foresee difficulties in holding these funds if short-term
rates continue to rise.

Savings and loan associations, which have been

unable to match market rates, apparently are losing deposits, and have
raised their mortgage lending rates.
Our directors were asked to describe local industries facing
capacity limitations and those that are making major additions to plants.
The most commonly cited industry operating at capacity is the timber

Yet in this district, the industry is not building new plants.

Lumber demand is expected to fall later this year in response to an expected slowing of construction; hence investment in forest products is
being directed at modernization of existing plants and at Installation
of pollution-control equipment.

Builders' hardware manufacturers are

following a similar policy for much the same reason.

On the other hand,

capacity is being enlarged by such consumer-oriented businesses as manufacturers of mobile homes and recreational vehicles.
Insufficient capacity is not the only limitation on production
in the Pacific northwest.

Lack of rain has forced power rationing,

causing the aluminum industry to cut production.

A shortage of boxcars

also has impeded shipments of timber to eastern markets.


control and other environmental factors are forcing heavier investment
in some cases, but are also preventing other projects from being
On balance, the consensus is that expansion will continue
through the rest of 1973, with the principal slowdown expected in construction.

The major policy concern of our directors continues to be

inflation control.