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CONFIDENTIAL (FR)
CURRENT ECONOMIC CONDITIONS BY DISTRICT
Prepared for the
Federal Open Market Committee
by the Staff
May 16, 1979
TABLE OF CONTENTS
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 14
Sixth District-Atlanta page 17
Seventh District-Chicago page 21
Eighth District-St. Louis page 25
Ninth District-Minneapolis page 28
Tenth District-Kansas City page 31
Eleventh District-Dallas page 34
Twelfth District-San Francisco page 38
SUMMARY*
[Asterisk: Prepared by the Federal Reserve Bank of Richmond.]
Most Districts report expansion of economic activity in recent weeks.
Characterizations of this expansion range from very strong activity in the
Boston District, to expansion at a moderate pace in New York and Philadelphia,
to a rebounding from adverse weather or strikes in other areas. Atlanta, on
the other hand, describes its reports as downbeat and Chicago and St. Louis
perceive a slowing of activity already taking place. Nationwide, strength
appears to be concentrated in manufacturing with producers goods providing much
of the impetus. Those Districts commenting on construction generally cite
strength here also. On balance this month's comments suggest less than buoyant
retail activity but continue to reveal strength in some lines and general
strength in some areas, California and the Pacific Northwest being notable examples.
Inventory levels do not appear to be of particular concern among either retailers
or manufacturers.
Gasoline shortages, real or potential, have had little effect
on economic activity other than in some closely related product lines:
recreational
vehicles, power boats, and light trucks, especially the four wheel drive varieties.
Severe winter weather in the Northern Plains and recent flooding in the Southeast
may affect crop production adversely, but increased plantings in several areas may
offset much of the potential loss of output.
Reports on manufacturing activity are generally favorable, almost
ebullient in the case of capital goods.
Chicago sees the demand for most capital
goods and their components continuing to tax capacity. New York reports manufacturing at near full employment with inventories low and backlogs extending into
1980. Minneapolis finds commercial and industrial activity expanding rapidly
as does San Francisco.
In the Dallas District industrial output is expanding
at a moderate rate from already high levels, and capacity utilization remains
high.
Reports from other Districts also indicate strength in steel related in-
dustries, transportation equipment, machine tools, electronic equipment and
computers, cement, and aircraft.
Consumer goods industries are less buoyant.
St. Louis and Richmond detect softening in production of apparel and furniture
while St. Louis and New York see more broadly based weakness in consumer durables.
There is little agreement among Districts as to the state of retail
sales, and even within some Districts sales are depicted as mixed.
St. Louis,
Kansas City, Atlanta, and Chicago all see sales as flat or declining, at least
in real terms.
In several Districts sales of furniture, appliances, and gasoline
consuming lines are sluggish. New York terms the softening in sales of recreational
vehicles remarkable. Automobile sales, while generally weak, are being hampered
in several Districts by low inventories of small cars. On the other hand, retail
sales are described as healthy by Boston, strong by Dallas, and booming by
San Francisco.
Construction activity was mentioned by only a few Districts but those
reports are basically consistent.
Residential construction is down from last
year, but only Chicago reports a significant decline.
Strength in nonresidential
activity seems to be more than offsetting weakness in residential building.
Kansas City finds housing starts down from 1978 but still good. Atlanta reports
thin inventories of housing and existing home sales holding up well.
Loan demand, particularly of businesses, appears to be strong throughout
most of the nation.
Boston terms commercial loans exceptionally strong across all
segments of the economy. New York reports a surge in business loan demand at
NYC banks due in part to growth in plant and equipment expenditures and inventory
investment. Philadelphia» Richmond, and Minneapolis also note strength in
total loan demand. Atlanta perceives some easing in business loan demand
but brisk consumer and real estate lending.
The overall picture concerning
deposit inflows is less clear. Demand for money market certificates continues
firm at commercial banks, but in some Districts bankers are reported to be
seeking nondeposit sources of funds.
Savings and loan associations have
apparently experienced reduced deposit inflows, or even net outflows, since
March.
Several Districts are concerned that State usury laws are or will soon
inhibit real estate lending. There are reports, however, that several States
have revised or intend to revise those laws so as to keep funds in real estate
loan markets.
The outlook for agricultural output is mixed.
St. Louis and Minneapolis
anticipate reduced yields of winter wheat, corn, and cotton due to adverse weather
conditions. Atlanta now expects a significant shift from cotton to soybeans,
also weather related. Kansas City, on the other hand, reports generally favorable conditions in the Southern Plains. All in all, the severe winter and the
cold,wet spring will hold output below its potential, but the extent of the damage
is, at this point, undetermined.
FIRST DISTRICT - BOSTON
Business activity in the First District continues to be very strong
although there are scattered signs of the beginning of a slowdown.
Many manu-
facturers report that they are operating at close to capacity; loan demand is
very high across the district with some northern New England banks rationing
credit. Although some retailers report a softening, sales continue to be
healthy overall.
In general, there is no problem with shortages although lead
times for electronic components continue to stretch out.
A Vermont director reports that the machine tool industry in that state
has the highest backlogs ever.
The chairman of the board of an optical goods
manufacturer indicates that sales of safety eyeglasses, which he considers a
leading indicator, are very strong.
The region's electronics and mini-computer
industries are operating at high levels of capacity and many have substantial
backlogs.
A large tire manufacturer indicates that sales have snapped back
sharply in May after a very slow April.
Production at this company is at very
high levels in order to produce inventory in anticipation of the rubber workers
strike.
The chairman of a large commercial bank reports that commercial loan
demand is exceptionally strong across all segments of the economy; deposit
inflows are only moderate with little growth in time and savings deposits.
While large banks seem to have no liquidity problems, smaller northern New England
banks indicate shortages of funds and the necessity to ration credit.
The chief
executive officer of a large Connecticut insurance company expects poorer cash
flow in the property and casualty insurance industry later this year, associated
with a deteriorating underwriting experience, this will result in diminished
availability of funds for lending.
The Boston outlet of a large national department store chain reports
that, although sales are still relatively healthy, they have not increased as
much as expected thus far this year.
However, soft goods sales have been very
strong in the last few weeks, with the slowdown occurring in durables. A
New England chain of discount stores reports some softness across all lines;
similarly, food store sales have been somewhat less than expected.
In general
inventories are not considered a problem.
While there is no general problem with the availability of materials
or labor there are some spot shortages.
A survey of New England purchasing
managers indicates that lead times on electronic components in particular
continue to stretch out.
In order to protect themselves from unintended
inventory buildups, some purchasing agents are negotiating more long-term
contracts with provisions for rescheduling deliveries in case of a recession.
In general, materials prices are increasing at a 10 to 11 percent rate.
Professors Houthakker, Eckstein, Solow, and Tobin were available for
comment this month.
Houthakker believes that real growth will decline by
summer and that there is a 40 or 50 percent chance of a recession this year.
He also believes that the inflation rate will decline modestly during the
remainder of 1979. A recession would do little to depress the inflation rate
more rapidly, because more investment and a more rapid growth of potential
output is needed.
Recessions alone are not "cost effective."
The Fed should
"aim for a modest, positive growth rate of Ml at this time," and the funds
rate should move freely to attain this goal.
Even though Eckstein expects a "slow-down/recession" to commence in
the second half of 1979, he welcomes the recent increase in the Federal Funds
rate.
Unless "continuing and convincing signs of a slow-down emerge," the
funds rate may have to rise still higher.
Because Eckstein expects only a
mild "slow-down/recession" the Fed should "avoid following the historical
pattern of dramatically increasing or reducing interest rates" in the coming
year, however.
Solow believes that the odds still favor a slow-down or mild recession
commencing this year.
He would be surprised if real GNP increased more than
1 or 2 percent from 1978:IV to 1979:IV.
Because interpretations of recent
money growth rates are speculative at best, monetary policy must rely on the
funds rate for the time being.
Solow is content with a Federal Funds rate
near 10 percent, but he believes the Fed has prudently exercised its independent judgment in resisting apparent pressures to raise the rate much
faster or much higher.
Tobin also thinks it was a good idea to increase the funds rate.
He believes the economy is stronger than most forecasts suggest.
The high
unemployment rate is a cause for concern, but the Fed has done a commendable
job, not attempting to attain unrealistically low unemployment or inflation
rates. While future increases in the funds may be required, Tobin feels the
Fed has done well to avoid overreacting as it did in the summer of 1974.
SECOND DISTRICT - NEW YORK
Second District business activity continued to expand at a modest
pace in April and early May, according to recent comments of directors and
other business leaders. Although department store sales have been mixed,
automobile sales have remained brisk.
In general, manufacturers appear to
be operating near or at full employment, inventories are below desired
levels, and some firms report that order backlogs extend well into 1980.
For the most part, however, labor and materials are generally in adequate
supply, although some scattered shortages have cropped up.
On the financial
front, business loan demand surged at major New York City banks.
According to reports from throughout the Second District, retail
sales have been mixed in recent weeks. While virtually all of the large
merchandisers enjoyed an acceptable Easter selling season, several have
been experiencing sluggish sales of late.
In general, for all of April
and early May, sales volumes have exceeded retailers' expectations with
exceptionally strong sales at New York City stores outperforming weaker
suburban branches.
Correspondingly, most merchants report that their
inventory stocks are in fine shape. Retail respondents were generally
reticent about their outlook for consumers spending, but one major chain
store did confirm that its outlook for retailing activity in New York City
was optimistic enough that it was planning to increase its investment in
its Manhattan flagship store.
Sales of new cars have continued to be brisk, especially for the
smaller, more fuel efficient models.
Indeed, dealers report that sales
would be even greater if they had had sufficient numbers of small cars in
inventory. Nevertheless, some signs of an industrywide slowdown are
emerging.
One auto analyst reports that the burst in small-car buying
has not been sufficient to offset the large-car sales decline. Truck
purchases, in particular, have fallen more than anticipated; and there
has been a "remarkable softening" in the recreational vehicles sector.
Moreover, while small car production is expected to remain strong,
automotive manufacturers will probably soon begin to shut down their large
car assembly plants in order to retool them. As a result, the regional
economy will be affected by some large-car plant closings and the accompanying layoffs of assembly workers.
But both industry analysts and auto
dealers feel that the current gas-crisis psychology is temporary and thus,
will not have a permanent debilitating impact upon the auto industry.
Nonetheless, there is a feeling that there is an emerging shift in buyer
preferences for smaller, more fuel efficient automobiles.
Outside of retailing, business activity remains robust. The
cement, paper, steel and computer industries are all at full capacity and
in some instances, have order backlogs that extend well into 1980. While
no serious bottleneck has yet developed for any raw material, respondents
from the steel and chemical industries each reported lengthening delivery
times by their suppliers.
Capital spending plans among District respon-
dents remain strong, but are little changed from recent months.
There is,
however, incipient weakness in the orders being booked by manufacturers of
durable consumer goods such as cameras and kitchen ware.
In any event,
overall inventories are running on the lean side, according to the consensus of businessmen contacted in the District. Looking ahead, the majority
of Second District respondents anticipate a recession, albeit a mild one,
in the second half of the year as a consequence of continuing inflation,
increasing oil prices, and the high level of consumer debt. At the same
time, while the respondents concede that the Administration's anti-inflation
program has had some effect, they are skeptical that it will succeed in
reducing the rate of inflation to the range of 6 to 6 1/2 percent.
On the financial scene, business loan demand surged at New York
City banks. The senior lending officers who were contacted attributed part
of advance in business lending to the growth in plant and equipment expenditures and inventory investment.
Other factors mentioned were a reduced
level of corporate cash flow, increased acquisitions, and aggressive loan
pricing. While predicting continued growth in commercial and industrial
loans through 1979, most respondents failed to foresee a boom in demand
comparable to that experienced in 1973-74.
THIRD DISTRICT-PHILADELPHIA
Third District economic activity is expanding overall this month.
Manu-
facturing appears to be holding its own, and retail sales have generally picked up
from the April lull. Bank loan demand remains very strong.
The six-month outlook
is mixed, however. Executives in the industrial sector continue to forecast an imminent
downturn, and are joined by some merchants.
There is some sentiment in the retail
sector though that if a recession is coming, it won't start until the fourth quarter.
Bankers forecast continuing strength in loan demand between now and November.
Respondents to this month's Business Outlook Survey report no change in
manufacturing activity relative to April levels.
shipments have been stepped up.
a seven month trend.
New orders remain stable while
Consequently, inventories have shrunk, continuing
Industrial employment growth has apparently slowed also, as
manufacturers report little change in either the size of their payrolls or the length
of the workweek.
As for the future, survey respondents continue to forecast a downturn in
industrial activity within six months, with the bears outnumbering the bulls by nearly
two to one. New orders are expected to remain unchanged between now and November,
and a further increase in shipments is expected. No change in inventories is forecast,
leaving stock levels about where they were at the beginning of 1979.
Despite the
bleak outlook, however, Third District manufacturers plan to add to their work forces
over the summer and fall, as well as boost spending on plant and equipment.
Inflation continues in the Third District industrial sector.
In the current
survey, about five out of eight of the executives polled report paying higher prices
for inputs in May, while three out of eight are charging more for their finished
products.
More of the same is anticipated through the balance of the year.
Five
out of six respondents foresee higher raw material costs by November, and two out
of three plan to raise the prices of the goods they sell.
Area retail activity has picked up in May.
Reports of current dollar sales
range from five to twenty percent over May '78 volume. Sales are generally reported
to be as planned. There are some signs of unanticipated inventory accumulation, but
this is not the rule.
Looking ahead to the next two quarters, retail merchants have diverse
expectations. Sales forecasts for November range from just slightly under year-earlier
levels to ten percent above those levels.
Merchants at the lower end of the scale
foresee a stagflation scenario starting at the end of the current quarter.
Others
expect consumers to continue buying to beat expected price hikes, with no sign of a
slowdown evident until October or November at the earliest.
Retailers do not expect
any major inventory problems over the next six months.
Both business and consumer loan demand continues strong according to area
bankers contacted in May.
C&I loans are up as much as sixteen percent over May
1978 levels and consumer loans, although not showing quite as large a year-over-year
increase, are higher than many bankers had anticipated. Bankers foresee little change
in the business loan demand situation through November, but are allowing for the
possibility of slower consumer borrowing as the public faces higher food and energy
bills in the coming months.
The prime rate is holding at 11 3/4 percent in the Third District but a
move to twelve percent seems imminent. Bankers' interest rate forecasts vary beyond
the next few weeks.
Some see a flattening after a move to twelve percent, but
others anticipate successive increases with a late summer peak 75 to 100 basis points
above current levels.
Deposit flows at local banks still look to be adequate.
There have been
moves to downgrade the importance of CDs and rely on nondeposit sources of funds
to some extent, but this practice does not appear to be widespread.
Money market
certificates are still in heavy demand.
One area bank recently introduced a new innovation aimed at attracting
new deposit funds and concurrently serving as a hedge against future interest rate
hikes.
The institution was issuing $1000 repurchase agreements with a one-year
maturity and carrying an effective interest rate of nine percent.
According to a
spokesman for the bank, response to the instrument was strong and a remarkably high
percentage of the funds attracted was "new money."
"repos" are scheduled to end on May eighteenth.
Nevertheless, sales of the
A recent news release by the bank
indicates that the principal reason for withdrawing the instrument is that its success
and emulation by other financial institutions might hinder progress in the gradual
elimination of Regulation Q.
FOURTH DISTRICT - CLEVELAND
Manufacturing activity in the Fourth District is rebounding from
effects of the teamsters strike last month, and major industries are producing at or near effective capacity.
Consumer spending has been sluggish
except for autos, but business spending has been sustained by further increases
in orders and backlogs.
inventory buildup.
trial products.
activity.
Officials claim little sign of speculation or excessive
They uniformly see little sign of price relief for indus-
Gasoline supplies are tight but have not disrupted business
Deposit inflows into S & Ls fell sharply in April.
The city of
Cleveland remains in default.
Employment, production and shipments in the automotive and steel
industries, the main industries affected by the teamsters strike, are recovering.
However, some production losses of large cars will not be recouped because of
poor sales. Also, steel haulers in the Youngstown Steel Producing Center are
still not back to work.
As much as 10 percent of steel production schedules
in April were curtailed, in addition to cutbacks in steel shipments.
Presently,
steel is operating at practical capacity, which is expected to continue through
the balance of this quarter because of strong demand from the construction and
capital goods industries.
Steel economist expect some easing next quarter,
partly from lower demand from the auto and appliance industries, and also because some facilities will be shut down for repairs during the summer months.
Aluminum is operating at about 94 percent of capacity and an even higher operating
rate is expected next quarter.
District officials continue to report a widening dichotomy between
the consumer and business sectors.
Some retailers and producers of consumer
goods believe a cyclical turning point is near unless consumer spending shows
a pickup in real terms.
Remarks about consumer resistence to higher prices,
increased consumer substitution, especially of food products, lack of strength
in most department store type-goods, and moderation in credit card usage, are
increasingly common. Although one retail economist expects retail sales in
Mav will show a larger increase than in April, most of the expected gain would
be absorbed by higher prices. In his opinion, retail sales are on a plateau
similar to 1974.
He expects deceleration in income gains this quarter, which
along with continued double-digit rates of inflation, would further reduce real
spending.
Because of uncertainty over sales prospects, retailers have been
cutting their fall orders by at least 15 percent in real terms, according to a
producer of men's apparel.
Capital goods producers are still bullish over sales prospects, and
some have pushed back their expectations for a decline in orders to the second
half of this year or early next year.
Their comments emphasize continued in-
creases in orders and backlogs, but they generally report no sign of doubleorders because shortages are not prevalent as they were in 1974. Aerospace and
machine tool builders report backlogs at the end of last quarter were at least
50 percent higher than a year earlier.
Strength in machine tool orders has
been widespread because of growing need for modernization and for additional
capacity, according to one builder.
With few exceptions, district officials assert there is little sign
of speculative building of inventories, although most acknowledge some buildup
in stocks in line with higher production and backlogs. A ball bearing producer
notes some speculative buying that has been triggered by his firm's allocation
of production.
Limited supplies of domestic steel, coupled with a curtailed
volume of steel imports in recent months, have held the buildup in steel inventories to normal levels relative to current usage, although one economist
believes that some steel users must hedge in order to protect production
schedules.
Similarly, an economist asserted that the low volume of imports
and strong domestic demand have prevented a buildup of aluminum inventories.
Tire inventories held by retailers are believed to be consistent with industry
targets, especially in view of the strike against one tire producer.
Officials uniformly report little sign of refief from recent intense
price pressures for industrial products.
Some complain about COLA cost pressures.
However, a steel economist notes that guidelines will limit future steel price
increases this year to about 4 percent, although the market can absorb a much
larger increase. Also, a machine tool builder indicated price increases are
being held down to some extent by wage-price guidelines. A scheduled increase
in aluminum prices was recently scaled downward because of guidelines, although
domestic prices are said to be far below world prices.
Gasoline supplies in the District are tight but apparently not as
serious as some other regions of the country. While business activity has
not yet been hampered by spot shortages, some economists believe short supplies
of diesel fuels may disrupt industrial activity later this year. Production
and sales of recreational vehicles and light trucks for personal use have been
curtailed rather sharply in response to higher prices and reduced availability
of gasoline.
S & Ls report a sharp drop in deposits since the change in money
market certificates last March. However, they acknowledgethat April is typically
a poor month for deposits and that some rebound has occurred in early May,
even in passbook accounts.
Apparently, a large part of the decline in April
was the result of depositors failing to roll-over maturing certificates and
placing funds into passbook accounts for temporary liquidity. Mortgage loan
demand is reported to be rising seasonally but is not as strong as a year-ago.
Some association officials expect a further increase in mortgage lending
rates because of reduced availability of mortgage funds.
As Cleveland enters its sixth month in default, local banks that
hold $14.5 million in notes are becoming increasingly critical of the city's
inability to present an acceptable repayment plan. One local bank, which has
not received information about the city's budget revenues and expenditures
during 1979, has threatened to seek a court ruling on the city's obligation
to begin repaying the notes.
The mayor has responded to the bank's concern
by stating that, if state aid is not obtained soon, the city would begin repayment in July and would repay the total amount by the end of the year.
Whether such a repayment schedule could be attained without further cutbacks in
operating expenses is uncertain.
Indeed, it is unclear whether the city is
currently able to meet operating expenses other than payrolls and debt service.
FIFTH DISTRICT - RICHMOND
Most indications are that Fifth District business activity continued
to expand through April. Manufacturers surveyed report further increases in
new orders, order backlogs, and shipments. Loan demand of businesses and
households is strong and survey respondents generally characterize business
as "good." They express concern, however, that recent heavy consumer spending
may have been largely anticipatory in nature and that this, coupled with a
growing burden of consumer debt, will dampen retail sales in the near term
future. Most of our directors view the recent strength in the economy as a
rebound from the seasonally depressed first quarter and expect a slowing of
activity to begin shortly.
Expectations among our manufacturing respondents
have also become more negative in recent weeks.
More than one-third of the manufacturers responding to our latest
survey experienced gains in new orders and increased shipments and order backlogs over the past month. Manufacturers' inventories have grown only very
slowly in recent months and there is little concern about their current level.
Manufacturing employment apparently continues to expand but the average workweek has remained unchanged for several months now. Most respondents in the
goods producing sector are comfortable with both current capacity and expansion
plans.
Recent strength in manufacturing does not seem to have been evenly
distributed among industries. Textiles producers have apparently encountered
substantially firmer demand for their output in recent weeks, but curiously,
apparel producers report flagging demand for their products.
Respondents in
the furniture industry also report weakening demand.
Our directors and a number of our survey respondents seem increasingly
concerned that the recent heavy buying of consumers durables has been speculative
and will act as a drag on future sales activity.
Current debt positions of
many households are also cited as a source of concern for the near term future
of consumer spending. Most of our directors expect activity to slow or decline
in the near future. Expectations of our survey respondents also deteriorated
in April.
Over half the manufacturers surveyed now expect the level of business
activity nationally to decline over the next six months and well over one-third
expect a worsening in their respective market areas. Most expect little or no
change in the level of production in their own firms.
Recent reports from district financial institutions confirm that aggregate credit demand is strong and that both businesses and households are borrowing
actively.
Only the residential mortgage loan market shows any signs of weakness,
but even here there appears to be significant strength in some states. Credit
demands of manufacturers have increased strongly in recent weeks.
These demands
are apparently not associated with unwanted inventory accumulation but rather
reflect working capital requirements that have risen along with the pace of
business activity. There are also indications of exceptionally strong latent
credit demands, as reflected in healthy increases in requests for lines of credit.
Large retailers, on the other hand, paid down their credit lines after an active
Easter sales period and apparently do not expect to increase their borrowings
until the third quarter of 1979 at the earliest.
With the sharp rise in farm prices during the first quarter of 1979,
the improvement in Fifth District farmers' financial position that began last
year has continued. This Bank's first quarter survey of farm credit conditions
indicated continued improvement over a year earlier in loan repayment rates
and in the number of request for renewals. While farm loan demand at banks was
down significantly from a year ago, it was up sharply at production credit
associations and Federal land banks.
Bank supplies of loanable funds continued
at the reduced levels of the three immediately preceding quarters. Loan-todeposit ratios of reporting banks rose moderately, however. Moreover, there
was a modest increase in the proportion of banks actively seeking new farm
loan accounts and a reduction in the share indicating they had been forced
to refuse or reduce a farm loan because of a shortage of funds.
SIXTH DISTRICT - ATLANTA
The latest reports from Red Book contacts have been more downbeat
than any in the last two years.
The deep South has been troubled by exten-
sive flood damage in addition to the nationwide problems of rapid inflation
and dubious energy supplies. Retail sales, which has shown little strength
since Christmas, now appears to be declining in real terms. Housing markets
continue to weaken, except in Florida, where thin inventories, high prices,
and increasing speculation pose potential problems.
While banks have enjoyed
strong deposit growth and some pick-up in lending, thrifts have realized
little or no net inflows since the regulatory changes vis-a-vis money market
certificates.
The short-term outlook for industrial production, capital
spending, and jobs is largely positive despite some weak spots.
Inventories
seem well in hand with the exception of autos, where stocks are far out of
line with demands.
The Southeast is weathering the gas cutbacks with a
minimum of problems.
Heavy rains and flooding have caused severe damage in several large
sections of the District.
Estimates are not yet available for many affected
areas, but early estimates indicate damages of well over $1 billion in
Mississippi, roughly $30 million in Louisiana, at least $60 million in the
Nashville area, and several million more in southwest Alabama and south
Florida.
Federal disaster relief has been made available to most locales,
some $600 million thus far in Mississippi alone.
The floods' agricultural impact included damage to farm structures,
severe soil erosion in limited areas, some loss of cattle and vegetable
crops, deterioration of pastures, and delays in planting. Agricultural
experts estimate that pastures will be restored by mid-June and that soybeans
will be planted in time to produce normal yields.
The delay, however, mandates
a shift from cotton to soybeans that may involve as much as 50,000 acres.
Districtwide, consumer spending has been noticeably weaker since
March, with year-over-year retail sales gains lagging or barely keeping pace
with inflation in most areas. Directors and their contacts in retail trade
characterize consumers as increasingly cautious, angry about inflation and
beginning to resist price hikes, and worried by the energy outlook. Undoubtedly, however, the bad weather and early Easter have restrained spending
in the latest few weeks.
Softness has been particularly noted in sales of
nondurable goods and automobiles, although demand for small cars (both domestic and imported) continues to boom. While general merchandise stocks remain
under control, inventories of large cars are uncomfortably high but short
supplies of fuel-efficient models threaten to dampen sales.
In the Atlanta
area, Ford has added another idle week to its alternate-week schedule at its
full-sized model production facility, while area Volkswagen dealers have
stopped taking orders for the rest of the model year.
In most parts of the District, residential construction has continued its shallow decline with nearly all work pre-sold.
Inventories are
universally reported as thin; existing-home sales have held up well. The
growing popularity of converting apartments to condos is aggravating a shortage of rental housing.
Observers attribute the slowdown to a variety of
causes—poor supplies, high home prices, "availability of money," buyers'
difficulty in qualifying for loans, a negative economic outlook—but none
believe that high interest rates per se are deterring prospective buyers.
In flood-stricken areas, contractors are looking to restoration work to help
keep up their business volume.
Florida remains the exception in the housing picture; in south Florida
especially, market activity continues at record levels.
Supply strains are
acute there; large companies are complaining that inadequate inventories and
dramatic price increases are thwarting relocation efforts and personnel
transfers; realtors are knocking on doors and encouraging owners to consider
selling.
Several Florida directors expressed concern about speculation;
besides builders, local "non-realtors" (doctors, lawyers) have gotten into
the act. Mortgage credit supplies appear adequate but not plentiful, evidenced by a trend toward larger downpayment requirements and rising mortgage
interest rates (now, atypically, above those of other District states).
Deposit inflows to thrifts were quite weak in April, while banks
enjoyed strong gains, particularly in demand deposits and money market certificates. Despite an easing of business loan demand at the "large" banks,
bank lending has picked up, with brisk increases in real estate and consumer
loans. The May 1 raising of Tennessee's usury ceiling from 10 percent to an
effective 14.5 percent brought the first of a series of planned gradual
interest rate adjustments at most banks; however, the state's largest bank
holding company has "frozen" its rates to "small borrowers" at 10.5 percent.
So far, Tennessee banks have noticed little change in lending volume or
borrower reaction to the higher rates.
The state's S&Ls are back in the
mortgage lending business after several dormant months, but many refuse to
set rates until closing.
Industrial activity remains healthy, for the most part, and quite
profitable, by the latest reckoning. Directors report minor deterioration in
sales and order backlogs for home-building materials and some types of equipment, but steel-related industries, suppliers to the paper industry, and
railcar producers have taken a rash of new orders.
Persistent weakness in
the coal market has added to Alabama's unemployment rate and created surplus
inventories for some of the industry's suppliers.
The textile situation
remains a mixed bag, with some mills prospering and expanding and others
closing.
Generally, capital spending and nonresidential construction show
steady growth, although many contacts sense some hesitation with regard to
projects still in the planning stages.
Inventories continue to be held
tightly in rein despite isolated incidents of advance buying.
Employment
prospects are positive in most industries; the shortage of technicians and
engineers appears to have worsened.
The gasoline shortage seems to have created more fear than real
problems as yet, although most people expect it to get worse.
May alloca-
tions to distributors and industrial users range from 70 to 95 percent of May
1978 sales (usage), with the mode at 80 percent.
Gas stations throughout the
District have cut back their hours; weekend closings are troublesome only in
central Florida; purchase limits are relatively rare. Atlanta's Hartsfield
airport has and expects to maintain ample supplies of aviation fuel. The
State of Tennessee has implemented a contingency plan to help make up for
shortfalls of supply to farms, businesses, and school systems.
Given the usual seasonal slowdown, tourism appears to have suffered
no ill effects from limited gasoline availability in spite of the industry's
grave concern. Huge increases in air passenger traffic and faltering recreational vehicle sales may reflect a substitution effect, but hotel occupancy
rates, advance bookings at hotels, travel agencies, and cruiselines, attendance at major attractions, and pleasure boat sales continue strong.
SEVENTH DISTRICT - CHICAGO
Most observers in the Seventh District believe a slowing in total
activity has already occurred. They believe that the second half will see at
best a level trend in real GNP.
One observer expects a decline in the fourth
quarter at a 6 percent rate. Tight supplies of oil products casts a pall over
the future, both near and longer term. Many business managers who accept this
prognosis for the general economy expect their own industries to continue to
operate at very high levels. Demand for most capital goods and their components continues to tax capacity, but there are a few signs of softness. Good
workers are in short supply. Consumer buying appears to have leveled off with
sales of low-mileage vehicles down sharply.
credit demands substantial.
The farm sector is prosperous, with
Residential activity, both in new construction and
transactions, is off sharply.
As far as we can determine, vehicle traffic in our district has not
been significantly affected by gasoline allocations.
Doubtless some auto trips
have been deferred voluntarily. For May, the largest marketer in the district
is allowing dealers 80 percent of their supply in May 1978. For a number of
detailed reasons this is not nearly so severe as it seems.
However, dealers
have shortened hours., and some have limited purchases. A real test of the
situation may not occur until the Memorial Day week end. Diesel fuel also is
allocated for highway vehicles.
Inventories of both motor fuel and heating
oil are uncomfortably low. The basic problem is reduced crude oil imports with
US firms refusing to bid the highest prices, partly because of federal pressure.
Lead times on manufacturers' new orders continued to lengthen in April.
For some companies the main reason is inadequate transportation, both rail and
highway.
Equipment of the right type often is not available, on time and in
sufficient quantity.
Demand for heavy trucks, trailers, freight cars, and
locomotives remains intense. A producer of heavy trucks placed a penalty on
order cancellations after a certain date and was surprised that only 5 percent
of affected orders were canceled.
Freight car component capacity is being
expanded, apparently on the belief that demand will remain high in the 1980s.
The truck strike of early April and the more extended steel haulers' strike
did not seriously affect activity in the district, although temporary disruptions occurred.
Demand for equipment for metalworking, materials handling, construction,
agriculture, and logging has held up well.
Longer lead times on certain equip-
ment have caused customers to look abroad. Castings and forgings are bottlenecks for various producers.
unsatisfactory in some cases.
Foreign sourcing for such components has proved
Heat treating and welding capacity is fully
utilized.
Overall, capital equipment producers continue to report vigorous growth
with rising backlogs.
However, a producer of small drives and other components
sold "off the shelf" says demand for these items, which led the expansion, has
softened.
Sales of oil exploration equipment have declined significantly.
Producers of some types of coal mining equipment are operating well below
capacity.
Some steel companies are booked through the third quarter.
virtually all types are strong.
Orders for
Estimates of shipments for the year have been
raised. Competition from foreign steel has dropped off as markets have
strengthened abroad.
Although intermittent layoffs were associated with the truck strikes
causing claims for unemployment compensation to rise, demand for experienced
and trainable workers continues to exceed supply. As in 1973-7^, foundries are
ready to hire "warm "bodies" for this rather disagreeable work-
Through early
May, help-wanted ads in Chicago papers have been running about 20 percent above
the advanced level of a year earlier.
Retail sales have varied substantially " y line and establishment.
b
Credit use may have slowed somewhat, but large retailers report that delinquencies remain at a low level. A very large retailer has been reporting large
declines in dollar volume from year ago with inventories on the high side.
Increased promotions and price cuts are planned to boost sales. But other
chains report sales to be at budgeted levels with inventories under close control.
Prices of general merchandise, which had been rising at a rate of only
^ percent, are expected to accelerate to about 7 percent "because of increases
for petrochemicals, natural fibers, rubber, and leather.
Among the lines that have weakened are appliances and furniture. Fuel
stringencies have depressed sales of recreational vehicles, power boats, and
light trucks.
Sales of four-wheel drive trucks, in short supply until quite
recently, have declined precipitously.
Although seasonal problems are still difficult to sort out, both new
residential construction and transactions in the resale market appear to be
significantly lower than year ago.
Only half as many residential building
permits were issued in the Chicago area in the first quarter as in the same
period of last year, with single-family homes down 58 percent.
Total permits
were slightly less than in the very depressed period of 1975. These comparisons
may " e somewhat improved in the second quarter because the January-February
b
experience was "dismal."
Single-family homes are staying on the market much longer than last
year, partly because more offerings are available. Desirable condos are selling
well at steadily rising prices.
The going mortgage rate in the Chicago area has
increased to a record 10.5 percent, plus two points for fees.
Loans are said to
be "available" at going rates, unlike the situation in earlier periods of tight
money.
Usury ceilings are not an immediate problem anywhere in the district,
reflecting more flexible rules in certain states.
Sales of residential building materials, such as gypsum board and
insulation, are still setting new records, partly because of nonresidential
requirements.
Ready-mix concrete companies are working full blast to make up
for a long period of weather-enforced idleness during the winter.
logs, in tonnage, are at record levels.
Order back-
Ready-mix companies are choosing jobs
carefully, partly with an eye to the cost and availability of diesel fuel.
Structural steel demand is strong, but is not at record levels.
Our survey of rural bankers indicates that District farmland values
averaged 2.k percent higher in the first quarter, and now exceed year-earlier
level by l6 percent.
The first quarter increase was one of the smallest in-
creases since 1972.
Liquidity pressures are still very evident among rural banks, despite
robust farm earnings in recent months.
strong.
Demand for farm loans has been very
The first quarter rise in loan-to-deposit ratios was unusually large.
Interest rates charged on farm loans by rural banks have risen 1 per-
centage point in the last six months and 1.5 percentage points in the past year.
Seasoned bankers say they cannot recall a period when rates on farm loans have
risen so rapidly.
EIGHTH DISTRICT —
ST. LOUIS
The rate of growth in the Eighth District economy appears to have
slowed in recent weeks. Although activity in many sectors such as commercial
building and industrial goods continues strong, a slowing in consumer demand
was reported. Retailers reported a slowing in sales and some undesired
buildup in inventories.
Some manufacturers of consumer products, such as
apparel and furniture, also reported a noticeable slowing in sales.
Nevertheless, overall industrial activity appears to have gained modestly in
April from the high March level, spurred by continued gains in the capital
goods and chemical industries.
Construction activity also continues quite
strong in the District, led by advances in nonresidential construction which
have apparently more than offset the decline in home construction.
In the
financial sector, savings and loan associations experienced a net outflow of
funds in April, and mortgage lending requirements have become more
restrictive, particularly in Arkansas, Mississippi, and Missouri where low
usury ceilings still exist.
According to several area retailers, growth in consumer spending has
begun to slow noticeably in recent weeks.
Some retailers noted the recent
slower growth in consumer incomes and felt that the "buy-now" attitude is
apparently coming to an end. Department store retailers reported that
inventories have become greater than desired as the slowdown in sales
exceeded expectations. An apparel manufacturing representative noted that
sales in rural areas have also softened in the past month and that retailers
in these areas are cutting back on fall orders.
Industrial activity generally continued to expand in April, although
the Increases were more modest than those in March, when some activity was
partially induced by anticipation of the truckers' strike. The capital goods
industry continues to be the strongest sector.
Firms manufacturing railroad
cars, commercial airplanes, welding and cutting equipment, lubrication
equipment, and metals reported that sales growth has continued to increase.
A representative of a chemical firm noted continued strong sales, partially
attributable to higher export demand. Some decline in production, however,
was reported by a number of consumer goods firms, such as apparel, furniture,
appliance, and recreational vehicle manufacturers.
A representative of a
paper manufacturing firm reported that April sales were not as large as in
March, but believes that no significant downturn was indicated.
Construction activity in the District continues to grow, although
the type of construction is changing. Residential construction has declined
from a year ago in a number of areas in the District. Housing permits issued
in the St. Louis area are down about 20 percent from last year, and home
construction has declined somewhat. Nonresidential construction, however,
has taken up the slack, and overall construction employment is up relative to
a year ago. Large contractors report that they are turning away new
business, and that difficulties in obtaining materials and supplies is
prompting them to place orders far in advance of the start of new projects.
Savings and loan associations in the St. Louis area reported a net
outflow of funds in April with only 4 of the 27 associations in the area
reporting positive net inflows. They attribute the decline to the recent
changes in regulations concerning money market certificates.
These officials
also noted increasing competition from banks, credit unions, and money market
funds. Loan qualification standards and down payments continue to be raised
on mortgage loans, particularly in states where usury laws constrain mortgage
rates. S and L officials in Missouri have warned the state legislators that
substantial amounts of funds will leave the state if the 10 percent usury law
is not changed.
In Tennessee the usury ceiling was recently changed.
Effective May 1, the usury ceiling on mortgage loans began to float at 2
percentage points above the FNMA auction rate on conventional mortgages.
Substantial rainfall over much of the District has delayed the
planting of corn and cotton. Plantings of these crops, however, are likely
to be only minimally affected unless these unfavorable weather conditions
persist. Floods along rivers in the District have caused considerable
property damage, but spring-planted crops in most cases were not damaged
because of the late planting season. However, some damage to the wheat crop
was reported, and in some flooded areas, plantings of corn and cotton may be
prevented.
NINTH DISTRICT - MINNEAPOLIS
The Ninth District economy is currently very strong, but this Bank's
directors see signs of weakening ahead. Poor weather might cut crop production
and produce excess inventories at retail stores. Government regulations could
disrupt economic activity.
And larger loan requests combined with lackluster
deposit growth point toward rising interest rates.
Directors report recent sizeable gains in district business activity.
In the region's large urban areas, commercial and industrial activity is expanding vigorously. The northeastern part of the district is enjoying a strong
demand for iron ore and forest products.
High livestock prices are propelling
farm income above last year's high level in central and western areas.
And
throughout the district, auto and consumer hard goods are selling well.
Prosperity Threatened by Bad Weather . . .
Directors say, however, that recent developments in three areas are
threatening this prosperity.
One is bad weather, which they think could hurt farm production
especially.
A dry fall and a severe winter have destroyed half of the winter
wheat crop in South Dakota and up to 70 percent of it in parts of Montana. The
wet and unseasonably cold spring is preventing farmers from reseeding this
acreage or planting their spring crops.
In Minnesota by early May, just 6
percent of the spring wheat, 15 percent of the oats, and 1 percent of the barley
and corn were planted; the 197^-78 averages range from 30 to 60 percent. This
planting delay has substantially shortened the growing season, which increases
the likelihood of reduced yields.
The colder-than-normal weather
has already reduced sales at the
district's retailers. Last month directors reported that retailers were hoping
better weather would boost their soft goods sales.
But the weather did not
improve, and merchants are still reporting poor soft good sales. Unless these
sales pick up soon, unwanted inventories will start accumulating.
• . . Government Regulations . . •
Another threat to the district's prosperity comes from government
regulations—one in force and one being considered.
The wage and price guidelines can disrupt businesses, as a current
labor dispute illustrates. Early this month 2,700 workers walked off their jobs
at a large district computer manufacturer.
These strikers are demanding a 10
percent salary increase, but their employer is a large government contractor and
claims the 7 percent wage guideline prohibits it from meeting the strikers'
demand. If this company exceeded the guideline, it could be barred from obtaining government contracts.
If enacted, a federal gasoline rationing program could also disrupt
the district's economy.
So far, gasoline shortages have caused little trouble
in this area, and supplies are available for farmers' spring planting.
But
directors fear that the market won't be allowed to ration available supplies
this summer.
A government-mandated rationing program could seriously cut back
the district's tourist business.
. . . and Demand/Supply Problems at Financial Firms
The third disturbing development directors report is in the financial
market, where further interest rate increases seem likely.
prices have inflated loan requests in the district.
Rapidly rising
A Montana director says
that at his bank a rancher borrowed $25,000 last year and $50,000 this year to
buy the same number of cattle. Other directors indicate that rising prices have
boosted requests for business and consumer loans too. At the same time, deposit
growth has been sluggish, especially at commercial banks.
Interest rate ceil-
ings are no doubt partly responsible for this, since money market certificates
are the only accounts which have been growing.
If loan growth continues to
outpace deposit growth, district consumers and businesses can expect to be
paying higher interest rates.
TENTH DISTRICT—KANSAS CITY
Savings and loan associations in the Tenth District report a sharp
decline in net inflows as a result of the March changes in money market
certificates.
Housing starts and sales, however, remain relatively strong,
though somewhat below 1978's level. Most major retailers report roughly flat
real sales, but some expect a stronger second half.
A lower-than-expected
increase in winter wheat production could result in higher wheat prices ahead.
Loan demand at Tenth District banks remains high, but deposit growth, with
the exception of strong money market certificate inflows, is weak.
Tenth District savings and loan associations report large drops in
net savings inflows and, in some cases, net outflows since the March 1979
money market certificate changes.
Despite the current 10 to 11 per cent
range in mortgage rates, loan demand is still reported as strong due to fears
of even higher rates in the near future or of credit shortages in the states
of Missouri, New Mexico, and Kansas which all have usury limits. Mortgage
commitments are reported generally below the levels of a year ago and are
expected to decrease over the rest of 1979 due to rising mortgage rates or
mortgage fund shortages.
According to Tenth District builders' associations, housing starts
have been good this year, though down from a very strong 1978. Where strength
exists, it is primarily in single-family units with multi-family starts remaining about the same as this time last year.
Some associations, especially
in Missouri and New Mexico, express concern about the effect of usury laws
in their states on the availability of funds to meet existing demand for
housing.
Sales of new homes are down slightly over this time last year and
the inventory of unsold homes is reported to be adequate to tight, largely the
result of better planning and less speculative building.
Prices of materials
have not increased a great deal from last year and materials availability is
adequate for current needs.
Deliveries have been somewhat slow due to the
harsh winter and there is some concern over the supply of concrete, but most
District associations anticipate these situations to improve as the year
progresses.
Most major retailers in the Tenth District, with the exception of
Sears stores, report current dollar sales approximately 10 per cent above
last year.
Seasonal goods and summer fashions are rather strong sellers,
while household furnishings, major appliances, and hardware items are soft.
Some price rollbacks, reductions, and absorption of price increases were
mentioned by a number of retailers. Most of the retailers said that they
expect a 10 per cent inflation rate in 1979.
Inventories are a little
high, but "well within our budget" at most of the stores. No one mentioned
any major change planned in inventory movements.
The retailers expect a
stronger second half, although some pessimism was noted. With predictions
of a recession and with gas shortages, retailers feel they will be hit hard
if both occur on a widespread basis.
U.S. winter wheat production for 1979 is currently estimated at
1.39 billion bushels by the U.S. Department of Agriculture, up 11 per cent
from 1978.
Slightly higher yields and increased acreage account for the
larger production estimate. Nonetheless, the current production estimate
was below grain trade expectations and could, consequently, add support to
wheat prices. An Oklahoma Branch director indicates the Southern Plains
winter wheat crop is outstanding and growing conditions are very favorable,
although crop maturity is 10-14 days behind normal. Wheat fields in Nebraska
and in some parts of western Kansas, however, suffered substantially more
winterkill than usual.
Planting progress for spring crops has been delayed
over much of the Northern Plains and Middle West due to wet weather. As yet,
there is little indication that the delays will cause Tenth District farmers
to significantly alter planting intentions.
Nonetheless, grain industry con-
cern about the progress of the late planted crop—especially in view of similar
problems in Canada and in the USSR—means that market prices will be particularly
sensitive to weather news this summer.
All but one of the banks contacted in this month's survey report
strong loan demand among major loan categories. Agricultural loans, especially
those to cattle ranchers, are up sharply in some areas.
Banks are responding
to this demand by offering loan participations, instituting programs to
restrict the growth of certain types of loans, and in some cases, by increasing
lending rates. Most Tenth District bankers report that both demand and
savings deposits are stable or declining.
Strong inflows to money market
certificate accounts continue to furnish the only source of growth in small
time deposits.
Some of the larger banks in the District are relying in-
creasingly on the issuance of large CD's.
In addition, some banks are
planning to seek alternative sources of funds—such as holding company
commercial paper and borrowing at the discount window—to compensate for
the expected reduction in funds from TT&L accounts and from purchases of
nonmember bank Federal funds that may result from adoption of the recently
proposed change in reserve requirements.
ELEVENTH DISTRICT—DALLAS
Directors and businessmen report economic activity in the Eleventh
District continues to grow at a moderate and steady pace.
Retail sales in real
terms are running slightly ahead of a year ago and are expected to remain fairly
strong through summer. Loan demand at banks appears to have dipped slightly in
recent weeks from the strong level of earlier months, and some bankers anticipate
somewhat slower growth in loan volume in coming months. Net deposit inflows to
banks and savings and loan associations are up from April but have not recovered to
the moderate growth rates that had prevailed in the first quarter.
Conventional
mortgage lending activity remains depressed mainly by usury ceilings. The Texas
legislature is expected to raise the usury ceiling rate following FNMA's reluctance
to purchase FHA/VA mortgages that exceeded the state's 10-percent usury ceiling.
{Manufacturing activity continues to grow steadily, and many industries are near
full capacity utilization.
Retail sales are strong with no letup expected through the summer
months. Spring auto sales are increasing on the strength of small cars sales and are
slightly above the level a year ago. Bad weather and low inventories of small cars
are hampering sales at some dealers. A few dealers expressed the desire to keep
lower inventory levels because of the rising cost of financing inventories. Department store sales are running slightly ahead of a year earlier in real terms.
Retail
store executives remain optimistic for the short term, but they anticipate a mild
slowing of consumer spending later this year.
closely and are generally near planned levels.
Inventories are being managed
Gasoline prices continue to increase rapidly with the wholesale price of
regular gasoline now selling for 84 cents a gallon in the Houston spot market, up
from 70 cents a month ago. No major shortages have developed at the retail level,
but many gas stations are closing early on weekdays and all day on Sundays. Most
oil companies and refiners in the District do not expect the shortage to become so
severe as to warrant rationing.
A spokesman for a major oil company said that
demand would have to decline 5 percent nationally this summer from a year ago if
shortages are to be avoided. The tightest supplies of gasoline are expected in late
summer when refiners shift more of their production runs to heating oils.
Some softening in loan demand is noted by bankers, and a generally
slower rate of growth of loan demands is anticipated in coming months.
Loans
outstanding continue to advance briskly, and the strength is broad based. Bankers
continue to report commercial and industrial and real estate loans as particularly
strong.
Deposit growth has resumed following April's poor showing, but growth
rates do not appear to have returned to the levels that existed in the first quarter.
Funds continue to be diverted into MMC's with banks apparently getting a small
amount of funds from thrifts.
Net savings inflows at savings and loan associations are returning
marginally to the black after many S&L's experienced losses in April.
Personal
income tax payments contributed significantly to the losses experienced in April,
and the change in the terms offered on MMC's is keeping the expansion of savings
below earlier levels.
S&L's have increased substantially their holdings of non-
mortgage investments as usury ceilings in Texas discourage lending activity.
Mortgage lending is picking up seasonally but remains well below year-earlier
levels. Home improvement loans are at historically high levels.
Most mortgage bankers in Texas temporarily halted origination of
FHA/VA loans after FNMA expressed concern that the higher interest ceiling on
these types of loans might conflict with the state's usury statutes. Although there
are laws that exempt FHA/VA loans from the state's usury ceiling, they are
untested and may prove to be unconstitutional if adjudicated.
Some mortgage
bankers have resumed lending at the 10-percent rate but are not charging a
one-point origination fee to the borrower.
With conventional mortgage lending
severely limited by the usury statutes, the state legislature is expected to raise the
usury ceiling to a maximum 12 percent on a floating basis tied to the 10-year
Treasury bond rate.
Industrial output continues to expand at a moderate rate from an
already high level.
Capacity utilization generally remains high, and many
industries report rising backlogs of unfilled orders.
Recently, however, a major
producer of drilling equipment announced plans to reduce output and lay off
workers because of the industry-wide slowdown.
Manufacturing activity for firms producing consumer products appears
to be improving after a sluggish first quarter.
Apparel manufacturers report
improving sales levels, although capacity utilization remains low for most firms.
Much higher prices for synthetic yard goods and lengthening delivery times for
material inputs are reported. Furniture manufacturers have a mixed outlook and
are faced with higher lumber prices and, in some cases, difficulty in securing
certain types of lumber. Manufacturers of home appliances report increased dealer
orders, but sales to new home developments are down.
Consumers and businessmen express little optimism that inflation will
soon ease. Although a few retailers report some inflation-induced sales, the large
majority of retailers see a reduction in sales volumes as consumers' real incomes
decline.
Inventory building by manufacturers as an inflation hedge appears
minimal.
Many manufacturers have implemented cost-cutting measures, but low
productivity caused by declining labor quality and near full capacity utilization is
offsetting cost-cutting efforts.
TWELFTH DISTRICT - SAN FRANCISCO
With few exceptions, the Western region has continued to enjoy
strong economic growth during the first four months of the year.
consumers are definitely spending instead of saving.
'Bullish'
Retail sales continue
very strong. Both national and regional chains are planning numerous new
store additions this year—reflecting confidence in the region's further
growth.
Business demand for bank credit remains high. Retail inventories
generally have been kept under control except in two categories—gasguzzling large cars and recreational vehicles—which are the obvious victims
of gasoline shortages. Demand for compact and subcompact autos continues to
exceed supply. Residential construction is active in the Northwest, but
the housing industry continues to slow elsewhere in the West. Commercial
construction continues strong throughout the area.
Sales remain strong for
new and used business equipment. Employment is strong, unemployment low.
Skilled workers are at a premium.
The region's main concerns, according to
several directors, are the gas shortage and inflation.
While California has suffered more than other Western states from
inadequate fuel supplies, the entire 12th District may eventually be hurt.
(However, the damage to date has been modest.) The shortage would first be
felt in automobile, recreational vehicle and pleasure boat sales, in the
retail trade, in the amusement park and hotel/motel business and in the
planting, harvesting and delivery of
to the marketplace.
agricultural products from the fields
In addition, the United Airlines strike is affecting
the shipment of fresh produce. And railroad boxcar shortages are delaying
deliveries of lumber.
Concern over the energy situation will be an
additional risk factor causing firms to be more cautious than usual when
placing orders for the remainder of 1979.
But to repeat, the volume of sales
at both the wholesale and retail levels remains strong, despite signs of
trouble on the horizon.
The gasoline shortage has proved to be a mixed blessing for the
Pacific Northwest, where the Boeing Company is located.
Boeing's aircraft
sales are very strong as airlines order more fuel-efficient aircraft, such
as the 757 and 767 models.
Meanwhile, inventories remain low except in the petrochemical
industry, where producers have built up stocks largely as a security measure for
meeting existing commitments for delivery.
Booming retail sales are particularly evident in California and the
Pacific Northwest. Preliminary data for the first quarter shows California
had a gain of about 20 percent over the first quarter of 1978, with gains of
15 percent for nondurable goods and 29 percent for durables. These gains
are at least 50 percent larger than the national gains for the same period.
Partial data for April covering a sample of large Southern California
retailers show an 18 percent gain over the April 1978 sales volume. Only
Utah and Idaho report first-quarter retail sales weaker than anticipated.
When quizzed about the impact of the 1978 tax cut on the spending/
savings habits of Western consumers, most directors report that fhe tax cut
generally did not offset higher social-security taxes and the inflation-induced
boost of individuals into higher tax brackets. The rampant rise in inflation
more than offset first-quarter wage increases for most workers—so purchasing
power actually declined, giving individuals less to spend than last year.
The situation for California property owners has been somewhat more favorable,
due to the effect of lower property taxes as well as a reduction in state
income taxes. And those who benefited by these tax cuts seem to be spending
their newfound wealth rather than saving it.
@FedFRASER