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Prepared for the
Federal Open Market Committee
by the Staff

November 14, 1973


SUMMARY page i
First District - Boston page 1
Second District - New York page 4
Third District - Philadelphia page 7
Fourth District - Cleveland page 9
Fifth District - Richmond page 12
Sixth District - Atlanta page 15
Seventh District - Chicago page 18
Eighth District - St. Louis page 21
Ninth District - Minneapolis page 24
Tenth District - Kansas City page 27
Eleventh District - Dallas page 30
Twelfth District - San Francisco page 33

While the reports of the Federal Reserve Banks Indicate that the
pace of economic activity may have slowed somewhat in recent weeks, the
current situation is highlighted by growing demand pressures, material
shortages, problems of inadequate capacity, and increased rationing of raw
and semi-finished products by the private sector. In the agricultural sector, large crops and increased food supplies are in prospect.
The energy crisis is a topic of prime concern to businessmen
throughout the country. Several Reserve Banks report business slowdowns in
their Districts resulting from fuel shortages, and respondents in many Districts fear that layoffs of workers will worsen. Dallas reports that oil
production in Texas is falling and that present stocks of oil in that state
are only sufficient to last through the first severe cold spell. Diesel
fuel shortages are being felt in some areas. Atlanta reports that a recent
cutback in diesel fuel allotments will reduce coal deliveries to TVA, thus
contributing to a power shortage. Cleveland reports that the petrochemical
and rubber industries are being adversely effected by lack of oil and that
steel production may be curtailed in the months ahead.

Chicago reports

that industrial users of natural gas and propane may be cut off, but major
electric utilities in the Seventh District appear to be in a relatively
good position because of the use of coal and nuclear energy.
In addition to the concern about energy, shortages of other materials are widely reported. New York reports shortages in zinc and copper

[Asterisk: Prepared at the Federal Reserve Bank of St. Louis.]

which approach "Korean War proportions". Labor, paper, steel products, and
various other raw materials are reported to be in short supply in many
areas. An increasing number of firms in the St. Louis District report
rationing of a wide variety of raw materials by their suppliers, and Cleveland Indicates that a three to six-month delivery period is common for many
Manufacturing activity continues generally strong, but some Districts report a slowing in the rate of increase. Chicago indicates that
lack of supplies and manpower, rather than lack of demand, is responsible
for the slowing. Capital goods industries are especially strong, as investment spending continues at a high level. Reports from New York and St. Louis
suggest that much of the investment may be for mandatory pollution control
equipment rather than for projects which will increase productive capacity.
Many investment projects in the Atlanta District are being delayed, largely
as a result of shortages. Continued high capital spending in agriculture
is projected in the New York District, and Chicago reports that farm equipment firms are "swamped" by orders.
Retail sales generally continue at high levels, although some
of the Federal Reserve Banks indicate a slowing in consumer demand. This
was noted particularly for automobiles and consumer durables.
Employment generally continues at high levels, with many Districts
reporting labor shortages. For example, Dallas reports a sharp rise in employment in recent months, led by increases in construction and government
employment; unemployment in the Dallas District remains around 4 percent.
By contrast, Boston describes the New England employment picture as "bleak",

with September unemployment about 6-1/2 percent in the region and 7-1/2 percent in Massachusetts.
The agricultural situation is good with high crop yields and
large farm incomes in prospecto

Many Districts report that crop harvesting

is progressing rapidly. Livestock production in the Dallas District is
slightly higher than last year, and the Florida citrus crop is the second
largest on record. Chicago reports that, in the last year, value of farmland has experienced the largest increase in 20 years.
Construction activity is down in many areas, but commercial construction has held up better than residential. A number of the Federal
Reserve Banks reported that construction is being retarded by material
shortages, late deliveries and uncertainties stemming from rapid price
Interest rates have in some cases declined in recent weeks, reflecting a decrease in bank loan demand, especially for commercial loans.
Both San Francisco and St. Louis, for example, reported that the lower
business loan demand may reflect the substitution of commercial paper for
bank loans. Some Reserve Banks report increased availability of mortgage
funds, but the movement in mortgage rates is apparently mixed. Usury laws
in some states have tended to limit the supply of mortgage funds„


reports that the 8 percent usury law in Illinois continues to limit new
loans. New York reports an increase in the supply of mortgage funds resulting from the raising of the state usury ceiling from 8 to 8-1/2 percent.

Our Directors' businesses continued to experience high levels of
activity with no decline in new orders. In fact, one Director notes recordhigh backlogs both for oil field equipment and super alloys. In contrast,
the unemployment picture remained bleak. Despite the decline nationally, the
unemployment rate in New England rose from 6.2% in August to 6.5% in September and in Massachusetts the unemployment rate reached 7.5%.
The energy crisis was a major concern of our Directors and seems
to be having a mixed impact on their businesses. One Director, President of
a large manufacturing conglomerate, mentioned strong demand for helicopters,
stimulated in part by the increase in offshore oil exploration and, on the
consumer side, strong demand for chain saws, presumably to cut wood for home
heating. The head of another major conglomerate found the energy crisis
was having offsetting effects. Oil drilling equipment was in great demand,
and oil and gas producers were profiting from the higher prices, while, on
the other hand, the carbon black business was suffering substantially from
the high price of residual oil. Phase III controls prohibit passing the
increased energy costs on to the customers. Consequently, carbon black
manufacturers were experiencing a profit squeeze.

For the longer run,

higher gasoline prices and lower speed limits would reduce the demand for
tires and, in turn, the demand for carbon black.
Our Director from a large Boston bank reports that the credit
situation has eased considerably, primarily due to a contra-seasonal decline
in the demand for loans. He attributes this decline to a general hardening

of Che opinion that we are heading for a recession which will be aggravated by the energy crisis.
While our Directors expect a recession next year in the economy,
one Director from a large public utility indicated that the outlook in
Connecticut for next year had brightened considerably. A recession next
year in Connecticut now appears less likely, and, if it did occur, would
be less severe than previously thought.

Connecticut has accumulated a $70

million budget surplus which would be available next year either for tax
reduction or expanded spending programs. Another Director of a multinational
corporation argued that enough softening in the economy has been seen,
and that we are definitely due for a recession next year.
Professors Samuelson, Shapiro, Tobln and Wallich were contacted
this month. Most felt the economy has not been cooling as rapidly as many
had predicted it would. Several mentioned the large October decline in the
unemployment rate and Wallich noted that third quarter real growth was
within the statistical limits of long-term potential. Wallich suggested
that some of the supply problems may not be

genuine" but due instead to

inefficiencies resulting from price controls. Both Samuelson and Shapiro
doubted that controls have had a significant limiting effect. Shapiro
traced the supply limitations to nearly twenty years of dollar overvaluation which has eroded capacity expansion in U.S. industries (a point
Professor Otto Eckstein has also made).

Samuelson notes that a slowdown,

whether due to demand or supply limitations, still would generate effects
of the accelerator principle.
There was broad agreement on a target rate of growth for the
money stock near 5 percent. The agreement, however, masked significant

underlying differences in implementation. Wallich, for example, would
accept a 5 percent target but would not permit short rates to decline in
order to achieve it; under present conditions, the more restrictive policy
indicator should be followed. Tobin, who does not use an aggregate as a
policy target, advocated a gradual decline in the Federal funds rate
toward the bill rate; he expressed concern about the stock market and
felt that, as a result of the rising costs of capital goods, "equity
values have fallen behind the replacement cost of the capital they are
claims to". He attributes this shortfall to uncertainties about the
Middle East and the Presidential problems. Samuelson preferred a money
target "not lower than 4 percent". Shapiro favored a 5 to 6 percent
rate of monetary growth. He was puzzled by the recent uptick in the
bill rate. Because he could find no objective reason for the rise, he
speculated it should be treated as a random event which will be reversed
in the future. So long as money growth came in at or above target levels,
both Samuelson and Shapiro would allow short rates to be determined in
the market.

Second District directors and other business leaders who were contacted recently reported that demand pressures remain intense, and that materials shortages, capacity limitations, and delivery delays are continuing
to hamper production in many industries.

The respondents generally felt that

current capital spending plans for 1974 would hold up even if the widely forecast slowing in the growth of the economy materializes. A moderate increase
in the availability of mortgage funds during coming months was expected,
paralleling an anticipated recovery of deposit flows to thrift institutions.
The respondents generally saw no evidence of any easing in the intensity of demand pressures. Indeed, most felt that the materials shortages,
capacity pressures, and delivery delays were still "predominant", and in some
instances, increasing. A senior official of a large chemical concern reported
that demand pressures in his industry have intensified and that shortages
have developed to an extent leading to substantial business slowdowns. Another director reported that shortages and delivery delays for fuel and raw
materials, including petrochemical products and steel, were expected to slow
economic activity in the upstate New York area.

The president of a large

non-ferrous metals producer reported that shortages in the copper industry
are approaching Korean war proportions and that zinc is also in very short
supply. Similar observations were made by senior officials of several
other major firms in the metals industry. A vice president of a large multinational packaging products firm, moreover, reported that the shortage of
paper was hampering his firm's operations.
The only sector where any respondents noted an easing of demand
pressures was the consumer sector. One director observed that sales of

consumer durables, both automobiles and home goods, appear to be slowing
somewhat as a result of heavy purchases over the past year and increasing
caution on the part of consumers.
Concerning prospective business capital outlays, all of the
respondents who expressed an opinion on the subject felt that current
plant and equipment spending plans for 1974 would hold up, even if the
generally forecast slowdown in the growth rate of the economy materializes.
Most of these respondents felt that owing to the long lead times typically
involved in capital spending projects, the funds for most 1974 programs
have been committed and many of these projects have already been activated.
Some of the business leaders, moreover, pointed to the need for investment
in pollution control equipment to meet governmental standards. A number
of respondents noted the growing belief on the part of businessmen that
current worldwide shortages are likely to persist, inducing businesses to
increase operating capacity. A branch director with farming interests
predicted a continuation of high capital spending in the agricultural
sector as well.
With respect to prospective developments in the mortgage market
over the fall and winter, a number of directors felt the availability of
funds would meet the demand, but at somewhat higher rates, larger downpayments, and shorter maturities. Thus, an upstate manufacturer felt
that while mortgage funds would probably become somewhat more readily
available, they still would remain relatively scarce because of the
higher rate of return available to financial institutions on alternative

The president of an upstate bank, however, reported that

the recent declines in market rates and the recent increase in the New

York State usury ceiling to 8-1/2 percent have significantly improved the
availability of mortgage funds in his area. A New Jersey banker, however,
reported that many New Jersey institutions appear to be delaying making
mortgage commitments, awaiting an increase in the State's usury ceiling
to 8-1/2 percent, despite the increase In deposits at those institutions
resulting from the recent decline in money market rates.
In this connection, the directors in general felt that the worst
of the recent wave of disintermediation is past, and that interest rate
developments might lead to a reflow of consumer time and savings deposits
to banks and thrift institutions in the months ahead.

Hie president of

an upstate bank stated he expected a "material" rise in consumer-type deposits, not only because of rate developments, but also because consumers
in his area appear to be saving more in anticipation of adverse economic
conditions next year. Another director, on the other hand, felt that the
lower discretionary income levels, resulting from relatively moderate
wage increases at a time when prices are escalating rapidly, is likely to
reduce the rate of consumer savings.



The economic expansion continues to move ahead in the Third District but there are some indications that the advance may be slowing. Manufacturing activity increased again this month and employment is up slightly
as well. Plant and equipment spending plans are bullish. Loan demand at
banks is strong. On the darker side, inventory investment has leveled off
and retail sales are lackluster.

Finally, inflationary price changes are

Third District manufacturers polled in this month*s business

outlook survey report their output is increasing less rapidly.

The large

majority of responding firms report no change in their new orders, shipments,
unfilled orders, and delivery times. However, for the minority of firms reporting changes in these categories, there are still more reporting increases than decreases. The six-month outlook is less bullish. Although
the majority of firms contacted expect no change in business activity during
the six months ahead, the minority expecting change includes more firms
expecting decreases than increases.
The continued high level of business activity is reflected in a
slight increase in employment.

More than twice as many firms report in^

creasing the number of people on their payrolls and the length of the
average workweek than are reporting decreases. However, over 85 percent
report no change in their current labor usage. During the coming six
months, however, the level of employment is expected to remain flat. The
number of firms expecting to hire approximately equals the number that
foresee layoffs. A slight reduction in the length of the average workweek
is also expected by next spring.

The continued high level of current business activity is causing
a sizeable number of businessmen to increase their plant and equipment
spending. Although half the respondents have no plans to change their
capital expenditures, one-third plan increases. Inventory investment is
less bullish. The respondents' consensus indicates that current inventories
are holding constant, but small inventory reductions are expected during the
next six months.
Retail sales are slowing according to executives in Philadelphia
department stores. Durable goods purchases of the postponable variety, such
as appliances, are off significantly. However, the retailers contacted expect good Christinas sales.
Upward pressure on prices is still strong with over two-thirds of
the respondents reporting paying higher prices during the past month. On the
other hand, two-thirds of the firms report no change In the prices they
charged during the past months. Looking ahead to next summer, however,
over 80 percent of the respondents expect higher prices both for the goods
they buy and sell.
City and regional bankers report that checking and saving deposits
are maintaining the same slow levels of growth as in past months. Dependence of large CDs as a source of funds has weakened as bankers are now returning to the Federal funds market for shorter term funds. Loan demand is
strong, especially business, real estate and consumer loans, while loans to
non-bank financial intermediaries decreased a little.



Business activity in the District remains strong, although there
are some signs of slowing. Apart from the weakening in housing and consumer durables, the slowing is probably more a reflection of capacity limitations and a tight supply situation in raw materials and fuels than the result
of a decline in underlying demand. Our Directors and businessmen and economists in the District are gravely concerned over the energy situation and its
implications for the economy in 1974.
Output in the District's manufacturing sector continues to rise,
but signs of slowing in the upward momentum are accumulating.

Our monthly

survey of manufacturers shows a significant decline in the proportion of
firms reporting gains in new orders and backlogs in recent months. September was the poorest month of the year, and early returns for October
suggest further weakening occurred.

There has also been some slowdown in

the rate of inventory accumulation.

Delivery time, however, continues to

lengthen, compounding the problem of shortage faced by virtually every

(The October report of Cleveland purchasing agents questioned how

there could be a recession next year in view of the fact that very little
inventory is available and deliveries are taking three to six months
or more on practically everything.) There was a surge in price increases
during October, as the largest proportion of firms in the ten-year history
of our survey reported paying higher prices.
Our industrial Directors, particularly those supplying the
capital goods market, generally report strong business conditions, although
some softening in the consumer area was noted. The Directors are becoming

increasingly concerned over problems of inflation, distortions caused by
wage-price controls, public confidence, shortages of raw materials, lead
times growing worse and -- of greatest concern —

the energy situation.

Some are worried that energy shortages could cause Industrial layoffs next
year and lead to a recession.
One of the largest refineries in the District is experiencing
difficulty in obtaining crude oil supplies. It must purchase 85% of its
crude oil, and a significant share of that comes from the Mideast. The
company is already allocating supplies to its gasoline stations and oil
customers. A financial executive of the company informed us that refinery
runs will be cut 20% in December and 30% or more in January if the Arab
oil embargo continues.
A major concern of industrial firms in the area is that the
energy crisis will precipitate layoffs, especially if natural gas is diverted to home heating. Previously, firms were able to switch to oil when
gas supplies were curtailed; now they are uncertain if they can obtain oil.
The rubber Industry in Akron reports shortages of raw materials
as well as energy problems common to other industries.

The petrochemical

industry, which supplies the rubber industry with much of its raw materials,
has been cut back in its oil allocations, and thus creating problems for the
rubber producers.
The steel industry is still operating at peak capacity and is continuing to allocate orders. One major firm just opened its order books for
first quarter delivery, and they expect to be filled by Decen&er.

(As in

the past, this procedure of opening and closing order books will cause a
distortion in the monthly series on manufacturers' new orders for durable

goods.) Fuel shortages are likely to curtail steel output in the months
ahead, according to economists from three large steel firms. Cutback in
either oil or natural gas will affect their output. In addition, one major
steel firm is short on coal and coke. Qne. economist said many of its smaller
steel customers have been unable to accumulate inventories and have been
forced to operate hand-to-mouth.

Thus, any decline in steel output would ad-

versely affect general manufacturing operations.



Results of our most recent survey of businessmen and bankers Indicates that business activity in the District is still expanding. Further
increases were reported in employment, and retail sales remain strong throughout the District. Manufacturers reported further increases in shipments, new
orders and backlogs. District manufacturers continued to be plagued by raw
material shortages and tight labor markets.

The demand for business and con-

sumer loans increased during the past month while the demand for mortgage loans

In general, manufacturing and retailing respondents expect that

general business activity, both nationally and locally, will decline during
the next six months. Business activity in the District is expected to decline
less than nationally, however.
Our list of manufacturing survey respondents has been enlarged and
this month's report is based on responses from 56 large manufacturing firms in
the District. Survey responses indicate that business activity in the manufacturing sector remains strong. More than 30 percent of those surveyed reported
an increase in shipments, new orders and backlogs.

Increases were especially

prevalent among chemical and machinery and equipment producers. Numerous
respondents commented about tight labor markets and shortages of raw materials,
especially petrochemical based materials.

Complaints about the unfavorable

impact of price controls were common. On balance, manufacturing respondents
indicated that inventory levels were down compared to the previous month, with
the decline in finished goods inventories substantially greater than that of

In general manufacturers believed that inventory levels were too low.

Survey responses indicated employment in the District increased during
the past month. Increases in the number of employees were reported by 24 percent
of the manufacturing respondents. While retailers reported no change in the
number of employees, one-third of the banking respondents reported that employment in their areas had increased.
Price increases have been widespread in the District during the past
month. More than three-fourths of the manufacturing respondents reported increases in prices paid and one-fourth reported increases in prices received.
All of the retailers reported increases in prices paid and three-fourths reported
increases in prices received.
Retail sales in the District remain strong. More than one-half of the
retail respondents reported that sales had increased in recent weeks. In general,
banking respondents indicated that retail sales in their areas had increased.
Several retailers commented about the negative impact of price controls on profit margins. Comments by retailers suggest some customer resistance to top-ofthe-line items and a higher than normal interest in medium priced and sale items.
The demand for business and consumer loans reportedly increased during
the past month while mortgage loan demand declined further. More than three-fourth
of the banking respondents reported that the demand for mortgage loans either declined or remained the same.
The shortage of funds continues to be reflected in residential construction. More than 90 percent of the banking respondents indicated that residential construction in their areas had declined.

Nonresidential construction

activity in the District appears to have changed very little since the previous
District farmers continue to benefit from a greatly improved farm
income situation, with cash receipts from farm marketings during January-August

running 24 percent above a year ago.
In general, manufacturing and retailing respondents expect the level
of business activity, both nationally and locally, to decline during the next
six months. But both groups expect production and sales In their own firms to
increase during the next six months.



The District's economy appears to be showing some signs of slowing
down from its recent rapid growth pace. Reasons for the slowdown are energy
and materials shortages and declines in residential and commercial construction resulting from high interest rates and overbuilding in some areas.
Although announcements of new commercial projects and new or expanded plants
continue to pour in, there is growing evidence that some of these projects
may be delayed or canceled because of energy and materials shortages. Bumper crops are reported in some parts of the District.
According to Directors and businessmen, the energy shortage is
beginning to have an impact on the District's economy. TVA announced that
coal supplies are running low at several steam plants. The present stockpile is only 19 days rather than the preferred 90-day supply; anything below
a 60-day stockpile calls for emergency measures.

The shortage of diesel

fuel is intensifying TVA's coal shortage. A recent cutback on allotments
of diesel fuel means that barges which deliver about one-third of TVA's coal
will not be in operation.

TVA estimates that the energy loss from the non-

delivery of coal is about 300 times that saved by the cutback in diesel
fuel. This demonstrates the need for a more rational allocation of fuels.
In Louisiana, a gas supplier has implemented cutbacks on natural gas supplies
to its electric utilities and industrial customers in several southern states.
As a result of this curtailment, 32 of 39 sugar mills In Louisiana will be
without natural gas this fall, and a substantial part of this year's sugar
cane crop may rot in the fields. The energy and fuels shortages are also
causing a scarcity of nitrogen-based fertilizers. According to one Director,

this means a shortage of food and high food prices next year. There seems
to be a definite choice between suffering some cold this winter or a shortage
of food next year. Two major airlines in the District, Eastern and Delta,
have announced plans to cut back operations 5 percent and 3 percent, respectively, to save fuel.
The energy shortage, along with the past high level of building
activity, has caused delays in the completion of many construction projects.
Plastic plumbing, a petrochemical product, is now in short supply. Builders
have had to revert to cast-iron plumbing*

One Director indicated that plans

for a new paint plant were canceled when the manufacturer found that he could
not obtain the needed petroleum products. Shortages of cement, steel, and
fixtures have also stretched-out completion of a number of projects. In
most cases, contractors have been willing to pay whatever the asking price
was to obtain materials. According to one Director, these same contractors
will be less anxious to start new products because of these shortages*
Reports from around the District indicate that both residential
and commercial construction continue to weaken. Although construction on
many projects continues, partially because of delays in delivery of materials, a decline in building permits in most areas indicate that further
drop-offs in home building are just around the corner.

The tightening

of credit has also affected the District's large mobile home industry.
Reports from northwest Alabama indicate that mobile home plants have been
shutting down and laying off workers. In central Florida, Bible World,
a proposed $11 million tourist attraction, has been postponed indefinitely
because of tight credit conditions.
motels in central Florida.

There is evidence of over-building of

The hotel-motel occupancy rate in the Orlando

area is approximately 41 percent, and some of the larger hotels are running

only 24 percent of occupancy* However, a shortage of apartments still
exists. Disney World, which has a problem in housing its employees, is
building a 900-unit apartment complex on its property in Lake Buena Vista.
A large number of commercial and industrial projects continue to
be announced. Several national corporations have announced plans to locate
regional offices in the Atlanta area; four new hotels have been announced
for its outlying areas. Some businessmen believe the present fuel shortages
and the possible reduction in traveling may force cancellation of some of
these projects. As last month's report indicated, the shortages of energy
and materials are stimulating some new announcements of industrial projects.
The energy shortage has forced a $28,4 million expenditure by Copolymer Rubber
and Chemical Corporation in Baton Rouge in order to modify their equipment
for a reduction in natural gas usage. In west central Alabama, Citadel
Cement Corporation plans a $50 million Portland cement plant with an annual
capacity of 750,000 tons. Pass Christian, Mississippi, seems certain to be
the location of a $100 million Dupont chemical plant which will eventually
employ 1,200 workers.
A new twist may be in the offing for foreign investment in the
District. One Georgia official speculates that Japanese banks will soon
be opening branches in Atlanta, and a British bank is currently in the
process of establishing a branch here. A Japanese textile firm plans
to build a $15 million plant in Augusta, Georgia. This will be the tenth
Japanese firm in Georgia.
In agricultural news, the soybean harvest is going well; nearly
50 percent of the crop is harvested. Bad weather has reduced the cotton
crop in middle Louisiana to 20 to 30 percent below last year's production.
This year's Florida citrus crop is the second largest on record.

The fuel situation was potentially critical in the Seventh District
before the curtailments in oil supplies resulting from the Mid-East war. The
President's conservation speech of November 7 was greeted as long overdue.
Attempts to assess the overall impact of fuel shortages are still inconclusive.
Demands for workers are very strong, and total consumer spending apparently
continues at a very high level, despite reports of "consumer pessimism." The
availability of residential mortgage funds has eased somewhat in the past month,
but no significant reversal of the decline in residential construction is foreseen before mid-1974. Demand for capital goods (in fact, for all manufactured
goods) is intense with widespread shortages of materials, components, and manpower impeding attempts to increase output, especially of buildings and equipment. Crop harvests have progressed rapidly. Farmland values have jumped
sharply in the past year.
Business firms, governmental units, and many individuals are taking
steps to cut consumption of fuel and electric-* ty along the lines suggested by
the President. Major electrical utilities in the District appear to be in
a relatively good position to handle demand this winter because of relatively
heavy use of nuclear power and coal. Many industrial users of natural gas and
propane have been notified that their fuel would be curtailed or shut off.
Some plants could shift to oil, but they have no current basis for an allocation. There is great uneasiness that layoffs will occur as a result of fuel
shortages, not only in the industries using fuel and petrochemical feedstocks,
but also in plants that require plastic parts and other components.

A "shakeout" of weaker competitors in the motor home and other recreational fields is said to be near-at-hand.

Such a shakeout has been in progress

for the past year in modular home building, and plant shutdowns are still
The mortgage market has eased with rates in the Detroit area reduced
from 9 to 8.5 percent in the past few weeks. The 8 percent usury ceiling in
Illinois continues to limit new loans. Home sales in the Chicago area were
off about 50 percent from last year in recent weeks. Nevertheless, a recent
survey shows prices of existing homes in the Chicago area to average 10 percent
above a year earlier, compared to an 8 percent rise in the previous 12 months.
This Bank's survey of farmland values shows an average increase of
17 percent from a year ago as of October 1, and a rise of 8 percent in the third
quarter. These are the largest increases in the 20 years of the survey. The
soybean and corn harvests are coming along very well. Most areas report lower
grain moisture content (and better quality) than last year, so less fuel will
be needed for drying.
When polled concerning their views cf the U. S. economic outlook for
1974, business and financial executives in the District report expectations of
slower growth (but no recession), continued rapid price inflation, weaker
consumer markets, large capital spending, strong exports, and some rise in
unemployment. This should be no surprise because they all see the same national
publications and subscribe to the same services. When asked about their own
prospects, most all executives report continued problems in meeting demand.
District experts are very concerned about reduced availability of
dlesel truck fuel, which could cut production in many factories dependent
on trucks for shipments in and out. Postponements or reversals of environmental

regulations relating to types of fuel used are deemed essential. Moreover,
price controls are interfering with the most efficient distribution of
available supplies.

Gasoline prices in the Chicago area have jumped to 45-47

cents for regular, and a further boost to 55 or 60 cents is anticipated for
next spring.
Factory output is being limited in most major industries by availability of supplies and manpower, not by lack of demand. Auto sales in October
were somewhat below expectations, but sales still reflect production shortfalls
resulting from lack of components and strikes. Consumer purchases of small
cars, appliances, furniture, TV sets, audio products, and most soft goods are
at a very high level. Demand for capital goods is so vigorous that some firms
are having trouble untangling their order books.

Farm equipment firms are

"swamped" and will maintain output in the off season.

Steel output is ex-

pected to be as large in 1974 as in 1973, despite a cutback in motor vehicles.
Steel shipments earlier in 1973 were helped by liquidation of mill inventories
and, therefore, steel shipments are expected to be lower in 1974. No net
growth in steel capacity is expected in 1974, but a large expansion program
has been announced for northern Indiana —
recent years.

the first such announcement in

Foreign demand for capital goods and for steel is excellent

in virtually all markets, but not all orders can be accepted because of U. S.



Business activity in the Eighth Federal Reserve District
generally remains strong. Retail sales have continued to increase in
recent weeks, but at a somewhat slower pace than earlier. Manufacturing
firms generally remain operating at full capacity. There has been no letup
in the problem of raw material "shortages" and backlogs of unfilled orders.
However, businesses are reluctant to expand plant capacity even though
current demands apparently call for further plant expansion. Credit
demands at commercial banks have slackened off in recent weeks, but
mortgage funds generally remain in short supply.

In the agricultural

sector, crop harvesting is generally on schedule for this date.
The uptrend in retail sales is continuing in the District,
although at a somewhat reduced rate on a seasonally adjusted basis. Some
outlets reported difficulties in making a profit at some of their stores,
particularly in the central city areas. One remedy contemplated by these
firms is to reduce inventories and offer somewhat different types of goods.
"Shortages" and production "bottlenecks" are problems of
increasing intensity for business managers in the District. Shortages of
basic raw materials were reported in numerous instances, and in the case of
some products such as paper, boxboard, fabricated steel, brass, forestry
products and gasoline, the shortages may have grown more intense in recent
weeks. An increasing number of firms report rationing of a wide variety of
raw materials by their suppliers.

In the construction Industry it is

reported that a number of subcontractors are refusing to make bids because
of uncertainties stemming from rapid price changes and availability of

In a number of instances shortages of raw or semi-finished

products have led to production stoppages and the laying-off of workers.

Although most manufacturing firms are operating at or near peak
capacity levels, some firms stated a reluctance to enter into long-term
projects to increase capacity. These firms expressed a desire to be quite
certain of the profitability of such projects before undertaking them.
This reluctance apparently reflects many uncertainties including the
near-term outlook for the economy and the possibility of profit restricting
Government price control policies. Also, a number of firms reported that
most of their recent investments were made to meet environmental
requirements rather than provide for new capacity. Scheduled capacity
increases for 1974 in many cases will not occur because of shortages.
Employment at major businesses in this District continues to inch
up, according to the firms interviewed.

"Shortages" of skilled labor

continue throughout the District, and in recent weeks the problem was
apparently more serious in the smaller communities than heretofore. The
unemployment rate has remained stable at a relatively low level for several
Some large commercial banks in the area report a recent slowing
of demand for business loans. The prime rate is generally 9-3/4 percent,
although bankers felt that this rate will soon be reduced to 9-1/2 percent.
One factor leading to the slackening demand for bank loans is the
substitution of commercial paper for bank loans by large business firms.
This reflects the more attractive commercial paper rate In recent weeks
relative to the prime bank loan rate. Net savings at commercial banks and
savings and loan institutions were generally reported to have Increased
recently, although at substantially reduced rates compared with the early
months of 1973. Saving and loan associations, however, reported great

difficulty in attracting funds in recent months. This apparently reflects
the strong competition from commercial banks and higher yielding market
instruments such as Treasury bills, government agency securities, and
commercial paper.
Favorable harvesting weather has permitted farmers to get "on
schedule" with crop harvesting operations despite the later than normal
planting of crops. Crops are generally good and record breaking farm
incomes are in prospect.



Despite evidence in national surveys of declining consumer confidence, District retail spending continues to expand, but there are signs of
slowing. Many District businessmen plan to increase their plant and equipment spending; there was less certainty, though* about increasing inventory
outlays. In response to the President's request, District businessmen and
Governmental officials are adopting energy conservation programs and are
very concerned about the adequacy of fuel supplies this winter. District
farmers are making good progress in harvesting this year's crops and look
for record yields.
Although Bank Directors reported that consumer spending continues
quite strong and District retailers in general look for a good Christmas
season, some softening in sales growth has recently emerged. A Director
associated with the retail trade industry revealed that a recent decline
in consumer sentiment has not yet affected his firm's sales. He did,
however, express some concern about how the recent deterioration in
consumer confidence would affect Christmas spending.

Furthermore, he

stated that substantial year-to-year sales gains this Christmas season
are going to be hard to achieve, since sales gains were so large last
Christmas. A Twin Cities area banker disclosed that his commercial customers report some recent slowing in retail sales gains but are quite
optimistic about Christmas spending. Another Minnesota director noted
that retailers in his area are optimistic about Christmas spending but
are experiencing delays in receiving needed inventories. Given the
favorable agricultural situation, a North Dakota director termed the

outlook for retail spending in his state as very good. A Duluth Director
indicated that a definite softening in his area's retail spending has occurred
in the last three weeks, and many retailers expect that Christmas spending will
probably remain at last year's level.
District businessmen, according to Directors' responses, plan
to increase their plant and equipment spending, but the outlook for inventories was mixed. One Director said that customers surveyed by his bank
plan to substantially increase their plant and equipment spending and that
many firms want to expand their inventories but are encountering supply
constraints. Another Director disclosed his firm is having difficulty obtaining steel supplies as a result of recent increases in business spending.
In the Upper Peninsula of Michigan, the construction of a large mining
installation has stimulated a great deal of plant and equipment spending.
In the Duluth area, several major capital investments are under way, but
businessmen are being very cautious with regard to inventory spending.
In response to the President's request to curb energy usage,
District businessmen and Governmental officials have instituted fuel
conservation programs. Many Minneapolis/St. Paul businesses have announced
plans to forego their annual Christmas lighting, and temperatures have
been lowered in many of the area's major office buildings and plants. In
addition, the airlines headquartered in the District have cut flights.
Furthermore, many firms are encouraging their employees to form car pools
and are imposing 50 m.p.h. speed limits on company vehicles.
Fuel shortages have not yet seriously hampered District business
activity, but businessmen are concerned about shortages this winter. A Twin
Cities area retailer thought it possible that his firm may have to shorten
hours this winter. Although a lack of fuel has not yet restricted operations,

major district manufacturers reported difficulties obtaining needed supplies.
If shortages develop, two firms indicated they may shift to a four-day week,
while another may close its smaller plants. Twin Cities area motor carriers
are very concerned about inadequate fuel supplies, and one railroad headquartered in the District looks for a really difficult winter.

Major fuel

oil distributors are not accepting any new business but are hopeful they
will be able to meet their old customers' fuel needs this winter.
Blessed with favorable weather in recent weeks, farmers in the
grain-producing areas of the District have made good progress in harvesting
this year's crop. Favorable harvest conditions have all but eliminated
the threat of propane shortage for drying the District's 1973 corn crop.
As of November 4, the harvest of soybeans in Minnesota was 98 percent

The corn harvest was 74 percent completed, compared with

less than 50 percent a year ago. Record yields are now being forecast
for both crops.

Directors of the Federal Reserve Bank of Kansas City and its
Branches report that economic activity remains generally strong in their
areas, with the exception of residential construction. Concern was
expressed about the energy supply situation, and most respondents
called for an end to wage-price controls. Farm prospects continue
strong, except among some cattle feeders. Total loan demand at District
banks was weak in October, with business loans the weakest component.
General economic activity remains strong in most parts of the
Tenth District, although some slowing in the rate of increase has
occurred. Retail sales as a whole continue to be fairly strong, but
automobile sales seem to be weaker than anticipated earlier. Residential
construction is reported to be generally slower across the District.
Homebuilding is off in Omaha and Oklahoma City as well as in out-state
Nebraska and Oklahoma. Earlier overbuilding of apartments in Oklahoma
City has led to extremely high vacancy rates as well as to a halt in
new construction. Only Denver reports continued strength in homebuilding,
with construction labor in tight supply. Commercial construction activity is holding up better than homebuilding in most areas.
Two matters of concern were mentioned specifically by several

the energy situation, and wage-price controls. Reactions

to the energy situation were mixed.

(These reports preceded the Pre-

sident's speech on the subject.) Several Directors blamed the situation
on "going overboard on ecology."

"Much concern over the energy crisis"

is reported from Albuquerque, while little concern was reported from
smaller cities and agricultural areas of Colorado and Oklahoma. While

one respondent felt that the situation was not as critical in Denver as
elsewhere, another reported that "people here in Denver are scared. .«of what
the energy crisis will bring." One Director believes that current economic
forecasts are giving too little weight to the energy supply situation.
Only one Director spoke in favor of keeping wage-price controls
in place. All others commenting on them believed that controls should be
abandoned soon, as being "ineffective" and "an unnecessary nuisance." A
Director in the steel business remarked that controls have really "goofed
up" that industry, specifically by keeping prices of some items so low
that they become unprofitable to produce and hence difficult to get.
Generally, farm prospects continue strong in most areas, although
the downturn in cattle prices has put several producers in serious trouble.
This stems from their buying feeder animals at unreallstically high levels
and then holding them too long, thinking that prices were bound to go up
shortly after the freeze was lifted. However, it was the Directors' view
that, while a few smaller operators would suffer big losses, most producers
are in good enough financial shape to wither the storm, assuming that
cattle prices strengthen in the not too distant future. Most of the other
sectors seem to be in excellent shape. The harvest is progressing rapidly,
the crops are good, and prices are such that crop income will show a sharp
jump over last year.

Furthermore, producers of feeder and stocker cattle

are still making good profits, although not as good as was experienced earlier
in the year.
Locally severe flooding occurred this fall in parts of Kansas,
Nebraska, and Oklahoma. The effects in Nebraska have not been as harmful
as first expected, and high prices and good crops there are contributing

to a healthy economic situation for the state as a whole. In Oklahoma, the
floods affected some of the best wheat land in the state. The major impact
there is likely to be the lessened availability of winter pasture on much
of that land.
Tenth District bankers indicate that total loan demand was weak
in October, although this was not uniformly true for all banks contacted.
In general, the component of loan demand reported weakest was business loans,
while agricultural and real estate loans were generally steady. On the other
hand, consumer installment loan demand was reported as being strong. Host
respondents reporting weak loan demand also reported that the interest
rates they were charging were declining or would decline in the near future.
The decline in interest rates was attributed to the need to keep rates in
line with money market conditions in New York. One respondent reported
that it lowered its rates to compete on a national level with large money
center banks as Its national business was off somewhat. No respondent
reported any effects on rates charged from the newly Imposed ceiling on
wild-card CDs.
Total deposits at weekly reporting banks continued to Increase in

In conformity with the trend for this year, but in contrast to

September, most of the increase in deposits was in time and savings deposits
rather than in demand deposits. Large CDs at weekly reporting banks also
increased substantially in October.

Several of the banks surveyed, however,

especially those reporting weak loan demand, reported a runoff in CDs and
a reduction in their CD rates. This gives rise to the possibility that the
runoff may have been intentional on their part.

Recent changes in economic Indicators suggest that the Eleventh
District economy is continuing to grow, although the present expansion may
have begun to slow. Texas industrial production and District employment
advanced strongly in September, and District agricultural conditions are
good to excellent. But new construction contracts and demands for credit
dropped sharply, and department store sales have leveled off. In addition,
an informal survey in early November of Texas buyers of crude oil, petroleum industry associations, and Texas railroad commission staff revealed
broad concern over the adequacy of present and future availability of crude
oil and refined petroleum products to meet the state's energy requirements.
Several respondents felt that present stocks of crude and refined
products are not as adequate as statistics indicate because figures Include
pipeline fille

As a result, fuel stocks may only be sufficient this winter

to see the state through its first severe cold spell. Moreover, the crude
oil buyers indicated that they are already having difficulty finding the
supplies to meet their company needs and the full impact of restrictions
already placed on petroleum exports from the Middle East has not been felt.
The outlook for oil availability is further dimmed since production in Texas oil fields is currently falling at a rate around 3 percent
per annum, while demand has been rising about 6 percent or more a year.
Some of the Texas railroad commission's staff indicated a belief that the
commission would be reluctant to waive conservation restrictions to allow
greater production and that it may not have the legal authority to do so in
any event*

The survey respondents were also concerned that new mandatory
allocation programs based on historical use patterns would sake fuel oils
more scarce in the Gulf states, In Texas, for example, many utilities and
industrial concerns have recently switched from expensive and hard-to-get
natural gas to fuel oil, and consequently, they may not qualify for allocations on the basis of past use patterns. Many farmers could be denied
dlesel fuel because last year's weather conditions prevented planting and
reduced their demand for fuel. Similarly, some drilling and transportation
firms face problems obtaining diesel fuel because they have recently switched
from another type of fuel or because the mobility of their operations has not
allowed them to establish a use pattern in a given region,.
Seasonally adjusted total employment in the five District states
rose 0.6 percent in September,, Gains were made in all sectors except nondurable manufacturing, but the increase largely reflects a sharp rise in
construction and governmental employment.

The 4.0 percent unemployment rate

for September is 0„4 percentage points lower than the figure a year earlier,
but it has remained in a narrow band around 4.0 percent since November 1972,
The seasonally adjusted Texas industrial production index advanced
1.0 percent in September to a level 7.4 percent higher than a year ago. All
major components contributed to the increase, but the advance in utilities
was particularly sharp.
Department store sales in the District were 7.8 percent higher
in the four weeks ended October 27 than in the comparable period of 1972.
But at the same time, the sales pace has subsided from the peak reached last
August when sales were 5 0 2 percent above last month.

Construction activity in the five southwestern states, as measured
by the value of new contracts, fell 25 percent in September. Contracts declined in all categories, but most of the fall resulted from reductions
in awards for residential and nonbuilding construction. While the value of
nonbuilding contracts has vacillated each month this year, residential contracts have generally declined since June. Agricultural conditions in the
five District states remain good to excellent as the harvest of a bumper
crop gathers momentum. If current conditions prevail, crop production
for 1973 is anticipated to reach a level 22 percent higher than in 1972,
and livestock production is expected to be slightly greater than last year.
As production increased, average farm prices have also risen. Through the
first eight months of this year, cash receipts from farm marketing rose
to $6.0 billion, 35 percent greater than in the same period of 1972.



Our Directors have mixed views on the prospects for a recession in
1974. Some expect a slower, though still not satisfactory, rate of growth,
but others expect a mild recession.

Inflation is expected to be less severe

in 1974. A new source of uncertainty is the Impact of fuel shortages on employment and production. Bankers report less demand for some classes of loans
and interest rates are somewhat lower.
Although the general level of economic activity remains high in this
District, and many of our Directors expect a continuation of growth at a somewhat lower rate, other Directors think there will be a mild recession in 1974.
Weakness is now apparent in consumer durable expenditures, and residential
housing construction remains weak. A further complication is the energy
shortage which is beginning to create significant problems in some states
such as Oregon and Washington. Layoffs, caused by fuel shortages, are likely
to be more common later this winter. In contrast, outlook is for continued
strength in business investment expenditures and exports.
The labor market in most District states is nearly fully employed,
with the exception of Washington where the unemployment rate Is still above
7 percent. In most states, unemployment is highest among unskilled workers.
Banks report no shortage of applicants, including college graduates, for
entry and training positions. In particular, there is a surplus of applicants with graduate training. Despite reports of shortages of skilled
workers, there is no indication that lack of labor is holding up production; the principal bottlenecks in industry are caused by lack of capacity
and materials. There are, however, some industries where layoffs have

occurred because of lack of demand. Lockheed has recently laid off production workers In its southern California plants*

Generally, the unemployment

picture in this District has not changed very much in the past six months.
Agricultural prospects remain excellent. Farmers are maintaining
heavy expenditures for new equipment and for consumer durables. In most areas
the demand for farm land has jumped substantially, and in California new irrigated farm land is being brought into production in response to high agricultural prices. Farm income in the District is expected to climb in 1974.
In construction, non-residential building remains very strong, but
residential construction continues to fall. The decline in housing activity
had caused lower lumber and plywood prices, and producers had expected to
cut back production this winter. However, fears of shortage of fuel and
glues for plywood has caused a resurgence of demand by buyers who are
attempting to build up inventories.
Except in agricultural areas, consumer spending on durables and
automobiles has fallen off. Spending on nondurables is still growing and
many, but not all, retailers expect excellent Christmas sales. Demand for
automobiles has weakened with large domestic automobiles experiencing the
greatest declines.
Demand for compact cars, both foreign and domestic, is still satisfactory. Many Directors are worried about a possible energy crisis this winter.
The energy shortage is likely to be most severe in the Pacific Northwest where
a hydro-electric power shortage exists. If serious oil and gasoline shortages
develop, then production cutbacks would occur. Reductions in oil imports might
also create further shortages of chemical fertilizers.

Many banks report less demand for loans but there Is considerable
variation among banks as to the specific categories affected* A large
Oregon bank reports a decline in consumer credit to finance durable but
an increase in general consumer credit, especially through its credit-card

Agricultural lending is high at some banks, but at others, in-

creased farm income has resulted in less borrowing. In Utah, a softening
in demand for mortgages is noted, but a large California bank reports an
increased demand for real estate loans. Business loan demand is lower at
several California and Oregon banks0

One bank explains the decline as

reflecting a shift to financing through other sources such as commercial
paper. Other banks expect a recovery in business loan demand in the next
few months. In contrast, loan demand at other banks in California is still
strong, with the funds being used to finance inventories.
Interest rates have eased off, but they are expected to be firmer
in the months ahead.

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