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CONFIDENTIAL (FR)
CURRENT ECONOMIC COMMENT BY DISTRICT
Prepared for the
Federal Open Market Committee
by the Staff
September 12, 1973
TABLE OF CONTENTS
SUMMARY
page i
First District-Boston
page
1 4
Second
District-New
York
page
Third
page
7
FourthDistrict-Philadelphia
District-Cleveland
page
Fifth
District-Richmond
page
129
Sixth
District-Atlanta
page
15
SeventhDistrict-St.
District-Chicago
page
18
Eighth
Louispage
page
22
Ninth
page
2
Tenth District-Minneapolis
District-Kansas
City
page
275
Eleventh
District-Dallas
page
31
Twelfth District-San
Francisco
page 34
SUMMARY [Asterisk: Prepared at the Federal Reserve Bank of Boston.]
Reports of sustained current strength continue to coexist with
expectations of a future slowdown.
Consumer spending and the demand for
consumer loans have maintained their recent pace of growth.
Business
investment and foreign demand are buoyant and are expected to remain strong
into the future.
Only residential construction has weakened, though
business and public construction has partly offset housing declines.
Shortages of material, skilled labor, and mortgage funds are widespread.
The unavailability of some materials is traced to the economic controls
program.
Small changes in employment have occurred.
business loan demand has strengthened.
ing
With a few exceptions,
With thrift institutions experienc-
deposit losses, some loans have been made to nonbank intermediaries.
Despite damages due to Delia and drought, agricultural output, prices,
and income are reported to be high.
Greater stability in food prices is
expected in the future.
With the exception of large automobiles, consumer demand has
been brisk in most Districts.
Minneapolis and Atlanta report that controls
have not produced the feared curtailment of planned business investment,
but St. Louis and Chicago suggest controls may be hampering capacity expansion in sectors such as the paper industry.
San Francisco and
Kansas City report inventories generally below desired levels but reports
from the Richmond, Philadelphia, and Cleveland Banks do not expect major
inventory buildups in the future.
The Cleveland and Chicago Districts have
experienced intense foreign demand for steel and many "bargain" U. S.
materials.
Lack of mortgage funds has reduced residential construction
activity in most Districts.
Shortages are reported by the New York, Atlanta, Chicago,
St. Louis and Kansas City Banks.
In the Kansas City District, lead times
are considerably above normal, and lengthening.
facturing is at or near its capacity levels.
In St. Louis, manu-
Chicago, which has been
experiencing strong demand for a wide variety of goods, indicates that
price controls have restricted the supply of petroleum and paper products.
Atlanta reports that material shortages have led to plant closings.
New York has experienced shortages of skilled labor.
In Chicago and
Atlanta, the labor shortage includes unskilled labor as well.
Nevertheless,
most Districts reported only minor gains in employment.
A near-term slowdown is expected by the Directors and businessmen in the Boston, New York, Philadelphia, Cleveland, Richmond, and
Minneapolis Districts.
A Boston director notes a convergence of opinions
on the economic outlook very close to the consensus view of the business
economists in the Fourth District—a "growth" but not "classical"
recession.
New orders have started to level off in the Philadelphia and
Richmond Districts, though they continue to rise in other areas.
According
to the reports from New York, Cleveland, and Minneapolis,the tapering will
cent€;r in the consumer spending area.
The outlook for agricultural incomes and crops, particularly
soybeans, remains good.
Drought in the West and tropical storm Delia in the
Gulf have destroyed some of the wheat, rice, cotton, and soybean crops.
poultry prices have stimulated supply in the Southeast.
High
The Dallas Bank
notes that the number of cattle and calves on feed in the Southwest was down
from July but well above last year.
Cattle placements and slaughter were,
however, down from last month and last year.
The Kansas City Bank indicates
that "on balance, food prices should tend to stabilize in coming months, but
hoped-for declines of a significant magnitude are still sometime off."
Business loan demand was strong in most districts.
and Kansas City, however, report some decreases.
Both Dallas
The pace of disinter-
mediation is widely reported to have accelerated in August.
Except in
St. Louis, where most prospective home purchasers can obtain mortgage credit,
mortgage availability and terms have become increasingly stringent.
FIRST DISTRICT—BOSTON
Our business directors report that new orders are continuing
at a strong pace.
Despite this, the seasonally adjusted unemployment
rate i.n New England in July was 6.2% and in Massachusetts it was 6.9%.
Our bank directors note that loan demand is strong despite money's
increasing cost and credit restrictions by banks.
The mortgage market
is especially stringent, with mortgage money often not available at
savings banks, even at very high rates of over 8 1/2 percent.
High order rates are increasing backlogs, but firms are not
generally operating at capacity.
One director of a large conglomerate
which manufactures carbon black, specialty metals and superalloys reported
that orders in August, while good, were not as hectic as during April and
May.
This manufacturer is actually working off inventory in filling orders.
Another director, also connected with a large manufacturing conglomerate,
reports that new orders for general aviation aircraft and industrial
machinery have picked up during the last month.
This director reported
that the aircraft manufacturer is requiring dealers to put down 5% of the
sale price when the dealer places an order.
This is to ensure that the
dealers are not too optimistic about their sales forecasts for 1974.
far, this has not affected the manufacturer's sales.
So
Order backlogs for
industrial machinery are reported so high - and lead times are so long that present backlogs mean that the current high sales rate will continue
in 1974.
One director reports that he notes a division between top
management who are pessimistic about the economic outlook in 1974 and
marketing personnel who are optimistic.
Another director notes a
convergence of opinion towards a growth recession: those who had foreseen
a major downturn are raising their forecasts, and those who had not forecast a {significant slowing
are much less sure.
Our business directors
are looking for a growth recession.
One business director noted that tight money markets had led to
more nervousness in his company than actual stringency.
This director
reported, that he had not heard of business firms having trouble getting
money, although the cost was high.
Another business director reported
that he had heard that the latest boost in the prime has begun to affect
demand, and that there is less talk of a 10 1/2 percent prime now than
there was a few weeks ago.
This was confirmed by a director from a Boston
bank.
Our bank directors continue to ration credit, by restricting
loans to old customers.
A New Hampshire bank director reports that his
demand deposits have declined, in part because corporate treasurers are
keeping balances very low.
used to have sizable
In fact, he notes that some corporations which
balances have been overdrawing their accounts, and
his bank has taken to charging them.
A director from a large Boston bank
reports that his lending officers say that high rates are not deterring
borrowing anywhere except in real estate.
projects has virtually halted.
Borrowing for new commercial
The bank has had in effect a vigorous
program for the past 5 months to control its loan portfolio.
There has been
a 5 percent run-off in loans since the June peak, but it is not clear whether this can be attributed to slackening demand or the internal control
program.
This bank director asserts that they are still telling customers
that there is no shortage of funds.
It's just that funds are costly.
The savings banks in Massachusetts had a big run-off of deposits
in August.
Mortgages are often unavailable at any price and the best rate
quoted is 8 1/2, percent with some banks charging 9 1/2 percent.
Only two of our academic respondents, Professors Samuelson and
Wallich, were available for comment this month.
Professor Samuelson noted
that the belief in the inevitability of a genuine recession next year has
diminished.
He saw a ray of hope on inflationary prospects in the recent
declines in the futures markets, pointing out that commodity inflation
would have to recede at its own micro-economically determined pace.
His
main concern was with the impending auto negotiations, which could either
disrupt production or usher in an era of higher wage settlements.
current policy, Samuelson would not
A to 5 percent annual rate.
As to
"fight" to reduce money growth below a
Only if it were to come in lower for several
months would he attempt to accelerate money growth.
In contrast, Professor Wallich believes that the economy could
use a few quarters of zero money growth.
Fear of a crunch is wholesome for
the economy, he said, although an actual crunch would not be.
He believes
that the Fed must keep money supply growth at zero for some time after the
peak in the business cycle if we are to beat inflationary expectations.
If,
however, we are going to live with 3-5 percent inflation, then we have to
accept higher interest rates.
Given the present inflation rate, present
monetary policy is not very restrictive because real interest rates are not
so high.
Wallich argues that high interest rates work with a longer lag than
non-availability of funds.
He believes, however, that it is non-availability
which really provides restraint.
SECOND DISTRICT--NEW YORK
Second District directors and other business leaders who were
contacted recently reported that economic activity remains very brisk, but
that a number of problems plague businessmen.
Particular concern was
expressed over shortages of raw materials, rising costs, the high level
of short-term interest rates, and the uncertainties surrounding the Government's
economic program.
Little change was reported in labor market conditions, with
continued reports of shortages of skilled technical and managerial personnel.
Views regarding the outlook for retail sales were mixed, but the respondents
on balance looked for some tapering in the rate of growth of consumer demand
over the coming months.
Consumer resistance to high food prices was not generally
expected to have a lasting effect on such prices.
Concerning the retail sales outlook, the president of a large
chain of retail stores anticipated a slowdown in business over the coming
months, notably with respect to consumer outlays on durable goods.
The
chairman of the board of a large New York City bank also expressed concern
over the outlook for retail sales in the fall and winter of this year.
In
his view, sales have been stimulated partly by expectations of higher prices.
He felt that the currently high rate of consumer spending is unsustainable
and that the heavy burden of instalment indebtedness would lead to some
"consolidation."
On the other hand, a New Jersey banker reported that
retailers in his area expected an "excellent" fall season.
Most of the
Buffalo Branch directors also regarded the sales outlook as good for the
rest of the year and well into 1974, but a number of these directors
expected a somewhat slower rate of growth in 1974 than in 1973, and looked
for weakness developing in big ticket durables—notably automobiles.
A
senior official of a large multinational firm headquartered in Rochester
characterized the retail sales outlook as "bleak," in good part because
the increase in food prices will leave consumers with less to spend on
nonfood items.
In this connection, the respondents in general felt that consumer resistance to high food prices would have little lasting impact on
food prices.
The New York banker noted that consumer boycotts might
actually have a perverse impact by discouraging farmers from increasing
production.
He did feel, however, that shifts in consumption patterns
induced by high prices of certain items--such as beef--might keep some
prices from rising as high as they otherwise might.
Similarly, the
president of the retail chain felt that consumer resistance to high food
prices has had some short -term effect, and that in the future consumers
were likely to show a greater tendency to adjust buying habits in response
to sizable price movements.
The Buffalo Branch directors observed that
food had first priority in the consumer's budget and that any stabilizing
effect on food prices would have to stem more from the supply side--where
shortages now prevail—than from the demand side.
In their view, food
price increases reflect higher production costs and food prices are
finally "catching up" with the rise in other prices.
Concerning the employment picture, the majority of the respondents
saw little change over the past month.
With scattered exceptions, most of
the directors noted a continuing shortage of skilled labor.
The president
of a large retail chain thus noted a tightening in the market for various
types of positions in the retailing industry, and felt that in general
competition had increased for managerial and technical personnel in many
areas, including real estate and the computer field.
Similarly, the New
York banker reported hearing about shortages of skilled labor in the
machinery and textile industry.
The Buffalo Branch directors noted the
continuation of the tight labor market conditions that have prevailed for
some time in western New York, particularly in the machine tool trade,
and in seasonal farm labor.
A major exception was the Buffalo area, which
apparently has not been significantly affected by labor shortages.
Among the major economic problems foreseen for the balance of
1973 and in 1974, a senior official of a large chemical firm cited the
shortage of raw materials and fuel, and the disruptions and uncertainties
surrounding Phase IV as his firm's main concern.
Similar sentiments
regarding Phase IV, growing shortages, and rising costs were also expressed
by several other directors and businessmen.
some decline in economic growth.
The New York banker looked for
The retailer mentioned slackening consumer
demand and rising interest costs as the problems most concerning his firm.
And several of the bank directors also felt the "high cost" of money to
be one of the major problems from the standpoint of their operations.
THIRD DISTRICT--PHILADELPHIA
Executives in the Third District report that business activity
is still increasing, but at a slower rate.
Manufacturers' new orders,
shipments, unfilled orders and delivery times are all up again this month.
Employment rose slightly.
Plans for larger investment expenditures are
contributing to the advance.
well.
And domestic economy cars are selling very
However, on the darker side, reports of price increases are wide-
spread and disintermediation is a serious problem at savings institutions.
This month's business outlook survey of manufacturers in the
Third District indicates activity is rising more slowly than in previous
months.
The majority of firms responding to the survey report no change
in their new orders, shipments, backlogs of unfilled orders and delivery
times since last month.
Of the minority of firms reporting changes, most
are experiencing increases in these measures of business activity.
Looking
ahead six months, the executives report expectations of slight reductions
in their level of manufacturing activity.
increasing at a few firms.
Employment opportunities are
Thirteen percent of the responding executives
report increases in the length of the average workweek of their employees
and 17 percent of the firms report increases in the number of people
employed this month.
The longer run outlook isn't as favorable.
Although
most firms expect no changes in the next six months, a few more firms are
expecting the length of their employees' average workweek to decrease than
are expecting it to increase.
The continued high level of business activity in the Third
District is causing businessmen to increase their investment spending plans.
Inventory investments are expected to increase slightly in the six months
ahead.
The number of firms that plan to increase their plant and equipment
outlays is more than double the number planning reductions.
Auto dealers in Philadelphia are experiencing strong demand for
autos and trucks.
Demand for medium-sized and compact cars is strongest.
However, one dealer reports an excess inventory of what he called "the
tank-sized cars" because people wouldn't buy them.
He attributes this to
consumers' increasing dislike for "big polluting gas-hog" models.
ment stores are experiencing strong seasonally adjusted sales.
DepartThe new
conservative men's clothes and consumer durables are selling well.
Inflationary expectations are high; 65 percent of the respondents
reported paying higher prices than they were charged for the same goods last
month.
prices.
Thirty percent of the firms reported charging their customers higher
The six-month outlook is even worse, since well over 70 percent
of the responding firms expect to pay, and to receive, higher prices.
Area bankers report that strong loan demand is exceeding deposit
inflows, forcing them to buy funds in the money markets and at the discount
window to keep from turning away valued customers.
Several banks report
that loans to nonbank financial intermediaries are at record highs; disintermediation and seasonal property-tax withdrawals have reduced savings
institutions liquidity.
One banker said the savings and loan associations
were in a credit crunch, but that banks were not.
FOURTH DISTRICT--CLEVELAND
The consensus forecast of about 35 economists — primarily from
major industrial firms and commercial banks in the District—who attended
the Fourth District economists' round table meeting on September 7 is that
the economy will experience sharply reduced real growth late this year and
throughout next year; unemployment is expected to rise throughout 1974.
(Only two economists forecast a classical recession.)
The group projects
a temporary rebound in the growth rate of real GNP during the third quarter,
followed by a slowing in the fourth quarter, and remaining in the range of
2 percent to 2.5 percent during 1974.
Unemployment is projected to remain
at 4.8 percent for the balance of this year, and to rise to 5.3 percent by
the end of 1974.
The rate of increase in the GNP price deflator is expected
to slow to 4.3 percent by the end of 1974, largely because agricultural
prices are unlikely to rise as much as in 1973.
Forecasts of a reduced rate of real growth during the near term
stem largely from an expected weakening in the consumer sector, partly
reflecting a projected decline in housing that will slow sales of appliances
and home furnishings.
New car sales are expected to decline sharply.
The
median forecast of seven economists whose firms depend heavily on the auto
market shows a decline
in new car sales on the order of one million units
in 1974 (to 10.8 million).
An economist with a major retailing firm
headquartered in the District said they had already begun to see evidence
of a softening in non-automotive retail trade.
The consensus of the round
table economists is that consumer spending would be weakest in the fourth
and first quarters (with gains in personal consumption expenditures averaging
only about $13 billion), and would remain depressed until late 1974.
The reduced growth in economic activity forecast for next year
also reflects the group's projection of less stimulus from the net export
balance.
Following an estimated swing of more than $6 billion in the net
export balance between 1972 and 1973, the economists forecast further
improvement of only $1 billion in 1974.
Discussion during the meeting, however,
indicated that this estimate may be on the conservative side.
Some economists
held the view that the round table group may be underestimating future benefits
to our trade balance stemming from new exchange rate relationships.
The business economists were conservative with regard to prospects
for inventory investment, with the median forecast calling for the change in
business inventories to reach a $9 billion rate by the fourth quarter of this
year, followed by a cutback to a $6 billion rate by year-end 1974.
Capital
spending is expected to be strong for the balance of this year, and the
projected rates of increase during 1974 suggest only a moderate easing.
Following a gain of $18.8 billion this year, nonresidential fixed investment
is projected to rise $15.2 billion in 1974.
(There was general agreement
that with the pressing need to expand capacity in so many industries,
capital spending was unlikely to be choked off next year.)
It was noted
that with corporate profits at or near a peak, and with Phase IV and
reduced growth in the economy expected to dampen profits in 1974, corporations
would be forced to rely more heavily on external sources of funds to finance
their capital outlays.
Sentiment was that the supply of funds next year
would be adequate enough (albeit at a high price) to sustain the capital
spending boom.
An economist with a major steel firm reported that most steel
companies continue to have their customers on an allocation basis (i.e.,
they are rationing new orders).
One factor contributing to the tight
steel supply situation has been a very sharp rise in foreign steel prices.
Recently, steel imports have been either unavailable or available only at
premium prices.
It was ironically noted that only a few years ago there
was much talk about relying on cheap foreign steel for our domestic uses.
The economist also pointed out that the domestic steel industry could have
exported perhaps 15 million tons in 1973 instead of an estimated 3.5 million
tons, but it concentrated on supplying the domestic market first.
The steel
industry is expected to remain at or near peak capacity operations until
mid-1974 at least.
Current savings flows at S & L's in Ohio SMSA's are characterized
as dreadful by industry sources.
During August, the largest S & L's in the
Cleveland area (our sample includes 57 percent of S & L deposits in Cuyahoga
County) incurred deposit outflows equal to 1.9 percent of their savings
deposits,,
For comparison, these institutions lost 1.1 percent of their
savings deposits during July and experienced a 5.4 percent increase in their
deposits during the first half of 1973.
A large share of the August with-
drawals coincided with the Treasury's offering of the 8 3/8 percent notes.
Primarily as a result of the publicity afforded this offering by the Cleveland
newspapers, the Cleveland office received $42 million of noncompetitive tenders,
or 75 percent of the total received.
In response to the poor deposit experience,
several Cleveland S & L's have moved aggressively to attract depositors by
offering the 4-year wild card certificates with current rates ranging from
8 to 10 1/4 percent.
Preliminary results for the first ten days of September
from two of these S & L's indicate that the higher yielding certificates have
generated a net inflow of funds.
FIFTH DISTRICT—RICHMOND
Results of our most recent survey of businessmen and bankers
suggest that business activity in the District continued to expand during
the past month.
Manufacturing shipments were up while backlogs and new
orders remained unchanged.
Further advances in retail sales were reported
and employment has increased in recent weeks.
Reports from bankers suggest
that residential construction activity has declined because of tight
mortgage markets, while nonresidential construction activity continues to
increase.
Banking respondents indicate that the demand for mortgage loans
did not change in the past month, while the demand for consumer and business
loans increased further.
Most businessmen and bankers expect business
activity to stabilize at present levels.
Survey responses indicate that economic activity in the
manufacturing sector continues to expand.
Nearly one-half of the manu-
facturing respondents reported that shipments increased during the past
month while none reported decreased shipments.
On balance, the volume of
new orders and backlogs of orders were unchanged.
Increased shipments were
reported by important producers in such industries as chemicals, paper and
synthetic fibers.
Manufacturing inventories were reported little changed
from the previous month's survey, and most manufacturing respondents
believe that current inventory levels are about in line with sales prospects.
Survey responses suggest a slight increase in District employment
during the past month.
Nearly three-fourths of the manufacturing respondents
reported that employment was unchanged, while most of the remaining firms
reported that employment had increased.
The majority of trade and services
respondents reported that employment was unchanged.
Both manufacturing and
trade and services respondents reported increases in wages and prices
received.
Retail sales in the District continue strong.
Nearly a third
of the banking respondents reported further increases in retail sales in
their areas.
Information from major District retailers and other sources
also indicates gains in retail sales during the past month.
In general, loan demand in the District remains strong.
Demand
for consumer loans is particularly strong with more than 50 percent of
the banking respondents reporting an increase in the demand for this type
of loan.
Mortgage loan demand is reported to be little changed from recent
high levels and numerous respondents expressed concern about the unavailability of mortgage funds.
The shortage of mortgage funds is being reflected in residential
construction activity.
More than 50 percent of the banking respondents
indicated that residential construction in their areas has declined.
In
general, banking respondents report that nonresidential construction
activity continues to increase although at a slower rate than in recent
months.
Michelin Tire Corporation recently awarded a $175 million contract
for the construction of two manufacturing plants in South Carolina.
A sharply improved farm income situation continued throughout the
first half of 1973, with cash receipts from farm marketings recording a 27
percent gain over a year ago.
Season average prices are running below year-earlier levels on
all flue-cured tobacco belts except the border belt.
Despite concern over high interest rates and the unavailability
of funds for residential mortgages most businessmen and bankers expect
business activity in the District to stabilize at present Levels.
Nearly
80 percent of the banking respondents expect no change in business
activity in their areas during the next three months.
SIXTH DISTRICT--ATLANTA
Reported shortages of money, men, and materials are putting a
damper on the District's economic growth.
While announcements of new
plants continue brisk, there is growing uncertainty about future spending
plans and economic activity partly related to the controls program.
declines in residential construction have been noted.
Sharp
Despite gasoline
shortages, Florida's tourist traffic remains excellent.
Tight money markets are curtailing residential construction,
particularly in the Florida area.
Savings and loans are currently being
sapped for funds as investors turn to Treasury bills and other higherinterest investments.
Florida bankers are receiving loan requests from
savings and loan institutions.
funds rate.
One Florida banker
One banker is lending to them at the Fed
notes that interest rates are running up
against: state usury laws and that the small investor is feeling the brunt
of the current money shortage.
According tosone Florida businessman, high
interest rates have stimulated the purchase and resiting of older homes.
Many of: these old homes have been relocated from sites near interstate
highways.
Home-building in Atlanta and areas of Louisiana, Mississippi,
and Alabama is also down from year-ago levels.
Reports of shortages of
mortgage money from savings and loans have been received from all of
these areas.
Businessmen also report shortages of labor and materials.
Apparel producers, particularly in the Miami area, indicate that it is
virtually impossible to find workers, skilled or unskilled.
Cotton shortages
have limited the supply of denim fabric and forced a switch to man-made
fabrics, according to two Georgia apparel manufacturers.
Other material
shortages have forced the closing of plants in some areas of the District.
In Florida, a shortage of Portland cement has caused the closing of six
ready-mix plants.
Natural gas shortages had temporarily closed a number
of paper products plants as well as a paper mill in Louisiana.
Because
of the paper shortage, partly the result of the Canadian strike, two
of Florida's larger newspapers are cutting back on the size of their
publications.
Poultry producers apparently are expanding flocks as a result
of today's high poultry prices.
Georgia increased sharply.
In late August, broiler placements in
One local poultry equipment manufacturer
indicated a strong pickup in demand.
Recent rains from tropical storm
Delia have damaged the rice and soybean crops in southwest Louisiana.
Less than one-half of the crop has been harvested.
High meat prices
have caused an increased slaughter of milk cows in Georgia; some
reports indicate a critical milk shortage may result.
In assessing the results of the President's economic controls
program, several businessmen and bankers report that the resulting
uncertainty will probably dampen business intentions for plant and
equipment expenditures.
yet been noted.
However, this expected decline has not as
Announcements of new plants continue brisk.
plans to build a $300 million crude oil refinery in Louisiana.
Texaco
An
American subsidiary of a large international chemical company with
headquarters in Germany may locate a new plant in Louisiana which will
initially employ approximately 1,000 workers.
There appears to be a
growing international flavor to many investments taking place in the
District.
One-half interest in a large plot of Louisiana riverfront
property has recently been sold to an Italian investor.
Georgia state
officials have reported that since December of 1972, the Japanese have
either put into operation or announced 10 manufacturing facilities in
Georgia.
One local banker indicated that a southeastern cotton grower
has contracted his entire production for the next five years to a
Japanese firm.
New announcements of commercial and public projects also
continue to roll in.
In Louisiana, a long delayed new north-south
superhighway costing $500 million has been announced, and a new
shopping mall which will employ 2,000 workers has recently opened.
Other
announcements include a $150 million office park-hotel-regional shopping
center complex and a $50 million truckstop complex, both in the Atlanta
area.
Florida's summer tourist season has been excellent.
The
Pensacola area reports tourist traffic up nearly 22 percent over last
year.
Central Florida has enjoyed a strong summer business, despite
fears of a gasoline shortage.
A survey of the Georgia Oilmen's
Association indicates that independent jobbers and distributors had
either been shut off completely from their usual sources of supply or
had been placed on strict allocation limits.
SEVENTH DISTRICT—CHICAGO
The region of the Seventh District has not yet witnessed any
letup in the extremely vigorous demand for metals, chemicals, fuel, consumer
goods, business equipment, and building materials.
Very hot weather in
the second half of August cut production of steel, motor vehicles, and
other products, but these developments are presumably associated with
extending the period of shortages.
Foreign demand for many U.S. materials
and products at "bargain prices" is intense and would take up any domestic
slack in the near future.
volume.
Orders for capital goods continue in heavy
Manufacturers are concerned with shortages, delayed deliveries,
and quality problems.
Declines in farm prices in recent weeks have about
wiped out the surge recorded in the August indexes.
very tight.
Labor markets remain
New commitments for mortgages on single-family homes are very
difficult to obtain, but the volume of total construction activity remains
very high.
Large firms generally appear to be following the price guidelines, and in many cases prices have not been raised as much as would be
allowed by the Cost-of-Living Council.
prices freely.
Most smaller firms are raising
Price controls have restricted availability of some goods,
including petroleum products and certain grades of paper.
Charges for
services—utilities, maintenance work, and medical care—have increased
sharply in the past month or so.
For example, some home furnace maintenance
fees in the Chicago area jumped 55 percent in the summer, and the city of
Chicago intends to raise water prices to city customers and 67 suburbs by
34 percent.
(All this suggests that John Galbraith's theory that the
general price level can be controlled merely by controlling prices charged
by giant firms is not valid.)
Availability of labor, skilled and unskilled, poses a problem
for many employers in the District.
The job situation was aggravated in
the last two weeks of August as students left summer jobs in manufacturing,
trade, and recreational activities to return to schools that opened before
Labor Day this year.
Help-wanted advertising has increased sharply, and
help-wanted signs, full or part time ("hours arranged"), are a very common
sign at manufacturing, trade, and service establishments.
The order surge continues in the capital goods industries
(apparently across-the-board), and the volume of new construction contracts
for manufacturing buildings is very large.
new work.
Design firms are swamped with
Various hard and soft goods industries see a need to push
capacity expansion programs for the next two to five years—with short
supplies predicted for the intervening period.
small cars and trucks are in full swing.
Expansion programs for
The chemical, petroleum, public
utility, and paper industries are all pushing expansion plans more-or-less
vigorously.
The blowup of order backlogs in machine tools, freight cars,
construction and farm equipment relates to lags in increasing output caused
by limited availability of materials, parts, components, and skilled labor.
A very large construction equipment producer has announced a five-year
program with capital expenditures far above the level of recent years.
Steel output was restrained in the summer by hot weather, labor
shortages, equipment failures, and electricity cutbacks.
Smaller firms
which used to buy steel from warehouses on a month-to-month basis have
been forced to negotiate nine months or more in advance of needs.
Shortages
of steel and various other materials are increased by the fact that some
users have increased inventories beyond normal levels to insure supplies
(although inventories overall are relatively low).
U.S. steel firms are
sorely tempted to sell steel abroad in volume at premium prices, but, thus
far, have not done so.
Gasoline supplies are reasonably adequate in most areas, but
scattered shortages remain.
We are told most oil firms are not following
the government guidelines for allocating supplies to favored users.
Rigid
price controls on gasoline, diesel fuel, and home heating oils may reduce
availability.
For example, prices for industrial fuels are above prices
of the higher grades, thereby encouraging diversions.
A cold winter may
bring critical heating oil shortages, especially for the Midwest and the
plains, which are not allowed to bid supplies away from other areas.
More-
over, present rules provide no incentive to import oil products from abroad.
Net outflows of funds from the S&Ls remained large in August,
at least in downtown Chicago.
The volume of existing mortgage commitments
remains very large, but new commitments on home mortgages in the Chicago
area are being made on 30-40 percent down payments (at the 8 percent usury
ceiling), and are commonly restricted to established customers.
The home-
building picture for next year is growing darker.
Power shortages in this area partly have reflected restrictions
on nuclear power plant operations.
The August heat wave caused inter-
ruptions for industrial users and some voltage reductions.
The prospect is for record crops of corn and soybeans.
supplies appear adequate to prevent a sharp rise in prices.
slaughterhouses have been reopened.
Beef
Closed
Elevators have paid premiums to
obtain covered hopper cars, still in short supply, to move grain.
EIGHTH DISTRICT—ST. LOUIS
Business activity generally continues up in the Eighth Federal
Reserve District.
Retail sales at major outlets continue to increase on a
seasonally adjusted basis.
Most manufacturing firms report that operations
remain at: or near capacity levels.
Raw materials are still scarce in many
lines of production with no major increases of supply in sight.
Construction
activity is mixed; residential building is down but commercial construction
is increasing.
The agricultural situation generally points to large crops
and high farm incomes.
Credit demand remains high, and no major decline in
interest rates is foreseen by officials of those financial institutions
interviewed.
Apparel and clothing items led the upward movement of sales at
large District retail stores in recent weeks.
There was a slackening in the
sales of some appliance items which are installed by home builders, but the
slowdown was more than offset by increased sales of clothing, household
equipment and fixtures, and other items.
Manufacturing establishments in the District continue to report
capacity operations, backlogs of orders, shortages of raw materials and
skilled labor, and pricing problems.
stable for most industries.
The backlogs of orders are holding
A representative of the paper and paperboard
industry reported that capacity construction underway is only sufficient to
take care of projected population increases, and that the profits of the
firms, at current product prices, are not sufficient to provide incentive for
the amount of construction necessary to relieve the shortage.
He also
reported that there is an insufficient number of pulpwood harvesting workers
to meet the demand for pulpwood at current prices.
A natural gas company
representative reported that gas consumption in the Nation had exceeded the
amount discovered in each of the past six year.
As a result, the supply of
gas is diminishing and only about nine to twelve years of reserves remain
at current consumption levels.
Residential construction has slowed considerably over most of the
District in the past three months.
to be at a standstill.
In some areas home building is reported
Commercial construction, however, continues at a
relatively high level and is reported to be gaining momentum in the St. Louis
metropolitan area.
Large crops, relatively high farm prices and record farm incomes
are in prospect for farmers in the Eighth District.
Although most crops
were planted later than average, the weather has been generally favorable.
Rainfall has been timely and crop conditions are good to excellent.
Prices
of farm products remain relatively high despite recent declines in some
feed grain and livestock prices, and with the large marketings in prospect
net farm income should be well above the previous record level.
Credit conditions in the District remain very
"tight."
Loan demand
continues to rise faster than the supply of loanable funds, and upward
pressure on interest rates continues.
banks have declined in recent weeks.
Total deposits at the large District
Time and savings accounts have increased
somewhat, but not enough to offset the decline in demand deposits.
Savings
inflows into savings and loan associations have been at a slower rate in
recent weeks than heretofore, and there has been some complaint among the
savings and loan associations that the current margin of one-fourth of a
percentage point between bank and savings and loan rates is too small.
A
few savings and loan associations, however, continue to search for loans,
and most prospective home purchasers can obtain mortgage credit.
The rate
on conventional mortgages in the St. Louis area is 8 percent plus one to
three points.
The maximum legal rate in several of the Eighth District
states is 8 percent; hence a higher point charge will be used to reflect
further increases in market rates on home purchase loans.
NINTH DISTRICT--MINNEAPOLIS
Although second quarter District manufacturing sales were up substantially from a year earlier, respondents to our latest Industrial Expectations Survey foresee some slowing in sales growth.
Recent price increases
and uncertainties about the economy have not dampened District consumers'
enthusiasm to spend, and District retailers expect business to remain good.
Despite high interest rates and Phase IV regulations, Bank directors report
that District businessmen have not altered their investment plans.
However,
high interest rates and a lack of mortgage funds are expected to curb District
residential construction.
According to results of our third quarter Industrial Expectations
Survey, District manufacturing sales continue to expand at a brisk pace.
Following an extremely large first quarter advance of 21.8 percent, District
manufacturing sales in the second quarter were up 15.7 percent from a year
earlier.
These large gains undoubtedly reflect substantial price increases
and are not considered by survey respondents to be sustainable.
Looking
ahead to the third and fourth quarters, District manufacturing sales are
expected to surpass year-earlier levels by 12.9 and 9.8 percent, respectively.
By the first quarter of 1974 sales growth is expected to slow to a 6.9 percent
rate.
In recent surveys, however, actual sales gains have generally exceeded
manufacturers' earlier expectations.
Bank directors report that District consumers are continuing to
spend at a brisk pace, and District retailers are optimistic about their
sales prospects.
A Twin Cities area director associated with the retail
trade industry indicates that his firm's sales were good in August and that
he expects business to continue strong for some time.
Another director
reveals that his area's merchants foresee good saleS gains, providing merchandise is available.
Industrial construction activity is stimulating
retail spending in Michigan's Upper Peninsula, and directors from District
agricultural regions, where farm income is up markedly, report sizable advances
in retail spending.
Another director, however, foresees some slowing in the
Minneapolis/St. Paul metropolitan area's economy and looks for future retail
sales gains to be smaller than they have been recently.
One director believes
that recent gains in consumer spending stem from consumers' desires to avoid
future price increases.
According to directors' responses, record high interest rates and
Phase IV regulations have not caused District businessmen to alter their
plant and equipment expenditure plans.
One director, for example, says that
high interest rates have not affected his firm's plans.
Another director
indicates that high interest rates have deterred some of his area's businessmen,
but most are going ahead with their plans.
No slowdown in northeastern Minnesota's
economy was foreseen, and businessmen there have not changed their spending plans.
One director, however, thinks that capital spending in real terms in the Minneapolis/
St. Paul metropolitan area will not change much between 1973 and 1974.
A lack of mortgage funds and high interest rates are expected to dampen
District home building, but several directors foresee no letup in nonresidential
construction.
In the Minneapolis/St. Paul area, where Minnesota's 8 percent
usury law has significantly contributed to a drying up of mortgage funds, a
decline in hous ing starts is foreseen.
Many directors report that mortgage
funds remain available in their areas but interest rates have risen, which has
discouraged many potential home buyers.
A South Dakota director indicates
that the decline in farm loan demand in
his area is providing mortgage funds.
TENTH DISTRICT—KANSAS CITY
Purchasing managers at Tenth District manufacturing firms
reported that nearly all materials are in short supply, with no easing
of the situation in sight.
Lead times are considerably longer than
normal, and are lengthening.
Prices are rising sharply and are ex-
pected to continue to rise.
Although larger inventories are desired,
firms are unable to increase them for several reasons.
Business loan
activity at District commercial banks has decreased, for both demand and
supply reasons.
In the agricultural sector, higher farm prices will
maintain pressure on food prices although greater stability should occur
in the months ahead.
Purchasing officers and managers at a number of manufacturing
firms in the Tenth District were interviewed with regard to their
materials supply situation, including availability, lead times, prices,
and inventory plans.
The composite picture resulting from this survey
was one of uncertainty and disarray.
The following quotation from one
respondent captures much of the feeling of disorder:
material situation is very unstable.
"The whole raw
You cannot be sure that you will
get the quantity you ordered, you cannot be sure you will get it when you
want it, and you cannot be sure of the price you will have to pay."
Nearly
all materials were reported to be in tight supply, with some simply not
available.
Many firms find themselves facing materials allocations and
allotments from their suppliers, which in some cases are less than the
desired amounts.
Furthermore, the purchasing managers do not anticipate
an imminent easing of the situation.
The following materials were
specifically mentioned as being in short supply: textile products,
especially burlap; paper and paper products, including containers; aluminum;
plastics; petroleum products for manufacturing purposes, including solvents;
metal castings; and steel, especially so-called "low profit" items—with
specific mention of reinforcing bars.
Purchasing managers almost unanimously report that lead times
are now considerably longer than normal on virtually all materials ordered,
and nearly all report that lead times are continuing to lengthen.
Among
the products and materials showing lengthening lead times are plastics,
metal castings, steel products, electronic components, and electric motors.
One firm estimated that lead times now are generally about four times
their normal length, very close to the average increase in lead times for
those items specifically reported.
Prices of materials are reported to be rising by nearly all
respondents—"enough
that it hurts," said one.
In a few instances, firms
reported that they had been able to protect themselves by contracts for
the rest of this year for materials such as aluminum, textiles, and
plastics.
Further significant price increases are almost universally
expected.
The majority of respondents suggest that it is still too early
for the; influence of Phase IV rules to be ascertained.
Several commented
on the importance for future price movements of decisions that will be
made on pending requests for increases, with the steel industry request
singled out for particular attention.
Increasing voluntary accumulation of materials inventories is
very exceptional among the Tenth District firms surveyed.
Several reasons
were given by purchasing managers: high interest rates are a deterrent
("money is too expensive for building inventories"); materials are not
available or in such short supply that inventories cannot be greatly expanded; allocation of materials by suppliers prevents further stock
building.
Some respondents stated that they could not keep production at
desired levels with available materials, and thus could not add to inventories although they wanted to.
The only reported instances of stock
building as strictly a price hedge were from one heavy user of copper and
another of polyethylene, both of whom expect significant price increases.
A rise of 20 percent in the month ended August 15 pushed farm
prices more than 60 percent above a year earlier and intensified the
pressures on food prices, pressures that will continue to be felt for
several weeks.
However, there are indications that the upward spiral
in food prices may soon start to level out.
Consumer resistance to high
retail prices has induced a lowering of live animal prices, especially
hogs which have dropped significantly from their August high.
Grain prices
have also weakened during this period, reflecting new crop prospects and
slightly dampened foreign demand.
Furthermore, with the lifting of the
freeze on retail beef prices, cattle prices may dip somewhat if a bulge
in marketings develops over the next few weeks.
likely to be temporary.
However, any decline is
On balance, food prices should tend to stabilize
in coming months, but hoped-for declines of a significant magnitude are
still sometime off.
A decline in business loans over the last few weeks at Tenth
District banks has been due to both tighter supply conditions and decreased
demand.
Banks in Denver and Kansas City tended to stress the supply
side, saying they were only making loans to old customers, and then very
selectively.
Potential new customers who had exhausted credit lines at
competing banks and were shopping around for additional credit sources
were being turned down.
In other District cities a distinct slackening
in loam demand from businesses has been noted in recent weeks.
Resistance
to higiher interest rates was one reason cited for this decline.
Demand
in some other loan categories (e.g., consumer loans and loans for carrying
grain inventories) continues to be strong.
Aggressive marketing of consumer and large CD's has offset demand
deposit declines at District banks.
Large CD maturities are being kept
short at most banks as a decline in short rates is expected soon.
The
public's enthusiastic response to the 4-year consumer CD's was something
of a surprise to many bankers who soon realized that most of this money
was coming from passbook savings in their own banks.
ELEVENTH DISTRICT—DALLAS
A number of indicators of economic activity for the Eleventh
District continue to show strength, although others demonstrate some
weakness.
Employment in the five southwestern states rose to record levels
in July, department store sales continued strong, and crop prospects remain
good to excellent.
Yet, in July, industrial production in Texas moved down
and registrations of new passenger automobiles in the largest cities of the
state declined.
Moreover, total loans at District weekly reporting banks
fell slightly during the month of August.
Seasonally adjusted total employment in the five southwestern
states rose to a new high level in July, following an upward revision in
the number of people employed in June.
Total employment was higher than
a year before, and even with a slight increase in the labor force, the
unemployment rate dropped to 3.8 percent in July.
Manufacturing employment was essentially unchanged, as gains in
the employment at durable goods producers were offset by declines at
nondurables plants.
by new hirings
The advance in nonmanufacturing employment was paced
for construction and government jobs.
All categories
of industry were well above their employment levels of a year earlier.
The seasonally adjusted Texas industrial production index fell
in July but remained 6.0 percent higher than a year earlier.
was the largest since August of last year.
The decline
All major components of the
index except utilities contributed to the reduction.
Department store sales in the Eleventh District were 13 percent
higher in the four weeks ended August 25 than in the comparable period
last year.
Cumulative year-to-date sales were also 13 percent above the
corresponding period in 1972.
Registrations of new passenger automobiles
in Dallas, Fort Worth, Houston, and San Antonio declined in July but still
remained higher than in July of last year.
Cumulative registrations for
the first seven months of 1973 were 8 percent above the same period in 1972.
Agricultural activities in the Eleventh District continue slightly
behind normal schedule, but general crop prospects remain good to excellent.
Harvest activity for corn, sorghum, and cotton is gaining momentum; soybean
crops are showing excellent progress; and seedbed preparation is under way
for wheat and winter vegetables.
The rice harvest is sharply behind last
year though yields have been very good.
Texas and Louisiana could suffer
some losses to rice and cotton as a result of tropical storm Delia.
Texas and Arizona reported a total of over 2.8 million head of
cattle and calves on feed as of August 1.
The 2.3 million head in Texas
was 9 percent above a year earlier but slightly below July 1.
Arizona had
a small gain on a year-to-year basis but showed a 15 percent decline from
the preceding month.
levels.
July marketings in both states were above year-ago
But placements continued sharply below both those in ,the previous
month and in July of last year, apparently as animals are being held on
pasture.
Texas cattle slaughter in July also was down from both June and
year-ago levels.
However, the total for the first seven months continued
1 percent above 1972, in contrast to the 5 percent decline nationally.
Total credit at weekly reporting banks in the Eleventh District
decreased slightly during the month of August.
The decline which was repre-
sented in a fall in both loans and investments, was accompanied by a sizable
outflow of deposits.
Total loans edged downward during the month, primarily
reflecting a substantial fall in business loan demand.
The drop in business
loans, however, resulted mainly from reductions in bankers' acceptances at
one large bank.
Construction activity in the District was brisk and demand for
real estate loans remained high.
Growth in consumer loans at District
banks was still strong, as borrowers apparently continue to use bank credit
to finance purchases of automobiles and other durable goods.
Despite the decline in the overall demand for loans, District
reporting banks on balance reduced their security holdings.
They did add
a substantial volume of Government issues, mainly Treasury bills, to their
investment portfolios; but decreases in other security holdings, primarily
municipal issues, more than offset the rise in bills.
TWELFTH DISTRICT—SAN FRANCISCO
Economic activity continues to maintain a high level, led by
consumer and business spending.
The agricultural sector is another
source of strength, but residential construction is at a lower level.
With certain exoeptions, inventories appear to be low relative to demand,
primarily because of delays of manufacturers in filling orders.
Commercial
banks report strong loan demand in most categories.
Consumer and business spending are maintaining the rates established in recent months.
Purchases of consumer durables, especially
freezers and refrigerators, are very strong, and automobile sales are good.
The demand for compact cars is particularly strong, and this is attributed
partly to concern about gasoline shortages.
automobiles is somewhat weaker.
Demand for large domestic
Business spending for commercial buildings
and new equipment shows no sign of slowing.
Although some directors expect
that the demand for consumer durables will ease later this year, there is
no sign of any slowing in overall economic activity.
Agricultural prospects in the District are excellent according to
our directors in farming areas.
Drought is causing some crop losses for
wheat in eastern Oregon and Washington, but otherwise yields are expected
to be above average for this crop year.
Farm prices are at a record high
for most crops, and the resulting high farm income is encouraging heavy
purchases of consumer goods and farm equipment.
The only major sector exhibiting weakness is residential construction which is falling off in most parts of the District,
in some areas
the decline affects apartment construction, as well as single-to four-family
residences.
A factor in this decline is the high level of interest rates
and lack of available mortgage finance at savings and loan associations.
The decline in housing demand is affecting the lumber and
plywood industry which is experiencing lower prices.
Currently a rail
strike in Canada is cutting imports of green lumber and supporting the
demand for domestic timber, but when this strike is over, prices are expected to resume their downward trend.
The pulp and paper sectors of the
forest products industry are facing strong demand, in part caused by the
Canadian strike. Domestic mills are running at full capacity.
According
to one director, supplies should be tight for several years, because new
capacity is being added at half the normal growth rate.
Our directors were asked to comment on prospective changes in
inventories.
Their reports indicate that inventories are low for most
manufacturers and many retailers.
are more than adequate.
semi-finished goods.
Only inventories of large model cars
Shortages are most severe in raw materials and
Copper and steel are in particularly short supply
and the order backlog is so great that some steel companies have taken
their salesmen off the road.
not lumber.
Paper inventories are on the low side but
Retail inventories except for those products facing strong
demand are satisfactory.
Although inventory levels are somewhat low,
the consensus seems to be that there will be no major buildup of inventories this year.
High interest costs discourage large stocks and there is
uncertainty, especially by retailers, about long-term business prospects.
District banks report continuing strong demand for loans over
most categories.
The decline in housing construction has not resulted in
a decline in mortgage demand at banks.
The run-off of funds at many S & L's
has caused a shift in demand to the banks.
The recent increases in time
deposit interest rates have allowed most banks to hold their deposits or
to limit outflows.
Although more individuals are putting funds directly
into such market instruments as Treasury bills, the major losses are
being experienced by S & L's, not banks.
Some bankers now feel that
short-term rates are at their peak and the only question concerns the
timing of the downturn.
@FedFRASER