Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

April 12, 1972

TABLE OF CONTENTS

SUMMARY page i

First District - Boston page 1

Second District - New York page 4

Third District - Philadelphia page 8

Fourth District - Cleveland page 10

Fifth District - Richmond page 13

Sixth District - Atlanta page 15

Seventh District - Chicago page 17

Eighth District - St. Louis page 20

Ninth District - Minneapolis page 22

Tenth District - Kansas City page 25

Eleventh District - Dallas page 29

Twelfth District - San Francisco page 32

SUMMARY*

On the whole, District banks report that the general business

climate continues to improve.

Industrial activity is increasing in most

Districts, but gains on the employment front are less widespread.

The

retail sector shows signs of improvement in several Districts both for

general items and automobiles.

Capital spending plans have been stepped

up in some Districts, but caution remains among businessmen in other

areas.

Construction, however, continues to be a strong sector in most

of the regional economies.

Loan demand at commercial banks, in general,

shows increasing strength.

Concern about inflation appears in several

reports, but there is some evidence that food prices are stabilizing.

Industrial activity is on the upswing in most Districts.

Richmond, Cleveland, Boston, and Philadelphia report continued increases

in new orders and shipments at manufacturing firms. Other Districts also

report gains, with business sentiment stabilized on a moderately optimistic

level.

Chicago notes particular strength in the steel industry while

St. Louis reports improvement in steel and the consumer goods sector.

Dallas attributes increases in industrial production in its District to an

especially large boost in mining activity.

However, improving trends in business activity have yet to register a nationwide impact on employment.

District reports remain mixed.

Richmond, Philadelphia, and Boston find firms adding workers to their payrolls.

Richmond also reports increases in hours worked per week.

Other

Districts (Cleveland, St. Louis, and Dallas) report little change in their

overall employment picture.

[Asterisk:Prepared

Chicago notes that layoffs have become fewer

at the Federal Reserve Bank of Philadelphia.]

in recent months and many firms are hiring again after a long drought.

Minneapolis expects employment growth to improve but not significantly

in the second quarter.

The retail sector shows signs of improvement in several Districts.

Richmond reports continuing strong sales, both in general retail items

and in automobiles.

Dallas cites sizeable gains in department store sales

and new car registrations.

San Francisco finds durables doing better than

average and autos continuing steady.

Other Districts (New York, Philadelphia,

Cleveland, and Minneapolis) report only moderate improvement but more

optimistic forecasts for future months.

Although capital spending plans have increased in some Districts,

an aura of caution remains among businessmen elsewhere.

Boston reports

that expenditure plans range from unchanged to a 10 to 15 per cent increase

over last year.

Chicago also cites an improved investment outlook with

orders for capital goods rising in recent months.

finds investment remaining sluggish.

St. Louis, however,

Profits at area firms, although up,

are not sufficient to merit additional capital outlays.

San Francisco

reports that business investment plans remain cautious with no major

revision of expectations apparent.

Construction remains a bright spot in many of the regional

economies.

Kansas City reports housing starts are considerably ahead of

last year and are expected to continue strong.

tion is also expected to improve.

Nonresidential construc-

Richmond, likewise, reports increases

in both residential and nonresidential construction.

New York reports

continued strength but forecasts a possible flattening out in activity.

Atlanta finds a near boom in construction in Florida.

Other Districts

(Cleveland, St. Louis, and Dallas), although reporting a leveling off or

even a moderate decline, still show construction at high levels of activity.

Loan demand at commercial banks shows increasing strength.

Philadelphia, Cleveland, Richmond, St. Louis, Kansas City, and Dallas report signs of improvement in demand conditions for business loans.

New

York and Chicago report more sluggish activity and regard alternative

sources of funds for business as a prime reason for a slack in loan

demand, both now and in the near future.

Boston, Richmond, Kansas City,

and San Francisco report strong mortgage demand.

Richmond, Kansas City,

and San Francisco also see increases in consumer installment loans.

Those District Banks reporting on the price situation generally

express some reason for concern.

Richmond, although noting few changes in

prices received by trade and service or manufacturing concerns, reports

increases in wages paid by these firms. Chicago reports upward pressure

on a wide variety of raw materials.

Boston cites many areas in which

price increases have become common and, in some cases, quite large.

Businessmen in the Boston area convey a growing disillusionment on the

effect iveness of Phase XX.

Minneapolis District.

This sentiment is also reported in the

New York businessmen, although recognizing that

Phase II is not fully adequate, nevertheless feel it is having a favorable impact on current developments.

In the agriculture sector, conditions appear to be improving.

Farm income is up and crop production is normal or better.

Spot checks by

Kansas City at retail food chains reveal greater price stability than a

month ago.

Wholesale meat prices are expected to decline in the near term

but retail prices less so.

Dallas finds livestock conditions better than

a year ago, with the number of cattle on feed up substantially.

Francisco reports cattle prices holding steady.

San

FIRST DISTRICT - BOSTON

The Bank directors contacted indicated a recent upturn in the

pace of business activity.

everywhere.

For the first time our directors show gains

At the same time, prices are generally reported as rising, and

disillusionment of the effectiveness of price controls is widespread.

The directors said that they were now beginning to add a little

to their work force.

To control costs, manufacturers are holding down over-

time and are adding workers instead.

Despite efforts to keep inventories

lean, one conglomerate manufacturer reported moderate increases in inventories

for the first time, while another manufacturer reported no change in overall

inventory levels.

New orders were reported as up "everywhere," with orders

for capital equipment slightly better and with a supplier to the aerospace

industry seeing the first quarterly gains in three years.

Capital spending

plans varied between unchanged and up quite a bit (that is, up 10-15 per cent

over last year).

Price increases from suppliers have beqome very common and in some

cases appear to be so large that one director stated that his company has

refused payment in some cases until proof of price commission approval is

provided.

The following is a list of price changes between 1972 - I and

1971 - IV reported by our directors:

Steel prices up, die castings up a lot,

raw materials for superalloys up 2 per cent, natural gas prices doubled,

other costs in the carbon black business up 3 per cent on average.

Warehouse

steel was up 3 per cent; flat ground tool steel up 3 per cent, electric motors

up 4 per cent, marble supplies up 2-3 per cent, and abrasives up 4-5 per cent.

While some directors expressed the feeling that most people are getting a

little discouraged about Phase II's effectiveness, one director felt that

Phase II has delayed price increases, but even he felt that the wage-price

guidelines for the year will not be met.

A bank director said that there was growing feeling that inflation

was not going to decrease and that we were not going to control inflation.

One bank director noted that savings deposit flows have continued very strong

through April (up 18 per cent over last year), but that demand deposits

are stable in part due to businesses economizing on their balances.

demand is reported as strong and rates as stable.

pondents —

Our four academic corres-

Eckstein, Samuelson, Tobin, and Wallich —

course of monetary policy has been "wise."

Mortgage

agreed that the recent

Eckstein and Tobin felt the

bill rate was now "in line" and urged holding it near the present level.

If

the differential between long and short rates begins to rise, Tobin would

advocate recalling the "operational twist" policy.

Noting that rates abroad

have been falling and expecting a rising trend in domestic short rates anyhow, Wallich would allow the bill rate to be "guided" above 4 per cent by

international rates in the short run.

On the other hand, he warned that a

rise in long rates should be taken very seriously, citing several econometric

simulations in which a permanent 1 per cent rise in the bill rate resulted

in a $10 to $15 billion reduction in GNP.

Samuelson felt that the recent

increases in short rates have not yet put undue pressure on long rates.

Samuelson advocates a 9 per cent rate of monetary growth over the first half

of the year, but he was willing to cater to the concerns of "irrational money

watchers" enough to prevent a very rapid upshoot.

Most expressed some concern over recent price behavior.

While the

spurt in food prices is not primarily a macroeconomic phenomenon, Samuelson

pointed out that it may have macrorepercussions on wage settlements, for

example.

Wallich expressed optimism that Phase II will "broadly succeed"

in reducing the rate of inflation to 3 per cent or below, but he felt

Eckstein's argument —

that inflation rates above a critical level of about

2 1/2 per cent generate further inflationary expectations —

possibility.

is a serious

Eckstein himself welcomes a restudy of the price commission.

He felt the top priority for stabilization policy at present is for Congress

to lower the withholding requirements.

He also would be pleased if Congress

should choose to be more liberal on social security contributions.

SECOND DISTRICT - NEW YORK

The directors of the New York Bank and the Buffalo Branch in

general felt Phase II still was having a favorable, if not fully adequate,

impact on current economic developments, and that the resignation of the

four labor members would not cripple the Pay Board.

Most of the direc-

tors, as well as the retailers who were contacted, continue to be moderately optimistic, on balance, about the retail sales outlook.

Views

expressed by the directors, however, on the whole suggested that some

cooling of the housing boom may be in the offing. According to most

responses of the directors and of a number of bank officials, business

loan demand has continued sluggish.

Although the directors at both the Buffalo Branch and the

head office were not especially enthusiastic over the impact so far

of Phase II, they generally agreed that the President's program was

having some effect in restraining inflation.

Those Buffalo Branch

directors who expressed an opinion agreed that the current situation

would have been "far worse" without these measures, but they felt that

more stringent action would probably be needed to bring inflation

under fuller control.

The vice-president of a large upstate firm pointed

to the slowing down in the rate of growth of nonfood prices so far this

year, and similar sentiments were expressed by the president of an

upstate bank —

a head office director.

The chairman of the board of a

large New York City bank felt that Phase II had been fairly effective,

and he also remarked that the Pay Board had done a "fairly creditable

job" in view of the "nasty problems" it had faced. Much the same view

was expressed by the president of a large nationwide manufacturing

concern.

All but one of the directors who commented on the subject felt

that the departure of the four labor members would not cripple the Pay

Board.

Indeed, some of the Buffalo Branch directors thought that this

move might result in smoother Board operation.

A New Jersey banker,

however, reported that his staff foresaw more strikes and a "complete

breakdown" of the efforts of the Pay Board.

The recent consumer spending picture has been somewhat blurred

by the early Easter holiday, which tended to boost March sales, possibly

at the expense of April sales.

In any event, the directors and the

retailers who were contacted still present a moderately optimistic

picture, particularly with respect to the coming months.

It is true

that the president of a Rochester department store, a head office director, characterized current retail sales in that area as only "fair."

And Buffalo Branch directors reported only slightly better performance

in western New York this Easter period relative to last year.

In each

case, however, these directors said that businessmen in their area expected sales to pick up as the year progressed.

An official of a high

price, high quality New York City department store, who last month had

reported a spurt in business by his firm in early March, was more restrained this month.

He noted that while sales were still picking up,

the rise was only "moderate" and smaller than had been hoped.

However,

he still remained cautiously optimistic, and he felt that 1972 would

turn out to be a fairly good year, up to his store's expectations and

better than 1971.

An official of a nationwide chain of medium-priced

stores, on the other hand, verged on the exuberant.

He reported that

his firm's business had been picking up smartly, that the increased

strength in the demand for bigger ticket items he had noted last month

continued in evidence, and that his firm was "very pleased" and looking

for a good year.

The president of the large nationwide manufacturing

concern viewed the strength in his firm's corrugated container sales

as signaling a rise in consumer demand.

Regarding residential construction, the overall impression

emerging from the views expressed by the directors was that, on balance,

it continues strong, but that some flattening-out may be in the offing.

An upstate banker reported a considerable amount of apartment and singlefamily dwelling construction in his area.

A New York City banker re-

marked that a slight rise in the rate of vacancies might not be an unfavorable development, as it might tend to reduce upward pressures on

rents.

The senior official of the large upstate firm looked for some

cooling off of the boom in residential construction as a result of a

"slight" rise in the rate of vacancies and in mortgage rates.

Buffalo

Branch directors reported some concern on the part of builders that

supply would soon exceed demand, partly, in the case of Rochester, as

the result of a number of urban development projects now underway.

Reports concerning the strength of business loan demand varied

somewhat, but, on balance, pointed to continued relative sluggishness.

On the one hand, the New York City banker-director reported that demand

at his bank was up to levels experienced in a "good year," and an upstate banker-director noted an uptrend of all types of loans at his

bank in recent weeks.

On the other hand, a Rochester banker, a Buffalo

Branch director, while characterizing demand as "fairly good" at his

own bank, indicated that reports from the Rochester area suggested such

demand continues weak.

Similarly, a New Jersey banker reported no

pronounced increase in the demand for business loans at his bank.

These

latter assessments are consistent with the results of a special survey

of five New York City banks and four other District banks:

four of the

five New York City banks reported no, or only seasonal, increases in

business loans over the past month, as did three of the four out-of-town

banks.

A key reason advanced for this weakness was that business gen-

erally appeared to be in a fairly liquid position, thus obviating the

need for bank credit at this time.

THIRD DISTRICT - PHILADELPHIA

Overall business activity in the Third District remains strong.

District manufacturers continue to report increases in new orders, shipments, and employment.

And the outlook six months ahead remains optimistic.

Bankers report strengthening loan demand and increasing rates on loans and

savings certificates.

Retail sales show some signs of improvement, with

department stores beginning to do some inventory building in particular

lines.

District manufacturers responding to the Bank's monthly Business

Outlook Survey continue to report a strengthening regional economy. Nearly

50 per cent reported increases in new orders during the month of March, while

over 40 per cent noted increases in shipments.

For both new orders and

shipments, the number of firms reporting increases outpaced those experiencing declines by the widest margin in over three years.

This increased business activity is having a favorable impact on

employment at area firms.

Over 18 per cent of the respondents to the Survey

added employees during March, while only 2 per cent trimmed their work rolls.

This spread between the percentage adding workers and those reducing their

labor force also represents a three-year high.

Looking beyond the immediate period, manufacturers also remain

optimistic.

They see continuing strength in the general business climate and

in orders and shipments for their own firms.

Over 40 per cent are planning

to increase employees during the next six months.

During that same period,

over 20 per cent expect to increase their average employee workweek.

Members of the Bank's board of directors offer confirming reports

of a strengthening regional economy.

On the whole, the directors seem to

be more optimistic than they were a month ago, primarily because they've

started to see the recovery show up in their own businessses and industries.

Area bankers report a strengthening of loan demand during the

past month.

Most see this pickup as broad-based in the commercial and in-

dustrial categories, with some help from the consumer and mortgage sectors.

Bankers expect further growth in loan demand during the second quarter as

businesses transform their increasing confidence into loan requests.

On the interest rate front, most of the bankers see short rates

moving up with longer rates remaining stable.

are expected.

Increases in the prime rate

Philadelphia banks recently increased rates paid on savings

certificates but have yet to offer higher rates on regular passbook accounts.

Retail conditions appear to have improved slightly over previous

months.

Department stores reported strength in furniture and stereo lines.

In addition, they are building women's wear inventories in expectation of

an extremely good fall season.

FOURTH DISTRICT - CLEVELAND

Economic conditions in the District continue to show signs

of improvement.

during March.

conditions.

Area manufacturers report further gains in key areas

The steel industry is returning to normal operating

Residential construction contracts have declined moderately

in recent months, however, from their very high level of last NovemberDecember.

One director reported that a large number of manufacturers

and wholesalers of consumer products with whom he has maintained steady

contact for several years are quite optimistic about the prospects for

consumer spending and that his own business continues to operate at

maximum capacity.

Business loan demand at the District's largest banks

has improved during the past month.

The District's insured unemployment rate has held during the

past two months, after having declined during the previous four months.

Nonfarm payroll employment has yet to register a strong recovery;

manufacturing employment, however, is creeping up.

Preliminary results

of our monthly survey of manufacturers indicate that further strong

increases in new orders, shipments, and backlogs occurred in March.

The upward momentum of business is expected to continue in April.

Steel industry economists say their firms experienced a high

level of orders in March.

Shipments once again are in line with

consumption, but they are just beginning to match output, as producing

mills have been building inventories.

A major firm reports that new

orders in March were the best in over a year, with the pickup in demand

coming "across-the-board."

Another large steel producer said that in

recent weeks orders have leveled off on a high plateau.

A third steel

company also reports that orders have been on a plateau, and that the

demand for heavy construction steel is not showing the usual seasonal

strength; steel sheet mill employment, however, has returned to the

prenegotiation level of last year.

An economist from a large machine tool company reports that

machine tool business is improving gradually, although orders remain

well below their peak.

Small cutting tool orders have been rising

strongly since January 1, but aircraft and defense business continues

to be weak.

Machine tool orders usually lag about nine to twelve

months behind orders for cutting tools, according to this economist.

The firm is not planning to increase its labor force until their

workweek rises to 40 hours.

They have built some inventories of

cutting tools in anticipation of rising demand, and they expect to

work those stocks down before increasing output and employment.

One director, who just returned from a regional convention

of hardware wholesalers and manufacturers, reported widespread optimism

about current and anticipated developments in consumer spending.

The

nearly uniform theme of almost all of the participants was that orders

and sales are far exceeding expectations.

This director has maintained

close contacts with this large group of manufacturers and wholesalers

for several years, in both good times and bad.

Reflecting the overall

situation, his own firm is operating at maximum capacity and experiencing

a high level of new orders for and sales of a wide range of products for

the home and for the hotel and motel industries.

Demand for commercial and industrial loans at the four largest

District banks has improved somewhat over the past month or two.

One

bank reports a strong increase in such lending; another has experienced

a modest increase; a third has had an increase in commitments and inquiries;

the fourth reports that loans have stopped declining.

All four banks

expect further improvement in loan demand during the second quarter,

as inventory building and capital spending pick up.

FIFTH DISTRICT - RICHMOND

A continuing improvement in business activity is indicated by

results of our most recent survey.

On balance, manufacturers report

continued increases in shipments, new orders, employment, and hours

worked per week, and very little change in backlogs of orders.

Strength

in retail sales is reported by both bankers and trade and service respondents.

Little change in prices received was reported, while increases in

wages paid were reported by a sizeable number of respondents.

More than

50 per cent of banking respondents reported that the demand for consumer,

mortgage, and business loans was up.

Businessmen in the District continue

to be optimistic in their outlook for the economy in the next several months.

District manufacturers report continued increases in shipments

and volume of new orders, but very little change in backlogs of orders.

Declines in backlogs of orders were reported, however, by several manufacturers of construction related materials.

Increases in shipments were re-

ported by textile, hosiery, and furniture manufacturers.

Manufacturers

report further increases in employment and hours worked per week, while

trade and service responses indicate no change in employment but a sharp

increase in hours worked per week. The diffusion of responses from bankers

indicates that both employment and hours worked per week have increased

in their areas.

Retail sales apparently continue to be strong.

More than 75

per cent of the banking respondents reported increases in general and

automotive retail sales, and all trade and service respondents indicated

that sales either remained the same or increased.

Few changes in prices

received were reported by either trade and service or manufacturing

respondents.

One-fourth of the manufacturing respondents and one-third

of the trade and service respondents reported increases in wages paid.

All trade respondents reported no change in inventories, while

slightly more than one-fourth of manufacturers reported a decline in inventories.

Inventory declines appeared to be most prevalent among textile

and synthetic fiber manufacturers.

The overwhelming majority of both

manufacturing and trade and service respondents indicate that inventories

relative to desired levels are about right.

Lower than desired inventory

levels were reported by nonferrous metal producers.

Most manufacturers

report that current plant and equipment capacity is about right.

According to banking respondents, sharp increases in both residential and nonresidential construction have occurred since the last

reporting period.

Demand for all types of loans is reported to be strong,

especially consumer and mortgage loans.

All but one banking respondent

reported an increase in the demand for consumer loans, and more than 60

per cent reported an increase in the demand for mortgage loans.

The de-

mand for business loans, which has been slow for the last several reporting

periods, was reported up by 50 per cent of the banking respondents.

District farmers' cash receipts from farm marketings in January

were up 3 per cent over a year ago, considerably less than the national

gain of 12 per cent.

Businessmen in the District, especially bankers, believe that

the moderate uptrend in the economy, evident in the last several months,

will continue.

More than 80 per cent of the banking respondents reported

that they expect an increase in business activity in the months ahead.

SIXTH DISTRICT - ATLANTA

Business sentiment seems to have stabilized on a moderately optimistic level.

As one northern Alabama director put it, "The economy appears

to be settling down after its transition from recession to recovery."

Florida, however, appears to be in the midst of a strong upturn.

Construction activity remains near a boom level in Florida.

Building permits in one county near Disney World are up about sevenfold from

last year.

Motel and hotel construction is strong in many areas of the state.

A company that recently purchased property with 40 miles of waterfront on the

North Florida Gulf Coast is reportedly planning a $20 million condominium

project.

The boom in residential construction may be producing some temporary

bottlenecks, but it is also stimulating the building of additional facilities

for producing building supplies.

Rock mines in central Florida that supply

the cement industry are operating at capacity, yet they cannot nearly keep up

with demand.

Lumber companies are experiencing strong sales, and two have

recently announced expansions of mills.

One of two plants to be built in

Georgia will produce doors and paneling, and the other will produce wallboard.

Plant announcements continue at a steady pace.

In Panama City,

Florida, construction is expected to begin this summer on a $50 million plant

to produce steam-generating components.

announced for a brewery in Jacksonville.

A $25 million expansion has been

Jacksonville is also expected to be

the site of a huge operation to build offshore nuclear generators.

Two ware-

houses and a food processing plant will be built in Jackson, Mississippi.

Shipyards are also experiencing improved business.

A large order

for barges was recently booked by a New Orleans yard, and the Jacksonville

shipyard is planning an expansion.

Other scattered signs of strength include a substantial increase

in the volume of telephone business in Alabama.

In the first two months of

this year, long distance telephone conversations have increased 11 per cent

over the comparable period a year ago.

Aluminum ingot production is

gradually expanding in north Alabama.

The agricultural outlook is generally optimistic, and Florida's

citrus industry is enjoying a record year.

Directors from slow-growth areas in Louisiana and Alabama are not

optimistic about the outlook for their areas.

Furthermore, Lockheed has

announced another gradual layoff of 5,500 employees at its Marietta, Georgia,

plant.

SEVENTH DISTRICT - CHICAGO

The business uptrend appears to be gathering momentum in the

Seventh District.

Psychology and attitudes have improved markedly in

recent months, as uncertainties have diminished.

Moderate increases

in employment are reported from most areas, and further gains are

expected in the months ahead.

broad front is underway.

A trend toward inventory building on a

Manufacturers' order-backlogs have increased

and lead times are lengthening.

Strength in residential construction

has been maintained, and capital expenditure plans are being increased.

Farm income prospects are favorable. Despite some recent pickup in

loan demand, lenders are willing and able to expand credits substantially

further.

Upward price pressures are evident in raw materials such as

nonferrous metals, steel, hides, and lumber.

The steel industry has led the rest of the economy in the

past month or two.

The pickup in orders and production in the Chicago

area has been somewhat stronger than in the nation, with cold-rolled

sheets doing especially well.

Order lead times for steel have length-

ened and discounts from list prices have largely disappeared.

The Detroit auto firms apparently are not unhappy with the

relatively large inventories of cars, and they expect a good second

quarter, perhaps bettering the advanced March pace.

have been phenomenal.

Sales of trucks

A strike at a District plant that produces about

half of the heavy truck engines has continued for five weeks, and is

holding back heavy truck assemblies.

Orders for capital goods have been improving in recent months.

Even machine tool builders are experiencing a rise in orders and

inquiries, but from a very low base.

Defense orders are coming through again for producers that

were hit very hard in the cutbacks of recent years.

Defense is a rel-

atively small factor in the Seventh District, but a reversal of the

decline in procurement will be beneficial to some areas.

Layoffs have been fewer in recent months, and many firms are

hiring again selectively after a long drought.

Job prospects for col-

lege graduates with engineering or business training are better for

the first time in three years.

remains weak.

But the market for liberal-arts types

Skilled white-and blue-collar workers, including

supervisory types, are in demand again, but the unskilled and inexperienced remain at a disadvantage.

Want-ad volume has increased

moderately, and executive recruitment agencies report more requests for

their services.

Crop preparation activities are proceeding normally in the

District despite cold, wet weather.

In contrast to the situation in

the Southwest and on the Great Plains, moisture conditions are adequate

here.

Recent price increases for corn and

soybeans (associated with

speculation surrounding the visit of Butz to Moscow) could increase

planting intentions of District farmers, especially for soybeans.

A majority of large District banks have reported some increase in business loan demand in recent weeks, but they do not expect

this trend to accelerate substantially through the remainder of 1972.

Funds generated from higher profits and depreciation, together with

funds obtained from the capital and commercial paper markets, are

expected to hold down demand for bank loans even if the rise in

business activity matches optimistic projections.

Some bank executives

describe their loan deposit ratios as "too low," although these ratios

are quite high by the standards of ten years ago.

In order to compete

with the capital market, some banks are offering five-to seven-year

credit at 1 per cent over the prime rate, with no compensating balances

required.

There is an undercurrent of apprehension concerning specula-

tion (with the use of credit) in the stock market.

A large number of

new equity issues of doubtful quality are being offered, as was the

case in earlier periods of stock market strength.

Moreover, it is

said that "bonds have no friends," partly because inflation fears cause

many investors to shun long-term bonds.

EIGHTH DISTRICT - "ST. LOUIS

Business prospects continue to be viewed with optimism, according to a sample of businessmen in the Eighth District.

activity continues to expand onxa broad front.

Economic

Department store officials

report that Easter sales exceeded expectations and that the post-Easter

trend continues upward.

Manufacturing activity is increasing throughout

the consumer products sectors.

Farm production is expected to remain

about the same as last year, but higher farm incomes are in prospect.

Residential construction remains near the relatively high level of the

past year.

Few firms report additions to the work force, however some

manufacturers are beginning to discuss the possibility of additional

hirings for a second shift.

Investment in new plants and commercial

buildings remains generally sluggish.

Savings continue to flow into

financial agencies at a high rate and loan demand is picking up, but

profits of these firms for the year are expected to be less than in 1971.

While not considered spectacular, sales of goods and services

are moving ahead of year-ago levels over a wide range of products.

Department stores reported sizeable gains in Easter and post-Easter sales

compared with year-ago levels.

Hardware and automobile sales are up.

Hotels and restaurants likewise indicate gains, and the uptrend in airline traffic which began last fall is continuing.

Most sectors of manufacturing continue to move ahead. Manufacturers of consumer goods, including such industries as packaging,

clothing, uniforms and small tools, have all made gains in recent weeks.

Some steel firms report moderate increases in orders.

Net farm income in the District is expected to rise 10 to 15

per cent from year-earlier levels.

Higher prices are being realized

for most farm products, especially meat animals, with little change in

real output.

Farm costs are up, but the increase is less than in most

recent years.

While residential construction may have leveled off somewhat

in recent months, it continues at the relatively high rate of last year.

Reports indicate that most construction activity in the District is concentrated in one-family houses.

A few multi-family units are being con-

structed in the outlying metropolitan areas.

Activity in commercial and

office building, however, is generally limited to a few schools and

hospitals.

Employment by surveyed firms has remained relatively stable despite sizeable gains in output.

Some have called back employees which

were laid off last year, and, in a few cases, plans are being made for

some additional hirings.

From the comments received, however, the out-

look is not good for a rapid reduction of the unemployment rate.

Investment in new plants and commercial buildings remains sluggish.

Despite operations of near to capacity levels by many manufacturers,

no great change in plant capacity is being planned.

Businessmen report

that while profits are up from last year's levels, prospects for future

profits are still not sufficient to merit additional capital outlays.

Financial firms in the District are predicting lower profit

levels this year than last as a result of lower interest rates.

The

volume of assets and of liabilities are up, but the margin between rates

paid and received is down.

Loan demand is rising, but the rate of in-

crease in the flow of savings appears to be tapering off.

decline in mortgage interest rates is expected.

Some further

NINTH DISTRICT - MINNEAPOLIS

According to bank directors, District businessmen believe that

Phase II has not been very successful in bringing inflation under control and stated that the Pay Board's recent reorganization would not

alter its effectiveness.

Although employment growth was expected to

improve, no significant reduction in unemployment was foreseen for the

second quarter.

Twin Cities retail sales in the first quarter were up

modestly from a year ago and are expected to improve in the second

quarter.

In addition, District first quarter new car sales were quite

strong and, due to improved farm income, District farm machinery sales

strengthened in the first quarter.

Although they feel Phase II has helped, bank directors reported that District businessmen are not convinced that the Administration's efforts are bringing inflation under control.

Given the large

wage increases that have been permitted, one director reported that his

area's businessmen consider further inflation inevitable.

alternatives to Phase II mentioned by District businessmen

price freeze or some type of rigid controls.

The only

were a wage-

Because they felt both

alternatives are unworkable, the general feeling was that now inflation

would persist.

Bank directors indicated that the recent resignation of labor

leaders from the Pay Board would not jeopardize that body's effectiveness.

In fact, the consensus was that the labor leaders had thwarted the Pay

Board's past efforts and that it would probably be more effective in the

future.

Although employment growth was expected to improve, a survey

of employment security offices in 16 of the District's largest labor

areas revealed that generally no reduction in unemployment was anticipated.

When asked to characterize the outlook for employment growth

during the next 90 days, one respondent termed it as "excellent," nine

considered it "good," and five called it "fair."

Ten of the respondents

looked for job openings in their areas to be up from a year ago, with

eight terming the increase "slight," while two expected job openings to

match last year's level.

Four respondents anticipated job openings to

be down from a year earlier.

In spite of these encouraging responses, no

reduction in unemployment was foreseen.

Eight respondents indicated

that second quarter unemployment would be up from a year ago with five

respondents calling the increase "slight."

Seven respondents disclosed

that unemployment would probably match last year's second quarter level

in their areas.

However, a labor market analyst for the Minneapolis/

St. Paul Metropolitan Area, which accounts for a third of the District's

employment, looked for second quarter unemployment to be down slightly

from a year ago.

A telephone survey of five major retailers located in the Twin

Cities revealed that their sales were up from a year ago.

One respondent,

however, called his firm's first quarter sales growth soft and the increase experienced by three other firms could be termed moderate.

The

first quarter Minnesota sales of one large company's department and

discount stores were up 4.2 per cent from a year ago, while a chain of

discount stores reported a 5 per cent year-to-year sales increase in

February and March.

All respondents indicated that their sales gains in

March were stronger than those recorded in January and February.

In

general, these respondents were optimistic about their expected second

quarter sales.

According to a regional sales manager, new car sales were

quite strong in the first quarter.

The sales of automobiles produced

by Ford and Chrysler were up markedly from a year ago.

Chevrolet sales

exceeded last year's level by 35.0 per cent in February and 9.1 per cent

in March.

Although other GM Divisions experienced first quarter year-

to-year sales declines, these managers were quite pleased with this year's

sales, as these decreases can be attributed to the recovery from the 1970

automobile strike which inflated their first quarter automobile sales

last year.

First quarter American Motors sales were only 1.4 per cent

above a year ago.

District farm income strengthened in the first quarter which

induced District farmers to spend much more heavily on farm equipment.

An ad hoc survey of Ninth District area sales offices of farm equipment

and farm supply firms revealed that equipment sales ranged from "no

change" to "20 per cent greater" than sales in the first quarter of 1971.

The latest published data on farm tractor sales show that the number of

units sold in the District during January was 19 per cent larger than the

number sold one year earlier.

Practically all of the equipment man-

ufacturers in our ad hoc survey reported that their first quarter sales

could have been greater had not the increase in demand caught them without adequate inventories.

TENTH DISTRICT - KANSAS CITY

Construction is still an important source of economic strength

in the Tenth District.

Housing starts, which have been considerably

greater than last year, are expected to continue strong through the year,

and nonresidential construction activity also is expected to improve.

District savings and loan associations report continuing large inflows

of savings and substantially increasing mortgage commitments.

Real

estate lending by banks remains strong, and banks' construction loans are

on the rise throughout the District.

Other business lending is growing,

though less universally than construction loans.

In the last Red Book, it was reported that retail meat prices

had risen sharply and that further increases would likely occur.

The

most recent consumer price index confirms the reports made a month ago,

as meat prices accounted for 70 per cent of the sharp advance in retail

food prices posted in February.

With all the national attention on food

prices, spot checks were made with a few retail food chains to determine

what changes, if any, have occurred in meat prices in recent weeks.

Modest increases have occurred in some cases but the general tone reflected greater stability than was anticipated a month ago.

Very recently,

meat prices have weakened, with the respondents reporting that the prospects for further declines are good in the near term.

Nevertheless, it

is unlikely that any downward adjustment in wholesale prices will be

passed on fully to the consumer; thus, retail meat prices, after a brief

period of uncertainty, may show less downward movement than currently

reported.

Construction activity continues to be a source of strength for

Tenth District economic activity.

Commercial and industrial constru-

tion in the District are expected to be better this year than last year,

with the last half of 1972 expected to be better than the first.

Road

and heavy construction activity are expected to improve in Kansas and

Missouri due to actual and anticipated increases in funding of new

state highway building programs.

The housing market is good, and

housing starts continue well above the same period last year.

Several

large housing contractors interviewed believe that 1972 as a whole will

continue to surpass 1971 in housing starts, although one respondent

feels that the national housing boom may be peaking out.

Homebuilders interviewed have varying feelings about the

possible effects of changing finance costs.

One company doesn't antic-

ipate much effect on housing starts this year from any firming of

mortgage rates, while another expects a quick change in the rate of

housing starts if mortgage rates go up later this year.

A third respon-

dent thinks that loan rates could rise one-fourth of 1 per cent with no

slowdown in construction, but that a larger rise would lead to a

tapering off in housing starts after a three or four month lag.

Interviews with a number of large savings and loan associations

in the District suggest that home mortgage interest rates are expected

to remain the same or rise slightly in the near future, following a

general decline in the last three months.

change in nonrate terms.

Most associations reported no

Savings inflows continued to be strong through

March at nearly all institutions interviewed, in some cases, especially

so.

There were two exceptions noted to this pattern:

one firm

reported March inflows not so good but noted that its competitors were

doing better because the respondent firm is refusing "big ticket depositors who are too unpredictable;" a second respondent attributed a

March slowdown in inflows to its dropping of 6 per cent savings certificates.

Mortgage commitments were uniformly reported as very strong

and increasing substantially.

Of those firms making loans on both

single-family and multi-family units, most report a greater emphasis on

single-family dwellings.

The upturn in business loan demand at commercial banks, seen

as only quite tentative by Tenth District bankers at the time of the

last Red Book, has gained in scope and size over the last several weeks.

Nearly all of the gains are emanating from local borrowers —

was reported among national accounts.

no upsurge

This imbalance, which may be due

to many Tenth District banks not following the prime rate when it went

below 5 per cent earlier this year, is expected to diminish with the

rise of the national prime rate back to District levels.

The upturn is least evident in Kansas City, where business

lending seems fairly flat, while the most vigorous growth was reported

in Tulsa.

Construction loans were on the rise everywhere.

The advance

in loans to other types of businesses is broadly based, with many industries borrowing for a variety of purposes.

Moderate gains in business

loans are expected during the second quarter.

In other loan categories,

real estate lending remains quite strong, and consumer installment loans

continued to rise in March, at what some bankers feel is a faster pace.

Demand deposits were steady or declining in March at District

banks, while time deposits continued to climb.

The several-months-old

pattern of decreases in large CD's and increases in consumer savings

and time deposits continued to hold, although rising marketable CD rates

are expected to moderate these trends.

ELEVENTH DISTRICT - DALLAS

The economy of the Eleventh District continues to show moderate

strength.

Industrial production in Texas increased moderately in February,

and employment in the five District states held steady.

Sales of depart-

ment stores continued to experience significant year-to-year gains in February and March, and new automobile registrations rebounded in February

after experiencing a sharp drop in January.

Construction activity slack-

ened in February but was still well above its year-earlier pace.

The out-

look for agriculture also remains generally favorable.

The seasonally adjusted Texas industrial production index rose

moderately in February following a sharp advance in January.

All of the

February increase resulted from a large boost in mining — especially the

production of crude petroleum which rose in response to the higher oil allowable.

Utility output was about unchanged from January, while manufac-

turing production slipped nearly 1 per cent.

The decline in manufacturing

was due primarily to sharp drops in output of the petroleum refining,

printing and publishing, transportation equipment, and apparel industries.

These declines were partly offset by sizeable gains in production of electrical machinery, food, textiles, and paper.

The Texas Railroad Commission raised the state's oil allowable

for April to 100 per cent of maximum efficient production, allowing for

full production for the first time in a quarter century.

Shortly after

its announcement, however, the allowable for the giant East Texas field

was cut back to 86 per cent.

Other District states left their allowables

unchanged.

Seasonally adjusted total employment in the five southwestern

states changed very little in February.

And with the labor force about the

same as in January, the average unemployment rate for these states matched

the 4.5 per cent of a month before.

a year before.

This rate was down from 4.9 per cent

Nonfarm payroll employment edged up slightly as nonmanu-

facturing employment increased enough to more than offset a slight decline

in manufacturing employment.

Retail sales in the District continue to register sizeable gains.

Registrations of new passenger cars in Dallas, Fort Worth, Houston, and

San Antonio rose 16 per cent in February, with all four metropolitan areas

posting increases.

Moreover, department store sales in the District were

17 per cent higher in the four weeks ending March 25 than in the corresponding period a year ago.

Construction activity in the five southwestern states, as measured

by the value of contracts awarded, fell significantly in February, with all

three major categories of construction sharing in the decline.

However,

the total value of contracts in the five-state region was still nearly a

fourth larger than in February a year ago.

The decrease from January re-

sulted from large declines in Texas and Arizona.

District agriculture is progressing well.

Planting intentions

show an increase of cotton acreage in the five-state area, and planting is

off to a good start.

Range and livestock conditions are substantially

better than a year ago and are somewhat better than the average for the

past ten years.

The wheat crop is making excellent progress, and cattle on

feed is up substantially from a year ago.

The index of prices received by

Texas farmers and ranchers fell nearly 4 per cent in the month ending

March 15, with most of the drop centered in commercial vegetables, cotton,

and meat animals.

Total credit at weekly reporting banks in the Eleventh District

rose sharply in the four weeks ending March 22.

was especially strong.

Demand for business loans

Inflows of demand deposits moderated while net

withdrawals were reported in time and savings deposits.

TWELFTH DISTRICT - SAN FRANCISCO

In the view of our directors, economic conditions have changed

little from those of previous months.

Consumer spending and construction

remain the most important sources of strength.

The agricultural outlook

is also favorable in most areas and for most crops. On the other hand,

business investment expenditures continue to be relatively cautious, and

this situation is mirrored in bankers' reports of moderate, rather than

strong, business loan demand.

Our directors were asked to assess prospects for construction

during the coming year.

Most directors expect a continuation this year.

Single-family home construction has been stimulated by the recent reductions in interest rates and the greater availability of finance.

Devel-

opers in many areas have had little trouble in selling houses, especially

in the medium-priced range.

what cautious.

But nevertheless, developers have been some-

For example, new tracts have tended to be moderate-sized,

and construction has been kept reasonably close to sales.

As a result,

there is little evidence of large-scale speculative building of homes.

The areas with strongest demand are southern Arizona, the San Diego and

Orange County areas of southern California, and Portland.

Commercial building and government projects,particularly for

highways and bridges, provide the other major components of construction

demand.

In particular, there are good prospects for maintaining the

recent pace of construction of office building in the San Francisco area

and in Los Angeles.

A major redevelopment project is being considered

in the San Francisco area, and several large buildings have been announced

for Portland.

State expenditures for highways and bridges in California

and Oregon are expected to contribute to construction activity.

Apartment construction, in contrast, shows a more mixed pattern.

In some areas, multi-unit construction is strong and vacancy rates are

low —

for example, Portland and much of southern California — but in

other areas there is concern about overbuilding and the possibility"of

higher vacancy rates —

for example, Salt Lake City and Los Angeles.

The state of Washington, which still suffers from high unemployment, remains the major exception in this favorable construction

picture.

Construction activity has recovered from the low levels of

1970, but, in general, it is not expected to be much higher than that of

1971.

Residential construction in the Seattle-Tacoma area is described

as "sporadic," and there is little incentive for much new construction.

Commercial and government projects have helped, but overall the rate of

growth of construction is expected to be moderate.

Within the state,

only Spokane is expected to have a record level of construction activity

during the coming year.

Spokane had not expanded as much as Seattle or

Tacoma during the previous years, and the local economy has buoyant

prospects for the immediate future.

Retail sales have remained good, with increases in the 5 to 10

per cent range being common.

Durables seem to have done better than aver-

age, but occasional weakness in soft goods lines has been reported.

Both

domestic and foreign automobiles are continuing to experience steady sales,

even though the latter have had some inventory shortages.

At the moment,

auto dealers expect one of their best spring seasons, even in such high

unemployment areas as Seattle.

Most of our directors in agricultural areas report good prospects

for the coming year.

Wheat prices are described as rising, and cattle

prices are holding steady.

Certain fruit crops remain exceptions, and

recent late frosts resulted in serious losses for various fruit crops

in Utah and for grapes in California.

Business investment plans remain cautious, and no major revision

of expectations is apparent.

As an indication of this situation, most

bankers report that business loan demand has been steady rather than

strong.

There are a few exceptions where individual banks are experiencing

strong demand, but the majority indicate little change from recent trends.

The one major exception remains construction and related loans, where

demand is strong.

continuing to rise.

Real estate and consumer installment lending are also