Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared f o r the

Federal Open Market Committee

by the Staff

June 13, 1973

TABLE OF CONTENTS

SUMMARY page i

First District - Boston page 1

Second District - New York page 4

Third District - Philadelphia page 7

Fourth District - Cleveland page 9

Fifth District - Richmond page 12

Sixth District - Atlanta page 15

Seventh District - Chicago page 19

Eighth District - St. Louis page 23

Ninth District - Minneapolis page 26

Tenth District - Kansas City page 30

Eleventh District - Dallas page 34

Twelfth District - San Francisco page 38

SUMMARY *

Reports by the Reserve Banks indicate that the economy has continued to expand vigorously in recent weeks.

However, the rate of expan-

sion has apparently slowed in the residential construction industry, and

a number of Banks reported expectations of a more moderate rate of expansion in the overall economy in the second half of the year.

Retail sales have generally continued strongly upward.

The

most common report was that sales continue to rise at about the same rate

as in recent months.

However, some softening in r e t a i l trade was detected

in the Fourth D i s t r i c t , especially in appliance sales, and a Minneapolis

Director associated with the r e t a i l industry reported that a slowdown in

consumer spending may be occurring.

There i s no letup in manufacturing expansion.

reported on this topic found the uptrend noticeable.

Most Banks which

Cleveland and

St. Louis indicate that factories are operating at or near capacity; the

former, however, found a modest decline in the proportion of firms

reporting new orders in May.

Dallas, Minneapolis, Philadelphia, and

Richmond reported further gains in manufacturing a c t i v i t y .

Atlanta r e -

ported that employees were working overtime in lumber, machinery, and

metal products.

Chicago reported that the uptrend of manufacturers'

orders may be slowing because of reluctance to take new orders many

months ahead at stated p r i c e s .

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

Shortages and rationing continue to be major complaints in many

product l i n e s .

Seven of the Reserve Banks reported either raw materials

or manufactured products of some type in short supply.

short supply include:

Items reported in

labor, gasoline, natural gas, paper, paperboard,

transportation f a c i l i t i e s , cement, f e r t i l i z e r and other agricultural

supplies, and e l e c t r i c power.

The shortages are apparently leading to a capital spending "boom."

The impending plant expansions in the Sixth District include a wide range

of the major industries of the nation.

Cleveland respondents representing

s t e e l and other industries reported that capital spending to expand capacity

i s underway and that no plans e x i s t f o r cutting back in 1974 as long as new

orders and p r o f i t s warrant the expenditures.

A high l e v e l of capital

investment in plant and equipment was indicated by Dallas and San Francisco,

and plant capacity i s reported t o be inadequate to meet expected future

sales in a number of other D i s t r i c t s .

The reports indicate that i n f l a t i o n i s s t i l l a major concern of

businessmen, and there i s l i t t l e optimism that i t w i l l come to an early

end.

Chicago reported an acceleration in the number of announced price

increases in June.

Dallas Directors expect wage rates in their companies

to rise at a 7 percent rate in the second half of the year.

Philadelphia

respondents report higher prices f o r raw materials, and over half of the

area's executives expect a worsening of the situation.

New York Directors

expect further price increases over the coming months, but at a more

moderate rate.

New York expressed the view that the increased food prices

may have a strong impact on union wage demands.

Residential construction has apparently turned down in most of

the D i s t r i c t s .

Chicago reported that a decline in residential construction

i s clearly underway.

Other Districts reporting either a slowdown or weak-

ness in such activity include:

Atlanta, Cleveland, Dallas and San Francisco.

Only Richmond reported further increases in home building.

The trend in

commercial construction i s mixed.

Employment has leveled o f f in most of the Districts and unemployment has inched up, but most of the Banks s t i l l report a " t i g h t " labor

market and labor shortages, especially of s k i l l e d labor.

The nation's agricultural situation has vastly improved in recent

weeks.

After an extremely d i f f i c u l t planting season because of wet weather

and f l o o d s , prospects are now good f o r a large production of c r i t i c a l food

and feed crops.

Some shortages in seed and f e r t i l i z e r s t i l l exist in

limited areas and some land along the Mississippi River may not dry in time

to plant cotton, the intended crop, which w i l l be c r i t i c a l to individual

cotton farmers.

Farm production costs are high and r i s i n g , but overall

prospects are f o r high farm incomes.

If average growing conditions are

realized, record levels of production are likely for a number of major

crops

and record prices may be received f o r them.

In the meantime, however,

as reported by Chicago and Kansas City, prices of meat animals may be

pressing against the c e i l i n g s , and rising feed costs are reducing p r o f i t

levels from feeding.

The ceilings could thus result in lower levels of

production.

Most Districts reported a strong loan demand, slower deposit

growth, and generally higher interest rates than heretofore.

Regular

business customers are apparently having no trouble obtaining credit at

the higher rates, but Chicago reports that country elevators are having

increased financing d i f f i c u l t i e s as a result of transportation problems

and sizable margin c a l l s on hedged grain.

In response to the Board's request f o r information on the impact

of the Treasury's tax proposals f o r eliminating real estate tax shelters,

the replies varied from l i t t l e or no impact on construction a c t i v i t y to

a d e f i n i t e dampening e f f e c t .

Boston, after a study in sane depth, con-

cluded that subsidized housing would be severely hurt, and that while

p r o f i t s in the private market would be reduced, most "worthwhile" projects

would be b u i l t .

A decline in construction would be anticipated in the

Kansas City and Minneapolis D i s t r i c t s .

Kansas City reported that the

healthy business situation in the Tenth District would be dealt a severe

blow i f investment funds flowing into c a t t l e and construction were

suddenly cut back by tax reform.

The respondents indicate that the tax

would not have a s i g n i f i c a n t impact on construction in the Chicago,

New York, Richmond, and St. Louis D i s t r i c t s .

FIRST DISTRICT — BOSTON

Discussions with three large Boston real estate developers about

the Treasury proposals to limit a r t i f i c i a l accounting losses indicated that

only subsidized housing built by limited dividend corporations would be

severely hurt.

Developers of apartments f o r the private market and of

commercial construction f e l t that while p r o f i t s would be reduced, worthwhile

investment projects would s t i l l be b u i l t and only marginal projects would be

affected.

The Massachusetts Housing Finance Agency channels funds into the

subsidized housing market to limited dividend corporations.

Between 95-100

percent of the equity capital put up in these corporations i s attracted by

the tax shelter feature.

The Director of the agency said, "We're in the

business of s e l l i n g tax s h e l t e r . "

Without the tax shelter provision, the

limited dividend corporation would not attract private capital and the low

income housing market would disappear.

Developers are only interested in

this kind of construction i f they can s e l l o f f their losses at the front

end and end up with no investment or even a negative investment of their

own c a p i t a l .

In the private market f o r apartments, developers f e l t that the

tax shelters were one of the factors increasing p r o f i t s , but that i t s removal would not really hurt large firms.

As one developer put i t , "The

Treasury proposals are like higher lumber prices; they're another factor

a f f e c t i n g a firm's income stream, but they only a f f e c t the marginal s i t u ation."

The Treasury proposals may, therefore, partially slow down some

construction a c t i v i t y , but i t ' s not going to k i l l the apartment market.

In some cases, this developer f e l t that removal of the tax shelter provision

w i l l help the housing market because i t has been an added ingredient d i s torting the economic picture and has led to overbuilding.

He cited over-

building in Southern California, Florida and Texas where there are wealthy

tax-conscious populations which have put their money into projects which

were not economically viable investments just because they provided tax

shelters.

These projects are b u i l t f o r s a l e , not investment.

While large real estate developers w i l l be able to continue

operating, i t was f e l t that many small builders are not dependent on outside

capital attracted by the tax shelter provisions.

For large builders, the

tax shelter has been a windfall, but f o r many small builders i t i s c r u c i a l .

Developers also f e l t that the Treasury proposals would accelerate condominium

construction.

A large developer of commercial construction reported that the

Treasury proposals should not have a dramatic e f f e c t on that market because

there; i s more capital available f o r investment in good industrial and commercial leases than there are good p r o j e c t s .

Since there aren't small

developers in the commercial market, the e f f e c t s w i l l again be less than on

apartment construction.

This developer summarized his company's position by

saying, "We'll survive, but i t won't be as much fun."

Both of the academic correspondents available this month, Professor Eckstein and Dr. Shapiro, f e l t the prospects are good that economic

growth w i l l taper o f f without becoming negative.

about the long-run outlook f o r i n f l a t i o n .

Neither was pessimistic

Shapiro f e l t that internal sources of funds would be s u f f i c i e n t

to finance the most l i k e l y prospective levels of nonfinancial corporate

investment.

come down.

Thus, he f e l t short rates, and later long-term rates, w i l l

This would preclude a s i g n i f i c a n t squeeze on housing and con-

sumer c r e d i t .

Shapiro recommended a 7 to 8 percent rate of growth in RPDs

for the current policy period.

Eckstein again expressed concern about a credit crunch.

crunches, he suggested, have been "stumbled i n t o , not planned."

Past

He noted

that the indicators of a crunch — short rates close to long rates, and no

growth in unborrowed reserves — are present in the current situation.

In

order to prevent the Federal funds rate from s t a b i l i z i n g as high as 8.5

percent, additional reserves must be made available over the next two

months.

Unless borrowings are to rise to unprecedented heights, therefore,

nonborrowed reserves must be expanded.

Eckstein grants that current policy

must tread "the narrow path between not worsening the prospects for a decline in 1974 and not contributing to the current commodity price explosion."

SECOND DISTRICT ~

NEW YORK

The Second District Directors who were contacted recently

generally f e l t that prices w i l l continue to r i s e rapidly in the months

ahead, a l b e i t at a more moderate pace than has been experienced recently.

A good deal of concern was expressed over the p o s s i b i l i t y that continued

price increases might lead to inflationary wage settlements.

Despite

the s t a b i l i t y of the overall rate of unemployment, the Directors have

seen increasing evidence of tightness in the labor market, especially

shortages of s k i l l e d labor.

None of the Directors expressed apprehension

over the large buildup in consumer credit during the past several months.

A number of respondents expected the rise to taper o f f in coming months,

along with a moderation of the demand for consumer durables.

The real

estate s p e c i a l i s t s who were contacted expressed mixed opinions on the

implications of the proposed changes in the tax treatment of some income

from real estate Investments, but most foresaw l i t t l e impact on overall

construction a c t i v i t y .

Regarding the price picture, the Directors expected further

increases over the coming months, but at a more moderate rate.

The

feeling was widely expressed that the sharpness of the recent increases

was largely traceable to temporary f a c t o r s .

These factors we re s ummed

up by the Buffalo branch Directors as including a broad-based "catch up"

increase in price following the termination of Phase I I , the recent devaluation of the d o l l a r , e a r l i e r pressures on industrial production, and

bad weather conditions for agriculture here and abroad last year.

The continuation of poor weather conditions this year was expected to increase further the cost of foodstuffs to the consumer — a

development f e l t l i k e l y to have a strong impact on union wage demands.

The chairman of a large New York City bank thus stated that "The upsurge

in prices w i l l be a s i g n i f i c a n t factor in wage negotiations and could

lead to large wage demands.

This i s a major area of uncertainty, but i f

the upsurge in prices i s allowed to be translated into large wage s e t t l e ments next year, then the s t a b i l i z a t i o n program w i l l be rendered i n e f f e c tive.

This i s perhaps the strongest argument for modifying the program

and seeking broad-based support."

Similar expectations regarding the

possible e f f e c t s of price increases on wage negotiations were expressed

by most other respondents.

Upward pressures on wages, moreover, were considered l i k e l y to

be intensified by conditions in the labor market, which, as in previous

months, were generally reported to be tightening.

Special note was taken

of shortages of s k i l l e d workers, including managerial and technical personnel.

Concerning consumer c r e d i t , the chairman of the New York bank

argued that the nonmortgage debt of households was not out of l i n e ,

h i s t o r i c a l l y , with consumer incomes.

Similarly, none of the Buffalo branch

Directors reported any indication that consumers in their area have been

over-extending themselves in this regard.

The president of a Buffalo bank

mentioned that his assessment was based, among other things, on an examination of ratios of delinquencies and refinancing to the total amount of

consumer credit at his bank.

The New York banker attributed the rapid run up in consumer

credit to the strong demand f o r cars, appliances, and other consumer

durables.

The president of a nationwide chain of r e t a i l stores mentioned

that the recent sharp rise in this type of credit in good part reflected

anticipatory buying related to expected tax refunds and to expected

higher p r i c e s .

Indeed, the desire to avoid higher prices was widely

mentioned as a major factor in the high level of consumer spending and

the accompanying growth In consumer c r e d i t .

The president of the r e t a i l firm reported that there were now

some indications of a slowing in the rate of growth of such c r e d i t , and

the New York banker expected the rate of growth in the sale of consumer

durables to slacken s i g n i f i c a n t l y over the next year, with a concomitant

slowdown in the rise of consumer c r e d i t .

While the Buffalo branch Direc-

tors have observed no signs of any weakening of consumer willingness to

incur additional debt, some noted a growing concern by the public regarding economic conditions that could lead to a slackening in the use of

credit later In the year.

Several construction industry s p e c i a l i s t s at Hew York banks,

insurance companies, and mortgage firms were queried regarding the

possible adverse e f f e c t s on construction a c t i v i t y of the proposed change

in tax l e g i s l a t i o n , mentioned in the St. Louis Bank telegram, that would

curb the use of some real estate tax shelters.

One observer forecast a

drastic decline in the number of individual investors in the real estate

business.

Most respondents, however, f e l t that the impact on construction

activity of the proposed change was likely to be very limited.

THIRD DISTRICT — PHILADELPHIA

Business conditions in the Third District are generally favorable.

Production a c t i v i t y is s t i l l brisk and expected to improve further.

Labor markets are holding steady with small increases in payroll and work

week possible by year end.

A considerable number of firms are increasing

their inventories in anticipation of further sales advances; r e t a i l e r s

are experiencing good demand f o r their summer sportswear l i n e s .

tion a c t i v i t y has slowed somewhat.

Construc-

Bankers are feeling the beginnings of

loan demand pressure, and i n f l a t i o n continues to plague the D i s t r i c t .

Production a c t i v i t y i s maintaining l a s t month's brisk pace.

Over half of the respondents to this month's business outlook survey r e port sales and shipments unchanged, and a substantial 35 percent reported

sal€>s advances.

While a small minority of the local manufacturers are

experiencing a drop in sales, the six month outlook Is bright.

The major-

i t y of respondents anticipate increased sales and shipments.

The employment situation in the Third D i s t r i c t remains basically

unchanged despite small pluses and minuses in some areas.

Twenty percent

of the firms report increasing the number of people they employ and 14 percent are increasing the number of hours in t h e i r average work week.

But

the overwhelming majority report no change in either their work week or

the number of people on their payroll.

However, some improvement i s anti-

cipated; almost a third of the firms plan to hire more workers by year end.

Investment in inventory is generally holding steady, although over a quarter of the firms surveyed are increasing stocks this month.

On the six month planning horizon, over 80 percent expect to

either increase inventories o r , at l e a s t , maintain them at their current

levels.

A considerable minority of respondents plan to increase capital

outlays within six months, but their number does not represent a gain

over last month.

slowed s a l e s .

Local retailers note that recent rainy weather has

Nevertheless, demand for goods such as summer sportswear

has been good.

Overall, construction a c t i v i t y in the Third District is down

slig;htly, particularly in the nonresidential and public works sectors.

Bright spots are the Atlantic City metropolitan area, where increases

in resort homes are boosting the l o c a l economy, and the Wilkes Barre

area, which i s s t i l l hard at work rebuilding from the disastrous hurricane floods of l a s t year.

Over half of the survey respondents report paying higher

prices for raw materials, and nearly 60 percent report that they are

keeping their own prices steady.

No r e l i e f is expected, with well over

half of area executives queried anticipating a worsening of the situation.

Third District bankers report that loan demand i s up s l i g h t l y ,

deposits are f l a t , and loan demand pressures are building.

Several

said that they were discouraging many loan applicants; but, none reported denying worthy requests for funds.

Two banks report witnessing

disintermediation as savers request conversion of their deposits to

U.S. Government bonds.

FOURTH DISTRICT - - CLEVELAND

Business activity in the District i s s t i l l strong, although

there are a few scattered signs of slowing in the pace of the expansion.

Some softening i s detected In r e t a i l trade, residential construction i s

declining, gains in employment have slowed, and manufacturers are experiencing some d i f f i c u l t i e s in increasing output.

The chief executive o f f i c e r of a major department store in

Cleveland informed us that r e t a i l sales were not as strong in May as in

previous months of the year.

Sales of home furnishings and s o f t goods

remain at a high l e v e l , but the appliance business has slowed.

There i s

no evidence of consumer resistance to higher prices by way of a downgrading in purchases; that i s , the sales volume of color TV sets remains

at a high l e v e l and there has been no unusual pickup in budget department

sales.

There i s no sign of an increase in payment delinquencies; in f a c t ,

c o l l e c t i o n s were up In May, probably because of tax refunds.

With respect

to prospects in the period ahead, the department store o f f i c i a l expects

that each succeeding quarter w i l l probably show reduced rates of growth,

and the fourth quarter may be a d i f f i c u l t one f o r r e t a i l s a l e s .

An economist from one of the nation's largest department store

chains also expects consumer spending to slow sharply by late this year

or early next year — mainly because of the extraordinary pace of debt

accumulation and the e f f e c t s of the recent surge in consumer p r i c e s .

Both consumer expenditures and borrowings have been growing faster than

recent h i s t o r i c a l averages.

The economist reports no evidence of consumer

downgrading or rising delinquencies.

Residential construction contracts in the District seem to

have peaked in January of this year; since then, the decline has been

more pronounced in the District than in the nation.

Nonresidential

construction, on the other hand, i s on a strong upward trend.

Overall business conditions in the D i s t r i c t ' s manufacturing

sector remain strong, although there have been a growing number of

reports in recent months indicating problems of physical capacity l i m i t ations, material shortages, lengthening delivery times, and widespread

price increases.

Early returns from our monthly survey of manufacturers

reveal a moderate decline in the proportion of firms reporting gains in

new orders during May.

The proportion of firms reporting higher shipments

has also slowed recently.

Some manufacturers are finding i t more d i f f i -

cult to increase output because of material shortages; delivery time

continues to lengthen f o r the majority of firms.

The d i f f u s i o n index

f o r prices paid by District manufacturers, which had hovered around the

60 percent level during most of Phase I I , moved to the 80 percent l e v e l

between February and April, and jumped to 85 percent in May — the

highest figure in the nine-year history of our survey.

In recent months,

gains in manufacturing employment have slowed markedly compared with the

increases that occurred late l a s t year and early this year.

Remaxks from some of our industrial Directors tend to support

the general conclusions of the manufacturers' survey.

industrial Directors (industries:

Three of our

consumer goods, producers durable

goods and o f f i c e equipment) noted that new orders had levelled o f f in the

l a s t month in contrast to the continuous monthly increases recorded

e a r l i e r in 1973.

A l l three also reported some problems in increasing

output because of capacity limitations.

The Director of the o f f i c e

equipment industry said that they had experienced a sharp backup in

shipment schedules because of the high l e v e l of orders and the need to

hire and train additional employees; this situation has been complicated

by the introduction of a new line of their basic equipment, however.

The

Director in the producers durables industry reported continued problems

in finding high-quality skilled and semi-skilled labor.

Steel firms mentioned that new orders were down in May, r e f l e c t ing order limitations imposed by the mills rather than any decline in

underlying demand.

Steel demand i s said to be at peak and i s expected

to stay high f o r the rest of the year.

One steel firm notes that further

increases in output are impossible due to capacity constraints.

Comments

from our Directors in other industries indicate they, t o o , are operating

at capacity.

Capital spending to expand capacity in their firms i s

underway, with no plans f o r cutting back in 1974 as long as new orders

and p r o f i t s warrant such expenditures.

FIFTH DISTRICT — RICHMOND

Results of our most recent survey of businessmen and bankers

indicate that the Fifth District economy remains in a strong advance, with

the manufacturing sector continuing to gain momentum.

Further increases

in manufacturers' shipments, new orders and backlogs are reported, while

manufacturers' inventories have apparently declined further in recent weeks.

It now appears that f o r a s i g n i f i c a n t number of manufacturers, inventory

levels are lower than desired.

Increases in r e t a i l sales evident in recent

months are continuing while construction outlays apparently remain on the

rise.

According to a special survey, the mortgate markets have tightened

s i g n i f i c a n t l y in recent weeks.

Increases in shipments, new orders and backlogs were reported by

more than 50 percent of the manufacturing respondents in the latest survey.

Among the manufacturers reporting gains were producers of synthetic f i b e r s ,

chemicals, and s t e e l .

Nearly one-half of the manufacturing respondents

reported declines in inventories, while o n e - f i f t h indicated that inventory

levels are too low relative to sales prospects.

Nearly one-third of the

manufacturing respondents reported that current plant and equipment capacity

i s inadequate.

The number of manufacturing firms reporting increases in employment: rose sharply and manufacturers on balance also reported an increase in

hours worked per week.

Trade and services respondents indicated l i t t l e

change in employment and hours worked per week.

Widespread wage and price

increases were reported by both manufacturing and trade and services respondents .

Retail sales In the District remain strong.

All r e t a i l respon-

dents reported sales increases and more than one-half of the banking

respondents indicated that r e t a i l sales in their areas had risen further

in recent weeks.

Banking respondents report that the demand f o r a l l types of

loans continues strong.

Increases in the demand f o r business, consumer

and mortgage loans were reported by more than 60 percent of a l l banking

respondents.

Bankers also indicate that both residential and nonresiden-

t i a l construction a c t i v i t y increased in their areas during the past month.

Some overbuilding of residential apartments i s reported in parts of the

Carolinas.

Contacts with several major builders in the District suggest

that the proposed changes in real estate tax shelters have not had any

noticeable impact on construction a c t i v i t y .

A recent survey of residential mortgage lenders in the Fifth

District indicates that mortgage markets have tightened in recent weeks.

This tightening i s associated with a slowdown of deposit inflows at

savings and loan associations and savings banks which, in turn, is a t t r i buted to increased consumer spending and rising market rates of interest.

Also contributing to the tighter conditions i s the large volume of loans

to which these institutions have committed themselves in recent months.

Very few funds are available f o r new loans, while rates to preferred customers are in the 8 percent range.

The Washington, D.C. area appears to

be experiencing the tightest conditions, while Baltimore has some i n s t i tutions (savings banks) that are s t i l l making new loans.

District c i t i e s seem to f a l l between these two extremes.

Other major Fifth

The s i g n i f i c a n t l y improved farm income situation continued

throughout the f i r s t quarter of 1973, with cash receipts from farm

marketing recording a 26 percent increase over a year ago.

While spring

plantings in the District are about on schedule, recent sharp increases

in the price of feed are of major concern to livestock producers and may

be having adverse e f f e c t s on poultry and hog production.

On balance, businessmen and bankers in the Fifth District continue to be optimistic about the general economic outlook.

A l l of the

banking respondents expect business a c t i v i t y in their areas to s t a b i l i z e

at present levels or to advance further during the next three months.

SIXTH DISTRICT — ATLANTA

The D i s t r i c t ' s economy remains robust with no letup in s i g h t .

There continue to be numerous announcements of new plants and plant

expansions.

Plans have been announced f o r several large real estate

p r o j e c t s , but there are some reports of impending weakness in residential

construction and some doubts that a l l of the planned major projects f o r

Atlanta w i l l actually be b u i l t .

Tight labor market conditions are common,

especially in Florida.

A large flow of new plant and plant expansion announcements

continues throughout the D i s t r i c t .

Firms in the chemical industry have

announced plans for a $90 million phosphate processing plant in North

Florida, a $50 million polyvinyl chloride plant in Lake Charles, a $50

million plant expansion in Nashville, and a $21 million synthetic resin

plant near Mobile.

Chrysler Corporation is planning to locate an assembly

plant employing 1,000 In South Georgia.

A multimillion-dollar t i r e

fabric plant, which w i l l eventually employ 300, i s to be b u i l t in North

Alabama.

Firms in the e l e c t r i c a l products industry have announced plans

to expand an air-conditioner plant and to build a thermostat plant and a

new air-conditioner plant, a l l in Tennessee.

A dictation equipment plant

i s slated f o r Central Georgia and an e l e c t r i c a l t o o l plant for Jackson,

Mississippi.

There i s also a p o s s i b i l i t y that a major investment w i l l be

made at an engineering center in Tennessee.

Lumber products companies

intend to build two new plants in Georgia and three others in Alabama,

Mississippi, and Louisiana.

Three apparel plants In Mississippi and

Alabama are being expanded, generating from 300 to 400 new j o b s .

The outlook f o r residential construction i s mixed.

There have

been some noteworthy announcements, including two planned unit developments

covering a total of 2,600 acres near Orlando, a $28 million residential

development in Jacksonville, and a 1,000-acre residential development

north of Atlanta.

An Atlanta firm has bought 5,500 acres north of Daytona

f o r eventual development of a "recreational-oriented residential community."

There has been a multimillion-dollar land deal in the Florida Panhandle

involving thousands of acres, but no d e f i n i t e plans have yet been announced.

There are some reports of weakness in residential construction, however.

In some areas such as East Tennessee, this i s the result of labor or

material shortages or weather conditions.

delivery are reported in East Tennessee.

Five-month delays in brick

One Tennessee banker notes that

the "increasing cost and the diminishing supplies make i t d i f f i c u l t for

contractors to bid on p r o j e c t s . "

A low supply of labor and a shortage of

concrete and plywood are reportedly slowing construction in the Jacksonville

area.

Construction activity in the Miami area i s expected to slow a f t e r

a rush to beat a permit moratorium ordered by a pollution control board.

Plans f o r another 30-story o f f i c e building and parking f a c i l i t y

have been announced f o r downtown Atlanta.

However, because of the large

number and the ambitiousness of many of the planned Atlanta p r o j e c t s , real

estate people have begun to express skepticism that a l l the projected developments w i l l actually be b u i l t .

They note that, in the past, projected

developments have sometimes been scrapped because of a lack of s u f f i c i e n t

financing.

On the other hand, the occupancy rate in metropolitan Atlanta

area o f f i c e buildings has reportedly risen to 87 percent and the rate i s

even higher in moderately priced space in dcwntown Atlanta.

Flans have been announced f o r a $200 million shopping center and

o f f i c e complex in a planned community southwest of Atlanta and for a $50

million o f f i c e park north of Miami.

On a smaller s c a l e , plans have been

announced f o r a $7 million hotel complex in Augusta, Georgia, a $4.5 million

addition to a motel in downtown Atlanta, a $3 million shopping center in

Northeast Florida, and a $2.1 million r e t a i l o f f i c e building in South

Atlanta.

Taut labor market conditions are reported in some areas of the

District.

Florida.

The unemployment rate i s less than 2 percent in some areas of

One businessman claims that a shortage of labor i s an impediment

to attracting new firms to the Tampa area.

The citrus and vegetable i n -

dustries in Central Florida report d i f f i c u l t y in attracting s u f f i c i e n t

harvesting labor.

In Tennessee, overtime in the lumber, machinery, and

metal products industries has kept unemployment so low that a Knoxville

businessman complains that " I t i s s t i l l virtually impossible to find anybody to work."

An exception to these conditions exists in areas of

Louisiana where l a y o f f s in manufacturing, reportedly due in part to a lack

of raw materials, have pushed up unemployment.

There are reports of increased real estate speculation.

In

Tennessee, where land prices are "booming," people are acquiring land

which was considered "wasteland two or three years a g o . "

A Tenneseee

banker claims that older people compare the current situation to the speculation of the late 1920s.

In the Cape Kennedy area, house prices have

reportedly f u l l y recouped from the depressed levels of 1970.

cost of used homes in the Atlanta area has risen sharply.

The average

Paid attendance at the tourist attractions in Florida, particularly Disney World, has increased.

Attendance during the f i r s t seven

months of Disney World's second year has been running 8 percent ahead of

the comparable period last year.

However, people in the tourist industry

are worried that the gas shortage w i l l diminish the current volume of

tourism.

Farm costs are reportedly rising sharply be cause of the high price

of seeds and feed and shortages of fuel and f e r t i l i z e r .

SEVENTH DISTRICT — CHICAGO

The strong uptrend in employment, output, factory orders,

r e t a i l s a l e s , personal income, and p r o f i t s continues in the Seventh

District.

Demand f o r apartments has slowed, however, and the expected

decline in residential construction i s clearly underway.

The w e l l -

publicized decision of a major producer of recreational motor homes to

cut output sharply because of excessive inventories stands out as an

isolated example.

Most manufacturers are concentrating on maintenance

of high l e v e l production schedules, with due concern for quality, in the

face of shortages of materials and manpower.

Prospects f o r large crops

are now e x c e l l e n t , following e a r l i e r fears that wet f i e l d s would cut

yields.

Higher short-term interest rates and reduced a v a i l a b i l i t y of

mortgage credit have caused some apprehension that credit conditions

w i l l tighten generally in the remainder of the year.

The adverse psy-

chological factors — Watergate, i n f l a t i o n , international pressures on

the d o l l a r , and the failure of the stock market to rebound — are widely

commented upon, but there i s no s o l i d evidence that either planned

consumer purchases or planned business investments have been curtailed

as a result.

Newspapers have publicized views of Chicago forecasters that

a general recession, or a marked slowdown in growth may occur late in

1973 or early in 1974, but, again, there is no clear evidence that these

reports have affected planning.

Possible a n t i - i n f l a t i o n moves by the Administration, of course,

are a subject of general interest.

In June, there has been an a c c e l e r -

ation in the number of announcements of price increases for a variety of

products and services, including petroleum products, chemicals, motor

vehicles, t i r e s , nonferrous metals, and u t i l i t y rates.

This may r e f l e c t ,

in part, fears of either a price freeze or tougher Phase IV controls.

Some union contracts have been negotiated at the 5.5-6.0 percent guideline

l e v e l , but others, including the building trades, are valued at 8 percent

or more.

The uptrend in manufacturers' orders may be slowing because of

a reluctance to take on new orders f o r delivery many months ahead at

firm p r i c e s .

This factor is present in s t e e l , capital goods, nonferrous

metals, t e x t i l e s , paper, petroleum, and chemicals.

The heat wave of the past several days (with heavy demands for

air conditioning) caused major u t i l i t i e s in Michigan and I l l i n o i s to

lower voltages, reduce sales to industrial customers, and c a l l upon other

companies f o r help.

peak loads.

Margins of power capacity are lower than desired at

U t i l i t y executives i n s i s t that the situation would be extreme-

ly c r i t i c a l i f Nader i s successful in shutting down nuclear power stations.

Gasoline shortages are continually in the news.

Most major

companies have s t r i c t allocation on sales to dealers, and independent

distributors are cutting operations.

More stations are limiting purchases

and are reducing hours of operation to the point that motorists are

warned against long journeys at night.

Municipalities that usually obtain

supplies on contracts covering a year or more have trouble getting bids.

Despite a l l e f f o r t s at publicity by major o i l companies, there is a widespread view that the fuel shortage is a r t i f i c i a l and i s based on a conspiracy.

The gasoline situation i s especially severe in the Midwest

where r e f i n e r i e s are largely dependent on domestic crude o i l production

which has been declining in volume f o r the past year.

The flurry of interest in the Treasury's proposed tax shelter

reforms that relate to construction has largely disappeared.

Many

builders and real estate financiers never heard of these proposals.

For

those who were concerned, Representative Mills' statement in early June

was taken to mean that no impact would be f e l t this year.

It is doubtful

that tax reform proposals would influence real estate a c t i v i t y before

the reform became law.

Even i f the Treasury's proposals were enacted,

many limited partnerships to finance speculative building would s t i l l be

arranged because of the apparent p r o f i t a b i l i t y of such arrangements.

Many investors with $5,000 to $100,000 to invest have become disillusioned

with the stock market and find real estate a t t r a c t i v e , especially with

prospects f o r further i n f l a t i o n of land values and construction c o s t s .

Of greater concern to real estate people than tax reform are (1) overbuilding of apartments in some areas, (2) the p o s s i b i l i t y of s i g n i f i c a n t l y

tighter c r e d i t , and (3) the d i f f i c u l t y of getting new projects approved

in the face of environmentalist pressures.

Sharp advances in farm prices and in wholesale prices of

processed foods, together with the current structure of future p r i c e s ,

portend further increases in r e t a i l food p r i c e s .

Recent prices paid for

livestock at the farm level in some cases have exceeded implied c e i l i n g s .

A growing number of experts in this region believe the rise in food prices

f o r 1973 as a whole w i l l exceed the revised government estimate of 10 percent.

Country elevators are encountering increased d i f f i c u l t i e s in

obtaining adequate financing.

Sizable margin c a l l s cm hedged grain and

transportation shortages further sharply raised operating capital requirements.

The situation i s l i k e l y to worsen as harvest seasons begin.

EIGHTH DISTRICT — ST. LOUIS

Economic a c t i v i t y continued sharply up in May and early June

according to a group of businessmen in the Eighth D i s t r i c t .

Retail sales

continue up, plants are operating at f u l l capacity and in some cases

rationing output.

The labor market remains " t i g h t , " demand for loans is

high, and interest rates are r i s i n g .

Excessive r a i n f a l l and floods r e -

tarded farming operations and may cause a reduction in the acreage of

some crops from intended plantings.

Rising demand and i n f l a t i o n is of increasing concern.

Repre-

sentatives of manufacturers report that s e l l i n g is no more a problem; now

their chief problem is obtaining raw materials and allocating output at

current prices.

The price outlook is so uncertain that some manufacturers

refuse to quote prices f o r future delivery.

Manufacturing plants are apparently operating at f u l l capacity

in a l l industries, and in some instances arbitrary rationing of products

to wholesalers and r e t a i l e r s was reported.

Supply relative to demand i s

apparently shortest in the o i l refining, paper and paperboard industries

which are rationing output.

Retail sales at major department stores in the District are

maintaining their uptrend established more than a year ago.

Sales in the

mid-city stores are not as strong as elsewhere relative to a year ago but

such sales have turned up and the outlook is reported to be generally good.

Payroll employment in the Eighth District has apparently leveled

o f f in recent weeks a f t e r rising sharply in late 1972 and early this year.

The unemployment rate in most District states and major c i t i e s remained

relatively lew in April averaging below 4 percent and not exceeding 5

percent of the labor force in any state or major c i t y .

Financial firms report that the credit market is very " t i g h t "

with upward pressure on interest rates f o r a l l types of loans.

Savings

and loan associations in St. Louis reported that net savings are n o t i c e ably down and that residential mortgage rates are r i s i n g .

Loans at major

Eighth District banks have leveled o f f in recent weeks a f t e r rising

sharply since mid-1972.

since early April.

Total deposits have been generally unchanged

A small decline in demand deposits was o f f s e t by a

slight increase in time deposits.

The delay in farming operations became quite c r i t i c a l in late

May as a result of excessive r a i n f a l l and f l o o d s .

Corn yields and

production generally decline substantially i f planting is delayed beyond

early June.

I t i s generally believed that most of the intended corn

acreage was planted by the end of May except in some flooded and extremely wet areas.

A sizable portion of the intended cotton acreage In the

Central Mississippi Valley Area was not planted.

Most of the shortage

is in Southeastern Missouri; Mississippi County, Arkansas; Lake and Dyer

Counties, Tennessee and the lower delta counties of Mississippi.

In some

of these areas less than 50 percent of the intended acreage i s believed

to be planted and i t i s now too late f o r further planting.

I t is believed

that much of the land that was not planted in cotton w i l l be planted to

soybeans.

However, soybean seed is scarce and high priced which w i l l

tend to limit the acreage planted.

Although some of the major buildings in downtown St. Louis

apparently were b u i l t as a result of tax s h e l t e r s , we have no evidence

of great concern over the proposed change in the tax laws.

NINTH DISTRICT — MINNEAPOLIS

Ninth District manufacturing activity has expanded vigorously

in recent months, and District r e t a i l e r s have enjoyed sizable sales gains.

However, reports disclose that some slowing may occur in both areas during

the last half of 1973.

Transportation problems continue to plague the

District and several materials are in short supply.

Interest rates have

generally not risen at rural, agriculturally oriented banks but have moved

up at large urban banks.

Business loan demand is characterized as strong

throughout the D i s t r i c t .

If real estate tax shelters are eliminated,

District construction a c t i v i t y w i l l be curbed.

According to our l a t e s t industrial expectations survey, f i r s t

quarter D i s t r i c t manufacturing sales exceeded year-earlier levels by 21.8

percent, and a 17.2 percent second quarter sales increase is anticipated.

These record-breaking sales gains noticeably exceed both durable and nondurable goods respondents' l a s t February's sales expectations.

During the

l a s t half of 1973, however, District manufacturers look f o r a marked slowdown in their sales growth.

District manufacturing sales are expected to

be up 12.5 percent in the third quarter and increase 8.1 percent in the

fourth quarter.

Further evidence of the recent acceleration in District manufacturing a c t i v i t y i s manifested In survey respondents' attitudes about their

inventories and plant and equipment.

In the current survey, 33 percent

of the respondents indicated that their inventories are low in relation

to their sales outlook.

This compares with 20 percent a year ago and 13

percent two years e a r l i e r .

Furthermore, 24 percent of the respondents

consider their current plant and equipment inadequate to meet their expected sales while 15 percent voiced this opinion twelve months ago, and

10 percent in May 1971.

Bank Directors disclose that District r e t a i l e r s generally have

been recording quite strong sales gains and attribute these increases to

favorable economic conditions rather than to consumers' desires to avoid

future price increases.

However, one Director associated with the r e t a i l

trade industry indicates that the anticipated slowdown in consumer spending

may be occurring already:

his firm's May sales growth was down markedly

from the prior four months.

Several other Twin Cities area r e t a i l e r s

reveal that they expect their sales growth to soften this f a l l and some

anticipate relative sales gains in the last half of 1973 to be below comparable 1972 sales advances.

Outside the Minneapolis/St. Paul metropolitan

area, Directors report that retailers generally look for continued strong

sales growth and that much of this optimism stems from the favorable outlook f o r District farm income this year.

Due to the heavy demand placed on transportation f a c i l i t i e s by

grain shipments, transportation bottlenecks have emerged in the D i s t r i c t .

Several Twin Cities users of r a i l cars and barges are operating on a dayto-day basis and others have found that the flooding on the lower Mississippi

has hampered their barge shipments to the Gulf.

A Director from the Upper

Peninsula of Michigan reports a shortage of gondola cars; a shortage of

railroad care i s also a problem in Northeastern Minnesota.

A South Dakota

Director voices concern that part of the 1972 crop is s t i l l awaiting shipment in his state and fears that f a c i l i t i e s w i l l not be available to handle

the 1973 crop.

With the D i s t r i c t ' s fuel supply situation remaining t i g h t , other

material shortages have emerged as w e l l .

Cement shortages were reported

in the Minneapolis/St. Paul metropolitan area as a result of transportation

problems among other d i f f i c u l t i e s .

Although the transportation situation

has improved, cement i s expected to remain in tight supply throughout the

summer.

Reinforcing s t e e l used in construction i s also becoming very

d i f f i c u l t to obtain.

Printers and paper distributors in the Sioux Falls

SMSA are experiencing the tightest squeeze on paper supplies since World

War I I .

F e r t i l i z e r i s in very short supply in the D i s t r i c t , and a South

Dakota Director reports that since the 15th of April only a third of the

demand f o r f e r t i l i z e r has been met in his state.

A Montana Director, how-

ever, indicated that the f e r t i l i z e r situation has started to improve in

his state.

Also, Directors from South Dakota and Montana indicate that

farmers and ranchers are having d i f f i c u l t y obtaining agricultural supplies

and in South Dakota, major seed corn companies are completely sold out of

seed.

Directors' reports generally indicate that commercial bank

interest rates have risen at larger urban banks but have changed very

l i t t l e in rural areas.

One Director from a rural area, however, revealed

that interest rates have risen 0.5 percent in his area.

characterized as vigorous throughout the D i s t r i c t .

Loan demand was

One large urban bank,

f o r example, termed loan demand "strong" in spite of a marked rise in

interest rates.

The proposed changes in real estate tax s h e l t e r s , i f enacted,

would undoubtedly curb District construction a c t i v i t y .

Following the

announcement of the proposed tax changes, a major Minneapolis/St. Paul

area bank revealed that four planned apartment projects which would have

involved this bank were dropped.

A representative of a firm s e l l i n g tax

shelters indicated that immediately following the release of the proposed

tax changes considerable confusion existed, but he expects the tax shelter

business in 1973 to be good, especially a f t e r the announcement that tax

shelters would not be eliminated in 1973.

A trade association spokesman

f o r Twin Cities area builders states that the proposed changes would not

curb building a c t i v i t y in 1973.

Builders, however, are aware of the pro-

posed tax shelters, and he f e e l s that the elimination of tax shelters would

dampen future Twin Cities construction a c t i v i t y .

TENTH DISTRICT — KANSAS CITY

The Tenth District economy looks very good, although our respondents had a few complaints.

The a b i l i t y of bankers to loan is being

squeezed as deposit inflows weaken while business loan demand does not.

Auto dealers are disappointed that big cars have stopped s e l l i n g w e l l , but

they allow that customers are buying uqp small cars f a s t .

Farmers are

having to pay much higher prices f o r their supplies, but stand to make a

net gain because of the favorable price situation f o r agricultural products.

The overall strength of the regional economy i s summarized by r e t a i l sales

t o t a l s , which continue to r i s e .

This healthy business situation would be

dealt a severe blow, according to our special respondents on tax shelters,

i f investment funds now flowing heavily into c a t t l e and construction were

suddenly cut back by tax reform.

Deposit flows at several large District banks have been somewhat

weaker than expected.

Most bankers f e e l that high short-term interest

rates are Inducing intensified e f f o r t s to economize on money holdings.

Only a l i t t l e disintermediation out of consumer-type time deposits has been

noted.

Many of the banks contacted indicated that they need to r o l l over

up to 50 percent of their large CDs in June.

About half are continuing

e f f o r t s to reissue shorter dated CDs, while the rest are trying to stretch

their maturities to prevent a bunching three months hence.

The l a t t e r

group i s o f f e r i n g higher rates out to six months, and l e v e l or declining

rates from s i x months to a year.

months.

No takers are being found beyond six

Business loan demand remains very strong.

Several banks noted

that their volume of business loans has not been growing quite as rapidly

of l a t e , but attribute this to their reluctance to loan, rather than to a

lack of demand.

The cost of rolling over June CDs and expectations of an

even tighter squeeze over the next few months have caused banks to raise

credit standards and limit new loan commitments.

Prime rates to large

borrowers have followed the lead of the New York banks.

The small borrowers'

prime ranges from 6-1/4 percent to 7-1/4 percent at District banks.

tudes about changing i t vary considerably.

Atti-

Several banks f e e l they are

locked into whatever the rate was when the dual system was instituted,

while others are increasing their small borrower prime with a lag behind

that to large borrowers.

Retail sales continue to boom in the Tenth D i s t r i c t .

Most de-

partment store executives said sales were up in May over April, and running

considerably ahead of last year.

The increase seems to be f a i r l y wide-

spread among a l l types of products.

Some of the executives singled out

women's apparel as a strong s e l l e r .

Most stores reported a continued high

volume of durable goods s a l e s .

especially w e l l .

Furniture and appliances are s t i l l s e l l i n g

What was e a r l i e r described as an "excellent" year for

auto sales i s now being characterized as "good" by dealers throughout the

Tenth D i s t r i c t .

Respondents almost universally c i t e the gas shortage, or

the threat of a shortage, as being responsible f o r a s h i f t In demand from

luxury cars to economy cars.

As the current model year draws to a c l o s e ,

compact cars and pick-up trucks are in short supply.

According to several builders, r e a l t o r s , and investment counselors,, private capital that i s financing the construction of o f f i c e buildings

and housing units, especially multi-family dwellings, would be greatly

reduced should the tax shelter reform proposal be enacted.

Estimates of

the amount of new construction that would be dried up ranged from 20 to 60

percent.

The individuals contacted foresee a severe shock to the economy

should the proposal become law without a transitional phase.

Owners and operators of c a t t l e f e e d l o t s , as well as investment

counselors knowledgeable in cowboy economics, also were asked about the

probable e f f e c t s of removing the tax shelter.

The feedlot managers

acknowledge that prepayment of expenses i s the rule, and that many of the

owners l i v e as far away as Connecticut.

Investment counselors estimate

that a third of the c a t t l e on feed in the country, and 60 percent of those

in major f e e d l o t s , are owned by individuals attracted by the tax shelter

aspects.

Removing the tax shelter, therefore, would drive down the price

of feeder c a t t l e , reducing the supply and increasing the price of beef

over time.

Due to a sharp drop in shipments, meat animal prices have r e cently approached levels that are squeezing slaughtering margins under

current meat price c e i l i n g s .

The low slaughter has been somewhat surprising

since, on the basis of the animal inventory f i g u r e s , larger supplies

normally would be expected.

I f numbers have been overestimated and high

feed costs continue to erode p r o f i t margins, prices may be pressing against

the ceilings most of the year, causing economic hardships f o r feeders and

processors a l i k e .

In f a c t , one large packer has announced an immediate

cutback in production and employment at a l l plants because of an i n a b i l i t y

to operate profitably under the price c e i l i n g s .

After a temporary dip in A p r i l , farm prices advanced 4 percent

in May, to an all-time high.

Although farm prices are currently averaging

one-third above a year ago, the prices farmers pay f o r inputs are up

sharply also.

Over the past 12 months, these prices - including those

f o r feeder livestock and feed - have risen 14 percent, o f f s e t t i n g some of

the farmers' gains from rising output p r i c e s .

Despite continued uncertainty

over the weather and new crop prospects, a l l Indications - particularly

recent quotations in the future's market - point to another outstanding

year for farm income.

On a more somber note, however, these projections

raise serious doubts that a turnaround in food prices can be achieved by

year-end.

ELEVENTH DISTRICT — DALLAS

The economy of the Eleventh District i s continuing to expand,

although the expansion appears less widespread than in earlier recent

months.

Industrial production in Texas continued to increase in April,

but employment in the f i v e District states declined s l i g h t l y .

of construction a c t i v i t y also slowed in A p r i l .

The pace

And although sales of

District department stores rose substantially in May, automobile r e g i s trations in April were sharply below their previous month's l e v e l s .

In response to a survey of the nonbanking Directors of the

Bank, only a third of the respondents indicated that their companies have

altered their 1973 plans f o r plant and equipment expenditures since the

f i r s t of the year.

Those indicating that their companies' capital

spending plans have been altered stated that these plans have been scaled

up only moderately.

The majority of the Directors also f e l t that the

current inventory-sales ratios f o r their companies were not below their

desired long-run l e v e l s .

However, most of those with companies having

abnormally low inventory-sales ratios indicated that they were unable to

build their stocks because of rising s a l e s .

A sizable number of the respondents reported shortages in the

goods or production supplies their companies purchased, and about twothircls indicated that their companies were having at least some d i f f i c u l t y

in employing or retaining skilled workers.

On average, the Directors

expected wage rates f o r employees in their companies to increase at an

annual rate of about 7 percent in the second half of the year.

Without exception, the Directors stated that the recent i n creases in the commercial bank prime rate have not caused their companies

to decrease their use of bank lines of c r e d i t .

Furthermore, the over-

whelming majority of companies have not altered their borrowing p o l i c i e s

at a l l in recent months.

The seasonally adjusted Texas industrial production index rose

sharply in April as every industry category reported an increase over the

month b e f o r e .

The manufacturing sector was again primarily responsible

f o r the r i s e , although both mining and u t i l i t i e s also showed monthly

increases.

In manufacturing, substantial monthly increases were reported

in leather and leather products, petroleum r e f i n i n g , printing and publishing, primary metals, and apparel products.

In mining, crude petroleum

and metal, stone, and earth minerals reported the largest monthly increases

as natural gas and natural gas liquids rose only s l i g h t l y .

U t i l i t i e s also

reported a small gain over the revised level in March.

The energy shortage i s becoming increasingly evident in the

District.

Several municipalities have experienced trouble in receiving

bids f o r future energy supplies, and farmers are being threatened with

fuel shortages which could hamper harvesting operations.

There has also

been some rationing by service stations to motorists, as monthly gasoline

quotas f o r the stations have f a l l e n behind demand.

Although d r i l l i n g was

predicted to increase this year, f i r s t quarter d r i l l i n g was o f f 4.1 percent from the corresponding period l a s t year, probably due to unfavorable

weather conditions.

Seasonally adjusted t o t a l employment In the f i v e District states

f e l l s l i g h t l y in April, the f i r s t drop since June of last year.

Although

the labor force also contracted slightly in A p r i l , the unemployment rate

edged up to 3.8 percent from 3.7 percent in March.

The employment drop

was attributed to the manufacturing s e c t o r , where both durable and nondurable industries reported declines in the number o f j o b s .

Nonmanufac-

turing continued to report employment increases, in spite of reported

declines in the mining and construction industries.

All industries reported

year-to-year increases.

The value of construction contracts awarded in the f i v e D i s t r i c t

states f e l l s l i g h t l y in April as both residential and nonresidential

building slipped from their March l e v e l s .

Spurred by large volume con-

tracts in Louisiana and Texas, nonbuilding construction was the only

category to show an increase.

The cumulative value of contracts awarded

through April of this year f e l l to a level only 6.2 percent above the

corresponding period last year.

Sales of department stores in the District continued to show

substantial increases over year-ago levels in May.

Cumulative sales f o r

the f i r s t f i v e months of the year were 13 percent above the levels f o r

the corresponding period l a s t year.

However, the number of new automobile

registrations f o r the four largest metropolitan areas of Texas — Dallas,

Fort Worth, Houston, and San Antonio — suffered a sharp f a l l in April

from the previous month's high l e v e l .

Nevertheless, cumulative car

registrations through April were over a f i f t h higher than in 1972.

Agricultural a c t i v i t i e s in the f i v e states of the Eleventh

District gained momentum in May a f t e r a slow start due to excessive

moisture in the early spring.

Flooding in Louisiana continued to hamper

planting, but in Texas and Oklahoma, planting was nearing average completion l e v e l s .

Wheat and oat crops in the District states were reaching

maturity, and early yields were above average.

The outlook f o r farm

income this year in the District states remained good as cash receipts

from farm marketing continued at record levels through the f i r s t quarter.

TWELFTH DISTRICT — SAN FRANCISCO

Our Directors report continued strong expansion in the Twelfth

D i s t r i c t , but are divided on whether the expansion w i l l continue unabated

into 1974, or w i l l slow in the second half of 1973.

Principal strength

centers in consumer spending and business outlays f o r plant and equipment.

Agricultural prospects appear good, except in areas suffering from drought.

Banks report strong loan demand, principally f o r consumer credit and business

loans.

Economic a c t i v i t y is at a high level in a l l regions of the D i s t r i c t .

Most Directors think that this expansion w i l l continue f o r the rest of the

year, although some anticipate a slewing in the second half of the year in

response to a slower pace of consumer expenditures f o r durable goods, a decline in exports, and fewer housing s t a r t s .

Consumer expenditures currently

are at a very high l e v e l , particularly f o r autos and durables.

Among other

industries exhibiting high rates of expansion are e l e c t r o n i c s , recreational

vehicles and aerospace.

Homebuilding has slackened, but there i s consider-

able strength in nonresidential construction.

The impetus of recent con-

struction demand also i s supporting a high l e v e l of orders for builders'

hardware.

Problems may develop later this summer according to some

Directors, who think consumers' purchases of durables w i l l decline.

concern i s the possible impact of gasoline rationing.

Another

Unemployment may

increase in areas dependent upon tourism, i f a serious gasoline shortage

develops.

Reports from District agricultural areas generally indicate

excellent crop prospects, the exception being the wheat-growing areas of

Eastern Washington and Oregon, which have experienced drought.

Generally,

farmers are optimistic that above-average prices w i l l hold and are continuing

to invest in new equipment.

be at near record l e v e l s .

Orchard crops, such as pears, are expected to

Cattle prices and feed-crop prices are high.

The f o r e s t products industry i s maintaining output to meet continuing domestic and export demands.

Mill prices f o r plywood and lumber

have fallen from 15 to 26 percent in the last month.

Despite this decline

in prices, however, current employment and production are expected to be

maintained f o r the next few months.

Inflation continues to be a major concern of our Directors.

Some

Directors believe the a b i l i t y of the Federal Government to provide firm

leadership has been weakened by the Watergate a f f a i r .

Others are concerned

about the impact of r e s t r i c t i v e monetary policy and credit market conditions

on the economy, and s t i l l others are concerned over the impact of possible

gasoline rationing.

Several Directors f e e l that, despite the current

strength of the economy, businessmen are becoming less confident, and that

this attitude w i l l cause a slowdown later this year.

Banks report that loan demand by consumers and business is very

strong.

Consumers apparently are borrowing heavily to finance purchases of

autos and other durables.

Business borrowing appears to be aimed at building up working

capital and financing inventories, but bank loans also are being sought to

finance plant equipment outlays.

In California and Oregon, bankers report

that cut-backs in mortgage lending by other financial institutions have r e sulted in a jump in mortgage loan applications.

At the moment, regular

business customers appear to have no problem in obtaining c r e d i t , which i s

available but at higher interest rates.

In some cases, banks are stressing

the need for appropriate compensatory balances.

Banks are tightening

standards and some marginal borrowers are being screened.

In addition,

some classes of loans, especially those for speculative purposes, are

being r e s t r i c t e d .