Beige Book
CONFIDENTIAL (FR)
CURRENT ECONOMIC COMMENT BY DISTRICT
Prepared for the
Federal Open Market Committee
by the Staff
July 11, 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 18
Eighth District - St. Louis page 21
Ninth District - Minneapolis page 24
Tenth District - Kansas City page 28
Eleventh District - Dallas page 32
Twelfth District - San Francisco page 36
SUMMARY*
Economic activity remains strong across the nation.
Consumer
spending is consistently described as continuing to grow in each District.
A high level of activity is also reported in most manufacturing areas,
as order backlogs keep production at full capacity in most industries.
In spite of some signs of weakness, construction is maintaining current
volume and in some Districts, it is expanding.
The principal economic
problem concerns stabilization policy, and in particular, the price freeze.
The price freeze is causing major dislocations in agricultural processing.
At the moment, the effects in other sectors such as manufacturing and retailing are limited, yet some inequities are appearing which would become
serious if the freeze should continue beyond 60 days.
Credit conditions
remain tight as banks face very strong loan demand.
Consumer spending is showing no sign of slowing.
attributed to expectations of higher prices.
In part this is
Heavy purchases of durables
are reported by retailers in the Minneapolis and San Francisco Districts.
Automobile dealers are also experiencing excellent sales, particularly in
the Dallas and Atlanta Districts.
In Minneapolis, Richmond and Cleveland,
a shift is noted toward smaller cars, and this is thought to be a reaction
to prospective gasoline shortages.
Manufacturing activity is pressing against capacity in most Districts, and order backlogs show no sign of shortening.
Shortages of many
materials are developing, and according to the Cleveland and St. Louis
Banks, they are beginning to affect production adversely.
Chicago reports
[Asterisk: Prepared at the Federal Reserve Bank of San Francisco.}
shortages in steel, castings, chemicals, and many other products; furthermore, delivery dependability and product quality have deteriorated.
Farm
equipment and parts are also in short supply in several Districts.
Construction, despite some expectations of slowing later this
year, is at high levels in most Districts.
Residential construction con-
tracts increased in the Dallas and Richmond Districts, but Atlanta and
San Francisco report forecasts of a construction slowdown later this year.
Gasoline shortages are affecting tourism in such Districts as Kansas City
and Minneapolis.
In other Districts, shortages are not as severe, but
the problem is causing some uncertainty and it is reducing demand for such
products as recreational vehicles.
Dallas reports its District refineries
are turning out record amounts of gasoline; both Dallas and Chicago indicate, although there may be localized distribution problems, the shortage
is not as severe as expected.
Despite a high level of activity, more concern is reported about
prospective economic conditions in Philadelphia, Cleveland, and Atlanta.
In contrast, the Chicago Bank describes local businessmen and bankers as
seeing no sign of any downward trend.
In other areas, the evidence is
mixed; industrial equipment lines are at capacity in the Boston District,
but orders for consumer goods are slackening.
Inventories are variously
reported unchanged in New York, lower in Richmond, and up in Philadelphia.
In the St. Louis District, many industries are expanding production
facilities, but in the Philadelphia area more firms are now expecting to
decrease their capital expenditures.
Directors in several Districts are expressing concern over the
direction of economic policy.
Most feel that more emphasis should be given
to fiscal policy.
Reports for all Districts indicate various degrees of
hostility to the present price freeze, ranging from belief that it is
ill conceived to the opinion that it is disastrous.
The common conclusion
is that the freeze cannot be continued beyond the planned 60 days without
serious problems developing.
The most serious consequences are now felt in agriculture and
associated food-processing industries.
livestock and poultry production.
The price freeze is cutting into
Feedlot operators and poultry producers
are being squeezed by higher feed grain prices and fixed wholesale prices
which do not cover costs.
Food and grain processors in the Chicago, Rich-
mond, Kansas City and San Francisco Districts have cut back or closed
operations.
Egg and milk production is expected to fall.
Both St. Louis
and Dallas forecast reduced beef supplies this fall as a result of the
freeze.
In nonagricultural industry, the price freeze is beginning to-cause
dislocations.
New York, Dallas and Chicago describe shortages caused by
imports being hampered by low domestic prices.
Some suppliers, according
to the New York Bank, are exporting to obtain higher external prices and
thus not filling domestic orders.
Chicago lists a large number of devices
that are beginning to be used by suppliers to evade price ceilings.
Banks in all Districts report strong loan demand.
Real estate loans,
in particular, are being restricted or tied to higher down payments.
Kansas
City banks report that the recent increases in prime rate are not discouraging business borrowing.
FIRST DISTRICT —
BOSTON
Our directors report that industrial equipment lines are operating
at capacity, but that new orders for consumer goods are slackening.
Out-
side of food processing lines, our directors can report no specific cases
of hardship created by the freeze.
However, disappointment was expressed
that recent fiscal and monetary policy actions were based on political
rather than economic criteria.
Industrial equipment lines for machine tools, fasteners, bearings, etc. are running at capacity.
In some cases, lack of skilled labor
is an additional supply constraint.
Manufacturers, however, do not want
to add to capacity at this time because they see this as a cyclical
phenomenon and they don't think the boom is going to last much longer.
For the first time, inventories are reported as substantially higher.
This is accounted for by a rise in work in process and by hedge buying
of supplies because of fears of future shortages.
New orders for consumer goods are reported as spotty.
While
most lines are doing well, some deterioration in new orders is noticeable.
Manufacturers of recreational vehicles, which had been a booming area,
sense a slackening of demand for next year.
In most consumer goods lines,
manufacturers reported they had no capacity strains.
Retail sales in
Connecticut were reported as disappointing but resort areas, like Martha's
Vineyard, report higher retail sales and bookings than last year.
One director commented that the "price freeze has more inequities than we've ever seen"
and another reported that the general
opinion of businessmen in Connecticut is that "the damn thing won't work."
While our non-food-processing directors could not report any specific cases
of hardship, they could cite examples of inequities.
For example, al-
though a machine tool may have been ordered a year ago, if it was shipped
during the first week in June, then that sale in June set the price for
new orders for that kind of machine tool for the rest of the freeze,
despite cost increases over the past year.
The price freeze and recent increases in the discount rate
prompted one director to voice his concern over the politicization of
economic decisions.
He was skeptical that the recent rise in the discount
rate was stabilizing, given economic forecasts.
He noted that when
boards of directors had tried to raise the discount rate earlier this year,
when the signs were clear of a continuing boom, they were cautioned
against doing so because it might anger Congress and lead to a freeze.
This director found it disillusioning that the much-vaunted independence
of the Fed was illusory.
Professors Eckstein and Samuelson both based their remarks on
the preliminary indications, reported to the Board by Eckstein and Alan
Greenspan, that real economic growth in the second quarter was about
3 percent.
Samuelson welcomed this slowdown insofar as it reflects
slowing of demand but warned that, to the extent it represents supply
limitations (primarily in food and staples), it indicates "we are not
yet out of the woods."
Noting that the slowdown came primarily in the
components where it had been expected —
residential construction —
the demand side.
retail sales, auto sales, and
Eckstein attributed most of the slowing to
He also felt that recent wage behavior suggests that
labor supply has not been the constraining factor; he acknowledged that
the insufficiency of basic manufacturing industrial capacity can become
a problem later this year.
Both men agreed that Phase IV must be limited in scope, focusing
on the large companies with high profit margins.
With regard to food and
gasoline prices, "the public can't get what it wants" Samuelson said.
Eckstein said the political situation, staffing problems, and waning public support would all force Phase IV to be limited.
While he urged that
phase-out characteristics be built into the program, he insisted that
the guidelines in the program be vigorously enforced.
Both professors urged policy be geared to preventing a credit
crunch rather than to short-term changes in the money stock.
Samuelson
would aim for a 5 percent rate of money growth but would be perfectly
willing to raise that target if interest rates were to rise rapidly.
New macroeconomic tightness, according to Samuelson, is getting to be
risky.
Eckstein criticized the monetary policy by the month-to-month
changes in money.
He felt the Federal funds rate is a critical indicator
which must be held below 8.5 percent to avoid a credit crunch before the
end of August.
SECOND DISTRICT —
NEW YORK
Second District directors and other business leaders who were
contacted recently were unanimously critical of the price freeze and
called for its early termination.
Some had already encountered distor-
tions in their operations owing to the freeze, while others had not yet
felt any direct impact on their business.
All, however, foresaw serious
dislocations if the freeze were to continue much longer.
The sustained
buoyancy of retail sales in general continued to be linked to expectations
of further price increases.
No evidence of business inventory buildup
was reported.
All of the business leaders surveyed in the Second District
shared the view that the price freeze was likely to lead to serious market
distortions.
The feeling was generally expressed that the temporary
freeze should be terminated quickly and that Phase IV of the Administration's
program should be formulated and implemented as rapidly as possible.
In
this connection, most of those contacted felt that an early announcement
of "strong" controls was an absolute necessity, while some of the directors
expressed disappointment that Federal fiscal policy had not "faced up to
its responsibility in the current situation."
The president of a tire and
rubber manufacturing concern expressed the hope that the country is
headed for "controlled inflation rather than what we are presently experiencing" and suggested that the Government should provide some indication of
its plans if it is going "to change the rules of the game."
As far as specific problems were concerned, discussions with the
Second District business leaders revealed that serious distortions had
already arisen in the agricultural, chemical, petroleum, and some metals
industries.
With domestic prices of a number of items frozen below world
market prices, the freeze was said to be causing shortages by hampering
imports of essential materials and by encouraging sales abroad.
For ex-
ample, an upstate manufacturer pointed to the difficulties resulting from
the continued rise in the cost of imported raw materials, which could not be
reflected in the prices charged by his company.
Similar experiences
were reported by a number of other respondents.
An upstate banker cited
a serious shortage of specialty steel and reported that a number of small
machine tool manufacturers in his area were being forced out of business
as a direct result of the freeze.
Special concern was expressed over the
situation in agriculture, where poultry and hog production was being
seriously disrupted.
It was predicted that critical shortages of feed-
stuffs and fertilizers, resulting in part from the freeze, might cause
food shortages later on.
Regarding consumer spending, the directors felt it was still too
early to assess the impact of the freeze on consumer attitudes.
However,
they saw consumers as willing to pay whatever prices were necessary to
purchase goods they currently wanted.
As in previous months, the current
high level of retail sales was attributed to expectations of further
price increases.
A Buffalo banker, however, reported that "considerable
apprehension" regarding the future demand for automobiles had been expressed at an economic briefing he had recently attended in Detroit.
To
some extent, the forecasted decline in demand was attributed to the pollution-control devices mandated for future model years.
Regarding business inventory positions, the respondents reported
seeing no evidence of a buildup at this time, partly because of the high
cost of financing inventories.
The upstate manufacturer, however, reported
that while his firm was concerned about low inventories, it was having
difficulty in strengthening its inventory position because of increased
sales.
THIRD DISTRICT —
PHILADELPHIA
The overall assessment of business activity in the Third District is essentially one of "no changes" from last month.
Signs are be-
ginning to appear suggesting that current business expansion is losing some
of its vigor, but the outlook is still basically positive.
activity is continuing undiminished.
Manufacturing
Employment is still gaining slightly.
Inventory investment continues upward, but capital outlay expectations
have leveled off.
Bankers report tightening credit conditions.
Prices are
currently frozen but are expected to rise in the future.
Manufacturing activity in the Third District maintained last
month's high level according to this Bank's July Business Outlook Survey.
Most firms report no change in their new orders, shipments, unfilled orders,
and delivery times this month; and they expect little change in the future.
For the six-month outlook, manufacturers are slightly optimistic with predictions of advance in orders and sales outnumbering predictions of declines by a 6 to 5 ratio.
The District is experiencing modest but continuing gains in
employment.
Less than 5 percent of the manufacturers surveyed report
cutbacks in their payrolls and work hours, while 10 percent are taking on
additional employees.
By early 1974, 16 percent of those surveyed plan
hiring increases, but another 16 percent foresee layoffs.
So, the
longer-run employment outlook seems to have leveled off.
Inventory investment is still headed upward.
Thirty-one percent
of the responding firms indicate increased stocks over last month.
Looking
six months into the future, however, further inventory increases were not
revealed by the survey.
The majority of firms report unchanged
or increased
capital expenditures within six months but the minority predicting decreases has doubled from last month.
Area bankers report tightening credit markets.
Loan applications
from new business customers and some old customers who deserve loans are
being denied.
Demand for mortgage credit exceeds most banks' willingness
to make mortgage loans at the current low ceilings.
loans continues to grow.
Demand for consumer
However deposits are not growing at most banks.
Several banks report that the velocity of their demand deposits is skyrocketing while demand deposits grow very slowly.
Disintermediation is a
problem at all the banks contacted except one which just started giving
free checking account service if more than $200 is kept in savings.
The
bankers report that interest rates on CD's are very high but they can
still be sold fairly easily; no credit crunch atmosphere exists.
The
area bankers contacted report that the effect of the higher interest rate
ceilings cannot be determined yet.
Prices are reported frozen stable at June levels by every firm
contacted.
But, inflation continues to loom as a problem for the beginning
months of 1974 although manufacturers unanimously indicated that they are
presently holding the line on price increases.
Well over half of the
respondents fear that both their costs and the prices they charge will be
higher by January.
FOURTH DISTRICT ~
CLEVELAND
Business activity in the District is generally strong, although
rates of increase in key indicators have begun to slow somewhat from the
pace registered earlier this year.
Shortages of materials and lags in
delivery time, which appear to have grown worse during the past month,
continue to hamper production in many firms.
In recent months, our survey of manufacturers has reflected a
gradual tapering in the proportion of firms reporting increases in new
orders, shipments, employment, and the workweek.
Gains in backlogs and
inventories, on the other hand, have been stronger recently than earlier
in the year.
Delivery time on orders placed has continued to lengthen
for the majority of firms.
Purchasing agents in the area report that
widespread shortages of materials are adversely affecting production and,
in some instances, are causing a reduction in overtime.
Lead times on
orders placed for all types of materials, supplies, and capital equipment
have extended unbelievably.
Early returns from our latest survey
indicate little slowing in the proportion of companies paying higher prices
from May
to June.
In fact, an economist with a major building materials
company in the District candidly remarked, the price freeze is being
widely ignored by suppliers.
An economist with one of the area's major machine tool producers
indicated that his firm is still experiencing very strong demand, but
the rate of increase in new orders has started to taper off.
new orders to start declining in about six months.
He expects
Material shortages
have been a problem to his firm in selective areas of production.
Reports from the steel industry indicate no letup in the strength
of underlying demand.
Although steel companies continue to allocate new
orders, the bookings are still running ahead of shipments and productive
capacity.
Lead times continue to lengthen, and some orders are now being
booked for the first quarter of next year.
One major steel firm reports
a slowdown in output may occur during the near term because of maintenance
work that has been postponed due to the recent strong demand for steel.
Economists expect steel inventory building by customers to level off during
the second half.
An economist with a major auto producer attributed part of the
recent strength in new car sales to anticipatory buying.
He is concerned
over the repercussions in the auto industry and the feedback on the
economy if demand for the 1974 models weakens significantly and if unemployment begins to rise.
In his opinion, the high sales volume of
imported new cars is definitely related to the publicity given to the
gasoline shortage and to projections of sharply higher gasoline prices.
In addition, the recent sales performance of imported cars partially reflects the fact that domestic subcompact capacity is not great enough to
meet the demand.
The 1973 model carry-over is expected to be concentrated
largely in the standard sized cars, and a strong sales incentive program
will be necessary to move them.
An economist with one of the Federal Home Loan Banks in the
District reports that savings flows at S&L's in recent months have averaged
only about half of the volume of a comparable period in 1972.
Although
deposit growth has slowed, there is little evidence of disintermediation
so far.
But the thrift institutions are concerned, recalling the exper-
iences of 1966 and 1969.
Mortgage commitments have started to slow in
recent months, both because of reduced savings flows and some decline in
multi-family units.
tightening.
Mortgage terms (rates and downpayments) are gradually
FIFTH DISTRICT —
RICHMOND
Results of our most recent survey of businessmen and bankers
suggest that the District economy remains robust.
Some abatement in the
rapid rate of expansion reported in recent months is evident, however.
Most manufacturers reported no change in shipments, new orders and backlogs,
although manufacturing employment increased further.
Reports from bankers
suggest some tapering off in residential construction activity, while
non-residential construction activity continues at recent high levels.
Further advances in retail sales were reported, with automobile sales
being especially vigorous.
On balance, businessmen and bankers expect
economic activity in the District to stabilize at present levels.
Survey responses indicate that economic activity in the manufacturing sector of the District economy may be leveling off at recent
high levels.
The range of responses from manufacturers shows little
change in shipments, new orders, and backlogs.
This is in sharp con-
trast to recent surveys in which numerous firms have reported increases
in these items.
Manufacturing inventory levels declined further and one-
third of the respondents reported that inventory levels were low relative
to sales prospects.
Tight labor markets continue to hamper production
in some manufacturing lines, especially furniture.
Employment in the District apparently increased during the past
month.
Approximately one-fifth of the manufacturing firms reported an
increase in employment, and nearly one-third of the banking respondents indicated that employment in their area had risen.
Manufacturing respondents
reported further increases in wages paid with little change in prices
received.
Retail sales in the District remain strong.
Forty percent of
the banking respondents reported further increases in retail sales in their
areas.
Information from major District retailers and other sources also
indicate gains in retail sales during the past month.
Automobile sales
were reportedly strong with the demand for smaller cars, both domestic and
foreign, being especially brisk.
One major retailer reported plans to
reduce inventory levels substantially because of the recent sharp increases
in business loan rates.
A strong demand for all types of loans continues to be evident
throughout the District.
Increases in the demand for business, consumer
and mortgage loans were reported by more than 50 percent of all banking
respondents.
Several District banks moved quickly to raise interest rates
paid on savings deposits following the change in Regulation Q ceilings.
Bankers in all parts of the District also report general tightening of
loan terms and a much closer screening of loan applications.
Construction activity in the District remains strong.
Banking
respondents report that residential construction in their areas increased
again during the past month, although the number reporting increases
was considerably lower than in recent months.
Increases in non-residential
construction activity were reported by more than 50 percent of the banking
respondents.
this activity.
New plant locations and plant expansion account for much of
Weyerhaeuser recently announced a $100 million expansion
program in North Carolina.
Dislocations resulting from the price freeze have created almost
chaotic conditions in certain segments of the agricultural industry.
Numerous broiler, egg, and hog producers have been forced to curtail pro-
duction.
Tabacco farmers in North Carolina could lose more than $27 million
worth of this season's crop because of a shortage of fuel
for curing,
according to an estimate by North Carolina agricultural extension service.
District farmers' January-April cash receipts increased 29 percent above
a year ago.
Farmland values recorded one of the sharpest increases on re-
cord during the year ended March 1, 1973.
Gains in all District states,
except South Carolina, were well above the national increase of 13 percent.
On balance, business men and bankers expect little change in
District economic activity in the immediate future.
More than 60 percent
of the banking respondents expect economic activity in their areas to
stabilize at present levels.
SIXTH DISTRICT ~
ATLANTA
A feeling of pessimism has been detected among some businessmen
and bankers who feel economic problems are worsening and that little is
being done about them.
Other businessmen, however, continue to assess
economic conditions and prospects optimistically.
The pace of construc-
tion project announcements has slowed, but many new plants and plant
expansions are planned.
Several recent wage settlements call for increases
of between 5.5 and 6 percent.
Zoning has been approved for a major planned unit development
north of Atlanta.
The project will contain homes in the $70,000 to
$150,000 range, as well as condominiums and apartments, and will cost
$350 million to develop as planned.
Except for this project, there have
been few other major projects announced.
Condominum developments in
the $3 million to $7million range have been announced for Atlanta, a
north Georgia resort area, Birmingham, and Fort Lauderdale.
An economic
research firm located in south Florida has warned that that area may be
entering a period of overbuilding similar to that of 1969-70.
Tight
credit conditions are blamed for holding down single-family housing starts
in the Atlanta area.
Savings and loan associations in Atlanta have re-
portedly tightened credit standards, and a local newspaper has carried
a story predicting an increase in mortgage rates.
There have also been relatively few announcements of major
nonresidential construction projects.
A new hotel is scheduled for New
Orleans, and there is a possibility that a new complex of hotels and
office buildings will be built in that city.
A $50 million, 100 acre
office park is planned near Miami.
built at Huntsville, Alabama.
A $7 million shopping center will be
A textile firm will build a $5 million
office and distribution center in the Atlanta area.
Near Tampa, a glass
producer has purchased a tract of land for a distribution center.
Two
100-unit motels will be built in east Alabama.
A chemical company is undertaking a $43 million expansion of
fertilizer plants in Mississippi.
Wood product firms will build three plants
in Alabama and two in Georgia at a total cost of $35 million.
An oil
company has announced a $13.5 million expansion at a south Alabama refinery.
area.
A $12 million heavy machinery plant is planned for the Birmingham
A tire company is tripling the size of its Alabama plant.
Rubber
and plastic products will be manufactured at a new plant in north Alabama.
An underground coal mine employing 200 will also be opening in Alabama.
Apparel manufacturers will locate two plants in southwest Louisiana, each
eventually employing 300.
out the District.
A number of smaller plants are planned through-
In recent months, there has been a sharp increase in
the number of companies investigating the Lake Charles, Louisiana area as
a possible plant location.
Several Atlanta construction trade unions have recently accepted
two-year wage contracts calling for increases near the 5.5 percent guideline.
Hourly workers in the nuclear industry at Oak Ridge, Tennessee
have accepted a wage increase considerably above the 5.5 percent level.
Workers in Florida's sugar cane industry are pressing for a $1 an hour
increase, but producers are offering a 10-cent-an-hour raise.
An auto
assembly plant in Atlanta has been struck in dispute over production schedules and health and safety standards.
Despite an unemployment rate near
5 percent, a Mobile businessman reports that an extreme shortage of
skilled labor has forced many companies to increase training
efforts.
A special survey of retailers in east Alabama found that sales
are up strongly and that merchants were particularly pleased with sales in
the July 4th week.
However, retailers in Tennessee report that shoppers
are becoming more price and quality conscious and that they are waiting
for sales.
Auto sales are reportedly booming in the Tennessee portion of
the District and used cars are particularly scarce.
Two auto dealers in
east Alabama expect their inventories to be depleted by the time 1974
models arrive.
In spite of late plantings and other difficulties, the Louisiana
rice crop is in good condition.
SEVENTH DISTRICT —
CHICAGO
No signs have yet developed in the Seventh District that the
uptrend in overall activity is losing momentum.
Businessmen and bankers,
almost universally, believe the 60-day price freeze was ill conceived, but
the immediate impact on slowing activity seems to be confined to food
processing and petroleum refining.
Any slowing of growth in other sectors
appears to reflect shortages of manpower, materials and components, and
summer vacations.
The freeze and a tough Phase IV may have an adverse
affect on long-range planning, however.
Inventories are generally low
relative to activity, critically so in some cases.
Retail sales of both
hard and soft goods appear to be very strong.
Host businessmen and bankers are aware of forecasts of a recession to begin late this year or early next year.
Even those who accept
such projections, however, indicate that they see no signs of slippage
in their own areas.
In fact, most manufacturers are most concerned about
their ability to maintain production schedules and product quality in
the face of bottlenecks.
The 60-day freeze was very generally opposed in this District,
even by most of those who viewed favorably the 1971 freeze.
of course, is the fact that wages are excluded.
One factor,
But a widespread belief
exists that tight price controls under conditions of tight supplies will
do more harm than good.
Businessmen are particularly adamant that a
pass-through of increased costs of raw materials and imported commodities
must: be permitted to prevent further shortages.
Many District feeders of swine and cattle say they will lose
money because of the squeeze between operating costs and the price of meat
packers can afford to pay under ceilings.
pork, packers have ceased operations.
A number of medium-sized
An ominous note for future months,
the current swine slaughter includes a highly abnormal proportion of pregnant sows.
The number of cattle moving into feed lots is below last
year, partly because cattle are being kept longer on grass.
cessors are aided by high prices for by-products.
Beef pro-
Except where supplies
have been reduced by adverse weather, canning of fruits and vegetables
appears to be proceeding normally.
But there are reports that part of
the pack will be held back awaiting the end of the freeze.
A bright spot
in the meat situation is the drop in spot prices for soybean meal, partly
because of the embargo.
Corn prices remain near recent highs, however.
Current developments in agriculture probably will have their major
adverse impact on livestock and meat supplies in the fourth quarter.
A number of District firms had to cancel price increases because
of the freeze, e.g., steel, appliances, and machinery.
They maintain
they must have price flexibility to justify the risk of new investments.
Oil industry experts say that the price freeze has sharply
curtailed imports of refined products, and, in some cases, imports of
crude oil.
The sharp increase in prices of imported petroleum means
that imports can only be resold at an out-of-pocket loss.
The gasoline
crisis appears to have eased except for scattered situations.
But oil
firms are not building up stocks of heating oil as planned.
A steel producer now estimates shipments of U.S. mills at 108
million tons for 1973, with all categories much stronger than had been
projected earlier.
Steel warehouse
There is "absolutely no sign of demand weakening."
stocks are very short.
The Milwaukee Purchasing Managers report (July 8) that "lead
times on a vast number of products are extremely long."
Items in short
supply include steel, castings, aluminum, paper, lumber, plywood, fuels,
rubber, cork, electronic components, wire, small motors, glass, fasteners,
bearings, zinc, many chemicals including petrochemicals, hydraulic components and large tires.
Delivery dependability has deteriorated badly
and almost one-third complain of poor quality.
A Chicago producer of a variety of products stated recently:
"every component we purchase is in short supply.
everything.
Paper, wood, steel
The worst in my 30-years in business."
—
This moderate-
size firm, like many others, has appointed a "procurement expediter."
Steps taken to side-step price controls include:
low profit
lines dropped; products "redesigned"; fictitious upgrading; inclusion of
rejects; dropping discount practices; insistence on larger orders than
customers require; "tie-in" sales; elimination of "free" services; new
charges for "extras"; curtailment of sales to nonaffiliated customers;
and curtailment of sales to customers whose business is less profitable.
EIGHTH DISTRICT —
ST. LOUIS
Business activity in the Eighth Federal Reserve District continues strongly upward.
Retail sales have expanded further in recent
weeks, manufacturing orders are up, and demand for output continues to
exceed the amount that can be supplied at current prices.
The labor mar-
ket is reported to be "tight" over most of the District, but there has
been little change in the unemployment rate in most of the metropolitan
areas during the past two months.
Excessive demand, inflation, and supply shortages are the major
problems of businessmen.
Interruptions to output caused by the price
"freeze" and raw material shortages have become more general throughout
the District.
Shortages of forest products, paperboard, gasoline and
livestock feed are apparently causing the greatest concern.
layed deliveries were mentioned for numerous items.
However, de-
Some increase in
the delivery of raw forest products to mills has occurred with the improved weather conditions in recent weeks but paperboard container manufacturers report that there has been no reduction in the lag between
orders and deliveries of such products.
An engineering equipment manu-
facturer reported that merely trying to meet demand was now a problem.
Also pricing for future delivery is reported to be hazardous because of
the uncertainty about future price controls on raw materials and output.
An increasing number of firms are refusing to quote prices on such orders.
Most manufacturing firms report that operations are at full
capacity.
Numerous reports of capacity expansion programs indicate that
major increases in capacity are underway.
In some cases, however, such
plans are being delayed because of the uncertainty caused by public
policies with respect to wages and prices.
Retail sales at major department stores in the District have
continued upward in recent weeks at about the same rate as during the
last: twelve months on a seasonally adjusted basis.
Representatives of the
stores report that their suppliers are not shipping as much as ordered
and that for more than a year there have been long delays on delivery
of furniture ordered from manufacturers.
The labor situation remains tight throughout the District.
Employment continues to rise slowly but the unemployment rate has leveled
off after declining for about two years.
Representatives of the larger
firms report that they can still get help but the smaller firms report
that, all the good workers they can find are currently employed.
A major
complaint in the lumber and pulpwood industries is that they can no longer
get workers to do timber cutting operations.
Financial markets have tightened throughout the District in
recent weeks.
Rates on all types of credit instruments have been in-
creased and larger down payments are being required by most lenders,
especially on real estate mortgages.
One savings and loan association
reported that it is no longer interested in residential loans with less
than a 20 percent down payment.
The food and agricultural situation has suddenly changed from
favorable to disastrous as a result of the recent price freeze.
The crop
outlook is generally good but timely rainfall throughout the summer months
will be necessary for high yields since most crops were planted later
than average.
Most livestock producers are losing money from feeding at
the current feed cost-livestock price ratios.
The unexpected sharp
increase in feed costs has taken most if not all of the profit out of
livestock feeding.
Some hog feeders may still be covering their costs,
but all cattle, laying hens, and broilers are probably being fed at a
loss.
Profits are insufficient in all livestock feeding to provide in-
centive for increased production.
Unless relief is quickly forthcoming,
the outlook for lower food prices early next year must be revised markedly
upward.
Some meat shortages are already beginning to develop in grocery
stores.
Feed dealers and other farm specialists report that farmers are
simply not making plans for increased production.
Instead of holding back
breeding animals for larger output, they are selling them off at lower
than normal market weights to reduce losses.
Given this condition the
supply of meat animals and animal products for market early next year
will be reduced regardless of the size of crop harvested this fall.
NINTH DISTRICT -- MINNEAPOLIS
Bank directors had mixed views on how Phase IV should be
structured, but generally supported tighter fiscal policies to accompany
the new wage-price control program.
District labor markets were
characterized as tight, and skilled workers were in many cases scarce.
District businessmen continued to be confronted with shortages; in some
instances a lack of materials has actually slowed District business
activity.
Further advances in District consumer spending were reported
and District retailers anticipated no immediate letup in their sales
growth.
Bank directors' opinions varied on how Phase IV ought to be
structured.
Two directors believed Phase IV should concentrate on those
industries that are significantly contributing to our current inflationary
situation —
industries where price increases are the most visible.
Another view was that big companies and unions should be required to inform the government of proposed wage and price increases.
One director
wanted Phase IV controls to be as flexible as possible, and another
director voiced opposition to mandatory wage-price controls.
One director
expressed a personal dislike of wage-price controls, but believed that
such controls would be necessary for some time in the future.
Although their views varied, bank directors generally favored
tighter fiscal policies to accompany Phase IV.
A cutback in the invest-
ment tax credit was favored by one director and another felt several
measures to tighten fiscal policy would be necessary to deal with our
current inflationary situation.
Rather than raising taxes, one director
advocated cutting expenditures.
Another director voiced his opposition
to increasing personal taxes because, in his opinion, tax increases would
only result in higher wage demands since inflation has already eroded a
considerable amount of workers' purchasing power.
According to the bank directors' responses, District labor
markets were characterized as tight.
Employment conditions have improved
recently in the upper peninsula of Michigan, and a Wisconsin director
indicated that unemployment was not a problem in his community because
local industries were expanding.
A South Dakota director reported gains
in his state's manufacturing activity and disclosed that workers were
in short supply.
A Minnesota director reported an abundance of summer
and college educated workers but a lack of workers for permanent yearround blue collar jobs.
A director from southeast Montana revealed
employment gains in his area and stated that labor shortages existed for
workers in the service industries and farm workers.
A director from
Bozeman, Montana indicated a shortage of construction workers in his
area.
A North Dakota director, on the other hand, disclosed no lack of
employable workers in his state.
Various material shortages continued to confront Ninth District
businessmen and in some instances shortages have curbed District business
activity.
A South Dakota director indicated that spare parts for
agricultural machinery were in very short supply and that new farm
machinery was almost impossible to obtain.
A small manufacturer in his
area has been unable to expand operations because of a lack of steel.
A director associated with the construction industry revealed that cement
and reinforcing steel continued to be in tight supply and indicated that
a lack of spare parts was also a construction industry problem.
Two
large Minneapolis/St. Paul manufacturers reported difficulties in obtaining electronic components and one firm disclosed these shortages
have slowed down production.
Also, a lack of kraft paper has restrained
the output of another Twin Cities firm.
Several directors indicated that their areas' businessmen were
continuing to express concern over the gasoline situation, and gasoline
shortages have affected the District's tourist industry.
In the upper
peninsula of Michigan a 10 percent decline in tourist business from a
year ago was attributed to the gasoline supply situation.
In North Dakota
slow business at that state's major tourist attraction was also attributed to the gas supply problem.
activity was foreseen.
In South Dakota no expansion in tourist
In Montana, on the other hand, tourist business
has been good so far this year.
One Montana director voiced the opinion
that the concern over gas shortages has caused individuals to take their
vacations earlier and his area experienced a good June tourist business.
District consumer expenditures have continued to expand and
further increases in consumer spending are anticipated throughout the
summer and into early fall.
Large Ninth District retail stores reported
recent sales running 8 to 10 percent above a year earlier, with particularly strong sales outside the Minneapolis/St. Paul metropolitan area.
Most: survey respondents attributed their sales increases to improved farm income and to strong sales of durables accompanying new home purchases.
Survey
respondents expected sales increases in the 8 to 10 percent range to
continue through the summer, with possibly some tSpering off this fall.
Retail sales in rural areas were expected to remain strong through 1974.
Area automobile dealers reported phenomenal rises in new car
sales this spring:
trucks and smaller cars were selling particularly well.
Several dealers noted that sales of smaller cars were well in excess of
their manufacturers' capacity to produce these models.
Most dealers stated
that gasoline mileage has become of great importance to new car buyers and
cited this as a major reason for the sharp rise in sales of smaller automobiles.
Truck sales this spring have been 20 percent to two-thirds
higher than a year ago, with most of the increase again attributed to
higher rural incomes.
Auto dealers, however, were concerned that current
high sales may be displacing potential sales for the 1974 model year.
TENTH DISTRICT —
KANSAS CITY
Difficulties in obtaining fuel because of station closings
apparently are scaring some motoring tourists away from the Tenth District
this summer.
But while the energy crisis may be depressing tourism, it
is generating activity in the extractive industries in Wyoming and elsewhere.
A survey of many light manufacturers throughout the District
turned up none pessimistic about sales outlooks.
Good news of a bumper
crop of wheat in Kansas is largely offset by the bad news of the adverse
effects of the price freeze on food supplies.
Bankers feel that recent
increases in administered interest rates (discount, prime) will have
little dampening influence on economic activity.
In most cases, popular historical sites and outdoor recreation
areas throughout the District are attracting fewer tourists.
Attendance
at Eisenhower Center in Abilene, Kansas, for example, is running 20
percent below last year.
Colorado apparently has been hit hardest.
and museum visitations there are down "tremendously."
Park
Even campground
use has declined for the first time, while motel receipts are off as
much as 30 percent in some Colorado areas, and perhaps 10 percent statewide.
Businessmen blame problems in obtaining gasoline.
New Mexico also
is suffering a decline in tourist business, with national park and monument visitation down 7 percent and state park visitation down 4 percent
through May.
Tourist inquiries received by the New Mexico Department of
Development during June of this year were 25 percent fewer than those
received during June of 1972.
Wyoming tourism so far this year appears about as good as last
year, and perhaps somewhat better.
But respondents fear that the early
visitors are trying to beat the gasoline shortage, and that the season
will finish slow.
Advanced sales of nonresident hunting and fishing
licenses are down 30 percent, no doubt partly due to their increased
prices, but probably also due to fears of short gasoline supplies.
Thanks largely to fuel shortages, mining activity has increased
greatly in the Tenth District western states.
The shift toward atomic
energy is stimulating the pace of extraction and processing of uranium in
the Rocky Mountain States, where much of the nation's known reserves of
uranium ore are located.
On top of this, the renewed importance of coal
has given a boost to the Wyoming economy, where major reserves of low
sulphur coal are found in thick seams near the surface.
In most of the
District states, petroleum and natural gas production is of continuing
economic importance.
Stepped up efforts of discovering new fields and
producing zones* and the possible economic feasibility of extracting oil
from vast shale deposits, further brighten the economic outlook in the
District.
Sales managers of many light manufacturing firms in the District
see little indication of an end to the boom.
sales growth into 1974.
They expect continued
Most firms are producing at or near capacity.
Several are adding, or planning to add, to capacity.
Only minor incon-
viences are being experienced because of the price freeze.
However, one
Wyoming manufacturer came near closing recently because of inability to
get diesel fuel.
For the month ended June 15, farm prices posted another gain,
rising 6 percent above May on the strength of higher grain prices.
The
spurt in grain prices was precipitated in large measure by a wave of buy
orders from abroad in anticipation of export control.
Despite record
high prices, the freeze has locked much of the livestock industry into an
unprofitable position, and with controls on exports, crop producers may
curb their plans to expand output in the future.
Food processors have
also been hard hit by the new program as several have either cut back or
closed down operations.
On the whole, the stiff actions taken to ease
food prices likely will prove counter productive and result in more restrictive production.
Harvest of the 1973 winter wheat crop is progressing rapidly.
Earlier fears about possible shortages of combines, fuel, and elevator
storage
have been largely unfounded.
Isolated shortages occur nearly
every year, but usually are not so well publicized.
Kansas harvest has been less troublesome than usual.
If anything, the
Some wheat is being
stored on the ground, but none has been lost due to an inability to get
it out of the field.
At this point, the 1973 crop could quite possibly
exceed the June 1 estimates.
Following the lead of the nation's largest banks, all but one of
the major District banks increased their large borrower prime rates to
8 percent in the past week.
The only exception, a large Tulsa bank,
raised its prime rate to 8 1/4 percent.
Surveyed banks generally felt
that further increases in the prime rate would be required to slow business loan demand.
With regard to the prime rate charged to small
borrowers, only two banks reported increases since the guidelines went
into effect.
However, the level of this rate varied greatly among banks,
ranging from 6 1/2 to 8 1/2 percent.
Recent increases in the discount
rate were not viewed as being much of a deterrent to further borrowing
from the Federal Reserve.
Several banks implied that unless otherwise
restricted they would continue to use the discount window as long as it
remained their cheapest source of funds.
Two banks also said that the
recent increases in required reserve ratios would be far more effective
in restraining their lending activities.
ELEVENTH DISTRICT —
DALLAS
The economy of the Eleventh District continues to expand with
almost all major economic indicators showing greater strength.
The only
notable exception is the unemployment rate, which edged up slightly in
May.
Industrial production in Texas reached another record level in May,
and the pace of construction activity picked up substantially.
Sales of
District department stores also rose further in May and June, and
mobile registrations rebounded sharply from April's decline.
auto-
A survey
of major District retailers indicates that the price freeze has had little
effect on their business operations.
The vast majority of the retailers surveyed felt that their
sales, adjusted for seasonal factors, would be at least as strong in the
second half of 1973 as in the first half.
has so far had no effect on their sales.
Moreover, the price freeze
None of the retailers reported
their current inventory-to-sales ratio as being abnormally low, and none
reported any effort to take advantage of the price freeze to accelerate
inventory buying.
The majority of the retailers also indicated that the current
price freeze has had no discernable effect on their company's profit margin.
Most of the remaining respondents reporting any effect felt that
their profit margins are moderately smaller than they would have been
without the freeze.
The retailers, on the average, reported no change in
the extent to which their customers are using credit in their purchases,
and they noticed no change in the quality mix of goods their customers buy.
The recent increase in commercial bank lending rates have not influenced
retailers to use less bank credit.
Almost all report no change in their
bank, borrowings as a result of the interest rate increases.
The seasonally adjusted Texas Industrial Production Index rose
further in May, as gains were posted in all three major sectors.
In uianu-
facturing, the largest production increases occurred in petroleum refining,
food and food products, primary metals, and stone, clay and glass products.
Mining rose mainly as a result of increases in output of crude oil, and
metal, stone and earth minerals.
Utilities edged up only slightly.
With imports of foreign crude helping to ease the supply shortage,
District refineries are turning out record amounts of gasoline.
The gaso-
line shortage has not proven to be as severe as originally feared, although some companies warn that there may still be some local shortages due
to distribution problems.
A few municipalities, particularly Austin,
continue to face energy shortages, as natural gas supplies have been curtailed.
Seasonally adjusted total employment in the five District states
rebounded in May, regaining most of the loss of the month before.
The
labor force grew at a slightly faster pace than employment, however,
causing the unemployment rate to edge up to 3.9 percent from April's 3.8
percent.
Manufacturing employment remained unchanged, while nonmanufactur-
ing employment rose slightly, as substantial gains were recorded in finance
and services.
The value of construction contracts awarded in the five District
states increased in May as residential building contracts rose to their
highest level since August 1972.
Nonresidential building rose only slight-
ly, while nonbuilding construction fell from April.
The cumulative value
of contracts awarded through May was only 1.3 percent above the corres-
ponding period last year, primarily due to the sharp year-to-year decline
in nonbuilding construction.
Sales of department stores in the District continued to show
substantial increases over the year-ago level in June.
Cumulative sales for
the first half of the year were 12 percent above the level for the corresponding period last year.
The number of new automobile registrations for
the four largest metropolitan areas of Texas—Dallas, Forth Worth, Houston,
and San Antonio —
rebounded sharply in May with particularly strong year-
to-year increases in Dallas and Forth Worth.
Cumulative car registra-
tions through May were over a fifth higher than in 1972.
The agricultural outlook in the Eleventh District is favorable.
Increased field activity has closed the lag in planting and harvesting
created by the earlier bad weather.
The wheat harvest in Texas is near-
ing completion with yields good to excellent.
rapid advances in its wheat harvest —
Oklahoma is also making
although average moisture content
continues somewhat higher than usual and protein content is down somewhat.
Livestock conditions are generally good.
However, the screwworm regula-
tions governing interstate shipments of livestock were recently extended
to include Arizona and New Mexico.
This action was necessary because of
serious fly spillover from Mexico into Arizona and to some extent into
New Mexico.
The price freeze has caused serious distortions in both the livestock and poultry industries.
Placements of cattle on feed have dropped
significantly because of the squeeze between the cost of feeding cattle
and the price received for slaughter cattle.
As a result, spokesmen for the
cattle industry expect a shortage of beef this fall.
In addition, the
latest production figures for Texas poultry are bleak, with Texas broiler
egg sets down 15 percent in the last half of June from a year earlier.
Dairymen, also faced with high feed costs, are reported to be culling their
herds to eliminate marginal producers.
TWELFTH DISTRICT ~
SAN FRANCISCO
The Twelfth District economy led by consumer spending continues
to maintain a strong rate of expansion.
Many of our Directors now feel
that this expansion will not continue through the rest of the year and a
slowing may occur in the fourth quarter.
The price freeze is viewed as a
temporary measure in terms of restraining inflation but recent Federal
Reserve actions are expected to restrain the economy.
In addition, the
price freeze may cause serious shortages, especially of processed agricultural products, if it is maintained beyond 60 days.
Consumer spending is reported to be strong in all parts of the
District, particularly for consumer durables and for automobiles.
In-
dustrial production similarly is maintaining output, and wood products is
the only industry where some signs of weakness are present.
In Washington
and Idaho, mills are still operating at full capacity, but in Oregon some
mills are now operating at 25 to 50 percent below capacity.
Aerospace
activity continues to be a major source of strength in Washington and
southern California.
Construction activity, except for residences, is still vigorous,
and shortages of skilled tradesmen continued to be reported.
construction is weaker in some areas —
Residential
for example, Washington.
Directors
in California and Utah report construction of new housing has not turned
down, but a decline is expected later this year, as construction may soon
be affected by reduced credit availibility.
Savings and loan associations
have less funds, and some banks report that they are rationing real estate
loans because the demand cannot otherwise be met at the rates set under the
price freeze.
The gasoline shortage is continuing to cause some concern in
tourism-oriented areas.
In Idaho, an oil distributor describes the mar-
keting situation as confused.
Increased numbers of visitors are reported
in some areas but others have experienced less activity.
Oregon manu-
facturers of recreational vehicles blame reduced orders on uncertainty
about gasoline availability.
Despite the local problems, the gasoline
shortages have not caused serious difficulties in this District.
In general, our directors feel that the current strength of the
economy will not be maintained into 1974, and a slowdown is expected
before the end of the year or earlier.
Recent actions by the Federal
Reserve System are expected to have a major restrictive influence according
to some directors.
will be lower.
The directors think consumer expenditures on durables
Other factors tending to cause uncertainty and to slow
down the economy are the international situation, the Watergate hearings
and prospective energy shortages.
Several directors advocate more re-
strictive fiscal policy to reduce some of the burdens on monetary policy.
Local businessmen and farmers are unhappy with the price freeze.
It is seen as having only transitory effects in restraining inflation,
but it is also beginning to cause dislocations and shortages which would
become serious if the freeze is kept beyond 60 days.
The major problems
are centered in the processing of agricultural products.
Feed lot
operators and poultry processors are being squeezed by the higher cost of
grain, and at the same time mill operators are reported to be cutting
production of many types of feed.
In reaction to the freeze, millers
in Oregon have canceled contracts to furnish flour under government
contracts.
At present prices, they cannot affort to mill flour.
Similar
pressures stemming from high feed prices are tending to cut milk and egg
production.
Livestock producers in Washington have begun to sell hogs
and cows ordinarily kept for breeding purposes.
A shortage of hay in
Oregon and Washington is compounding the difficulties of local cattle producers.
Food processors report difficulties in obtaining semi-processed
foods, which are being exported at higher prices than domestic buyers
are willing to pay.
In nonagricultural industries, some manufacturers report difficulties in obtaining supplies.
Suppliers appear to be postponing com-
mitments to fill orders at present prices, in expectation of higher prices
at the end of the present price freeze.
Retailers do not appear to be
experiencing major difficulties as yet.
A few chains were caught during
a sale period when the freeze was imposed and they are locked into belownormal prices.
Cite this document
Federal Reserve (1973, July 16). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19730717
@misc{wtfs_beige_book_19730717,
author = {Federal Reserve},
title = {Beige Book},
year = {1973},
month = {Jul},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19730717},
note = {Retrieved via When the Fed Speaks corpus}
}