Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

August 15, 1973

TABLE OF CONTENTS

SUMMARY page i

First District - Boston page 1

Second District - New York page 4

Third District - Philadelphia page 8

Fourth District - Cleveland page 10

Fifth District - Richmond page 13

Sixth District - Atlanta page 15

Seventh District - Chicago page 17

Eighth District - St. Louis page 20

Ninth District - Minneapolis page 23

Tenth District - Kansas City page 26

Eleventh District - Dallas page 28

Twelfth District - San Francisco page 31

SUMMARY*

The overall impression conveyed by the District Banks' August

Red Book reports is that business activity continues at a high level, but

with some scattered indications of a tapering off in the rate of growth.

Most Banks report a sustained high level of consumer spending, in part

related to expectations of further price increases, but respondents in several

Districts looked for a cooling off of consumer demand over the coming

months.

Business plant and equipment outlays remain at a high level, largely

undeterred by the high cost of credit, and the demand for agricultural

machinery is recording a sharp rise. However, shortages of raw materials,

energy, and trained labor were frequently cited as possibly inhibiting

further expansion in capital goods output and production generally.

Moreover,

private residential construction is generally reported on the decline, in

good part because of the high cost and unavailability of mortgage funds,

in turn traceable to the net outflow of deposits at thrift institutions.

Commercial and nonbuilding construction has been faring better, although

some reports indicate a tapering off in this sector.

Against this background,

there appears to have been little net change in the nationwide industrial

production and employment situation.

Crops are expected to be at, or near,

record levels in most agricultural areas. Most Districts in varying degree

reported dissatisfaction on the part of business over Phase IV, and controls

generally.

[Asterisk:Prepared

Continued strong loan demand was noted in most reports.

at the Federal Reserve Bank of New York.]

San Francisco reports that consumer spending is clearly the

leading sector in all areas of the District, in part reflecting anticipations of further price increases—a factor also mentioned by Minneapolis.

St. Louis reports that consumer outlays are continuing to trend upward, and

Chicago notes that sales of major appliances have surged since mid-June.

Major retailers in the Richmond District, however, have found that while

sales have continued to improve, the rate of growth has tapered off during

the past month.

A large nationwide retail firm headquartered in the Cleveland

District, moreover, looks for an appreciable decline in the rate of expansion

in consumer spending over the year ahead.

Retailers in Minnesota, on the

other hand, are reported to expect no slowdown in their sales growth during

the remainder of 1973. The reports generally also point to a sustained

high level of business plant and equipment outlays.

Philadelphia thus reports

that almost 45 percent of the manufacturers surveyed planned to increase

capital investment in the six months ahead, while Cleveland and Boston report

receipt by firms in their Districts of large capital goods orders.

Chicago

reports that business borrowers have shown little reluctance to borrow at the

currently high level of interest rates and that a number of industries are

moving vigorously to expand basic capacity.

of large new plant announcements.

reports.

Atlanta lists a sizable number

A similar picture emerges from most other

However, a number of Banks—including Chicago, Cleveland,and New York—

cite the growing list of shortages of raw materials and trained personnel

as adversely affecting both capital goods and consumer products output.

Regarding construction activity, most of the Banks report an

actual or prospective decline in private residential construction, reflecting

the net outflow of funds from thrift institutions and the accompanying

dearth and high cost of mortgage funds.

Commercial and nonbuilding con-

struction, however, with scattered exceptions, was generally reported to

be holding up well.

A bright picture emerged from reports from agricultural areas.

Kansas City thus expects a record wheat crop while Atlanta reports a record

citrus fruit crop. Dallas, San Francisco, St. Louis and Richmond all anticipate above average or good to excellent agricultural production.

Much

criticism, however, was expressed over the continued "freeze" on beef prices.

More generally, a great deal of skepticism regarding the effectiveness of Phase IV in coping with inflation, and hostility on the part of

businessmen toward the controls, was expressed by respondents in many

Districts.

FIRST DISTRICT—BOSTON

Our Bank directors report a sharp stiffening in recent lending practices.

They are now making new loans rarely and only to good customers.

Business

conditions in the First District are reported as good, if not booming, but

the seasonally adjusted unemployment rate in June remained at 6.2 percent.

Bank directors report that they have cut back sharply on new loan

commitments.

Our Bank directors say that they have ended all construction

loans and that they are limiting other loans only to good customers.

A New Hampshire bank director says that he is only making new loans

rayely and is making none for construction, new customers, expansion, or

acquisitions.

This director attributes monetary tightness to a loss of

demand deposits, in part due to firms cutting down demand deposits and in

part due to competition from "NOW" accounts which are allowed in his state.

The new Fed ruling limiting four-year time deposits to 5 percent of time

money prevents his bank from competing for funds.

This banker reports that

his tig'ht loan policy is generally true throughout New Hampshire and that

many savings banks are also very tight and mortgage rates are firming.

A large Boston bank director reports no trouble in getting additional

funds, but that rates are too high to make profitable loans.

He feels

that the bank gains more goodwill by explaining to a potential borrower that

the bank has no funds than to charge 12 to 13 percent for a loan.

Instead,

they are encouraging borrowers who can do so to go elsewhere, and they are

not looking for new customers.

They are currently combing their loan

portfolio to get some loans out of the portfolio.

building up their residential mortgage portfolio.

They are also no longer

Business conditions are reported as pretty good in New England,

although not booming.

Machine tools and heavy capital equipment production

are doing especially well.

Unemployment still remains high in a number of

areas., In Massachusetts, the seasonally adjusted unemployment rate in June

was 6.9 percent, down from 7.3 percent a year ago, and in the Boston SMSA

the unemployment rate remained at its year ago level of 5.9 percent. With

the exception of New Hampshire, all of the New England states have unemployment rates above the national average.

Professors Eckstein and Samuelson had very different orientations

in their policy remarks.

To Eckstein, the crucial issue for the monetary

authorities is "whether or not to letdisintermediationruin housing".

Traveling around the country talking to banks, thrift institutions, and

life insurance companies, Eckstein found the supply of mortgage funds has

dried up. Mortgage loans are available only at a few large banks to some

established customers.

Insurance companies were fully committed and now

are having trouble with policy loans.

face a situation like 1966.

California savings and loan associations

He feels monetary policy is misguided by focusing

on monetary aggregate figures which suffer from technical problems.

He

cited various theories to explain the pattern of money growth in the first

and second quarters, saying none had much to do with real economic growth.

Interest rates are the only indicator one can go by at the present time,

he argued, since no one understands the recent behavior of the monetary

aggregates.

Samuelson felt it is still unresolved whether the economy has

entered a growth recession.

He suggested that the second-quarter real

growth figures look too low and the third-quarter figures will look too

high due to seasonal correction problems.

He agreed that we are in a partial

credit crunch and that mortgage money cannot be obtained in many areas.

He

feels, however, that a growth recession, even if it comes, would be "stagflation".

Monetary policy could not choke off the commodity price explosion

without choking off a lot more.

quick inflation abatement.

Monetary tightness will not produce automatic,

In order to reduce the growth in the aggregates,

he would allow interest rates to continue to rise so that the move toward

ease could come faster later if it became necessary to ease.

Citing the

1966 experience, he believes that policy can be successfully reversed.

Eckstein also felt policy could be reversed if it backed off soon.

SECOND DISTRICT—NEW YORK

The Second District directors and other business leaders who were

contacted recently generally expressed doubts regarding the effectiveness

of Phase IV in bringing about price and wage stability.

Most respondents

felt that the dollar for dollar cost pass-through provision would, with varying

intensity, squeeze profit margins.

Several directors reported that so far

tightening credit conditions have had little effect on business spending plans

of larger firms, but some noted it was having a dampening effect on smaller

businesses.

A marked tightening of the mortgage market was also indicated.

A note of skepticism marked the directors' initial assessment of

the probable impact of Phase IV on the prospects for price and wage stability.

Thus, one director characterized this part of the Administration's stabilization efforts as a "triumph of political expediency over economic reality".

This view was shared by a number of other directors, who also felt that while

the new controls might be partially effective as a "stop gap" measure in

achieving price and wage stability, growing shortages—notably of agricultural

products—would unavoidably lead to increases in the cost of living and in

turn to heightened wage demands.

The chairman of the board of one of the

largest New York City banks stated that an assessment of the impact of the new

measure was difficult, particularly because of the uncertainties surrounding

the implications for wages of a prospective rapid rise in food and certain

other prices.

In this context, he felt that at this juncture

the longer

term outlook for wages and prices seemed closely linked to the extent of the

increase in agricultural output and production and its stabilizing influence

on the price level generally.

The president of a large metal producing

concern observed that the controls were causing severe domestic shortages

of certain internationally traded key materials.

He felt that the biggest

problem associated with Phase IV was the 30-day pre notification period for

price increases applications by large firms, which he deemed much too long,

making it "extremely difficult" for businesses to respond effectively to

changing demand and/or cost considerations.

The president of an upstate bank

noted that, in contrast to the widespread support accorded Phases I and II,

small businessmen in his area were "not at all pleased" with Phase IV, and that

cooperation in the program was not likely to be forthcoming.

On the other

hand, an upstate manufacturer assumed there would be tolerance of and adherence

to the Phase IV program for a reasonable period of time—at least through

April 1974—and felt that the mandated controls were tough enough to enable

a return to a more reasonable and acceptable rate of inflation.

With respect to the effect of the dollar for dollar cost passthrough limitation on profit margins, it was the consensus of the Buffalo

branch directors that this proviso would result in some contraction of profit

margins in the short run, at least as measured on a percent of sales basis.

The reduction, however, was not expected to be significant, barring a substantial fall in demand.

The New York banker felt, however, that this rule

could create significant problems for certain firms and reported that his

bank's research personnel estimated it would reduce after-tax profits by

about $2 billion.

None of the respondents reported that the dollar-for-dollar passthrough would have an immediate effect on business spending plans. Views

were mixed, however, regarding the impact of tightening credit conditions on

such plans.

The New York banker reported that he had not seen widespread

evidence that capital spending plans were being deferred as a result of high

interest rates and tightening credit conditions, although he felt that shortages

of equipment and material could have a dampening effect on such outlays.

A

senior official of a large multinational firm said that not only have tightened

credit conditions not had an appreciable effect on capital spending, but that

there was evidence of a "spend-now" philosophy in the face of inflationary

expectations.

A similar view was expressed by the president of the large metal

producing firm, while another director reported that executives of large firms

with whom he had contacts had suggested to him that capital spending plans were

not being materially affected by higher interest rates:

cash flows were still-

sufficiently large to finance capital outlays and thus these firms were not

especially sensitive to interest rate considerations.

On the other hand, an

upstate banker reported that in his area, the high levels of interest rates

were starting to have a dampening effect on capital spending decisions.

He

reported that among smaller businessmen with whom he had contact, borrowing

rates in the range of 7 1/2 percent or higher tended to have an immediate

adverse effect on their willingness to commit funds.

Similarly, most Buffalo

branch directors felt tighter credit conditions were bound to have an impact

on business spending plans.

These directors cited instances where bank customers

were postponing borrowing and spending plans, and reported that banks were

rationing available funds by extending credit to their own customers first.

There has been a significant tightening in second District mortgage market conditions according to the opinions expressed by a number of

directors and major lenders in that market.

Senior officials of thrift insti-

tutions reported that as a result of a net outflow of deposits, together

with a sizable backlog of unclosed loan commitments, little or no funds were

available for new mortgages in the 1— to 4—family home sector.

A New Jersey

savings bank thus reported it was making loans only to depositors, with a

40 percent down payment,,and an official of a large New York savings bank claimed

that at this time "there was no home mortgage market" and that his institution

was entering into no new commitments for 1- to 4-family homes.

Against this

background, the respondents felt that the recent increase in the usury ceiling

from 7.5 percent to 8 percent in New York and New Jersey (effective August 15

in New York) would have little or no effect at this time on the home mortgage

market.

Officials at the insurance companies, commercial banks, and mortgage •

companies who were contacted reported that construction loans and mortgages

for commercial properties—apartments, shopping centers, office buildings—

were available, but at very high rates.

In this context, several respondents

reported a drop in recent weeks in the demand for such loans, which they attributed in part to the high rates and in part to overbuilding in this sector.

THIRD DISTRICT—PHILADELPHIA

The business advance of previous months is continuing at a slower

pace in the Third District.

Industrial activity showed gains on all fronts

surveyed, and there was a slight improvement in employment reported this

month.

Plant and equipment expenditure plans are up at almost half the firms

contacted.

Retail sales are brisk.

Loan demand at banks is very strong,

but banks can only raise additional deposits by selling certificates of

deposit (CDs).

On the darker side, price increases are widespread.

According to this month's Business Outlook survey of manufacturers

in the Third District, industrial activity is still rising.

New orders,

shipments, unfilled orders, and delivery times are continuing to increase

slightly, but the six-month outlook isn't as favorable.

Nearly 40 percent of

the executives surveyed expect business to be below current levels, while only

25 percent anticipate further improvement.

At the present time, increasing business activity is having a slightly

favorable effect on employment.

Over three quarters of the respondents report

no change in their number of employees and the length of their average workweek,

but most of the remaining firms are experiencing increases in these categories.

The employment picture isn't expected to change much in the next six months.

The number of firms expecting layoffs equals the number of firms expecting to

increase their hiring.

However, more firms expect to cut the length of their

workweek than to increase it.

The continued high level of business activity is causing area

businessmen to increase their investment; almost 45 percent report plans to

increase their plant and equipment in the six months ahead.

stock of inventory is increasing gradually.

In addition, the

Retail sales are strong in the Third District at the stores contacted.

Fashionable clothing is selling very well at the department stores, and auto

dealers report that sales are strong.

Not a single firm surveyed reported a decrease in the prices it

pays or the prices it receives, but over half reported paying higher prices

this month.

Six months from now, over 65 percent of the firms expect to be

paying and receiving higher prices.

Large city banks are experiencing very strong loan demand from all

the major sectors, but deposits are not keeping pace.

but are starting to flow out again now.

Time deposits increased,

As banks reach their legal limits on

high interest saving certificates anddisintermediationresumes, two bankers

voiced strong resentment about Government pressure to keep the prime rate

below the rates at which they are raising money.

These bankers are filling •

lines of credit at the prime rate—but only reluctantly—because they feel

they are losing money on the loans. Area bankers can still sell their shortterm CDs if they pay high-enough, interest rates, but one banker said he thought

that nonbank financial intermediaries were almost in a credit crunch now.

Corn and wheat prices continue to advance strongly in a commodity

futures market in spite of the bumper harvests projected by the United States

Agriculture Department.

These rising prices are based at least partially on

fears that large exports will deplete the harvest.

In addition, the rising

grain prices are pushing up the costs of raising cattle and chickens.

As a

result, future prices on beef and broiler chickens are rising sharply too.

This is taken as an indicator that retail meat prices will skyrocket when the

ceilings are removed.

FOURTH DISTRICT—CLEVELAND

Comments from our directors, businessmen, and economists indicate

that the pace of business activity remains at a very high level.

There are,

however, numerous reports of distortions, including complaints of production

bottlenecks stemming from capacity constraints and labor and materials

shortages.

A major retailing firm expects consumer spending to slow appreciably

in the year ahead.

In the financial area, some savings and loan associations

in the District are experiencing heavy deposit losses as a result of interest

rate differentials.

The comments of our industrial directors at a board meeting held on

August: 9 indicate that the pace of business activity remains strong, but

shortages of certain raw materials, particularly in the chemical area, are

becoming an increasing problem.

Two directors, whose firms are important

producers of consumer goods, reported that, while orders remain strong,

shortages of raw materials are impeding production.

One of these indicated

that aibout 10 percent of the firm's facilities are idle because they cannot

get raw materials and the other is attempting to secure foreign sources of

supplies.

A director whose firm is a large supplier of chemical products

reported that their customers are on an allocation basis.

Two other directors—

one from a large diverse manufacturing firm and one from a large office

equipment manufacturing firm—reported that new orders remained strong and

that all of their production facilities were operating at full capacity.

Both

firms are viewing 1974 with caution, especially in the case of their capital

spending plans.

Finally, a large and diversified manufacturing and construction

firm indicated that it expects a continuation of at least nine months of

upward activity. As a result, its capital spending plans are on the upswing;

it will not be borrowing to finance these additional outlays because of a

strong; internal cash flow.

Early returns from our monthly survey of manufacturers reveal

considerable strength in certain key indicators and signs of stress in others.

In July, the largest proportion of firms reported gains in new orders since

January.

Peak capacity operations and shortages of materials have limited

the ability of many firms to increase shipments, however.

Thus, backlogs are

continuing to rise and delivery times are growing longer.

Our survey also

shows stepped up inventory accumulation during July.

Buyers in the Cleveland

area say it is difficult to build inventories of finished goods, however, in

the face of numerous shortages and limitations on production.

Finally, it

now appears that payroll employment in the District is leveling off following

strong; gains through the first quarter.

One of the District's capital goods producers received in July an

order in excess of $275 million for six nuclear power systems.

This is

reported to be the largest order ever placed in the nuclear industry. To

achieve economies in design, licensing, and construction, five electric utilities

acted together (with Federal approval) to order standardized nuclear power

plants.

Economists with three major steel firms in the District report no

sign of any easing in the demand for steel.

Customers' orders are being

allocated because of capacity limitations, and orders are booked solid through

the fourth quarter.

Nevertheless, production and shipments during the second

half of 1973 will not be so high as in the first half of the year.

Approximately

A million tons of the 56 million tons shipped in the first half came from steel

mill inventories—something the steel companies cannot repeat.

Production at

a major steel firm in Cleveland is currently being cut back until October in

order to reline blast furnaces.

The tight steel situation is underscored by a

comment from one economist to the effect that, for the first time since

World War II, steel consumption (in the second half of 1973) will equal total

domestic capacity plus imports.

United States situation.

The world market for steel is similar to the

With steel prices generally higher abroad, there is

now less incentive to import.

In fact, steel imports in June dropped below the

year-ago level for the first time this year.

The economist from a major retail food chain is extremely pessimistic

with regard to near-term prospects for relief from rising food prices.

He

does not expect an immediate boost in beef supplies when the freeze is lifted

because of the time it will take to get cattle off the farms into feedlots,

processed, and distributed.

He does not expect a drop in retail beef prices

until January.

The economist from a major retailing firm with headquarters in the

District reported that they have a pessimistic forecast for consumer spending

for the next four quarters and that recent developments have increased their

confidence in this projection.

Their current view is that the peak growth

rate for consumer spending was reached in early 1973 and that an appreciable

decline in the rate of expansion in consumer spending will materialize between

mid-1973 and mid-1974.

Their outlook is based on a number of factors, including

the rapid rise in prices, especially food prices, declining consumer confidence,

the consumer credit situation, and high interest rates.

All of these factors

are thought to have a negative influence on discretionary expenditures.

On the financial side, the economist at one of the two Federal Home

Loan Banks in the District reported that savings and loan associations in the

area have suffered sizable withdrawals of funds since early July, and there

are indications that the outflows have continued thus far in August.

In the

past month, mortgage rates have increased 25 to 50 basis points at both savings

and loan associations and banks.

In addition, mortgage loan demand is being

discouraged by requiring larger downpayments and shorter maturities.

FIFTH DISTRICT—RICHMOND

Results of our most recent survey of businessmen and banks indicate

that economic activity in the District is still expanding.

Further increases

were reported in employment, and retail sales remain robust throughout the

District.

further.

Loan demand continues strong and mortgage markets have tightened

Activity in the manufacturing sector appears little changed from

last month, although the inflow of new orders may be weakening.

Most business-

men and bankers expect business activity to stabilize at present levels.

Activity in the manufacturing sector is reported to be continuing

at the recent high level, with little further change in shipments and backlogs.

But for the first time in more than a year the number of manufacturers reporting

a decline in new orders exceeded the number reporting an increase.

Manufacturing

inventories were reported unchanged from the previous month's survey, and

manufacturing respondents appear generally satisfied with current inventory

levels.

One large manufacturer of synthetic fibers, however, reported that

August-September production will be curtailed because of shortages of raw

materials.

District employment has apparently increased since the last survey.

Both manufacturing and trade and services respondents indicated net new

hirings during the past month, and nearly a third of the banking respondents

reported employment increases in their areas. Manufacturing respondents

reported further increases in wages paid with little change in prices received.

Trade and services respondents reported increases in both wages and prices

received.

Retail sales in the District have continued upward in recent weeks.

More than one third of the banking respondents reported that sales in their

areas had increased during the past month. Major retailers report continued

improvement in sales, although the rate of increase tapered off during the

month.

Retailers expressed some concern over the newly passed minimum wage

legislation.

Loan demand remains quite strong in the District.

More than

two thirds of the banking respondents reported increases in the demand for

consumer and business loans, while nearly 50 percent reported increases in

mortgage loans.

Bankers report further tightening in the mortgage markets.

One banker observed that increased rates have reduced loan requests from

small businessmen, while loan demand from larger businesses remains unabated.

Construction activity in the District may have moderated from the

recent fast pace.

On balance, banking respondents report no change in non-

residential construction and a decline in residential building in their

respective areas.

Generally larger crops than last year were indicated on August 1

for Fifth District crop prospects.

Biggest gains were anticipated for:

soybeans, up 25 percent; peaches, 18 percent; peanuts, 13 percent; tobacco,

11 percent; and feed grains, 7 percent.

Exceptions to these expected improve-

ments were lower forecasts for cotton, wheat, apples, Irish potatoes, and

hay.

In general, larger acreages and higher yields combined to produce the

improved prospects.

In general, businessmen and banks expect economic activity in the

District to stabilize at present levels.

More than 50 percent of the banking

respondents expect no change in business activity in their areas during the

next three months.

SIXTH DISTRICT —

ATLANTA

Economic activity continues brisk and no letup is anticipated.

Numerous new plant and plant expansion announcements have been noticed.

Several major and many minor residential and commercial construction projects

continue to be announced.

A steady flow of new plant announcements continues.

oil refinery is to be built near Mobile, Alabama.

A $400 million

A railroad has broken

ground on a $350 million expansion of its freight facilities in South Georgia.

The same company is undertaking a $3.5 million expansion at a Florida freight

yard.

Permits have been granted for a $66 million natural gas pipeline to be

constructed from the Louisiana coast to various locations in the Midwest

and Southeast.

Fiberglass insulation products will be produced at a $20 million

plant to be built in northeast Georgia.

will be built in south Alabama.

A $12 million wood products facility

A chemical company is spending $10 million to

expand a south Louisiana plant that manufactures chemicals used in water

treatment.

A $6 million addition will be made to a central Tennessee

plant manufacturing oil filters.

Other announcements include:

a $4.5 million

electronics plant in Mississippi, a $4 million wood products plant in central

Georgia, a $3.5 million lumber mill in southeast Alabama, a $2.5 million

expansion of a building materials plant in Jacksonville, a $1.5 million meatprocessing plant in Louisiana, a 150-man electronics plant northwest of Atlanta,

and a chemical plant employing 50 people in central Georgia.

There have been several announcements of large projects in the

residential and commercial construction sectors.

is planned northwest of Atlanta.

A $250 million "mini-city"

This project will contain seven major buildings,

including three high-rise condominiums, two office buildings, and two hotels.

Still another $200 million office and apartment project has been proposed for

an area near Atlanta.

Two condominium communities, one projected at $60 million

and the other at $40 million, have been announced for Florida's northwest

Gulf coast.

A $5 million hotel is to be built in Pensacola, Florida.

Condominium and single-family residential projects totaling $40 million are

planned for the Nashville area.

Plans have also been announced for a 440

residential home site development near Atlanta.

A high-volume, national home

builder is moving into the Atlanta market for the first time with a 48-home

development.

A $3 million office building and a $1.5 million merchandise mart

are also planned for the Atlanta area. Apartment building is reportedly growing

at a rapid clip in Nashville and parts of east Tennessee.

However, officials of

savings and loan trade associations representing southeastern states have

warned that the housing industry "is being brought to a schreeching halt"

by higher interest rates.

A meat-packing plant in Jacksonville reportedly has laid off 200

workers because of the meat shortage.

A shortage of propane gas used in heating

chicken houses could hinder poultry production later in the year.

The Florida

citrus crop is the largest ever, but a shortage of labor has hindered harvesting.

High school and college students from as far away as Texas have reportedly been

recruited to harvest citrus.

A textile firm in northwest Georgia has signed a union contract calling

for an immediate 9 percent increase in wages. Atlanta bus drivers have

ratified a contract calling for a 16 percent increase in wages over a two-year

period.

The price of milk has risen sharply in Miami, and a dairy farming

commission in Alabama has raised the wholesale price of milk.

SEVENTH DISTRICT ~

CHICAGO

As seen from the Seventh District, demands for, and output of,

virtually all consumer goods, building materials, and business equipment

continue to rise or remain at very high levels.

issued in major

The number of housing permits

Midwest centers declined sharply in June, and the downtrend

almost certainly continued in July and early August as new mortgage commitments

were curtailed.

reported.

Scattered signs of softness in sales of mobile homes are

Sales and output of motor homes and other recreational vehicles

have been well below expectations.

With these exceptions, the momentum of the

uptrend appears to continue unabated. Major new expansion plans have been

announced for a number of industries.

for skilled and experienced workers.

Labor markets are very tight, especially

There are widespread shortages, often

critical., of materials and components.

The frenzied activity and surging prices

in the agricultural commodity markets are without precedent and difficult to

analyze.

Phase IV price regulations are commonly regarded as difficult to

understand, as hard to administer, and in some cases as inequitable and

"counter-productive".

The recent sharp rise in short-term interest rates to record levels

was not foreseen in forecasts offered earlier in the year. Moreover, most experts

did not expect high-grade corporate bonds to break through the 8 percent level.

Very high rates have caused uneasiness and produced forecasts of recession by

some bankers.

(Those who emphasize changes in monetary aggregates are less

concerned.)

Large net outflows of savings from savings and loan associations

in July, compared with large gains last year, began after interest ceilings on

savings accounts were raised on July 5.

Ironically, some savings and loan

association executives regarded the higher ceilings as harmful rather than

helpful in preventing deposit drains.

Outstanding mortgage loan commitments

are very large and probably will support a continued high level of residential

construction through the summer.

In Illinois, under an 8 percent usury ceiling,

new commitments have almost "dried up".

Only scattered effects of high interest rates have been reported on

expanding plans for mortgage financing of commercial and industrial projects.

Similarly, business borrowers have shown little reluctance to borrow at the

higher prime rate, with an effective rate commonly about 10 percent.

Purchasing managers of manufacturers are "beating the bushes"

to locate greater quantities of a long list of materials and components in short

supply.

Steel, nonferrous metals, cement, petroleum products, textiles, and

paper, to mention only major areas, are all causing headaches.

have developed that recall "gray market" situations.

Various practices

Equipment output has been

held back by the availability of castings, forgings, bearings, motors, electrical

controls, and other necessary parts.

Some producers have gone to outside suppliers,

often at 30 to 40 percent higher cost. Backlogs continue to grow, and lead

times continue to

lengthen.

longer term contracts.

Escalator clauses of various types are written into

Many sellers refuse to enter into the long-term contracts

that had been customary.

A number of industries are moving vigorously to expand basic capacity.

Included are electric power, motor vehicles (assembly facilities and parts),

chemicals, petroleum, mining (coal and metallic ores), farm tractors, and paper.

Basic expansion plans in steel and cement, however, are not under way despite

apparent long-term needs.

(Incidentally, a new official measure of oil-refining

utilization places operations recently at 100 percent, rather than at 95 percent,

as indicated by the old series.)

Strength in orders continues for equipment used in agriculture,

construction, earth moving, mining, quarrying, railroads, trucking, food

processing, electrical generation, and materials handling.

types of machine tools continues very strong.

Demand for most

(Most major airlines, however,

have no plans to buy new aircraft.) Foreign demand is excellent, including

orders from Russia.

The high figures for retail trade in July did not surprise large

retailers headquartered in this region.

all year.

They have been pleased with results

The rise in instalment loan delinquencies shown by the ABA series

has not been evident in the experience of large chains.

Sales of major appliances

by distributors to dealers (equated with consumer demand) have surged since

mid-June.

Freezers and air conditioners have been in the lead, but all major

appliances have performed well.

Appliance inventories are significantly

lower relative to sales than a year ago. Among the worst shortage items in

retailing are wood furniture and wool clothing.

But relatively tight supply

conditions are reflected generally in the absence of heavy promotions and normal

price cutting for sale merchandise.

Many informed businessmen now believe that the dollar is undervalued

relative to other currencies.

Domestic prices of steel, nonferrous metals,

petroleum products, chemicals, and agricultural commodities average well below

world prices. Moreover, prices of finished goods appear to be rising more

rapidly abroad.

EIGHTH DISTRICT —

ST. LOUIS

Business activity in the Eighth District continued to expand in July

and early August.

However, there are indications of a slower rate of growth of

output, especially among suppliers to the construction industry.

at major District department stores continue upward.

Retail sales

Factories are generally

operating at full capacity, and backlogs of orders generally remain undiminished.

Unemployment is at a relatively low rate throughout most of the District, and

quality workers are reported to be scarce.

The level of construction has

apparently passed the peak and is declining moderately in some of the larger

District cities.

Loans and deposits of major District banks have declined in

recent weeks, but loan officers report very strong credit demand and upward

pressure on interest rates.

Crop conditions are generally good over most of the

District as a result of timely rainfall.

The uptrend in retail sales established about two years ago at major

District stores has continued in recent weeks.

Representatives of major depart-

ment stores report that, after adjusting for inflation, sales in July and early

August were well above year ago levels.

Backlogs of orders generally have not increased in recent weeks, but

large backlogs continue to exist at most District factories.

Machinery orders

continue to grow faster than shipments, but paper, paper board and similar

product backlogs have stabilized and backlogs of construction-related products

have generally declined.

A representative of the aircraft industry reported that

passenger miles flown during recent weeks were well below expectations and that

passenger plane orders were also less than anticipated.

On the other hand, a

representative of the shoe factory reported considerable improvement in domestic

production as a result of the realignment of exchange rates in the past two

years.

Imports of foreign shoes have declined sharply.

Payroll employment continues to increase throughout the District,

and the employment rate has remained stable for several months at a relatively

low rate.

A representative of a major manufacturing firm reported that its

major problem was the large number of nonproductive workers on its payroll.

Another firm reported problems in filling all the jobs with the type of people

desired.

Labor turnover has become a major complaint, with some firms reporting

turnover at approximately double the normal rate.

Activity in the construction industry has diminished in some of the

larger District cities in recent weeks, following a long period of relatively

stable and high level operations.

A representative of the paperboard industry

reported some slight cutting-back on orders of materials related to housing.

A number of St. Louis manufacturers of other construction supplies reported

similar moderate declines in orders. A major commercial construction contractor

in Louisville reported that he is now seeking construction projects.

As a result of the sharp increase in interest rates in recent

weeks, loan rates are approaching the maximum permissible levels under the

usury laws in many states, and such laws are becoming a major factor in credit

allocation.

An Arkansas spokesman reported that lenders in the state are

finding that their funds can be used more effectively elsewhere than in

Arkansas.

A St. Louis savings and loan company reported that savings had

picked up with the higher permissible rates in August but that rates on mortgages

had also risen.

Its rates charged on conventional loans are now 8 percent plus

3 points, up from 7 1/4 percent plus 2 points in May.

A representative of a

larger St. Louis commercial bank reported that it was turning down all loan

requests except the older lines of credit.

He noted that problems of arbitrage

are making banking more difficult and expressed a desire for the elimination

of all interest rate restrictions.

Furthermore, most of the businessmen

interviewed expressed hostility toward the wage, price,interest rate, and

dividend restrictions in effect since mid-1971.

Crop production conditions are generally good to excellent throughout

the District.

Large crops of corn and soybeans were planted; the planting

was somewhat later than average, but weather conditions have been favorable

and yields are expected to average about normal for recent years.

Prices of livestock are probably sufficient to provide incentive

for enlarging herds and flocks, and if feed supplies are forthcoming this

fall, as anticipated, output of livestock products may begin to rise by

mid-1974.

There are some beef shortages in stores, but increasing concern

is reported among cattle feeders that a holdback in marketings of

fat cattle

until September 12 will result in a sufficient number marketed at that time to

drive prices down even below current levels.

NINTH DISTRICT—MINNEAPOLIS

Many District businessmen disapprove of Phase IV and the continued

price freeze on beef which has resulted in shortages.

District economic

activity continues to expand at a vigorous pace and, according to director

responses, District businessmen generally look for business to remain good.

Minnesota retail sales in July expanded at a vigorous pace, and no letup

in sales growth is anticipated.

Loan demand at District commercial banks

is strong, and banks are being very selective in making loans.

Bank directors indicated that most District businessmen dislike

Phase IV and that the continued price freeze on beef is producing shortages.

A South Dakota director associated with the beef industry, however, revealed

that the price ceiling on beef is being violated nationwide.

In some areas

beef producers are ignoring the price freeze, while in others they are placing

"wind in the invoice", i.e., billing the customer for more beef than is

actually shipped. Another alternative for avoiding the price ceiling on

beef is "custom killing", where the meat-packing company's customers purchase

the cattle and pay the meat-packing company to process it. A MinneapolisSt. Paul director indicated that businessmen disapprove of Phase IV and don't

expect the new controls program to ease shortage problems.

Petrochemicals,

steel, and beef, he reported, are in short supply in the Twin Cities.

Despite emerging shortages, a director disclosed that his area's grocers

felt the Government had to do something to curb price increases.

Another

director expressed the view that Phase IV will hurt businessmen more than

they realize if the regulations are enforced.

Taking a different position,

however, one director said that businessmen are shortsighted and evaluate

Phase IV only with regard to their own affairs and without considering how

the new controls program can help achieve long-run price stability.

Economic activity was characterized as strong throughout the District

and, although some exceptions were cited, District businessmen generally

expect; business to remain good.

In South Dakota, gains in agricultural

income are spurring that state's economy, and bumper crops are anticipated

this fall.

as good.

The tourist business in northeastern Minnesota was also described

One director reported favorable business conditions in his area

but indicated that residential construction will probably taper off as

mortgage funds become unavailable.

A director from western Montana reported

that lumber producers fear a lack of mortgage funds may dampen their business.

In addition, because of uncertainty about forest service regulations, lumber

producers are hesitant to make capital expenditures.

A Twin Cities-area

director indicated that economic activity continues strong but that the

recent decline in housing starts, combined with a slowdown in automobile

sales and an increase in consumer savings, hint at the possibility of a

business slowdown.

Although no slowdown has occurred in another director's

area, local businessmen have expressed some pessimism about the future.

Most Minnesota retailers surveyed in a recent newspaper article

disclosed that their July sales gains slightly surpassed the 12 to 15 percent

year-to-year increases achieved during the first half of 1973.

Part of the

recent strength in retail spending, some merchants felt, stemmed from

consumers' desire to avoid price increases permitted by Phase IV.

Nevertheless, Minnesota retailers do not look for a slowdown in their sales

growth during the remainder of 1973. Although prices are expected to

continue to rise, survey respondents indicated that Phase IV may help curb price

advances.

Bank directors described current loan demand at District commercial

banks as strong.

Many District banks are being selective in making loans

and are not soliciting new business.

Two directors indicated, for example,

that their areas' banks were refusing applications from marginal customers

for real estate loans.

TENTH DISTRICT—KANSAS CITY

Tenth Federal Reserve District home builders report a noticeable

decline in activity relative to last year and earlier this year.

Although

some exceptions were noted, most respondents indicated difficulty in securing

mortgage funding as a key reason in dampened building activity.

District

savings and loan associations report that new and higher costs for mortgages

have discouraged demand and that the new rate ceilings, while serving to reduce

the rate of outflow, have substantially added to their cost of doing business

without significantly affecting their ability to attract funds.

The agricultural

situation in the Tenth District is marked by record or near-record crops, with

prices up substantially over past years as a result of strong domestic and

foreign demands.

A number of commercial banks throughout the District report

continued tight credit conditions.

These banks have been net buyers of

Federal funds, had raised their prime lending rate to 9 percent as of last

week, and have increased their time and savings rates to the new ceiling

levels.

In a telephone survey of a number of Tenth District home builders

and home builders' associations, a pronounced softening in activity relative

to last year or early this year was noted by nearly all respondents.

Looking

ahead to the remainder of this year, the outlook for building activity was

pessimistic, with one respondent observing that "builders are spooked by the

money situation".

In fact, the "money situation" relating to the high cost

and difficulty in securing mortgages was cited as the major reason for the

weakness in residential construction in the Tenth District.

Where state

usury limits preclude mortgage above an 8 percent level, anywhere from 2 to

A points are being assessed on mortgage loans of 80 percent or over.

The

95 percent loan has been largely discontinued, as have been FHA and VA loans.

The savings and loan associations contacted were nearly unanimous in indicating

that the new rates for savings had not added to their ability to attract

funds, but rather had aided in reducing their rate of savings outflow, albeit

at a significant cost to them.

A particularly bright spot within the Tenth District economy is

the agricultural sector.

Wheat production is forecast at record levels, and

as of August 1, corn and soybean production was headed for record harvest,

with the expectation that grain sorghum production would be only 1 percent

below the 1971 record.

Despite the huge grain harvests anticipated, prices

have continued to push on to new highs.

the $4 to $5 range, a historic high.

Wheat prices recently moved into

This price strength for wheat and for

grains generally is the result of unusually strong domestic and foreign demand,

combined with very tight carry over conditions for food and feed grains.

Tenth District banks contacted report tight credit conditions continue

to prevail.

Faced with heavy business loan demand, major banks raised their

prime lending rate to 9 percent in the past week.

Related to the strong

agricultural situation noted earlier, banks in Kansas City, Omaha, and Tulsa

reported large increases in agricultural loans resulting from box car shortages

and increased grain and storage costs.

Nearly all survey banks have been net

buyers of Federal funds, have raised rates payable on savings and consumer time

deposits to new ceiling levels, have offered a four-year certificate paying

either 7 percent or 7 1/2 percent, and have maintained CD rates at levels

quoted by New York City banks.

As a consequence, several bankers reported that

the increased cost of funds has significantly reduced their profit margins

in the past month.

Rather than curtail their lending activity, these banks

have felt obligated to accommodate the heavy demands of regular customers, even

though it has become increasingly less profitable to do so.

ELEVENTH DISTRICT —

DALLAS

The economy of the Eleventh District continues to expand, but some

major economic indicators are beginning to show signs of weakness.

Industrial

production in Texas grew substantially in June, and weekly department store

sales in the District advanced during July.

However, total employment and

new automobile registrations for the District declined during June, and

the value of construction contracts fell. Moreover, the unemployment rate

increased for the fourth consecutive month.

A survey of our directors who

are bankers revealed that they expect business conditions to be unchanged

or slightly weaker by the end of the year.

Most of the responding directors indicated that business conditions

in their communities are about the same or slightly stronger than three

months ago, but a majority feel that conditions will be moderately weaker

by the end of the year.

Almost all of the respondents revised upward their

expectations of price increases as a result of the introduction of Phase IV.

They now feel that the growth rate in consumer prices will accelerate in the

three months ending in September but will slow down later in the year.

A majority of the directors felt that both long- and short-term

market rates of interest will continue to move upward over the next four to

five months.

Most did not expect that by the year-end the prime rate charged

to large business firms would rise much higher than the early August level.

Furthermore, they anticipated this rate would be below its present level by

the end of March next year.

Very little change is anticipated in the prime

rate charged on small business loans between now and the year-end.

Most of the respondents have not altered their willingness to make

consumer and agricultural loans in comparison to the preceding three months.

However, a majority expressed less willingness to make large business and

mortgage loans, indicating a concern over the availability of funds at their

bank.

Over the next six months, almost all of our bank directors expect

disintermediationin savings and time deposits.

At the same time, a majority

thoug;ht that the July increase in Regulation Q interest rate ceilings would

help prevent a substantial loss of funds.

The seasonally adjusted Texas industrial production index advanced

sharply in June, the third consecutive monthly gain.

Manufacturing and

mining were responsible for the entire increase, while utility activity

remained unchanged.

The continuing high level of Texas oil and gas production

is drawing down reserves.

At this time, new discoveries are replacing

only about 10 percent of production, but some production may be curtailed

by the proposed Phase IV rollback in crude prices.

The value of construction contracts in the District states

decreased in June.

Residential building contracts were at their lowest

level since December 1972, and residential building awards fell slightly.

But nonbuilding awards reached the highest level in a year.

Seasonally

adjusted total employment slipped slightly in the district states during

June.

At the same time, the unemployment rate rose to 4 percent.

July department store sales in the District continued to be above

the year ago figures.

For the first half of this year,

new-car registrations

in the four largest Texas cities exceeded those for the corresponding period

last year by almost 20 percent.

However, in June, the number of new

registrations dropped below that for the preceding month.

Prospective crop yields in the Southwest appear to be above average,

as weather conditions have been favorable in the growing season.

The harvest

of grain sorghum in south Texas is making excellent progress, and farmers

are receiving prices as much as double those obtained last year.

The livestock industry reflects the uncertainty that has resulted

from economic controls and the cost price freeze.

Ranchers are keeping

cattle on pasture rather than placing them on feed, and feed-lot operators

are holding cattle to heavier weights.

reaching market.

As a result, fewer animals are

Broiler chicken placements in July were nearly 15 percent

less than in the same period last year, and the number of hogs and pigs

in Texas have dropped sharply from a year ago.

TWELFTH DISTRICT—SAN FRANCISCO

Economic activity in the Twelfth District continues to be led by

heavy consumer spending on durables and automobiles.

Strong demand is

keeping most industries operating at full capacity, and agricultural prospects

are excellent except in areas affected by drought.

The only sign of weakness

is in residential construction, and this weakness is beginning to affect

timber production.

Banks report strong loan demand, but no major liquidity

problems at the moment.

Consumer spending is clearly the leading sector in all parts of

the District, and to some degree this spending is thought to be in anticipation

of more inflation.

Accompanying this spending is a heavy demand for consumer

credit at District banks.

Declines in consumer durables purchases are expected

by some directors later this year, and the heavy automobile sales of this

year might cut into demand for the 1974 models.

Fears of gasoline rationing

may also hurt new car sales,according to one director.

Our directors in

agricultural areas report that farmers expect high prices and good crops this

year, except in those areas of eastern Washington and Oregon affected by

drought.

High farm income is stimulating heavy purchases of new farm equipment,

and deliveries from manufacturers are not keeping up with this demand.

Crop

prospects in California and fruit crops in western Oregon are excellent.

The major problem for agriculture is the continuation of the price

freeze for beef.

Beef producers are apparently reacting by withholding deliveries

until the freeze ends.

the retail level.

The result is a growing shortage of beef supplies on

Business investment expenditures are increasing both to

purchase plant and equipment and to build up inventories.

Environmental controls

are cited as one factor in stimulating new equipment orders.

High interest

rates are not having a significant impact on this demand, and several banks

reported that they are revising their lending guidelines in an effort to cut

back.

On the other hand, some directors report that business investment

plans are being hampered by slow deliveries and capacity limitations.

Residential housing starts are reported to be lower in several

areas—Oregon, Washington, and California—but apparently other kinds of

construction are maintaining a good level of activity.

A major manufacturer

of builders' hardware reports order backlogs sufficient to keep at full

capacity throughout the rest of 1973.

The weakness in housing starts, combined with reduced exports to

Japan, has caused lower prices and reduced activity at Oregon and Washington

timber mills. Pulp production remains high, but producers are described as

reluctant to expand capacity because of uncertainty over profit-margin

controls and the strength of demand over the next two or three years.

Increased supplies have apparently ended the gasoline shortages

that had developed in some localities.

dealers are able to operate normally.

having been "over-advertised".

Apart from some reduction in hours,

One director views the situation as

Nonetheless, the temporary shortages have

been a factor in cutting tourism in the Pacific Northwest, but there has been

no similar impact on tourism in California.

Drought in the Pacific Northwest is causing an energy problem in

that region.

Metallurgical industries, such as aluminum refineries, which are

heavy users of electricity, are being forced to curtail production.

Hydro-

electric shortages may prevail in this region into the coming winter.

District bankers feel that the recent increases in interest rate

ceilings for time accounts are of mixed value.

Some think that the regulation

changes have merely increased customers' confusion and perhaps have made them

more aware of nonbank market instruments.

Although problems may develop, none

of the banking directors have reported major difficulties for their own

institutions in holding time accounts, but several remained concerned about

the longer term liquidity situation of banks.

Savings and loan associations,

in contrast to banks, are experiencing deposit losses despite the higher

rates.