Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

January 16, 1974

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 14

Seventh District - Chicago page 17

Eighth District - St. Louis page 21

Ninth District - Minneapolis page 23

Tenth District - Kansas City page 26

Eleventh District - Dallas page 29

Twelfth District - San Francisco page 31

SUMMARY*

Notwithstanding the pervasive concern over the energy situation,

District reports on balance point to a sustained high level of industrial

activity as strong demand—with the exception of some consumer goods—

generally continues in evidence.

Weak spots so far by and large have been

concentrated in regular or large-sized auto sales, airlines and aircraft

manufacturers, residential construction, and, to some extent, recreational

business.

Largely reflecting developments in these sectors, some softening

in the employment picture appears in the offing, though current industrial

production and manufacturers' orders and backlogs remain at high levels.

However, much concern was expressed over the obstacles to further growth

presented by the wide variety of growing shortages of materials in addition

to petroleum products.

Moreover, many respondents felt that the abatement

of inflationary pressures was not in the cards for the immediate future.

Increasing doldrums in the residential construction industry were also noted

in some Districts, primarily as a result of high mortgage rates and the high

cost of new housing.

Strong demand and high prices were expected to

stimulate increased agricultural production in 1974, though such an increase

might be inhibited by fuel and fertilizer shortages.

District respondents generally continued to express serious concern

over the potentially adverse effects of the anticipated energy shortage

and the rise in oil prices.

However, the main thrust of the "energy

crisis" in terms of output and employment so far appears to have been

concentrated on a relatively few, albeit significant, economic sectors,

in particular, according to the District reports, the automobile and

[Asterisk: Prepared by the Federal Reserve Bank of New York.]

related industries, airlines and the aircraft industry, and in some areas

tourism.

The plastics and petrochemical industries have also suffered

from shortages of raw materials.

However, as noted by Boston, growing

shortages of supplies other than petroleum products appear more critical

at this time to current production, leading to accumulation at manufacturers

of virtually completed products, ranging from aircraft to ovens, for want

of a few parts.

Indeed, concern over such shortages is mentioned in

virtually all District reports.

Thus, Chicago succinctly sums up the

situation as one where so many different materials and components are in

short supply that a list could be constructed almost at random, with shortages of castings, forgings, bearings, steel, nonferrous metals, plastics,

all fuels, and paper probably being the most prominent.

Cleveland also

reports that purchasing agents in the Cleveland area find virtually

everything they buy in short supply, with increasingly long delivery time,

and that the steel industry continues to operate at full capacity despite

some cutback in orders from the auto industry.

Dallas reports a dearth

of drilling rigs, pipes and other products involved in petroleum output,

with little or no relief in sight over the next few years.

Against this

background, there were frequent reports of business efforts to stockpile,

of "double ordering", and in some instances of budding black markets and

of sharp price increases.

Despite the uncertainties surrounding fuel and material supplies

and the price situation generally, most District reports pointed to a

continued strong business plant and equipment picture.

Among others,

business respondents in the Dallas, St. Louis, and New York Districts

indicated they had no intention at this time of changing their current

plans for increased capital outlays.

Philadelphia reports that many

manufacturers in that District expect to increase their capital expenditures

in the coming months, and San Francisco notes that capital expenditures

remain at a high level, as business continues to modernize or expand

capacity to meet expanding demand.

Cleveland points to strong new orders

for machine tools, and to a high level of backlogs in that industry, while

Chicago reports that producers of a wide variety of capital equipment

indicate that the very strong demand for such equipment that had prevailed

since early 1973 or late 1972 continues unabated.

The consumer spending picture is somewhat more mixed, although

with the exception of sales of autos—and, in some instances, of other

durables—on balance still appears strong.

In part, this strength may

reflect anticipatory buying, which was mentioned by Cleveland and New York.

A number of Districts, including Minneapolis, Chicago, San Francisco, and

Richmond, report that retailers have generally enjoyed a high level of

sales over the holiday season, in some cases exceeding expectations.

Atlanta, however, notes that increased consumer cautiousness may have

kept a "good" Christmas season from being a "great" one, while a mixed

consumer spending picture emerges from Cleveland.

A slowing down in

department store sales of postponable items is mentioned by Philadelphia,

while St. Louis also reports a slowdown in consumer purchases, reflecting

in part a sharp drop in auto sales, and perhaps the unusually bad weather

conditions in that area.

Regarding the employment situation, a number of Districts,

including San Francisco, Minneapolis, St. Louis, Chicago, Atlanta, and

Richmond report some laying off in industries directly affected by the energy

crisis—notably in the auto, airline, and aircraft industry—but otherwise

in general see little evidence that this trend is becoming more widespread

at this time.

Manufacturers in the Kansas City District expect employment

to hold up well in 1974, but some manufacturers in the Philadelphia District

expect laying off workers by next summer.

FIRST DISTRICT—BOSTON

In general, our directors report that firms at the moment are being

only moderately adversely affected by higher petroleum prices.

They are more

concerned about a recession in 1974 reducing business activity than they are

about shortages of oil.

Shortages of supplies other than oil appear more

critical to current production and are causing rising inventories of almost

completed products.

The New England states appear to have enough heating oil to meet

the needs of residences and industry.

At the moment, residual oil require-

ments of utilities are being met by the allocation programs.

Petrochemicals

for the plastics industry and resins are still very short, and shortages

here appear to have been created or exacerbated by price controls.

The

newly announced allocation program on petrochemical feedstocks has made

plastics manufacturers more hopeful, although temporary layoffs are continuing.

Our directors did note some adverse impact on their businesses

arising from the energy situation.

A director of a large conglomerate re-

ports that his firm has closed down its recreational vehicle and large motor

boat facilities.

Sales of single-engine planes are also down.

On the other

hand, sailboat sales are up strongly, and twin-engine plane sales are good.

An industrial supplier to the auto industry also reported lower sales and

orders.

Again, however, orders for industrial supplies for utilities, for

chain saws, and for helicopters (used for offshore oil exploration) have

skyrocketed as a result of the energy situation.

Capital goods orders are

reported, for the first time, to be tapering off, but order backlogs are

so high that shipments in 1974 will continue at high levels.

Supply problems continue to hamper production.

A director of a

large manufacturing conglomerate reports that inventories of almost completed products, like airplanes and ovens, are piling up and cannot be

shipped for lack of some small parts.

This has already led to a 10 per-

cent cut in employment because the conglomerate cannot keep people just

standing around waiting for one part.

On balance, our directors see profits in 1974, varying from

level with 1973 to down 15 percent.

Our Bank directors report that loan demand is firm.

firm loan demand does not indicate good business conditions.

Interestingly,

A director

from a large Boston bank reports that his bank's loan demand is being bolstered by firms building inventories of raw materials, like metals, whose

supply they fear could be shut off in a manner similar to oil.

form of hoarding is occurring.

Thus a mild

A New Hampshire bank director states that

loan demand is strong because the recreational business is so weak that

firms need operating capital.

A Boston bank director also reported that other bankers with whom

he has spoken share his surprise that short-term rates have not yet come

down.

The financial community is beginning to question the Federal Reserve's

commitment to an easier policy.

Our Bank directors report that demand for mortgages is very weak

and home sales are down sharply.

Consumer apprehensiveness is blamed for

the rising stock of unsold homes.

Mortgage rates have not yet come down

but are expected imminently to begin slowly declining.

Although Professors Eckstein, Tobin, and Wallich were contacted

this month, Wallich preferred not to give his policy views.

Eckstein and

Tobin agreed that the economic slowdown has been at least partly and perhaps

primarily demand, rather than supply, determined.

Tobin believes the supply

situation is not so tight that substitution possibilities cannot be found.

He was still distressed by the weak performance of the stock market.

Both

pointed out that weakness in the demand for housing and automobiles had been

expected before the energy scare.

Eckstein argued the economy's behavior

will generate the feeling of a recession, whether or not a recession is officially declared.

rising rapidly.

The unemployment rate, for example, is certain to be

The role of the monetary authorities, he stated, is to

avoid compounding the recession.

Eckstein's policy prescription is a 7 per-

cent to 8 percent rate of monetary growth over the next six to nine months.

He felt this target would be accompanied by a Federal funds rate in the 8 to

9 percent range in the first quarter and in the 7 to 8 percent range in the

second quarter.

This policy, according to Eckstein, would not be a very

easy one in the current context.

Specifically, with the amount of uncon-

trollable energy-related inflation the economy will experience and with the

legacy of a year of modest money growth in a highly inflationary setting,

the quantity of money available for output expansion would be quite modest.

Tobin's policy prescription is a gradual reduction in the Federal funds

rate to 8 percent.

He believes the recent uncertainties have produced a

shift into more liquid assets and that no harm would be done by creation of

additional liquid assets.

SECOND DISTRICT—NEW YORK

Second District directors and other business leaders who were

contacted recently in general were somewhat less pessimistic than last

month regarding the overall economic impact of the energy crisis.

The

respondents did not expect a cutback in business plans for plant and

equipment outlays, and in their view consumer spending remains strong, at

least at this juncture.

However, the respondents did see an actual or

prospective increase in unemployment in a number of industries resulting

from the petroleum shortage.

The current weakness in residential construction

was attributed primarily to high interest rates and high housing costs

rather than to a shortage of mortgage funds.

Regarding the overall impact of the energy crisis, the president

of a large petroleum products firm stated his belief that essential

industries would get all the oil products required, and that any potential

gap in supplies would be met by cutbacks in pleasure driving and in other

nonessential oil uses.

In his view, the impact on the economy of the oil

shortage would turn out to be less severe than had seemed likely initially.

He felt that current crude oil prices should provide sufficient returns to

oil companies to permit them to launch large-scale research programs to

develop alternative sources of energy.

He foresaw a sharp increase in

gasoline prices, however, and felt that the allocation of gasoline should

not be left"in the hands of the man at the gas pump", but that mandatory

rationing would probably be necessary.

The respondents generally felt that the energy situation would

not lead to substantial cutbacks in business plans for plant and equipment

outlays.

The Buffalo branch directors thus reported that while investment

plans were being restudied in light of the energy situation, they believed

that such plans would not be significantly changed given the current high

rate of plant capacity utilization, the prospect for continued inflation,

and the shortages of a growing number of items.

Indeed, the directors

felt that while the energy situation would affect certain industries more

adversely than others, they expected that the overall effect of recent

economic developments would be to stimulate business plant and equipment

spending.

As examples, they cited specific plans of a number of firms for

large-scale capital outlays and reported that agricultural equipment

manufacturers were sold out far in advance and required additional manufacturing facilities.

Several other respondents also indicated that their

firms were "sticking" to their long-term capital investment plans, although

some saw the possibility that part of some investment programs might have

to be deferred because of shortages of materials.

A senior official of a

large chemical corporation reported that owing to the uncertainties associated with the energy crisis, capital spending plans were being trimmed

in some industrial sectors but that such reductions will have little or no

effect on capital outlays over the near term because of the long lead time

involved in most capital investment projects.

In the view of a number of respondents, the current consumer

spending picture continues strong.

The president of a large New York City

department store with branches in the suburbs thus reported that his firm

had enjoyed a high level of business over the holiday season, both in volume

and dollar terms, and that sales had remained strong after Christmas.

He

noted the possibility of "scare buying", against prospects of rising prices

and shortages, but stated that he could not determine if this were the case.

The Buffalo branch directors characterized retail sales in Western New York

during the Christmas season as good to excellent.

Strong post-Christmas

sales were also reported in that area, a development which in the view of

these directors suggested that there was no "hold back" in consumer spending

at this time.

The president of a nationwide department store chain, however,

felt that the sale of durable goods had become somewhat softer, while an

upstate banker reported some reduction in the demand for consumer credit at

his bank.

The retailers in general did not think the gasoline shortage

would have much of an adverse effect on their suburban stores; most of their

customers reside nearby, and some expected that women shoppers driving to

shopping centers would spend more time at these centers, concentrating their

purchases at one time.

The employment picture was more somber.

A number of respondents

cited actual or prospective lay-offs, not only in the airline and automobile

industries, but also in the tourist and related industries, as well as in

several other key industries, particularly those using petrochemicals.

None of the respondents expressing an opinion on the residential

construction situation believed the decline in activity in that industry to

be traceable to a lack of available mortgage funds at this time.

Rather,

major deterrents to homebuilding were seen as high interest rates, the

high and rising cost of land and of new housing, shortages of building

materials, overbuilding in some regions, and the termination of certain

Government-sponsored housing programs.

The Buffalo branch directors also

felt that energy uncertainties—both as to heating fuels and as to possible

gasoline rationing—could have a potentially serious impact on building in

the suburbs.

THIRD DISTRICT —

PHILADELPHIA

General business conditions in the Third District have begun to

soften and are expected to deteriorate in the months ahead.

Production

activity continues to move ahead slowly, but respondents to this month's

business outlook survey foresee reduced activity in the months ahead.

Employment opportunities still exist, and layoffs are not a significant

problem at the present.

Inventory spending is about level, but plant and

equipment spending plans are still strong.

Retail sales have slowed a bit

more than usual at Philadelphia department stores.

Bankers are experiencing

continued deposit inflows, but certain categories of loan demand show signs

of weakening.

However, prices are still climbing and are expected to continue

to do so in the next six months.

There is a divergence between current business activity and what

the respondents expect six months in the future.

At the present time, the

majority of area manufacturers are experiencing no change in their new orders,

shipments, and unfilled orders.

Of those experiencing changes, a few more

are reporting increases than decreases.

In contrast, the six-month outlook

reported by the same respondents is less optimistic.

Only a minority expect

increases in their new orders, shipments, and unfilled orders.

The employment market in the Third District is stable with over

85 percent of the respondents reporting no change this month in their number

of employees and the length of their average workweek.

one in five expects to be laying off workers.

By summertime, however,

Most of the remaining firms

expect to hold their labor forces constant through the first half of the year.

Inventory investment is increasing at a few more plants than it is

decreasing, and the six-month outlook is for no change in overall inventories.

But capital equipment spending should be a source of strength in the coming

months, as 45 percent of the firms report plans to increase their capital

expenditures.

Philadelphia department store executives report that energyconserving goods, such as fireplace equipment and blankets, are selling very

well, but sales on postponable items, such as appliances, and credit sales

are off a bit more than usual for this season.

Prices continue upward on a broad front, as nearly 80 percent of

the area respondents report paying higher prices for the goods they buy and

half report charging higher prices.

The inflation is expected to accelerate,

as over 75 percent anticipate paying and receiving higher prices as summer

nears.

Area bankers report that total deposit inflows are outplacing loan

extensions.

Changes in time deposits are insignificant at the banks contacted,

but demand deposits are rising.

At the same time, consumer loans are off a

bit and business loan demand shows signs of slackening.

demand is maintaining strong growth.

Only mortgage loan

FOURTH DISTRICT —

CLEVELAND

There are some signs of weakening in retail sales and a softening

in the manufacturing sector.

Capital goods industries are still doing well,

but automotive-related business has been hit hard.

Large firms appear to

be weathering the effects of the energy situation better than smaller firms.

Prospects for the steel industry remain good, despite the downturn in autos

and housing.

Department store sales in the District seem to have been a mixed

situation during the holiday season.

One of our directors, with a national

retailing firm, reported that sales were poor in the District relative to

the nation.

There was strong demand for luxury items, which was attributed

largely to anticipatory buying, as a hedge against inflation or, possibly, as

an investment.

The same director also indicated that he expects additional

upward pressures on retail prices in the months ahead as a result of higher

priced goods in the early stages of the retail pipeline.

Finally, the senior

management of the firm is less optimistic about the economic outlook than

they were last fall, and they are reexamining their capital expenditure plans

for 1974.

In contrast, the president of a large department store in Cleveland

reported that holiday sales were good, although he noted some decline in

luxury goods.

Credit sales were stronger than expected because of a highly

publicized deferred billing plan promoted by the firm.

The post-Christmas

season, however, has been marked by a larger volume of merchandise returns

than last year.

A vigorous promotion to interest customers will be necessary

in the coming months, according to the executive, because of the rising

number of layoffs taking place in firms caused by the energy situation.

Our monthly (December) survey of District manufacturers indicates

further slowing in the pace of manufacturing activity and continued upward

pressures on prices.

There was a significant reduction in the proportion

of firms reporting gains in new orders, and a continued slowdown in the

rate of inventory accumulation, employment, and hours.

In addition,

business expectations for January are not particularly encouraging.

The

diffusion index for prices paid reached a record high for the third

consecutive month.

Automotive-related business has dropped sharply in many firms, and

in recent weeks there have been widespread reports of layoffs among auto

producers and suppliers in the District.

According to an economist with a

firm heavily dependent on the motor vehicle industry, cyclical forces are

expected to account for the bulk of the decline in new car sales this year.

As early as last August, this economist had forecast an 8 percent decline in

new car sales for 1974.

He expects that the petroleum situation will reduce

sales by another 3 percent.

Purchasing agents in the Cleveland area report that virtually

everything they buy is in short supply and that delivery time continues to

grow longer.

and 1975.

The lead times on orders now being placed go well into 1974

More than half of the buyers say that three to six months are

needed for delivery of production materials and a year or more for capital

equipment.

Machine tool builders in the area report that incoming new orders

are still strong and that a heavy volume of inquiries indicated strength

in future orders.

Although a few firms report some cancellations as a

result of the energy situation, the cancellation rate is viewed as normal

with the current length of lead times.

The high level of backlogs assures

capacity operations in the industry well into 1974, even if new orders should

decline in the months ahead.

One of our directors in the machine tool

business corroborates the strength in the industry and, he adds, the coal

companies are buying everything they can get their hands on.

A leading producer of casting equipment in Cleveland says the

foundry business is so strong these days that the firm has a year's backlog

on the books—three times the normal level.

Economists from three major steel firms in the District all report

some order cancellations from the automotive industry.

Two companies,

however, say the decline in steel orders is less than the cutback in auto

production.

According to the steel industry economists, the auto firms

usually draw down their steel inventories when output is reduced, which

reinforces the decline in steel orders.

The auto companies do not appear

to be following their normal steel-inventory policy, thus far, however.

The slack created by the auto firms is being absorbed by other

steel-using industries.

Demand for steel products other than sheets remains

greater than the steel firms' ability to produce.

The steel companies are

continuing to operate at peak capacity with full order books.

Some of

their concern over possible fuel shortages has been alleviated since last

month.

It now appears that the steel companies will receive enough fuel in

1974 to enable them to produce as much steel as last year.

The 5.5 million

to 6 million tons of steel shipped from mill inventories last year, but not

available this year, will just about be offset by reduced steel demand for

autos, furniture, and appliances.

Moreover, imports are expected to be hit

before domestic steel by any decline in demand, because the price differential

is so large.

FIFTH DISTRICT —

RICHMOND

Results of our most recent survey of businessmen suggest that

business activity in the District has experienced some moderation in recent

weeks, although it remains at a high level.

In the manufacturing sector

both employment and hours worked per week have declined, and recent increases

in retail sales have not been up to those registered earlier in the year.

Survey respondents, in general, remain pessimistic about the outlook for

business activity during the next six months.

Manufacturing activity in the District continues at a high level,

although a number of survey respondents report some slowing in recent weeks.

Our latest survey shows little or no change in shipments and new orders and

a decline in backlogs.

Raw material shortages and uncertainty over the

energy situation continue as major problems facing manufacturers.

The

diffusion of manufacturers' responses indicate that materials inventories

increased slightly in recent weeks, while finished goods inventories declined

slightly.

More than one third of the respondents reported that inventories

were below desired levels.

Judging from the results of our survey, employment in the District

apparently declined slightly during the past month.

Manufacturing respondents

indicated a small decline, while retailers reported employment unchanged.

Hours

worked per week were down appreciably in manufacturing, however, with nearly

one third of the respondents reporting a decline.

Scattered layoffs related

to the energy crisis continue to be reported.

Further increases in prices were reported by the majority of both

manufacturing and retail respondents.

More than 80 percent of the manufacturers

reported higher prices paid, and one third reported higher prices received.

Increases in prices paid were reported by 100 percent of the retailers, and

60 percent indicated increases in prices received.

Reports from major District retailers suggest that retail sales

remain strong.

Most retailers report increases in sales during the past

month, although the increases were generally less than those registered

earlier in the year.

Reports from directors and other sources indicate that

motel occupancy along Interstate 95, running through Virginia and the Carolinas,

is down substantially.

Motels and other tourist-related businesses are

expected to be hurt by the gasoline situation.

The experience of large commercial banks in the District suggest

that the demand for all types of loans has increased in recent weeks.

The 1973 farm income situation continued to show improvement as

the marketing season progressed, with January-October cash receipts registering

gains over a year ago of 27 percent in the District and 37 percent nationally.

Most survey respondents continue to express pessimism about the

economic outlook.

More than three fourths believe that the level of

business activity nationally will worsen during the next six months, and

more than 40 percent believe that local business activity will decline.

SIXTH DISTRICT —

ATLANTA

The District's economy continues to hold up well, but distortions

related to energy and materials shortages in some industries have been

reported.

areas.

Christmas holiday sales were good, if not outstanding, in most

New car sales especially in the larger models are sluggish, and the

used car market has fallen completely apart.

Announcements of new and

expanded plants as well as new commercial projects were strong, but energy

problems are causing some curtailment in previous plans.

For the most part,

workers laid off in some industries are finding jobs in other areas; however,

some rise in unemployment insurance claims has occurred.

Consumer cautiousness and apprehension over merchandise shortages

may have kept a "good" Christmas buying season from being a "great" one.

The

largest department store in the Southeast has only a modest gain in Christmas

sales over 1972.

Tennessee retailers report that many people shopped earlier

than usual because of expected merchandise shortages that never materialized.

Many retailers were pessimistic about the outlook for 1974 sales.

Auto sales continue to be blah but small car sales remain strong.

A Nashville-area car dealer reports that pickup truck sales have been excellent.

Small foreign cars even with price increases are in great demand.

In the

Montgomery, Alabama area, sales of larger cars are down by 20 percent or more.

The area most adversely affected is the used car market as reports from around

the District indicate very sluggish sales.

One dealer indicated that a 1971

Cadillac, with a wholesale book value of $3,500 a month ago, now wholesales

at about $1,500.

Dealers are very reluctant to take cars in on trade.

Energy-related shortages are continuing to plague District manufacturers

causing only inconvenience to some in actual production and employment declines

to others, and some smaller plant shutdowns.

The plastics industry is

experiencing severe problems in obtaining raw materials.

One Tennessee

manufacturer is cutting back on his labor force by 55 percent because of these

shortages.

He cited suppliers exporting plastic materials overseas in order

to make better profits as the reason.

These materials,which previously

sold for 30 cents per pound,were finally purchased in the foreign market for

90 cents per pound.

Plastic pipe manufacturers report they cannot find enough

resin, and an Atlanta-area wire manufacturer indicates no shutdowns or layoffs

as yet but difficulty in finding plastic for plastic-covered wiring.

A Mobile, Alabama area manufacturer of engines for small private

aircraft has recently laid off 300 workers, with the energy crisis cited for

the softening in demand.

Mobile home and recreation vehicle manufacturers

are being severely affected by the energy shortage.

Motor home and mobile

home manufacturers in Florida and Georgia have reported layoffs and shorter

workweeks.

Many motor home manufacturers have switched to producing smaller

vehicles such as campers and trucks.

Georgia mobile home manufacturers report

production declines because of high interest rates and fuel shortages.

A

furniture manufacturer who supplies the mobile home industry has also reduced

its payrolls and workweek.

In another energy-related development, a south

Florida citrus processor says it will delay the opening of its new $5 million

plant until the United States Government can assure adequate fuel supplies.

Textile manufacturers, on the other hand, are expecting a good year and are

not yet seriously affected by energy shortages.

They may absorb some workers

released from other industries.

Tourist-related activity continues to soften, with the gasoline

shortage most often cited as the primary reason.

Motel occupancy along

Georgia's major highways is down considerably, and operators are offering

enticements such as "free breakfasts" and a "guaranteed tank of gas" to

attract the dwindling number of travelers.

Disney World has laid off 700

employees because of declining attendance related to the fuel shortage.

Cypress Gardens has announced a layoff of 10 percent of its work force.

Announcements of new commercial and industrial projects continue

strong.

Eastman Kodak plans to double capital expenditures from 1973 levels.

General Motors has announced plans to build a $50 million facility in

Huntsville, Alabama, to manufacture power-steering components.

Florida Power

and Light has signed a $65 million contract with Westinghouse for the construction of a new electric generating plant.

The Baton Rouge, Louisiana

area has reported several plant expansion plans.

be spent by area plants for pollution control.

At least $200 million will

One oil refinery has announced

a capacity expansion of 150,000 barrels which will double capacity.

However,

one area businessman estimated that only about 50 percent of these planned

expenditures will actually take place because of the present energy shortage.

There have also been isolated reports of other postponements in capital

spending plans in the District.

These have been limited largely to Southern

Bell Telephone and the plastics industry.

SEVENTH DISTRICT—CHICAGO

The picture in the Seventh District continues to show marked

contrasts among sectors to an extent seldom witnessed in the past.

On the

one hand, sales and construction of housing, standard-sized cars, the airlines,

and certain other less important sectors have been hard hit.

On the other

hand, demand for capital goods, almost all basic materials, and many consumer

goods remains intense and exceeds capacity.

Except for autos and the airlines,

there is very little evidence of output and employment being affected adversely

by the primary or secondary effects of the fuel crisis.

In part, this may

reflect the fact that so many other goods and services are in short supply.

Inventories are generally low, but badly unbalanced.

of inflation appear dimmer than before.

December apparently were very strong.

Prospects for abatement

Nonautomotive retail sales in

Prominent forecasters of the general

economy in this region are modest concerning the accuracy of their current

projections because of the unprecedented nature of recent developments.

Some

point out that a gross national product (GNP) forecast has less meaning

than usual for the individual business.

Our contacts with producers of a wide variety of capital equipment

(e.g., for farms, construction, mining, industry, materials handling,

railroads, and trucklines) indicate that the great strength of demand shown

since early 1973 or late 1972 did not diminish in December or January.

Exceptions are firms dependent on petrochemicals.

In typical cases, new

orders were up 50 percent from last year in December and backlogs were double.

Moreover, most of these firms have controlled acceptance of new orders for

at least several months; some have a large volume of firm but "unbooked

orders"; some have surveyed order backlogs and have canceled orders believed

to be soft; some have refused to sell to dealers for their inventory; and

some have demanded renegotiation of orders booked at an earlier stage of the

inflation.

Altogether, these factors suggest problems in evaluating the

Commerce orders data.

Steel companies continue to ship at capacity levels.

There is little

evidence of auto companies reducing orders, but such a trend is regarded as

inevitable.

However, at present, domestic markets (foreign markets remain

unexploited) can absorb steel released by auto firms, and many users would

like to build inventories.

The bottleneck in the industry is not metal but

finishing capacity, so that there is flexibility in adjusting the product mix.

The industry insists that an allocation of residual fuel oil equal to 100

percent of 1973 usage would require production cutbacks.

Oil use was

increasing during 1973 because of natural gas cutoffs, pollution controls,

closing of obsolete facilities, and shortages of coke.

The primary or direct impact of the energy crisis in this District

thus far has been largely confined to the airlines, the petrochemical and

related plastics industries, and wholesale and retail oil distributors.

The

major secondary impact has been on sales and output of standard-sized cars

and recreational vehicles and on recreational areas.

Almost all firms have

taken steps such as reducing thermostats, doubling delivery runs, recapturing, and recirculating heat, etc.

success.

Many have been surprised at their

These actions need not be "patriotic"; they are highly profitable

and would have been induced in large degree merely by higher fuel costs.

Most areas of this region have ample supplies of natural gas for

existing noninterruptible customers, but utilities are concerned that their

favorable position based on sound planning may be eroded by Government orders

to divert supplies to the East Coast.

Large electric utilities also are in

a relatively good position, in part because they have been leaders in

developing muclear power.

There appears to be a marked shift to electric

heat for residences, especially in Michigan where new gas customers have

not been accepted since March of 1973.

Many people in this region (not necessarily the uneducated)

believe that the fuel crisis is a fake, perpetrated to increase oil company

profits and to divert attention from Government scandals .and inflation.

These views are encouraged by various prominent citizens and by newspaper

columns and cartoons.

The oil industry has a problem stating its case,

partly because of many uncertainties in the supply-demand picture.

Very little is known of demand elasticities, but it is feared that completely

decontrolled prices could rise "explosively".

Almost nothing is known of

the size of inventories in the hands of distributors and retailers, to say

nothing of oil users.

So many different materials and components are in short supply that

a list could be constructed almost at random.

Castings, forgings, bearings,

steel, nonferrous metals, plastics, fuel (any fuel), and paper probably are

cited most prominently.

These conditions have led to widespread black

markets (usually with no questions asked), innovative pricing practices,

imbalancing of inventories by purchases of "what is available", a resort to

barter or "swaps", "embargoes" on shipments awaiting favorable CLC actions,

and steps by purchasers to aid suppliers.

Some minor effects include

elimination of "double-bagging" at supermarkets and long delays in production

of records by popular rock groups.

EIGHTH DISTRICT —

ST. LOUIS

Business activity in the Eighth Federal Reserve District generally

remains strong.

Substantial weakness, however, was reported in a number of

activities, including the automobile and construction industries.

In general

manufacturing activity continues at a high level, with shortages and inflation

remaining as difficult problems.

Higher farm incomes and expected increased

acreages have bolstered the business situation in rural areas.

Retail sales have slowed in recent weeks, although unusually bad

winter weather in the region makes the sales data difficult to assess.

Some

items such as electric heaters and warm winter clothing have been selling

stroiigly,but automobile sales have dropped off sharply.

Dealers report very

few sales and precipitous price declines of the larger car models.

On the

other hand, small cars were reported as difficult to find and were selling

at premium prices.

Most manufacturing firms still report operations at full capacity;

however, some temporary plant closings and layoffs have occurred in the automobile industry.

No change was reported in capital investment plans for

plant expansion, which generally call for greater investment this year than

last.

Inflation, shortages of raw materials, and the energy situation in

particular, remain major problems on the minds of businessmen.

In view of

the many shortages of materials, some "double" ordering by businessmen was

reported, thus adding to the confusion relative to the shortage problem.

Construction activity is generally down in the District.

In 1973,

construction of single-family dwelling units in the St. Louis area was about

the same as in 1971 and 1972.

However, construction of multifamily dwellings

dipped to about one-half the 1971-72 levels.

Expectations are that construction

of single-family dwellings in the St. Louis area will decline by as much as

30 percent in 1974.

Banks report that commercial loan demand continues strong.

Savings

and loan associations in the St. Louis area report increases in savings in

the first part of January, after small negative net inflows in December.

Mortgage demand was reported as weak, but mortgage rates remain steady, despite

the somewhat greater inflows of funds.

The farm outlook is optimistic based on both last year's high farm

income and the relatively high current prices of farm commodities.

Many

farmers are reported to be selling contracts on the futures market to avoid

the risk of a price decline prior to harvesting.

With higher farm incomes,

business activity continues strong in rural areas and banks have experienced

increased deposits.

This strength is associated with a high demand for

agricultural supplies in anticipation of a larger crop acreage than last

year.

NINTH DISTRICT—MINNEAPOLIS

The energy crisis has not yet forced substantial cutbacks in

District economic activity, but businessmen are concerned about the future.

In addition, other materials besides fuel are in short supply and delivery

times are being stretched out.

District retailers enjoyed a good Christmas

season, with sales generally up to expectations.

Several bank directors

expect a decline in home building in their areas in 1974.

Although a number of District layoffs have been attributed to the

energy crisis, fuel shortages have not yet seriously disrupted District

economic activity, and mild fourth-quarter weather has lessened the threat

of heating-fuel shortages.

District businessmen, however, remain concerned

about how the energy crisis will affect their operations.

A director

associated with retail trade said that his firm has had enough fuel for its

regular operations, but he felt it was too early to assess the impact of

gasoline shortages on consumer shopping habits.

Another director reported

some concern in his community about employees having adequate gasoline to

commute to work.

Also, in his community a firm producing plastic parts for

cars was concerned about automobile sales declining in 1974.

According to

another director, the fuel crisis has not yet directly affected sewer and

highway building, but uncertainty over prices is making contractors hesitant

to bid on projects.

A Montana director indicated that there was no lack

of gasoline in his area; he believed that a considerable amount of gasoline

is being stored by consumers and businessmen.

A survey of nine ski resorts located away from the District's

major population centers indicated that the energy crisis did not hurt their

holiday business.

Only one ski area reported poor business during the

Christmas-New Year period and, in general, ski-area operators look for

business to remain good for the remainder of the season.

gasoline existed in any of the areas surveyed.

No shortage of

Several operators indicated,

however, that business from local customers was up, while customers who had

to travel any distance were staying away.

The concern in the resort and

travel industry appears to be shifting from the fuel shortage's impact on

winter recreational activities to the summer tourist business.

A lack of

gasoline this summer as well as the possibility of rationing could seriously

hamper the District's tourist industry.

Directors indicated that other materials besides fuel are becoming

difficult to obtain.

A plastic resins shortage has forced one director's

firm to curb some operations.

areas but stated

Other directors reported no shortages in their

that delivery times are being stretched out.

A Montana

director has had to wait over a year to obtain farm machinery and remains

uncertain as to when this machinery will be shipped.

Many District retailers enjoyed a good Christmas season, as sales

exceeded earlier expectations.

Major Minneapolis-St. Paul retailers

responding to a newspaper survey indicated that December sales were up from

a year ago, and most stores equaled or surpassed their sales expectations.

Furthermore, a director who heads a major retailing organization reported

that, after some softening in sales growth last fall, his firm's relative

year-to-year sales gain in December came closfc to matching the larger

increases achieved earlier in the year.

A North Dakota director termed his

area's Christmas spending "great" due to high farm incomes.

A Wisconsin

director reported "excellent" Christmas business in his community, and a

Montana director termed Christmas spending "good" in his area.

On the other

hand, an Upper Peninsula director said Christmas sales in his area only

equaled year-earlier levels, while a Minnesota director from outside the

Twin Cities indicated his area's Christmas sales were not up to expectations.

Major Minneapolis-St. Paul retailers are uncertain about the future, and

most look for modest sales gains in 1974.

The number of new District housing units authorized during the

first eleven months of 1973 was down 22 percent from a year earlier, and

several directors look for declines in their areas' residential building

in 1974.

A director from the upper peninsula of Michigan indicated that

a scarcity of fuel for heating homes was expected to curb his area's

residential construction, while two other directors indicated the availability

and cost of mortgage money would hurt their areas' home building.

A North

Dakota director, on the other hand, stated that the outlook for home

building in his area was good.

In addition, the apartment vacancy rate in

the Minneapolis-St. Paul area in November was 5.6 percent, compared with 8.9

percent last February, which indicates District apartment construction may

improve later this year.

TENTH DISTRICT—KANSAS CITY

Judging from responses of buyers of materials for major

manufacturers in the Tenth District, no recession in this region is likely

in 1974.

Although many raw materials, such as petrochemicals, and many

advanced-product inputs, such as electric motors, are in extremely short

supply, most manufacturers are cautiously optimistic that sales this year

will surpass those in 1973.

Bank deposits remain at high levels, and the

energy crisis appears to have stimulated business loan demand.

Consumer

instalment lending continues strong, and feedlot operations are boosting

agricultural loans.

In fact, bankers report no recent developments

suggestive of a slowing economy, save weaknesses in construction loans

and auto loans.

All bankers contacted are keeping their CD maturities

short, anticipating a decline in interest rates.

In the agricultural

sector, farmers have planted more wheat again, and an insulating snow cover

is improving crop prospects.

The materials supply situation continues to deteriorate.

Purchasing

agents for major manufacturers in the Tenth District say that most items are

harder to get now than they were a few months ago, when they reported

extremely short supplies.

Prices and lead times have doubled or tripled

on certain items, such as zinc; some materials are not available at all, even

on an allocation basis.

In many instances, the energy crisis is blamed for

making matters worse.

Despite the severe difficulties in obtaining supplies, almost all

the manufacturers expect to produce and sell at last year's level or higher.

True, some have revised downward their earlier, more optimistic sales

forecasts for 1974.

For example, because of the energy crisis, one major

manufacturer of private aircraft now expects to sell 5 percent fewer

airplanes, instead of 35 percent more, in 1974 over 1973.

tied to the auto industry, expects a "down" year.

Another company,

All of the others,

however, say that 1974 will be better than 1973, although several hedged

their forecasts with phrases like "if we don't panic", "if raw materials

are available", and "if we don't have to shut down because of fuel cutoffs".

Consistent with their ordering plans and their firms' sales expectations,

most purchasing agents expect employment to hold up well at their factories

during 1974.

Seeding of winter wheat last fall totaled 51 million acres, up

18 percent from the previous year and the largest since the 1967 crop.

Currently, United States production is projected at 1.51 billion bushels

which would be 19 percent above the record crop in 1973.

In the District,

where roughly one half of the nation's winter wheat is produced, fall

seedings of wheat were 10 percent larger than a year earlier.

However,

current projections point to a slightly smaller crop than in 1973—715 million

bushels versus 734 million—due to much late seeding which increases the

likelihood of winter kill from cold winds.

Fortunately, a heavy blanket of

snow now covers a large portion of the wheat in the District, reducing the

threat of this hazard.

Interviews with larger Tenth District banks revealed deposit and

loan activity over the last few weeks to be at or above seasonal norms.

Business demand deposits increased about as expected in the latter part of

December, but some bankers are pleasantly surprised at the continuation of

high levels of deposits through the first week in January.

Large CD positions

have not changed appreciably.

Of those interviewed, only one banker feels

that the lower reserve requirements have encouraged them to be more aggressive

in selling large CDs.

All banks anticipate a decline in interest rates and

are setting their offering rates to keep their CD maturities very short.

Loan demand at District banks shows no sign of slackening.

To date, the

petroleum shortage seems to have added to business loan demand.

Some firms

need to finance larger stockpiles of petroleum products they feel may become

in short supply.

This was especially evident to Kansas City banks serving

customers in the plastics industry.

Banks in Tulsa and Denver were feeling

the effects of increased oil and coal production, respectively.

Consumer

instalment loan volume is also holding up as reductions in auto loans were

being compensated for by increases in other areas, including home-improvement

and credit-card loans.

Agricultural loans are sharply higher in some parts

of the District because larger numbers of cattle are moving onto feedlots.

The only loan category demonstrating consistent weakness throughout the

District is construction loans.

ELEVENTH DISTRICT—DALLAS

Scarcity of pipe, rigs, and work crews continues to constrain

petroleum drilling in the Southwest, according to an association of drillers,

since many do not have permanent workers or established lines of supply.

The association reports that the shortage of drilling rigs could be a

problem for as long as three years because capacity constraints are

limiting the ability of manufacturers to fill a growing backlog of orders.

The seasonally adjusted index of industrial production in Texas

fell in November for the first time since July 1973.

The decline was

centered in mining of crude oil, petroleum rfefining, and production of

petroleum-related chemicals.

Despite intensified drilling, mining of crude

oil has decreased because of the reduction of domestic reserves of crude.

At the same time, shortages of crude oil have contributed to the reduction

in refining activity, although in recent weeks imports have been greater

than they were earlier anticipated to be.

Unscheduled shutdowns for repairs

and maintenance have also hampered refining.

A survey of manufacturers based in Texas indicates that many firms

are taking action to stockpile petroleum or petroleum-related products.

While many businesses complained about more limited supplies and rising

prices, there is no evidence that petroleum or related products are unobtainable.

Shortages were reported in plastics, solvents, and diesel fuel, but many

manufacturers seemed just as concerned about the scarcity of nonpetroleum

materials such as steel, copper, and aluminum.

At present, these manufacturers are not planning to cancel or even

delay previously made plans to expand plant and equipment expenditures

because of the energy situation.

Of those contacted who had plans for

significant investment in 1974, most are drawing up contingency plans in

the event that the energy shortage becomes critically disruptive, but all

seemed optimistic that the economy will remain sufficiently strong to

warrant continuation of their capital spending programs in 1974.

New car registrations in the four largest metropolitan counties in

Texas declined in November.

The fall came in the wake of a substantial

increase in October registrations—which has the result of filling large

fleet orders placed earlier in the year.

The November decline indicates

the continuation of a cyclical downturn in Texas automobile sales which

began last March.

Agriculture in the five District states had a record year in

1973 for crop production, income, and investment.

Encouraged by strong

demand and higher prices, farmers and ranchers are planning even greater

production in 1974.

However, they are seriously concerned that the necessary

stocks of fuel and fertilizer may not be available to achieve this goal.

Farmers in several major cotton-and grain-producing areas have reported

difficulties in obtaining diesel fuel and complain that distributors are

reluctant or unable to assure them of adequate fuel supplies for the

approaching planting season.

Local shortages of fertilizer have also been

reported, and many cases have been noted where the price of fertilizer has

doubled in the past year.

TWELFTH DISTRICT—SAN FRANCISCO

Despite the problems associated with the energy crisis, the

majority of our directors expect only a slowing of the economy this year but

no serious recession.

Consumer spending for nondurables and business capital

expenditures are strong, and District agriculture is also likely to

experience another prosperous year.

The major weaknesses are in housing

and consumer expenditures for durables and automobiles.

The energy crisis has had little impact on this District's employment and output as yet.

Some directors report shortages of some classes of

raw materials, and manufactured goods are just as important, as energy

shortages in restraining output.

For example, lack of resins are slowing

plywood production, and petrochemicals and some metals are in short supply.

The energy problems in the District are largely limited to sectors dependent

upon gasoline supplies.

Therefore, automobile sales are lower, and layoffs

have occurred both in assembly plants and at the dealer level.

Manufacturers

of recreational vehicles are particularly hard hit, a "disaster area"

according to one director.

reducing employment.

Airlines are another industry which has been

Nonetheless, these sectors represent a minor fraction

of total employment and the overall level of employment has not changed much.

In states such as Oregon and Washington, recent rains have eliminated

previous power shortages, and these states have surplus power.

Industries

such as aluminum smelting, which had been on part-shifts, have been able to

increase output and employment.

Forest products in the Pacific Northwest are experiencing strong

external and domestic demand.

The reduction in housing starts has been

partially offset by higher demand in orders for various paper products as a

substitute for plastics which are in short supply.

Utah and Idaho similarly expect no power shortage.

Ninety percent

of the region's power is generated from plentiful low-sulphur coal, and

utilities are able to export their surplus to other states.

The principal

shortage of energy in this District appears to be in gasoline, but this is

limited to a few areas, such as Arizona and Oregon.

A major factor in the

Oregon situation has been the decision of two oil companies, Gulf and Amoco,

to close their stations in the state.

Idaho are in an "oversupply position".

In contrast, independent dealers in

Although California appears to have

sufficient gasoline supplies, there would be more economic dislocations

if the proposed 35 gallon monthly ration is imposed in areas dependent upon

the automobile for transportation.

hit by rationing.

Los Angeles would be especially hard

The Los Angeles area also appears to face a more serious

power shortage than the rest of the state.

Mandatory cutbacks have been

ordered.

Our directors described various efforts of business to save power.

Forest products firms are burning previously discarded waste products;

Georgia Pacific expects to save in 1974 energy equal to 200 million gallons

of fuel oil by its program of utilizing wastes.

The general response of

business has been to reduce lighting, especially for display purposes, and

to lower heat in buildings.

areas.

Christmas retail sales were higher in most

Business capital expenditures remain strong because of continued

efforts to modernize and to expand capacity to meet expanding demand.

Commercial construction is maintaining a high level of activity, but there

is no sign of any recovery in residential housing.

Spending on consumer

durables is expected by several directors to be lower this year, and automobile sales are also likely to fall more.

Agricultural prospects for 1974 remain good.

High prices are

expected—record highs were reported for Idaho potatoes—and farmers are

increasing planted acreage of most crops.

Net income of farmers, however,

may be reduced somewhat by rising costs of such items as fertilizer and

machinery which remain in short supply.

Bankers are experiencing continued growth in deposits, and they

face strong loan demand particularly by business.

Short-run interest rates

are expected to decline slightly, but little change is seen for long-term

rates.

In summary, although some directors are uncertain about the effect

stemming from possible energy shortages, the majority expect only a slight

slowing in economic activity.

For the moment, shortages of energy have not

had a significant effect on the District economy.