Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

June 12, 1974

TABLE OF CONTENTS

SUMMARY. .

. . . . . . . . . . . . . . . . . . . . . .

i

First District - Boston. . . . . . . . . . . . . . . .

1

Second District - New York . . . . . . . . . . . . . .

4

Third District - Philadelphia. . . . . . . . . . . . .

7

Fourth District - Cleveland. . . . . . . . . . . . . .

10

Fifth District - Richmond. . . . . . . . . . . . . . .

14

Sixth District - Atlanta . . . . . . . . . . . . . . .

17

Seventh District - Chicago . . . . . . . . . . . . . .

21

Eighth District - St. Louis .

. . . . . . . . . . . .

25

Ninth District - Minneapolis

. . . . . . . . . . . .

29

Tenth District - Kansas City

. . . . . . . . . . . .

33

Eleventh District - Dallas .

. . . . . . . . . . . .

Twelfth District - San Francisco . . .

36

36

SUMMARY*

"Moderate economic recovery" capsules the views of most Red Book re­

ports this month.

Inflation and materials shortages once again seem to be

major items of concern.

While some reports expect a subsiding of inflation­

ary pressures toward year's end, others expect these pressures to remain se­

vere throughout the year.

Current views on materials shortages also vary.

Some Districts indicate a loosening of basic materials supplies, while other

reports indicate continued shortages.

Residential construction remains de­

pressed, with strikes of construction trades making matters even worse in

several Districts.

Capital spending plans remain strong, though some downward

revisions of capital expenditures have apparently taken place because of high

interest rates, materials shortages, and the cyclical downturn in the economy.

Inventory building as an inflationary hedge or because of the fear of short­

ages has been limited and scattered.

levels despite high interest rates.

Business loan demand remains at high

However, there were some reports of

slight reductions in demand; and lending is reported to be more selective

now.

Delinquencies on most types of loans are up.

Consumer spending is be­

ginning to show some life, with a renewed interest in larger autos as one area

of strength.

Heavy rains may cut into expected bumper crops in some Districts.

The first quarter slide in economic activity has apparently bottomed

out, and a moderate economic expansion is now under way in most Districts.

Philadelphia reports that the first quarter slide has ended.

Cleveland,

St. Louis, and Minneapolis note that economic activity is beginning to pick

up and should continue to do so throughout the rest of this year.

San

Francisco, however, does not expect much improvement until the third quarter.

*Prepared by the Federal Reserve Bank of Atlanta.

A number of Districts emphasize the growing concern over inflation.

Philadelphia sees inflation as the sore spot in its economy, with price in­

creases on manufactured items and raw materials continuing throughout the

year.

This view was echoed by Atlanta, St. Louis, and San Francisco, while

Cleveland expects some abatement in price increases by the fourth quarter.

Though supply problems continue to exist, some easing is beginning

to be noticed.

Boston, Richmond, and Chicago note some loosening in supplies.

However, other Districts indicate continued difficulties and longer lead times

in obtaining plastics, basic petrochemicals, steel, and electrical goods.

Residential construction remains universally weak in all Districts.

In Minneapolis, San Francisco, and St. Louis, strikes in the construction

trades have depressed this sector even further.

The Administration's new

housing program is expected to have only a slight impact on residential con­

struction.

New York describes the program's probable impact as a "cushion"

to a further decline in residential construction rather than a stimulus.

Capital spending continues to be the major area of strength, but

some retrenchment in these spending plans may now be taking place.

Boston

reports some postponing of capital spending because of anticipated declines

in interest rates.

Reports from New York indicate "some cooling of enthu­

siasm" regarding expansion programs.

Materials shortages are curtailing

capital spending in the San Francisco District.

Inventory building because of materials scarcities is not as wide­

spread as earlier reports indicated.

Atlanta and New York note that high

financing costs may be inhibiting inventory investment in many areas.

Cleveland also finds some signs of inventory investment abating, and re­

sponses to Richmond's survey of manufacturers suggests that inventories may

be higher than desired.

Views are mixed on the effects of record-high interest rates on loan

demand.

Philadelphia, Cleveland, Minneapolis, Dallas, and San Francisco indi­

cate little letup in loan demand.

However, Boston, Richmond, St. Louis, and

Kansas City note a slight reduction, particularly in demand for business loans.

A pickup of deposit growth at commercial banks was also observed in several

Districts.

Richmond's survey of large District banks, as well as information

from other Districts, reveals that firmer credit standards are being applied

to loan requests.

Several Districts also indicate that an increase in loan

delinquencies and a rise in bankruptcies are a matter of growing concern.

Consumer spending in most Districts is beginning to perk up.

St. Louis and Kansas City indicate that appliances are selling well.

Tourist

activity is on the upswing and is expected to remain so through the summer

months in the Atlanta and Minneapolis Districts.

pickup in the sale of larger-sized cars.

Several Districts note a

Minneapolis suggests, however, that

consumer resistance to higher car prices may be responsible for a more recent

drop in sales.

Agricultural prospects appear mixed.

Reports from a number of

Districts confirm the decline in livestock prices.

San Francisco's agricul­

tural prospects are expected to be excellent throughout the District.

Rain

and bad weather have affected crop plantings and prospects for crop yields

in the Chicago, St. Louis, Kansas City, and Atlanta Districts.

- 1 -

FIRST DISTRICT -

BOSTON

Our directors reported that the business situation remains pretty

strong, with the cost of money the major business problem.

The high cost

of money has led both to a noticeable slowing in business loans, as firms

trim inventory accumulation and large outflows from thrift institutions.

The directors felt that businessmen are more concerned with the

cost of money than with the state of business.

have varied reports.

Some report continued strength in capital goods areas,

while others note a dip in hand tool orders.

have some weakness.

Machine tool manufacturers

Automotive suppliers still

Generally, the consumer sector is weak, although there

has been some pickup in recreational vehicle sales.

noted a lessening in

While manufacturers

focused on money problems.

supply problems,

One director from a management

they have

consulting firm

discussed his difficulties in collecting payments, even from major utilities.

Another director notes that with floor-planning loan rates at 18 percent,

dealers had to cut back on inventories.

Our Bank directors report that bor­

rowers are postponing capital spending plans because they anticipate a de­

cline in

interest

rates or are borrowing less than they normally would be­

cause manufacturers

and wholesalers

are cutting down on inventories.

As a

result, one bank director reported that his outstanding commercial loans

dipped below year-ago levels.

A business director from Connecticut also

cited high interest rates as a cause in delaying capital spending but felt

that the expectation of a coming slowdown in business had led to a slowing

in expansion plans anyway.

panies,

He also noted that there were quite a few com­

especially small businesses

and seasonal borrowers such as clothing

-2

­

manufacturers and the tobacco industry, which were being pushed to the wall

by high interest rates.

On the wage scene, our directors generally noted that nonunion

employees have been given some form of cost-of-living increase to compen­

sate for inflation.

In some cases, this has also been extended to retired

employees on pensions.

One director commented on a recent Wall Street

Journal article that was critical of the Fed for lending to the Franklin

National Bank at a discount rate which was below market rates.

the 4-percent loans to Lockheed to argue that it

lend to an ailing firm at below market rates.

spondents,

month.

He cited

was common practice to

Only two of our academic re­

Professors Tobin and Eckstein, were available for comment this

Professor Tobin reiterated his position that monetary policy is too

tight and that the Fed funds rate should be eased down to 8 percent over

the next two months.

He feels it

is

unimportant to quibble over whether

the present policy will produce a N.B.E.R. recession or not, since we know

it

will raise the unemployment rate to 6 percent.

He feels there should

be some redefining of recessions to tie them more closely to the behavior

of unemployment.

Tobin emphasized that it

is

not within the Fed's power to

deescalate the wage-price spiral in the short term.

The cost of doing

this through macroeconomic policy by keeping unemployment rates up is far

too high.

Instead, Tobin argues that inflation should be attacked through

an incomes policy.

is

Professor Eckstein strongly agreed that monetary policy

too tight and the Fed funds rate cannot be held at 11 1/2 percent for

very long without bringing down the financial system.

rate is

11 percent in July,

If

the Fed funds

Eckstein predicts massive outflows from thrift

institutions as market forces enable the public to enter the 11-percent

-3­

money.

He notes that when the financial system cracks, it always cracks in

unexpected places, so we won't be prepared.

A major question the Fed should be asking itself, according to

Eckstein, is how much the Fed can accomplish in slowing inflation by this

policy.

Eckstein agrees with Tobin that the Fed is being unrealistic if

it thinks monetary policy can do much to stop a wage-price spiral by a

growth recession if the rest of the government does nothing.

Eckstein be­

lieves that a 1958 type recession will slow inflation but that it will ter­

minate the independence of the Fed because the whole political spectrum is

not that conservative.

Real wages have been declining.

Eckstein argues

that the Fed should not try to defeat the labor movement's attempts to re­

gain their wage position because it will create economic chaos, since the

Fed cannot compensate for all the sins of government.

Eckstein believes

the Open Market Committee should lower the Fed funds rate below 11 percent

at this meeting and below 10 percent at the next, with an 8-percent rate as

its target.

Money supply targets should be at least 7-percent growth rates.

Eckstein agrees that the Fed cannot have a real money supply target, but he

also believes the Fed cannot ignore the real money supply without killing

the patient.

-4-

SECOND DISTRICT - NEW YORK

According to Second District directors and other business leaders

who were recently contacted, there has as yet been little easing of materials

shortages and capacity limitations.

The business capital spending outlook on

balance remains strong, but the District residential construction picture ap­

pears bleak.

High financing costs, as well as shortages, may be inhibiting in­

ventory investment in some sectors, and little evidence of excessive inventory

accumulation was noted.

Most respondents perceived little or no indications that shortages

and capacity limitations were easing up.

Among others, the president of a

multinational chemical corporation reported continuous shortages and capa­

city limitations in his industry, while a senior official of a nationwide

chain of department stores noted that many items were still not available.

An official of a large paper firm reported that while his firm might be ob­

taining an adequate supply of raw materials, the production capacity situa­

tion in the paper industry was still very tight and his firm was behind in

shipping its products to its customers.

The president of a large electrical

equipment distributing firm, on the basis of conversations with his firm's

suppliers, saw no easing as yet in the supply and capacity picture.

On the

other hand, the chairman of a large New York City bank reported that some

basic materials have become more easily available since price controls were

removed, and the president of a nonferrous metals product manufacturing

concern reported some softening in the copper and brass markets, which he

associated with the current weakness in the auto and construction industries.

Both respondents, however, noted that many materials shortages still persist.

- 5 -

Responses to a question about business capital spending were mixed,

but most of the respondents felt that financial market conditions had not yet

caused firms to cancel or cut back their capital spending plans, at least in

dollar amounts.

The New York City banker mentioned above thus stated that he

was not aware of any reduced capital spending plans, while the retailer re­

ported that his firm was upgrading its capital spending plans to take into

consideration the rise in construction costs.

The official of the paper firm

reported that his firm, and probably the paper industry in general, was em­

barking on a three- to five-year expansion program involving significantly

higher outlays than had been expected in recent years, while the president of

a diversified financial institution characterized the demand for capital as

"still good."

On the other hand, the president of a large New York City bank

stated that some of his bank's business customers reported that their firms

were cutting their expansion programs in physical terms although not in dollar

terms, and the chairman of another large New York-based financial institution

noted "some cooling of enthusiasm" regarding expansion programs.

The presi­

dent of the nonferrous metal products concern stated that his firms had be­

come "definitely more conservative" with respect to capital expenditures

in the light of current financial market conditions; and while another

director was not aware of reduced capital spending plans solely as a result

of financial market conditions, he felt this could become a factor for some

electric utilities.

There were suggestions that current high, short-term interest rates

may be, as stated by a New York City banker, acting as a "restraining in­

fluence" on firms' inventory policies.

The president of the nonferrous metal

products firm reported that the high cost of carrying inventories had induced

- 6­

his firm to institute tighter inventory controls.

The great majority of the

respondents commenting on the inventory situation felt that there has been

no excessive inventory accumulation as yet.

Among others, the president of

an electric equipment distributing firm reported that his firm's sales had

risen more rapidly than its inventories, and he felt this was also true for

many of its customers.

Other respondents, including the retailer and the

paper company official, cited the shortage of some items as another factor

inhibiting inventory accumulation.

Second District residential construction remains weak.

The president

of a large New York City savings bank cited the continued loss of deposits by

thrift institutions to higher-yielding Treasury securities and, in his view

even more significant, the high cost of construction with new housing not

selling well.

An official of a savings bank trade association reported that

savings banks in the New York City area had continued to suffer net outflows

of deposits in May and that the savings and loan associations had probably

undergone a similar experience.

He saw no evidence of a turnaround in resi­

dential construction at this moment.

The respondents in general felt that

the Administration's new housing program was likely to have little effect

on the housing industry.

In the view of the savings bank association offi­

cial, it might be a "cushion" to a further decline in residential construc­

tion rather than a stimulus.

- 7 -

THIRD DISTRICT -

PHILADELPHIA

Economic activity in the Third District continues to show that the

downward slide of the first

quarter has ended.

for the second consecutive month,

of activity is

and manufacturers

expected to hold steady through

ment too remains stable.

Production activity is

stable

report that this level

the end of the year.

Employ­

Retail sales continue to show surprising strength,

as do spending plans for plant and equipment.

Inflationary pressure is the

sore spot in the regional economy, as area businessmen expect both the prices

they receive and the prices they pay for manufacturing goods and raw mate­

rials

to continue rising during the next two quarters.

Bankers reported that while total loan demand remains at mid-April

levels in Philadelphia, business borrowing has advanced slightly.

Moreover,

disintermediation is not currently a problem with Philadelphia banks, as

they continue to post deposit gains.

Manufacturers in the Third District, responding to this month's

business outlook survey, report a general leveling in the regional economy,

both in June and six months in the future.

Currently, almost three-fourths

of area manufacturing executives are experiencing no change in their new

orders, shipments, and unfilled orders.

Last month's extended outlook

reported an expected increase in business activity by November.

However,

it now appears that some manufacturers have revised their expectations, with

nearly half reporting no change in these key indicators up through the end

of the year.

Employment opportunities also reflect this stabilizing trend in

the regional economy.

While just one in ten employers expects to decrease

- 8­

the number of his employees or reduce the average workweek in

the next two

quarters, only one in ten expects to increase the number of employees and

one out of twenty-five anticipates lengthening the average workweek.

Yet,

as the size of the work force continues to grow, we are likely to see some

increase in the level of manufacturing unemployment in the Third District

in the months ahead.

Manufacturers report little change in inventory stocks this month.

And, with raw material prices on the rise, only a third of the executives

expect to boost the level of their investment in raw materials by the end

of the year.

However, though somewhat more cautious than last month, re­

spondents still remain optimistic about their plans for increases in expendi­

tures on plant and equipment in the next six months.

Philadelphia department stores are reporting steady sales in summer

apparel.

However,

fall lines will start coming out in

July, and retailers

are pessimistic about the effect that higher prices will have on consumer

spending.

With the garment strike presumably settled, retailers anticipate

only short-term problems such as delayed deliveries.

However, if the strike

is extended over a considerable period, serious shortages would have occurred.

The outlook for prices in manufacturing is also reported gloomy.

Respondents are still increasing their own prices on finished goods and are,

in turn, paying higher prices for raw materials.

Though other indicators in

the regional economy appear to be leveled off, manufacturers report expecta­

tions of an increased push on prices until at least the end of the year.

Over three-fourths expect to receive and to pay higher prices six months out.

Reflecting this leveling in business activity in the region,

Philadelphia banks report the growth rate for total loans holding steady since

- 9 ­

mid-April, although business borrowing has advanced slightly.

Surveys of

Philadelphia banks indicate some increase in REIT and utility borrowing, as

these industries are being pushed out of financial markets.

Philadelphia

bankers are continuing to realize deposit growth, and reliance on Federal

funds has decreased sharply.

Regional banks report a continued rise in total

loans and a growth rate for deposits at somewhat less than April's levels.

- 10 -

FOURTH DISTRICT -

Manufacturing

in

activity in

the District

May for the second successive month,

change.

CLEVELAND

appears

to have strengthened

and bank loan demand showed little

At a meeting held in this Bank on June 7, thirty economists (pri­

marily from major industrial firms and banks in

the District)

generally

agreed that the economy was beginning to recover and indicated they expected

continued strengthening in output during the balance of this year, accom­

panied by abatement of price increases by the fourth quarter.

In the dis­

considerable emphasis was placed on the crosscurrents

cussions,

and weaknesses

in

the economy,

distortions

of strengths

caused by inflation and price

controls, uncertainties regarding the impact of monetary policy, and the

According to a source in

response of labor to the past rate of inflation.

the savings and loan industry,

following sizable outflows in

deposits about equaled withdrawals in

deposits

May,

during April.

Preliminary returns from our monthly manufacturers' survey suggest

further improvement in new orders, shipments, backlogs, and employment in

May.

Inventory investment shows some sign of abating.

The percentage

of

firms reporting price increases was the highest in the 10 years of this

survey.

Major banks in

demand in recent weeks.

the District

report

little

change in

business loan

Two Cleveland banks reported what they consider

a temporary slackening in demand, with the passing of earlier shifts of

borrowers out of commercial paper.

Another has experienced some unexpected

demand because two large industrial customers postponed capital market

financing.

Construction loans present problems to four of six large banks

- 11 ­

contacted.

These problems involve requests for maturity extensions and in­

creased loan amounts and reflect cost overruns, materials shortages, and,

in some cases, delayed or canceled takeouts of permanent financing by insur­

ance companies.

The business economists project a 1-percent growth rate for real

GNP during the second quarter, followed by gains of 2.4 percent and 4.0 per­

cent in the third and fourth quarters.

Over the same period, the GNP deflator

is projected to rise at annual rates of 8.2 percent, 7.4 percent, and 6.0

percent, respectively.

The unemployment rate is expected to drift upward to

5.75 percent by year-end.

The projected economic recovery is based largely

on improvement in the consumer sector and strength in capital spending.

Some

economists raised questions as to how much of the recent pickup in retail

sales was due to tax refunds and whether real income of consumers would re­

cover in the near term.

The sentiment of the group was that there would be

an acceleration of nominal wage increases during the second half; moderating

inflation would, therefore, result in real income rising enough to sustain a

recovery.

course.

New car sales, in particular, are expected to remain on an upward

The median forecast of 10 economists whose firms depend heavily on

the auto market places this year's domestic new car sales at 8.1 million units

Fleet purchases of new cars, which have

and imports at 1.6 million units.

been below normal during the last two to three quarters, are expected to bol­

ster sales in the months ahead.

Automotive economists also see evidence of a

recovery in sales of recreational vehicles.

On the matter of capital spending, there was widespread agreement

among the roundtable economists that the secular need for increased capacity

overwhelms normal cyclical forces.

According to the economists, capital

- 12 ­

spending ordinarily would be expected to weaken under conditions of tight

money and prospects for declining corporate profits.

Some economists noted

that much business investment is planned on the prediction that long-term

interest rates will be lower and demand stronger toward year-end.

The pre­

vailing view was that, despite high interest rates, the pressures for capi­

tal spending are on the upside.

Basic process industries, such as steel,

petroleum, and chemicals, are considered to have the best liquidity positions

for financing their investments.

On the other hand, utilities appear to be

reassessing their spending plans in view of the dramatic shift in their cost

structure and uncertainties regarding growth prospects.

Automotive econo­

mists hold the view that sales of heavy trucks will begin to decline later

this year, partly because of increased costs associated with antiskid de­

vices.

It was reported that capacity limitations and shortages have held

down the recent physical volume of capital outlays.

A shortage of casting

capacity, for example, has contributed to a short supply of engines, which

has in turn held down shipments of trucks.

Steel shortages also have in­

hibited shipments of numerous capital goods.

Several steel industry economists said steel shortages will become

even worse during the second half.

city for two years.

Shipments have been above industry capa­

With mill inventories depleted and the deferment of

needed maintenance, the steel industry's ability to ship in the second half

will be less than in the first half.

Moreover, if there is a coal strike in

December, the steel industry will be forced to shut down because coal and

coke supplies are very tight.

during 1975.

Little relief in the steel situation is expected

A steel economist expressed the opinion that the economy's poten­

tial growth rate next year could be restricted by the limited availability of

steel.

- 13 -

According to the roundtable group, sectors of near-term weakness

in the economy include housing, the net export balance, and inventory in­

vestment.

An economist with a Federal Home Loan Bank reported that the

savings and loan industry would have sufficient funds to ensure 1.6 million

housing starts for 1974 if there is no massive disintermediation.

At any

rate, housing is projected to begin recovering very slowly beginning in the

fourth quarter.

The net export balance is expected to decline for the re­

mainder of the year.

Inventory investment, following a pickup in the second

quarter, is expected to ease slightly in the second half.

there has been an unknown degree of inventory speculation.

It was noted that

As prices of

certain raw materials come down, inventory building should subside.

An economist with a major agricultural corporation discussed the

outlook for grains and meat.

Wheat and feed grain crops are expected to be

sufficiently abundant to cause some price declines between now and next fall.

Prices of livestock and hogs, however, are expected to rise 10 to 15 percent

at wholesale, while broilers could rise by one-third.

- 14 -

FIFTH DISTRICT - RICHMOND

Some easing of demand pressures on the Fifth District economy is

suggested in our latest survey.

Reports from manufacturers indicate a de­

cline in new orders, the second successive such reduction;

and shipments are

apparently being maintained at recent levels only through a working down of

order backlogs.

Also, for the first time since late last summer, the diffu­

sion of manufacturing responses suggests that inventories may be higher than

desired.

Trade respondents report recent increases in the dollar volume of

retail sales, although sales of big ticket items apparently lack buoyancy.

Residential building continues in a sharp slump, and recent reports indicate

that the current stringent credit conditions are also dampening nonresiden­

tial construction.

Reports of materials shortages continue to crop up but

rather less frequently than in earlier surveys.

A large majority of survey

respondents report increases in employee compensation and in prices paid and

received.

In a special survey of a sample of large District banks, respon­

dents in every state except North Carolina and Maryland report some easing

of business loan demands.

The orders picture at District manufacturers appears considerably

less robust than earlier in the year.

In our latest survey, 20 of 48 manu­

facturing respondents report declines in new orders against only 8 reporting

increases, and 21 indicate a reduction in backlogs against 6 reporting in­

creases.

New orders are apparently holding up well in electrical equipment

and supplies and in primary metals but have slipped in most other major

District industries and especially in textiles and furniture.

The diffusion

of manufacturing responses suggests some further recent accumulation of both

- 15 ­

materials and finished inventories,

but it

may be noteworthy that of the 48

respondents 16 evaluate their inventories as too high while 11 characterize

them as too low.

This is

the first

time in

the last ten surveys that re­

ports of excessive inventories outnumber reports of deficiencies.

The diffu­

sion of responses also suggests small reductions in both employment and hours

worked in manufacturing.

A large majority of retailers in

the dollar volume of retail sales,

but just as many report declines in sales

of big ticket items as report increases.

gests a decline in

our survey report recent gains in

Also, the balance of responses sug­

retail inventories and a reduction in

employment.

Some

respondents cite recent wage increases and a tight labor market as factors

holding down retail employment.

Construction continues in a sharp slump, with residential building

reported as having declined substantially further in recent weeks.

Reports of

shortages of building materials persist, but high building costs and unusually

high interest rates on construction loans of all kinds appear to be the chief

factors in the slowdown.

Prospective home buyers are reported to be unable to

find mortgage financing or reluctant to borrow at prevailing mortgage rates.

Nonbank intermediaries have cut back significantly on their mortgage lending,

and, in only one state, are commercial banks reported to be supplying such

funds in

any quantity.

Large banks in

credit standards in

the District indicate that they are applying firmer

reviewing loan requests,

jected to particularly close scrutiny.

with new customers being sub­

Most bankers are apparently increas­

ingly reluctant to make loans with long maturities and are shying away from

business term loans and real estate loans.

Most also continue to note a

- 16 ­

step-up in the activity of large national accounts, relating this to the in­

creasing difficulty of financing in the commercial paper market.

Neverthe­

less, the surveyed banks in every state except North Carolina and Maryland

express the view that business loan demand may be easing from the recent fe­

verish pace.

Only the North Carolina banks entertain any firm expectation

of continued increases in business loan demand.

Businessmen in our survey are apparently somewhat less optimistic

about the six months' outlook for the national economy than they were a month

ago.

The number expecting national conditions to worsen increased moderately

in the latest survey and now exceeds by a considerable margin the number ex­

pecting some improvement.

But, interestingly, in evaluating the outlook for

their respective industries, more expect improvement than declines.

A large

number of manufacturers continue to consider their current capacity too small

relative to expected sales, and several feel that current expansion plans

should be enlarged.

- 17 -

SIXTH DISTRICT - ATLANTA

Inflation continues to be of uppermost importance to most business­

men contacted this month.

Most expressed concern over the current fiscal

policy stance but wholeheartedly urged continuation of a restricted current

credit policy as a means of restraining inflation.

Material shortages con­

tinue to plague the District economy; labor shortages were also apparent in

some areas.

Again, several announcements of capital spending plans were

noted, some by foreign-based firms.

Tourist activity has picked up, but

auto sales remain substantially below year-ago levels.

Some businessmen

have indicated limited inventory building from fear of continued material

shortages.

The much publicized fertilizer shortage is apparently not as

critical as earlier expected.

The new minimum wage has had only scattered

distorting impact on District labor markets so far.

Reports from many District businessmen confirm the heightened con­

cern over inflation.

The term "double digit inflation" is creeping into

many businessmen's conversations.

They see little relief in sight, with

the continued shortages of materials and upcoming wage negotiations putting

upward pressure on costs the remainder of this year.

These businessmen see

"double digit inflation" leading to a growing lack of confidence in our en­

tire financial system.

In order to combat inflation and restore confidence,

there seems to be universal agreement that a restrictive monetary policy is

needed for some time to come.

There seems to be little relief in sight from the materials short­

ages which have been affecting many businesses and manufacturers.

Several

construction contractors have noticed a loosening in building material

- 18 ­

supplies.

However, District manufacturers continue to report difficulty and

longer waiting periods in obtaining all metals and metal products, paper, and

plastic pipe.

As reported earlier, some layoffs and increases in unemploy­

ment have occurred in parts of the District.

workers and craftsmen exist in many areas.

However, shortages of skilled

Economic activity along the

Alabama and Mississippi Gulf Coast is booming.

ments have recently been reported.

Several new plant announce­

The most recent is a new $40-million ce­

ment-manufacturing facility south of Mobile, Alabama; it will be financed

through revenue bonds.

Tourist activity continues to pick up.

World and the Daytona Beach areas are booming.

The Disney

Tourist and convention busi­

ness is still strong in New Orleans, particularly at the downtown hotels.

Auto sales, though improving recently, remain well below year-ago levels in

the District.

The regional office of one of the big three auto manufacturers

indicates that for the first ten days of May, auto sales in the Southeast are

24 percent below the year-ago period.

One brighter note is that truck sales,

particularly small trucks, are down only fractionally from a year ago.

A

report from an importer of Japanese-made cars indicates that unit sales in

the Southeast are behind the comparable period last year; but the spokesman

said that sales would be ahead if there were cars to sell.

Apparently a

dock strike in Japan kept them from getting cars to fill all the orders.

Several announcements have been made of foreign manufacturers locating plants

in the Sixth District; ten such announcements have been made so far this

year.

In April alone, four were made, 20 percent of the U. S. total.

A survey of several District manufacturers indicates some hedged

inventory building has taken place in this region, particularly in steel,

paper, fuel oil, and critical machine parts.

However, in many cases,

- 19 ­

manufacturers were simply unable to build inventories because of shortages.

Several manufacturers did mention longer lead times in placing orders today.

In response to why they were attempting to build inventories, all manufac­

turers agreed that fear of continued shortages rather than expectations of

higher prices down the road was the major reason.

There was universal agree­

ment that shortages would continue for some time to come.

They also indi­

cated that building inventories strictly for an inflationary hedge would not

be profitable today because of the high cost of carrying inventories (i.e.,

high interest rates on inventory loans).

Some indication was given of turn­

ing to commercial banks for short-term financing of this inventory building.

Summer supplies do appear adequate for fuel supplies to utilities.

The power companies which burn natural gas had supplies curtailed somewhat

last winter because the Federal Power Commission has diverted gas to the

Northeast, but no problems are expected this summer other than rising fuel

prices.

One electric utility which had been burning 100 percent natural gas

now has the capability of burning 40 percent fuel oil, thus being better

prepared for fuel emergencies.

A Louisiana power company which had been a

100-percent natural gas user has announced plans to build a coal-fired plant

using low sulphur western coal scheduled for completion in 1978 and costing

$150 million.

Coal-burning utilities in the Southeast are finding it diffi­

cult to build inventories.

A severe coal miners' strike is expected, but

inventories cannot be increased because of the closing of some mines.

Coal

supplies are apparently adequate for current consumption needs, however.

Although there is a tight market for fertilizer, supplies appear

adequate.

Earlier reports indicate that fertilizer shortages might precipi­

tate switching some corn acreage into soybeans, but this does not seem to be

- 20 ­

happening in the District.

Heavy rains in the Mississippi Delta area are

Because of a lack of cold weather this

delaying some cotton plantings.

winter, the Georgia peach crop may be as much as 25 percent below last year's.

A telephone survey of employment security offices in the District

indicates only scattered and very limited distortions from the increased

minimum wage enacted on May 1.

what the total effect would be.

Most analysts report it was too early to tell

However, some domestic workers, yardmen,

porters, janitors, and farm laborers are apparently out of work because of

the increase in the minimum wage.

One report from a large Georgia city in­

dicated that some women have quit their jobs rather than pay the higher cost

of employing domestics.

- 21 -

SEVENTH DISTRICT - CHICAGO

The economic picture in the Seventh District is mixed, both among

industries and localities.

Capital goods producers continue to push output

against limits imposed by availability of resources.

struction remains generally strong.

Nonresidential con­

On the other hand, output of autos, small

trucks, and recreational vehicles remains well below the levels of last year,

and there is scant hope for an early revival in the severely depressed housing

industry.

Shortages of material remain widespread, although easing in supplies

is reported in some sectors.

everyone.

Inflation is a constant sore point with almost

Announced increases in wages and salaries are running in the 9- to

12-percent range and some are higher.

Prospects for the corn crops, so opti­

mistic in early May, have been seriously altered by heavy rains.

There is no longer any serious concern that fuel shortages will hold

back activities in the next several months.

A question of the availability of

power supplies has developed, however, because of difficulties with the opera­

tion and construction of nuclear plants in Michigan and Illinois.

A great contrast exists in the Seventh District between Michigan, where

insured unemployment is at the highest rate since 1961, and Iowa, where labor

shortages "run the gamut."

in the summer.

1973.

The situation in Michigan should improve relatively

Auto output is scheduled at a third quarter record, except for

(Hopes have faded for any significant improvement in auto sales until

1975 models come on the market.)

In Illinois and Wisconsin, insured unemploy­

ment is above the year-ago level but well below the rates of 1971 or 1972.

Strongly influenced by demand for auto components, Indiana is in an intermediate

position.

- 22 Announced increases in wages are substantial, as pressures mount

to offset two-digit inflation.

The "revelation" that the auto workers'

gain last fall was valued at 11.6 percent has set a mark for other bar­

gainers.

Nonunion employees of the nation's largest airline (headquartered

in Chicago) will get increases totaling 11 percent this year.

A number of

municipalities have granted "across-the-board" increases of 9 percent.

Union supermarket clerks

$5 per hour.

in

Detroit obtained a

14-percent boost in

May to

Demands are being enforced by strikes, many of short duration,

in various sectors.

The District's capital goods producers, without exception so far

as we can determine, are going all out to try to contain mounting backlogs.

Many have modified their methods of accepting and booking orders to hold

down the "water" in their backlogs and to get scarce equipment direct to

customers.

Several producers of equipment for farming, construction, and

mining have announced large, new expansion programs of their own in recent

weeks.

Along with producers of machine tools, these firms, increasingly,

look upon demand for their products as basically strong through 1980 or

beyond.

The end of price controls on April 30 probably loosened supplies

of some raw materials and components, as market forces were allowed to

operate more freely.

Because of adjustments of production schedules to

higher profits lines during the control period, however, the process will

take some time.

Steel is now the most commonly mentioned item in short

supply and substitutes are seldom possible.

Output will be down in the

third quarter, and imports are available only in limited amounts and at

extremely high prices.

Castings and forgings frequently are cited as

- 23 ­

bottlenecks, partly because some shops have been shut down in recent

years.

Most nonferrous metals, many chemicals, and paper remain on the

typical shortage list.

Cement capacity is said to be down because

plants have been taken out of production for environmental reasons and

for needed maintenance.

District housing experts do not expect any large benefits from

the Administration's proposals to inject funds into the mortgage market.

This is partly because of specified restrictions on the mortgages to be

financed and partly because it is believed that a substantial portion

of the funds would be diverted to other markets.

Savings outflows con­

tinue at S&L's, and loan commitments have been at very low levels.

Pressures to lift the 8-percent usury ceiling in Illinois have not been

sufficient to date.

Chicago S&L's are reported to be charging fees of

7 or 8 percent on new loans, with interest rates at 7.5 percent.

Assum­

ing an average loan life of 8 to 12 years, effective rates on such loans

can be 9 percent or more.

Extremely wet weather in the corn belt in the past four weeks

has restricted field work and has left water standing in fields already

planted.

Corn plantings, which had been well advanced in early May, are

now only equal to last year's slow pace.

behind their normal schedule.

Soybean plantings also are far

Continuing heavy rains in recent days may

have caused some farmers to switch acreage to soybeans.

Yields on corn

already planted will be reduced, partly because of hampered weed control.

Heavier-than-expected marketings cf cattle and hogs suggest that the num­

ber of animals on feed, especially hogs, had been underestimated.

of meat in cold storage are very large.

Stocks

Lower wholesale meat prices have

- 24 ­

been accompanied by sharp declines in cheese prices, much to the dismay

of the State of Wisconsin.

- 25 -

EIGHTH DISTRICT -

ST. LOUIS

Economic activity in the Eighth Federal Reserve District has con­

tinued moderately upward in recent weeks.

Retail sales have increased on a

seasonally adjusted basis; and manufacturing activity,

automobiles, is generally at full capacity.

with the exception of

Construction is at a standstill

in St. Louis as a result of a strike, and residential construction has slowed

throughout the District.

Total employment is

ployment rate is relatively low.

jor

concern of businessmen in

down slightly,

but the unem­

Inflation and supply shortages remain a ma­

the area.

demand has slowed and bankruptcies

Bankers report that growth of loan

are up.

Farming conditions are mixed.

Livestock feeders are losing money, but most crop prices remain at profit­

able levels for producers.

Retail sales in the Eighth Federal Reserve District have generally

continued upward in recent weeks.

A representative of a major St. Louis de­

partment store reported that sales of all major lines except women's fashions

had increased on a seasonally adjusted basis.

Sales increases were also re­

ported by businessmen in Arkansas, Mississippi, and West Tennessee; however,

some slowdown in the rate of consumer purchases may have occurred in Louisville.

Sales of appliances, however, were reported to be holding up surprisingly well

in Louisville and St. Louis, in view of the decline in housing construction.

Manufacturing activity in the District is

city with the exception of automobile production.

assembly plants in

the St.

continuing at full capa­

Two of the major automobile

Louis area have laid off one shift

each,

or roughly

one-third of their work force, and a third plant has laid off a few workers.

Most other manufacturers

report

that backlogs of orders still

exist for most

- 26 ­

types of capital equipment.

There has been some slowing in demand for cer­

tain types of appliances, primarily of the gas burning type; however, the de­

cline was more than offset by gains in other appliance sales.

Demand for home

freezers is especially high, reflecting the larger number of home gardens in

urban areas and plans for freezing the vegetable crop.

With the slower rate

of home building and automobile output, demand for plastics and fibers is

down; and even though raw material sources for such products, largely petro­

leum, have become scarcer, the upward price pressures have been less than ex­

pected.

Residential construction has slowed in most of the District, and, in

St. Louis, it has come to a standstill as a result of a strike by the con­

struction workers.

Single-family housing is also reported to be at a stand­

still in Memphis and falling off in Louisville and Little Rock.

Commercial construction is spotty.

It has been halted by the strike

in St. Louis, but in other parts of the District it varies from slow to mod­

erate, being retarded in some communities by shortages of equipment and ma­

terials.

The latest available data indicate a slight decrease in total em­

ployment in most Eighth District states compared to the beginning of the

year.

The unemployment rate was unchanged in April from the previous month

and remains below the national average of 5 percent.

In Mississippi, Missouri,

and Tennessee, the unemployment rate is below 4 percent.

In the Eighth

District SMSA's, it ranged from 2.7 percent in Little Rock to 5.7 percent

in St. Louis.

Inflation remains a major concern of Eighth District businessmen.

Suppliers of many items are reported to be wary of quoting a price of future

- 27 ­

delivery.

A major manufacturer in

Louisville reported that materials costs

have skyrocketed, largely reflecting shortages in steel and plastics.

A

Louisville brewery representative reported that increased costs of supplies

and inability to raise selling prices were major problems.

72-percent increase in

He reported a

the cost of barley malt since the first

and an 82-percent increase in

the cost of corn since last year.

of the year

A Little

Rock businessman reported that roofing asphalt has risen 56 percent this

year and that benzene has risen tenfold since 1973.

tilizer

prices continue.

Complaints of high fer­

An Arkansas businessman viewed with alarm our

decision-making process which allows the money supply to increase while in­

flation is accelerating.

There were a number of comments,

rate of inflation may be subsiding.

however,

to the effect that the

A St. Louis businessman reported that

a number of formerly scarce items were becoming more available and that peo­

ple are beginning to back away from panic buying.

An oil industry representa­

tive reported that the price of crude oil has fallen back from winter levels

and that more gasoline has come on the market in

the last two weeks.

He ex­

pects a stabilization of gasoline prices this summer.

Loan demand at major Eighth District financial centers may have

change

reached a plateau.

Total loans at the major banks showed very little

from April to May.

Demand deposits have continued sharply upward in

weeks,

recent

but other deposits have remained fairly stable.

The savings and loan associations reported large inflows of funds;

however,

outflows were often greater than the inflows,

certificates

are not being renewed.

as the 7 1/2-percent

Holders of these certificates

vesting their savings in higher-yielding assets.

are in­

Bankers reported that

- 28 ­

bankruptcies and delinquencies are the highest in several years.

ers associate this problem with the labor stoppages,

seem to be a problem in

Some bank­

but delinquencies also

areas that have not experienced severe strikes.

The agricultural situation varies from good to bad, depending on the

type of farm production involved.

recent weeks.

All feeders of animals have lost money in

Beef cattle feeders have probably suffered the worst losses.

Some are believed to have lost as much as $100 per cow.

Crop planting got off to an excellent start in most of the District,

but,

in

recent weeks,

planting has been slowed because of excessive rainfall,

especially in Illinois and Indiana.

If farmers are further delayed in plant­

ing corn, they will be forced to switch to faster-maturing,

varieties or to some other crop.

lower-yielding

Most crop prices remain favorable to pro­

ducers, providing incentive for sizable output increases over the 1973 crop.

- 29 -

NINTH DISTRICT - MINNEAPOLIS

According to directors' responses, the combination of scarce mort­

gage funds and high interest rates has seriously curbed District home

building; the directors do not believe recent government efforts to stimu­

late this industry will significantly benefit the District.

So far, high

interest rates have not reduced loan demand at District commercial banks,

and retail sales have been quite strong.

Several directors expect business

to remain good this summer, but others are less optimistic.

District auto­

mobile sales have held up quite well, and the outlook for this summer's

tourist business is quite optimistic.

Directors indicated that it's still

difficult to get farm machinery, but demand may ease later this year or in

1975.

Our latest quarterly industrial expectations survey indicates that

District manufacturing activity should expand through the rest of 1974.

Directors commented that recent increases in interest rates and a

lack of mortgage funds have slowed District home building.

A Montana di­

rector said that his area's home building had come to a "grinding halt,"

and a Minneapolis-St. Paul area banker indicated that there are signs of

accelerating weakness in the home building industry.

Three directors re­

ported no shortage of mortgage funds, but one of them felt that lenders were

being more selective in granting home loans.

The directors stated that the

recent $10.3-billion Federal program to bolster the housing industry would

not significantly affect the District.

Despite weaknesses cited in resi­

dential construction, directors thought that total construction activity

would remain strong, with increases in industrial and commercial construc­

tion, as well as heavy construction, offsetting declines in residential

- 30 ­

construction.

In Montana, however, strikes have currently stopped construc­

tion activity.

Several directors noted that high interest rates have not deterred

District businessmen from borrowing and that loan demand is strong at

District banks.

For example, loan officers at a major Minneapolis-St. Paul

area bank foresee no slowdown in loan demand in the near future.

One di­

rector, however, indicated that businessmen are becoming very sensitive to

the cost of working capital.

Furthermore, some small and marginal busi­

nesses are having difficulty in obtaining funds, and some businessmen may

have to forego new projects.

Some directors suspected that their area banks

may be encountering difficulty in accommodating current loan demand.

In

one area, District businesses are straining to obtain funds and are leaning

on their customers to pay their bills; in another, businessmen have encoun­

tered difficulties in collecting accounts receivable.

District retailers have enjoyed a good year so far, and several

directors expect business to remain quite good.

A director associated with

the retail trade industry said that his business, which has been strong all

year, has even improved recently.

But a Twin Cities area banker looked for

slack in consumer spending during the last half of 1974.

He also mentioned

that although retail spending has been relatively better in MinneapolisSt. Paul than in the nation, the unit volume of goods sold in the Twin Cities

has changed very little from a year ago.

Reinforcing this observation, one

director reported a moderation in retail sales growth in his area and indi­

cated that businessmen are not as optimistic as they were two to three

months ago.

Furthermore, a southern Minnesota director indicated that

- 31 ­

concern over recent agricultural price declines may dampen consumer spending

in his area this summer.

Automobiles have been selling somewhat faster in the District than

in the nation in recent months; however, May sales in the MinneapolisSt. Paul metropolitan area were down markedly.

Conversely, consumer interest

to consumer resistance to higher car prices.

in recreational vehicles has been renewed.

Declines were attributed

The outlook for the District's

tourist business this summer is generally quite optimistic.

However, a di­

rector in the upper peninsula of Michigan indicated that concern with the

availability of gasoline has clouded the outlook for tourism in his area.

Generally, the directors felt it was hard to get farm machinery in

the District and, since many dealers have large order backlogs, the situa­

tion probally would not improve this year.

However, the demand may be

overstated if farmers are ordering equipment from more than one dealer.

Also, the prospects of lower agricultural prices and farm incomes this year

may reduce the demand for farm machinery in 1975.

A director from western

South Dakota said that because of a lack of moisture and concern over agri­

cultural prices, the major implement dealer in his area expects business

may be off as much as 33 percent from last year.

Our second quarter industrial expectations survey shows continued

expansion in District manufacturing activity.

After rising 12.7 percent

from a year earlier in the first quarter, District manufacturing sales are

expected to increase 15.9 percent in the second quarter, 14.2 percent in

the third quarter, and 11.5 percent in the fourth quarter.

With an upward

revision in the durable goods manufacturing sales forecast, the second and

third quarter sales expectations are higher than those made in February.

- 32 -

Nonelectric and electric machinery manufacturers--the District's major du­

rable industries--look for substantial sales gains, while District food

processors--the major nondurable goods producers--expect very little growth

during the last half.

- 33 -

TENTH DISTRICT - KANSAS CITY

Major retailers in the Tenth District report modest sales increases

over last year and appear moderately optimistic about the rest of 1974.

Sales

of new domestic automobiles have grown more than seasonally in recent months,

with some relative movement away from small cars.

Lower livestock prices and

prospects for a smaller wheat crop than was expected earlier may weaken the

District farm income situation.

However, little of the substantial decline

in meat animal prices has shown up in retail meat prices.

Although business

loan demand at Tenth District banks remains strong, there are some indications

that a slowdown in the growth of such loan demand may be under way.

The retail sales picture continues to be mixed, according to reports

from department stores across the Tenth District.

Different firms in the same

metropolitan area report widely differing growth in sales, along with the

usual divergence from city to city.

One major retail firm reports that its

sales in rural areas are very good but that the sales picture in the metro­

politan areas is "not so rosy."

While furniture sales are apparently weak,

sales of other consumer durables--especially appliances--seem to be fairly

strong.

Much of the inventory growth reported is said to be almost wholly

in dollar terms, with some firms reporting declines in unit terms.

Several

firms emphasized the high holding costs for inventories as an important in­

fluence on their policies.

Attitudes of the various respondents toward

future sales may be summed up as moderately optimistic.

Sales of new domestic automobiles seem to be showing slightly more

than seasonal growth in recent months.

Sales are shifting back to large­

and intermediate-sized cars, compared to the December through February period.

- 34 -

Buyers seem to be accepting standard engine sizes for a given model but con­

tinue to add options such as air conditioning and automatic transmission on

all sizes of cars.

There may be some movement away from such accessories as

power windows and power seats.

Reports on inventories vary so much from

dealer to dealer that the situation is impossible to summarize.

Sales of imported cars in the Kansas City area have slipped substan­

tially since February, with changing attitudes toward the fuel situation

cited as the major reason.

As a result, inventories are now very heavy.

A

Volkswagen dealer feels that the manufacturer simply guessed wrong on the

duration of the gasoline shortage and the longer-run attitudes of car buyers,

with inventories becoming "burdensome" as demand "fell apart."

Prices and weather continue to dominate the agricultural picture.

The latest report on sliding farm prices, which have now fallen about 14 per­

cent since February, offers more evidence that processors and food retailers

are allowing profit margins to widen before adjusting their prices.

Hog and

cattle prices are down 30 percent and 12 percent, respectively, from a year

ago, but the decline in red meat prices has been 3 percent or less.

This

reluctance to pass lower meat animal prices on to the consumer has slowed

the movement of meat through the marketing chain and has contributed to an

oversupply of heavy animals.

Consequently, the livestock industry continues

in a depressed financial state.

However, on the basis of a recent telephone

survey to a limited number of commercial bankers, most cattle loans have been

adequately secured during the past year, thereby minimizing the number of bad

loans.

It was reported that a few rural banks may be in jeopardy because of

poor cattle paper.

- 35 -

The District's wheat situation has not improved since the last Red

Book.

Various reports indicate that drought has destroyed much of the crop

in New Mexico and Colorado.

Given the recent planting difficulties in the

spring wheat regions, 1974 wheat production may fall short of official es­

timates.

However, the crop is still expected to surpass last year's record

of 1.7 billion bushels.

The volume of business loans declined substantially during May at

weekly reporting banks, thereby providing some indication that business loan

demand has perhaps begun to slow.

Furthermore, in a survey of large District

banks, several reported signs of a cooling in loan demand, as indicated by a

reduction in the volume of new loan requests.

However, other banks in the

survey, in spite of experiencing a decline in business loans in May, still

felt that business loan demand was exceptionally strong and was showing no

signs of abatement.

Whatever the future direction of loan demand might be,

it was the consensus among the surveyed banks that current loan demand was

quite strong.

As a result, virtually all banks were more actively policing

compensating balance requirements and repayment schedules.

District banks also experienced sizable inflows of CD's during May.

In spite of press reports indicating that medium-sized banks might experience

difficulty in attracting CD's in the wake of the problems at Franklin National

Bank, apparently that was not the case with larger District banks.

None of

the surveyed banks reported having any difficulties in attracting and rolling

over maturing CD's or having to pay a premium rate on CD's.

- 36 -

ELEVENTH DISTRICT - DALLAS

The rise in retail food prices has been slowing recently at leading

grocery store chains in Texas, and executives of these chains expect the

trend to continue through midsummer.

Lower meat prices have accounted for

much of this slowdown, and food chains report that beef prices have dropped

to the lowest level in two years--down 10-20 percent from the February peak.

However, sales have not rebounded as anticipated because most shoppers now

appear to be willing to eat less beef.

While total purchases of beef remain

depressed, recent buying patterns suggest some consumers are responding to

lower prices by resuming purchases of better quality and higher priced cuts.

This has led to a slowdown in the sale of vegetable extenders, which accom­

panied the soaring demand for ground beef last winter.

The reduced demand for beef, coupled with higher marketing costs,

is resulting in smaller profit margins for food retailers, according to a

representative at one of the leading chains in the state.

He points out

that over the past year the cost of handling and shipping beef from the

feedlot to the meat counter has increased 15 percent, but his stores have

been able to pass only about two-thirds of the added expense on to consumers.

He expects, however, that because fewer cattle are being fed, beef prices

will rise by midsummer as retail supplies are likely to decline.

Cattlemen currently have limited funds for buying animals to place

on feed because of the depletion of their equity capital through heavy losses

in earnings since last September.

Their reduced equity positions are limit­

ing the amount they can borrow from banks.

The loan terms of most banks in

the Eleventh District require that borrowers maintain an equity investment

of about 25 percent in the cattle being financed.

- 37 -

Business loan demand at large banks in the Eleventh District has con­

tinued strong through May.

A number of these banks were recently surveyed

concerning the composition of this demand.

While most reported no real change

in the composition of loan demand, there was some evidence that long-term

business borrowing is being deferred because of depressed bond and stock

prices.

For example, business loans to oil companies have been strong in re­

cent weeks, and one Houston bank indicated that it was lending to a number of

oil companies and gas transmission companies that were using short-term bank

funds until conditions improved in bond and equity markets.

Utility rates for gas and electricity in Texas have risen only about

one-fourth as rapidly as those for the nation as a whole this year.

disparity primarily reflects the cost of producing electricity.

The wide

Because of

the reliance on natural gas as a boiler fuel, electric utilities in the state

have largely escaped the dramatic price increases for coal and oil.

In

addition, production costs and rate increases have been held down because

the recent purchases of higher priced gas have been averaged in with existing

fuel stocks which were purchased earlier at considerably lower prices.

For

example, a large electric utility in the state reported that the cost of gas

has risen 20 percent in the past year.

However, by averaging the newly con­

tracted gas with the lower priced gas purchased earlier, rates paid by cus­

tomers were raised just 6 percent.

- 38 -

TWELFTH DISTRICT - SAN FRANCISCO

Little change has occurred in the economic outlook of our directors

from the previous month.

Inflation is the major policy concern.

Existing

levels of activity are expected to be maintained, with little real growth

until the third quarter.

Business expenditure on plant and equipment is a

major source of strength, but expansion efforts are hampered by shortages.

Consumer spending appears to be off somewhat, but there has been a recovery

in car sales.

Agricultural prospects are excellent throughout the District.

Despite record interest rates, there has been little impact on borrowers'

demand and banks continue to be selective in making loans.

Businesses continue heavy spending to expand plant and equipment,

as pressures on capacity and build-up of orders show little sign of easing.

Delays in shipments and shortages are a common problem that is affecting

both expansion and current production.

Businesses are attempting to protect

themselves against the uncertainties of obtaining needed supplies by build­

ing up inventories whenever possible.

Plastics, basic petrochemicals,

steel, and electrical goods are all subject to delays in shipments.

Infla­

tion causes additional uncertainty, and contract prices are being quoted as

"those existing at time of delivery."

Some of the large California banks report slower consumer spending.

The growth of retail spending has continued but at a slower pace, in part

because inflation is making consumers more careful.

Automobile sales have

been recovering, and sales are at higher levels in most areas.

Sales of

standard-sized cars are better, and some directors report that sales of

foreign compact cars are off now that the gasoline shortages have eased.

- 39 -

Higher prices on these cars is another factor in their weaker sales.

Foreign

luxury car sales, in contrast, are being maintained.

Several directors are concerned about a deterioration in consumer credit

and a rise in personal bankruptcies.

In one case, a bank president in southern

California feels that a similar weakness exists in some major businesses that

are continuing to receive "unbelievable" lines of credit from competing banks.

Residential construction shows little sign of recovery, although one

large California bank expects modest gains in the months ahead.

Nonresiden­

tial building, in contrast, reflects heavy investment spending.

Activity is

high, but the completion of many projects is being hampered by structural

steel shortages.

A director cites the case of a building requiring 1,300 tons

of structural steel, of which reasonable delivery exists for only 500 tons.

In some regions, strikes by construction workers might also disrupt building

activity.

In southern California, a director described several major projects

which are being delayed by new environmental controls.

In forest products, lumber prices are lower, but demand for pulp and

paper remains good.

Producers in this industry also report that supply short­

ages are hampering production.

in all parts of the District.

Agricultural prospects appear to be excellent

Weather conditions, with few exceptions, have

been favorable, and farmers expect good crops with satisfactory prices.

Farmers are continuing to expand acreage and to upgrade their equipment, in

part to offset labor shortages.

Record interest rates, according to the replies from commercial

bankers, have not had any significant impact on loan demand, except perhaps

in construction finance.

Borrowers are willing to pay going rates and either

try to pass the cost on or accept temporary reductions in profits.

The problem

- 40 ­

for borrowers is availability, not prices.

Banks are generally more restric­

Business demand is directed

tive and more careful in accepting new customers.

toward inventory build-up as well as expansion.

Consumer loans show more

variation among banks, but credit-card borrowing is continuing to increase.

Borrowing is heavy in agricultural districts, both to finance new

construction by food processors and to expand crop production.

Additional

borrowing needs reflect demands by fertilizer and equipment dealers for cash

payment.

Dealers in such states as Washington, Idaho, and Utah are ceasing

to carry their customers over the growing season.

Higher interest rates are

not restraining agricultural loan demand.

Inflation remains the major concern of our directors.

Opinion is

somewhat divided, but a majority think the rate of inflation will become less

during the rest of the year.

Yet, several directors are worried about the

size of future wage settlements and expansionary tax cuts which may stimulate

even more price rises.