Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

August 14, 1974

TABLE OF CONTENTS

SUMMARY .

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First District --

.. ...

Boston

. .

... .

. . . .

Philadelphia

Fourth District --

Cleveland

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. . .

Richmond

Sixth District --

Atlanta . . . . .

Chicago . .

Eighth District -- St. Louis

Ninth District --

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1

4

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7

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10

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13

17

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20

. . . .

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23

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25

Tenth District -- Kansas City . . . .

Dallas . . . .

Twelfth District -- San Fancisco

i

. . . . ...

.

Minneapolis . .

Eleventh District --

. . .

. . . . . . . . .

. . . . . .

Fifth District --

Seventh District --

..

. . . . . . . . ...

Second District -- New York . . . . .

Third District --

..

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.

28

. . . . . . . ...

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31

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SUMMARY*

District reports present a mixed picture, with elements of weakness

generally overshadowing those of strength.

There are scattered indications

that shortages and bottlenecks are breaking up in some sectors, although

shortages of certain industrial goods remain critical.

Many firms have been

critically reexamining their capital spending plans, and some have scaled back

such plans, not only among public utilities but in some other sectors as well.

Similarly, more cautious inventory policies seem to have been adopted by some

firms.

Consumer spending on appliances continues sluggish, but demand for

the remaining 1974 model automobiles appears to have strengthened.

construction continues to languish.

Residential

Inflation remains a serious concern,

especially in light of recent estimates of a significant drop in the expected

harvest of certain key agricultural commodities.

Regional differences in the state of overall economic activity were

reflected in the District reports.

Economic conditions were characterized

as mixed by Cleveland and Atlanta and as showing "marked contrasts" by Chicago.

Activity was described as sluggish and slowing by Philadelphia and Richmond,

respectively, while Minneapolis reported that prospects were not as promising

as earlier in the year.

On the other hand, manufacturing activity was reported

strong by St. Louis and San Francisco, and Dallas reported that factory orders

are generally running ahead of year-ago levels.

Capital spending plans are being subjected to increasingly critical

scrutiny, and some cut-backs were reported even outside of the public utility

sector, where deferrals and cancellations of capital investment projects are

widespread.

Among others, Philadelphia and Richmond report reluctance on the

*Prepared by the Federal Reserve Bank of New York.

-

ii ­

part of manufacturers to increase such outlays, with some manufacturers planning

some cut-backs.

tools.

Cleveland reports some softening in new orders for machine

On the other hand, Chicago and St. Louis report continued strong

demand in the capital goods industry, and San Francisco reports that business

investments are heavy.

As in the case of capital spending plans, inventory policies have

been under reexamination.

The emergence of more cautious inventory policies

on the part of businesses was reported by a number of banks, including New York,

Philadelphia, Cleveland and Richmond.

Some easing of shortages was reported

by Chicago and Cleveland, although Cleveland also noted continued intense

demand for steel and desperate attempts on the part of industrial firms and

utilities to stockpile coal.

Shortages were reported to be continuing to hamper

output in the San Francisco District.

Several banks reported that residential construction remains in the

doldrums.

Other types of consumer outlays appear sluggish for the most part,

although Richmond noted a rebound in retail sales and San Francisco characterized

such sales as "good".

A number of banks reported weakness in sales of big-ticket

items such as furniture and appliances.

On the other hand, several banks,

including St. Louis and San Francisco, observed a strengthening of automobile

sales.

Despite the apparent slowing down of business activity and the

reported easing of supply conditions in a number of industries, concern over

inflation continued to be expressed by many respondents.

These fears have

been heightened by recent reports of prospects of significantly lower harvest

of certain key agricultural products, notably corn and soybeans, than expected

earlier in the year--a situation described in detail by Minneapolis and

Kansas City and referred to by several other banks.

Agricultural conditions

- iii ­

were reported to be more favorable in several Districts, including Richmond,

Atlanta, and San Francisco.

The demand for bank credit generally continued strong.

The adoption

of tighter bank lending policies, which in some instances may have helped

contain the expansion, was mentioned by several banks, including Dallas,

Philadelphia, Minneapolis, and New York.

Thrift institutions were widely

reported to still be losing deposits, and to have been especially adversely

affected by the recent Treasury sale of 9 percent notes in denominations as

low as $1,000.

FIRST DISTRICT--BOSTON

Our directors' reports vary.

Some indicate that business continues

to be pretty good, although below peak levels, while others note concern

about where the economy is heading.

Unemployment rates in New England are

climbing, with the seasonally adjusted rate in June reaching 7 percent in

New England as a whole and 8 percent in Massachusetts.

Energy-related develop­

ments continue to affect business conditions, prices, and the outlook.

Tourism, affected by fears of gasoline shortages, picked up in July

after a very slow June.

The number of tourists appears to be about the same

as last year, but they are not buying as much.

Dollar sales seem to equal

year-ago levels but, due to higher prices, real sales are down 10 percent,

according to industry spokesmen.

A director from a large conglomerate reports that carbon black sales

continue doing pretty well, but that much of their profits are inventory profits.

There is expected weakness in the carbon black markets because of sluggish auto

sales.

Despite a slowdown in sales, this manufacturer plans to raise prices

again to reflect rising costs.

Carbon black is made from petroleum feedstocks

whose prices have tripled since last fall.

Natural gas is expected to be in very short supply again this year.

Companies with southern pipelines supplying the Northeast have informed

New York and New Jersey utilities that they will not be able to meet their

contracts.

According to our director who is involved in bringing liquid

natural gas (LNG) from Algeria, deliveries are still being held up by

Federal regulatory agencies and by plant problems in Algeria.

This LNG is

under contract to New York and Boston utilities.

A booming area is specialty metals and alloys.

Demand has increased

in part because of conversion needs caused by the energy shortage.

In addition,

our directors report continued stockpiling of strategic metals and minerals

like copper and zinc.

High interest rates have dampened loan demand and deposit growth.

Our directors from small and moderate-size banks from Massachusetts and

New Hampshire report demand deposits lower than a year ago.

They suspect

that there has been some loss to new accounts and to Treasury bills.

loans are also lower, due to higher interest rates.

Business

Even the home improve­

ment loan business is being affected.

A business director reports that tight money is having a general

impact and that there is a widespread feeling that there is a big tail-off in

expenditures on all kinds of things.

He notes that intermediate-size firms

are being locked out of credit markets.

expansion plans.

As a result, they are deferring

He feels that uncertainty about when interest rates will come

down is making firms delay borrowing because they are afraid of being locked

into high rates if they are about to drop soon.

Professors Eckstein and Samuelson and Dr. Shapiro were reached for

comment this month.

All agree that the economic outlook has deteriorated

significantly recently.

On the basis of the data revisions, Shapiro fore­

casts an inventory recession.

The inventory figures along with foreign

borrowing explain the strength in business loan demand in the first quarter.

Despite his forecast that the recession will bring unemployment to between

6 and 6.7 percent by mid-1975, Shapiro recommends a money growth target of

4 to 5 percent, "although the Fed may be in some trouble if it pursues

4 percent too rigorously".

Eckstein's forecast is for 2.5 percent real growth over the next

year, but he grants that this is at the optimistic end of the range.

With

tighter money, short-term interest rates would stay high, the housing recovery

of 1975 would be totally aborted, consumer durables would weaken in late 1975

and 1976, and capital spending would be hurt in 1976.

of inflation would come after 1976.

The benefits in terms

To preclude this outcome, Eckstein argues

that the Federal funds rate should be brought down to 10 percent by the year­

end.

In the meantime, the Fed must monitor the disintermediation situation

carefully and be prepared to let rates fall more rapidly.

If the Fed continues

its tough policy, Eckstein feels that it must become more sympathetic to the

selective credit controls approach.

The Federal Reserve is creating a shortage of liquidity, according

to Samuelson, and it needs to get ready to bail out the thrift institutions.

In light of the universally bleak outlook, he urges those who favor continued

monetary restraint to do a careful cost-benefit analysis of the scenarios under

different regimes of money growth.

Attempts to analyze the output costs and

inflation benefits of stagnant growth, such as those by Tobin, Gordon,and Hall,

all indicate very little inflation abatement from even very lengthy periods

of stagnation.

Advocates of "old time religion" must be aware of what they

are paying and how much they are buying.

is nothing in the store."

"They're buying little because there

The appropriate, near-term goal for monetary policy,

according to Samuelson, is to burn a low two-digit inflation down to a high

one-digit inflation, while praying for good weather and weakness in the

Arabian cartel.

8 percent".

Under these circumstances, "tight money begins at less than

SECOND DISTRICT--NEW YORK

In the views of the Second District directors and other business

leaders who were contacted recently, while many firms are critically reexamining

their capital spending plans, few are cutting back such plans, with the notable

exception of utilities.

The majority of the respondents similarly felt that

no major attempts to reduce inventories had got underway as yet.

At the same

time, however, the comments of several respondents indicated that somewhat

more cautious inventory policies might be emerging.

Some observers expected

the 1974 model automobiles to sell out quickly but expressed apprehensions

about the outlook for demand for the 1975 models.

Views were mixed regarding

the prospective strength of business loan demand, but there was general agree­

ment that bank lending policies had become tighter.

Regarding business plant and equipment outlays, the Buffalo branch

directors felt that despite currently tight conditions in the financial market,

most corporations were going forward with their capital spending plans, prompted

by shortages in productive capacity and by the need to improve productivity.

Among other respondents, a senior official of a New York City securities firm

reported that except for utilities and some other scattered instances, he could

not discern cutbacks in corporations' longer term capital investment plans,

a view that was expressed by several other respondents.

And while a New Jersey

banker felt that a continued high level of interest rates might eventually

lead to some retrenchment in business capital outlays, he had seen little of

that so far in his area.

Similarly, most of the respondents had observed no major efforts as

yet to reduce inventories.

The official of the securities firm stated that

notwithstanding the high level of interest rates, the current rate of inflation

still made it profitable to accumulate inventories.

Several respondents at­

tributed the high level of inventories to the rapid inflation and the fre­

quently long delivery lead-times which encouraged businessmen to increase

stocks on hand, both as a hedge against further price increases and as

protection against shortages.

On the other hand, a senior official of a

nationwide department store chain attributed the recent buildup in that firm's

stocks to a shortening of some suppliers' delivery lead-times.

A senior

economist at a large New York City bank reported that whereas until recently

the bank's corporate clients had been using credit to "invest" in inventories,

the rise in interest rates combined with the fact that the prices of many

commodities were no longer rising as rapidly as previously had made the carrying

of excessive inventories "too costly", and that this had been reflected in some

slowdown in the rate of accumulation.

Similarly, a senior official of a large

upstate New York firm stated that in view of the rise in interest rates and the

decline in price of some commodities, carrying excess inventories had become

"risky".

Regarding consumer spending, the department store chain official

reported that his firm's sales had been better than expected during the first

half of the year.

He expected a good second half, although the rate of increase

would probably be slower.

An upstate retailer expected an increase in dollar

sales over last year's level but somewhat lower physical volume.

director saw the retail sales picture as being fairly flat.

Another

The New Jersey

banker expected that retail sales--particularly of automobiles and other big­

ticket items--would be adversely affected by inflation.

In this connection,

an upstate banker reported a sharp reduction at his bank in consumer loans for

appliance purchases, although demand for home improvement loans remains heavy.

Several respondents felt the short-run outlook for automobile sales was better

today than a few months ago and expected a rather quick sell-out of remaining

1974 models.

They did note, however, that the long-term outlook for auto sales

was clouded by concern over public acceptance of 1975 models equipped with

largely unproven catalytic converters and by the uncertainties regarding the

availability of the lead-free gasoline required to fuel models equipped with

such anti-pollution devices.

With respect to the demand for business loans, the New Jersey banker,

the securities concern official, and several other respondents saw no let-up

at this time.

On the other hand, several upstate bankers felt that such

demand had probably peaked, at least for the balance of the year, in part, as

a result of sluggish economic conditions.

Similarly, a senior economist at

a major New York City bank reported that business loan demand at his bank,

while still high, was tapering off.

The respondents in general reported a tightening in banks' lending

policies.

Among others, the New Jersey banker stated that his bank had adopted

a "hard nosed" lending policy.

It was making no new commitments and extending

only modest amounts to regular customers.

Similarly, the New York bank economist

reported that his firm had not taken on new corporate customers for some time

and was discouraging its regular customers from borrowing for non-productive

purposes such as accumulation of excess inventories and the acquisition of

other firms.

THIRD DISTRICT--PHILADELPHIA

Economic activity in the Third District continues to advance at

a sluggish pace.

Manufacturing activity is posting little change, and manu­

facturers expect this trend to hold steady at least until February.

levels, too, remain stable.

Employment

Inventory stocks are being held constant, with

manufacturers reporting few plans to increase their existing levels in the

next six months.

Earlier optimistic plans for boosting spending on capital

goods have been revised down again this month.

This slow-paced business activity is also showing up in some declines

in retail sales.

Both retailers' and manufacturers' expectations of higher

prices in the months ahead could add fuel to the slowdown in business activity

in the regional economy.

Area banks experienced some disintermediation in

early August, but no liquidity problems were reported.

Loan levels, as well

as deposit levels, are reported lower at most District banks.

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

business outlook survey, report that business activity in the Third District

is continuing to move along at a slow pace.

Seventy percent of the respondents

report no change in new orders, shipments, and unfilled orders in August.

The executives' six-month outlook reflects a continuation of this trend.

Twelve percent more of the area manufacturers expect an increase in these key

indicators than expect a decrease, with the remaining third anticipating no

change at all by February.

Presently, the slowing in manufacturing activity is having very

slight effects on employment in the District.

Over 80 percent of the res­

pondents report no change in their number of employees and the length of

their average workweek.

The employment picture isn't expected to alter much in the next

six months.

Seven out of ten executives expect to maintain stable employment

levels through February and to keep the length of the average workweek the

same.

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 region

in the months ahead.

Manufacturers are showing some reluctance to increase their inventory

stocks this month.

Just as many decreased their stocks as increased them, and,

respondents report that they expect to maintain this posture at least until

February.

For the second month, manufacturers indicate reluctance to boost

spending plans on plant and equipment.

Fifty percent of the respondents report

no change in capital expenditure plans, with the remaining 50 percent split

evenly between those who expect to step up their spending on plant and equipment

and those who expect to cut back.

Area retailers report a slight slowing in

sales in July despite widespread price reductions of season-end merchandise;

however, those executives surveyed report optimism for August.

But uncertainty

still remains regarding consumer spending later in the fall and winter.

Coats

and men's suits will post the largest gains on price, but executives report

higher price tags on most new merchandise.

facturing also remains pessimistic.

The outlook for prices in manu­

Seventy percent of the executives polled

expect to pay higher prices for raw materials in February and to receive higher

prices for finished goods.

Not one manufacturer reported any expectations

of price declines in the manufacturing sector of the regional economy.

Loan levels at regional banks dropped off in July and early August,

primarily because of restrictive loan policies.

Area banks are not soliciting

new business, and some report cancellations of existing credit lines.

Most

banks surveyed report few difficulties in the money market although, in

general, area banks must pay a premium for funds over that which New York

9

banks pay.

Disintermediation was a large problem last week for most commercial

banks as well as area savings banks.

Record outflows resulting from the

latest Treasury issue, coupled with a drop in deposit levels, produced a

substantial reduction in available funds.

problems were reported.

However, no severe liquidity

FOURTH DISTRICT--CLEVELAND

Reports from our directors and other business executives indicate

a mixed picture of strengths and weaknesses.

Inflation remains the main

concern of many of our directors, and their reports indicated that prices will

remain under upward pressure over the period ahead.

There is little firm

evidence as yet that the pace of economic activity in the District is slowing

down significantly, although there are some limited indications of softening

in capital spending plans among utilities.

Supply conditions generally have

eased, and this development coupled with higher interest cost is leading to

a reappraisal of inventory situations.

Demand for steel products remains intense.

Industrial firms and utilities are trying desperately to stockpile coal.

Con­

ditions in the District's savings and loan industry continue to tighten.

Early returns from our monthly survey of manufacturers showed some

weakening in new orders during July, following three consecutive months of

recovery.

Firms reported further moderate gains in shipments and inventories.

Backlogs are still rising, and price increases remain pervasive.

One of our directors associated with a major retail firm emphasized

that the physical volume of sales remains basically level.

In addition, he

was particularly pessimistic about the price outlook for the near term, noting

that most of the foods in the retail pipeline carried considerably higher

prices than goods currently on the shelf.

Several other directors also gave

pessimistic reports about the likely price structure for their products in

the months ahead.

A director, associated with a consumer products firm, noted

specifically that the firm's price increases reflect only higher costs for

raw materials and that the firm was absorbing other cost increases.

The supply situation for raw materials generally has eased in the

past few months, although there are still numerous reports of shortages.

Buying lead times for production materials have improved slightly since the

end of price controls.

Two of our directors--one with a large industrial

firm and the other with a consumer goods producer--noted that increased avail­

ability of basic materials and high interest costs are causing a significant

reassessment of inventory positions.

Another director mentioned that lift

trucks are being delivered faster and that paper companies in Ohio are now

giving quick delivery.

A chemical firm reported that certain petrochemical

products remain in short supply, while a chemical-rubber firm stated that

petroleum derivatives are now in ample supply.

The same company reported its

tire inventories are on the high side, but that it does not plan to cut produc­

tion.

Management is relying on a pickup in new car sales, especially fleet

purchases, to reduce its inventories.

An executive in the machinery industry

remarked that some of their inventories are growing faster than desired

because shortages of component parts have held up shipments.

Industrial firms and electric utilities in the District, which

depend on coal more heavily than the national average, are increasingly con­

cerned over the possibility of a miners' strike in November.

attempting to stockpile coal.

week inventory of coal.

Many firms are

The steel industry has only a two to three­

The steel industry would have to start cutting back

production immediately to protect its facilities in the event of a strike.

Steel demand remains strong as customers continue to stockpile

steel products.

An economist with a major steel firm said that the market

situation could turn around fast if customers stop hoarding.

rails, and plates are in particularly short supply.

Railroad wheels,

Companies are paying

a premium of $100 a ton over domestic prices for imported steel.

Capital spending plans appear to be holding up, although there are

some signs of softening.

Purchasing agents in the Cleveland area continue

to maintian long lead times for capital equipment.

Economists with petro­

chemical, machinery, and steel companies say their spending plans for the

remainder of this year have not been scaled down, despite the high cost of

borrowing and a squeeze on cash flow in some firms.

Steel mills are increasing

their capacity for making hot steel and semifinished products, where the pro­

duction bottlenecks are concentrated.

Nonresidential building awards in the

District remain strong, but there are indications of a softening in new orders

for machine tools and some other types of industrial machinery.

A director

in the machine tool business believes his orders backlog is about to level off

and then remain on a high plateau for about a year.

Other directors expressed

the opinion that industrial firms must be reexamining their capital spending

plans.

Several utilities in the District recently announced cutbacks in

planned capital spending programs.

The District's savings and loan associations lost deposits throughout

the month of July and during the first week of August.

An official with a

Federal Home Loan Bank described the situation as poor, but not exactly a

disaster.

Recent deposit outflows were greater in Cleveland and Cincinnati,

and were related to the Treasury note offerings.

Savings and loan associations

are still making mortgage loans; all are at rates of 9 percent or higher--some

are charging 10 percent.

FIFTH DISTRICT - RICHMOND

The latest survey of Fifth District business conditions shows a

continuation of the slowing trend noted over the past few months.

The

diffusion of manufacturing responses indicates a further weakening in new

orders, and over one third of the survey respondents now report declines

in backlogs.

Some apparently involuntary inventory accumulation is con­

tinuing, and more than 40 percent of the manufacturing respondents report

that inventories are excessive.

Retail sales rebounded after a month of

little or no change, but sales of big-ticket items remain slow.

Expectations

patterns among both manufacturers and retailers appear to have taken on a

more pessimistic tone in recent weeks.

Business loan demand remains strong,

but District banks report an increasing selectivity in securing new loan

applications.

In the agricultural sector, recent rains have resulted in

crop improvements, and current crop conditions generally range from fair to

good.

As in several previous months, survey responses of manufacturers

are weighted toward a reduced volume of new orders, a decline in backlogs,

and further inventory accumulation.

Growing dissatisfaction with high

inventory levels may portend slowing production, if the orders picture does

not improve significantly.

For the seventh month this year, the diffusion

of responses indicates some reduction in weekly hours of work.

The continued

slack in activity is beginning to register on current expectations patterns

of District manufacturers, as increasing numbers of respondents expect

business conditions to worsen over the next six months both nationally and

in their respective market areas.

While one third of those surveyed continue

to expect their own production to increase, over one fourth now expect declines.

The latter figure represents a significant increase over recent reporting periods.

The outlook for capital investment is somewhat uncertain.

While

almost one fourth of the manufacturing concerns surveyed consider current

plant and equipment capacity inadequate, only 13 percent feel current

expansion plans should be enlarged.

Four respondents think such plans

should be cutback, the first to express such sentiments this year.

Aside

from our regular survey, two more major utility firms have recently

announced cutbacks or delays in expansion plans.

actions reported last month.

This follows two similar

One utility firm announced reductions in

planned investment for the next two years and had delayed for one to two

years the opening of three facilities.

Another major electric utility

has deferred $100 million in construction this year.

In other industries,

however, there were announcements of plans to build several new plants,

which will involve substantial new investments over the next three years.

Of the retailers responding to our survey, two thirds reported

that sales were up during the month, but an equal number indicated that

sales of big-ticket items relative to total sales continued to decline.

A majority of respondents indicate no change in inventories and general

satisfaction with current inventory levels as well as with the number and

size of outlets.

Over 80 percent of the respondents in this category anticipate

little or no change in the general level of business activity over the next

six months.

The uneasy labor situation is currently having some impact on

Fifth District business activity.

By early August, strikes had closed

several plants and idled thousands of workers across the District.

Labor

disputes are affecting such industries as primary metals, textiles, paper,

chemicals, and sheet metal work.

One District firm in the primary metals

category, closed since July 15, indicates that inventories are at extremely

low levels, but it does not expect a rapid pickup after the strike is

settled.

The major uncertainty in the labor relations area is the situation

in the coal industry.

As of the present it appears that a major coal strike

can be avoided only at the expense of outsized wage and benefit increases

with corresponding increases in coal prices.

Some West Virginia observers

believe that, given the strong demand for coal and the large potential for

profits, operators are likely to acquiesce in union demands and avoid a

prolonged strike.

The monthly survey of commercial banks indicates that business

loan demand continues quite strong, while demand for consumer loans remains

flat.

Commercial banks are adopting a position of "conscious restraint"

with regard to further loan expansion.

The source of demand for business

loans is reported to be increasingly regional in nature, with national

firms playing a diminished role.

Local utilities are contributing to this

condition by seeking longer term loans with fixed interest costs.

Savings

flows at both banks and savings and loan associations remain flat, with

concern over the recent Treasury issues as a potential drain on savings

deposits centered in those cities having a Federal Reserve Bank or Branch.

Responding savings and loan associations in those cities report significant

deposit losses.

Rains have fallen over most of the District during the past two

weeks, alleviating widespread drought conditions.

Crops are improving as

a result, with current crop conditions generally ranging from fair to good.

With the sharp upward revisions in 1973 farm income figures, January-June

16

cash receipts from farm marketings show only a 10 percent increase over

a year earlier.

Low prices and poor quality offerings have marked this

season's early flue-cured tobacco sales.

Prices improved significantly

last week, however, as growers brought better quality upstalk tobacco to

market.

17

SIXTH DISTRICT--ATLANTA

The District's economy shows a mixed bag of pluses and minuses,

according to the most recent reading.

The situation for cattle producers

is now considered more favorable than previous reports indicated.

Bank

lending remains strong in Tennessee despite the state's 10 percent usury

ceiling.

Residential building remains very weak.

North Georgia's carpet

industry is beginning to feel the effects of the decline in construction.

Activity at four of the District's major ports is up over year-ago levels.

Tourism continues to soar, after being depressed by gasoline shortages

earlier in the year.

Several large contracts have recently been awarded to

District industries.

Spending on pollution control in the region remains

significant.

Reports from several District bankers indicate that conditions

have brightened recently for the region's livestock producers.

Rains have

revived pastures somewhat and, for the time being, have reduced the need

for purchasing high-cost supplemental feeds.

Some improvement in cattle

prices has brightened prospects of cattlemen, eventually succeeding in

disposing of their unusually large calf inventories at favorable prices.

Cattle loans continue to be renewed and extended to prevent growers from

having to sell on depressed markets.

Bankers are now more optimistic that

these loans will be repaid from cattle receipts.

Crop reports are much improved by the recent substantial rainfall.

Most District farmers stand to benefit from good yields and the high prices

caused by drought damage to crops in other parts of the country.

Tennessee's 10 percent usury ceiling has apparently had little

impact on reducing bank lending.

Large weekly reporting banks report increases

in business and consumer instalment loans as well as lending to nonbank financial

institutions.

Real estate lending shows the only weakness.

Apparently,

Tennessee banks are able to skirt the usury ceilings in some instances by

upping compensating balance requirements.

Some large Tennessee bank holding

companies did have a decline in second-quarter earnings, however, which may

be partially related to the state's usury law.

Many Tennessee banks, believing

interest rates have peaked, are shortening the maturity structure of their

liabilities by shifting from CDs to the Federal funds market.

Residential building remains very weak in the District.

Latest

information indicates increased outflows from savings and loan institutions.

One bright spot is the Atlanta apartment market.

Atlanta was overbuilt with

apartments a year ago, but now there is a shortage partly because of the high

price of single-family dwellings.

This may also provide good news for the

condominium market, which had come to a near standstill.

The decline in residential construction is beginning to affect north

Georgia's carpet industry.

According to one area banker, not only is carpet

demand dropping off, but many materials are still difficult to obtain.

net result has been reductions in production and employment.

The

This banker

indicated that the demand for inventory loans by carpet manufacturers is up,

with increased prices of raw materials given as the reason.

There has been

little, if any,demand for bank funds for capital expansion by the carpet industry.

Ports in New Orleans, Mobile, Jacksonville, and Palm Beach reported

increases in tonnage shipped recently.

the port's history.

Mobile had the third highest month in

The first Russian Merchant ship to call at the Savannah,

Georgia, port has docked there to load wood pulp and cellulose for export to

Europe and Russia.

Tourism has remained strong.

Alabama's second largest industry is

tourism, and it may receive a shot in the arm as eight welcome stations are to

be built along Alabama's borders to "sell" the state as a vacation spot.

Florida is having a good summer as earlier reported.

Gardens are doing well.

Disney World and Cypress

Two major tourist attractions in the Atlanta area

have reported increases in visitors from a year ago.

Atlanta's convention

business is booming, with activity coming in from all over the world.

At

the present time, there are around 16,000 hotel and motel rooms and, in two

years, the number will be increased to around 26,000.

Representatives from an Atlanta area investment house indicated

that they have received feelers from Arabs about possible investment in

District income-producing property; they are currently negotiating several

investments in the Atlanta area.

Several new contracts have been awarded to District industries.

Textron's Bell Aerospace Division of Michoud, Louisiana, has been awarded a

$36 million contract to conduct an advanced development program for the Navy's

proposed 2,000 ton, high-speed surface effect ship.

Rohn Industries of Winder,

Georgia, received a $30 million contract from the United States Department of

Transportation to build seven high-speed turbo trains for Amtrak.

Lockheed,

Georgia, received a $26 million contract for five aircraft for the Canadian

Armed Forces.

Spending on environmental protection and pollution control continues

to be a sizable portion of District investment spending.

Miami and Tampa,

Florida, received two of the largest grants made by the Environmental Protection

Agency to help clean up water pollution.

received $34 million.

Miami received $41 million; Tampa

The Tennessee Valley Authority will invest a record

$180 million this year on pollution-control projects at ten power plants.

SEVENTH DISTRICT--CHICAGO

The economic situation in the Seventh District continues to show

marked contrasts.

backlogs.

Most capital goods producers report further increases in

Problems of shortages have eased somewhat, partly as a result of

rationing by higher prices.

has softened.

Residential construction is at a very low ebb, with no prospects

of a revival this year.

vities.

Consumer demand for some appliances and furniture

Strikes are hampering output in a variety of acti­

Price and wage inflation appears to be accelerating.

The most sig­

nificant adverse development of the past month has been the substantial de­

terioration in the outlook for the corn and soybean crops.

Electric utilities and auto companies are slowing their capital

expenditure programs, mainly because demand for their products has fallen be­

low expectations.

Such decisions do not seem to have moderated the extremely

strong demand for virtually all types of machinery and equipment.

Some machine­

tool producers are not taking additional orders for lead-time items because of

pricing uncertainties.

and mining machinery.

Perhaps demand is most intense for railroad equipment

Some freight care producers are booked through 1975.

A major producer of mining machinery has embarked on a three-year program

designed to more than double its capacity.

Reduced activity in some sectors and the rapid rise in prices

since decontrol

have eased supplies of some items.

Fuel supplies are ample

at current prices, and "absolutely no" shortages of any major petroleum pro­

duct are expected to develop through the remainder of 1974.

more available at prices 20 to 25 percent higher.

consumer goods may be in excess supply.

Paper also is

Electrical components for

On the other hand, there has been no

letup in demand for steel or aluminum and many other materials.

Complaints

about slow deliveries of axles, transmissions, brakes, bearings, diesel engines,

castings, and forgings continue.

Because of failures of suppliers to meet

delivery schedules, some companies are pushing programs to become more self

sufficient.

We have not found evidence of a general buildup of excessive

inventories (although there are many imbalances), but a significant decline

in total business activity would soon cause such a development.

For the

present, most firms appear to be increasing inventories according to plan or

the degree of availability of the items they purchase.

High interest rates and

limited availability of credit have caused some firms, especially smaller ones,

to limit inventory investments and capital outlays.

Strikes have been significant in holding down construction

activity and output of motor vehicles and various types of equipment.

By far,

the most serious strikes in the District was settled on July 22 when cement

truck drivers in the Chicago area resumed work after a nine-week strike that

had halted a large part of all construction activity in seven countries. First­

year wage increases of 10 to 12 percent or more are common, with or without

strikes.

The main factor delaying conclusions of some labor negotiations has

been a failure to agree on cost-of-living adjustments clauses for future years.

The residential construction situation is miserable,

In June,

building permits for new dwelling units were off 70 percent from last year and

the six months' total was off over 50 percent.

Permits for homes in the Chi­

cago area were lowest for any June since World War II, and permits for apartments

were the lowest since 1956.

percent for six months.)

(Permits in the Milwaukee area were off over 40

The Illinois usury rate was belatedly raised from 8

percent to 9.5 percent in July, but this is not expected to help much because

of the impact of high money market rates on the availability of mortgages.

Proposed new developments of both residential and commercial projects are

said to have "dried up".

Financial stringencies reflect the problems of

real estate subsidiaries of insurance companies, banks, and manufacturers in

obtaining funds, as well as the plight of the savings and loan associations.

Large Chicago savings and loan associations reported a net outflow of savings

in July for the fourth straight month and a record outflow for any month.

Demand for housing continues strong, with vacancy rates reduced, rents rising

sharply and prices of existing homes holding steady or rising further.

Heavy rains earlier in the year, followed by drought, have

drastically altered the prospects for the corn and soybean crops in the Corn

Belt.

The corn crop is almost certain to be substantially lower than in 1973,

instead of the large increase anticipated early in the year.

The soybean crop

will benefit from high prices, but incomes of farmers who lose a major share

of their crops will be reduced sharply.

Reduced availability of feed grains

and forage may cause farmers to liquidate inventories of meat animals, leading

to lower meat prices temporatily but followed by higher prices in 1975.

EIGHTH DISTRICT - ST. LOUIS

The pace of economic activity in the Eighth Federal Reserve

District has continued up in recent weeks.

Retail sales at major depart­

ment stores have slowed, but most of the decline has been offset by rising

automobile sales.

Manufacturing continues at a high level, and employment

remains about unchanged.

Loan demand remains at a relatively high plateau,

following a sharp increase in the first half of the year.

Agricultural con­

ditions have improved in recent weeks as a result of rainfall over most of

the District.

Corn yields will be below average for recent years because of

lack of moisture in July.

Consumer spending at major department sotres has declined in recent

weeks.

Big-ticket items, especially those related to housing, are being hit

the hardest, although clothing and shoe sales were also reported to be sluggish.

Most of the decline has been offset, however, by a sharp recovery in automo­

bile sales.

One major St. Louis dealer reported that automobile sales

were at record levels in July and that he cannot obtain a sufficient number

of large cars to meet demand at current prices.

In general, manufacturing activity has continued at the high

levels of recent months, but most firms report some increase in inventories.

The steel industry and other capital goods industries not related to construc­

tion are still continuing to expand operations.

A steel industry representa­

tive reported no letup in their orders backlogs, and firms which use steel

noted the long delivery time.

"tight" supply.

Aluminum is reported to remain in very

Delivery of some other metal products, such as brass, however,

was reported to be substantially improved.

In general, the firms contacted reported that employment has

been steady in recent weeks.

Eighth District unemployment continued at a

lower rate than the national average.

However, a few manufacturers with

rising inventories noted that operations may have to be curtailed and

employment cut back.

Business loan demand continued up but apparently at a slower rate

in recent weeks than heretofore.

Total business and consumer loans for the

District have continued to increase somewhat.

Low yielding savings-type

deposits at banks and savings and loan associations have remained virtually

unchanged since last spring, but time certificates have increased,

especially those denominations over $100,000.

The damage from the drought in the Eighth District is "spotty",

and its impact on crop production is difficult to determine.

Early corn

yields have been severely damaged in some localities, but recent rains and

cooler temperatures have increased prospects for soybean and late corn.

Cotton and rice corps have not been significantly damaged by the dry

weather.

NINTH DISTRICT - MINNEAPOLIS

The prospects for the District economy are not as promising as

earlier in the year.

A price-cost squeeze is still hurting the District

livestock industry, and dry weather is expected to reduce crop yields

markedly.

District consumer spending has softened recently, and no substan­

tial sales pickup is foressen.

Tourist business is good in the eastern part

of the District, but is sluggish in the western states.

Savings inflows to

District financial institutions have slowed as large investors have sought

higher yielding investment opportunities.

District loan demand is expected

to remain strong at both rural and urban banks.

District livestock producers have sustained substantial losses and

are expected to do so until the price-cost situation improves.

much refinancing of feeder-cattle loans.

Bankers report

However, District livestock pro­

ducers appear to be getting the credit they need, and the Bank is not aware

of any bankruptcies in this industry in the District.

The pricing problem

in the cattle industry is rapidly reverberating from the feedlot owner to cow­

calf operators, many of whom are still holding their 1973 calves.

For the

cow-calf rancher, the full impact of the high grain prices will probably be

felt later this fall.

A Montana director indicated that there are currently

no buyers for feeder cattle in his area because buyers are holding back, given

current uncertainties about feed and cattle prices.

Although the situation was undoubtedly improved by recent rains,

dry weather is expected to lessen District crop yields noticeably.

Within

the District, South Dakota is experiencing the most severe drought conditions,

and a lack of moisture is also a serious problem in North Dakota and Montana.

With the exception of the southwestern corner, crop yields in Minnesota, on the

other hand, should be quite good.

savers have withdrawn funds from their area's financial institutions and

invested these funds in higher yielding alternatives.

Respondents to our latest agricultural credit conditions survey

reported that no letup is expected in the strong loan demand experienced

by District agricultural banks in the second quarter.

Eighteen percent of

the respondents reduced or refused a loan in the second quarter, and 20 per­

cent expect to have problems meeting loan requests in the next three months.

Factors contributing to this continued strong loan demand are a reduction in

the availability of merchant credit, increased prices of farm inputs, the

continued need to refinance feeder-cattle loans, and the expected need to

finance wheat inventories.

Also, the absence of Government payments this

summer has increased loan demand:

previously Government funds were used to

cover mid-year operating expenses and pay off bank loans.

Loan demand is

also very strong at urban banks, and a twin cities banker reported that his

bank is allocating loan funds among customers and has a flat prohibition

against commitments to other than traditional customers.

This bank looks

for its loan demand to continue very high in the months ahead.

TENTH DISTRICT--KANSAS CITY

In light of the recent sharp rise in farm prices at wholesale

levels, inquiries were made in several Tenth District states to assess the

agricultural situation.

Despite recent rains and cooler temperatures in the

District, damage to crops, particularly corn, has been serious although grain

sorghum and soybean prospects have improved somewhat.

Some District bankers

have indicated that they expect spillover effects from the drought conditions

to show up soon in increased loan demands by farmers.

Consumer interest in the

recent 9 percent Treasury note issue has prompted substantial deposit with­

drawals.

Several District bankers have expressed concern over the longer run

impact of similar Treasury financing operations in the future.

Recent and cooler temperatures over much of the District have

eased the stress on growing crops, but additional precipitation will be re­

quired before any significant benefits are realized.

A grain spokesman men­

tioned that by no means has the drought been broken, but "now that we've had

rain, there is hope it can rain again".

The general consesus on crop condi­

tions is that the corn has been badly damaged and the rains will be of little

benefit.

Except for irrigated corn, which accounts for nearly one half of

total acreage, the Nebraska crop will be "nearly zero" this year and only a

small protion is suitable for chopping into silage because of its low nutritive

value and the buildup of nitrates in the stalk.

The Kansas and Missouri corn

prospects are not so grave as Nebraska's, but again the recent rains came too

late to be of much help.

However, with additional rainfall, the yield pros­

pects for soybeans and grain sorghum could be substantially improved as these

crops are now in the critical development stage.

In light of recent developments, corn production in the nation

will likely fall moderately below 1973 levels.

One month ago, the crop was

expected to be about 8 percent larger than last year's.

also probably fall below earlier expectations.

The soybean crop will

With grain supplies already

very tight, the shortfall in 1974 production levels will likely buoy prices

over the next year.

Furthermore, the hoped-for reductions in feed costs for

livestock producers and some abatement in food prices have been blunted by

this new outlook on the grain situation.

The drought has greatly reduced the carrying capacities of

pastures throughout the District, forcing producers either to use supplemental

feed ahead of schedule or to move animals to other points, including slaughter.

The recent rains will help alleviate this problem, but more rain will be needed

before the pastures begin to rejuvenate.

If dry conditions persist, especially

into and through 1975, heavy liquidation of animals will likely occur.

While

this will temporarily boost meat supplies in the short run, supplies in the

longer run will be smaller and prices correspondingly should move higher.

In July total loans at Tenth District weekly reporting banks

continued to rise at well above normal seasonal rates, with commercial and

industrial loans accounting for most of the increase.

Farm loans at these

banks fell more than seasonally, but several banks anticipated that the demand

for such loans would soon be stimulated by the drought and the increasing

cost of feed grains.

District reporters experienced a decline in demand de­

posits, mostly United States Government, and substantial gains in other types

of deposits, with the result that total deposits grew at well above average

seasonal rates.

No larger banks indicated special problems in meeting targets

for CD funds.

The situation at smaller District banks may be somewhat different.

The tendency for farmers to withhold crops from market and the special problems

of cattle feeders appear to have caused deposits in smaller banks to grow less

than seasonally and loan payoffs to be less than anticipated.

Consequently,

the normal seasonal easing of liquidity pressures may be delayed this year.

The overriding concern among bankers contacted was the $2.25

billion issue of 9 percent Treasury notes being completed at the time of the

survey.

Consumer interest in these securities was resulting in substantial

withdrawals of deposits from both banks and savings and loan associations.

Although only one bank explicitly voiced concern about the cost of processing

small individual orders.,

several of the banks noted a substantial concern

over the longer run impact on deposits if such issues were to become more

common.

ELEVENTH DISTRICT--DALLAS

Many of the labor contracts settled in the Eleventh District,

since the end of the wage-price controls on April 30,are reported to have

granted the biggest wage hikes in the history of collective bargaining in

the Southwest.

A survey of new multiyear contracts indicates that the

first-year increases in wages and fringe benefits range from 7 to 12 percent,

with most averaging about 10 percent.

Increases during the remaining years

of the contracts run about a third less.

In addition, the typical contract

includes cost-of-living adjustments that provide a one percent increase

in the hourly wage rate for each 0.3 point rise in the consumer price index

(CPI)--with adjustments made quarterly.

For example, the 4-point rise

in the CPI during the second quarter of 1974 would have boosted hourly

wage rates under these contracts by 13 cents.

The settlements apparently

reflect organized labor's insistent demand that real wages be protected

during periods when prices are subject to sharp and persistent advances.

A key point in the negotiation of these agreements is reported to be

labor's position that wages not be subject to downward adjustment in the

event that living costs should decline.

In contrast to the new union contracts, salary increases for

white-collar workers typically include a one-time cost-of-living adjustment

of 5 to 7 percent and merit raises averaging 6 percent.

Most respondents

doubt that the income of salaried workers will keep pace with the rise in

wages of their blue-collar counterparts--especially if the CPI continues

to climb at a rate in excess of 10 percent.

Despite the record wage settlements, there have been some favor­

able contractual developments for Southwestern businesses.

For example,

it has not been necessary to renegotiate any existing contracts containing

emergency reopening provisions.

And a new wage settlement was signed by

a Texas steel manufacturer three months before the existing contract was

due to expire.

An executive of the firm attributed the

prompt settlement

in part to be the "Experimental Negotiating Agreement" signed last year,

which contains provisions promising to pay workers a $150 cash bonus if

they do not strike.

Commercial loan officers at large banks in the District report

that they are discouraging borrowing that "is not absolutely necessary"

in response to the reduced availability of funds.

In general, only loans

to regular customers are being considered, and even these are kept to

short term.

High interest rates are driving many businesses to seek

interim-term bank loans rather than financing through long-term debt or

equity issues.

Businessmen anticipate that these bank loans will be

refunded in debt and equity markets when interest rates fall.

However,

one Dallas banker is concerned that these customers will not be able to

roll over their loans for some time.

Therefore, his bank is not making

these loans.

Borrowing at banks to finance inventories remains strong, but most

respondents expect the volume of these loans will level off as the rise in

materials and other prices slows.

In addition, bankers are encouraging

customers to hold borrowing to the lowest level practical.

Moreover,

businessmen are reported to be returning to more prudent buying practices

in accumulating their materials inventories, instead of engaging in "panic

buying" and in stockpiling materials that are in short supply.

There have been reports in the financial media that many "country"

banks are growing more reluctant to supply reserves to the Federal funds

market.

There is, however, no evidence that this practice is occurring

to any significant extent in the Eleventh District.

Sales of Federal

funds to large District banks by correspondents and small country banks

remain very high.

Apparently, however, banks have become a little more

selective and cautious with regard to whom they sell Federal funds.

Interviews at several large banks in the District indicate that efforts

are being undertaken to spread sales among more banks in order to reduce

potential risk.

While this cautious sentiment might result in a slight

redistribution of funds, there has been no appreciable decrease in the

District in the total volume of funds supplied to the Federal funds market.

New factory orders received by District manufacturers are

generally running ahead of year-ago levels.

Heavy demand is reported by

producers of primary and fabricated metals, oil field drilling equipment,

plastic products, and agricultural equipment.

However, manufacturers of

residential construction materials continued to experience sharply reduced

sales, and petrochemical producers report a slight softening in new orders

in the last month.

Most manufacturers are experiencing some relief from soaring

prices of raw materials.

A majority of the producers surveyed report the

rise in materials prices has slowed in recent weeks.

Moreover, prices of

some items--including cotton, polyester, plywood, and carbon scrap--have

actually declined.

However, manufacturers of wood and plastic products

have not experienced any letup in the skyrocketing costs of these materials.

TWELFTH

DISTRICT--SAN FRANCISCO

Little change in the overall level of economic activity is ex­

pected by our directors.

policy problem.

In their view, inflation will remain the number one

Manufacturing is generally at capacity levels, but shortages

continue to hamper output.

Consumer spending is described as steady to cautious.

Residential housing activity is very weak, and this weakness is contributing to

a slowdown in the lumber industry.

The agricultural outlook is good.

Banks

face heavy loan demand, and some classes of borrowers are experiencing diffi­

culties in raising funds.

Our directors do not expect that there will be much

real growth in GNP during the second half of the year.

They are very con­

cerned with inflation, and some think cost-push pressures are increasing.

Consumer spending is variously

Business investment expenditures are heavy.

described as cautious or stable.

Department store sales appear to be good,

and automobile sales continue to show a recovery although considerable in­

ventories of small cars have accumulated.

Except for housing, no major

weaknesses are apparent.

Manufacturing activity is very strong in most District states.

Shortages and slow deliveries, especially of steel and chemicals, are causing

production difficulties.

Heavy equipment producers report large order back­

logs, and Boeing's activity is helping to strengthen the Seattle economy.

Strikes which had been causing disruption have been settled in many areas,

for example, Portland and Salt Lake City, but they continue in some industries

in Idaho, Washington and Southern California.

Nonresidential construction is maintaining its recent pace

despite some strikes and shortages of structural steel.

Some construction

wage settlements were very high, and the resulting wage costs are expected to

weaken construction activity in the future.

Residential housing is still weak

with little sign of recovery, and multiple construction is even weaker.

In the

Portland metropolitan area, multiple units in the first half of the year were

down 63.2 percent over the same period a year ago, and single-family houses were

down 33.5 percent.

lumber demand.

Lack of housing activity has in turn contributed to falling

Lumber production has declined in the Pacific Northwest, and

some mill closings are expected.

In contrast, pulp and paper and packaging

materials are continuing to keep that part of the forest products industry at

or near capacity production.

The Seattle-Tocoma-area economy is sustained by aerospace,

agriculture, and pulp and paper industries.

is also stimulating port activity.

The Alaska pipeline development

In western Washington, the Spokane world's

fair has stimulated local construction and tourism, and the region's agri­

cultural crop prospects are excellent.

Except for lumber, the Oregon economy

is experiencing a good year, particularly in agriculture and manufacturing.

Agriculture shows some weakness in Idaho and Utah, where cattle production

is more relatively important, but producers of potatoes and other crops in

irrigated areas expect large crops.

Agricultural processors are expanding

capacity, and mining activity also contributes to the strength of the local

economy.

California's overall level of growth is expected to be somewhat

above the national average.

Like most other District states, its agricultural

outlook, except for cattle, is good.

Business activity, although hampered

somewhat by strikes, should remain high.

Tourism in the state appears to be

recovering.

Banks report that commercial loan demand remains strong,

and consumer and real estate loans have been growing modestly.

The real

estate demand at banks reflects the reduced lending capacity of savings and

loan associations.

Consumer-type savings deposits are not showing much

growth, and the larger banks have had to bid for C-Ds in the money market.

High interest rates had some impact on credit demands.

projects have been postponed, but many firms have turned to bank

order to avoid long-term market issues at this time.

Some

lines in

Issues are being post­

poned because long-term rates are expected to be somewhat lower next year.

Capacity expansion is being financed in many cases by internal funds and in

a few instances from either foreign customers or through Euro-dollar loans.

High rates have hurt those industries which ordinarily rely upon the money

market or other short-term sources for a large proportion of their funds,

for example, finance companies, leasing companies, and auto dealers.

Public utilities are experiencing particular difficulties.

A Washington power company held back from marketing a new long-term issue and

has been relying upon bank debit, but Pacific Northwest Bell went to the

market and received a 8.90 percent rate.

Consolidated Edison's problems, in

the view of some utilities' management, have made all utilities' issues more

difficult to float.

One utility applied to the SEC for an exemption to sell

an issue to underwriters on a negotiated basis rather than to use competitive

bidding.