Beige Book
CONFIDENTIAL
(FR)
CURRENT ECONOMIC COMMENT BY DISTRICT
Prepared for the
Federal Open Market Committee
by the Staff
April 9,
1975
TABLE OF CONTENTS
SUMMARY .
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First District Second District -
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Boston .
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New York
Third District - Philadelphia ..
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Fourth District - Cleveland . . . . . . . . . . . . . . . . .. . .
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Fifth District - Richmond . . . . . . . . . . . . . . . . .. . . .
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Sixth District - Atlanta
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Seventh District - Chicago
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Eighth District - St. Louis . . . . . . . . . . . . . . . . .. . .
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Ninth District - Minneapolis
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Tenth District - Kansas City
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Eleventh District - Dallas
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Twelfth District - San Francisco
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SUMMARY*
This month, reports from the twelve District Banks show faint signs
of optimism--not that the recession has already bottomed out, but that it
is approaching bottom.
quick solution in sight.
The unemployment picture is grim, and there is no
But inflation is abating.
Retail sales are weak,
and the manufacturing picture is mixed, but the inventory correction which
must precede recovery is occurring.
While construction activity is very
soft, mortgage rates are dropping and the new tax bill provides some addi
tional incentive to get housing going again.
a very strong sector in the months ahead.
Agriculture is likely to be
Bank loan activity is weak
throughout the country, but savings inflows should provide the industry
with large amounts of lendable funds once the recovery starts.
The picture in manufacturing is a mixture of good and bad.
Post
rebate auto sales have been soft for all except luxury and imported car
lines.
However, some progress is reported in trimming auto inventories
and auto manufacturers are starting to produce some models again.
In con
trast, both Chicago and Cleveland report that steel production has been
strong.
Demand has recently begun to slacken, but in the Cleveland Dis
trict, the industry is still producing to rebuild its own inventories.
Kansas City reports that its area's extractive industries are quite busy.
Dallas, however, notes that oil refining is now operating well below capac
ity as a result of declining demand for oil and a shortage of available
storage capacity.
There is a concensus that the inventory adjustment process is moving
along well.
In manufacturing, San Francisco reports that the firms in its
*Prepared by the Federal Reserve Bank of Philadelphia.
area are over the worst of their cutbacks, while Richmond notes that the
But whether
process may continue for another 3-6 months in its District.
it be 3 months or 6 months, the message from all areas of the country is
that progress has been significant and that production consistent with
current demand is likely to begin soon.
are less uniform.
In the retail sector the signals
In general, there have been substantial inventory reduc
tions, but in some lines of goods more trimming will be required.
Consumer
durables is one example offered by Cleveland as an area which still has
substantial inventories.
Whether retail sales will rebound enough to move these durables in
the near future is uncertain.
areas of the country.
Retail sales in March were weak in most
An early Easter, cold weather, and in Philadelphia
a major transit strike all combined to keep sales down.
Yet many Districts
report that their retailers see signs of rising consumer sentiment which
make them cautiously optimistic about the future.
Chi
There are also hopeful signs in other sectors of the economy.
cago, Kansas City and San Francisco all report strength in their agricul
tural areas--despite the declining prices of farm products.
Residential
and nonresidential construction are both still weak, but the signs are
hopeful.
Unsold inventories of structures are said to be manageable
everywhere except in the Southeast and Far West.
Atlanta and San Francisco
both report that builders in their region are pessimistic about the chances
for a quick recovery even with the new Federal tax incentives.
Elsewhere,
it is expected that construction can be a positive force in turning the
economy around in the months ahead.
Oddly enough, tourism and leisure
seem to be one of the economy's strongest sectors.
Cleveland, Atlanta,
Kansas City, and Minnesota all mention that industries catering to the
nation's taste for recreation have been remarkably resistant to the
recession.
buoyant.
Capital expenditure plans of industry have been much less
While the process of cutting capital spending may be stabiliz
ing, the outlook everywhere is, as Boston phrased it, "lean."
Financial institutions throughout the country are facing the same
basic problem.
Money is flowing into these intermediaries at a record
rate, but reinvestment alternatives are limited.
By default, the funds
are being used to build liquidity because loan demand is very weak.
Vir
tually every District reports declining commercial and retail loan demand.
Inflation and unemployment also conform to the "good news/bad news"
theme of these reports.
There is widespread optimism that inflation is
being brought under control.
Many examples of growing industrial compe
tition and price cutting are cited in the District reports.
There are
also scattered reports of restraint in the prices of new lines of sea
sonal consumer goods.
Relatively few shortages still remain.
Kansas City
forecasts that declining raw agricultural prices may enable food prices
to stabilize in the second half of 1975.
The news on unemployment is less cheerful.
The best that any Dis
trict Bank could say is that the situation is no worse.
most areas is still rising.
Unemployment in
It is especially severe in New England, but
even some urban areas of the Midwest are feeling the pinch.
Scattered
reports of rehirings and fewer layoffs create an impression that, at best,
the indices may soon stabilize at their current high levels.
Overall, however, the central theme of the reports is one of hope-
hope that inflation is slowing, that the inventory correction is nearing
completion, and that lower interest rates may stimulate housing and busi
ness investment.
There is also a suggestion that the "hope" itself is
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very important.
While the reports relay skepticism that recent tax
legislation will have any significant economic impact on the economy,
there is some agreement that the psychological effect of fiscal stimula
tion on consumer and business confidence may be very important in turn
ing the economy around.
FIRST DISTRICT - BOSTON
Although our directors express more optimism this month, they are
cautious and anticipate no great surge of activity as yet.
Some express
grave misgivings about Federal fiscal policy fearing that the funding of
the projected deficit will frustrate private borrowing-investment programs.
Others are less concerned; they recognize that the deficit is a symptom
of general malaise.
10.4 percent:
For February the New England unemployment rate was
Rhode Island's rate was 14.2, Massachusetts' was 11.0, and
Connecticut's rose to 9.2 percent.
Our directors report that banking is attempting to improve liquidity
while engaging in moderate loan expansion programs.
To some extent, big
borrowers of quality have been able to liquidate bank loans; consequently,
loans are down, and are concentrated with riskier customers.
Certificates
of Deposit and Federal Funds borrowing have been reduced as well.
Bankers
report seeking to expand consumer credit and short-term commercial loans
which entail a minimum of long-term commitment.
However, there seems to
be no aggressive selling of loans; there is an attitude that if the cus
tomers do not materialize, the government securities market will provide
an outlet for funds.
The outlook is for the prime to drop maybe 50 basis
points by mid-June; then, in the third or fourth quarter, it should move
upward.
The directors are noticing a reduction of inventories taking place.
Attempts to assess the situation for consumer goods lines in Connecticut
reveal that the long pipelines between retailers and manufacturers are
becoming "flatter."
A director speculates that a rebound in retail sales
will lead to factory orders.
Due to the reduction of inventories or acclimation to the slump,
retailers are less pessimistic.
mism yet:
However, this does not foreshadow opti
A most successful major retailer in nondurables is planning a
4 percent dollar volume gain (from 1974) for spring and fall.
are watching their purchases and seeking value for their money.
Consumers
Even
supermarket chains are pursuing extensive promotions since they are only
meeting their pessimistic projections.
A major New England electric utility is considering a public power
takeover of its generating facilities.
Before, this was unthinkable; now
it is a viable option.
Capital goods suppliers respond that orders are weaker, deliveries
stretched out, and the outlook is lean.
One firm reports reducing its
own capital outlays 20 percent from recent plans.
There is no need for
more capacity.
In summary, there is optimism based on a slower slide of indicators.
Even directors that are beginning to sense that a foundation for recovery
is being laid, expect a sluggish economy for 1975, as well as unemployment
rates more than .5 percent above current levels.
Professors Houthakker, Duesenberry, Samuelson, Solow, Tobin and Eck
stein were available for comment this month.
They all agree that the
economy has yet to hit bottom and that a credible recovery has yet to be
assured.
Monetary policy is the key to the rebound.
Houthakker feels that recent Federal fiscal actions may be too stimu
lative and too disruptive for private financing plans.
He is advising
that M1 growth should average 5 percent, assuming that velocity observes
its secular rate of decline.
Once the recovery commences, inflation may
be a real concern:
He cites the European recovery and the rise in
commodity price indices.
Duesenberry is reasonably content with recent policy.
However, he is
anxious to provide for growth of the monetary aggregates consistent with
recovery:
He
This may require temporary rates of expansion of 8 percent.
notes that household saving is heavily directed to passbook accounts and
M1 in the early stages of recovery; resisting expansion of the aggregates
could frustrate investment and growth.
Samuelson senses a restoration of nerve, marking an end to the reces
sion.
But the weakness of basic demand in durables, construction, and
investment goods requires continuing attention by the Fed.
"It's too
late to flood the market, but too early to fight the next inflation."
He
does not advocate exclusive interest in M1 or M 2 , but insists that the
stimulative impact of monetary policy is measured by the performance of
the economy.
Solow agrees that it is necessary for the Fed to support a recovery,
and that fears of inflation must not paralyze accommodation.
Most fore
casts of recovery assume fairly aggressive monetary policy; a denial of
this assumption threatens the existence of a rebound.
At any rate, he
also argues, there is too much slack in the economy to worry excessively
about inflation.
Tobin also argues that there is such a long distance for recovery to
go (once it gets started) that inflation should not be our major concern.
He advises aggressive short-run monetary policy tapering off as the recov
ery gathers momentum; the Fed could explain that large growth rates of M1
over some temporary period need not imply that we are locked into such a
policy over the long haul.
He finds it incredible that the prime is
stuck above 7 percent and long-term rates are so high.
Final demand is
weak and there is a risk of a weak rebound leading to stagnation:
around is one thing, recovery is another."
"Turn
"People should derive little
comfort in second derivatives when levels and first derivatives are so
low."
In his opinion, the economy is weak and much more stimulation is
required for a return to well-being.
Eckstein sees the Fed playing the central role for recovery.
cent money target is tantamount to resisting recovery.
A 6 per
High interest
rates and slow money growth undercut the rebuilding of private confidence;
the Federal Funds rate may have to go below 4 percent and M1 growth above
8 percent.
He states that there is a real fear among businessmen that
in 12-18 months, a money crunch may be necessary; a "swing away from
stimulus now would be grossly premature," however.
Once the economy
regains its footing, a tapering of money growth is in order.
SECOND DISTRICT - NEW YORK
The overall impression that emerges from the responses of Second
District directors and other business leaders that were contacted recently
is a slowing down in the rate of decline in business activity, and that the
economy might be approaching a "bottoming" point.
in real terms, continued below last year's levels.
Although retail sales,
Retailers reported some
improvement in the recent past, and, in general, were cautiously optimistic
regarding the outlook for the second half of the year.
Good progress toward
the reduction of excessive inventories, at the retail as well as at the
manufacturing level, has apparently been made.
The majority of the respon
dents felt that most large cutbacks in business capital spending plans had
already occurred.
And there were scattered indications that housing activ
ity might pick up in the coming months.
Views expressed by retailers regarding consumer spending were mixed,
but, on balance, were somewhat more optimistic than in previous months.
A
senior official of a nationwide chain of department stores reported that,
following a sluggish performance in the first two months of 1975, his firm's
business had improved somewhat in March, possibly because Easter came early
this year.
While he did not expect a pronounced improvement over the near
term, he was hopeful that sales would pick up smartly in the second half of
the year, especially in the fourth quarter.
An official of a high quality
New York City department store with branches in the suburbs reported that
sales over the Easter season had been much stronger than expected, and
expressed "guarded optimism" regarding the outlook over the coming months.
Similar sentiments were expressed by a number of other retailers.
The retailers, however, in general were not overly sanguine regarding
the impact on consumer spending of the tax rebate provided for in the new
tax bill.
The chairman of a large New York City department store did feel
that such rebates potentially might have strong psychological impact on
consumer attitudes and provide some help to the retail business.
respondents, however, were more restrained.
Other
One retailer noted that it
might have some favorable impact on consumer spending, but that it was hard
to determine to what extent.
The Buffalo Branch directors felt that the
restoration of consumer confidence was the key to increased consumer spend
ing, and that the new tax bill would be only mildly stimulative despite
expected widespread use for debt reduction.
Perhaps the most positive development reported by most respondents was
rapid progress made toward reducing excessive inventories.
At the retail
level, the official of the nationwide department store chain reported that
his firm's inventory had been reduced sharply and was not at a desired
level, and indeed for certain lines somewhat below desired levels.
He felt
that this was true for the retail industry, generally, and that the firm's
suppliers, at the wholesale as well as the manufacturing level, were also
making good progress in that direction.
experiences.
Other retailers reported similar
The chairman of a large New York City bank noted that indus
try had approached the problem of inventory reduction with "unusual vigor"
once it was recognized.
At the retail level, including the auto industry,
the worst part of the problem should be out of the way by mid-year, while
further reductions at the basic materials level are likely to continue for
most of the year.
A Buffalo Branch director felt that many industries have
now reached their desired inventory levels, and that the process should be
completed by mid-year or before.
A senior official of another large New
York City bank, who last month had stated that too many manufacturers were
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maintaining excessive inventory positions, now felt that, on the basis of
conversations with his bank's directors and corporate clients, good progress
toward reducing such inventories had been made since then.
Regarding business capital spending, the chairman of. the New York City
bank mentioned above stated that major cutbacks in plans for such outlays
probably have already been made.
Such cutbacks were particularly pronounced
among utilities and consumer goods related industries.
Capital spending
plans in basic materials industries have held up well, a situation he
expects to continue given the inadequate capacity for the long run in these
industries.
The Buffalo Branch directors in general considered it unlikely
that further large cutbacks in capital spending plans would occur.
There
already has been an intensive reevaluation of such programs, and projects
which met the "more stringent" profitability tests would move ahead on
schedule.
The executive vice-president of a large New York City bank stated
that the worst of the cuts in capital spending plans were "behind us."
Such cuts were announced at the turn of the year when, in his view, the
economic outlook appeared gloomiest.
He felt that the atmosphere had now
brightened, and that the capacity ceiling in a number of industries could
be reached again rapidly.
Concerning home building activity, the Buffalo Branch directors did
not see any signs indicating an early upturn in such activity, even though
mortgages were more readily available at declining rates.
In their view,
the high cost of home ownership and the lack of consumer confidence were
major deterrents to an upturn in the housing industry.
were slightly more optimistic.
Other respondents
This attitude was best summed up by an
official of a trade association who pointed to the "massive" inflow of
funds into Second District thrift institutions and to the easing of
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mortgage loan terms, and reported that some, albeit quite limited, recovery
in new commitments by these institutions was just getting under way.
He
also noted that the inventory of unsold new houses was smaller in New York
State than in certain other parts of the country.
Because of the latter
situation, however, he felt that the $2,000 tax credit toward the purchase
of a new house provided for in the tax bill would have only a limited
impact on housing activity in this District.
THIRD DISTRICT - PHILADELPHIA
Economic activity remains unchanged again in April from March.
Manufacturers report no change in new orders, shipments, and prices, and
are optimistic for the outlook six months ahead.
And, the manufacturing
employment picture for late fall is more optimistic this month than it has
been in quite some time.
Unfortunately, however, retailers were severely
damaged during the Easter season, and do not share the manufacturers' opti
mism for the next several months.
declining deposit levels.
Area banks report weak loan volumes and
And, most express concern over the large Fed
eral deficit and how it is to be financed.
Again this month, manufacturers in the Third District, responding to
this month's Business Outlook Survey, report a general leveling in business
activity in the region.
While not yet heralding an end to the area's reces
sionary woes, the current survey does indicate a possible "bottoming out"
in the steady decline the regional economy has been experiencing.
In addi
tion, 75 percent of the respondents expect the pace of business activity to
pick up by October.
And, new orders and shipments in their own firms are
reflective of this general trend.
Most manufacturers report "no change" in
these key indicators in April, while 65 percent expect both new orders and
shipments to increase by October.
Despite a second month of new found opti
mism, however, capital investment plans six months out remain about the
same.
The outlook is still uncertain enough that manufacturers are not
willing to alter current capital spending plans for the present.
Employment levels too remain flat in April.
One half of the respon
dents report no change in the number of employees, and over three-fourths
report no change in the length of the average workweek.
However, over
half of the manufacturers now expect to increase the size of their workforce
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by October.
But with the size of the labor force continuing to expand,
and with a new crop of graduates joining the workforce next month, unemploy
ment in the region will continue to be a problem.
But, for area retailers the news is not as optimistic.
are always damaging to department store sales.
Early Easters
But, a transportation
strike by employees of the local transportation authority severely hampered
Easter sales in downtown stores.
the situation.
last year.
And, unusually cold weather compounded
Retailers report dollar sales down from the same period
And, the outlook for the remainder of the spring season is
rather bleak.
The value of construction contracts in the Third District has declined
37 percent over the last year (the national average has declined 23 percent).
The largest factor in this overall decline in the region has been a decrease
in the value of residential construction contracts of 28 percent since this
time last year.
During the same period, nonresidential contract values have
declined by only 1 percent.
However, with the construction industry experi
encing ever rising prices, the decline in construction in the District is
likely to be even more severe.
And while rising prices are not limited to the construction industry,
area manufacturers report some easing of inflationary pressures.
Nearly
two-thirds of the manufacturers report "no change" in the prices they pay
for raw materials and the prices they receive for finished goods.
And,
manufacturers look for a continued easing of inflation during the next
six months.
Area bankers report weak loan volumes despite a moderate easing in
overall loan policies.
And, all of the major banks surveyed report a gen
eral decline in overall deposits this month.
With the end of the quarter
statement due March 31, many banks increased their CDs outstanding
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significantly in order to lower loan-to-deposit ratios.
However, most
banks expect to continue to increase their CDs throughout April.
Several
banks also mentioned shifts in the composition of their portfolios.
Banks
appear to be interested in shortening their municipal positions and in
shifting to more governments.
In addition, most bankers expressed some
concern over the large Federal deficit the credit markets would be forced
to absorb and its effect on interest rates.
And, one particular bank
noted great difficulty in securing approval from its Board to purchase
$25 million worth of 14-month bills.
The Board expressed reluctance in
extending itself out that far at this particular time.
FOURTH DISTRICT - CLEVELAND
In general, economic activity in the District continued to decline in
March.
Signs of falling prices and more price competition are increasing.
Retail sales of durable goods remain weak, but sales of nondurables are
improving.
There is considerable evidence of inventory liquidation at
both retail and manufacturing levels.
Near-term prospects for a recovery
in capital spending are not particularly encouraging.
Increased deposit
inflows have put financial institutions in a better position to help pro
mote recovery in residential construction.
In the consumer sector, new car sales weakened significantly last
month, following a surge in February.
Car sales in Ohio were depressed,
partly because a bill was proposed in the state legislature that would
have suspended the sales tax on motor vehicles until June 30.
Legislators
debated the bill during most of March before finally defeating it.
One of our directors in the consumer recreational business commented
that revenue from TV and radio advertising is up substantially.
Consumer
spending for recreation has been exceptionally good.
Some major retailers in the District report scattered signs of a
pickup in soft goods.
Sales of big-ticket items remain poor with little
prospect of recovery until early next year, according to one source.
An
executive with a major department store said that he is encouraged by
somewhat better than expected sales around Easter, and by collections
above estimates in recent weeks.
An economist with a department store
chain believes that retail sales, except for household goods, bottomed out
in January and February.
He sees progressive strengthening in sales of
soft goods and a completion of inventory liquidation of these goods by May.
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Continued weakness in appliance and furniture sales is expected until next
spring, because of a 9 to 12 month lag between recovery in housing and
recovery in household goods.
All retailers report excessive inventories
of appliances and furniture.
Liquidation is not expected to be completed
until July or August, according to one source.
The treasurer of a finan
cially troubled retail chain said that it has had difficulty building
inventories of summer merchandise because its suppliers have held back
credit.
All firms contacted say that retail prices definitely are moder
ating--some fall merchandise will be priced below current levels, and
price increases for other lines will be much smaller than last fall.
According to purchasing agents in the Cleveland area, production cut
backs were more widespread in March than in previous months.
Lower prices
became more pervasive, with 40 percent of firms paying lower prices and
only 5 percent paying higher prices.
roughly equal in February.)
(The higher-lower percentages were
Our own Survey of District Manufacturers con
firms the continued weakening in business during March.
For the month of
April, firms expect some moderation in the rate of decline in new orders,
shipments, backlogs, and employment, but an accelerated rate of inventory
liquidation.
Auto firms have started to recall some workers, and some
automotive suppliers report a pickup in business.
Steel companies report a dramatic decline in new orders.
Several
major steel firms emphasized that their customers are rapidly liquidating
steel inventories.
The run-off is expected to continue throughout the
second quarter and possibly beyond.
this quarter.
first quarter.
Steel shipments will drop sharply
One firm estimates a decline of 20 to 25 percent from the
Production, however, will not decline as much because
steel mills still need to rebuild their inventories.
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The situation in the capital goods sector is mixed, and the outlook
is uncertain.
An executive with a large industrial machinery firm believes
it may step up its capital spending somewhat in light of the more favor
able investment tax credit, ITC.
Its customers are expected to place
orders previously deferred because of expectations that the tax credit
would be liberalized.
One of the area's major electric utilities said the
increase in the ITC is unlikely to increase its spending plans this year.
Several of our industrialist directors expressed the view that an accelera
tion in depreciation allowances would do more to stimulate capital spending
than the higher ITC.
A highly-regarded economist in the machine tool
industry does not expect the ITC to stimulate capital goods much this year,
and he continues to forecast no recovery in real capital spending during
the second half.
His own firm booked four new orders for machine tools in
March, whereas cancellations had exceeded new orders during the previous
four months.
Another machine tool firm said new orders continue to be
depressed, but offers to bid on contracts are increasing.
A director
reports excellent business in his capital goods firm which produces equip
ment for oil exploration and drilling and coal mining machinery.
In the District's construction sector, the decline in residential
construction contracts resumed in February, following some improvement in
January.
Nonresidential building remains depressed.
Construction firms
in the region are said to be hungry for business, a report that tends to
be confirmed by more competitive bidding for public projects.
Recently,
Ohio awarded the contract for a new bridge to a firm whose bid was almost
25 percent below state engineers' estimated cost.
Last month, other bids
below estimates were reported for road construction, school remodeling,
and a recreation center.
One banking director in southern Ohio reported
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that a home builder, anticipating a recovery in demand by late spring, has
started 50 homes without any sales contracts so far.
In the financial area, banks report that demand by residential con
struction builders for new loan commitments has been unchanged.
improvement is expected during the second quarter.
Limited
Some banks that adopted
restrictive loan policies for residential construction last year say funds
are now available.
Ohio's 8 percent usury ceiling on mortgage loans is
discouraging some state-chartered banks from lending.
in Cleveland report excellent deposit inflows in March.
Several large S&Ls
But more deposits
are in the form of passbook savings and short-term certificates, as savers
expect higher yields in the months ahead.
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FIFTH DISTRICT - RICHMOND
Results of the March survey of Fifth District businesses suggest a
marked slowing of the current decline in business activity.
There is not
yet any indication of a turnaround, but the bottom of the decline may be
coming into view.
Among manufacturers surveyed, inventories were essen
tially flat over the February to March period, while backlogs of orders
declined further and new orders made their best showing in recent months.
Inventories remain above desired levels, but the mild optimism noted
last month seems to have grown even stronger in March.
Among retailers
surveyed, sales weakened slightly after showing some improvement in
February; but the inventory picture improved somewhat, although half the
respondents feel current inventory levels are excessive.
Banking condi
tions have changed little in the past month; loan demand remains depressed
and bank liquidity continues to improve.
In the agricultural sector,
land preparation for spring planting is lagging behind normal because the
recent heavy rains and generally wet weather for the past several weeks
have brought farming operations to a near standstill in many areas of the
District.
Of the manufacturers responding to our survey, approximately one
fourth report increases in shipments and in the volume of new orders dur
ing March.
While this does not represent a turnaround as such, it suggests
some moderation of the pervasive weakness exhibited in recent months.
Almost one-half of the respondents indicated further declines in backlogs
of orders while the diffusion of responses indicates little or no change
in inventory levels.
Sixty-eight percent of the manufacturers still view
current inventory levels as excessive.
But, of those, almost 50 percent
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feel their inventory adjustment will be completed within three months, and
86 percent expect inventory levels to be brought into line within six months.
The responses reveal further declines in the number of employees and in
hours worked per week, but the number of manufacturers reporting lower
employment and a shorter workweek declined from about 60 percent last month
to about 40 percent at the end of March.
The relative softness displayed
by prices received by manufacturers continued and apparently is spreading
to prices paid, although in the latter case the movement is less pronounced
and could prove tentative.
Over 50 percent of the manufacturers still feel
current plant and equipment capacity is excessive, but almost 85 percent
view current expansion plans as about right.
The lessening in pessimism
noted last month appears to be turning to mild optimism.
Over 50 percent
of the manufacturers surveyed expect the level of business activity to
improve over the next six months, and over half foresee an improvement in
the level of production in their own firms over that time period.
The survey of District retailers also suggests some moderation in
the rate of decline of business activity, although not to the extent indi
cated by the manufacturers.
The dollar volume of sales showed little
change during March as sales of big ticket items relative to total sales
remained weak.
Responses reveal some further declines in inventories,
although half the respondents still view current levels as excessive.
Of
those retailers with excessive inventories, however, 75 percent feel the
adjustment will be completed within three months.
Employment among
retailers surveyed declined in March, but employee average hourly earn
ings continued to rise.
Price increases continued, but were not quite so
widespread as in recent months.
As a group, the retailers remain cau
tiously optimistic, expecting that, at worst, business activity will
-18
remain the same over the next six months and that the decline may be near
an end.
Fifth District banking conditions seem to have changed little since
the last Redbook summary.
Loan demand remains depressed and banks are
apparently continuing their efforts to improve their liquidity.
Several
banks in the District have expressed a gloomy outlook about the prospects
for recovery in the economy before year-end, and are planning accordingly.
There is some concern about the retarding effect on recovery which would
result from rapidly rising long-term interest rates.
As has been the
case for nearly a year now, special attention is being given to the loan
credit review process.
Business loans at weekly reporting banks continued to decline in
March, having fallen about 4.5 percent since the beginning of the year.
Lending has recently increased only in the chemical and wholesale trade
industries.
Consumer loans continue their steady decline and have fallen
by 6.8 percent since the beginning of the year.
Agricultural credits
have increased in the past four weeks, but not as much as during the same
period last year.
Only in South Carolina has business lending turned
upward.
Holdings of CDs seem to have leveled off during March after experi
encing a slow decline since early in the year.
Net purchases of Federal
Funds by District member banks for the first three weeks of the month are
about 20 percent below the average level so far this year.
Borrowing at
the discount window declined for the ninth straight month, with reserve
city bank borrowing falling to zero.
The District's farmers indicated on March 1 that their total crop
plantings in 1975 would be only a little larger than last year.
There
-19
would be major acreage changes from 1974 for some crops, however.
Cotton
acreage, now expected to be down 55 percent, shows the biggest decline.
But growers' plans for increasing soybean plantings 8 percent will more
than offset the cutback in cotton.
Moreover, intended tobacco acreage is
up 15 percent, while acreage seeded to winter wheat last fall was 11 per
cent larger.
Total cash receipts from farm marketings in January were 10 percent
below a year ago, with declines in crop and livestock receipts about equal.
-20-
SIXTH DISTRICT - ATLANTA
The District economy continues its adjustment to its steep economic
decline.
Layoffs and temporary plant closings are still reported in many
parts of the District.
Attempts at inventory realignment are most often
cited by businessmen as the reason for these layoffs.
Some companies have
already made adjustments and are beginning to hire back workers.
Capital
spending cancellations may be near an end, since few cutbacks were reported
in the past month.
Construction activity in the residential area remains
bleak because of the large housing overhang in many areas, particularly in
multifamily structures.
Construction is likely to lag instead of lead any
general economic recovery.
Reports from many parts of the District again
confirm the surprising tourist boom.
Layoffs continue, but are now being matched by rehires in many parts
of the District. Several paper mills have closed their doors temporarily.
A Florida paper plant closed its craft mill for a two-week period in midMarch because of economic conditions.
About 600 workers were idled.
A
Louisiana paper company has also laid off a number of workers temporarily
in an attempt to work off inventories.
A huge Louisiana aluminum and chem
ical plant has temporarily furloughed workers in order to bring inventories
in line with demand.
A Tennessee chemical plant is also laying off around
250 workers because of inflated inventories.
recovered.
Textile firms have not yet
Textile plants in southeast Tennessee and in Georgia continue
to operate with reduced work forces and shortened workweeks.
The Alabama
Power Company has recently released nearly 1,800 people and has let another
700 jobs go unfilled.
tion workers.
The biggest portion of those released were construc
-21-
Steel fabricators are beginning to feel the drop in demand for their
products.
One fabricator is slashing prices to move inventories.
The
company's representative indicates that he can buy raw steel at about two
thirds the price of last year.
Many businesses are now reporting prospects as looking up.
inventories have moved back in line for these companies.
Apparently
In Tennessee,
appliance and furniture manufactureres are beginning to call back workers.
In fact, one report from an eastern Tennessee furniture manufacturer indi
cates that production schedules have been increased to replenish inventory
stocks.
The lumber industry has been hard hit by the economic decline, but
a number of people in the industry think that the slump in sales and prices
has bottomed out and that a recovery, while it will be slow, is now in
sight.
Recalls in auto assembly plants in the Atlanta area have given some
strength to that area's economy.
Several local area economists have men
tioned that they are besieged by calls from businessmen wondering when the
turnaround in their particular industries will be over.
An optimistic inter
pretation of this development might be that businessmen will actively expand
production and employment as the first concrete signs of recovery develop.
This might aid the economic rebound.
This is the first time in several months that there were no reports of
further cutbacks or cancellations in capital spending plans.
eral new developments have been announced.
These include:
In fact, sev
A $35-million
ammonia plant in Mississippi; a $30-million oil storage capacity expansion
plant in Louisiana; and a $10-million addition to a Louisiana chemical
plant.
In Mississippi, $2.5 million provided from the Emergency Employment
Appropriations Act has been allocated for the Tennessee-Tombigbee Waterway
Project.
It is estimated that an additional 1,000 construction workers will
-22
be brought in by the end of the year to work on this project.
It has been
cited as the largest earth-moving project ever to be undertaken in the
continental U. S.
Several other smaller plants have been announced, and
new contracts let for District manufacturers.
Everyone seems set for a pickup in housing activity which has not as
yet developed.
District.
The forces behind the housing picture are mixed within the
Reports indicate that funds are much more readily available as
large savings inflows occur at S&Ls.
However, the housing overhang, partly
among multifamily units, remains substantial.
The apartment and condominium
market seems to be the most overbuilt, particularly in the southeast Florida
area.
The issuance of building permits for new dwelling units is the lowest
since these areas became known as Standard Metropolitan Areas.
However, at
least in single-family housing, there are some signs of improvement.
One
large Florida home builder has cut prices by as much as 10 percent in order
to stimulate sales.
Atlanta's largest condominium builder has recently
reduced prices on selected units; within 10 days most of these units sold.
A representative of the New Orleans area S&L industry says that half of the
inventory of new houses at the beginning of the year is now sold.
Mortgage rates have apparently declined more sharply in this area than
in other parts of the District.
The tax credit for the purchase of new homes
was mentioned by only one director.
building from this credit.
He expected little stimulation for home
One final note of optimism was viewed by a South
Florida banker, who thought that the stock of unsold condominiums in
this
area, which are now available for sale, is generally smaller than realized.
Many units are tied up in litigation and will have to be refurbished before
they are sold, and other units will have to be completed.
condominium situation is not as serious as believed.
As a result, the
Reports from District
-23
bankers, however, generally indicate that single-family housing is most
likely to recover much more quickly than most multifamily construction.
The tourist boom continues.
The previously reported tourist boom in
Florida has buoyed retail sales in the area; apparently, the boom is more
general, however.
Reports from the New Orleans area indicate that, within
the last three months, tourist and convention business has been well above
normal.
Downtown New Orleans hotels are running at about 70 percent occu
pancy rates.
Tourism is again flourishing in Tennessee, also.
Registra
tions at Tennessee welcome stations are nearly 10 percent above levels of
1973--the last good tourist year.
Camping business is also booming.
A
recent camping show held in Atlanta produced record sales volumes of camp
ing items.
A recent boat show in the Orlando, Florida area produced sales
in the first day which exceeded the whole week of the show in 1974.
-24SEVENTH DISTRICT - CHICAGO
Although general business activity continues to decline in the Seventh
District, there are signs that the rate of decline is slowing.
Job and
product markets are much more competitive and prices of various industrial
products have declined.
A heavy snowfall on April 2 disrupted transporta
tion and output in Chicago and southern Michigan for a day or so.
Output
schedules for autos, appliances, and some other consumer goods have been
raised moderately and tentatively from very depressed levels, mainly
because rapid inventory liquidations resulted in stockouts of certain pro
ducts.
Weakness in capital goods is spreading.
relatively strong.
modest revival.
The farm sector remains
Residential construction appears to be heading for a
Most analysts project some growth in real GNP in the third
quarter, helped by slower inflation, inventory reductions, and more stimu
lative monetary and fiscal policy.
Most "monetarists," however, see "the
turn" delayed for at least one or two additional quarters.
Many business
men and lenders are concerned that steps to bolster activity will acceler
ate the inflation rate later this year or next year.
Output of autos, trucks, appliances (both large and small), and some
materials and components is scheduled to rise moderately in the next month
or two, less because of stronger demand than because of inventory reductions
that left some gaps.
Producers of certain products, for example, fasteners,
small metal parts, and certain home furnishing materials, report very spotty
demand with improvement in some areas, while others are severely depressed.
Demand for some construction equipment associated with home building, very
weak last year, has increased in some cases.
Despite scattered improvements, virtually all industries are oper
ating at reduced levels, most far below capacity, with no sign of an early
-25
reversal.
Steel mills, which continued to operate at effective capacity
throughout 1974, began to cut workweeks and lay off workers in March.
Last year's severe shortages are only a fading memory except for natu
ral gas, fertilizer, and a few special items, mainly components for heavy
capital equipment.
Lead times have been reduced sharply, deliveries are
more dependable, and complaints of poor quality are less frequent.
Products
such as metal fasteners, paper, motors, and electronic components, which
often sold at premiums last year, are now discounted--heavily in some cases.
Certain bolts that brought $35 per thousand last summer are now readily
available at $8.50.
Market prices of some electronic components were cut
in half in the first quarter.
Much price cutting takes the form of negotiated discounts or changes
in terms of trade, with list prices unchanged.
Such adjustments are said
to be more prevalent than in the past because of fears that price controls
will be reinstated.
Manufacturers and large retailers are "putting a
squeeze" on suppliers.
Price escalators have largely disappeared and
prices for future delivery are being quoted on a firm basis for longer peri
ods.
However, in many sectors higher prices are likely to hold.
Prices
of many types of components and finished equipment are 15 to 25 percent or
more higher than a year ago.
An insurance company reports that its price
index on auto parts is up 40 percent from a year ago.
Strength in capital goods, which sustained many District centers
through 1974, is ebbing rapidly.
Demand for equipment for mining, off
shore drilling, petro-chemicals, and pollution control is still very strong.
Markets for farm equipment will be more competitive because producers are
rapidly rebuilding badly depleted inventories.
Output of railroad equip
ment continues at a high level, but many freight cars are in storage.
open hopper cars are now in short supply.
Only
Builders of large vessels for
-26
the Great Lakes, although operating at high rates, say order backlogs are
disappearing.
Oil companies say that the end of depletion and changes in
tax treatment of foreign earnings will reduce exploration budgets.
Pro
ducers of various capital goods report cancellations of orders as well as
postponements and stretchouts.
Reduced demand for products and reduced
cash flow are cited as reasons.
A producer of construction and materials
handling equipment says, however, that the "explosive" rate of order can
cellations that started late last year has moderated.
Producers of com
ponents for equipment report that the decline in orders, very sharp in
late 1974 and early 1975, has leveled off--even reversed in some cases.
A
number of companies say that European orders have held up better than
domestic business.
Some believe that the dollar is now substantially
undervalued relative to various other currencies.
There is no evidence
that the increase in the investment tax credit (to 10 percent) has affected
sales of equipment.
The decline in employment and the rise of unemployment continues in
most centers, but probably at a slower pace.
Factory work layoffs con
tinue and many companies are trimming office workers and executives--often
by forcing early retirement.
Total employment is not being sustained, as
in the past, by the service sectors.
Many utilities are reducing staff,
and jobs in finance and retail trade are not expanding significantly.
The
City of Detroit has announced a 25 percent staff reduction to help balance
its fiscal 1976 budget.
Large general merchandisers, other than "discounters," were disap
pointed with March sales--far below last year after adjustment for infla
tion.
The early Easter clearly didn't help.
Retailers' inventories are
reported to be in good shape after reductions starting in late 1974.
-27-
Although construction contracts and building permits in the District
remained at very low levels through February, there are reports that
improved availability of credit is beginning to activate transactions.
Savings inflows at S&Ls have been very favorable.
These institutions have
been able to repay debt and are actively seeking mortgages.
Developers of
various residential and commercial projects are coming out of hibernation
after 6-8 months.
Rapid release of impounded water and sewer funds would
help construction activity.
-28-
EIGHTH DISTRICT - ST. LOUIS
Eighth District businessmen generally expressed more optimism than
heretofore about the prospects for an economic recovery later this year.
Although department store sales remain weak, unemployment high, and gen
eral economic conditions relatively depressed, some signs of recovery
were observed.
Most of those interviewed believe that economic activity
has bottomed out.
Despite the low level of construction, building repre
sentatives are generally optimistic.
Funds continue to flow into thrift
institutions at a rapid rate, and interest rates have declined from their
peaks of last year.
Department store representatives are still rather pessimistic.
Despite the early Easter, March sales at major Eighth District outlets
were not much above last year's level; thus the real volume of sales was
down.
Retailers continue to report reduced sales of big-ticket items.
However, inventories are being reduced to minimum levels and a turnaround
in consumer demand could bring a quick increase in orders to manufacturers.
Car sales have also sagged in the post-rebate period, although imported
automobiles are apparently selling fairly well.
General manufacturing activity is difficult to gauge as representa
tives of some industries reported worsening of conditions and of others,
improvement.
Automobile manufacturing activity, for example, has improved,
as manufacturers expect an upturn in car sales in the spring and summer
months.
One clothing manufacturer reported the closing of some operations,
while another was increasing its workday.
Still another reported current
orders for the fall season down considerably, but was fairly optimistic
that sales will pick up substantially in late spring since retailers have
reduced inventories below optimal stock levels.
A plywood company reported
-29
operations at high levels with increased sales.
A manufacturer of paint
and coating felt the bottom of the decline had been reached, but sales
were 14% below a year ago.
A substantial drop-off in synthetic fiber
sales was reported, while sales of synthetic rubber and freon have
increased.
Manufacturers of small farm implements and garden tools were
highly optimistic, with operations at very high levels and a high sales
volume in prospect.
Several manufacturers are more optimistic than heretofore about
future conditions, even though sales at the moment do not justify that
optimism.
Expansionary government policies are no doubt contributing to
the belief that the economy is currently at or near the bottom of the
recession, and that a substantial recovery will soon begin.
No major changes in business investment plans were reported as a
result of the recent tax concessions.
As a general rule, firms expect to
implement their earlier spending plans which were quite expansionary.
Some, however, expressed the view that part of their spending plans hinged
on adequate financing at reasonable rates which may be difficult to obtain
in view of the level of prospective government borrowing in the capital
markets.
Unemployment continues up, reflecting the growing labor force and a
moderate decline in the employment level.
Some improvement has been reg
istered for employment at automobile plants, but some other industries
report plant closings and further layoffs.
An increase in housing sales and new housing starts was reported.
One builder stated that March was his best month since a year ago.
The
tax credit recently passed for new home purchases is expected to help
clear existing housing inventories; however, areas such as St. Louis,
-30
with a relatively small inventory of homes, will not be helped much by
this action.
Funds continued to flow into S&Ls at a relatively high rate in March.
The increase in savings so far this year has put downward pressure on
interest rates.
Since mid-March, however, mortgage rates have remained
at about 8 1/2 percent.
S&Ls are reluctant to lend at lower rates since
lower rates received would require a change in policies with regard to
rates offered on CDs.
They are reluctant to make this change while con
siderable uncertainty remains concerning the effects of government financ
ing on credit markets.
Loan volume at commercial banks continued to decline in March reflect
ing weak demand, and a further decline occurred in interest rates.
The
volume of business loans declined, on balance, although some increase was
noted late in the month.
Consumer installment loans also continued to
decline, reflecting the decline in sales of big-ticket items such as cars,
televisions, and furniture.
The level of time deposits at banks was
little changed, as a small increase in consumer-type savings deposits was
about offset by a decline in other time deposits.
-31-
NINTH DISTRICT - MINNEAPOLIS
Early 1975 brought a deterioration in District economic activity, and
the immediate prospects are for a further decline.
District unemployment
rose markedly in the first quarter and is expected to climb even higher.
District residents were not very optimistic about the economic outlook.
These developments affected consumers' outlays, and retailers reported
small first quarter sales gains.
However, contrary to the general trends
in the District's economy, resort owners had a good winter, and look for
business to remain strong.
Also, savings inflows at S&Ls improved, though
a rapid recovery in District housing construction is not foreseen.
Even though the District's unemployment rate has not risen as far and
as fast as the nation's rate, District joblessness increased conspicuously
in early 1975.
The District's seasonally adjusted unemployment rate was
6.4 percent in January/February, contrasted to 5.8 percent in the fourth
quarter of last year.
in unemployment.
Other District indicators point toward further rises
District initial claims for unemployment insurance in the
first quarter were up 41 percent from a year ago, and help wanted advertis
ing in January/February was down 31 percent.
The attitudes of District residents reflected the softening in the
economy.
According to results of a newspaper poll taken in early March,
58 percent of the respondents described the United States economy as
"pretty bad" and 19 percent used the term "very bad."
With regard to
future economic activity, 54 percent anticipated "pretty bad times" and
14 percent expected "very bad times" over the next twelve months.
One
encouraging result from the survey, however, was that the percentage of
respondents anticipating "pretty good times" during the next twelve months
increased from 19 percent in early January to 26 percent in early March.
-32-
Adverse economic developments made District consumers reluctant to
spend.
Major Minneapolis/St. Paul area retailers reported a lackluster
first quarter.
Sales gains in dollar terms were not large, and in some
instances unit sales were down from twelve months earlier.
Large appliance
sales were particularly hard hit, while do-it-yourself merchandise sold
quite well.
This year's long winter and early Easter adversely affected
spring clothing sales.
Furthermore, much of the sales activity that
existed did so as a result of price reductions--which in turn cut profit
margins.
Interestingly, discount stores did better than department stores, and
stores in rural areas did somewhat better than those in the Minneapolis/
St. Paul area.
District retailers, in general, indicated that inventories
were in good shape and that they were beginning to buy goods in smaller
quantities and replenish their stocks more often.
Consequently, retailers
believe they can hold their own, but they do not look for any immediate
improvement in sales.
In fact, in order to maintain profit margins one
major retailer has developed contingency plans to reduce personnel and
other costs in case sales fall off more than anticipated.
Contrary to the general trends in the economy, District resort owners
had excellent business this winter.
Part of the reason can be attributed
to good snow conditions and acceptable temperatures which made for excel
lent skiing and snowmobiling.
Further, consumers did not seem to mind the
higher prices at ski areas, and ski equipment sales were excellent despite
the softening in consumer spending.
Looking ahead to this summer, resort
owners are quite optimistic, and in some cases reservations and inquiries
for this summer are ahead of comparable figures for last year.
The first quarter's substantially stronger savings inflows at mort
gage lending institutions brightened the District's prospects for a housing
-33
recovery in the months ahead.
Although liquidity positions at District
S&Ls were still weak, loan commitments increased perceptibly.
not likely to be rapid, however.
Recovery is
In a recent survey of interim construc
tion financing, senior loan officials of several commercial banks in the
Minneapolis/St. Paul SMSA indicated that the loan demand from builders of
multifamily housing was not strong.
Moreover, banks were not eager to
make new multifamily loan commitments because of the fear of both the cost
overruns and the other problems that beset builders in 1973 and 1974.
-34-
TENTH DISTRICT - KANSAS CITY
Business conditions in the Tenth District appear to be stabilizing.
Purchasing managers are still paring inventories, but generally not because
they expect further declines in sales.
Some firms are going ahead with
capital expenditures planned earlier, but there is no suggestion of deci
sions to increase such outlays more than had been budgeted.
Weak spots in
the region, such as in autos and construction, are being offset to some
degree by strength in areas such as extractive industries and skiing.
How
ever, unemployment rates in the District states and metropolitan areas con
tinue to show the uptrends evident in recent months.
Agriculture has
suffered from adverse price movements this winter, but this sector too may
be bottoming out.
Bank business is slow, and bankers are like other
respondents in taking a "wait and see" position with regard to the tax-cut
economy.
The Tenth District economy historically has enjoyed insulation from
the severity of business cycles.
This time around, however, unemployment
rates in the Colorado Springs, Kansas City, and Omaha metropolitan areas
have risen to levels near the national average.
Further increases may fol
low, but businessmen foresee a leveling off or improvement in sales and
production.
Some price breaks are reported by purchasing agents, who still
complain of shortages of certain items.
One construction outfit that spe
cializes in pollution control devices still cannot get the castings it
wants, evidently because suppliers of castings have had their forging
operations curtailed by pollution control requirements.
especially weak in the District.
Construction is
While business executives cannot be
characterized as pessimistic, they are not optimistic either--just cautious.
For example, plans for expenditures on new plant and equipment have not
-35
been scaled up in light of recent events.
The possible closing of the Rock
Island Railroad worries some communities a great deal, but this appears to
be the only dark spot in the outlook.
Led by lower prices for most of the major crops, the index of prices
received by farmers declined 2 percent for the month ended March 15, the
fifth monthly drop in a row.
an average of 15 percent.
Compared to a year ago, farm prices were down
Since mid-March, however, the prices of most
grains and livestock have rebounded sharply causing some observers to con
clude that the 5-month decline may have bottomed out.
The higher price
levels for livestock are generally expected to be sustained into the summer,
but the prospects for crop prices are more uncertain.
If the expectation
for bumper crops is fulfilled, some downward movement in price is likely.
While falling farm prices have been reflected in the wholesale price
index, retail food prices have continued to rise over the last several
months.
However, the rate of increase has eased substantially from the
unusually high rates experienced in 1974.
will probably continue rising.
In the months ahead, food prices
However, there is reason to hope that food
prices will be fairly stable during the second half of the year, in light
of what has happened to farm prices since the beginning of the year, and
favorable prospects for production in both the crop and livestock sectors.
Loan demand at Tenth District weekly reporting banks continued weak
during the month of March.
Real estate loans were especially weak, while
business loans increased less than is seasonally normal.
Bankers note no
recent pickup in home mortgage loan requests, and a continued sluggish
demand for auto loans.
In addition, bankers report that credit card loans
have weakened more than expected.
Some bankers, however, expect loan
-36
demand to increase in the next several months, including an increase in
the demand for real estate construction loans.
Generally, bankers say
that their loan policies are not becoming more restrictive.
Total depos
its declined recently at District weekly reporting banks but the decline
was less than seasonal.
Bankers express considerable uncertainty about
the future growth of their deposits.
Some feel that the Federal tax rebates
might increase their time and savings deposits in May and June, but others
do not expect to benefit to any significant degree.
-37-
ELEVENTH DISTRICT - DALLAS
Despite a boom in output of oil field equipment and related products,
industrial production in the Eleventh District has continued to decline at
a moderate pace.
In anticipation of the dollar-a-barrel tariff imposed
February 1, imports of crude oil were accelerated in January.
But, due to
unseasonably mild weather and the recession, demand for petroleum products
has fallen and refiners have trimmed operations.
Petroleum refining is
running at 84 percent of capacity, down 10 percentage points since early
January.
In spite of lower output, refiners report that stocks of finished
products are pressing storage capacities.
Chemical production has also trended downward since late last year
with a sharp falloff in new orders.
Manufacturers attribute the drop in
bookings to inventory liquidation by many customers that made large pur
chases last year as a hedge against possible shortages.
One of the Dis
trict's leading producers of industrial chemicals reports output has dropped
to 50 percent of capacity.
Despite reduced demand, producers have been
reluctant to lower prices.
One firm attributes the reluctance to an
industry-wide concern that price controls may be imposed later this year.
Operations of District steel producers primarily engaged in supplying
residential and commercial construction, continue to be depressed.
Manu
facturers of reinforcing steel bars have cut production as much as half.
Still, a buildup of inventories has forced them to substantially reduce
prices.
One of the largest producers of re-bars, for example, has lowered
prices by roughly 20 percent across the board and still reports record
high inventories.
-38-
In addition, the falloff in demand has left many steel dealers flush
with high priced foreign steel that was ordered last year when domestic
mills could not keep pace with demand.
During the fourth quarter of 1974,
foreign steel--priced well above domestic levels--poured into the District
at record rates.
Now, with prices down, dealers will have to take losses
estimated at $150 per ton to liquidate their inventories.
Nevertheless,
foreign producers have remained active in District markets by aggressively
cutting prices.
Steel ordered in March, scheduled to reach the Gulf Coast
this summer, is priced roughly a tenth below quotes by District mills.
One official reports his firm cannot compete at current prices, since
quotes on foreign products are now lower than his cost of production.
Manufacturers of truck trailers are experiencing drastic reductions
in new orders and production.
To avoid the added cost of an anti-skid
braking system that became mandatory on January 1, major fleets bought
ahead last year.
As a result, new orders have been "practically nonexis
tent" this year.
Production by one of the largest manufacturers in the
District is down 75 percent from the level in the fourth quarter of 1974.
And at one assembly plant where 400 workers have been laid off since midDecember, output has been cut from 35 to 8 units per day.
In addition, the
slowdown in business activity late last year prompted a sharp decline in
hauling and forced the cancellation of many orders.
This has contributed
to large inventories of finished trailers--in the case of one firm between
700 and 800 units.
Apparel manufacturers--many operating on reduced workweeks--report
orders have picked up recently.
One major garment maker said salesmen are
now getting orders they would not have gotten a few weeks ago, indicating
that most retailers have run off large post-Christmas inventories.
-39-
Nevertheless, buyers remain extremely cautious.
To control inventories,
retailers are ordering smaller quantities and are reordering more fre
quently.
In addition, they are largely confining their purchases to sta
ple items--basic styles, sizes, and colors--and are carefully avoiding
"fad" items.
Producers of oil field equipment--including offshore drilling plat
forms--continue to operate under a deluge of orders.
to five years are common.
Backlogs of three
In addition, firms engaged in supplying steel
and fabricated metal products to equipment manufacturers are hard pressed
to meet demand.
One of the District's largest materials suppliers, for
example, reports a two year backlog of unfilled orders for steel castings.
Shortages of skilled labor are also impeding equipment production.
Many
firms have started recruiting nationwide, especially in the Detroit area.
Moreover, several large producers have established schools to train
unskilled workers for skilled positions.
A survey of new car dealers indicated sales have fallen sharply since
the cash rebate program ended.
Respondents said sales in March were, on
average, down 50 percent from the level in February.
Dealers admit the
downturn seems to indicate that the cash rebates simply borrowed from
future sales.
Nevertheless, they regard the program as having been suc
cessful, as they were able to liquidate large inventories of new cars-
even to the extent of selling entire stocks of some small models.
Since
dealers expected sales to be sluggish after rebates ended, they have held
down new orders, thus keeping inventories manageable.
-40-
TWELFTH DISTRICT - SAN FRANCISCO
Our directors remain cautious about the near-term economic outlook
and would prefer to react to developments as they occur.
If anything,
their estimate of the turnaround in general business activity has been
shifted a little further into the fourth quarter of 1975.
Consumer spend
ing continues lethargic, and business loan demand is off considerably.
The most depressed industries, forest products, construction and transpor
tation equipment, have deteriorated further.
Our directors do not believe
that passage of the 1975 tax bill will create enough stimulus for a sudden
recovery, although consumer spending will benefit.
Consumer spending is reported to be cautious; department store sales
in southern California were down 5 percent from a year ago and promotional
sales were ineffective.
Furniture and appliance dealers are anticipating
sales increases as a result of the tax rebates.
Post-rebate automobile
sales weakened across District states, but the decline was mitigated by
price reductions stemming from cutbacks in standard equipment.
According
to one director, reports of improved mileage on 1976 models has all but
sounded the death-knell for 1975 models.
One banker reports a trend toward
42 to 48 month maturities on new car loans.
Luxury cars continue to sell
well, at about 15 percent over last year.
After a year during which manufacturers built up inventories in
anticipation of price increases and materials shortages, the recessionary
fall-off in demand has precipitated sharp inventory declines.
It is gen
erally believed that the worst is over, and output is currently in line
with sales.
Some industries, however, notably forest products and alumi
num and food processing, are still working off excess inventories.
Manu
facturers are anticipating declines in materials prices, and they intend
-41
to hold down inventory in this hope at least until the fourth quarter of
1975.
The situation in the forest products industry continues to deterio
One large paper company has stopped shipments for 90 days and most
rate.
other companies are still curtailing output.
Negotiations for a new
industry labor contract will get underway in May and strikes are antici
pated.
One director estimated that the final wage settlement will entail
a 10 percent increase on a one-year contract.
The depressed state of the lumber industry continues unabated,
reflecting weakness in construction.
One director who cites the growing
number of bankruptcies among building contractors and the high unemploy
ment rates of laborers and architects, claims that it will take 7 to
8 years to absorb existing vacancies in southern California.
Petroleum inventories are currently at an all-time high and, although
refinery runs have been reduced, stocks will be above normal through mid
summer.
Several directors indicated concern over the long-run petroleum
supply situation--one citing that the fields in southern California have
been nearly pumped dry and another stating that Washington D. C. has been
short-sighted in its action on the depletion allowance.
A study he has
made showed that the worldwide effective tax rate for 10 large oil com
panies was 11.5 percent, compared with 8.4 percent for a sample of large
commercial banks.
In a separate question inquiring as to the effects of the investment
tax credit on their capital spending plans, the directors were unanimous
in stating that there would be no impact.
They consider that, with prof
its dropping and retained earnings for capital investment limited, long
term credit would have to be priced more attractively to induce capital
-42
expansion.
One director states that a permanent investment tax credit at
a higher level than 10 percent might have a significant effect.
The agricultural economy is still reflecting the effects of a highly
profitable year in 1974:
sales of tractors and farm equipment are up,
but consumer resistance to high-priced processed foods is beginning to be
felt at the retail level.
A citrus freeze in the Bakersfield area will
reduce yields by 30 percent this year.
This District's banks are currently experiencing healthy deposit
inflows.
Although the rate of return on loans is high, loan volume to
business has been falling off, partially from lower demand and partially
as a result of a policy change to improve the quality of loans made in
the light of heavy loan losses last year.
The banks anticipate only a
modest resurgence in business loan demand by year-end, but they are
actively seeking consumer loans.
Mortgage loan expansion will be limited
by the aggressive competition of S&Ls.
seasonal increase in agricultural loans.
This quarter will see a normal
The increased liquidity of banks
will be invested in securities only to the extent that it cannot be loaned.
Cite this document
Federal Reserve (1975, April 14). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19750415
@misc{wtfs_beige_book_19750415,
author = {Federal Reserve},
title = {Beige Book},
year = {1975},
month = {Apr},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19750415},
note = {Retrieved via When the Fed Speaks corpus}
}