Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

December 15, 1976

TABLE OF CONTENTS

SUMMARY page i

First District-Boston page 1

Second District-New York page 4

Third District-Philadelphia page 7

Fourth District-Cleveland page 11

Fifth District-Richmond page 15

Sixth District-Atlanta page 18

Seventh District-Chicago page 22

Eighth District-St. Louis page 26

Ninth District-Minneapolis page 29

Tenth District-Kansas City page 32

Eleventh District-Dallas page 35

Twelfth District-San Francisco page 39

Summary*

Asterisk: Prepared by the Federal Reserve Bank of San Francisco.]

Although many Districts report that activity over the past month

has been sluggish or flat, almost as many report that the lull in activity

is over and an uptrend has been resumed.

Consumer spending is anticipated

to be 8 to 10 percent higher this Christmas season than last although sales

will not be this exuberant in agricultural areas where income gains are low

this year.

Residential housing has been picking up momentum over the past

three months, generating capacity operations at lumber mills.

There is some

doubt as to whether the recent rash of posted price increases will stick.

Business loan demand remains in the doldrums but inquiries at banks have picked

up.

Savings flows at thrift institutions continue to set new records.

Consumer spending is not expected to be exuberant over the Christmas

season, nor is it expected to flag greatly.

Gains over the last year on

the order of 8 to 10 percent are anticipated depending on the amount of

promotional effort expended.

the use of credit.

A larger proportion of sales this year involve

As reported by Minneapolis, Richmond and Kansas City,

spending is less bouyant in agricultural areas where income is running about

5 percent over last year.

Inventories of big-ticket appliances continue

to be high in the Northeast.

Sales of large cars and intermediates are

very strong but many reports state that the rebate program was unsuccessful

in moving subcompacts.

The Dallas District is experiencing more robust

Christmas sales than elsewhere.

The coldest winter in 80 years is draining fuel supplies in the

Midwest and, in some cases, raising home heating bills by 35 to 40 percent

over last year.

Observers in the oil industry in Dallas expect an OPEC

price increase of 10 percent which would lead to a one cent per gallon

increase in gasoline prices.

Although the most recent indicators of industrial new orders, employment and the workweek are down, this trend is generally regarded as a

lull and is not expected to continue.

There is some feeling that capital

spending plans are being held up in anticipation of an investment tax credit

and other possible changes from the new administration.

The strength of

residential construction reported by Dallas and San Francisco is already

causing tight supply situations for lumber and gypsum in those areas.

According to Cleveland, steel economists have reduced their forecasts of

domestic steel shipments for 1977 from 105 million tons to about 100 million

tons, compared with an estimated 89 million tons in 1976.

Moreover, both the

textile and apparel industries are reported by Richmond to be experiencing

declining activity and capacity is regarded as excessive.

The factors re-

sponsible are excessive inventories and higher imports of apparel.

It is unclear whether recent posted price increases for a wide

range of basic materials such as flat-rolled steel, aluminum sheeting,

chlorine and chlorine solvents and synthetic textiles will hold in today's

markets.

Some of these increases were unexpected and are being attributed

to fear of the imposition of price controls.

Although the consensus appears

to be that these increases will stick, discounting seems to be a widespread

practice.

In agriculture, livestock feeding operations continue to be unprofitable and some crops such as cotton had a below-normal yield this year.

The winter wheat crop has been planted, but farmers are very concerned

about the low level of soil moisture.

Drought seems to be a real fear this

year across much of the nation's farmland.

Spending on new farm equipment

and vehicles is down considerably and loan activity, especially refinancing,

is up.

Business loan demand continues sluggish in all Districts.

The

Boston Dsitrict reports that four noted economists interviewed by them believe

that some stimulus is called for to avert an "incipient recession" and "...provide the strong financial climate for the strong investment performance

which had been hoped for but not yet materialized."

However, some bankers

in Philadelphia, Dallas, and San Francisco have noted an increased number of

encouraging conversations with corporate borrowers regarding additions to

plant and equipment.

The heavy inflow of funds into thrift associations has continued

and, as a result, both mortgage rates and interest rates for savers are

declining.

Some savings and loan institutions in Cleveland are raising the

size of minimum savings certificates and withdrawing the offer of certificates with less than 2-year maturities.

In some areas, mortgage rates

have declined from nine percent to 8 1/2 percent over the past month.

FIRST DISTRICT —

BOSTON

The Directors of the First District report that the national pause

is curtailing economic activity in New England.

'cautious optimism;' now we just use 'cautious.'"

"We formerly used the phrase

Furthermore, there are

no indications that capacity will constrain growth in the region, since

local utilization rates are high only in the paper and lumber industries.

In

spite of generally disappointing business conditions, new orders for machine

tools have increased modestly during recent months and retail sales volumes

range from "good" to "excellent."

In the paper industry, the newsprint sector almost always operates

close to 100 percent capacity with Canadian suppliers taking the fluctuations.

Canadian capacity at the present time is adequate, and, although little

expansion is planned, conservation programs adopted by buyers should prevent

shortages in the coming year.

Purchasers of fine papers do not have similar

conservation programs and domestic supply is much more important.

However,

this sector of the industry is not generally subject to the fluctuations in

demand that produce shortages.

Retailing is performing very strongly in New England.

November

was an excellent month for many stores, and December is running well ahead

of plan so far.

Most retailers report that sales have increased at least

8 to 10 percent over last year during recent weeks.

for spring is cautious:

Officially, the outlook

there is a tendency to live "hand-to-mouth" since

"nobody predicts far out with any confidence."

Professors Eckstein, Houthakker, Samuelson, and Tobin were available

for comment this month.

Houthakker and Tobin both found the economy's

1976 performance consistent with what could have been expected from the

monetary policy followed.

All expect some further deceleration in the real

growth rate this quarter and little pick-up in the first quarter of 1977.

This decelerating growth trajectory, Samuelson said, has undermined the

animal spirits of investors and the buoyancy of consumers.

Tobin describes

the present circumstances as "incipient recession," and Eckstein assigns a

10 percent probability to an inventory recession.

The commendable 6 percent

real growth target is not likely to be achieved, Samuelson points out, under

any of the policies seriously being discussed.

All favor a more stimulative monetary policy although each for different reasons.

issues.

Tobin's argument centers primarily on timing and policy mix

He prefers a moderate, temporary fiscal stimulus combined with a

strong, monetary expansion.

Given the lagged impacts, fiscal stimulus can

best avert the "incipient recession" and monetary policy can provide the

strong financial climate for the strong investment performance which had

been hoped for but has not yet materialized.

This policy prescription stems

from his conservative bias favoring a large investment component and a

balanced federal budget at full employment.

He favors a 50 basis point

reduction in the Federal funds rate; if this should violate the monetary

targets, the divergence can be explained as desirable in view of the state of

the economy.

Houthakker finds "monetary policy still on the unnecessarily tight

side."

He favors a reduction in the Federal funds rate to 4 percent to

achieve monetary growth near the top (but still within) the target range.

He notes the progress that has been made in reducing the rates of inflation,

expects further progress over the next few quarters, and sees little risk

of a reacceleration so long as monetary growth remains within the target range.

Samuelson argues policy "should err, if necessary, a little on the

expansionary side because there is still some breathing room."

Despite the

revisions in capacity utilization indices, there is still ample capacity in

the aggregate.

Admittedly, on a disaggregated basis, there are

very few

industries which could be expected to reach "capacity" before the labor force

becomes fully employed.

Good policy, however, does not seek to prevent full

utilization in all industries:

to the contrary, the purpose of an expansion

is to put some price and profit pressures on those industrial sectors where

capacity expansion is necessary.

To accompany the fiscal stimulus — which

should be shared by everybody, households and business, taxpayers and nontaxpayers — monetary growth should proceed at or above the upper limits of the

target range until the perilous corner has been turned. Once the system "gets

its second wind," monetary growth could be reduced in order to average within

the target range over a period of perhaps a full year.

To Eckstein, "the situation is clear.

The economy needs stimulus.

The burden of stimulus rests on everyone, including the Fed."

Short-term

rates should be held at or below current levels to accommodate the fiscal

stimulus.

Without monetary accommodation, the effects of fiscal stimulus will

be nil or even negative.

SECOND DISTRICT —

NEW YORK

Business activity in the Second District appears mixed, but the

outlook remains favorable according to directors, business leaders, and

analysts contacted recently.

Retail activity apparently slowed in late

November after strengthening progressively since Labor Day.

This pause in

momentum caused merchants to temper some of their holiday optimism, but nonetheless a good sales picture was expected for December as a whole.

At the

same time, automobile sales were expected to be higher in coming months as

inventories of popular models increase.

Respondents in this district pointed

to a few inventory excesses but generally felt there was a good balance with

sales.

On the price scene, while discounting is common in a number of

industries and product lines, respondents generally felt that the recent

price increases on certain metals and fibers probably would hold.

District merchants reported a slowing in the growth of sales in

November after two months of strong gains.

remained optimistic about December.

Nevertheless, retailers generally

A vice president of a leading New York

City department store termed November sales as rather disappointing but

said he expected the Christmas season this year would be "late." Another

City retailer agreed that sales were not up to expectations, but he too

was hoping for a "substantial Christmas."

One department store executive

predicted that his company would post a record fourth quarter in sales.

In

upstate New York as well, there were signs that retail sales slowed toward

the latter part of November.

Compounding this slowing was a severe snow-

storm in Western New York that immobilized retail activity in early December.

Reports on new car sales suggest that the district developments reflect

national conditions.

Sales of small cars appear to be relatively weak and

inventories are still high.

cars remains strong.

On the other hand, consumer demand for large

Indeed, Buffalo observers, as well as metropolitan

New York City and northern New Jersey automobile dealers, cited insufficient

inventories of large cars as limiting sales.

tories were mixed —

as about right —

Retailers' reports on inven-

viewed by some as a bit high while considered by others

suggesting that imbalances were not widespread.

One senior

retail executive stated that disappointing sales in November had resulted

in inventory imbalances but that they were not so burdensome as to warrant any

special adjustments.

Another retailer reported that inventories were up,

but he saw no cause for alarm since part of the buildup reflected a decision

to carry over some of their surplus of hard goods.

At the same time,

several department store officials reported that their inventories were in

line with sales.

In most other Industries, inventories were generally viewed as in

balance with sales although exceptions, most notably in metals, were cited.

One director considered inventories of both ferrous and nonferrous metals to

be high.

Another director felt that steel inventories were being cut back,

and an official at a Buffalo steel plant agreed.

Beyond these areas, in-

ventories were generally felt to be in good balance. The purchasing manager

of a major industrial firm noted a more conservative materials inventory

policy, reflecting an easing in concerns over shortages.

In view of the

generally good balance of inventories to sales, one business planner predicted that inventories would move up moderately in 1977 as the recovery

continues.

On the price front, respondents generally felt increases recently

posted on various materials and products would probably stick.

One analyst

specializing in the steel industry stated that he had been expecting the

steel industry to raise prices before year-end because of their rising costs.

Unlike the aborted earlier attempt to raise prices, the recently announced

price hike was scheduled to take effect almost immediately, giving steel

customers little time to undertake defensive manoeuvers.

Because of the

accelerated timing, the recent price increase was given a good chance of

sticking.

A steel company official agreed that the higher prices would

probably hold because, in his view, the demand for flat-rolled products was

strong.

A Buffalo director thought that steel companies, wanting to pass

on their higher product costs, would refuse to relent on the price hike

irrespective of the level of demand.

Less sure that the price increase would

stick was a steel economist for a major chemical company.

According to

him, a key determinant was whether or not the demand for automobiles holds

up.

He expressed surprise at the timing of the price increase and suggested

that the possibility of price controls might have been a factor.

While discounting is a widespread practice in the aluminum industry,

the price increase on aluminum sheet is likely to hold, in the view of a

metals analyst.

He termed demand in the aluminum sheet lines as strong

relative to rolling capacity, and felt there was very little discounting

in rolled sheet aluminum.

Synthetic textile producers are reportedly

following the industry leader in raising prices.

Even though there is

excess capacity throughout the industry, a marketing analyst for a major

textile company thought the price increase would hold.

THIRD DISTRICT - PHILADELPHIA

Economic activity in the Third District is faltering in some important sectors.

softened.

Retail sales are expanding, but conditions in manufacturing have

This weakness is primarily in the durable goods sector.

While

inventory levels in area factories are higher, other major indicators of

activity are lower.

New orders, unfilled orders, and shipments are each

down slightly from November, and employment has dropped for the third month

in a row.

Nevertheless, the six-month outlook both in retailing and manufac-

turing is for some strengthening.

Capital spending plans show no signs of

softening despite the current slowdown.

Price pressures on manufacturers are

about the same as last month, and prices received are only marginally higher.

Bankers report that business loan demand is still weak, and they anticipate

only a moderate pickup in 1977.

Manufacturers responding to the current Business Outlook Survey

report that overall business conditions are not as good as they were last

month.

Only 12 percent of the businessmen polled report any improvement

this month while 24 percent report a worsening of business conditions.

New

orders and shipments are down fractionally, employment has fallen, and the

factory workweek is shorter.

This is the third month in a row in which work

forces have been reduced to some degree,> and the second month in a row for

a shorter workweek.

Inventories are slightly higher after being flat since

August.

The weakness in new orders, shipments, and employment, as well as

the increase in inventories is concentrated in the durable goods industries.

To some extent, the buildup in stocks results from slow sales, but this is

not the case across the board.

A producer of agricultural machinery indicates

that much of the increase in his inventory is seasonal, and a manufacturer

of specialty steel products notes that he has increased his inventory of

nickel and chrome to take advantage of price protection clauses.

His firm

supplies steel to capital goods industries, and he is looking for a pickup in

orders by June.

Despite the current weakness, manufacturers are looking for improvement over the next two quarters.

By June, better business conditions are

foreseen by two-thirds of those surveyed—about the same as last month.

New

orders, shipments and inventories are expected to increase over the period,

and higher levels of employment are projected as well.

However, the propor-

tion of firms planning to hire additional employees six months out is down

to 24 percent from 40 percent in November.

Over the next half-year, capital expenditures are expected to

increase at 42 percent of the firms sampled—a figure that has held steady

for the better part of this year.

In general, producers of durable goods are

less bullish than those of nondurables.

A manufacturer of commercial air con-

ditioning systems reports that his firm is currently spending only for capital replacement, and he foresees no increase in such expenditures six months

from now.

That firm is currently producing at 70 percent of capacity, and he

notes that capital spending over and above replacement would not occur until

utilization reached 80 percent.

This would require a 15 percent increase in

real demand in 1977, but his projection is for no increase in real terms

next year.

Retailers in the area report that while competition is unusually

intense, sales are performing just about as expected.

Most indicate that

November turned out to be a strong month, but few are expecting nominal

sales this month to show any sizeable gain over the relatively high levels

of December 1975.

For the fourth quarter, expected gains over last

year range from 0 to 8 percent in real terms with most of those contacted

looking for 0 to 5 percent.

Merchants note, however, that while performance

is strong thus far, they are less than certain about their anticipations

for the rest of December.

optimistic."

While a few are bullish, several are "cautiously

There is ho excessive buildup of inventories reported des-

pite the lull in retail sales earlier in the year.

For the longer term,

most retailers anticipate moderate real gains in sales in 1977, but this

outlook is accompanied by an attitude of caution.

As one merchant puts it,

"We're not yet ready to commit ourselves to large advertising expenditures

or orders for merchandise."

Inflationary pressures in manufacturing appear to be the same as

in November.

Prices for supplies are moving upward and those for finished

products are only marginally higher.

About a third of the manufacturers

surveyed report paying more for supplies and less than one-fifth indicate

higher prices for their own products—both the same as last month.

By June,

9 out of 10 expect to be paying more for their inputs, and 2 out of 3 anticipate higher prices for the products they sell.

Bankers in the area report that consumer loan volume continues to

increase, but business borrowing is virtually flat.

One banker notes an

increased number of encouraging conversations with corporate borrowers regarding additions to plant and equipment.

This executive feels that these

inquiries may be the beginning of a more confident attitude on the part of

business borrowers.

However, all of the other bankers contacted say that

any increase they see in such conversations is below the normal seasonal

upswing.

With the continued softness in business loan demand, bankers

report that lending competition is intensifying.

Looking to 1977, bankers expect consumer loan volume to continue

to increase, and they anticipate the beginning of a modest pickup in business

loan demand, although not before the second quarter.

Local bank projections

of business loan volume (current dollars) by year-end '77 range from 6 to

15 percent over year-end '76 levels.

At the same time, a moderate increase in

interest rates in '77 is anticipated, with the prime projected to be 7-7 1/2

percent by the end of the year.

Before the upward movement begins, however,

most bankers anticipate a further drop in the prime to 6 percent, and, according to one executive, possibly lower.

FOURTH DISTRICT —

CLEVELAND

Economic activity in the Fourth District remains sluggish.

Inventory

corrections in the steel and chemical industries apparently are nearing completion, but manufacturers stocks of major appliances remain excessive.

Among

materials producers, only the rubber industry is rebounding strongly and rebuilding stocks.

Recovery in capital goods is still not pervasive.

from retailers remain cautious.

Reports

Savings and loan executives expect downward

pressure on mortgage interest rates as well as rates paid on deposits.

Inventory adjustments continue to curtail production in the District.

An exception is the rubber industry, where production is rising rapidly as

an aftermath to the long strike that slashed inventories of tires and of industrial rubber products.

An economist with a major tire producer expects capacity

operations for conventional tires through the first quarter of 1977, after which

inventories are likely to be either adequate or too large.

for radial tires are expected for most of 1977.

Capacity operations

Liquidation of steel inventories

is apparently nearing completion, according to economists with major steel

producers in the District.

Operating rates fell below 70 percent of capacity

in recent weeks, but a moderate pickup in steel orders for December and January

delivery suggests an end to the 6-month slide in production and shipments.

Steel economists reduced their forecasts of domestic steel shipments for 1977

from 105 million tons to about 100 million, compared to an estimated 89 million

tons in 1976.

Chemical and plastics producers report operations have steadied

in recent weeks at about 82 percent of capacity.

Inventory correction for some

products, including polyvinyl chloride, has apparently ended, and orders for

December are higher than for November.

Another producer, however, expects

some further decrease in stocks in December as users trim stocks for balance

sheet and tax valuation purposes.

Excess stocks of major appliances held by

manufacturers are likely to carry inventory correction in that industry into

the first quarter of 1977, according to an economist with a major appliance

producer.

Its stocks at the end of November were 20 percent higher than planned

and 10 percent higher than for the same month a year-ago.

The producer commented

that without a $10 to $15 billion permanent tax cut and further improvement in

new housing starts, the inventory adjustment could carry into the second quarter

of 1977.

Recovery in capital goods remains selective.

Machine tool builders

continue to report steady improvement in orders and backlogs, which will be

reflected in a sharp improvement in shipments in 1977.

Orders for motors have

also picked up; and one manufacturer reports a sharp boost in orders for industrial equipment during November, especially for international and defenseoriented business.

Its trend in orders has been climbing somewhat faster than

suggested in the latest Department of Commerce plant and equipment survey.

On

the other hand, an official with a construction machinery producer reports

irregular improvement in orders for construction machinery, especially hydraulic

cranes and excavators.

twice normal size.

Inventories held by dealers are still judged about

Business this year will be about 50 percent below its peak

in 1973, and a projected 14 percent increase for 1977 implies capacity utilization will not be much higher than rates that prevailed in the early 1970's.

Reports from retailers continue mixed.

A director associated with a

department store chain notes that sales gains over a year earlier continue to

narrow and that it may take longer than one quarter to work off excess

inventories.

Another director associated with houseware products describes

business as good and backlogs as rising.

November retail sales hold about

even with October, according to an economist with a major retailer.

He expects

aggressive promotional selling during the remainder of the Christmas season if

merchants are to realize an expected 10 percent gain from last year.

Preliminary results of this Bank's latest monthly survey of manufacturers show the highest proportion of respondents reporting price increases

since late 1974, with little indication of let-up expected for December.

The

recent 6 percent increase in flat-rolled steel prices is expected to hold,

according to several economists associated with major steel firms.

reasons for this expectation, they cite the following:

Among

flat-rolled steel

products are still the best selling products; relative prices of flat-rolled

products have not increased as much as other steel products since wage-price

decontrols; major users, especially auto producers, have not resisted the

increases.

Chlorine and chlorine solvent prices were increased December 1 in

response to strong demand, but a financial officer with a chemical firm was

uncertain if the increases will stick.

He indicated that discounting from

list prices is most prevalent now than 3 months ago.

A major plastics resin

producer also reported that transactions prices for its products have weakened

in the last 3 months.

Thrift institutions are adopting different strategies in response to

continued strong deposit flows and easing in interest rates.

Some are concen-

trating on controlling costs of funds while others seek to stabilize future

flow of funds.

One S&L raised the minimum on savings certificates from $1,000

to $5,000 and withdrew offering certificates with less than 2-year maturities,

which they consider hot money.

Another association lowered rates on 1-year

certificates to 6 1/4 percent and on 6-year certificates to 7 percent.

It

discontinued offering certificates of less than one-year maturity and will

limit deposits on certificates over $10,000.

rates to a maximum of 7 percent

A third association also lowered

for a 6-year certificate, and reduced its

mortgage rate to 8 percent for a 29-year loan.

their rates on passbook savings.

None of the associations changed

Officials at these associations took as a

sign of further downward pressure on both mortgage rates and rates paid on

savings the recent actions of two large Gleveland banks that reduced interest

on corporate savings to 4 1/2 percent.

FIFTH DISTRICT —

RICHMOND

Our November survey of business conditions suggests a continued

lackluster performance in the Fifth District economy.

Responses of manu-

facturers surveyed indicate rather distinct softness, with shipments, new

orders, employment and weekly hours all declining from a month ago.

Reports

of reduced volumes of new orders outnumbered reports of increases by better

than two to one. Materials inventories were unchanged while stocks of

finished goods increased somewhat, and remain above desired levels at many

firms.

Retail sales apparently showed no change, while sales of big ticket

items relative to total sales weakened slightly.

Inventories at retail

were unchanged, but remain above desired levels.

Retailers report no change

in prices paid during November, while manufacturers experienced further increases.

prices.

Retailers and manufacturers, on the other hand, received higher

Manufacturing respondents expect improvement in the level of

business activity nationally and in their respective market areas during the

next six months, but retailers are less optimistic, expecting no significant

change.

Both groups, however, expect improvements for their own firms.

District farm income improved slightly in September and October and is now

running 5 percent above a year ago —

about the same as the increase for

the nation as a whole.

While over one-third of our manufacturing respondents reported

new orders running below a month ago, much of this weakness seems to have

been concentrated in the textile and apparel industries.

Activity in the

apparel sector has fallen since early in the year, a trend which a prominent

trade publication attributes to excessive inventories at the retail level and

to higher imports of apparel products.

Whatever the cause, over one-half of

textile respondents experienced a reduced volume of new orders in November

and now view current plant and equipment capacity as excessive.

At the same

time, 80 percent of apparel industry respondents also experienced lower volume

of orders and feel current capacity is in excess.

Some weakness was also

reported in the furniture industry while reports from chemicals and primary

metals producers were mixed.

Manufacturers of electrical machinery and

equipment seem to have done somewhat better in November, at least in terms

of new orders.

Lower levels of shipments were also reported by more than one-third

of the manufacturers, while over one-half report reduced backlogs of orders.

Nearly 20 percent experienced increases in materials inventories, but a

like number report reductions.

Stocks of finished goods apparently grew

somewhat, although even here nearly 20 percent of the respondents report

declines.

In addition, almost one-third indicate reductions in employment

in November and almost as many operated fewer hours per week.

Prices, in-

cluding employee compensation, moved up rather broadly, as has been the case

in most recent months.

Almost 40 percent of the manufacturers surveyed

feel current inventory levels and current plant and equipment capacity are

excessive and 10 percent now feel current expansion plans should be cut back.

Among retailers surveyed, sales and inventories showed little

change last month although sales of big ticket items declined slightly in

relative terms.

Employment was also unchanged, but employee compensation

rose as did prices received.

Prices paid held steady.

Forty percent of our

retail respondents view present inventory levels as excessive, but all say

the current number and size of outlets is about right.

The retailers are unanimous in expecting the level of business

activity nationally and in their respective market areas to remain unchanged

over the next six months, but 40 percent expect some improvement in the level

of sales of their own firms over that time period.

One-half of the manu-

facturers, on the other hand, expect improvement in each of these areas.

Results of a recent survey of district banks failed to yield a

clear-cut picture of business loan demand.

The borrowing needs of business

are increasing moderately, with both short-term and long-term demands represented.

It is clear, however, that borrowers are leaning toward longer

maturity, fixed rate loans, and that lenders are resisting this movement.

Record high prices on all flue-cured tobacco belts highlighted the

1976 marketing season.

With prices averaging 11 percent higher than in

1975 and quality of offerings better on the eastern North Carolina and

border belt markets, the total value of sales was up about 5 percent even

though volume of marketings was down.

Reports from South Carolina indicate

that farmers are still holding free cotton and that some are asking 80 cents

per pound.

SIXTH DISTRICT —

ATLANTA

Further strengthening occurred in the Southeast.

Despite concern

about natural gas supplies, a number of steps are being taken to maintain

adequate supplies of energy.

Consumer spending has increased, although rural

areas are feeling the pinch of energy costs.

Inventories may be inadequate if

vigorous holiday sales continue.

Auto sales are spotty, with some signs of

price resistance to new models.

The winter tourist season has been boosted

by cold weather, investments in convention and tourist facilities are increasing,

along with major plant investments or expansions in paper, rubber, and transportation.

In contrast to this cheerful picture, payment problems and the termination

of some major ventures echo the effects of the recession.

Savings and loan

associations are enjoying rapid growth in the Southeast.

Energy resources remain a key influence on economic activity.

Concern

continues in parts of Tennessee that industrial use of natural gas will be

curtailed, causing unemployment.

This outcome appears likely in some areas if

the abnormally cold winter persists.

Looking toward the future, an immediate

decision by the Federal government is expected on construction of the Louisiana

Offshore Oil Port, a facility to receive oil shipments from supertankers.

Several nuclear power plants are under construction in the Southeast, including

one north of Baton Rouge, Louisiana, and another in Southeastern Florida.

Construction of a third plant on the Southeast Florida coast has been halted

by environmental interest groups.

Seven to eight hundred construction workers

have been laid off. A highly promising new oil and gas strike off the Louisiana

coast illustrates the possibility of further development of offshore oil

resources.

Extraction of methane from salt water in deep-drilled oil wells is

being investigated as a potential source of additional natural gas supplies.

Rising energy prices in connection with abnormally cold weather are

reducing consumption outlays in rural areas.

Rural residents who depend on

liquefied petroleum gas for heat have recently experienced a doubling of their

fuel costs in some areas.

where in the District.

A brighter consumer spending picture emerges else-

Most department stores report enlarged post-Thanksgiving

sales volume, although some expect to do no better than last year.

Last month's

suggestion of a bifurcated consumer market has been confirmed by current reports

that strength is concentrated in the more luxurious lines of boats, automobiles,

and department store goods.

unusually low.

Inventories of retailers and wholesalers are

If the present sales growth persists, sales volume will be lost

due to unavailability of goods.

Especially strong sales are found in eastern

Tennessee, which benefits from the high incomes of coal miners in neighboring

states, and in central and south Florida, where tourist traffic has been boosted

by abnormally cold weather elsewhere in the country.

Sales of automobiles are spotty.

Buyers rejected the smaller cars

but are now responding to the rebate offers in some areas.

Large models,

especially luxury cars, are enjoying the strongest sales.

However, several

areas report disappointing sales in November for dealers unaffected by the

recent strike.

There are also some reports of resistance to the higher prices

on 1977 models.

Tourism promises to remain the District economy's bright spot.

The

winter season in Miami, and Fort Lauderdale is off to a fine start as a result of

severe weather elsewhere.

Tourism continues to lead central Florida's recovery.

New Orleans's restaurant population is growing rapidly; new hotels and motels

are adding to the city's dining facilities, established hotels are renovating,

and several new restaurants are also being built.

A new hotel and convention

center is under construction at Opryland in Nashville.

The circus world theme

park in central Florida will double the present size of its operation during

1977.

International flights have been aproved for the Orlando Airport.

Some additional strength is evident in capital spending.

In Tennessee,

announced spending for new and expanded plants through the end of September

exceeded the 1975 total.

Industrial power usage reported by TVA has shown an

upward trend and is close to the pre-recession level.

In Georgia, new capital

investment announcements through October are two-thirds greater than in the

first ten months of 1975.

Demand for paper products remains weak, with several mills taking down

time.

Backlogs of orders have dropped.

Still, a bleached kraft market paper

plant, with an investment of $286 million, is being built in Alabama.

The Goodyear facility in Gadsden, Alabama, will undergo a major expansion, becoming the largest tire plant in the world.

by 400.

Employment will expand

Surface transportation facilities are also rapidly expanding.

A large

trucking company is building freight terminals in three Florida cities for

service to cities in the far West.

In Atlanta, a long delayed $50-million

super truckstop will be built on a 280-acre site.

Less favorable developments include indications of slowness in payments

to milk producers in Florida.

In Atlanta, an innovative high-rise amusement

park located in a new downtown office-hotel-retail-condominium complex has

ceased operations; a six-month trial period failed to achieve profitability,

a major hotel chain has decided to withdraw from managing a luxury hotel in

another multiuse complex located near the downtown area.

Strong savings and loan activity is reported throughout the District.

Healthy gains in savings inflows and in lending activity are widely reported.

In Florida, over a five-year period, deposits at savings and loan associations

have almost tripled; they have risen during this period from about one-half the

level of total commercial bank deposits to approximately equal bank deposits.

SEVENTH DISTRICT — CHICAGO

Confidence that the expansion will continue appears to have

strengthened in the Seventh District in the past month.

Most observers be-

lieve that the recent slowdown is about to give way to renewed growth.

Fears of price and wage controls are causing some companies to post price

increases earlier than had been anticipated.

with recent levels of sales.

Output is expected to be significantly higher

in virtually all industries in 1977.

boosted sales of natural gas.

brighter.

year.

Large retailers are very pleased

Abnormally cold weather has sharply

The outlook for capital goods is somewhat

Apartment construction is expected to rise substantially next

The financial picture in the district is generally excellent, but

farm credit conditions have deteriorated in some areas.

Most business and financial executives and analysts accept the

standard forecast that both real GNP and the price level will average about

5 percent higher in 1977.

ceeds.

Most expect some acceleration as the year pro-

Moreover, most believe that their own businesses will show gains

approximating those foreseen for the general economy.

divergence of opinion on the need for tax reduction.

There is a sharp

All agree that a

tax cut would be stimulatory, but many believe that activity will improve

without such stimulus.

Confidence is judged to be of crucial importance,

particularly for capital spending.

Most business executives do not believe

that an increase in the investment tax credit from 10 to 15 percent would

have a significant impact on demand for capital goods.

Supplies of all goods and services appear ample at the present time,

However, gypsum board and lumber will be in tight supply if housing starts

reached the 1.8 million level, which is commonly accepted as a reasonable

guess for 1977.

Late in 1977, shortages of gray iron castings, forgings,

raw steel, and certain chemicals are possible and even predicted by some

analysts.

Although prices of various materials —

paper-board —

e.g., nonferrous metals and

are soft currently, many producers of components and finished

goods are posting increases in prices to "catch up" with rising costs.

Partly,

this reflects fears of new price controls, despite assurances to the contrary.

Some increases in list prices may not hold up in the marketplace.

Despite talk of "inventory congestion," we are unable to find

significant examples of excessive inventories.

exception.

Small cars are a notable

Production was adjusted rapidly by steel, appliance, chemical,

and paperboard companies when demand lagged expectations.

Major retailers report that their total sales showed excellent

increases in November and early December.

Credit sales have increased

relative to the total and collection experience has been good.

are said to be "loosening up."

Consumers

In contrast to experience of the largest

merchandisers, some smaller companies report little or no increase in sales

from a year ago.

A major airline reports that passenger travel, measured in seat

miles, rose significantly in November, seasonally adjusted, following a

flat trend from the spring through October.

For 1976 as a whole, traffic

is expected to be up 10 percent and a 6 percent rise is projected for 1977.

Forecasts of auto sales have been reduced for both 1976 and 1977

by most analysts, but a rise of about 5 percent still is expected for next

year.

Sales of compacts and subcompacts have been even poorer than ex-

pected, while most intermediates have done very well.

Saturday and even

Sunday overtime is scheduled for components of the most popular models.

Sales of RVs have been excellent.

Sales of heavy and medium trucks are ex-

pected to rise about 25 percent next year, but sales of light trucks may

decline.

Demand for capital equipment continues slow, but some improvement is

discernible overall.

Sales of most types of heavy construction equipment

remain very poor with no signs of a revival.

Farm equipment sales are ex-

pected to be down 5 to 10 percent next year.

On the upside, orders for

electric motors, controls, materials handling equipment, overhead cranes,

hoists, and some types of mining and construction equipment have strengthened

recently.

Overall, demand for capital equipment is expected to be signi-

ficantly higher in 1977.

Output of industrial chemicals has been about flat since last spring

following a strong upsruge early in the year.

For 1976 as a whole, unit

output of various major groups of chemicals is expected to be up 10 to 20

percent, and increases of 3 to 10 percent —

are forecast for 1977.

at least 5 percent overall —

Although capital expenditure programs of chemical

companies have been scaled down, further gains are predicted for 1977.

The chemical industry is operating at about 80 percent of "capacity."

At

the time of the worst shortages in 1973-74 operations were at 87 percent

of capacity.

Partly because of the reduction in capital spending plans,

some analysts predict a return of important shortages in late 1977 or in 1978.

Thus far, the winter has been the coldest in 80 years or more in

most areas of the district.

Sales of gas by one utility are up 20 percent

from last year, but supplies appear to be adequate.

Electricity sales are also

up with December recording the peak load this year, above the usual summer

peak.

Gas bills for home heating are expected to be 35 to 40 percent higher

this year, because of both higher usage and higher rates.

Construction of single-family homes in 1977 is expected to match

this year's high level.

Increases in apartment construction will provide

most of the expected rise in total starts.

for apartment construction.

Rising rents are improving prospects

Home mortgage rates have declined with a major

lender announcing a reduction from 8.75-9.00 percent to 8.5 percent.

Private

mortgage insurance is being used increasingly to reduce risks on loans

with relatively low downpayments.

There are signs of a revival in industrial

construction, but mainly smaller projects to be located in "semi-rural"

sites.

An exception to the general improvement in the financial situation

is related to lower prices for farm commodities and drought-stricken harvests

in some areas.

Many district bankers report slower farm loan repayments

and increased renewals.

The greatest incidence of deterioration appears

concentrated in Iowa, Wisconsin, and Michigan.

EIGHTH DISTRICT -- ST. LOUIS

Reports from Eighth District businessmen suggest that the economyhas expanded at a somewhat faster pace in recent weeks than during late

summer.

Strengthening in the economy was evidenced by reports from both re-

tailers and manufacturers.

Department store representatives indicate a

pickup in sales in November, and manufacturing representatives report rising

orders for paper and boxboard, processed foods, refrigeration equipment,

apparel, paints, coatings and chemicals.

As a result of this increase in

manufacturers' orders and retail sales, inventories, which had been somewhat

higher than desired in certain industries, are now approaching desired levels.

Several firms report planned increases in capital spending next year, and

in some cases, the increases are substantial.

institutions continue relatively strong.

Savings flows into thrift

Mortgage rates are again moving

downward.

Department store sales have increased in recent weeks.

Leading

department stores in St. Louis report a sizeable gain in November sales on

a seasonally adjusted basis, and the higher sales volume is generally expected to continue through the Christmas season.

Department store sales are

up 10 percent from a year ago in several areas of the district, a somewhat

greater increase than for retail sales in general.

In Louisville, however,

retailers avoided the usual Christmas inventory buildup, and are having some

apprehension about Christmas sales.

Manufacturing activity in the district has increased in recent

weeks.

A representative of the paper and boxboard industry reports orders

are coming in more rapidly now, after a lull last summer.

Operations were

reported at near capacity and backlogs are beginning to build up.

A repre-

sentative of a food processing firm noted that some softening in food sales

occurred in September and October, but that sales have expanded more rapidly

again in the last four weeks.

The uniform apparel industry, which also ex-

perienced some softness in sales in earlier months, was reported to have picked

up starting in September.

Sales of certain industrial coating and chemical

products have gained strength in recent months after a period of sluggishness during the summer.

A representative of a paints and coating firm re-

ported a 15 percent increase in sales in 1976 over the previous year.

A number of other manufacturers report excellent business conditions.

One firm noted an upsurge in sales for refrigeration equipment used primarily

in food stores.

A firm manufacturing industrial cutting and do-it-yourself

tools reported more orders than capacity to fill.

The prospects for a

pickup in the aircraft industry next year are quite bright according to a

representative of a large aircraft manufacturer.

and civilian aircraft production is expected.

An upswing in both military

On the less optimistic side

a representative of the stone and cement industry reported a substantial

decline in business in mid-June and no upturn yet.

Inventory stocks in the late summer period of slower economic activity

reached somewhat higher levels than desired in some industries. A representative of one large supplier of software goods stated that inventories

began to get out of hand six weeks ago, but recent sales gains were alleviating this problem.

An apparel manufacturer noted a very cautious atti-

tude on the part of retail store buyers to increase inventories.

A repre-

sentative of a major manufacturer of appliances and capital goods stated that

lack of inventory building had contributed to the slower growth of the economy in

recent months.

Announcements of capital spending plans indicate that moderate to

large increases in such spending will occur next year.

One major food pro-

cessor announced a substantial increase in investment spending next year,

while another expects only a normal increase.

Investment in the paper industry

is being increased somewhat, but mostly by the addition of machines to

existing facilities.

A paper industry representative reported that this

industry will probably experience a "shortage" of capacity by late 1977 or

early 1978.

The liquidity of thrift institutions and banks continues to increase.

Funds are flowing into these institutions at a rapid pace, and despite the

fact that morgage loan demand is described as strong, there is downward

pressure on mortgage interest rates.

Rates on an 80 percent loan in the

St. Louis area are currently 8 1/2 to 8 5/8 percent, down from 8 3/4 percent

a few weeks ago.

Livestock feeding operations continue to be unprofitable, and

according to one observer, this situation is not expected to improve

materially in next 6 to 8 months.

Reports also indicate that in certain

drought-stricken areas farm income is down substantially.

In Southeast

Missouri, for example, where cotton yields were generally only 50 percent

of normal, banks report some increase in problems of loan repayments.

On

the other hand, in other sections of the District such as southern Illinois,

west Tennessee and Kentucky, crops were generally excellent, and the financial

conditions of farmers have improved significantly.

NINTH DISTRICT - MINNEAPOLIS

District sales activity in the final weeks of 1977 appears to

be satisfactory.

Retailers are reporting good holiday business and auto

and truck sales are holding up quite well.

are enjoying large sales gains.

Also, district manufacturers

However, loan demand at district commer-

cial banks is only "steady" or "flat," and many bankers in agricultural

areas are having to extend loan maturities.

Despite colder than normal

weather, fuel supplies are adequate, but shortages could emerge if

colder weather persists.

Looking ahead to 1977, agricultural prices and

moisture conditions are sources of concern and will significantly

influence this region's economic activity.

Recent retail sales have been quite good, and retailers are

optimistic about holiday sales.

Minneapolis and St. Paul retailers have

been quite pleased with their holiday business so far and are looking

for a good December.

However, they are uncertain as to whether this

buoyancy will carry over into 1977.

also look for good holiday business.

South Dakota and Montana retailers

And a bank holding company official

states that recent reports received from around the district are generally

quite positive regarding consumer spending—but not quite as optimistic

as a month earlier.

In communities that are primarily orientated toward agriculture,

however, the drought has begun to cut into spending.

A representative

of a rural Minnesota clothing store chain, for example, would be delighted

with even a modest increase over last year.

Spending by farmers on

autos and trucks is off in North Dakota, though holding up quite well in

most other areas of the district.

In addition, farm implement sales are

down in several areas.

A Reserve Bank director from the Upper Peninsula of Michigan

expects holiday spending to be down substantially from last year due to

a strike and layoffs in that area's paper and copper industries.

Also,

depressed economic conditions are curbing auto sales in the Upper Peninsula.

The Ninth District manufacturing sector continued to experience

strong sales gains in the third quarter, according to our November

Industrial Expectations Survey.

Total manufacturing sales advanced

15.1 percent between the third quarters of 1975 and 1976.

This followed

a surprisingly strong second quarter in which sales gains reached 20.3

percent above a year earlier.

Furthermore, district manufacturers

expect strong, though somewhat more moderate, sales gains through the

first half of 1977.

Advances of 11.5, 11.6, and 10.5 percent over a

year ago are anticipated for the current and next two quarters.

Although district manufacturers anticipate continued sales

advances, survey respondents are generally satisfied with current levels

of inventories and plant and equipment.

Also, manufacturers are not

expanding their payrolls, as indicated by Ninth District manufacturing

employment, which has remained relatively unchanged since early 1975.

Loan demand at district commercial banks is generally characterized

as being "flat" or "steady."

One banker reports that most increases in

lending have been either seasonal or extensions of existing loans;

according to another, commercial lending has not been strong.

And in

agricultural areas, it has been necessary for many bankers to refinance

or extend existing loans.

However, improved prospects are anticipated

for mortgage lending in the district; and an unusual number of loan

losses is not foreseen as a potential problem.

Colder than normal temperatures in November and early December

have started to strain energy supplies.

The demand for natural gas has

been much higher than normal, and interruptible natural gas users have

substantially increased fuel oil consumption.

However, according to

industry and government officials, the situation will be manageable, if

the below normal temperatures don't continue.

In large part, prospects for the Ninth District's economy in

1977 depend on agricultural developments.

Several Reserve Bank directors

are of the opinion that livestock prices may be turning around, although

recent prospects for wheat prices are not very heartening.

And next

year's poor moisture prospects are causing a considerable amount of

anxiety around the district.

In addition to these concerns is the

awareness that the full economic impact of this year's drought will

probably not be felt until the first half of 1977.

TENTH DISTRICT - KANSAS CITY

The sluggish pace of economic growth is reflected in the soft

markets for basic materials used by major manufacturers in the Tenth District.

Purchasing managers expect only modest price increases on continued plentiful supplies in the months ahead.

In keeping with these expectations and

the general mood of caution, they are holding their inventories at low levels.

Winter wheat is off to a fairly good start, but the size of the harvest next

year is still in doubt because of the deficiency in subsoil moisture.

Mean-

while, expecting price increases, farmers are borrowing to finance carryovers of inventories of cattle and grain.

With this exception, loan demand

is weak, although within the business loan category, petroleum companies

are a bright spot.

The slow pace of lending is putting downward pressure on

interest rates paid and charged by banks, but most bankers expect rates to

rise in a few months.

Purchasing managers for major manufacturers in the district report

a buyer's market.

There are no shortages of materials.

this softness to persist well into next year.

Agents expect

On balance, manufacturers are

holding their inventories of materials at levels near last year's.

They

consider these levels to be low but justifiably so, citing better control

and the favorable materials supply and price outlook.

More specifically

with regard to prices, most buyers do not foresee any acceleration in the

rate of increase experienced this year.

Opinion is about evenly divided

as to whether or not the steel price increase will stick.

Discounts on

steel currently are common, but not on other materials used by the manufacturers surveyed.

The district's winter wheat crop is rapidly moving into dormancy

for the winter months.

This is the period when reports begin circulating

about impending disasters in the wheat belt because of late plantings, no

rain, wind erosion, and the like.

The condition of this year's crop can be

best described as hanging delicately in the balance.

The planting process

was conducted under generally favorable conditions; the seed germinated well

and the wheat got off to a good start.

However, very little moisture has been

received since then, so new growth has been limited.

Oklahoma is about the

only area with wheat pasture available for livestock grazing.

Elsewhere,

the plants are too small.

The chief concerns at the moment focus on moisture and protection

from the winter elements.

Root development through fall was retarded by the

lack of moisture, thus increasing the susceptibility of the wheat to wind

erosion and winterkill unless a protective blanket of snow is present.

the moment, this snow cover does not exist.

At

Furthermore, subsoil moisture

is in very short supply throughout the district, and without this backup

reserve, the new crop will have to rely on rains next spring and summer for

growth and development.

In summary, next year's wheat harvest has the po-

tential to be very large if weather conditions are favorable from this point

forward.

But if the adverse conditions of 1975-76 are repeated, production

may be affected more significantly than a year ago because the subsoil

moisture reserve has been largely depleted.

Loan demand continues to languish in most areas of the Tenth District.

Bankers are particularly disappointed in the weakness of construction and

commercial loans.

There is some speculation that business customers are

delaying capital spending decisions in hopes that the investment tax credit

will be increased.

Bankers from agricultural regions doubt if construction

activity will pick up much until agricultural prices rebound.

Bankers in

Colorado and Kansas are pleased about increases in loans to the petroleum

industry to finance capital expenditures.

Otherwise, apart from the seasonal

increase in consumer credit, the only major area of strength is their

correspondent's loans to finance inventories of cattle and grain.

These in-

ventories are being held on the bet that prices will rise after the first

of the year.

In the face of slack loan demand and the downward trend of interest

rates nationally, bankers here are thinking of reducing their prime lending

rate.

They are reluctant to do so, however, because of the high cost of

deposit funds.

While many bankers want to lower rates paid on savings

accounts and consumer CD's, all seem unwilling to initiate such a move,

fearing deposit losses that they may not be able to recapture.

Then, too,

most believe that the current decline in interest rates will be reversed by

the spring or summer of 1977 with the anticipated rejuvenation of the economic

recovery.

If the present imbalance between market rates and time deposit

rates and the attendant influx of deposit funds continue, however, some bankers

doubt if they will be able to maintain rates paid on business savings

accounts and CD's.

ELEVENTH DISTRICT - DALLAS

Most regional economic indicators point to further strength in the

Southwest economy.

Business loan demand at large District hanks, however,

is expected to continue weak, with further downward pressure on interest

rates.

Oil and gas production continues to decline, hut drilling activity

and employment and income in the industry continue to rise.

labor continues to grow.

Demand for

Unemployment is declining, and the unemployment

rate for the five states of the Eleventh District is down to 6.0 percent.

A recovery in construction activity appears to he taking hold in multifamily

housing and nonresidential building.

A survey of department stores found

Christmas sales to "be strong, and auto dealers reported further growth in

new car sales.

Moreover, manufacturing output should continue to grow at

a moderate rate next year.

Department store sales are showing strong improvement.

Almost all

retailers interviewed are optimistic about the prospects for robust Christmas

sales, and early indications seem to support their optimism.

Only at stores

in border cities that cater to Mexican nationals is business off substantially.

Sales of both hard goods and soft goods are reported to be strong.

priced merchandise is moving extremely well.

High-

Retail inventories are at

desired levels and in line with the anticipated volume of Christmas sales.

A major Dallas retailer stated that his inventories are at their best level

in three years.

A director with a large nationwide group of department

stores reported a very conservative outlook for first quarter 1977 with

improvement in the second quarter.

Automobile sales in the District are up moderately, but sales in

Houston are at the highest level in three years.

Demand for small cars

remains weak, while sales of intermediate- and full-size cars continue to

strengthen.

Also, fleet demand remains strong, and sales of vans, trucks,

and jeeps are "brisk.

GM and AMC dealers indicate that the rebate programs

on subcompact models increased sales only marginally.

Dealer inventories of

full- and intermediate-size models are low, while stocks of small cars remain

high.

But nearly all dealers report that inventories are gradually "being

"brought into "balance.

Some Houston dealers, however, cite overall inventory

levels are 30 to 50 percent lower than they would like.

Manufacturing output in Texas continues to increase in most major

industries.

However, output of petroleum refining; paper products; and

stone, clay, and glass products has weakened.

A Houston economist notes

that durable goods production has been gaining momentum in that area.

And

coupled with the high level of output of nondurables, further gains in

production should stimulate increased capital spending in a few months.

The future increase in production by the Southwest*s largest industrial

complex, petroleum refining and chemicals, could "be influenced "by the anticipated

price increase by OPEC.

Most observers expect an increase of 10 percent,

which would lead to a one cent a gallon increase in gasoline prices.

there are differences on the anticipated timing of the price hike.

However,

Some

respondents expect no immediate increase in oil prices "but felt the increase

would certainly be imposed in the next six months.

In any case, output by

the complex is expected to rise next year and may push existing production

capacity in some

product lines.

Recovering from a slump earlier this year, the number of active oil

drilling rigs in Texas has risen to the highest level in IT years.

Despite

the high level of drilling activity, production of oil field equipment has

weakened.

New orders have fallen as drilling contractors, faced with higher

equipment prices and increased financing problems, are content to work their

current inventory of rigs more intensively.

As a result, production of oil

field equipment next year probably will be geared largely to the replacement

of older equipment.

Production of primary metals is rising on relatively strong demand

for aluminum.

Demand for steel and copper remains weak.

Output of steel,

however, is expected to increase by next spring, "but copper production will

remain little changed for most of next year.

Moreover, a high level of

copper inventories will have to be run down before production can be stepped

up.

Aluminum producers see a gradual increase in product prices, while a

Fort Worth steelmaker expects prices of ferrous metals to remain soft.

Another

steel producer thought the recently announced 6-percent increase in prices

for sheet steel would not hold.

The recovery in construction activity is beginning to spur the demand

for lumber in Texas.

to low."

Current inventory levels of lumber range from "adequate

And lumber prices have climbed to the high levels that prevailed

four years ago, according to a lumber brokerage firm.

A Houston company

anticipates that the demand and prices for lumber will continue to move up

in the next six months.

In mining, production of oil and gas continues to decline, but drilling

activity has rebounded sharply from a low last June.

Drilling in Texas has

surpassed the peak level of output attained a year ago.

In uranium mining,

one District state—an important producer—is considering a large increase of

its tax on "yellow cake."

Grain sorghum prices have fallen substantially in recent months.

And in response to lower feed costs, the number of cattle placed on feed is

up in the District's major feeding areas.

Pressured between high production

costs and low prices, grain farmers are reported to be "in trouble" and may

press vigorously for higher price supports.

TWELFTH DISTRICT —

SAN FRANCISCO

According to this District's directors, there was little change

in the pace of the economy over the past month.

Retail sales continued

to show small gains in both durables and nondurables categories.

Demand has

been strong for large cars and pickups, but sales of small cars have been

disappointing.

Industrial strength has been spotty with new orders for

steel, aluminum and paper products flat while orders for lumber products and

electronic equipment were reported to be very strong.

Residential con-

struction activity is rising fast with new housing starts in some areas

doubling last year's rate.

Plans for new plant construction remain on the

drawing boards while manufacturers await firmer assurance of the economy's

direction.

Reports from the agricultural sector are mixed.

Fall planting

has been completed, but there is widespread fear of drought.

On the evidence of reports from Twelfth District directors, the

trend in consumer spending is sloping upward in small increments.

Large

automobiles and pick-ups are selling well, but small car sales have been

disappointing on a broad geographic front.

Personal loan activity has been

soft except for home improvement loans and loans to consolidate debt.

In

those areas where personal loan volume is rising, the number of loans has

generally remained level with last year, but the amount borrowed has increased indicating the effect of inflation.

Producers of aluminum, steel and chemical coatings report that

orders have been flat over the past month and operating rates unchanged;

new orders have been reported as slipping by a large saw chain and power

tool manufacturer, a sportswear manufacturer, producers of consumer paper

products and agricultural machinery.

On the other hand, the newsprint

business has been working at capacity and domestic orders have surged in

the electronics industry.

Moreover, forest products companies are reporting

heavy order inflow with momentum gathering for the past two to three months;

the plywood and lumber industry has been operating at capacity for the past

90 days.

Inventory accumulation is not adding substantially to the thrust

of the recovery as manufacturers continue to pursue cautious policies.

Most of the strength in the lumber industry is attributable to

the current surge in residential construction.

starts have doubled from the year ago rate.

In some areas, housing

Savings flows at Western

savings & loan associations continue very heavy and banks are showing renewed

interest in granting mortgage loans as a result of the creation of a strong

secondary market.

Loans for plant expansion are reported to have picked up slightly

over the past five months relative to the previous fifteen months, but large

outlays have been postponed in order to assess "the Carter effect."

"There

is an attitude prevalent among businessmen that it is less risky to be a

little late coming on with additional capacity than it is to be caught

with a low level of capacity utilization and the added burden of new capacity

in progress.

Plans for significant capital expansion exist, but they

are tightly controlled and are highly susceptible to constraint at the

slightest negative turn in economic news."

Nonresidential and heavy con-

struction awards in District states are running 12 percent below last year.

In agriculture, the fruit crop has been harvested and farmers

acknowledged a good crop and "pretty good prices this year."

Potato pro-

cessing is enjoying strong demand with large orders from Japan for potato

flakes.

Sugar beet processing is "in full-swing and the run is considerably

ahead of 1975."

The dairy business is making a comeback with milk sales

"magnificent."

Turkeys bought at 48 cents per pound in August are selling

in a price war at 43 cents per pound in national and regional supermarket

chains.

Due to the raisin crop failure, prices are up to $1,050 per ton

from $647 per ton last year.