Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

February 9, 1977

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 21

Eighth District-St. Louis page 24

Ninth District-Minneapolis page 27

Tenth District-Kansas City page 30

Eleventh District-Dallas page 33

Twelfth District-San Francisco page 37

Summary*

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

Weather dominated the news in most Districts' reports.

Cold weather

drained natural gas supplies and resulted in widespread layoffs in some

Districts, especially Atlanta, Philadelphia, Cleveland, Chicago, and New

York and extensive crop damage in Florida.

Nevertheless, the overall opinion

seems to be that the economy shows signs of strengthening and losses in output

and employment will be made up later in the year.

Retail sales were particularly

strong in several areas not affected by the weather, such as San Francisco

and Boston, and also held up in Chicago and St. Louis despite severe weather.

Housing activity shows signs of accelerating.

Prices for manufactured goods

are likely to be under upward pressures because of the high cost of alternate

fuels and alternate transportation, and prices for fruits and vegetables are

also expected to accelerate.

Savings flows remain generally strong and rates

paid on deposits are easing in some Districts.

Natural gas and fuel shortages apparently have their greatest effects

on output and employment in Atlanta, Philadelphia, Cleveland, Chicago, and

New York.

An estimated 250,000 to 335,000 layoffs have resulted from fuel

shortages in the Atlanta District.

Approximately 175,000 workers were laid

off in the Philadelphia District as a result of curtailments of natural gas

and weather-related problems.

Cleveland estimates that about 110,000 manu-

facturing workers were laid off as of early February, principally in steel,

automotive, glass, and metal fabricating plants.

Chicago notes that the most

serious impact has been on steel plants in Indiana, where over 40,000 workers

were laid off early in February.

Automotive assembly plants in Michigan had

layoffs because of parts shortages.

Chicago and Cleveland said that many

manufacturers have switched to alternate fuels, but deliveries have been slowed

by frozen waterways and lack of carriers.

As these deliveries have improved,

many laid off workers have been recalled.

New York also notes cutbacks in

output and employment, especially in Buffalo and Rochester.

Slight to moderate effects of fuel shortages were noted in Richmond

and St. Louis, but other Districts, including Boston, Minneapolis, and Dallas,

were relatively unaffected either because alternate fuel supplies have been

available or weather conditions have not been abnormal.

Despite widespread effects of fuel shortages and abnormal conditions,

the tone of District reports still seems to indicate that losses in output and

employment will eventually be recovered and economic activity will continue to

strengthen.

New York remarks that "business economists viewed the decline in

production and employment as a temporary disruption," and Cleveland points out

economists who met at that Bank on February 3 expect the expansion to continue

through 1977 despite constraints on fuel supplies.

The latest surveys by the

Philadelphia and Richmond Banks indicate that respondents expect continued

improvement in economic activity at least through the first half of 1977.

Consumer spending has been notably strong in some Districts, but fell

sharply in some others especially in the last few weeks of the cold weather

period.

Boston, Chicago, St. Louis, and San Francisco note that retail sales

in the last 2 months were strong; but New York and Philadelphia comment that

sales in the last 2 weeks of January and early February fell sharply, apparently

in response to severe weather.

Retailers, although optimistic, are concerned

over effects of high fuel bills on discretionary spending.

Construction activity, especially housing, appears to show signs of

accelerating.

San Francisco.

Substantial strength in housing starts is noted in Dallas and

Forecasts of housing starts in the Chicago District have been

increased because of the large volume of funds available from savings and loan

associations and life insurance companies.

Dallas remarks that one homebuilder

plans to boost starts by a fourth this year in Dallas, Ft. Worth, and Houston.

Starts in several areas of the San Francisco District have increased 30 to 50

percent from last year.

strengthened.

Both Dallas and Atlanta report mobile home sales have

Similarly, signs of revival in multi-family construction are noted

in the southwest and west coast areas.

Shortages of building materials, including

lumber, brick, cement, plastic pipe, wallboard, and insulation, may develop this

year according to Chicago and Dallas.

Adverse weather conditions in Atlanta, Minneapolis, and San Francisco

have caused extensive damage to crops and concern over future prospects for

agriculture in those Districts.

Florida's fruit, sugar cane, and vegetable

crops, except celery and lettuce, have been severely damaged by freezing weather.

Citrus fruit losses are estimated between 25 and 35 percent of the unharvested

crop.

Last year's drought and lack of moisture caused considerable concern

to farmers and bankers in the Minneapolis District.

Low farm commodities prices

and low production in drought-striken areas are cutting farm spending.

The need

for refinancing appears to have increased, but bankers are concerned about the

ability of farmers to continue payments even on existing loans.

in the west is curtailing hydro-electric power output.

Lack of rainfall

According to San Francisco,

the Bonneville Power Administration has stopped the flow of interruptable power

to aluminum and chemical plants in the northwest and plans for allocating water

to farm and residential areas are underway in most States.

Agriculture prices

will apparently be under upward price pressures because of adverse weather

conditions.

Sharp increases in prices for agricultural commodities this year

are expected by San Francisco, and Atlanta points out that vegetable, citrus

crops, and livestock prices are likely to increase as a result of a severe

freeze in Florida.

However, ample supplies of red meat and pork should hold

down increases in overall food prices, at least for the first half of 1977

according to Kansas City.

Large beef supplies in the first half are likely

to be followed by smaller supplies and higher prices in the second half of

1977.

Upward price pressures on industrial commodities are likely to intensify

because of higher costs of alternate fuel oil and higher costs of alternate modes

of transportation.

Business loan demand remains generally sluggish in Districts that

commented.

However, a considerable pickup in credit demand from oil distributors

to finance inventories is noted in Philadelphia, and Kansas City notes strong

loan demand by coal mining and oil drilling firms.

Easing in rates paid on

time and savings deposits and on saving certificates has occured in Dallas and

St. Louis; but some thrift institutions in Cleveland, which only last month

reduced rates on passbook savings accounts and on certificates, raised rates

because of loss of deposits.

FIRST DISTRICT - BOSTON

The New England economy has been relatively unaffected by the cold

weather thus far.

Production at the region's factories has been almost completely

unaffected and retailers report strong sales increases.

New England relies much

more on oil than natural gas and no important fuel shortages are anticipated.

There have been no significant interruptions in New England's production

because of fuel shortages although the General Motors assembly plant in

Framingham closed for two days because of an inability to get parts coming by

rail through snow-bound Buffalo.

A survey of regional manufacturers indicates

that most have sufficient inventories to allow them to continue production for

some time even if transportation into the region is held up.

A great deal of

industrial freight comes into New England through Buffalo and continued problems

there could have important secondary effects.

New England manufacturers

generally are not worried about fuel supplies and local utilities report they

expect no significant problems.

One local electric utility is exporting

substantial power to the Mid-Atlantic region and could produce even more except

transmission lines could not handle the additional power.

The Chief Executive Office of a very large and diversified manufacturing

conglomerate reports that sales of consumer durables are very strong but that

capital goods sales have been disappointing.

However, one division which

produces machine tools for the automotive market reports strong sales as a

result of retooling.

There has also been an increase in interest in long lead

time capital goods although orders have not picked up yet.

A supplier of alloys

used in chemical processing equipment reported a significant increase in orders.

A large tire manufacturer expects a very good sales year and indicates

that the cold weather has not had a significant impact on their sales yet.

If

auto producers are forced to continue curtailing operations this manufacturer

believes it could effect their sales although they expect most of the decline

would be made up later.

A manufacturer of a chemical filler used in tires and

many other products indicated that sales to Mid-West companies are beginning

to slacken as a result of the weather.

However, this producer has not cut back

on output but is building inventories instead.

Overall they expect a good year.

Although sales did slow down during January's snowstorms, regional

retailers report they have picked up very strongly and are expected to remain

high.

However a major department store chain indicated they are watching

inventories especially carefully in case continued cold weather and high fuel

bills reduce consumers' discretionary income.

A large commercial bank president indicates that commercial loan

demand is still weak and has been off in January reflecting seasonal patterns.

Increase in consumer loan demand has resulted in large part from pickups in

automobile paper.

Deposit inflows for this Connecticut commercial bank continue

to be hurt by NOW account competition.

The bank expects a general increase in

interest rates and is planning for a 100 basis point rise in their prime rate

by the end of the year.

Except for parts shortages induced by transportation problems caused by

the weather, manufacturers contacted in the region report no anticipated

bottlenecks.

Most are operating below desired capacity and do not anticipate

the need for plant expansion.

Price developments have been relatively modest

and several companies noted that the expected increase in steel prices was not

able to stick.

One economic consulting firm expressed concern about inter-

national commodities, particularly chromium from Rhodesia.

Professors Eckstein, Houthakker, Samuelson, and Solow were available

for comment this month.

Except for Houthakker, who opposes the rebate and

manpower portions of the Administration's fiscal package, our academic

correspondents "disagree with the Central Bank's view of fiscal policy."

Solow insists there is an important distinction between the direction the

economy would go without stimulus and whether that outcome is a healthy one.

While the pattern of real final demand suggests there would be no recession,

its very moderate rate of growth, well below the stated policy goals, is

insufficient.

Samuelson notes that a temporary, not a permanent, step-up in

spending would be the expected response to a one-shot tax rebate.

this is the intended, desired response from the rebates.

He argues

Eckstein agrees with

the size of the Carter program and insists, if there are any doubts, they are

whether the package is too small.

Eckstein, Samuelson, and Solow all warned that the cold weather

disruption cannot be viewed solely as a short-term supply disruption.

Although

most of the hours worked will be made up later, part of the effects can be

viewed as the functional equivalent of an energy price increase.

Real incomes

will be lower and will not be recovered.

Houthakker continues to recommend money growth of 5 to 5 1/2 percent.

Solow and Eckstein want no increase in the Federal funds rate.

Solow argues

that with all the uncertainty and changes in fiscal policy, it would be a mistake

to base policy solely on money growth.

Eckstein warns against tightening policy

when the inevitable bulge in money balances occurs, as tax rebates are held

initially in consumer balances.

be resolved on the side of ease.

During those weeks, all technical doubts should

Samuelson fears that anything more than a

modest increase in short-term rates may be strongly reinforced by the market.

SECOND DISTRICT—NEW YORK

Fierce winter weather and a natural gas shortage have materially

affected economic activity in the Second District, according to businessmen,

utility executives, and directors of the Buffalo Branch who were contacted

recently.

The dislocations varied greatly across the District—ranging from a

virtual halt of business activity in western New York State to scattered

commercial and industrial closings in metropolitan New York City.

Most of

these firms expected to reopen within the current week because of an easing in

the shortage of natural gas.

Notwithstanding the return to production, busi-

nessmen remain concerned over the prospects of future shutdowns should frigid

temperatures reemerge.

On the general outlook for the national economy,

business economists viewed the decline in production and employment as a

temporary disruption that would be largely made up in coming months.

On the

other hand, these economists were less optimistic on the outlook for prices,

projecting a reacceleration in the rate of inflation.

Cutbacks in production and employment varied substantially across the

District.

The most severe and widespread closedowns were in the Buffalo area

which was struck by a devastating winter storm in late January.

As a result

of the adverse weather conditions and storm aftermath, employees were unable

to travel to work and tens of thousands were idled.

Outside of the Buffalo

area, work stoppages appeared to be largely the result of cutbacks in

natural gas supplies.

Late in January, natural gas suppliers experienced

a drastic diminution of stocks due to increased consumption and pipeline

curtailments.

Faced with the prospect of cutting back service to residential

customers, many upstate New York and northern New Jersey utilities reduced

commercial and industrial service to levels that would only protect plant

and equipment from freezing.

While many firms continued production by

switching to alternative fuels, numerous closings were reported.

The Buffalo

directors estimated that approximately 6,000 Rochester area workers were laid

off due to a shortage of natural gas.

Closer to New York City, layoffs and

production losses appear to have been relatively much more limited with fewer

natural gas curtailments of customers without alternative fuel sources.

Conservation measures, some moderation of temperatures, and purchases

of natural gas by utilities produced at least a temporary easing in the natural

gas shortages early in February.

Natural gas service was expected to be

restored to most business customers within the current week.

Despite this

encouraging development, firms remained concerned that further service disruptions might occur if adverse weather conditions reappear.

A director of a

major upstate utility emphasized that prolonged cold could result in a major

natural gas crisis.

Overall, respondents felt that energy shortages were

largely limited to natural gas.

Despite this general consensus, however,

several respondents complained of an inability to receive propane shipments due

to weather-related transportation problems.

A few businessmen, who were able

to obtain propane, complained of its sharply higher price.

With the restoration of natural gas service, most firms felt they

would be able to make up for the lost production.

Exceptions were two glass-

makers who felt there was little room to make up for lost production since

they had already been operating their plants 24 hours a day.

Another exception

was in the auto industry where two plants were expected to remain closed an

additional week due to shortages of parts and supplies that had been created

by plant closings in Buffalo.

The disruptive effects of the extraordinarily severe weather conditions were also reflected in retail activity in the District.

Through

the first weeks of January merchants reported that sales were generally good.

However, in the wake of the brutal climatic conditions sales plummeted over

the remainder of the month.

Particularly hard hit were stores in the Buffalo

area which were forced to close for several days.

In addition, many stores

in upstate New York, in an effort to conserve fuel, reduced their hours by

20 to 30 percent.

Even in New York City, which was relatively less affected

by the adverse weather, customer traffic fell below normal as the temperature

fell.

In New Jersey, stores drastically lowered thermostats or cut hours to

meet the Governor's strict conservation regulations.

As a result of these

various measures, combined with the bad weather, sales toward the close of

January and in early February fell below year-earlier levels.

Despite the

overall slowdown in sales, inventories were generally described as in good

shape.

Merchants did not appear overly concerned by the sluggishness in retail

activity which they appeared to regard as temporary and expect to be made up

in coming months as the weather returns to normal.

On the implications of the severe winter for the general economy,

most business economists felt that it was premature to substantially alter

their projections of production for the year.

An exception to this view was the

senior economist of a major appliance manufacturer who was uneasy about describing the effect as similar to a strike.

He was concerned about the on-going

production constraint posed by natural gas shortages.

In addition, he also felt

that due to the heightened sensitivity of consumers and the financial markets

to price changes, a reacceleration in inflation could have substantial ramifications.

All of the respondents expected at least a short-run acceleration in the rate of

inflation due to increased fuel and food costs.

THIRD DISTRICT - PHILADELPHIA

The Third District economy is feeling the effects of weather-related

problems.

Retailers report that sales have been adversely affected, and

industrial production and employment are being curtailed.

The Third District's

survey of manufacturers was starting to point to an improvement in business

conditions in that sector along with unchanged levels of employment.

the survey was conducted

However,

prior to the gas shortage, and more recent checks

with officials in each of the District's states indicate that layoffs are

occurring.

Bankers in the region say that current disruptions in economic

activity could affect business loan demand to some degree, as well as repayment of loans by small and medium-sized firms.

All agree, however, that

there is little evidence of this yet.

Absent the gas shortage, manufacturing executives responding to the

latest Buiness Outlook Survey say that business is better than in the previous

month.

Close to 30 percent of the respondents report improvement while 6 per-

cent indicate a worsening in business conditions.

New orders and shipments

are higher, and, to some degree, shipments are being made out of inventories.

Stock levels are down at more than one-third of the firms sampled.

At the

same time, employment and the average workweek are unchanged for the second

month in a row.

In general, this picture holds for both durables and nondur-

ables.

For the longer term, manufacturers look for additional improvement.

Almost 9 out of 10 executives surveyed expect a pickup in economic activity

over the next two quarters.

New orders, shipments, and inventories are pro-

jected to increase over the period, and employment prospects are favorable

as well.

One-half of the respondents plan to hire additional employees and

one-third plan to lengthen the average workweek.

At the same time, capital

expenditures are expected to climb at 50 percent of the firms sampled—up

about 10 percentage points from the previous survey.

Price pressures in manufacturing are about the same as last month.

Forty percent of the respondents report paying more for their supplies and 14

percent are receiving more for their finished products.

portions show little change from last month.

Both of these pro-

By August, 9 out of 10 expect

to be paying more for their inputs and 8 out of 10 anticipate higher prices

for the products they sell.

Employment in the District is suffering from shortages of natural

gas and other cold-weather problems.

State officials in New Jersey estimate

that as of February 4th, 32,000 workers had been laid off statewide as a

direct result of shortages of natural gas, including 8,000 in the Third District

portion of the state.

An additional 6,300 have lost their jobs because of

icy conditions, mostly in the fishing industry.

offs occurred in the Third District.

Roughly one-half of these lay-

In Pennsylvania, a survey by the state

found that as of February 4th, about 160,000 workers statewide had lost their

jobs as a direct result of the natural gas shortage.

A state official in

Delaware reports that an auto assembly plant with 1,700 employees will be

closed temporarily because it cannot get parts from another company plant in

the Midwest.

Natural gas has been curtailed to industrial users in Delaware,

and consequent layoffs of roughly 2,000 are scattered among 9 firms.

It's

reported that many companies in the Third District are trying to alter pro~

duction processes and shorten the workweek in order to keep their workers

employed.

Retailers in the area say that sales have been affected by the severe

winter weather, but not in monumental proportions.

One merchant, who was

looking for January sales to meet or slightly exceed year-ago levels, reports

that the last two weeks in the month were "terrible" and indicates that sales

were down about 7 percent in real terms.

He guesses that part of this was

due to limited store hours near the end of the month.

January's loss in real terms at 4 percent.

Another retailer puts

One of the merchants contacted

reports that his stores registered mild gains over last January, and notes

that he is struggling to keep many items in stock.

Other retailers say

they are virtually cleaned out of cold-weather merchandise.

For the most

part, there are no problems in receiving supplies reported.

For the immedi-

ate future, one merchant

expects sales in February to "come on like gang-

busters," but the majority of retailers contacted are scaling down their

sales forecasts as a result of cold weather, layoffs, and higher home heating

bills.

Area bankers report that business loan demand remains essentially

flat.

One notes that loans to regional customers have been moving up slightly,

but is not ready yet to call it a definite trend.

A banker in New Jersey notes

some heavy borrowing from mortgage loan brokers, but other purely local

demand is weak.

In general, bankers look for a gradual upturn in business

loan demand this year.

Only a mild pickup is anticipated through the first

half, with more acceleration in the third and fourth quarters.

This outlook could be affected, however, by the current disruptions

in economic activity.

At one New Jersey bank, credit demand from fuel oil

distributors to finance inventory has picked up considerably.

Overall, how-

ever, bankers feel that the gas shortage could delay the expected upturn

in business borrowing.

Some indicate that, if the cold weather continues,

their small and medium-size customers may have trouble cleaning up their

loan payments as fast as planned.

However, there is no substantial evidence

of any of these potential effects at this time.

FOURTH DISTRICT —

CLEVELAND

Energy shortages, aggravated by the coldest winter in the past 100 years,

have hampered production, employment, income and sales in the Fourth District.

Our latest monthly survey shows that more manufacturers expect curtailment in

output in February than last month.

Lost output of automobiles, glass and

appliances caused by natural gas shortages are expected to be made up in the

second and third quarters, although some steel producers express uncertainty

that the steel market will revive as much as was expected just a month ago.

Economists who attended this Bank's meeting on the economic outlook on February 3

still expect the expansion to continue through 1977, despite constraints on fuel

supplies.

Interest rates on passbook savings, which were lowered in several

major metropolitan areas of the District last month, were raised by several

thrift institutions in the Cleveland area.

The worst winter since the 1870's has caused scattered shutdowns

especially in steel, automotive, glass and fabricating metal industries,

widespread school closings during January and early February, and reduced

retail shopping hours.

Temperatures in northern Ohio, for example, have been

33 percent below normal so far this winter.

natural gas, has been well above supply.

aggravated the shortages.

Demand for energy, especially

Bottlenecks in transportation have

Natural gas has been in short supply, and supplies

of alternate fuels have been available but tight.

According to an official

with a major utility in Ohio, daily flows of natural gas into Ohio equal only

81 percent of the State's requirements.

improve.

Prospects for the longer term should

With higher prices for natural gas, demand and supply would likely

be in balance by 1982, and prices would decline after the mid-1980's because

of excess supplies.

Because supplies of natural gas into Ohio have been curtailed each year

since 1972, some manufacturers have switched to alternate fuels, including coal,

oil and propane.

These fuels are currently available, but bottlenecks in

transportation have hampered deliveries.

Despite the higher mix of heating

fuel to gasoline, shortages of gasoline this summer are not likely, according

to one source.

Refinery capacity has been increased 18 percent since 1973 and

larger supplies of imports are available now than during the gasoline shortage

in 1973.

An estimated 15 million tons of a projected 55 million tons of coal

production was lost in January as a result of heavy snows, cold, and absenteeism,

according to an economist with a major coal producer.

Frozen coal piles held by

utilities and barges of coal that could not move on the Ohio River worsened the

situation.

Utilities had an estimated 65- to 70-day supply of coal at the end

of January.

Major coal producers apparently do not expect a coal shortage this

year even though they expect the mineworkers union to reopen its contract later

this year.

The industry's capacity to produce is estimated at 100 million tons

above the recent 675 million ton annual rate of output.

Estimates from a variety of reliable sources suggest that as of early

February, about 110,000 manufacturing workers were laid off, or about 2 percent

of total employment in the District.

recalled.

Many of those workers have since been

Primary metals, automotive, glass and pottery, and fabricating

industries appear to be hardest hit by the natural gas curtailment, although

a variety of smaller industries ranging from greenhouses to forging producers,

is also affected.

At least 500,000 tons of steel ingot production was lost

in January because of energy problems, according to one estimate.

One steel

producer laid-off 1,000 workers, or 14 percent of its workforce, for several

days because its barges of fuel oil were frozen on the Ohio River, and coke oven

gas supplies were cut because of frozen pipes.

Another large steel producer

experienced only minimal losses because of extensive oil storage capacity which

was built in recent years.

Although steel economists expect steel shipments

and production this quarter will increase about 5 percent from last quarter,

they are now apprehensive that a recovery will not begin this quarter.

A major producer of flat glass indicated its firm laid off 2,600 of

its 5,000 employees for a few days in mid-January, but all have since been

recalled.

The firm switched to oil and propane but still requires natural

gas for some types of fabrication.

Developments in the automotive industry are mixed.

Two major auto

parts suppliers report energy shortages have had only minimal effects on their

operations, but both are concerned over slow deliveries by some of their suppliers.

Ford lost about 35,000 to 40,000 autos and trucks in January because of energy

shortages and slow deliveries of supplies to their assembly plants.

Nearly

26,000 of 33,000 GMC workers in the Dayton area were laid off January 16-18,

and 20,000 were recalled January 19.

Another 4,200 workers were laid off at

a GMC assembly plant near Cincinnati, but since then, all GMC employees in Ohio

except 280 were recalled.

Despite fuel problems, overall economic expansion is still expected

to be sustained through 1977, according to the 29 economists who attended a

recent meeting held at this Bank.

The median forecast of the group expects

real GNP to increase about 5.7 percent from the fourth quarter of 1976 to the

fourth quarter of 1977.

They expect the rate of inflation to average 5.4 percent

in 1977, and the rate of unemployment to show only gradual improvement from 7.9

percent in the first quarter to 7.2 percent in the fourth quarter of 1977.

The

group reduced its forecast of fixed investment to a 13.9 percent gain from last

year, compared with a 15.0 percent gain they expected at the October 1976

meeting.

On the other hand, they were slightly more optimistic with respect

to residential construction than they were last fall.

At a capital goods

seminar in Cleveland sponsored by the local chapter of the NABE, a TownsendGreenspan official forecast a 13 percent increase in fixed investment (7 percent

to 8 percent in real terms) from 1976.

Some savings and loan associations, which only last month lowered

rates paid on passbook savings accounts and on savings certificates, reverted

to the 5 1/4 percent rate of passbook accounts.

A few associations also raised

rates to maximum ceilings on shorter maturing certificates, but kept the 7 percent

rate on 6-year certificates.

A $400 million deposit association apparently lost

$2 million in deposits during January to competitors who did not reduce passbook

rates.

The prime rate for mortgage loans is expected to remain at about 8 1/4

percent for a 70 percent loan.

FIFTH DISTRICT - RICHMOND

The unusual weather conditions prevailing over the last several weeks

make it difficult to interpret the results of our latest survey of Fifth District

businessmen.

About half the manufacturers in our panel of respondents report

that the severe winter weather and fuel problems have had an adverse effect on

production and employment although these effects are reported for the most part

to have been slight to moderate.

The diffusion of manufacturers' responses

indicates some reduction from a month earlier in shipments and order backlogs

but an increase in new orders.

While total employment in manufacturing is

reported to have changed little, reductions in weekly hours worked were

indicated by nearly one-third of our respondents.

Reports from retailers

suggest some further improvements in retail sales during the survey period.

Both retailers and manufacturers continue to express optimism concerning the

outlook for the next six months, although some retailers are fearful that rising

home heating costs may have adverse short-run effects on consumer outlays.

There is little doubt that recent weather and fuel supply conditions

have affected business operations across the Fifth District and these effects

are reflected to some extent in the responses to our survey.

Numerous instances

of employees being kept away from work by weather conditions have been reported

as have plant closings due to the cold.

The energy situation is also having an

effect on production, curtailing operations directly or affecting supplies or

orders, of several of our survey respondents.

In the agricultural sector, an

abnormally harsh winter continues to damage small grains and pastures and limit

fieldwork.

some areas.

Hay and roughage supplies continue to be depleted and are short in

Feed grain supplies are somewhat more plentiful, but they, too, are

well below normal.

Of manufacturers responding to our latest survey, more than one-third

report a reduced volume of shipments in January and nearly as many indicate a

decline in backlogs of orders.

Nearly 36 percent of these respondents, however,

indicate an increase in the volume of new orders since the last survey period.

On balance, inventories of both materials and finished goods were somewhat

higher than a month ago, with increases in finished goods being more widespread.

Manufacturing employment apparently showed little change during January although

hours worked per week declined at nearly one-third of manufacturing firms

represented in our survey.

This decline in hours is, at least partially,

due to weather and fuel supply conditions prevailing over the past two weeks.

More than one-third of the manufacturers surveyed now view both current

inventory levels and current plant and equipment capacity as excessive.

In

some cases, however, the excess capacity is a result of operating at less than

capacity due to the unavailability or short supplies of fuel.

Survey responses of retailers vary considerably, but on balance

suggest a moderate increase in sales with no relative change in sales of big

ticket Items.

Inventories at retail showed no change and are essentially in

line with desired levels.

Employment among retail respondents declined some-

what as many District retailers are operating on a modified schedule due to

fuel problems.

Price increases appear less widespread as fewer manufacturers report

paying and receiving higher prices and fewer retailers report increases in

prices received.

Most retailers, on the other hand, continue to report

Increases in prices paid.

Concerning the outlook for the next six months, survey respondents

are more optimistic than in recent months.

A majority of manufacturers

and retailers now expect continued improvement nationally, locally, and for

their own firms over that time period.

Such expectations represent a marked

improvement in the outlook of retailers from even the last survey period, and

a continuation of the steady improvement in the outlook of manufacturers

which began several months ago.

The January 1 Prospective Plantings report indicated that District

farmers planned to increase 1977 cotton acreage 8 percent—up somewhat more

than is planned nationally.

But prospective feed grain plantings show little

change from last year, with acreage down slightly in the District and up by

a small percentage in the U. S.

District cash farm income for the first 11 months of 1976 recorded

a 2,5 percent gain over the same period a year ago, compared with an increase

of some 5 percent nationally.

SIXTH DISTRICT - ATLANTA

The Southeast reeled from the effects of unaccustomedly severe winter

weather.

Frost damage to the Florida vegetable and citrus crops promises to

boost food prices.

Livestock prices may also be increased.

Shortages of

natural gas closed industries and schools and limited the operations of commercial firms in several areas.

Layoffs were widespread.

The mobile home

industry appears to be slowly reviving.

Florida's vegetable crop was decimated by an unusually severe freeze;

only winter-hardy crops such as celery and lettuce were unharmed.

Replanting

began immediately, so new crops can be expected within about eight weeks.

Some growers have reportedly purchased tomato plants from growers in Mexico

to hasten the availability of new supplies.

Citrus fruit suffered losses variously estimated to range between 25

and 35 percent of the two-thirds of the crop remaining to be harvested.

Damage to grapefruit was light compared to oranges.

Since only 10 to 15

percent of the orange crop is sold as fresh fruit, these supplies should be

affected only slightly.

Most of the remainder of the crop is used for juice

concentrate; the freeze-damaged oranges can be processed for this purpose,

provided daytime temperatures remain below 60 degrees.

this level, the fruit would deteriorate rapidly.

At temperatures above

To hasten processing, weight

limits have been removed for trucks hauling citrus fruit; processors are

operating at rates in excess of the normal maximum capacity level.

A substan-

tial carry-over of concentrate from last year may help limit price increases.

Tree damage is limited mainly to growing twigs, so crops in future years

should not be seriously affected, in the absence of another severe freeze.

Other cold weather effects include freeze damage to the unharvested

half of the sugar cane crop.

Again, mill operators are operating at maximum

capacity to salvage the remaining crop, in a race against higher temperatures.

Severe losses have occurred in the foliage plant industry in Florida.

Fisher-

men fear damage to inshore fish and marine animal populations.

Livestock supplies have also been affected.

A lack of forage crops,

due to adverse weather, has stimulated marketings of beef.

While this trend

has cushioned current price increases, it is likely to worsen shortages during

the remainder of the year.

Poultry producers report curtailed production, as

unheated housing compounds the problem of poor weight gain with losses due to

freezing of chickens, as well as to decreased fertility of eggs.

Natural gas shortages have had serious effects on industrial, educational, and commercial activities.

One large gas utility reported that it

began dipping into its reserves in October; the normal beginning time for

usage of reserves is in December.

A survey found that over three-quarters

of industrial users in Georgia have made no provisions for alternate fuel

supplies.

Firms which were continuing to operate by using stand-by fuels

reported that supplies are low, threatening increased layoffs.

A key

element of the shortage is a delivery problem attributable to a shortage of

rail cars and trucks designed to haul liquefied petroleum gas fuels.

In

some states, procedures for inspection of vehicles and compliance with other

legal requirements have been expedited to hasten deliveries.

Emergency pro-

cedures have been instituted to prepare heated public facilities for use by

families whose household fuel supplies have been exhausted.

The impact of the industrial cutbacks varies from day to day.

Carpet

manufacturers in North Georgia, whose production was cut sharply, have resumed

operations at close to normal levels.

resumed production.

An auto plant in Atlanta has also

However, another auto plant states that production cuts

by suppliers threaten to affect output.

Fuel shortages are not limited to natural gas.

Some Tennessee coal

retailers are experiencing delays in deliveries, since mining operations have

been curtailed by the severe weather.

Deliveries by retailers have fallen

behind, new orders are being rejected, and some homeowners have run short of

fuel for home heating.

A variety of other businesses have felt the effects of weather conditions.

Building supply and auto parts dealers report unusually slow sales.

Truck transportation has been slowed.

Small businesses, including cleaners,

laundries, and fast-food restaurants, have been closed down by rationing of

natural gas.

Retailers are operating fewer hours per day.

Layoffs resulting from the natural gas shortage are estimated to

have reached at least 200,000 in Alabama, Mississippi, Tennessee, and Georgia.

In Florida, a large number of migratory agricultural laborers, estimated to

number from 50,000 to 135,000, have been left without jobs.

Employment is

available in central Florida, where the intense effort to pick and process

the orange crop is under way; but these jobs will not last more than a few

weeks.

One of the recession's casualties, the mobile home industry, appears

to be reviving slowly.

In Alabama, sales and output rose in 1976; two of

the thirty-five plants which closed during 1975 have been reorganized and

reopened.

SEVENTH DISTRICT - CHICAGO

Apart from the impact of severe weather, the stronger tone in business

activity that developed late last year in the district continued in January.

Retail sales were excellent in both December and January.

Inflation prospects

have worsened, mainly because of weather-related developments.

The capital ex-

penditure outlook remains spotty, but some sectors report demand at high levels.

Construction forecasts have been increased.

Farmland prices in the district

continue to rise at a rapid pace.

One major result of the winter cold will be a new impetus to price inflation.

Production losses cover a wide range of goods, and uses of alternative

fuels and alternative transportation will increase costs.

One company has noti-

fied customers that an "emergency fuel surcharge" will be added to the price of

a product.

Many special deals to procure extra fuel supplies may not be fully

reflected in the usual price indexes.

Natural gas curtailments have had their most serious impact in this

region in Indiana where the state labor service estimates that over 40,000 were

out of work late last week.

Motor vehicle assemblies in Michigan have been re-

duced mainly because parts shipped from other states were not available.

Some

layoffs have occurred in Wisconsin when gas cutoffs were ordered at large firms.

Many of these companies have turned to alternate fuels which also are in short

supply, especially so in the case of propane.

Manufacturers have been turning away from natural gas for several years

because of the high price as well as reduced availability.

fuel problem varies by company rather than by industry.

The severity of the

For some the situation

varies day by day.

Some workers laid off have been returned to work.

Some gas

curtailments have been relaxed recently, at least for smaller customers.

The steel industry concentrated in Northern Indiana has been put on a

"plant protection" basis by gas utilities, probably through February.

10 percent of the workforce has been laid off, but this could worsen.)

a surprise move after a partial cutback in supplies.

is no significant need for gas.

(About

This was

At one large plant there

At other plants certain processes cannot be

performed without gas.

The fuel situation in this district is complicated by the fact that waterways are frozen and barges carrying oil, coal, chemicals, salt, and other products

are either stopped or moving very slowly.

The problem has been helped in some

cases by relaxing state regulations on burning coal or oil with higher sulphur

content.

A large producer of appliances in the Chicago area had indicated that

it would be forced to close if it were not allowed to burn a lower grade of oil.

Railroads have been moving additional freight that normally moves by

barge.

Also, piggyback traffic has increased.

Rail movements have been ham-

pered by derailments and other cold-related developments.

Frozen coal in freight

cars has prevented or slowed unloading.

Retail sales, both hard and soft goods, were strong in January, following an excellent December.

Weather-related items and auto parts and supplies

have been especially strong.

For example, many stores have sold out electric

heaters, and do not expect new shipments this season.

Observers fear that big

heating bills will drain consumer purchasing power.

Sales of cars slowed somewhat in late January, but this is expected to

be temporary.

Stocks of small cars are excessive and a series of cuts in pro-

duction schedules have been necessary.

Meanwhile, overtime has been common for

plants producing the most popular standard-size and intermediate models.

Sales of heavy trucks and trailers have continued to improve and further

gains are expected.

Machine tool producers expect to increase shipments sub-

stantially this year, especially to the auto industry.

to increase capital expenditures this year.

when adjustments are made.

Most industries expect

The tendency has been to boost plans

Orders for construction equipment continue at a low

level.

Forecasts of housing starts have been increased because of the large

supply of funds available in savings and loans and life insurance companies.

expect mortgage rates to decline this year even if other rates rise.

Many

Some believe

that single-family home construction will be limited by supplies of building

materials such as gypsum board, insulation, and certain types of lumber.

There

are signs that construction of commercial and manufacturing buildings will increase also.

Considerable repair and maintenance work will be required on gas

and water mains and other structures injured by frost.

Farmland prices in the district increased by 6 percent in the fourth

quarter, according to our survey of bankers and were 28 percent above year ago.

The boom in prices started in late 1972 and has accelerated.

investors in farmland are helping to boost prices.

New classes of

EIGHTH DISTRICT - ST. LOUIS

The coldest winter on record has affected economic activity in the

Eighth District.

Although the losses in plant operation and days worked have

apparently been relatively mild compared to some parts of the country, lasses

have occurred over a wide range of industries in the District.

The

underlying strength of the economy is, thus, difficult to judge in view of

the abnormal weather conditions, but the generally improving conditions in

recent months do not appear to have been changed.

January were surprisingly strong.

In fact, retail sales in

Part of this spending, however, was

induced by the unusually cold weather.

Furthermore, some of the production

losses, which resulted from weather-induced inefficiencies and gas shortages,

can be made up.

Retail sales have held up well despite the severe January weather.

The composition of the sales, however, was heavily influenced by weather

conditions.

As a result, the experience of retail outlets varied widely

depending on the types of products offered for sale.

Fast selling items

included snow tires, batteries, auto parts, and warm clothing.

Some stores

reported that inventories of many of these items were virtually exhausted.

Even vacation sportswear was selling fairly well as winter vacations were

spurred by the weather.

Automobiles were also selling at a brisk pace,

possibly reflecting weather-induced problems with older cars.

Manufacturing activity has been slowed somewhat by the severe

weather and related energy shortages, though the loss in production and

employment has been relatively minor compared with reports from other areas

of the country.

Lack of fuels, particularly natural gas, has resulted in

some temporary losses in production and employment in the District, though

particular regions of the District have suffered more than others.

Plant

closings due to fuel shortages have occurred in the Me^shis and Little Rock

Branch zones, while activity in the St. Louis zone generally has been

unhampered by gas cutoffs.

Most of the plant closings were only for a few

days and the plants are now back in operation.

Beside fuel shortages, manufacturing activity has been hampered by

other weather-related problems.

Some plants have been hampered by lack of

raw materials due to transportation delays and plant closings in other areas.

For example, some automobile assembly plants in the St. Louis area have been

affected by a lack of parts caused by plant closings elsewhere or by lack of

shipping facilities.

One assembly plant in St. Louis employing several

thousand workers has been closed for a week and another plant has cut back on

the number of hours worked.

Also, many firms have experienced high

absenteeism and inefficiency in operations induced by adverse weather

conditions.

Some delays and inefficiencies have also occurred in the

homebuilding industry due to the weather conditions.

Most construction work

has been confined to interior work and relatively few new foundations have

been poured.

These problems, however, are not expected to alter the

long-term outlook for the homebuilding industry which continues to be quite

bright.

Mortgage interest rates in the St. Louis area have held steady in

recent weeks at around 8-1/2 percent on an 80 percent loan.

Savings inflows

into thrift institutions have continued briskly in January.

The larger

savings and loan institutions in the St. Louis area have recently reduced

their rates paid on time and savings deposits.

Some of the larger

institutions now are paying rates 1/2 percent below the legal maximums, while

others continue to pay the legal maximums.

Agricultural production has experienced weather-related

difficulties.

Poultry production has been less profitable due to increased

heating requirements and reduced rates of growth.

Cow-calf operators have

experienced higher than normal losses of cattle, and heavy feeding of scarce

hay and other feeds has been necessary.

This year's fruit crop is believed

to have been affected by the extreme cold.

The peach crop in the St. Louis

area may be down sharply while the apple crop may still be reasonably good.

Tobacco markets in Kentucky were reported to be operating on a reduced

schedule and sales were substantially below normal.

A low level of soil

moisture remains a potentially severe problem in many parts of the District.

NINTH DISTRICT - MINNEAPOLIS

Weather continues to dominate district economic activity in

early 1977.

Cold weather has sharply reduced district fuel supplies,

but the region has been spared the severe economic disruptions experienced in many Eastern states.

Last year's dry weather and the prospects

of continued drought are curbing farm-related economic activity.

However, some improvement in district nonagricultural economic activity

is indicated, and the outlook is for modest improvement.

In contrast to the eastern part of the United States, fuel

shortages here have not seriously disrupted business activity.

Fuel

supplies in the district are at precariously low levels, and the public

has been strongly urged to conserve energy.

Recent conservation measures

appear to have been effective, and some rebuilding of fuel stocks has

occurred.

Also, this region is generally better equipped to handle cold

weather problems than many other parts of the country.

Consequently,

the Directors of this Bank believe that fuel supplies should be adequate

for the remainder of this winter.

Concern is expressed, though, about

how the emergency legislation to allocate natural gas might affect this

region.

Economic activity in the Ninth District continues to be affected

by last year's drought, and concern is great regarding this year's

moisture conditions.

In January, 86 percent of the bankers responding

to our latest Agricultural Credit Conditions Survey reported farm earnings down from a year ago.

Furthermore, 78 percent of the respondents

expected earnings during the next three months to be down from last

year.

Farm income is affected by low production in the drought-stricken

areas of Minnesota and South Dakota, but the situation is not much

better in the remainder of the district, with low farm commodity prices

making most operations only marginally profitable at best.

Besides low

beef and milk prices, cattle and dairy operators in the drought areas

face the additional problem of increased production costs through the

necessity of buying feed and hay at this time.

In response to their lower incomes, district farmers are cutting

spending to a minimum.

In January, 73 percent of the bankers responding

to the Agricultural Credit Conditions Survey reported farm spending at a

lower level than last year, and 75 percent expected spending to be below

year-earlier levels during the next three months.

This Bank's Directors

also report that spending in many agricultural communities has softened,

and farm implement dealers, in particular, are experiencing a sharp

curtailment in business.

According to this Bank's Directors, much of the shortfall in

farm-related spending in the first half of 1977 may be due to a reduction in confidence rather than in income.

Though many farmers still

have sizable inventories of grain which could be sold to supplement

incomes in 1977, they have been reluctant to sell due to low prices and

the feeling that these inventories provide some security against the

continuing drought conditions.

In addition, many farmers are hesitant

to order even the most necessary of production inputs (such as chemicals

and fertilizers) for the spring, fearing that the drought will continue.

Depressed earnings are increasing farmers' needs for refinancing.

Greater-than-usual demand to refinance farm debt is observed by 69

percent of the bankers responding to the January survey (up from 47

percent in October), and 79 percent expect higher refinancing demands in

the coming quarter.

In addition, bankers remain somewhat pessimistic

regarding the ability of farmers to continue payments on existing loans.

Among those responding, 75 percent characterize the current rate of

repayment as "slow," 73 percent expect an adverse change in the ability

of farmers to repay debt, and 55 percent report finding a greater proportion of farmers at their debt limits than usual.

Even in those areas

of the district where 1976 crop production was good, refinancing is

being sought by farmers who are withholding crops from the market in

hopes of more favorable prices.

Where farmers are at their debt limits

on operating loans, many are having to refinance their farm real estate.

Employment in the district has recently increased, and prospects

are for modest job growth in 1977.

Most Directors of this Bank indicate

that labor market conditions have been stable to modestly improved in

their areas.

In South Dakota, for example, a new manufacturing facility

is expected to provide 600 additional jobs in the eastern part of that

state.

And in the Upper Peninsula of Michigan, the settlement of a

labor dispute combined with improving conditions in the copper industry

are expected to augment jobs in that area.

Furthermore, labor market

conditions have improved in the Minneapolis-St. Paul metropolitan area:

in December employment was up 2.0 percent from a year and the unemployment rate had declined to 5.4 percent from 6.4 percent.

TENTH DISTRICT - Kansas City

Tenth District purchasing managers report that materials availability

is good, price increases have been relatively modest recently, and inventories

are generally at desired levels.

cited as especially soft.

ply problems.

Steel and polyethylene are the two areas

The weather has not as yet created any serious sup-

Although food prices may rise somewhat due to weather-damaged

fruits and vegetables, ample supplies of red meat should continue to dampen

the total increase in consumer food costs for at least the first half of 1977.

Agricultural loan demand has been weaker than usual, but some bankers expect

this to change as spring approaches.

On the other hand, real estate, commercial,

and industrial loans have been above their seasonal norm in some District states.

Tenth District purchasing managers indicate that conditions are little

changed from those reported in December.

Across a wide range of industries,

materials availability is good to excellent and is expected to remain so through

1977.

Prices are generally behaving as last year and inventories are being

closely controlled.

Weakness in both sales and prices is noted, however, by

steel warehousers and fabricators.

One respondent observed, "The mills are

crying for business and so are we.

Deals are being made daily."

Price weak-

ness is also cited in the market for polyethylene and certain chemicals.

Some

managers are concerned that the weather might create temporary problems with

their East Coast suppliers.

For example, the Ford assembly plant in Kansas

City was forced to close temporarily, but widespread general problems have not

yet developed.

While most respondents report their inventories as "where they

should be," "intentionally lean," and "in good shape," a few have increased

levels above last year in anticipation of higher demand.

Overall, the mood of

surveyed purchasing managers appears to be one of cautious optimism.

Though prices received by farmers increased 1.5 per cent during the

month ending January 15, they remain 2 per cent below year-ago levels, while

the index of prices paid by farmers is 4 per cent above year-ago levels.

Farmers received higher prices for vegetables, feed grains and hay, meat animals, and oil-bearing crops.

However, the index of meat animal prices remains

9 per cent below year-earlier levels, despite modest improvement in the month

ending January 15.

Ample supplies of red meat should continue to dampen any increases

in consumer food costs that might arise from the weather-damaged fruit and

vegetable crops, at least during the first half of 1977.

Although numbers of

cattle on feed January 1 were 3 per cent less than a year earlier, they were

24 per cent higher than 2 years ago.

Feedlot placements during the fourth

quarter of 1976 were up 5 per cent over a year ago and 34 per cent above 2

years ago.

Distress sales of cows and calves between now and April 1, due to

drought and winter feed shortages, will further add to the beef supply.

How-

ever, large beef supplies during the first half of 1977 will likely be followed by shorter supplies and higher prices during the last half of the year.

Pork producers have increased their farrowing plans for December 1976May 1977 by 5 per cent over year-ago levels.

Combined with a June-November

1976 pig crop that was 18 per cent larger than a year earlier, pork is expected

to remain in good supply through most of 1977.

Consequently, hog prices will

likely decline from present levels and remain below 1976 levels for most of

the year.

Total loan demand during January at Tenth District banks was seasonally stronger than usual due to larger than normal increases in real estate,

commercial, and industrial loans in Nebraska and Colorado.

Respondents from

the remainder of the District reported either flat or declining loan demand.

In contrast to strength in these categories, agricultural loan demand was

weaker than usual.

The demand for real estate loans appears to be mostly for construction on commercial property.

Respondents almost uniformly indicated no resi-

dential loan demand, although one banker in New Mexico felt that this category would pick up later in the year.

In the commercial and industrial cate-

gory, respondents in Colorado indicated that loans were being extended to ski

resorts which at this time of the year would normally be repaying prior loans.

These same respondents also indicated strong loan demand by companies engaged

in coal mining and oil drilling.

According to most respondents, agricultural loan demand was weaker

than usual because of the effect of the adverse weather on cattle feeders.

A

few bankers, however, indicated there were cattle loans that soon would have

to be extended.

Some respondents also felt that agricultural loans would

increase in the spring, especially if some replanting needs to be done this

spring because of damage to the winter wheat crop.

Investments in the Tenth District have also increased substantially

more than usual, with a good deal of the increase being in the 1- to 5-year

maturity category.

Most respondents indicated that their own banks were in-

vesting in relatively shorter term maturities because they were anticipating

that interest rates would increase shortly.

ELEVENTH DISTRICT - DALLAS

Except for a few problem areas, business conditions in the Eleventh

District continue to improve.

The unemployment rate has declined to 6.0

percent, although total employment has also dipped slightly.

Industrial

output has not been seriously affected by fuel shortages or weather conditions,

and the tight energy situation should spur drilling efforts.

With the exception

of nonresidential building, construction activity continues to strengthen.

Savings and loan associations report that mortgage loan demand is expanding

rapidly, and mobile home sales are on the rise.

Fuel shortages have not severely hampered business activity in the

District because alternative fuel supplies have been readily available.

The

only weather-related work stoppages have been due to icy roads that prevented

some workers on two days from getting to work in a wide area of North Central

Texas and Oklahoma.

Curtailments of natural gas used as a feedstock slowed

production at a few chemical plants, particularly those that are supplied

with interstate gas.

But a bigger problem to the chemical industry is trans-

portation bottlenecks that forced some production cutbacks.

Frozen rivers

halted barge shipments of such products as fertilizer and styrene, and ground

transportation vas unable to take up the slack.

Louisiana officials expressed concern about the possible impact of

continuing severe weather.

New Mexico has been little affected by the cold

wave, but officials are concerned about their limited natural gas supplies

should severe weather spill into their state.

Efforts to allocate intrastate

natural gas into interstate lines is expected to reduce supplies and raise

prices in all District states.

Drilling activity in Texas, following the seasonal pattern, has been

very strong, and the number of offshore rigs has increased in Louisiana.

Industry experts expect 1977 to be a good year because the prospects of

higher prices for natural gas may stimulate more exploration.

The usual mid-

year downturn in rig activity may not be as sharp this year as in 1976.

Wildcat activity, in particular, should be strong.

Residential construction continues to strengthen and appears to be

one of the most vigorous areas of business activity in Texas.

Housing starts

in December were at the highest level since April 197^—with the exception of

the spurt that occurred last September.

One Dallas homebuilder is planning

to boost starts by a fourth this year in Dallas, Fort Worth, and Houston.

He

also indicated that the number of sold, but not yet completed, homes had soared

nearly fourfold from a year ago.

Prices for new single-family homes are

expected to rise 6 to 8 percent this year.

Multifamily construction shows signs of slow improvement.

Apartment,

construction in Houston continues strong, and higher occupancy rates in El Paso

have led to a renewal in apartment building.

A San Antonio builder reported

that high occupancy rates should stimulate some apartment construction later

this year.

The pace of nonresidential building remains sluggish.

Demand continues

weak with increased competition by builders for the declining level of business.

A commercial builder

in Dallas indicated that profit margins are under steady

downward pressure due to ever-increasing costs.

Most builders, however, expect

a moderate pickup in activity this year as various planned projects get under

way.

Nonbuilding construction is gaining momentum, "based largely upon the

expanded building programs of Texas utilities.

One large electric utility

is planning to spend a record C38l million this year, and other utilities

are also boosting their construction budgets.

Additional spending may be

forthcoming from proposed Federal public works programs, according to some

builders.

Highway construction continues to be the weakest area of building

activity.

But the prospects for future highway construction in Texas will

be determined by a highway funding bill that is currently under study.

Some supply shortages may develop for lumber, brick, cement, steel

products, plastic pipe, and wallboard with a strong expansion in construction

activity.

Materials that require a large energy input into their production

may be the first to be in short supply.

Greater use of insulation materials

may also lead to shortages of those products.

Residential builders in Houston

and Dallas reported that shortages of construction labor have eased slightly.

Mobile home sales have strengthened considerably during the last

several months.

A Dallas manufacturer reported that double-wide units are

selling well and expects shipments to increase a fifth this year.

Higher

prices for conventional homes are expected to turn more people toward the

mobile home market, but a San Antonio dealer indicated that new mobile home

prices are up sharply because of expanded Government regulations.

Consumer

financing has eased significantly as ample supplies of funds are being made

available by S&L's.

Savings inflows into Texas savings and loan associations continue to

rise, but at a slightly reduced pace.

However, S&L's in Houston reported

that savings inflows were very heavy in January.

Interest rate reductions,

lengthened maturities, the elimination of certain maturities, and increased

minimum deposit requirements on some CD's "by various S&L's in Dallas and

San Antonio have dampened the inflow of funds.

The majority of respondents

interviewed do not anticipate a lowering in regular passbook savings rates.

Demand for mortgage loans is expanding rapidly in some areas of

Texas.

Mortgage demand in Houston and El Paso has remained brisk.

demand has also climbed sharply in Dallas and San Antonio.

However,

A Fort Worth

S&L expects an increase in mortgage lending this year of 10 to 15 percent

above last year.

Mortgage rates on conventional loans currently vary from

8 1/2 to 9 l A percent.

Most S&L's expect mortgage rates to ease down a bit

more before edging up by year-end.

TWELFTH DISTRICT - SAN FRANCISCO

In the opinion of our Directors, the recovery has been strengthening

on a broad front, but there is great concern over the economic implications

of the low rainfall in the West and low temperatures in the East.

In most

non-agricultural areas of the District, consumer spending exceeded expectations in December and into January.

at a rapid rate

The recovery in housing is proceeding

and early signs of a pickup in nonresidential construction

have been reported.

The low rainfall and snowpack in the West will curtail

hydro-electric power output.

The Bonneville Power Administration has already

stopped the flow of interruptible power to aluminum and chemical plants

in the Northwest.

The forest products industry has benefitted from the ex-

tension of their logging season, but the dry weather has heightened the

danger of forest fires.

Plans for limiting irrigation water to agricultural

areas are underway in many District states.

Most areas of the District report record December retail sales

and a continuation of the trend into January.

The exception is agricultural

areas where lower incomes have dampened consumer spending.

Along the Pacific

seaboard and other areas where the housing boom has been gathering strength

for a year, sales of furniture, appliances and carpeting are very strong.

Current sales gains for new cars are ranging 12 to 60 percent over last year.

Large cars, pick-ups and vans continue to be popular while smaller car sales

lag expectations.

The construction industry is expanding at a very rapid rate.

Housing starts are up 30 to 50 percent over last year in many areas.

cause of the cost of land, lead time required and interest on property

Be-

during the development stage, builders claim there is no low cost housing,

that the cheapest house would cost $40,000 to $45,000 to produce.

As a re-

sult, they believe that the stage is set for a "rather dramatic shift to

multi-unit housing" that will be evident within the next 4 to 5 months.

Moreover, a turnaround is occurring in nonresidential construction.

"Major plants are being planned and the plants are going to go ahead.

is a good market for building.

quality workers."

It

There are no shortages and you can get

Complaints are made, however, that environmental require-

ments and the demands of City Councils often hold up a project for a year

to eighteen months.

The renewed interest in plant and equipment spending is

reflected in growing backlogs at steel plants and the shift in the composition of demand to more plate and structural forms.

Many of our Directors commented on the economic effects of the

current drought in the West and freezing conditions elsewhere in the country.

The following areas of special concern were discussed.

Electric power

The Columbia River flow is now at 68 percent of normal and will

probably fall below that.

The Bonneville Power Administration has already

cut off interruptible power to aluminum and chemical plants.

depend about 25 percent on interruptible power.)

(These plants

In Oregon, the Trojan

nuclear plant came on stream and in December it was operating at 95 percent

of capacity and carrying 40 percent of Portland General Electric*s load.

The fuel cost was about one-seventh of what it would have been using oilfired generating facilities.

Pacific Gas and Electric Co. of California

has a nuclear plant that is finished, but operations will be delayed another

6 to 9 months by the regulatory commission.

One Director states that

there is a heavy inventory of No. 5, No. 6 and No. 2 heating oils, substitutes for natural gas, but there is difficulty getting it to the needy

areas. California utilities have reversed inflow on the El Paso line and are sending

natural gas to Texas.

Exploration for natural gas will not pick up, according

to one Director, until controls on inter-state pricing are removed.

Current-

ly, the intra-state producer is getting about $1.55 per cubic foot whereas

the inter-state producer is getting about $.52 per cubic foot.

Agriculture

Plans for water allocations to farm and residential areas are

underway in most states.

During the past season available water was used in

California's Central Valley for cotton rather than for alfalfa.

This will

make feed grain for cattle exceptionally scarce and cattlemen are now reducing herds.

Prices for agricultural commodities are expected to increase

sharply this year.

So far, however, crops are still in a state of over-

production and farm income continues low.

Industries

The skiing industry was a- total disaster this year and many businesses will probably go under causing problems for bankers.

The only in-

dustry to wring some good out of the current drought is forest products

where the weather has allowed logging operations to continue through the

winter.

Even here, however, the low rainfall is having unfavorable con-

sequences in that the Northwest had a forest fire in January, an unheard of

event before this year.