Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

July 13, 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 10

Fifth District-Richmond page 13

Sixth District-Atlanta page 16

Seventh District-Chicago page 20

Eighth District-St. Louis page 23

Ninth District-Minneapolis page 26

Tenth District-Kansas City page 29

Eleventh District-Dallas page 32

Twelfth District-San Francisco page 36

SUMMARY*

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

Most districts report continued improvement in economic activity and

a generally optimistic outlook for business. Consumer durables are still selling well. Manufacturing and residential construction remain strong. Doubts

persist regarding the likely paths of business investment in inventories and

in plant and equipment.

In the agricultural sector, low prices and drought

are having depressing effects on farm income in some areas. The demand for

bank loans is generally strong, but business loans are weak in some districts.

Reports on consumer spending vary, although most districts note a

continued high demand for durables. Kansas City says retail sales are much

stronger.

St. Louis reports a continued rise, and Chicago a continued vigor

in consumer spending.

Boston observes that retail sales have recovered from

a recent slump. Minneapolis finds slowing growth in retail sales; Richmond

reports little change in the level of retail sales; and Atlanta says retail

trade presents a mixed picture.

Philadelphia describes department store sales

as uneven, while New York calls them "slack" in June.

Strength in durables

is mentioned by New York, Richmond, Atlanta, Chicago, St. Louis, Minneapolis,

and Kansas City. Cleveland finds expectations of a reduced pace of consumer

spending during the second half of 1977, but retailers are reported as optimistic by Kansas City, Boston, New York, and Minneapolis.

In contrast,

Philadelphia describes merchants as generally bearish about the second half

as a whole.

Summer tourism is reported as excellent by Minneapolis and

Philadelphia, but as off to a slow start by Atlanta.

Manufacturing activity continues to increase, but at an apparent

slower rate.

San Francisco finds production still strong in aerospace and

pulp and paper industries.

Dallas notes growing manufacturing output gener-

ally, except in transportation equipment.

St. Louis says manufacturing

appears to have leveled off somewhat, and Philadelphia describes conditions

in the industrial sector as only marginally better.

But Richmond reports

improvement in the manufacturing sector, especially in machinery and electrical equipment.

Boston says its region's manufacturers are experiencing

strong demand, while Atlanta mentions increased demand for certain hard

goods such as castings.

Cleveland reports a mixed recovery continuing in

capital goods industries.

An unusual degree of caution characterizes investments in inventories and capital projects. New York, feels capital spending plans are

slowly gaining momentum, but Philadelphia finds no substantive change

during the month.

San Francisco describes investment plans as mixed, while

Richmond finds manufacturers content with current capacity.

Atlanta sees

an acceleration in industrial building activity, but Cleveland projects a

weakening in steel production.

on inventories.

levels.

Just as inconclusive are the observations

St. Louis describes them as being maintained at very low

Boston and Cleveland, however, report possible overaccumulation.

Kansas City, Minneapolis, and Philadelphia retailers call their inventories

satisfactory; Philadelphia and Richmond manufacturers appear content with

their current levels.

Residential construction is continuing its boom, according to

reports from Atlanta, New York, Chicago, St. Louis, and Minneapolis. Dallas

and Chicago say high occupancy rates are spurring construction of office

buildings, and New York notes an impressive recovery in demand for Manhattan

real estate. Atlanta finds commercial construction is increasing.

Particularly encouraging were scattered comments about lower inflation and inflationary expectations.

pressure on prices.

Philadelphia notes a lessening in upward

Boston says fears of inflation seem to have abated.

Retailers reporting to Kansas City do not expect inflation to accelerate.

New York observes that builders' concerns about inflation appear to be waning,

and New York respondents do not expect reimposition of wage-price controls.

Dallas, however, projects no appreciable slowdown in the current rate of

inflation.

Agricultural developments are touched upon in several district

reports. Minneapolis, Chicago, Kansas City, Dallas, and San Francisco point

to low farm prices. Dallas reports reduced cash flows to Texas farmers due

to low wheat prices.

Kansas City expects a large wheat crop, and other crops

are reported doing very well by Chicago, San Francisco, St. Louis, and

Minneapolis.

Atlanta indicates heavy losses resulting from drought, and a

rise in price for Florida citrus fruit.

Richmond reports being hard-hit by

drought, too, but District farm income is up there nonetheless.

Loan demand is reported as strong by Minneapolis, Richmond, Cleveland,

Kansas City, and, at small banks, by St. Louis.

St. Louis finds business

loans demand relatively low at large banks, while Philadelphia says business

loan demand is still weak although consumer loans are generally increasing.

San Francisco reports a very modest growth in business loan demand. Chicago

sees little change in the generally sluggish loan demand for large businesses.

FIRST DISTRICT—BOSTON

First District directors and businessmen report a- continuation of the

favorable trends that have characterized most of the past six months. The

region's manufacturers are experiencing strong demand. Retail sales are well

above a year ago, although somewhat less than retailers expected. Price

increases are more moderate than in the first quarter and, as a result, fears

of inflation seem to have abated.

In general the outlook is for steady growth.

Retail sales have recovered from what appears

slump.

to have been a slight

Sales are significantly above the level of a year ago, although the

increase is a little less than the industry expected.

However, because the

last couple of weeks have been particularly good many retailers are quite

optimistic.

One major retailer in the region reported that inventories are

higher than desired.

fully.

They are not accumulating, but are being watched care-

He feels that this situation is quite widespread in the trade and, in

addition, that manufacturers as well as retailers are being very cautious

regarding inventory buildup.

On the other hand, a June survey of purchasing

agents indicated that a majority of those surveyed plan to increase their

inventories slightly because the delivery times for some industrial products

and materials are getting longer.

Manufacturing activity in New England is continuing to recover.

Business expectations are favorable: most foresee aa extended period of

moderate growth. At present demand is particularly strong for building

supply products, like hardware.

Manufacturers of automobile parts are doing,

well and in Connecticut the defense-related industries are having a good year.

Fears of inflation definitely seem to have moderated. Recent price

increases are reported to have been numerous but generally modest. Most

respondents expect continued gradual increases.

Capacity limitations are not creating any problems for New England

firms, even those experiencing particularly strong demand. There have been

no unusual difficulties in obtaining materials although one durable goods

manufacturer expressed concern about the energy situation next winter.

Nationally, a local economic consultant specializing "in the process industries

reports that there continues to be no danger of shortages during 1977.

Professors Eckstein, Houthakker, Samuelson, and Tobin were

contacted this month for their views on the appropriate long-range monetary

growth taVgets.

There was no sentiment for changing the targets from the-ir

current values.

This unanimity, however, masked a divergence in views about

where the economy ought to be headed.

Houthakker stated that the

Administration's long-term economic outlook could not be attained with the

present monetary targets. He feels the Administration is willing to live

with too high inflation and is too optimistic about real growth. He believes

that the present targets are consistent with 4 percent increases in prices

and output which would produce continued gains in employment though only a

small decline in the unemployment rate. The stubbornness of the unemployment rate is due to large increases in the labor force which cannot be dealt

with by monetary and fiscal policies.

Eckstein's long-term forecast—4.6 percent real growth and a 5.6

percent inflation rate through 1980—is based on top-of-range monetary growth

and moderate increases in interest rates of the next year. He believes it is a

probable and desirable compromise between "a dash to full employment" and "a

dash to deflation." He argues it would be a mistake to aim at targets lower

than those on which his forecast was based.

Samuelson's target is a 5.5 percent real growth rate. The present

monetary growth targets would prove adequate if we are lucky enough to benefit

from favorable exogenous shocks on the price front—if for example, "Congress

does not frustrate Nature's desire for lower food prices by instituting price

support programs."

The growth targets can be met with moderate (50-75 basis

points) rises in the federal funds rate if the inflation rate is 4 1/2 percent but with large (150-200 basis points) increases if inflation holds in

the 6 to 7 percent range.

Tobin feels that monetary policy targets should be expressed in terms

of desired rates of growth of nominal GNP rather than money stocks. The

present procedure places undue weight on the highly speculative question of

velocity behavior.

Money stock targets are not sacred and, as Chairman Burns

has pointed out, have different implications depending on the behavior of

velocity. Policy goals should be a revival in business investment and a

balanced budget in the early 1980s. These goals can only be achieved with

continued real growth and high employment.

'The major concern for investors

is the fear of a collision between the recovery and the money targets. Business

investment has been held back by both high capital costs and by expectations

of sagging sales and profits in the years ahead.

SECOND DISTRICT—NEW YORK

Economic activity in the Second District continues to gain according

to reports from directors and other business leaders contacted recently. While

department store sales slackened in June, demand for consumer durable goods

remained strong and merchants view the outlook as favorable. Real estate and

residential construction activity have posted solid gains and inventories df

unsold homes are in good balance with sales.

Capital spending plans in the

Second District appear to be slowly gaining momentum.

Respondents apparently

discount the possibility that wage-price controls will be reimposed in the

foreseeable future.

Current labor supplies are adequate for the most part,

but a few shortages of skilled labor have emerged.

Department store sales were described as sluggish in June. The

chairman of a large apparel company characterized sales in the first part of

June as the worst in three months. Another retailing executive attributed

the sluggishness of sales to the warm weather in Hay which had encouraged purchases

of seasonal apparel that would normally have taken place in June.

For the most

part, it appears that the slowdown was concentrated in nondurable goods. Despite

this softening, all of the retail executives contacted were optimistic about

the outlook for merchandising.

One retailer emphasized that care would be

required in interpreting July retail sales data. He pointed out that July is

traditionally marked by clearance campaigns, and sales are thus more likely

indicative of the size of markdowns required to move unsold goods than of underlying demand.

Outside of department stores, strong demand for consumer products

was reported by several respondents.

A supplier of electrical components

to the appliance industry reported shipments running well ahead of the

near-record pace of the previous year.

In addition, a major producer of

components for writing instruments was experiencing excellent sales and was

operating at full capacity.

The continued improvement of the regional economy was also

reflected in a pickup of real estate activity and residential construction.

According to the president of a real estate management company, demand for

Manhattan real estate has been recovering impressively.

Blocks of prime rental

space are now scarce, with the large vacancies concentrated in secondary or

less desirable buildings.

In New Jersey, the president of a large mortgage

banking firm held a sanguine assessment of the outlook for single-family

construction. . In his judgment, while housing prices are high, financing costs

are being met-through the contribution of working wives and/or moonlighting

on the part of breadwinners.

Barring an unforeseen tightening in credit, deferred

demand remains unsatisfied and construction activity is expected to continue

to advance.

Furthermore, builders' concerns about inflation appear to be

waning, so that cost escalators are no longer being built into sales contracts.

Businessmen continue to keep a close watch on inventories.

As a

consequence, inventories generally remain in good balance with sales. Petroleum

inventories, which experienced a sharp rundown last winter, have returned to

normal levels and were reported to be well above the level of a year ago. The

chairman of an international oil company felt that summer gasoline prices could

weaken as a result. Reports from the chemical industry suggest that inventories are satisfactory.

Capital spending appears to be slowly gaining momentum.

On the

negative side, the president of a major life insurance company reported that

businessmen are hesitant to increase their capital spending plans because the

outlook for profits remains uncertain. More positively, a major automotive

producer has a $22 million plant under construction in the Rochester area.

Elsewhere in Western New York, capital spending by industry was described as

moderate. Reporting on the agricultural sector in Upstate New York, one

director indicated that investment in both fixed assets and equipment was

exceptionally strong.

In New Jersey, a manufacturer of plastic products is

planning near-record outlays on machine tools in order to meet robust demand.

Contributing to the positive outlook, directors and businessmen

generally did not expect a reimposition of formal wage and price controls.

One industrial economist felt that the appointment of Mr. Barry Bosworth as

director of the Council on Wage and Price Stability was suggestive of some

greater attempts to keep the lid on prices. However, this respondent expected

these to be more in the form of "jawboning" than actual controls.

In the view

of the chairman of a maj-or New York City bank, an informal program of price

controls already appeared to be in effect. He expects to see a reaction by

the Administration to large price increases similar to the reaction to recent

increases in bank prime rates.

While labor supplies were considered adequate

ages of certain skills were noted by respondents.

overall, some short-

In the upstate area, the

Buffalo directors reported a slight shortage of skilled workers—most notably

qualified draftsmen and engineers. A manufacturer of plastic products reported

that production was limited somewhat by an inadequate supply of skilled toolmakers

and mold designers.

THIRD DISTRICT - PHILADELPHIA

Economic activity in the Third District is showing fewer signs of

strength in July. Department store sales are uneven, and conditions in the

industrial sector are only marginally better after improving steadily since

January.

New orders and shipments show little change this month, and inventories

are holding steady as well.

Employment in manufacturing is up minimally, but

the workweek is unchanged.

For the longer term, retailers anticipate continued

softness, while manufacturers look for a pickup in business conditions. However, there has been no substantive change during the month in the capital

spending plans of area manufacturers.

Bankers report that consumer loans are

generally increasing, but business loan demand is still weak.

Resort areas in

the district are having an excellent season so far, and prospects for the rest

of the summer are good.

Manufacturers responding to this month's Business Outlook Survey

report that general business conditions are only marginally better than in June.

Twenty-three percent of the executives surveyed say that business has improved

this month, while 15 percent indicate a slackening.

8 percentage points is the lowest since December.

This "net improvement" of

Both new orders and shipments-

are unchanged in July after increasing last month, and inventories are holding

steady for the third month in a row. At the same time, factory employment is up

fractionally, and the average workweek is unchanged.

Each of these showed

slight improvement last month.

Despite the lack of bullishness at the moment, manufacturers are

optimistic about economic conditions over the next six months.

Seventy-three

percent of those polled expect business to improve by January.

Specific increases

are projected in new orders, shipments, and inventories, and gains in employment are expected as well. Twenty-five percent of the respondents plan to

hire additional employees by the beginning of next year, and 28 percent expect

to extend working hours.

Increases in capital spending are anticipated at one-

third of the sampled firms—about the same as last month.

Prices in the industrial sector continue to climb, but at a markedly

slower pace than in the first half of this year.

Forty percent of the respon-

dents to the current survey report paying more for inputs, while 23 percent are

receiving higher prices for finished products.

reporting such increases since mid-winter.

These are the lowest proportions

By January, 88 percent expect to be

paying more for supplies, and 78 percent anticipate receiving higher prices for

the products they sell.

Department store sales in the area aEe mixed.

Reports of current

dollar sales range from 9 percent above to 5 percent below year-ago levels.

In general, sales are equal to or below expected levels.

Stores in the immediate

Philadelphia area are experiencing slower sales than those in other areas of

the district.

Retailers indicate that inventory levels are generally satis-

factory, and that their desired inventory-sales ratios are lower than they were

a year ago.

Over the next six months they expect to maintain the current ratio

or increase it slightly.

Merchants are looking for a modest pickup of sales in the third quarter, but are generally bearish about the second half as a whole.

While one

expects year-end sales to be 12 percent above December '76 levels, most of those

contacted project gains in the 5-6 percent range.

Reports from the Pocono Mountain and South Jersey shore resorts

indicate that business has been better than expected so far this season, with

record crowds over the Fourth of July weekend.

Contacts in these areas attribute

this to good weather conditions, improvements in the economy, and, in Atlantic

City, the imminent beginning of casino gambling.

In that city, some tourists

have been attracted by the mistaken belief that they could gamble already,

while others have come for one last look before the onset of the casinos. In

addition, favorable weather has given a boost to commercial and sport fishing.

Prospects for the rest of the season are good.

Inquiries and advance reserva-

tions are said to be well ahead of last year's levels and much higher than

expected in both resort areas.

Area bankers report that while consumer loan demand is generally

strong, business loan volume remains weak.

There is some pickup noted in busi-

ness borrowing by regional customers, but totals are being kept down by a

depressed national market.

One local bank is making loans outside the Phila-

delphia area at rates below prime in order to attract borrowers in those

regions. All of the banks contacted have maintained their prime rata at 6 3/4

percent, and no reduction is anticipated.

Bankers do not appear to be concerned about excessive deposit outflows

as their "wild cards" mature.

Some, however, have recently raised CD rates to

the legal maximum, and are giving holders of "wild cards" advance notice of

debenture offerings in an effort to retain those customers.

For the rest of the year, bankers' expectations about business borrowing are mixed. A few look for moderate gains, but one banker contacted anticipates no movement at all. Interest rates are expected to be steady or move up

gradually with a prime by year-end in the 6 3 / 4 - 7 1/4 percent range.

FOURTH DISTRICT—CLEVELAND

A moderated rate of growth in economic activity during the second

half of 1977 is generally expected in the Fourth District.

A reduced pace

in consumer spending, lower output in steel, and a slower rate of inventory

accumulation account for the expected moderation in overall activity. Capital

goods recovery continues rather mixed.

Bankers report strong loan demand

and a few expect liquidity pressures may develop in the months ahead.

Directors, financial officers, and economists contacted generally

expressed confidence that the economy will continue to expand for the next

several quarters but at a moderated pace from the first half of 1977. Auto

sales and housing are expected to either ease or show smaller gains in the

second half of the year as consumers take on new debt less rapidly than they

did during the past several months.

Opinions vary on whether consumer spending will be sustained at

recent high rates. Automobile retailers remain optimistic for this year.

One bank economist expects 1978 new car sales to increase 5 per cent from

this year. The. home remodeling business continues very strong, although- an

economist.with a major department store chain headquartered in the District

commented that gains in general merchandise sales remain below those previously experienced at this stage of an expansion.

Steel economists expect production in the third quarter will drop

about 5 to 10 per cent from second quarter levels. They are optimistic,

however, that output this half will be much stronger than in the second half

of last year because steel consumption is stronger and inventories are not

nearly as large as last year's.

One economist expects the industry's

operating rate to average about 80 to 82 per cent capacity this quarter

and in the mid- to high-80's next quarter.

Expectations are that the recent overall inventory buildup will

slow this half.

The buildup in recent months has been both voluntary and

involuntary according to a number of economists.

Firms with rising sales

trends expect to continue rapid buildup in the months ahead, if not into

early 1978, to protect higher production schedules.

Steel inventories,

increase last quarter partly as a hedge against price increases, are not

judged to be as excessive as they were last summer.

On the other hand, last

quarter's rapid building in crude oil and motor gasoline have placed inventories well above a year ago.

increases.

Refinery output may be cut back unless demand

A retailer estimates that general merchandise inventories,

especially in apparel and home furnishings, have been built up too rapidly

in recent months, with the result that adjustment of these inventories will

last through the fall.

Inventories of conventional tires have been rebuilt

following depletion caused by the rubber strike last fall.

Radial tire

stocks still remain low.

Some capital goods producers experiencing a sharp rebound in orders

earlier in the recovery have noted a flattening in recent months.

This is

especially the case with a large machine tool builder who expects that 12

to 13 per cent gains in plant and equipment this year and again next year

are about the maximum that can be expected.

Oh the other hand, orders for

printing, communications, and electronic components business are running

about 25 per cent ahead of shipments according to one producer, and demand

for new technology and labor-saving equipment will remain strong. Latecomers in the capital goods recovery, including construction machinery and

overhead cranes, are gaining strength in response to improving dealer inventories and increased construction activity.

Several bankers in the District expressed a view that continued

strength in all types of loans, including commercial and industrial, would

lead to upward pressure on short-term rates.

Some report that recent in-

creases in loan demand are unlikely to taper off in the summer months as

is typically experienced.

Therefore, for the first time since 1974, liquidity

may be run down and banks will likely step up issuance of CD's.

Inability

to roll over CD's could squeeze the liquidity of small banks in farm areas

of southwestern Ohio and northern Kentucky.

Some of these banks have loan-

deposit ratios of 70 to 80 per cent that reflect farm loans in support of

the high cost of farm machinery.

One banker also noted a recent switch

by correspondent banks from sellers to buyers of Federal funds.

Upward price pressures appear to have lessened in recent weeks.

Several directors and economists commented on the moderation of prices in

glassware, containers, some petrochemical products, and raw materials used

by the construction industry.

Preliminary results from this bank's latest

monthly manufacturers' survey show that the proportion of respondents who

expect price increases in July is the lowest in several months. The latest .

labor contract settlement completed by a firm in the District includes an

8 per cent yearly wage hike, which was generally better than expected.

FIFTH DISTRICT - RICHMOND

Responses to our latest survey of Fifth District business conditions

suggest continued moderate expansion of activity during June, In the manufacturing sector, shipments, new orders and backlogs of orders rose further during the month. Much of this improvement, however, was accounted for in the

machinery and electrical equipment industries. Retailers report little change

in the overall level of sales, although there was apparently some increase

in relative sales of big ticket items.

Employment was up slightly among manu-

facturers and unchanged among retailers, and manufacturers also report some

lengthening of the work week.

Employee compensation was up broadly among

respondents, as were other prices paid, but there was no apparent deviation

from the trend of. recent months. Most manufacturers surveyed remain content

with current inventory levels and with current plant and equipment capacity.

Concerning the outlook for the next six months, most respondents foresee

little change in the level of activity, although a sizeable minority anticipate

continued improvement*

Demand for bank credit remains strong in the District.

Among manufacturers responding to our survey approximately one-third

experienced increased levels of shipments, new orders, and backlogs of orders

during June. Of these indicators the volume of new orders apparently showed

the strongest performance with reports of increases more than double reports

of declines.

Expansion of manufacturers' inventories was somewhat greater than

in May, but more than two-thirds of the respondents view current levels as about

right. Manufacturing employment rose only slightly during June, according to

our survey, and the manufacturing work week was extended at a few responding

firms. Prices paid by manufacturers, including employee compensation, rose

broadly, but only a few firms report receiving higher prices.

Current plant

and equipment capacity and current expansion plans continue to be viewed as

about right by most manufacturing respondents.

Among individual industries, only the machinery and equipment and

electrical equipment groups report consistent, across the board, improvements.

Performance in the textile and apparel industries continues mixed and no

industry-wide patterns are discernible. Employment has expanded rapidly in

the textile industry in recent months, but has yet to return to 1974 levels.

Reports from the furniture industry indicate only slight and scattered improve

ment in the level of activity over the past month. Much the same is true of

District firms in the chemicals and primary metals sectors.

In the retail sector, sales of responding firms were flat in June

although one-third of those surveyed report relative increases in sales of

big ticket items.

Inventories at retail were unchanged to slightly lower in

June. Two-thirds of 'the retailers surveyed- report higher average hourly

earnings for employees, and one-half report that other prices, paid and received, were higher last month than a month earlier.

Manufacturers' expectations for the next six months remain basically

optimistic, but slightly over one-half of the respondents foresee no change

in the level of activity nationally, locally, or for their respective firms

during that time period. Very few expect conditions to worsen. Two-thirds

of the retail respondents expect no change in the level of activity nationally

or locally within six months, but one-third anticipate some improvement in

their own sales.

In the banking sector credit demand continues strong as undiminished

demand for consumer installment loans is accompanied by steady increases in

demand for business loans. Large District banks have recently returned to the

CD market as an additional source of funds.

Drought conditions and record-breaking temperatures highlight the

District's agricultural situation. Dry, hot weather has taken its toll of

some crops —

especially com, hay, and pastures —

in wide sections of

Virginia and South Carolina and to a lesser extent in North Carolina. The

drought-stricken corn crop is being cut for silage and hay in a few areas.

Some Virginia and South Carolina farmers are selling their cattle because

of poor pasture conditions. Thousands of chickens and turkeys have died in

North Carolina from the tremendous heat built up inside truck coops as they

were being transported from farm to market.

District farm income continues to run well ahead of last year, registering a 9 percent increase during the January-April period compared with

less than a 1 percent gain nationally.

Record high prices, improved quality,

and sharply larger volume characterized the marketing season for the 1976

crop of Southern Maryland tobacco.

SIXTH DISTRICT - ATLANTA

An unsettled pattern dominated the Southeast's midsummer economic

climate, reflecting current or past aberrations in weather. Agricultural

production continues to suffer ill effects from the drought. Tourist traffic

made a late start this year; and retail trade presents a mixed picture.

Rapid gains in residential construction continue, while commercial and industrial building activity is accelerating.

experienced, increased demand.

Certain hard goods producers have

Some manufacturers are attempting to insu-

late themselves from impending energy shortages.

fruit and lumber are rising.

Prices for Florida citrus

Savings and loan association activity continues

to increase.

The drought has taken an increasing toll on District farm revenues,

depressing sales in stricken areas, though late June showers gave hope for

recovery of some late-planted crops. Projections of this year's crop losses

have mounted to several hundred million dollars. The corn crop is nearly

a complete failure. In some areas where com has withered, herbicides

applied to aid the corn crop now prevent replanting in soybeans because

rainfall has been inadequate to dissipate the chemicals.

Extensive damage

to hay raises the possibility of a serious shortage this winter. Forced

liquidation of cattle continues to depress prices.

Peanuts and tobacco

are seriously threatened, as are soybeans in some areas.

The cotton crop

is holding up well; however, rice, sugarcane, and some vegetables appear

to be relatively unaffected.

One hundred and thirty Georgia counties are

receiving Federal disaster assistance; thirty-five of these were already

in an emergency state because of worm infestations which plague the cotton

and tobacco crops.

Florida's tourist traffic improved noticeably during June, following a series of below-average months.

Sources indicate that the extended

school year in northern states caused by severe weather delayed the normal

seasonal influx.

In contrast to its uniformity during the earlier months of this

year, consumption spending now exhibits wide variations in strength. Auto

sales remain generally strong, but exceptions have grown more numerous.

Some areas report flatness, and some note actual slippage, except for

imported models.

Used car sales, particularly of large models, are poor

in parts of Florida.

In a drought-stricken area of Alabama, new car sales

are suffering; used car sales are up in number,, but profits have fallen.

The same spottiness is found in department store and apparel sales. Again,

the greatest weakness occurs in hard-hit agricultural areas.

yearly gains range from 6 to 12 percent.

Elsewhere,

Sales of retailers, particularly

pleasure boat dealers, in parts of Florida have flattened; this trend may

also reflect the late-starting tourist season.

ing are mixed in tone.

Reports on consumer borrow-

One source reports that collections are slow, while

another reports declining repossessions.

Rapid gains continue in residential construction, according to

directors' reports from many areas of the Southeast.

Single-family home

building is up 25 to 60 percent from year-ago levels for the first half

of this year. The most rapid gains are in the previously depressed Florida

market.

In Alabama, lots are being sold from plats before roads are built;

homes are also being sold before completion.

Some sources regard the sales

pace as unsustainable; in Tennessee, sales resistance to high home prices

is noted. Multifamily residential construction, the core of "Florida's

oversupply problem, is also reviving.

Apartment vacancies have fallen sig-

nificantly and rents are rising. Absorption of condominiums in South Florida

has accelerated.

Construction of new condominium units is being started,

and some apartment units are being converted successfully to condominiums.

But in other areas, there remain condominiums where no units have been sold.

Commercial and industrial construction activity is also on the

rise.

In parts of Florida, small building construction is keeping con-

tractors busy and inquiries about future projects are increasing.

Commer-

cial and industrial construction activity in rural Tennessee is showing

considerable strength.

Some hard goods producers such as manufacturers of castings for

the auto and farm implements industries arg enjoying strong demand. A

large manufacturer of railroad equipment anticipates a sharp increase in

business during the second half of the year, barring problems in upcoming

labor talks. However, pipe and structural Steel fabricators still face

slack demand conditions. Pulp and paper industry conditions are stable,

despite a continuing surplus of pulp inventories.

The severance tax on

Florida phosphate producers has been increased from 5 percent to 10 percent

of the value of extracted minerals; some firms report losses of sales to

foreign competitors. Manufacturers in several parts of Tennessee are bracing

for another winter of energy shortages; they anticipate natural gas cutoffs

as a result of reduced deliveries from producers to local distributors.

Stand-by energy systems are being installed; but for some companies, capital

costs are a deterrent to such investments.

Futures prices of citrus products have risen as buyers, fearing

that last winter's freeze damage may reduce next season's crop, attempt to

guarantee their supplies. Growers caution, that many buyers may hold contracts .apd take delivery; they feel that the number of contracts outstanding

should be watched closely to preserve an orderly market.

Citrus juice price

increases have not immunized Florida growers from financial losses.

Sub-

stantially lower juice yields, stemming from the effects of last winter's

freeze, have resulted in higher unit costs of harvesting, processing, and

transp or tation.

Elsewhere in Florida, reduced demand for ground coffee as a result

of high prices has resulted in a layoff of one-quarter of the work force at

the nation's second largest coffee plant.

Full production is expected to

resume in late summer. Lumber prices continue to rise, reflecting the

strong pace of construction activity.

Savings and loan associations' activities continue to expand.

During July, a Florida association will open an office contained in a supermarket, the first facility of its kind in that state.

Savings inflows and

loan demand are generally strong. Two savings and loan associations in

Alabama have raised their real estate loan rates to 9 percent.

Banks in

Tennessee have benefited from an increase in the spot price of coal, which

has permitted payment of delinquent loans and thereby reduced loan losses.

SEVENTH DISTRICT - CHICAGO

The general business outlook in the Seventh District appears favorable

through 1977 and into 1978. Widespread confidence that activity will continue

to expand, however, is tempered by an unusual degree of caution in making commitments to invest in inventories or substantial capital spending projects beyond

obvious requirements.

Consumer spending continues vigorous, especially for durables.

The housing market has lost some of the "frenzy" of last spring but retains

great momentum.

Crops are growing well in virtually all areas of the district.

Few basic products, either raw materials or components, are in short

supply, but there are complaints of limited availability of rail and highway

transportation.

A major producer of building materials, for example, says both

fr&ight cars and trailers have been short and some units furnished have not been

usable. An analyst of the trucking industry has argued for several months that

a capacity crush was developing in highway transport and that orders for new

trucks and trailers, while up sharply from last year, were not rising at an

adequate pace. A major Western railroad has been pleased with the pickup in

important classes of traffic this year.

This line recently ordered 124 new loco-

motives, compared to none in 1976. Track maintenance work has been increased

substantially.

Purchasing managers in Chicago and Milwaukee reported continued gains

in output, employment, new orders, and order backlogs for June.

continue upward at about the rate of recent months.

Prices paid

Inventories are increasing

only moderately. Most companies expect the expansion to continue well into

1978.

Inflation is the number one concern.

The improvement in demand for capital equipment is still underway, but th

heavier types of equipment are still lagging. On the whole, the picture is somewhat disappointing with the expansion at a relatively advanced stage. A number of

large capital goods producers are taking longer vacation shutdowns this July, up

from two to three weeks, as required by union contracts.

Consumer spending still buttresses the expansion, with emphasis on durabl

goods. Credit is being used freely with fewer collection problems. Larger purchases of durables, including most types of appliances, have helped the performance of large chains specializing in these goods.

Production schedules for cars and trucks have been increased, at least

for the most popular models, as a result of strong sales.

Sales of recreational

vehicles are reported to have rebounded vigorously after a slump that followed

the President's energy messages in April.

Office space occupancy in the Chicago area has returned to 1972 levels.

Construction of three sizable (not "giant") office buildings is now definitely

slated for the Loop, and other sites are under active consideration.

analysts expect an office "space crunch" in two to three years.

Some

On the other

hand, few new shopping centers are underway or planned. Moreover, rents must

rise substantially further to justify large new apartment buildings.

plans for such buildings are again under active consideration.

Even so,

A large supply

of vacant industrial buildings exists in Chicago and other large district centers. Most new industrial buildings are either specialized types or are expansions of existing properties.

The frenzied demand for single-family homes appears to have moderated

somewhat.

The picture is somewhat clouded because of seasonal trends. Also,

some builders have stopped taking orders for this year or have pushed out

delivery dates from the usual four to five months to seven to 12 months. Finally,

buyers have begun to show resistance to rapid price increases. Apartment building

has picked up, but with more buildings of only four to 12 units.

Several large

apartment units are being converted to condominiums, with rapid sellouts if prices

are right.

Some S&Ls have stopped accepting mortgage loan applications except from

customers.

But "customer" is defined broadly to include referrals from builders

or brokers with whom the lender has a "relationship."

percent 25-year loans is still 8.75 percent.

pected.

The typical rate on 80

No severe credit stringency is ex-

Capacity to process loans is taxed, however.

Savings inflows have held

up well, and loan repayments are very large. Large S&Ls are more interested in

obtaining funds from sales of large CDs.

Substantial funds could be borrowed

from the FHLBs.

Recent declines in prices of major crops, paced by soybeans, have disturbed some bankers with substantial portfolios of loans to farmers.

Growing

conditions are favorable, much better than had been expected earlier in the year.

Higher livestock prices, partly reflecting reduced estimates of pork supplies in

the second half, have eased concerns of bankers emphasizing livestock loans.

Most banks see little change in the generally sluggish demand for loans

from large businesses. Many large firms have ample internal cash flows. Some

have sizable holdings of Treasuries that could be liquidated.

Sales of securities,

including private placements, have reduced needs for bank loans. Medium- and

smaller-sized firms have been using bank lines all through the expansion.

banks have been seeking out smaller companies more aggressively.

trend toward reducing, even eliminating, compensating balances.

Some

There is a

EIGHTH DISTRICT—ST. LOUIS

The Eighth District economy continues to expand., but at less than

the rate of gain achieved earlier this year.

rise in most areas of the District.

Consumer spending continues to

Manufacturing activity, after' large gains

from February through May, appears to have leveled off somewhat. Home construction remains at a high level, but home sales have declined in recent

weeks. Agricultural conditions are generally good.

remain at a low level.

Inventories generally

Business loan demand remains relatively low at large

banks, but loan demand at smaller banks is strong.

Consumer spending in June, as measured by retail sales, was about 10

per cent above the dollar level of a year ago, or about 4 per cent above a

year ago in real terms.

One retailer noted that the strongest selling items

were weather-related goods, such as air conditioners, fans, and watering

equipment.

Automobile sales are still strong, but have apparently remained

level in the past 2 or 3 months.

The rate of increase in manufacturing activity apparently slowed in

June and early July after sizable gains earlier this year. A representative

of a major chemical firm notes a relatively high level of incomeing orders, but

finds little change from a month ago.

Some weakness was reported in a few

items such as plastics. A boxboard manufacturer reported strong sales gains

in March.through May, but a leveling off in June.

Firms producing consumer

products, including apparel, shoes, and appliances, also noted little change

in orders in the past 2 months.

Steel shipments were reported to be strong

in the second quarter, but are expected to decline more than seasonally in

the third quarter and pick up in the fourth quarter.

Defense-related

manufacturing is generally at a high level and continuing to gain strength as

real defense spending increases. A representative of a paint and coatings firm

reports good sales and profit gains in recent months.

On the other hand, a

manufacturer of telecommunications equipment has experiended weak demand.

Home construction remains one of the strongest sectors in the District.

The value of newly constructed single-family dwellings in the St. Louis area

is more than double that of a year ago. During the spring, sales outpaced

construction; however, builders report that sales have declined in recent weeks.

Single-family homes have been the strongest part of the housing market, but

apartment construction has made gains. Much of the recent gain in the apartments, however, involves projects with Government financing.

A construction

representative noted that further increases in rents-will be necessary before,

a substantial boost in privately financed apartments can be expected. Rent

increases in the St. Louis area over the past 5 years have been small relative

to increases in other major cities.

Currently, apartment dwellings in

St. Louis are virtually at full occupancy.

A "shortage" of skilled workmen in the home building industry continues in the St. Louis region. Workers are now coming from out of town and

the number of apprentices is increasing.

Builders also report delays in

procurement of certain building materials.

For example, the delivery time

for bath tubs and a number of other plumbing items has increased from 7 to

as much as 30 days.

Recent rains have greatly improved crop production prospects over

most of the District, although a few areas continue to report drought conditions.

Cotton is reported to be in the blooming stage and is generally in

excellent condition.

About 20 per cent of the cotton crop is reported to be

sold forward.

Soybean plantings were delayed in several areas and this crop

is somewhat behind schedule.

The corn and tobacco crops are reported to be

in excellent condition in most areas of the District.

The recent rains have

caused a slowing in cattle sales in the District as the pasture and hay crops

have improved.

Both manufacturers and retailers report that inventories are being

maintained at very low levels. Retailers have been especially cautious about

the buildup of inventories during the current expansion. A representative of

a major steel company reported that both steel manufacturers and steel fabricators were carrying a month less than the normal supply of inventories.

Representatives of the larger banks in the District continue to

report sluggish demand for business loans. However, some expect such demand

to gradually rise over the second half of the year as business inventories

are increased.

Loan demand at smaller banks is generally strong, reflecting

rising demand for consumer, real estate, agricultural, and small business

loans. Bankers are generally expecting a modest rise in interest rates of

50 to 75 basis points for short-term paper and 25 to 50 basis points for

long-term by the end of the year.

Savings and loan associations report rising demand for mortgages, reflecting the high demand for new and older homes.

On the supply side, however,

these institutions have had sizable increases in net savings in recent weeks,

particularly since mid-June.

One savings and loan association, offering maxi-

mum interest rates, reported that some funds are now being received through

brokers on the East coast where rates are below maximum levels. Mortgage

interest rates have generally remained unchanged over the past month.

NINTH DISTRICT - MINNEAPOLIS

The district's midyear economic situation is q.uite hopeful,

except in the agricultural sector. Retail sales growth recently slowed,

but autos are selling well and merchants are looking for a good autumn.

Homebuilding is strong. Tourism is excellent. And unemployment has

been falling. But, despite better moisture conditions, worries about

low ag prices make agricultural conditions a concern.

The current

expansion in the nonfarm sector and refinancing in the farm sector have

boosted loan growth. The strength in loan demand, along with a slowing

in deposit inflows, has resulted in some declines in liquidity.

Consumer Spending: Major Minneapolis-St. Paul area .retailers report

some slowing in June sales gains after fairly strong sales this past

winter and early spring. Several think this letup was caused by early

June's unseasonably cool weather which cut into.summer apparel sales.

Furniture, appliances, and other hard goods', on the other hand, have

been moving quite well in the region's urban areas. But concern over

farm incomes is holding back rural customers' catalog purchasing.

District retailers don't expect a great pickup in sales in July and

August, but their outlook for this fall is quite optimistic.

A late June survey of district automobile distributors shows

recently strong auto sales. Major manufacturers are enjoying sales

gains of 10 percent or more above last year's May-June period.

Production Activity: While nonagricultural activity is expanding quite

vigorously, concerns continue about the agricultural situation.

Homebuilding is strong. District housing unit building permit

authorizations (at a seasonally adjusted annual rate) so far in 1977

have risen well above 1972's record level.

Single-family units make up

much of the renewed growth in housing activity. With the current high

level of loan commitments at S&Ls, strength in this market should continue. A significant pickup in the multiunit market over the near term

is not likely. Additionally, district nonbuilding and nonresidential

construction have improved this year.

Despite this rather bright outlook, capacity constraints could

curb further increases in homebuilding.

Carpenters are in very short

supply in the Minneapolis-St. Paul area. The demand is also strong for

roofers, plumbers, electricians, and bricklayers.

The region is enjoying a good tourist season. Minnesota and

Wisconsin resorts, full over the July 4 weekend, expect business to

remain excellent through July and August.

The agricultural, situation is not nearly as encouraging.

Prices, rather than drought, are the main concern. Moisture conditions

are ample in most of Minnesota and South Dakota.

Some dry areas remain

in Montana and North Dakota. The weather's dramatic turnaround is

maturing crops two to three weeks faster than normal.

But prospects of

abundant crops and large carryovers will likely exert more downward

pressures on grain prices. Feeder and slaughter cattle prices remain at

unprofitably low levels too. Hog prices, however, have increased in

recent months and should remain profitable through the summer.

Inventories: Although unanticipated weakened sales in early June resulted

in some unexpected inventory build-up, most major retailers view their

inventories as satisfactory.

Regional car distributors consider dealer

inventories to be about right in light of expected sales.

Financial Sector Developments: Mirroring nonagricultural and agricultural

developments, loan demand at district banks and S&Ls has been strong.

The recent strength in homebuilding has brought a large increase in

mortgage lending and no letup is foreseen.

Business loans at large

district banks have increased at a 33 percent annual rata during the

first half of 1977, compared to a 5 percent increase nationally.

This

broadly based growth is due to increased financing of manufacturers'

stocks and accounts receivable, of commodity dealer loans reflecting

higher soybean prices, of automobile financing by dealers, and of interim

construction.

Our faster rate 'also stems .from regional banks lending

mostly to smaller businesses with limited financing options. Moreover,

due to last year's drought and falling prices, farmers have felt the

need to renew loans, greatly increasing farm debt outstanding.

As in the nation, time and savings deposit inflows have recently

slowed at district S&Ls and banks.

Consequently, liquidity positions at

district financial institutions have tightened, but no immediate problems

meeting the district's credit demands are expected as a result.

Other:

Improved district nonfarm activity has influenced labor markets.

This spring's unemployment rate, seasonally adjusted, was 5.4 percent,

compared to 6.3 percent in the final months of 1976.

Furthermore,

recent increases in both average weekly hours worked in manufacturing

and help wanted advertising point toward further job growth.

TENTH DISTRICT—KANSAS CITY

Tenth District retailers report sales in May and June to be much

stronger than in preceding months, with durable home goods leading the way.

Retail inventories are generally viewed as satisfactory. None of the businessmen surveyed expect an acceleration of inflation during the last half

of the year. The wheat harvest is proceeding, and preliminary estimates

suggest a large crop.

Bankers in the Tenth District report continuing

strong loan demand.

Retail sales in May and June, at large department stores in major

metropolitan areas of the Tenth District, were generally much stronger than

in March and April, and also stronger than in the same period a year ago.

Most- respondents report business to be at least as good, and often better,

than they had expected earlier this year. Durable goods sales tend to be up

more than sales of soft goods. Furniture, major appliances, carpeting, and

other home furnishings are selling very well.

Several businessmen relate

such sales to a housing boom in their areas.

Store managers in both Kansas

City and Omaha note an improvement in peoples' confidence, some of which they

attribute to better weather for agriculture.

Nearly all of the retailers surveyed report that their inventories

are in satisfactory condition.

In some instances, this means higher stocks

than last year; in other instances, lower.

Where inventories are slightly

out of line, improving sales in the second half of the year, or special

sales promotions, are expected to correct the situation.

Virtually none

of the respondents expect to cut back on their purchasing to correct an

inventory imbalance. None of the major retailers are encountering any

shortages of goods, nor are they experiencing any trouble with their suppliers.

With few exceptions, the businessmen surveyed are optimistic about

the continued strength of consumer spending and retail sales in the second

half of the year. None of them believe that the rate of inflation will accelerate during the rest of 1977.

Sales of new automobiles, both foreign and domestic, continue to

be strong in the Tenth District.

Some sellers of domestic cars are experi-

encing difficulties in achieving the right inventory mix as the model year

comes to an end, while most foreign car dealers report stocks much lower

than they would like them to be.

In general, both foreign and domestic

dealers expect continued strength in sales into the 1978 model year.

The wheat harvest is making good progress despite weather delays

in several areas. Heavy rains slowed the harvest in central Kansas for

several days and caused some damage, but for the most part the wheat harvest

in the nation's major producing state is nearing the completion stage.

Preliminary figures indicate that the crop will amount to at least 375

million bushels—down somewhat from earlier estimates but still a verylarge harvest by historical standards.

harvested in Kansas.

Last year, 339 million bushels were

The harvest is now moving into Nebraska at a fast

clip, and the early reports are that yields are generally quite good. Thus,

wheat output in the Tenth District should exceed last year's level by about

12 to 15 per cent.

Farm prices fell 5 per cent in June, posting their first monthly

decline in 7 months.

Although prices had been rising for several months,

the decline in June pushed the average level of farm prices 6 per cent below

the year-earlier figure.

In light of recent reports on prospective supplies

of crops and livestock products, future developments in farm prices are not

likely to exert much upward pressure on food prices.

Most tenth District bankers contacted for the Jiily Redbook indicated

that loan demand continues strong in their areas. Increased residential construction loans were reported in the western region of the District.

Oklahoma

and Colorado bankers indicated that energy-related business loans have increased substantially.

Agricultural loan demand was reported buoyant by

rural bankers and their correspondents.

Most of the banks surveyed have increased their lending rates in

line with the recent increases in the national prime rate. A number of

respondents indicated that they would further increase lending rates if the

national prime rate rose in the future.

Only a few bankers reported a slowdown in the rate of growth of

time and savings deposits as a result of the increase in market interest

rates. Most indicated that deposit growth is moderately strong and will

be sufficient to enable them to meet anticipated loan demand. A few

respondents said they intend to be more aggressive in their attempts to

attract CD funds.

ELEVENTH DISTRICT—DALLAS

Economic activity in the Eleventh District continues to improve.

Although the unemployment rate for the four southwestern states inched up to

5.8 percent, total employment remains high. Directors and manufacturers

contacted believe the size of union wage settlements will rise moderately

this year, and they see no appreciable slowdown in the current rate of inflation.

Industrial production in the District is being bolstered by grow-

ing manufacturing output, "but transportation equipment remains one of the

weaker industries in the Texas economy.

High occupancy rates are generating

an increase in office building construction.

A recent survey of agricultural

credit conditions reports reduced cash flows to Texas farmers from low wheat

prices.

According to the directors and manufacturers surveyed this month,

union wage settlements will continue to rise moderately for the remainder of

the year. Most agree that the proposed increase in the Federal minimum wage,

when enacted, will boost U.S. labor costs substantially, and they anticipate

no appreciable slowdown in the current rate of inflation.

Others are con-

cerned that prices might be rising at an annual rate as fast as 3 percent

nationwide by the end of the year. However, one director feels that we are

currently placing too much emphasis on the problem of inflation.

He believes

this has intensified the fears of inflation and has reduced plans for U.S.

business investment.

Industrial production in the Eleventh District is being spurred by

growth in manufacturing output.

Increased production is fairly well balanced

between durable and nondurable goods industries.

Output of primary metals in Texas is climbing as demand, is strengthening

for steel and aluminum products.

Steel inventories are at desirable levels,

but stocks of aluminum are off. Prices of Mexican steel imports are substantially lower than domestic prices, and producers are concerned that Mexican

steel will gain a significant share of the Texas market. Production of copper,

however, is down because of soft demand and a large buildup of inventories.

Apparel production is exhibiting evidence of further improvement.

Demand is strong for women's dresses, lingerie, and accessories, while orders

for men's clothing are now beginning to grow. Manufacturers confirm earlier

reports that retail prices for fall and winter merchandise are likely to rise

at least 10 percent. As a result, all producers are disturbed that retailers

are reluctant to order significant amounts- of high-priced goods in the face

of stiff consumer price resistance.

Output of chemicals continues to expand.

Input prices are up about

11 percent from a year ago, but most producers have not raised product prices.

A rubber manufacturer reports a mild shortage of butadiene, but inventories

of most chemicals are in line with demand.

Petroleum refiners are shifting their mix of output from primarily

gasoline to winter fuel oil. Some refiners express concern about possible

shortages of storage capacity for winter fuel oil because current high levels

of gasoline stocks are taking up much of the capacity. However, post-Fourth

of July reductions in wholesale gasoline prices, along with strong demand,

should lead to a sharp drawdown in stocks.

Transportation equipment production continues to trend downward.

Cancellations of the B-l bomber program will force the Dallas-Fort Worth based

Vought Corporation to lay off 260 employees.

That is on top of 1,000 layoffs

announced earlier when the A7 aircraft and Lance missile programs were cancelled.

But helicopter sales remain strong, and one manufacturer has hired additional

workers recently in order to reduce the rising backlog of unfilled orders for

some models.

Automobile production also remains high, but 1978 model change-

over is estimated to take longer than usual because of large-scale length

and weight reductions that are necessary to meet new fuel consumption requirements.

As a result, production is likely to decline more than usual during

the changeover period.

High occupancy rates are leading to an increase in construction of

new office "buildings.

In Houston and Dallas, first-class downtown office

space is 98 percent and 92 percent occupied, respectively.

Houston has

three major construction projects underway, and two others will soon "be.started.

Construction of two large projects totaling $300 million will begin this summer

and fall in downtown Dallas.

According to our latest quarterly survey of agricultural credit conditions, reduced cash flows from low wheat prices are adversely affecting the

financial condition of farmers in the High and Soiling Plains of Texas.

Agri-

bankers note that many "tenant- farmers" are unable to pay rent, harvest expenses,

and cover both the interest and principal of operating loans.

Renewals and

extensions of operating and machinery loans are up sharply, and numerous farm

failures or bankruptcies are likely this year. Many wheat producers, however,

minimized losses by grazing out their wheat and sidestepped the added costs

of harvesting and hauling.

With prices well below costs of production, a

large portion of the harvested crop is being stored and placed under the

Commodity Credit Corporation loan program. Much of the wheat is being stored

on the farm, causing the demand for new storage facilities to soar. Conversely, the survey results show cotton farmers are generally in good

financial condition.

TWELFTH DISTRICT - SAN FRANCISCO

Economic activity in the Twelfth District is currently characterized by moderate growth.

Current investment plans are mixed, with

considerable investment activity taking place in energy and aerospace

and little activity taking place in agriculture, aluminum, pulp and

paper (except for some environmentally induced investment in the latter

two).

Production continues strong in aerospace, pulp and paper, and

agriculture, and the latter sector is facing unprofitably low prices.

Business loan demand is generally experiencing a very modest growth,

though this, too, varies considerably within the District.

Twelfth

District banks are not experiencing a significant net outflow of

savings.

Investment plans vary considerably by industry with the largest

increases coming in aerospace and the smallest in agriculture.

Likewise,

the share of investment devoted to meeting environmental' and worker safetyregulations varies by industry.

Boeing, for example, reports that their

1977 level of investment will be three times the average for the past

five years, with practically all of this going for equipment replacement

and facility modernization.

tures to be negligible.

They report environmentally-induced expendi-

On the other hand both the aluminum and the pulp

and paper industries report low levels of investment with substantial shares

being used to meet environmental standards. An aluminum spokesman sees

no significant investments to increase either primary or secondary capacity

due to a) energy uncertainties, b) environmental delays, and c) poor profits

in recent years. The pulp and paper industry also faces slow growth in

capacity (2.5 percent for both 1976 and 1977) — considerably below the

expected growth in demand, and attributable to low prices.

One large

pulp and paper firm is devoting one-third of this year's investment to

pollution abatement.

Substantial investments by energy companies are re-

ported in domestic gas exploration, coal gasification, and facilities for

liquifying natural gas shipped from Alaska to California. Major oil producers, however, are said to be concentrating their investment offshore

since the domestic investment climate is still not favorable.

Low prices and a drought-induced increase in operating costs

have kept investment in the agricultural sector to a minimum, and at least

one more lean year for both profitability and investment is expected. The

only exception to this is a considerable increase in grain storage facilities

prompted by low grain prices and aided by a new. government program providing

7 percent, five-year loans covering 85 percent of the value of

new storage facilities.

Aerospace continues brisk production and sales, with Boeing having

sold out of 747's through June 1979.

Factor and product prices in that

sector are rising at about the general rate of inflation.

Production in

the pulp and paper industry also continues at full swing, though there

are some reports of weakening demand, especially export demand. Still,

prices continue rising and are expected to average about 20 percent ovep

last year. Aluminum production is not expected to keep pace with demand

at current prices and prices are expected to rise for the remainder of this

year.

Large world and national crops have kept most district agricultural

prices (especially those for grain and cattle) relatively low. While the

effects of the drought still linger, one increasingly gets the impression

that concern earlier this year was overplayed.

For example, irrigated

wheat output in one area of Washington is now expected to be roughly

120 percent of normal.

Good pear, apple, peach, prune and potato crops

are also reported for the Pacific Northwest.

Business loan demand, like investment activity, varies markedly

within the district.

While the overall picture that emerges is one of

very moderate growth, Utah reports rapid growth and Idaho and Washington

report zero growth in loans to businesses.

Continued population growth

is at least partially responsible for Utah's strong business loan demand,

and one banker said that demand has increased so much that he had adopted

a more restrictive loan policy as of June 1. While a number of respondents

described business loan demand as continuing flat, several areas in California and Oregon did report some strengthening over the past several weeks.

Almost all growth in business loan demand is attributable to local, intermediate-sized enterprises and practically none to national corporate clients.

Our directors were asked about savings flows, and they saw little

evidence to confirm the unseasonably large outflow of savings observed

nationally over the past two months-. Only one Los Angeles director reported having a visible outflow of some interest-sensitive money and most

did not even observe a significant net- ouflow of savings over the past two

months.

Several Oregon banks reported a weak Hay and strong June while two

southern California banks reported just the opposite.

Only one Idaho bank

reported a significant recent outflow of savings, but this was attributable

to very localized competition from a credit union.