Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

January 11, 1978

TABLE OF CONTENTS

SUMMARY

i

First District - Boston

1

Second District - New York .

4

Third District - Philadelphia

7

Fourth District - Cleveland

10

Fifth District - Richmond

14

Sixth District - Atlanta

17

Seventh District - Chicago

20

Eighth District - St. Louis

23

Ninth District - Minneapolis

26

Tenth District - Kansas City

29

Eleventh District - Dallas

32

Twelfth District - San Francisco

35

SUMMARY*

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

The overall impression that emerges from this month's Current

Economic Comments is one of no significant change over the past month in

the business and financial situation. According to these reports, retailers

in most Districts enjoyed a good to excellent Christmas selling season,

although the sale of domestically produced autos continued weak. Retail

inventories are generally at or even below desired levels, and manufacturing

inventories are in line with sale expectations. Residential construction

remains strong. There were further, albeit limited, indications of a

strengthening of business plant and equipment expenditures. No significant

disintermediation has developed, although savings inflows apparently have

slowed down. Demand for bank credit, notably consumer loans, was strong.

Virtually all Districts report a good to excellent Christmas

selling season at non-auto retailers, with business generally exceeding

already high expectations.

Sales thus are characterized as "fantastic" by

some Boston respondents, and as breaking all records by Atlanta. A good to

excellent selling season is reported by Cleveland, Chicago, San Francisco,

New York, and Minneapolis and as substantially above expectations by Dallas.

A number of Districts report continued brisk sales since Christmas, including Chicago, Philadelphia, Atlanta, Boston and San Francisco. Sluggish

auto sales, however, are reported in about half of the reports. Among

others, Chicago reports December auto sales to have been a distinct disappointment, while St. Louis and New York also note that such sales have been

less than expected. Auto dealers in the Dallas District look for sales of

the 1978 models to exceed those of the 1977 models, but Cleveland characterizes prospects for new car sales and production as "highly uncertain".

Continued strong sales of imported cars, however, are noted in Atlanta,

Dallas and New York. Regarding consumer outlay on tourism, a good ski

season is reported by Boston and San Francisco.

The high level of non-auto retail sales has apparently reduced

retail inventories to desired levels, indeed in a number of cases to below

such levels. Boston thus reports that strong Christmas sales has enabled

retailers to work off any excess stocks that may have developed earlier,

while Dallas reports inventory levels to have been drawn down to low levels

at many stores.

Similar sentiments are expressed by respondents in the

Cleveland and San Francisco Districts. Chicago characterizes current retail

inventory positions as on the "slim side", St. Louis as "trim", Minneapolis

and New York as posing no problems, and Philadelphia and Richmond as consistent with sale expectations.

Similarly, according to several reports,

inventories at the manufacturing level are generally well balanced.

Manufacturing respondents in the Kansas District thus reported their inventories as neither excessive nor inadequate, while Boston respondents felt

inventories were unlikely to create problems. Philadelphia manufacturers

plan to maintain their inventories at current levels, while St. Louis reports

manufacturing inventories excluding autos to be generally in line with

expected sales. However, the view that inventories are too high is widely

held among manufacturers in the Richmond District.

Residential construction remains strong, according to those reports

that comment on this sector. Atlanta perceives an acceleration in the pace

of such construction, led by single-family units but with quickening of

the rate at which apartment projects are coming on stream as vacancies

dwindle and rents climb.

St. Louis reports home building to be strong,

with recent home sales in some areas of the District the largest in several

years for the winter season. Minneapolis notes that home building in its

District has remained well above the previous record pace of 1972, and is

expected to remain strong in the coming months, while housing experts in

the Chicago District also believe home building will be strong again in 1978.

Regarding business capital outlays, Chicago reports that the

demand for most types of capital goods has continued in a modest uptrend,

and that a majority of purchasing agents in areas heavily emphasizing capital goods production expect improved conditions this year.

Similarly,

capital goods producers in the Cleveland District expect business to be as

good or better this year than in 1977, with a sharp step-up in capital

spending in the aerospace and communication industries.

Respondents in New

York and Cleveland note that currently ample capacity obviates the need for

additional investment in the chemical industry, but Boston reports increased

capital goods orders by that industry.

Dallas reports that many oil field

machinery and equipment manufacturers are expanding production facilities.

No significant change on balance appears to have occurred in

manufacturing output and sales, which in general continued to advance. An

improvement in the steel industry is noted by several banks, including

Chicago, Cleveland and St. Louis.

Philadelphia reports that the strike in

the coal industry as yet has had little effect on the District's economy,

although Richmond reports the strike to be a major factor in the District's

economy.

On the banking scene, no indications of significant disintermediation have emerged, although a low or slower rate of growth in time

deposits and passbook saving accounts is noted by several Banks, including

Richmond, Cleveland, St. Louis and Dallas. Concern was expressed by some

respondents, however, that such disintermediation would occur should money rates

rise much further. The demand for credit continues strong, particularly for

consumer and real estate loans.

FIRST DISTRICT - BOSTON

First District respondents are generally pleased with the present

economic situation. Manufacturers are experiencing growth ranging from moderate

to very strong.

Christmas retail sales were very good. Inventories seem to

be under control and the inflation rate appears to be holding steady. The

only negative notes are concern about the continued weakness of foreign economies

and worry over the possibility of higher short-term interest rates.

Christmas retail sales in the First District were very good. Several

respondents described them as "fantastic." Moreover, indications of afterChristmas sales are also favorable. The head of a large department store chain

who was previously worried about a widespread inventory buildup now feels that

no substantial inventory correction will be necessary. The strong Christmas

sales enabled retailers to work off any excess. Consumers also appear to be

spending freely on tourism. The ski industry in northern New England is off

to a very good start. Volumes are well above last year, which was a record.

One banker did report that the demand for consumer retail loans is tapering

off. However, he felt that this was to be expected given

the unusually high

volumes of recent months. The demand for auto loans was flat.

Most manufacturers contacted are continuing to see an increase in

sales. Even in Connecticut where several firms with special problems had

extensive layoffs, manufacturing production was up and employment held steady.

Sales of household products, particularly small appliances, have been doing

well. Auto products have also been moving briskly and although growth in

1978 is not likely to be as strong as in 1977 some gains are still expected.

A supplier of capital goods to the chemical industry reported a sharp pick-up

in his order, rate. International prospects, however, are a source of uncertainty.

A chemicals producer expressed concern about the weakness of the overseas

market: recent sales in Europe were very disappointing.

None of the manufacturers contacted felt that inventories were likely

to be a problem for them. Price increases have been pretty much as expected

and no one foresees any difficulty obtaining materials or fuel. One manufacturer, however, was quite worried about short-term interest rates. This

firm is a frequent borrower of working capital, and while they are not

experiencing a problem now they are very concerned about the future.

Commercial banks in the First District report good deposit inflows

although one banker expressed concern about disintermediation should market

rates increase more than another 50 basis points. Consumer loan demand continues

to improve and is expected to be strong throughout 1978 with bank credit

supplying an increasing share of corporate borrowing.

Professors Eckstein, Houthakker, Samuelson, and Tobin were contacted

this month. All but Tobin expressed reservations about intervention on behalf

of the dollar. Eckstein feels avoiding getting locked into fixed exchange

rates is of singular importance. On the other hand, when our major creditor,

Saudi Arabia, insists that something be done, token intervention may be a

wise near-term political expediant. Houthakker believes intervention may

occasionally be necessary when market conditions become disorderly as may

have been the case in the early days of the new year. Further intervention,

however, is not necessary and not in the best interests of the United States.

Lower import prices would help meet Germany's and Japan's concern about

inflation and provide them with more elbow room to pursue expansionary policies.

Although declines in the dollar do contribute to our inflation, the magnitude

of the impact so far is one we can live with. Unlike 1972 and 1973, the rise

in the prices of our imports have not been accompanied by sharp increases in

the price of exported goods. Tobin does not object to short-run intervention

to stabilize irrational day-to-day speculation but does oppose trying to peg

the exchange rate. Tobin doubts that the dollar would be overvalued if

Germany and Japan were operating at reasonable levels of capacity, and

questions whether it is overvalued anyway. Recent declines reflect portfolio

shifts by OPEC investors that have little to do with the fundamental value of

the dollar. A policy which would enhance confidence in the economic recovery

and boost the stock market would help to restore the capital inflow.

Eckstein believes the long-run monetary growth targets should be

left unchanged. Houthakker urged the Fed to stick to its target range;

stabilizing Ml growth at the 7 percent rate recorded over the past year

would be a satisfactory policy. Tobin reiterated his view that quantitative

targets should be set for GNP, rather than monetary, growth. Monetary policy

should aim at a 10 to 13 percent growth in nominal GOT.

With the exception of auto sales, Samuelson feels economic data are

favorable. The tax cut proposal will act like a safety net—adjusted down if

the economy proves stronger than expected and augmented if the economy is

weaker. Samuelson is concerned that preoccupation with the stability of the

dollar be used as an excuse of deliberate acceptance of a growth recession.

A real growth target of at least 4 1/2 percent would not create demand pull

inflationary pressure.

SECOND DISTRICT—NEW YORK

Business activity remains mixed in the Second District, according

to directors and business leaders, but the outlook is viewed more favorably

than in recent months.

Retailers throughout the region apparently experienced

an excellent holiday season, and their inventories are now judged at satisfactory levels. Although some hesitation followed settlement of the twomonth selective dock strike, the outlook for shipping is now characterized

as strong.

There are also some scattered reports of increases in capital

spending in the district.

Domestic auto sales remain depressed, however,

although some dealers are optimistic that activity could strengthen considerably in the spring.

Virtually all major retailers contacted in the Second District

were elated over the strength of buying during the holiday season.

Sales

at the major department stores apparently at least matched or in some cases

far exceeded expectations, which had already been high.

New York City sales

were especially strong, with some outlets claiming their best holiday performance in at least several years.

While some retailers reported a large

amount of discounting and promotional activity, few indicated that this

was more than normal for the period.

Information on post-holiday sales is sketchy and conflicting.

Some respondents reported that sales were holding up very well in early

January, while others talked of a post-holiday slump.

In any case, all

retailers contacted indicated that inventories were now on target or only

slightly above target. None viewed their inventories as a problem given

the volume of business they experienced in December.

While department store sales have been strong in the district,

according to most respondents, sales of domestically produced autos continue to be depressed. Dealers report that inventories are not moving

because of price resistance and dissatisfaction with the new models.

However, there appears to be growing optimism among dealers that this is

simply a question of deferred buying, since a spring upturn is common

when there has been a slow winter.

By contrast, foreign auto sales have been very strong, substantially above last year's level and ahead of all projections. A

spokesman for dealers of a major foreign compact reported that, since the

introduction of the 1978 models, inventories have been insufficient to

meet demand, and there has been a backlog of orders. Although there has

been a sharp increase in price, largely as a result of the depreciation

of the dollar, there is no evidence of any price resistance as of yet.

Instead, customers apparently intend to hold their newly purchased autos

for a longer period of time, As they are buying more expensive options.

These dealers believe former large car owners are switching to smaller

cars but prefer the proven quality of the foreign models to the unknown

performance of the new domestic small models.

In other sectors of the district economy, respondents also

continue to paint a rather mixed picture. A Buffalo director indicated

that the outlook for the chemical equipment industry is not good. The

situation in the power equipment industry, however, appears brighter due

to the general need for more power plants, but the long time frame for such

construction makes specific predictions difficult.

A spokesman for a metals producer in the district reports that

their copper and brass business is still strong. This is expected to continue for the next two months and reflects, in part, strikes at competitors.

Although aluminum mill production has been good, demand for ingots is spotty.

Demand for consumer metal products, on the other hand, is expected to continue to be strong through spring.

A spokesman for an upstate forge reports a mild increase in orders.

He expects a steady level of orders through the first half of the year with

most as replacement orders rather than net investment. With no expectations

of bottlenecks in production capacity or shortages in labor or materials, he

believes 1978 will be a good year.

The New York telephone company is projecting an increase in volume

above last year's rise, according to one of the directors. He also indicated

that the telephone company is planning to increase expenditures on new construction by approximately 10 percent over the 1977 level. Another director

reported a substantial increase in capital spending plans by other companies

in the Second District for 1978.

Contrary to initial impressions, the shipping industry in the

Second District did not rebound immediately following settlement of the

selective dock strike at the beginning of December. However, an executive

with a leading steamship company reports that business now looks good and

that his outlook for 1978 is very optimistic.

THIRD DISTRICT - PHILADELPHIA

Indications from the Third District are that economic activity continues to expand unevenly. Respondents to the January Business Outlook Survey

say that manufacturing activity is essentially unchanged for the third

straight month, but retail sales are up for the fourth month in a row according

to executives in that sector. Looking to the future, both manufacturers and

retailers are anticipating expansion. Area bankers say that business borrowing

is up, but still generally sluggish. They too look for expansion over the

next six months. The nationwide coal strike is having little effect on the

District economy at this time, but shortages could develop if miners stay off

the job through February.

Manufacturers responding to this month's Business Outlook Survey

say that general business conditions are only marginally better than last

month, indicating that the slowdown that started in November is now in its

third month. In terms of specific indicators, employment and the average workweek are unchanged, continuing a three-month trend. New orders and shipments

are higher in January, but inventories are down for the first time since

early last year.

The continued sluggishness appears to be having an effect on manufacturers' expectations regarding the next six months. While producers are still

bullish overall, fewer are looking for improvement in the first half of 1978

than in previous months. New orders and shipments are expected to pick up,

but again by a smaller proportion of respondents than in the recent past.

At the same time, inventories are projected to remain at their current levels.

Despite this dampened optimism, however, manufacturers still anticipate some

gains in employment over the next six months. Thirty percent of the respondents say they plan to add to their payrolls by July, and 21 percent anticipate

a longer workweek by that time. Capital spending plans have not been

diminished either. Increases in expenditures on plant and equipment are planned

at slightly more than one-third of the sampled firms—about the same as last

month.

Comments by a director of this Bank are consistent with these reported

expectations. He sees the outlook for 1978 as only moderate, and claims that

capacity utilization in his particular industry won't approach the levels

necessary to induce investment.

Price increases in the industrial sector appear to be picking up

steam. Over half of the executives surveyed this month report higher prices

for inputs, and about one-fourth say they're getting more for the goods they

sell. As for the future, three-fourths of those polled anticipate paying

more for raw materials by July, while about half expect to hike the prices of

their finished products.

The nationwide coal strike is having little impact on the Third District economy. Although about 18 percent of all bituminous coal miners in

the U.S. are employed in Pennsylvania, only about 4 percent work in the

Third District. Moreover, utilities and steel producers, the major users of

coal, have stockpiled the fuel so that no shortages have as yet developed.

According to a director of this Bank representing the energy industry though,

with the strike now in its sixth week, about half of those inventories have

been depleted. Should the strike last longer than 45 more days, supply may

become a problem as holders of inventories try to spread a limited stock over

a longer time. Coal officials contacted had no opinion on the expected

duration of the work stoppage.

Sales at area department stores are higher again in January according

to retailing executives.

Current dollar sales, reported to be between 8 and

21 percent above January '77 levels, are outpacing expectations by about 5

percentage points in most cases.

Downtown Philadelphia and suburban stores

are doing equally well.

Merchants appear to be optimistic about economic conditions over

the next six months, and look for sales increases of 5 to 12 percent over

year-earlier levels.

Consequently, most retailers say that inventories are

up, but that these higher levels are consistent with the expected higher sales

volume.

Commercial bankers in the area say that business loan demand is

about 4 percent higher than it was at this time last year.

at or below planned levels.

This is generally

Bankers note that although borrowing by local

businesses is "as expected," the national market continues to be depressed.

They continue to cite alternative sources of funds and uncertainty about

future economic developments as the major causes of sluggish loan demand.

The demand for the consumer loans remains strong.

For the longer term, bankers foresee "moderate" growth in C&I loans.

They expect July loan volume to be 7 to 9 percent above the mid-1977 level.

The prime rate at every bank contacted is at 7 3/4 or 8

percent.

it is generally expected to increase to about 8 1/4 percent

by mid-year.

Contacts say they have noticed some disintermediation owing

to higher short-term rates, but that it is not now a problem.

One banker

noted that when interest rates started to rise, some depositors shifted to

higher-rate, longer-term certificates and are now locked into those deposits,

and claims that this is one factor that has helped to keep disintermediation to

to a minimum.

FOURTH DISTRICT - CLEVELAND

Nonautomotive retailers and steel producers in the Fourth

District are increasingly optimistic over sales prospects.

Auto suppliers

are skeptical that domestic new car sales will pick up much from recent

rates.

Steel production will be boosted this quarter partly because of

price hedge buying.

boom year.

Capital goods producers still expect a good but not

Continued slow growth in deposit flows is noted by banks and

thrift institutions.

Nonautomotive retailers describe sales during December as

excellent and generally above expectations.

Some department store officials

had expected year-over-year gains of 9 to 10 percent, but actually recorded

larger gains. An economist associated with a large department store chain

reported even larger gains for GAF merchandise.

These retailers are

increasingly optimistic in view of the sustained rise in sales since last

fall, but also point out that by spring consumer preferences can again shift

from general merchandise to automobiles.

Retailers are also pleased that

sizable increases in sales have pared inventories.

Prospects for new car sales and production are highly uncertain.

Two contrasting scenarios have surfaced: one views the reduced pace of

sales as temporary and associated with down-sizing of intermediate cars by

GMC; the other views the softening as a result of consumer substitution of

other goods for automobiles.

According to the former, as expressed by an

economist with a major auto producer, consumers are either buying smaller

GMC cars or are holding on to their cars a year longer.

If sales in

January do not pick up, auto producers will sharply cut back production

schedules for the balance of this quarter.

Some GMC auto dealers confirm

consumer disinterest for even the highly popular Oldsmobile Cutlass,

which one dealer described as smaller, lighter and 6 percent lower in

price than the 1977 models.

Auto suppliers, especially steel and tire producers, have not

experienced major setbacks in orders from auto producers, except from

Chrysler and AMC. A major tire producer reported, however, that GMC's

January projection of car production this quarter was shaved 100,000 units

to 2,485,000 cars.

This tire maker has been skeptical of sales and

production projections by auto producers and has pared the estimate to

2,250,000 million this quarter.

They expect total new car sales of

10.7 million this year and feel a comeback in auto sales is unlikely because

of the ample stock of new cars over the past few years and the rapid buildup of consumer debt.

The turnaround in steel operations that began last month has

accelerated under the impetus of price hedge buying.

The February 1

increase in steel prices caused the bulge in orders for January deliver.

According to one steel economist, orders for February and March shipments

have not fallen

as they usually have done after a price increase.

The

steel price increases scheduled for February and March have also had the

effect of ending the most recent phase of steel inventory liquidation.

First quarter steel shipments are expected to increase about 10 percent

from the fourth quarter 1977.

Even at this higher level of shipments and

production, however, industry profits will probably be neglible this quarter.

Generally, steel economists were noncommittal about reference pricing of

steel, pending additional information. One executive with a major steel

producer, however, views the announced trigger prices as low; and an

industry economist is skeptical that these prices will result in much of

a rollback in steel imports. Another source indicated that the talk about

reference pricing may have deterred some users from placing foreign orders

beyond the first quarter of 1978. If anything, reference prices are more

likely to have an adverse effect on European steel producers than on the

Japanese, who still have a quality and price advantage over most steel

producers.

Capital goods producers expect business this year to be as good

or better than 1977, although there is still little sign that spending for

new plant capacity is accelerating. Exceptions are in technically oriented

industries, such as aerospace and communications, where producers indicate

a sharp stepup in spending for new capacity. A communications and printing

press producer has been experiencing an order rate of about $1 billion

compared with sales of around $900 million and will boost capital expansion

this year. An aerospace and electronics producer expects to boost capital

spending by 40 percent from last year. On the other hand, a medium-sized

chemical producer reported that they had no additional need for capacity

over the next few years in view of softness in prices, ample capacity, and

completion of expansion programs that were begun a few years ago. Rubber

producers will accelerate capital spending this year because of need for

additional radial tire capacity to replace obsolete facilities and to improve

productivity. A large machinery producer reported the excavator machinery

business is still slow to recover and.that increased orders for machine

tools are replacements for existing inefficient equipment with computercontrolled machinery.

There is no sign of early settlement of the coal strike. More

than a third of the industry in Eastern Kentucky, one of the largest coal

mining centers in the country, is shut down, and about 90 percent of the

mines in Ohio, West Virginia and Pennsylvania are down. A director, who

describes the strike as bitter, does not expect a settlement before midFebruary, although there will be growing pressure to end the strike because

pensions funds will be depleted. Another source associated with a major

coal producer expects the union may drop the right-to-strike issue in return

for increased contributions by mine operators to the health and welfare fund.

Banks and thrift institutions report no signs of disintermediation,

although growth in time deposits and passboook savings accounts has slowed.

A large S&L is concerned that outflows from passbook savings accounts could

occur if yields on 3-month Treasury bills exceed 7 percent.

S&L's have

been increasingly active in the secondary mortgage market to support the

high volume of mortgage loans. One association reported that it sold over

$50 million of mortgages in 1977, or 10 percent of its portfolio, in the

secondary market. Lenders, builders, and producers of home maintenance and

building materials continued to be cautiously optimistic over prospects for

new housing starts in 1978. One director expects new starts at 1.8 million

units this year.

FIFTH DISTRICT - RICHMOND

The pace of Fifth District manufacturing activity apparently showed

little change in December, judging from responses to our latest survey. The

volume of new orders and backlogs were down somewhat while shipments were

essentially unchanged. Inventories also showed little change, a minor expansion

of stocks of materials being offset by a comparable decline in finished goods.

There remains, however, a widespread view among manufacturers that current

inventories are above desired levels. Retailers' expectations of a strong

Christmas selling season have apparently been fulfilled. Total sales as well

as relative sales of big ticket items increased in December. Concerning

longer term expectations, manufacturers' outlooks have improved over the past

month, but a majority of the respondents still foresee little change in the

level of business activity over the next six months. The apparent lack of

progress in the coal industry negotiations suggests continued sluggishness in

the overall level of Fifth District activity in the near term future as

supporting industries continue to cut back operations and personnel.

As in December, our January survey of manufacturers showed considerable

variation in the performance of individual respondents. There is little

indication from the survey of the present direction, if any, of the District

economy. One change since last month is that the weaker responses are now more

heavily concentrated in the textile industry and the fibers component of the

chemicals group. Otherwise there is no discernible pattern in this month's

responses. Inventories held by District manufacturers were virtually unchanged,

but the view that current levels are excessive remains common. Employment and

weekly hours worked both declined in December according to survey respondents.

Prices, particularly prices paid, continued to rise across a broad front.

In the retail sector activity was broadly higher in December than

a month earlier. Respondents to our survey were unanimous in reporting

increased sales and a majority also reported increases in the relative sales

of big ticket items. Inventories at retail showed little change and are

generally in line with desired levels. Employee compensation, in terms of

average hourly earnings, rose over the month, but responses suggest no change

in other prices paid or received bv retailers.

District manufacturers express somewhat greater optimism than in

recent surveys and expectations in general now seem more positive than at

any time since mid-summer. Approximately one-third of the manufacturers

surveyed now expect the level of business activity nationally, locally, and

in their respective firms to improve over the next six months. Retailers,

on the other hand, apparently expect little or no change in the level of

activity over that period.

The UMW strike remains a major factor in the Fifth District economic

picture. Indications are that somewhat in excess of 80,000 Fifth District

employees are out of work as a result of the strike, although this number has

not increased since the early days of the work stoppage. Significant additions

to this figure are unlikely over the next month. Should the strike extend

beyond that point, however, a second round of layoffs, primarily of coal users,

is likely unless other sources of coal are found.

Credit at large Fifth District banks has expanded moderately during

the past several weeks, with loans to consumers and business leading the

expansion. At the same time inflows of time and savings deposits net of

negotiable CD's have been small. Holdings of large negotiable CD's, however,

have risen substantially. These funds have increased every week for the past

several months. Consumer credit extended by banks has risen steadily since

November, reversing its October lull. Real estate loans, on the other hand,

continue seasonally weak. Half of the banks reporting on the Fifth District

survey of changes in lending practices confirm that demand for commercial

and industrial loans has increased moderately over the past six months. Only

two of the twelve reporters, however, expect such demand to continue to expand

over the next three months. Both the price and non-price terms on business

loans have firmed recently, as District banks exhibit a reduced willingness

to enter into term loan arrangements.

The District's cash farm income during January-October 1977 was down

4 percent from a year ago, reflecting the drought-reduced crop output and

sagging grain, soybean, and cotton prices. Crop receipts were 10 percent

under the year-earlier period, while livestock receipts were up 2 percent.

Nationally, total cash farm receipts were about 1 percent under the yearago level.

SIXTH DISTRICT - ATLANTA

December was a banner month for consumer spending; auto purchases

held up better in the Southeast than in the nation. Banks have realized

strong gains on both sides of the balance sheet, but at S&Ls, the gap

between loans and deposits has widened. Housing demand continues to

climb. Rising agricultural prices have brought some relief for the farmers'

plight, and the strike has had little impact. Job gains continue despite

strikes and layoffs. Businessmen are relatively optimistic about economic

conditions in 1978.

By almost all accounts, December retail sales broke all records

and a brisk buying pace carried through the week after Christmas. Retailers commonly estimate year-to-year sales gains at 15-20 percent. Two

directors commented that luxury items had been moving particularly well

in their areas. One retailer who had been concerned about his large inventory now complains that inadequate stocks restrained his sales. Only

in the coal-mining areas of northeast Tennessee did sales fail to show

a year-to-year advance.

Sales of new domestic-made cars seem to have held about even with

last year in the last few weeks of 1977. Dealer inventories have reached

"ample" (but below national) levels. Designations of the best-selling models

vary too widely for a neat characterization.

In Jacksonville, a record

number of imports were unloaded last month. Truck sales continue to surge;

both Chrysler and Ford recorded all-time peak truck sales in their southeastern zones last month.

Bank deposit inflows have strengthened after a brief slowing;

large-denomination CDs have accounted for much of time deposit growth.

Exceptionally strong gains in bank lending have been broad-based, inducing some banks to reduce their securities holdings.

Stricter adherence

to usury laws has reduced bank earnings in Tennessee. Mortgage rates at

S&Ls have held a pretty even keel, though lending activity remains heavy.

There are indications that sources of funds are tightening in places:

Central Florida S&Ls are advertising certificates at maximum rates (atypical

in that state), and Atlanta associations are both advertising and offering

premiums again.

The pace of residential construction has continued to accelerate

through the off-season, still led by single-family homes. Demand for

existing homes has mounted. Apartment projects are coming on stream at a

quicker but moderate rate as vacancies dwindle and rents climb.

The first round of annual tallies of nonresidential construction

outlays shows surprisingly strong (30-75 percent) gains in some of the

smaller cities. Planning has progressed to the initial stages of construction on several major industrial projects (representing several

hundred million dollars) announced earlier. On the negative side, Offshore

Power Systems of Jacksonville ordered a 30-day halt (with possible termination) on $75 million of construction when the State of New Jersey, its only

customer, extended the delivery date on its order by three years.

Stronger export demand has lifted prices of farm products,

especially grains, improving farm incomes somewhat from badly depressed

levels. Recent loan applications suggest that Mississippi farmers have

maintained their living standards through a disastrous year, piling up

substantial unpaid debts.

The effects of the much-publicized farmers'

strike have been limited to sporadic interruptions of marketings.

auctions in Georgia and Alabama closed briefly.

Livestock

Picketers at meat-packing

plants convinced few truckers to hold their cargoes, but slaughter volume

was reduced temporarily. Late December explosions at several grain storage

facilities are thought to have been caused by unusual atmospheric conditions,

combined with high concentrations of dust, rather than sabotage.

District employment has risen steadily despite the interruptions

of strikes. Most of the disputes which have troubled the labor scene for

the past few months (including the massive Lockheed strike) have now been

resolved.

The coal strike, however, has begun to afflict retailers, banks,

and small coal producers"in northeast Tennessee.

The impact of a recent

large layoff in central Florida will be more than offset by new jobs provided by industrial expansion; a new CETA grant to Mississippi will

furnish almost as many new jobs as will be lost to extensive layoffs by

Ingalls Shipyards.

There is no uniform consensus among businessmen or area economists

about the prospects for 1978.

Few are totally pessimistic, but most express

some apprehension about inflation, government regulatory policies, energy

developments, and the minimum wage.

Tennessee bankers are particularly

concerned with the outcome of a March constitutional referendum on the

usury ceiling. The majority of business leaders expect the economy to

improve at least as rapidly in 1978 as it did in 1977.

They generally

anticipate better-than-national growth in their own industries or locations,

citing such potential stimulants as reviving population growth, continuing

housing expansion, rebounding nonresidential investment, and/or increasing

tourist inflows.

SEVENTH DISTRICT - CHICAGO

Most economic sectors in the Seventh District still appear to be

expanding, and sentiment is generally favorable that growth will continue

into the second half of 1973.

Production schedules for autos and farm equip-

ment have been reduced, however.

been very strong.

Retail sales of general merchandise have

Inventories are generally on the slim side. The slow but

steady uptrend in total capital outlays is continuing.

Favorable weather,

until this week, has permitted outdoor construction activity to continue

later this winter than last. Mortgage credit terms are tightening moderately.

Virtually all general merchandise retailers report that sales exceeded optimistic budgets, not only in the Christmas season, but since Christmas as well.

Inventories are "on the slim side." January "clearance" sales

have emphasized special purchases rather than markdowns of regular stock.

Sales of most lines have been at high levels, with home furnishings, including

appliances and furniture, especially good. Consumers have used credit freely

but "with prudence." A University of Michigan survey showing consumer confidence "at a two-year low" in December baffles local retail analysts.

Large retailers expect their selling prices to average somewhat more

than 4 percent higher in 1978, about the same as the rise in 1977, with soft

goods up more than hard goods.

Purchasing managers for industrial and commer-

cial companies expect the prices they pay to rise 6 to 7 percent on average in

1978, also about the same as in 1977.

held down by stiff competition.

Prices of some commodities have been

But utility rates are 10 percent or more

above year ago levels, while costs of insurance, transportation, and professional services probably have increased even more.

Auto companies have been cutting production schedules for the first

quarter. Sales in December were a distinct disappointment, particularly for

the new down-sized intermediates. Sales of heavy trucks also have slowed.

A number of layoffs have been announced in the district's important

farm equipment industry, with at least one tractor plant closed for the whole

month of January. Sales of farm equipment had been sharply below year ago

levels long before the widely publicized "farmers' strike."

The December survey of the Milwaukee purchasing managers shows that

h6 percent expect their business to be better in the first quarter than in the

fourth quarter, as opposed to only 10 percent who expect it to be worse. For

the second half of 1978, 58 percent see business better than in the first half,

and only 5 percent expect it to be worse. This is significant because of the

heavy emphasis on capital goods production in the Milwaukee area. Also, a

high proportion report that their companies' capital expenditures will be

higher in 1978. Finally, the proportion reporting higher output and orders

was larger in December than in November. Inventories were reduced on average

in both months.

Demand for most types of capital goods has continued in a modest uptrend. Foreign demand for US equipment has remained sluggish, however. Among

the most confident firms are producers of sophisticated machine tools, often

used in mass production processes. The auto industry continues to dominate

these orders, but demand from other industries also has improved.

Steel companies expect an improvement in their shipments in the first

quarter because of restrictions on imports, low user inventories, and further

gains in total usage. However, auto producers probably will reduce their

orders for steel. While total steel imports into the US were up about one-

third last year, imports into the Great Lakes area rose "by over three-fourths.

Many of the vessels waiting to exit the Seaway after the scheduled closing

date of December 15 had. brought in European steel and had delayed their sailings as they sought cargos for the return voyage.

Relatively favorable weather in December and early January permitted

private and public construction projects to continue in a period when outside

work had virtually ceased last winter because of severe cold and strong winds.

Four new office buildings totaling 3.8 million square feet are underway (or

soon will "be) in Chicago's Loop, scheduled for completion in 1979• Over 5

million square feet of office space is said to be vacant in the Loop, but

large blocks of top notch space are not available.

Most housing experts believe that homebuilding will be strong again

this year. Prices are still rising at a 9 to 10 percent pace. Shortages of

materials, particularly insulation and sheetrock, are not likely to be resolved in 1978. Limited availability of developed lots, with sewer restrictions a large factor, has held back plans of some builders. Some of the

largest Chicago area S&Ls recently raised their basic rates on 80 percent

home mortgages from 8.75 to 9 percent. Moderate further tightening of rates

is expected. Opinions vary as to whether availability of mortgage funds will

limit construction this year. The main question mark is the extent of disintermediation, already noted by some lenders.

Permits for apartment units in the Chicago area in 1977 were about

double the level of 1975. Nevertheless, apartments comprised only 3*+ percent

of all units, compared to 58 percent in 1971 and 1972. Suburbs reporting the

largest increases in permits in 1977 are generally 30 miles or more from the

Loop, and often 6 to 7 miles from public transportation.

EIGHTH DISTRICT —

ST. LOUIS

Business activity in the Eighth District continued to rise in late

1977, and businessmen generally expect further gains in 1978.

Retail sales

have registered moderate gains in recent weeks, although automobile sales by

some dealers have been less than expected.

Retail inventories are generally

at a "satisfactory" level, but stocks of some types of cars were reported to

be greater than desired. Home construction and sales continue strong for

this time of year, and overall manufacturing activity is advancing.

financial sector loan demand is generally strong.

In the

Savings and loan

institutions report inflows of savings are smaller than a year ago, and with

strong demand for home mortgages, mortgage interest rates are beginning to

inch upward.

Consumer spending has continued to advance from year ago levels,

and retailers are generally optimistic about sales prospects for 1978. On

the basis of limited information, St. Louis department stores made only modest

sales gains during the recent Christmas season, but reports from other areas

of the District indicate larger gains than in the St. Louis area.

goods sales are mixed.

Durable

Home appliance sales continue up, while automobile

sales have leveled off. Automobile sales have declined in the Memphis area,

probably reflecting a ruling by the Tennessee Supreme Court which limited

interest rates under the state usury law to a 10 percent maximum.

Inventories at the retail level are reported to be "trim." Even at

department stores, where sales gains in the Christmas season were only

modest, inventories are not considered to be a problem.

Inventories of some

automobile makes, however, are considered to be above desired levels. Other

manufacturing inventories are generally in line with expected sales.

Demand is strong for most types of loans, including real estate,

consumer, and agricultural loans. Overall, business loan demand at

commercial banks, however, has not increased much in recent weeks. In

December net inflows of consumer-type savings deposits at banks and savings

and loan associations were well below year ago levels. However, sizable

increases have occurred in large negotiable certificates of deposit. Upward

pressure on home mortgage interest rates is apparently developing. One large

savings and loan association in the St. Louis area recently increased its

lending rate on an 80 percent loan to 9 percent from the 3-3/4 percent rate

which had prevailed for several months.

Manufacturing activity generally continues to advance.

Manufacturing of building materials, appliances, heating equipment,

recreational equipment, paints and coatings, paper and boxboard, and hospital

supplies are among industries reporting sales gains. A steel industry

representative noted that steel orders have unexpectedly accelerated in

recent weeks, reflecting prospective anti-dumping measures, and continued

overall improvement in steel demand. A major chemical firm, however, notes

mixed sales among its product lines, and farm equipment sales are reported to

be sluggish, reflecting the relatively low farm incomes of last year.

Home building remains at a high level. Recent home sales in the St.

Louis and Memphis areas were reported to be the largest in several years for

the winter season. Reports from Memphis also indicate a recovery from the

overbuilding which occurred in 1973-74. Due to strong home sales and sizable

backlogs of orders, most builders are not laying off workers as normally

occurs at this time of year.

Fall wheat plantings are estimated to be down substantially in the

District. Wet weather in Missouri last fall hampered planting operations and

wheat acreage was estimated to be off 45 percent from last year. Wheat

acreage is also reported to be down substantially in Tennessee.

NINTH DISTRICT - MINNEAPOLIS

As we enter the new year, most indicators of economic activity

in the Ninth District remain strong, and the near-term outlook is

generally favorable.

Declines in unemployment, strong retail sales, and

booming residential construction were reported in 1977 and are expected

to continue, perhaps at moderated paces, in early 1978. Large crop

carryovers are expected to continue downward pressure on commodity

prices.

Despite historically high loan-to-deposit ratios, Reserve Bank

directors are not aware of serious liquidity problems at district

agricultural banks.

Employment

The district's employment picture is considerably improved from

a year ago.

The fourth-quarter unemployment rate of 5.2 percent (based

on October-November data) is more than a full percentage point below

last year's 6.3 percent.

Improvement is reported throughout the district,

including the chronically high unemployment area of Michigan's Upper

Peninsula.

Even in that region, unemployment in a few counties is less

than 5 percent.

Reserve Bank directors generally see a favorable employment

outlook for the first half of 1978, ranging from "very strong" to "very

stable." Areas expecting continued strength include western Wisconsin,

South Dakota (except for some weakness in ag-related industries), portions

of the Upper Peninsula, and central Minnesota.

"Stable" areas include

metropolitan Minnesota, North Dakota, and eastern Montana. A banker sums

up the outlook for the large industrial areas by suggesting that unemployment

will continue to decline but at a somewhat slower pace as the economic

recovery progresses- Only two areas in the district may have employment

problems: western Montana, where public employment is being reduced and

the wood product industries are softening, and Sault Ste. Marie, Michigan,

where the closing of an air base is having a severe impact on the local economy.

Retail Sales

Retail sales were strong throughout the district in the last

quarter of 1977, according to our directors.

All directors report that

Christmas sales met or exceeded retailers' high expectations.

A few

directors describe seasonal sales as "strong," "pretty good," and

"remarkably good."

Severe weather in North Dakota reduced sales from

what they otherwise would have been, but even there, retailers are

described as "happy."

Our surveys are consistent with these observations.

Some

retailers are reporting sales for December as 10 to 30 percent over a

year ago. Retailers with outlets in rural areas found sales gains there

about the same as in the metropolitan area.

Neither our directors nor our surveys uncovered any significant

retail inventory problems.

Residential Construction

Homebuilding has remained well above the record annual pace set

in 1972. For the first ten months of 1977 cumulative housing permits

were 31 percent higher than the year-earlier level, which was 34 percent

higher than in 1975. Data through October do not yet indicate a slowdown,

although some directors have previously suggested this might happen.

any event, loan commitments outstanding at district S&Ls rose steadily

In

throughout 1977 and in November were 25 percent above the year-ago

level.

Consequently, we expect homebuilding to remain strong in the

district, at least during the first quarter of 1978.

Agriculture

According to Reserve Bank directors, there is little evidence

to suggest that the farm strike has done anything more than generate

some publicity.

In Montana, some small marginal crop farmers apparently

are participating, but ranchers are not. A director representing the

food industry notes that his firm has been buying corn from farmers

throughout December, which does not represent a withholding action. One

director described the farm strike as a "nonevent."

With the dramatic turnaround in weather conditions, total crop

production in 1977 easily exceeded that of 1976.

Soybeans were up 80

percent and corn 75 percent. Wheat production declined about 10 percent

but only because of a 13 percent reduction in plantings.

The resulting

low commodity prices not only have depressed current farm receipts but

also have built up a large carryover of grain which will continue to

exert downward pressure on market prices.

In general, our directors have observed that government crop

deficiency payments are improving liquidity situations at rural banks,

but how much is still hard to say. Apparently, some of the payments are

lower than anticipated and are coming in a little slower than expected,

so directors have yet to form any judgments.

Several directors note

that there might be some complaints about ag bank liquidity or that

loan-to-deposit ratios might be high in historical terms, but they are

not aware of any serious liquidity problems.

TENTH DISTRICT—KANSAS CITY

Reports of business and financial conditions in the Tenth District

point to continued economic expansion.

Although prospects for improve-

ment in farm income are not that bright, the winter wheat crop looks good

and prices of agricultural products have regained some strength.

Purchas-

ing agents for major manufacturers in the District expect the year to be

good for business.

These buyers are comfortable with their current inven-

tories of materials, and they are neither experiencing nor anticipating

a general acceleration in the prices of materials nor significant problems

in maintaining stocks at desired levels.

District bankers report a sharp

increase in loan demand and a good increase in total deposits.

These

bankers do not expect deposit growth to keep up with loan demand, and they

forecast sharp disintermediation if short-term interest rates rise to

7 per cent.

Purchasing agents in various types of businesses throughout the

District report little change in the lead times for the items they buy, with

a few exceptions.

The exceptions are primarily in steel, especially sheet

and plate, where some stretching out of lead times is being experienced,

but not by all buyers.

The purchasing agents who are finding steel harder

to obtain attribute the change to layoffs in the domestic steel industry,

and to less "dumping" by the Japanese.

Some aluminum materials also are

becoming somewhat less readily available, according to a purchasing manager

for a manufacturer of small airplanes.

A competitor, however, says he

is having no problems getting aluminum.

The purchasing agents are generally optimistic about prospects

for sales by their firms this year.

Their levels of inventories of raw

materials are neither excessive nor inadequate, say most buyers, who

describe their stocks with phrases such as "ideal," "just right," "where

we want them," and "according to plan." Most buyers expect the prices

of materials to rise at about the rate of inflation.

Certain petroleum-

based chemicals and related products are expected to go up somewhat faster

in price.

Polyester fibers, used by two major rubber manufacturers, and a

solvent, used by a paint manufacturer are two of the items expected to

show sizeable price increases soon. A manufacturer of furniture hopes to

see an end to the frequent price increases, totaling 30 per cent in 1977,

on plywood and particle board.

Following a 3-month rebound, farm prices have once again reached

the levels of last July due largely to stronger markets for hogs, cattle,

and corn.

In December, farm prices were only

per cent above year-ago

levels, which explains why retail food prices were not a particularly

troublesome issue in 1977.

Of course, it should be recognized that the

stability in food prices has come at the expense of the farmer who has

been confronted with serious cash flow problems and depressed incomes for

most of the last 2 years as commodity prices have generally fallen.

Moreover, although adjustments are occurring, most of the evidence suggests

that income levels are not likely to show much improvement in the year ahead.

A recent report on the seeding of the new winter wheat crop shows

that acreage nationwide will be down about 14 per cent from 1977 levels.

If the 1.3 billion bushel projection is realized, 1978 production will be

off 13 per cent from last year's figure. However, a larger carryover

will help keep total supplies for the 1978-79 marketing year at a high level.

Within the Tenth District, 1978 winter wheat acreage will be about 13 per

cent smaller than in 1977.

But the prospects for higher yields in 1978 are

excellent since most of the wheat is in better condition now than it was

last winter when severe cold and drought were affecting the District's

agriculture.

Most Tenth District bankers contacted report loan demand is up

sharply.

Loans for natural resource development and energy-related

businesses continue to be a source of strong demand, and credit needs

for retail inventory financing have increased.

Many bankers report heavy

credit demand from agribusiness and from country banks to finance farm

needs.

In Lincoln, however, there has been a significant paydown in

correspondent bank loans related to agriculture, as farmers have reduced

their debts to banks by borrowing from the Federal Government.

Consumer

credit card loans have increased sharply at many of the banks surveyed,

but auto loans are weak in most areas of the District.

Deposit growth has been good at District banks.

Demand deposits

have increased at several banks due to large public deposits.

Passbook

savings deposits continue to decline although outflows are reported to have

moderated from the second and third quarter declines.

and large negotiable CD's have increased.

Other time deposits

Bankers anticipate sharp dis-

intermediation if short-term interest rates rise to 7 per cent.

Several

bankers feel that deposit growth will not keep pace with loan demand and

that they will have to purchase funds in the near term.

ELEVENTH DISTRICT—DALLAS

Business activity in the Eleventh District enters the new year on a

note of strong economic expansion.

The businessmen and Directors surveyed

this month are optimistic about future business prospects.

Christmas sales

exceeded the expectations of many department store executives, and the outlook for future sales is bright. Auto dealers expect sales of 1978 models to

be greater than 1977 models. Bankers report deposit inflows have slowed but

do not see disintermediation becoming a serious problem.

The booms in drilling

and construction continue, with heavy demand for inputs to the two activities.

The financial position of the agricultural sector is being squeezed by low

crop prices.

The Directors surveyed this month generally agree that the pace of

economic activity for the Southwest and nation will quicken in 1978. However,

they all express concern that many of the economic and political uncertainties

that discouraged capital investment in 1977 are still present.

Only one

Director expects that many of these -uncertainties will be resolved and that

business spending will move from the "maintenance" expenditures that characterized capital investment in 1977 to a greater emphasis on expanding productive

capacity this year. Most respondents see little improvement in the national

rate of unemployment and are forecasting a jobless rate of 6.5 percent by yearend 1978.

Interest rates are expected to show only moderate changes in 1978—

rising in the near term and falling by year-end. A small majority of the respondents thought that the rate of inflation would increase moderately rather

than abate.

Department store sales in the Eleventh District ended 1977 on an upbeat with Christmas sales substantially above the expectations of most merchants.

Inventory levels were drawn down to low levels at many stores, and the clearance

sales now underway are relatively small in volume.

executives forecast increased sales for 1978.

Most department store

Some respondents feel, however,

that part of the exceptionally high level of Christmas sales reflected advanced

buying by customers and are predicting that sales this quarter may be weaker

than they otherwise would be.

Although new car sales have slowed somewhat, auto dealers continue

to express confidence that sales in this model year will exceed last year's

level. Sales of intermediate-sized cars are especially slow.

of domestic cars are above desired levels for most dealers.

Inventories

Foreign car

dealers seem to be doing slightly better than domestic dealers in spite of

recent price increases on foreign cars, and some Volkswagen dealers report

that inventories are below desired levels.

At current interest rate levels, bankers report funds are being transferred out of demand and savings deposits and into certificates of deposit.

Most do not expect disintermediation to become a serious problem. However,

banks are having difficulty attracting new deposits, with consumer saving

deposits especially weak. Demand for construction, real estate, and consumer

loans continues to increase in the District, and demand for those types of

loans is expected to remain strong throughout 1978.

Drilling activity is at an 18-year high, and drilling contractors

anticipate continued expansion in 1978.

Because of the high level of activity

in the industry, the supply of oil field equipment is tight.

The lead time

required to deliver most equipment has doubled since last spring. A short

supply of drill pipe is hampering some activity, but the problem is not acute.

To meet demand, many oil field machinery and equipment manufacturers are

currently expanding or plan expansions of their production facilities in 1978.

One respondent plans a $6 million expansion that will add 600 new jobs.

The increase in construction activity in the District is also leading

to greater output in several durable goods industries. Cement producers are

expanding their operations to meet the increased demand for their products.

Demand by construction contractors for metal buildings to store equipment and

materials is increasing output in the fabricated metals industry. In addition,

fabricated metal manufacturers report strong demand for solar panels and

aluminum doors and window frames.

According to our latest quarterly survey of agribankers, reduced cash

flows from low grain and cotton prices continue to squeeze the financial conditions of farmers. As a result, repayments of loans remain slow at rural

banks, and the Availability of loanable funds has decreased since October.

Participations with nonbank credit agencies continue to rise. One "banker noted

that "many farmers will have to refinance long-term debt to meet operating and

machinery loan obligations." With commodity prices at low levels, a large

portion of the 1977 crops will be placed under the Commodity Credit Corporation

loan program. Higher cattle prices and more profitable feeding margins account

for much of the increase in feedlot placements. But dry weather and poor

winter grazing conditions continue to force many cow-calf operators to cull

herds. The farm "strike" movement appears to be gaining support, with the

strongest backing in the grain-producing areas in West Texas.

TWELFTH DISTRICT - SAN FRANCISCO

Retail Christmas sales were up by double digits over last year for

many Western firms.

Since these sales were typically larger than expected,

inventories were typically leaner than planned by year end. An apparent end

to the drought is filling both agricultural reservoirs and mountain ski lifts,

both of which were nearly empty for most of last year. Western firms are

still highly liquid and western banks are comfortably liquid, though there

were two reports of mild disintermediation. Related to the U.S. trade deficit,

concern was expressed over the lack of competitiveness of U.S. goods.

Christmas sales were higher than expected and end-of-the-year inventories lower than expected in almost all areas of the district. Most areas

experienced double digit increases in their Christinas sales over year-ago

levels. In the Los Angeles area, sales of practically all items, except

autos, were up 10 to 15 percent over last year, and this strength has abated

only slightly in the post-Christmas period. A Chamber of Commerce survey of

another Southern California city found this year's Christmas to be selling

17 percent better than last year's.

In Portland, the largest department

store reported a 12 percent increase and a large local chain a 21 percent

increase in Christmas sales. Particular strength was seen in electronic

games, food processors and TV/stereo items, and even foreign autos were selling nicely in Portland.

In Seattle, even Christmas-week food sales topped

last year's level by 20 percent, according to one large chain. Christmas

sales were reported to be unusually heavy among both large and small retailers

in various parts of Idaho, and Salt Lake City's major retail outlets were

ringing up 12 to 15 percent more sales than a year ago. The only declines

in retail sales were reported on an Oregon Indian Reservation and in a

drought-damaged agricultural part of Idaho.

The unexpectedly high level of sales left unexpectedly lean inventories. One Southern California city reported shortages in certain lines of

toys, women's clothing and small appliances. One large Portland store

reported that inventories were depleted a full week to ten days before

expected. Lower than planned inventories were reported in virtually

every part of the district. One note of concern came from a large California banker who characterized the season as a "credit card Christmas" and

feared that optimistic retailers may restock inventories as if such sales

would continue, while consumers will begin to feel overextended in their

debt load and cut back their spending.

There are reports from the forest products industry that the supply

of raw timber is down because environmental groups have blocked timber sales

from government lands. The end of the drought has put the Western ski industry back on the road to financial health since extremely good snows are

bringing droves of people to the mountains. The weather has imparted mixed

blessings on California agriculture. While deepening snowpacks and rising

reservoir levels mean more water for farming in 1978, the hurricane-force

winds which ripped through California's Central Valley on December 20 have

reduced farmers' net income by an estimated 20 million dollars. Up to half

of the damage was confined to avocado losses, but damage was also reported

in vineyards, citrus and almond groves, some field crops, green houses

and irrigation systems.

When asked to comment on press reports of liquidity problems among

banks and non-financial corporations, Twelfth District directors responded

that such reports appeared exaggerated and alarmist. Two years of strong

profit growth combined with modest plant and equipment expenditures was said

to have left corporations in strong cash positions. Most major forest products firms are able to fund their planned investments largely through

internally generated cash. There was one report of a firm repurchasing its

own stock. Overall, there was not a single report of a liquidity problem

among Twelfth District firms, and many firms were reported to be in highly

liquid positions. The only liquidity problems appear to be among farmers

who are squeezed between low prices and high costs.

Most banks also report no liquidity problems, though one Salt Lake

City bank hints that strong loan demand may soon spark a rise in interest

rates and two Southern California banks have observed some disintermediation.

In particular, one of these latter banks reported a 20 percent decline in

savings certificate balances between August 1 and mid-December.

Several of our directors commented on the persistent U.S. trade

deficit.

Some echoed the prevelant explanation that the lagging economies

of our trading partners were responsible for weak foreign demand and that

our rapid import growth was due to purchases of foreign oil. A natural

gas producer recently turned to Japan for "malleable pipe fittings" because

U.S. fittings were of such poor quality, and for small trucks because the

U.S. did not produce an equivalent product. One banker noted that foreign

autos now capture 41 percent of. Oregon's new car sales due to their high

quality. He also noted that Oregon capital goods producers are losing their

competitive edge due to government restrictions concerning ecology, human

rights, boycotts and due to relatively non-aggressive action by U.S. export

financing agencies (such as the Export-Import Bank).