Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

September 13, 1978

TABLE OF CONTENTS

SUMMARY page i

First District-Boston page 1

Second District-New York page 5

Third District-Philadelphia page 8

Fourth District-Cleveland page 11

Fifth District-Richmond page 14

Sixth District-Atlanta page 17

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 35

SUMMARY*

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

Reports from the twelve District Banks this month indicate continued

expansion of the national economy but at a moderate pace. Retail sales growth

continues in most Districts but at varied rates. Expanding manufacturing

activity and generally strong loan demand continue to be major sources of

strength to the economy. Construction activity is on the upswing despite some

labor and materials shortages in the midwest. With the exception of cotton,

crop prospects are reported to be favorable.

Retail sales volume is growing in all Districts in September, but at

various rates. Boston, Richmond, Chicago and Minneapolis report strong sales

growth, while the other Districts indicate only modest or marginal gains after

accounting for inflation. Automobiles and/or big-ticket items are mentioned

as particularly strong areas by New York, Cleveland, Richmond, Chicago, Minneapolis and San Francisco. There is scattered concern that inventories may be

becoming excessive. As for the future, retailers have mixed opinions. Several

Reserve Banks mention that merchants are concerned about the possibility of

overextension of consumer credit within the next few months.

Manufacturing activity is reported to be generally strong. Although

New York and San Francisco report little or no growth in this sector, an

actual decline in activity is not observed anywhere.

Supplies of most commodi-

ties appear to be adequate at this time. For the longer term, manufacturers

seem to be considerably less optimistic and a little more uncertain than they

have been in recent months. In fact, Philadelphia and Richmond report that

manufacturers in those Districts are anticipating a decline in economic

activity within the next six months.

Expansion in the construction industry is indicated across the board,

despite an acute shortage of cement noted in Chicago, Minneapolis, and Dallas.

Although no wholesale shutdown of work has been observed in those areas, some

cutbacks are noted and jobs are being delayed. Nevertheless, gains in residential and/or nonresidential construction are noted in these three Districts, as

well as in Atlanta and St. Louis.

Economic conditions in the agricultural sector are generally favorable . Farm income is reported to be rising and crop prospects, with the exception of cotton, are said to be good. Hot, dry weather has been a problem in

cotton producing areas for some time now and the cotton yield is expected to be

well below normal. The prolonged drought has also led to the liquidation of

cattle in the St. Louis and Dallas Districts, affecting prices in those markets.

In the banking sector, loan demand is reported to be generally strong.

Consumer borrowing, especially for mortgages, is reported to be particularly

heavy. However, the demand for business loans, while strong overall, is showing signs of weakness in Atlanta and Richmond. Looking ahead to 1979, bankers

are generally projecting continued loan demand growth and foresee little difficulty in meeting that demand. Although tight money conditions currently prevail

in Minneapolis and San Francisco, these conditions may be, at least in part,

only seasonal. Bankers do not generally foresee funds drying up as a result of

disintermediation in the coming months.

FIRST DISTRICT - BOSTON

The level of economic activity in the First District remains high and

signs of a coining slowdown are limited. The retail sector, particularly the

automobile component, is doing very well. Manufacturing production is well

above last year's levels; new orders are high by historic standards although

there appears to have been some slackening recently. While prices of industrial

materials are continuing to rise, no significant acceleration has been observed.

There are no serious supply bottlenecks although some delivery lead times have

lengthened and labor markets appear tight. Loan demand remains high. Despite

this generally favorable experience, businessmen are deeply concerned about

the future direction of the economy.

Consumer demand continues to be a source of strength in the New England

economy. Northern New England just saw the conclusion of one of its best summer

tourist seasons. All the associated retail outlets did very well. Back to

school sales throughout most of the District were very successful. The head of

a major New England department store chain reports that sales in August substantially exceeded expectations and the early days of September look similarly

good.

Sales of automobiles have also been stronger than expected. The region's

banks have seen no weakening in the demand for consumer loans. There are, however,

scattered indications of some slackening. One retailer notes that consumers

appear to be more cost conscious; in food purchases there is greater interest in

generic brands and the use of coupons. Another retailer has observed some slowdown in the rate at which credit is repaid; however, the head of a large utility

reports that uncollectible bills are continuing to decline.

Several local

consultants and the head of a large department store expressed concern that

retail inventories may be excessively high if there is any softening in demand.

Manufacturing shipments are substantially above a year ago. Several

surveys of the region's manufacturers suggest that there has been a slight

fall-off in new orders in the past month; more firms reported a decline in

orders than an increase. However, most firms contacted were very pleased with

their recent performance. A large chemical manufacturer said August shipments

were the highest ever. Orders for producers' durables and heavy capital equipment are also very strong. Housing related products are continuing to do well,

although one firm has seen a weakening in the demand for major appliances.

Firms are not experiencing any serious difficulties in obtaining materials

although several report a slowdown in deliveries of steel and aluminum. There

has been no substantial change in the rate of price increases. Manufacturers

appear to be keeping inventories under tight control. A large machinery

producer reported that his inventories were a little higher than desired; however, this was based upon concerns about the future course of the economy, not

actual experience.

In the financial sector, consumer loan demand remains high throughout

the region. For a large bank in southern New England, commercial loan demand

is strong and above expectations; in northern New England, commercial demand

is also strong but has fallen off slightly during the past month.

Professors Eckstein, Houthakker, and Samuelson were available for comment

this month. None of the three believes that monetary policy is an appropriate

tool to stabilize the exchange value of the dollar, nor do they feel that the

devaluation experienced so far is sufficient justification for the sacrifice of

domestic policy goals. All agreed that the outlook for inflation is discouraging,

and all were critical of the government's present approach to dealing with the

problem. More optimistically, all three were pleased to see the recent slowdown

in money growth rates.

Professor Eckstein noted that although the U.S. does have an obligation

to its creditors (particularly OPEC) to prevent an excessive decline in the

dollar, domestic interest rates are not responsible for the dollar's current

weakness. He fears that further interest rate increases will produce a recession

in 1979 without eliminating the inflation or energy imbalances that are the source

of the dollar's problems. Given the large interest rate increases that have

already occurred, Eckstein feels that "it would be rash to raise rates further

before determining if the economy is or is not slowing, if inflation is or is

not decreasing, and if the trade balance is or is not improving." It is Eckstein's

view that the government's time would be better spent gaining control of the

budget than worrying about stop-gap dollar support measures.

Professor Houthakker agrees that the dollar should not be a consideration

for monetary policy. Arguing that the inflationary effects of the weak currency

are minor, he feels that appropriate domestic policies will lead to a stronger

dollar by themselves. Houthakker is less than sanguine about the short-term

inflation outlook. He deplores the government's tendency to rely on "cosmetic"

anti-inflation policies (jawboning) rather than to attack such underlying causes

of inflation as unnecessary import restrictions and business regulation.

Citing the disappointing domestic results of the British pound support,

programs, Professor Samuelson feels that "little blood should be shed" in a

dollar defense effort. He is particularly concerned that such policies could

turn the "soft landing" expected next year by many forecasters into a Germanstyle soft economy with a strong exchange rate but weak profit and output growth.

Since Samuelson believes that the economy will generate a minimum of 5 percent

inflation through 1980 in any case, he sees little benefit from a policyinduced recession at this time.

SECOND DISTRICT - NEW YORK

Business activity continued to advance in August at a moderate pace,

according to recent comments of directors and other business leaders. Retailers chalked up only modest gains, but with a pick up in sales in early

September merchants remained optimistic about autumn sales prospects. Outside

of retailing, economic activity seems to be expanding with slightly less vigor

than in recent months. Respondents reported ample supplies of materials and

most kinds of skilled workers, so that production apparently could be increased

in the event that the tempo of economic activity were to pick up. There is

little indication that business demands for external financing will change

materially in the near term. Loan demand at New York City banks has firmed up

a bit, reportedly in part due to a "spillover" of demand from regional banks.

Retail sales in the Second District registered only modest gains in

August. A spokesman for one national retailer noted that his company's sales

in the Second District have lagged behind those rung up elsewhere in the country.

Several other retailers in New York City mentioned that their sales last month

fell short of what had previously been projected. None of the merchants felt

that the City's newspaper strike had contributed to the sluggishness of sales.

Notwithstanding the modest overall gains, consumer purchases of appliances and

new cars reportedly held up fairly well in August, and several retailers indicated that sales receipts had "snapped back" in the first week of September.

Indeed, merchants appear to be generally optimistic about the prospects for

autumn retail sales.

Business activity outside of retailing turned in a mixed performance

in August. Some businessmen reported that their new orders were growing at a

healthy clip, but others experienced a bit of a slowdown. Likewise, some

businessmen reported that delivery lags were lengthening slightly, while others

saw them shortening. There was virtually unanimous agreement among respondents

that there were no materials shortages or bottlenecks. One director did mention that the petroleum industry had recently had a little difficulty in purchasing lime and oil well cement. Isolated shortages of certain kinds of

skilled workers were mentioned by several businessmen from the New York City

region who faced problems in hiring.

While the directors and other business leaders were disturbed over

the recent pace of inflation, they are in general agreement that a slowdown

is in the offing for the second half of this year. Nevertheless, there are a

few scattered reports that materials prices are beginning to rise at a somewhat faster rate—though evidently not so fast that the price rises are perceived to be symptomatic of any underlying shortages. One director was especially concerned about the unusually big price hikes that have occurred in the

new equipment sector in recent years. According to another director, some

manufacturers have lately tried to hold down their output prices through substitution of materials and compromising somewhat the quality of their goods.

Despite the outlook for a slowing in inflation, the rate of price increases

remains worrisome.

Business demands for external financing are not expected to change

substantially through the remainder of 1978 and early 1979. Most respondents

foresee little change in the pace of business borrowing. On the one hand, one

director thought that there might be a decline in such borrowing because of a

slowdown in economic growth and a consequent reduction in the rate of inventory

accumulation.

In contrast, other directors felt there would be an increase in

borrowing. One director indicated that the firms with which he was acquainted

appeared to be borrowing short term to finance their capital expansion in

anticipation that interest rates will be turning down in the foreseeable

future.

A survey of business loan developments at several major New York City

commercial banks suggests a firming in loan demand. Only one respondent failed

to register an increase in loans during August, a month which was cited by two

respondents as typically being a somewhat slack month for commercial and industrial borrowings. All five respondents reported various signs of loan demand

"spilling over" from regional banks who for reasons such as liquidity strains

or capital limitations were either unable or unwilling to fully satisfy specific customers1 loan demand. Currently, the "spillover demand" has most

commonly taken the form of loan participations offered by smaller regional

correspondents, although some respondents also cited outright loan purchases

and instances in which a correspondent referred customers directly to the

respondent New York City bank. Despite some firming in loan demand at New

York City banks, most respondents noted that some below-prime lending continued. One bank emphasized that agencies and branches of foreign banks in

the U.S. had used "cut rate" loan terms to attract existing business of large

New York City banks. Looking to the near-term business loan demand, nearly

all of the respondents expected either continued moderate expansion or some

pick up.

THIRD DISTRICT - PHILADELPHIA

Reports from the Third District indicate that business conditions

are generally good. Manufacturers note continued expansion and gains in local

employment, but are not nearly as optimistic for the longer term. For

the first time since early 1974, respondents to the Business Outlook Survey

foresee a downturn in economic activity within six months. Retail sales are

reported to be sluggish this month, but the slowdown can probably be explained

by some unusual conditions. Merchants are less bullish about business conditions

six months out than they have been recently, some citing overextension to the

consumer as a cloud in the sales picture. Area bankers say loan demand is

strong and expect it to remain so through early next year.

Interest rates are

expected to rise between 25 and 100 basis points over the next six months, but

there is little agreement about when a peak will occur.

Manufacturers responding to this month's Business Outlook Survey

say business continues to pick up steam in September. One-third of this

month's respondents say general economic conditions are better than they were

in August while less than one-tenth say the business climate has worsened. In

terms of specific indicators, new orders and shipments are substantially

higher in September, while inventories have reportedly stabilized.

On the

job scene, the continued expansion has been good news for local labor. Both

the size of factory work forces and the length of the average workweek are

growing in September.

Looking ahead to early 1979, local manufacturers continue to lose

confidence.

In fact, for the first time in over four and a half years,

Survey respondents are predicting a fractional decline in general business

conditions within six months. Consistent with this bearish outlook, new orders

are expected to fall, and shipments and inventories are projected to remain

at their current levels between now and March. Respondents don't see the

anticipated slowdown as having a large impact on employment or capital

expenditures, however. Factory payrolls will remain at their current sizes,

according to the Survey, but the workweek could be trimmed marginally. At

the same time, manufacturers plan to hold the line on plant and equipment

expenditures,

Inflation continues in the local industrial sector in September as

price hikes become more widespread.

Of the manufacturers polled, 3 out of

5 report paying higher prices for inputs this month while 2 out of 5 say they're

charging more for their finished products. For the longer term, about 80 percent of the respondents expect the cost of raw materials to be boosted within

the next six months, and half plan to raise the prices of goods they sell.

Area retailers say sales are sluggish in September, Although moderate

gains over year-ago levels are reported, sales volume has not quite kept pace

with the retailers' optimistic expectations. Merchants offer a variety of

reasons for the shortfall. Year-ago sales figures reflect the opening of a

new shopping complex in central Philadelphia and are considered to be unusually

high and difficult to match. Moreover, ongoing political demonstrations in the

downtown area have kept many shoppers away, possibly depressing sales figures

below what they would otherwise be,

Retailers contacted have mixed views regarding the course of economic

activity over the next six months. Forecasts of sales volume at the end of

the first quarter of 1979 range from "flat" to 6 percent over year-earlier

levels. Those merchants whose projections are at the lower end of the range

foresee overextension of the consumer becoming a problem by early 1979,

probably after the holiday shopping season. Retail inventories are unanimously

reported to be in good shape currently, with no changes in the inventory-sales

ratio planned.

Local bankers say loan demand is strong in all categories. Business

loan volume is up as much as 20 percent over September '77 levels and

generally "on target." Similar increases are noted in consumer loans. As

for the next two quarters, bankers expect loan demand to continue to be strong.

The prime rate at all of the banks contacted is currently 9 1/4 percent.

Interest rates are projected to rise over the next six months but con-

tacts differ as to how high they will go. Although all expect to see a peak

between now and March, estimates of that peak range from 9 1/2 to 10 1/4 percent. There is widespread concern that the peak will be only temporary and

that subsequent rate hikes will be observed and a cyclical peak will be

reached late next year.

Deposit flows appear to be satisfactory at this time with no disintermediation problems observed or anticipated.

Bankers expect to continue

to be able to meet loan demand between now and March '79.

FOURTH DISTRICT - CLEVELAND

Consumer spending in the Fourth District has been spotty, and

retailers, except for automotive, are uncertain over prospects for the balance

of the year. Scattered signs of inventory adjustment are apparent in major

appliances, steel and some soft goods. Steel prospects next quarter are also

uncertain because of imports. Capital goods spending still lacks pervasive

strength but mortgage loan demand remains strong.

Consumer spending continues strong in automotive buying while spending

for other consumer goods has either shown little movement or has tapered in

recent months. Automotive producers and suppliers are reasonably optimistic

over sales and production prospects at least until the 1979 models are in

abundant supply. Auto suppliers, including steel, glass, and tires, report

orders are strong into next quarter. Uncertainty marks responses of retailers

and producers of other consumer goods. Retail sales have not shown much movement in recent months, according to an economist with a major department store

chain. He expects that year-over-year increases in retail sales will probably

fall from a recent 10% rate to as low as 7% to 8% by year-end as the personal

savings rate rises by about 0.5%. Sales of some major appliances fell in the

last few months. Another official with a large department store chain noted

lack of sales strength in their northeast Ohio store and remarked that consumers have responded to higher prices by moving down to lower priced, mass

merchandising chains. Difficulty in gauging consumer buying attitudes has led

to scaling down in inventories and buying plans this fall. An official with

a major grocery chain noted a consumer shift to lower priced, generically

labeled products.

Some adjustment of business inventories appears in the making. Stocks

of some major appliances, steel and soft goods are probably more than ample

and may tend to hold down production gains. Apparently the unusual strength

of appliance sales last quarter resulted in some false perceptions of underlying market strength, according to a major appliance producer. Recent weakness in sales, however, has not been across the board. Steel stocks have been

built more rapidly than expected as a result of the continued surge in imports,

and some adjustment has been underway. On the other hand, stocks of petroleum

products are expected to be built again, in response to an expected OPEC price

increase and to a need to build home heating and other fuel stocks.

Steel economists have revised downward their expectations for steel

production for the balance of this year. Orders have slowed and the operating rate has eased to about 85% of capacity, down from about 90% in the second

quarter. Auto orders are strong and are likely to continue so through most

of the fourth quarter unless production schedules are cut back. Though orders

from machinery and aircraft industries are satisfactory, they have weakened

in the shipbuilding and appliances industries, the latter apparently because

of large inventories. Steel imports are a major uncertainty in the outlook.

One steel economist said if imports continue at July's high volume, this will

be a record year and will cause a sharp drop in steel production similar to

the second half of 1977 when the operating rate fell to the range of 70% to

75% of effective capacity. Another economist believes, however, that the

bulge in imports may be over and if the yen continues to rise, trigger prices

will be pushed above domestic prices.

There is still little indication that gains in capital spending this

half will be as large as during the first half of this year. An economist

with a major capital goods producer, whose forecast of P&E spending called for

a real gain of 6.5% this year, is now skeptical because of the higher cost of

capital and slower growth in the economy than originally anticipated. Strength

in producers* durable goods is in railroads, aircraft, and trucks. Industrial

and commercial construction orders are strong. Heavy construction work remains

a mixed bag, according to an official with a major design construction and

engineering firm. Orders from steel and chemical industries continued weak

but awards for terminals and barges for hauling grain rose sharply last

quarter. Energy-related business has not been up to expectations because of

continuing uncertainty over energy legislation.

Mortgage demand continues strong, although some seasonal weakening

is noted by lenders. One S&L reported a record volume of loans in August but

believes last month represented the peak in both lending and mortgage rates.

Some others report loan activity so far this month equals that of the past two

months and that unless there is a let-up in commitments, they may have to discourage new applications by raising rates. Mortgage rates in some areas are

as high as 10%% for an 80% loan, although 10% appears to be the most common

rate.

S&L interest in six-month certificates has not waned, although some

complain of the higher cost of funds associated with the new certificates.

Another view, however, is that S&Ls are better off in the current market than

a year ago when mortgage rates were about 1 percentage point lower but many

were paying 7 3/4% for long-term certificates.

FIFTH DISTRICT - RICHMOND

The level of business activity in the Fifth District was little

changed over the past month, but most areas of activity can still be characterized as firm. The volume of new orders received by District manufacturers

was essentially unchanged, but shipments continued to expand and backlogs of

orders were up slightly. Retail sales gained broadly, with relative sales

of big ticket items registering a slight increase over the month. Retailers

continue to experience widespread price increases, while some manufacturers

apparently experienced some relief in this area in recent weeks. Business

loan demand has moderated substantially in recent weeks, but area bankers expect demand to strengthen in the fourth quarter.

Results of our survey of manufacturers are generally positive, suggesting continuing expansion at a moderate pace. New orders changed little over

the summer, but remain at the level reached during a burst of growth last spring

and backlogs are large.

Shipments continue to expand at a good pace. Stocks

of materials and finished goods apparently declined slightly in August and

although one-third of our respondents view current levels as excessive, recent

performance of inventories suggests they remain well within manageable limits.

Manufacturers' employment and weekly hours worked both continued to expand

during August. Manufacturers' responses suggest some improvement in the price

situation. Reports of price increases were less widespread in our latest

survey than in recent months and there were scattered reports of declines in

prices received.

A strike against a principal coal carrying railroad is depressing coal

output and employment in southern West Virginia and southwest Virginia. The

impact of the strike on coal output has been difficult to assess, but production remains well below the pre-vacation second quarter level. It has been

estimated that from 20,000 to 25,000 miners have been idled as a direct result of the lack of transportation for mined coal. There is no evidence to

date, however, of coal shortages developing within the District.

Survey responses of retailers suggest continued strength in sales as

well as a recent pickup in relative sales of big ticket items. Reports from

our directors, however, suggest that sales in some parts of the District are

not as strong as they were in early summer. Retailers responding to our

survey report increases in employment, some further inventory accumulation,

and widespread price advances during the past month.

A majority of manufacturers participating in our survey continues to

hold to the view that business conditions, nationally, will turn down within

six months. A sizeable number also expects some decline in activity in their

respective market areas although some are more optimistic concerning the outlook for their own firms. Retailers generally expect little change in the

level of activity through the first quarter of 1979, and a majority of our

directors share this view.

Commercial and industrial loans have been flat over the past several

weeks. The heavy loan demand of late spring and early summer, especially demand

for intermediate and long-term loans, has moderated substantially.

This is true

of virtually every industrial classification, including both durable and nondurable goods manufacturers and the retail trade sector. Bankers are expecting

demand to strengthen in the coming quarter, however. Bankers have also been

looking for signs of a turnaround in the unusually strong consumer instalment

loan demand but these signs have not yet materialized. Automobile sales continue

to explain the strong instalment loan demand and there is some feeling that

Christmas sales will help sustain high levels of consumer lending. Second

mortgage loans are a moderately important form of consumer financing in some

areas, but these loans do not appear to be a significant element in supporting

current consumer expenditures.

Residential construction activity is healthy and banks are not reluctant to finance speculative housing projects. Builders seem to be doing a

good job of gauging their own markets and banks are apparently not fearful of

a sharp reduction in the demand for new homes. Reports of tighter mortgage

markets, however, are increasing. Thrift institutions in the District of

Columbia and Maryland, for example, have not experienced significant deposit

increases recently.

District farmers' cash receipts from farm marketings have continued to

improve over last year's level, recording a 5 percent gain during the first half

of the year. Further improvement in District farm income can be expected as the

flue-cured tobacco marketing season progresses. With the season's sales volume

through August 31 heavy and prices averaging 20 percent above a year ago, the

value of gross sales is up some 47 percent over that in the same period last

year. Harvesting of fall crops has begun and is moving at a fairly rapid pace

in southern areas of the District. Crop prospects generally range from fair

to good, while pastures are in fair to excellent condition.

SIXTH DISTRICT - ATLANTA

Growth has clearly slowed In many sectors of the District economy,

and the price outlook remains dim. Consumer spending has decelerated throughout the summer, making many retailers uneasy about sales prospects and stock

levels. Loan growth has slackened with a downturn in business loans. Home

sales and starts have faltered in some areas.

Still, substantial strength

remains in many segments. Nonresidential construction is on the upswing, and

housing is still booming in the major growth centers. Tourism has been breaking

records. Crop prospects are good.

Although talk of advance buying has toned down, the price outlook

has scarcely improved. Building supply firms are expecting sharp increases,

perhaps double the inflation rate, in materials prices. The Jacksonville port

will raise its charges 10 percent on October 1 to cover a wage hike. Prices

of fall apparel are at least 7 percent higher than last year. Although

they're presently discounting much of the increases away, food processors

have lifted list prices. On the brighter side, a steel fabricator expects

steel prices to stabilize.

Retail sales are generally regarded as strong, although year-over-year

gains have continued to shrink. Big-ticket items appear to be moving slower in

several areas; grocery store sales seem to have rebounded.

Inventories may be

a shade higher than desired. Many major retailers are uneasy about fall sales

prospects; others are reported to be buying extensively for the Christmas

season.

A slowdown in new car sales has been widely attributed to extremely

short inventories rather than a faltering of demand. Late-model used cars are

at a premium and are becoming difficult to get. Truck sales continue very

good. Auto dealers generally expect moderate sales growth in the 1979 model

year.

Large banks' business loans have declined significantly in recent

weeks (their first drop since the credit expansion began), but consumer instalment and real estate loans continued to advance robustly. Consumer deposit

gains have been exceptionally strong; checking accounts, six-month CDs, and

other personal time and savings deposits all have increased briskly.

In many of the District's smaller, slower growing cities, housing

markets have begun to soften as buyers and builders resist high prices and

financing costs. But in the rapidly expanding areas, home sales and residential starts continue at a record pace. Demand for raw land remains strong.

Inflows to thrifts have been satisfactory and mortgage rates relatively stable.

Commercial real estate markets are also quite active. A substantial

amount of office space is under construction or on tap, and warehouse space

is tightening rapidly. Relocations or expansions of out-of-District and

foreign firms are contributing significantly to both commercial and industrial

expansion in Florida, Alabama, and Georgia.

It looks like a record year for tourism is in the making. Off-season

traffic has been unusually heavy throughout Florida; even the long-ailing Miami

Beach area has had its best season since 1967. The Mississippi coast and the

inland areas of the District have also enjoyed a pickup in recreational

visitors. Discount air fares have certainly contributed to the influx, possibly

drawing off some highway traffic. An all-night, fast-food chain whose primary

locations are highway interchanges blames its recent sluggish business on

increased air travel. At destination spots, the restaurant business is

booming—but higher wages and food costs are virtually eliminating profits.

Weather conditions have been favorable for crops in most of the region,

but dryness has been damaging in some cotton-producing areas. Reductions of the

cotton crop there, in Texas, and in California are likely to accelerate the

recent gradual uptrend of cotton prices. The latest small declines in feed

cattle prices will probably be erased this fall. Harvest of the 1978-79

citrus crop has just begun. The orange crop appears to be of good quality

and substantially larger than last year's.

SEVENTH DISTRICT - CHICAGO

The expansion in the Seventh District doubtless has slowed since the

catchup period of last spring, but there is no sign that a reversal is likely

in the near future. Consumer spending continue to advance with rising incomes.

Demand for workers remains strong and increases in compensation may be accelerating. There are few indications that inventories are excessive, and some

items are in tight supply. Demand for capital goods is generally, but not

universally, strong. Residential activity is holding up better than had been

expected. Prospects for commercial and industrial construction are favorable.

Corn and soybean crops are developing well.

Informed people are deeply concerned about inflation, the foreign trade

deficit, high taxes, and high interest rates, but there is no evidence of a

rush to the storm cellars.

In September 1974, just before the sharp recession,

there were significant signs that both consumers and businesses were holding

back on spending decisions.

Local polls of consumer sentiment reflect the widespread pessimism

reported nationally.

There is no clear evidence, however, that people are

restraining their desires for goods and services.

Retail sales remain vigorous, overall. The largest national retailer

has been reporting very narrow volume gains from a year ago, but last year this

firm was offering deep discounts to stimulate sales and profit margins were

affected adversely. Among the products selling especially well are autos and

light trucks, recreational equipment, TV sets, dishwashers, home remodeling

items, and gasoline.

In the non-retail sectors spending is very strong for

air travel (helped by discounts), telephone usage, and insurance.

Consumer credit delinquencies are very low, below the best levels of

1972-73* despite sane concern expressed earlier this year.

In 1973 some

deterioration in collections was already in evidence, and conditions worsened

in the 197^-75 recession.

Demand for gasoline has been running well ahead of expectations in

recent months.

Refineries have been operating at 9^-95 percent of capacity,

which is "all out" for practical purposes.

Gasoline stocks are low and prices

have strengthened recently, in contrast to the usual post-Labor Day decline.

No serious shortages are foreseen, however, because large additional supplies

of gasoline can be obtained from abroad, although at higher average cost.

Demand for workers continues strong in most areas.

occurred in recent months.

Strikes

Pew layoffs have

also have been relatively unimportant,

except for the usual rash of teachers' strikes.

Chicago City College teachers

recently rejected a 7.5 percent boost (plus 3 percent longevity increases for

most), and are demanding 12 percent.

Increases this year by private employer®

have ranged from 7.5 to 11 percent with most concentrated in the 8-10 percent

range.

Union members and nonexempt personnel tend to get larger increases.

Job offers to recent college grads were the best in several years, especially

those technically trained, particularly women and blacks.

Demand is especially

strong for engineers, programmers, electricians, skilled metalworkers, auto

mechanics, restaurant workers, office workers, domestics, and, as always, sales

people.

The capital goods sector continues mixed but generally vigorous.

Among the strongest lines are heavy trucks, rail freight cars, locomotives,

machine tools, power shovels, heavy tractors, front-end loaders, farm equipment,

small power generators, and diesel engines. Demand for electric motors, often

a "leading indicator" for equipment, generally shows no sign that a "turn" is

imminent. Demand for heavy mining equipment (shovels and draglines) remains

slow, but inquiries suggest an improvement. Demand for electrical generating

equipment for utilities is below expected levels.

Most machine tool producers have full order books with planned deliveries stretching into 1979 and beyond. Demand for very large machine tools,

advanced technology tools, and automatic transfer machines are especially

strong. Motor vehicle industry orders for downsizing new engines (both

gasoline and diesel) and other components are a major factor, but all equipment producers are said to be "in the market."

The 10-day International Machine Tool show opened in Chicago September 6. The show will be the largest ever. Of the 1,000 exhibitors registered, one-third are foreign. U. S. producers fear that orders for imported

machines will benefit because of shorter lead times.

Major producers of electrical generating equipment complain of a lack

of sizable new orders. Partly this is because equipment produced for some

utilities "in the last cycle" has not yet been installed because of construction delays caused by litigation and/or regulatory roadblocks.

A serious cement shortage developed in midsummer and has become steadily

worse. "It's a crisis," according to one spokesman. Residential and commercial

construction has been delayed as ready-mix producers have placed customers on

allocation. The reasons are several:

strikes at cement mills, problems with

barge and rail transport, closing of older plants, and, of course, high usage.

Nevertheless, a problem of this dimension had not been anticipated.

EIGHTH DISTRICT - ST. LOUIS

The pace of economic expansion has continued at a moderate rate in

recent weeks according to Eighth District businessmen. Retail sales continue

up and inventories remain at satisfactory levels. Increases in orders are

reported by some manufacturing industries and, overall, the construction

industry continues to register some gain over a year ago. In the financial

area, saving inflows continue above the expectations of many financial

officials, and interest rates on mortgages have declined slightly in some

markets. In the agricultural sector crop yield prospects are near normal

despite adverse weather conditions in some areas.

Retail sales continue to post modest gains after inflation is taken

into account. Department store sales varied among respondents, but, on

average, sales remain on an upward trend. Some store managers, whose sales

have been stagnant recently, noted less aggressive sales promotions as one

reason for their lackluster performance. Managers of those stores having

gains, noted that the largest sales gains were among fashionable dresswear

for men and women, jewelry, and higher quality stereo equipment. Inventories

are near desired levels given the sales outlook. Retailers generally believe

the sales outlook is encouraging although some sentiment was expressed that

"high" levels of consumer credit might dampen consumers' ability to maintain

spending. Automobile sales are reported to be quite good in the District.

The primary complaint of automobile dealers was the inability to obtain

enough larger-sized cars to meet customers demands.

The pace of manufacturing activity continues unabated. A major

chemical firm representative reported that larger than expected sales gains

were registered in the past month. A box board company also reported that

increases in sales occurred in recent weeks and that supply constraints are

causing substantial increases in prices. Manufacturers of building products

report a continued high level of demand, although gains, in general, have not

been as rapid this year as last year. A building products manufacturer

expects residential housing construction to remain near current levels

through next year. Exceptionally strong increases in sales were reported in

oil and gas industry products, with growing backlogs as a result of the

worldwide surge in drilling. One representative reported that production is

being hampered by long delivery schedules for forgings and certain

semi-processed metal products.

Overall the construction industry has continued to advance in the

District. Nonresidential construction has made gains over last year while

housing construction has remained at a high plateau. In the St. Louis

metropolitan region housing starts are holding at approximately the same

level as a year ago. However, more of the new homes are being built in

outlying areas.

Banks and thrift institutions report greater than expected inflows

of savings deposits. These institutions report that the new higher-yielding

certificates are partially responsible for the continued high level of

inflows. Some, however, expressed concern about the effects of the higher

yields on profit margins. However, none of the officials contacted

contemplated a change in policy relative to the new certificates.

Overall loan demand remains generally strong although demand for

some types of loans has apparently lessened in recent weeks. For example,

business loan volume at large commercial banks was unchanged in August after

registering large gains in earlier months. Nevertheless, the prime lending

rate for District banks rose along with the rate in the larger money markets.

The growth in demand for agricultural loans has subsided in recent months,

due, in part, to improved income in the agricultural sector. Continuing to

register large increases in loan volume during August were real estate and

consumer loans.

Quoted rates on home mortgages have remained steady at

9-3/4 percent for an 80 percent loan and 10 percent on a 90 percent loan;

however, lenders in some parts of the District reported that the actual

lending rate had declined slightly.

Farm income prospects continue to be more favorable than a year

ago, largely based on higher crop and livestock prices. Recent prices for

cotton and soybeans provide farmers an opportunity for a profit and forward

contracting is reported to have increased. In some areas, for example,

farmers have already sold as much as one-third of their soybean crop.

Abnormally hot and, in some areas, very dry conditions in August damaged crop

prospects in some southern portions of the District. Reports indicate,

however, that, on the whole, crop yields will be near normal. Reports

indicate that dry pastures in West Tennessee have led to liquidation of some

cattle.

NINTH DISTRICT - MINNEAPOLIS

Developments in the real sector indicate that the Ninth District's

economy may be somewhat stronger than the nation's as the third quarter draws to

a close.

However, continued high farm loan demand plus low seasonal deposit

inflows are contributing to tightness in district money markets.

According to this Bank's August survey of district manufacturers, sales

in the second quarter averaged 15 percent more than a year ago, with most of the

gain coming in durable goods. Durables producers expect their sales growth to be

nearly 20 percent in the last half of the year, while nondurables manufacturers

are looking towards 10 percent gains.

This would mean that district sales of

nondurables will increase about 11 percent for the year, compared to an expected

growth rate of 9 percent nationally (reported in McGraw-Hill's May survey). And

durables sales here should increase about 19 percent in 1978, compared to the

national expectation of 11 percent.

Construction

activity,

including

mining

and

energy

projects

in

Michigan, North Dakota, and Montana, has been very strong this year. Residential

building continues at a record pace despite rising mortgage rates, and commercial

construction is doing very well according to several sources.

Low commercial

vacancy rates have encouraged this activity and should sustain commercial

building.

However, shortages of cement are producing some spot reports of job

shutdowns or slowdowns. Major cement plants in the region have had maintenance

problems and have been operating below capacity. Contractors have been placed on

allotments, causing them to look for additional supplies from other parts of the

U.S. and from Canada. A secondary market for cement is said to have developed.

The generally good picture in construction and manufacturing has kept

the district's unemployment rate well below the national average. The July rate

was 4.6 percent.

Tight labor markets were reported by several Reserve Bank

directors, and even the chronically high unemployment area of upper Michigan is

having problems finding skilled labor.

Excellent crops, improved prices, and government programs have greatly

benefitted the district's agricultural sector.

Dairy farming in central

Minnesota is said to be as profitable as it has been in the last five years.

Dairy observers expect a robust picture for the next two years. High prices are

holding in the livestock sector, where profitable operations are once again

expected.

The resulting higher farm income is showing up in improved spending as

many farmers upgrade their operations after several years of low (or negative)

profits.

Implement dealers are enjoying good sales, and Minnesota farmers are

also investing in irrigation equipment and crop storage facilities.

Retail sales, especially for durables, are generally good throughout

the district.

But several of our sources reported some easing of soft goods

sales. Very warm weather has delayed purchases of fall clothes, and retailers

seem to be in a cautious mood.

Although fall sales are expected to pick up,

retailers are keeping inventory positions at lean, manageable levels.

Financial sector developments are not much different than in the

nation.

A generally tight money situation is having the predicted impact on

mortgage funds. About 25 to 50 percent of the "Treasury bill" CDs are said to

represent new deposits.

Seasonal factors are affecting rural banks, however. Deposit growth at

ag banks has been flat during summer months but should improve as cash flow from

harvesting steps up this month.

The upgrading of farm operations has resulted in heavy loan demand at

banks and production credit associations.

So rural bankers are experiencing a

tight money situation for factors in addition to national phenomena. Apparently

this tightness has produced many requests for loan participations, and daily

average borrowing from the Reserve Bank was three times higher than in August

1977.

This situation has left district ag banks with limited but adequate

liquidity. Rural banks are still accepting reasonable loan requests.

However, a major banker in the region expects strong loan demand to

exceed deposit growth at many rural banks next year.

Higher operating costs,

equipment upgrading, and rebuilding of livestock herds are expected to fuel loan

demand. As a result, this banker expects increased use of "outside funds," that

is, correspondent borrowing, Federal Reserve discount window activity, and

referral to the Farm Credit System.

TENTH DISTRICT—KANSAS CITY

Business activity and inflation are both strong in the Tenth

District. Price increases continue to be in the 6 to 8 per cent area for

most inputs. Neither input availability nor capacity utilization currently

appear to be major problems. Retail sales are generally reported as sharply

higher than last year, but expectations are for a sales slowdown in the

fourth quarter. On the agricultural front, credit conditions and farm

income have greatly improved over last year. Bankers in the District report

a mixed loan picture in general, but sharply higher consumer instalment loans.

The economies of Oklahoma and Nebraska are doing very well, according

to directors from those states. The Oklahoma City area is thriving due to

energy development, agriculture and, especially, a new GM plant. The general

business climate is good, capital investment is very high, and there seems to

be a "buyer's panic" in housing.

In Nebraska, too, the economy is strong,

bouyed by an especially good agricultural situation.

Businessmen there are

expressing a "cautious optimism."

Purchasing agents for firms in the machinery, drug and medical

equipment, transportation, electrical goods, and furniture industries report

that prices for most of their inputs have risen about 6 to 8 per cent over

the year. Aluminum and steel prices, however, are each up about 15 per cent.

Over the past 3 months, primary metal products have increased about 5 per

cent and paper packaging products have gone up 6 to 7 per cent. With the

exception of paper products, which are anticipated to increase an additional

6 to 7 per cent, no major price increases are expected for the remainder of

the year.

Input materials availability has not presented any major problem

for the industries surveyed this month. Lead times for inputs in the nonfarm

transportation equipment industry, however, have been increasing and are

expected to increase further this year. Currently, most purchasing agents

consider their materials inventory levels to be adequate for meeting upcoming

demands, or perhaps even slightly higher than needed. Tool and dye makers are

still in short supply, but this shortage has not created any bottlenecks in

production. Plant capacity is adequate in most industries contacted, but near

full capacity is reported for some furniture, truck-trailer, and medical

supply manufacturers.

Retail sales in the Tenth District are generally up sharply over yearago levels.

It appears that major appliances, home furnishings, and other big

ticket items are selling rather slowly, except in the Denver area. Sales

strength appears to be in new fall and winter clothes, school apparel, and

other seasonal items. Most stores indicate that those price hikes that have

occurred have been in the 3 to 7 per cent range. However, half of the stores

said they had to absorb some of their increased costs simply because of increased competition. Most stores report that their inventory levels may be

a "little" high, but are much better than last year. Retailers believe that

consumer resistance to higher prices will be strongly felt in the fourth

quarter and that competition will be exceptionally keen. As a result, some

managers expect softening in consumer purchases and slowdowns in sales volume.

Inventory levels are expected to remain in good condition.

Agricultural credit conditions across the Tenth Federal Reserve

District have shown continued improvement since late last year. Although

the demand for farm loans remains strong and District agricultural banks

continue to have high loan-to-deposit ratios, farmers' cash flows have shown

substantial improvement and this has been reflected in their ability to

service outstanding loans in a timely manner. This cash flow improvement

is partly a result of government assistance, and partly of loan refinancing.

A more important factor has been improved farm income. Paced by increased

beef prices—up more than 40 per cent from a year ago—and record farm export

sales for fiscal 1978 (estimated at $26.6 billion), realized net farm income

is expected to be about $25 billion this year compared to $20 billion in 1977.

Cash receipts from farm marketings for the first 6 months of 1978 in Tenth

District states have exceeded year-earlier levels by 18 per cent.

Most bankers contacted in the Tenth District report moderate loan

demand. Bankers in Colorado and Oklahoma report heavy demands for real

estate loans, and most bankers in other areas are experiencing moderate increases. Agricultural loans are up moderately in Kansas and Missouri,

apparently due to loans for agricultural inventories. Other areas are

experiencing either flat or decreased agricultural loan demand. Commercial

and industrial loan growth is mixed in the District, with a slackening of

loan demand by national accounts.

Consumer instalment lending is up sharply

throughout the District. All bankers contacted indicate that they raised

their prime lending rate in September, and some expect it to peak in the

fourth quarter of 1978 at about 10 per cent. Deposit growth is moderate at

most banks contacted. Demand deposits are down throughout the District.

Time deposits are up sharply, especially in Denver and Kansas City, but

savings deposits are flat. Most large city bankers attribute the lack of

disintermediation to the money market CD's. While all bankers contacted

are currently offering the ceiling rate on money market CD's, some may not

if the 6-month Treasury bill rate increases further.

ELEVENTH DISTRICT—DALLAS

On "balance, economic activity in the Eleventh District continues

to show moderate growth, according to the Directors and businessmen

surveyed this month. Current demand for factory output remains strong

but does not appear adequate to produce significant gains in total

manufacturing activity. Residential construction appears to be headed

down as home prices continue to climb and mortgage markets remain tight.

Savings and loan associations and banks report little change during the

past month in either the inflow of deposits or demand for loans. Department store sales showed a slight advance in August from July's high

level. Drought conditions in some areas are causing farmers to plow

under damaged cotton crops and ranchers to liquidate cow herds.

Few manufacturers report significant increases in production,

as demand for many products appears to have leveled off. One notable

exception, however, is the production of drilling equipment. Lead times

now extend up to two years on some drilling equipment in response to the

heaviest demand in 20 years. One equipment manufacturer complains that

high employee turnover is restricting production.

Construction activity remains strong in the District, especially

in Houston and Dallas. Overall, however, total housing starts have

declined below the level of a year ago. Inventories of unsold homes do

not appear excessive in most cities, although some observers indicate

San Antonio is nearly overbuilt.

Shortages of material and labor continue to plague the construction industry. Acute shortages of cement have forced some contractors

to eliminate Saturday work schedules "but otherwise have not caused

serious work stoppages. Residential builders, however, have found the

cement shortage a hindrance to scheduled completion of sidewalks and

streets in some developments. Small contractors appear to be bearing

the brunt of the shortages. A new cement plant just began operating in

Central Texas which should help ease the supply situation in that part

of the state. Other materials in short supply are sheet rock, insulation,

and plywood.

Wet new savings received at District S&L's continue to improve

slowly, extending the trend of recent months. The gains are attributed

largely to the new money market CD's ability to aid the retention of

funds, but they have not substantially improved the availability of

mortgage credit which is expected to remain tight well into 1979Mortgage loan demand has leveled off, and conventional mortgage rates

remain unchanged at the 9 3/^-percent level. S&L's continue to rely

heavily on FHLB borrowing, which has been running at nearly twice the

level of last year. Some respondents reported a reluctance to continue

this form of borrowing.

Total loans at some weekly reporting banks appear to have eased

slightly in mid-August. As a whole, loan demand appears healthy and

reflects a high overall level of business activity in the District.

Business acquisitions continue to account for much of the strength in

business loan demand. Growth in deposits, however, is largely limited

to large-denominated CD's. Liquidity positions appear to have improved

in recent weeks. Some banks that had been experiencing a squeeze in

liquidity in recent months were able to improve their positions in

August by moving more heavily into government securities.

Sales at department stores showed only slight improvement in

August as year-to-year gains have been slim for the past several weeks.

Inventories remain in line at most stores, although a few respondents

reported a higher level of stocks than current sales warrant. The sales

outlook is good, but some retail executives expressed concern about the

relatively high level of consumer debt. These executives feel that

consumers may be more cautious in their spending and that retail sales

may slow. One large national conglomerate of department stores is

planning on recession in the first and second quarters of 1979.

Hot, dry weather has caused severe stress to the cotton crop in

the major producing areas of the District. A greater than normal amount

of dryland cotton has been plowed up in the southern High Plains of

Texas, and yields are expected to be far below normal. Ranchers continue to liquidate cow herds in drought-stricken areas, but marketings

of slaughter cows appear to be slowing down. It does not yet appear

that many cattlemen have begun to rebuild their herds. Cow and calf

prices are at high levels with some stocker calves reportedly sold for

$1 a pound. Feed cattle marketings are expected to be heavy in the ne?±

two months, due to a relatively large number of feedlot placements in

the second quarter. This may dampen or delay any seasonal upward

movement in feed cattle prices.

TWELFTH DISTRICT - SAN FRANCISCO

Some of the wind appears to have been taken out of the western

economic boom. Retail sales are growing at a hair above the rate of inflation

There is no apparent slowdown in plant and equipment spending. There appears

to be a slight weakening in the real estate market and associated construction

industry, and this may be reflected in a softening in mortgage interest rates

in a few areas. There are also indications that western consumers are

beginning to spend less and save more.

Retail sales in the district appear

to be increasing right at,

or just a notch above, the rate of inflation. Domestic auto sales continue

strong but foreign car dealers complain that their sales are down due to the

declining dollar. In southern California, Cadillacs and other luxury cars

are selling as fast as dealers can get them. Some softening of sales is reported for hard goods, furniture and adult clothing.

Several directors felt

that some current retail sales, especially those of foreign goods, are in

anticipation of increased inflation and a further decline in the dollar.

Twelfth District Directors tend to feel that the decline in new

factory orders observed nationally is not reflected in the western economy.

Boeing's growth continues in Seattle. A large manufacturer of chain saws and

power tools plans continued expansion of plant and equipment. A large food

distributor in the Pacific Northwest plans expansion of both its retail and

wholesale distribution centers and will complete construction of its first

restaurant within 60 days. Agricultural reports from all over the region

note good crops, stable prices and incomes considerably better than last year'

Even pulp manufacturing is picking up after two years of heavy inventories.

Reports on residential constructionvand housing sales are somewhat

mixed, but the general trend appears to be toward a weaker market.

Southern

California, where the housing market had been the most feverish, now exhibits

the most visible signs of softness.

Homes which used to sell in less than

a month now stay on the market two to three times as long. Houses priced

above $100,000 are taking even longer to sell and sellers are settling for

prices even less than the 5 to 10 percent below asking price observed for

less expensive homes.

Residential construction permits in the 5-county

area of southern California are being requested at a slower pace, partly

due to a pre-July bulge in permits as people scrambled to avoid the implementation of energy conservation requirements.

Reports from the rest of

the district indicate that demand is still strong, but that it does take a

bit longer to sell houses and there is a modest decline in both permits and

starts in some areas.

The District savings picture is somewhat mixed.

The majority of

reports indicate that consumer loan demand remains strong while consumer

savings remain weak. However, one California and one Oregon bank are beginning

to notice a reversal.

The Oregon bank noted that consumer time deposit in-

flow rose back to normal levels in June and set a record gain for July. The

California bank did not notice any real growth in savings until August. The

experience of these two banks could signify the beginning of a district trend.

The mortgage picture is also mixed, since while most areas are still

experiencing high and stable mortgage rates of about 10 percent, a few areas

have noticed a 1/8 to 1/4 of a percent softening. An Oregon banker explains

his rate reduction as being due to a seasonal weakening in demand. Reports

from southern California are mixed since some bankers claim there is a

weakening of demand while another claims that the new money market certificates have worked so well for S&L's that they no longer need to ration mortgage

funds as strictly as before.