Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

January 29, 1980

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 15

Sixth District-Atlanta page 18

Seventh District-Chicago page 22

Eighth District-St. Louis page 26

Ninth District-Minneapolis page 29

Tenth District-Kansas City page 32

Eleventh District-Dallas page 35

Twelfth District-San Francisco page 38

SUMMARY*

[Asterisk: Prepared at Federal Reserve Bank of Chicago.]

This month's REDBOOK reports show total activity continuing to hold

at high levels, but softening is expected in the next several months.

Mild

weather in the North, in contrast to recent years, has influenced activity

both for better and worse.

Weakness is still centered in the auto and housing

industries and their satellites, while performance has been "spotty" or "mixed"

in other sectors.

Several districts reported retail sales, other than motor

vehicles, to be surprisingly strong both before and after Christmas.

Signs

of erosion in the generally vigorous capital goods industries are spreading.

Unlike housing, nonresidential construction activity has remained at advanced

levels.

Inventories are under close rein and are in good balance overall.

Price inflation has not abated.

The President's grain embargo has not de-

pressed prices as had been feared.

Defense orders have not increased signifi-

cantly to date, and manufacturers' ability to boost output is closely limited

in the short run.

Credit demands have moderated in the face of high interest

rates and tighter credit standards.

Generalizations offered by the twelve districts reflect trends in

the major concentrations of activity in each region.

"still see very few signs of a downturn."

"surprisingly resilient in January."

Boston respondents

New York reports activity

Philadelphia finds a contrast between

a decline in manufacturing and "unexpectedly strong" retail sales.

Cleveland

respondents "still expect a recession," but are less certain about "timing

and depth."

The Richmond district's businessmen remain "decidedly negative."

Atlanta reports weakness in retail sales, but a boom in tourism.

Chicago,

affected more than the nation by the slowdown, sees "further deterioration."

In St. Louis, the evidence suggests that total business activity has "declined

somewhat" in recent weeks.

Minneapolis reports that "the region is not in a

recession," but "signs of softening persist."

activity continues to slow."

Kansas City says "business

Dallas finds near-term weakness confined largely

to autos and housing, with sustained long-term growth apparently assured.

San Francisco reports "no major decline in employment or production."

Mild temperatures and light snowfalls in December and January contrasted with experience of recent years.

In the northern districts there were

few impediments to transportation of commodities and people, and construction

continued at abnormally high levels. As a result, retail sales and manufacturing may have been maintained at deceivingly high rates.

However, lack of snow

markedly reduced tourist outlays in resort areas. Winter merchandise had to be

moved with large markdowns.

Stocks of fuel for heating were more than ample.

Tourism in the South, by contrast, set new records.

Auto and truck sales remain seriously depressed, with most parts and

assembly plants operating far below capacity.

permanently.

Some plants are being closed

Sales of imports and desirable small domestic cars are still

limited by availability.

Many auto dealerships have closed and there are fears

that many more will go under

before sales revive in the spring.

High interest

rates are a major burden for dealers carrying inventories and many potential

car buyers have been deterred by high finance charges and tighter lending

standards.

Residential construction activity and sales of existing properties

have declined further, with the end of the slide still not in sight.

The

recent suspension of state mortgage usury ceilings has not significantly

benefited states where usury was a barrier.

High interest rates, large down

payments, and high prices keep many potential buyers out of the market.

Most

districts report considerable strength in nonresidential construction, especially office and commercial buildings.

of ethanol plants.

Atlanta expects a surge in building

In the mining sector coal gasification projects are under-

way, and precious metals are booming in the West under the stimulus of high

prices.

Capital equipment production continues at high levels, but this

sector probably is no longer expanding overall. Among the strongest groups

are machine tools, railroad equipment, energy-conserving equipment, items related to oil and gas exploration, electronics, and commercial aircraft. Among

the weaker groups are construction equipment, farm equipment, heavy trucks

and trailers.

Some districts expect a rise in defense orders, but expansion

of output will be limited by the availability of critical materials, various

components, and skilled workers.

Inventories at both the manufacturing and distribution levels have

been kept lean by adjustments in output, except for some products facing very

weak demand.

Reta.il inventories had appeared somewhat high before Christmas,

but special promotions helped to correct these conditions.

Reports from virtually all districts show inflation continuing at a

high rate, with no abatement expected in I98O.

Rising energy prices and rising

labor costs are largely responsible.

The farm sector is relatively prosperous because of bumper crops and

high prices.

However, the grain embargo has created a larger-than expected

stock overhanging the

market*

Also, farm credit conditions are very tight,

causing some farmers to defer purchases of equipment and other investments.

The new two and one-half year floating rate certificates are proving

popular at both S&Ls and banks.

Six-month money market certificates continue

to expand at a rapid pace, and account for a larger volume of funds.

on the strength of business loan demand were mixed.

Reports

FIRST DISTRICT - BOSTON

Respondents in the First District still see very few signs of a 'downturn.

If there has been a change in the level of economic activity during the

past month, it has been for the better.

Retail sales seem to have picked up

in the few days before Christmas and preliminary January figures have been quite

good compared with a year ago.

An important exception is northern New England

which is suffering from a lack of snow and consequently a lack of tourists.

Manufacturing activity remains at a high level; in several cases December was

stronger than expected.

In the banking sector, the movement from savings deposits

to money market certificates is continuing.

Loan demand is holding steady; in

northern New England delinquencies seem to have increased.

Respondents from the retailing sector report that sales in the last

few days before Christmas were good.

This pick up plus relatively strong

sales in the first weeks of January means that the Christmas season was relatively

successful.

To a large extent the vigorous sales before Christmas were attributable

to very large markdowns.

This had the effect of bringing inventories under control

and while it cut profit margins, a firm's inventory position seems to have more

influence on its short-run purchasing behavior than do profits.

In general

retailing in New England had a much stronger Christmas than seemed likely a

couple of months ago.

New England.

An important exception, however, is the ski areas of northern

There has been virtually no snow in New England and this has

adversely impacted not only the ski resorts themselves but also all the hotels,

stores, restaurants and specialty manufacturers which are associated with them.

Even if snow does come there is no way that the losses can be fully made up.

Even real estate has been affected as developers of second homes rely on skiers

coming up to see model homes.

The level of manufacturing activity remains high.

One diversified

manufacturer in the high technology area reports that December was very good

in all categories; even areas which had been doing poorly picked up.

A manu-

facturer of measuring equipment used in the process industries finds that orders

are continuing at a strong pace and backlogs are high; if the present order

rate continues this firm's 1980 plan will be revised upward.

of aircraft and parts, backlogs are rising steadily.

quality sportswear has record spring orders.

For a large producer

A manufacturer of high

An exception to the generally

favorable picture came from a firm in the furniture area; attendance at trade

shows is low and price cutting is fierce.

Moreover, even those respondents who

are very pleased with their current level of business

in the year.

expect a fall-off later

Prices do not seem to be softening, although there have been some

improvements in delivery lead times.

Several firms which are active in the defense business were asked

whether the industry could handle a large increase in spending.

The industry

as a whole has been below capacity; so physical capacity is not really a

problem.

The exception is in the manufacture of semi-conductors and chips;

the lead times for these are already long and with a substantial increase in

defense demand they could become "unbelievable."

The other major bottleneck

is labor; there are not enough people with the necessary skills, especially

programming.

While an increase in defense spending over what was already platmed

will have some effects in 1980, the real employment impact will not occur until

1981 and after.

Banking directors report that loan demand is holding steady at a

relatively high level.

Two respondents from northern New England have observed

an increase in delinquencies and as a consequence they are adding to their

reserves for bad debts.

This increase in overdue loans is thought to be

independent of the problems caused by lack of snow.

All see a steady conversion

of savings deposits to money market certificates.

Professors Eckstein, Houthakker, Samuelson, Solow, and Tobin

were available for comment this month.

Houthakker, Solow, and Tobin

favor leaving the long-term monetary growth rate targets unchanged,

Eckstein favors significant tightening, and Samuelson favors something

in between.

Solow argues that continuation of the present 5 to 8 percent

target rates for M2 provides ample room for monetary deceleration

should that prove warranted.

After analyzing the various reasons for

the drop in the savings rate, he noted that they are all probably transitory factors; further decline should not be expected and a sharp reversal

is also possible.

Tobin argued that if the objective of policy is to

produce a mild recession, a continuation of present policies is sufficient

to achieve that goal. However, he questioned the strategy of seeking a mild

recession which, he feels, will do little to reduce inflation very soon.

He had hoped for but not really expected a more vigorous incomes

policy.

Houthakker argues that by the best available measure, the GNP

fixed-weight deflator, inflation has been holding steady at about

10 percent.

Thus, real interest rates are positive—short-term rates

significantly and long-term rates slightly—and are "now about right."

Despite the wild gyrations in the price of gold, Houthakker notes that

the dollar has performed well and speculative activity lias not spilled

over into other markets.

He continues to believe that the appropriate

gold policy would be a major (5 million ounce) sale.

Eckstein favors a 4 to 7 percent target range for M2.

argues that ve need a recession to reduce inflation.

He

He has revised

his real GNP forecast upward because of higher defense spending and

"momentum."

If the first quarter growth is positive, he feels another

round of tightening will be unavoidable.

He feels policy should be

geared primarily to interest rates since the aggregates are currently

impossible to interpret.

Samuelson favors "token tightening" simply to short-circuit

the ideological contention that we must show determination to counter

inflation.

In fact, the growth recession we are now in is producing the

appropriate amount of slack and a serious recession wtould be counterproductive.

If the economy strengthens, we should move to the low end of

the target range and run on the high side if it weakens.

The possibility

of a war is the most serious reason to expect the economy may strengthen.

Samuelson also urged paying little attention to sharp variations in metals

prices which are not a matter of national interest.

If the dollar should

weaken, Samuelson would welcome some overshooting on the downside, to

generate a little "excess competitiveness" for traded U.S. products.

SECOND DISTRICT—NEW YORK

Business activity in the Second District has been surprisingly

resilient in January, according to recent comments of District directors

and business leaders.

One of the brightest spots has been retail sales

which were generally substantially higher in the first three weeks of the

month than most respondents had expected.

Outside of retailing, business

activity also appears to be holding its own.

New brders at several indus-

tries posted modest recoveries after declining slightly in recent months;

and inventories seem to have been kept in line with shipments.

At the

same time, however, cost increases have cut into the profit margins of

some companies since they have been unable to raise their prices fully under

current market conditions.

Most respondents expect the Federal override

of state usury ceilings on mortgage interest rates to have little effect

on construction activity.

Retailers in the Second District generally experienced higherthan-expected sales in the first three weeks of January.

Merchants

chalked up good to excellent gains in sales in downstate New York and in

New Jersey.

Stores in New York City appear to have done slightly better

than those in the suburbs.

Sales were mixed, however, in upstate New York.

While consumer buying reportedly was "brisk" in the Rochester area, it was

less sanguine in the Buffalo area.

Inventories seem in balance with sales,

with one major department store actually reporting them to be on the lean

side.

In this vein, many of those retailers contacted noted a lengthening

in delivery times in some of their faster moving lines because suppliers

had been caught with low stocks.

Despite the healthy showing in recent

weeks, most retailers expect a weakening in sales in the months to come.

New car sales appear to have stabilized in the Second District with

small cars continuing to outsell large ones. At the same time, truck sales

are showing tentative signs of recovering from the doldrums of a few

months ago.

Despite the softness in certain automotive lines, domestic

dealers in this area report inventories are close to desired levels.

In

sharp contrast, foreign car dealers have apparently been unable to increase

their inventories which reportedly has hurt their sales.

Customers do not

appear to be kept out of the market by any tightening of credit.

Outside the consumer sector, business activity for most firms seems

to be holding steady or even improving slightly.

Two upstate manufacturers

of machine tools report that their orders and sales are continuing at high

levels, although one did note that inquiries concerning prospective orders

has tapered off a bit.

Also reporting gains in orders or sales were

companies in such diverse industries as chemicals, steel, and petroleum

refining.

One manufacturer of photographic equipment

indicated that its

sales had held up much better than it had been anticipated.

The strength

in consumption spending was cited by one upstate producer of paper boxes and

other packaging containers for consumer goods as buttressing his business

activity.

A few firms, however, do report that they have been hurt by

fall-offs in homebuilding and automobile sales.

Companies throughout the Second District report severe upward

pressure on their costs led by higher energy costs and rising labor costs.

One paper box producer, for example, reported that its costs had shot up

25 to 30 percent over the last six months.

Most other companies indicated

that their costs had increased by lesser amounts, on the order of 10 percent

per year.

The chemical companies contacted cited the rising cost of petroleum

as a key element of their costs.

In addition, labor costs have risen under

new contracts as well as under the COLA provisions of contracts negotiated

earlier.

The higher cost pressures have led to price increases, but profit

margins remain under pressure.

Many firms are selling in weak markets and

have been limited in their ability to raise their prices.

Some firms,

such as those in the photographic field, have been forced by the extraordinary

explosion in certain commodity prices to raise their prices significantly

just to cover costs.

These firms may therefore be facing a particularly

difficult period.

Despite price uncertainties, the longer-term outlook for firms is

not unfavorable.

There is some feeling that recent speculative fever in

commodity markets may have run its course, and oil supplies seem to be

coming into balance with demand.

Nevertheless, most firms still expect a

recession early this year with a recovery later in the year.

spending plans have not been reduced.

Still, capital

Further strength in the local economy

may come from the projected boosts in defense spending.

The temporary Federal override of state usury ceilings on mortgage

interest rates is expected to result in only a limited increase in homebuilding activity.

Several respondents felt that consumers simply could not

afford the high costs of debt service.

The amount of turnover in housing,

how&ver, was expected to rise as a result of increased availability of

mortgage funds.

THIRD DISTRICT - PHILADELPHIA

Reports from the Third District in January indicate that business activity is

mixed.

Representatives of the industrial sector report continued decline in

manufacturing and predict further slippage in the next six months. Retailers, on the

other hand, are experiencing unexpectedly strong sales this month. In the financial

sector, area bankers say consumer loan demand has been strong, but business borrowing is

mixed. Interest rates have stabilized for the time being, but will probably drop slightly

in thefirsthalf of the year.

Respondents to this month's Business Outlook Survey say the '80s have begun

with further slippage in area manufacturing.

About one-third of the manufacturers

polled this month say general business conditions are worse than they were in December,

while less than a tenth report improvement. In terms of specific indicators, new orders

are down again in January, but shipments have remained stable.

So, once again,

producers' backlogs have diminished, and a commensurate cut in inventories is noted. On

the jobs scene, payrolls have been pared slightly at area plants for the first time since

the slump began some seven months ago, and many managers have cut working hours

somewhat as well.

Looking ahead to the next six months, responding manufacturers predict

further decay of general business conditions, as they've ?been doing since December "78.

New orders are expected to increase only marginally between now and July, while a more

significant pickup in shipments is forecast. The cautious mood of the respondents is

reflected in their plans to maintain current inventory positions for a white and hold the

line on hiring as well. Working hours will probably be trimmed fractionally in coming

months.

Industrial prices are on the upswing again in January, according to survey

participants. Over three-quarters of the manufacturers polled this month report paying

higher prices for inputs than they did last month, and well over one-third say they are

charging more for their finished products. For the longer term, almost 9 out of 10

respondents expect the cost of raw materials to be higher by midsummer, while about 8

out of 10 plan price hikes by that time for the goods they produce.

Area bankers contacted in January report strong consumer loan demand, but

say business borrowing is mixed. Commerical loans are running between 1 and 19 percent

ahead of January '79 levels, but are generally below plan. A Director of this Bank

comments that inquiries about business loans are numerous, but that actual followthroughs are relatively few. Looking ahea

have reprcciiHH Ioiih

in the lumber industry and other activities associated with housing.

A

regional lumber manufacturer in Oregon reports that production is off 20 to

25 percent.

Closures of both plywood facilities and sawmills are also

reported in Oregon, with the loss of about 1,000 more jobs than is usual for

this time of year.

Employment data for the state of California show an

abnormal decline in November in the lumber and furniture industries although

the absolute numbers involved are small.

Prices of dimension lumber have

dropped by about a third since early September.

Non-residential construction

activity is credited with temporarily cushioning the building supply industries from a more severe decline and some observers expect considerably

worsened conditions in the coming months as non-residential construction

falters.

Automobile retailers are reported to be in severe straits in some

parts of the District.

A survey of dealers in Salt Lake City resulted in

«

remarks about sales such as "almost non-existent" and 'worst in twenty years."

In Seattle, however, dealers have accommodated high flooring costs by cutting

inventories and sales are reported to be "fair."

Sales of small and foreign

cars continue to be stronger than sales of large domestic automobiles.

There are very few reports of weakness in the District's economy

outside the housing and automobile sectors.

Demand for aluminum products

is so strong that a major producer is allocating the product to its customers.

Recent rainfall in the Northwest has removed the threat of hydroelectric

Dower cutbacks that would have hurt aluminum production.

High world

prices for lead, zinc, gold and copper have boosted t^e value of output

f

roin the Coeur d'Alene mining district in the Northwest.

If current metals

prices hold, the mining district's 3980 production Is expected to be more

than triple last year's figures.

The Secretary of Interior announced last,

month that the intermountain power project will be located near Delta, Utah.

Construction of this $4-6 billion plant is expected to further boost that

ar ea's economy.

The demand for skilled technical and clerical labor remains high

throughout much of the Twelfth District.

The unemployment rate of clerical

labor in Southern California is estimated to be only 2 percent, for example.

A major transportation company reports strong demand for its pipeline

and rail services despite weakness in the forest products and automobile

industries.

The large department stores in the District report a level of holiday

sales ranging from "good" to "exceeding our budgets".

A regional manager of

Sears in Utah added that regional sales were better than those for Sears

nationally.

Sales of kitchenware and softgoods were stronger than sales

of consumer durables.

Most retailers are apprehensive about the prospects

for the first quarter of the year and have maintained trim inventories.

Loan demand is generally weak throughout the District.

However,

a major bank headquartered in Southern California reports strong demand for

commercial loans and loans for commercial and industrial construction.

The

weakness in demand for consumer loans, auto loans and mortgage loans is

ascribed to consumer resistance to high interest rates.

Several lenders

in the District have dropped their rates but still have no significant loan

volume.

In those states without binding usury limits, funds are reported

to be "generally available" at the prevailing interest rates.

However,

applicants in many parts of the District are having difficulty qualifying

at present interest rates.

A bank in Oregon reports that only one out of

every four mortgage loan applicants is able to qualify for a loan.

Delin-

quencies on consumer loans are reported to be on the rise, although they

still remain at reasonable levels.

Bankers in the District generally expect

bankruptcies and foreclosures to increase in 1980.

They also expect loan

volumes to weaken further as previous commitments dry up.

The agricultural sector in the District is in good shape

after the successful harvests of 1979.

Banks in the central valley of

California enjoyed strong deposit growth because of good harvests and there

are no reports of anticipated farm credit problems.

Inventories of farm

equipment are high as a hedge against the increasing prices of this equipment.

Farmers expect the markets for beef cattle, dairy cows and farm crops

to be strong in 1980.