Beige Book

CONFIDENTIAL

(FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

May 14, 1980

TABLE OF CONTENTS

SUMMARY page i

First District-Boston page 1

Second District-New York page 4

Third District-Philadelphia page 7

Fourth District-Cleveland page 10

Fifth District-Richmond page 14

Sixth District-Atlanta page 17

Seventh District-Chicago page 21

Eighth District-St. Louis page 25

Ninth District-Minneapolis page 28

Tenth District-Kansas City page 30

Eleventh District-Dallas page 33

Twelfth District-San Francisco page 36

SUMMARY*

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

Economic activity slowed markedly across the country according

to this month's district reports.

Led by a sharp falloff in automobile

sales, consumer spending has weakened substantially.

There is evidence

of a contraction in sales of other durable goods as well as of nondurables.

The outlook outside the consumer sector was generally pessimistic as well.

Residential construction has ground to a virtual halt, although nonresidential

building remained brisk in several districts.

With a few notable exceptions,

mainly the defense, energy and machine tool industries, a wide crossection

of manufacturing firms reduced their workforces in the face of declining

new orders, shrinking backlogs and rising inventories.

Many firms also began

to reassess capital spending plans, but other than in the auto industry, there

has been little actual retrenchment thus far.

On the financial scene, despite

lower interest rates, business and consumer loan activity remained dormant.

Agricultural loan demand, however, rose about in line with past seasonal

patterns.

Consumer spending weakened across the nation in April.

While the

largest cutbacks continued to be in big-ticket durable items especially autos,

purchases of nondurable goods also slackened.

As a result, there were reports

of excessive retail inventories in several districts.

In the Chicago area,

where demand was particularly depressed, merchants offered large price

reductions and discount programs to trim accumulating stocks.

In contrast,

inventory-sales ratios were reported as acceptable in both Philadelphia and

New York.

Auto stocks were generally lean.

Nevertheless, many dealerships

have gone out of business in the Atlanta, Dallas and San Francisco regions.

Declining consumer credit card usage nationwide contributed importantly to

weakening demand.

Existing credit balances were significantly reduced

according to Atlanta and Richmond, and new credit purchases were down as

much as 20 percent from last April in Dallas with cash buying, as evidenced

in the weak growth in currency nationally, not taking up the slack.

debt collection and bill payments

Slower

were noted in Philadelphia, Chicago and

San Francisco.

Outside the consumer sector, overall business conditions deteriorated

in recent weeks.

Backlogs were worked down, as new orders declined and

lead times were shortened in a variety of industries ranging from

steel in Cleveland and Chicago, to furniture and floor covering in Boston,

to chemicals and electronic supplies in New York.

Inventory liquidation was

reported in Philadelphia, Chicago and Kansas City although excessive stocks

are not yet a problem for New York manufacturers.

As a result of decreased

production activity, workweeks were shortened in Richmond, Philadelphia and

Chicago, and l a y o f f s — b o t h temporary and p e r m a n e n t — h a v e spread.

Both hourly

and salaried employees have been dismissed in the automobile and related

industries in the Chicago and Cleveland areas, while workers in homebuilding

and construction industries have been particularly hard hit in Atlanta and

San Francisco.

Reassessments of capital investment plans were underway by

firms in Boston, New York and St. Louis, but little actual retrenchment has

taken place except in the auto industry.

As with auto employment, these

cutbacks have been concentrated in the nation's midsection.

Input prices

continued to rise in Philadelphia and Kansas City although metals, lumber

and paper prices have all softened in the Boston district.

In contrast to these generally bleak conditions, machine tool

manufacturers in New York and Cleveland appear relatively insulated from

the recession.

In Boston, Dallas, San Francisco and St. Louis the manufacturing

base has been strengthened by the defense industry.

In Minneapolis, defense

procurement contracts have grown by 30 percent in the last two years.

Residential construction continued to stagnate with activity at

a virtual standstill in Atlanta, Cleveland and St. Louis.

are 50 percent below last year in Kansas City.

building have also been especially depressed.

Housing starts

Industries related to home

The plywood industry in San

Francisco has been operating at less than half capacity.

Estimated joblessness

in construction and related industries ranged between 20 and 40 percent in

Chicago.

At major lumber and plywood mills in the San Francisco district,

one-sixth or more of the workers have been furloughed.

Nonresidential

building, however, remained brisk in Minneapolis, St. Louis and San Francisco.

Reflecting weakening loan demand across the nation, shortterm interest rates declined sharply.

Still, relatively high interest rates

and growing economic uncertainty continued to discourage business and consumer

borrowers alike.

Moreover, nonprice lending terms were tightened in Kansas

City, New York and San Francisco.

Business loan demand eased in all districts

although demand by energy industries remained strong in Dallas.

New York

reported some companies shifted to the long-term bond and commercial paper

markets to meet credit needs.

Although home mortgage rates are well below

recent peaks, little activity was noted in Kansas City or Cleveland although

in Chicago and St. Louis, a few loans were made.

personal bankruptcies was noted.

in Richmond.

In Atlanta, a surge in

Auto instalment loans were especially weak

Agricultural loan demand rose seasonally but this sector, as

others, was affected by comparatively high interest rates and escalating

uncertainty.

Some bankers are concerned about repayment ability because

of generally rising agricultural costs and declining prices for food.

Farm credit was tight in Chicago but adequate in Atlanta, Dallas and

Richmond.

Slower repayments and increased renewals and extensions, how-

ever, became common in Richmond, while in Chicago many farmers restricted

purchases, especially df equipment, in order to ease their credit needs.

FIRST DISTRICT - BOSTON

Signs of recession are becoming more widespread

Retail sales have slowed.

nonresidential activity.

in the First

District.

Homebuilding is depressed although there is still

Manufacturers of consumer products have seen a

marked decline in demand, but firms producing capital goods continue to do well.

Input prices are softening.

A number of respondents commented on the suddeness

of the change; sales in March were very good but April brought a decided

weakening.

Retail sales have slowed.

experienced a falling off in demand.

Department stores and specialty shops have

However, sales at discount

stores remain strong and may even have picked up.

department

The head of a chain with

both general department stores and discount operations observes that

discount

sales in early April exceeded expectations while sales of general merchandise

suddenly fell behind.

Consumers are said to be very price

In manufacturing

conscious.

there is a clear distinction between the experience

of firms in consumer related areas and those producing capital goods.

Those

selling to consumer markets have seen a sharp deterioration in sales.

A wide

range of products has been affected, including such diverse items as appliances,

handtools and hardware, silverware, and eyeglasses.

The furniture and floor

covering industries were said to be weak several months ago, but now they are

described as "disaster areas."

The weakness at the consumer level is having

second and third order effects although changes at this level are not as severe

as in the manufacture of the consumer goods themselves.

Orders are down for

motors used in air conditioners, automobile plastics and for packaging materials.

The capital goods industries, on the other hand, are still doing well.

However,

several firms said they are reassesing their own capital spending plans.

remains a source of strength.

Input prices are softening.

and zinc prices are all down from the end of the year.

Defense

Copper, lead, tin,

Lumber prices are said

to have weakened a lot and there has been a softening in paper prices.

Some

plastics prices remain low even though plastics are petroleum based and costs

have increased sharply.

Loan demand has slowed although two large banks in southern New England

report that demand remains surprisingly strong.

Banks are looking carefully

at loan requests.

Professors Samuelson, HouChakker,

comment

and Eckstein were available

this month.

Samuelson believes

in a recession."

deep and

long.

that "the medicine has w o r k e d — w e are

He is not confident, however,

Although

the demand

for domestic

for some time, consumption spending generally

resiliance" until a month or two ago.

that

certainly

this recession will be

autos may remain

showed

depressed

"special signs of

"The consumer has not

learned a

permanent

lesson;" so even though

quarters,

it is too soon to say that consumers are now adopting more

conservative

spending habits.

demand ana the general

the impending

the saving rate may rise in the next

This

fundamental strength

lack of "excess

inventories" may

two

in consumption

limit

the size of

slump.

Samuelson believes

the large increase in April's unemployment

"may contain some noise, but there is still plenty of message

Fed."

for

"This is precisely

stock coupled with

that money demand

the time for easing off."

the larger-than-expected

is very weak.

Unless

for the

The declining

drop in interest

interest rates drop

rate

rates

money

implies

further, money

growth will fall short of the Fed's targets.

rates to rise sharply

exceed

the target.

The Fed allowed

in 1979 and early 1980 so that money growth would not

Unless

it is a "foul weather friend," the Fed must now

allow rates to fall to keep money growth on target and build

for its new operating

interest

credibility

procedures.

Houthakker sees no radical surprises in the latest economic

data.

He still believes real output at the end of this year will equal output

year-end

1979.

His research suggests that consumption and

demand will not collapse during

investment

1980.

Houthakker supports the current

however, should be prepared

for

targets for Ml growth.

The Fed,

to allow interest rates to fall enough so that

money growth does not fall below target.

Even if the slump is more

severe

than he now foresees, Houthakker encourages the Fed not to revise its money

growth

targets.

Eckstein believes real GNP will decline about 8 percent at an

annual rate this quarter led by falling consumption spending; over the

course of the coming recession, output will decline 3.5 percent; and the

unemployment rate will peak at 8.5 percent.

Eckstein believes that "the

recent credit controls confused and frightened people," and the lesson he

draws from this experience is that the "government should not play with the

psyche of consumers."

Eckstein believes that the Fed should try to achieve its current

M-1A growth targets.

now endorse.

This is a better policy than any other the Fed might

"With this monetarist principle,

interest rates should

decline sharply and then rebound abruptly later in the year, a V-shaped

profile."

SECOND D I S T R I C T — N E W YORK

Business activity in the Second District continued to lose momentum

in April.

Consumer spending weakened at major department stores across the

district at the same time that automobile sales were lethargic.

consumer sector, the outlook was generally pessimistic.

Outside the

Manufacturing

firms

in many industries have started to reduce their workforces in the face of

declining new orders and shrinking backlogs.

Cautious inventory

however, appear to have kept stocks from growing excessive.

policies,

Many firms also

have began to reassess capital spending plans, but there has been only limited retrenchment

thus far.

On the financial side, business loan demand at

major New York City banks slowed as some companies shifted to the long-term

corporate bond and commercial paper markets to meet credit needs.

Consumer spending in the Second District weakened in April.

eleven-day transit strike in New York City contributed

The

to the downturn at

metropolitan stores, but a similar slackening occurred throughout

the region.

While monthly sales comparisons are distorted by the effects of the transit

strike and timing of the early Easter selling season, merchants voiced

con-

cern that the recent poor performance of sales was indicative of a more

prolonged economic slowdown.

Credit financing of sales fell at a major

department store chain, while another store reported a shift from credit to

cash transactions.

This downturn is occuring although relatively

little

reportedly is being done by these respondents to directly discourage credit

card usage.

In spite of lagging sales, conservative inventory policies have

kept stocks at acceptable levels.

Domestic car sales fell sharply in A p r i l .

With few

dealers in the Second District reported a severe falloff

truck purchases.

50 percent.

exceptions,

in new car and

In some instances, sales declined by as much as 40 to

In the last 10-day selling period in the month, floor

at one dealership

being booked.

reportedly ceased

traffic

and as a result, no new orders w e r e

Demand for used cars, however, has remained relatively

strong

and their prices are rising sharply due to the increasing scarcity of

supply

as potential buyers postpone the replacement of their old models until they

are no longer serviceable.

Dealers in New Y o r k State w e r e concerned

the state's usury ceiling on automobile loans was restricting

that

financing.

A l l of the respondents felt that local financing problems w e r e being

exag-

gerated by media coverage, which was scaring away even those customers

eligible for finance company loans.

Dealer stocks are lean,

reflecting dim sales prospects and the high cost of financing

still

however,

inventories.

Outside the consumer sector, overall business conditions also have

deteriorated

in recent weeks.

A sharp, dramatic falloff in new orders and

a shortening in lead times was reported by manufacturers

in such diverse

industries as paper products, chemicals, consumer and industrial metals,

electronic and photographic supplies and steel.

Several firms have begun

to reduce their staffs both through attrition and layoffs.

of a major metals manufacturer,

workforce.

In some

layoffs have affected 30 percent of

divisions

the

In contrast to other District producers, m a c h i n e tool manufac-

turers so far h a v e been relatively insulated

from the downturn.

at these firms are still growing as new orders remain strong.

raw m a t e r i a l prices have abated, cost pressures remain intense.

and energy costs have continued

to rise.

Despite the uncertain

Backlogs

W h i l e some

Both labor

economic

conditions and the high cost of financing, however, relatively few firms

have marked down their capital investment plans.

With the exception of a

major chemical firm, which reported excessive inventory stocks,

inventories

remain at acceptable levels.

In general, the industrial outlook became more markedly pessimistic

during April.

Expectations of a longer and deeper recession have grown.

Upstate business leaders note widespread layoffs in construction and autorelated industries.

Downstate, further economic dislocations are imminent

with the planned closing of a major New Jersey auto plant in June.

This

shutdown will result in direct permanent job losses to 3,700 workers in

addition to the 800 already laid off.

Further job cutbacks and losses in

income are expected as the ripple effects of this plant closing work through

the local economy.

Most respondents do not anticipate a recovery in national

business activity until the first half of 1981.

But, with the exception of

a steel industry spokesman who feared the effects of continuing inflation and

foreign competition, the long-run outlook for the 1980's remains positive with

strong growth in demand expected for all products.

The weakening in business activity has been reflected in credit

demands.

New York City banks have experienced a sharp easing in business

loan demand, which they expect to continue over the remainder of the year.

While there has been some tightening in non-price lending terms, senior

loan

officers attribute most of the weakness to a combination of the recessionary

environment, the lean inventory situation, and some shifting to long-term

financing.

Moreover, given the current spread between the prime rate and

commercial paper rates, some firms apparently have recently turned to the

commercial paper market for short-term funds.

THIRD DISTRICT - PHILADELPHIA

Indications from the Third District in May point to a slowdown that is gaining

steam and spreading to a variety of sectors. Manufacturers in the District say industrial

activity has taken another large dip this month, and retailers report sluggish, but still

better than anticipated, sales. Representatives of both sectors say the future holds only

bleak prospects. District bankers say C

and 172 days, respectively.

Orders for steel dropped abruptly in late March and have remained depressed.

Cuts by motor vehicles producers continue, and new weakness has

developed in farm and construction equipment, structural steel, and prefab

buildings.

A local steel company has reduced its estimate of second quarter

shipments by 15 percent in recent weeks.

Paperboard orders in physical units, which had leveled off in the

spring of 1979, were 6 percent below last year in March, and probably by a

similar margin in April.

Many customers have cut back on paperboard orders

as they have reduced workweeks.

Production of household appliances, lawn

equipment, outboard motors, and other large consumer goods shipped in boxes

is down more or less sharply.

Home mortgage rates have been dropping rapidly from the 16.5-17 percent peaks posted in mid-April.

More important, some new loans are actually

being negotiated again, in contrast to the virtual halt in the March-April

period.

The decline in new residential construction will not be reversed

quickly.

Too many builders have called off plans for 1980, and some buildup

in finished properties has occurred.

In the Chicago area, only 700 permits

for single-faaily homes were issued in the first quarter.

This is off 8U

percent from 1978 and 6l percent below the depressed period of 1975.

ment permits are down almost as much.

centers are similar.

Apart-

Reports from other large district

Estimates of the jobless rate for construction workers

range from 20 to Uo percent—with many on short weeks.

Demand for ready-mix

concrete, gypsum board, hardboard, lumber, plumbing fixtures, built-in appliances, and carpeting is way off with accompanying layoffs in manufacturing,

distribution, and installation.

Layoffs by realtors and title companies axe

also significant.

Tight credit conditions and bleak farm income prospects continue to

have an adverse Impact on Seventh District agriculture.

farmland values down in the first quarter.

in only one other quarter—in 1977.

Our survey shows

Since i960 these values dropped

Average rates on farm loans at rural

banks rose from 13.5 percent in January to 17 percent in April.

While bankers

have been rationing credit, they also report a steep decline in demand.

Farmers are restricting purchases of all types, especially equipment.

Recent

evidence suggests that rural credit conditions may be easing as outflows of

funds associated with high market rates slow down.

Spring plantings have

an excellent start, but scanty rainfall and low topsoil moisture raise concern

about seed gemination.

EIGHTH DISTRICT - ST. LOUIS

Business conditions in the Eighth District continued to deteriorate

in April.

Consumer spending for durable goods, such as cars, trucks,

appliances, and home furnishings, declined further and some softening in

nondurable goods, such as clothing, was also noted.

reported to be at the lowest rate since the 1974-75

Manufacturing has slowed

New home sales are

recession.

further in a number of industries,

including

automobile assembly and related industries and home building product

industries.

On the positive side, manufacturing activity remains

fairly

strong for some capital goods products, particularly defense-oriented

energy-saving equipment.

and

Nonresidential construction has also held up well,

but fewer new projects were reported.

In the financial area, loan demand

has declined rapidly in recent weeks, and most interest

rates have dropped

sharply.

Consumer spending is reported

weeks.

to have slackened

further in recent

There has been a sizable reduction in consumer credit demand as

reflected

in credit card use.

charge balances.

Consequently, retailers report a downturn

in

Sales of big-ticket items are quite sluggish, and some

soft good sales have also deteriorated, but not to the extent of durable

goods.

Sales of both domestic and foreign-built

to decline in recent weeks, although

large domestic cars.

major

automobiles have continued

the decline has been most

severe for

Automobile dealers point to higher interest rates as a

factor discouraging sales.

On the other hand, dealers in auto parts

and repair materials are reportedly doing well.

Gasoline dealers

indicate

that sizable decreases in gasoline sales have occurred

that inventories are at relatively high

in recent months and

levels.

Representatives of the manufacturing sector reported

declines in unit sales in recent weeks.

further

With decreases in automobile and

truck sales, assembly plants have announced

additional layoffs of workers

and so have industries supplying parts for the manufacture of new

automobiles.

With the sharp decline in sales of new homes, building

materials industries, such as manufacturers

of lumber and connector

plates,

as well as manufacturers of appliances and furniture are experiencing a

decline in new orders.

that depressed

A representative of a major chemical firm reported

sales of automobiles and homes are beginning to affect the

sales of plastics and fiber

products.

Nevertheless, manufacturing activity of industries

energy-efficient

producing

and defense-related equipment remains quite

strong.

Foreign demand for a number of products, such as chemicals and

likewise remains strong.

holding up well

plastics,

While demand for capital goods appears to be

in general, several firms are reported

to be currently

reviewing their capital expenditure budgets in view of the decline in

economic

activity.

Residential building activity remains at a virtual

throughout the District.

standstill

Most home builders have cut back a substantial

portion of their work force, and some are reported

Reports of falling interest

to be near

bankruptcy.

rates are encouraging, but some feel that the

decline in rates will not generate sales in the immediate future because of

the expectation that rates will fall still further.

Nonresidential

building

remains fairly strong, reflecting large backlogs of projects.

General

contractors report that major projects continue to be funded, but that many

small jobs are being postponed or

cancelled.

Loans by major commercial banks in the District

consumers, and real estate developers have declined

to business,

sharply.

Only

agricultural loans have posted gains, reflecting seasonal increases in these

loans at planting time.

few mortgage loans.

Savings and loan associations are also making very

As a result of the drop in loan demand, interest

have begun to fall rapidly.

from about 20 percent

rates

The prime commercial bank rate has declined

to 17 1/2 percent, and the mortgage rate from about

1/2 percent to 15 percent.

16

Some savings and loan officials indicate that

the mortgage rate is likely to fall even more in the near future, and one

association has already reduced the rate to 12 3/4 percent.

In St. Louis,

two savings and loan associations have instigated the new "rollover"

mortgage (which permits an adjustment

in the rate charged), but they have

not been successful in marketing this type of loan.

Savings and loan

industry representatives are more optimistic about the prospects

for

improved profit margins with the decline in money market rates, but point

out that they are still being squeezed by the continuing shift from passbook

savings to higher yielding CD's.

Demand

for farm credit is reported

to be up from a year ago, but

bankers report that this credit is being supplied at competitive rates.

In

a number of communities, bankers are lending to farmers at lower rates than

to others in order to avoid the loss of their customers

Credit Association.

to the Production

NINTH DISTRICT - MINNEAPOLIS

The Ninth District economy is closer to a recession than it was a month

ago.

Sinoe last month, a decline in farm income, combined with reduced

and spending, has increased

off workers.

lending

the number of firms curbing production and

laying

The recession hasn't arrived, though, because investment

spend-

ing, manufacturing output, and planting intentions indicate district output is

still

increasing.

The Recession Is Getting Closer

Our

last

report

. . .

stated

that

the

district

had

been

moving

toward

a

recession, and in April it moved even closer.

In April

farm

income

fell

again.

Our

last

report

indicated

that

combination of falling prices and rising costs was reducing farm income.

income

fell

further

last

month,

as

farm prices

decreased

4.5 percent

a

Farm

between

March and April.

In

addition,

rates decreased,

lending

they were

declined

further

still very high,

nesses continued to reduce their borrowing.

and

in April.

district

Although

consumers

interest

and

busi-

Home loan applications at Minnea-

polis/St. Paul S&Ls, for example, declined 60 percent from April 1979, following

a 30 percent decline in March.

With

farm

income and

lending

continued to be curtailed in April.

sales of general merchandise,

autos,

still

falling,

spending

and

production

Directors report a further decline in the

homes, and

farm

implements.

In a large

central Minnesota community in April, for example, department store sales were

down 10 to 15 percent from a year ago, whereas in March these sales were down 5

to 10 percent.

With less consumer and farm spending, some manufacturers'

new

orders are still falling, and some manufacturers continue to curtail production

and lay off workers.

Partly as a consequence, Minnesota's initial claims

for

unemployment insurance in both March and April were up about 50 percent from a

year ago.

.

. . But It Still Hasn't Reached The District

Despite

the declines in lending,

trict still isn't in a recession.

and manufacturing

expanding.

output

Businesses,

considerable

would

spending,

and farm income, the

For a recession to occur, investment spending

probably

have

to

decline,

and

they

are

for example, are still investing, as directors

nonresidential

building,

both

inside

and

outside

the

still

report

Minnea-

polis/St. Paul metropolitan area.

Although growth has slowed, directors

report

output

that

attributes

district manufacturing

is still

increasing.

One

also

director

this growth to the district's large number of rapidly growing high

technology firms.

biggest

dis-

Another cause

manufacturers

are

of this growth

defense

contractors,

could

and

be

that

district

the

district's

defense

spending

has increased 30 percent in the last two years.

On the farm, output is also still expanding.

District farmers

to plant 4 percent more acres this spring than a year ago.

weather

has been helping

them achieve

this goal.

intend

So far, dry, sunny

In Minnesota,

for

example,

normally 20 percent of the corn planting is completed by May 4, but this year 36

percent

of

the

corn

planting

nearly

completed, district farmers are now hoping for rain to get the growing

season

off to an excellent

was

start.

planted

by

that

date.

With

their

TENTH DISTRICT - KANSAS CITY

Economic activity in the Tenth District

markedly.

prices.

is beginning

to slow

Retailers report declining sales and slower increases in

Purchasing agents report a recent slowdown in the rate of

crease of input prices.

being reduced.

Inventories

in retail and manufacturing

Savings and loans report

are

reduced savings inflows ana

mortgage commitments, and homebuilders report

the building and sales of new homes.

in-

significant declines

in

The winter wheat crop is in fair-

to-good condition, while supplies of fed cattle will be tight in coming

months.

Bank loan demand has continued

struction and real estate activity.

to weaken, particularly for

Deposit growth remains

generally

steady, though demand deposits are declining at some District

Retail activity

in the Tenth District

con-

is weakening.

banks.

Some re-

r

tailers report only slight gains in January-April dollar sales over a year

ago, while others report significant declines.

sales have been particularly weak.

Appliance and

All retailers contacted

declines in sales since mid-March, and all expect continued

throughout

the remainder of 1980.

furniture

report

declines

Most retailers report slower

price

increases in recent months, along with declining profit margins.

tory levels are generally considered too high for current sales

tations and are to b e trimmed throughout

Most purchasing agents report

expec-

the remainder of the year.

that input prices have risen by 10

per cent or more over the last 12 months, although many report

have recently begun to stabilize.

Inven-

that

prices

Input availability is not a problem,

with lead

times decreasing

throughout

are cautiously being held down.

the District.

Materials

inventories

Over half the firms contacted have

plant capacity, and about one-third

excess

of the companies have either idled

some

workers, or plan to do so soon.

Savings and

loan associations contacted

in the Tenth

report that savings inflows are down substantially

District

from last year.

Mort-

gage commitments are down significantly, due to a shortage of funds and

high mortgage rates.

However, mortgage rates in the District have

fallen to below 16 per cent, and are expected

to fall further

recently

throughout

the year.

Tenth District homebuilders' associations report that

housing

starts are down about 50 per cent from last year, with single-family

starts leading the decline.

housing

Many association spokesmen believe that home-

building activity will begin to improve within the next three months.

though sales of new homes have been off considerably,

there is not a

critically high inventory of unsold homes, and builders are not

home prices significantly.

out the District at stable

Al-

reducing

Building materials are readily available

through-

prices.

The winter wheat crop throughout

the Tenth District

be in fair-to-good condition at the present

forecasting a large crop for 1980.

time.

is reported

to

Commodity groups are

The Wheat Quality Council has projected

a 362 million bushel crop for Kansas, 12 per cent below the record crop of

1979.

However, area bankers are less optimistic

observing

in their

projections,

that crop conditions are much more variable than last

year.

Wheat prices have shown an increase in recent days reflecting concern about

the lack of rainfall necessary for continued

crop development

in the winter

wheat area and very dry conditions

Canada.

in the spring wheat areas of the U.S. and

Total U.S. wheat acreage is expected

to be up 11 per cent over

Supplies of fed cattle will be tighter in coming months,

producing some increase in cattle prices.

probably

Cattle currently being

quarantined

in feedlots because of DES implants will start coming on the market

week.

That may result

1979.

in only a short-term increase in slaughter

in about a

weights

and numbers marketed.

A survey of bankers in the Tenth District

in loan demand in the last

loan demand

is primarily

two months.

indicates a marked

Most bankers believe the decline in

the result of high lending rates, but they also re-

port that uncertainty about the current recession is contributing

softening of loan demand.

decline

to the

While the demand for all types of loans is generally

weak, the demand for construction and real estate loans appears to be virtually

nonexistent.

Several bankers report continued

strength in the demand

sumer loans.

However, these bankers also report

for c o n -

that they are discouraging

demand because of the Federal Reserve's Special Credit Restraint

this

Program.

In the past month, the prime rate in the Tenth District has declined

from the 19 to 20 per cent range to the 17 to 18 1/2 per cent range.

the majority of bankers on this month's survey have tightened

However,

their nonprice

lending terms, primarily because of the uncertainty regarding the effects of

the recession.

Most bankers report their deposit growth to be generally

stable.

ever, demand deposits are still declining at some banks, as customers

to shift their funds into interest-rbearing accounts.

Money market

and large CD's continue to account for most of the deposit growth,

some bankers are no longer bidding aggressively for these

deposits.

How-

continue

certificates

although

ELEVENTH DISTRICT—DALLAS

Evidence continues to accumulate to suggest the Eleventh D i s t r i c t

economy is s l i d i n g into recession.

Department store sales adjusted for in-

flation are declining, and auto sales continue to deteriorate.

Residential

construction is well below the year-ago level, and S&L's report a continued

net outflow of savings.

Bank loan demand has softened perceptahly. Factory

output is leveling off, and production cutbacks and layoffs are reported in

a growing number of industries.

The brightest spot in the southwestern

economy is oil f i e l d a c t i v i t i e s , which continue to expand.

Department store executives report real sales are declining as

consumer buying is drying up in anticipation of a deepening recession.

Nominal retail sales fell 2 percent in A p r i l .

Credit purchases have de-

clined as much as 20 percent below last y e a r ' s levels, and cash purchases

are not taking up the slack.

An increasing number of customers are re-

ported to be paying down their credit balances instead of purchasing new

goods.

Inventories have begun to bulge.

As a result retailers are step-

ping up price discounting and are placing fewer new orders.

New car sales continue to decline.

estimated to be 40 percent below last spring.

Sales of domestic models are

Demand for some models, par-

t i c u l a r l y imports, remains strong but is restricted by high prices and a

limited a v a i l a b i l i t y of credit.

their potential sales.

Dealers report closing only a third of

Many dealers are pushed to their financial

by the decline in sales and high inventory costs.

limits

Layoffs are on the in-

crease, and several dealerships have closed in the last month.

Residential construction activity is 20 percent below the level a

year ago, and no indication of a turnaround is in sight.

Further declines

in interest rates are expected to restimulate mortgage demand, and several

c i t i e s are providing funds for home mortgages with municipal bond issues.

However, builders indicate i t will take an estimated nine months for the

market to fully recover when the turnaround comes.

Most savings and loan associations continue to report net outflows of savings.

Overall loan demand continues to decline as most custom-

ers remain priced out of the market.

Demand for home improvement loans

continues to increase, but a majority of associations do not offer such

loans.

About one-half of the large monthly reporting holding companies

and banks appeared to exceed the 9-percent growth in their March reports,

but commercial banks generally report no problems in complying with the

guidelines for loan growth.

The situation has eased with the option of

selecting a base period for covered consumer loans and an increased volume

of loan participations.

Loan demand by the energy and real estate indus-

t r i e s remains strong, although the lack of long-term financing has reduced

the supply of interim construction financing by banks.

Consumer loan de-

mand is slowing and usage of bank credit cards is down s i g n i f i c a n t l y from a

year ago.

While agricultural loans are readily available at D i s t r i c t

banks, bankers express concern over the a b i l i t y of farmers to repay borrowings.

Some loan carryovers from the last two years have been absorbed by

federal programs, leaving banks in a better position to meet r i s i n g credit

needs in agriculture.

But r i s i n g production costs and f a l l i n g commodity

prices are creating concern over the outlook for farm credit.

While most D i s t r i c t manufacturers continue to report high levels

of capacity u t i l i z a t i o n and normal order backlogs, conditions are considered bleak for suppliers to the residential construction industry.

Signif-

icant cutbacks in employment prevail in the fiberglass and aluminum extrusion industries, and more layoffs are expected in 30 to 60 days.

manufacturers also report a rise in layoffs and factory closings.

Apparel

Produc-

ers of construction steel and cement are allowing attrition to reduce

employment levels.

However, the capital goods and defense industries are

proceeding with expansion and hiring plans.

ing has put chemical producers in a squeeze.

The decline in autos and housShipments of chemicals are

down, inventories are up, and prices of feedstocks are r i s i n g , reflecting

the ongoing increases in prices of oil and gas.

D r i l l i n g activity in the D i s t r i c t states is up a third over a

year ago and at a 24-year high.

Both major and independent oil producers

are reported to be cutting back production levels to take advantage of

preferential tax rates under the windfall profit tax.

TWELFTH DISTRICT —

SAN FRANCISCO

Sluggish retail sales, a slumping forest-products industry, and a

very weak housing market have led to a general softening of business

in the Twelfth District.

activity

Most analysts agree that a recession has finally

overtaken the Western region, especially in the timber area stretching

Northern California, across Oregon, and into Washington and Idaho.

from

However,

sharply falling mortgage interest rates in early May provide some hope that

the housing industry will come out of the doldrums.

Rail shipments of autos

and lumber are declining, and the downturn is now spreading to other types

of rail traffic.

On the farm front, good growing weather has been apparent

in most areas except California's Central Valley, but farmers are complaining

about low prices for their products as well as the high cost of labor,

materials and money.

In Southern California, the signs of an economic slowdown have

included a softening of supermarket and department-store sales,

significant

personal savings withdrawals to finance purchases, a downturn in creditcard transactions, continued weakness in consumer-durable sales, bankruptcies

among established auto dealers, and a marked lateness in utility-bill

payments.

Major Southern California department stores recorded a sales decline of one

percent between April 1979 and April 1980, which means a substantial decline

in real terms.

Thus, nondurable-goods sales are now showing the same

weakness that has been apparent in durable-goods sales since last

Other sections of the District all report similar

developments.

fall.

The lumber industry remained very weak in April, with 54,000 lumber

mill workers and at least 13,000 plywood workers out of jobs or working a

curtailed workweek.

half capacity.

The plywood industry has been operating at less than

About 55 lumber and plywood mills in Oregon have curtailed

operations, and some have even shut down permanently, partly because of the

recession but also because of the erosion of their timber base.

Some major

installations have furloughed one-sixth or more of their workers.

other hand, two major forest-products firms reported record

On the

first-quarter

profits, reflecting heavy export demand and strong domestic demand for pulp,

paper and packaging materials.

Real-estate activity has remained very soft throughout the West.

Small builders in particular have been hit hard by the downturn.

Builders

regained some of their optimism in early May, however, when major lenders

retreated rapidly from their 18-percent prime mortgage rate.

The nation's

largest savings-and-loan association went all the way to 12 3/4 percent.

In the nonresidential sector, a major contractor says that demand, while

still strong, may decline later because of a lack of long-term

Some areas of strength still remain visible.

schedules are continuing

Defense

financing.

procurement

to support the Southern California economy.

The

Puget Sound area remains strong because of Boeing's substantial order

backlog.

Military business is strong, especially because of Boeing's

for the cruise missile.

contract

Civilian-aircraft production will be reduced next

year, however, as a reflection of weakness in domestic-airline orders.

a result, Boeing's workforce is scheduled to stabilize later this year.

As

Meanwhile, Alaska's state finances are in good shape because of a $3.5billion surplus resulting

from its oil boom.

The legislature has

of part of this surplus by making subsidized mortgages available

and also by boosting legislative

On the agricultural

front, California's

residents,

San Joaquin Valley has been

from high-90's

rain, during the critical spring-planting period.

temperatures to snow and

Dairy producers

from soft sales and from high operating costs.

Northwest

farmers continue to feel the after-effects of the Russian wheat

But crop prospects in the Northwest

and seed crops.

to

salaries.

plagued with freak weather, ranging

suffering

disposed

are

grain

embargo.

look good for apples, cherries, hay

A deep snow pack and high water tables promise

southern

Idaho farmers their best prospects of the past four years, especially by

allowing crop production in non-irrigated

areas.

In the financial sector, most lenders are continuing

consumer-credit

terms.

Many credit-card

to tighten

lenders have increased

the annual

interest rate, and some have begun to charge annual fees for card use.

Some smaller rural banks report satisfactory operating results because

of a stable deposit base.

But a Southern California banker reports

availability of funds to lend despite continued heavy demand

limited

for loans.