Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

March 25, 1981

TABLE OF CONTENTS

SUMMARY page i

First District-Boston page 1

Second District-New York page 4

Third District-Philadelphia page 8

Fourth District-Cleveland page 13

Fifth District-Richmond page 17

Sixth District-Atlanta page 20

Seventh District-Chicago page 23

Eighth District-St. Louis page 27

Ninth District-Minneapolis page 30

Tenth District-Kansas City page 32

Eleventh District-Dallas page 35

Twelfth District-San Francisco page 38

SUMMARY*

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

Overvie w.

The reports from the Federal Reserve Banks suggest little

overall strength in economic activity.

Current economic conditions are generally

characterized as ranging from w e a k or sluggish to stable, flat, and mixed;

w i t h the exception of the Tenth and Eleventh Districts w h e r e business activity

is seen as somewhat b e t t e r .

Expectations for the future are in contrast to

the current situation, w i t h optimism prevalent in varying degrees among most

Districts commenting on the outlook.

San Francisco's report of "gloomy"

expectations for economic activity in the Twelfth District is the major

exception.

Consumer Spending.

The current performance of consumer spending

varies across the country from improving slightly to remaining sluggish.

Dallas,

Kansas City, Chicago, New York, and Boston report sales as slightly improving.

Sales in the San Francisco, M i n n e a p o l i s , and Cleveland Districts are described

as w e a k or sluggish, w h i l e the Atlanta and Richmond Banks report sales to be

essentially flat.

Substantial gains in new domestic automobile s a l e s — d u e to

the rebate p r o g r a m s — a r e reported by m o s t D i s t r i c t s , but the gains are expected

to disappear with the termination of the rebates.

Manufacturin g.

W h i l e manufacturing activity varies considerably from

District to District and from industry to industry, there is little evidence of

strength.

New Y o r k and S t . Louis emphasize the different levels of activity

in various industries, as does Boston w h e r e the demand for high technology

output is softening.

Philadelphia and San Francisco call industrial activity

unchanged or flat, w h i l e Minneapolis reports current w e a k n e s s .

Cleveland

notes that capital goods spending may have reached a trough, but Chicago says

that "orders for business equipment remain at depressed levels in real terms".

Steel demand, however, is showing surprising strength.

Inventories.

Inventories of both retailers and manufacturers are

being kept under tight control, and are generally viewed as being at satisfactory levels.

The only significant difference was reported in the Richmond

District where, although retailers' inventories are generally at desired levels,

there has been some recent buildup in stocks.

A l s o , manufacturers' inventories

in the Fifth District are now reported as somewhat higher than desired.

Prices.

Moderation in recent price increases and optimism over the

price outlook were reported by some of the Reserve Banks.

Although Philadelphia

noted that "industrial prices have jumped again in the Third District," Boston,

Chicago, and Kansas City reported observations of moderating tendencies in price

increases.

Optimism about deceleration in inflation was expressed in the reports

from Cleveland and Kansas City.

Construction.

District reports.

Housing activity continues to b e weak according to most

Atlanta and St. Louis note an increase in potential customer

traffic recently, but with little effect on sales.

The effects of weakness in

housing include continued depressed demand for home furnishings and building

materials (Boston) and great financial strain on small builders

(Cleveland).

In some Districts (Atlanta, Richmond, St. Louis) strength in commercial and/or

industrial construction is helping to offset the weakness in housing.

however, also reports weakness in nonresidential construction.

Chicago,

Dallas stands

alone in reporting overall strength in construction activity, with residential

construction advancing steadily and commercial activity booming.

Financial Developments.

Reserve Banks generally describe loan demand as

flat or weak and sluggish, occasionally noting a direct relationship to weakness

in the District economy.

Business loan demand is sluggish at large commercial

banks in New York, while Richmond and Atlanta note a slight pickup in business

loan activity.

In the Tenth District, business loan demand is flat-to-weak

except in energy areas.

Total bank loan volume is up in the Dallas District,

with energy-related industries accounting for most of the growth.

In both

Philadelphia and New York below-prime lending activity has increased.

Agriculture.

In most reporting Districts recent rainfall has eased

the problems of low soil moisture conditions.

A s a result, wheat and pasture

conditions have improved in the St. Louis, Kansas City, and Dallas Districts.

In the Minneapolis District, however, continued drought and falling farm prices

threaten the agricultural sector.

Chicago and Kansas City report financial

difficulties for livestock producers, and Chicago notes that farm income

estimates for the year have been adjusted downward.

FIRST D I S T R I C T — B O S T O N

First District respondents report a pronounced softening in the

demand faced by manufacturers of high technology products.

These firms

were relatively unaffected in the early stages of the recession.

Manufac-

turers of more traditional products who were affected earlier have seen no

further deterioration but also no signs of a pickup.

to be keeping pace with inflation.

Retail sales appear

Housing starts are minimal.

Smaller

banks report business is slow; loan demand is just holding at last year's

level.

The region's high technology manufacturers, which fared well in

the early stages of the recession, are now seeing a softening in demand.

The fall-off has been particularly pronounced for electronics components, but

manufacturers of computers, word processors, and measuring and control devices

also seem to be affected.

Layoffs have been small and firms are still hiring

experienced professionals.

Manufacturing activity in areas other than high technology seems to

have stabilized.

There were signs of a pickup in home furnishings and

appliances in December but this proved short-lived.

the home furnishings business as "dead".

One executive described

The demand for building materials,

such as lumber, siding and roofing, remains depressed.

Firms producing a

variety of capital goods report that recent orders have been disappointing;

while there may not have been a deterioration a stronger performance was

expected.

A n exception is a manufacturer of specialized machinery for the pro-

cess industries; here new orders are strong and point to an unusually good year.

Price increases appear to be moderating.

A recent survey of local

purchasing agents showed a substantial increase over the month in the number

reporting no change in the prices of purchased materials and components and

a substantial decrease in the number reporting higher prices.

In addition,

several of the manufacturers interviewed have seen a slowing in price increases.

A dissenting comment came from a buyer of snythetic fabrics:

cutbacks in

capacity attributable to the recession are causing price increases despite

weak demand.

Manufacturers are generally satisfied with inventory levels.

In the retail sector, general merchandise sales are said to be

healthy.

Higher quality and off-price items are particularly strong; the

middle of the range is the weakest area.

Overall, retail sales seem to be

growing at or a little above the rate of inflation.

Professors Houthakker, Samuelson, and Tobin were available for comment

this month.

Houthakker anticipates that real growth will average zero to 1

percent this year and 2 to 3 percent next year.

He endorses the current

money growth targets and hopes that interest rate constraints will not deflect

the Fed from achieving its announced targets.

There is no reason to support

the dollar by limiting interest rate declines in coming months, and the prospective Federal deficit provides no excuse for limiting interest rate increases

later this year because Federal tax cuts will be nearly matched by spending

cuts.

Houthakker does not believe that the rapid decline in interest rates

during the second quarter last year was a mistake.

"The big mistake was con-

trolling credit; once the controls were lifted, the economy resumed its growth."

Samuelson believes that the "President's forecast is overly optimistic

in its entirety, no part is as improbable as the whole put together."

The

announced money growth targets cannot accomodate both 9 percent inflation and

3 or 4 percent real growth.

"With the Fed's monetary targets, growth will prob-

ably average 1 or 2 percent during the next five years while the inflation

rate declines to 7 per cent in 1985."

Samuelson, like Houthakker, does not

believe the Fed should "fine tune" interest rates.

Samuelson encourages the

FOMC to ask itself if "the Fed should alter its announced policy to take account

of interest rates."

Once growth declines, should policy become more restrictive?

"Should w e resist the normal decline in interest rates consistent w i t h slower GNP

growth given our money targets?"

accommodate little growth.

A s they stand, the announced monetary targets

If real growth fails to fulfill even these modest

expectations, Samuelson wonders if the Fed "wants to be an accessory."

Tobin agrees with Samuelson that real growth will be squeezed in the

collision between inflation and monetary policy.

Tobin disagrees with the

Administration's strategy of selling the n e w fiscal policy as the cure for

inflation.

It is monetary policy that has been assigned the goal of fighting

inflation, and yet the public does not understand that the Fed's targets will

accommodate new investment, production, and jobs only if wage and price increases

are reduced significantly.

"How can policy be credible if it is kept a secret?

How can the threat in monetary policy be taken seriously if the threat is not

explained to the people?"

Tobin hopes the Fed has learned at least one lesson

from last year's experience:

propped up by the Fed.

when GNP declines, interest rates should not be

Constraining the decline in interest rates in the second

quarter exaggerated the swing in GNP and money growth.

The high interest rates

in late 1980 were not caused by the second quarter's "low yields;" the rapid

money growth during the third quarter coupled with the Fed's desire to meet its

year-end target produced last year's record interest rates.

SECOND D I S T R I C T — N E W YORK

Economic activity in the Second District continued mixed in February

and early March.

Retail sales increased at most stores, though a few merchants

reported disappointing results.

Domestic car sales picked up a bit at some

dealers, due in large part to the rebate programs; foreign car sales also

improved.

Outside the consumer sector, economic activity appeared to be

generally flat.

Yet a number of respondents did indicate that their companies

had experienced a modest improvement in business in recent weeks.

Despite

the stronger than expected performance of the national economy in the first

quarter, the consensus forecast still calls for sluggish growth over 1981 as

a whole.

Many respondents expressed enthusiasm for the direction and substance

of the new Administration's tax and expenditure proposals.

None, however,

indicated that the proposals had led them to change their own production and

capital-spending plans.

Consumer Spending.

The February gains in Second District retail sales

were weaker than during the Christmas season, but somewhat stronger than in

November.

Mild weather and widespread promotional price-cutting accounted for

the February pickup.

Generally, inventories were reported at satisfactory

levels and under continued close surveillance.

Automobile sales in the Second District strengthened in recent weeks.

To a large extent, however, the sales gains have been the result of the substantial rebates offered by domestic car makers.

Yet sales of some imported

cars also improved, and dealers in these cars anticipate further gains during

the spring.

Inventory positions vary greatly.

Some were reported low because

of the high cost of carrying inventories while others were described as

adequate or high.

The Manufacturing Sector.

Economic activity in the Second District

outside the consumer sector was somewhat mixed though many respondents

experienced an Improved situation in recent weeks.

A spokesman for the

petroleum industry noted a softening of demand compared to a year ago due to

greater conservation efforts and warmer weather, and some upstate capital

goods firms report a continued low level of new orders.

However, moderate

pickups in new orders occurred at several firms including a chemical equipment

manufacturer that supplies oil refiners, a home furniture and furnishings manufacturer, and an automotive company.

In addition, a major food company fore-

sees that 1981 will surpass last year's record performance, a large cosmetics

and jewelry manufacturer reports continued gains following an acceleration in

sales which began late last year, and an industrial equipment manufacturer has

experienced strong demand from commercial and industrial construction firms.

Economic Outlook.

While several economists saw business activity

in the first quarter of 1981 coming in stronger than they had anticipated, they

have not changed their forecast of a 1 to 1-1/2 percent rise in real GNP for

the year as a whole.

Retailers anticipate a positive impact on sales during

the second half of 1981 resulting from the enactment of President Reagan's

proposed personal income tax cut, and some manufacturers expect the rise in

defense expenditures to stimulate the economy in general and provide orders for

their defense-oriented customers.

Others, however, expect the near-term effects

of the tax and expenditure cuts to be offsetting.

The proposed accelerated

depreciation program is not expected to have much immediate impact, in light of

the current low level of capacity utilization and the less than buoyant

level of final demand.

Financial Development s.

Business loan officers at large commercial

banks report that business loan demand has been sluggish.

Respondents gener-

ally agree that a slowing of economic activity and competition from the commercial paper market have contributed to the weakness in bank loan activity.

H o w e v e r , in the w a k e of the recent decline in market interest rates relative

to the p r i m e , respondents reported that below-prime lending has been b r i s k ,

but v e r y competitive.

Financial P a n e l .

This month w e have comments from Henry Kaufman

(Salomon Brothers), Francis Schott (Equitable Life Assurance Society), and

Albert Wojnilower (First BostonCorporation).[Asterisk:Theirviewsarepersonal,

not institutional.]

Kaufman:

A double-dip in economic activity w i l l not o c c u r .

Besides

a much larger than expected increase in real GNP this quarter, the economic

path for the balance of this year w i l l include about 2 percent real growth in

the second quarter and 3 to 4 percent for the second half of this y e a r .

The

distinctive features of the continued expansion w i l l include no cyclical support

from housing, a big increase in defense expenditures, prudent business monetary practices (constrained by high interest rates) and renewed strength on

corporate liquidity later this year when interest rates w i l l reach new highs

in the long t e m bond m a r k e t s .

Schott:

Prospects for disinflation, largely created by well-judged

monetary policy, are being converted into reality.

Progress w i l l be slow

because of the institutionalization of inflation.

have turned distinctly favorable for three reasons:

Yet, psychological factors

(1) the Administration's

expenditure control proposals have credibility, including prospects for

Congressional acceptance; (2) Federal Reserve restraint has resulted in

renewed liquidity pressures at intermediaries, which is reflected in

cautious loan policies; and (3) the soft spots in the economy, such as housing,

automobiles and farm machinery have created apprehensions about significant

business failures.

Wojnilower:

These apprehensions have dampened speculation.

Current statistics and reports from business contacts

suggest that the economy remains strong and that the Reagan program is prompting

more expansionary planning by business firms.

The decline in interest rates

likely is setting up a repeat performance of last summer's acceleration of

business and upsurge in interest r a t e s — b u t this time it will be from a stronger

base of business activity and without the caution induced by preceding credit

stresses.

Indications are that longer term bond issues, initially by banks but

probably followed by others, are accelerating sharply.

Buying of such secur-

ities, however, remains limited largely to pension funds and to fiduciaries and

speculators who expect to remain interested in the bond market only very briefly.

THIRD DISTRICT - PHILADELPHIA

Reports from the Third District indicate that business activity for the month

of March is sluggish to mixed. Area manufacturers say industrial activity is showing

some signs of expansion in March but has remained basically unchanged for the third

consecutive month. The continued stability in manufacturing activity may have put a

halt, at least temporarily, to cuts in factory employment observed since last April. As

for the future, manufacturers anticipate a sharp upswing within the next six months

which may give labor a boost as well. Retail sales are up overall in March, but a mass

transit strike in the Philadelphia metropolitan area has dropped sales in downtown stores

50 percent. Looking ahead, retailers are a bit more optimistic than they have been in

recent months, anticipating increased sales by September. In the financial sector, area

bankers report sluggish loan activity. Consumer loans are down from a year ago, while

C&I loan volume is slightly better, but still not strong. In efforts to bolster business loan

demand, many banks have increased below-prime lending activity and are offering fixedrate loans to businesses that want them. In the coal industry, the Third District will feel

some impact should the United Mine Workers call a general strike on March 27, as

planned.

Area utility companies and manufacturers appear ready, however, having

stockpiled supplies that would last one to three months.

INDUSTRIAL

Area industrial activity is showing some signs of expansion in March, but has,

according to the respondents to the latest Business Outlook Survey, remained basically

unchanged for the third month in a row. With these results in, it appears that the first

quarter of 1981, in general, has been a period of little or no growth for Third District

industry. In terms of specific indicators this month, new orders and shipments are up

from February. Inventories, however, have held steady for the fifth consecutive month,

as local manufacturers may be waiting for stronger signals on the economy before

building their stock levels. As for labor, the continued stability in area manufacturing

activity may have put a halt, at least temporarily, to the cuts in factory employment

observed since last April. Survey participants report no real change in their payrolls or

the average workweek over last month.

For the longer term, respondents to the survey continue to be optimistic,

anticipating a sharp upswing in general industrial activity within the next six months.

Over one-half of the survey participants expect new orders and shipments to grow

between now and September, and, as production pick ups, manufacturers plan to increase

factory payrolls and lengthen the average workweek a bit. Higher expenditures on plant

and equipment are also forecast.

On the inflation front, industrial prices have jumped again in the Third

District, as over one-half of the survey respondents report paying more for raw materials

than they did last month, and about one-fifth say they are charging more for their

finished products. Prices are expected to continue climbing, as 9 out of 10 of the survey

participants anticipate higher input costs by September and nearly 8 out of 10 plan price

hikes for the goods they sell.

RETAIL

The Philadelphia metropolitan area has been enduring a mass transit strike

since March

15, as Transport Workers Union leaders and SEPTA

(Southeastern

Pennsylvania Transportation Authority) officials try to work out a new contract

agreement.

Downtown Philadelphia stores have been hit hard by the strike, with

shopkeepers reporting daily sales down 50 percent from pre-strike levels. Spokesmen for

major area retail chains estimate that their center city department stores account for

only about 20 to 25 percent of their companies' total sales volume though, and that lost

sales in center city have been made up for, in part, by increased volume in suburban

stores. Many local merchants have reduced their evening hours for the duration of the

strike. Although the strike will probably have only temporary effects on the retail

community, some longer-term damage may be done as well. As a Director of this Bank

notes, merchants "can't be sure if consumers will maintain the same willingness to spend"

that they displayed a few weeks ago.

Outside of the downtown area, March sales are up over last year's levels,

about 7 to 10 percent, owing mainly to new spring lines and growing consumer

confidence, according to area contacts. Sales of soft goods—apparel and small household

items—continue to be strong, with big ticket items starting to pick-up as well.

As for the future, area retailers are a bit more optimistic about the second

half of 1981 than they've been in recent months, expecting sales to run at least 3 percent

above year-ago figures. According to some contacts, consumer confidence in the Reagan

Administration is growing, as "they try to get a handle on inflation." Area retailers are

keeping the lid on inventories, though, and plan no changes for stock levels, hoping to

keep inventory-sales ratios healthy.

FINANCIAL

Area bankers report sluggish-to-mixed loan activity in March.

Consumer

loans are down 14 to 16 percent from a year ago, mainly because banks continue to take

a restrictive posture towards retail lending. Business loan volume is better, but still not

strong. Reports of C