Beige Book

CONFIDENTIAL (FR)

CURRENT ECONOMIC COMMENT BY DISTRICT

Prepared for the

Federal Open Market Committee

by the Staff

May 18, 1983

TABLE OF CONTENTS

PREFACE page i

SUMMARY page ii

First District - Boston page I-1

Second District - New York page II-1

Third District - Philadelphia page III-1

Fourth District - Cleveland page IV-1

Fifth District - Richmond page V-1

Sixth District - Atlanta page VI-1

Seventh District - Chicago page VII-1

Eighth District - St. Louis page VIII-1

Ninth District - Minneapolis page IX-1

Tenth District - Kansas City page X-1

Eleventh District - Dallas page XI-1

Twelfth District - San Francisco page XII-1

APPENDIX - Summary of Special Reports on Construction page A-1

PREFACE

addition

This

edition

of

to

preparing

Redbook

their

contains

regular

a

reports

special

on

section.

general

In

economic

conditions, District Bank staffs assembled and summarized additional

information

on

conditions

in

industries.

The

construction

their

industry

regional

was

attention because it appears to be playing

construction

selected

for

an especially

special

important

role in the current economic recovery and because analysts have been

concerned

about

the

sustainability

of

the

first

quarter's

marked

pickup in housing starts.

Reserve

District

Bank contributions were assembled

Bank

New

of

York,

where

a

summary

summary appears as an appendix to this Redbook.

was

at

the

prepared.

Federal

That

SUMMARY *

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

Overview:

District

gaining momentum.

the nation.

suggest

that

Manufacturing

persists

activity

is

generally

in some

industries,

on

increase

conditions

vary

and

commercial

considerably;

loans

bad

will

help

them.

As

weather

more

the

is

upswing,

goods

for

loans showing a

sluggish.

Agricultural

continues

farmers and there is no consensus on how much

program

recovery

capital

Lending activity is mixed, with mortgage

widespread

(PIK)

the

Consumer spending has strengthened further across

although weakness

example.

reports

to

plague

the payment-in-kind

signs

emerged, businessmen have gained confidence that

of

recovery

economic

have

activity

will continue to pick up through the rest of the year.

Consumer Spending

The

recovery

in

consumer

spending

intensified

weeks, expanding both geographically and across product

in

recent

lines.

All

Districts reported continued or growing strength, except for Kansas

City,

where

gains

over

1982

were

smaller

than

at

last

report.

Boston reported the largest sales growth, more than 10 percent above

1982.

Apparel

Districts.

and

Many

electronics

also noted

other home durables,

in housing demand.

continued

increases

in

to

move

sales

of

well

in

furniture

which some attributed to the recent

most

and

strength

Automobile sales strengthened in seven Districts.

Retail

signs

inventories

of

generally

expansion

Richmond.

Optimism

in

remained

Atlanta,

for

future

lean,

New

sales

but

York,

growth

there

were

some

Philadelphia,

and

widespread;

only

is

Atlanta reported expectations of weakening, and only for the short

term.

Manufacturing and Mining Activity

District Banks reported

that recovery in the manufacturing

sector advanced broadly, but areas of weakness

remained.

tial increases in orders have

and

times

in

many

accordingly.

Districts

slowly

regions,

led to backlogs

and

production

has

Substan-

longer delivery

been

stepped

up

Average workweeks have been growing, and a majority of

indicated

in many

that employment was moving

cases.

Boston,

Richmond,

and

up

as well,

St.

Louis

albeit

reported

broad-based improvements affecting a wide variety of industries such

as

inks,

castings,

textiles,

and

however, strength was narrower.

furniture.

In

confined

and

petrochemicals.

to housing-related

and

Districts

In Atlanta, the signs were uneven,

with revival in lumber and phosphates countered

in textiles

other

The

pickup

defense

still reducing production and employment.

by continued

in

sectors,

San

slack

Francisco

with many

And Minneapolis

was

others

reported

that the pace of improvement slackened in all but paper and building

input industries.

Capital goods and mining remained dark spots.

Producers of

machine tools and other business equipment have seen no

and future prospects are uncertain.

capital

projects were being

planned,

Chicago was concerned

and

St. Louis

and

turnaround

that few

Cleveland

also foresaw no improvement in the next few months.

and Philadelphia noted

that businesses were

express

in capital

some

interest

at

projects.

However, Boston

least beginning

Mining

also

to

remained

depressed, with low energy prices hurting coal mine operators in the

Midwest and Far West.

Finance

Loan

activity

remained

mixed

in

almost

all

Districts.

Commercial and industrial borrowing continued to be weak across the

country;

only St. Louis reported an increase in volume.

consumer

loans

Richmond,

Philadelphia,

was

somewhat

and

stronger,

Cleveland.

growing

Mortgage

in

Demand for

St.

lending

Louis,

continued

to pick up throughout most of the nation.

On the deposit side, funds continued to flow into MMDA and

Super NOW accounts.

Districts though.

to

fund

The inflows appeared to be moderating in a few

Banks are reported using these accounts primarily

short-term

or adjustable

rate

loans,

and

are

selling

off

fixed rate mortgages in the secondary market.

Agriculture

Agricultural

weeks.

conditions

varied

among

Districts

Unusually wet and cool weather continued

the country.

in

recent

in many parts of

As a result, planting of corn is behind schedule in a

number of areas.

Farmers in California face additional

losses due

to delays in plantings of important crops such as lettuce, tomatoes

and onions.

allowed

In Atlanta, however, recent improvement in the weather

farmers

to make

up much

of

their planting.

In addition,

Kansas fanners are expected to harvest the second largest wheat crop

ever.

There was no consensus on the effects of the PIK program.

Dallas,

St.

reductions

Atlanta

Louis,

to

noted

and

improve

the

Minneapolis

the

program was

pushing up feed prices.

the

increased

incomes

spending

expected

of

grain

disrupting

the

the

resulting

farmers.

poultry

crop

However,

industry

by

Some agricultural suppliers were aided by

associated

with

higher

farm

incomes,

but

others were hurt by the removal of land from cultivation.

Outlook

climate

The emergence of more signs of

recovery

of

many

optimism.

Businessmen

in

has

engendered

Districts

are

a

now

confident that strong consumer spending and residential construction

will

spur

increases

in

demand

through

Accordingly, they expect manufacturers

and employment.

the

rest

of

the

to continue expanding output

However, in Boston, New York, and Minneapolis, there

still is concern that the recovery will be weaker than usual.

Chicago reports

that much of the ground

will not soon be regained

in the Midwest.

the evidence is encouraging.

economists

year.

do not

over the next year.

foresee

lost during

the

And

recession

On the inflation front,

While prices are beginning to edge up,

a significant

acceleration

of

inflation

FIRST DISTRICT - BOSTON

The First District is in the early stages of a recovery.

Retailers

are enjoying stronger sales than expected and are developing fairly optimistic

plans for the future.

Most manufacturers have also seen an upturn in orders,

although, in contrast to the retailers, several think the recovery is weaker

than normal.

Interest in capital spending is apparently quite high but firms

are unwilling to make commitments until the recovery is more clearly

established.

Retail

Retail sales in the First District continue to outpace expectations.

The strength appears to be general; no specific product lines were reported to

be especially strong or weak.

Sunday retail openings in Massachusetts have

had a small positive effect, on total sales in the state, but the other New

England states are also doing well.

Price increases have slowed considerably

from a year ago.

The range of sales increases reported for recent months compared to a

year earlier was from a "very successful" 11 percent to an "excellent" 15

percent.

Two merchants mentioned that these results compare even more

favorably to recent years than the nominal figures indicate, because inflation

accounts for a much smaller share of the growth than has been typical

recently.

A pet store chain, more cyclically sensitive than many retail

operations, said this pickup was stronger than usual after a recession, but

the slowdown had also been more severe.

Plans are fairly optimistic over the long run.

The pet store chain

said they thought sales growth would slow somewhat over the next six months,

but then would pick up again.

They and another contacted firm have new stores

in the planning stages and expressed confidence in New England's continuing

growth potential.

Comparisons with other regions were mixed.

A discount chain with 13

percent sales growth in New England in April contrasted that result with 4

percent for the chain nationwide.

A department store chain with affiliated

chains in other regions said they no longer stood alone at the head of the

pack —

other regions were beginning to catch up.

Manufacturing

Most of the manufacturers contacted have seen an upturn in orders over

the past several months; the products of firms reporting increases include

inks, adhesives, specialty steel, bearings, castings, hardware, specialized

industrial machinery and process controls.

The increase in demand is said to

be broadly based with no one industry or group of industries responsible for

the improvement.

Exceptions to the reports of increased activity come from

two firms in the machine tool industry; orders are no longer declining but

they have not risen from the very depressed levels of year-end.

differed on how this recovery compares with past recoveries.

Opinions

A large

manufacturer of fabricated metal products and machinery described the upturn

as "typical":

orders for construction related products picked up first,

automotive products followed, light machinery is beginning to show encouraging

signs, and heavy machinery remains depressed.

Several manufacturers said the

recovery has been weaker than normal; three, producing castings, bearings and

control equipment, said demand has picked up a little sooner than they

expected.

A number noted that inquiries about capital purchases have risen

sharply but customers are not following through with committments.

This

development was interpreted to mean that customers are planning capital

programs but are waiting to see if the recovery will be sustained.

One firm

said that when customers do place orders they want delivery in an unusually

short time period.

Several manufacturers are starting to increase employment.

One, the

castings manufacturer, has recalled all those previously laid off and is

planning to expand.

No one plans substantial layoffs, although two or three

expect their workforces to fall through attrition.

In general, the firms contacted have not seen any increases in the

prices of materials and components.

However, one reported that the prices of

nickel, cobalt and molybdenum are rising.

These metals were selling at prices

below the cost of production.

Construction

New England housing construction has improved markedly in recent

months.

Between December 1982 and March 1983 seasonally adjusted housing

permits in the region jumped 89 percent.

Despite the sharp increase, a

building goods supply house reported no shortage of supplies in any major

category —

roofing, insulation, and lumber.

Lumber prices in the first:

quarter of 1983 were about 5 to 6 percent above year-ago levels.

Commercial office building activity continues at a vigorous rate in

the major cities of the First District.

Most of the projects will become

available for occupancy over the next year and a half.

Very few definite

plans have been made for the period after 1985 but real estate brokers report

that interest in further building remains high.

but are considered manageable.

Vacancy rates have increased,

Professors Houthakker, Eckstein, Samuelson, and Solow were available

for comment this month.

Their comments focused on the economic outlook,

monetary policy, and the federal deficit.

All agreed that the recovery is weak and fragile.

Eckstein is

confident that consumer spending will pick up shortly, assuring that the

recovery will not dissipate later in the year.

He is concerned, however, that

high "real" interest rates are limiting expansion of housing, auto sales, and

capital spending.

None were concerned about a near-term resurgence of

inflation.

Nevertheless, Houthakker cautioned against a shift toward ease in

monetary policy.

He feels that technical factors are still distorting growth

in the monetary aggregates, depriving the Fed of the information needed to

determine whether such a shift would be appropriate.

more attention paid to a credit target.

He would like to see

When it was pointed out to him that

business loan demand has been weak, he still counseled against easier money on

the grounds that it would take pressure off of Congress to deal with the

deficit problem.

He feels that by maintaining its current stance the Fed

props up interest rates, which in turn provides Congress with an incentive to

cut deficits.

He is concerned about deficits several years out, not those

projected for the short run.

Eckstein feels that monetary policy is pretty much on track, although

ideally he would like to see short-term interest rates fall another 100 basis

points.

Over the next several quarters he thinks the Fed should try to

stabilize short-term "real" interest rates at between 3 and 5 percent in order

to promote steady, moderate growth.

He warned against the "excesses fueled by

cheap credit of previous postwar expansions."

Like Houthakker he fears that

huge deficits in 1985 and beyond could cause interest rates to rise, choking

off the recovery.

Samuelson also believes that the Fed is supplying just about the right

amount of stimulus to the economy, although he wishes that the near-term

prospects for economic growth were better.

Over 1983, he would like to see

fourth-quarter-to-fourth-quarter growth of between 5 and 6 percent instead of

the 4 to 5 percent currently predicted.

To this end he cautions the Fed not

to adopt a tighter stance, which he believes monetarist doctrine would demand

at this time.

In his opinion inflation will not be a problem in 1983 or 1984

because of the oil glut; dissonance in OPEC; plentiful crops, meat, and fiber;

weakness in markets for primary metals; and decelerating unit labor costs.

He

believes that the growth rates of the monetary aggregates will regain their

target ranges without a change in course of monetary policy.

He urges the Fed

not to try to lower the inflation rate by another 1 to 2 percent at all costs,

because the sacrifices we have made over the last few years in lost profits,

investment, and employment have been too great.

Solow also thinks that the rate of economic growth over the year

should be higher.

He thinks that the Fed should insure the recovery by easing

its current stance.

down the road.

He doubts that a shift toward ease would fuel inflation

He is not worried about the deficit in the short run and would

accept measures to reduce it in 1983 and 1984 only if monetary policy were

much more lenient.

could be a problem.

He concedes that three to five years from now deficits

SECOND DISTRICT—NEW YORK

The Second District

recovery

in recent

weeks.

economy continued

Major

retailers

to show evidence

reported

that

of

consumer

spending remained strong, and sales generally were above plans.

The

residential real estate market picked up further, but some slowdown

in

nonresidential

manufacturing

construction

spread

to more

was

anticipated.

areas,

and

firms

The

upswing

in many

in

industries

were increasing hours and workforces.

On the financial side, retail

deposits at all classes of depository

institutions have grown with

the

introduction

of

MMDAs

and

Super

NOWs.

The

consensus

among

business leaders is that the economy will continue to improve.

Consumer Spending

Retailers

continued

to

enjoy

year-over-year

sales

gains

over the past two months, despite some temporary weakness in early

April.

their

Business

plans.

efforts

shoppers

at

One

"light-years

ahead

into buying.

pick up as well.

keeping

respondent.

department

respondent

sources of strength.

store

most

of

did

stores

was

running

note, however,

last

year"

Soft goods and

were

that

electronics

of

promotional

necessary

to

continued

coax

to be

One merchant indicated that furniture began to

Inventories remained at desired

them

ahead

"aggressively

heavy."

The

levels, with one

outlook

varied

One discount chain was considering an upward revision

by

in

its sales

goals, while

another

retailer

felt

that

the

general

optimism about the economy was unfounded.

Construction and Real Estate Activity

The

residential

improvement

recently

definitely

underway.

increases.

Most

however.

and

of

real

estate

respondents

Both

sales

market

believe

and

the growth was

that

starts

limited

showed

an

further

upswing

showed

to high

is

healthy

priced

homes,

Some contacts believe a further drop in mortgage rates is

needed before low- and middle-priced homes will move.

foresees a boom, builders expressed

While no one

a good deal of optimism about

the next few months.

The

cloudy.

outlook

Brokers

for

reported

improved in recent weeks.

or signed

see

the

nonresidential

that

of

construction

completed and vacancy

absorption

of

remained

office

space

A number of major leases were negotiated

in New York City and

pace

the

construction

rates

surrounding

slowing.

suburbs. But

With

new

observers

space

trending up, rents have been

landlord concessions more prevalent.

being

flat and

Consequently, new projects are

expected to be limited.

Business Activity

The

confirmed

District.

by

onset

of

recent

Areas

hit

recovery

reports

in

from

particularly

the

manufacturing

business

hard

by

leaders

the

sector

was

around

the

recession

noted signs of an upturn, and regions that had remained

finally

relatively

healthy

reported

auto-related

rebounded,

recent

industries

leading

signals

backlogs

somewhat

one

could

developed

has

faster

continued.

supplier

to

foreshadow

and

production schedules.

growth.

delivery

Furniture

that

one

The

industry

of

times

his

upswing

orders

in

finally

to believe

that

best

years

ever.

As

lengthened,

firms

picked

up

Shortened workweeks became much less common.

While some more layoffs occurred, such diverse industries as autos,

aluminum,

and

communications

equipment

were

adding

to

their

workforces.

Outlook

Business leaders are virtually unanimous in believing that

the

recovery

concerning

has

its

arrived.

strength,

our

Although

contacts

that the upswing will be sustained.

businessmen

are

enthusiasm about

still

there

cautious,

some

become

disagreement

more

confident

One respondent noted that while

they

are

expressing

the future as he can remember.

prospects for economic growth look good

years.

have

is

Another

for the next

as

much

believes

two or

three

But one state labor official still fears that the recovery

will be one of the slowest on record.

Financial Developments

Reflecting national trends, home mortgage rates offered at

banks and thrifts in the Second District have fallen by as much as 5

percentage points since last summer.

While some of the institutions

contacted offer only variable rates on home mortgages, most of those

that offer both fixed and variable

rates

report

that

a very

proportion of new mortgages (about 75 percent) have fixed rates.

high

In

part, this reflects a narrowing of the spreads between the fixed and

variable rates.

In addition, most

mortgages now being made represent

said

that

at

refinancings

least

20% of

wherein

the

households

prefer to substitute one fixed rate instrument for another.

Many of the banks and thrifts contacted said that they are

selling

the bulk

of

their new mortgages

One institution specified

that

in the

secondary

it is now mainly

selling

market.

the fixed

rate mortgages and using MMDAs to fund the variable rate mortgages.

All

in

all,

mismatching

the

institutions

assets

and

appear

liabilities

aware

of

resulting

the

from

potential

the

for

inflow

of

MMDAs.

Since the introduction of MMDAs and Super NOWs, all classes

of depository institutions in the Second District have gained retail

deposits.

The commercial banks, however, were clearly

gainers, in both dollar volume and market share.

estimates,

between

mid-November

1982

and

the biggest

According

mid-March

1983,

to our

Second

District commercial banks raised their share of the retail deposit

market by as much as 5 full percentage points, from 30 percent to 35

percent.

By comparison, in the rest of the nation it appears that

the commercial bank gains in retail market

smaller.

to

share were

considerably

Some New York banks have expressed concern about the need

replace

funding

sources

as

the

market

shrinks along with money market mutual

for

funds.

money-center

CDs

Perhaps because

of

this concern, competition for MMDA money has been particularly keen

in New York City, where the

rates

offered

on

these

been consistently higher than the national average.

accounts

have

Financial Panel

This

month

we

have

comments

from

David

Jones

(Aubrey

Lanston & Co.,), Donald Maude (Merrill Lynch) and Albert Wojnilower

(First Boston Corp.)

[Asterisk: Their views of course are personal, not institutional.]

Jones:

The "critical mass" for economic recovery is now in

place and the question now is whether the recovery will be moderate

or brisk.

interest

there

The seeds of recovery were planted by a sharp decline in

rates

has

in

been

a

the

second

pick-up

half

in

of

demand

last

in

year.

such

More

recently,

interest-sensitive

sectors as housing, autos, and other durable goods.

In the improved

economic climate, businesses cut their rate of inventory liquidation

roughly in half in the first quarter of this year and some actual

restocking

may

begin

in

strengthening new orders,

the

second

production,

quarter,

employment

thus

and

further

income.

The

recovery is, however, likely to remain moderate and uneven through

1984.

high

Serving to limit economic gains are likely to be abnormally

real

increases

Federal

deficits.

time

as

depressed

rates

reflecting

in consumer

borrowing

and

demands

the

clash

business

arising

between

credit

from

recovery-related

demands

and

mounting

excessive

structural

Accordingly, the recovery is likely to stall from time to

business

spending

(both because

on

new

plant

of high real rates

and

and

equipment

remains

a huge margin

unused capacity) and as U.S. exports continue weak (because of a

of

strong

dollar).

All

in

all,

real

GNP

might

show

gains

of

5.0

percent in the second quarter, 2.0 percent in the third quarter and

4.0 percent in the fourth quarter.

In 1984,

the pattern might

be

6.0 percent in the first quarter, 7.0 percent in the second quarter,

3.0 percent

in

the

third

quarter

and

4.0

percent

in

the

fourth

quarter.

Maude:

invariably

economic

the

While progressing at an uneven pace, as is almost

case

recovery

environment

in

should

of restrained

Presently, we envision

percent

the

and

an

throughout

the

restrained

to

recovery

intact

inflation

rate

and

half

of

phase,

going

into

inflationary

1983 gain

increase

of

the

1984

in

an

expectations.

in real

5.7

present

GNP

percent

of 5

in

the

Under such conditions, private credit demands

remainder

allow

remain

a second

annual

consumer price index.

early

the

of

the

year

Treasury

billion net new cash over the

to

final

should

raise

remain

a

sufficiently

projected

two quarters

of

much disruption to the financial markets on balance.

110-120

1983 without

However, even

a controlled slow growth recovery runs the risk of being aborted as

early as the first half of

begin

to

clash

with

fiscal

1984 as

1984

rising

Treasury

private

credit

financing

demands

requirements

exceeding $200 billion —

potentially leading to a meaningful upward

spike in interest rates.

Indeed, even at present real interest rate

levels,

the

sustainability

of

the

recovery

remains

However, monetary policy

is once again perceived

markets

latitude

as

credible

and

for

interest rate sense presently exists.

further

by

the

tenuous.

financial

accomodation

in

an

Wojnilower:

Domestic

business

contacts

suggest

that

the

economic recovery is broadening somewhat and that confidence for the

longer pull has increased materially.

explosive

segments

attitude

of

the

displayed

department

At the same time, the nearly

previously

store,

industries has sobered, as what

by

steel,

executives

and

building

in their perception were

in

some

materials

initially

extraordinary sales gains have slowed considerably.

In the security

markets

continue

large

amounts

of new

issues

placed.

Demand by foreign investors

reversal

well

might

ensue

if

of

all

types

is enormous

policies

to weaken

but

a

the

to

be

torrential

dollar

were

officially adopted.

During a visit to Europe last week, I gathered

the impression that

the reported

may

be more

the

continent

France, of course, a sharp setback in business is anticipated.

In

Mrs. Thatcher's

than

on

In

Kingdom,

in sentiment

pickup

in performance.

the United

an improvement

business

reelection

is taken

virtually

for granted and people are quite sure that business is rebounding.

THIRD DISTRICT - PHILADELPHIA

Indications from

generally

on the

the Third District in M a y

upswing.

Local

business conditions since March.

manufacturers

are that business activity

report substantial

improvement

is

in

Retailers say sales at area stores are growing steadily.

L o a n activity has turned mixed recently; retail lending has gained ground but commercial

loans have slipped slightly. In the construction industry, overall activity is healthy.

Third

months.

District

contacts foresee

these trends continuing

for the next six

Gains in industrial activity and retail sales are expected to continue at a brisk

pace into the fall. In the banking sector, declining interest rates should reinforce current

diverging lending trends. Strong demand for housing will bolster residential construction,

according to builders, but commercial demand looks weak.

R E A L ESTATE A N D

CONSTRUCTION

Representatives

construction

of the Third District construction

activity is in good shape in M a y .

industry indicate

that

Real estate brokers report a steady

increase in sales at current mortgage rates, with more sales spilling over from pre-owned

homes into the market for n e w units. A s a result, residential construction is showing the

first

real signs

of strength

in over two-and-a-half years.

Builders say demand is

sufficient to sustain, if not boost, the current pace of residential activity, but expansion

at the present rate will press on already tight supplies of building materials.

Commercial

construction business has also improved recently, despite relatively high vacancy rates.

Commercial developers, however, say demand for office space is very weak and expect

office-building to wind down considerably.

MANUFACTURING

Respondents to the Business Outlook Survey indicate that industrial activity

in the Third District continues to pick 15) steam. T h e gains reported in April and M a y are

on a par with the vigorous growth recorded earlier this year, providing further evidence

that a sustained

recovery

is underway.

booming new orders and shipments.

time

since

mid-1979,

and

delivery

Specific indications of the pick-up include

Producer backlogs have also increased for the first

times

are getting longer.

Inventory

liquidation

continues, but some employers have begun adding to payrolls and extending working hours

as activity levels have climbed.

Survey respondents are very confident that industrial rebuilding will continue

and

are projecting more gains for the next six months.

shipments

are

businessmen

workweek

forecast

are

by

planning

by late fall.

four

out

to hire

of

five

additional

respondents

workers

and

Expanding new

to

the

May

to lengthen

orders and

survey,

the

and

average

In addition, modest growth in stock levels is foreseen, and

increased outlays for capital equipment are in the works.

Increased activity is pushing industrial prices up slightly in M a y , according to

survey results.

Input costs have risen at just over one-quarter of area plants, and a few

reports, of price hikes fear finished products have surfaced this month, too.

Respondents

foresee further escalation in raw material prices by November and, to a lesser extent,

are planning to boost their own prices over that time, as well.

RETAIL

Sales at Third District department stores have climbed steadily through April

and into M a y .

Dollar volume is right where retail executives expected it to be, about 5

percent to 6 percent ahead of a year ago. Merchants say an improving economic climate

has buoyed consumers' confidence and, as big tax refunds keep rolling in, customers are

parting with mors dollars.

In addition, this spring's excellent weather is credited with

taking the edge off the usual post-Easter sales slump.

Activity remains good across the

board including some n e w movement in durables, especially household furnishings, which

are benefiting from the housing pick-up.

Retailers predict that sales will continue to grow over the next six months.

Declining unemployment rates and an expanding economy are expected to provide an

increasingly strong stimulus to sales.

Larger tax refunds will still be a factor, according

to contacts, and the mid-summer tax cut also should give retail business, particularly

durable goods, a boost.

Merchants are projecting that, by N o v e m b e r , sales activity will

be 6 percent to 8 percent ahead of the year before.

Stock levels are about even with those of a year ago, and retailers report a

little easing in their tight grip on inventories as sales have improved. Inventories remain

very lean, nonetheless, and there are no plans at the present time for further rebuilding.

FINANCIAL

Loan

Redbook.

weaker

activity

at

Third

has

turned

mixed

since

the last

and cutbacks in below-prime lending, according to

Reports of commercial loan volume now range fom 6 percent below a year ago

to 4 percent above a year ago.

slowly.

banks

C & I loan volume, as expected, has dropped slightly since March, owing to

commercial loan demand

contacts.

District

Retail loan activity, on the other hand, is building

Although interest rates are still high enough to keep a somewhat tight lid on

demand,

consumers' attitudes

bankers.

In the wake of a push by lenders, consumer loan volume has risen by 5 percent

to 10 percent from a year ago.

toward

credit have improved this spring, according to

A r e a banking contacts say these trends in borrowing are

likely to continue into the fourth quarter.

loans will be soft for the next f e w months.

Lenders expect that d e m a n d for commercial

T h e shift to the bond market is likely to be

enhanced by further declines in interest rates, and a "hesitating" economic recovery

should keep capital investment plans flat until fall.

L o w e r rates, however, are likely to

bolster retail lending activity, especially if economic indicators continue to point to

strength.

T h e prime rate has held steady at 10.50 percent at major banks in the Third

District.

Pressures are building, according

to bankers, that should push rates down

between 50 and 100 basis points by the middle of the third quarter.

include good inflation news and weak demand for commercial credit.

These pressures

By fall, however,

much of the downward pressure should begin to disappear as more consistent economic

growth awakens business loan demand.

Deposit flows are still very strong in M a y , although activity has settled down

recently.

D e m a n d deposits are a healthy 4 percent to 6 percent ahead on a year-over-

year basis, down

slightly from

March

levels.

Bankers attribute that slide to April

seasonal problems and a surge of I R A activity at tax time.

T i m e deposit growth has

slowed as well, indicating that the shift to M M D A s may be nearing completion.

In fact,

some outflows from M M D A s have been reported. Nevertheless, time deposits remain far

ahead of year-ago levels.

FOURTH DISTRICT - CLEVELAND

Summary.

Economic conditions continue to improve.

rising and unemployment is falling.

Retailers report improving sales.

Manufacturing activity appears to be expanding slowly.

primary metals are strengthening.

spot.

Employment is

Prices and orders for

Construction continues to be a bright

Demand for fossil fuels remains weak, and farm prospects remain

uncertain despite the new program to curtail production.

Banks are reported

to be liquid, with residential mortgage lending the only sector showing

strength.

District Labor Market Conditions.

unemployment is falling in this District.

Employment is rising and

Manufacturing employment in Ohio

(nsa) rose slightly in January, February, and March, and average hours worked

per week has a slowly rising trend.

Recalls have begun at some firms as

orders have improved but firms generally are cautious about expanding their

workforce.

Indexes of leading indicators point to recovery in Pittsburgh and

Cleveland.

Indexes for both areas have risen for five consecutive months.

Unemployment rates in the District are falling but remain well above

the national average.

Unemployment rates in the District's eleven largest

SMSAs averaged 14.0% in March (nsa), down from 15.4% in January, and the rate

fell in every SMSA except Toledo.

Retail Sales.

Major retailers report improving sales.

store sales have been very good in recent weeks.

Department

One major firm reports sales

up 4 percent in real terms from the year-ago level.

Another reports April

sales up 1.7 percent (s.a., monthly rate) from March, and similar gains in

early May.

Both firms report higher priced "upscale" goods doing especially

well, and both are optimistic about the sales outlook.

The intensity of price

promotions has ebbed some in the last two or three months.

Inventories are

described as "clean and lean;" neither firm plans major adjustments up or down.

A major automobile service and tire retailer reports unit volume of

tire sales up 10 percent from last year and dollar volume of service sales up

7 percent.

The firm describes the market as "extremely competitive," with

more price cutting this year than last.

no adjustments are planned.

Inventory levels are satisfactory and

Customers continue to replace tires only when

absolutely necessary, except for buyers of "prestige" tires.

Manufacturing.

Manufacturing activity appears to be expanding slowly,

but capital goods production remains weak.

A survey of purchasing managers

reveals increases in orders and production, and stable employment.

Inventories of raw materials, supplies, and finished goods are stable.

orders are "rush," apparently because of lean inventories.

Many

Price increases

outnumber price decreases by a growing margin but most prices are stable.

Preliminary results of this Bank's May survey of Fourth District

manufacturers shows new orders, shipments and backlogs are rising while

inventories are flat.

Prices paid for supplies are generally stable, as is

employment, but there is some increase in average hours worked per week.

A major producer of machine tools is very pessimistic.

Except for_

those from the defense industry, he is obtaining practically no orders, not

even for spare parts for which orders usually improve at this stage of a

business cycle.

He sees no sign of upturn in his business before 1984.

A

major producer of components for capital goods reports orders were flat in

April and are likely to be flat in May.

Primary Metals.

aluminum.

Orders and prices are strengthening for steel and

A major steel producer reports that orders for flat rolled steel

had surged earlier this year as customers feared that supply might tighten,

but that flurry of orders quickly died.

inventory.

Steel users have ceased liquidating

Shipments to steel users have risen to equal steel consumption,

which is rising slowly in line with the general business recovery.

Steel

mills are still reducing their own inventory to raise cash to offset losses

from operations that are still below the break-even point.

The gap is slowly

closing, however, as volume and prices gradually rise.

A major producer of aluminum reports that orders have improved

substantially since last fall, at times coming in at a rate that exceeded

capacity.

The strength in orders has come from customers hedging against

rising prices and a possible strike in June, from refilling the supply

pipeline after customer inventories had become too low, and from some

strengthening in underlying demand, especially from housing and autos.

Ingot

prices have risen by half since last summer but remain below some producers'

costs of production as there is strong competitive pressure for market share.

Construction.

Construction continues to be a bright spot.

House

construction continues to rise and respondents are confident the improved

level of house construction in the District can be maintained at current

mortgage interest rates.

built and bought.

House prices are firming and larger houses are being

House builders expect shortages of lumber, gypsum board,

and skilled workers.

Office construction is likely to remain strong in the

District for another year or two as major projects already underway are

carried to completion, but few new projects are being planned.

Construction

of shopping space is weak, but construction of general purpose industrial

buildings is firm.

Energy.

Rental rates for non-residential properties are very soft.

Demand for fossil fuels remains weak.

spot market demand for coal is practically non-existent.

A director reports

Small mine operators

are in difficulty and their numbers are shrinking.

drying up.

Oil and gas exploration is

There is an excess of drilling rigs, and drilling is expected to

be weak for at least another year.

Agriculture.

Farm income is low and prospects remain uncertain

despite the payment in kind (PIK) program.

A director is concerned that the

PIK program may not take enough land out of production to avoid another bumper

crop.

Prices are rising sharply for grass seed required to prevent erosion of

idled land that has more than an 8 percent grade.

Commodity prices are

recovering, but only because of speculation on PIK's impact.

Some farmers,

expecting higher prices, are fertilizing crops more heavily than usual, and

others are considering reducing the amount of land they will withdraw from

production.

Some farms still are being sold at distress prices but others are now

selling at reasonable prices.

Another director reports farm equipment sales

are rising and dealers are accepting PIK commodity warrants as payment for

equipment.

Fertilizer sales are reported to be slow.

Commercial Banks.

Banks are very liquid, putting downward pressure on

interest rates as residential mortgage lending is the only sector with strong

demand.

Inflows of deposits to MMDAs are reported slowing, especially as

offered interest rates are lowered toward market rates.

is soft, while consumer loans are up a bit.

Business loan demand

Bankers report getting a

smaller-than-usual share of automobile financing business.

Residential

mortgage lending activity continues to grow rapidly, and the proportion of it

used to refinance older high-interest rate mortgages is shrinking.

FIFTH DISTRICT - RICHMOND

Overview

A broadly based economic expansion appears to have gotten underway

in the Fifth District in recent weeks.

In the manufacturing sector,

shipments and new orders rose across a wide front.

Order backlogs,

employment, and the average work week also increased among manufacturers.

District retailers also report gains in activity over the month, with sales

and relative sales of big ticket items having both increased.

In addition,

the construction industry has begun to gain support from the housing sector,

at least in the metropolitan and resort areas.

businesses is generally positive.

The outlook among District

Prices remain relatively stable.

Inventories, despite modest recent increases, are at comfortable levels.

Manufacturing

Gains in shipments, orders, and order backlogs have been widespread

among Fifth District manufacturers in recent weeks.

Most industries appear

to be sharing in these gains, but some, like textiles and furniture, seem to

be leading the way.

production side.

Also, these recent gains are beginning to affect the

Manufacturing employment edged up over the month, while the

length of the average work week rose across a broad front.

Stocks of mate-

rials were up slightly, but finished goods on hand held steady.

Nonetheless,

total inventories seem to be very nearly in line with desired levels. Current plant and equipment capacity, however, remains somewhat in excess of

present needs.

Consumption

Most evidence points to a fairly substantial rebound in consumer

spending since our last survey.

Sales appear to have advanced broadly in

most areas, although some rural areas appear to be lagging in this respect.

Retailers experienced increases in sales and in relative sales of big ticket

items over the month.

Our directors also note improved levels of consumer

activity in most areas.

The most widespread gains appear to have been in

autos, although other durables and non-durables have also done well.

Furni-

ture and appliance lines are getting support from both primary and replacement markets.

Activity in the housing sector has picked up sharply in some

areas so that builders and new owners are actively furnishing new or recently

purchased houses.

Despite the increase in sales, retail inventories are reported to

have risen slightly in the past few weeks.

well in line with desired levels.

Nonetheless, total stocks are

The feeling appears to be that retailers

will continue to maintain very trim inventory positions, at best allowing

their growth to keep pace with sales.

Housing and Construction

Fifth District construction and real estate activity continues to

vary widely from sector to sector and from region to region.

To the extent

that it is possible to generalize, housing construction and sales appear much

improved in the metropolitan and resort areas.

In most other areas of the

District, with only a few exceptions, the residential sector continues

sluggish to severely depressed.

There is generally thought to be very little

inventory of new, finished homes and prices are characterized as stable to

firming.

By and large, current construction in the commercial sector con-

sists of projects in their later stages.

the pipeline.

There appears to be little work in

Estimates of the time before any pickup run generally in the

6-12 month range.

Materials prices are coming under upward pressure and in some cases,

e.g., lumber, have risen substantially.

Wages, on the other hand, are

generally stable, and have been for some time.

On balance, construction

costs would not appear to be in for any major shocks originating within the

District.

Banking and Finances

Business loan demand has been flat to slightly declining recently

while consumer demand has been stable to slightly rising.

Mortgage rates

have generally declined to the 12-13 percent range and activity is up

significantly.

There is a feeling that'current mortgage rates will permit a

modest but sustainable recovery in housing sales and construction.

Most depository institutions seem to feel that total MMDAs consist

of about 10-50 percent new money.

Agriculture

District farm credit conditions during the first quarter of 1983

remained much the same as in the previous quarter but showed signs of slight

improvement over the situation a year ago.

Further declines in interest

rates and continued improvement in bank fund availability highlighted conditions for the second consecutive quarter.

By and large, liquidity con-

ditions at rural banks eased again, while farm loan demand remained soft.

Both loan repayment rates and requests for renewals took a modest turn for

the better, compared with those a year earlier.

Farmland values increased

for the second quarter in a row, rising moderately over the revised previous-quarter level but remaining under a year ago.

SIXTH

Evidence

of

recovery

DISTRICT - A T L A N T A

continues

to grow,

but certain sectors,

agriculture and the textile and chemical industries, remain weak.

of consumer durables, are still on the upswing.

reported resurgence.

prevails

in

some

Construction

particularly

Retail sales, especially

continues the previously

T h e financial sector shows modest improvement, but uncertainty

local

markets.

The

upsurge

in

tourism

remains

concentrated

geographically, but the increase in the volume of air travel appears to be spreading.

Employment

employment are uneven.

extended

and Industry.

Signs of recovery in manufacturing output and

Orders in the lumber industry are strengthening.

After

an

period of economic slack, shipments of phosphates have revived in Florida.

In contrast, output and employment in the textile industry have not yet responded to

the upturn in economic activity.

Nonetheless, industry representatives are optimistic.

They expect increasing auto sales and new housing construction to boost orders for tire

cord, upholstery,

carpeting, and draperies.

of financing new

equipment

Spokesmen

required

Still, they express concern about the cost

to become

competitive

for the petrochemical industry in Louisiana

improvement in demand for petrochemicals.

with

foreign

producers.

and Mississippi foresee little

Engineering firms report that

companies

are not expanding product lines but are exploring alternatives with higher profit potential.

Many establishments are shifting to more lucrative specialty chemicals.

Consumer Spending.

and April.

District retailers report continued sales gains in March

Retail sales performance in the Southeast, especially in Orlando and Atlanta,

is reportedly better than in other parts of the country.

Department store officials say

that current promotional activity rather than recovery in the housing industry is spurring

sales and higher-than-usual inventories.

Merchants expect

May but look for a strong back-to-school season.

retail sales to weaken in

Both attendance and orders at the

fall apparel buyers' market in Atlanta were up 15 percent over last year.

reportedly

months.

few

stepped

up

their

buying because

sales have been

Retailers

strengthening in

recent

District motor vehicle sales in April continued the upward trend of the past

months.

Automobile

dealers say that sales of full-size, luxury models and light

trucks are responsible for most of the improvement.

Construction.

Officers

continue declining through

May.

of financial institutions expect

Reports from

mortgage

rates

to

building permit offices indicate April

and M a y applications are at least as strong as March, during which they were up sharply

in spite of bad

weather.

Our respondents believe the strong permit data during the

first four months of the year reflect the true strength of residential housing demand.

Those we polled see a general firming of house prices and in some areas outright price

hikes by means of the elimination of builder buy-downs and other discounts.

Respondents

in

Tennessee,

construction and office space absorption

Mississippi,

and

Georgia

anticipate

new

to be at lower levels in 1 9 8 3 than in 1 9 8 2 .

Sources in Florida, Louisiana, and A l a b a m a are more optimistic yet cautious.

Contacts

report a hiatus in new

Alabama,

construction

Mississippi, and Tennessee.

of large shopping

centers in Georgia,

Shopping center construction in Florida and Louisiana is

characterized as steady with good prospects for picking up in the near future.

Finance.

Legislators

in Florida

and Tennessee

bills to allow interstate banking in their respective states.

legislation

maintained

that interstate

banking

have

effectively

Proponents of the Florida

would provide

more capital for loans,

expand the state's tax base, and create some healthy competition.

the Florida bill could come up later this year.

argued

that out-of-state acquisition

of some

defeated

Although

tabled,

Advocates of the Tennessee legislation

local banks

would

relieve

the lack

of

confidence in the state's financial industry caused by the failure of United

American

Bank ( U A B ) .

purchased

Bankers claim the F D I C ' s failure to honor loan participations

by Tennessee

and Kentucky

banks from

the now

defunct

UAB

could further

weaken

some already shaken institutions.

Tourism.

Contacts report an expanded increase in the volume of air traffic

at regional airports.

Smaller carriers are introducing service to many local airports

that major airlines abandoned following deregulation.

southeastern

carriers

remain

troubled

despite

However, financial conditions for

a slight abatement

in the intensity of

airfare competition.

Our contacts do not expect financial conditions for District-based

carriers to improve

until at least the third quarter.

market strength remains concentrated geographically:

In other sectors of the travel

Central Florida is booming, while

lodgings and attractions in south Florida, Tennessee, and Louisiana languish.

Atlanta's

convention trade continues to be troubled by shortened stays and drop-offs in bookings

although volume is up.

Agriculture.

Declining demand

reflects continuing weakness in agriculture.

for short-term

credit by

District

farmers

Except in Georgia, loans outstanding from

the Production Credit Association fell in every District state in the first quarter relative

to the previous quarter.

Payment-In-Kind program.

a

2-5

per dozen

T h e poultry industry is reeling from the side effects of the

Feed grain price increases of $10-30 per ton have resulted in

climb in the cost of egg production.

Large

supplies, a declining

export market, and weak domestic demand have led to a sharp drop in egg prices here.

A

substantial improvement in the weather has allowed farmers to make up much

of

their planting, but corn and cotton crops remain behind schedule, and yield reductions

on

late-planted

corn

are

possible.

Corn supplies

are likely to be below

normal in

southern states in July and August.

Panel of Economists.

its recommendations

appropriate,

Our panel of economists is almost evenly divided in

for monetary

policy.

Half

believe

that

current

Fed

and half think that money supply growth should be reduced

policy is

to a steady

rate, ranging from 5 to 10 percent.

Similarly, about half of those surveyed

expect

inflation to average 4 percent in 1983; the remaining members anticipate a more rapid

acceleration in prices.

1984.

in

By a narrow majority, they look for the foreign exchange rate of the dollar to

fall this year.

the

Almost all expect inflation to reach at least 5-6 percent

T h e most frequently cited signs of local recovery continue to center on

construction

manufacturing.

industry—housing

and

commercial

building,

real estate, and

lumber

However, a few respondents mention improving labor markets, increases

in consumer spending,

and some

upturn in manufacturing.

regard to the next phase of recovery.

N o pattern is evident in

Nearly everyone on our panel regards housing

demand as strong enough to sustain the current pace of construction

activity.

SEVENTH DISTRICT—CHICAGO

Summary.

The economic picture is definitely brighter in the Seventh

District, but there is scant hope that employment and output will soon regain

a substantial portion of the ground lost in the steep descent from the

prosperous levels of 1978.

Confidence has been at least partially restored.

Households are spending more freely, especially on motor vehicles and other

durables.

Employment appears to be rising gradually and factory hours have

lengthened.

Output schedules for autos and trucks have been raised.

The

uptrend in housing activity, both transactions and new construction, seems to

have substantial momentum, assuming interest rates do not rise.

Nonresidential construction remains weak with widespread evidence of

overbuilding.

Except for a few items such as double trailers, demand for

producer goods remains very depressed.

Depleted inventories of steel and

other materials and components are being cautiously replenished.

In the farm

sector, adverse weather has delayed field work, but income prospects have

improved, mainly because of PIK.

The decline in District farmland value

ended in the first quarter.

Caterpillar Strike.

With the ending of the seven-month Caterpillar

strike on April 25, one of the District's largest manufacturers resumed

ordering steel, castings, and other supplies.

Demand for Caterpillar's

earth-moving equipment remains weak, but its inventories of finished goods

and replacement parts had declined so much that sales were being lost.

Company Restructuring.

Business confidence has improved to the point

that "mere survival" is no longer the principal concern of hard-pressed

enterprises.

But many prominent District companies are emerging from the

recession smaller, leaner, and less aggressive.

Breakeven points have been

lowered by "drastic blood-lettings", with deep cuts in supervisory and

white-collar staff that will not be restored, and closings of less efficient

plants that will not be reopened.

Refinancing of debt will continue as

opportunities develop, but new debts will be incurred only reluctantly.

Producer Goods.

Demand for most capital goods produced in the

District remains very slow.

worse.

However, depressed lines are no longer getting

Moreover, a pronounced pickup has occurred in orders for double truck

trailers permitted by new federal regulations.

Also, sales of some types of

mining and construction equipment have improved.

The longer-term outlook for

capital goods is clouded by the lack of large programs in the planning stage

in basic industries such as steel, chemicals, electric power, and energy

development.

Motor Vehicles.

Auto dealers believe a solid, if moderate, rise in

demand for domestic cars and light trucks is underway.

Easier credit terms,

improved product quality, and stronger consumer confidence are cited.

Auto

demand is centered in full-sized, conventional cars, which are generally in

short supply.

A large proportion of these cars are built to order.

Recreational vehicle sales also are much improved.

decline as much as usual in the third quarter.

changeovers are planned for most makes.

Auto output will not

Rapid, "rolling" model

Output of both cars and trucks will

be up sharply in the third quarter from last year, but still well below the

high levels of 1978.

Steel.

The industry's reduced capacity to produce cold-rolled and

coated sheet is fully booked for the near future, mainly because of increased

vehicle production.

Light structurals also have picked up.

Demand for

plates and large structurals remains very weak.

Retail Sales.

Some large retailers are pleased with recent increases

in sales, with appliances, furniture, consumer electronics, and some types of

clothing showing good gains.

Inventories are on the low side.

Housing.

Transactions in existing homes are up sharply, particularly

in the Chicago area.

Many purchasers are first-time home owners, often

two-income couples, who have been waiting for "affordable" mortgages.

Residential construction is up by about two-thirds in the District from last

year, but is less than half the level of early 1978.

Prices of building

materials have increased, but no significant shortages are expected if starts

do not exceed the expected 1.5-1.6 million range.

Nonresidential Construction.

Most types of nonresidential

construction in the District will be lower this year.

Office space is

overbuilt, especially in downtown Chicago, and substantial concessions are

offered to attract tenants.

No large new shopping centers are planned, but

work on small "strip" retail developments and renovations are at a good pace.

Utility construction and most public works also will decline.

However,

highway and bridge repair work will increase substantially.

Agriculture.

Cold, wet weather has substantially delayed spring

field work, caused death losses and slow weight gains for livestock, and

disrupted production of fruits and vegetables.

farm income for this year have been raised.

However, projections of net

Planting intentions suggest that

corn acreage will be down 31 percent in District states, and soybean acreage

down 4 percent.

Our April 1 survey of agricultural bankers indicates that the

downturn in District farmland values ended in the first quarter, aided by the

PIK program.

Each of the District states noted at least a slight upturn.

Potential land buyers who had been waiting for land prices to "bottom" have

reappeared, and landowners wanting to sell are less inclined to accept low

bids.

EIGHTH DISTRICT - ST. LOUIS

The economic recovery in the Eighth District picked up momentum in

April and early May.

Retail sales continued significantly above year-ago

levels, and construction activity has been robust.

Orders and shipments of

manufactured goods have been increasing, and inventories are relatively

lean.

Employment is inching up, and a few plans for future capital

expansion have been revised upward.

On the adverse side, many plants are

operating substantially below capacity, unemployment remains high, and

price increases have accelerated slightly.

Expectations are widespread

that economic activity will continue to expand during the summer and fall

of 1983.

A recent survey of 166 executives in the St. Louis area by a local

management association found that 25 percent of the businessmen expected

their business will continue to be good in the next six months, another 48

percent anticipated their business will improve, 18 percent said it will

remain at about the same depressed level, and 3 percent thought it would

deteriorate.

Six percent did not predict.

A number of other respondents

noted that a climate of optimism had developed, and that the mid-year tax

cut should further bolster sales and production.

Producers of business

equipment, especially for the petroleum industry, seemed to be the least

optimistic.

They believed that any significant upturn for t;hem would be

delayed until at least the fourth quarter of this year.

Sales at six department stores in the District were 8 percent

higher in April and early May than in the comparable period in 1982.

Most

types of merchandise shared In the improvement; furniture and other home

furnishings sold particularly well.

Two retail shoe chains reported that

sales averaged 12 percent above the year-ago pace.

A restaurant chain and

a fast food firm also reported that business had improved.

Automobile

sales improved in April and early May at five dealers and declined at two

dealers.

A large Ford dealer sold 40 percent more cars, 25 percent more

trucks and 12 percent more used cars in April and early May than in the

same period last year.

Both new and existing homes have sold well since March.

Reflecting the demand for homes, as well as a slight increase in orders for

office buildings, construction activity has expanded.

The average size of

new homes, however, has decreased, reflecting high costs of construction,

relatively high interest rates, and higher gas heating prices.

Most industrial firms in the District reported an increase in new

orders and shipments since March.

The gains were largest for consumer

goods and for products sold to automobile manufacturers, residential

construction contractors and related businesses.

Firms producing business

equipment and metals reported little change in sales or only a slight

pick-up.

Inventories at most firms are either at or below desired levels,

a positive sign for future production.

Trucking companies reported an

increase in tonnage hauled, but rail and river barge traffic has changed

only slightly.

Total District employment inched up, reducing the unemployment

rate slightly in April and early May, but the number unemployed is still

relatively high.

Whirlpool is adding 2,000 workers at an Arkansas

appliance plant, and many other firms have hired selectively as activity

has improved.

On the other hand, businessmen are still striving to control

costs, and some further reductions in employment have occurred.

These

attritions and layoffs, however, are becoming less frequent.

While financing of District business has come from increased cash

flows and from borrowing in capital markets, the demand for commercial and

industrial credit at large District commercial banks also rose in April and

early May.

In addition, both real estate and consumer loans increased

moderately at these banks.

Bank deposits rose more sharply than loans,

with both money market deposit accounts and super NOW accounts continuing

to rise rapidly.

Savings and loan associations likewise have experienced a

huge inflow of funds to these new accounts, enabling them to increase their

lending and improve their liquidity.

Because of unseasonally cool weather and heavy rains, planting of

cotton, rice, corn and other crops in the District has been delayed.

There

is still time to plant these crops, however, if the weather improves.

The

PIK (payment-in-kind) program, which limits the amount of land in

production, has provided more flexibility for timely planting.

Livestock

production has become less profitable than during 1982 since feed prices

have risen relative to selling prices.

Because the PIK program reduces

acreage planted, it has adversely affected both farm implement and seed

sales at many dealers.

Some implement dealers, however, have had an

expansion of sales, reflecting the bargain prices available and the more

favorable income outlook resulting from the PIK program.

NINTH DISTRICT - MINNEAPOLIS

The previously reported upswing in Ninth District consumer

and agriculture

slackened.

has continued, but

the recovery

spending

in industrial activity

has

General merchandise and home sales were still improving in April

and early May, and auto sales have begun to expand again.

In addition, as

expected, the Payment-In-Kind Program appears to have started to provide some

relief for district farmers.

to have

softened

this

The recovery in manufacturing, however, appears

spring after a spurt

in early 1983*

Rail and truck

shipments showed only modest increases, confirming this slackening in industrial activity,

and

increases

in airline passenger

travel were

also

weak.

Finally, lending remains sluggish at Ninth District banks.

Consumer Spending

District consumers continue to spearhead the recovery.

The improve-

ment in Minneapolis/St. Paul department-discount store sales, which began last

fall, continued

retailers.

items.

in April and early May, according to two major Twin Cities

They say that clothing and electronics have been the best selling

Bank

directors

report

that

outside

Minneapolis/St.

Paul,

general

merchandise sales have also continued to improve since last fall, particularly

at large shopping centersDistrict

home

sales

have

sparked an increase in homebuilding.

continued

to

improve

as

well

and

have

A South Dakota director indicates that

home sales in Sioux Falls doubled between January and April, and other directors report increased home sales in their communities.

turn, have led to a pickup in homebuilding.

Rising home sales, in

The executive secretary of the

Minneapolis

Association

of Homebuilders,

crease in homebuilding this spring.

March were up U8 percent

for example, reports a marked

in-

District residential building permits in

from a year ago.

Many of the homes being built,

however, are the low-priced or starter homes (costing less than $80,000).

District auto sales rebounded in April, after pausing in the first

quarter.

A regional sales manager for one of the nation's largest auto manu-

facturers states that his firm's sales in April increased 20 percent from a

year

ago

after decreasing

8 percent

in early 1983*

Another

reports a noticeable pickup in medium-sized car sales.

sales manager

The directors' gen-

erally positive remarks about April auto sales in their communities confirm

these upbeat sales reports.

Agricultural Conditions

The

faint

signs

of

previously, have intensified.

recovery

in

The upswing

agriculture,

which

percent,

in April.

(PIK) Program,

The Minneapolis cash corn price, for example, rose 8

from $2.87 to $3.09

per bushel, between

increased 33 percent since January.

percent,

reported

in corn and wheat prices, which

began in January with the announcement of the Payment-In-Kind

continued

were

and April;

it

has

The Minneapolis cash wheat price rose 7

from $1».01 to $^.31 per bushel, between

increased 13 percent since January.

March

March

and April

and

has

These increases, according to bank direc-

tors, have boosted farmers' confidence, which has resulted in some increase in

farm

spending.

reported

In North

increasing

Dakota,

for example, some implement

dealers

have

implement sales, while in western Wisconsin, prices have

risen at farm auctions.

Although

district

agriculture

corn planting is behind schedule.

appears

to

have

started

to

recover,

Due to excess moisture in Minnesota, only

lU percent of this year's corn acreage had been planted by May 10; normally,

33 percent has been planted by this time.

will plant

Because of PIK, however, farmers

only about two-thirds of their normal corn acreage.

Therefore,

they are less worried than usual about catching up once the fields dry out or

about a late crop that might reduce yields.

In contrast to corn, district

spring wheat planting is on schedule.

Industrial Activity

In contrast

to the

further

strengthening

in consumer

spending

and

agriculture, the advance in manufacturing, which began last fall, appears to

have slackened in April and early May.

Paper and building inputs are the only

areas where directors report a continued pickup.

reports

that

running

at capacity.

well,

paper

reflecting

and wafer board

some

Prices

plants

One director, for example,

in Minnesota have recently

been

for these commodities have risen modestly

strengthening

in

demand.

Minnesota, a manufacturer of heavy construction

three-fourths of its previously

laid-off workers.

some signs of softening have emerged.

In

addition,

equipment

as

in

southern

recently

recalled

But even in these areas,

A Montana director, associated with a

national forest products company, reports some letup in lumber sales in April.

A large Minneapolis manufacturer of residential temperature controls recently

laid off 100 of its It,000 local employees because recent sales haven't been up

to expectations.

In both instances, this softening was attributed to worries

about excess inventories.

Transportation

The recent softening in district manufacturing is reflected in transportation activity.

district

This industry, which employs around 90*000 people in the

and accounts

for 5 percent of district personal income, is a good

coincidental indicator because it moves the goods produced by the district's

major industries.

movement

has

An economist with a large district railroad says that this

recently

been

lackluster

and

experiencing a "spit and sputter" recovery.

sharply

in January, then

sagged

picking up a bit in late April.

factured

goods

have not been

that

he believes

the

region

is

His firm's rail shipments rose

in February, March and early April, before

Shipments of lumber products and other manu-

as good

as expected.

He attributes this to

business concerns about excess inventories and believes businesses are ordering smaller amounts and relying more on trucks than usual.

Trucking

business.

firms, however,

have yet

to

see a major pickup

in their

The total truck tonnage shipped by general freight carriers from

Minneapolis/St. Paul businesses has only increased modestly since early January.

A trucking

executive with a large general freight

carrier, like the

railroad economist, believes concerns about inventories are curbing shipments

and says that building input shipments have been increasing faster than other

shipments.

Like the transportation

increased only modestly.

of goods, the transportation of people has

The number of people arriving and departing from the

Minneapolis/St. Paul International Airport

percent

from a year ago.

reached in 1980.

in the

first

quarter was up 1.1

But it was still down 10.7 percent from the high

Financial Developments

Lending continues to be soft at Ninth District banks.

of

the

April,

respondents

to

our

Agricultural

for example, indicated

than desired.

that

their

Credit

Conditions

loan to deposit

Sixty percent

Survey

in

early

ratios were lower

Directors' comments about weak loan demand in their communities

confirm this survey.

TENTH DISTRICT—KANSAS CITY

Overview.

Tenth District business firms are generally optimistic

about economic conditions in 1983.

Their optimism has not been reflected

in loan demand at District commercial banks, which remains unchanged for

the third consecutive month.

While retailers expect sales growth throughout

the year, inventories are still being trimmed in many instances.

Housing

starts activity is strengthening, but new house sales are lagging.

Wet

conditions are delaying corn planting in the District, but the winter wheat

crop is generally in good condition.

Retail Trade.

Retailers report that nominal sales in early 1983 range

from unchanged to 5 percent above last year, due largely to a rebound in

home appliance sales in the last two months.

off.

range.

Sales of apparel have tapered

Forecasts of nominal sales growth in 1983 are in the 3 to 10 percent

Despite increased optimism, abundant supplies and short lead times

allow retailers to continue to trim inventories.

Half of the respondents

expect inventory levels to bottom out soon, however.

For 1983 as a whole,

retailers anticipate little change in prices or markups.

Purchasing Agents.

A majority of manufacturers' purchasing agents

report average prices of major inputs as unchanged to 10 percent higher than

a year ago.

Larger increases are reported for lumber, however.

increases have occurred in the past three months.

Most price

For the rest of 1983,

purchasing agents expect further increases in input prices to average less

than 4 percent.

With minor exceptions, respondents are not experiencing

problems with lead times or material availability, nor do they expect such

problems this year.

Inventories are now at very low levels, and are

expected to remain low for the rest of the year.

Housing and Housing Finance.

Tenth District respondents report sub-

stantial increases in housing starts, especially, single-family units, in

early 1983 compared with early 1982.

Most respondents believe that the

present level of housing starts is sustainable at the current level of

mortgage interest rates.

strength as starts.

Sales of new houses are not showing as much

The current level of housing activity is putting little

pressure on supplies and prices of inputs, with the exception of lumber.

Further declines in mortgage rates are expected to bring further improvement

in housing activity with no hindrance from supply constraints.

Most Tenth District savings and loan associations report improvement

in deposit inflows in the first four months of 1983 compared to last year,

due both to an improving economy and to new deposit instruments.

Almost all

associations expect continued gradual gains in inflows throughout the

remainder of 1983.

Demand for mortgage funds is also increasing.

Mortgage

interest rates range from 11 3/8 percent on adjustable rate loans to 13

percent on 30-year fixed rate loans.

Rates declined slightly in April and

are expected to decline gradually through the rest of the year.

Agriculture.

The winter wheat crop in the District is generally in

good condition, with some localized damage due to adverse weather conditions.

Although the nation's winter wheat harvest is expected to be 10 percent less

than last year, Kansas farmers should harvest the state's second largest crop

ever.

Wet conditions continue to delay corn planting in the Tenth District.

Cattle grazing on wheat acreage idled by the PIK program is prevalent in the

southern part of the District.

Calving has proceeded normally with only

isolated instances of unusually high death losses, despite a wet, cold spring.

While it is too early to determine the full impact of PIK on input

suppliers, sales are substantially lower than last year for fuel, fertilizer,

and agricultural chemicals.

New machinery sales are very sluggish, though

some areas report brisk used machinery and haying equipment purchases.

Agricultural credit conditions are generally improved throughout the District,

as indicated by increased availability of funds, higher loan repayment rates,

fewer requests for loan renewals and extensions, and lower interest rates.

District farmland prices remain weak.

Banking.

month.

Loan demand at Tenth District banks is unchanged from last

Real estate lending continues to show modest growth, while demand for

commercial and industrial lending is experiencing modest declines.

Most

District banks surveyed report that deposits continue to grow although a few

have experienced a normal seasonal runoff.

Demand deposits are up slightly,

while both NOW accounts and Super-NOW accounts are beginning to stabilize.

In contrast, most of the banks surveyed report growth in money market deposit

accounts (MMDA's), with funds still being attracted from outside institutions.

Money market certificates, small saver certificates, and large CD's are

holding steady.

The prime lending rate is either down slightly or unchanged

from last month.

It ranges from 10.5 to 13.25 with most banks at the lower

end of the interval.

in the prime rate.

slightly.

Most bankers surveyed expect further small declines

Consumer lending rates are reported to have declined

ELEVENTH DISTRICT—DALLAS

The District

economy continues

to show evidence of a recovery.

Electronics and construction-related manufacturing is rising, but oilfield

equipment production remains very low.

unchanged, but

The District drilling rig count is

the U.S. count has been rising

steadily.

District retail

sales slowed in April from March's surge, but auto sales are stable.

outlook

rate,

for farm income has

but

material

improved.

availability

The

Construction continues at a rapid

has

begun

financing and mortgage lending remain high.

to

vary.

S&L

construction

Deposits and bank credit are

both well above levels posted a year ago.

Construction is robust in the District.

The first quarter saw a

record number of single-family and multifamily housing permits.

Apartment

construction will probably decline later this year, in the wake of rising

vacancy rates, but suppliers of construction materials expect high

of

single-family

homebuilding

nonresidential projects showed

through

surprising

1984.

The

strength

square

in the

levels

footage

first

of

quarter.

This sector is expected to remain healthy all year.

The availability of materials for homebuilding

is

plenty

exterior

of

lumber,

plywood,

siding

are

short

homebuilders

and

in

steady

demand

and

particle

supply.

from

board,

Because

commercial

of

is mixed.

but

rising

There

sheetrock

and

demand

from

construction,

suppliers

may have to ration sheetrock until the third quarter, when new production

capacity

will

come

on

line.

The

plentiful in the District, but

demand

from other regions.

supply

of

exterior

siding

had

been

it is now insufficient owing to increased

Prices of residential construction materials

have generally increased since year-end, but they will remain at or below

their 1978 levels.

Manufacturers

and

consumers.

inventories.

in electronics report rising

Production

of

Manufacturers

steel

of

rose

as

insulation

sales to businesses

distributors

for

expect very high rates of capacity utilization

rebuilt

commercial

during

low

construction

the rest of 1983.

Output of oilfield equipment remains very low.

The number of drilling rigs at work

the

first half

of May was

slightly

below April's

several factors suggest that drilling may

seeking

potential

drilling

sites

in the District

weekly

increase.

increased

states in

average.

But

The number of crews

slightly

in

April.

The

recession appears to be over, and the price of oil is stabilizing.

Retail sales increased substantially in March, aided by an early

Easter,

but

appliances

levels.

they

are

rose

at

selling

a much

well,

slower

and

pace

in April.

inventories

are

Furniture

generally

at

and

planned

Some stores are increasing orders to replenish stocks of consumer

durables

which

District

cities

were

with

reduced

during

diversified

increases, but respondents

recent

economies

promotions.

are

Retailers

optimistic

about

along the Gulf and Mexican border expect

in

sales

slow

sales all year.

Although

volume, new

higher

car

recent

shortages of more popular models have held down

sales have been

than a year

ago.

stable

Inventories

models are being returned unfilled.

new car sales over

the next

since March,

are

low.

Factory

Dealers expect

few months,

and

they

are much

orders

for some

stable to

increasing

if discount financing

continues.

After special new car financing programs appeared again in April, used car

sales slowed, but they picked up in early May.

Recent increases in some crop prices and widespread participation

in the payment-in-kind

(PIK) program have improved the prospects for farm

profit margins this year.

Agricultural bankers anticipate a declining rate

of bankruptcies/liquidations during the rest of 1983, and they expect to be

able to help marginal farmers stay in business another year.

Total deposits at the District's financial institutions continued

to

increase

at

a healthy

rate

in April

percent above last year's level.

deposits.

and

savings

deposits were

154

MMDAs now account for 12 percent of total

The first quarter's runoff of small time deposits and buildup of

large time deposits continues.

In April, loans and securities at member banks were 16 percent

higher

than a year earlier.

Bank loans grew slowly

as

firms'

liquidity

improved, and business loan demand at large weekly reporting banks remains

sluggish.

Real estate lending in April slowed from its first quarter pace,

but it remains significantly above last year's level.

Loans to consumers

declined slightly in April.

S&Ls

continue

purchase

loans

packaged

and

at

to

a brisk

promptly

sold

fund

pace.

in

residential

Most

the

new

secondary

losing money on new but unfilled apartments

with developers.

S&L

liquidity

Increases

positions.

in net deposit

Excess

investments and federal funds.

funds

construction

residential

loans

market.

Several

they built

inflows have

are

and

being

home

are being

S&Ls

are

in joint ventures

further

placed

in

improved

short-term

Recently, the first and second largest S&Ls

and the fourth and fifth largest S&Ls merged, resulting in two associations

with 114 and

applied

to

110 branches, respectively.

the

commercial bank.

Comptroller

of

the

The 38th

Currency

for

largest S&L in Texas

permission

to

open

a

TWELFTH DISTRICT —

SAN FRANCISCO

Consumer spending and residential construction continue to lead the Twelfth

District economy into recovery.

Retail sales at department stores and auto

dealerships continue to improve, while the decline in mortgage interest rates has

held Western homebuilding and sales activity at levels far above those of a year ago.

Manufacturing activity is picking up in a few important industries such as lumber and

aluminum, but most of the region's capital goods and mining industries continue to

experience extremely weak demand.

Despite ample funds and aggressive promotional

efforts on the part of the institutions, commercial and consumer loan demand at

Twelfth District banks remained sluggish during April, but the banks report a

significant increase in real estate lending activity.

Consumer Spending

Reports throughout the Twelfth District confirm the growing strength of retail

sales in March and April.

Major department store chains in Southern California

reported that sales increased in both months and in April ran about 8 percent above

the level of a year earlier, representing a solid gain in real terms.

One respondent

described sales at smaller stores, such as those selling women's apparel and shoes,

as "the best in years, even better than Christmas".

In the Pacific Northwest and

Intermountain states, department stores also are experiencing strong year-to-year

sales increases.

The pickup is extending beyond apparel, which remained relatively

strong even during recession, to a broader spectrum of product lines.

In particular,

the upturn in home sales is helping to spur sales of household goods, including

furniture, appliances, and other big ticket items.

Interest rate concessions by

automobile manufacturers, and declining gasoline prices, have stimulated sales of

automobiles and recreational vehicles.

more normal levels.

Retail credit delinquencies are returning to

Manufacturing and Mining

Twelfth District manufacturing industries that serve the housing and defense

sectors are showing improvement.

But the majority of industries—namely, those that

manufacture durable capital goods—continue to reduce output and employment.

Perhaps

the brightest spot in the district economy in terms of a turnaround is the Pacific

Northwest lumber industry.

The recovery in national homebuilding activity enabled

the industy to boost production during the first quarter 46 percent above the level

of a year earlier and to raise prices on average by 11 percent.

aluminum industry also has reactivated some idle capacity.

number of other important industries however.

cutting efforts in the face of weak demand.

The region's

But layoffs continue in a

The paper industry continues its costIn both California and Washington, the

aerospace equipment manufacturing sector has been benefiting from increased defense

business, but weakness in civilian markets for aircraft and electronic equipment have

continued to reduce overall industry payrolls.

In the Intermountain states—Arizona,

Nevada, Utah—the nonferrous metals industries are once again experiencing depressed

demand now that the likelihood of a copper strike has diminished.

Throughout the

District, capital goods industries that produce such goods as trucks, machinery and

equipment and ships, have yet to experience a turnaround in demand.

The decline in

oil prices is depressing oil drilling activity and revenues in Alaska and California

and causing layoffs at Intermountain coal and uranium mining sites.

Construction and Real Estate

The West shared in the moderate decline in housing starts and building permits

recorded nationally in March, suggesting that the pace of residential construction in

the district in coming months may not be quite as high as during the first two

months.

But housing analysts still expect regional homebuilding activity to be at

least 50 percent better for the year than last year's depressed level.

They stress,

however, that homebuilding activity could drop much more sharply during the rest of

the year if mortgage rates do not fall further.

This is because homebuilders built

inventory during the first quarter in the expectation that rates would fall further,

qualifying more buyers.

If the decline is not realized, they will be caught with

excess inventory and reduce construction sharply.

The fact that most of the new

homes being constructed are at the lower price range and that many carry subsidized

FHA/VA mortgages also suggests that the recovery will not be sustained unless rates

fall further to make homes affordable to a greater segment of the public.

rates also are needed to offset rising home prices.

Lower

In the non-residential sector,

construction is reported to be slowing due to the high vacancy rates in most

metropolitan areas.

Agriculture

Rain storms continued in California through April causing further adverse

consequences for the agricultural sector.

In addition to an estimated $300 million

in crop losses sustained earlier in the year, farmers face further financial losses

as a result of continued delays in plantings of important row crops such as lettuce,

tomatoes and onions.

Prices for these products have risen sharply in the past few

months but volume has been so reduced as to result in far less than normal revenues.

Also, the storms seriously reduced the prospective nut crop by preventing pollination

of blooming orchards.

Although prices for livestock, grains and a wide array of

other farm products also rose in April, District farmers and ranchers expect 1983 to

be another difficult year, with net income showing little, if any, improvement over

1982's depressed level.

Large world crop supplies, weak overseas economies and the

rising value of the U.S. dollar are combining to lower exports.

Financial Institutions

Although Twelfth District banks have been aggressively promoting commercial and

consumer loans as an outlet for the huge inflow of funds generated by the MMDA's,

demand for those types of loans remained sluggish during April.

Real estate loans

showed a similar pattern.

But since institutions are reporting strong real estate

lending activity, this probably just means that the recovery in the housing market

has yet to translate into an increase in the aggregate statistics on real estate

loans.

Banks are noting an increase in both loan inquiries and new loan extensions

which coincides with the fall in mortgage rates and consequent surge in housing

starts and permits during the first quarter.

An additional favorable indicator that

a homebuilding recovery is underway is that the majority of the lending activity in

recent months has represented new credit extensions, rather than the refinancing of

old loans.

REDBOOK SPECIAL REPORT

CONSTRUCTION AND REAL ESTATE ACTIVITY

NATIONAL SUMMARY

This summary is organized around the answers to four key questions

about current levels of construction activity.

•

How robust is the current upturn

construction?

in housing

•

How serious is the current

construction activity?

•

How sensitive would activity in the housing sector be to

interest

rate changes

of different

magnitudes

and

directions?

•

What is the likelihood of bottlenecks and upward

pressures in the construction supplies industries?

downturn

in

sales

and

nonresidential

price

Housing Sales and Construction

The recent upswing in housing is widespread

with

all

Districts

reporting

substantial

geographically,

improvements

over

extremely depressed levels of the first quarter of 1982.

a

moderately

high

rate

of

housing

sustainable at least through 1983.

in

the

housing

construction

starts

of

supply

at

least

construction

the

Moreover,

appears

to

be

Cautious estimates by economists

industry

indicate

1.5 million

an

units,

annual

and

the

rate

of

consensus

among forecasters centers on levels between 1.5 and 1.6 million.

The

underlying

January

general

demand

for

and February's

feeling

is

houses

has

that

marked

occurred,

good weather

high figures for those 'months.

a

that

and

pickup

it

generated

was

the

in

not

the

just

remarkably

Moreover, the bad weather in March

was probably responsible

adjusted

starts,

for that month's small drop

especially

in

the

Richmond,

in seasonally

Atlanta,

and

San

Francisco Districts.

Most Districts reported that sales of low priced homes had

picked

up

especially

toward

construction

rapidly

and

and

there

is

an

apparent

sale of smaller houses.

While

tendency

the houses

may be smaller than ever, they are apparently still being equipped

with

a full array

Philadelphia

of appliances.

for example,

sales

have also picked up, but

In some

of medium

the performance

regions,

or

of

Cleveland

luxury

priced

the middle

and

and

homes

upper

markets has been spottier.

While all the Districts

medium

term

started

outlook

off

very

considerably by

is

strong,

the end

is

more

activity

that

industry

observers

Districts

the current

reported

mixed.

but

St.

rivaling

anticipate

are

previous

level of activity

and

Dallas

expected

New York

continued

improvement,

Louis

starts

of the year.

already

current

and

peaks

growth.

and

In

slow

report

regional

the

falls well below

peaks, and analysts are uncertain as to what

have

to

Boston

the

other

previous

the rest of the year

will bring.

Nor

San

is

Francisco

there

reports

a nationwide

speculative

healthy sales later this year.

pattern

in builder

building

In Richmond

in

confidence.

anticipation

and Dallas

are only completing already-sold homes, and Philadelphia

substantial, but diminishing, inventory of unsold houses.

of

contractors

reports a

Construction of rental housing has also increased, but the

strength

with

of

the upswing varies

from District

the tightness of local markets.

to District

Rental markets

in line

are tight

in

New York and Minneapolis; loose in Atlanta, Chicago and Dallas.

In general then, while there is little doubt that a strong

recovery in housing is underway, it is not at all certain that the

rest of 1983 will continue as strong as the first quarter.

Nonresidential Construction

The

strong

over

slowdown

is

completed

and

nonresidential

construction

the

the

course

beginning

fewer

started to climb

of

last

nationwide

new

starts

in most

reporting

remained

recession.

as

are

sector

large

Now,

office

planned.

generally

however,

projects

Vacancy

regions—exceeding

rates

a

are

have

five percent

in most places and as high as 8 percent in Chicago and 9 percent in

Minneapolis.

but

Advertised rents

several

Districts

for office

report

an

space have not

increasing

declined,

incidence

of

rent-reducing special deals such as one year's free rent, extensive

remodelling, and free amenities.

are

taking

plans.

a

"wait

and

see"

Under these conditions developers

attitude

about

future

construction

Vacancy rates will have to decline and effective rents will

have to increase before office construction starts begin to increase

again.

The

Districts

differ

slowdown in commercial starts.

pick

up

in

Florida

and

in

in

the

expected

duration

of

the

Indeed activity has just started to

some

of

the

smaller

Texas

cities.

Industry analysts in New York expect 1984 to be a good year, and new

projects are being talked

about actively

in Boston and

St. Louis.

By contrast, observers in Minneapolis fear that it will be three to

five years before commercial construction activity begins to pick up

in that District.

None of the Districts reported large amounts of new retail

construction.

begin

later

housing

work

Work on

this

year,

construction

on a

large

smaller

shopping

about

six

activity.

shopping

months

Only

mall,

malls

after

Kansas

and

an

can

City

analyst

be

expected

to

the

increase

in

reported

of

large

current

regional

retail centers does not expect any such projects to be started this

year across the nation.

Sensitivity to Interest Rates

It is generally agreed that the decline

is the single most important

activity.

Indeed, most

increase

in

housing

could

additional decline in rates.

to be whether

another

large

rates

factor behind the increase in housing

respondents

sales

in mortgage

tended

still

to

feel

happen

that

even

a

without

The basic question, however,

drop

in conventional,

further

fixed

any

appears

rate,

30

year mortgage interest rates—to 10.5 or 11 percent—would bring out

a

great

many

more

potential

buyers.

Observers

in

Boston,

Philadelphia, Atlanta and Minneapolis believe that lower rates would

touch

off

something

like

a

boom

in

housing

sales.

Analysts

in

Chicago and Dallas are more dubious on this point.

The use of variable rate mortgages, which might reduce the

sensitivity of housing activity to interest rate fluctuations, does

not appear to be gaining

in consumer acceptance.

District

reports

that discussed this issue indicated that the practice of "creative"

financing

had

diminished

markedly

with

the

drop

in

rates.

The

conventional 30 year fixed rate mortgage remains, by far, the most

popular home finance instrument.

The general optimism about the sustainability of a healthy

market

appears

to be

based

rates will not increase.

increase in mortgage

on

a widespread

belief

that

interest

Several Districts report the fear that any

interest

rates, of say

more, could dampen recent growth rates.

fifty basis points or

Market analysts in the New

York region, however, believe that activity could be sustained, even

given a small interest rate increase—especially

as

a

sign

that

mortgage

costs

had

"bottomed

if this, were taken

out"

and

would

be

increasing further in the future.

Input Prices

While there have been a few

shortages

(notably for

instances

lumber and dry wall) and

of

temporary

some price

input

rises,

«

observers do not expect any sustained pressure on construction costs

through this year.

Construction supply industries are operating far

below capacity and are apparently

quickly;

so it

is unlikely

that

capable of increasing

anything

more

than

production

temporary

and

localized shortages will occur in the near future.

However,

if

mortgage

interest

rates

do

fall

another

percentage point or more, and if, as some predict, this leads to an

annual level of housing starts closer

input bottlenecks and upward

problems.

to 1.8 than to 1.6 million,

price pressure

could

begin

to become