Beige Book
National Summary

October 10, 1979

This month's District reports indicated that the economy did not show any distinct signs of slipping further. The business situation actually strengthened a bit in some districts, although it did little more than hold steady in most areas of the country. Department store sales remain lackluster, but automobile sales have rebounded somewhat from their recent lows. Automobile and steel production continues to be sluggish, but strength in other industries such as aerospace and capital goods has buoyed the economies of many districts. Inventories remain generally in line with anticipated sales. Total construction activity remains strong with increases in non-residential building offsetting declines in residential. Farm income is expected to rise with the recent bumper harvest. Although inflation continues unabated, some letup is expected before the end of the year. Demand for business loans continues at a high level.

Department store sales remain mixed across the country. Boston and Kansas City have recently experienced some modest improvement, and New York reports fairly robust gains. In many districts, the increases in retail sales have outpaced inflation. However, retailers are anxious about the future, and in Cleveland where sales growth has slowed there is concern over falling profit margins and rising loan delinquencies and bad debt losses.

Automobile sales have recently picked up, and appear to be quite strong in New York. In several districts, it is feared, though, that the recent spurt in sales was the result of the extensive price incentives and that sales will weaken once these incentives are ended. Other vehicle sales remain weak, particularly for the larger cars, recreational and four-wheel drive vehicles, and light trucks. Meanwhile, Chicago reports that auto assemblies in October are scheduled to be 12 percent lower than last year and truck assemblies 33 percent lower, thus continuing the pattern of the third quarter.

In certain parts of the country, tourism has rebounded from the nadir reached during the gasoline shortages. Recent increases in northern New England may even be sufficient to offset earlier losses. In Atlanta, tourism is now about equal to last year, and the recent groundbreaking in Florida for Disney's Experimental Prototype Community of Tomorrow bodes well for the future there. In contrast, tourism remains depressed in San Francisco.

Other business activity appears to be holding up fairly well. Automobile production and steel orders have stabilized at lower levels. Strength in aerospace, electronics, and small appliances has led to input shortages in Kansas City. Conditions in Boston have improved, partly as a result of increased export sales. San Francisco reports continued strength, but industrial output slipped again in Philadelphia. In Richmond, although employment fell, it did so at a slower rate than in the two previous months.

In general, the capital goods industry remains strong despite a slowdown in orders. Order backlogs are still high, and St. Louis reports that in some companies they have continued to increase. Capital spending plans continue undiminished, although investment activity is not uniform across sectors. Boston reports capital spending by industries producing consumer appliances and electrical equipment for the home is already weak, but that spending by the chemical, rubber, and non-automotive transportation industries is at record levels.

Inflation continues rampant, but the rate of increase varies by industry and section of the country. For example, robust building activity in Dallas has contributed to the rapid price increases of building materials there. In contrast, the decline in the demand and hence the price of steel scrap has helped to lower steel prices. Overall, there seems to be the feeling that price increases for the rest of the year will be less dramatic than they have been. However, continued inflation combined with the recent GM-UAW settlement has raised some concern over the future level of wage demands.

Inventories are still reported to be on the lean side, as firms continue to be extremely cautious. Those few cases in which retail inventories are reported to be somewhat high are not expected to result in any large or sudden corrections. In fact, the moderate build-up previously experienced in St. Louis has already been worked off. Even the large auto inventories have been greatly reduced. Business inventories range from "adequate" in Chicago to a level somewhat-above-desired for materials in Richmond. Still, in Richmond and other districts, inventories of finished goods seem, if anything, to be a little on the low side.

Recent declines in residential construction seem to have been largely offset by increases in non-residential construction. In St. Louis, for example, housing permits are down but total construction employment is at or above last year's level. In some districts such as Chicago and Atlanta, speculative housing starts have been dampened by the very high financing costs. Many banks and financial intermediaries are also becoming much more restrictive in issuing mortgages. In Dallas, although the burst in non-residential construction has been welcomed, it has raised concern of a future oversupply of commercial space.

In many areas of the country, farm income is higher than anticipated. Bumper crops, however, have created storage and transportation problems; the recent settling of the grain haulers' strike should, according to Minneapolis, provide some relief. Production is down in Southern California, but price increases have more than compensated for the smaller volume. In contrast, Atlanta reported some farm areas were severely hurt by hurricane Frederic. Losses are also being experienced by those farmers raising hogs and broilers.

In most districts, business loan demand remains strong. Cleveland considers this a bad sign, fearing that the borrowing reflects a deterioration in the financial condition of industry. Many of the loans in New York are not for expansion but are for added inventory and acquisitions. Although the higher interest rates have not yet choked off overall demand, Minneapolis is concerned that small businesses are now being hurt. Consumer loans have weakened, but, in Philadelphia, they have not weakened as much as expected.