July 15, 1970
The softening in the Ninth Federal Reserve District which has been evident since early this year appears to have continued through June. Almost universally, district directors, bank officers and leading businessmen felt that district unemployment rose in June and that students were finding either less lucrative summer jobs than in previous years or none at all. Consistent with this deterioration in employment, consumer tendency to downgrade purchases is continuing. At the same time, price shading, especially among retailers, is becoming more prevalent while business failures appear to be on an upswing.
District newspapers in recent weeks have contained numerous articles reporting that labor markets have softened appreciably in their local areas. These articles were corroborated by the observations of the Minneapolis Bank's Directors and officers who are able to cite specific examples of softening. First, job applications are substantially greater than usual; moreover, many applicants have considerable experience and technical skills. Second, some electrical contractors in the twin cities have gone to a 4-day week in order to spread the work. Third, unemployment in the rural areas of the district is rising, partially because people who had left for higher paying jobs in Metropolitan areas are now returning after having been laid off.
The softer labor market conditions have resulted in fewer summer job opportunities for students this year than in the past few years. The two reasons that were most often cited for this lack of job opportunities were that construction and tourism, the two major activities in the district where students usually find work, are operating at lower levels than in the past few years; and a number of employers who are facing squeezes on profits and liquidity are not hiring summer help as freely as they did in previous summers.
A number of additional cases which indicate that consumers are downgrading the quality of their purchases have come to our attention in the past month. Directors from areas in the district where tourism is a major industry all report that tourist spending is down significantly from a year ago. At the same time, however, traffic seems to be about the same as it was last year. Instead of spending money and attending paying attractions, people are relying more on free accommodations and are traveling with campers rather than staying in motels. Meanwhile, repair shops for automobiles and other durable goods are reporting record volumes of business; a regional parts distribution center for a major automobile manufacturer in the twin cities reports that the demand for automobile parts is so great that its crews are working overtime. Although automobile sales in the district are still at depressed levels, the weakness seems to be centered on the more expensive models while the market for lighter, economy models and used autos appears to be relatively strong.
The greatest evidence of "price shading" in the district is at the retail level. In addition to markdowns on automobiles, the directors felt that retailers were holding sales earlier than usual this summer and were offering larger discounts. One reason given for this was that inventories appear to be larger than desired because of the general slowing in retail sales. Retailers are also concerned that they will "get stuck" with merchandise that was ordered before the truckers' strike and is only now arriving.
There appears to be very little "price shading" for industrial goods, and directors and officers of the bank cited a number of cases where prices have actually risen in the past few weeks. In general the feeling was that manufacturers do not have adequate margins with which to cut prices. As one director put it, "business is hurting but volume at a loss doesn't help." Another felt that industrial suppliers are beginning to drop unprofitable lines. On the other hand one director indicated that discounts in some construction materials are greater now than they were a year ago. He was careful to point out, however, that list prices have risen during the past year, and as a result, the net effect on prices is not clear. He noted that sales efforts among construction materials distributors have intensified, and that they have improved services including schedules in order to increase their sales.
The slowing in sales along with a decreased availability of funds has led to an increase in district business failures. The three most common characteristics of failing businesses are that they were relatively young firms, were in industries in which entry is fairly easy, and/or were undercapitalized. Of the 21 failures of which one leading district banker was aware, all could be attributed to one or more of these factors. One director observed that the number of failures or near failures in the construction industry has risen in recent months. The primary cause for this is the lack of working capital, a problem which is chronic in the industry, but which has become increasingly acute because of the large number of recent strikes and the slowing in construction activity.