February 3, 1971
The slight increase in optimism reported last month by businessmen in the Eighth Federal Reserve District continues to prevail. Retail sales, which picked up seasonally just prior to Christmas, are still slightly ahead of this time last year. The labor picture remains unchanged in the absence of strikes. Firms interviewed report that belt-tightening plans have been completed. Some capital spending plans are slightly higher than last year, but these tend to be the exception. Home-building continues to exceed year-earlier levels, and prospects for this activity in the future are good.
Most respondents engaged in retail sales indicate that their business is better than during the autumn months. Some automobile dealers report sharp increases in new car sales. Although overall sales improvement has not led to major changes in inventories or plant size, retailers generally feel that a moderate upswing is underway. Prices are expected to continue up, however, reflecting high wage settlements and rigidities in the labor market.
No major improvement in the unemployment picture is anticipated in the near future. Respondents reported no employment expansion plans, but some indicate that the workweek may be lengthened.
Although one large firm reports a capital budget that is higher this year than last, the increase is due to long-term commitments rather than to any additional optimism based on recent sales or other factors. Most firms are still wary of plant expansion, and in the St. Louis area the number of new plant inquiries is still down from the corresponding period in the previous year.
The picture remains bright with respect to home-building. Building permits issued in suburban St. Louis are currently running more than double those of a year ago. Traffic of homeseekers has improved as more people are actively shopping for houses. The major drawback in the industry is the increased cost of housing due to rising input prices, especially labor costs. The directors of one branch of this Bank noted that labor costs constitute 50 percent of total housing costs. Whereas the corresponding proportion in automobile manufacturing is only 25 percent. This factor is pricing some people out of the market despite the lower mortgage rates now available. One respondent felt that this may be a hindrance in meeting the President's announced goal of 2.6 million new housing units in 1971.
District banks had an above average increase in profits in 1970. Loan demand, however, is not increasing, while deposits are rising slowly, and rates paid on passbook and other savings-type deposits are generally unchanged. Thus the outlook for banking in 1971 is for a substantial decline of the margin between the cost of funds and the rates on bank assets. Some banks report that although net income may be maintained at current levels, any expansion in net income will definitely be less than the average rate of recent years.
The agricultural situation is characterized as "dreary." Losses and late harvesting of field crops are reported to be cutting returns in this sector. Prices of some crops are said to be satisfactory, but the volume of sales is disappointing. Despite the dissatisfaction, however, farm cash receipts remain above corresponding levels of a year ago in most Eighth District states.