March 9, 1971
The trend of business conditions in the Eighth Federal Reserve District is generally unchanged from the moderate uptrend reported a month ago according to a number of businessmen that were interviewed. Although most reporters indicate that recent levels of activity are insufficient to support much optimism, all expect substantial gains before the close of the year. Retail sales are running slightly ahead of a year ago on a dollar basis. Home- building is likewise stronger. The employment situation, however, is generally stable with few hirings and a relatively high level of unemployment. No early improvement is seen in capital investment, despite lower credit costs. Financial agencies report rising availability of both short- and long-term credit.
Some large retailers report that post-Christmas sales continued ahead of year-ago levels through February, but that the increase was somewhat less than anticipated on the basis of the sharp pre- Christmas gains. The increase from a year ago was only sufficient to offset price increases. Sales in real terms, however, are believed to be higher on a seasonally adjusted basis than during the autumn months.
Most manufacturers made their major retrenchment moves in late 1970 or in January of this year, but further moderate employment reductions were announced in February. These layoffs, however, were probably offset by employment gains in the services, trade, and construction industries. Most of those interviewed expect unemployment to continue relatively high through the spring and summer months, reflecting both the conservative attitude of businessmen in hiring and an increase in the labor force.
Home-building continues to be the brightest feature on the business horizon. All phases of this industry, including lumber, plywood, and especially the construction of lower priced homes, report more than seasonal gains from levels of last summer.
Despite the generally increased optimism by businessmen since the turn of the year, no early improvement in capital spending is foreseen. Few manufacturers appear willing to risk investment in major expansion projects at this stage. Exceptions include one retailer who reported a moderate increase in investment plans, and the utilities, which were not seriously affected by the slowdown. Utilities continue to expand to meet longer run demand projections. Otherwise, the investment slowdown continues, and little optimism is found for an early resumption of capital spending at levels existing before the slowdown.
Financial corporations reported further increases in liquidity during recent weeks. Mortgage rate reductions have so far been relatively small, but some agencies state that excessive quantities of credit are available at the quoted rates, pointing to further rate reductions. A number of savings and loan associations are now advertising for borrowers, and one commercial bank indicated that net income this year will be well below 1970 levels because of the sharp decline in bank lending rates.
Respondents, in general, expect the rate of inflation to continue to subside through 1971. The agriculture and food sectors may tend to push prices up in the second half of the year, in contrast to the downward influence of these sectors in late 1970. Farm commodity prices fell sharply late last year, but meat and other livestock product prices have already turned upward. With reduced supplies in prospect in the Third and Fourth Quarters, further increases in such prices are expected.