Minneapolis: September 1971

Although bank directors have noticed very little change in District business activity since President Nixon announced his new economic policy, they do feel that the new program has acted to build consumer confidence. The directors consider it still too early, however, to assess the impact on investment spending. At the same time, the recent changes instituted by the Federal Home Loan Bank Board (FHLBB) are not expected to have a significant effect on housing in this District.

Several directors reported a modest pickup in consumer spending in their areas since August 16, but no consensus exists as to how the President's program has affected District automobile sales. Three directors reported poor car sales due to consumer uncertainty over whether or not the excise tax will be eliminated, while two others reported a strengthening in automobile sales in their areas since August 16. A newspaper survey of Minneapolis/St. Paul automobile dealers revealed that car sales improved during the last two weeks of August.

In assessing the impact of the President's program on business investment spending, directors' replies varied from it would have "no effect" to it was "too early to assess its impact". In addition, responses to an informal telephone survey of ten Twin Cities manufacturing firms agreed with the directors' observations.

When asked what would be an appropriate follow-up to the wage-price freeze after November 12, the directors advocated everything from a continuation of the freeze to a strong "jawboning" program. In general they felt that jawboning alone would not be sufficient to restrain inflationary pressures, but they opposed the imposition of an elaborate set of wage-price controls. Several directors favored a program that would allow major industries to grant wage increases in line with productivity gains. They realized that such a program would be difficult to administer and would require some type of bureaucracy. One director felt that people expect more controls and bureaucracy, while another stated that "such controls would be easier to administer today than during World War II and the Korean war because goods are not as scarce as they were and purchasers have more than one supplier from whom to obtain goods and services". Still another director said that dividends should be frozen for some time in the future, and something should be done at least to give the appearance that interest rates are being controlled. These steps would make wage-price controls more palatable to the man on the street. A freeze on taxes, especially property taxes, was advocated by one bank director, and another recommended the elimination of the 10 percent surtax on imports.

Indications are that the unsettled foreign exchange rate situation of recent weeks has had little effect on business loan demand among large Ninth District banks. At several banks, inactive lines of credit extended to Japanese banks have been reactivated since mid-August. The amounts involved were relatively small, however, and did not cause an unusually large increase in business loan demand.

Some strengthening in business loan demand has developed for inventory buildups and public nonresidential construction. No Reserve city banks, however, have experienced unusually strong demand for business loans recently, and most have revised downward their expectations for the next several months. While not anticipating greater-than-seasonal expansion, about half of the bankers sense underlying strength in business loan demand and expect to see positive results of policy changes.

Contrary to the opinions expressed by FHLBB officials, the general feeling among industry people in the Twin Cities is that recent changes by the FHLBB will have only a marginal effect on housing in this area. The lower liquidity requirements will have no effect, as local savings and loan associations had higher-than-required liquidity ratios and savings and loan associations in this area have not been selling mortgages to the Federal Home Loan Mortgage Corporation to any great extent. The change to 95 percent for mortgage loans, however, is expected to result in higher loan activity.
Savings and loan associations prefer to make conventional loans, and the lower downpayment requirements will make this type of borrowing more attractive to potential homeowners.