November 10, 1971
Economic activity seems to be picking up a bit in the Tenth District, although most firms are being conservative in expanding employment and inventory levels. Capital spending intentions in various types of businesses across the district suggest a slight increase, on balance, over last year. Investment plans are said to be virtually unaffected by the promise of a tax credit. Business loan demand remains generally soft, and deposits are reported as steady. Interviewed bankers and other businessmen are guardedly optimistic about the economy in 1972, but few really expect a boom year. Many executives are apprehensive about Phase II and the wage increases that may be allowed.
Judging from the businesses contacted, economic conditions are improving somewhat. Construction contractors report increased activity and have been doing some hiring. A manufacturer of small aircraft has recalled some employees. Other firms, however—including a manufacturer who has recently suffered a strike by his steelworkers, a major airline, and oil companies—are doing increased business with fewer workers. With only one exception, reported plans for expansion held little promise for adding jobs once capital additions are put in place. And while production activity is increasing, inventories still are being held down.
A survey of major utility companies shows continuing expansion in this industry. Plans for capital outlays vary from maintaining last year's pace to substantial increases over recent rates of growth. Prospects for tax relief are said to make no difference in investment intentions. As in the past, employment is expected to grow less rapidly than total services.
Firms in other industries also are expecting to make new capital outlays. A large manufacturer of rubber products plans a multimillion dollar plant expansion next year. A major agricultural supplier reports new plant and equipment expenditures for next year will be below those in the recent past because of project completions, but still will total several millions. Two large sugar corporations, two big oil refineries, and three steel-using companies all are planning modest additions to plant and equipment at about last year's pace. None of the reporting executives of these firms feel that the investment tax credit has influenced their plans in more than a very small way. Businessmen feel that Phase I has been a success, and they expect 1972 to be better than 1971. Uncertainty about Phase II—"waiting for the other shoe to drop"—is complicating decision-making right now. For example, one manufacturer, who normally sets standards for production costs a full year in advance, is finding it difficult to do so because suppliers are unwilling to quote full-year prices.
Loan demand at district commercial banks varies considerably from area to area, but generally continues to follow the pattern of recent months. Real estate and consumer installment (especially auto) loans remain the stronger categories. Several bankers, moreover, noted an improvement in the quality of consumer credit-delinquencies in some cases are at record lows. Construction loans and a few calls on national account lines are the only bright spots in an otherwise bleak business loan picture. Some bankers look for a seasonal upswing in business loans over the next two months. One respondent mentioned the possibility of an increase in transportation business loans in response to the proposed investment tax credit.
District bankers report steady deposit figures in the past month.
Rates offered for CD money have, in several cases, been set above
money center levels by one-eighth to
one-fourth point, but response
has been only moderate. One banker observed that consumers seem to
be financing purchases out of savings rather than by borrowing.
The "floating" of the prime rate was widely applauded as a further step toward de-emphasizing that rate. Most district banks are quoting a 5 1/2 percent prime rate, but they will charge their national prime borrowers whatever those firms are paying to money center banks. The district's largest bank has just introduced a new policy of not announcing its prime rate. The bank's policy is ". . . to be very competitive and in fine tune with money market rates." Judging from responses, the rate structure for local non-prime borrowers has probably not declined in line with national prime rate reductions.