June 13, 1973
Reports by the Reserve Banks indicate that the economy has continued to expand vigorously in recent weeks. However, the rate of expansion has apparently slowed in the residential construction industry, and a number of Banks reported expectations of a more moderate rate of expansion in the overall economy in the second half of the year.
Retail sales have generally continued strongly upward. The most common report was that sales continue to rise at about the same rate as in recent months. However, some softening in retail trade was detected in the Fourth District, especially in appliance sales, and a Minneapolis Director associated with the retail industry reported that a slowdown in consumer spending may be occurring.
There is no letup in manufacturing expansion. Most Banks which reported on this topic found the uptrend noticeable. Cleveland and St. Louis indicate that factories are operating at or near capacity; the former, however, found a modest decline in the proportion of firms reporting new orders in May. Dallas, Minneapolis, Philadelphia, and Richmond reported further gains in manufacturing activity. Atlanta reported that employees were working overtime in lumber, machinery, and metal products. Chicago reported that the uptrend of manufacturers' orders may be slowing because of reluctance to take new orders many months ahead at stated prices.
Shortages and rationing continue to be major complaints in many product lines. Seven of the Reserve Banks reported either raw materials or manufactured products of some type in short supply. Items reported in short supply include: labor, gasoline, natural gas, paper, paperboard, transportation facilities, cement, fertilizer and other agricultural supplies, and electric power.
The shortages are apparently leading to a capital spending "boom." The impending plant expansions in the Sixth District include a wide range of the major industries of the nation. Cleveland respondents representing steel and other industries reported that capital spending to expand capacity is underway and that no plans exist for cutting back in 1974 as long as new orders and profits warrant the expenditures.
A high level of capital investment in plant and equipment was indicated by Dallas and San Francisco, and plant capacity is reported to be inadequate to meet expected future sales in a number of other Districts.
The reports indicate that inflation is still a major concern of businessmen, and there is little optimism that it will come to an early end. Chicago reported an acceleration in the number of announced price increases in June. Dallas Directors expect wage rates in their companies to rise at a 7 percent rate in the second half of the year. Philadelphia respondents report higher prices for raw materials, and over half of the area's executives expect a worsening of the situation. New York Directors expect further price increases over the coming months, but at a more moderate rate. New York expressed the view that the increased food prices may have a strong impact on union wage demands.
Residential construction has apparently turned down in most of the Districts. Chicago reported that a decline in residential construction is clearly underway. Other Districts reporting either a slowdown or weakness in such activity include: Atlanta, Cleveland, Dallas and San Francisco. Only Richmond reported further increases in home building. The trend in commercial construction is mixed.
Employment has leveled off in most of the Districts and unemployment has inched up, but most of the Banks still report a "tight" labor market and labor shortages, especially of skilled labor.
The nation's agricultural situation has vastly improved in recent weeks. After an extremely difficult planting season because of wet weather and floods, prospects are now good for a large production of critical food and feed crops. Some shortages in seed and fertilizer still exist in limited areas and some land along the Mississippi River may not dry in time to plant cotton, the intended crop, which will be critical to individual cotton farmers. Farm production costs are high and rising, but overall prospects are for high farm incomes. If average growing conditions are realized, record levels of production are likely for a number of major crops and record prices may be received for them. In the meantime, however, as reported by Chicago and Kansas City, prices of meat animals may be pressing against the ceilings, and rising feed costs are reducing profit levels from feeding. The ceilings could thus result in lower levels of production.
Most Districts reported a strong loan demand, slower deposit growth, and generally higher interest rates than heretofore. Regular business customers are apparently having no trouble obtaining credit at the higher rates, but Chicago reports that country elevators are having increased financing difficulties as a result of transportation problems and sizable margin calls on hedged grain.
In response to the Board's request for information on the impact of the Treasury's tax proposals for eliminating real estate tax shelters, the replies varied from little or no impact on construction activity to a definite dampening effect. Boston, after a study in some depth, concluded that subsidized housing would be severely hurt, and that while profits in the private market would be reduced, most "worthwhile" projects would be built. A decline in construction would be anticipated in the Kansas City and Minneapolis Districts. Kansas City reported that the healthy business situation in the Tenth District would be dealt a severe blow if investment funds flowing into cattle and construction were suddenly cut back by tax reform. The respondents indicate that the tax would not have a significant impact on construction in the Chicago, New York, Richmond, and St. Louis Districts.