August 10, 1973
The overall impression conveyed by the District Banks' August Red Book reports is that business activity continues at a high level, but with some scattered indications of a tapering off in the rate of growth. Most Banks report a sustained high level of consumer spending, in part related to expectations of further price increases, but respondents in several Districts looked for a cooling off of consumer demand over the coming months. Business plant and equipment outlays remain at a high level, largely undeterred by the high cost of credit, and the demand for agricultural machinery is recording a sharp rise. However, shortages of raw materials, energy, and trained labor were frequently cited as possibly inhibiting further expansion in capital goods output and production generally. Moreover, private residential construction is generally reported on the decline, in good part because of the high cost and unavailability of mortgage funds, in turn traceable to the net outflow of deposits at thrift institutions. Commercial and nonbuilding construction has been faring better, although some reports indicate a tapering off in this sector. Against this background, there appears to have been little net change in the nationwide industrial production and employment situation. Crops are expected to be at, or near, record levels in most agricultural areas. Most Districts in varying degree reported dissatisfaction on the part of business over Phase IV, and controls generally. Continued strong loan demand was noted in most reports.
San Francisco reports that consumer spending is clearly the leading sector in all areas of the District, in part reflecting anticipations of further price increases—a factor also mentioned by Minneapolis. St. Louis reports that consumer outlays are continuing to trend upward, and Chicago notes that sales of major appliances have surged since mid-June. Major retailers in the Richmond District, however, have found that while sales have continued to improve, the rate of growth has tapered off during the past month. A large nationwide retail firm headquartered in the Cleveland District, moreover, looks for an appreciable decline in the rate of expansion in consumer spending over the year ahead. Retailers in Minnesota, on the other hand, are reported to expect no slowdown in their sales growth during the remainder of 1973. The reports generally also point to a sustained high level of business plant and equipment outlays. Philadelphia thus reports that almost 45 percent of the manufacturers surveyed planned to increase capital investment in the six months ahead, while Cleveland and Boston report receipt by firms in their Districts of large capital goods orders. Chicago reports that business borrowers have shown little reluctance to borrow at the currently high level of interest rates and that a number of industries are moving vigorously to expand basic capacity. Atlanta lists a sizable number of large new plant announcements. A similar picture emerges from most other reports. However, a number of Banks—including Chicago, Cleveland, and New York—cite the growing list of shortages of raw materials and trained personnel as adversely affecting both capital goods and consumer products output.
Regarding construction activity, most of the Banks report an actual or prospective decline in private residential construction, reflecting the net outflow of funds from thrift institutions and the accompanying dearth and high cost of mortgage funds. Commercial and nonbuilding construction, however, with scattered exceptions, was generally reported to be holding up well.
A bright picture emerged from reports from agricultural areas. Kansas City thus expects a record wheat crop while Atlanta reports a record citrus fruit crop. Dallas, San Francisco, St. Louis and Richmond all anticipate above average or good to excellent agricultural production. Much criticism, however, was expressed over the continued "freeze" on beef prices.
More generally, a great deal of skepticism regarding the effectiveness of Phase IV in coping with inflation, and hostility on the part of businessmen toward the controls, was expressed by respondents in many Districts.