April 10, 1974
Manufacturing firms in the Tenth District continue to be plagued with supply shortages and rising prices of materials. Yet most of those surveyed report their own business to be good and their view of the economy to be fairly optimistic. The worst of the decline in auto sales may be past. Declining farm prices will slow the growth of farm income, but may result in more stable food prices at retail. Business loan demand at District commercial banks is strong for nearly all types of customers.
Rising prices, inadequate supplies, and lengthening lead times for delivery continue to face manufacturing firms in the Tenth District, with variations on these themes appearing from industry to industry. In some instances, shutdowns have been averted by slight modifications in product that permit substitutions among inputs, or by finding alternative sources of input supply. Further price increases are expected by nearly all respondents, and several have already been put on notice of future increases. The majority of purchasing agents queried seem to expect more ample supplies and improved availability of materials in the short run and expressed a willingness to pay the higher prices if supplies could thereby be assured.
Some materials, such as steel, rubber, and plastics, come in for special mention in discussions of short supplies. A maker of rubber goods reports either feast or famine: after going months without a delivery, he may receive a six-month supply thus creating unwanted inventory. Delivery times for plastics are reported to be very long (and lengthening), and prices are rising sharply. One plastic goods fabricator put it this way: "A year ago suppliers were giving us green stamps to buy their polyethylene; now, we have to beg them for it, and take something less in the way of specifications than we want. When you buy what you can get, you don't get what you want." Steel castings and rebars continue to get special mention among steel goods in tight supply, along with some fabricated steel items. A manufacturer of small appliances summed up his supply situation in this way: "...it's give and take; it's search and find—or search some more; it's accept higher-priced items than you need, or get nothing at all; it's pay higher prices, period." There were few respondents echoing this relatively optimistic view from a metals firm: "I see signs of people coming up with items that have been hard to get, and I think this is the beginning of new supplies responding to demands."
In spite of these problems, nearly all respondents felt that their own businesses were doing pretty well, and several believed that only inadequate supplies of materials were preventing them from expanding output further. Views on the condition of the economy ranged from "... I think the economy is a good bit weaker than we read about...", to "... I think that the economy is a lot stronger than some people are saying." In general, the responses tended to support the latter view somewhat more than the former.
Responses from automobile dealers in major cities of the Tenth District suggest that the new auto sales situation is no longer worsening. As elsewhere, smaller cars continue to sell better than full-sized cars, but several dealers believe they are seeing a turnaround in large-car sales. Sales of small imported automobiles appears to be rather weak. Farm prices fell four percent during the month ended March 15, led by an 8 percent decline in the price of meat animals and a 10 percent drop in the price of wheat. Further declines since mid-March have brought hog prices to their lowest level in 14 months. Expectations of large marketings during the next few weeks have limited buying and may portend even lower prices for hogs. Fed cattle prices have also declined since mid-March, and a number of heavy cattle continue to hang over the market. Wheat prices have dropped precipitously since late February due to strong progress of the winter wheat crop and increased competition to sell wheat in foreign markets. Farmers are also putting pressure on the market by selling wheat to make room for the record 2.1 billion bushels expected to be harvested this year. These factors will have a negative influence on farm income, but will be welcomed by consumers if these lower prices are passed along to the supermarket.
A survey of District bankers revealed that business loan demand in the first quarter of 1974 generally far exceeded what was expected. Most interviewees attributed the heavy loan demand to the underlying economic strength of the local and regional economies. In addition, higher prices were frequently cited as a prime source of the increase in business borrowing. In many instances, bankers also felt some borrowing appeared to be in anticipation of higher prices and, perhaps, higher interest rates in the future. Related to this, one banker in Denver reported that suppliers were now demanding immediate payment for goods, thereby forcing many of the bank's customers to increase their borrowings. In reflection of economic strength, increased borrowing was reported to be fairly uniformly distributed across bank customers and not confined to any single industry. Increased borrowing to finance inventories was noted by several bankers, but this was generally felt to reflect higher prices rather than declining sales.