August 13, 1975
This month's Red Book District reports again suggest that the recession has come to an end and that recovery is under way. Assessments of the strength of the upswing vary, however. The majority of the respondents expect a gradual pickup in business activity. A somewhat more optimistic tone, however, emerges from some reports, particularly from those Districts where agriculture and the production of nondurable goods loom large. Retail sales, including auto sales, increased over the past month. The reduction in retail inventories apparently has largely run its course, a development that has been reflected in increased orders to and production by the consumer goods industries. The residential construction picture has improved moderately in some areas. The capital goods industry, however, remains depressed, with continued reduction in metal and machinery inventories. Crop prospects appear generally good, except in certain areas of the Midwest affected by drought or flooding. The demand for bank credit is generally described as weak, except for agricultural loans.
Regarding consumer spending, Boston reports a modest growth in such outlays, while retailers in the Philadelphia District look for a gradual upturn through the fall. Richmond and St. Louis report that retail sales continue to improve, but that sales of big ticket items remain weak. Kansas City, however, reports particularly strong sales of durable goods. Minneapolis reports that consumer spending has improved since last spring and that the outlook is for further expansion. About half of the Districts report increased auto sales, with particularly good performance reported by Atlanta, Kansas City, and Dallas. Heavy tourist traffic is reported by several Banks, including Philadelphia, Minneapolis, and San Francisco.
The reduction of inventories at the retail level apparently has run its course. Indeed, several Banks including New York and Philadelphia report some actual or prospective rebuilding of inventories. Increased new orders, production, and shipments of consumer goods are reported by several Banks, including Cleveland, Richmond, Kansas City, and Dallas. And hand in hand with the increase in activity in the consumer goods sector, notably textiles and other soft goods, the employment situation in those industries has improved, as noted by Cleveland, Philadelphia, Richmond, and St. Louis, among others.
On the darker side, the capital goods industry remains in the doldrums. Chicago thus notes that the less vigorous tone in that District compared with the nation reflects the relatively greater emphasis in that area on producers' goods. That Bank reports that order backlogs of capital goods producers continue to erode, that inventory liquidation at the manufacturing level continues in full swing, and that the demand for workers remains very weak. Similar observations are expressed by Cleveland, San Francisco, and Richmond, while Philadelphia characterizes capital spending plans as less than robust.
There apparently has been some pickup in the construction of one-family homes, as reported by Atlanta and Chicago. On the other hand, commercial construction-apartments, condominiums, and nonresidential structures-remains weak in most areas. San Francisco notes that construction of all types is being hampered by high costs. Atlanta, however, reports the reactivation of several industrial building projects that had previously been shelved.
There are scattered indications that concern is mounting over the possible development of shortages and over the resurgence of inflation as recovery gets under way. Concern over the shortage of natural gas was expressed by respondents in the San Francisco, Atlanta, and Cleveland Districts. Cleveland, moreover, reports that while most of its respondents in general do not expect shortages of materials and capacity to hamper the early state of recovery, a small minority do fear such an eventuality might rapidly develop. A similar view was expressed by purchasing managers in the Atlanta District and by some retailers in the Kansas City District. Regarding the fear of inflation, Philadelphia bankers were in general agreement that inflation remains a potential problem, and St. Louis notes that inflation has re-emerged as a major concern of businessmen as demand begins to pick up. Cleveland reports that several District directors expect the rate of inflation to accelerate.
Reports from agricultural areas for the most part continue to point to good crops. However, several Districts-Chicago, St. Louis, and Kansas City-report crop damage from drought in some corn-producing areas, and Minneapolis reports flood damage to potato, sugar beet, and small grain crops. Chicago and San Francisco note that sales of grains to the USSR have put upward pressures on cereal prices. Cash receipts by farmers from sale of livestock and crops, however, were reported by Dallas to have fallen sharply.