October 21, 1975
The general tone of this month's REDBOOK reports is somewhat less confident. Virtually all districts note improvement in conditions, but there are frequent mentions of unsatisfactory gains. Retail sales have increased, but mainly in soft goods with consumers showing continued caution on big-ticket purchases. Inventory adjustments are largely completed at the retail level (unless sales recede again), but many manufacturers plan further liquidations. General price inflation continues, despite weakness in some commodities, and there are fears that increases in the price level will accelerate. References to weak job markets do not seem commensurate with the substantial gains in employment reported for the nation. Unemployment remains at depressingly high levels in all districts. Reports on capital expenditures suggest further weakness, overall. Construction activity has shown no sign of revival except for single-family homes. Fears of substantial disintermediation are slowing new loan commitments by thrift institutions. Business loan demand at commercial banks remains sluggish for the most part. Harvests of major agricultural crops have been generally very good, but Hurricane Eloise caused extensive damage in some parts of the South.
Boston's report indicates widespread discouragement with economic trends and emphasizes "hazards" to business. Richmond finds the improvement "less widespread," and San Francisco says the recovery is "slower than expected." Most districts sound some notes of caution. Perhaps the strongest pictures are presented by Philadelphia, St. Louis, and Dallas.
Retail sales have improved modestly in most districts, mainly in apparel and other nondurables. Only Dallas reports a "marked pickup" in big-ticket items. However, Minneapolis, St. Louis, and Dallas find that auto dealers are pleased with the reception accorded 1976 models. Chicago and Philadelphia say that consumer credit delinquencies have been reduced.
The inventory correction continues. Most districts draw a contrast between manufacturers' continued efforts to reduce inventories and the success of retailers in bringing stocks into line with anticipated sales. Cleveland emphasizes the continued overhang of steel inventories, and Kansas City points up the recent stocking of steel to beat the October 1 price increase. Needs to replenish depleted inventories account for much of the increase in output of chemicals and textiles since last spring.
Continuing price inflation remains a major consideration almost everywhere. Cost-push inflation reflects rising labor costs, higher prices for energy, outlays to control pollution, and high interest charges. New York observers see inflation in the 6 to 8 percent range and some fear a "reacceleration." None of the districts reported views that the inflation rate would slow substantially next year.
Dallas and Philadelphia report a significant rise in manufacturing employment and in the average workweek. But Chicago finds that demand for workers continues weak, and Minneapolis says manufacturing employment declined further in the summer. The weakest job market appears to be in New England where unemployment increased to 12 percent in August.
Most districts reported that capital expenditure prospects appear soft for the next several months at least. Cleveland says capital goods orders have strengthened, but from "very low levels" last spring. Chicago says most manufacturers of capital goods and components are still cutting output, but demand for large mining and earth moving equipment remains strong. Richmond says 40 percent of manufacturers consider capacity "excessive." Dallas reports a very high level of oil and gas exploration in proven fields, but riskier ventures have been deemphasized and exploratory offshore drilling is at a "virtual standstill." San Francisco reports weak orders for commercial aircraft and reductions in investment plans for aluminum and lumber.
Sales and construction of single-family homes have improved this year throughout the nation, and added gains are expected in 1976 if credit conditions permit. But slowing inflows of funds to thrift institutions constitute a threat to further recovery. New apartment building is at very low levels. Office space is in excess supply with Atlanta reporting a vacancy rate of 20 percent. Chicago says architects have "nothing on the shelf or the boards."
Atlanta comments at length on the damage done to crops and buildings by Hurricane Eloise and the associated adverse impact on tourism. New York observers are apprehensive over the spreading impact of the financial problems of New York City. Unsettled conditions in the municipal bond markets have "virtually halted" major new commitments on government construction projects throughout the state.