February 11, 1976
Strong retail sales are the key to a generally optimistic outlook for the Redbook this month. Nearly every District focuses attention on the strength of consumer demand as an indication that the economy may be regaining some of the momentum it lost in the latter months of 1975. The picture is still far from rosy, but the outlook is distinctly more optimistic. Even though capital goods industries are still weak, the rest of the manufacturing sector is gaining strength. Inventories have been brought into line with sales and new orders are up. Two persistent weak spots—the construction industry's slump and high urban unemployment—remain gloomy, but inflationary pressures seem to be moderating in several Districts. While there is little disagreement that "catch-up" efforts in wage negotiations scheduled for 1976 pose a problem for stabilizing production costs, there are differences of opinion on the likelihood that food prices will rise significantly during the next few months. The financial sector continues to build liquidity rather than expand. Savings are flowing into commercial banks and thrift institutions at very rapid rates. This is putting downward pressure on mortgage rates. However, despite low interest rates for business loans, demand for credit remains sluggish.
Reports from 10 of the 12 Districts indicate that the surge of retail sales experienced in December was no fluke. In each case, the bulk of the gains recorded at the end of 1975 were preserved through January. "Big-ticket" items are leading the sales surge in most areas. Cars, trucks, appliances and furniture are all selling well. Chicago, Philadelphia and Minneapolis note that apparel sales are also strong. In general, retailers appear to have their inventories at levels which they feel are sustainable and are increasing their stocks only to the extent needed to meet revised sales forecasts.
The manufacturing sector continues its upswing. Cleveland notes that steel producers are experiencing a gradual recovery while Kansas City and Chicago both point to rising sales forecasts as a spur to automobile production in their Districts. In most industries manufacturing inventories are now either in line with sales or nearly so. Dallas reflects the findings of most District Banks in reporting that business continues to be reluctant to rebuild inventories now that stocks have been cut back. The manufacturing sector's advances seem to be most hesitant in the Richmond District. That region had experienced substantial improvement in late 1975, but this month's report indicates a retrenchment may be occurring. New orders and backlogs both softened during January in that District. Capital goods manufacturers have yet to participate fully in the recovery, and in the Boston District capital goods orders are still "feeble." St. Louis and Minneapolis report similar weakness. Cleveland describes farm machinery and mining equipment as "holding up well," while Richmond's machinery and equipment group is one of the few sectors showing progress in that region.
The construction industry remains in the doldrums throughout much of the country. Residential and nonresidential construction activity were both lower last quarter in the Cleveland District, and Boston's real estate and housing markets remain "depressed." Atlanta finds itself with very large amounts of vacant office space that resulted from overbuilding. However, the city is trying to turn substantial recent additions to its hotel room capacity into a plus by searching for more convention business. The San Francisco District reports that its stock of unsold housing and high building costs are continuing to discourage new residential construction even though mortgage rates are dropping.
There has been relatively little progress so far in reducing the nation's unemployment problem. Chicago finds that "job markets are improving gradually but unemployment remains very burdensome in the inner cities." St. Louis finds its region in a similar situation. The Dallas region is one of the few in the country where the problem is not severe. Increasing job opportunities in the oil industry have helped to bring the area's unemployment rate below 6 percent. By contrast, San Francisco reports the opposite problem since its area's aircraft industry is once again badly depressed and its employment is dropping.
The best that can be said of inflation is that it may be moderating. Prices continue to rise virtually everywhere, but no District reports any unusual increases. New York and Kansas City both note predictions from sources in their Districts that food prices will be declining in the months ahead—courtesy of good harvests, heavy plantings and intensified preparation of livestock for meat production. The Chicago District report, however, disputes this forecast. New York, Richmond, Chicago and Minneapolis all mention the concern that "catch-up" raises will be the objective of 1976 wage bargaining.
The current outlook for agriculture is mixed. With the exception of soybeans, forecasts call for planting additional acreage in most major crops. The outlook for 1976 crop harvests at this point is generally positive. However, farm income is currently under pressure because of declining grain prices. According to the Minneapolis report, the price decline is also resulting in slow debt repayment and requests for additional inventory financing at rural banks.
The situation of the country's banking community has not changed substantially in recent weeks. Savings inflows are generally strong, while business loan demand continues to be weak. For instance, Richmond reports that some of the banks in its District are experiencing unusually low levels of credit line utilization. Even aggressive loan pricing efforts (Philadelphia) are producing little new business. The Dallas District banks seem to be relatively busy with agricultural and consumer loans. But despite the comparative strength of that region's economy, commercial loan growth is described as "lackluster." The only development of significance is the downward pressure that savings inflows are putting on mortgage rates, especially in thrift institutions. Boston, Cleveland and Chicago all report declining financing costs for mortgage loans.