November 10, 1976
Continuing attenuation of the economic recovery is evidenced in the past month's reports. Despite some recent increases in soft goods sales, merchants generally expect holiday gains no greater than a normal seasonal advance. There is some feeling that the recent boost may be the result of abnormally cold weather in combination with price reductions rather than an upsurge of demand. Sales of appliances and furniture differ in strength between regions, but auto sales are generally good. Production declines have occurred in several key industries, as efforts to realign inventories have reduced demand. Some strengthening is discernible in capital expenditures. Single-family housing continues to dominate construction activity. Price reductions are occurring in those industries seeking to reduce inventories, but other firms are hedging against wage and price controls by raising prices. Credit demand is generally flat, with certain exceptions reflecting special conditions. The agricultural sector presents a picture of marked contrasts in prosperity.
The degree of optimism concerning consumer spending has diminished somewhat. Most areas expect a normal seasonal gain during the holiday season. Soft goods sales, which have been weak, were helped by the arrival of colder weather and recent price markdowns. Philadelphia notes that outerwear sales have risen in advance of their normal seasonal upswing due to the cold weather. Dallas notes some price resistance in men's clothing lines. Major appliance and furniture sales are weak in the Cleveland, Chicago, and St. Louis Districts but have strengthened in the Richmond, Atlanta, and Kansas City regions. Merchants remain hopeful but uncertain about further strengthening. Auto sales appear to be fairly strong, except for smaller models; San Francisco and Cleveland note some signs of weakness. Chicago views strongly increased consumer borrowing as a confirmation of growing consumer confidence; similar trends are noted by New York, Philadelphia, and Richmond. Dallas reports lackluster consumer loan demand and, like San Francisco, interprets high savings inflows as an indicator of consumer caution.
Production declines have taken place in several industries. Steel output has been reduced to limit an inventory build-up; but increasing orders for some types of steel are found by Chicago and Richmond. Appliance production has been sharply reduced in the Chicago, St. Louis, and Cleveland Districts. Declines are also noted in output of paper and board, plastics, and aluminum. Orders are down for lumber, apparel, chemicals, and furniture. Copper, lead, and zinc output has risen in the western states. Lift truck inventories have stabilized, and orders recently have been increasing.
Increasing strength is detectable in capital expenditures. Boston, Cleveland, Chicago, and St. Louis note increased orders for machine tools. New York cites an increase in new orders for capital goods at a number of firms, but Philadelphia finds a decrease in the proportion of firms planning further increases in capital outlays. New York mentions environmental and other government regulations, as well as the threat of wage and price controls as deterrents to capacity expansion. Atlanta and San Francisco report that capital expenditures by paper companies will be very limited in the foreseeable future.
Construction activity continues to be strongest in the single-family home category. Housing starts are at a high level in Texas, and construction employment has expanded rapidly during the past year. Home building in the St. Louis area is strong, but a decline has occurred in Memphis, other parts of Tennessee, and Mississippi. In the Los Angeles area, home construction is very strong, but average monthly price increases of nearly 3 percent are now generating buyer resistance.
Price reductions are occurring in sectors where inventory accumulations are excessive. In both steel and apparel, price concessions are being made to stimulate demand. Lumber prices have softened in the past two months. St. Louis states that chemical prices should remain stable as a result of new capacity coming on-stream. Atlanta finds evidence that businesses are raising list prices as a hedge against possible imposition of wage and price controls. Shortages and bottlenecks are of little concern, partly as a result of the economic slowdown. Some concern continues to be expressed about natural gas shortages.
Demand for credit remains generally weak, with interesting regional exceptions. Consumer loans provide an element of strength in several areas. In the Southwest, lending for petroleum drilling is the sole area of growth in loans. Dallas, Kansas City, and Minneapolis report that the demand for agricultural loans is rapidly increasing. Higher costs and lower prices are forcing farmers and ranchers to seek extensions of present loans. In wheat growing areas, many farmers are withholding grain from the market to await higher prices. Dallas notes that marginal farmers will find it difficult to obtain operating capital unless Farmers' Home Administration or Small Business Administration loan guarantees are granted. In contrast to the general flatness reported in commercial and industrial loans, San Francisco finds a modest increase in loan demand from small- and medium-sized companies, and Richmond notes an increasing demand in wholesale and retail trade.
The agricultural sector presents a mixed impression. Farm cash receipts in the Richmond region have benefited from sharp price increases for flue-cured tobacco. Minneapolis reports that price declines for corn, wheat, hogs, and cattle, as well as the effects of drought on crop production, present a bleak prospect of lower income, reduced spending, and increased borrowing. St. Louis and Kansas City note that cattle ranchers and feeders remain in a loss position, despite recent price increases. Land in the Southeast is likely to be shifted from cattle production into other crops, with the potential for an eventual beef shortage. San Francisco reports a bountiful harvest; supplies of fruit, wheat, beans, and potatoes are large, storage facilities are bulging, and prices have declined.