March 9, 1977
A slow and gradual increase in economic activity, along with a slightly more rapid rate of inflation, is expected by marketing and financial officers and corporate economists in the Tenth District. Few significant long-term effects of the severely cold January weather are expected for business activity. Little enthusiasm is evident for the purchase of new plant and equipment. Expected weakness in the farm sector is a source of concern for economic activity this year in some states. Fuel cost increases may be joined by food cost rises due to drought if the amount and timing of precipitation received this year are not satisfactory. Although business loan demand remains little changed, bankers believe that loan activity has been postponed rather than eliminated.
This month's Red Book survey included conversations with marketing managers and financial officers of various nonfinancial corporations, as well as with economists for both financial and nonfinancial businesses, and at several universities. The consensus view saw only a slow and gradual increase in economic activity overall, with inflation perhaps becoming more worrisome than appeared likely a few months ago. There was general agreement that there would be few significant long-term effects on business activity from the severe cold in January. Production disruptions have been temporary, and are expected to be offset by a catch-up later in the year. Expectations for GNP growth for the year remain about the same, even if first quarter growth is low. (A large interstate trucking firm noted, however, that they have experienced a tremendous increase in shipping in February and early March, indicating to them that "the first quarter will be stronger than most people think.") Caution is still the watchword with regard to capital spending. Respondents report that they see "little enthusiasm" for purchases of new plant and equipment, reflecting a conservative mood on business fixed investment.
Several respondents believe that some of the problems of the severe winter—especially the fuel situation—will combine with the effects of the drought to affect adversely the rate of inflation this year. "Inevitably" higher energy prices are expected to "ripple" through the economy, adversely affecting prices, income, and economic activity. An Oklahoma City bank economist notes that a number of 20-year natural gas contracts are now expiring, and that sharply higher fuel costs are thus almost certain this year for businesses and households in Oklahoma.
Business in Oklahoma generally is reported as favorable—retail sales good, "housing moving well, consumer borrowing improving." More uncertainty and concern were expressed for Kansas and Nebraska in the year ahead, primarily because of the expected weakness in the farm sector. Adverse weather effects in Colorado were reported as limited to agriculture and tourism. One respondent noted that "the winter sports season was ruined"; another commented that, although the ski areas were hurt substantially, they represented only a small part of Colorado's income total.
Expected food cost increases for 1977 have recently been revised upward to 3 to 5 per cent for the year, as a result of the harsh winter and drought conditions over much of the country west of the Mississippi. Worsening of drought conditions during this spring and summer could result in even larger food cost increases. Soil moisture levels in the Great Plains and western corn belt presently range from 2 to 5 inches below normal. Thus, crop production in these areas will depend solely upon the upcoming season's precipitation, and the timing of the rainfall takes on added significance. Well timed rains during periods of peak demand by crops will result in minimal crop production, while the same amount of moisture less well timed, will result in less than normal production. Past history suggests that the precipitation required to produce a normal yield for crops in these areas will occur during 3 to 4 years out of 10 early in the growing season and 1.5 to 3 years out of 10 during critical later stages of the growing season. On balance, the chances of producing normal crop yields in these areas during 1977 are small, due to the low soil moisture levels that presently exist.
Tenth District banks contacted for the March Red Book indicated little change in business loan demand during the month of February. One bank which reported a small increase in demand attributed it to participations in loans generated at correspondent banks. Another banker stated that strong cash flows at businesses were holding down or delaying new loans. It was also suggested that the weather had temporarily depressed loan demand. None of the banks reported any changes in their prime lending rates.
Several bankers indicated that they felt that the impact of this
winter's severe weather had been overestimated and that loan demand
was probably being postponed rather than eliminated. All did express
greater concern about the effects of the drought. Besides direct
loans to farmers and
agri-businesses, other areas expected to be
adversely affected include agricultural loan participations with
smaller banks, and skiing area loans. The possibility of water
rationing in Denver is quite strong and could result in weakening of
demand for single-family construction projects and for many business
loans.