March 9, 1977
The overall impression that emerges from this month's district reports is that the economy is recovering smartly from the disruptions caused by the bitter weather earlier in the year. Production has rebounded quickly, and laid off workers have returned to the job with the onset of more temperate weather. Retail trade generally shows strength, factory orders are reported to be rising, and a rebuilding of business inventories may be getting underway. There were also scattered reports of a strengthening of the business capital investment picture. On the darker side, however, there appeared to be increased apprehension over inflationary pressures, as the drought in the western states threatens to add higher food prices to higher fuel prices.
The impact of the weather-induced disruptions appears to be short-lived. Cleveland, for example, reports that economic activity in the district is recovering rapidly from the severe winter, with respondents from industries hardest hit by fuel shortages—steel, automobile, appliance, and glass—generally expecting losses in output to be recouped over the next few months. Economic activity in the Chicago district has returned to near normal levels, with many manufacturers, particularly in the steel and auto industry, working full speed to overcome shortfalls in output. St. Louis reports that although weather conditions and natural gas shortages hampered activity of some firms in January, the return of normal weather has alleviated most of the problems. Similar sentiments were expressed by New York respondents.
It appears, on balance, that weather related disruptions of industrial activity turned out to be less acute than had been feared. Boston states that New England industry escaped relatively unscathed, with only isolated production slowdowns, and Philadelphia reports only moderate disruptions at the relatively small group of firms affected—mostly in the primary metal and food product industries. Richmond and Kansas City report that weather-related difficulties were not widespread, and Atlanta reports only minor disruptions. Finally, Minneapolis reports the cold weather had no significant impact on its district's industrial activity, which indeed expanded further.
The consumer spending picture is generally favorable. Chicago characterizes retail sales of both durables and nondurables as excellent, and St. Louis reports February sales to be running somewhat above the particularly high February 1976 pace. Dallas sees continued strength in department store sales, and notes that merchants are generally optimistic. Richmond reports similar sentiment. On the other hand, sales were apparently mixed in the Philadelphia district in February.
Consumer outlays on new homes also appear to be on the upswing. Chicago reports that demand for housing, especially for single-family homes, is very strong, and residential building is up in urban areas of the Minneapolis district, where a healthy amount of residential construction is expected for 1977. San Francisco reports that construction activity continues strong in most western states. On the other hand, commercial and industrial construction generally continues sluggish, although Atlanta reports increases in nonresidential construction activity in some parts of the district.
Regarding business sales, Boston reports a particularly high level of new orders for hardware, machine tools, and appliances, and St. Louis notes a rise in the sale of chemical goods and commercial aircraft. Manufacturers in the Richmond district report a high level of orders, particularly for chemicals and primary metals, and as a group seem more optimistic than at any time in the past several years. Similarly, Philadelphia reports that manufacturing respondents report increases in orders and that most of these respondents expected further expansion over the coming months; Minneapolis reports manufacturing sales up 18 percent from a year before, with respondents expecting sales to exceed year-earlier levels over the coming months.
A period of inventory rebuilding may be getting underway. Chicago notes that many manufacturers and some retailers have already begun to rebuild depleted inventories. Philadelphia reports that retail inventories are in good shape and that higher levels of inventories are projected by manufacturers. Minneapolis respondents are generally content with current inventory levels, while manufacturing respondents in the Richmond survey of business conditions suggest the most comfortable inventory positions in almost a year.
Business outlays for plant and equipment generally still appear sluggish, although there was some limited evidence of a strengthening in that sector. Several respondents in the New York district expected some increase in plant and equipment outlays later in the year, partly reflecting a shift by some producers to alternative energy sources for their plants. Respondents in the Richmond and Philadelphia districts also expected some increase over the coming months, while Chicago notes that capital expenditure programs probably have increased somewhat but that uncertainties continue to hamper such spending.
On the darker side, respondents in over half of the districts looked for a heightening of inflationary pressures, particularly in view of the drought in the western states. Concern over possible damage to crops due to the lack of moisture is mentioned by Kansas City, San Francisco, and Minneapolis and, to a lesser extent, Chicago and St. Louis.