May 10, 1977
A broad uptrend in activity continues in the Seventh District. Most observers expect the expansion to continue through the remainder of the year. The Administration's energy plan has received mixed reviews. Retail sales trends are favorable. Output and employment are rising in most areas. Order backlogs are increasing in most industries. The pace of price inflation has quickened somewhat, and further boosts are expected. Order lead times are lengthening gradually. Some producers of capital goods report substantial increases in orders, but prospects for new plant construction in this region remain poor. The market for single family homes is extremely strong. District farmland values continue to rise at a rapid pace.
District observers look favorably upon the Administration's attempt to impress the public with the seriousness of the energy problem. The need for a concrete "energy policy," even one with defects that could be remedied later, has been strongly urged for years by informed people. However, the proposed program is viewed as one sided, with its heavy emphasis on slowing demand and with little to offer in the way of incentives to increase supplies. The Administration's program is viewed as excessively complicated. Few of the specifics are expected to pass Congress without alteration, and, then, only after substantial delays. Although a rise in oil and gas prices to world or "replacement cost" levels is desirable, and the sooner the better, the expected degree of conservation is believed to be optimistic.
A major oil company emphasizes that its investments on exploration and development are determined by internal cash flow, and available cash would be less under the Administration's program than currently. District electric utilities are largely oriented toward coal and nuclear plants and are not much affected by the proposed restrictions on gas and oil. Major utilities here deplore the deemphasis of the breeder reactor, which currently appears to be the only feasible means of supplying adequate energy in the years ahead.
The effect of the energy plan on business investment prospects is not clear. We have learned of no specific investment decisions that have been either accelerated or delayed as a result of the messages. With the future of the legislation in doubt, moreover, specific calculations as to the impact of higher prices, taxes, and tax credits are not possible. Most business executives do not believe that investment tax credits provide a major incentive, although the tax savings clearly provide additional investment funds.
Well-managed and well-financed industrial and utility companies have been planning and investing with an eye to fuel conservation, in general, and gas and oil, in particular, for at least four years. They needed no warnings concerning current and probable future supply stringencies. Most companies have an ''energy czar'' who coordinates all energy-related policies for all facilities wherever located.
Owners of both commercial and industrial buildings send representatives to periodic meetings with other companies and government officials to consider energy problems. Existing structures are being renovated by adding insulation, new windows, and siding. Arrangements are being made to provide additional storage for fuel oil and propane and to reduce use of natural gas. Various manufacturers have acquired their own gas and coal properties, either for direct use or to barter. Manufacturers of instruments, controls, valves, and whole systems that regulate energy use are doing an excellent business. Any appropriation urged as an energy measure is said to receive rapid approval by boards of directors. All of these factors were at work prior to the Administration's recent proposals.
Construction of large new industrial and utility plants is at a low level in the district, and no significant pickup is expected in the near future. Stringent federal and state environmental controls are said to restrict new developments to an important degree. Currently, the major concern is air pollution. EPA regulations issued in December, in effect, state that no new major "source" of emissions can be constructed unless an "offset" is provided by reducing emissions from other sources. Some analysts insist that the standards established for various emissions are unreasonably severe, even unworkable. These air quality restrictions do not seem to apply to new equipment installed in existing structures, and help explain the rising share of capital spending accounted for by equipment.
Major retailers report a continued high level of retail sales with furniture and appliances—both large and small—showing new strength. Inventories of these items are said to be "thin." General merchandise sales are expected to be up 10 or 11 percent for the year as a whole with prices averaging about 5 percent higher.
Sales of single family homes are "phenomenal" and may reflect "panic buying." Mortgage funds are in good supply, but interest rates and fees have been increased moderately by S&Ls. Processing of loans is at "capacity." Buyers are not favoring sites closer to centers of population, and most are not much concerned about fuel bills.
Producers of equipment for constructions, mining, materials handling, and metalworking report a significant rise in orders in the past month of two. Order backlogs are building up again.