May 10, 1977
The firmer tone asserted in last month's REDBOOK was generally confirmed by developments in the recent period. Eleven districts reported further increases in output, employment, and new orders. Cleveland and Philadelphia reported a slower rate of rise, however. Minneapolis found "little change" in nonagricultural activity. All districts attempted to assess the impact of the Administration's energy program, as requested by the Board telegram of April 27, with interesting but inconclusive results. In general, the strongest reports were from the Sunbelt districts, especially Dallas. Business inventories are in reasonable balance and are expected to rise. Capital spending is moving up, with emphasis on new equipment. Inflation fears are increasing, although in varying degree. The frenzied boom in single-family homes is virtually universal. Agricultural prospects have improved with recent rains in the Midwest and Northwest. Demand for consumer, real estate, and agricultural loans is strong, but demand for business loans is still relatively weak.
A sampling of opinions finds the Administration's energy program praised for its note of urgency, and for its objective of curtailing demand through taxes and higher prices. It is criticized for complexity, inadequate incentives to expand supplies of fuel, and for lack of compromise on the methods and timetables for reaching environmental goals (Cleveland, Chicago, and San Francisco). A number of districts, including Boston, Atlanta, St. Louis, Kansas City, and San Francisco reported opinions of some contacts that, by increasing uncertainties, the proposed program would have some retarding effect on capital spending. In any case, the program is "highly tentative" and is unlikely to be accepted as a package in its original form. The predominant view appears to be that the program will have little or no clear effect on either consumer spending or capital spending, at least not in 1977. Most business investment plans are fairly well set for the current year. Moreover, investment programs have been moving toward reducing dependence on natural gas and toward general energy conservation for at least four years (emphasized by Cleveland, Chicago, and Minneapolis). These trends were accelerated by the January fuel crisis.
Retail sales continue at a favorable level. However, a Boston area retailer reported a drop in sales following the announcement of the energy program. New York sees "good prospects" for the second quarter. Cleveland reported one view that the cancellation of the income tax rebate would reduce sales somewhat. No clear impact on auto sales from the proposed taxes and rebates is apparent. Philadelphia retail sales were depressed by a transit strike, now settled.
Inventories, overall, are well in line with sales. New York expects a "moderate buildup" in the months ahead. Some Richmond manufacturers now view inventories as "inadequate." Longer lead times are mentioned by Atlanta and Chicago.
A number of districts, including Boston and St. Louis, see a continuing improvement in sales of business equipment. Cleveland reports a "broader recovery." San Francisco reports a surge in demand for commercial airliners that is helping the Seattle area.
Six districts report increased fears of accelerating inflation, but none expected a near-term return to double-digit inflation once the effect of the special conditions of the first quarter are overcome. Supply stringencies are not generally significant at present. However, current or prospective pressures on capacity were mentioned for tires (Boston), coal freight cars (Cleveland), building materials (Dallas), and aluminum (San Francisco).
The tremendous market for single-family homes is nationwide, and prices continue to rise sharply. Vacancy rates are down for Florida condominiums. Higher mortgage rates are reported by Chicago, St. Louis, and Dallas. Nonresidential construction remains sluggish in most districts, but Atlanta finds some improvement, and prospects for new plants in Texas are very strong, partly because energy is "believed to be readily available" there.
Minneapolis, Kansas City, and San Francisco emphasized substantial improvement in farmland moisture conditions, although some areas, such as Montana and North Dakota, remain parched. Retail trade in rural areas improved with crop prospects. Soybean plantings are up in various districts, including Richmond and Minneapolis. Dallas reports increases in receipts from sales of cotton and soybeans.
Districts reporting on bank loan demand presented a generally similar picture. Consumer, real estate, and farm loans are strong, while business loans remain weak or only moderately higher. Philadelphia, for example, finds business loan volume "flat or down" in April, but inquiries and commitments are up, and "moderate" increases in business loan volume are expected for the remainder of the year.