May 10, 1978
All Districts report that the economy has strengthened further in recent weeks, but inflation is a dominant concern. Consumer spending is mixed, with cold weather dampening sales of seasonal merchandise although car and hard goods sales are generally strong. Further improvement in manufacturing activity is noted, as orders and backlogs continue to rise and scattered signs surface of tightening labor and special product markets. Loan demand at banks continues strong, except in New York City, and savings and loan associations have raised mortgage rates as demand exceeds supply. Crop plantings are behind schedule and may hamper production this year.
District reports uniformly indicate that the economy continues to expand rapidly. Although there is some uncertainty over prospects for housing and some doubts about the strength of consumer spending later this year, there appears to be growing confidence that capital spending is strengthening (Chicago and Cleveland). Several Districts report officials are optimistic that the expansion will continue at least through 1978 but Chicago and Cleveland, looking further ahead, anticipate it may end in 1979. Philadelphia also reports less optimism among industrial officials than at any time during this expansion. The concern that underlies most District reports, however, is that the rate of inflation is accelerating. Practically each District notes a worsening in inflation last month, and some comment that it is their primary concern.
Indicative of the expanding economy is the continued strengthening in manufacturing activity, as reported by half the Districts. Further increases in shipments, orders, and backlogs are noted in a variety of industries, including steel, machine tools, food, apparel, electrical machinery, nonelectrical machinery, appliances, chemicals, and home building and construction materials (Boston, Chicago, Cleveland, New York, Philadelphia, and, St. Louis). Accompanying this increased activity are reports of shortages of skilled labor (Atlanta, Chicago, Dallas, Minneapolis and St. Louis) and of castings, transportation and storage space for wheat and grain, small electrical components and cement (Dallas and Kansas City).
Retail sales present a mixed picture between and within districts. Half of the districts report strong gains in sales for April, but several others note mixed spending patterns. Generally, hard goods and automobiles are selling well, but sales of seasonal merchandise, including summer apparel and air conditioning units, have been sluggish or below expectations. Unseasonable weather apparently has hampered sales. Nevertheless, most retailers are cautiously optimistic, though they expect sales increases to moderate in coming quarters. As a result of less than expected increases in retail sales, inventories are described as at or above desired levels in several districts (Boston, Cleveland, Kansas City, New York, Richmond and St. Louis).
Credit demands are generally strong and expectations are for continued moderate strengthening during the balance of 1978. No District reports on concerns of a credit squeeze, although some look for additional firming in interest rates (Atlanta, Boston, Philadelphia). Business loan demand has been rising rapidly in some areas (Atlanta, Kansas City, San Francisco and St. Louis) but is still sluggish in New York City where alternative sources of funds tend to constrain demand (New York).
Demand for mortgage credit continues strong in all districts and mortgage rates have firmed in most districts. In response to strong demand and generally inadequate supplies of mortgage funds, savings and loans in a number of Districts have curtailed commitments or loans (Atlanta, Chicago, Cleveland, Dallas and Minneapolis). A few districts report net outflows in deposits at savings associations, (Kansas City, San Francisco and St. Louis) while others note only moderate or small increases in deposits. Uncertainty about prospects for homebuilding later this year is expressed in a number of reports that cite further increases in building costs and housing prices, higher mortgage interest rates, and a shortage of mortgage credit (Dallas, Minneapolis, San Francisco and St. Louis).
Planting is behind schedule in key agricultural regions of the country (Chicago, Kansas City, Richmond and St. Louis) because of wet spring weather and below-normal temperatures, thus raising some uncertainty over prospects for crop output in 1978. Richmond reports replanting of seeds will be necessary. While cold, wet weather has improved production prospects for winter wheat, corn planting has been delayed and initial estimates of production of corn and soybeans for 1978 are highly uncertain (Kansas City). Dallas reports drought is hampering plantings and livestock production.