August 9, 1978
Economic activity continues to advance, according to this month's district comments. While there is concern in some areas that a downturn may be in the offing, business activity generally appears to be strong with little evidence of current weakness. Some shortages of skilled labor and certain materials have developed, but building activity and industrial production continue to post healthy gains. At the same time, capital goods orders are strong, suggesting that capital spending will expand further. Retail sales generally remain robust, and inventories appear to be at moderate levels. Furthermore, higher farm prices and good crop prospects have improved the outlook for agricultural incomes. Demand for bank credit appears to be strong and broadly based.
Moderate to strong gains in consumer spending were reported in most districts, although Cleveland and Dallas experienced some recent softening. Sales continued to be vigorous in most of the San Francisco District, but some hesitancy was noted in California in response to uncertainties about the impact of passage of Proposition 13. Automotive sales were strong in many areas of the country. Nevertheless, sales were generally not expected to continue at the current brisk pace. Richmond, for example, reports that at least part of its strong auto loan demand reflects buying in anticipation of higher prices.
Retail inventory levels generally appear to be in good balance with overall sales, although some overstocking in a few lines was noted by several districts. Major exceptions to this view were New York, where several merchants expressed concern that stocks were higher than desired, and Cleveland, where the level of inventories of a wide range of merchandise is considered high. In general, retailers appear to be optimistic about the near-term outlook for sales.
Among those districts reporting on building activity, most are continuing to experience relatively high levels of residential and/or nonresidential construction. Atlanta reports little or no slowdown in housing starts or mortgage lending to date, and nonresidential construction is also at a rapid pace. Housing activity also remains high in the St. Louis and Cleveland districts and in the latter, most lenders report no slowing in mortgage commitments and loan applications. Dallas characterizes nonresidential construction as the fastest growing sector in its regional economy and notes that home building is also strong. Faced with rapid growth, both Dallas and Minneapolis cite shortages of cement as a constraint on their building activity. Nonresidential construction remains high in San Francisco though home building has slowed. A recent spurt in California residential permits reflects the imposition of more costly energy regulations beginning in July rather than a pickup in activity. Many of the districts reported that the new six-month money market time certificate resulted in better-than-expected deposit flows to thrift institutions. Chicago and St. Louis note a leveling off of mortgage rates in their areas.
Industrial activity expanded in many areas during July. The volume of new orders was strong in the Boston, Cleveland, Philadelphia, and St. Louis Districts, while order backlogs have increased sharply for transportation equipment in Chicago. A survey in the New England area indicated that 80 percent of small businesses had higher backlogs than a year earlier. Manufacturers responding in the monthly Philadelphia and Richmond surveys also reported gains in shipments and employment. Boston and Chicago report some industries operating at or close to capacity. While inventories rose in the Richmond District in contrast to a decline in Philadelphia, Richmond manufacturers state that inventories more closely approximate desired levels than in earlier months. Activity in the steel mills of the Chicago and Cleveland Districts is reported to be robust. Chicago steel producers are witnessing the best demand in four years and orders in Cleveland have been strong due to automotive demand and some stockpiling in anticipation of an August price hike.
The outlook for continued growth in capital expenditures appears promising, judging from the reports of districts commenting on capital spending. Cleveland expects good business fixed investment ahead based on strong orders in its capital goods industry. At the same time, producers of machine tools and other capital equipment in some other districts report strong new orders. Nevertheless, there were a few reports of continuing caution. For example, Philadelphia's manufacturers expect to "hold the line" on such spending.
Prospects for agricultural incomes in much of the country have brightened considerably. Higher prices for livestock and crops, along with a good harvest in view have raised farmers expectations. Chicago contrasted the current farm situation to the dismal conditions of last winter that prompted a strike. San Francisco says its farmers are in the process of recouping the losses from the heavy spring rains. As a result of the improved financial situation, sales of farm equipment and farm spending in general have risen and loan repayment problems have declined. However, as Kansas City notes, continued reduction in beef production together with liquidation of cattle inventory indicate even higher meat costs for consumers in the months ahead.
Demand for bank credit was reported strong in most districts. The source of recent demand appears to be broad based. Business loans were strong in Philadelphia and St. Louis while Kansas City had heavy demand for real estate loans and Dallas for real estate and construction loans. Consumer borrowing was a major source of bank loan demand in the Richmond and New York areas. Consumers in the Chicago District also made liberal use of credit. So far, there is no evidence of an increase in delinquency rates. Minneapolis and Dallas were the only areas to mention the possibility of a liquidity problem.