October 11, 1978
An acceleration of activity has created further pressures on prices and supplies. The possibility of wage and price controls has undoubtedly begun to influence pricing decisions in some industries. Although businessmen expect inflation to accelerate next year, their cautious control of inventories has kept stockpiling to a minimum. The "inflation psychology" is thought to have contributed significantly to the latest strength in consumer spending, capital investment, and housing markets. Financial institutions are uneasy with the rising cost of money and automatic transfers on the horizon.
Business leaders in several major District cities have noted a variety of problems with short input supplies and slow deliveries. The latest list of shortages includes parts for aerospace and communications equipment, light-weight trucks, castings, aluminum alloys, and paper for telephone directories. Deliveries are reported to be "very bad" for auto parts and many building materials. Lead times are longer for office equipment, tools, and some steel goods and finished textile goods. On the other hand, there seems to have been some improvement in deliveries of wood, aluminum, aluminum containers, and insulation.
A poll of business leaders revealed that businessmen take the possibility of wage and price controls much more seriously than they did four months earlier. Quite a few suspected their suppliers, particularly manufacturers of building materials and steel makers, of raising prices in anticipation of controls. The fear of controls has been openly acknowledged in one industry whose product prices have been escalating rapidly—food processing. Food processors have been raising list prices and discounting; food retailers, who reportedly consider the threat of controls less ominous, have raised prices in line with the increase in list, blocking the pass through of lower wholesale food costs. One contact remarked that next year's large union wage settlements would certainly bring on controls if something else doesn't before then; another thought that the mere mention of controls in the papers touches off a wave of price increases. Still, there remains a number of businessmen who feel that rising costs, not the fear of price controls, are the primary reasons for recent price increases.
The consensus 1979 inflation forecast of these business leaders was "we'll be lucky if it's not double-digit." Many offered predictions of increases in prices in their own industries—steel to rise 9 to 10 percent, shipping industry costs to gain 11 percent, costs in the soft drink industry to advance 8-1/2-11 percent, and the teamsters to get a 33- to 37-percent compensation hike.
In the face of such inflationary prospects, there is little evidence of businesses stockpiling to beat price increases. Inventory policies remain conservative. The inflation's psychology's impact can be seen in investment decisions and consumer behavior, however. Equipment suppliers find buyers moving up purchases; builders see projects coming off the drawing boards after long delays. Whether for this reason or others, the past month brought a rash of announcements of large building projects, both commercial and industrial, that will add substantially to an already sizable volume of nonresidential construction under way.
Consumer spending growth picked up in August and in September after the early summer slowdown. A remarkable number of contacts in a wide variety of consumer-oriented businesses noted that the higher-priced, higher-quality goods and services have been selling best. Automobile sales have been reasonably good, although late arrivals of 1979 models and thin carry-overs of 1978's restrained sales of new domestics in many areas. Red Book contacts characterize the younger consumer as motivated almost entirely by expectations of higher prices, ready to buy everything now that he can afford or meet the payments on, and having little use for savings.
High prices and expensive money have yet had little effect on housing markets in the rapid growth areas, but the end of the boom is in sight. Forecasts of a slowdown in 1979 are nearly universal, and some call for a sharper downturn than was anticipated earlier in the year. Sales and starts have already tapered off in many slower-growing areas, where unsold inventories are rising and builders and lenders have virtually ceased speculative ventures. There is some evidence that mortgage lenders have become more selective.
As business loan growth has slowed, banks have experienced exceptionally strong credit demands from consumers for both mortgages and consumer installment loans. Auto loans of 42 and 48 months are common; one director reported that banks in his area are now offering 60-month loans. The financial community appears to be troubled by three recent developments. The new CDs have been of considerable help in maintaining deposits, but with T-bill rates approaching state usury ceilings on mortgage rates, many thrifts fear being priced out of the mortgage markets.
In Tennessee, where the usury ceiling is most difficult to skirt and applies to corporate loans as well, bankers are debating how much longer they can afford to pay the maximum rate on six-month certificates. Some say they won't hesitate to stop offering them if rates rise further; others feel they must hold onto these accounts and hope for a decline in rates because of stiff competition for deposits. Apparently, some banks have already suffered losses of funds because they were unwilling to pay the going rates. With the advent of automatic transfers at hand, bankers are struggling to develop satisfactory pricing schemes. Many view the service as tantamount to interest-bearing checking accounts and expect earnings declines like those that New England banks experienced with NOW accounts. There is some feeling that offering the service is "practically mandatory." A further concern is the uncertainty surrounding the regulations that will implement the Community Reinvestment Act.