March 14, 1979
Reports from the Twelve District Banks this month indicate continued strength in the economy as many parts of the nation recover from a severe winter. The only exception is Atlanta which reports mixed activity in the Southeast. Strong loan demand and overall expansion in manufacturing continue to be major sources of strength to the economy. And, although residential construction is suffering in some states, nonresidential construction is generally doing well. Retail sales appear to be expanding with a few exceptions. Crop prospects are reported to be favorable with the exception of Southern California.
March retail sales volume is reported to be growing in all Districts except Philadelphia, Richmond, and Atlanta. Minneapolis reports some weather-related constraint in consumer spending. Sales of big-ticket items are reported to be spotty in some areas, but lower-priced goods such as apparel and fabrics have been big sellers. Retail inventories are reported to be in good shape, except in Kansas City where merchants are expressing concern over some unplanned stock accumulation. One notable exception to the sluggishness of big- ticket items is auto sales. Cars, especially small, fuel efficient models are reported to be in great demand. In fact, in one area of the Twelfth District, Ford Pintos are completely sold out. Looking ahead, retailers have varied expectations, and are cautious.
Manufacturing activity is said to be strong and expanding in virtually all Districts this month. Capacity utilization is high, and in Cleveland and Chicago, 100 percent utilization is being approached. Electrical components and appliances, auto products, and a broad spectrum of producer components are mentioned as some of the strongest industries. Supplies of most inputs, with the exception of labor, appear to be adequate at this time. San Francisco and Boston mention a shortage of skilled labor, particularly engineers. For the longer term, there is much less agreement about the industrial sector. Manufacturers in some Districts are fairly bullish, but Philadelphia and Richmond report a bleak outlook for industry through the balance of 1979.
Expansion in nonresidential construction is generally the rule, but residential investment seems to be suffering. One possible cause of the home building slowdown is the mortgage funds situation. As market interest rates creep up, mortgage money in states which have usury ceilings is becoming scarce. Some states are reacting to this by eliminating or altering those ceilings. March 15th changes in regulations governing interest paid on money market certificates (MMCs) also have mortgage lenders worried. They fear that without their advantage in attracting funds, the flow of funds into the mortgage market will dry up.
Economic conditions in the agricultural sector are generally favorable. Although some sluggishness is reported by Minneapolis, this is weather-related and should clear up when the snow melts. Atlanta reports favorable weather conditions and strong farm prices. Chicago paints a similar picture, and Kansas City indicates good strength in cattle. The only trouble spot is California, where a farm labor strike is disrupting the harvest of lettuce and several other crops. A freeze in Southern California has also caused considerable damage to the grapefruit crops. The agricultural outlook is, again, mixed.
In the banking sector, loan demand is reported to be good overall, but deposit growth is not strong, as consumers increasingly become aware of interest rate differentials. The demand for auto loans is quite healthy. The prime rate is at 11 3/4 percent over most of the nation currently. Although tight money conditions do not prevail everywhere at this time, there seems to be a general fear that slack deposit growth will cause funds to dry up in the near future. The residential construction industry is particularly worried about such a possibility, because mortgage credit, as noted above, is already difficult to find in some areas.