July 5, 1979
On balance, a slowing of business activity in recent weeks has been accompanied by a significant deterioration of businessmen's expectations for the remainder of 1979. Reserve Banks' characterizations of the current picture seemed to follow a geographical pattern: the northeastern, Midwestern, and western districts view it as largely positive with some trouble spots, while negative factors dominate the reports of the north central, southern, and mid-Atlantic regions. Tight gasoline supplies, on top of more basic problems, have cut noticeably into consumer spending, with pronounced effects on tourism and sales of large cars. To date, the Independent Truckers' strike and diesel fuel shortages appear to have caused only minor disruptions of manufacturing activity, but the agricultural impact has been more severe in some areas. Apart from the fuel-afflicted sectors, industrial activity seems to be holding steady or coming off slightly from an elevated pace. Capital spending, for both plant and equipment, is unquestionably the best thing going, but many districts foresee some easing of growth there as well. Inventories, both retail and manufacturing, are heavier but seem to be of concern to retailers only. Job markets remain tight, for the most part. Bank lending, particularly to businesses, is almost universally described as strong; deposit growth has been slow to moderate. Housing has continued to wane.
Those districts commenting on the availability of gasoline regard supplies as "generally adequate." Odd-even rationing, purchase restrictions, reduced gas station hours, and curtailed driving have alleviated the crunch and avoided long waiting lines. The travel cutback has taken a heavy toll on the tourist industry—estimates of year-over-year declines in tourist-related businesses, where given, were double-digit. Philadelphia, however, reports increases at two major vacation spots and sees other factors contributing to the sharp fall in Jersey shore resort traffic.
Diesel fuel stringencies and/or the Independent Truckers' strike have resulted in relatively minor disruptions of coal mining (Minneapolis), construction work (Chicago), and manufacturers' input or finished product deliveries (New York, Cleveland, Minneapolis, Dallas). Some farmers have been harder hit. Atlanta and Richmond report cases of excellent crops of perishables rotting in the fields or at shipping points; Chicago and Boston have seen reduced supplies and unseasonably high prices of produce. Movement of animals to slaughter has been curtailed, forcing temporary shutdowns of meat processing plants in five districts. However, farm operations have been relatively unaffected in most of the Kansas City and Dallas districts.
Retail sales have fallen, in real terms if not dollar volume, say Boston, Philadelphia, Cleveland, Atlanta, and St. Louis; weakness has been particularly apparent in the latest week or two. Other districts (except Kansas City, which reports slowing sales gains) convey an impression of "mixed," "spotty," or "flat" sales. Retail stocks have crept above desired levels. A majority of retailers have revised downward their sales projections for the rest of the year and are likely to be rather aggressively thinning out inventories. The gasoline situation has been widely blamed for at least part of the sales slowdown, but those who believe that more plentiful fuel will spur a dramatic revival are a small minority. Gasoline probably does account for an apparent change in shopping patterns—several districts noted that downtown or neighborhood stores are faring much better (or less badly) than far-flung suburban or regional shopping centers.
The gas-related decline in sales of large cars, RVs, and light trucks and resulting inventory overhang have reached troublesome proportions. Production cutbacks and layoffs have occurred in the Atlanta, St. Louis, and Chicago districts; San Francisco reports one dealership closing and three others for sale in Portland. Three Banks note a substantial drop in prices of large used cars. Small economy cars are moving briskly, where available, but supply constraints for the best sellers have probably meant a decrease in total new car sales.
Although manufacturing activity is generally characterized as strong, a number of exceptions were noted. Auto output, of course, is off considerably, and some districts have seen or expect some slowing in other consumer goods—appliances, jewelry, some types of apparel—and in products auxiliary to production of new cars and homes, like tires, glass, and furnishings. Capital goods producers are enjoying vigorous demand, in general, but orders have slipped in some product lines. Steel orders are down from a lofty peak and other metals show signs of softening. There are conflicting reports on the direction of activity in some industries: paper products, heavy trucks, and chemicals. Atlanta, Chicago, Kansas City, Minneapolis, and San Francisco depict industrial activity as somewhat tighter than in other districts. By and large, producers now expect further reductions in activity in the months ahead but few seem worried by recent inventory accumulations; there were no reports of radical changes in capital spending plans.
New York, Philadelphia, Richmond, Chicago, and Kansas City report rapid increases in industrial prices, particularly for petroleum products or derivatives. Most expect more of the same, come rain or come shine. Wheat, soybean, and other grain prices have advanced sharply of late and livestock prices remain high, but an excellent wheat harvest and favorable prospects for other crops should ease food price pressures within the next few months. The combination of strong prices and good production makes robust gains in farm income probable this year.
Except for layoffs by automakers, meat packers, and some tourist businesses, labor markets still look pretty tight; Banks cite heavy help-wanted advertising, vigorous recruitment efforts, and reported shortages of some types of labor. Chicago indicates that recent wage settlements have exceeded guidelines by a wide margin, but Richmond's regular survey of manufacturers actually turned up fewer instances of wage boosts.
Nonresidential construction is advancing briskly in the Richmond, Atlanta, Chicago, St. Louis, and Minneapolis districts, and booming on the West Coast. Home building, however, has continued downward except in some rapidly growing Sunbelt areas. Substantial sales declines and the prospect of a shift to a buyer's market were mentioned by Cleveland, Chicago, and Minneapolis.
Virtually every district used the word "strong" to characterize loan demand. Commercial and industrial borrowing, particularly short- term, has been especially heavy. Richmond and Kansas City suspect that inflation (but not stockpiling) accounts for much of the increase in inventory financing and/or constructions loans. Major NYC banks are among the most optimistic about lending prospects; they are joined by bankers in several other districts in their forecast of no further increases in the prime rate. Requests for consumer installment, mortgage, and real estate loans seem to be tapering but apparently still exceed the volume that lenders are willing or able to supply. Dallas reports an acceleration of deposit growth but most other Banks view inflows as modest at best. Some thrifts have been having problems as the drawing power of MMC's has waned. Recent increases in usury ceilings have freed lendable funds in New Jersey and Tennessee, but New York State's new mortgage cap, still below market rates, has had little impact. Higher ceilings are scheduled to take effect soon in Texas and await the governor's signature in Missouri.