Sharp drops in residential construction and new car sales reinforced the growing conviction that the recession has arrived. Christmas spending was good throughout most of the nation and provided a welcome boost. Manufacturing activity declined in several Districts, and new orders slackened in most Districts. Input prices are expected to continue escalating. Mortgage funds are available, but high interest rates cut demand sharply. Demand for commercial and consumer loans lessened. Employment held steady despite some cutbacks.

Retail sales, except for automobiles, held their own in December. Inflation-adjusted sales were equal to or slightly better than last Christmas for New York, Philadelphia, Richmond, and Atlanta. Holiday purchases were sluggish for Boston and Chicago. Sales and promotions were prevalent. Amidst increasing concern about a recession during the first half of 1980, most retailers are keeping inventories under very tight control; none report excessive inventories.

New car sales dropped substantially, with large- and mid-size autos taking the brunt of the decline. Compacts remain popular; some sales were lost because of shortages and delivery problems. Inventories of large-size autos are high nationwide. However, New York reported promotions and markdowns helped clear out 1979 leftovers.

Residential construction, mortgage lending, and real estate sales slid markedly, except for Boston, where several directors observed a relatively high level of sales and also an increasing number of purchases in cash. Several Districts report an availability of mortgage funds, but reduced demand due to high interest rates. Mortgage lending is at a virtual standstill in New York and Texas because of usury ceilings. Additionally, usury ceilings imposed during December noticeably hampered lending in numerous other states. Contacts in many Districts believe real estate activity will turn down even further in several months when commitments are used up.

A resilient commercial construction sector continued to partially offset declines in residential building for most Districts. San Francisco, Dallas, and St. Louis report commercial construction proceeding at a rapid pace. However, builders in the St. Louis and San Francisco Districts are apprehensive about the smaller number of new projects in the planning stage.

Production for industries related to automobiles and residential construction is off sizably. Steel firms in the Cleveland District noted a sharp contraction in auto-related orders. A spokesman in the same District states that new-car tire production shrank 12 percent this year. Aluminum orders for automobiles fell, but notable support was provided by above-normal demand for aluminum by the canning industry and for exports.

A major manufacturer of plastics in the St. Louis District encountered a reduction in orders for all products used by automotive and residential building industries. In the First District, manufacturers of housing fixtures and other housing products noted a drop in demand. In the Second and Twelfth Districts, the slump in home building crimped sales of lumber products. Some smaller mills in the West have been closed.

Manufacturing activity leveled off for Boston, dropped for Philadelphia, declined slightly for Dallas, and remained stable for San Francisco. New orders were down broadly for Richmond and declined for St. Louis. In the New York District, new orders eased, but the shipments remained robust. New orders lag shipments in the Chicago District, and businesses have started to cut back on ordering in the Minneapolis District. However, electrical equipment industries located in the Boston, Cleveland, and Chicago Districts report a continued high level of activity. And, machine tool firms in the Cleveland and Chicago Districts are experiencing sustained growth of new business.

Input prices for materials and parts continue to rise. Some discounting in steel occurred. Nearly all manufacturing executives in the Philadelphia District predicted higher costs for raw materials by summer, and 80 percent planned to charge more for their own products by then. No input availability problems were reported.

Loan requests for the Boston and Philadelphia Districts remained at a high level. Kansas City and Dallas reported notable declines. A softening in demand was experienced in the remaining Districts. High costs of borrowing rather than the availability of funds discouraged businesses and consumers from applying for loans. Reduced inventories contributed significantly to the tempering in commercial loan demand. Many Districts observed cutbacks in consumer loans, particularly loans for automobiles and higher-priced consumer durables.

On balance, employment levels were unchanged. Areas of strength remained, but some Districts reported weaknesses. Philadelphia and Richmond noted reduced workweeks, and Atlanta reported layoffs in automotive and residential building industries. Employment levels in Michigan declined due to the slump in auto production. Labor markets were relatively strong for Minneapolis, Kansas City, and Dallas. In the Northwest, employment continued to grow in response to expansion in the electronics and aircraft industries.

Agricultural reports were generally upbeat. Grain and livestock sales, and also profits, increased in the Kansas City and Minneapolis Districts. Transportation bottlenecks in the Midwest eased. Atlanta reported that prices for broilers and hogs finally rose. A record apple crop was harvested in Washington State. An improvement in agricultural bank liquidity occurred in the Kansas City District, where abruptly higher interest rates reduced loan demand and favorable agricultural sales increased deposits.