Business conditions in the nation as viewed by businessmen and other observers of economic conditions in the twelve Federal Reserve Districts were slightly improved in late December and early January compared with a month earlier. Retailers report a sizable late spurt in Christmas sales, pushing the dollar volume above expected levels and well above levels of a year ago. However, the recent sales record has not been followed by reported intentions to expand inventories or to increase demand for factory output. The employment situation remains weak and the number of job seekers continues to grow. Some moderate gains are envisioned for industrial output in the months ahead, but capital investment plans continue to be pared. Credit availability is increasing with the rising liquidity of financial firms. Rising prices and price expectations continue to prevail, leading to intensive discussion of additional means of curtailing further advances. Output of most farm products, notably meats, was higher at the close of the year than a year ago, resulting in relatively low food prices and declining farm incomes.

Most Federal Reserve banks reported sharp increases in retail sales just prior to the Christmas holidays, which resulted in total dollar sales well above planned levels, and, in some cases, 5 to 6 per cent higher than a year ago. Pre-Christmas sales apparently started off slow but began to rise sharply just before the holidays, and the higher sales volume is extending into the new year. The sales gains were predominantly in the lower priced items. Higher priced items such as color TV sets and high quality clothing continue to move slowly. Retailers report that inventories of most goods remain at very conservative levels, indicating considerable doubt that the recent upturn in sales will continue.

Manufacturers are cautiously optimistic compared with the fact that no change was foreseen a month ago. The Cleveland Bank reports that new steel orders have increased sharply since mid-December. Furthermore, steel industry economists expect a big pickup in steel shipments to begin about March and the second quarter to be much stronger than the first. Much of this anticipated gain is based on rising demand in preparation for a steel strike. The Richmond Bank reported an increase in manufacturers' inventories. With the exception of the steel companies, however, manufacturers generally do not indicate great gains in sales expectations. In conformity with this view, some layoffs and plant closings have recently occurred in the electronics and TV industries.

Most Reserve banks indicate that the current high rate of unemployment is likely to continue for several months. Further declines in employment, however, are not expected as most reports indicate that the retrenchment process of firms is about complete. Any future increases in the unemployment rate will primarily reflect additions to the labor force rather than layoffs.

Most reports point to some moderate gains in construction in the months ahead. Reasons given include the more favorable interest rates and easier payment terms.

Capital investment plans apparently continue to be pared. The Richmond Bank reports that manufacturing respondents often cite excess productive capacity as a problem. The Chicago Reserve Bank reports that a number of important firms have decided to keep capital outlays at or below depreciation in 1971. Cleveland reports that the 1971 authorized plant and equipment appropriation of a large rubber firm is only 60 per cent of the 1970 level of actual expenditure. Excluding public utilities, there are no reports of major industrial expansion plans, and when new investment is mentioned, it is in connection with cautious and conservative planning.

All respondents concur that credit became increasingly available in the closing weeks of 1970. Savings inflows at banks and savings and loan companies have been very high in recent months. Business loan demand has been declining, and reports of more aggressive lending policies are more frequent than heretofore.

Inflation and expectations of inflation continue to be a major worry of most businessmen. Practical means offered for stabilizing prices, however, vary widely from one Reserve District to another. Dallas, for example, reports that some form of incomes policy is generally favored as the solution, while Atlanta and Minneapolis report respondents varying from adamant opposition to an incomes policy to support for the adoption of some type of controls.

A leveling out or decline in farm income may be in prospect for the months ahead. Low meat and poultry prices and higher priced feed have reduced profit margins to livestock producers. The large numbers of livestock on farms, however, have resulted in a high level of marketings despite the higher production costs. Readjustments in livestock numbers will likely occur during 1971, resulting in higher returns to farmers and higher food prices.