Beige Book
National Summary

October 11, 1978

The tone of District reports is one of high employment of resources, accompanied by high operating rates in basic industries, shortages and lengthened deliveries, and generally tight labor markets. Upward price pressures remain intense. There is also an undertone of uncertainty and, indeed, concern over a slowdown or recession next year. Perhaps best illustrating the uncertainty are mixed comments on consumer spending and residential construction. On the other hand, capital spending and nonresidential building appear to be stronger than earlier expected. Credit demands are somewhat mixed, with softening noted for both C&I and mortgage loans. Crop prospects are generally favorable.

District reports frequently mention continued expansion in manufacturing activity and high utilization of capacity. New York notes some producers appear to be nearing limits of capacity. Both Chicago and Cleveland are relatively optimistic about steel production this quarter, which if it matches last quarter, would amount to about 85 percent of capacity, far better than a year ago. Some Districts expect slowing in business early in 1979 (Philadelphia, Minneapolis and Dallas).

Accompanying high levels of utilization in manufacturing and construction are reports of shortages of materials and labor. Districts report shortages of industrial and construction-related materials, ranging from cement (Chicago, Minneapolis and San Francisco) to drill pipes (Dallas). While shortages may not be a widespread problem, some Districts note stretching out of deliveries (Boston, New York and Kansas City). Similarly, complaints of labor shortages in a variety of industries are also noted (Boston, Chicago, Kansas City and San Francisco).

Still, uncertainty and concern mark comments about economic prospects over the short term. New York, for example, points out that respondents expect slower economic growth in the next half, but not a recession, and Chicago reports that pessimism is widespread in that area.

A majority of Districts indicate that retail sales have softened or have shown slower growth in recent weeks than earlier in the summer. Slower sales of major appliances are noted in some Districts (Boston, Chicago and Kansas City). Still, there are some exceptions to slowing tendencies. New York, Atlanta, Dallas and San Francisco report larger increases in sales in the past month than in the previous month. There is also a mixture of views concerning prospective sales. Retailers are optimistic in New York, Richmond, Minneapolis and Dallas, but those in Boston and Cleveland see further deterioration in sales.

The pace of housing and mortgage loan demand throughout the District appears to have softened. High mortgage rates, high housing prices and in some cases, more selective lending terms account for the lessened pace. Chicago, for example, notes that houses over $100,000 are selling more slowly than earlier in the summer. In California, mortgage demand generally exceeds supply, but in other parts of the West, high mortgage rates seem to have slowed demand.

The investment sector provides more encouraging developments. Plant and equipment spending and nonresidential construction appear to be either accelerating or stronger than generally expected. Chicago reports that producers' durable goods sales appear stronger now than earlier in the year and that office building construction in that city is in a full-fledged boom. Atlanta notes that inflationary psychology has given an additional boost to an already large volume of nonresidential construction underway. Dallas also indicates construction of new plants and expansion of existing ones already exceeds all of 1977 and that the boom in oil and gas drilling continues. San Francisco remarks construction is still booming in most parts of that District.

Several Districts characterize inventory policies as cautious (New York, Atlanta and Minneapolis) or at about desired levels (St. Louis), but there are also reports of excess stocks, especially at the retail level (Boston, Cleveland, Richmond and Dallas). Also, inventories held by steel distributors are believed to be higher than desired (Cleveland and St. Louis).

Continued strong upward price pressures for a spectrum of industrial materials are reported in a number of Districts. Reports show continued widespread and substantial increases in prices (Philadelphia, Richmond and Kansas City). Atlanta stresses a fear of double-digit inflation has contributed importantly to the latest strength in consumer spending, capital investment and housing.

Credit demands are generally strong, but softening tendencies have surfaced in several Districts. Slower growth in C&I loans is reported in some Districts (Boston, Cleveland, Atlanta and Dallas). Boston considers the slowdown temporary, while New York comments that commercial banks are generally optimistic over growth in loan demand through the first half of 1979. They point out a "spill-over" loan demand from regional banks in the form of loan participations. Latest increases in interest rates apparently have not slowed loan demand except for mortgages. The prevailing view seems to be that consumer installment and business loan demand has not yet slowed in response to higher rates (New York, Cleveland, Richmond, Minneapolis and San Francisco) but some other Districts express some concern over higher rates. Boston and Philadelphia see some signs of disintermediation and Chicago points out that recent increases have convinced some of the "inevitability" of a slowdown or recession next year in response to tightened credit markets.

Crop output in key farm belt regions is generally described as ranging from good to record harvests. Kansas City reports corn yields are good. St. Louis expects an above average crop sufficient to depress prices from a month-ago. Chicago expects a record year for corn and soy beans. On the other hand, Richmond and Dallas complained that dry weather has affected output of some crops.