Beige Book
National Summary

December 13, 1978

Business conditions in most districts continue to improve, but more signs of weakness are cropping up. Most businessmen look for a slowdown in economic activity next year. Christmas sales are slightly ahead of a year ago. Production in manufacturing continues to advance slowly; no significant shortages, excesses, or bottlenecks have developed yet. Bank lending is expected to increase at a faster rate despite higher interest rates and tighter restrictions on terms for loans. Money market certificates continue to provide substantial amounts of funds to banks and S&Ls. Home building has begun to weaken. Net farm income has risen sharply with higher farm prices and bumper crops.

Most districts report the dollar volume of Christmas sales is running slightly ahead of a year ago, and much of the strength is in soft goods since purchases of big ticket items other than autos are generally slowing. The biggest sales gains are on the West Coast where California's Proposition 13 property tax cut has helped to boost consumer spending. Early holiday sales were slowed by warmer than normal weather which dampened consumer enthusiasm for shopping, but sales in some areas are expected to rebound before Christmas. Heavy promotions account for much of the strength in sales reported by New York, Atlanta, and Dallas.

Retail inventories are high, according to most districts, but remain within manageable limits. Philadelphia, however, reports stocks at national chain stores are beginning to accumulate at unplanned rates. New York, Minneapolis, and San Francisco, on the other hand, indicate sales are reducing inventory levels.

New car sales are strong in the Chicago, St. Louis, Dallas, and San Francisco districts but are running below year ago levels-in Atlanta. Sales of trucks and used cars are growing also. Most reports indicate new car inventories are adequate, but new trucks are in short supply.

Manufacturing output continues to rise, although the rate of increase is slowing. High levels of capacity utilization are reported in many districts, but no major bottlenecks have developed. Boston reports a slippage in the number of small firms reporting increases in new orders, and Philadelphia and Richmond indicate factory payrolls have leveled off. Manufacturers' inventories are fairly well balanced. However, Richmond and St. Louis indicate stocks are excessive, and a cutback in reorders for consumer goods in the Cleveland district has led to involuntary additions to stocks. Atlanta and Chicago, on the other hand, report a tightening in factory inventories. Shortages of materials and labor continue to be confined largely to construction, but some easing in the supply of building materials was noted by Dallas and San Francisco. Price increases for major materials should be more widespread next year according to Philadelphia, Richmond, and Kansas City.

Despite higher interest rates, bank loan demands continue to increase, and liquidity positions of most banks remain adequate to meet foreseeable requirements. However, bankers are becoming more selective in approving loan applications, and St. Louis reports a number of small outlying banks are loaned up.

Money market certificates of deposit continue to be a major source or funds for banks and S&Ls, and most existing certificates are being rolled over as they mature. Deposit inflows continue weak in time and passbook accounts, and some disintermediation is noted at banks by Philadelphia and at S&Ls by St. Louis.

Construction activity remains at a high level, as a weakening in home building is being offset by increases in nonresidential construction. Residential construction is slowing as a result of substantial tightening in mortgage markets. Home building in New York state remains moribund, and an increase in that state's usury ceiling is not expected to reduce a heavy backlog of mortgage applications or increase sales significantly. Condominium sales are bright spots in the housing markets in the Chicago and San Francisco districts as conversions have continued to rise.

Higher farm prices and bumper crops, except for cotton and peanuts, are raising net farm income. Improved financial conditions for farmers and ranchers have led to substantially higher land values in the Kansas City district. Shortages of railroad cars have delayed grain movements from farms according to Minneapolis.