Beige Book
National Summary

January 31, 1979

The economy continues to advance but there is increasing evidence of a slowing, judging from this month's district comments. Among the positive developments, consumer buying generally remains robust, apart from the middle part of the nation where retail activity was temporarily disrupted by especially severe winter weather. Manufacturers continue to report substantial order backlogs and commercial construction appears to be strong. Business inventories are being closely watched in all sectors of the economy. On the darker side, there is apprehension over an economic downturn and the rate of inflation. Residential construction activity recently appears to have slowed perceptively. At the same time, automobile sales appear mixed with several districts noting a slackening in demand. Increasingly, there are reports of shortages of skilled labor and materials. On the financial scene, loan demand appears to have eased somewhat.

After a sluggish start, consumer spending was generally strong during the holiday and post-holiday selling seasons. Purchases of big-ticket items in particular were noted in the New York, Atlanta and Richmond districts. In the San Francisco district, several department stores are reporting record sales, some exceeding last year by as much as 25 percent. The Philadelphia district, too, reported robust holiday sales. In the middle part of the nation, however, retailing activity was unusually slow in early January. Chicago, St. Louis and Dallas attributed this to the dislocations created by heavy snows and extremely cold weather. Minneapolis felt that the severe weather conditions contributed only slightly to the normal post-holiday slowdown. In the Cleveland district, retailers see little sales improvement in real terms and there is some fear that widespread promotions and markdowns in December will dampen January sales gains. Automotive sales reports were mixed, continuing strong in the Boston, Chicago and Dallas districts, but somewhat weaker in large parts of the Atlanta, St. Louis and San Francisco districts.

Manufacturing activity and business sales continue to advance in most districts, but signs of weakness appear to be emerging. Several districts noted a lengthening of lead times for some products, citing shortages of building materials and machine parts. Cleveland reports that machine tool builders are operating at capacity and expect to continue at current production levels through most of the year. Capital goods producers in the New York and St. Louis districts report sustained activity as do Chicago and Cleveland steel producers, but some slowdowns in consumer goods are reported in Boston, Cleveland and St. Louis. In the Philadelphia district, manufacturers appear less than sanguine about the prospects for the economy, expecting a drop-off in new orders along with declining shipments. As a result, some marginal cuts in factory payrolls and further shortening of the average workweek may be in the offing. In the Richmond district, too, there is some pessimism as a result of scattered employment reductions and shortening of the workweek. Some shortages of skilled and semi-skilled labor were reported by Boston, Minneapolis, and Kansas City.

Against a background of an uncertain outlook for the national economy, businesses are closely watching inventory levels. At the retail level, inventories generally appear closely aligned with sales. In the current environment, merchants appear to be very wary about adding to their stocks. In manufacturing, the reports varied. Philadelphia reported the manufacturers continue to reduce stocks, while Cleveland noted that capital goods producers are building inventories in response to further increases in backlogs and prices.

Construction activity is mixed. Nonresidential building has remained strong in Atlanta, Chicago, Dallas, San Francisco, and Minneapolis. In contrast, residential building activity has slackened in most districts. Even in San Francisco, residential real estate activity seems to be weakening in virtually every part of the district, with inventories of unsold homes on the rise.

Much of this weakness in residential construction is being attributed to the limited availability of mortgage funds. In Richmond, tighter lending terms are having a depressing effect on residential mortgage loan demand. Similar tightening is also reported in New York. Respondents in Atlanta, St. Louis, Dallas and San Francisco blame part of the mortgage money shortage in their districts on state usury laws.

Other types of loan demand also appear mixed. Individual loan demand remains strong in Richmond but has tapered off in Philadelphia, St. Louis and Dallas. Business loan demand remained strong in several districts, but slackened in others. With respect to agricultural lending, several districts reported improved repayments from a year ago on farm loans, reflecting substantially higher crop prices.