Beige Book Report: Minneapolis
August 12, 1970
Ninth District business economists feel that the national economy is turning around and that a pickup in consumer spending will lead to improved business conditions during the latter part of 1970. A vigorous recovery, however, is not anticipated, and the rate of inflation is not expected to slow appreciably. Although they do not foresee large increases, reports from bank directors and officers reveal that District retailers expect their sales to improve during the second half of the year. Manufacturing sales, on the other hand, are expected to continue sluggish. Corporate profits in the District have suffered and Ninth District firms are cutting costs in order to restore earnings. Recent large wage concessions to construction workers and Teamsters are impeding efforts to cut labor costs. Several cases of unwanted inventory accumulation were reported in the District.
The consensus of opinion among local business economists is that the economy is turning around and business conditions will improve during the latter half of 1970. They do not, however, expect a vigorous recovery, and one economist described the current slowdown and expected recovery as being saucer shaped. He said that the current slowdown has not been as rapid or deep as in earlier post-World War II downturns and that the recovery will not be as sharp as in previous upturns. The rate of inflation is not expected to slow appreciably and interest rates are not expected to fall significantly before the end of the year. They also look for businessmen to continue to revise downward their capital spending plans this year. A major Minneapolis scientific instrument and ordnance manufacturer, for example, reduced its original increase in capital spending plans by 20 per cent. These economists do not think that total Government spending will change noticeably. Consequently they see the stimulus for recovery coming from consumer spending. A business economist representing a national retailer felt that consumer confidence would be recovered during the last half of the year. He also stated that consumers financially are in better shape than in previous downturns and it will be easier for them to resume spending.
In spite of their relatively optimistic outlook, they felt that the economy was not out of the woods yet. One economist, for example, stated that another "Penn Central" could have a disastrous effect on business activity.
Reports from bank directors and officers confirm local business economists' expectations that retail sales will improve during the second half of the year. They do not look for an unusually large increase in retail sales, but they do expect it to be better than during the first half. Women's apparel and automobile sales are big unknowns. Reports disclose that a major Minneapolis retailer is having trouble selling midi-length styles. A report from one director indicates that consumers are buying cars now to avoid the price increases on 1971 models this Fall. District manufacturers responding to our latest industrial expectations survey feel that the rate of advance in District manufacturing sales will continue sluggish during the remainder of 1970.
In responding to a question on corporate profits, bank directors and officers indicated that profits in the Ninth District suffered or at best held steady during the second quarter, although there were notable exceptions. In response to this situation numerous examples of cost cutting were cited. An economist for a large national manufacturer stated that attitudes have changed in his company on what constitutes a necessary cost. One large brewery in the Twin Cities cut its current advertising budget by $800,000. District employers have curtailed their utilization of labor through layoffs and overtime reductions, and a large Minneapolis computer manufacturer instructed each employee to take ten days of unpaid vacation before the end of the year. Cost cutting is also manifesting itself in reductions in capital spending and inventory cutbacks.
Although reports indicate District businessmen are trying to cut inventories, several cases of unwanted inventory accumulation were reported. One large Twin City manufacturer's inventory increased because of overly optimistic sales projections. Reports reveal that the large retailers and a national mail order house have accumulated inventories because of the trucking strike. They are receiving this summer' s seasonal merchandise late and are being forced to cut its price to avoid carrying it over.
One factor, however, that will impede cost cutting efforts by District businessmen is the recent large wage concessions granted to the construction workers and Teamsters. As a result of these settlements, bank directors indicate that unions in their areas are becoming very aggressive in their wage demands, making the settlement of some current negotiations difficult. One director reports that construction companies are cutting overtime because of the large wage settlements.