The economy lacks buoyancy in most parts of the Tenth District. This is reflected in continued sluggish business activity, although there is substantial variability by region and sector. This weakness, combined with the easing monetary policy stance, is having an impact on district commercial banks. With loan demand easing and more funds available, banks generally are emphasizing investment portfolios which are aimed at improved liquidity positions. They want to remain flexible because of uncertainties they perceive relative to future rate movements.

Business activity in Kansas and Missouri has been most affected by the current economic slowdown. Employment in the aircraft industry, particularly in Wichita, remains soft—as corporations have curtailed their purchases of executive planes and Government contracts remain weak. In addition, Kansas City is still suffering from the impact of the long construction and General Motors strikes. Business activity in Oklahoma, Colorado, and Nebraska has not been affected as much by the current slowdown, largely because they have not experienced the severe economic misfortunes of the other areas. Business in Colorado is also being sustained by a strong outdoor recreation industry. Activity in ski areas continues to increase at rates that are normal or better. Mining activity is depressed. Domestic oil exploration is down because of various Government actions discouraging such activity. Economies of cities where uranium mining is important such as Grand Junction, Colorado, have been adversely affected by curtailment of Government uranium purchases.

Since retail sales are so important at this time of year and consumer spending is being closely watched as a clue to economic growth in 1971, district retail stores were again surveyed this month. Reports were mixed—with some department stores and discount houses reporting a decline in sales during December, as compared with the same month last year; while others reported gains, mostly of a modest nature. After having generally good sales in November, several stores reported that sales in early December were disappointing but then improved substantially again just before Christmas. Weather conditions may have been partly responsible for this pattern. Generally, stores that had the best gains were the large combination mail order-department stores. One regional controller of a chain of such stores said that their sales usually hold up quite well during economic slowdowns when customers are interested in good quality at reasonable prices. Somewhat surprisingly, a large store that specializes in luxury gift items and caters to above-average income customers reported sales this fall increased by about 10 per cent. Generally, stores that had strong sales just before Christmas also report strong post-Christmas sales, while stores with weak pre-Christmas sales continue to exhibit weak sales.

The surveyed retail stores were also asked whether they had used any extra promotional activities such as intensified advertising campaigns or earlier price reductions this year due to the economic slowdown. Most stores that reported generally good sales in December said that they had not made any special promotional efforts this year. On the other hand, many of the stores with disappointing sales records said that they had undertaken special advertising—with stress on value—and had used more price promotion sales.

Generally, auto dealers in all parts of the district indicated that sales of new American cars in December 1970 were lower than during December 1969. However, they report that sales of 1970 models through November were above the comparable year-earlier period. Shoppers are showing some interest in the subcompacts, but dealers say that these new domestic introductions are not especially popular. What success they are achieving appears to be at the cost of one-size-larger, American-made models. Foreign cars seem to be selling well everywhere. GM dealers blame slow sales on short supplies, while some dealers in foreign makes say they are continually sold out. Little showroom traffic is making many dealers in domestics pessimistic about sales prospects for coming weeks.

Loan demand is continuing to ease at many Tenth District banks. Banks with ample investable funds are reacting to the weak loan demand in several ways. In addition to a continued repurchasing of loans from holding companies, a more aggressive loan policy appears to be developing in some cases. More generally, however, banks continue to fortify their liquidity positions. In their investment policy, most are cautious—placing funds in shorter-term notes and short-term municipals, and, in some instances, selling Federal Funds where, until recently, they were purchasing them. Some banks expressed the view that long-term interest rates are likely to come under renewed upward pressure in the coming months, and that loan demand is likely to strengthen. This partly explains the continued cautious approach toward liquidity.