Reports from a sample of businessmen are slightly more optimistic regarding the economic outlook than a month ago. Christmas sales were generally above expectations, and the higher sales levels are continuing into the new year. Although still indicating that they are reducing the rate of investment and holding employees constant, larger manufacturing firms expect some gains in demand and output this year. Home builders point to the moderate gains already achieved and expect this higher rate to hold through the current year. Belt tightening of planned capital investment continues to prevail with respect to both production capacity and inventory accumulation. Respondents believe that the current high rate of unemployment and substantial inflation will continue throughout most of the current year.

Although customers began their Christmas shopping later than normal in the Eighth District, leading retail chains report sales to be well above expected and year earlier levels as Christmas approached, and the higher sales levels have been maintained into 1971. This increase in retail activity over expected levels in part reflects the depressed conditions in St. Louis for much of 1970; the extended General Motors and Teamsters strikes had a depressing influence on business during a large part of the year.

Cautious optimism as to the business outlook is expressed by most of the manufacturing firms. A period of general retrenchment, however, continues as no major expansion plans are in prospect, and hiring of new employees is generally limited to replacement personnel. New capital investment plans are generally restricted to labor saving equipment and the replacement of obsolete facilities.

Home building has already turned up in the St. Louis area, and this industry expects new construction in 1971 to average 15 per cent above the relatively low level of 1970. Last year the number of new housing units constructed was down 55 per cent from a year earlier, and expenditures for new homes were down 35 per cent. Home builders point to the lower interest rates as an optimistic sign, but they also observe that the higher rate of unemployment tends to retard demand for new homes.

Financial institutions report increasing liquidity, and some express concern at the declining demand for credit while rates paid savers remain generally stable. One banker referred to this tendency as the prospective profit squeeze in banking. Banks report a rising number of checks drawn against insufficient funds and more past due business loans.

Agriculture in the Eighth District was adversely affected by poor harvesting weather during the autumn months. Cotton production was reduced substantially by adverse weather, and the cotton harvested was of below average quality, causing a further reduction in returns to cotton farmers. Returns to livestock and poultry production have been relatively low in recent months, while rice and soybean producers have fared quite well.

The continuing inflation despite the slowdown in business activity is of concern to most businessmen interviewed, and many are planning further upward price adjustments. There is general agreement, however, that moderate policies should prevail with respect to total demand, and that the fight against inflation should continue.