March 9, 1971
The qualifiedly optimistic cast to Tenth District economic activity reported on last month would again seem to be borne out on the basis of reports from Directors and conversations with nearly two dozen purchasing agents representing manufacturing, wholesale, and retail firms doing business both nationally and within the several District states. As was the case last month, construction activity was singled out as being a sector of considerable strength. In addition, steel stockpiling is making a positive contribution to inventory investment on the part of several steel-using producers among those queried. At the same time, retail trade thus far has failed to show any significant signs of buoyancy.
In a number of the District metropolitan areas, construction activity appears to be quite strong. Retail trade, on the other hand, appears to be merely holding its own over year-ago levels. However, the auto component is a soft spot in the overall sales picture, with the major impetus to auto sales being provided by small cars. In Kansas City within recent weeks, Ford Motor Company has announced some shaving of earlier first quarter scheduled production. The General Motors assembly plant in Kansas City, which turns out Buicks, Oldsmobiles, and Pontiacs, has not made any such announcement and within the industry it is acknowledged that the Pontiac Division is faced with the biggest job of rebuilding its dealer stocks-a fact that supports high activity levels for the Kansas City assembly plant.
Looking down the road to the outlook for the months ahead, one Director in the steel fabricating business reported that work was backed up and expressed optimism over the outlook for new orders. However, another Director voiced a good deal of concern over what he felt to be a general lack of consumer confidence and expressed the view that, unless a turn in confidence could be brought about, he was decidedly pessimistic about the economic outlook. Yet, this concern about recession appeared to be a minority view on the part of most respondents. In terms of the responses of the purchasing agents, what was left unsaid may well have been as significant as the information they volunteered. Last July, when these sources were queried, their overall attitudes regarding the outlook were clearly pessimistic. This time, none mentioned the danger of recession, and the consensus was that moderate and continuing improvement in economic activity was expected.
With respect to the price situation, both for the present and the near term, the responses of purchasing agents suggested little abatement of inflationary pressures. As our sample included a large number of steel users, expectations of price advances came as no surprise—particularly since a number of these firms had purchased steel under a one-year, no-price increase arrangement. At its expiration, the purchasing agents expect sizable price increases to be posted. However, even for those firms not heavily involved in steel purchasing, they report that the cost of materials continues to rise at about the same rate as in past months, with little price shaving occurring. Given this price picture, despite expectations of an improved sales picture in the months ahead, inventory investment—with the exception of steel as noted earlier—is quite conservative. The view of one purchasing agent, that "we are as low on inventories as we can safely operate," would seem representative of the respondents as a whole. Cost consciousness is the overriding consideration in inventory behavior and imports are utilized wherever cost advantages dictate. In terms of the prices which these firms charge for their own outputs, cost increases of materials are cited as the basis for present and future price increases to their customers.
On the banking scene, developments seem to corroborate events in the real sectors discussed above. Overall, loan demand remains weak, and this is especially true for some of the large national accounts. While there has been little change in business loan demand during the past month, an exception is those firms who are borrowing to finance steel stockpiling. Loan demand on the part of locally based firms appears to be relatively stronger than from national firms, and some slight pickup in loan inquiries is occurring. Some of the slack in business loan demand is being taken up by other loan categories. For example, some bankers report a rather noticeable increase in their participations from country correspondents. Also, the demand for construction loans is strong.
Deposit flows continue strong in both demand and time accounts, considering seasonal factors. The large banks have reduced rates on large CDs in line with the national market. In addition, the beginning of some easing of rates on consumer CDs is appearing. For the most part, however, banks appear to be willing to encourage deposit growth in anticipation of an improvement in business loan demand in the coming months. Some banks are now soliciting loans in an attempt to generate loan volume. In the meantime, excess funds are being placed mainly in Federal funds and other short-term liquid assets.