June 2, 1971
Judging from the comments of bank directors and businessmen, sentiments about current and prospective economic activity have changed little over the last month. Respondents to our industrial expectations survey still foresee essentially the same sales gains as they did three months ago. Some bank directors are not quite as optimistic regarding consumer spending as they were last month. Almost without exception, the directors of this Bank are expecting the prime rate to rise soon and interest rates in general to move to higher levels.
Responses to our latest industrial expectations survey, taken in late April and early May, indicate that District businessmen have not significantly changed their sales expectations since early this year.
Sales during the first half of 1971 are still expected to about equal those of a year ago before rising appreciably above year-earlier levels during the second half. Most of the increase should occur in the durable goods sector, with sales rising 8.2 and 8.6 percent above year-earlier levels during the third and fourth quarters, respectively. Nondurable goods sales are expected to increase by about 5 percent during the second half of this year.
The survey also showed that some stockpiling may be occurring in anticipation of a possible steel strike later this summer. Respondents in the fabricated metals and transportation industries reported that their inventories were higher than would be normally needed for current and prospective sales levels.
The recent optimism regarding retail sales in this District seems to have dampened over the last month, although some directors reported that sales in their areas were still rising. A number of them felt that retail sales had slowed in recent weeks, primarily because of local conditions. However, one South Dakota director felt that farm machinery sales were down because buyers were not able to obtain bank financing. According to him, bankers have been experiencing some repayment problems due to the relatively poor agricultural income situation and, thus, have adopted more selective lending practices.
On the other hand, one bank director who had recently attended a meeting which included retailers from throughout the nation reported that they had experienced substantial sales increases during April and, thus, were considerably more optimistic than they had been earlier this year. Although not as dramatic, their sales gains in May have also been appreciable. He also mentioned, however, that the strongest areas were in apparel—particularly fashion items and that hard goods sales were not as robust.
Aside from the surplus in farm machinery, retail inventories in the District seem to be in "pretty good shape." Retailers throughout the District have been watching their inventories very closely over the last year and so have not been trapped with too many goods on the shelves. In addition, retailers (especially apparel merchandisers) have been conservative in their purchasing because of the uncertainty in clothing styles. No strong recovery in purchases for inventories is expected. The directors of this Bank on the whole agree that the prime rate, as well as loan rates generally, will rise in the near future. Leading to this conclusion were such factors as the recent rise in Federal funds rates and the continuing heavy demand for business loans.
Although District banks are still experiencing strong savings inflows, they are having no trouble finding loan customers. One director felt that most of the people he knows believe "now is the time to borrow because rates are going up."
Mortgage rates in the Twin Cities have remained relatively stable over the past month, but in the past few days some lenders have been making slight adjustments in discount points on government-insured mortgages. Whereas discount points for prime mortgages were down to 1 1/2 points a week ago, they now have been raised to 2 points.