September 15, 1971
The latest Red Book reports from the District Banks are on the whole more bullish regarding the economic outlook than the reports of recent months. The President's new economic program has been, in general, very well received throughout the country. To be sure, with the possible exception of the temporary "freeze," which appears to have been almost fully accepted by all segments of the economy, the actual impact of the program on economic activity is as yet barely discernible. Consumer spending was already on the rise during the first half of August, before the announcement of the program, and it was generally felt that, apart from some marginal situations, the proposed business investment tax credit is not likely to significantly stimulate capital outlays so long as the rate of utilization of existing capacity remains low. Nevertheless, the program seems, at the very least, to have had a beneficial psychological impact, halting the erosion in confidence that had been developing in previous months. Reports of the effect of the program on domestic business firms' demand for bank credit were mixed.
A rise in consumer spending during August was reported by most District Banks. The St. Louis Bank noted a continued moderate upward movement in retail sales in most major centers of that District, with sales in Memphis rising sharply in recent days. In the Chicago District, sales of domestically produced major appliances were running above last year's level, with the margin of gain widening. A pickup in retail sales was also reported by the Richmond and New York Banks, and retailers in the latter District are looking forward to the Christmas season with optimism.
Residential construction has been continuing at a high level in a number of Districts. This development is having a favorable effect on several industries. The San Francisco Bank mentioned the lumber industry in particular, while the Chicago and St. Louis Banks pointed to home furnishing and appliance manufacturers as well as building supply industries.
Near-term prospects for increased business outlays for plant and equipment, however, are not regarded as particularly bright, although respondents in several Districts look for some improvement in the long run. The main deterrent to a pickup in such outlays at this time is, of course, the relatively low rate of utilization of existing facilities. The Richmond Bank, for example, reports that the overwhelming majority of manufacturers contacted believe that their current plant and equipment is adequate, or more than adequate. Most respondent firms in the St. Louis District indicate they are operating at less than capacity and have no immediate plans for plant expansion. In the New York District there are also doubts about any near-term stimulus from the proposed investment tax credit. Businessmen may, in general, be more optimistic than previously, but they seem to be adopting a "wait-and-see" attitude. While they are perhaps reexamining marginal investment projects more closely, they also seem to be waiting for projected sale increases to materialize.
Three Districts reported some pickup in loan demand by domestic business firms that may not have been directly attributable to recent international developments. Some of the bankers contacted in a special System survey by the New York and Minneapolis Banks attributed the increase partly to inventory building. The other seven Federal Reserve Banks that reported on their survey results indicated domestic demand for business loans had remained "weak" or "unchanged". Indeed, Kansas City commented that "the deterioration noted in July appears to have continued into late August", and Richmond observed that not only has there been "no evidence of unusual strength in business loan demand" but "pressure for business loan commitments appears to have abated" since the wage-price freeze. Four Districts commented on bankers' expectations regarding business loan demands over the next few months, noting that these expectations were generally on the "hopeful" side. Interestingly, two of these Districts, Philadelphia and Minneapolis, were among those reporting some recent strengthening. The other two were St. Louis and Dallas.