February 9, 1972
Moderate recovery, based mainly on strength in residential construction and some consumer outlays, continues to epitomize the course of the economy. Optimism prevails despite widespread slack in employment and business loan demand. The range of response from Reserve Banks is small. At best, the economy is expanding "on a broad front" and "at a steady pace." Superlatives were confined mainly to demand for consumer household durables, heavy trucks and building materials. At worse, there are "some signs of recovery," though the upturn "can barely be perceived" in the eyes of some.
Phase II has been generally accepted" and has been regarded as helpful so far in aiding competitive forces to limit price increases. Some criticisms have developed, however, which may menace its future. Numerous declines in interest rates, particularly on mortgages and consumer deposit accounts, are reported. Savings flows have held up well. While some concern was expressed over the size of the Federal deficit, most were centered on the fear that large deficits will become a fiscal "way of life," which could not be abandoned as the economy approaches full employment.
Anticipated business investment remains very strong, though the concrete signs that have already emerged are mixed. In a survey of the corporate treasurers of Fortune's 650 nonfinancial firms, the Philadelphia bank found planned spending on plant and equipment will increase by 10 percent in 1972. That bank, along with Atlanta and Chicago, found numerous incidents of plant expansions and new plants. Neither New York, Cleveland, St. Louis, San Francisco, or Boston, however, found signs of a surge in capital spending. While the high level of unused capacity is typically cited as the cause, St. Louis found sluggish capital expenditures among some firms experiencing higher operating to capacity ratios. Although a majority of firms reporting to the New York bank anticipated higher inventory outlays, Kansas City encountered "further inventory reductions, and no inventory buildup-sometimes in spite of increased sales expectations." Neither Richmond nor Boston reported systematic inventory replenishment.
There was a pickup in the pace of manufacturing orders, shipments, and backlogs in the Philadelphia, Atlanta, Richmond, and Chicago Districts. Steel companies in the Cleveland District expect first quarter shipments to outstrip last quarter's by 25 percent. Steel orders have picked up in recent weeks in Cleveland, and in Chicago they show the broadly based gain which had been expected.
Most of the increases in employment were recorded in the East. Philadelphia found that 10 percent of manufacturing firms surveyed had increased employment and 17 percent had increased average hours. Richmond noted shortages of skilled and unskilled labor. Scattered gains also occurred in upstate New York and in the Cleveland and Atlanta Districts. Elsewhere the employment picture remained bleak, either stagnating or deteriorating. Little improvement was the story in Boston, St. Louis, and most of New York, while some layoffs appeared in Dallas, Cleveland, and Minneapolis.
Continued strength in construction, primarily residential construction, and heavy output of lumber and wood products were both mentioned often. Financing proved not to be a problem, as savings flows were reported to have held high or even accelerated, while mortgage rates have either fallen, as in Richmond and Minneapolis, or downward pressure has developed, as in St. Louis. Some demand problems, resulting from overbuilding, have popped up for apartments, in Atlanta and in the Twin Cities, and in retail selling and office space, in Atlanta and in the Chicago loop district.
A fear of competition from savings and loan associations has kept commercial banks in the Atlanta, Chicago, Minneapolis, and Cleveland Districts from cutting rates paid on consumer time deposits. Several banks have indicated to the Cleveland bank "that a further reduction in the prime rate would probably force them to cut their deposit rates, regardless of whether other institutions followed. Most banks maintained that they could not successfully cut deposit rates unless they were convinced that savings and loans would follow, but they see no reason to expect savings and loans to reduce deposit rates as long as mortgage rates remain at current levels."
Variations abound in the sales performance of consumers' goods. Good gains in general retail sales materialized in San Francisco and in Richmond. Demand was vigorous for consumer household durables in Chicago, and new orders were encouraging in Boston. Strong durable goods sales in Minneapolis accompanied only modest increases in the sale of nondurables. Mixed patterns were also experienced in St. Louis, where services were strong and department store sales were weak, and in Dallas, where department store sales were up and new automobile registrations were down.
Kansas City and Richmond reported buoyancy in consumer loan demand, but they, along with Philadelphia, Chicago, Boston, and San Francisco, continued to report weak business loan demand.
The three academic respondents contacted by Boston agreed that an expansive policy should be continued until additional signs of strength appear.