August 9, 1972
The vigor in the economic recovery reflected nationally in the most recent GNP figures appears to be mirrored in the sales reports of a number of Tenth District manufacturing firms as well as in comments elicited from bank directors. Increased sales were reported quite generally, and although little evidence of stockpiling is evident, inventory spending is keeping pace with recent sales improvements. Some firms reported longer delivery times to their customers, and there were scattered reports of lengthening lead times for inventory purchases from their suppliers. Despite sales increases, however, few of the firms contacted have added net to their work forces, and, as a consequence, there were a number of firms which reported noticeable productivity gains. Tenth District farm income rose more sharply than for the nation as a whole in the first six months of 1972, and income prospects for all of 1972 appear to be quite strong vis-a-vis last year. Strong loan demand continues at Tenth District banks, and, with few exceptions, District banks have experienced large increases in total deposits.
A near-consensus emerged as to improved business sales among those manufacturing firms and directors queried. Comments such as "best year on record," "up substantially," and, "business sales are beyond targets," characterized the kinds of responses received. Although several firms indicated that delivery times to their customers had lengthened as sales continued to improve, it was interesting to note that most respondents felt that they were maintaining their normal delivery times. In a few cases, firms cited improved delivery times over last year, even in the face of increased sales.
The inventory picture presented somewhat of a paradox. Most firms continue to pursue relatively conservative inventory investment behavior. Few outright attempts at stockpiling were reported; rather, inventory outlays were geared to keeping pace with the current sales picture. Although firms generally reported that stocks were readily available, some lengthening in the lead time from their suppliers was noted, particularly for such items as heavy equipment for handling materials. Presumably when lead times become further extended, and as business sales' strength gathers added momentum—an expectation held by most respondents—inventory spending may become more expansive. For the time being, however, those pressures have not yet become sufficiently persuasive to cause District firms to abandon their cautious inventory approach.
The "close-to-the-vest" inventory behavior of Tenth District firms extends to hiring behavior as well. Despite the sales increases reported, few firms have added net to their work forces. Apparently, this has not had any appreciable effect on their ability to accommodate their customers, although a sizeable minority of firms reported an increase in scheduled delivery times to their customers.
One respondent indicated that they had actually managed to reduce delivery times over last year. With business improving and new hiring being held down, it was not surprising that a number of firms reported noticeable gains in productivity. In one case, it was reported that productivity gains were responsible for an actual decline in product cost this year versus last year.
For the first six months of the year, U.S. farm income was up approximately 10 percent over the comparable year's-earlier period. However, District cash receipts from farm marketings registered a much sharper gain than the national average because of the preponderance of the livestock sector and very favorable prices. With livestock sales—principally cattle—accounting for about 80 percent of the total, District farm income for the first half was an estimated 16 percent above the comparable 1971 level. In view of the likely continuation of strong livestock prices, as well as the recent spurt in wheat prices resulting from the new trade agreement with Russia, District farm income for the year is expected to show a sharp gain over last year since the volume of farm marketings will also be higher than in 1971.
Tenth District bankers report continued strong loan demand in recent weeks. Business loan demand, which gained strength in June, continued to increase during July. Most of the increased demand is from local and regional businesses, as national accounts are still not utilizing their lines of credit.
The nature of the borrowing needs range broadly from working capital to plant expansion. Real estate and consumer installment lending also continue to be sources of strength, but signs of a leveling off of the recent upward trend in these categories are appearing. Much of the real estate lending has been for commercial purposes and for multifamily dwellings. Auto loans have been a major component in installment lending. Some banks are experiencing especially heavy demands for agricultural loans.
With few exceptions, District banks have experienced large increases in total deposits. Although the distribution of the deposit inflow between time and demand varies from bank to bank, most banks possess adequate funds to meet loan request. Continuing a recent development, Tenth District banks have not aggressively pursued large CD money.