April 10, 1974
The general impression conveyed by this month's Red Book is that the worst of the economic slowdown appears to be over, and that the economic outlook has improved. Directors throughout the System, along with other businessmen and bankers, are generally more optimistic (or less pessimistic) than a month or two ago. The improvement in attitudes is widely attributed to the lifting of the oil embargo. Moreover, indications are that business in the energy-affected sectors was not as bad as expected, or at least the declines have bottomed out in areas such as auto sales, tourism, and housing. Retail sales are showing signs of a pickup, while capital spending remains very strong. Severe shortages of materials and long delivery times continue to hamper operations in many industries. Residential construction is characterized as having stopped declining, but no solid upswing is yet in progress. Agricultural prospects are viewed as good in most areas, although shortages of certain production inputs are a problem. In addition, producers of meat animals and poultry are incurring severe losses as a result of recent price declines. Business loan demand has surged in recent weeks.
In the consumer sector, there are signs that the most depressed areas, such as new cars, large used cars, and spending for tourism and recreation, are beginning to improve. Districts commenting on the auto market indicate that the decline has ended. Auto dealers are becoming more optimistic as sales of luxury-type and large-sized new and used cars show some pickup. Tourism and recreational spending, which had been dampened by the gasoline situation (and poor weather in some ski areas), is beginning to recover. Nonautomotive retail trade is generally described as having been soft during most of the first quarter. Pre-Easter sales, however, appear to be better than expected by retailers in some Districts. Minneapolis attributes good first quarter sales partly to the high level of farm income. On the other hand, Richmond says that consumers are becoming more cautious about discretionary spending, while Cleveland suggests that it is too early to conclude whether a significant pickup in general merchandise trade is underway.
Business fixed investment continues to be an important source of strength. Atlanta notes that the volume of plant announcements is once again on the upswing and emphasizes substantial spending for pollution control. Chicago sees no letup in demand for all types of capital goods, and adds that the farm equipment industry will be hard pressed to increase shipments over last year because output is at capacity and finished goods inventories are down sharply. Cleveland also reports across-the-board strength in capital goods, particularly machine tools. St. Louis, San Francisco, and Philadelphia all see signs of further strength in capital spending.
Shortages and long delivery time continue to be serious economic problems, although of less importance than inflation. Almost every District's report includes some comment on the difficulties in obtaining materials and parts and, in some cases, skilled labor and transportation. Shortages are affecting not only manufacturing, but also mining, construction, and agriculture. There are scattered indications that selective decontrols have helped alleviate tight supply conditions in certain instances. But in some cases the situation has grown worse. Chicago, Cleveland, and Dallas, for example, all emphasize increasingly tight conditions in the steel industry, partly because of rapidly dwindling coal supplies.
Residential construction seems to have bottomed out, but no District reports a solid recovery underway. In fact, there is concern (variously expressed by Boston, Chicago, Cleveland, St. Louis, and San Francisco) that rising interest rates and potential disintermediation may adversely affect the recovery of home-building. St. Louis reports that S&Ls already have begun to lose deposits in significant amounts.
In the agricultural sector, prospects for crops are generally good. Dallas, however, notes that the winter wheat crop in Texas has been affected by drought and is expected to be half of last year's harvest. Shortages of agricultural inputs are disrupting production in the Southwest. Chicago and San Francisco also mention problems regarding shortages of inputs such as fertilizer and machinery. Prospects do not appear to be particularly good for cattle, hogs, and poultry. Dallas, Kansas City, Minneapolis, and St. Louis each express concern over the cost-price squeeze currently affecting many producers. Sharp losses due to recent price declines in cattle, hogs, and poultry are reducing the incentive of producers to expand their output.
In the banking sector, business loan demand has risen sharply in recent weeks. Kansas City and New York attribute some of the strength to borrowing in anticipation of higher prices. New York adds that the recent rise in money market rates has caused a shift from the commercial paper market to bank credit.