April 9, 1975
This month, reports from the twelve District Banks show faint signs of optimism—not that the recession has already bottomed out, but that it is approaching bottom. The unemployment picture is grim, and there is no quick solution in sight. But inflation is abating. Retail sales are weak, and the manufacturing picture is mixed, but the inventory correction which must precede recovery is occurring. While construction activity is very soft, mortgage rates are dropping and the new tax bill provides some additional incentive to get housing going again. Agriculture is likely to be a very strong sector in the months ahead. Bank loan activity is weak throughout the country, but savings inflows should provide the industry with large amounts of lendable funds once the recovery starts.
The picture in manufacturing is a mixture of good and bad. Post- rebate auto sales have been soft for all except luxury and imported car lines. However, some progress is reported in trimming auto inventories and auto manufacturers are starting to produce some models again. In contrast, both Chicago and Cleveland report that steel production has been strong. Demand has recently begun to slacken, but in the Cleveland District, the industry is still producing to rebuild its own inventories. Kansas City reports that its area's extractive industries are quite busy. Dallas, however, notes that oil refining is now operating well below capacity as a result of declining demand for oil and a shortage of available storage capacity.
There is a consensus that the inventory adjustment process is moving along well. In manufacturing, San Francisco reports that the firms in its area are over the worst of their cutbacks, while Richmond notes that the process may continue for another 3-6 months in its District. But whether it be 3 months or 6 months, the message from all areas of the country is that progress has been significant and that production consistent with current demand is likely to begin soon. In the retail sector the signals are less uniform. In general, there have been substantial inventory reductions, but in some lines of goods more trimming will be required. Consumer durables is one example offered by Cleveland as an area which still has substantial inventories.
Whether retail sales will rebound enough to move these durables in the near future is uncertain. Retail sales in March were weak in most areas of the country. An early Easter, cold weather, and in Philadelphia a major transit strike all combined to keep sales down. Yet many Districts report that their retailers see signs of rising consumer sentiment which make them cautiously optimistic about the future.
There are also hopeful signs in other sectors of the economy. Chicago, Kansas City and San Francisco all report strength in their agricultural areas—despite the declining prices of farm products. Residential and nonresidential construction are both still weak, but the signs are hopeful. Unsold inventories of structures are said to be manageable everywhere except in the Southeast and Far West. Atlanta and San Francisco both report that builders in their region are pessimistic about the chances for a quick recovery even with the new Federal tax incentives. Elsewhere, it is expected that construction can be a positive force in turning the economy around in the months ahead. Oddly enough, tourism and leisure seem to be one of the economy's strongest sectors. Cleveland, Atlanta, Kansas City, and Minnesota all mention that industries catering to the nation's taste for recreation have been remarkably resistant to the recession. Capital expenditure plans of industry have been much less buoyant. While the process of cutting capital spending may be stabilizing, the outlook everywhere is, as Boston phrased it, "lean."
Financial institutions throughout the country are facing the same basic problem. Money is flowing into these intermediaries at a record rate, but reinvestment alternatives are limited. By default, the funds are being used to build liquidity because loan demand is very weak. Virtually every District reports declining commercial and retail loan demand.
Inflation and unemployment also conform to the "good news/bad news" theme of these reports. There is widespread optimism that inflation is being brought under control. Many examples of growing industrial competition and price cutting are cited in the District reports. There are also scattered reports of restraint in the prices of new lines of seasonal consumer goods. Relatively few shortages still remain. Kansas City forecasts that declining raw agricultural prices may enable food prices to stabilize in the second half of 1975.
The news on unemployment is less cheerful. The best that any District Bank could say is that the situation is no worse. Unemployment in most areas is still rising. It is especially severe in New England, but even some urban areas of the Midwest are feeling the pinch. Scattered reports of rehirings and fewer layoffs create an impression that, at best, the indices may soon stabilize at their current high levels.
Overall, however, the central theme of the reports is one of hope—hope that inflation is slowing, that the inventory correction is nearing completion, and that lower interest rates may stimulate housing and business investment. There is also a suggestion that the "hope" itself is very important. While the reports relay skepticism that recent tax legislation will have any significant economic impact on the economy, there is some agreement that the psychological effect of fiscal stimulation on consumer and business confidence may be very important in turning the economy around.