Beige Book: National Summary
January 14, 1976
This month's Red Book reports suggest that economic activity is continuing to expand, but that the upward impetus is narrowly based. The most optimistic sector is retail trade, where Christmas sales as well as automobile sales in several Districts were stronger than expected. However, only a modest recovery in inventory spending is anticipated as retailers maintain tight inventory control and as some durable manufacturers continue to trim excessive stocks. Caution characterizes the capital spending outlook, with weakness expected in some sizable industries. Led by activity in the single- family area, construction is generally expected to continue its modest rate of recovery. Although most respondents did not foresee any near-term acceleration in inflation, some concern was expressed over construction costs and the outcome of the heavier bargaining calendar in 1976. One favorable aspect of the price outlook comes from the agricultural sector where there are generally expected to be increased supplies of pork and beef. Loan demand at commercial banks is generally expected to remain sluggish.
Strong gains in consumer spending were reported throughout the twelve Districts. Sales far exceeded expectations in several districts including New York, Atlanta, Chicago, Minneapolis, and Dallas. Very strong sales were reported even in some areas in the Boston and Cleveland districts where high unemployment was expected to have adverse effects on consumer buying. Some reluctance toward the purchase of "big-ticket" items was reported in New York and Richmond, but Philadelphia, Cleveland, and Minneapolis all reported increases in this category. Auto sales were surprisingly strong in Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco, while tourism was thriving in both the Atlanta and the Minneapolis Districts.
While the brisk pace of retail activity has significantly pared stocks, some progress remains to be made in trimming manufacturing inventories. For example, respondents from the Atlanta, Boston, and Chicago Districts reported that Christmas sales were so strong that stocks are now fairly low. However, retailers and purchasing managers in the Minneapolis and Kansas City Districts foresaw fears of overstocking as motivating tight inventory control policies. At the manufacturing level, respondents in the Philadelphia and Richmond Districts noted that durable manufacturing inventory liquidation had yet to be completed. Purchasing agents from the Kansas City District suggested that the rather modest outlook for inflation for most products precluded much in the way of speculative buildups. In view of these considerations, the typical outlook was for only a moderate first-half upturn in inventory spending.
A large measure of caution seems to surround the prospects for a recovery in capital spending in 1976. For example, respondents in the New York and Chicago Districts among others did not foresee more than a modest recovery until at least the second half of the year. One of the problems emphasized in the Dallas and Cleveland Districts was the considerable proportion of capital expenditures represented by pollution abatement requirements in the petroleum refining and steel industries. In the energy sector, Dallas respondents report that fixed investment in the drilling area remains strong. However, investment in petroleum refining is expected to be below last year's level reflecting, in part, refiners' expectations that higher petroleum costs will result in a long-term flattening out in demand for many refinery products. In the San Francisco District another sizable area of concern was the aircraft industry where a decline in new orders for commercial jets has prompted a significant cutback in plant and equipment expenditures for 1976.
Construction and real estate activity remain generally depressed, although there were a few signs of strengthening. Atlanta and Minneapolis both report continued sluggishness in new residential construction but increased interest in the existing housing stock. San Francisco reports that the anticipated improvement in residential construction has not yet materialized. St. Louis presents a somewhat brighter picture, reporting a strengthening in single-family dwellings as well as in non-residential construction. Chicago and Dallas also report a continued improvement in residential construction activity. But commercial construction, with few exceptions, is still weak. Also, a large number of condominiums remain vacant in the Atlanta District, and the construction of
Reports from agricultural areas are generally favorable. Richmond, Atlanta, Minneapolis, and Kansas City all expect increases in hog production and pork supplies. Improved conditions for cattle producers are anticipated in the Atlanta District as they are in Minneapolis, Kansas City, and San Francisco. Only the Dallas District is somewhat pessimistic, expecting placements of fed cattle to fall as their prices continue declining. Minneapolis reports cash farm receipts were up from the first half of the year, led by record prices for dairy products. Cash receipts for grain, however, were below 1974 levels.
The widespread remaining slack in manufacturing coupled with the generally expected near-term sluggishness of capital spending and rather modest inventory rebuilding were often mentioned as factors holding down inflation at least over the first half of the year. Nevertheless, the possibility of uncomfortably large price increases in some sectors was recognized by some respondents. For example, a Cleveland director reported sharply rising costs for concrete and lumber, while one of the nation's largest homebuilders expected a 10 percent rise in new home prices in 1976. Respondents in the Cleveland District also reported that the October 1 rise in steel prices appeared to be sticking fairly well, although divergent views were expressed elsewhere on the firmness of the aluminum price increase. Some concern was voiced over the possible price impact of the potential terms of settlements of major wage negotiations in 1976.
A rather broad consensus emerged that loan demand was weak and that no strong near-term recovery was in the offing. A number of respondents cited tighter inventory control policies as a major reason for the prospective sluggishness in loan demand. Reflecting this outlook, bankers in the Philadelphia District expected the prime rate to edge down somewhat further before starting to move up gradually beginning in the second quarter. Bankers from the Boston and San Francisco Districts, among others, emphasized the much increased concern over quality of credit. With respect to bank earnings, these bankers foresaw a weak profit picture for 1976.