February 11, 1976
Ninth District directors are becoming more optimistic that the current recovery will be sustained through the remainder of 1976. Midway through the first quarter, consumer spending is proceeding at a strong pace. Business investment spending, though currently not very robust, is expected to gain momentum by the second half. Fears of inflation have subsided somewhat, though several directors anticipate slightly higher inflation rates later in the year. However, the lessening concerns over inflation appear to be having little effect in moderating overall wage demands. Farm income in the District is running below year-earlier levels, and inventory financing of grain is up in rural areas. Both rural and city banks appear to have adequate liquidity to meet anticipated loan demands in coming months.
Directors confirm that consumer spending in this District was strong in the fourth quarter, and they say that current spending is proceeding at a good pace. A North Dakota director says that January retail sales in his area were very good; and a Minnesota director expects consumer spending in 1976 to average about 10 percent above 1975. Automobiles continue to sell well and one director reported exceptional strength in soft goods. Despite sales gains, retailers continue to exercise tight control over inventories, with any buildup generally being kept in line with increases in sales volume.
Directors foresee increases in aggregate investment spending through the remainder of the coming year. On balance, the directors feel that advances in investment spending in 1976 will exceed the 5.5 percent gain registered in the recent Department of Commerce Expectations Survey. However, one director, taking a more cautious view, expects that current excess capacity in the industrial sector will help keep the increase in spending in the range of 5 to 6 percent.
Currently, though optimism is increasing in the business community, most firms are still being slow to commit themselves to new capital projects. However, a more rapid advance in investment spending is foreseen for the second half, and one director anticipates second-half investment spending substantially above 1975 levels.
At the micro level, patterns of investment spending are mixed. A Montana director observes that farm machinery is still moving at a brisk pace, but a North Dakota director expects farm machinery demand to be down in the coming year due to the heavy investments in that industry in recent years. A Michigan director said that investment spending in his region will be off due to depressed copper prices and an inventory overhang. However, spending on coal development and associated industries will likely be up through 1976.
Directors feel that investment spending will not generate a major increase in bank loan demand. Any increases which do occur in loan demand are expected to be modest, at least through the first half. Two directors say that businesses will be looking more to internal cash flows to help finance new investments.
Ninth District directors generally feel that fears of inflation have subsided somewhat. Two directors cite declines in the prices of some food items as one reason to expect only modest inflationary pressures in coming months. On the other hand, price increases for heavy goods and rate increases for utilities will continue to exert inflationary pressures on the District's economy. In addition, several directors anticipate a somewhat faster pace of inflation in the second half than in the first half.
Few directors feel that the slowdown in inflation will have much effect in moderating wage demands in 1976, though there are some exceptions. For instance, a North Dakota director feels that recent wage settlements in that state have been tempered by a slowdown in inflation, and a Minnesota director reports that teachers in his area appear satisfied with wage gains in the 5 to 7 percent range. Nonetheless, most directors feel that workers will be seeking large wage increases in 1976, not so much to hedge against future inflation as to recoup losses from past inflation.
According to bankers responding to the latest Agricultural Credit Conditions Survey, farm earnings in the District are moderating as producers remain reluctant to sell grain on a bearish market. The rate of debt repayment is slow, and farmers are seeking more inventory financing from rural banks. The refinancing of farm debt is up, and rural bankers expect refinancing needs to be fairly strong through the first quarter of 1976. Nevertheless, banks appeared to have sufficient funds to meet credit needs of farmers; few agricultural banks were forced to turn down farm loans in the last quarter because of a fund shortage, and a high proportion of banks are still seeking new farm loan accounts.