Beige Book: National Summary
June 16, 1976
Continuing expansion at uneven rates characterizes this month's economic reports. Although capacity utilization is high in several major industries, shortages of raw materials, components, and finished goods remain the exception. The pace of consumer spending slackened somewhat in most areas in late April and May. However, opinion varies widely concerning the implications of this tendency. A positive outlook persists but is heavily tempered by caution in inventory building and capacity expansion. Price behavior appears fairly normal for a cyclical expansion; increases are primarily in sectors where spot shortages or a need to adjust to rising costs exist. Demand for business loans is flat or increasing slightly. Adverse weather conditions have affected yields of several major crops.
Major industries report generally high capacity utilization rates. Yet, capacity is regarded as adequate for the next 6 to 12 months in almost all industries. Shortages are expected to be temporary in most cases or confined to a relatively limited sector affected by unique conditions. With some exceptions, and a caveat concerning comparability of reports, high utilization rates are found in paper (90 to 100 percent), wood products, steel (80 to 90 percent), textiles (85 to 100 percent), apparel, chemicals (80 to 100 percent), oil refining (85 to 90 percent), and automobiles (80 to 100 percent). Low utilization rates are confined to furniture, aluminum, machine tools, and agricultural chemicals.
In each industry, however, a more meaningful impression is obtained by differentiating between particular products. In the steel industry, for example, flat-rolled steel used in consumer durable goods is in fairly tight supply, as are foundry products such as castings. Abundant capacity and supplies exist of other products used for capital goods and heavy construction.
Current shortages are few, across the board, and generally reflect special conditions. Foundry products, for example, are frequently mentioned as an area of potential shortages. Both Chicago and Kansas City note that closing of foundries because of EPA regulations is reducing capacity in this industry. Other facilities which are similarly affected are coke ovens and forging operations. Several responses indicate that coke supplies are a potential raw material problem for steel producers.
The primary current bottleneck in most Districts is the supply of natural gas to users on interruptible contracts. Uncertainty concerning natural gas supplies is widespread and has resulted in substantial capital investment in stand-by energy systems. Concern also exists about the reliability of natural gas liquids used as feedstocks in chemical processes.
Slackening consumer spending, beginning in about mid-April, is noted in a number of reports. In most areas, durable goods sales, especially automobiles, remain strong; nondurables, particularly apparel and department store sales, have weakened. Explanations include cool weather, smaller tax refunds, a shift from nondurable to durable purchases, as well as a return to a sustainable growth rate. Boston reports some retailers are cutting back on future commitments, while Philadelphia expects such action to follow, should the present tendency be confirmed. Dallas reports that the fall apparel market, held in May, was weak for women's and some men's clothing lines. Richmond and Philadelphia note continued optimism among most retailers; Cleveland finds that some remain positive, but one director fears a spending decline serious enough to "trigger a double-bottom recession." Each of these three Districts notes an excessive level of retail inventories.
The inventory condition of manufacturers varies greatly. Dallas finds factory inventories manageable, and Kansas City notes attempts by many firms to retain a lean inventory position. Philadelphia finds a decline in inventories of manufacturers for the first time since January, but Chicago reports cautious inventory building. One-third of the manufacturers in the Richmond District report an excessive inventory level, with most others indicating satisfaction with their condition.
Capital spending remains static. Boston finds a disappointing demand for machine tools. Chicago notes an improvement in capital goods orders but expects no uptrend until late in 1976. Cleveland expects little gain in the strength of fixed investment during the second half. An exception exists in the case of capital investment in agriculture, where strength is noted by Minneapolis and Chicago. New York, Chicago, Kansas City, and Cleveland find environmental regulations to be a source of uncertainty and a major disincentive to capacity expansion.
Price behavior is consistent with a normal cyclical pattern. Spot shortages have caused sporadic price increases, as in newsprint; but in cases such as heavy crude oil, chemical fertilizer, and carpet yarn, oversupplies are causing price shading. Prices are generally expected to behave normally within the context of a cyclical recovery.
Loan demand continues to increase slowly. Business loans have inched up," according to St. Louis, Richmond, and Kansas City but have not increased in Philadelphia. Gains in consumer loans are widespread. St. Louis reports moderating savings inflows. Kansas City finds some banks beginning to rebuild certificates of deposit.
Minneapolis reports that the recent drought will almost certainly curtail crop yields in Minnesota and has now spread westward into the Dakotas. The main impact is expected on prices of barley, oats, flax, and durum wheat. San Francisco reports weak demand, low prices, and surpluses of beans, potatoes, and wheat. However, a possible beef shortage is foreseen for late 1976. Richmond notes a sharp decline in the winter wheat crop and freeze damage to the peach crop.