September 15, 1976
Continued moderation in the pace of economic activity highlights reports from most Districts. Several Districts report spurts in retail sales in August, but few report signs of strengthening in manufacturing and housing. The recovery in capital goods continues at a gradual and uneven pace, and the outlook does not suggest substantial acceleration in the short-term. Concern over possible shortages and bottlenecks appears to have diminished with the slower rate of recovery. Business loan demand remains weak, and there is little indication of much revival for the next several months. Drought, especially in the corn belt, has reduced harvest prospects for corn, soybeans and cotton, suggesting possible upward price pressures for those crops and for cattle.
Most Districts report a spurt in consumer sales in August. The pickup reported in most areas was mixed, but New York was especially encouraged by "substantial momentum in recent weeks" across all product lines. New car sales were strong across the nation, but other big-ticket items and the tourist trade moved well only in some Districts. The outlook for consumer spending for the rest of the year ranged from continued steady improvement in Philadelphia, Cleveland, Chicago, and San Francisco to little change in Richmond.
Manufacturing activity continues to improve gradually and unevenly. Further strengthening is noted in Philadelphia, Atlanta, St. Louis, and Minneapolis; but Cleveland reports declines in steel, Atlanta and St. Louis declines in paper, and Dallas reports slower growth in chemicals. Philadelphia's most recent survey of manufacturers showed that two-thirds of the respondents expect continued gains in manufacturing over the next 6 months, and Minneapolis reports its latest survey showed manufacturers expect substantial gains in sales for the next three quarters.
Reports on residential construction suggest fairly strong demand for single-family housing. St. Louis notes that low vacancy rates for apartments in St. Louis and Little Rock spurred plans for new apartment projects. A special sales incentive program doubled condominium sales in Memphis. San Francisco reports a rise in home building in Southern California and Utah has stimulated lumber sales production.
Despite the moderated pace of recovery, businessmen are still optimistic over prospects. Cleveland, Philadelphia, St. Louis, and Kansas City all indicate little fear exists that the recovery will prematurely peak. Nevertheless, inventory and capital spending plans of business appear to be cautious. Richmond reports that some manufacturers still view their inventories as higher than desired. Philadelphia's survey shows manufacturers plan little addition to inventories for the next 6 months. There is still some liquidation of stocks, including copper, linerboard and corrugated paper, electrical machinery, and sheet steel.
There is still little indication of a surge in capital spending. Ample capacity and projections of only moderate growth in demand over the next year or so are among factors that are dampening spending. For capital goods producers, recovery is spotty. Perhaps most encouraging reports are those from Chicago and Cleveland, where sizable increases in machine tool business occurred in the last few months. Recent increases were also noted for heavy-duty trucks and drilling rigs. However, both Chicago and Cleveland comment that demand for machinery, such as cranes, construction machinery, and mine shovels, is still weak.
Concern over shortages appears to have diminished. Tightness in steel products virtually disappeared with the sharp drop in demand for flat-rolled products, which some producers were informally allocating a few months ago. Spot shortages may appear for a limited number of products, such as special castings, snow tires, and some chemical products, but District reports suggest no widespread bottlenecks or shortages are now apparent or in prospect.
Business loan demand remains weak and the outlook suggests little to moderate recovery over the next several months. Boston and San Francisco cite the lack of inventory building, the inability to recover return on investment, and the availability of funds from other sources among reasons for the continued sluggishness.
Drought in several parts of the country has reduced yield estimates for corn, soybeans, and cotton, according to reports from St. Louis, Kansas City, and Minneapolis. However, Kansas City reports the corn harvest is still expected to slightly exceed the record 1975 harvest. Sharp declines in supplies of soybeans from 1975 will likely cause upward price pressures, but the outlook for corn prices remains uncertain. Minneapolis, San Francisco, and Richmond report wheat, fruit crops, and flue-cured tobacco harvests are expected to range from good to excellent.