Beige Book: National Summary
April 12, 1977
The recovery has been solidly reestablished, according to this month's district reports. Manufacturing activity has increased, retail sales are generally good, inventories appear to be at satisfactory levels and there are signs that capital spending is picking up. Deposit inflows continue to be strong, particularly for savings accounts. Loan demand seems to be up overall, but there is considerable variation in the reports on commercial loans. Recent rainfall has eased problems in the agricultural sector, but several districts mention that this area remains a trouble spot. Farmers are caught in a profits squeeze as costs, often drought related, are rising faster than prices. The one rather negative element in this generally favorable picture comes from reports of widespread price increases.
Consumer spending continues to be strong. Almost all districts observed that retail sales are in an upward trend. Large ticket items such as appliances and furniture were singled out as moving particularly well by several Banks. (Boston, Richmond, St. Louis and Minneapolis). Sales of automobiles were reported to be healthy by Cleveland and Minneapolis, although in New York's district they are lagging last year. All three Banks observed that standard and intermediate size cars are in much greater demand than compacts. When mentioned, inventories were said to be within desired limits. Boston expressed concern that the tax rebate might lead to an excessive inventory buildup as a result of temporarily higher sales.
Manufacturing output and employment have picked up. Surveys by Philadelphia, Richmond and Chicago indicated that new orders and shipments are higher for many manufacturers. In both Philadelphia and Richmond this improvement has caused increases in both employment and the workweek. Cleveland, St. Louis and Minneapolis also expressed optimism about business prospects. Among the industries which were observed to have made significant gains in recent months were primary metals, especially steel, textiles and chemicals. Manufacturers of apparel and furniture were reported to be doing well in some districts but not in others.
The outlook for capital spending remains confused but there are signs of an improvement. Producers of capital goods, particularly small items, are experiencing increased interest in their products, but there seems a general reluctance to undertake any large-scale expansions. Increases in the demand for component capital goods like bearings, castings and engines were reported by Boston, Cleveland, Chicago and St. Louis. New York and Chicago observed that steel sales were strengthening. Boston and San Francisco reported that sales of aircraft and aircraft equipment were expected to improve; and Cleveland and Chicago noted a strengthening in orders for equipment used by the lumber industry. St. Louis indicated that sales of construction equipment have increased but Cleveland commented that these were still weak in its district. Despite these indications that capital spending is picking up, several Banks expressed dissatisfaction with the level of investment in their districts. Boston and Richmond noted that there was little interest in their regions in expanding capacity, New York reported that capital spending was recovering slowly. Businessmen in its district are said to feel strongly that investment is being discouraged by government regulations. Environmental regulations were singled out. This view was echoed by Chicago and St. Louis: while capital spending is picking up, government regulations are hindering it. Similar sentiments were expressed by Kansas City. On the more positive side, approximately 40 percent of the firms responding to Philadelphia's survey plan increased capital spending. Kansas City reported that investment in the energy field has been strong and will increase if there is a shift from natural gas to coal. According to Dallas, oil drilling activity is continuing to rise and the demand for oil field equipment is climbing steadily.
Recent rains have relieved drought conditions in the west, but several districts remain very concerned about low crop prices and drought-induced cost increases. Chicago and St. Louis reported that soil moisture conditions are considerably improved in their districts and planting is proceeding normally. Minneapolis, Kansas City, Dallas and San Francisco, on the other hand, reported that while drought conditions have been alleviated considerably more moisture is needed. All are concerned about depressed product prices, particularly for wheat and cattle. These prices in combination with rising costs have reduced farm income and except in San Francisco's district have resulted in heavy borrowing at rural banks.
Financial developments seem generally consistent with other sectors of the economy. Loan demand appears to have increased with real estate and consumer loans accounting for most of the gain. Richmond, Kansas City and San Francisco noted increases in commercial loan demand; Boston, Philadelphia and St. Louis observed that it was flat or varied throughout the district and Dallas reported a decrease. As mentioned above, agricultural loans have increased in parts of the west. Philadelphia reported that banks are receiving inquiries about fixed rate loans and that one is offering high quality customers loans at 8 percent with an outside maturity of five years and no balance requirement. Kansas City noted that in Oklahoma a number of banks had raised their local prime lending rate from 6 3/4 to 7 percent because of a strong demand for energy-related loans. Deposit inflows to savings accounts and savings and loan associations are said to be strong, although they have slowed recently in St. Louis and Minneapolis.
The ominous note in this month's reports is the widespread price increases observed in several districts. All the eastern banks—Boston, New York, Philadelphia, Cleveland, Richmond and Atlanta—noted that manufacturing prices are increasing. Over half of the respondents to Philadelphia's survey reported higher materials prices. Price increases in metals appear to be holding according to Boston and Cleveland, although Cleveland also noted that producers of stainless steel withdrew increases announced earlier this month. Concerns about inflation were apparently quite common among respondents for New York and Boston, although the academic economists consulted by Boston believe that recent spurts in prices are temporary and that the underlying inflation rate is still between 5 and 6 percent.