May 10, 1977
Businessmen in the Eighth District report continued economic gains in recent months. While retail sales are only modestly improved, production activities have improved over a broad range of activities. Increased orders have been reported among a number of capital goods items. However, in response to the question concerning the impact of the President's energy proposal on capital investment, several businessmen reported that the uncertainty created by the proposal will have adverse short-run effects on capital spending. In the financial sector, growth of saving flows into thrift institutions has apparently moderated in the past couple of months. Loan demand, particularly for real estate loans, remains quite strong.
Retail sales have improved only modestly in recent weeks. A representative of a major department store did note some improvement in big ticket items. Yet other major retailers reported that April sales were only slightly above the dollar level of last year. Nevertheless, retailers quickly volunteered that prospects remain good for the rest of 1977. Inventories at the retail level are reported to be at acceptable levels. Automobile sales have continued strong, with imports registering particularly large gains.
One of the more optimistic features of the business picture has been the rapid gains in production and employment so far this year. First quarter employment figures show sizable gains in payroll employment, particularly in the manufacturing sector. Recent interviews with businessmen indicate that this higher level of activity has continued into April. A representative of a major chemical company noted that demand has remained strong for most products with the exception of a slight reduction in demand for some fibers. Representatives of other manufacturing concerns, such as apparel, paper, beer, food products, appliances and consumer tools, indicate a continuing growth in demand.
Orders and production in several capital goods industries have picked up in the past couple of months, although reporters point out that boom conditions have not developed. Orders for large electrical motors, thermostats and other control devices, industrial screws and bolts, fabricated products, railroad cars, and industrial lubricating equipment were reported to have increased recently. Representatives of the aircraft industry also reported a high level of activity. On the other hand, orders for such items as telecommunications equipment, farm equipment, and radiators for heavy equipment were reported to have remained relatively stable.
While recent gains have occurred in the capital goods industry, the general consensus among businessmen is that the President's energy proposals will have adverse effects on capital spending in the near term. It is the businessmen's view that the proposals have created more uncertainty, and hence, have increased the difficulty of predicting costs. This will tend to discourage a marginal amount of investment for the time being. The long-run effects are less clear. However, some expressed the view that the program would discourage greater production of energy. Businessmen generally believe a genuine energy problem exists and that a solution must be found. While a market solution is preferred by most of those interviewed, they were aware of the political problems that such a solution would entail.
The fear of reacceleration of inflation was again expressed by several businessmen contacted this month. They noted more rapid increases in the price indexes in recent months, the increased level of business activity, and the energy proposals as contributing to this concern. A savings and loan representative noted that the current high demand for homes and mortgage funds is partly fueled by concern of consumers that inflation would soon put house prices out of their reach. Several local bankers expressed concern about the sharply rising land prices. In particular, they feared that farmers buying land at current prices may find themselves with cash flow problems which could result in increased foreclosures.
Growth of net savings at savings and loan associations and commercial banks has apparently moderated in the past two months. Some increase in such flows, however, is expected in the near future as funds invested in maturing Treasury notes issued during the high interest rate period are attracted back into these institutions. Loan demand at banks and savings and loan associations is reported to be strong, primarily reflecting the demand for housing, other real estate, and agricultural loans. Demand for commercial loans at the larger city banks, however, has remained relatively stable. The mortgage interest rate in the St. Louis area has moved up about a quarter of one percentage point in the past month.