June 15, 1977
The economy continues on a firm upward path, according to this month's district comments. Retail sales in general remain good, with the sales of autos and other durables showing particular strength. Factory orders continue to rise, and a building up of business inventories could well be underway. At the same time, the capital spending picture, while not exuberant, has brightened somewhat. Residential construction remains very strong, but little evidence of speculation is reported. The outlook for the 1977 harvest is, on balance, favorable. In the financial area, the demand for consumer and mortgage credit continues relatively strong, that for business loans generally weak.
Consumer spending generally continues to support the recovery, although several districts report a mixed performance. Chicago characterizes retail sales in its district as excellent, with sales of appliances, domestic large cars and imported small cars especially strong. Dallas reports department store sales as running about 14 percent above year-earlier levels, with durable goods selling especially well and retailers looking for a steady increase for the rest of the year. Similarly, solid gains in consumer spending were also reported in the New York, Minneapolis and San Francisco districts. And Boston indicates that, after rather disappointing performance in early May, retail sales gained considerable strength in the second half of the month. On the more restrained side, Cleveland reports a recent flattening in retail sales, although new car sales remain strong if off somewhat from the March and April pace. Richmond finds little change in total sales during May, but some decline in sales of big ticket items, while Atlanta reports that retail sales have turned spotty, although car sales remain robust. Philadelphia finds the pace of sales mixed, but generally below the expectation of retailers.
Housing construction continues very strong, in virtually all districts, and sharp increases in real estate prices, including farmland, are widely noted. Against this background, district reports address themselves to the question of the possible role of speculation in the current real estate market. With few exceptions, little or no evidence has been uncovered that speculation has been a significant factor in that market. Comments from the San Francisco district in general explain the sharp rise in housing prices as the result of a surge of post-recession demand confronting a housing supply reduced by the preceding recession. The influence of speculation, however, is reported in Southern California, where speculators may account for an estimated 20 percent of some markets. Scattered instances of possible speculation are also noted by Philadelphia and Atlanta.
Business sales and manufacturing activity continue strong. Manufacturing respondents to the Philadelphia monthly survey report that new orders and shipments are higher in June, and further increases are expected. Similar sentiments were echoed by respondents in the Richmond district survey. St. Louis reports that manufacturing activity continues to register gains in sales and orders over a wide range of industries, including the chemical, home building products, and commercial aircraft industries. Dallas mentions further gains in manufacturing output, and Minneapolis reports that district manufacturing activity remains quite strong, with manufacturers responding to its latest survey looking for year-over-year increase in sales of about 15 percent in the first half of 1977.
Against this background, a period of modest inventory rebuilding may be underway. Manufacturers in the Philadelphia district thus project an increase in inventories over the balance of the year, and Richmond reports that manufacturers? inventories, after remaining flat for several months, are once again moving upward. San Francisco reports that some industries, including aerospace and electronics, are cautiously bringing inventories back to "normal" levels to support higher production levels and sales. Minneapolis' manufacturers in general feel inventories to be in line with expected sales, as are department store inventories in the Dallas district. Similarly, Chicago reports inventories of some items, mainly hard goods, to be below levels necessary to maximize sales. Growing shortages of drilling equipment are mentioned by Dallas and Atlanta.
Reflecting the continued strength in manufacturing activity, improvements in the labor market are reported by several Banks, including Philadelphia, Richmond, Chicago and Minneapolis. Growing shortages of certain types of skilled workers are mentioned by St. Louis (carpenters) and Dallas and Atlanta (oil drillers).
Assessments of business capital spending generally remain cautious, but on balance have become somewhat brighter. Among others, Boston reports increased orders at machine tool manufacturers, as well as an expansion in the investment plans of New England firms themselves. Capital good producers in the Cleveland district expect capital spending in 1977 to at least match that projected by the latest Department of Commerce survey, in some instance to exceed it. Chicago reports increased steel shipments to capital equipment producers as well as a "well grounded" upswing in spending on such equipment, although the strength of demand varies greatly among industries, with construction leading the way. St. Louis reports strong sales of machine tools, welding and cutting equipment, and commercial aircraft. However, the proportion of manufacturers in the Philadelphia survey anticipating increases in their capital spending over the next six months declined somewhat. Several Banks including Cleveland, Minneapolis and New York, mentioned the uncertainties surrounding the energy program and/or environmental controls as factors inhibiting capital outlays.
Reports from the agricultural areas are generally good. Kansas City reports that the wheat harvest now underway in that district is expected to top the 1976 harvest by 15 percent, while Minneapolis indicates that recent rains have eased concerns about the draught. San Francisco, on the other hand, reports that the agricultural sector in that district seems "resigned" to a less than good year, while weather has adversely affected some crops in the Atlantic district.