October 11, 1977
This month's REDBOOK reports suggest an economy still expanding, but at a slower pace than in the first half of the year. Various districts note a contrast between business caution and consumer confidence. Progress is uneven, with softness noted in demand for steel, nonferrous metals, farm equipment, and textiles. Capital spending continues to rise overall, but not in a manner approaching the 1973-74 boom. Except for some building materials and certain skills, few shortages are apparent. Price inflation is less commented upon, but still pervasive. Inventories are not generally excessive, but managements are keeping accumulations under close control. Retail sales are described as "strong" in most districts. Demand for housing is somewhat less intense, while commercial and industrial construction is improving gradually. The energy supply picture is surprisingly favorable. Large crops are expected, but heavy rains have slowed harvests. Demand for consumer loans and mortgages remains vigorous, in contrast to demand for business loans which remains moderate.
Most districts report some slowing in the growth of employment, output, or other measures. Exceptions are Minneapolis where "activity is quite strong," Dallas where energy exploration is booming, and San Francisco where the economy is "healthy and growing," despite some "weak spots." Strong retail sales—often contrasted with business investment—accompanied by substantial use of consumer credit are described by New York, Philadelphia, Richmond, Atlanta, Chicago, and St. Louis. The particular types of goods that were selling especially well varied by district.
New York, Cleveland, and Chicago commented on recently announced cutbacks in the steel industry. Reductions in output and employment are mainly scheduled for older high-cost plants, but there is increasing concern about the viability of the whole industry and the effect on morale in other sectors. Chicago emphasizes also the competitive problems of the largest US color TV producer, and lower sales of farm equipment. San Francisco cites weakness in demand for nonferrous metals, especially copper. New York and Richmond tell of declining backlogs for textiles with output cuts expected.
Boston finds some concern about retail inventories being too high. Richmond says that one-third of manufacturers report materials inventories but retail stocks are "in line." Philadelphia sees no change in inventories. Atlanta, St. Louis, Minneapolis, and San Francisco find inventories held in balance by careful management. In general, excessive inventories are confined to the manufacturing sector, and, except for textiles, the problems do not appear to be substantial. Stringencies of supplies of insulation and various other building materials are hindering home building in Atlanta, Chicago, and Kansas City, and probably in other regions as well.
Most districts report the capital spending picture to be mixed, but that the general trend is upward. Cleveland says machine tool orders are up sharply after a "summer sag." Demand for excavators and cranes is good, but equipment for steel mills, nonferrous metals, chemical plants, and oil refineries is slow. An engineering design firm's backlog has been "flat" for several months. Atlanta and Dallas emphasize great strength in oil and gas exploration with drilling rigs and skilled workers in short supply. Minneapolis says food industry outlays are up. Chicago comments on huge outlays required to manufacture smaller cars. San Francisco tells of substantial orders for new commercial jet aircraft.
Although markets for most industrial and consumer goods are described as highly competitive, the "underlying" 6 percent inflation rate is probably unaffected. Chicago reports 60 percent of firms paying higher prices, Richmond 50 percent, and Philadelphia 27 percent. These proportions have been higher in the past but they are still large, and very few firms are paying lower prices on average.
The supply of gas and oil for the winter appears to be shaping up much better than had been expected last spring. Cleveland and Chicago say that large gas transmission companies are taking on new industrial and residential customers, for the first time in years in the case of Ohio. New gas supplies, conservation, and shifts to alternative fuels are responsible. Atlanta also sees gas supplies as more adequate.
The iron ore strike and the dockworkers' strike are not baying a significant effect, at least as yet. Cleveland says that a 45-day coal strike would have little effect because of large stocks above ground and because only a portion of total coal output would be stopped.
San Francisco says the "hot housing" market has "cooled," but with a beneficial effect. Housing markets in other regions are somewhat slower, but a large backlog of demand still exists. Apartment contracts are stronger in Dallas. Mortgage money is generally available at stable rates. Cleveland and Chicago report a gradual pickup in commercial and industrial construction. Outlays on public works are still slow in most districts.
New York, Atlanta, Chicago, St. Louis, and Minneapolis all report harvests slowed by wet weather. The effect on output probably will not be large, however. Harvests in the Midwest are ahead of schedule, because corn and soybean crops matured earlier than usual. Kansas City reports winter wheat off to a good start with soil moisture adequate, in contrast to last year. Farm income unfortunately is depressed by large crops. San Francisco says that costs of producing cotton, especially pumping of water, results in poor profits despite high prices. The Richmond region still suffers from drought.