Beige Book: National Summary
February 21, 1978
Severe weather conditions and the potential effects of the coal strike dominate this month's Current Economic Comments. Because of unfavorable weather, retail sales throughout much of the country were below expectations. However, respondents in most districts believe that consumer demand is basically strong and expect to make up the lost sales in the spring. Manufacturing was up but again somewhat less than expected. In the financial sector, deposit inflows to thrift institutions have slowed while mortgage demand remains strong. Consequently, mortgage rates have risen in approximately half the districts. Fears about disintermediation vary considerably among districts, but most report that lending institutions are fairly confident they can meet the demand for mortgages. Thus far, the coal strike has had only minor secondary effects on the economy, but this is likely to change as widespread power curtailments now appear imminent.
Almost every District reports that economic activity during the past several weeks was adversely affected by severe weather. Winter storms had their greatest impact in the northern districts, although Atlanta also experienced significant negative effects. Boston reports that much of southern New England was literally shut down for almost a week. Chicago describes the impact of the storms on sales and output as greater "than in any previous winter in memory."
Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Dallas and San Francisco all report that retail sales were depressed by weather conditions. In most cases retailers expect to make up the losses in later months. Philadelphia retailers are looking forward to a strong spring season; Dallas store executives are optimistic about the impact on sales of rising income levels and the proposed tax cuts. Such expectations seem to be supported by the experience of retailers before the winter storms and in unaffected areas. Chicago reports that retailers were very pleased with their experience until mid-January and the onset of the bad weather. Richmond, which did not report severe storm impacts, observed increases in both total sales and the proportion of big ticket items, and Atlanta reports that those areas least affected by bad weather experienced strong sales growth. In northern New England, the ski industry is enjoying another great year. According to San Francisco and Atlanta, automobile sales which had been slow began picking up in mid-January. Retail inventories were not seen as a problem in any district except St. Louis where stocks of new cars were larger than desired. Chicago notes that weather-caused shutdowns at the auto plants substituted for layoffs otherwise needed to hold down excessive inventories.
Manufacturing activity appears to be increasing, although in most districts dealing with this topic, the experience of the past month fell short of expectations. Again weather was thought to be the major cause of the slowdown. San Francisco observes that production levels are steady or growing in most industries and that some industries have largely achieved full capacity. The aluminum industry, in particular, is operating at capacity and there is actually a shortage of capacity at the rolling stage. Richmond's survey of manufacturers finds a general increase in new orders and rising backlogs. Dallas notes that sales in the apparel industry have strengthened; chemical sales remain weak but improvement is expected. St. Louis reports that aircraft manufacturing and industries serving the housing market are experiencing strong demand, although overall the rate of growth in manufacturing has slowed. New York and St. Louis both find that capital goods producers are making small gains but are not doing as well as expected. New York manufacturers do not expect the tax proposals to improve this situation. Chicago reports that the demand for capital goods has picked up, with construction equipment the leading sector. Steel orders have also increased, primarily because of the capital goods demand. According to Cleveland, capacity utilization in the steel industry will rise to the mid-eighties from about 75 percent in the previous quarter. The most pessimistic report comes from Philadelphia, which finds no change in new orders and a small increase in shipments. Richmond, Atlanta and Philadelphia report slight increases in manufacturers' inventories. Excessive automobile inventories have been reduced by planned shutdowns in the St. Louis district and storm-caused disruptions. Cleveland, Dallas and San Francisco note that refiners' inventories of petroleum products are above desired levels.
In the financial sector, almost all districts report that the inflow of deposits to thrift institutions and other mortgage lenders has slowed. Kansas City finds that deposit growth has actually picked up since the fourth quarter but is below that of two years ago. The demand for mortgages has remained strong. As a result, in over half the districts mortgage rates have increased in recent months. The greatest increase seems to have occurred in the Sixth District; Atlanta reports that conventional rates have risen 1/2 percentage point in one month. This increase seems to have attracted borrowers hoping to avoid higher rates in the future. Chicago reports some savings and loan institutions have begun to reduce maturities and increase fees; some are lending only for single-family, owner-occupied dwellings. Some California thrift institutions have also limited loans to single-family dwellings and in Oregon a number of thrifts have adopted a temporary moratorium on lending. In most districts, however, the thrift institutions believe that they can meet the mortgage demand by supplementing regular deposit inflows with other funds. Chicago, St. Louis, Minneapolis and Kansas City report that thrift institutions in their districts plan or have already begun to borrow at the Federal Home Loan Banks. In the Cleveland, Dallas and Kansas City districts a number of thrifts are planning to sell mortgages in the secondary market. Atlanta reports that saving and loan associations there have launched campaigns to promote savings and are offering ceiling rates on certificates of deposits.
The extent of concern about disintermediation varies considerably from district to district. Institutions in New York and Philadelphia are particularly worried that higher interest rates will lead to serious disintermediation. One Philadelphia mutual savings bank believes an increase in short-term rates of only 25 basis points will cause a significant shrinkage in mortgage funds. As mentioned above, San Francisco reports that several thrifts have already left the mortgage market. On the other hand, institutions in most districts seem to feel that they can meet projected demand with higher rates and by seeking non-deposit funds. Boston thrifts believe disintermediation will not be a serious problem unless short-term rates rise 100 basis points.
Districts with substantial involvement in agriculture report that price increases are likely in 1978. In California rains ended drought conditions but damaged crops. Consequently, prices of vegetables like lettuce and carrots have risen sharply. Atlanta reports that orange prices are "sky high" and that cotton prices are rising. Kansas City and Chicago both believe that pork prices will be higher than previously estimated and Kansas City thinks that there may be "rather explosive price increases in the cattle industry." There is still some talk of a farm strike, but interest has dwindled.
Finally, Philadelphia, Cleveland, Richmond, Atlanta, Chicago and St. Louis are very concerned about the potential economic impacts of the coal strike. To date the impact has been largely confined to the direct effects in the mining and railroad industries. However, supplies of coal have run low and these districts fear that there will soon be power curtailments which will in turn result in widespread layoffs. Richmond and St. Louis report that utilities in their districts may have to begin curtailments within two weeks. As Atlanta and Philadelphia point out, even those coal users with relatively large stocks are worried because after the strike is settled there will still be a considerable delay before deliveries start up. The most critical situation appears to be in Indiana where utilities have already requested a cutback in lighting and will soon reduce power to large industrial users. The steel industry, however, has adequate supplies of coking coal as long as the strike is settled by April 1.