March 15, 1978
The overall impression that emerges from this month's district comments is that while the severe weather in many parts of the country and, to a more limited extent, the spreading effects of the coal strike, have somewhat weakened the economy's momentum, the interruption is likely to be only temporary. The retail sale outlook remains good, with merchants generally expecting a strong spring season. The underlying demand for housing continues at a high level, although some concern was voiced over an actual or potential rise in mortgage rates. Business inventories generally are still in line with sale expectations, and there were signs of a strengthening in the business capital spending sector. Concern over inflation continues, reinforced by the implications of the coal negotiations. The demand for business loans seems to have strengthened, on balance.
The impact of the coal strike on production and employment appears to be limited so far. Cleveland thus reports that electric power shortages have affected employment in its district only "minimally" and far less than indicated in widely publicized estimates, and notes that its economic respondents were "unconcerned" about the long-range effect of the strike. Richmond reports further curtailment of energy supplies to commercial and industrial users, but expects losses in terms of employment and production to be small if coal shipments are resumed shortly. Atlanta notes that so far only from Tennessee and Alabama have reports of strike-related "significant" disruption of production emerged, although it feels further curtailments might induce massive layoffs if coal shipments are not forthcoming quickly. According to Chicago, the coal strike began to adversely impact output in late February, but the effect so far has been "relatively minor", largely confined to Indiana, and is expected to be quickly reversed after the strike is settled. St. Louis also reports only "relatively minor" effect from the strike, and, indeed, sees modest gains in manufacturing activity in recent weeks. Minneapolis feels the strike is not affecting industrial activity in its area, as do New York and Boston, although concern was expressed in those two districts over the potential adverse impact should the strike be prolonged much longer. That for the present underlying manufacturing conditions remain firm, however, is suggested by the number of reports of increases or continued strength in manufacturers' shipments, new orders, and the growing backlog of orders, emanating from, among others, Boston, Philadelphia, Richmond, Dallas and St. Louis.
Consumer spending continued to be depressed by inclement weather over large parts of the country, with more than half of the districts mentioning this as a factor. Retailers, however, generally remain relatively optimistic about the near-term outlook. Boston thus reports that retail sales in New England have weakened, but that bad weather was "undoubtedly" a contributing factor, while New York notes that consumer spending in that District appears to be shaking off its "winter doldrums" with retailers throughout the District looking to a strong spring season. Similar sentiments are expressed by several other banks, including Philadelphia, Cleveland, St. Louis and Kansas City. Richmond sees continued improvement in total sales, with retailers remaining optimistic. Atlanta reports year-to-year sales gains of 10 to 15 percent in most areas of that District, and a rise in late February in retail sales is reported by Dallas. Minneapolis characterizes consumer spending as "good to normal", except in rural areas particularly hard hit by cold weather, and while San Francisco reports that unusually heavy rains have dampened sales in Southern California, consumer spending remains strong in the northern part of the state.
While bad weather also hampered construction activity in a number of areas, underlying demand in that industry appears to remain strong according to those banks that comment on this subject. Atlanta thus reports that recent high rates of residential construction have not been able to keep pace with demand, while St. Louis reports that demand for new homes continues at a high level. Cleveland notes that while bad weather has depressed housing activity in its District, demand for mortgage money continues strong, as do Minneapolis and Dallas. Some concern was expressed in several districts, however, that rising mortgage interest rates associated with a weakening of deposit inflows at thrift institutions might eventually reduce mortgage demand.
Business inventories by and large remain in balance. Retail inventories thus are characterized as "well under control" by Boston, and at or near desired levels by Richmond, Dallas, Kansas City and St. Louis. Some respondents in the Chicago, San Francisco and Cleveland districts felt inventories to be too high, but others too low. Retailers' inventories in the New York district were regarded as a bit on the high side. At the manufacturing level, inventories in general appeared to be in line with expected sales, although Chicago reports a buildup in farm equipment inventories and there remains a widespread feeling among Richmond manufacturers that current stocks exceed desired levels.
There were indications of some improvements in business spending on plant and equipment. Boston thus reports increases in machine tool orders, while Atlanta notes that tool and diemakers are enjoying excellent business. A steel economist in the Cleveland district sees signs of "accelerating" orders from capital good producers. Chicago reports an expected rise this year in business capital outlays, both for equipment and structures, while Philadelphia characterizes the capital spending plans of its respondents as remaining strong.
Concern continued to be expressed over actual and prospective increases in prices and wages. More specifically, Chicago expects the "very large increase" in compensation which the eventual coal settlement will entail to stimulate wage demands in other industries. Minneapolis reports that the coal negotiations have already affected wage demands in that district, while respondents in the Cleveland district expect a sharp rise in coal prices this year.
The demand for business loans is reported as strong or on the upswing by several banks, including St. Louis, Dallas, Chicago and Philadelphia, but as flat or below expectations by San Francisco and New York. Reports on the demand for consumer and other types of loans were mixed.