Beige Book: National Summary
June 14, 1978
Business has been brisk throughout the nation, and nearly all Reserve banks expect it to stay that way for at least the next few months. The manufacturing, retail trade, building, and banking industries report strong growth, with little evidence or expectation of an imminent slowdown. Concerns are growing, however, that tightening input markets, accelerating inflation, and rising interest rates may soon stifle the expansion.
A SRAC-requested survey by district banks on recent changes in Regulation Q reveals little impact so far: nearly every district has had only modest responses to the new six-month CDs.
Regular surveys of manufacturing activity conducted by Philadelphia, Richmond, and Minneapolis document a strong growth trend in manufacturing sales in their regions. The remaining Reserve banks report similar quickening in both durable and nondurable manufacturing activity of firms serving industrial as well as consumer markets.
The goods being produced for consumer markets have not been sitting on the shelf for very long either. Retailers have enjoyed substantial sales gains. Every district noted either an upward trend or at the very least some firming in consumer spending. Consumer durables, especially automobiles, were often cited as the best sellers (New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco).
And despite rapidly rising construction costs and mortgage interest rates in the neighborhood of 10 percent, individuals have continued to demand new homes. That demand has been sufficient to fuel a resurgence of last year's homebuilding boom in some parts of the country (Atlanta, St. Louis, and Minneapolis). In some other regions where homebuilding activity has not resumed last year's pace nonresidential construction has picked up the slack (Chicago and San Francisco).
As usual expanding economic activity in the real sector has coincided with increased financial sector activity. Particularly strong loan demand was noted by district banks in Boston, Richmond, St. Louis, Kansas City, and Minneapolis.
That loan demand and the business activity with which it coincided isn't expected to let up in the near future either. Boston expects economic growth to continue throughout the year. The outlook for capital spending has strengthened in New York. Manufacturers and retailers continue to expect gains through the next two quarters in Philadelphia. Cleveland predicts expansion will continue into the first half of 1979. Chicago notes strength in capital spending plans. And Minneapolis looks for continued growth in manufacturing and retail sales through the rest of 1978.
These optimistic forecasts are tempered with a few notes of caution though. Some input markets have tightened noticeably. Skilled labor (Boston, New York, Chicago, St. Louis, Minneapolis, Kansas City, Dallas) and freight car (New York, Atlanta, Chicago, San Francisco) shortages were judged to be the most acute.
In addition, fears relating to accelerating inflation were common among many businesspeople. Several districts report widespread speculation that the recent rally in retail sales resulted from consumer attempts to beat expected price increases and thus could not be counted on to continue as those expectations were realized (New York, Cleveland, Atlanta, Dallas).
Rising interest rates, pushed up at least in part by accelerating inflation, were also cited as a reason for caution. Chicago, Minneapolis, and San Francisco each mentioned the negative impact on residential construction of the continuation of current trends in mortgage interest rates.
It was hoped by some that upward pressure on these rates would be substantially mitigated by recent changes in Regulation Q allowing for the marketing of a new six-month CD. So far, however, these instruments are contributing only modestly to the easing of tight credit markets.
Each district summary includes comments on early developments in the market for the new six-month CDs. Those comments revealed a fairly homogeneous experience across districts and can be summarized as follows:
Most banks and thrifts have been offering the new CDs at the ceiling interest rate.
There has been a wide variation in the aggressiveness of promotional efforts with large urban financial institutions typically the most aggressive.
As a rule consumer response to the new instrument has been mild.
Most funds for the six-month CDs have been coming from existing deposits.
Most financial institutions expect the new six-month certificate will have little net impact on their deposit inflows during the next six months.