July 12, 1978
District reports continue to point to a slowdown in economic activity in the second half of the year. However, current retail sales and manufacturing activity continue to advance at a rapid pace, although some industries have entered their normal midsummer doldrums. Businessmen continue to manage inventories closely, and growing uncertainty is deterring some capital spending. Higher prime rates are expected as loan demands strengthen and bank deposit inflows slow further. Although higher interest rates are not expected to impact significantly on business borrowing, they have led to fewer mortgage commitments. The prospects for farm income are improved, and the demand for new equipment in some areas is rising.
Modest to brisk gains in retail sales are being reported across the country, although the expected strength of sales at year-end remains uncertain. New cars continue to sell well, but sales of other durable goods are mixed. Minneapolis and Dallas suggest that retail sales are increasing at unsustainable rates, while Atlanta indicates a similar situation for new car sales. Chicago reports that consumers continue to use installment credit freely, and there is concern in the New York district that mounting consumer debt will soon slow sales. Inventory levels remain within manageable limits, although Boston, Cleveland, Richmond, and Kansas City indicate stocks are on the high side. Atlanta is the only district where retailers plan to build inventories through the summer.
Industrial production continues to grow at a brisk pace in most districts, as evidenced by expanded employment, increased shipments, and rising prices. Although some industries, such as autos and coal, have geared down to slower rates of summer output, production in such durable goods industries as fabricated metals, transportation equipment, construction materials, and defense goods are on the rise. Nonetheless, many manufacturers are pessimistic about business conditions at year-end and are keeping a tight rein on factory inventories.
Despite the recent runup in imports, steel companies in the Cleveland and Chicago districts remain heavily booked, and production is expected to remain strong. But inventory levels, especially in the distribution channels, are building and may hamper further price increases.
Capital spending plans vary widely. Low rates of return and uncertainties over inflation, government regulations, and economic policies are listed as obstacles to increasing capital outlays. San Francisco notes investment plans by several industries are short of that needed to meet future product demand. While no significant changes in capital spending are anticipated by Philadelphia, large expenditures are in the offing for commercial aircraft, rail cars, and heavy trucks and trailers, according to New York and Chicago.
Credit demands at commercial banks are expected to strengthen for the remainder of the year. Continued slowing in deposit growth is holding down the liquidity positions of most banks, and bankers are becoming more selective in processing loan applications. While business loans, consumer installment credit, and agricultural lending account for much of the growth in bank loans in many districts, New York points to the financing of mergers and acquisitions and inventories as sources of loan demand in that district. Interest rates are expected to continue to rise with the prime rate climbing 25 to 100 basis points by year-end, according to Philadelphia and Kansas City. Although the new six-month money market CD's appear to be adding little to overall deposit growth, they are helping many banks, and especially S&Ls, to hold on to some savings deposits.
Residential construction in many areas is being pinched as tight mortgage markets are leading to sharp reductions in new commitments. Chicago indicates that residential permits and sales of existing homes are down 30 to 40 percent in some areas from a year ago. The uncertainty of property tax cuts promised by Proposition 13 is an additional factor that is holding back home sales, according to San Francisco. Slowdowns in residential construction are anticipated by St. Louis and Minneapolis, while Cleveland reports housing starts will remain strong for the remainder of the year, regardless of sales. Demand for mortgages also remains vigorous in the Atlanta and Dallas districts.
Financial conditions in the agricultural sector show some improvement with higher livestock prices. But Atlanta reports some weakening of farm prices in recent weeks, and Kansas City indicates that the abundant wheat harvest should preclude a runup in wheat prices. Prospects of improved farm incomes are adding to demands for farm equipment, according to Chicago, Minneapolis, and Dallas. Soil moisture conditions are generally adequate, but shortages are reported in the Southeast and portions of the plains.