November 15, 1978
Generally good economic conditions prevail across most of the nation, although there is notable uncertainty over economic prospects. Retail sales have been fairly steady overall—consumer durables have been selling somewhat better than nondurables. Agricultural and industrial production has been strong. Construction activity is mixed, with some increases in commercial construction and some decreases in homebuilding. Inventories are lean almost everywhere. Financial markets continue to be tight. But despite fairly positive assessments of current economic conditions, reports from most districts reveal substantial uncertainty regarding future economic developments due in part to the evolving anti-inflation program.
Retail sales have held up in recent weeks throughout most of the nation. Strong consumer demand was reported in Boston, Chicago, St. Louis, Dallas, Minneapolis, and San Francisco. The weakest demand was observed in New York, Philadelphia, and Atlanta. In between, retail sales ranged from slightly above last year to 10 percent above last year in Kansas City.
Chicago was the only district reporting relatively better soft goods sales than hard goods sales. In Richmond, Atlanta, and Minneapolis the reverse was noted. Several districts indicated that auto and light truck sales did not adequately reflect demand, as slow deliveries held actual sales below potential levels.
Auto dealers aren't the only business people with low inventories. Nearly every district notes the lean inventory positions of most retailers. Some soft goods dealers in Boston, Atlanta, and Minneapolis are concerned about inventory creep, but this concern is much less prevalent than satisfaction with inventory levels. Reports from manufacturers throughout the U.S. reveal that the overwhelming majority are maintaining very tight inventory positions.
Since inventories are low, strong demand for manufactured goods has been reflected in healthy industrial activity. For instance, Chicago reports that most producers of capital goods continue to report rising shipments, new orders, and backlogs. Only New York characterizes manufacturing activity as flat, while all other districts cite improvements.
Improvements in agricultural production are also widespread. Richmond, Atlanta, Chicago, St. Louis, and Minneapolis all note good agricultural production. And prices are holding up so that crop values are quite impressive. Livestock producers throughout the nation are also reaping the benefits of high prices.>
Recent trends in the construction sector are not so clear-cut as they are in agriculture—commercial construction remains strong but homebuilding has weakened. Atlanta, St. Louis, and Minneapolis each report active commercial building. Meanwhile, most districts state that a homebuilding slowdown is imminent or had already begun.
High interest rates are cited most frequently as the reason for the housing slowdown. St. Louis, Minneapolis, and San Francisco remark that usury laws are making mortgage funds particularly scarce in parts of their districts. Regulation Q is also mentioned as having a detrimental impact on the ability of banks and thrifts to attract funds. The newly legalized automatic transfer service at commercial banks was supposed to have relieved some of the negative aspects of Regulation Q, but at least according to Atlanta, Minneapolis, and Dallas consumer interest in the ATS is currently quite limited.
This lack of interest contrasts with the public response to other recent Administration and Federal Reserve policy actions. New York, Atlanta, and Chicago report skepticism concerning the likelihood that wage-price guidelines would work. Furthermore, each of these banks notes public concern that the guidelines will turn into mandatory controls with the attendant inefficiencies. Reactions to discount rate and reserve requirement increases are mixed. For example, Atlanta finds that some observers are "reassured that something concrete has been done toward alleviating the inflation and exchange rate situations," while a few others feel the actions were "excessive or dangerous."
Uncertainty associated with the evolving anti-inflation program complicates economic forecasting. Districts report widely divergent opinions on the probability of a recession and on the chances that inflation and interest rates will moderate during the coming year. Boston's panel of experts reflects this diversity of opinion; Professor Eckstein argues that the odds now favor a recession in 1979, Professor Houthakker feels the odds are against recession in 1979, and Professor Samuelson suggests that government policy will have a substantial influence on what transpires and that recession is not inevitable. Similarly, opinions on inflation prospects range from less than the guidelines, according to some Philadelphia respondents, to substantially higher, according to some observers in Atlanta and Cleveland.