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National Summary: August 1981

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Beige Book: National Summary

August 11, 1981

Nine Redbook reports indicated weakening in activity since the last FOMC meeting, with varying degrees of emphasis. Exceptions were Dallas and Philadelphia, where activity was judged to be expanding, and St. Louis with "no marked change". Inflation appears to have moderated, but most observers fear a resurgence. Virtually all reports commented on the depressive impact of current high interest rates, especially on housing, but also on nonresidential construction, capital goods, motor vehicles, and inventory investment. Employment is sluggish, at best, in most districts. Retail trade is mixed, but with auto sales severely depressed everywhere. Labor unrest, highlighted by the air controllers' strike, is increasing. Capital goods demand is generally weaker. Energy development and defense procurement are among the few strong sectors. The higher value of the dollar has tended to slow exports and increase imports, but quantification is difficult. Consumer credit use has slowed. New residential mortgages are difficult to negotiate under current terms. The S&L crisis deepens. C&I loan demand varies, with merger-related loans a big factor in money centers. Crop prospects are "good to excellent" in most of the nation. The new fiscal package is viewed as favorable, but no substantial early impact is foreseen. Many observers anticipate a revival in activity late in the year or in 1982, but only if interest rates decline.

Exchange value of the dollar
All districts found that the higher value of the dollar was affecting imports and exports, but the picture is confused by the weak economic situation in Western Europe. Also, most observers expect the full impact to be delayed. Boston comments on reduced exports of "high-tech" items. New York finds exporters "worrying", but with few specific examples of declines in sales. Cleveland reports increased foreign competition for machine tools and pigments. Richmond finds textiles affected. Chicago reports a drop in inquiries from abroad as to the availability of U.S. products. San Francisco finds demand for aircraft and forest products seriously affected. Various districts pointed to reduced foreign demand for agricultural products, with accompanying downward pressure on domestic prices.

Inflation
Boston, Richmond, and Kansas City reported a trend toward price stability with fewer purchasing managers reporting paying higher prices. Prices of building materials, especially cement, are generally weak. Cleveland economists still see a "core" inflation rate of about 9 percent. Chicago reports prices rising faster in July than last year, and business equipment prices up at least 10 percent this year.

Financial institutions
Most districts commented on the growing S&L crisis. A New York analyst fears "a mass failure of the thrifts", and a shock to the economy. Outflows of funds continued heavy in July, and net worth is declining. The new adjustable mortgage loans and tax exempt "small savers" certificates may be of some help. But the basic problem is high interest rates. Atlanta points out that many people could not now afford to buy the houses they live in, and Dallas warns of a wave of foreclosures when creative financing deals must be renegotiated.

Housing
The housing industry remains depressed throughout the country, even in the relatively strong economy of the Eleventh District. Mortgage rates up to 18% and high prices are preventing many potential buyers from entering the market. Some developers are cutting prices. Bankruptcies of small builders are increasing. Related industries continue to suffer, including building materials, manufacturers, forest products, and appliances. Mortgage lending activity is reported nearly nonexistent in some areas.

Manufacturing
Manufacturing production was generally reported unchanged to down in the latest month. Industries linked to the construction and auto sectors were particularly adversely affected, while those producing military hardware and oil and gas equipment benefited. In contrast with other districts, Dallas reported continued expansion of manufacturing output, and Philadelphia noted signs of improvement following a decline earlier.

Retail sales
Reports on consumer spending are mixed though indications of lower, softer, or spotty sales predominant. Autos, appliances, furniture, and building materials are particularly sluggish. Discounting and heavy advertising to boost sales are being reported. Auto sales are benefiting from the recently announced promotion programs of the automakers. Additional parts and servicing business is partially offsetting weak new car sales in some areas. But additional auto dealers were reported to have gone out of business. The air traffic controllers' strike is exacerbating the problems of the airlines. Tourism, "already anemic" in the South, has been hit hard by the strike.

Inventories
Businessmen are generally reported to be watching inventory levels closely. Nevertheless, excessive levels have developed in a number of industries. High interest rate levels are encouraging tight inventory control. Kansas City noted that inventory cutting appears to be taking place at all stages of production. Types of inventories noted as being excessive include motor vehicles, farm and construction equipment, construction supplies, steel, certain lines of retail goods, and crude petroleum.

Capital investment
The Cleveland and Chicago districts, which emphasize durable consumer and capital goods, continue to send in pessimistic reports. Nonresidential construction is now softening in most regions as a result of financial stringencies. A number of districts reported reduced demand for producer equipment, including private and commercial aircraft, freight cars, trucks and trailers, and especially farm and construction equipment. Energy development items, defense equipment, and high-tech items are relatively strong.

Agriculture
Among the districts reporting good-to-excellent agricultural conditions are Richmond (tobacco), Chicago (near ideal weather for corn and soybeans), St. Louis, Kansas City, and San Francisco. However, Atlanta finds dry weather again restricting crop growth, and Minneapolis complains that excess moisture now endangers crop yields. Farm income is depressed by low farm prices and rising costs, and farmers are restricting new investments.