Beige Book

CONFIDENTIAL (FR) CURRENT ECONOMIC COMMENT BY DISTRICT Prepared for the Federal Open Market Committee by the Staff February 2 1 , 1978 TABLE OF CONTENTS SUMMARY page i First District-Boston page 1 Second District-New York page 5 Third District-Philadelphia page 8 Fourth District-Cleveland page 12 Fifth District-Richmond page 16 Sixth District-Atlanta page 19 Seventh District-Chicago page 23 Eighth District-St. Louis page 27 Ninth District-Minneapolis page 30 Tenth District-Kansas City page 33 Eleventh District-Dallas page 36 Twelfth District-San Francisco page 39 SUMMARY* [Asterisk:Prepared by the Federal Reserve Bank of Boston.] Severe weather conditions and the potential effects of the coal strike dominate this month's Current Economic Comments. Because of unfavorable w e a t h e r , retail sales throughout much of the country were below expectations. However, respondents in most districts believe that consumer demand is basically strong and expect to make up the lost sales in the spring. up but again somewhat less than expected. Manufacturing was In the financial sector, deposit inflows to thrift institutions have slowed while mortgage demand remains strong. Consequently, mortgage rates have risen in approximately half the districts. Fears about disintermediation vary considerably among districts, but most report that lending institutions are fairly confident they can meet the demand for mortgages. Thus far, the coal strike has had only minor secondary effects on the economy, but this is likely to change as widespread power curtailments now appear imminent. Almost every District reports that economic activity during the past several weeks was adversely affected by severe weather. Winter storms had their greatest impact in the northern districts, although Atlanta also experienced significant negative effects. Boston reports that much of southtern New England was literally shut down for almost a week. Chicago describes the impact of the storms on sales and output as greater "than in any previous winter in memory." Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. L o u i s , Dallas and San Francisco all report that retail sales were depressed by weather conditions. months. In most cases retailers expect to make up the losses in later Philadelphia retailers are looking forward to a strong spring season; Dallas store executives are optimistic about the impact on sales of rising income levels and the proposed tax cuts. Such expectations seem to be supported by the experience of retailers b e f o r e the winter storms and in unaffected a r e a s . Chicago reports that retailers w e r e very pleased with their experience until mid-January and the onset of the bad w e a t h e r . R i c h m o n d , which did not report severe storm impacts, observed increases in both total sales and the proportion of b i g ticket items, and Atlanta reports that those areas least affected by bad weather experienced strong sales growth. In northern N e w England, the s k i industry is enjoying another great y e a r . According to San Francisco and A t l a n t a , automobile sales which had been slow began picking up in m i d - J a n u a r y . Retail inventories w e r e n o t seen as a problem in any district except S t . L o u i s w h e r e stocks of new cars were larger than desired. Chicago notes that weather- caused shutdowns at the auto plants substituted for layoffs otherwise needed to hold down excessive inventories. Manufacturing activity appears to be increasing, although in m o s t districts dealing w i t h this topic, the experience of the past month fell short of expectations. down. Again weather was thought to be the major cause of the slow- San Francisco observes that production levels are steady or growing in most industries and that some industries have largely achieved full capacity. The aluminum industry, in p a r t i c u l a r , is operating at capacity and there is actually a shortage of capacity at the rolling stage. Richmond's survey of manufacturers finds a general increase in n e w orders and rising backlogs. Dallas notes that sales in the apparel industry have strengthened; chemical sales remain w e a k b u t improvement is expected. St. Louis reports that air- craft manufacturing and industries serving the housing m a r k e t are experiencing strong demand, although overall the rate of growth in manufacturing has s l o w e d . N e w York and St. Louis both find that capital goods producers are making small gains but are not doing as well as e x p e c t e d . New Y o r k manufacturers do not expect the tax proposals to Improve this situation. Chicago reports that the demand for capital goods has picked u p , w i t h construction equipment the leading sector. Steel orders have also i n c r e a s e d , primarily b e c a u s e of the capital goods demand. According to C l e v e l a n d , capacity utilization in the steel industry w i l l rise to the mid-eighties from about 75 percent in the previous quarter. The most pessimistic report comes from P h i l a d e l p h i a , w h i c h finds n o change in new orders and a small increase in s h i p m e n t s . R i c h m o n d , Atlanta and Philadelphia report slight increases in m a n u f a c t u r e r s ' inventories. Excessive automobile inventories h a v e b e e n reduced by planned shutdowns in the S t . Louis district and storm-caused disruptions. C l e v e l a n d , Dallas and San Francisco n o t e that refiners' inventories of petroleum products are above desired levels. In the financial s e c t o r , almost all districts report that the inflow of deposits to thrift institutions and other mortgage lenders has slowed. Kansas City finds that deposit growth has actually picked up since the fourth quarter but is below that of two years ago. remained s t r o n g . T h e demand for mortgages has As a r e s u l t , in over half the districts mortgage rates have increased in recent m o n t h s . The greatest increase seems to have occurred in the Sixth District; Atlanta reports that conventional rates have risen 1/2 percentage point in one m o n t h . This increase seems to have attracted borrowers h o p i n g to avoid higher rates in the future. Chicago reports some savings and loan institutions have begun to reduce maturities and increase fees; some are lending only for single-family, owner-occupied dwellings. Some California thrift institutions h a v e also limited loans to single-family dwellings and in Oregon a number of thrifts have adopted a temporary moratorium on lending. most districts, h o w e v e r , the thrift institutions believe that they can meet In the mortgage demand by supplementing regular deposit inflows w i t h other funds. C h i c a g o , St. L o u i s , Minneapolis and Kansas City report that thrift institutions in their districts plan or have already begun to borrow at the Federal H o m e Loan Banks. In the C l e v e l a n d , Dallas and Kansas City districts a number of thrifts are planning to sell mortgages in the secondary m a r k e t . Atlanta reports that saving and loan associations there have launched campaigns to promote savings and are offering ceiling rates on certificates of deposits. The extent of concern about disintermedlation varies considerably from district to d i s t r i c t . Institutions in New York and Philadelphia are particularly worried that higher interest rates w i l l lead to serious disintermediation. One Philadelphia m u t u a l savings bank believes an increase in short-term rates of only 25 basis points w i l l cause a significant shrinkage in mortgage funds. As mentioned a b o v e , San Francisco reports that several thrifts have already left the mortgage m a r k e t . On the other h a n d , institutions in most districts seem to feel that they can meet projected demand with higher rates and by seeking non-deposit funds. Boston thrifts believe disintermediation w i l l not be a serious problem unless short-term rates rise 100 basis points. Districts w i t h substantial involvement in agriculture report that price increases are likely in 1978. In California rains ended drought conditions but damaged crops. C o n s e q u e n t l y , prices of vegetables like lettuce and carrots have risen sharply. Atlanta reports that orange prices are "sky high" and that cotton prices are rising. Kansas City and Chicago b o t h believe that pork prices w i l l b e higher than previously estimated and Kansas City thinks that there may be "rather explosive price increases in the cattle industry." is still some talk of a farm s t r i k e , but interest has dwindled. Finally, P h i l a d e l p h i a , C l e v e l a n d , R i c h m o n d , A t l a n t a , Chicago and There S t . Louis are very concerned about the potential economic impacts of the coal strike. To date the impact has b e e n largely confined to the direct effects in the mining and railroad industries. H o w e v e r , supplies of coal have run low and these districts fear that there w i l l soon be power curtailments which w i l l in turn result in widespread l a y o f f s . Richmond and S t . Louis report that utilities in their districts may h a v e to b e g i n curtailments w i t h i n two w e e k s . As Atlanta and Philadelphia point o u t , even those coal users w i t h relatively large stocks are w o r r i e d because after the strike is settled there w i l l still b e a considerable delay before deliveries start u p . The most critical situation appears to be in Indiana w h e r e utilities h a v e already requested a cutback in lighting and w i l l soon reduce power to large industrial users. The steel i n d u s t r y , h o w e v e r , has adequate supplies of coking coal as long as the strike is settled by A p r i l 1 . FIRST DISTRICT - BOSTON T h e experience of the First D i s t r i c t during the past month h a s been dominated by adverse weather conditions. disrupted production. These have reduced retail sales and H o w e v e r , respondents are generally confident that the underlying trend for the region's economy continues to be o n e of steady growth. O n the financial s i d e , thrift institutions report some slowing in deposit inflows b u t mortgage rates remain s t a b l e . N e w England h a s experienced two major snowstorms d u r i n g the past m o n t h . The second w a s the most severe in the region's history and literally shut down much of southern N e w England for almost a w e e k . A l l b u t emergency travel w a s prohibited in eastern Massachusetts and Rhode I s l a n d , so that almost no one w a s able to go to w o r k or visit retail establishments for four to six days. In a d d i t i o n , flooding in coastal communities destroyed many homes and b u s i n e s s e s . M u c h of the loss in production and retail sales caused b y the storms is expected to b e made up in later w e e k s . H o w e v e r , impulse purchases and purchases o f certain services and food away from home are lost forever. If one w e r e to adjust for weather conditions the retail sales situation would b e m i x e d , b u t o n balance favorable. One large department store chain in southern N e w England reports that through the first w e e k of February - before the m o s t recent storm b u t after the first - sales in 1978 were 30 percent above the same period a year a g o . Retailers in northern N e w E n g l a n d , on the other h a n d , have been disappointed w i t h their recent sales experience; h o w e v e r , that sector of the industry associated w i t h s k i resorts is doing very w e l l . New England s k i areas are enjoying a very successful season. Once again U n t i l the most recent snowstorm retailers' inventories were w e l l under control a n d stores were having no difficulty obtaining m e r c h a n d i s e . In the financial s e c t o r , one large company reported keen competition among New Y o r k banks w a n t i n g to lend it m o n e y . The company w a s redesigning its revolving credit a r r a n g e m e n t s , w h i c h involve loans of about three or four years d u r a t i o n . The New Y o r k City banks seemed very eager to handle the loans and w e r e offering very attractive terms. too is pricing loans aggressively. A large Boston b a n k reported that it H o w e v e r , b e c a u s e of recent increases in loan d e m a n d , this bank expects the need for price cutting to d i m i n i s h . Most of the increased demand has been for intermediate-term fixed interest l o a n s . The b a n k is raising money for these loans w i t h a large note issue and by m o v i n g toward longer-term certificates of d e p o s i t s . Although savings inflows at mutual savings banks slowed in N e w England there is no sign of distress as y e t . declining slightly during 1977. M o r t g a g e rates are remaining stable after M o r t g a g e demand remains fairly strong and a continuation of present trends is expected. Most thrift institutions are reasonably liquid and are not expecting any crunch in the short term. Dis- intermediation is not expected to become a serious problem unless short term rates increase by 100 basis points or m o r e . Many thrift institutions in New England are not offering ceiling rates o n certificates of deposit now so they have some room to remain competitive. Professors H o u t h a k k e r , E c k s t e i n , T o b i n , and Samuelson w e r e available for comment this m o n t h . All respondents believe that the Fed should not make the stability of the dollar on foreign exchange markets a p r i m a r y concern for monetary p o l i c y . H o u t h a k k e r , in particular, noted that m o n e t a r y policy should respond to our domestic needs and that changing exchange rates are the appropriate market responses w h i c h accommodate differing national policies: "It is foolish to acquiesce to foreign monetary policies" which are not appropriate for our n e e d s by attempting to p e g the dollar. All respondents also believe that the adverse w e a t h e r during the first quarter will h a v e no lasting effect on the e c o n o m y . Unlike last y e a r , h o w e v e r , real growth during 1978:1 w i l l suffer b e c a u s e it w i l l not benefit from pent-up sales of autos and trucks (the Ford strike settlement) and because it must carry the added burden of an extended coal s t r i k e . The m a j o r legacy of the bad w e a t h e r may be that many economic indicators will b e very noisy for the next several months; it w i l l b e hard to identify trends and get b e a r i n g s . Houthakker anticipates 4.5 percent real growth during 1 9 7 8 . Although this performance w i l l n o t reduce unemployment rates d r a m a t i c a l l y , it does not invite the risk of excessively rapid expansion. Without violating the announced t a r g e t s , money growth near the upper target is sufficient to maintain healthy economic m o m e n t u m . He sees little risk of a credit crunch during 1 9 7 8 . Samuelson believes the Fed should continue the policy of the past few y e a r s : grudgingly giving ground both to rising interest rates and to abovetarget money growth. H o w e v e r , should h o u s i n g , i n v e s t m e n t , or durables consumption w e a k e n significantly, further interest rate increases should b e resisted. He feels that 4.5 percent growth for 1978 is the lowest defensible goal because many of the signs which mark the late stage of an expansion are not yet e v i d e n t , the real growth target could be as high as 5.5 p e r c e n t . Tobin and E c k s t e i n , n o t i n g the gloom of the investment c o m m u n i t y , report that businessmen fear a credit crunch perhaps as early as this year. The Fed's announced money growth targets appear to put it on a collision course w i t h the Administration's forecast of 4.5 to 5.0 percent real growth. Accordingly, declining bond and stock prices reflect lower profits forecasts and expectations of higher interest rates. for housing and investment. These developments, in turn, jeopardize the outlook Both Tobin and Eckstein believe that there is no reason for the Fed to validate these forecasts. It would be "foolish" to increase interest rates at the moment - the Fed should convince the business community that the economy is not on a path to a r e c e s s i o n . SECOND D I S T R I C T — N E W YORK Business activity in the Second District has lost some m o m e n t u m , according to recent accounts of directors and other business leaders. In the face of adverse w e a t h e r , retail sales in the region apparently softened in January and early F e b r u a r y . W h i l e the slackening in sales was u n e x p e c t e d , most merchants w e r e n o t alarmed by the rise in inventory s t o c k s , anticipating consumer spending to p i c k up w i t h an easing in climatic conditions. of r e t a i l i n g , capital goods production remains s l u g g i s h . Outside O v e r a l l , the re- covery in the regional economy continues to lag behind the economic expansion of the n a t i o n , but m u c h of the weakness appears concentrated in New York C i t y . Revised labor force data n o w indicate a widening in the gap between the city's rate of joblessness and that of the rest of the n a t i o n . On the financial s c e n e , senior thrift officers reported that w e a k or negative savings flows have had little effect on m o r t g a g e l e n d i n g . Consumer spending in this district appeared to slow in January and early F e b r u a r y . In N e w Y o r k C i t y , department store executives w e r e particu- larly disappointed in the sluggish pace of b u y i n g . Several n a t i o n a l retailers indicated that sales in the N e w Y o r k metropolitan area and the East Coast in general lagged w e l l behind the rest of the country. For the m o s t p a r t , the slowdown was largely attributed to the adverse weather conditions. In upstate N e w Y o r k , merchandising w a s also s l u g g i s h , w i t h sales reportedly falling w e l l short of anticipated v o l u m e s . The Buffalo directors w e r e less sanguine about the outlook than downstate m e r c h a n t s , voicing concern over a possible shift in consumer sentiment as w e l l as a lagged response to the retrenchment of the steel industry. Notwithstanding the overall sluggishness of sales in the d i s t r i c t , Rochester area retailers reported b r i s k post-holiday demand for both durable and n o n d u r a b l e g o o d s . W h i l e the unanticipated softening in sales activity has resulted in somewhat higher-than-desired inventory s t o c k s , m o s t retailers did not appear overly c o n c e r n e d . For the m o s t p a r t , m e r c h a n t s appear to b e l i e v e that under- lying consumer sentiment is strong and that as w e a t h e r conditions improve, buying activity w i l l p i c k u p . In any c a s e , inventory policies remain c a u t i o u s . Outside of the r e t a i l s e c t o r , inventories were generally viewed as in balance with sales. Capital goods production in the district appears to b e sluggish. Several industrialists in upstate N e w Y o r k report orders for n e w capital goods are only slightly higher than a year a g o . A t least thus f a r , the curtailment of steel production in the Buffalo area appears to have had no significant effects on m a j o r s u p p l i e r s . The Buffalo branch directors characterized spending prospects over the next several months as "lethargic." capital M o s t respon- dents expected little relief from the Administration's tax p r o p o s a l s , which w e r e viewed largely as an offset to the prospective h i k e in social insurance taxes. In contrast to this general v i e w , one u p s t a t e m a c h i n e and tool manu- facturer expected a good y e a r , w i t h only the p o t e n t i a l w e a k n e s s in the autom o b i l e industry possibly troublesome. W i t h the improvement in the regional economy lagging behind that of the n a t i o n , area unemployment rates remain w e l l above the n a t i o n a l l e v e l . M o r e o v e r , as a result of recent revisions in the calculation of j o b l e s s n e s s , the unemployment r a t e in New Y o r k City was revised up to 10.5 percent in J a n u a r y , some two percentage points higher than it would have been under the earlier p r o c e d u r e . Over the past y e a r , the N e w Y o r k City joblessness rate has fallen about half a percentage p o i n t , less than half the drop registered for the nation as a w h o l e . While the upstate region has fared much b e t t e r , the state as a w h o l e posted a 7.9 percent rate of joblessness in J a n u a r y . On the financial f r o n t , the rise in m a r k e t interest rates has finally b e g u n to have a significant effect on thrift deposit flows in the a r e a . Senior officers at N e w Y o r k City thrift institutions reported weak or negative net new savings flows in J a n u a r y . In upstate New Y o r k and N e w J e r s e y , deposit flows w e r e somewhat s t r o n g e r , although still below the levels of a year a g o . All New Y o r k City respondents expect continued weakness in deposit growth for the rest of 1 9 7 8 , while upstate institutions anticipate some slowdown relative to 1977 but less weakness than in New York C i t y . H o w e v e r , few respondents re- ported actual or expected tightening in lending requirements for residential mortgage loans in New Y o r k , due in large measure to the 8 1/2 percent usury ceiling w h i c h has already raised non-price terms of residential mortgage lending. The executive vice president of a major New Jersey savings bank expected some tightening in commercial and residential l e n d i n g . N o n e of the respondents expected to liquidate self-initiated, w h o l e mortgages during 1978 in order to raise funds. Moderate disintermediation w a s expected to be met through selling securities from their p o r t f o l i o s . Many respondents echoed the concern of the president of one of N e w York's largest savings banks that a further rise in interest rates would pose a serious threat of substantial disintermediation. THIRD DISTRICT - PHILADELPHIA Reports from the Third District indicate that economic activity is generally slow. M a n u f a c t u r e r s say that business is unchanged from J a n u a r y , and inclement weather has put a damper on retail s a l e s . Executives in both of these sectors look for renewed expansion over the next six m o n t h s . Area bankers say that business loan demand is seasonally s l o w , and that it too should gain strength in the future. They express a b e l i e f , t h o u g h , that higher short-term interest rates could have repercussions in the mortgage market. The nationwide coal strike also threatens to cut into the District economy if striking m i n e r s do not ratify a contract soon. Manufacturers responding to this month's Business Outlook Survey say that the general business climate is unchanged from J a n u a r y , continuing a n o w four-month old slowing trend. Supporting the claims of a slowdown in g r o w t h , respondents indicate no change in new orders this m o n t h , and only a weak increase in shipments. C o n s e q u e n t l y , there is no improvement reported on the employment f r o n t , and inventories are up fractionally. As for the f u t u r e , although manufacturers are still generally b u l l i s h , the overall optimism continues to diminish as the industrial sector fails to gain real strength. N e w orders and shipments are projected to pick up over the next six m o n t h s , but these expectations are also less widespread than they have been recently. Despite the dampened outlook though, manufacturers in the District continue to foresee gains in employment and increases in capital spending. In the current Survey, 40 percent of the respondents say they anticipate adding to their w o r k forces by A u g u s t , and a like proportion plans to increase plant and equipment expenditures. Prices increases in the industrial sector are n o m o r e w i d e s p r e a d in February than last m o n t h . A b o u t half of those polled this m o n t h r e p o r t paying h i g h e r prices for raw m a t e r i a l s , w h i l e about one fourth say they are charging m o r e for their finished p r o d u c t s . Looking ahead six m o n t h s , over 80 p e r c e n t expect to b e p a y i n g m o r e for i n p u t s , w h i l e only a b o u t 60 p e r c e n t think they'll b e able to get h i g h e r prices for the goods they s e l l . T h e nationwide b i t u m i n o u s c o a l strike could seriously affect the Third D i s t r i c t economy if an agreement between striking m i n e r s and m a n a g e m e n t is n o t reached q u i c k l y . A l t h o u g h the strike does n o t h a v e a direct effect on e m p l o y m e n t , s i n c e less than 1 percent of the D i s t r i c t labor force is involved in coal m i n i n g , the l o c a l economy could b e impacted if coal shortages d e v e l o p . Over half of the o r i g i n a l stockpiles that the m a j o r coal u s e r s , m a i n l y u t i l i t i e s , had accumulated b e f o r e the strike are n o w g o n e , and users have b e g u n to substitute m o r e expensive fuels for c o a l . A s stock piles d w i n d l e , power cutbacks could h a v e serious repercussions in the industrial sector and therefore on e m p l o y m e n t . A Director of this b a n k representing the energy industry believes that the crucial point has already b e e n p a s s e d , and that this a r e a w i l l start to feel real employment effects in a m a t t e r of d a y s . Retail sales in the area are reported to be m i x e d . Reports of cur- rent d o l l a r sales range from 1 p e r c e n t below to 5 percent above year-ago l e v e l s , and sales are generally below planned v o l u m e . The m a j o r reason for this, according to c o n t a c t s , has b e e n extremely adverse w e a t h e r which has helped to keep the lid on sales since the m i d d l e of J a n u a r y . In a d d i t i o n , two of the w o r s t winter storms to hit the area in twenty years caused m e r c h a n t s , along w i t h o t h e r b u s i n e s s p e o p l e , to shut down and l o s e a total of three selling d a y s . Inventories are somewhat thicker than they w e r e last y e a r at this time, partly as a result of slow winter s a l e s , and partly as a result of a management decision to add to stocks. For the longer t e r m , retailers are looking for a "healthy" spring buying season, hence the decision to increase inventories. M o r e o v e r , they believe the recent slowdown to b e a temporary s e t b a c k , and expect to recover lost sales over the next two m o n t h s . O v e r a l l , mid-summer sales a r e projected to be between 6 and 9 percent above year-earlier levels. Reports from commercial bankers in the region indicate that business loan demand is s l o w , but no w o r s e than seasonal patterns would lead one to expect. In terms of levels, commercial loans are between 2 and 5 percent ahead of the corresponding period in 1977. strong. Consumer loan demand remains Over the next six months bankers expect a slight pickup in C&I w i t h August levels about 4 percent ahead of year-earlier loans figures. The prime rate is currently 8 percent at all of the b a n k s contacted, and is generally expected to be pushed into the 8 1/2 to 8 3/4 percent range by late summer. Bankers contacted say that higher short-term interest rates will definitely have an effect on the market for m o r t g a g e f u n d s . Some have already noticed some disintermediation on the part of depositors as higher earning assets became available. One official at a local MSB notes that there is still a net inflow of deposits at his institution only because the rate on large CDs was recently h i k e d . H e believes that if the short-term rate rises another 25 basis p o i n t s , this region w i l l see a significant shrinkage in the supply of available mortgage funds. In addition to t h i s , m o s t of the commercial bankers contacted say that as short-term rates go u p , lenders w i l l shift away from mortgages into short-term a s s e t s . It is generally felt that this would also happen at institutions committed to financing the housing m a r k e t , such as MSBs and S&Ls, but that they would take a longer t i m e , perhaps 4 to 5 m o n t h s , to m a k e such alterations in their loan p o r t f o l i o s . FOURTH DISTRICT - C L E V E L A N D Blizzards and the effects of the coal shortage h a v e distorted District economic activity for the past several w e e k s . Retail sales have w e a k e n e d partly in response to prolonged sub-freezing temperatures throughout most of the D i s t r i c t . The coal shortage has hampered manufacturing in some a r e a s , and while layoffs h a v e been m i n i m a l , m a n d a t o r y curtailments in electrical power w i l l cause considerable layoffs w h e n i m p o s e d . Savings flows into savings and loans continued to soften in February and w h i l e commitments are not being cut b a c k , officials are cautious over prospects for both commitments and mortgage loans for 1978. Retailers of general m e r c h a n d i s e and automobiles attribute some of the weakness in retail sales to severe winter w e a t h e r . W h i l e recent poor performance of sales has not discouraged r e t a i l e r s , some appear less confident than they w e r e a month or two a g o . O n e official of a large department store c h a i n , who remains optimistic for the short run, expects a 15 percent gain in first quarter sales over last y e a r . as the year p r o g r e s s e s . Sales increases are expected to taper off A n economist w i t h a n a t i o n a l retail chain expected some let-up in sales this quarter following an unsustained rate of increase in the fourth quarter of 1977. Despite the large drop in sales during J a n u a r y , he still expects a 9 to 9 \ percent increase for the y e a r . A banker noted that retail sales had been depressed directly and indirectly by the coal strike. Auto producers and auto suppliers differ on expectations for auto sales and output this y e a r . A n economist w i t h a m a j o r auto p r o d u c e r expects new car sales of 10.9 million units in 1 9 7 8 , only slightly below his original forecast of 11.2 million last fall. He believes that bad weather over a larger part of the country this year than last has been an important factor in holding down car s a l e s . Auto s u p p l i e r s , including producers of flat g l a s s , tires and auto c o m p o n e n t s , expect sales in a range of 10.5 to 10.7 million units this y e a r . W h i l e suppliers generally n o t e some e a s i n g and setbacks in o r d e r s from auto p r o d u c e r s , none consider this of c o n s e q u e n c e . The coal shortage has resulted in only scattered production c u t b a c k s and l a y o f f s , but w o r s e n i n g conditions can be expected if mandatory controls on electricity a r e imposed this w e e k in some large metropolitan centers of the District. Of 9 major utilities in the D i s t r i c t , all but 3 h a v e plans calling for mandatory cutbacks in power usage that range from 25 to 50 percent w h e n coal stocks fall to a 40-day s u p p l y . Three utilities that serve T o l e d o , Cleveland and Dayton h a v e coal stocks that range from 52 to 60 d a y s . Three utilities that have a mandatory cutback when stocks fall to a 40-day supply have a 43 to 50 day supply. Three utilities have coal stocks that range from 25 to 33 d a y s ' supply and plan m a n d a t o r y cutbacks of 50 percent perhaps early this w e e k . One of these utilities serves the Pittsburgh area and another serves northern O h i o . The situation is of course fluid b e c a u s e of daily changes in supply conditions. A principal problem is that several utilities cannot physically increase p u r c h a s e d - p o w e r , and supplies of non-union mined coal has either dwindled sharply or has virtually e n d e d . Although coal production this month is estimated at about 25 million t o n s , compared w i t h a typical monthly average of 60-65 million t o n s , utilities claim these supplies are not a v a i l a b l e . Several manufacturers have indicated that they can m a n a g e their operations with a 25 percent cutback in electrical power p o s s i b l y by diverting production to other p l a n t s , reducing o v e r t i m e , reducing the n u m b e r of s h i f t s , and p e r h a p s , using small generator f a c i l i t i e s . Larger cutbacks w o u l d result in sizable decreases in both production and e m p l o y m e n t . Supplies of other fuels range from adequate to e x c e s s i v e . A large n a t u r a l gas supplier in n o r t h e a s t Ohio expects supplies are adequate to accommodate continued below normal temperatures into m i d - M a r c h , unless temperatures fall m u c h b e l o w zero. Another supplier has requested v o l u n t a r y conservation by its largest customers in order to assure adequate supplies for the coming m o n t h . Despite recent cutbacks in r e f i n i n g , inventories of c r u d e , distillate fuels and gasoline are still w e l l above n o r m a l l e v e l s . Steel operations this quarter appear to b e m u c h improved from last quarter. Capacity utilization w i l l p r o b a b l y rise to the m i d - 8 0 ' s compared w i t h about 75 percent last q u a r t e r . The improvement in part represents price hedge b u y i n g , stronger than expected orders for M a r c h represent some hedging against the possibility that steel operations w i l l be curtailed b y severe c u t b a c k s . Recent steel price increases have been h o l d i n g , which again is viewed as customer concern over steel s u p p l i e s . The record volume of steel imports in December is the result of efforts to ship as m u c h steel as p o s s i b l e before the effective date of reference pricing of steel on February 2 1 . One steel e c o n o m i s t estimates that the selling price of EEC steel shipped into the U . S . should be about $60 per ton higher than the U . S . p r i c e , rather than $80-$90 below U . S . prices. Executives w i t h thrift institutions are cautious about the outlook for m o r t g a g e c r e d i t . They have n o t cut commitments on new m o r t g a g e loans and do not expect to curtail commitments unless net savings flows deteriorate Officials generally feel there is room for further reduction in l i q u i d i t y . The main source of concern is volatility of deposit f l o w s , e s p e c i a l l y in further. passbook accounts. M o s t associations had a small gain in net deposits during J a n u a r y , although some larger associations had negative flows. Inflows so far in February are generally positive although outflows w e r e experienced around February 16 w h e n the two-year 7.7 percent Treasury note was o f f e r e d . Despite positive i n f l o w s , several officials noted cash flow this year has been falling behind expectations and in some cases below the volume of commitments. Mortgage loan demand in the District is described as strong or stronger than last year and one official explained the recent 1/4 percent rise in mortgage lending rates in Cleveland (generally 9 percent for an 80 percent loan) as an effort to restrain demand. Some associations expect to maintain lending by tapping the secondary mortgage m a r k e t , and some others plan to either step-up or undertake sale of mortgage backed securities as an additional source of capital. FIFTH DISTRICT - RICHMOND Fifth District business activity generally picked up in January judging from our latest survey. Such measures of activity as new orders, backlogs of orders, and employment improved among manufacturers surveyed. Only shipments, apparently held down by adverse weather conditions, showed no gain. Retailers also noted improved conditions as reflected by rising total sales and relative sales of big ticket items. Nonetheless, manufacturing respondents are less optimistic than they were a month ago. At least part of this change in attitudes is possibly due to apparently imminent curtailments of power consumption dictated by dwindling coal stocks. Despite the recent implementation of emergency measures in some areas, however, actual effects of the coal situation so far have been minimal. In the financial sector, mort- gage demand continues to be strong on a seasonally adjusted basis. supplies of mortgage funds have been adequate. To date, In some areas terms of lending are tightening in response to slower deposit growth. Conditions among Fifth District manufacturers firmed over the past month with one-third of our respondents reporting an increased volume of new orders and rising order backlogs. Despite the fact that inventories, of both finished goods and materials, expanded over the month.,there was no increase in the number of respondents reporting excessive inventories. Employment among manufacturing respondents also rose slightly but hours worked per week remained stable. Prices, meanwhile, continued to increase generally, although several manufacturers report declines in prices received. Among retailers responding to our survey, both total sales and the relative sales of big ticket items improved over the past month. Retail inventories apparently declined slightly and are now essentially in line with desired levels. desired. One respondent, however, views current stocks as lower than Prices and wages were generally higher than a month ago according to the retailers surveyed. Most Fifth District directors now anticipate that 1978 automobile sales in their areas will be somewhat weaker than In 1977. Although the expectations of our respondents regarding future business activity remain basically optimistic, manufacturers' expectations seem to have weakened somewhat over the past month. Fewer than one-third expect the general level of business activity, nationally, locally, and in their respective firms to improve over the next six months. On the other hand, more than one in six now foresees some deterioration of conditions over that time period. Other than the direct employment impact upon workers in a few industries, e . g ^ m i n e r s and railroad workers, and some secondary impact in such areas as local retail sales and state government revenues in coal mining areas, the coal strike has had little effect on the District economy to date. Dwindling coal 9tock9, however, have led to some minor power curtailments by electric utilities serving West Virginia and parts of Maryland and Virginia. If these utilities are forced to rely on their current coal stocks and are unable to tap outside sources of electrical power, major curtailments are possible within the next ten days to two w e e k s . The utility regulatory body in West Virginia has already initiated an emergency plan which will institute gradual service curtailments as needed. Comments of our directors and industry sources suggest some tightening in mortgage markets, at least in some areas of the District. A slowing of deposit inflows at lending institutions coupled with a seasonally vigorous demand for mortgage loans has created a general impression that a continued fclghtenlng of market conditions will be increasingly reflected in lending terms over the next several m o n t h s . To d a t e , h o w e v e r , adjustments have been scattered and apparently concentrated principally in the larger cities. The volume of credit extended by large Fifth District banks has b e e n unchanged since the beginning of the y e a r . Consumer loans, other than mort- gages, have increased only modestly while business loans have been essentially flat. A t the same time inflows of deposits appear to have b e e n slow. There has been no gain In savings deposits, and the growth of large negotiable CD's has leveled o f f . Replies to our fourth quarter farm credit survey revealed that last year's drought-reduced crop output and the tightening cost-price squeeze combined to create cash-flow problems for many Fifth District farmers. Bankers as a result have experienced such slower loan repayment rates and a sharp increase in requests for renewals and extensions. Farmers' demand for credit from traditional lenders continues fairly strong even though many farmers have been able to qualify for Federal drought disaster loans. Bank supplies of loanable funds seem to be adequate for the d e m a n d , but they are apparently a t the lowest level since this survey began more than two years a g o . District farmers may cut 1978 cotton acreage 26 percent from last year but are likely to offset this reduction partially by Increasing soybean plantings 9 percent. Planned feed grain acreage is down 5 percent as was the acreage seeded to food grains (wheat and rye) last fall. These Intended plantings are as of January 1 and may change considerably by planting time. SIXTH DISTRICT - A T L A N T A E v e n the Sixth District felt some ill effects of recent severe weather. Low temperatures added to the strain on already questionable supplies of c o a l . Construction activity w a s interrupted and retail sales w e r e slowed in some a r e a s , but strength in unaffected areas and earlier last m o n t h gave the District a satisfactory January record in both r e s p e c t s . Damage to w i n t e r crops w a s m i n i m a l . Thrift institutions have taken steps to compensate for smaller deposit inflows and generally feel capable of meeting continued h e a v y demand for h o m e l o a n s . But recent m o r t g a g e rate increases h a v e b e e n m e t w i t h a flurry rather than a flight of home b u y e r s . Foreign capital has become increasingly significant in the District's comm e r c i a l and industrial development and m o r e frequently d i s c u s s e d . Savings and l o a n a s s o c i a t i o n s , faced with mild to m o d e r a t e reductions in savings inflows and the smallest paydowns in m a n y y e a r s , generally believe they w i l l be able to m e e t expected strong demand for home m o r t g a g e s . Campaigns to promote savings a r e under way; m o r e associations are offering ceiling rates on c e r t i f i c a t e s , a d v e r t i s i n g , and giving p r e m i u m s . The A t l a n t a H o m e L o a n B a n k president feels that the good earnings and liquidity positions of southeastern associations w i l l allow them to pay higher rates and still m e e t housing demands; h o w e v e r , m o r t g a g e rate hikes h a v e been common in the past six w e e k s . The going conventional rates are 9 percent for 80 percent loans and 9 1/4 to 9 1/2 percent w i t h 10 percent down paym e n t s , up from 8 1/2-8 3/4 percent a m o n t h earlier; closing costs have moved up about half a point as w e l l . The currently prevailing rates in Florida are slightly l o w e r , but some cities report top-of-range rates and a number of associations have announced increases to take effect on March 1 . Announcements of coming increases in m o r t g a g e interest rates have brought h o m e buyers out of the w o o d w o r k , according to a director from South Florida. Yet in Atlanta, where higher rates are already in effect, buyers are coming out in force to head off possible further hikes. Indeed, the only sign of slackening of surging housing demand has been a leveling of single-family home construction in a few areas of Florida w h e r e lots have grown scarce and some recent building has been speculative. T h e r e , and in other parts of that state, condominium starts and sales have been quite b r i s k , stimulated by negligible apartment vacancy rates and high rents. Poor weather nationwide has induced a spurt in preretirement home buying and in requests for rental housing in southeast Florida. W i t h no end to the United M i n e W o r k e r s ' strike in sight, coal supplies have become strained in some areas. Mining operations have virtually halted in A l a b a m a , w h e r e 12,000 miners are off the j o b , although only 70 percent are union m e m b e r s . Severe weather has hindered nonunion production in northeast Tennessee, putting further pressure on prices that are already $10-$15 per ton above usual. Electric utilities and m a j o r industrial u s e r s , most of w h o m are relatively comfortable with 30-60 day supplies, fear that delivery start-up will not b e timely unless settlement and ratification come quickly. Although the TVA has systemwide supplies of about two m o n t h s , reserves at five of its twelve coal-burning plants are down to three weeks or less; power supplies have been curtailed in at least one rural area of Tennessee. Deliveries to TVA are running about 20 percent of normal; a spokesman says that shifting of coal between plants is not practical. U . S. Steel in Birmingham has undertaken conservation efforts; a coal "loan" from the Redstone A r s e n a l was required to keep Huntsville area schools o p e n . On the other h a n d , M i s s i s s i p p i Power carries a 150-day supply, and one TVA plant is flush w i t h reserves adequate for 250 operating d a y s . A director in the coal industry expects that negotiated wage increases and higher severance taxes and related costs w i l l add at least 25 percent to the price of c o a l . Icy roads and extreme cold put a damper o n consumer spending in the n o r t h e r n portions of the District; c o n s e q u e n t l y , month-end retail stocks w e r e n ' t as light as expected. H o w e v e r , a fairly strong sales pace continued in areas that w e r e least affected by the c o l d , and heavy early January buying kept m o n t h l y sales estimates even w i t h January 1976 or better in the worst afflicted l o c a t i o n s . Auto sales w e r e generally slow b u t picking up in late J a n u a r y . Damage to citrus crops from two freezes w a s m a i n l y limited to specialty fruits and should have little or no impact on the availability of orange c o n c e n t r a t e . Fresh orange shipments are running about one million boxes behind last year this season. The late start and projected high returns for processed fruit have been r e s t r a i n t s , but the primary reason has b e e n sky-high prices: FOB prices have risen 60 percent over the y e a r , and on-tree prices h a v e quadrupled. Cotton prices continued the uptrend w h i c h began in early D e c e m b e r , d e s p i t e the release of reports of heavierthan-expected 1977 production and planting intentions for 1978 and of declines in m i l l consumption and advance sales for e x p o r t . A director attributes the price strength to the depressed exchange v a l u e of the dollar. H e also expects near-record marketings (and thus some p r i c e w e a k n e s s ) of fed cattle in the next three m o n t h s . In L o u i s i a n a , the trickle of sugar m i l l closings continues and threatens to grow; producers say they want out of raw s u g a r . Processing o p e r a t i o n s , h o w e v e r , are e x p a n d i n g . As regards the farm s t r i k e , some 200 Georgia farmers have promised to withhold 50 percent of their land from production this year; they claim that their counterparts have promised to set aside at least 25 m i l l i o n acres n a t i o n w i d e . Foreign i n v e s t m e n t , actual and s u s p e c t e d , has become a hot topic of discussion among southeastern b u s i n e s s m e n . A regional r e a l estate firm headquartered in A t l a n t a described foreign investment in income-producing properties as heavy and primarily from European i n t e r e s t s . A director notes that foreign investors bought two-thirds of the shopping c e n t e r s , one-third of the office b u i l d i n g s , and one-fifth of the large apartment buildings sold in Florida's Dade and Broward Counties last y e a r . There a r e 55 foreign-owned projects currently under construction or planned in that s t a t e , compared to 4 at this time last y e a r . The list includes Siemens-Allis Chalmers' h u g e electric generator plant recently announced for the Bradenton a r e a . M i a m i banks h a v e b e e n hard pressed to put to w o r k their recent strong inflows of South A m e r i c a n c a p i t a l . H o w e v e r , business analysts in Georgia indicate that foreign investment in farmland has been i n s u b s t a n t i a l , despite rumors to the c o n t r a r y . Inventory accumulation appears to be accelerating m o d e s t l y after slowing through y e a r - e n d . A Georgia survey of purchasing agents indicates that s t o c k s , both current and expected in the near term, are r i s i n g , particularly of finished g o o d s . Deliveries are s l o w i n g , lead times lengthening. Goods in short supply in the District include a number of building m a t e r i a l s , paper for w e b offset p r e s s e s , and oil-drilling r i g s . SEVENTH DISTRICT - CHICAGO The b i g economic news in t h e p a s t 30 days has b e e n the impact of severe w e a t h e r o n sales and o u t p u t . Strike-depleted c o a l reserves of electric utilities are requiring power u s a g e restrictions in Indiana. R e t a i l sales w e r e strong p r i o r t o m i d - J a n u a r y w h e n the storms b e g a n t o take their t o l l . sales are expected to snap b a c k as w e a t h e r i m p r o v e s . on the low s i d e . Inventories are g e n e r a l l y Prices of m a n u f a c t u r e d goods are rising m o r e r a p i d l y . f o r c a p i t a l goods continues t o increase o v e r a l l . p r o v e d since D e c e m b e r . But Demand Orders for s t e e l have im- M o r t g a g e c r e d i t is t i g h t e n i n g , and h o m e starts are e x p e c t e d to decline in 1 9 7 8 . F a r m c r e d i t conditions h a v e improved s l i g h t l y . T h e recent rapid rise in h o g prices reflected a surprising decline in marketings. B a d w e a t h e r h a m p e r e d sales and output in m u c h of J a n u a r y and F e b r u a r y t o a greater extent than in any previous w i n t e r in m e m o r y . Heavy snow, ice, and h i g h w i n d s caused w i d e s p r e a d w o r k e r a b s e n t e e i s m , p a r t i c u l a r l y in Illinois and Indiana. A c t i v i t y w a s affected in t h e r e t a i l i n g , c o n s t r u c t i o n , manufactur- i n g , and service industries. n o r m a l speed. shortages. Trucks often w e r e u n a b l e t o m o v e , a t least n o t at T h e r a i l r o a d s also h a d problems with w i d e s p r e a d freight car H e a v y ice on the w a t e r w a y s has d r a s t i c a l l y slowed or halted t r a f f i c . A record n u m b e r of airline flights w e r e c a n c e l e d . A m o n g the industries affected significantly b y w e a t h e r w e r e s t e e l , p a p e r b o a r d , m o t o r v e h i c l e s , and a p p l i a n c e s . In a l l cases losses in sales and output caused b y w e a t h e r are expected to b e recovered in the months to c o m e . Electric utilities serving m o s t of the district w i l l b e a b l e to supply their customers despite the long c o a l strike. This is b e c a u s e o f large starting s t o c k p i l e s , and h e a v y u s e o f western coal and nuclear power,. Problems are mounting in I n d i a n a , h o w e v e r , except for the steel p r o d u c i h g area at the f o o t o f Lake M i c h i g a n . Strike-affected utilities in the rest of Indiana have re- quested a sharp cutback in l i g h t i n g . M a n d a t o r y cutbacks for large industrial users are expected shortly. Some factories c a n supply a portion of their p o w e r needs from self g e n e r a t i o n . But p o w e r cuts of 50 percent or m o r e w o u l d shut down or c u r t a i l the operations on a m a s s i v e scale. M a n y district manufacturers w i t h ample p o w e r available emphasize that they a r e dependent on components m a d e in Ohio and other power-short a r e a s . Large retailers w e r e v e r y p l e a s e d w i t h sales prior to m i d - J a n u a r y . Snow and blizzards since then h a v e h a d an unprecedented impact on v o l u m e . Customers and clerks often c o u l d n o t get t r a n s p o r t a t i o n , and deliveries o f merchandise w e r e h a m p e r e d . Some w i n t e r - r e l a t e d items are n o w in short supply. Rising incomes and evidence of consumer optimism (despite some surveys to the contrary) p r o b a b l y a s s u r e a rapid rebound in sales as w e a t h e r improves. Prices of general m e r c h a n d i s e are expected t o rise h.h p e r c e n t on a v e r a g e in 1 9 7 8 , somewhat m o r e than last y e a r . A i r l i n e s credit discount fares w i t h large gains in passenger t r a f f i c , w e a t h e r a d j u s t e d . Bad w e a t h e r and strikes h a v e reduced m o t o r vehicle output substantially in the past 30 d a y s . In p a r t , these output cuts m e r e l y substituted for layoffs w h i c h w o u l d have b e e n required to h o l d down excessive inventories of cars and trucks. Temporary shortages of models that have b e e n selling w e l l are e x p e c t e d , however. Steel orders have increased in recent m o n t h s . One c o m p a n y projects 1978 shipments at 97 m i l l i o n t o n s , assuming a 3 million ton cut in imports. c o m p a n y orders are d o w n , b u t orders for p l a t e s , b a r s , and structurals for Auto c a p i t a l goods are u p . Orders have also increased at steel service c e n t e r s . W e a t h e r problems on deliveries reduced shipments 10 percent in J a n u a r y . c o a l supplies are adequate if the c o a l strike ends b y A p r i l 1 . Coking User inven- tories of steel are b e l i e v e d to b e v e r y t h i n . A l t h o u g h t h e r e are important e x c e p t i o n s , demand for capital g o o d s , o v e r a l l , has c o n t i n u e d to improve. tor. Construction equipment is the strongest sec- F a r m equipment continues v e r y w e a k , b u t one tractor p l a n t has reopened as scheduled after a J a n u a r y l a y o f f . Producers o f c a s t i n g s , a x l e s , t r a n s m i s s i o n s , v a l v e s , c o n t r o l s , m o t o r s , a n d other components sense that demand for m o s t types of equipment is r i s i n g . Design-engineer companies t h a t h a n d l e m a j o r long-lead time projects say that their w o r k l o a d has increased in recent m o n t h s , after a long d r y s p e l l , and t h e y f i n d the outlook "very promising." Demand for homes has held u p w e l l in recent w e e k s , in v i e w of severe weather. N e v e r t h e l e s s , analysts anticipate a 10 percent decline in starts in 1 9 7 8 t o about 1.8 m i l l i o n (with a d r o p in singles m o r e than offsetting a rise in a p a r t m e n t s ) b e c a u s e of recent a n d prospective d i s i n t e r m e d i a t i o n . S&Ls around the district say t h a t n e t inflows of savings h a v e b e e n "below expectations" this y e a r . The average drop f r o m a year ago w a s 30 percent in the Chicago a r e a , b u t m u c h m o r e at some institutions. reported "red figures." Some officers in downtown areas Interest rates have increased b y as m u c h as a half percentage p o i n t in the past t w o m o n t h s , and are n o w in the 9 to 9 3 / 8 p e r c e n t range o n 2 0 p e r c e n t l o a n s . Further increases in rates are e x p e c t e d . This w e e k some S&Ls h a v e tightened other terms b y reducing maturities and b y increasing fees. Some are limiting n e w loans t o single-family owner-occupied dwellings. Borrowings at the FHLBs are u p significantly. Commitments have b e e n made m o r e cautiously in recent m o n t h s , and fees have b e e n charged m o r e frequently. Despite the points cited a b o v e , n o drastic curtailment o f n e w loans is anticip a t e d unless disintermediation accelerates sharply. Our survey shows that farmland prices increased m o d e r a t e l y in the f o u r t h q u a r t e r , offsetting a decline in the third q u a r t e r . 1977 was 13 p e r c e n t , smallest since 1 9 7 2 . The increase for C r e d i t conditions at rural banks improved slightly in the fourth q u a r t e r , halting the rapid deterioration of the third quarter. Higher crop prices in recent months r e f l e c t , in p a r t , a record m o v e m e n t of grain under CCC l o a n s . Margins o f livestock producers h a v e improved as prices rose in recent m o n t h s . The v e r y rapid rise in hog prices since year end h a s surprised m o s t a n a l y s t s . b e l o w expectations. Hog marketings h a v e b e e n w e l l Partly this m a y reflect w e a t h e r c o n d i t i o n s , b u t earlier projections of a 5-7 p e r c e n t rise in h o g slaughter in the first half are b e i n g scaled d o w n . EIGHTH DISTRICT — ST. LOUIS Business activity in the Eighth Federal Reserve District made modest gains in January although production and sales were hampered by adverse weather conditions. Retail sales registered small increases. were generally at or near desired levels. industries continues to increase. Inventories Manufacturing activity in most Home construction remains at high levels, spurred by a backlog of new home sales. Net savings inflows of consumer-type time and savings deposits into commercial banks and savings and loan associations continued to increase, but the rate of growth has slowed substantially. Mortgage interest rates have risen on both commercial and residential loans. Retail sales registered modest gains in January compared with a year ago. Sales were reportedly hurt by adverse weather conditions, although last year's January sales were also adversely affected by severe weather. Department store representatives reported somewhat larger sales gains for durable goods than soft goods. Automobile sales in the St. Louis area this year were about equal to the January and early February sales of last year but inventories of new cars are generally above desired levels. No significant inventory problems were reported by other retailers. The rate of growth in manufacturing appears to have slowed somewhat in January from the December level, reflecting in part some weather-related problems and a slowdown in automobile production. Severe weather slowed the delivery of raw materials and parts to a number of plants in the District. Some automobile assembly plants were temporarily shut down in order to make inventory adjustments in models where sales had not met expectations. Representatives of some capital goods manufacturers reported small gains in production, although demand has not been as strong as had been expected. Production of housing-related goods, including building materials, construction equipment, and wall coverings, remains generally strong. Aircraft manufacturing continued strong as substantial order backlogs were reported. A large backlog of orders continued in the home building industry, although a slowdown in new home orders has occurred in recent weeks. Homebuilders were generally optimistic despite the slowdown, given the existing backlog of orders and the generally good prospects for new home sales this year. Contributing to the large number of unfilled orders was the severe weather in part of December and January which hampered construction. Commercial banks in the District experienced little change in consumer-type savings deposits, but relatively large increases in other time deposits, primarily large certificates of deposits, in January. Savings and loan associations generally reported that net inflows of savings were positive, but the rate of gain had slowed noticeably. The slowdown was attributed to rising rates on alternative investments, but disintermediation is not believed to be a serious problem at this time. It was pointed out, however, that further increases in short—term rates could have significant effects on savings inflows in the coming months. Borrowings by savings and loan associations at Federal Home Loan Banks were reported to be increasing, but the level of such borrowings was still relatively low. The rate of interest on mortgage credit has risen in recent weeks. Mortgage rates on new homes in the St. Louis area are now generally at 9 percent on an 80 percent loan, up from 8-3/4 percent a few weeks ago. However, a few savings and loan associations in St. Louis are still making such loans at 8-3/4 percent. Mortgage rates on commercial building have also moved up one-eighth to three-eighths of a percent. In general, mortgage money is reported to be available at the higher rates. However, some directors of the Little Rock Branch reported that in parts of Arkansas savings and loan associations were fully loaned u p , that funds for commercial building were not now available, and that new home buyers were having difficulty in arranging permanent financing. The coal strike may soon have a sizable impact on overall economic activity in the District. Union Electric, the leading electric utility in the St. Louis area, reported that mandatory cutbacks may have to be considered within the next two weeks unless the voluntary cutbacks proposed last week work or the strike ends. However, representatives of this firm report that it has greater coal supplies than most utilities as much of its coal comes from the western states. The Governor of Kentucky has made a plea to residential, industrial, and business customers to voluntarily reduce their use of electricity. The TVA (Tennessee Valley Authority), which supplies electric power to west Tennessee and most of Kentucky, expects to require reduction of current usage by all customers about March 1st unless the strike is settled. Representatives of utilities in the area report that the TVA plan will likely involve some layoffs at manufacturing plants. Farm commodity prices and the farm income outlook have improved somewhat in recent weeks. higher than last September. Farm commodity prices average about 6 percent Nevertheless, a small percent of the farm operators still talk about a farm strike during the current year. NINTH DISTRICT - MINNEAPOLIS Homebuilding broke records and w a s a major spur to the Ninth District's economic recovery in 1 9 7 7 , but our Bank's directors don't think it w i l l be quite that strong in 1978. Even though disintermediation is not expected to affect credit terms much soon, small upward shifts in the mortgage funds supply curve and r i s i n g materials and labor costs are expected to slow n e w Homebuilding somewhat. This probable slowdown hasn't dimmed directors' 1978 outlook for most labor force groups. But they are concerned about continuing high unemployment among minorities and women and about the longer-term impact of recent legislation on the composition and growth of e m p l o y m e n t . 1977's homebuilding record won't be matched this year Homebuilding in the Ninth District set a n e w record in 1977, and it's likely to stand through 1978. Last year's rate beat the 1972 record b y 4 percent and the 1976 rate b y 17 p e r c e n t . Although directors generally expect this year to be pretty good for h o m e b u i l d i n g , they expect more moderate growth than in 1 9 7 7 . The most pessimistic o u t l o o k , based on a projection b y the National Association of Homebuilders, is that housing starts in the district w i l l fall as much as 20 percent. Directors believe supply shifts w i l l cause most of this slowdown. Some are particularly concerned about rising building costs making n e w housing units "unaffordable." Most also think upward shifts in the supply curve for mortgage funds w i l l push up the price of housing s e r v i c e s . The reason the supply curve for mortgage funds is expected to shift up is that deposit growth at district thrift institutions has been slowing and can be expected to continue to slow as incentives for disintermediation p e r s i s t . An official of the Federal Home Loan Bank of Des Moines estimates that net savings inflows in January were 60 percent less than a year ago in the D e s Moines district (which includes Minnesota and the D a k o t a s ) . One large thrift institution in the M i n n e a p o l i s / S t . P a u l area reports a 50 percent reduction in net inflows in J a n u a r y , while another reports a net o u t f l o w . Directors suggest that disintermediation is a factor in this reduced deposit growth and that continued or widening differences in market ahd Regulation Q rates w i l l exaggerate i t . Despite this deposit s i t u a t i o n , directors observe that thrift institutions are currently augmenting traditional deposit sources with alternative sources, including borrowings from the Federal Home Loan Bank. As a result, they expect the impact of disintermediation on mortgage supply to be small in the near future. The employment outlook is g o o d — f o r some Directors don't seem to think the homebuilding slowdown will reduce district employment m u c h . District construction employment increased 4 percent during 1 9 7 7 , contributing a lot to the 3 percent increase in total e m p l o y m e n t . By December the district's overall unemployment rate had fallen to 5.2 p e r c e n t , its lowest level in three y e a r s . Despite the expected homebuilding s l o w d o w n , directors do not expect a n y employment changes in the next few m o n t h s , and the current high level of help wanted ads supports their v i e w . However, directors indicate that unemployment among some labor force groups is still very h i g h . For e x a m p l e , minority youth unemployment in the Twin Cities is said to b e about 40 p e r c e n t . are h a v i n g particular difficulty finding j o b s . Native Americans And job opportunities in M i n n e s o t a recently appear to have been greater for men than for w o m e n . M o r e o v e r , directors b e l i e v e that the h i g h e r minimum wage could cut opportunities further for those having the most trouble finding work. Some think the h i g h e r wage w i l l reduce youth and summer employment in their a r e a s . Others think it w i l l reduce job entries in the trade and service s e c t o r s , which traditionally h a v e provided the most opportunities for those having problems finding e m p l o y m e n t . Directors also believe the social security tax increases w i l l hurt total employment growth h e r e in the next few y e a r s . Since these increases w i l l boost e m p l o y e r s ' costs and reduce take^home p a y , some directors think business investment outlays may suffer, retarding employment growth in capital goods i n d u s t r i e s . Others suggest that these taxes w i l l raise per unit labor costs w h i c h w i l l induce business to substitute capital for l a b o r . This substitution might improve employment in capital goods industries but would reduce employment in final goods industries. TENTH D I S T R I C T — K A N S A S CITY H e a v y snows and long cold spells have undoubtedly held b a c k Tenth District business a c t i v i t y , but the economic outlook remains b r i g h t . This is the c o n s e n s u s , at least, of principals in the homebuilding industry and of b a n k e r s in the D i s t r i c t . Homebuilders and executives of savings and loan in- stitutes are v i r t u a l l y all in agreement that funds w i l l b e adequate to support another year of h i g h m o r t g a g e d e m a n d . In one important District sector— a g r i c u l t u r e — t h e outlook has improved as new forecasts n o w project higher prices for cattle and h o g s . In b a n k i n g , loan demand continues at v e r y high levels. Builders of homes continue to e n j o y v e r y high demand throughout the District. They say that they cannot build fast e n o u g h , and wish they could find the labor to put together additional c r e w s . Most builders still are having problems getting certain m a t e r i a l s , but half say that the shortages seem to be less severe. Housing starts so far this year are off a bit from the same period last year in some parts of the D i s t r i c t , but only because of w o r s e w e a t h e r . Homebuilders expect 1978 to be as good a year for their business as 1977. A l l see interest rates r i s i n g , especially in the second half of this y e a r , and several express concern about Federal Reserve policies. Most h o m e b u i l d e r s , h o w e v e r , believe that sufficient funds w i l l continue to b e available for mortgage lending. Savings and loan associations in all parts of the District report very high m o r t g a g e d e m a n d . All a s s o c i a t i o n s , except one whose mortgage rate is higher than its competitors, say that loan demand is e q u a l t o , or higher t h a n , last y e a r ' s . A l l report lower deposit g r o w t h , particularly in passbook savings accounts, than during the comparable period in 1976. H o w e v e r , one-third say that deposit growth so far this year is substantially improved from the last quarter of 1977. None expects to b e able to meet its 1978 m o r t - gage demand w i t h cash flow from deposit increases and m o r t g a g e r e p a y m e n t s . H o w e v e r , all expect to b e able to m e e t mortgage demand by obtaining funds from other s o u r c e s . Two-thirds plan to increase their borrowings from the Federal Home Loan B a n k . One contemplates issuing mortgage-backed bonds and another m a y issue a pass-through s e c u r i t y . Several plan to increase sales of mortgages in the secondary m a r k e t , while others have already cut b a c k o n , or s t o p p e d , purchasing m o r t g a g e s or p a r t i c i p a t i o n s . M o r t g a g e rates in the District have increased from 3/8 to 3/4 per cent in the last y e a r , w i t h current rates ranging from 9 per cent in some cities in the eastern part of the District to 9 1/2 per cent in the w e s t e r n cities in the D i s t r i c t . An additional 1/4 per cent increase in the next few months is generally a n t i c i p a t e d . The respondents are not tightening nonprice terms or credit s t a n d a r d s , nor do they plan to do so in the n e x t 6 m o n t h s . A l l believe that some combination of increasing rates and obtaining funds from nondeposit sources is preferable to changing underwriting standards, and that this combination of higher rates and nondeposit sources of funds w i l l prove sufficient to meet the expected high level of mortgage d e m a n d . Tenth District bankers generally report continued strong loan d e m a n d , demand for business l o a n s , particularly for energy-related i n d u s t r i e s , remains high. Demand for construction and other types of real estate loans is also very high. Banks in A l b u q u e r q u e , Kansas C i t y , and Omaha report strong deposit g r o w t h , but banks in Denver and Tulsa have recently experienced losses of funds and they expect to borrow in either the Federal funds or CD market to obtain the funds necessary to meet their strong loan d e m a n d s . Recent reports on livestock inventories contain a number of surprises w h i c h have important implications for prospective production levels and p r i c e s . Based on the December 1 H o g R e p o r t , it w a s expected that p o r k output in the first quarter would rise enough to effectively hold the lid on prices. Although some of the current strength in the h o g market is related to weather-delayed marketings in the Corn B e l t , the general tone of the m a r k e t suggests that numbers in the December 1 report m a y have b e e n overestimated and that h o g prices in 1978 w i l l not decline as m u c h as originally a n t i c i p a t e d . The probability of h o g prices falling below $35 per hundredweight anytime this year n o w appears small. S i m i l a r l y , the outlook for cattle prices has improved in the past few weeks. A recent report on the cattle inventory shows that numbers declined about 5 per cent in the past y e a r . At 116 million h e a d , the cattle inventory is about 2 or 3 million head smaller than m o s t analysts thought it would be on January 1. The stage is rapidly being set for some rather explosive price increases in the cattle i n d u s t r y , and if p o r k production fails to expand as rapidly as currently p r o j e c t e d , stronger cattle prices could easily occur in 1978. Although production estimates for 1978 must now be shaved down in light of this new information, total meat supplies should still m a t c h — a n d w i l l probably e x c e e d — l a s t year's r e c o r d . In 1977, prices for both hogs and fed cattle averaged about $40 per h u n d r e d w e i g h t . Average prices for cattle in 1978 should run $3 to $5 per hundredweight above last year's f i g u r e , but hog prices are expected to average somewhat lower. Nevertheless, in both instances, the new forecast price levels are several dollars higher than originally e x p e c t e d . While this is good news for the farm p r o d u c e r , consumers w i l l hardly be overjoyed by this p r o s p e c t . ELEVENTH D I S T R I C T — D A L L A S A c c o r d i n g t o this month's survey of Directors and b u s i n e s s m e n , the underlying economic conditions in the Eleventh District continue t o i m p r o v e . H o w e v e r , w i n t e r v e a t h e r b r i e f l y disrupted some businesses in the northern t i e r of t h e District and contributed t o a slight w e a k e n i n g of retail s a l e s . Most n o n d u r a b l e goods m a n u f a c t u r e r s expect production to show modest gains this y e a r , but p e t r o l e u m refiners report that excess inventories of some refined products m a y hold down gains in output. Construction of office buildings continues t o s t r e n g t h e n , and S&L's report m o r t g a g e rates are climbing as net savings inflows slow and m o r t g a g e demand remains strong. Rural land values are expected t o be fairly stable this y e a r according tc District agribankers. The farm strike movement continues t o attract only small crowds at it's m e e t i n g s and rallies in t h e D i s t r i c t . Occasional bouts of unseasonably bad w e a t h e r have forced department store sales to fall b e l o w t h e expectations of some store e x e c u t i v e s . Sales a r e , n e v e r t h e l e s s , running 10 percent above year-earlier l e v e l s , and inventories are at m a n a g e a b l e l e v e l s . Although store executives concede that the sales growth recorded in 1977 w i l l be difficult to b e a t , t h e y point to rising income l e v e l s , growing employment r o l l s , and the proposed tax cut as reasons for expecting another strong sales performance this y e a r . A u t o dealers report few changes in new car sales from last m o n t h . Sales continue to run slightly above year-earlier l e v e l s , but below earlier predictions b y most d e a l e r s . Respondents see no major difficulties in selling cars and expect sales to strengthen b y spring. levels. Inventories are at "stvtisfactory" Apparel manufacturers report a recent strengthening of sales; h o w e v e r , they predict only slight increases in coming m o n t h s . Rising production costs and b u y e r resistance to price increases are forcing some manufacturers to operate at only 75 percent of c a p a c i t y . H o w e v e r , many large efficient firms report production near capacity. Sales of chemicals are currently s o f t , but improvement is anticipated in coming m o n t h s . One respondent forecasts a 10- t o 12-percent sales increase this y e a r , down slightly from last year's 15-percent i n c r e a s e . producers seem to be doing better than the rest of the i n d u s t r y . Petrochemical Capital spending plans for this y e a r are on t r a c k but are largely limited to projects that conserve energy or convert from natural gas feedstocks t o oil or coal. Inventories o f distillate and residual fuel oils are h i g h , and refiners h a v e switched t o building gasoline stocks for the summer driving season ahead of schedule. cient this y e a r . Present capacity levels are expected to be suffi- H o w e v e r , passage of the energy program and EPA approval of construction of new facilities to produce unleaded products w o u l d increase capital expenditures in t h e industry. Construction o f office buildings is on t h e rise in Houston and D a l l a s . In H o u s t o n , virtually all available office space is o c c u p i e d , and most of the space in proposed "buildings is leased before the projects get underway. Occupancy rates in downtown office buildings in Dallas average 92 percent of capacity. Several projects are under c o n s t r u c t i o n , and m o r e are expected t o b e announced "by s u m m e r . Savings and loan associations in Texas report that disintermediation has not yet b e c o m e a p r o b l e m , but they do report a w e a k e n i n g o f net savings inflows. One executive described the current situation as the "early stages of disintermediation." W i t h mortgage demand remaining s t r o n g , the rate on conventional mortgages has been raised over 50 basis points since November t o 9 1/2 percent at m a n y S & L ' s . state's usury r a t e . That is only 1/2 percentage point below t h e S&L's are increasingly m o r e selective in the t y p e of properties they w i l l finance. M a n y S&L's that had previously stayed out of t h e secondary market report that they will now enter it to secure f u n d s , and those that were already in it report that market is tightening. The rise in land values in the District is easing adjustment problems for banks on some real estate loans. land is also reported. Renewal of speculative interest in "rav" A g r i b a n k e r s , responding to our latest quarterly survey, indicate that rural land values could remain fairly stable in the months ahead following the modest 5- to 6-percent increases recorded in 1 9 7 7 . Much of the appreciation of land values is due to inquiries and purchases from nonagricultural investors. Activity in the Red River areas of Texas and Louisiana is particularly strong. H o w e v e r , in many areas of T e x a s , reduced cash flows and incomes from lower crop prices and higher production costs have slowed the expansion of farm o p e r a t i o n s , causing land prices to advance more slowly. In f a c t , the rise of costs associated with fueling irrigation pumps has forced the average value of irrigated cropland on the Texas High Plains to decline in each of the past four quarters. TWELFTH DISTRICT - SAN FRANCISCO After a v e r y good fourth q u a r t e r , r e t a i l sales h a v e slowed — notably in Southern C a l i f o r n i a . most W e s t e r n production continues to grow m o d e r - a t e l y , reaching full capacity in some i n d u s t r i e s . W h i l e some industries h a v e v e r y low inventories and m o s t a r e at desired l e v e l s , the petroleum and n a t u r a l gas industries are characterized by excess inventories. W h i l e there is con- cern about d i s i n t e r m e d i a t i o n , only a few banks have actually noted savings outflows. Because deposits have b e e n growing less rapidly than l e n d i n g , several thrifts h a v e temporarily left the m o r t g a g e m a r k e t . After several m o n t h s of depressed s a l e s , some auto dealers report a pickup in sales beginning in m i d - J a n u a r y . And after a record fourth q u a r t e r , r e t a i l sales in the Los Angeles area w e r e fairly poor in January — a pheno- m e n o n w h i c h might be attributable to the unusually heavy r a i n s . Production levels remain steady to growing in most w e s t e r n industries; full capacity is c l o s e at hand for some; and the inventory p i c t u r e varies from thin to f a t . The p r i m a r y aluminum industry is producing at or near capacity and there is actually a capacity shortage in aluminum rolling (a stage into w h i c h half of a l l primary aluminum e n t e r s ) . Demand for fabricated aluminum products has been m u c h higher than one would expect during w i n t e r m o n t h s . In the aerospace i n d u s t r y , Douglas recently obtained a government order for 20 DC-10's and Lockheed received a request from Delta Airlines for 5 Tristan jetliners. The employment and income effect of the stimulus should c o n t i n u e for several y e a r s . The energy field appears to be characterized by excess inventories of natural gas and petroleum p r o d u c t s , though there is much concern expressed over the continuation of the coal s t r i k e . A mild winter has resulted in large gas inventories (up 25 percent over year-ago levels according to one p r o d u c e r ) and an eagerness among gas producers to m a k e sales on favorable t e r m s . There is also reported to b e record inventories of petroleum products and an associated increase in competitiveness in that i n d u s t r y . Agriculture is receiving mixed b l e s s i n g s . With the drought declared officially over in v i r t u a l l y a l l w e s t e r n s t a t e s , farmers are assured of a l l the w a t e r they need over the next y e a r . U n f o r t u n a t e l y , the storms w h i c h brought the rain h a v e caused quite severe d a m a g e to a number of California farms. At least o n e c o u n t y , in which dirt and dust storms filled irrigation canals as w e l l as some o r c h a r d s , w a s declared a disaster a r e a . Because of the damage done to some v e g e t a b l e s , like c a r r o t s , g r e e n onions and l e t t u c e , local prices h a v e risen sharply — a reported tripling of price in the case of lettuce. W h i l e construction activity continues at a steady p a c e in m o s t parts of the D i s t r i c t , houses a r e not selling as quickly as they w e r e a f e w months ago. In contrast to the queues that w e r e forming outside new developments in Southern California last y e a r , today the average house is not sold until two m o n t h s after c o m p l e t i o n . In the market for existing h o u s i n g , it also takes about two months to sell and sellers are now getting 95 rather than 100 percent of their asking p r i c e . W h i l e there is s t i l l concern over the possibility of d i s i n t e r m e d i a t i o n , only two banks report having observed any decline in savings d e p o s i t s . One small Southern California b a n k noted that its savings deposits had fallen off in January b y about 5 percent m o r e than the seasonal n o r m . A large California b a n k observed "some degree of outflow of savings deposits from banks and thrift institutions in November and December," and expressed concern over the Fed's further tightening in J a n u a r y . This bank argued that the housing industry would be jeopardized if the 90-day T-bill rate moved above 7 p e r c e n t . W h i l e most other banks surveyed had observed no savings o u t f l o w , some noted a significant slowing in the rate of growth of deposits and others spoke of an increasing frequency of customer inquiry regarding T-bill a u c t i o n s . Still other banks noted a shift in the composition of savings toward the higher interest rate certificates. There is some concern in the Twelfth District over the impact of rising m o n e y market rates and consequent savings outflows on the housing sector. Mortgage rates h a v e increased by 1/4 percent in m a n y parts of the D i s t r i c t , though there has been little dampening of demand o b s e r v e d . A num- ber of Oregon thrifts h a v e adopted a 60- to 90-day moratorium on lending. Thrifts in o n e area of California have ceased m a k i n g loans on multi-family or non-owner occupied p r o p e r t i e s . Several Idaho banks report that credit avail- ability for housing over the coming year will depend largely upon whether the agricultural sector w i l l liquidate its loans on schedule and how heavy agricultural loan demand w i l l be over the coming y e a r . The only dissent from this tight mortgage credit scenario, comes from the CEO of a large bank holding c o m p a n y , w h o argues that given w e a k commercial loan d e m a n d , banks will continue to remain quite active in granting real estate c r e d i t .

Federal Reserve (1978, February 27). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19780228

@misc{wtfs_beige_book_19780228,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1978},
  month = {Feb},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19780228},
  note = {Retrieved via When the Fed Speaks corpus}
}