Beige Book

CONFIDENTIAL (FR) CURRENT ECONOMIC COMMENT BY DISTRICT Prepared for the Federal Open Market Committee by the Staff January 29, 1980 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 11 Fifth District-Richmond page 15 Sixth District-Atlanta page 18 Seventh District-Chicago page 22 Eighth District-St. Louis page 26 Ninth District-Minneapolis page 29 Tenth District-Kansas City page 32 Eleventh District-Dallas page 35 Twelfth District-San Francisco page 38 SUMMARY* [Asterisk: Prepared at Federal Reserve Bank of Chicago.] This month's REDBOOK reports show total activity continuing to hold at high levels, but softening is expected in the next several months. Mild weather in the North, in contrast to recent years, has influenced activity both for better and worse. Weakness is still centered in the auto and housing industries and their satellites, while performance has been "spotty" or "mixed" in other sectors. Several districts reported retail sales, other than motor vehicles, to be surprisingly strong both before and after Christmas. Signs of erosion in the generally vigorous capital goods industries are spreading. Unlike housing, nonresidential construction activity has remained at advanced levels. Inventories are under close rein and are in good balance overall. Price inflation has not abated. The President's grain embargo has not de- pressed prices as had been feared. Defense orders have not increased signifi- cantly to date, and manufacturers' ability to boost output is closely limited in the short run. Credit demands have moderated in the face of high interest rates and tighter credit standards. Generalizations offered by the twelve districts reflect trends in the major concentrations of activity in each region. "still see very few signs of a downturn." "surprisingly resilient in January." Boston respondents New York reports activity Philadelphia finds a contrast between a decline in manufacturing and "unexpectedly strong" retail sales. Cleveland respondents "still expect a recession," but are less certain about "timing and depth." The Richmond district's businessmen remain "decidedly negative." Atlanta reports weakness in retail sales, but a boom in tourism. Chicago, affected more than the nation by the slowdown, sees "further deterioration." In St. Louis, the evidence suggests that total business activity has "declined somewhat" in recent weeks. Minneapolis reports that "the region is not in a recession," but "signs of softening persist." activity continues to slow." Kansas City says "business Dallas finds near-term weakness confined largely to autos and housing, with sustained long-term growth apparently assured. San Francisco reports "no major decline in employment or production." Mild temperatures and light snowfalls in December and January contrasted with experience of recent years. In the northern districts there were few impediments to transportation of commodities and people, and construction continued at abnormally high levels. As a result, retail sales and manufacturing may have been maintained at deceivingly high rates. However, lack of snow markedly reduced tourist outlays in resort areas. Winter merchandise had to be moved with large markdowns. Stocks of fuel for heating were more than ample. Tourism in the South, by contrast, set new records. Auto and truck sales remain seriously depressed, with most parts and assembly plants operating far below capacity. permanently. Some plants are being closed Sales of imports and desirable small domestic cars are still limited by availability. Many auto dealerships have closed and there are fears that many more will go under before sales revive in the spring. High interest rates are a major burden for dealers carrying inventories and many potential car buyers have been deterred by high finance charges and tighter lending standards. Residential construction activity and sales of existing properties have declined further, with the end of the slide still not in sight. The recent suspension of state mortgage usury ceilings has not significantly benefited states where usury was a barrier. High interest rates, large down payments, and high prices keep many potential buyers out of the market. Most districts report considerable strength in nonresidential construction, especially office and commercial buildings. of ethanol plants. Atlanta expects a surge in building In the mining sector coal gasification projects are under- way, and precious metals are booming in the West under the stimulus of high prices. Capital equipment production continues at high levels, but this sector probably is no longer expanding overall. Among the strongest groups are machine tools, railroad equipment, energy-conserving equipment, items related to oil and gas exploration, electronics, and commercial aircraft. Among the weaker groups are construction equipment, farm equipment, heavy trucks and trailers. Some districts expect a rise in defense orders, but expansion of output will be limited by the availability of critical materials, various components, and skilled workers. Inventories at both the manufacturing and distribution levels have been kept lean by adjustments in output, except for some products facing very weak demand. Reta.il inventories had appeared somewhat high before Christmas, but special promotions helped to correct these conditions. Reports from virtually all districts show inflation continuing at a high rate, with no abatement expected in I98O. Rising energy prices and rising labor costs are largely responsible. The farm sector is relatively prosperous because of bumper crops and high prices. However, the grain embargo has created a larger-than expected stock overhanging the market* Also, farm credit conditions are very tight, causing some farmers to defer purchases of equipment and other investments. The new two and one-half year floating rate certificates are proving popular at both S&Ls and banks. Six-month money market certificates continue to expand at a rapid pace, and account for a larger volume of funds. on the strength of business loan demand were mixed. Reports FIRST DISTRICT - BOSTON Respondents in the First District still see very few signs of a 'downturn. If there has been a change in the level of economic activity during the past month, it has been for the better. Retail sales seem to have picked up in the few days before Christmas and preliminary January figures have been quite good compared with a year ago. An important exception is northern New England which is suffering from a lack of snow and consequently a lack of tourists. Manufacturing activity remains at a high level; in several cases December was stronger than expected. In the banking sector, the movement from savings deposits to money market certificates is continuing. Loan demand is holding steady; in northern New England delinquencies seem to have increased. Respondents from the retailing sector report that sales in the last few days before Christmas were good. This pick up plus relatively strong sales in the first weeks of January means that the Christmas season was relatively successful. To a large extent the vigorous sales before Christmas were attributable to very large markdowns. This had the effect of bringing inventories under control and while it cut profit margins, a firm's inventory position seems to have more influence on its short-run purchasing behavior than do profits. In general retailing in New England had a much stronger Christmas than seemed likely a couple of months ago. New England. An important exception, however, is the ski areas of northern There has been virtually no snow in New England and this has adversely impacted not only the ski resorts themselves but also all the hotels, stores, restaurants and specialty manufacturers which are associated with them. Even if snow does come there is no way that the losses can be fully made up. Even real estate has been affected as developers of second homes rely on skiers coming up to see model homes. The level of manufacturing activity remains high. One diversified manufacturer in the high technology area reports that December was very good in all categories; even areas which had been doing poorly picked up. A manu- facturer of measuring equipment used in the process industries finds that orders are continuing at a strong pace and backlogs are high; if the present order rate continues this firm's 1980 plan will be revised upward. of aircraft and parts, backlogs are rising steadily. quality sportswear has record spring orders. For a large producer A manufacturer of high An exception to the generally favorable picture came from a firm in the furniture area; attendance at trade shows is low and price cutting is fierce. Moreover, even those respondents who are very pleased with their current level of business in the year. expect a fall-off later Prices do not seem to be softening, although there have been some improvements in delivery lead times. Several firms which are active in the defense business were asked whether the industry could handle a large increase in spending. The industry as a whole has been below capacity; so physical capacity is not really a problem. The exception is in the manufacture of semi-conductors and chips; the lead times for these are already long and with a substantial increase in defense demand they could become "unbelievable." The other major bottleneck is labor; there are not enough people with the necessary skills, especially programming. While an increase in defense spending over what was already platmed will have some effects in 1980, the real employment impact will not occur until 1981 and after. Banking directors report that loan demand is holding steady at a relatively high level. Two respondents from northern New England have observed an increase in delinquencies and as a consequence they are adding to their reserves for bad debts. This increase in overdue loans is thought to be independent of the problems caused by lack of snow. All see a steady conversion of savings deposits to money market certificates. Professors Eckstein, Houthakker, Samuelson, Solow, and Tobin were available for comment this month. Houthakker, Solow, and Tobin favor leaving the long-term monetary growth rate targets unchanged, Eckstein favors significant tightening, and Samuelson favors something in between. Solow argues that continuation of the present 5 to 8 percent target rates for M2 provides ample room for monetary deceleration should that prove warranted. After analyzing the various reasons for the drop in the savings rate, he noted that they are all probably transitory factors; further decline should not be expected and a sharp reversal is also possible. Tobin argued that if the objective of policy is to produce a mild recession, a continuation of present policies is sufficient to achieve that goal. However, he questioned the strategy of seeking a mild recession which, he feels, will do little to reduce inflation very soon. He had hoped for but not really expected a more vigorous incomes policy. Houthakker argues that by the best available measure, the GNP fixed-weight deflator, inflation has been holding steady at about 10 percent. Thus, real interest rates are positive—short-term rates significantly and long-term rates slightly—and are "now about right." Despite the wild gyrations in the price of gold, Houthakker notes that the dollar has performed well and speculative activity lias not spilled over into other markets. He continues to believe that the appropriate gold policy would be a major (5 million ounce) sale. Eckstein favors a 4 to 7 percent target range for M2. argues that ve need a recession to reduce inflation. He He has revised his real GNP forecast upward because of higher defense spending and "momentum." If the first quarter growth is positive, he feels another round of tightening will be unavoidable. He feels policy should be geared primarily to interest rates since the aggregates are currently impossible to interpret. Samuelson favors "token tightening" simply to short-circuit the ideological contention that we must show determination to counter inflation. In fact, the growth recession we are now in is producing the appropriate amount of slack and a serious recession wtould be counterproductive. If the economy strengthens, we should move to the low end of the target range and run on the high side if it weakens. The possibility of a war is the most serious reason to expect the economy may strengthen. Samuelson also urged paying little attention to sharp variations in metals prices which are not a matter of national interest. If the dollar should weaken, Samuelson would welcome some overshooting on the downside, to generate a little "excess competitiveness" for traded U.S. products. SECOND DISTRICT—NEW YORK Business activity in the Second District has been surprisingly resilient in January, according to recent comments of District directors and business leaders. One of the brightest spots has been retail sales which were generally substantially higher in the first three weeks of the month than most respondents had expected. Outside of retailing, business activity also appears to be holding its own. New brders at several indus- tries posted modest recoveries after declining slightly in recent months; and inventories seem to have been kept in line with shipments. At the same time, however, cost increases have cut into the profit margins of some companies since they have been unable to raise their prices fully under current market conditions. Most respondents expect the Federal override of state usury ceilings on mortgage interest rates to have little effect on construction activity. Retailers in the Second District generally experienced higherthan-expected sales in the first three weeks of January. Merchants chalked up good to excellent gains in sales in downstate New York and in New Jersey. Stores in New York City appear to have done slightly better than those in the suburbs. Sales were mixed, however, in upstate New York. While consumer buying reportedly was "brisk" in the Rochester area, it was less sanguine in the Buffalo area. Inventories seem in balance with sales, with one major department store actually reporting them to be on the lean side. In this vein, many of those retailers contacted noted a lengthening in delivery times in some of their faster moving lines because suppliers had been caught with low stocks. Despite the healthy showing in recent weeks, most retailers expect a weakening in sales in the months to come. New car sales appear to have stabilized in the Second District with small cars continuing to outsell large ones. At the same time, truck sales are showing tentative signs of recovering from the doldrums of a few months ago. Despite the softness in certain automotive lines, domestic dealers in this area report inventories are close to desired levels. In sharp contrast, foreign car dealers have apparently been unable to increase their inventories which reportedly has hurt their sales. Customers do not appear to be kept out of the market by any tightening of credit. Outside the consumer sector, business activity for most firms seems to be holding steady or even improving slightly. Two upstate manufacturers of machine tools report that their orders and sales are continuing at high levels, although one did note that inquiries concerning prospective orders has tapered off a bit. Also reporting gains in orders or sales were companies in such diverse industries as chemicals, steel, and petroleum refining. One manufacturer of photographic equipment indicated that its sales had held up much better than it had been anticipated. The strength in consumption spending was cited by one upstate producer of paper boxes and other packaging containers for consumer goods as buttressing his business activity. A few firms, however, do report that they have been hurt by fall-offs in homebuilding and automobile sales. Companies throughout the Second District report severe upward pressure on their costs led by higher energy costs and rising labor costs. One paper box producer, for example, reported that its costs had shot up 25 to 30 percent over the last six months. Most other companies indicated that their costs had increased by lesser amounts, on the order of 10 percent per year. The chemical companies contacted cited the rising cost of petroleum as a key element of their costs. In addition, labor costs have risen under new contracts as well as under the COLA provisions of contracts negotiated earlier. The higher cost pressures have led to price increases, but profit margins remain under pressure. Many firms are selling in weak markets and have been limited in their ability to raise their prices. Some firms, such as those in the photographic field, have been forced by the extraordinary explosion in certain commodity prices to raise their prices significantly just to cover costs. These firms may therefore be facing a particularly difficult period. Despite price uncertainties, the longer-term outlook for firms is not unfavorable. There is some feeling that recent speculative fever in commodity markets may have run its course, and oil supplies seem to be coming into balance with demand. Nevertheless, most firms still expect a recession early this year with a recovery later in the year. spending plans have not been reduced. Still, capital Further strength in the local economy may come from the projected boosts in defense spending. The temporary Federal override of state usury ceilings on mortgage interest rates is expected to result in only a limited increase in homebuilding activity. Several respondents felt that consumers simply could not afford the high costs of debt service. The amount of turnover in housing, how&ver, was expected to rise as a result of increased availability of mortgage funds. THIRD DISTRICT - PHILADELPHIA Reports from the Third District in January indicate that business activity is mixed. Representatives of the industrial sector report continued decline in manufacturing and predict further slippage in the next six months. Retailers, on the other hand, are experiencing unexpectedly strong sales this month. In the financial sector, area bankers say consumer loan demand has been strong, but business borrowing is mixed. Interest rates have stabilized for the time being, but will probably drop slightly in thefirsthalf of the year. Respondents to this month's Business Outlook Survey say the '80s have begun with further slippage in area manufacturing. About one-third of the manufacturers polled this month say general business conditions are worse than they were in December, while less than a tenth report improvement. In terms of specific indicators, new orders are down again in January, but shipments have remained stable. So, once again, producers' backlogs have diminished, and a commensurate cut in inventories is noted. On the jobs scene, payrolls have been pared slightly at area plants for the first time since the slump began some seven months ago, and many managers have cut working hours somewhat as well. Looking ahead to the next six months, responding manufacturers predict further decay of general business conditions, as they've ?been doing since December "78. New orders are expected to increase only marginally between now and July, while a more significant pickup in shipments is forecast. The cautious mood of the respondents is reflected in their plans to maintain current inventory positions for a white and hold the line on hiring as well. Working hours will probably be trimmed fractionally in coming months. Industrial prices are on the upswing again in January, according to survey participants. Over three-quarters of the manufacturers polled this month report paying higher prices for inputs than they did last month, and well over one-third say they are charging more for their finished products. For the longer term, almost 9 out of 10 respondents expect the cost of raw materials to be higher by midsummer, while about 8 out of 10 plan price hikes by that time for the goods they produce. Area bankers contacted in January report strong consumer loan demand, but say business borrowing is mixed. Commerical loans are running between 1 and 19 percent ahead of January '79 levels, but are generally below plan. A Director of this Bank comments that inquiries about business loans are numerous, but that actual followthroughs are relatively few. Looking ahea have reprcciiHH Ioiih in the lumber industry and other activities associated with housing. A regional lumber manufacturer in Oregon reports that production is off 20 to 25 percent. Closures of both plywood facilities and sawmills are also reported in Oregon, with the loss of about 1,000 more jobs than is usual for this time of year. Employment data for the state of California show an abnormal decline in November in the lumber and furniture industries although the absolute numbers involved are small. Prices of dimension lumber have dropped by about a third since early September. Non-residential construction activity is credited with temporarily cushioning the building supply industries from a more severe decline and some observers expect considerably worsened conditions in the coming months as non-residential construction falters. Automobile retailers are reported to be in severe straits in some parts of the District. A survey of dealers in Salt Lake City resulted in « remarks about sales such as "almost non-existent" and 'worst in twenty years." In Seattle, however, dealers have accommodated high flooring costs by cutting inventories and sales are reported to be "fair." Sales of small and foreign cars continue to be stronger than sales of large domestic automobiles. There are very few reports of weakness in the District's economy outside the housing and automobile sectors. Demand for aluminum products is so strong that a major producer is allocating the product to its customers. Recent rainfall in the Northwest has removed the threat of hydroelectric Dower cutbacks that would have hurt aluminum production. High world prices for lead, zinc, gold and copper have boosted t^e value of output f roin the Coeur d'Alene mining district in the Northwest. If current metals prices hold, the mining district's 3980 production Is expected to be more than triple last year's figures. The Secretary of Interior announced last, month that the intermountain power project will be located near Delta, Utah. Construction of this $4-6 billion plant is expected to further boost that ar ea's economy. The demand for skilled technical and clerical labor remains high throughout much of the Twelfth District. The unemployment rate of clerical labor in Southern California is estimated to be only 2 percent, for example. A major transportation company reports strong demand for its pipeline and rail services despite weakness in the forest products and automobile industries. The large department stores in the District report a level of holiday sales ranging from "good" to "exceeding our budgets". A regional manager of Sears in Utah added that regional sales were better than those for Sears nationally. Sales of kitchenware and softgoods were stronger than sales of consumer durables. Most retailers are apprehensive about the prospects for the first quarter of the year and have maintained trim inventories. Loan demand is generally weak throughout the District. However, a major bank headquartered in Southern California reports strong demand for commercial loans and loans for commercial and industrial construction. The weakness in demand for consumer loans, auto loans and mortgage loans is ascribed to consumer resistance to high interest rates. Several lenders in the District have dropped their rates but still have no significant loan volume. In those states without binding usury limits, funds are reported to be "generally available" at the prevailing interest rates. However, applicants in many parts of the District are having difficulty qualifying at present interest rates. A bank in Oregon reports that only one out of every four mortgage loan applicants is able to qualify for a loan. Delin- quencies on consumer loans are reported to be on the rise, although they still remain at reasonable levels. Bankers in the District generally expect bankruptcies and foreclosures to increase in 1980. They also expect loan volumes to weaken further as previous commitments dry up. The agricultural sector in the District is in good shape after the successful harvests of 1979. Banks in the central valley of California enjoyed strong deposit growth because of good harvests and there are no reports of anticipated farm credit problems. Inventories of farm equipment are high as a hedge against the increasing prices of this equipment. Farmers expect the markets for beef cattle, dairy cows and farm crops to be strong in 1980.

Federal Reserve (1980, February 4). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19800205

@misc{wtfs_beige_book_19800205,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1980},
  month = {Feb},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19800205},
  note = {Retrieved via When the Fed Speaks corpus}
}