Beige Book

CONFIDENTIAL (FR) CURRENT ECONOMIC CONDITIONS BY DISTRICT Prepared for the Federal Open Market Committee by the Staff May 14, 1980 TABLE OF CONTENTS SUMMARY page i First District-Boston page 1 Second District-New York page 4 Third District-Philadelphia page 7 Fourth District-Cleveland page 10 Fifth District-Richmond page 14 Sixth District-Atlanta page 17 Seventh District-Chicago page 21 Eighth District-St. Louis page 25 Ninth District-Minneapolis page 28 Tenth District-Kansas City page 30 Eleventh District-Dallas page 33 Twelfth District-San Francisco page 36 SUMMARY* [Asterisk: Prepared by the Federal Reserve Bank of New York.] Economic activity slowed markedly across the country according to this month's district reports. Led by a sharp falloff in automobile sales, consumer spending has weakened substantially. There is evidence of a contraction in sales of other durable goods as well as of nondurables. The outlook outside the consumer sector was generally pessimistic as well. Residential construction has ground to a virtual halt, although nonresidential building remained brisk in several districts. With a few notable exceptions, mainly the defense, energy and machine tool industries, a wide crossection of manufacturing firms reduced their workforces in the face of declining new orders, shrinking backlogs and rising inventories. Many firms also began to reassess capital spending plans, but other than in the auto industry, there has been little actual retrenchment thus far. On the financial scene, despite lower interest rates, business and consumer loan activity remained dormant. Agricultural loan demand, however, rose about in line with past seasonal patterns. Consumer spending weakened across the nation in April. While the largest cutbacks continued to be in big-ticket durable items especially autos, purchases of nondurable goods also slackened. As a result, there were reports of excessive retail inventories in several districts. In the Chicago area, where demand was particularly depressed, merchants offered large price reductions and discount programs to trim accumulating stocks. In contrast, inventory-sales ratios were reported as acceptable in both Philadelphia and New York. Auto stocks were generally lean. Nevertheless, many dealerships have gone out of business in the Atlanta, Dallas and San Francisco regions. Declining consumer credit card usage nationwide contributed importantly to weakening demand. Existing credit balances were significantly reduced according to Atlanta and Richmond, and new credit purchases were down as much as 20 percent from last April in Dallas with cash buying, as evidenced in the weak growth in currency nationally, not taking up the slack. debt collection and bill payments Slower were noted in Philadelphia, Chicago and San Francisco. Outside the consumer sector, overall business conditions deteriorated in recent weeks. Backlogs were worked down, as new orders declined and lead times were shortened in a variety of industries ranging from steel in Cleveland and Chicago, to furniture and floor covering in Boston, to chemicals and electronic supplies in New York. Inventory liquidation was reported in Philadelphia, Chicago and Kansas City although excessive stocks are not yet a problem for New York manufacturers. As a result of decreased production activity, workweeks were shortened in Richmond, Philadelphia and Chicago, and l a y o f f s — b o t h temporary and p e r m a n e n t — h a v e spread. Both hourly and salaried employees have been dismissed in the automobile and related industries in the Chicago and Cleveland areas, while workers in homebuilding and construction industries have been particularly hard hit in Atlanta and San Francisco. Reassessments of capital investment plans were underway by firms in Boston, New York and St. Louis, but little actual retrenchment has taken place except in the auto industry. As with auto employment, these cutbacks have been concentrated in the nation's midsection. Input prices continued to rise in Philadelphia and Kansas City although metals, lumber and paper prices have all softened in the Boston district. In contrast to these generally bleak conditions, machine tool manufacturers in New York and Cleveland appear relatively insulated from the recession. In Boston, Dallas, San Francisco and St. Louis the manufacturing base has been strengthened by the defense industry. In Minneapolis, defense procurement contracts have grown by 30 percent in the last two years. Residential construction continued to stagnate with activity at a virtual standstill in Atlanta, Cleveland and St. Louis. are 50 percent below last year in Kansas City. building have also been especially depressed. Housing starts Industries related to home The plywood industry in San Francisco has been operating at less than half capacity. Estimated joblessness in construction and related industries ranged between 20 and 40 percent in Chicago. At major lumber and plywood mills in the San Francisco district, one-sixth or more of the workers have been furloughed. Nonresidential building, however, remained brisk in Minneapolis, St. Louis and San Francisco. Reflecting weakening loan demand across the nation, shortterm interest rates declined sharply. Still, relatively high interest rates and growing economic uncertainty continued to discourage business and consumer borrowers alike. Moreover, nonprice lending terms were tightened in Kansas City, New York and San Francisco. Business loan demand eased in all districts although demand by energy industries remained strong in Dallas. New York reported some companies shifted to the long-term bond and commercial paper markets to meet credit needs. Although home mortgage rates are well below recent peaks, little activity was noted in Kansas City or Cleveland although in Chicago and St. Louis, a few loans were made. personal bankruptcies was noted. in Richmond. In Atlanta, a surge in Auto instalment loans were especially weak Agricultural loan demand rose seasonally but this sector, as others, was affected by comparatively high interest rates and escalating uncertainty. Some bankers are concerned about repayment ability because of generally rising agricultural costs and declining prices for food. Farm credit was tight in Chicago but adequate in Atlanta, Dallas and Richmond. Slower repayments and increased renewals and extensions, how- ever, became common in Richmond, while in Chicago many farmers restricted purchases, especially df equipment, in order to ease their credit needs. FIRST DISTRICT - BOSTON Signs of recession are becoming more widespread Retail sales have slowed. nonresidential activity. in the First District. Homebuilding is depressed although there is still Manufacturers of consumer products have seen a marked decline in demand, but firms producing capital goods continue to do well. Input prices are softening. A number of respondents commented on the suddeness of the change; sales in March were very good but April brought a decided weakening. Retail sales have slowed. experienced a falling off in demand. Department stores and specialty shops have However, sales at discount stores remain strong and may even have picked up. department The head of a chain with both general department stores and discount operations observes that discount sales in early April exceeded expectations while sales of general merchandise suddenly fell behind. Consumers are said to be very price In manufacturing conscious. there is a clear distinction between the experience of firms in consumer related areas and those producing capital goods. Those selling to consumer markets have seen a sharp deterioration in sales. A wide range of products has been affected, including such diverse items as appliances, handtools and hardware, silverware, and eyeglasses. The furniture and floor covering industries were said to be weak several months ago, but now they are described as "disaster areas." The weakness at the consumer level is having second and third order effects although changes at this level are not as severe as in the manufacture of the consumer goods themselves. Orders are down for motors used in air conditioners, automobile plastics and for packaging materials. The capital goods industries, on the other hand, are still doing well. However, several firms said they are reassesing their own capital spending plans. remains a source of strength. Input prices are softening. and zinc prices are all down from the end of the year. Defense Copper, lead, tin, Lumber prices are said to have weakened a lot and there has been a softening in paper prices. Some plastics prices remain low even though plastics are petroleum based and costs have increased sharply. Loan demand has slowed although two large banks in southern New England report that demand remains surprisingly strong. Banks are looking carefully at loan requests. Professors Samuelson, HouChakker, comment and Eckstein were available this month. Samuelson believes in a recession." deep and long. that "the medicine has w o r k e d — w e are He is not confident, however, Although the demand for domestic for some time, consumption spending generally resiliance" until a month or two ago. that certainly this recession will be autos may remain showed depressed "special signs of "The consumer has not learned a permanent lesson;" so even though quarters, it is too soon to say that consumers are now adopting more conservative spending habits. demand ana the general the impending the saving rate may rise in the next This fundamental strength lack of "excess inventories" may two in consumption limit the size of slump. Samuelson believes the large increase in April's unemployment "may contain some noise, but there is still plenty of message Fed." for "This is precisely stock coupled with that money demand the time for easing off." the larger-than-expected is very weak. Unless for the The declining drop in interest interest rates drop rate rates money implies further, money growth will fall short of the Fed's targets. rates to rise sharply exceed the target. The Fed allowed in 1979 and early 1980 so that money growth would not Unless it is a "foul weather friend," the Fed must now allow rates to fall to keep money growth on target and build for its new operating interest credibility procedures. Houthakker sees no radical surprises in the latest economic data. He still believes real output at the end of this year will equal output year-end 1979. His research suggests that consumption and demand will not collapse during investment 1980. Houthakker supports the current however, should be prepared for targets for Ml growth. The Fed, to allow interest rates to fall enough so that money growth does not fall below target. Even if the slump is more severe than he now foresees, Houthakker encourages the Fed not to revise its money growth targets. Eckstein believes real GNP will decline about 8 percent at an annual rate this quarter led by falling consumption spending; over the course of the coming recession, output will decline 3.5 percent; and the unemployment rate will peak at 8.5 percent. Eckstein believes that "the recent credit controls confused and frightened people," and the lesson he draws from this experience is that the "government should not play with the psyche of consumers." Eckstein believes that the Fed should try to achieve its current M-1A growth targets. now endorse. This is a better policy than any other the Fed might "With this monetarist principle, interest rates should decline sharply and then rebound abruptly later in the year, a V-shaped profile." SECOND D I S T R I C T — N E W YORK Business activity in the Second District continued to lose momentum in April. Consumer spending weakened at major department stores across the district at the same time that automobile sales were lethargic. consumer sector, the outlook was generally pessimistic. Outside the Manufacturing firms in many industries have started to reduce their workforces in the face of declining new orders and shrinking backlogs. Cautious inventory however, appear to have kept stocks from growing excessive. policies, Many firms also have began to reassess capital spending plans, but there has been only limited retrenchment thus far. On the financial side, business loan demand at major New York City banks slowed as some companies shifted to the long-term corporate bond and commercial paper markets to meet credit needs. Consumer spending in the Second District weakened in April. eleven-day transit strike in New York City contributed The to the downturn at metropolitan stores, but a similar slackening occurred throughout the region. While monthly sales comparisons are distorted by the effects of the transit strike and timing of the early Easter selling season, merchants voiced con- cern that the recent poor performance of sales was indicative of a more prolonged economic slowdown. Credit financing of sales fell at a major department store chain, while another store reported a shift from credit to cash transactions. This downturn is occuring although relatively little reportedly is being done by these respondents to directly discourage credit card usage. In spite of lagging sales, conservative inventory policies have kept stocks at acceptable levels. Domestic car sales fell sharply in A p r i l . With few dealers in the Second District reported a severe falloff truck purchases. 50 percent. exceptions, in new car and In some instances, sales declined by as much as 40 to In the last 10-day selling period in the month, floor at one dealership being booked. reportedly ceased traffic and as a result, no new orders w e r e Demand for used cars, however, has remained relatively strong and their prices are rising sharply due to the increasing scarcity of supply as potential buyers postpone the replacement of their old models until they are no longer serviceable. Dealers in New Y o r k State w e r e concerned the state's usury ceiling on automobile loans was restricting that financing. A l l of the respondents felt that local financing problems w e r e being exag- gerated by media coverage, which was scaring away even those customers eligible for finance company loans. Dealer stocks are lean, reflecting dim sales prospects and the high cost of financing still however, inventories. Outside the consumer sector, overall business conditions also have deteriorated in recent weeks. A sharp, dramatic falloff in new orders and a shortening in lead times was reported by manufacturers in such diverse industries as paper products, chemicals, consumer and industrial metals, electronic and photographic supplies and steel. Several firms have begun to reduce their staffs both through attrition and layoffs. of a major metals manufacturer, workforce. In some layoffs have affected 30 percent of divisions the In contrast to other District producers, m a c h i n e tool manufac- turers so far h a v e been relatively insulated from the downturn. at these firms are still growing as new orders remain strong. raw m a t e r i a l prices have abated, cost pressures remain intense. and energy costs have continued to rise. Despite the uncertain Backlogs W h i l e some Both labor economic conditions and the high cost of financing, however, relatively few firms have marked down their capital investment plans. With the exception of a major chemical firm, which reported excessive inventory stocks, inventories remain at acceptable levels. In general, the industrial outlook became more markedly pessimistic during April. Expectations of a longer and deeper recession have grown. Upstate business leaders note widespread layoffs in construction and autorelated industries. Downstate, further economic dislocations are imminent with the planned closing of a major New Jersey auto plant in June. This shutdown will result in direct permanent job losses to 3,700 workers in addition to the 800 already laid off. Further job cutbacks and losses in income are expected as the ripple effects of this plant closing work through the local economy. Most respondents do not anticipate a recovery in national business activity until the first half of 1981. But, with the exception of a steel industry spokesman who feared the effects of continuing inflation and foreign competition, the long-run outlook for the 1980's remains positive with strong growth in demand expected for all products. The weakening in business activity has been reflected in credit demands. New York City banks have experienced a sharp easing in business loan demand, which they expect to continue over the remainder of the year. While there has been some tightening in non-price lending terms, senior loan officers attribute most of the weakness to a combination of the recessionary environment, the lean inventory situation, and some shifting to long-term financing. Moreover, given the current spread between the prime rate and commercial paper rates, some firms apparently have recently turned to the commercial paper market for short-term funds. THIRD DISTRICT - PHILADELPHIA Indications from the Third District in May point to a slowdown that is gaining steam and spreading to a variety of sectors. Manufacturers in the District say industrial activity has taken another large dip this month, and retailers report sluggish, but still better than anticipated, sales. Representatives of both sectors say the future holds only bleak prospects. District bankers say C and 172 days, respectively. Orders for steel dropped abruptly in late March and have remained depressed. Cuts by motor vehicles producers continue, and new weakness has developed in farm and construction equipment, structural steel, and prefab buildings. A local steel company has reduced its estimate of second quarter shipments by 15 percent in recent weeks. Paperboard orders in physical units, which had leveled off in the spring of 1979, were 6 percent below last year in March, and probably by a similar margin in April. Many customers have cut back on paperboard orders as they have reduced workweeks. Production of household appliances, lawn equipment, outboard motors, and other large consumer goods shipped in boxes is down more or less sharply. Home mortgage rates have been dropping rapidly from the 16.5-17 percent peaks posted in mid-April. More important, some new loans are actually being negotiated again, in contrast to the virtual halt in the March-April period. The decline in new residential construction will not be reversed quickly. Too many builders have called off plans for 1980, and some buildup in finished properties has occurred. In the Chicago area, only 700 permits for single-faaily homes were issued in the first quarter. This is off 8U percent from 1978 and 6l percent below the depressed period of 1975. ment permits are down almost as much. centers are similar. Apart- Reports from other large district Estimates of the jobless rate for construction workers range from 20 to Uo percent—with many on short weeks. Demand for ready-mix concrete, gypsum board, hardboard, lumber, plumbing fixtures, built-in appliances, and carpeting is way off with accompanying layoffs in manufacturing, distribution, and installation. Layoffs by realtors and title companies axe also significant. Tight credit conditions and bleak farm income prospects continue to have an adverse Impact on Seventh District agriculture. farmland values down in the first quarter. in only one other quarter—in 1977. Our survey shows Since i960 these values dropped Average rates on farm loans at rural banks rose from 13.5 percent in January to 17 percent in April. While bankers have been rationing credit, they also report a steep decline in demand. Farmers are restricting purchases of all types, especially equipment. Recent evidence suggests that rural credit conditions may be easing as outflows of funds associated with high market rates slow down. Spring plantings have an excellent start, but scanty rainfall and low topsoil moisture raise concern about seed gemination. EIGHTH DISTRICT - ST. LOUIS Business conditions in the Eighth District continued to deteriorate in April. Consumer spending for durable goods, such as cars, trucks, appliances, and home furnishings, declined further and some softening in nondurable goods, such as clothing, was also noted. reported to be at the lowest rate since the 1974-75 Manufacturing has slowed New home sales are recession. further in a number of industries, including automobile assembly and related industries and home building product industries. On the positive side, manufacturing activity remains fairly strong for some capital goods products, particularly defense-oriented energy-saving equipment. and Nonresidential construction has also held up well, but fewer new projects were reported. In the financial area, loan demand has declined rapidly in recent weeks, and most interest rates have dropped sharply. Consumer spending is reported weeks. to have slackened further in recent There has been a sizable reduction in consumer credit demand as reflected in credit card use. charge balances. Consequently, retailers report a downturn in Sales of big-ticket items are quite sluggish, and some soft good sales have also deteriorated, but not to the extent of durable goods. Sales of both domestic and foreign-built to decline in recent weeks, although large domestic cars. major automobiles have continued the decline has been most severe for Automobile dealers point to higher interest rates as a factor discouraging sales. On the other hand, dealers in auto parts and repair materials are reportedly doing well. Gasoline dealers indicate that sizable decreases in gasoline sales have occurred that inventories are at relatively high in recent months and levels. Representatives of the manufacturing sector reported declines in unit sales in recent weeks. further With decreases in automobile and truck sales, assembly plants have announced additional layoffs of workers and so have industries supplying parts for the manufacture of new automobiles. With the sharp decline in sales of new homes, building materials industries, such as manufacturers of lumber and connector plates, as well as manufacturers of appliances and furniture are experiencing a decline in new orders. that depressed A representative of a major chemical firm reported sales of automobiles and homes are beginning to affect the sales of plastics and fiber products. Nevertheless, manufacturing activity of industries energy-efficient producing and defense-related equipment remains quite strong. Foreign demand for a number of products, such as chemicals and likewise remains strong. holding up well plastics, While demand for capital goods appears to be in general, several firms are reported to be currently reviewing their capital expenditure budgets in view of the decline in economic activity. Residential building activity remains at a virtual throughout the District. standstill Most home builders have cut back a substantial portion of their work force, and some are reported Reports of falling interest to be near bankruptcy. rates are encouraging, but some feel that the decline in rates will not generate sales in the immediate future because of the expectation that rates will fall still further. Nonresidential building remains fairly strong, reflecting large backlogs of projects. General contractors report that major projects continue to be funded, but that many small jobs are being postponed or cancelled. Loans by major commercial banks in the District consumers, and real estate developers have declined to business, sharply. Only agricultural loans have posted gains, reflecting seasonal increases in these loans at planting time. few mortgage loans. Savings and loan associations are also making very As a result of the drop in loan demand, interest have begun to fall rapidly. from about 20 percent rates The prime commercial bank rate has declined to 17 1/2 percent, and the mortgage rate from about 1/2 percent to 15 percent. 16 Some savings and loan officials indicate that the mortgage rate is likely to fall even more in the near future, and one association has already reduced the rate to 12 3/4 percent. In St. Louis, two savings and loan associations have instigated the new "rollover" mortgage (which permits an adjustment in the rate charged), but they have not been successful in marketing this type of loan. Savings and loan industry representatives are more optimistic about the prospects for improved profit margins with the decline in money market rates, but point out that they are still being squeezed by the continuing shift from passbook savings to higher yielding CD's. Demand for farm credit is reported to be up from a year ago, but bankers report that this credit is being supplied at competitive rates. In a number of communities, bankers are lending to farmers at lower rates than to others in order to avoid the loss of their customers Credit Association. to the Production NINTH DISTRICT - MINNEAPOLIS The Ninth District economy is closer to a recession than it was a month ago. Sinoe last month, a decline in farm income, combined with reduced and spending, has increased off workers. lending the number of firms curbing production and laying The recession hasn't arrived, though, because investment spend- ing, manufacturing output, and planting intentions indicate district output is still increasing. The Recession Is Getting Closer Our last report . . . stated that the district had been moving toward a recession, and in April it moved even closer. In April farm income fell again. Our last report indicated that combination of falling prices and rising costs was reducing farm income. income fell further last month, as farm prices decreased 4.5 percent a Farm between March and April. In addition, rates decreased, lending they were declined further still very high, nesses continued to reduce their borrowing. and in April. district Although consumers interest and busi- Home loan applications at Minnea- polis/St. Paul S&Ls, for example, declined 60 percent from April 1979, following a 30 percent decline in March. With farm income and lending continued to be curtailed in April. sales of general merchandise, autos, still falling, spending and production Directors report a further decline in the homes, and farm implements. In a large central Minnesota community in April, for example, department store sales were down 10 to 15 percent from a year ago, whereas in March these sales were down 5 to 10 percent. With less consumer and farm spending, some manufacturers' new orders are still falling, and some manufacturers continue to curtail production and lay off workers. Partly as a consequence, Minnesota's initial claims for unemployment insurance in both March and April were up about 50 percent from a year ago. . . . But It Still Hasn't Reached The District Despite the declines in lending, trict still isn't in a recession. and manufacturing expanding. output Businesses, considerable would spending, and farm income, the For a recession to occur, investment spending probably have to decline, and they are for example, are still investing, as directors nonresidential building, both inside and outside the still report Minnea- polis/St. Paul metropolitan area. Although growth has slowed, directors report output that attributes district manufacturing is still increasing. One also director this growth to the district's large number of rapidly growing high technology firms. biggest dis- Another cause manufacturers are of this growth defense contractors, could and be that district the district's defense spending has increased 30 percent in the last two years. On the farm, output is also still expanding. District farmers to plant 4 percent more acres this spring than a year ago. weather has been helping them achieve this goal. intend So far, dry, sunny In Minnesota, for example, normally 20 percent of the corn planting is completed by May 4, but this year 36 percent of the corn planting nearly completed, district farmers are now hoping for rain to get the growing season off to an excellent was start. planted by that date. With their TENTH DISTRICT - KANSAS CITY Economic activity in the Tenth District markedly. prices. is beginning to slow Retailers report declining sales and slower increases in Purchasing agents report a recent slowdown in the rate of crease of input prices. being reduced. Inventories in retail and manufacturing Savings and loans report are reduced savings inflows ana mortgage commitments, and homebuilders report the building and sales of new homes. in- significant declines in The winter wheat crop is in fair- to-good condition, while supplies of fed cattle will be tight in coming months. Bank loan demand has continued struction and real estate activity. to weaken, particularly for Deposit growth remains generally steady, though demand deposits are declining at some District Retail activity in the Tenth District con- is weakening. banks. Some re- r tailers report only slight gains in January-April dollar sales over a year ago, while others report significant declines. sales have been particularly weak. Appliance and All retailers contacted declines in sales since mid-March, and all expect continued throughout the remainder of 1980. furniture report declines Most retailers report slower price increases in recent months, along with declining profit margins. tory levels are generally considered too high for current sales tations and are to b e trimmed throughout Most purchasing agents report expec- the remainder of the year. that input prices have risen by 10 per cent or more over the last 12 months, although many report have recently begun to stabilize. Inven- that prices Input availability is not a problem, with lead times decreasing throughout are cautiously being held down. the District. Materials inventories Over half the firms contacted have plant capacity, and about one-third excess of the companies have either idled some workers, or plan to do so soon. Savings and loan associations contacted in the Tenth report that savings inflows are down substantially District from last year. Mort- gage commitments are down significantly, due to a shortage of funds and high mortgage rates. However, mortgage rates in the District have fallen to below 16 per cent, and are expected to fall further recently throughout the year. Tenth District homebuilders' associations report that housing starts are down about 50 per cent from last year, with single-family starts leading the decline. housing Many association spokesmen believe that home- building activity will begin to improve within the next three months. though sales of new homes have been off considerably, there is not a critically high inventory of unsold homes, and builders are not home prices significantly. out the District at stable Al- reducing Building materials are readily available through- prices. The winter wheat crop throughout the Tenth District be in fair-to-good condition at the present forecasting a large crop for 1980. time. is reported to Commodity groups are The Wheat Quality Council has projected a 362 million bushel crop for Kansas, 12 per cent below the record crop of 1979. However, area bankers are less optimistic observing in their projections, that crop conditions are much more variable than last year. Wheat prices have shown an increase in recent days reflecting concern about the lack of rainfall necessary for continued crop development in the winter wheat area and very dry conditions Canada. in the spring wheat areas of the U.S. and Total U.S. wheat acreage is expected to be up 11 per cent over Supplies of fed cattle will be tighter in coming months, producing some increase in cattle prices. probably Cattle currently being quarantined in feedlots because of DES implants will start coming on the market week. That may result 1979. in only a short-term increase in slaughter in about a weights and numbers marketed. A survey of bankers in the Tenth District in loan demand in the last loan demand is primarily two months. indicates a marked Most bankers believe the decline in the result of high lending rates, but they also re- port that uncertainty about the current recession is contributing softening of loan demand. decline to the While the demand for all types of loans is generally weak, the demand for construction and real estate loans appears to be virtually nonexistent. Several bankers report continued strength in the demand sumer loans. However, these bankers also report for c o n - that they are discouraging demand because of the Federal Reserve's Special Credit Restraint this Program. In the past month, the prime rate in the Tenth District has declined from the 19 to 20 per cent range to the 17 to 18 1/2 per cent range. the majority of bankers on this month's survey have tightened However, their nonprice lending terms, primarily because of the uncertainty regarding the effects of the recession. Most bankers report their deposit growth to be generally stable. ever, demand deposits are still declining at some banks, as customers to shift their funds into interest-rbearing accounts. Money market and large CD's continue to account for most of the deposit growth, some bankers are no longer bidding aggressively for these deposits. How- continue certificates although ELEVENTH DISTRICT—DALLAS Evidence continues to accumulate to suggest the Eleventh D i s t r i c t economy is s l i d i n g into recession. Department store sales adjusted for in- flation are declining, and auto sales continue to deteriorate. Residential construction is well below the year-ago level, and S&L's report a continued net outflow of savings. Bank loan demand has softened perceptahly. Factory output is leveling off, and production cutbacks and layoffs are reported in a growing number of industries. The brightest spot in the southwestern economy is oil f i e l d a c t i v i t i e s , which continue to expand. Department store executives report real sales are declining as consumer buying is drying up in anticipation of a deepening recession. Nominal retail sales fell 2 percent in A p r i l . Credit purchases have de- clined as much as 20 percent below last y e a r ' s levels, and cash purchases are not taking up the slack. An increasing number of customers are re- ported to be paying down their credit balances instead of purchasing new goods. Inventories have begun to bulge. As a result retailers are step- ping up price discounting and are placing fewer new orders. New car sales continue to decline. estimated to be 40 percent below last spring. Sales of domestic models are Demand for some models, par- t i c u l a r l y imports, remains strong but is restricted by high prices and a limited a v a i l a b i l i t y of credit. their potential sales. Dealers report closing only a third of Many dealers are pushed to their financial by the decline in sales and high inventory costs. limits Layoffs are on the in- crease, and several dealerships have closed in the last month. Residential construction activity is 20 percent below the level a year ago, and no indication of a turnaround is in sight. Further declines in interest rates are expected to restimulate mortgage demand, and several c i t i e s are providing funds for home mortgages with municipal bond issues. However, builders indicate i t will take an estimated nine months for the market to fully recover when the turnaround comes. Most savings and loan associations continue to report net outflows of savings. Overall loan demand continues to decline as most custom- ers remain priced out of the market. Demand for home improvement loans continues to increase, but a majority of associations do not offer such loans. About one-half of the large monthly reporting holding companies and banks appeared to exceed the 9-percent growth in their March reports, but commercial banks generally report no problems in complying with the guidelines for loan growth. The situation has eased with the option of selecting a base period for covered consumer loans and an increased volume of loan participations. Loan demand by the energy and real estate indus- t r i e s remains strong, although the lack of long-term financing has reduced the supply of interim construction financing by banks. Consumer loan de- mand is slowing and usage of bank credit cards is down s i g n i f i c a n t l y from a year ago. While agricultural loans are readily available at D i s t r i c t banks, bankers express concern over the a b i l i t y of farmers to repay borrowings. Some loan carryovers from the last two years have been absorbed by federal programs, leaving banks in a better position to meet r i s i n g credit needs in agriculture. But r i s i n g production costs and f a l l i n g commodity prices are creating concern over the outlook for farm credit. While most D i s t r i c t manufacturers continue to report high levels of capacity u t i l i z a t i o n and normal order backlogs, conditions are considered bleak for suppliers to the residential construction industry. Signif- icant cutbacks in employment prevail in the fiberglass and aluminum extrusion industries, and more layoffs are expected in 30 to 60 days. manufacturers also report a rise in layoffs and factory closings. Apparel Produc- ers of construction steel and cement are allowing attrition to reduce employment levels. However, the capital goods and defense industries are proceeding with expansion and hiring plans. ing has put chemical producers in a squeeze. The decline in autos and housShipments of chemicals are down, inventories are up, and prices of feedstocks are r i s i n g , reflecting the ongoing increases in prices of oil and gas. D r i l l i n g activity in the D i s t r i c t states is up a third over a year ago and at a 24-year high. Both major and independent oil producers are reported to be cutting back production levels to take advantage of preferential tax rates under the windfall profit tax. TWELFTH DISTRICT — SAN FRANCISCO Sluggish retail sales, a slumping forest-products industry, and a very weak housing market have led to a general softening of business in the Twelfth District. activity Most analysts agree that a recession has finally overtaken the Western region, especially in the timber area stretching Northern California, across Oregon, and into Washington and Idaho. from However, sharply falling mortgage interest rates in early May provide some hope that the housing industry will come out of the doldrums. Rail shipments of autos and lumber are declining, and the downturn is now spreading to other types of rail traffic. On the farm front, good growing weather has been apparent in most areas except California's Central Valley, but farmers are complaining about low prices for their products as well as the high cost of labor, materials and money. In Southern California, the signs of an economic slowdown have included a softening of supermarket and department-store sales, significant personal savings withdrawals to finance purchases, a downturn in creditcard transactions, continued weakness in consumer-durable sales, bankruptcies among established auto dealers, and a marked lateness in utility-bill payments. Major Southern California department stores recorded a sales decline of one percent between April 1979 and April 1980, which means a substantial decline in real terms. Thus, nondurable-goods sales are now showing the same weakness that has been apparent in durable-goods sales since last Other sections of the District all report similar developments. fall. The lumber industry remained very weak in April, with 54,000 lumber mill workers and at least 13,000 plywood workers out of jobs or working a curtailed workweek. half capacity. The plywood industry has been operating at less than About 55 lumber and plywood mills in Oregon have curtailed operations, and some have even shut down permanently, partly because of the recession but also because of the erosion of their timber base. Some major installations have furloughed one-sixth or more of their workers. other hand, two major forest-products firms reported record On the first-quarter profits, reflecting heavy export demand and strong domestic demand for pulp, paper and packaging materials. Real-estate activity has remained very soft throughout the West. Small builders in particular have been hit hard by the downturn. Builders regained some of their optimism in early May, however, when major lenders retreated rapidly from their 18-percent prime mortgage rate. The nation's largest savings-and-loan association went all the way to 12 3/4 percent. In the nonresidential sector, a major contractor says that demand, while still strong, may decline later because of a lack of long-term Some areas of strength still remain visible. schedules are continuing Defense financing. procurement to support the Southern California economy. The Puget Sound area remains strong because of Boeing's substantial order backlog. Military business is strong, especially because of Boeing's for the cruise missile. contract Civilian-aircraft production will be reduced next year, however, as a reflection of weakness in domestic-airline orders. a result, Boeing's workforce is scheduled to stabilize later this year. As Meanwhile, Alaska's state finances are in good shape because of a $3.5billion surplus resulting from its oil boom. The legislature has of part of this surplus by making subsidized mortgages available and also by boosting legislative On the agricultural front, California's residents, San Joaquin Valley has been from high-90's rain, during the critical spring-planting period. temperatures to snow and Dairy producers from soft sales and from high operating costs. Northwest farmers continue to feel the after-effects of the Russian wheat But crop prospects in the Northwest and seed crops. to salaries. plagued with freak weather, ranging suffering disposed are grain embargo. look good for apples, cherries, hay A deep snow pack and high water tables promise southern Idaho farmers their best prospects of the past four years, especially by allowing crop production in non-irrigated areas. In the financial sector, most lenders are continuing consumer-credit terms. Many credit-card to tighten lenders have increased the annual interest rate, and some have begun to charge annual fees for card use. Some smaller rural banks report satisfactory operating results because of a stable deposit base. But a Southern California banker reports availability of funds to lend despite continued heavy demand limited for loans.

Federal Reserve (1980, May 19). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19800520

@misc{wtfs_beige_book_19800520,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1980},
  month = {May},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19800520},
  note = {Retrieved via When the Fed Speaks corpus}
}