Beige Book

CONFIDENTIAL (FR) CURRENT ECONOMIC CONDITIONS BY DISTRICT Prepared for the Federal Open Market Committee by the Staff March 25, 1981 TABLE OF CONTENTS SUMMARY page i First District-Boston page 1 Second District-New York page 4 Third District-Philadelphia page 8 Fourth District-Cleveland page 13 Fifth District-Richmond page 17 Sixth District-Atlanta page 20 Seventh District-Chicago page 23 Eighth District-St. Louis page 27 Ninth District-Minneapolis page 30 Tenth District-Kansas City page 32 Eleventh District-Dallas page 35 Twelfth District-San Francisco page 38 SUMMARY* [Asterisk: Prepared by the Federal Reserve Bank of Kansas City.] Overvie w. The reports from the Federal Reserve Banks suggest little overall strength in economic activity. Current economic conditions are generally characterized as ranging from w e a k or sluggish to stable, flat, and mixed; w i t h the exception of the Tenth and Eleventh Districts w h e r e business activity is seen as somewhat b e t t e r . Expectations for the future are in contrast to the current situation, w i t h optimism prevalent in varying degrees among most Districts commenting on the outlook. San Francisco's report of "gloomy" expectations for economic activity in the Twelfth District is the major exception. Consumer Spending. The current performance of consumer spending varies across the country from improving slightly to remaining sluggish. Dallas, Kansas City, Chicago, New York, and Boston report sales as slightly improving. Sales in the San Francisco, M i n n e a p o l i s , and Cleveland Districts are described as w e a k or sluggish, w h i l e the Atlanta and Richmond Banks report sales to be essentially flat. Substantial gains in new domestic automobile s a l e s — d u e to the rebate p r o g r a m s — a r e reported by m o s t D i s t r i c t s , but the gains are expected to disappear with the termination of the rebates. Manufacturin g. W h i l e manufacturing activity varies considerably from District to District and from industry to industry, there is little evidence of strength. New Y o r k and S t . Louis emphasize the different levels of activity in various industries, as does Boston w h e r e the demand for high technology output is softening. Philadelphia and San Francisco call industrial activity unchanged or flat, w h i l e Minneapolis reports current w e a k n e s s . Cleveland notes that capital goods spending may have reached a trough, but Chicago says that "orders for business equipment remain at depressed levels in real terms". Steel demand, however, is showing surprising strength. Inventories. Inventories of both retailers and manufacturers are being kept under tight control, and are generally viewed as being at satisfactory levels. The only significant difference was reported in the Richmond District where, although retailers' inventories are generally at desired levels, there has been some recent buildup in stocks. A l s o , manufacturers' inventories in the Fifth District are now reported as somewhat higher than desired. Prices. Moderation in recent price increases and optimism over the price outlook were reported by some of the Reserve Banks. Although Philadelphia noted that "industrial prices have jumped again in the Third District," Boston, Chicago, and Kansas City reported observations of moderating tendencies in price increases. Optimism about deceleration in inflation was expressed in the reports from Cleveland and Kansas City. Construction. District reports. Housing activity continues to b e weak according to most Atlanta and St. Louis note an increase in potential customer traffic recently, but with little effect on sales. The effects of weakness in housing include continued depressed demand for home furnishings and building materials (Boston) and great financial strain on small builders (Cleveland). In some Districts (Atlanta, Richmond, St. Louis) strength in commercial and/or industrial construction is helping to offset the weakness in housing. however, also reports weakness in nonresidential construction. Chicago, Dallas stands alone in reporting overall strength in construction activity, with residential construction advancing steadily and commercial activity booming. Financial Developments. Reserve Banks generally describe loan demand as flat or weak and sluggish, occasionally noting a direct relationship to weakness in the District economy. Business loan demand is sluggish at large commercial banks in New York, while Richmond and Atlanta note a slight pickup in business loan activity. In the Tenth District, business loan demand is flat-to-weak except in energy areas. Total bank loan volume is up in the Dallas District, with energy-related industries accounting for most of the growth. In both Philadelphia and New York below-prime lending activity has increased. Agriculture. In most reporting Districts recent rainfall has eased the problems of low soil moisture conditions. A s a result, wheat and pasture conditions have improved in the St. Louis, Kansas City, and Dallas Districts. In the Minneapolis District, however, continued drought and falling farm prices threaten the agricultural sector. Chicago and Kansas City report financial difficulties for livestock producers, and Chicago notes that farm income estimates for the year have been adjusted downward. FIRST D I S T R I C T — B O S T O N First District respondents report a pronounced softening in the demand faced by manufacturers of high technology products. These firms were relatively unaffected in the early stages of the recession. Manufac- turers of more traditional products who were affected earlier have seen no further deterioration but also no signs of a pickup. to be keeping pace with inflation. Retail sales appear Housing starts are minimal. Smaller banks report business is slow; loan demand is just holding at last year's level. The region's high technology manufacturers, which fared well in the early stages of the recession, are now seeing a softening in demand. The fall-off has been particularly pronounced for electronics components, but manufacturers of computers, word processors, and measuring and control devices also seem to be affected. Layoffs have been small and firms are still hiring experienced professionals. Manufacturing activity in areas other than high technology seems to have stabilized. There were signs of a pickup in home furnishings and appliances in December but this proved short-lived. the home furnishings business as "dead". One executive described The demand for building materials, such as lumber, siding and roofing, remains depressed. Firms producing a variety of capital goods report that recent orders have been disappointing; while there may not have been a deterioration a stronger performance was expected. A n exception is a manufacturer of specialized machinery for the pro- cess industries; here new orders are strong and point to an unusually good year. Price increases appear to be moderating. A recent survey of local purchasing agents showed a substantial increase over the month in the number reporting no change in the prices of purchased materials and components and a substantial decrease in the number reporting higher prices. In addition, several of the manufacturers interviewed have seen a slowing in price increases. A dissenting comment came from a buyer of snythetic fabrics: cutbacks in capacity attributable to the recession are causing price increases despite weak demand. Manufacturers are generally satisfied with inventory levels. In the retail sector, general merchandise sales are said to be healthy. Higher quality and off-price items are particularly strong; the middle of the range is the weakest area. Overall, retail sales seem to be growing at or a little above the rate of inflation. Professors Houthakker, Samuelson, and Tobin were available for comment this month. Houthakker anticipates that real growth will average zero to 1 percent this year and 2 to 3 percent next year. He endorses the current money growth targets and hopes that interest rate constraints will not deflect the Fed from achieving its announced targets. There is no reason to support the dollar by limiting interest rate declines in coming months, and the prospective Federal deficit provides no excuse for limiting interest rate increases later this year because Federal tax cuts will be nearly matched by spending cuts. Houthakker does not believe that the rapid decline in interest rates during the second quarter last year was a mistake. "The big mistake was con- trolling credit; once the controls were lifted, the economy resumed its growth." Samuelson believes that the "President's forecast is overly optimistic in its entirety, no part is as improbable as the whole put together." The announced money growth targets cannot accomodate both 9 percent inflation and 3 or 4 percent real growth. "With the Fed's monetary targets, growth will prob- ably average 1 or 2 percent during the next five years while the inflation rate declines to 7 per cent in 1985." Samuelson, like Houthakker, does not believe the Fed should "fine tune" interest rates. Samuelson encourages the FOMC to ask itself if "the Fed should alter its announced policy to take account of interest rates." Once growth declines, should policy become more restrictive? "Should w e resist the normal decline in interest rates consistent w i t h slower GNP growth given our money targets?" accommodate little growth. A s they stand, the announced monetary targets If real growth fails to fulfill even these modest expectations, Samuelson wonders if the Fed "wants to be an accessory." Tobin agrees with Samuelson that real growth will be squeezed in the collision between inflation and monetary policy. Tobin disagrees with the Administration's strategy of selling the n e w fiscal policy as the cure for inflation. It is monetary policy that has been assigned the goal of fighting inflation, and yet the public does not understand that the Fed's targets will accommodate new investment, production, and jobs only if wage and price increases are reduced significantly. "How can policy be credible if it is kept a secret? How can the threat in monetary policy be taken seriously if the threat is not explained to the people?" Tobin hopes the Fed has learned at least one lesson from last year's experience: propped up by the Fed. when GNP declines, interest rates should not be Constraining the decline in interest rates in the second quarter exaggerated the swing in GNP and money growth. The high interest rates in late 1980 were not caused by the second quarter's "low yields;" the rapid money growth during the third quarter coupled with the Fed's desire to meet its year-end target produced last year's record interest rates. SECOND D I S T R I C T — N E W YORK Economic activity in the Second District continued mixed in February and early March. Retail sales increased at most stores, though a few merchants reported disappointing results. Domestic car sales picked up a bit at some dealers, due in large part to the rebate programs; foreign car sales also improved. Outside the consumer sector, economic activity appeared to be generally flat. Yet a number of respondents did indicate that their companies had experienced a modest improvement in business in recent weeks. Despite the stronger than expected performance of the national economy in the first quarter, the consensus forecast still calls for sluggish growth over 1981 as a whole. Many respondents expressed enthusiasm for the direction and substance of the new Administration's tax and expenditure proposals. None, however, indicated that the proposals had led them to change their own production and capital-spending plans. Consumer Spending. The February gains in Second District retail sales were weaker than during the Christmas season, but somewhat stronger than in November. Mild weather and widespread promotional price-cutting accounted for the February pickup. Generally, inventories were reported at satisfactory levels and under continued close surveillance. Automobile sales in the Second District strengthened in recent weeks. To a large extent, however, the sales gains have been the result of the substantial rebates offered by domestic car makers. Yet sales of some imported cars also improved, and dealers in these cars anticipate further gains during the spring. Inventory positions vary greatly. Some were reported low because of the high cost of carrying inventories while others were described as adequate or high. The Manufacturing Sector. Economic activity in the Second District outside the consumer sector was somewhat mixed though many respondents experienced an Improved situation in recent weeks. A spokesman for the petroleum industry noted a softening of demand compared to a year ago due to greater conservation efforts and warmer weather, and some upstate capital goods firms report a continued low level of new orders. However, moderate pickups in new orders occurred at several firms including a chemical equipment manufacturer that supplies oil refiners, a home furniture and furnishings manufacturer, and an automotive company. In addition, a major food company fore- sees that 1981 will surpass last year's record performance, a large cosmetics and jewelry manufacturer reports continued gains following an acceleration in sales which began late last year, and an industrial equipment manufacturer has experienced strong demand from commercial and industrial construction firms. Economic Outlook. While several economists saw business activity in the first quarter of 1981 coming in stronger than they had anticipated, they have not changed their forecast of a 1 to 1-1/2 percent rise in real GNP for the year as a whole. Retailers anticipate a positive impact on sales during the second half of 1981 resulting from the enactment of President Reagan's proposed personal income tax cut, and some manufacturers expect the rise in defense expenditures to stimulate the economy in general and provide orders for their defense-oriented customers. Others, however, expect the near-term effects of the tax and expenditure cuts to be offsetting. The proposed accelerated depreciation program is not expected to have much immediate impact, in light of the current low level of capacity utilization and the less than buoyant level of final demand. Financial Development s. Business loan officers at large commercial banks report that business loan demand has been sluggish. Respondents gener- ally agree that a slowing of economic activity and competition from the commercial paper market have contributed to the weakness in bank loan activity. H o w e v e r , in the w a k e of the recent decline in market interest rates relative to the p r i m e , respondents reported that below-prime lending has been b r i s k , but v e r y competitive. Financial P a n e l . This month w e have comments from Henry Kaufman (Salomon Brothers), Francis Schott (Equitable Life Assurance Society), and Albert Wojnilower (First BostonCorporation).[Asterisk:Theirviewsarepersonal, not institutional.] Kaufman: A double-dip in economic activity w i l l not o c c u r . Besides a much larger than expected increase in real GNP this quarter, the economic path for the balance of this year w i l l include about 2 percent real growth in the second quarter and 3 to 4 percent for the second half of this y e a r . The distinctive features of the continued expansion w i l l include no cyclical support from housing, a big increase in defense expenditures, prudent business monetary practices (constrained by high interest rates) and renewed strength on corporate liquidity later this year when interest rates w i l l reach new highs in the long t e m bond m a r k e t s . Schott: Prospects for disinflation, largely created by well-judged monetary policy, are being converted into reality. Progress w i l l be slow because of the institutionalization of inflation. have turned distinctly favorable for three reasons: Yet, psychological factors (1) the Administration's expenditure control proposals have credibility, including prospects for Congressional acceptance; (2) Federal Reserve restraint has resulted in renewed liquidity pressures at intermediaries, which is reflected in cautious loan policies; and (3) the soft spots in the economy, such as housing, automobiles and farm machinery have created apprehensions about significant business failures. Wojnilower: These apprehensions have dampened speculation. Current statistics and reports from business contacts suggest that the economy remains strong and that the Reagan program is prompting more expansionary planning by business firms. The decline in interest rates likely is setting up a repeat performance of last summer's acceleration of business and upsurge in interest r a t e s — b u t this time it will be from a stronger base of business activity and without the caution induced by preceding credit stresses. Indications are that longer term bond issues, initially by banks but probably followed by others, are accelerating sharply. Buying of such secur- ities, however, remains limited largely to pension funds and to fiduciaries and speculators who expect to remain interested in the bond market only very briefly. THIRD DISTRICT - PHILADELPHIA Reports from the Third District indicate that business activity for the month of March is sluggish to mixed. Area manufacturers say industrial activity is showing some signs of expansion in March but has remained basically unchanged for the third consecutive month. The continued stability in manufacturing activity may have put a halt, at least temporarily, to cuts in factory employment observed since last April. As for the future, manufacturers anticipate a sharp upswing within the next six months which may give labor a boost as well. Retail sales are up overall in March, but a mass transit strike in the Philadelphia metropolitan area has dropped sales in downtown stores 50 percent. Looking ahead, retailers are a bit more optimistic than they have been in recent months, anticipating increased sales by September. In the financial sector, area bankers report sluggish loan activity. Consumer loans are down from a year ago, while C&I loan volume is slightly better, but still not strong. In efforts to bolster business loan demand, many banks have increased below-prime lending activity and are offering fixedrate loans to businesses that want them. In the coal industry, the Third District will feel some impact should the United Mine Workers call a general strike on March 27, as planned. Area utility companies and manufacturers appear ready, however, having stockpiled supplies that would last one to three months. INDUSTRIAL Area industrial activity is showing some signs of expansion in March, but has, according to the respondents to the latest Business Outlook Survey, remained basically unchanged for the third month in a row. With these results in, it appears that the first quarter of 1981, in general, has been a period of little or no growth for Third District industry. In terms of specific indicators this month, new orders and shipments are up from February. Inventories, however, have held steady for the fifth consecutive month, as local manufacturers may be waiting for stronger signals on the economy before building their stock levels. As for labor, the continued stability in area manufacturing activity may have put a halt, at least temporarily, to the cuts in factory employment observed since last April. Survey participants report no real change in their payrolls or the average workweek over last month. For the longer term, respondents to the survey continue to be optimistic, anticipating a sharp upswing in general industrial activity within the next six months. Over one-half of the survey participants expect new orders and shipments to grow between now and September, and, as production pick ups, manufacturers plan to increase factory payrolls and lengthen the average workweek a bit. Higher expenditures on plant and equipment are also forecast. On the inflation front, industrial prices have jumped again in the Third District, as over one-half of the survey respondents report paying more for raw materials than they did last month, and about one-fifth say they are charging more for their finished products. Prices are expected to continue climbing, as 9 out of 10 of the survey participants anticipate higher input costs by September and nearly 8 out of 10 plan price hikes for the goods they sell. RETAIL The Philadelphia metropolitan area has been enduring a mass transit strike since March 15, as Transport Workers Union leaders and SEPTA (Southeastern Pennsylvania Transportation Authority) officials try to work out a new contract agreement. Downtown Philadelphia stores have been hit hard by the strike, with shopkeepers reporting daily sales down 50 percent from pre-strike levels. Spokesmen for major area retail chains estimate that their center city department stores account for only about 20 to 25 percent of their companies' total sales volume though, and that lost sales in center city have been made up for, in part, by increased volume in suburban stores. Many local merchants have reduced their evening hours for the duration of the strike. Although the strike will probably have only temporary effects on the retail community, some longer-term damage may be done as well. As a Director of this Bank notes, merchants "can't be sure if consumers will maintain the same willingness to spend" that they displayed a few weeks ago. Outside of the downtown area, March sales are up over last year's levels, about 7 to 10 percent, owing mainly to new spring lines and growing consumer confidence, according to area contacts. Sales of soft goods—apparel and small household items—continue to be strong, with big ticket items starting to pick-up as well. As for the future, area retailers are a bit more optimistic about the second half of 1981 than they've been in recent months, expecting sales to run at least 3 percent above year-ago figures. According to some contacts, consumer confidence in the Reagan Administration is growing, as "they try to get a handle on inflation." Area retailers are keeping the lid on inventories, though, and plan no changes for stock levels, hoping to keep inventory-sales ratios healthy. FINANCIAL Area bankers report sluggish-to-mixed loan activity in March. Consumer loans are down 14 to 16 percent from a year ago, mainly because banks continue to take a restrictive posture towards retail lending. Business loan volume is better, but still not strong. Reports of C

Federal Reserve (1981, March 30). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19810331

@misc{wtfs_beige_book_19810331,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1981},
  month = {Mar},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19810331},
  note = {Retrieved via When the Fed Speaks corpus}
}