June 11, 1975
The May survey of Fifth District businesses supports the view that business conditions are beginning to improve. It is not yet apparent that a strong recovery has taken hold, but survey responses and other reports from around the district are more encouraging than at any time in recent months. Among the most encouraging signs at the present time are reports of notable improvements in labor markets. Several states have begun to report declines in unemployment rates and increases in employment. Of the manufacturing firms responding to our survey, more report an increase in the number of employees than report a decrease for the first time since August 1974. Shipments and new orders show little further improvement, after significant improvement in the previous month. Optimism continues to spread in the manufacturing sector. Recent contacts with Fifth District banks indicate that loan demand in virtually all lending areas continues weak and that this weakness is expected to continue for at least the next three months.
The latest district survey indicates improvement in a broad range of activities and a continued swing toward brighter expectations. In the manufacturing sector, shipments and new orders have held firm, showing perhaps a slight gain, after a relatively strong showing in May. In particular, the latest reports on new orders represent a substantial change from the widespread declines which occurred from September 1974 through March 1975. Backlogs of orders showed some further declines in May, but the relatively weak declines of April and May indicate a distinct slowing of the slide that began over a year ago. The inventory picture appears to be improving, but the current adjustment process still has a way to go. One-third of the survey respondents report declines of both materials and finished goods inventories, while only one-fifth indicate increases. This result may be significant with regard to finished goods inventories, which apparently were still growing through March of this year. Despite the latest improvement, however, 50 percent of the respondents still feel current inventories are excessive.
The employment situation also showed signs of improvement during May. For the first time since August 1974, the diffusion of survey responses suggests an increase in the number of employees in manufacturing firms. Even more significant results are those concerning the hours worked per week, as over one-third of the respondents indicate increases in this area. There remains a general feeling that current plant and equipment capacity is excessive, but there is little indication of any desire to alter current expansion plans.
The survey of retailers also suggests some general improvement in overall conditions. Over 70 percent of the retailers surveyed indicate an increase in sales during May, although most report that sales of big-ticket items relative to total sales remain weak. Inventories showed no change from the previous month, but most respondents view current levels as about right.
In the area of prices, the period of weakness indicated in recent months seems to have ended, or at least to have been interrupted. Manufacturers and retailers report paying higher prices, and only the retailers report little or no change in prices received. There is now general agreement as to expectations for the next six months. A majority of manufacturers and retailers foresee business conditions, locally and nationally, improving over that time period.
In the banking sector, commercial and industrial loan volume at large district banks declined steadily during May, with cyclical forces overcoming the strong positive seasonal movements normally expected at this time of year. Weak demand has led to especially low loan volume in the textile industry as manufacturers continue to reduce their inventories. One bank indicates that demand for business loans is particularly weak at its city offices. Consumer loan volume continues its steady decline also. Notwithstanding the weak demand situation, loan refusals are high in both business and consumer lending areas as portfolio quality remains a chief concern. Liquidity is steadily improving as funds from strong time deposit flows displace purchased money and as investments are substituted for loans. Based on their recent experiences, district banks generally feel that the recovery in prospect for the remainder of the year is not likely to be vigorous.
Time deposit inflows are strong at both banks and S&Ls, even though some institutions are doing little to encourage the longer maturity deposits. Net federal funds purchases in the Fifth District, although high by historical standards, are considerably below last year's levels. CD solicitations are being concentrated in local market areas due, at least partly, to the fact that large district banks still must pay a small premium for funds in the national market. It has been noted that short-term CD funds are plentiful but that longer-term deposits (maturities greater than 120 days) are difficult to attract.
District cash receipts from farm marketing during the first quarter were 12 percent below a year ago, but the decline was considerably less than that for the nation. Farmers generally have made good progress in their field work in recent weeks. Planting of most field crops in the southern portions of the district is in the windup stage, with earlier plantings reportedly in fair to good condition.