Beige Book Report: Richmond
June 16, 1976
Responses to our June survey of Fifth District Business Conditions suggest a leveling off of the rate of recovery. Compared to recent months, fewer manufacturers reported improvement in such areas as shipments and volume of new orders. Whether because of these developments or not, respondents' expectations for the next six months appear less optimistic than in previous months, particularly with regard to the level of production in their respective firms. Retail sales seem to have shown little change in May, an obvious departure from the rather rapid rate of improvement experienced earlier this year. Employment in the Fifth District continues to follow the trends set in the first quarter, as sizable monthly gains remain the rule. Neither current capacity nor availability of supplies and materials appears to present immediate problems. What supply problems have arisen were apparently related to differential rates of recovery which caused some supply channels to be drained. Such problems have already begun to subside.
Of the manufacturers responding to our latest survey, fewer reported increases in shipments, orders, and backlogs than did so in the two previous months. Backlogs of orders, in fact, seem to have shown little change in May. Inventories of materials held steady, while stocks of finished goods apparently grew somewhat. Most manufacturers responding to the survey report current inventory levels "about right" to "too high," with nearly one-third reporting the latter. Employment and weekly hours were also expanded somewhat, although these changes were less widespread than a month ago. Reports of price increases were more common than last month, with one-half of our respondents paying higher prices this month. Although nearly three-fourths of the manufacturers surveyed view current plant and equipment capacity as about right, over 20 percent continue to feel it excessive.
The performance of several key industries has permitted relatively rapid recovery, at least in terms of employment, in most areas of the District. Textile manufacturers, in particular, have experienced great improvement in the level of business activity and remain among the more bullish Fifth District industries. This very rapid return to high levels of production in the textile industry apparently caused some short-term shortages, particularly of machinery and equipment. Recent contacts with industry people, however, support the view that these problems are largely past. Other than some normal lengthening of delivery times, our contacts in the industry foresee no immediate symptoms of capacity or supply constraints. The apparel industry, heavily dependent on the textile mills, is apparently experiencing some lengthening of delivery times and some spot shortages. They seem, however, to view these problems as transitional, related to rapidly increasing rates of production and capacity utilization.
The furniture industry experienced little change in May, as new orders, shipments, and backlogs were essentially flat. Respondents expect, at worst, some lengthening of delivery times over the next six months. There is no indication of more than some isolated lengthening of lead time in the paper and paper products lines. Lengthening lead times in some lines and more aggressive selling, suggesting weak sales in others, seem to typify the situation.
Among primary metals producers and users, no problems are currently being experienced nor are any anticipated in the immediate future. Contacts with industry personnel turned up several comments about capacity limitations and possible difficulties developing as early as the fourth quarter; but even in these cases, no serious problems are expected. As in other industries, there has been some extension of lead time and may be more, but this is apparently not viewed as serious either by producers or users. Producers of electrical equipment and supplies report some delays in obtaining supplies, particularly electrical components, but here again the problems are not considered serious.
So far as potential supply bottlenecks are concerned, the major uncertainty among District producers is with regard to the availability of energy, particularly electricity and natural gas, over the coming months. The failure of projected shortages to develop so far has eased some of the concern but perhaps intensified the uncertainty, particularly among industries heavily dependent on these types of energy.
Retailers responding to our latest survey report a relatively flat month in May. There was little change reported in sales and sales of big-ticket items. Relative total sales held steady. Inventory increases were reported by most retailers, and a majority now view current inventory levels as excessive. Prices, including employee compensation, continued to rise, but this too was less common than in recent months. Retailers remain essentially optimistic, although not to the extent noted in the first quarter. Despite the rather flat performance in May, retailers expressed little disappointment. They seemed resigned to the fact that sales could not possibly continue to grow at recent rates. Unit sales remain well above year-ago levels, despite unusual weather and higher prices. Specific comments from survey respondents suggest that sales are firm at all price points but that the consumer retains an eye for quality.
In the banking sector, business lending at large Fifth District banks has declined about 2 percent so far this year. In a mid-May survey, one-half of the respondents reported no change in the strength of business loan demand over the past three months. One-third reported demand moderately stronger, while one-sixth reported it weaker. Respondents expect loan demand to be unchanged to moderately stronger during the current quarter.
District farmers' cash income from farm marketings during the first quarter of 1976 was up about 2 percent over the same period in 1975, compared with a 10-percent gain nationally. Smaller acreage and weather-reduced yields per acre have combined to cut the winter wheat crop 23 percent below a year ago—a much sharper decline than that forecast for the nation. Spring freeze damage reduced 1976 peach prospects sharply in all District states except South Carolina.