September 14, 1977
District manufacturers responding to our latest survey are developing some uncertainty about business prospects, and this uncertainty is apparently being fed by recent developments in business activity. New orders at these manufacturers were nearly flat in August, with the only really bright spots occurring in the apparel and furniture industries. Coincident with this performance in new orders, there appears to be some growing sentiment that inventories and plant and equipment capacity are excessive for current needs. Additionally, a majority of manufacturers surveyed anticipate little or no change in the level of activity over the next six months. This Bank's Directors, addressing a question on the outlook for business capital spending, were in general agreement that there is little evidence of a recent change in prospective outlays.
Among District manufacturers surveyed this month shipments were generally up while new orders and backlogs of orders showed little change. What strength there was in the new orders picture seems to have been largely a somewhat tardy advance in the apparel and furniture industries. Manufacturers' inventories continued to expand as did the number of respondents viewing current levels as excessive. Twenty-five percent of all respondents also now view current plant and equipment capacity as excessive. One representative of the furniture industry cited the intention of his firm to cut back on output over the next six months in order to reduce their stock of finished goods. The diffusion of survey responses further suggests little change in manufacturing employment and weekly hours from last month. Prices continued to rise across a broad front with over one-third of all manufacturers surveyed paying higher prices in August.
Our survey of retailers presents a somewhat brighter picture of current conditions. Total sales were up in August although relative sales of big ticket items showed little change. Retail inventories were reduced and brought into line with desired levels.
Perhaps the most conspicuous feature of the survey responses of manufacturers and retailers is the sharp differences between their respective expectations, or more precisely the recent change in their respective expectations. Retailers as a group, while still anticipating little change in the level of activity over the next six months, are more optimistic now than a month ago. Manufacturers' expectations, on the other hand, are decidedly less positive than in recent months and there was even a significant deterioration in the outlook during the most recent survey period. Fewer than one-fifth of all manufacturers surveyed expect business conditions, nationally or for their respective firms, to improve over the next two quarters. Only slightly more foresee improvement in their immediate market areas.
Some support is found among the Directors of the Richmond Bank and its' Branches for the view that state and local government expenditures will help sustain business expansion in the near future. Nearly half of the Directors commenting on this question foresee at least a moderate increase in state and local government spending in their respective areas in coming months. Some of the Directors believe that businessmen and investors now foresee some moderation in the rate of price increases. However, inflation remains a major concern, and the expectation of some moderation is by no means universally held.
Data for Fifth District weekly reporting banks suggest that loan demand has faltered somewhat in recent weeks, although bankers do not seem to think this will continue. Our mid-August survey of changes in bank lending practices shows no banks expecting weaker business loan demand in the months ahead. Recent data on consumer loans show a tapering off of growth, as do data on real estate loans. Advances in the consumer loan and real estate loan areas, however, are also expected.
The commercial and industrial lending picture is somewhat mixed, the net result being a recent flattening out in this category. Most of the weakness in business loan demand seems centered on the nondurable goods industrial sector, although declines in the volatile public utility classification have also been a depressing factor.
District cash farm income during the first half of 1977 was 8 percent above a year ago, but the outlook for the second half is not as encouraging. Sagging grain, soybean, and cotton prices weaken the farm income picture. Moreover, District farmers generally face prospects that 1977 crop output will be the poorest in many years. Because of the prolonged drought, prospective yields per acre are down sharply. And acreages for harvest in general are smaller. Recent rains will boost pasture conditions and may improve the yields of tobacco, soybeans, and peanuts but came too late to help the corn crop—now expected to be 35 percent under a year ago. Indications also point to a 25 percent drop in flue-cured tobacco production. On the bright side, however, quality of flue-cured marketings has improved in recent weeks, demand has been strong, and prices have risen sharply, averaging 12 percent above a year earlier and hitting record levels in two of the three flue-cured belts.