Beige Book Report: Richmond
December 14, 1977
Advances in Fifth District manufacturing activity continued spotty in November. Responses to our survey of manufacturers were nearly evenly divided between gains and losses in shipments, new orders, and backlogs of orders. This essentially sideways movement apparently prevailed for most individual industries as well as for the entire sample. Initial indications are that the retail sector is experiencing a strong Christmas selling season. The UMW strike, should it persist, looms as a major factor in Fifth District economic performance. Coal mining is virtually shut down in the District, even in such non-union areas as Maryland. In addition to the coal industry, the effects are already being felt by District railroads, where layoffs began before the strike. Fifth District bank credit expansion continues strong, with robust business lending compensating for weaker expansion in consumer and real estate loans. Despite problems in the coal industry and the lackluster results of our latest survey of manufacturers, business psychology in the District appears to have improved substantially in recent weeks.
In the manufacturing sector the overall level of activity appears little changed over the past month. Shipments, new orders, and backlogs of orders were higher in some firms, lower in others. This pattern was apparent within individual industries as well as across the manufacturing group as a whole. Inventories of finished goods are somewhat higher than a month ago while stocks of materials are essentially unchanged. Approximately one-third of our respondents now view current inventory levels as excessive. The diffusion of manufacturers' responses suggests a decline in employment as well as a reduction in weekly hours worked. Employee compensation and other prices paid by manufacturers rose widely in November while prices received were stable. Current plant and equipment capacity remains in excess of desired levels and there appears to be little sentiment for enlarging current expansion plans.
Among District retailers the situation has brightened significantly in the past month. All respondents indicated a pick up in sales and in relative sales of big ticket items from a month ago. Inventories, employment, and prices all rose over the month for these retailers. Christmas related sales are apparently running ahead of last year's heady pace. Sales are also substantial in a broad market for items to keep warm and to conserve energy, including such varied items as warm clothing, fireplace equipment and chain saws. Expectations of retailers are more buoyant than at any time in recent months, with respondents unanimous in expecting further improvement nationally, locally, and in their firms over the next six months.
Optimism among our manufacturing respondents also appears to have increased significantly after lagging for two months. A third of these respondents now expect the level of activity nationally and in their respective firms to improve over the next six months. Also, at their latest meeting, both head office and branch directors of this Bank expressed more bullishness about business in general than at any time since early in the year.
The UMW strike represents the largest uncertainty in the Fifth District. From preliminary figures, it appears that the strike is directly affecting approximately 80,000 miners in the District. This figure includes non-union miners in Maryland but not in Virginia. A non-union walkout in Virginia could add 10,000 to the figure. In addition, more than 1500 railroad workers have been laid off as a direct result of the strike, and this figure could run as high as 3500-4000 by mid-December. Beyond these effects, the impact on other activity in the District will depend on the duration of the strike. Most manufacturers and utilities have stockpiled up to 90-day supplies of coal. The most optimistic estimates of the length of the strike are in the 2-3 week range. Other estimates run as high as three or four months.
Business credit at large District Banks expanded at an annual rate of 20 percent in the last month. Some of this expansion, estimated at 15-20 percent of the totals is attributable to the dock strike, as exporters have sought credit to finance unexpected inventories. The greatest part, however, appears to be accounted for by middle-sized corporations representing a broad spectrum of activities. Consumer credit is recovering from an early fourth quarter lull, with some reports of special strength in the bank card area. Although real estate lending has shown some recent weakening, bankers feel that it will be strong in future months. The demand for single family mortgage loans is seen as a primary source of strength, with apartment lending increasing too.
Marketings of the 1977 crop of flue-cured tobacco were characterized by smaller volume and lower quality tobacco, particularly the leaf usually bought by exporters. The shortage of export grades resulted in record prices for the better grades usually purchased for export, bringing the season average to a record high $1.18 per pound, some 7 percent above the 1976 figure. Total value of sales was down $133.8 million or 10 percent below a year ago, however. The nation's farmers apparently face another year of relatively low prices and incomes in 1978. Consumers, however, seem assured of abundant supplies of food at prices only moderately higher—4 to 6-percent—than in 1977. The November crop report revealed further declines in the District cotton crop but slight gains in the tobacco, soybean, and peanut crops. The District farmers are joining in nationwide demonstrations against the cost-price-income squeeze in agriculture.