Beige Book Report: Richmond
February 21, 1978
Fifth District business activity generally picked up in January judging from our latest survey. Such measures of activity as new orders, backlogs of orders, and employment improved among manufacturers surveyed. Only shipments, apparently held down by adverse weather conditions, showed no gain. Retailers also noted improved conditions as reflected by rising total sales and relative sales of big ticket items. Nonetheless, manufacturing respondents are less optimistic than they were a month ago. At least part of this change in attitudes is possibly due to apparently imminent curtailments of power consumption dictated by dwindling coal stocks. Despite the recent implementation of emergency measures in some areas, however, actual effects of the coal situation so far have been minimal. In the financial sector, mortgage demand continues to be strong on a seasonally adjusted basis. To date, supplies of mortgage funds have been adequate. In some areas terms of lending are tightening in response to slower deposit growth.
Conditions among Fifth District manufacturers firmed over the past month with one-third of our respondents reporting an increased volume of new orders and rising order backlogs. Despite the fact that inventories, of both finished goods and materials, expanded over the month, there was no increase in the number of respondents reporting excessive inventories. Employment among manufacturing respondents also rose slightly but hours worked per week remained stable. Prices, meanwhile, continued to increase generally, although several manufacturers report declines in prices received.
Among retailers responding to our survey, both total sales and the relative sales of big ticket items improved over the past month. Retail inventories apparently declined slightly and are now essentially in line with desired levels. One respondent, however, views current stocks as lower than desired. Prices and wages were generally higher than a month ago according to the retailers surveyed. Most Fifth District directors now anticipate that 1978 automobile sales in their areas will be somewhat weaker than in 1977.
Although the expectations of our respondents regarding future business activity remain basically optimistic, manufacturers' expectations seem to have weakened somewhat over the past month. Fewer than one-third expect the general level of business activity, nationally, locally, and in their respective firms to improve over the next six months. On the other hand, more than one in six now foresees some deterioration of conditions over that time period.
Other than the direct employment impact upon workers in a few industries, e.g., miners and railroad workers, and some secondary impact in such areas as local retail sales and state government revenues in coal mining areas, the coal strike has had little effect on the District economy to date. Dwindling coal stocks, however, have led to some minor power curtailments by electric utilities serving West Virginia and parts of Maryland and Virginia. If these utilities are forced to rely on their current coal stocks and are unable to tap outside sources of electrical power, major curtailments are possible within the next ten days to two weeks. The utility regulatory body in West Virginia has already initiated an emergency plan which will institute gradual service curtailments as needed.
Comments of our directors and industry sources suggest some tightening in mortgage markets, at least in some areas of the District. A slowing of deposit inflows at lending institutions coupled with a seasonally vigorous demand for mortgage loans has created a general impression that a continued tightening of market conditions will be increasingly reflected in lending terms over the next several months. To date, however, adjustments have been scattered and apparently concentrated principally in the larger cities.
The volume of credit extended by large Fifth District banks has been unchanged since the beginning of the year. Consumer loans, other than mortgages, have increased only modestly while business loans have been essentially flat. At the same time inflows of deposits appear to have been slow. There has been no gain in savings deposits, and the growth of large negotiable CD's has leveled off.
Replies to our fourth quarter farm credit survey revealed that last year's drought-reduced crop output and the tightening cost-price squeeze combined to create cash-flow problems for many Fifth District farmers. Bankers as a result have experienced much slower loan repayment rates and a sharp increase in requests for renewals and extensions. Farmers' demand for credit from traditional lenders continues fairly strong even though many farmers have been able to qualify for Federal drought disaster loans. Bank supplies of loanable funds seem to be adequate for the demand, but they are apparently at the lowest level since this survey began more than two years ago.
District farmers may cut 1978 cotton acreage 26 percent from last year but are likely to offset this reduction partially by increasing soybean plantings 9 percent. Planned feed grain acreage is down 5 percent as was the acreage seeded to food grains (wheat and rye) last fall. These intended plantings are as of January 1 and may change considerably by planting time.