Beige Book Report: St Louis
February 21, 1978
Business activity in the Eighth Federal Reserve District made modest gains in January although production and sales were hampered by adverse weather conditions. Retail sales registered small increases. Inventories were generally at or near desired levels. Manufacturing activity in most industries continues to increase. Home construction remains at high levels, spurred by a backlog of new home sales. Net savings inflows of consumer-type time and savings deposits into commercial banks and savings and loan associations continued to increase, but the rate of growth has slowed substantially. Mortgage interest rates have risen on both commercial and residential loans.
Retail sales registered modest gains in January compared with a year ago. Sales were reportedly hurt by adverse weather conditions, although last year's January sales were also adversely affected by severe weather. Department store representatives reported somewhat larger sales gains for durable goods than soft goods. Automobile sales in the St. Louis area this year were about equal to the January and early February sales of last year but inventories of new cars are generally above desired levels. No significant inventory problems were reported by other retailers.
The rate of growth in manufacturing appears to have slowed somewhat in January from the December level, reflecting in part some weather- related problems and a slowdown in automobile production. Severe weather slowed the delivery of raw materials and parts to a number of plants in the District. Some automobile assembly plants were temporarily shut down in order to make inventory adjustments in models where sales had not met expectations. Representatives of some capital goods manufacturers reported small gains in production, although demand has not been as strong as had been expected. Production of housing-related goods, including building materials, construction equipment, and wall coverings, remains generally strong. Aircraft manufacturing continued strong as substantial order backlogs were reported.
A large backlog of orders continued in the home building industry, although a slowdown in new home orders has occurred in recent weeks. Homebuilders were generally optimistic despite the slowdown, given the existing backlog of orders and the generally good prospects for new home sales this year. Contributing to the large number of unfilled orders was the severe weather in part of December and January which hampered construction.
Commercial banks in the District experienced little change in consumer-type savings deposits, but relatively large increases in other time deposits, primarily large certificates of deposits, in January. Savings and loan associations generally reported that net inflows of savings were positive, but the rate of gain had slowed noticeably. The slowdown was attributed to rising rates on alternative investments, but disintermediation is not believed to be a serious problem at this time. It was pointed out, however, that further increases in short-term rates could have significant effects on savings inflows in the coming months. Borrowings by savings and loan associations at Federal Home Loan Banks were reported to be increasing, but the level of such borrowings was still relatively low.
The rate of interest on mortgage credit has risen in recent weeks. Mortgage rates on new homes in the St. Louis area are now generally at 9 percent on an 80 percent loan, up from 8-3/4 percent a few weeks ago. However, a few savings and loan associations in St. Louis are still making such loans at 8-3/4 percent. Mortgage rates on commercial building have also moved up one-eighth to three-eighths of a percent. In general, mortgage money is reported to be available at the higher rates. However, some directors of the Little Rock Branch reported that in parts of Arkansas savings and loan associations were fully loaned up, that funds for commercial building were not now available, and that new home buyers were having difficulty in arranging permanent financing.
The coal strike may soon have a sizable impact on overall economic activity in the District. Union Electric, the leading electric utility in the St. Louis area, reported that mandatory cutbacks may have to be considered within the next two weeks unless the voluntary cutbacks proposed last week work or the strike ends. However, representatives of this firm report that it has greater coal supplies than most utilities as much of its coal comes from the western states. The Governor of Kentucky has made a plea to residential, industrial, and business customers to voluntarily reduce their use of electricity. The TVA (Tennessee Valley Authority), which supplies electric power to west Tennessee and most of Kentucky, expects to require reduction of current usage by all customers about March 1st unless the strike is settled. Representatives of utilities in the area report that the TVA plan will likely involve some layoffs at manufacturing plants.
Farm commodity prices and the farm income outlook have improved somewhat in recent weeks. Farm commodity prices average about 6 percent higher than last September. Nevertheless, a small percent of the farm operators still talk about a farm strike during the current year.