Beige Book Report: Richmond
June 14, 1978
Fifth District manufacturing activity continued to expand in May as respondents to our monthly survey report further increases in shipments, new orders, and backlogs. Survey responses also included favorable reports on inventories, where accumulation slowed, employment, and weekly hours worked. Despite recent gains in activity, there is no indication of imminent bottlenecks. Comments by the Richmond Directors, however, were less encouraging than our survey results. The Directors view consumer attitudes as essentially neutral and a majority cited inflation as a negative or potentially negative factor. Bank credit activity in the District continues strong, with lending concentrated in the business and consumer sectors. Most banks and S & Ls in the District are offering the new six-month savings certificates and most are paying the legal maximum rate. Customer response, generally, has been less than expected.
The gains in manufacturing activity over the past several months have served to bring inventories and plant and equipment capacity nearly into line with desired levels. There remains a number of individual respondents who view current stocks as excessive, but nearly two-thirds consider current levels about right or too low. Nearly all manufacturing respondents view current expansion plans as about right. A majority of our Directors feel that business investment opportunities have changed little over the past six to twelve months.
Despite substantial recent improvements in orders and shipments, manufacturing respondents express considerably less optimism about the near-term future than has been the case in other recent surveys. The consensus now appears to be that business activity nationally and locally will be little changed over the next six months. Their expectations, as well as those of our Directors, appear to have been significantly affected by recent price developments. Our survey indicates widespread increases in both prices paid and prices received. Directors are almost unanimous in citing inflation as a negative factor in the outlook and note, in particular, its adverse impact on consumer attitudes. An overwhelming majority feel that recent mortgage rate developments have dimmed the outlook for residential construction in the District. The few retailers reporting in our latest survey reflect a somewhat more positive view of near-term prospects than those expressed by manufacturers and Directors. The outlook for automobiles appears especially to have firmed.
Reports from banks and thrift institutions suggest that the recent sharp increases in mortgage rates are beginning to have a depressing effect on loan demand, although this effect is still fairly minor. The typical rate for an 80 percent, 30-year mortgage loan in the District is around 9 3/4 - 10 percent. Business lending has been very strong in recent weeks, with loans to durable goods manufacturers, public utilities, and retail trade accounting for the largest portion of new volume. Two-thirds of the respondents to our May survey of bank lending practices report moderately stronger commercial and industrial loan demand over the past quarter, and half expect demand to strengthen further. Rates charged to customers have risen, and there is some evidence of firming in non-price terms of lending, too.
Most banks and S&Ls in the District are offering the new six- month savings certificates, and most are paying the legal maximum rate. An exception seems to be South Carolina, where the major banks have not entered the market for these instruments. The thrifts have been more aggressive than the banks in promoting the new certificates, with bank advertising generally taking the form of announcement or notification advertising.
In general customer response to the certificates has been less than expected at both banks and S&Ls. The expectation at most financial institutions is that the six-month certificates will help prevent the loss of existing deposits as market interest rates rise, but that no significant increase in new money will result. Initial experiences confirm this expectation, as most institutions report that the largest proportion, 75 to 90 percent, of funds being placed in six-month certificates is being transferred from existing accounts. Again, however, South Carolina is an exception. The thrifts in that state have had a good public response to the new certificates and a substantial amount of new money is being generated. There is a feeling at some institutions that funds currently held in long-term deposits will be transferred to the six-month certificates as outstanding savings certificates mature.
Most field crops have gotten off to a late start because of the cool, wet spring. Delays in planting have ranged from one to three weeks. Much replanting has been necessary. Some cotton has been plowed up because of poor stands. And shortages of flue-cured tobacco plants have developed in some areas. Peaches are said to be in good condition and sizing well.