Beige Book Report: St Louis
June 14, 1978
In the Eighth District, business continues its broadly-based expansion. Consumer spending has strengthened in recent weeks, manufacturing activity has risen further, and shortages in labor and materials are beginning to occur. Credit demand remains strong, interest rates are rising, and savings inflows are leveling off. Most financial institutions are offering the new six-month and eight-year certificates, but consumer response has been modest so far. In the agricultural sector, crop plantings have continued to be delayed by rainy weather but 1978 financial prospects for farmers have improved substantially as a result of rising farm commodity prices.
Department store retailers noted recent improvement in sales after a poor first quarter, and are generally optimistic about sales prospects for the summer season. Inventories of soft good items, which earlier this spring had become excessive, have been reduced to desired levels. Automobile dealers report strong sales in recent weeks, and, in some areas, shortages of some automobile makes were noted.
Shortages of labor and materials were reported by a number of businessmen, although serious bottlenecks do not appear prevalent at the moment. Delivery schedules are lengthening for a wide variety of products, such as semi-finished brass goods, pneumatic and hydraulic components, and steel forgings. The labor market is starting to show scarcities of some types of labor, including machinists, mechanics, electricians, stenographers, and maintenance workers.
Manufacturing activity has continued to increase. Aircraft orders at manufacturing firms continue to rise, due to both increased expenditures and a pickup in commercial airplane orders. Building products manufacturing shows continued strength. A manufacturer of connector plates used in construction registered sharp increases in May orders. A boxboard manufacturing firm reported continued improvement in sales. Other manufacturing firms showing increasing strength include steel, automobile, apparel, and leather products.
Housing construction remains at a very high level in the District as a result of a large backlog of orders. Builders noted some decline in consumer interest in recent weeks but felt that it was too early to judge whether a significant slowdown in orders is occurring. Even if a moderate slowdown should occur, the high level of existing backlogs would keep construction activity at a high level throughout this year. Commercial building has been sluggish in most of the District since the last recession, but recent information indicates a rapid increase in office rent in the St. Louis area, suggesting that economic conditions may be improving for a renewal of office building construction.
Most commercial banks and savings and loan associations are offering both the new six-month and eight-year savings certificates. Only a modest amount of advertising of these new instruments has occurred thus far. Consumer response to these certificates is termed "mild." Rates offered are at legal maxima, although they vary slightly on the eight-year certificates depending on the compounding methods used. The penalty for early withdrawal on the six-month certificate varies among institutions but is most commonly complete forfeiture of interest. Of the six-month certificates sold so far, it is estimated that roughly half of the funds were shifted from existing accounts in the same bank.
Savings inflows into commercial banks and savings and loan associations continue at the reduced pace of recent months. Some savings and loan associations reported net outflows in May, but for S and L's as a whole some gains appear likely. Commercial banks are experiencing some decline in consumer passbook accounts, but other time deposits have continued to advance, bolstered by increases in large CDs.
Loan demand at financial institutions continues to increase. Mortgage loan demand is very strong. Some savings and loan institutions reported record volumes of loans closed in May. Mortgage interest rates have moved up another quarter of a percentage point in recent weeks to 9-1/2 percent on an 80 percent loan. Rates on 90 percent loans are now at the 10 percent legal maximum in some District states. Both business and consumer loan demand at banks have continued to rise.
Crop planting has been hampered by rainy weather. Cotton planting has been reduced sharply from a year ago, but part of the reduction was planned. Corn planting is behind schedule. Rising prices for crops and livestock products have greatly improved prospects for farm income, which is now expected to be substantially above the 1977 level.