August 9, 1978
Manufacturers surveyed this month report little or no overall change in the volume of new orders or in backlogs of orders. Nonetheless, shipments continued to expand moderately and employment and weekly hours rose somewhat. Inventories of materials and finished goods were also up over the month. However, current stocks more closely approximate desired levels than at any time in recent months. Regarding the price situation, more than half of the manufacturers surveyed report paying higher prices in July and over 40 percent received higher prices.
Among retailers surveyed sales were generally up over the past month while relative sales of big ticket items held steady. A majority of respondents experienced rising inventories in July, but most continue to view current levels as about right. Employment was unchanged from a month earlier. Prices, including employee compensations, were broadly higher over the most recent survey period. Richmond directors perceive continued strength in household credit demand and feel that expectations of higher prices are fueling current consumption, particularly of durable goods.
Expectations remain negative in the manufacturing sector as nearly half of our respondents anticipate a worsening in the level of business activity, nationally and locally, over the next six months. Expectations are neutral, however, for level of production in the individual firms. Retailers in our survey have lowered their expectations considerably of the past month, and now foresee little change in activity over the next six months. Our directors are not at all optimistic with regard to the outlook for prices. Most expect little or no improvement in the inflation area during the second half of the year.
Although deposit flows are holding up well, banks and thrifts generally feel that their liquidity positions have tightened somewhat. The strong activity in consumer lending has come as a surprise to most banks, as expectations about loan volume in July have generally been exceeded. As a result, many lenders now expect consumer lending activity to remain strong in coming weeks. Strength in new car sales is the major factor explaining consumer installment loan demand, and anticipatory buying to avoid higher future prices is cited as an important motive behind the strong sales. Some banks have recently raised the interest rates on auto loans, but these increases have not affected demand.
While lending to business has moderated in recent weeks, commercial and industrial loan demand remains strong. Moreover, some banks report large amounts of new bookings in process. Borrowing seems widely dispersed among type of borrower. Our contacts report only isolated cases of short-term-borrowing to finance unwanted inventory. One such case, however, is in the textile industry, where the demand for denim fabrics is proving to be much less than expected. Noteworthy is the fact that area banks rate the credit worthiness of their business customers as being quite good; this view is also supported by our banker directors.
Demand for mortgage loans appears to have been strong in July, and fifth district thrift institutions described their liquidity positions as being comfortably tight to tight. Thrifts in Maryland appear to be particularly pressed for funds, and many have raised their conventional loan rate to 10 percent (the state usury ceiling) with a one-third down payment required.
Our farm credit survey for the second quarter of 1978 revealed that district bankers have experienced further improvement in loan repayment rates and a significant decline in the number of requests for renewals and extensions since the first quarter. Indications are, however, that a growing proportion of banks serving district agriculture are currently faced with liquidity pressures. While farmers' demand for short- and intermediate-term credit from commercial banks was weaker, on balance, demand for consumer and business loans continued strong and bank supplies of loanable funds were much less than usual. Loan-to-deposit ratios of reporting banks, in fact, were at the highest level in almost three years. Bankers forced to refuse or reduce a farm loan because of a shortage of funds rose relative to the total, while the share actively seeking new farm loan accounts dropped further. Bank interest rates on farm loans rose significantly, as might be expected.
While total planted acreage of principal district crops this year is down about 1 percent from a year ago, major cuts were made in the acreages devoted to cotton, corn, and wheat, offsetting the large increase in soybean plantings. Even though most crops got off to a late start because of the cool, wet spring, they have responded well to the generally better growing conditions than those prevalent last year. Gains in yields per acre are currently indicated for flue-cured tobacco and for all feed and food grains.