Beige Book Report: Richmond
August 7, 1979
Our latest survey of Fifth District business conditions suggests a marked slowing of activity over the past month. Manufacturers report month-to-month declines in shipments, new orders, and order backlogs, Inventories generally expanded both in absolute terms and relative to desired levels. More than two manufacturing respondents in five view current stocks as excessive. Retail sales showed little change over the month, but a majority of our directors feel that real sales are down slightly from a year ago. The directors anticipate little change in sales over the remainder of the year. Aggregate credit demand in the region continues to weaken, with consumer nonmortgage credit leading the decline. Business borrowings have been moderate in recent weeks. Our second quarter survey of farm credit conditions, however, reflected strong demand for agricultural loans, a continued rise in interest rates, and renewed pressures on liquidity at some banks.
Of manufacturers responding to our latest survey more than one-third experienced a decline in the volume of new orders and nearly as many had reduced levels of shipments during the past month. Backlogs of orders declined moderately. Respondents also report significant inventory accumulation during July. Over one-third indicate larger stocks of finished goods now on hand and over one-fifth report similar gains in materials inventories. Additionally, over 40 percent view current inventory levels as excessive while only six percent consider them inadequate. Nonetheless, a large majority of these manufacturers still feel current plant and equipment capacity and current expansion plans are at or near desired levels. Employment among District manufacturers declined slightly in recent weeks, and reductions in the length of the work week were widespread.
The District retail sales experience has been mixed in recent weeks although pervasive weakness in some consumer durables, notably autos, has given the entire retail sector a negative tone. It is the view of our directors that real retail sales are down only slightly from year ago levels, and most of them cite automobiles as a significant depressant. Weakness is also perceived in sales of recreational vehicles, boats, and tourist related lines. Recreational items for home use have shown some compensating strength and department store sales continue to hold up well in some areas.
Pessimism has become pervasive among our manufacturing respondents. More than ninety percent expect the general level of business activity nationally to worsen over the next six months and nearly two-thirds are anticipating further slowing of activity in their respective market areas. Over one-third expect the level of production in their own firms to decline over that period. There is less agreement among retailers as to the outlook for the rest of the year, but on balance they do not expect any improvement and seem to be preparing for some further weakening of sales. Our directors generally expect retail sales to be essentially unchanged for the rest of the year. Price increases continue widespread as over three quarters of all respondents report paying higher prices in the past month. On a brighter note, survey responses suggest a possible slowing of price increases in building materials lines.
As noted, aggregate credit demand in the region continues to weaken. It is in consumer lending that banks have noticed a clear softening in the demand for credit. Installment lending in particular has slowed as auto sales, and especially sales of recreational vehicles and power boats, continue weak. Moreover, there are some reports that consumer revolving credit is softening. At the same time, second mortgage loans are doing well, with debt consolidation being a major factor explaining demand for such credits. Home improvement loans, however, are also fairly strong. The market for residential mortgage loans is somewhat confused. Both banks and thrift institutions report strong to moderate demand for residential mortgages. At the present time banks appear more willing to extend such credit than do the thrifts. In fact, real estate has been the strongest lending category at large District banks in recent weeks. Commercial and industrial lending is moderate, with utilities, construction related businesses, and both wholesale and retail trade accounting for a major share of new loans at larger banks. Some longer term loans for fixed investment are being made, but short- term lending predominates. Deposit flows are adequate to support the current demand for funds, although recent changes in Regulation Q do not appear to have significantly strengthened the deposit gathering power of financial institutions.
The second quarter survey of farm credit conditions in the Fifth District indicates that loan repayment rates and requests for renewals were running about normal. Supplies of farm loan funds at banks declined further, and there was a slight increase in the proportion of lenders having difficulty meeting the credit needs of their farm borrowers. Moreover, there was a fairly sizable decline in the share of banks who were actively seeking new farm loan accounts. Loan-to-deposit ratios of reporting banks rose to an average of 68.1 percent, only fractionally below the record level a year ago. Bankers who indicated they were requiring more collateral than usual rose to a new high.