Beige Book Report: Richmond
September 12, 1979
Fifth District business and financial conditions remained spotty during the past month. The slowing of manufacturing activity seems to have spread. Manufacturers surveyed this month indicate declines in shipments, new orders, backlogs of orders, and employment. On the other hand, inventories rose only very slightly and price increases became less widespread. Retailers, however, report business gains over the month. Sales were up and, except for autos, big ticket items apparently kept pace. Consumer loan demand may have firmed somewhat in recent weeks while business loan demand has fallen off a bit. USDA's crop production estimates as of August 1 indicate that the District's 1979 harvest of tobacco, peanuts, some of the small grains, and apples will not be as bountiful as in 1978. But bumper harvest of soybeans, wheat, and corn are in prospect.
Of manufacturers responding to our survey nearly one-half experienced declines in the volume of new orders in the past month and over one-third had reduced shipments. In addition, there was a slight decline in order backlogs. Employment and the length of the workweek were down substantially. Current plant and equipment capacity is increasingly viewed as excessive and there is virtually no sentiment in favor of enlarging current expansion plans.
With some significant exceptions retail sales continue firm. Department stores are doing respectably but with notable weakness in some apparel lines. Building materials are doing well and consumer durables are holding their own. District retailers surveyed this month report gains in total sales with big ticket items keeping pace. Automobile sales have improved, apparently stimulated by recent promotions. Employment among retailers also rose over the month. These retailers note extensive price shopping by consumers and keen competition among sellers. The action remains in the moderate and higher quality lines, however, as bargain hunters seek lower prices but not cheaper merchandise.
Inventory accumulation still does not seem to have become a problem. Inventory levels among survey respondents rose moderately over the past month, but without any commensurate rise in concern over positions. Nearly two-thirds of the manufacturers surveyed are comfortable with current stocks as are all retail respondents. Three-fourths of our Directors queried on this point see no evidence of inventory problems in their respective areas. Instances of inventory problems were almost exclusively related to the automobile sector. Consequently, there is little evidence of any explicit action on the part of district businessmen to reduce current stocks or even to prevent further accumulation.
Despite their mixed views of where the economy stands, our respondents are largely in agreement as to where it is headed. An overwhelming majority expect the level of activity nationally to decline over the next six months and a clear majority expects similar developments in their respective market areas. Nonetheless, only about one respondent in three expects production in his own firm to fall over that period.
In the financial sector, consumer nonmortgage credit demand has shown signs of strengthening, although this strength appears limited in terms of the uses of funds borrowed. The recent improvement in automobile sales has resulted in increased demand for installment financing, while borrowing for other purposes continues to moderate. Also, larger and metropolitan area banks seem to be experiencing stronger consumer loan growth than smaller rural banks. Business loan demand has weakened in recent weeks, with loans to retailers showing the largest decline. Loans to both durable and nondurable goods manufacturers have also softened. There are indications that banks are making occasional price concessions to stimulate commercial loan demand. Commercial banks still appear to be active mortgage lenders. It appears, however, that there is growing caution in approving construction and land development loans.
Deposit flows continue to be adequate to support loan growth at banks, and the liquidity condition of larger commercial banks is good. Area thrift institutions are still experiencing outflows of deposits other than money market certificates, and reliance on this source of funds is increasing steadily.
Market demand for flue-cured tobacco this season has generally been weaker than a year ago. A stronger market and better quality offerings have been in evidence in recent weeks, however, and prices have improved. The season average price as of August 30 was running about 5 percent above a year earlier, but with the volume of gross sales down by 5 percent the value of gross sales was fractionally below the same period last year. The size of the 1979 flue-cured crop is now expected to be 15 percent below 1978's output, so, unless there is a sharp improvement in prices during the remainder of the season, flue-cured tobacco earnings for the year may well be significantly below those a year ago.