Beige Book Report: Richmond
November 14, 1979
The latest survey of Fifth District business conditions reveals a mixed pattern of recent developments. Manufacturers, in general, continue to report declining levels of new orders and order backlogs, but also indicate increased shipments, some extension of the average workweek, and reduced inventories over the past month. Retailers surveyed report a pickup in overall sales, but some weakness in relative sales of big ticket items. Responses suggest inventory reductions in this sector as well. Bank credit growth appears to have moderated. Except for mortgages, however, funds are available to qualified borrowers willing to pay high rates. Some large banks seem eager to make business loans and are actively seeking new customer relationships. Richmond directors see recent events in financial markets beginning to affect adversely real estate markets and residential construction.
Manufacturers continue to report slowing of new orders and reductions in order backlogs. But respondents increased their shipments in October and were able to reduce both materials and finished goods inventories from September levels. Inventories remain above desired levels at about one-third of the responding firms, but have apparently been generally well controlled over the past three months. Employment among manufacturing respondents declined slightly over the month, but hours worked per week increased. Current plant and equipment capacity is near desired levels at two-thirds of the responding firms and there remains virtually no sentiment for altering current expansion plans.
The weakness in new orders suggested by our survey results has not become generalized among manufacturing sectors. Much of the slowing has taken place in apparel, furniture, and building materials industries. Meanwhile, such industries as textiles and non- electrical machinery continue to show basic strength.
Retailers responding to our latest survey experienced an increase in total sales during the past month, although relative sales of big ticket items were reported down in most cases. Several respondents noted that better quality merchandise is still selling well. Some retailers are prepared to initiate promotional activities to maintain sales should they begin to weaken. Most retailers responding this month were able to reduce inventories, bringing them somewhat closer to desired levels. Forty percent of these retailers still feel current stocks are excessive, but all are satisfied with the present number and size of outlets. Total employment among responding retailers was also down over the month.
Our respondents remain overwhelmingly pessimistic about the near- term outlook for the national economy and most expect the level of activity in their respective markets areas to weaken over the next six months. Manufacturers, in particular, are much less negative about the prospects for their individual firms, but a slim majority of retailers expects little or no change in their own sales over the next six months.
Richmond directors are seeing widespread evidence of slowing in the real estate and residential construction sectors. Nearly three- fourths of them report housing starts in their areas down substantially from earlier in the year. They also report a decided slowing of home sales. About one-third of our directors report disproportionate effects of recent changes in financial market conditions on small businesses.
Bank credit growth appears to have moderated in the last month, but lenders indicate that the results of recent tightening are only beginning to show up. Business loans have been expanding moderately, but much of the increase in recent weeks reflects deals negotiated in September. Applications for new loans are down, and lenders report that the record prime rate is discouraging borrowing. Large banks indicate that the liquidity of their commercial customers is generally good and that there is little evidence of distress borrowing or unusual inventory financing. Credit standards have tightened on both installment and credit card applications, with large down payments required on auto purchases and higher income/debt ratios required for revolving credit approvals. There has been a fairly sharp drop in new loan applications. The mortgage market is experiencing the tightest conditions. Rates are up sharply with the typical 80 percent conventional mortgage contract now bearing an interest rate in the 12 1/2 to 13 1/2 percent range. Moreover, many thrift institutions have either withdrawn from the mortgage market or are rationing credit.
Results of the third quarter survey of farm credit conditions in the Fifth District were highlighted by somewhat weaker—but still relatively strong—farm loan demand, sharply higher interest rates, and continued pressures on liquidity at some banks. Loan-to-deposit ratios of banks reporting rose to an average of 68.2 percent, up from 66.8 percent a year ago and equal to the record level set in June 1978. Many bankers continued to report problems with availability of farm loan funds, although the proportion was not quite as large as in the previous quarter. Bankers who said they were actively seeking new farm loan accounts remained at roughly three-fifths of those reporting. While some slowdown in loan repayment rates was evident, loan renewals or extensions continued at about the same level as in the second quarter.