January 29, 1980
Business conditions continue spotty in the Fifth District. Manufacturers surveyed this month have, on balance, experienced further weakening of new orders, reduced order backlogs, and a resumption of inventory accumulation. There is little indication, however, that these conditions are pervasive or, in fact, that they represent the underlying trend. Our directors, for instance, see little evidence that demand for the products of firms in their areas has slackened further in the past month. Nonetheless, the expectations of District businessmen remain decidedly negative. Retail sales have softened in recent weeks. Indications are that wholesale and retail credit demands have also moderated. Most lenders hold the view that, in the near-term at least, loan growth will continue to slow.
Despite the continuing weakness in new orders, Fifth District manufacturers were able to maintain the level of shipments over the past month. More than 40 percent of the respondents to our survey of manufacturers reported a decline in the volume of new orders over the past month and nearly as many experienced further reductions in order backlogs. Survey respondents also suggest a resumption of inventory accumulation. Apparently most of the additions to stocks took place in materials. Also, inventories appear not to have risen relative to desired levels. The number of respondents viewing current stocks as excessive has remained fairly stable for several months now. The view that current plant and equipment capacity might be in excess has become slightly more widespread recently, but remains a minority position. There is still virtually no sentiment for altering current expansion plans, however. Employment and weekly hours worked both declined among our manufacturing respondents over the latest survey period.
Most of our directors have seen little or no improvement in conditions in their respective areas over the past month. Nonetheless, they report some industries, e.g., textiles, electronics, printing, food processing, continuing to show some buoyancy. The directors continue to cite weakness in residential real estate, automobiles, and some related areas such as construction, primary metals, and glass. Despite what is apparently perceived as a lack of any real strength, our directors are unaware of any significant layoffs, unwanted inventory accumulation, production retrenchments or other evidence of slackening demand.
Retail sales have softened slightly in the past few weeks, but general merchandise lines such as those in department stores continue to hold up. Big ticket items and home improvement lines are contributing significantly to the broad weakness in total sales. Retailers have apparently reduced their inventories somewhat and there do not seem to be any serious problems in this area. Survey responses suggest that there may be some significant price cutting taking place at the retail level.
Despite the view among district lenders that loan growth will continue to slow, few expect interest rates to decline by any substantial amount. As has been the case for sometime, consumer demand for personal loans is offsetting weakness in other areas, but this source of strength is not as great as it has been. The larger business customers of banks have been very quiet. There continues to be a steady flow of smaller sized business loan requests, but only in a very few cases have lenders seen firms seeking financing for unusual inventory buildups. In some areas, e.g., Maryland, industrial revenue bond financing for plant improvements is an important source of funds.
Area lenders are beginning to see some signs of retrenchment on the part of consumers insofar as the use of credit is concerned, but the picture here is far from clear. Credit card volume, which is still growing due to Christmas related expenditures, remains strong. A number of banks, however, have commented on signs of weakness in installment loan demand. Moreover, this developing weakness appears to be broadly based and not due exclusively to slower automobile sales. There has been some mention recently of increased applications for second mortgage loans to be used for bill consolidation. Residential mortgage financing is slowing, due largely to decreased willingness on the part of borrowers to pay high rates. The market has softened to such an extent that in some areas rates have come down 1/4-1/2 percentage points from their peak levels.
With both crop and livestock receipts significantly larger, the District's total cash farm income during the third quarter of 1979 registered a 16 percent gain over a year earlier. The District improvement, which compared with a 14 percent upturn nationally, may well be somewhat lower at year-end 1979, however, because of the sharply smaller tobacco and peanut crops.