Beige Book Report: St Louis
May 14, 1980
Business conditions in the Eighth District continued to deteriorate in April. Consumer spending for durable goods, such as cars, trucks, appliances, and home furnishings, declined further and some softening in nondurable goods, such as clothing, was also noted. New home sales are reported to be at the lowest rate since the 1974-75 recession. Manufacturing has slowed further in a number of industries, including automobile assembly and related industries and home building product industries. On the positive side, manufacturing activity remains fairly strong for some capital goods products, particularly defense-oriented and energy-saving equipment. Nonresidential construction has also held up well, but fewer new projects were reported. In the financial area, loan demand has declined rapidly in recent weeks, and most interest rates have dropped sharply.
Consumer spending is reported to have slackened further in recent weeks. There has been a sizable reduction in consumer credit demand as reflected in credit card use. Consequently, retailers report a downturn in charge balances. Sales of big-ticket items are quite sluggish, and some soft good sales have also deteriorated, but not to the extent of durable goods. Sales of both domestic and foreign-built automobiles have continued to decline in recent weeks, although the decline has been most severe for large domestic cars. Automobile dealers point to higher interest rates as a major factor discouraging sales. On the other hand, dealers in auto parts and repair materials are reportedly doing well. Gasoline dealers indicate that sizable decreases in gasoline sales have occurred in recent months and that inventories are at relatively high levels.
Representatives of the manufacturing sector reported further declines in unit sales in recent weeks. With decreases in automobile and truck sales, assembly plants have announced additional layoffs of workers and so have industries supplying parts for the manufacture of new automobiles. With the sharp decline in sales of new homes, building materials industries, such as manufacturers of lumber and connector plates, as well as manufacturers of appliances and furniture are experiencing a decline in new orders. A representative of a major chemical firm reported that depressed sales of automobiles and homes are beginning to affect the sales of plastics and fiber products.
Nevertheless, manufacturing activity of industries producing energy-efficient and defense-related equipment remains quite strong. Foreign demand for a number of products, such as chemicals and plastics, likewise remains strong. While demand for capital goods appears to be holding up well in general, several firms are reported to be currently reviewing their capital expenditure budgets in view of the decline in economic activity.
Residential building activity remains at a virtual standstill throughout the District. Most homebuilders have cut back a substantial portion of their work force, and some are reported to be near bankruptcy. Reports of falling interest rates are encouraging, but some feel that the decline in rates will not generate sales in the immediate future because of the expectation that rates will fall still further. Nonresidential building remains fairly strong, reflecting large backlogs of projects. General contractors report that major projects continue to be funded, but that many small jobs are being postponed or canceled.
Loans by major commercial banks in the District to business, consumers, and real estate developers have declined sharply. Only agricultural loans have posted gains, reflecting seasonal increases in these loans at planting time. Savings and loan associations are also making very few mortgage loans. As a result of the drop in loan demand, interest rates have begun to fall rapidly. The prime commercial bank rate has declined from about 20 percent to 17 1/2 percent, and the mortgage rate from about 16 1/2 percent to 15 percent. Some savings and loan officials indicate that the mortgage rate is likely to fall even more in the near future, and one association has already reduced the rate to 12 3/4 percent. In St. Louis, two savings and loan associations have instigated the new "rollover" mortgage (which permits an adjustment in the rate charged), but they have not been successful in marketing this type of loan. Savings and loan industry representatives are more optimistic about the prospects for improved profit margins with the decline in money market rates, but point out that they are still being squeezed by the continuing shift from passbook savings to higher yielding CD's.
Demand for farm credit is reported to be up from a year ago, but bankers report that this credit is being supplied at competitive rates. In a number of communities, bankers are lending to farmers at lower rates than to others in order to avoid the loss of their customers to the Production Credit Association.