November 12, 1980
Economic activity improved moderately in recent weeks according to Eighth District businessmen, several of whom expressed confidence that the worst is over and that a slow recovery is likely in 1981. Although consumer spending in nominal terms is expanding, it does not appear to be increasing as rapidly as inflation. Inventories are generally lean and in line with sales. Sales gains have recently occurred in manufacturing industries such as steel, automobiles, chemicals, and appliances. Although demand for capital equipment is still declining somewhat, there are indications that this sector will bottom out soon. On the negative side, home sales have become severely depressed again and mortgage loans have fallen off with the reoccurrence off sharply higher mortgage interest rates in recent months. Business and consumer loans at banks have continued to increase.
Overall, consumer spending continues to increase at a modest pace. One retail representative noted that sales were larger than anticipated for this time of year and that he was optimistic about Christmas sales. On the other hand, rural retailers in areas which were hit by severe drought conditions during the summer months report that sales are quite weak and, consequently, are cutting back on spring commitments. While auto sales have continued to improve since last spring, they remain well below levels of a year ago.
Most businessmen report that inventories are in line with current sales. Appliance inventories may be even less than desired in some cases. The steel inventory liquidation is reportedly completed, and some planned buildup is underway. A few smaller firms report that inventories are high because they kept their work force intact during periods of weak product demand. Also, some rural retail stores in drought-stricken areas have excessive inventories because of depressed sales.
Manufacturing industries including steel, automobile, chemical, paper, and appliances registered some sales gains in recent weeks. A steel industry representative noted that the industry is in the early stages of a recovery based on modest increases in demand for steel from the consumer product sector. However, no sizable increase in steel output is anticipated until capital spending gains momentum later in the decade. Although some automobile workers have been called back to work in the St. Louis area, the industry remains relatively depressed. For example, at the 1979 peak, automobile manufacturing jobs in St. Louis totaled at nearly 30,000 compared to about 12,000 at present. A representative of a major appliance firm, noting that sales have trended up since last summer, is optimistic about continued gains.
Capital spending is still declining and manufacturers of some equipment, such as machine tools, and lubrication and welding equipment, report that previous backlogs have been depleted and that operations are now on a hand-to-mouth basis. A machine tool manufacturer reported that the worst is over. In contrast to the overall picture, expenditures on oil and natural gas equipment and military hardware remain at a high level. Arkansas, for example, reports considerable investment in the drilling of shallow oil wells which are expected to pay off in about 12 months.
Construction activity, which gained momentum in the summer months, has lost ground again. Home sales represent the most affected area and the decline here is largely blamed on the sharp rise in mortgage interest rates. Nonresidential construction, remains relatively strong. Although total volume is down, one contracting firm reported that bids are being made on a considerable number of projects and that funds for the projects are available.
Loan demand continues to increase with business and consumer installment credit being responsible for most of the gain. While mortgage interest rates have remained around 14 percent in recent weeks, banks lending rates have continued to increase and mortgage lenders generally expect increases in mortgage interest rates in the near future. One saving and loan official noted that margins have again become depressed, and he charged that competition for funds from the Federal government is responsible for the continuing high interest rates.
In the agricultural sector, lower crop yields in many areas is leading to severely depressed farm income. Harvesting and fall plantings are proceeding rapidly with generally favorable weather conditions possible. Chicken production in Arkansas is resuming normal levels after last summer's losses. Placements of broiler chickens are now running somewhat ahead of a year ago.