Beige Book Report: St Louis
December 10, 1980
The overall level of economic activity in the Eighth District has remained virtually unchanged in recent weeks. Largely reflecting the impact of sharply rising interest rates, the optimism expressed by many businessmen immediately after the November election has diminished. Several businessmen have suggested that the recovery is losing momentum, and that the chances of a W-shaped recession have increased. Consumer spending appears to have stalled in November, with department stores reporting that sales in current dollars are only slightly above levels of a year ago. Automobile dealers note that sales have improved from earlier in the year but that recent sales have been disappointing. Manufacturing activity, which had posted some gains in certain industries such as steel, consumer durables and paper, showed no further increases in November. On the positive side, some increase in orders for military equipment and energy-related products continues. In the building sector, nonresidential building activity remains relatively strong, but homebuilding has declined again and concern over the survival of many homebuilding firms has been expressed. Loan volume at banks has increased in recent weeks, but saving and loan officials report that mortgage lending activity is at a very low level.
Retail sales have made only slight gains in recent weeks in contrast to rapid price increases; hence, sales have declined in real terms. Retailers report that higher quality merchandise is selling better than other goods. As a result of the sluggish sales outlook and rising interest rates, some retailers report that they are paring down their orders for spring inventories. Although automobile sales are mixed, they appear, on balance, to be modestly above last summer's level but substantially below the level of a year ago.
Manufacturing activity has remained unchanged in recent weeks. Automobile manufacturing, which registered modest gains as the new models were introduced, has remained steady in recent weeks, but at levels far below those of a year ago. Similarly, manufacturers of paper products, metals, appliances, and furniture report no further gains in recent weeks, following a rise in the late summer and early fall. Some manufacturers noted adverse outlook signals such as sluggish retail sales, deteriorating home sales, and sharply higher interest rates. A number of building materials manufacturers and an appliance manufacturer reported that the slowdown in residential construction could likely affect their businesses in the near future. On the other hand, the manufacturing of military aircraft and energy-related products continues at a strong pace.
Inventories are reported to be at satisfactory levels. Some firms report that a downturn in business activity would lead to inventory adjustments with one major chemical firm reporting that some customers are already realizing unplanned inventory increases.
Homebuilding continues to slow in the District because sharply rising mortgage interest rates have discouraged homebuying. Home mortgage interest rates are now in the 14 to 15 percent range with lenders reporting few loans at these rates. One savings and loan official noted that three out of four applicants are rejected because of inadequate income or savings. Consequently, most home sales entail some kind of special financing arrangements. Some builders, for example, are making loans at below market rates and absorbing the difference. Nonresidential building activity appears to be holding stable and at a relatively high level. One nonresidential contractor noted that his company has a full calendar of work for the next few months and that new projects are on the drawing board. It was also revealed that a considerable portion of current construction projects is being financed by short-term credit.
Loan volume at commercial banks has continued to increase in recent weeks, reflecting increases in business and agricultural loans. Increases in business loans reflect a seasonal increase in loans to finance Christmas inventories. Higher than normal demand for agricultural loans is reported because poor harvests and depressed farm income are requiring an abnormally large carryover of loans. In contrast, bank installment loans have remained essentially unchanged in the past two months, partly because of slow consumer spending on cars and other large purchases. Several bankers report that loan delinquencies are up and personal bankruptcies are unusually high. In Arkansas, bank lending to consumers has almost evaporated, reflecting the low usury ceilings. The attempt to amend the state's 10 percent usury law failed again in a recent election.
In the agricultural sector, harvesting of this year's crops and fall plantings of wheat are nearing completion. Wheat acreage is reported to be up sharply throughout the District. A substantial increase in the double cropping of wheat acreage is expected in 1981, if current prices hold.