Beige Book: National Summary
December 10, 1980
Overview
Reports from Reserve Banks this month indicate, on
balance, a definite weakening in the economy, with widespread
prospects for a W-shaped recession resulting from sharply rising
interest rates. While manufacturing is generally slowing, modest
gains in orders are still prevalent. Inventories at the
manufacturing and retailing levels are considered to be
satisfactory, but in some cases are described as lean. Consumer
spending in the early part of the Christmas season has been
disappointing, but retailers expect heavy discounting to provide a
strong finish. Bank loan demand is weak, with business loans
generally holding up better than consumer loans. Mortgage lending is
depressed, as rates reach as high as 16% in some districts. Farm
price increases have strengthened the agricultural sector.
Outlook
The effect of rising interest rates on housing, autos, and
business investment is blamed for a weakening economic outlook.
Economic activity in the past month has been relatively unchanged in
Boston and St. Louis, but is becoming sluggish in most other Reserve
Banks. Only Atlanta reports strengthening, except for housing and
auto sectors. Expectations of a resumption of recession are
mentioned by Philadelphia, Cleveland, Chicago, and San Francisco.
Several bank economists in Cleveland now view the recent recovery as
a temporary lull from the recession. Respondents in New York,
Philadelphia, Cleveland, and Richmond expect conditions to improve
by the second half of 1981.
Manufacturing Activity
Sluggish or slowing manufacturing activity
is indicated in Boston, Chicago, Minneapolis, St. Louis, and Kansas
City. However, high interest rates have not prevented widespread
gains in manufacturing employment in Atlanta, or increases in new
orders in Boston and Chicago. Manufacturing has improved somewhat in
Dallas, based on strength in chemical and energy industries.
Richmond reports mild declines that cut across most industry groups,
while Philadelphia reports a sharp downturn in early December.
Cleveland and Chicago are experiencing sustained strength in steel
orders, partly related to a turnaround of inventories, but both
report that no revival in capital goods orders has occurred yet.
Some machine toolmakers in New York report weakening sales.
Inventories
Inventories are generally reported to be under tight
control at both manufacturing and retailing levels, mostly because
of the high cost of financing. Several Reserve Banks note that
inventories of some items are quite lean at the retail level.
However, inventory problems with autos and housing are cited by
Boston and Richmond. St. Louis and Cleveland expect quick
adjustments to inventories, notably in steel and autos, following an
economic slowdown. Chicago reports that retailers may still find
January liquidation sales necessary despite clamps on stocks.
Consumer Spending
Retail sales have shown mild strength in Kansas
City, Dallas, Richmond, and Atlanta, but are flat or sluggish in
most other Reserve Banks. Heavy traffic is reported by Chicago, but
buying is said to be restrained, especially for big-ticket items.
Consumer durable sales fell substantially in San Francisco, and
Richmond reports durable goods sales remain weak. Heavy promotions
are reported in most districts and are the basis for relative
optimism among retailers for a healthy Christmas season.
Auto Sales
Auto sales are generally described as weak or declining,
according to most Reserve Banks, because of rising interest rates
and high prices on new models. Sales are off in Minneapolis, Kansas
City, Dallas, and San Francisco. Some gains are noted in Boston over
year-ago levels and in St. Louis over summer levels, but dealers
view such gains as unsatisfactory. While domestic sales are stagnant
in New York, foreign car sales picked up. Dallas sales are hampered
by a usury ceiling that makes auto loans unprofitable. Some banks in
Cleveland and Chicago are reluctant to finance dealer floor plans.
Housing
Mortgage lending activity continues to weaken, with Boston,
Chicago, Atlanta, and San Francisco experiencing a virtual halt in
mortgage loans. Mortgage rates at or near 16% in Chicago and San
Francisco are apparently the highest in the nation. Philadelphia
reports that seasonal declines and tight mortgage money have
contributed to curtailed sales at a level 40 to 65% below last June.
The difficulty over qualifying for financing is particularly noted
by San Francisco, while St. Louis reports that three-fourths of loan
applications are rejected. Some banks in Cleveland are providing
preferential rates to builders who they financed, and St. Louis
reports that builders are subsidizing home buyers by offering below
market rates.
Banking
Although loan demand is generally soft, some improvements
in business loan demand are cited by Dallas, Kansas City, and St.
Louis. Sources of the loan strength are restricted to energy and
agricultural industries, although business loans in St. Louis appear
to be supporting Christmas inventories. Richmond reports a mild
increase in installment credit. Bankers in Minneapolis state that
funds are available, and several districts report that deposit
growth is supported by large CDs. Both St. Louis and San Francisco
stress that much of the business borrowing is short-term. Strong
business loan demand, centered in inventory financing and in
substitution of business loans for commercial paper, is also
reported by New York.
Agriculture
Agricultural production and farm income are relatively
strong as a result of rising farm prices. St. Louis reports a sharp
increase in wheat acreage and expects a substantial increase in
double cropping of wheat acreage in 1981, if prices hold. Kansas
City states that credit conditions have shown sustained improvement
and Dallas notes an increase in the usage of Government agencies for
loans at lower interest rates than banks. However, farm income
prospects have dimmed in Atlanta, as prices for meat, citrus crops,
and cotton decline.