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Beige Book Report: Richmond

January 28, 1981

Overview
Fifth District manufacturing activity has slowed somewhat in recent weeks but, on balance, remains reasonably strong. A majority of firms responding to our survey report shipments and new orders level to slightly higher over the month, but the number reporting declining activity was up from the last survey. Retail sales showed decided strength over the survey period and sales of big ticket items continued to keep pace. Inventories at retail were up substantially over the month and now exceed desired levels. Manufacturing inventories, despite declining in size, also grew relative to and remain somewhat above desired levels. Expectations of future activity are decidedly less buoyant than at the time of our last survey.

Consumer Spending
Retail sales have been brisk of late and big ticket items seem to have held their own. A majority of retailers surveyed report increased sales and in no instance was there a report of activity being down over the month. Once again consumers are moving toward quality and durability in items purchased. Retailers do report widespread inventory accumulation in excess of desired levels, but in some instances part of the growth was planned. Employment was up slightly among retailers. There is some sentiment for increasing the size and number of outlets. Prices, paid and received, continued to rise across a broad front.

The Manufacturing Sector
On balance, our latest survey of manufacturers indicates a slight reduction in shipments during the month and somewhat greater declines in new orders and order backlogs. Inventories of both materials and finished goods were down slightly from the last survey period but grew relative to desired levels. Nearly half of those responding now feel current stocks are excessive. Almost one-third of them find current plant and equipment capacity in excess, but there continues to be some scattered sentiment for enlarging current expansion plans. Employment and the length of the average workweek both fell broadly over the period. Gains in prices, including employee compensation, continue increasingly widespread.

This weakness in manufacturing has not yet cut across the majority of industries in the District, nor has it come to pervade any single industry. Several of the District's major industries, textiles, furniture, and paper, for instance, continue to report stable to slightly stronger activity. Much of the reported weakness is concentrated in such industries as chemicals, electronics, electrical machinery and equipment, and shipbuilding. In the primary metals and building materials sectors performance is spotty but there are still individual reports of strength.

Housing and Construction
Home construction continues weak in most area of the District, but earlier reports of severe depression may have been overstated. It is fair to say that performance in this sector has exceeded recent expectations. Inventories of new and previously occupied housing remain high, but for the most part do not appear unmanageable. In addition, some of the slack in the residential field is being taken up by the commercial and industrial sectors, where activity is surprisingly strong. As a result, total construction, while somewhat below normal levels, is not an area of severe weakness.

The Financial Sector
Commercial and industrial lending by the District's large banks has declined since the first of the year, as have real estate and consumer lending.

There remains, however, little expectation of any significant change in loan demand in the immediate future. For the most part, Richmond's banker directors do not share the view that recent pressure on short-term rates is attributable to a preference for short maturities among borrowers who normally borrow long term. One of them feels that it is the banks, not the customers, who are structuring loans toward shorter maturities.

The Economic Outlook
Our survey respondents and directors have become decidedly less optimistic about the short-term outlook since late last year. Over a third of the manufacturers surveyed expect the general level of business activity to decline over the next six months. Those same respondents and a majority of our directors expect activity in their own areas to be unchanged to slightly lower over that period. Only retailers, on balance, expect their business to improve.