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Richmond: August 1981

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Beige Book Report: Richmond

August 11, 1981

Overview
Despite scattered sources and areas of strength it is apparent that business activity in the Fifth District has turned decidedly sluggish. The manufacturing sector where orders, shipments, and employment have recently declined is indicative of this general weakness. Retail sales are spotty with the durable goods sector serving as a depressant. Construction activity continues slow and is characterized as weak to severely depressed in many areas of the District. The recent strength of the dollar on foreign exchange markets is a factor, having apparently curtailed export demand in some manufacturing sectors, notably textile products. The rebound from the end of the coal strike is a positive factor in some areas lending support to retail sales and consumer lending, but some secondary effects of the strike persist.

Consumer Spending
Retail sales appear to have weakened over the past month although reports are somewhat mixed. Indications are that sales of department and general merchandise stores have held up reasonably well and that even big ticket items are continuing to hold their own. In addition, there has been a rebound in sales in those areas directly affected by the coal strike. More generally, however, retail sales, particularly of durable goods such as autos and furniture have declined, at least in terms of unit sales. Building materials also appear to be moving slowly at the retail as well as the wholesale level.

Manufacturing
District manufacturers surveyed experienced minor declines in both shipments and new orders over the past month. Backlogs of orders and materials inventories were essentially unchanged, but stocks of finished goods grew and remain above desired levels. Manufacturing employment also declined in recent weeks, but the length of the average work week was unchanged. Current plant and equipment capacity also remains somewhat in excess. Nearly half of the manufacturers responding to the question on the effects of the recent strength of the dollar report that business has been affected. From this sample it would appear that export demand for textile products, primary metals and machinery and equipment has declined as a result of the dollar's appreciation. One textile manufacturer reports a drastic decline in export demand. A major manufacturer in the machinery and equipment sector notes a significant impact on international business while another in the same line finds both import and export sectors being affected and new business opportunities restricted.

Housing and Construction
Housing and construction generally appear to have weakened further in recent weeks, although conditions vary widely from area to area. Some areas are now reporting a virtual dearth of construction. In some scattered areas housing is holding up reasonably well and in a number of localities commercial and industrial activity is supporting the industry at a modest level.

Prices and Expectations
Price increases have become significantly less widespread in the past month judging from responses to our survey. A large majority of the manufacturing respondents, for instance, report no change in prices paid or received over the month. Increases in employee compensation seem also to have moderated. This latter impression is supported by Richmond directors who perceive a moderation in wage demands by labor in their respective areas. Survey respondents still expect little change in the level of business activity over the next six months, but one-third of the manufacturers expect production in their respective firms or establishments to improve over that period. Retailers are somewhat less optimistic but most foresee little change in the level of activity nationally, locally, or in their individual firms.

Agriculture
Generally improved crop production prospects so far this year, a better quality crop of flue-cured tobacco, plus stronger demand and higher grade prices for the golden leaf, are encouraging to both District farmers and farm lenders. While these conditions suggest increased farm income, better repayment rates, and fewer renewals this fall, weather and price developments the remainder of the year will, of course, determine whether or not current favorable farm income prospects materialize.

Farm credit conditions at midyear were similar to those in the first quarter. Both the slowdown in farm loan demand at banks and growth in the availability of loanable funds continued in the second quarter but at an accelerated pace. Bank interest rates on farm loans remained volatile, registering sizable increases over rates in both the spring quarter and a year ago. There was some improvement over the previous quarter in loan repayment rates and requests for renewals. Repayment rates were below these at this same time last year, however. Liquidity pressures of banks active in farm lending rose slightly but remained well below a year earlier.