November 10, 1981
Deteriorating economic conditions appear to be spreading, and most respondents do not anticipate a recovery before spring, according to this month's District reports. Exceptions are energy, non-residential construction, defense, recreation, and some high technology firms. Real consumer spending has slipped, and the outlook for Christmas sales is mixed. New car sales declined sharply in October, and the depressed housing market continues to slump. Declines in manufacturing and employment are spreading, but inventory levels are generally not reported to be excessive. Bumper crops are in prospect, and farm incomes are depressed. Demand for most loans has slowed, but business borrowing is up in some districts. Concerns about a continued deterioration in the quality of loan portfolios are cited.
Consumer Spending
All districts report further weakness in consumer spending, as
increases in nominal sales failed to keep pace with inflation.
Prospects for Christmas sales are described as strong-to-optimistic
in Philadelphia, Cleveland, Atlanta, and Kansas City and cautious-
to-pessimistic in New York, Chicago, Dallas, and San Francisco.
Consumer durables account for much of the current weakness, although
sales of soft goods and apparel are off in Boston and Richmond. Non-auto retail inventories do not appear to be excessive in most
districts.
New car sales declined sharply in October after the rebate and incentive programs expired. High prices and interest rates, a lack of new models, and consumer caution are primary reasons cited for why auto sales are not likely to improve soon.
Construction
Most districts indicate the depressed housing market continues to
deteriorate. Even a softening in home prices and creative financing
have failed to stem the decline in sales. Atlanta and San Francisco
noted a growing incidence of foreclosures and real estate related
bankruptcies. Residential builders in those districts also resorted
to auctions to reduce inventories.
Nonresidential construction remains active in the Dallas District and is holding up reasonably well in Cleveland, Richmond, and Atlanta. Chicago and San Francisco report postponements in some projects.
Manufacturing and Employment
Weakness in manufacturing is becoming more widespread, and price
discounting is evident in some districts. However, output remains
steady in St. Louis and Dallas, and the backlog of unfilled orders
has temporarily sustained production at a low level in New York.
Declines in factory output center on motor vehicles, household
appliances, and construction materials. Boston and Cleveland report
demand for packaging products has begun to fall, suggesting a
further slowdown in the economy. Nonetheless, production of oil
field equipment, defense-related goods, and recreational items
remains high.
Most factory inventories appear to be within manageable limits, although semiconductor firms in California are planning shutdowns to reduce inventories, and steel producers in the Cleveland District are liquidating stocks. Cleveland and Minneapolis note businesses are financing unplanned inventories. Richmond reports some buildups of finished goods, but Chicago indicates "pipelines are virtually empty" in various wholesale markets.
Demand for labor is softening, as evidenced by increased layoffs and reductions in hours worked. Two exceptions are St. Louis where total employment rose and Atlanta where increased demand for high-technology and communications workers continues. Chicago indicates the demand for workers may be at the lowest level since the 1930's, and many employers are seeking substantial concessions when renewing labor contracts.
Financial Conditions
Deteriorating economic conditions dampened loan demand in most
districts, but a pickup is generally expected before next spring.
Consumer and mortgage loan demands remain weak, and lackluster
business loan demand is reported by several districts. Cash
shortages, the poor bond market, and inventory financing are noted
as key factors contributing to non-production business loan demand.
Rising delinquency rates and business borrowings to finance interest payments on prior loan commitments are causing concern for bankers in Cleveland. Signs of growing financial strain are also noted by Boston, Richmond, Atlanta, Kansas City, and San Francisco. Richmond cites increasing financial difficulties among auto dealers, farm machinery and equipment dealers, construction firms, and wholesalers.
Deposit growth is generally sluggish. Sales of all-savers certificates, although below expectations, were strong initially but generally fell off in mid-October. However, Atlanta indicates growth in these certificates at thrifts remained rapid, and Boston and Philadelphia note renewed growth in sales. Estimates of new funds in those deposits ranged from 5 to 50 percent.
Agriculture
Agriculture production is up, but dry weather has constrained yield
prospects further in Atlanta and heavy flooding caused damage to the
cotton and wheat crops in North Central Texas. Minneapolis reports
wet weather has delayed corn and soybean harvests. Continued
weakness in farm and livestock prices and higher production costs
have severely squeezed farm incomes and are causing concern among
agricultural lenders.