January 27, 1982
Overview
Most available information suggests that business activity in the
Fifth District has not yet bottomed out. Continued deterioration
over the past month is evidenced by further declines in
manufacturers' shipments, new orders, employment, and the return to
sluggishness of retail sales activity. Layoffs continue to spread,
involving transportation, machinery, and government in a widespread
pattern of layoffs and falling employment. Construction activity
seems to have slipped further and the prospects for a near-term
recovery are fading according to Richmond directors. On the positive
side, growth of inventories has abated, wage demands have softened,
and manufacturers surveyed are decidedly less pessimistic than in
recent months.
Manufacturing
Although the rate of decline may have moderated over the month, the
trend in manufacturing activity is clearly down. More than half the
manufacturers surveyed report further declines in new orders and
order backlogs over the month. Employment and the length of the
workweek fell broadly so that despite further cutbacks in shipments,
inventory growth was brought under control, at least temporarily.
Stocks of finished goods were essentially unchanged over the month
while materials on hand fell slightly. Inventories fell relative to
desired levels but remain substantially in excess. Current plant and
equipment capacity also far exceeds present needs. Price increases
continued moderately by recent standards. These signs of weakness
remain pervasive. There are still no apparent exceptions in the
manufacturing sector of the Fifth District other than, perhaps, some
defense contractors. Several of the District's major industries—
textiles, furniture, and building materials—remain very weak.
Consumer Spending
Most indications are that the Holiday Season brought a respectable,
if unspectacular, surge of consumer activity. More recent
information suggests, however, that the buoyancy was short lived.
Retail sales, particularly of big ticket items, have fallen further
according to our respondents. One respondent, a major department
store, finds customers just waiting for sales, unwilling to buy at
full price. There is some feeling that the scope of pre-Christmas
promotional activities, particularly discounting, sapped the retail
sector of some of its late winter potential. Partially because of
this thinking, District retailers remain basically pessimistic.
There is little expectation that conditions will improve over the
next six months. In fact, several respondents expect conditions to
be worse at mid-year. Retail respondents managed to hold inventories
and prices at previous levels this month. Nonetheless, inventories
remain above desired levels and the recent pricing policies are
expected to adversely affect profits for the year.
Housing and Construction
Construction in general, and particularly residential, remains very
weak. In many areas of the District, housing construction is almost
non-existent. In addition, there is less optimism regarding the
near-term outlook for housing. A number of our directors feel that a
decline in mortgage rates, even to the 13% level, will not induce a
major turnaround. They see the situation as now more complex
requiring a combination of economic growth, rising employment and
incomes, and greater confidence in addition to lower interest rates
before significant improvement will occur.
The Financial Sector
Bankers are apparently continuing to experience positive responses
to market interest rate instruments. Although it is still too early
to know, they expect significant inflows of funds into IRAs. Our
directors in banking generally expect anywhere from 40-80% of a
large pool of IRA funds to wind up in banks and thrifts. They are
very much encouraged by this prospect.
The Outlook
Changes in the outlook were mixed over the month, but in general
there seems to have been a shift toward the positive. Of interest is
the recent segmentation of this outlook picture. The generally held
outlook for the manufacturing sector is positive, while for
retailing and construction the recovery is thought to be somewhat
more remote.