January 27, 1982
Economic activity in the Eighth District has continued to decline since Christmas. The relatively severe winter weather has combined with a soft economy in contributing to the weakness. Retail sales have been slow, and orders for new merchandise have been reduced further in an attempt to avoid large inventory build-ups. Manufacturing firms also report a reduction in new orders, and as a result a number of concerns have pared production schedules and reduced employment. Many farmers in the District are in serious financial difficulties due to the high and rising operating costs and relatively low selling prices. Reports on the number of new IRA accounts established at banks and savings and loans are mixed.
Consumer spending has declined more than usual for the post- Christmas period. Price concessions and other promotions at department stores in late November and early December reportedly left potential customers with fewer funds than usual in early January. One store reported that the flow of savings into the new IRAs is hurting sales of big ticket items. In addition, the unusually cold weather has kept potential shoppers home. Because of weak sales, department stores have been reducing their orders for new merchandise, and inventories have risen.
Automobile sales generally continued at a low level in early January. However, one auto dealer and one auto supplier reported slight sales improvements, and another dealer had sold 72 cars in the four days preceding the survey—the best four days in 1-1/2 years. One agency expressed concern with the negotiations between the automobile manufacturers and the unions regarding sizable reductions in new car prices. If the prices of new cars are lowered suddenly, it was feared that used car prices would decline proportionately, causing substantial losses to dealers with large inventories of used cars.
Manufacturing activity in the District has weakened further since mid-December. Orders declined at seven of the eight larger manufacturing firms contacted, including chemical, agricultural supply, consumer durable and industrial machinery. Moreover, two medium-sized firms—an electrical company and an automobile supplier—cut back operations substantially. A trucking firm in Arkansas reported that freight volume is 21 percent below the year- ago level. On the other hand, it was reported that defense, oil drilling equipment, process control machinery and food sales continued at a high level.
Reflecting the decline in orders, inventories at most manufacturing firms inched up. In order to avoid excessive inventories, production was cut back and more employees were laid off. Additional workers would have been furloughed except for the fact that several plants were forced to close several days because of bad weather. One firm went to a four-day week, and another firm reduced weekly hours from 40 to 36. In view of the prolonged economic weakness, one large firm has stretched out its future capital spending plans.
Construction remains generally unchanged from late-1981 levels. However, builders report some increase in traffic through model homes and express some optimism that the decline has bottomed out. To attract customers, some builders are now offering zero interest rate loans on new homes. In this plan, the customer must pay 1/3 down and the remainder over 5 years. This makes the payments large, but the attraction of no explicit interest has increased home sales.
Many farmers in the District have experienced reductions in real income and are in financial difficulty. Crops were generally large last fall, but prices have declined, and interest and other costs have continued to rise. Particularly hard hit are those farmers who purchased a farm three years ago, financed by a 10 percent three- year mortgage, and who now face refinancing at a 16 percent or higher rate.
Commercial banks reported a moderate increase in savings balances in the past four weeks, and outstanding loans have inched up. Deposits at savings and loan associations declined on balance, as flows to money market funds continued. Experience with the new IRAs is uneven. Those institutions that have aggressively priced and promoted them report a large inflow of funds; other firms report little IRA activity.