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Beige Book: National Summary

November 16, 1982

Overview
The economy is still entrenched in the recession, with District reports giving few indications of an imminent recovery. Lower interest rates and a slower rate of economic decline are cause for optimism, particularly in the North East, which has fared better than the rest of the country. Consumer spending, especially auto sales, remains weak in much of the country as consumers are cautious in the face of higher levels of unemployment. Manufacturing, mining and lumber industries are still experiencing widespread layoffs and plant closures, with no increase in orders to signal a recovery; defense-related industry remains strong. Lower mortgage rates are bringing optimism to the housing industry, but construction has yet to increase; commercial construction has turned down in many areas. Low prices, weak demand and bad weather are keeping farm income down, with only livestock producers benefiting from low feed prices. Corporations and households are taking advantage of the recent drop in rates to restructure their balance sheets rather than buying new capital equipment or homes. Many fear that a rise in interest rates will stall any recovery next year.

Retail Sales
Retail sales, especially sales of durables, remain weak throughout the country, and are being sustained in many areas only by promotional activity and aggressive pricing. Inventories, however, are now at acceptable levels. Retailers are optimistic about the holiday season in most Districts, but weak October sales are keeping some retailers cautious. In the North East and the St. Louis District, recent advances in retail sales are seen as encouraging. Auto sales, however, are still depressed, especially in the Atlanta District, where many dealers are failing. Lower interest rates are generating some optimism among dealers, but high prices and high unemployment continue to deter buyers. Despite the declines in interest rates, consumer lending has not increased significantly.

Manufacturing and Mining
Though the view that the economy has hit bottom is widely expressed, signs of an imminent recovery remain scarce. Many of the Districts report further layoffs and plant closures, with expectations of more of the same, albeit at a slower pace. In the Chicago and Cleveland Districts, the capital goods industry is particularly distressed, with no upturn in new orders to signal a recovery. Low sales and imports continue to plague the auto and steel industries, and are now affecting truck manufacturers. Mining is down everywhere, and the lumber industry continues to experience very low demand, leading to further mill closures. Recent increases in drilling activity are attributed to tax motives, not to a recovery in the oil and gas industry.

With widespread excess capacity, weak prices and pared inventories, some believe the conditions are now ripe for recovery. Others, however, are afraid that higher interest rates next year will continue to curtail economic activity and prolong the recession. There appears to be more economic strength in the North East than elsewhere, with the Boston, New York and Philadelphia Districts reporting strength in the business of their defense contractors, high technology manufacturers, finance and other service companies. Though some weakening in the high technology industry is evident there and in other Districts, defense-related business is expanding everywhere. One positive sign is the pervasive weakening of prices, which indicates continued low levels of inflation. It remains to be seen whether the moderating decline of business activity is indeed a precursor of the long-expected recovery.

Construction and Real Estate
Lower mortgage rates have returned some life to the housing industry, with real estate agents, builders and lenders all reporting an increase in home-buyers' inquiries. Only in the Atlanta and Dallas Districts, however, is the improvement being translated into an increase in permits and construction. Elsewhere, the housing industry remains on hold till rates stabilize at this lower level and spring comes. Commercial construction is weakening, as there are few new projects to replace completed or canceled projects. Excess office space in the San Francisco District is expected to slow the construction of office buildings. while many Districts report cutbacks in plans for commercial construction, demand for construction loans is up in the Kansas City District, and commercial construction improved in the St. Louis District in October.

Agriculture
Agricultural income continues to suffer from large stocks, weak domestic demand, poor export demand and bumper crops. Bad weather has caused problems in the San Francisco and Minneapolis Districts. Prices of many crops—such as cotton—are well below last year's. Cattle, hog, dairy and poultry producers are doing better because of lower feed costs. Low farm income is threatening some farmers with the loss of their farms, but widespread foreclosures are not expected. Values of farm land continue to fall. Lower interest rates will bring relief, but only in the future.

Financial Conditions
The recent drop in interest rates has spurred a restructuring of corporate balance sheets. In the Minneapolis and Philadelphia Districts, for example, many firms have issued new equities and long-term debt to replace bank loans. Mortgage borrowers are also restructuring their debt, particularly in the San Francisco District where creative financing and balloon payment loans have created large demands for refinancing. Despite the length of this recession, delinquencies, foreclosures and problem loans do not appear to be causing unmanageable difficulties for most financial institutions.

Depository institutions appear to be retaining a large proportion of the funds that were in all savers certificates, and some deposit gains have come from new types of accounts. Most institutions are preparing to offer the new money market account, but express concern about the likely increase in their cost of funds.