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Beige Book Report: Richmond

December 1, 1986

Overview
Manufacturing remains at about the level reported a few weeks ago, which was improved from midsummer's pace, and producers are generally optimistic about prospects for their businesses in the months ahead. In retailing, non-auto sales are stronger, and store managers expect a good holiday season. Three-fourths of producers and retailers forecast inflation to be between two and four percent in 1987. Sales of homes are weakening faster than usual at this time of year, and realtors believe that it will take lower mortgage rates to increase activity in this sector. In the financial sector, home equity-line loans are being offered by most large banks in the District, and customer response has been strong. District agricultural bankers expect a new round of farm failures due to the drought-depressed harvest and low crop prices.

Consumer Spending
Retail sales, other than new car sales, are generally strong throughout most of the District, and store managers expect a good Christmas season, according to our directors. Their reports are confirmed by our survey of retailers; 61 percent say that their sales volume in November is running ahead of October's pace, seasonally adjusted. This month's survey of retailers also indicates that a higher percentage of respondents are optimistic about the outlook for their businesses and for general business conditions six months from now.

Manufacturing
Manufacturing activity in November is little changed from October, judging from District survey results. The average rate of capacity utilization is up one percentage point, but the percentages of firms reporting increases in shipments or employment are down slightly from the percentages reported last month. Reports of increases, however, still outnumber those of decreases.

Compared with the results of last month's survey, those for this month show a larger percentage of manufacturers optimistic about their business prospects six months from now. Forty-five percent of the respondents indicate that they expect increased sales as a result of improved international trade conditions, while 15 percent expect reduced sales due to less favorable international trade conditions. All but a handful of the remaining respondents indicate that international trade conditions have no influence on their businesses.

Housing
Housing sales remain above year-ago levels but are weakening rapidly. The downturn appears to be more than seasonal and is attributed to higher home prices that are keeping some potential buyers out of the market, despite lower mortgage rates. Realtors believe that it will take another decline in mortgage rates to support this industry in the months ahead.

Inflation Expectations
We asked our survey respondents—primarily manufacturers and retailers—to forecast the general level of inflation for 1987. The results are summarized in the table below.

1987 Inflation Forecast Percent of Respondents Under 2 %                                 5 2 % to 3 %                               29 3 % to 4 %                               48 4 % to 5 %                               13 Over 5 %                                 5

Financial
A telephone survey of twenty large District banks was conducted to determine the activity in and terms of home equity-line loans. Eighteen of the banks surveyed are currently offering these loans, and most of these are very active in advertising their new product. The remaining two banks expect to be offering equity-line loans by December 15.

The loans are structured in various ways. Most are tied to the prime rate, but some are tied to T-bills or CD's. Some banks offer the option of balloon payments or a rollover of the principal at maturity periods of up to 15 years, or amortization in monthly installments.

Most of the banks offering the loans describe the response with words such as "very strong," "dynamite," and "hot," although four banks located in a relatively depressed part of the District did not regard the response as unusually good. Bankers feel that home-equity line loans will become increasingly popular. One respondent describes these loans as the most significant new product since money market accounts.

Agriculture
Revised estimates of crop yields based on nearly complete harvests are in line with estimates earlier this fall. As expected, drought damage will mean severe hardship for some district farmers, especially because of low crop prices. Agricultural bankers expect that more farmers will he out of business by next spring.