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Beige Book Report: Richmond

August 3, 1987

Overview
Broadly speaking, economic conditions in the District have not changed much in recent weeks. Directors and respondents to our regular mail and special telephone surveys reported generally positive current conditions and widespread optimism about prospects for the economy. Manufacturing activity continued to increase moderately from June to July, while retail sales were unchanged. Wage and price pressures intensified at producer and consumer levels. Homebuilding and sales of single family homes were steady. Large banks reported strength in consumer and home equity loans, no clear change in commercial and industrial loans, and extraordinary additions to loan-loss reserves. Reports from agricultural bankers indicate that farmers are under less financial stress than a year ago, although July's hot and dry weather has probably reduced prospective crop yields.

Retail Activity
Retailers responding to our regular survey reported that their sales through the first part of July were about even with those in late June. Forty percent of the survey respondents reported increases in sales, as compared with 33 percent who reported declines. Weakness in sales of big ticket items was noted by one-fourth of the respondents, as compared with one-sixth who reported strength in this category. Retail inventories, except of automobiles, were reported to be higher. Retail employment showed little change.

Upturns were evident in retail prices and wages from June to July. One-third of the retailers reported increases in the prices they charge and in employee compensation, as compared with negligible percentages reporting declines. Retailers were about evenly split between those reporting increases and those reporting no change in the prices they pay for goods at wholesale.

Retailers remain optimistic about sales in the months ahead, with almost two-thirds anticipating increases. Most expect wholesale and retail prices to rise further. Few, however, expect an increase in their employee numbers, even though over half currently report job openings. Evidently retailers are doubtful that they will be able to fill these positions, given the tightness of markets for service workers.

Manufacturing and Mining
Manufacturing activity continued to grow at a moderate rate in July. Shipments, new orders, employment, and the workweek increased. The backlog of orders has been generally unchanged in our last two regular surveys. Inventories of materials increased slightly, while inventories of finished goods were unchanged. Manufacturers again reported increases in the prices of raw materials and finished products, and over one-third of the respondents reported that they had raised wages in the past month. Manufacturers believe their business activity will improve further in coming months.

Coal production is above its year-ago level, but below the level predicted a few months ago. Export demand is weaker than had been anticipated, and electrical generating utilities are not buying at the expected rate.

Housing
Homebuilders in most of the District report July activity was about even with June, but down from a year ago. Builders believe that many prospective buyers are staying out of the market, waiting for mortgage rates to decline. Meanwhile, current buyers of new homes are seeking more amenities, including higher ceilings and larger rooms. In the Washington, D.C., area, homebuilding activity, particularly condominium construction, continues to increase.

Realtors in the District report that their sales of single family homes were unchanged in July from June. They expect mortgage interest rates to remain steady for three months, and then to rise.

Financial Large District banks report that consumer loan demand is strong this summer compared to last, and home equity loan demand is also strong. Commercial and industrial loan demand is mixed. Residential mortgage activity other than home equity loans is lower this summer. Variable rate mortgages that allow conversion to a fixed rate mortgage at the borrower's option—the so-called convertible ARMs—are being offered by only a few District banks, and only one bank reported strong customer interest.

Almost half of the banks surveyed reported out-of-the-ordinary additions to their loan-loss reserves. The increases were mostly due to foreign debt exposure and were expected to be one-time adjustments.

Agriculture
Preliminary results from our recent survey of District agricultural banks suggest a lessening in the financial stress facing District farmers. Agricultural loan repayment rates are improving and bankers are more optimistic that farmland values will rise. Further, interest rates across all loan categories eased somewhat in the second quarter. Hot, dry weather is the predominant problem now facing District farmers. If it doesn't rain soon, corn and soybean yields will suffer, which would reduce prospective revenues from crop sales at harvest and the ability of some farmers to service debt.