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Beige Book Report: Richmond

August 2, 1988

Overview
The District economy continued to expand through the first half of July but apparently at a slower pace than earlier this summer. Retail sales were generally firm but auto sales were weaker. Manufacturers reported moderate growth in activity, although some softening was noted in the demand for textiles and furniture. Producers continued to report shortages of raw materials and upward pressure on prices. Export activity was strong and import activity was mixed at District ports. Depository institution executives reported generally firm loan demand and increases in deposits. They expect interest rates to be flat to rising in coming months. District farmers welcomed the recent rainfall which has provided some relief to many drought-stressed crops.

Consumer Spending
District retailers responding to our regular mail survey reported higher sales in the first two weeks of July compared with the preceding two weeks. About half of the retailers reported increases in sales while 34 percent reported declines. Increased sales were reported at department stores and furniture stores while most car dealers reported a decrease.

Among department stores, sales of big ticket items were unchanged according to about 50 percent of the respondents while one reported an increase. Half of the department stores said their inventories declined compared with one-third who said their inventories were unchanged. Nearly 80 percent of the department store respondents expect sales to increase in the next six months, while none expect sales to decline. In comparison, in our May survey, 36 percent expected sales to increase and 11 percent expected declines.

Tourism
With the exception of West Virginia, states in the District report that summer tourist and convention activity have been higher than a year ago. West Virginia's activity is reported to be unchanged from year-earlier levels. All states expect their tourist business to continue to improve.

Manufacturing and Coal
Manufacturing activity expanded in the first three weeks of July, according to our regular mall survey, although not as sharply as reported in our last survey. Thirty-eight percent of the respondents reported increased shipments, compared with 46 percent in the previous survey. Reports of reduced shipments increased to 23 percent from 12 percent. New orders, backlogs of orders, employment, and the length of the workweek increased, although at a slower pace. About three-fifths of our respondents reported no change in inventories of finished goods and materials, and about one-fourth reported increases.

Prices of inputs and finished goods continued to rise at about the same pace as reported in our previous survey. About one-third of the District manufacturers said they had raised the prices of their finished products, and two-thirds reported higher prices for raw materials. Almost half of our respondents reported difficulties in obtaining raw materials--especially steel and chemicals.

District manufacturers expect their businesses to expand further in the next six months. About 40 percent of the respondents believe their shipments and new orders will rise, compared with about 15 percent who anticipate declines. The majority of producers do not plan to change their inventory levels in the next six months. One- third of the respondents, compared to about one-fourth in our previous survey, expect to increase capital expenditures in the next six months.

District coal production for the first half of the year is up about two percent from the first half of last year. Industry analysts say the decline in the value of the dollar and increased steel production has increased demand for West Virginia coal. These analysts foresee little effect of a decline in oil prices on coal demand because only a small number of domestic coal-fired electric power generators can be converted to oil.

In conversations with us, executives from several major Fifth District financial institutions indicated continued strength in their sector. Most institutions posted large increases in deposits in July. Generally institutions experienced modest increases in consumer and real estate loan activity through mid-July. The executives reported little change in loans for commercial construction, but the volume of these loans would have risen, they said, had their institutions not become more conservative in their lending policies. Bankers and thrift executives expect interest rates to hold steady or increase slightly over the next three to four months.

Housing
The District housing market remains strong according to a telephone survey of realtors and builders and according to reports from our directors. Most of our contacts are optimistic about market conditions for single-family homes in the coming months. However, one realtor said the current surge in sales may reflect buyer anticipation of higher mortgage rates in coming months, which could leave the market depressed this fall. On a down note, market activity in multi-family units is almost nonexistent according to our survey.

Ports Representatives from the three major District ports—Hampton Roads (Norfolk), Charleston, and Baltimore—noted general increases in export shipments for June over May. The import picture was mixed, however, with shipments reported to be lower at Hampton Roads, higher at Baltimore and unchanged at Charleston. All ports expect strong export activity to continue during the next six months. Compared to a year ago, export activity was outpacing that of imports.

Agriculture
Recent rainfall across District states has brought some relief to crops, but more rain is needed, especially in the western portions of the states. Analysts believe the drought has reduced District corn yields, but expect most other crops to show only minimal damage if rainfall is normal for the rest of the growing season. The South Carolina peach crop, for example, is said to be one of the best on record. Hay conditions are poor, but as yet, District livestock liquidations do not appear to be above normal. Agricultural banks responding to our quarterly survey indicate that, as of June 30, demand for farm loans in the District were at normal levels and farm loan repayment rates were above average.