Beige Book Report: Richmond
May 14, 1975
The April survey of Fifth District businesses reveals a number of signs of some improvement in business conditions, particularly in the manufacturing sector. Responses from manufacturing concerns suggest somewhat stronger current activity and, in particular, a significant improvement in expectations, with a majority of those surveyed anticipating continued improvement over the next six months. Manufacturers' responses suggest some recovery in shipments and new orders, as well as some further decline in inventory levels. The survey of district retailers reveals little change from recent months other than a marked turn toward optimism on the part of respondents. In the banking sector, loan demand for inventory and receivables financing and capital expansion programs has not yet materialized, as commercial and industrial loan volume at weekly reporting banks has remained steady since the beginning of April.
The latest survey of manufacturers indicates improvement across a broad range of activity. Only 15 percent of the respondents report a decline in the level of shipments during April, and a diffusion of responses reveals the first increase in this indicator in eight months. Virtually the same picture shows through with regard to the volume of new orders. Materials inventories apparently continued to decline, and for the first time in recent months the diffusion of responses suggests a decline in finished goods inventories as well. Nevertheless, over half the manufacturers surveyed continue to view current inventory levels as excessive and almost half hold the same view with respect to current plant and equipment capacity. Perhaps a further indication of actual or anticipated gains in business activity is revealed by a relative firming of prices, both paid and received, during April. Some reports indicate that with inventory levels becoming more manageable, firms are beginning to review current price lists. The most dramatic result of the latest survey concerns the outlook for the next six months; fewer than 1 percent of the manufacturing respondents expect further worsening of conditions, locally or nationally, over that period.
Retailers responding to our April survey gave little indication of any change during the month. Total sales were essentially flat, while sales of big ticket items relative to total sales remained weak. Inventories showed no change, and current levels remain above desired levels. As in most recent months, responses continue to suggest a mild tendency toward higher prices. Further, each of the respondents is satisfied with the current number and size of outlets. As was the case with manufacturers, expectations showed a dramatic improvement during the month. No retailer responding foresees any worsening of conditions over the next six months, and each expects improvement in his market area as well as in his individual firm.
But in general, business remains slow and there is little firm evidence that any significant recovery has begun. Nonetheless, improvements in various indicators are contributing to a growing mood of optimism. With inventory levels becoming manageable, some firms are apparently preparing to resume production at more nearly normal levels. Unemployment seems to have stabilized and in some cases to have declined as plants have recalled laid-off workers. Significant improvement in this area may be some time in coming, however. Despite the growing optimism, caution pervades some industries and substantial adjustments may be yet to come as marginal operations are eliminated and plans are revised to meet new market conditions. Industries such as textiles, which have been especially hard hit, are poised for the recovery, and a good showing in housing construction could lead to a swift return to relatively high levels of production.
Any improvement that may have occurred in Fifth District businesses has not yet been strong enough to show up in increased demand for bank credit. Bank loan customers in some important Fifth District industries, however, have indicated to reporting banks that their business situations are improving. The demand for residential mortgages at district banks and S&Ls is substantially below the level normally experienced at this time of year. S&Ls in some areas have responded to improved liquidity by becoming quite aggressive in the mortgage market, and as a result are doing more business than most banks. The tax credit on new home purchases may have stimulated some interest in home buying, but most lenders feel it has had only a limited impact on market conditions. It is seen as having limited effect because (1) few homes qualify, (2) builders and consumers are confused by its complexity, and (3) existing homes must be sold before many consumers can take advantage of the credit.
Our recent survey indicates that farm loan demand is unusually strong at banks, PCAs, and the FMHA. Demand is strongest for operating loans, weakest for farm mortgage loans. This is at least partially due to the fact that farm suppliers have largely withdrawn from the credit business and now require payment for their goods on delivery. Availability of bank loan funds this spring, compared with last fall, generally shows improvement, markedly so in some cases. At banks which had some bad lending experiences in other fields last year, and at small rural banks, availability of funds is generally down. One large district bank reports that some of its small correspondents are buying federal funds in order to meet this demand for agricultural production credit.
On balance, the majority of our bankers do not appear to be reluctant to expand their farm loan volume this spring. But they are apparently taking a hard look at the credit worthiness of their borrowers. Volume of loan referrals to nonbank credit agencies seems to be about the same as last year. There appears to be some increase in the volume of participation loans with FMHA, however.