May 10, 1977
The Southeast's economic climate remains generally sunny, although some clouds have appeared in the form of the energy program and persistent price increases. A broad survey finds businessmen unsure of the effects of the energy proposals but cautious in making major commitments until the uncertainty abates to some degree. Construction expenditures are rising rapidly, reflecting local government improvements, booming single-family housing markets, and moderate advances in nonresidential building. A special survey of bank lending finds strength in construction-related lending and growth in agricultural loans. Purchasing managers' responses to a survey suggest favorable developments, on the whole. However, their expectations of intensifying price pressures are consistent with other current reports. Georgia mobile home manufacturers, who looked to recent regulatory changes for a new lease on life, are encountering disappointment.
One word summarizes the reaction to the recently announced energy policy—uncertainty. A broad cross section of businessmen just surveyed expressed an almost unanimous view that capital spending plans are being postponed. Utility industry sources expect the costs of coal conversion and pollution control equipment to hike the cost of electricity. In addition, utilities question the practicality of converting small plants which might be shut down instead. This same pattern may also apply to small industrial plants. Coal producers also question the new policy; they perceive a conflict between the energy policy, which encourages use of coal, and environmental protection regulations, which increase the degree of uncertainty surrounding large mining investments. Slight changes in these standards can curtail the market for a mine's output, thereby making a substantial investment unprofitable.
Several District cities have recently completed or are in the midst of "face-lift" operations. Seven Mississippi towns and Montgomery, Alabama, have undertaken extensive renovation of their downtown areas. Birmingham plans less comprehensive but large-scale city improvements. Atlanta will spend several hundred million dollars on airport expansion and sewage system improvements. Well over a billion dollars will be spent when subway construction is included. Tampa is taking steps to complete city expressways; airport expansion is scheduled for Miami.
Housing has been exceptionally strong in many areas of the District. By all accounts, March and April brought record sales for realtors. In southeast Florida, new single-family home sales have been running 60 percent over a year ago; in the state, new home building is up 81 percent. East Coast builders are selling out projects from floor plans. Atlanta realtors report sales about 45 percent better than last year. In the New Orleans area, single-family home buying has become speculative. Unsold condominium stocks are being chipped away in Florida, and Atlanta's housing supply is tightening. Some areas report rapidly rising housing prices; others find almost no change from last year's price levels. A negative aspect of the housing boom in South Florida is a record rate of foreclosures of home mortgage loans.
Nonresidential construction activity has made solid but unspectacular advances. Louisiana and Mississippi have picked up several new industrial expansion contracts. Though a large part of new capital spending is going for expansion rather than new plants, several large new facilities have been announced.
A survey of commercial bank lending activity in the Southeast detected moderate to substantial increases in loan demand. Increased demand is almost universally reported on the part of construction contractors, builders, and their suppliers. Coffee producers, importers, and dealers also have increased their borrowing. Gains have been noted in lending to hard goods manufacturers; there is little sign of an increase for soft goods producers. These borrowing trends correspond to recent retail sales developments. Lending has also increased rapidly for oil producers and service firms in coastal areas. Agricultural lending has increased, reflecting rising land values, favorable prospects for 1977 crops, especially soybeans, and new equipment demands caused by changes in crop mix. Some "carry-over" loans for rice and sugar producers are also being made.
In general, the resurgence in loan activity reflects the effects of inflation in addition to a normal expansion in the need for working capital, accounts receivable, and inventory financing. Some loans are being used for equipment purchases, but there is little evidence of lending for plant expansion.
In coming months, most banks foresee a continuing moderate to strong increase in loan demand; particular strength in construction-related lending is expected to continue.
Life insurance companies reportedly are holding an abundance of funds for investment. Because they expect rising interest rates, they are concentrating their lending almost entirely in the short- and intermediate-maturity ranges. Some companies are, for the first time, entering into warehouse financing.
Favorable economic prospects appear in an April survey of southeastern purchasing managers. Order backlogs for their products are growing; they also note a stretch-out of lead times on goods they order. Although no noticeable change in the pace of deliveries has occurred in the past four months, some slowing is foreseen during the next quarter. During the past three months, there has been a steady increase in the proportion reporting higher prices. More pervasive price increases are anticipated in coming months.
Rapid growth in inventories is not expected. Changes in raw materials stocks were limited in the three months preceding April, when a strong buildup was reported. However, during the next quarter, a return to stability in raw materials is foreseen. The growth rate of finished goods stocks flattened last month after three months of steady increases; slower growth is expected to continue.
The proportion of respondents reporting sales increases has risen steadily for four months; almost three quarters foresee continued gains. Profits had been stable prior to an increase in April. This recent improvement is expected to continue.
In price developments, there presently exists an inventory overhang of about one year's supply of copper and a six-month supply of nickel. Steel producers report a demand increase related to a pickup in heavy construction. Retailers note price increases for appliances, leather goods, and "home fashion" merchandise. Furniture prices were recently boosted 25 percent by two manufacturers.
Manufacturers of mobile homes in Georgia report that a recent easing of restrictions on highway transportation has brought no noticeable improvement in their business. Shipments remain quite weak, despite the enactment of legislation permitting 14-foot wide mobile homes to be transported over Georgia highways. Additional plant closings appear likely to occur.