September 14, 1977
Directors and other business reports from around the District are generally optimistic and indicate solid growth. Retail sales are strong. The housing boom continues to spread and gather momentum, straining supplies of some building materials. Energy development activities are at record levels. But the agricultural outlook remains dim despite small improvements in production prospects. A recent Tennessee court decision, strictly enforcing the Constitution's 10-percent interest rate ceiling, has cut off funds from finance companies and reduced bank lending, threatening consumer spending. Directors cite uncertainties about the direction of government policy, particularly the possible elimination of investment tax incentives, as the main cloud on the horizon.
Consumer spending is strong in most areas, with record retail sales reported in southeast Florida and along the Gulf Coast. August auto sales were excellent following announcements of price increases on 1978 models; many dealers expect healthy demand to carry over to the new models. Some softness is evident in sales of higher-priced fall apparel, notably menswear, and is causing inventories to back up at Georgia textile mills.
Tennessee banks, finance companies, and credit unions are in a lending quandary since an August 22 State Supreme Court decision invalidated a statute which allowed lenders to skirt the Constitution's 10-percent interest rate ceiling by using add-ons or discounts. A pending class action suit on behalf of all borrowers demands repayment of all interest in excess of 10 percent collected on loans made by the state's lending institutions in the past five years. A constitutional convention is currently considering proposals to modify or remove the usury provision but will not be able to get the issue before the voters until May or August of 1978.
The state's finance companies (there are nearly 500 with 450,000-500,000 borrowers), specifically affected by the decision, have virtually ceased all cash lending and have laid off about 1,000 employees. Bank reactions indicate confusion as to interpretation of the decision and fears that future challenges may extend strict interpretation of the interest limitation. Interest charged by stores and car dealers or on bank credit cards in financing specific purchases has been exempted from the ceiling by an earlier court decision, but the more recent ruling has been construed to apply to bank loans for such purposes. Banks generally are making such loans only to those established low-risk customers to whom they can profitably lend at 10 percent or are offering 12-month, 10-percent loans with final "balloon" payments, hoping the Constitution can be amended in time to refinance. Some have cut off all small loans. Most are still buying auto dealer paper. A few are escrowing interest collected in excess of 10 percent.
State retail sales figures are not yet available to show the impact of the credit dam. There have been some reports of lighter sales of big-ticket durable goods; one director remarked on increased auto sales by dealers just inside Kentucky. Displaced borrowers are expected, wherever possible, to go out of state for financing; loan activity has reportedly already risen at Mississippi banks in the Memphis area.
Residential real estate sales and housing construction have accelerated to an extremely rapid pace in Florida's coastal areas. New apartments and condos account for much of the latest surge on the "Space Coast." Vacant land has grown scarce in the Miami area, encouraging speculation. A Florida director notes continuing moderate real estate speculation along the north Gulf Coast. Mortgage money is plentiful throughout the District, and loan closings at savings and loans are up sharply. Farm real estate activity has risen in Tennessee.
Plans to construct new hotels and expand tourist attractions highlight moderate advances in nonresidential construction. Announcements of plans to build shopping centers and large industrial facilities have become more numerous in the Gulf states. The latest round of announcements included a phosphate mine expansion in central Florida, a headquarters relocation and new industrial complex for the Melbourne area, and large army construction projects in Mississippi. Commercial and industrial growth in the Atlanta area has not kept pace with other District cities. A foundry owner finds encouragement for business spending in rising orders from capital goods producers.
Intense construction activity has resulted in delayed deliveries and climbing prices of building materials, particularly in Florida. Lumber supplies are low, and prices have risen as much as 20 percent in the past three months; one Tennessee producer has been turning down orders. Atlanta and Florida builders report shortages of insulation materials.
August rainfall has improved crop production prospects, but harvests of most crops will be considerably lighter this year than last. Pest damage is unusually heavy; some pesticides are in short supply. Despite extensive losses in some areas, the District's cotton and soybean output should be abundant this fall, but sluggish demand and soft prices for these and several other major cash crops will restrain farm revenues. However, rising demand and expectations of low supplies are allowing citrus growers to sell production in advance of the season for the first time in years, at prices nearly double last year's. Livestock liquidation has slowed as pastures revived. Purchased feed costs have fallen, enlarging profit margins of poultry and hog producers, but depressed local corn and hay production will make beef cattle herds difficult to maintain through the winter.
Oil and gas industry activity, both onshore and in the Gulf, is at an all-time high. Some shipbuilders, benefiting from larger volumes of oil-related jobs and preparations for East Coast drilling to begin soon, are experiencing serious shortages of all types of oil-handling equipment. Others remain concerned about maintaining sufficient work levels despite improvements; layoffs by New Orleans and Pascagoula shipyards probably won't be as severe as originally announced but will be substantial at best.