September 14, 1977
The Eighth District economy continues to advance at a moderate rate, although growth has slowed from the very rapid rate of the first half of the year. Consumer spending continues on an upward course, but at a reduced rate from last spring, and a number of manufacturing industries indicate continuing increases in orders. Retail and manufacturing inventories are generally at desired levels, except in a few industries where demand has been weak recently. Homebuilding continues at a rapid pace. In the financial sector, demand is generally strong for most types of loans, particularly real estate. Crop prospects are excellent for several major crops.
Consumer spending continues to increase, but at a slower pace than earlier this year, Representatives of major department stores report back-to-school and early fall sales are up from a year ago. Some of the respondents, however, noted that competition for the consumer dollar is increasing, and sales are becoming more difficult to obtain. Passenger car and truck sales are reported to be strong.
Retail and manufacturing inventories are generally in line with the expected moderation in sales. Retailers report that they have been cautious about inventory building and have adjusted quickly to changing demand conditions. However, one retailer of ladies apparel noted some softening in sales and somewhat higher inventories than desired. In manufacturing, steel inventories are being reduced in the third quarter, and the chemical industry reported excessive inventories of fibers due to softening demand.
Savings continue to flow into thrift institutions at a strong and steady pace. Representatives of these firms report a continued high level demand for mortgages, and some firms report a great deal of overtime by their staff to keep up with the workload. Commercial bank loan demand is reported to be quite strong in smaller cities and rural areas, while business loan demand in the larger cities remains sluggish. Interest rates on mortgages are predominantly in the 8-3/4 to 9 percent range and are expected to remain at this level for the next few months. Bankers in the area expect the prime lending rate to increase to about 7-1/2 percent before the end of the year.
A ruling by the Tennessee Supreme Court on a statute, which circumvented the 10 percent usury law written into the State constitution, has thrown consumer lending in that state into confusion. Some banks have decided to operate on a 10 percent simple rate until the banking law on interest rates has been clarified. These bankers say that the quality of their consumer loans will be upgraded, thereby reducing collection and loss expense. Other banks have not changed their loan policies. Small loan companies in the state have generally stopped making loans.
Manufacturing activity continues to make moderate gains. Manufacturers of electrical motors, appliances, furniture, paints and coatings, barges, hotel supply equipment, footwear, plywood, and certain apparel items all reported sales gains. However, a representative of the steel industry reported depressed conditions. Steel shipments are currently running 10 percent or more below levels of earlier this year. A chemical industry representative reported a slowing in orders among several product lines in August. Demand for textile fibers and plastics has slowed, partly due to weak foreign demand. Industrial chemical sales have been flat recently, while agricultural chemicals, after a period of weak demand, have picked up.
Home construction remains one of the healthiest segments of the District economy. Most areas report large increases in construction of both the single-family and apartment units over a year ago, and recent sales have continued relatively brisk. Current construction of single-family homes continues to reflect homes already sold, and very little speculative building is reported. Material and labor availability has been of some concern, although some observers of the homebuilding industry believe that such shortages are overemphasized.
Prospects for the fall harvest of most District crops are quite good. Yields for corn, soybean, and cotton are expected to be generally good. However, reports from the southern portion of the District indicate that the cotton and, to a lesser extent, the bean crops are being damaged somewhat by army worm infestations. The tobacco crop in Kentucky is reported to be good, and somewhat higher prices than a year ago are expected for this crop.