July 12, 1978
Responses to our latest survey of District manufacturers suggest some slowing in the rate of expansion over the past month. Shipments continued to grow but new orders were essentially flat and backlogs of orders declined somewhat. Inventories were unchanged, remaining moderately above desired levels, and inventory policies continue on the cautious side. Retailers, on the other hand, report improvement in sales and relative sales of big ticket items over the past month. Expectations have become mixed. Manufacturers surveyed have turned decidedly pessimistic about the national outlook while retailers and Richmond Directors retain basically positive expectations for the second half of the year. Credit market activity in the District is brisk, with some institutions reporting record consumer and commercial lending in June. Real estate lending, while showing some signs of tapering, is still vigorous.
District manufacturers continued to expand employment and weekly hours over the past month as their shipments continued to increase. But in the face of stable new orders some reduction in backlogs resulted and further improvement in employment are doubtful. Inventories of both materials and finished goods were virtually unchanged and inventory positions relative to desired levels improved slightly. Although one-third of the manufacturers surveyed view current stocks as excessive, a small number consider them inadequate. Most respondents view current plant and equipment capacity as about right and there is little sentiment for altering current expansion plans. Manufacturers also continue to report widespread price increases, but such reports were slightly less common this month than last.
Retailers' responses were somewhat more positive. Total sales were up in June as were relative sales of big ticket items. There is some question, however, as to whether these increases involve more than just price changes. Nonetheless, retailers are encouraged by recent performance and look for continued improvement. Inventories at retail were larger than a month ago, but remain in line with desired levels. One of our Directors attributes current satisfaction with inventories to the relatively strong sales activity of recent weeks. He feels that even a minor reversal in sales would lead to a rapid turnaround in retailers' views of current inventory levels.
Current expectations vary widely from sector to sector. Manufacturing respondents have become pessimistic over the past several months; half now expect the general level of business activity nationally to worsen over the next six months. Their expectations for their respective firms and market areas are not quite that weak, but are essentially negative. Retailers, on the other hand, are basically optimistic, with most expecting further improvement nationally, locally, and in their respective firms over the remainder of the year. Most of our Directors who commented on this topic expect second-half growth, nationally, to be somewhat below that for the first half of the year. Specifically, they expect real GNP growth in the 3-4 percent range. Current perceptions of local labor market conditions are likewise varied. Comments by Directors suggest some tightness in markets for specific types of employees and in areas which have recently experienced rapid growth or development. Otherwise there is no indication of impending constraints arising from labor market conditions.
Bank business lending seems to be generally stronger than expected. Recent increases in commercial and industrial loans have been concentrated in the durable goods, retail trade, and transportation sectors. The coal industry has also been a big borrower of late, leading West Virginia banks to increase their requests for loan participations with correspondent banks. A clear cut pattern has emerged in business use of loan proceeds, with capital expenditure financing explaining the largest part of commercial and industrial loan demand. Consumer installment loans of commercial banks have increased rapidly in recent weeks, largely as a result of healthy automobile sales. Bankers seem to expect continued strong demand for installment loans over the near-term, although some note that consumers' interest in big ticket items may be cooling off. Demand for residential mortgages continues strong, and is responding only moderately to increases in interest rates. Real estate loan demand is not limited to the single-family area. There is still interest in borrowing to finance construction of apartments and condominiums, although the latter are intended as primary residences, not second homes. Area banks seem generally comfortable with their liquidity positions, but thrift institutions are concerned about low rates of deposit growth.
The District's total cash farm income, led by significantly higher livestock receipts, continues to show a slight improvement over a year ago. Soil moisture conditions throughout the District were marked by considerable diversity as of July 1. Moisture levels ranged from short to very short in South Carolina, with drought conditions broadening and cutting yield prospects, to mostly adequate to surplus in West Virginia. Elsewhere, soil moisture was also short in slightly more than half of North Carolina but generally adequate in Maryland and Virginia. While conditions of most field crops and pastures were generally rated as fair to good, apple and peach prospects were reported as good to excellent.