August 9, 1978
Businessmen in nearly all industries seem to share the opinion that growth is currently at a peak, will continue strong for a few months, and will slow by year-end. There are some signs that an easing of growth has already begun, however. Labor markets are tight, with job gains slim; retail sales are "holding up well" but probably advancing little in real terms. Loan growth has moderated; deposit gains have quickened. Housing markets are starting to make some observers uneasy. The strain on supplies of construction materials and transportation has increased. Crops appear to be bearing the hot, dry weather well.
Retailers characterize sales gains as roughly in line with inflation, perhaps slightly better, with strength distributed pretty evenly across items. Most are anxious to get their inventories down—some because of high financing costs or style changes, others because they consider sales prospects questionable. Larger-than-usual, widespread markdowns have helped many to bring stocks close to desired levels. Unit automobile sales remain well above the year-earlier pace, but the gains have been shrinking.
Consumer delinquencies have edged up but are not posing problems. Insurance companies have seen no increase in borrowing against life insurance policies, which they construe as evidence that consumers are not strapped financially.
At both banks and savings and loan associations, deposit inflows picked up in July. The six-month certificates have gained acceptance and contributed substantially to the advance. Loan demand has stopped accelerating but is still rising.
Statistics for the six District states have shown negligible job growth since early spring. Businessmen seem not to have perceived the weakness, describing employment as high, and their announced hiring intentions are bullish. Labor force expansion has been very slight, according to official estimates, but contacts continue to note substantial migration from outside the region. At any rate, shortages of skilled technical and construction workers have become more acute in the coastal areas. For example, Ingalls Shipyard, which is in the process of substantially reducing its work force, has been advertising heavily for skilled tradesmen.
Supplies of many industrial goods are growing ever tighter as well. A large aircraft manufacturer documented a sharp lengthening of lead times for a wide variety of materials, particularly raw aluminum, although its price increases have not been extreme. (It blames the short supplies, in part, on OSHA regulations which have driven small foundries out of business.) Sheetrock is now on allocation.
Trucking and rail transport are groaning under a heavy load, with no letup yet in sight. A railcar plant, closed a few months ago, has been reopened; other producers are operating full steam.
For the first time in many months, all of our respondents had some negative comment on residential construction. There has been little or no slowdown in starts or mortgage lending to date. But Florida observers are uneasy with the rapid pace of activity. Speculation may have pushed the supply above the demand; many buyers appear to be willing to pay 20-25 percent more than they had planned with little consideration. In other states, observers feel that prices have begun to dampen the market. A director noted that builders were finishing homes without finding buyers where they had been making sales before breaking ground a few months ago. Suppliers to the residential construction industry are looking for a slowdown by year-end. A manufacturer of aluminum and fiberglass screens has begun to trim inventories of both raw materials and finished products in anticipation.
Producers of materials for nonresidential building also, feel that current feverish activity cannot be sustained. One steel company analyst says, "we're looking over our shoulder"; its orders have slowed somewhat. A pipe manufacturer remarked that a number of large projects (such as nuclear power plants, refineries, and chemical plants) have been postponed because of uncertainties, largely in the energy area. In contrast, a director noted that many small projects which had been delayed are getting under way because of the fear of even higher costs.
A significant exception in the outlook is the oil and gas industry. Sources close to the industry expect another 40-percent increase in offshore Gulf wells in 1978. Drilling activity apparently stalled a couple of years ago when the energy debate began; now, lessees must develop their older lease holds or lose them. The number of newer leases ensures that this industry's business will be quite strong for the next few years.
Hot, dry weather has been troubling livestock producers and damaged the corn crop in the southern parts of Alabama and Georgia again this year. Despite the short soil moisture, other crops are rated in fair to good conditions. Agricultural prices have shown divergent trends, with corn, cotton, soybeans, and broilers down and eggs, vegetables, and tobacco up sharply. Slaughter of livestock, particularly calves and cattle, continues to slide.