November 15, 1978
Events of the past month have created a sharp contrast between expectations and the current business picture. Growth continues strong in nonresidential investment, heavy industry, and agriculture. There's been some weakening of consumer spending and housing markets, but the near-term outlook remains good. At financial institutions, the rapid run-up of borrowing costs was accompanied by a sharp slowdown in deposit inflows, but no significant liquidity problems have surfaced as yet. A lack of confidence in price-restraint measures and the likelihood of further increases in interest rates has convinced many of the region's businessmen that a recession is in store for 1979.
Retail sales were spotty in October and early November. Retailers in many areas reported sales gains that would not cover price increases, with a further softening of nominal sales in the latest two weeks. Unseasonably warm weather has apparently dampened demand for soft goods, particularly apparel. Strong sales of housewares, furniture, and appliances have kept spending growing steadily in other locations. Generally, retail inventories are heavier than desired; retailers have become more apprehensive about post-holiday prospects.
Auto sales reports are mixed as well. There has been considerable grumbling from dealers that low inventories or slow deliveries of popular models have held sales below potential. Buyers continue to favor the larger, higher-priced models, although a few dealers noted resistance to "loaded" cars. Small trucks are in heavy demand and short supply. The used car market is strong; supplies of late models have become inadequate as higher-mileage, older-model cars account for a growing share of dealers' stocks. Import sales are still lagging.
Housing markets have continued their gradual slowdown. In southern and central Florida, residential construction activity remains near record levels, but mortgage closings and permits are waning. Directors report that lenders have raised mortgage rates and have tightened credit standards in most areas. Sales and construction of commercial properties, particularly office buildings and shopping malls, appear to have accelerated in the past few weeks; contractors are carrying a sizable backlog of industrial projects. Central Florida is experiencing a boom in all types of nonresidential construction, including several huge tourist attractions.
Heavy industries are enjoying very good business. A regional industrial supplier reports sales up 20 percent over the year- earlier level. A railcar manufacturer describes demand as "unbelievable" and claims his current bookings could keep him operating at full capacity for 13 months. Manufacturers of metal products find their sales steady and have been shipping from inventories. U. S. Steel plans to add steel finishing facilities in Birmingham to complement its new blast furnace and coke oven battery. In contrast, the southeastern textile industry, ailing from import competition, sluggish apparel sales, and the demise of denim, continues to pare operations and lay off workers.
Crop harvests, speeded by dry weather and now virtually complete, have been good. Yields are slightly better than average for cotton and soybeans, with total output somewhat below last year's for cotton and sharply higher for soybeans; prices and demand are good. Citrus production has fallen short of expectations, pushing up prices. Drought-damaged winter grazing pastures have forced many cattlemen to dip into feed supplies and could precipitate additional herd liquidations. Pork production has failed to expand significantly.
Deposit inflows to both banks and thrifts slowed sharply in October. Interest rates climbed, with the prime rate reaching 10-3/4 percent at many large banks. Directors have pointed out that most banks are fairly liquid and in good shape to weather further increases in interest rates. S&Ls have become noticeably less aggressive in raising funds via the costly six-month certificates.
According to branch directors, most major banks began offering some form of ATS on November 1. Set-ups run the gamut from simple overdraft protection to zero-balance demand accounts, with wide variety in pricing structures. Promotions have varied greatly, even within cities; some banks have embarked on a virtual blitz of television, newspaper, billboard, and radio advertising and give-aways, while others have been completely silent. Consumer response has been limited so far.
Southeastern businessmen have become markedly more pessimistic since last report. Although the great majority are pleased with current business conditions, only a handful of contacts consider the probability of recession within the next year remote. The uneasiness has been reflected in increased caution in planning and management of inventories, cash flow, and personnel and closer watchfulness of business indicators. By and large, the business community feels that recent and prospective government actions (or inaction) will be largely responsible for any slowdown.
President Carter's anti-inflation program has not lowered expectations of inflation. Generally, respondents have little confidence that voluntary controls will work, describing them as a "stop-gap measure" or "the first step toward mandatory controls." Some suspected that either the Government or the unions would not hold up their end of the bargain. Several were troubled that the guidelines permitted larger increases than they were accustomed to in their areas and noted that 7 percent could become a floor, rather than a ceiling, for wage hikes. That possibility and the emphasis that the problem has received of late may have even raised inflationary expectations.
The discount rate and reserve requirement increase and dollar-support announcement seem to have reassured many that something concrete has been done toward alleviating the inflation and exchange rate situations, although few are convinced that it will be enough to solve the basic problems. Only a couple of respondents felt that the interest rate increase was excessive or dangerous, but all expected further rises to take a toll in the year ahead.