November 15, 1978
Fifth District manufacturing activity remains firm at this point as new orders and shipments continue to gain over the past month. Responses to our survey also indicate some drawing down of manufacturers' inventories, particularly of finished goods, during October. Manufacturing employment and weekly hours worked continued to rise among our respondent firms. Nonetheless, manufacturers' expectations for the next six months weakened markedly during the latest survey period. Reports on the retail sector are a mixed bag; automobile sales appear to be slowing, if only slightly, while other retail activity remains firm. Credit demand in the district has been strong in recent weeks, with both businesses and consumers borrowing significant amounts. To date there has been no sign of any substantial moderation in credit demand, even though interest rates have increased sharply. Strong demand for farm loans, rising interest rates, and continued liquidity pressures at some banks were reflected in our latest survey of farm credit conditions.
In the manufacturing sector, activity in the Fifth District continued to expand during October. Shipments and new orders both gained over the month, although the gain in new orders was somewhat less widespread than in September. Backlogs of orders and materials inventories were essentially unchanged, while stocks of finished goods continued to run off. Overall, manufacturers' inventories have been brought very nearly into line with desired levels. Current plant and equipment capacity is also at or near desired levels at most respondent firms. Manufacturing employment also made some month-to-month gains, although these gains were not particularly widespread, and weekly hours worked were up slightly. Prices continued to rise broadly as 65 percent of our respondents reported paying higher prices over the past month.
Manufacturers' expectations deteriorated badly during our latest survey period. Half of the manufacturers surveyed now expect the level of business activity nationally to worsen over the next six months, while over one-third expect a decline in activity in their respective market areas. Over half of these respondents expect to maintain current levels of production in their own firms, but even here expectations have weakened over the past month.
No clear picture of current conditions in the retail sector emerges from our various sources of information. Our survey of retailers suggests some minor gains in total sales and in relative sales of big ticket items over the month. Other sources indicate that sales of department stores have turned spotty around the district with weakness in apparel and other textile products and some scattered strength in home furnishings. Automobile sales, although strong, seem to have tapered off in recent weeks, at least in some areas. A survey of district bankers shows October as a strong month for consumer installment lending, due largely to automobile sales. Installment lending is described by bankers as strong but not booming. Use of credit cards by consumers continues to be moderately strong.
Most Fifth District directors have detected no significant impact of the recent run-up in interest rates on consumer demand for homes or the rate of homebuilding in their respective areas. More often it is nonavailability of funds, if anything, rather than the interest rates, which is dampening residential construction and/or sales activity in real estate markets. There is some concern, however, that more serious effects on housing will be felt in the near future. This situation may be compounded by what appears to be a growing reluctance on the part of financial institutions to pay market rates on money market certificates.
Business loans have surged ahead over the past several weeks, although a substantial part of this lending appears to be in response to seasonal credit demands. Commodity dealers and retail stores account for a large share of borrowing at large area banks, but public utilities have also been active. While the major source of recent loan demand appears to be middle market firms that are expanding plant facilities, there has also been some pickup in usage of lines of credit by larger companies. Demand for new credit lines may also be increasing somewhat. Agricultural loan repayment rates and the number of renewals and extensions of existing loans continued to be roughly the same as the improved levels of the second quarter. Banks actively seeking new farm loan accounts showed a modest rise in the third quarter, while the fraction of bankers forced to refuse or reduce a farm loan because of a shortage of funds continued at the reduced level of the second quarter.
Estimates through July reveal continued improvement in district cash farm income, with all of the increase coming from livestock marketings. Drought conditions have reduced corn and soybean yields in some areas, but bumper harvests of these crops and other feed grains are still anticipated. The season average price for flue-cured tobacco continues at a record level, some 13 percent above a year earlier, as the end of the 1978 marketing season approaches.