December 13, 1978
Business activity has slowed in the Southeast, with hesitation generated by pessimistic attitudes and concern with high interest rates. Consumer spending for apparel and new automobiles has been weak; retailers will depend on heavy promotions and markdowns to help clear inventories in what they expect to be an unspectacular holiday season. Producers, too, are aiming at tighter control of stocks. Commercial construction continues to advance, but home building is waning. Many S&Ls have shown reluctance in mortgage lending. Demand for all types of loans remains strong; money market certificates have been an important source of funds at both banks and thrifts. Crop harvests have been very good, but problems linger from the recently ended drought.
Branch directors and their business contacts almost unanimously foresee a slowdown or recession in 1979, a sharp contrast to the expectations prevailing two months ago. High interest rates are now the scapegoat for current and prospective economic ills, replacing inflation as the most frequently mentioned problem. Recession talk appears to have been a major influence on attitudes; many fear that it will become a self-fulfilling prophecy. Still, most contacts anticipate only a mild downturn, if any, and expect their areas to weather it well.
Contacts generally characterize November retail sales as good, especially of luxury and "better" goods, but nearly all noted some weakness in apparel sales due to unseasonably warm weather. Reports are mixed on Christmas sales thus far; expectations are that holiday sales will be even to slightly ahead of last year. Heavy promotions and discounts are expected to continue, evidencing retailers' fears that stocks are on the high side and their pessimism for early 1979 prospects.
New car sales are reported to be down, sharply in some areas, or even with last year at best. Inventories appear to be adequate; dealers blame the slowness on high prices, shrinking sizes, and consumers' uncertainty about the economic outlook. Commercial sales of trucks and cars for rental, however, have been strong, as are sales of late-model used cars.
Manufacturers, influenced by prospects of slower shipments and the rising cost of inventory financing, seem to have tightened their rein on stocks. Although plant utilization is generally high, materials shortages are minor. Complaints of slow deliveries or tight supplies are less frequent than they were two months ago.
Commercial and industrial construction generally remains strong, with more on tap. In-migration of industry from outside the region continues at a steady pace; Georgia-Pacific's relocation of headquarters to Atlanta was noteworthy among last month's announcements. Several areas, however, report that rising costs, particularly of power and money, have resulted in some slowdown.
While final demand for new homes continues fairly strong in all but the highest price ranges, housing construction is suffering the impact of high interest rates, tight money, and wariness of prospects. Speculative building has virtually ceased in all but the most active markets (south Florida); S&Ls have moved to restrict construction loans; lot sales are meeting resistance in some areas; and planned projects are being delayed.
Supplies of mortgage money appear somewhat strained. S&Ls' sales of money market certificates have been strong, but, overall, net inflows have been weak to moderate. From throughout the District, we hear reports of S&Ls, both large and small, suspending or limiting commitments. However, many of these are rebuilding liquidity by investing in banks' large CDs, anticipating higher mortgage rates (especially in states where the legislature is expected to consider raising the usury ceiling next month). Some are requiring larger downpayments; others are pushing up interest rates and/or points as usury ceilings permit. Conventional rates range from 9 5/8 to 10 3/4 percent, points from 2 to 4 1/2 percent. In states where rates have reached usury ceilings, there is some evidence that borrowers are switching from conventional to government-insured loans. Still, several directors report no problems with availability of mortgage funds in their areas; in fact, many of the District's large associations have been aggressively seeking new commitments.
Bank lending has accelerated in recent weeks. Except in Tennessee, where national and state banks' rates are limited to one point above the discount rate, most of the District's larger banks are posting an 11 1/2-percent prime rate. One director noted that banks in his area had become more selective and had raised interest rates in their consumer installment lending. At banks as at S&Ls, sales of money market certificates have been heavy despite their costs and there have been substantial outflows from passbook savings. ATS has found few takers, and those are largely customers who normally maintain high deposit balances.
Rains have improved pasture conditions somewhat, but pasture growth is likely to be slow enough to delay feeding of stocker cattle to full weight; one agricultural expert sees temperatures as the key to cattle prices in the next few weeks. The recent downtrend in milk production should continue, as hold-over effects of the summer weather depress output per cow and high cattle prices promote extensive culling of dairy herds. Florida's citrus growers are disturbed by competition from Brazilian imports; year-end carryover is likely to be large enough to press prices down from recent near-record levels. However, the lengthy drought has made citrus crops more susceptible to freeze damage.