December 13, 1978
Business activity in the Fifth District in November seems to have held on to most of the gains of recent months, but apparently made only meager further advances. In the manufacturing sector new orders continued to move ahead but gains were spotty. Backlogs of orders and inventories were down slightly from a month ago. Retailers report little change in total sales over the month, but suggest that relative sales of big ticket items weakened. Price increases continue widespread in all sectors and the business outlook remains largely negative. Year-end credit conditions in the District appear to be moderately tight, with rates on loans rising and nonprice lending terms tightening. Liquidity is good at regional banks, and thrift institutions continue to rely heavily on funds raised through 6-month money market certificates. Loans at District banks are off seasonally but bankers consider loan demand generally to be moderately strong.
Our latest survey of District manufacturers indicates continued expansion of activity during November although this expansion narrowed markedly from recent months' experience. On balance, shipments and new orders rose, but the incidence of declining activity at individual firms or establishments also increased. Backlogs of orders were unchanged to slightly lower overall. Inventories, despite scattered reductions, apparently rose relative to desired levels. Employment and weekly hours worked were basically unchanged at those manufacturers surveyed. Over 25 percent of our respondents now view current inventory levels as excessive. Current plant and equipment capacity is essentially in line with desired levels, and there is almost no sentiment among respondents for altering current expansion plans.
Much the same picture emerges from the results of our survey of retailers. District retailers surveyed report little or no change in total sales during the month, but some noted a decline in relative sales of big ticket items. Retail inventories rose somewhat from October, but remain essentially in line with desired levels. Retail employment also rose in our latest survey period.
Retailers and manufacturers continue to report widespread price increases. Respondents' expectations remain broadly pessimistic. A majority of manufacturers surveyed expect the level of business activity nationally and in their respective market areas to decline over the next six months. In addition, 40 percent expect the level of production in their own firms to worsen over that period. Retailers generally share these expectations, but as a group are somewhat less negative about the outlook for their respective market areas and firms. A large majority of the Richmond Directors feels that there is at least a 50-50 chance of a recession developing in 1979.
Business lending in the District is seasonally depressed with substantial rundowns in loans to commodity dealers and the wholesale trade sector. Nonetheless, there is a general expectation that demand for commercial and industrial loans over the next three months will equal or possibly exceed its recent cyclical strength. Nonprice terms on loans to businesses have tightened of late, taking the form of firmer compensating balance requirements and limits on approvals of lines of credit to new customers. Also, fixed rate loans are harder to come by. Uncertainty about the real estate outlook has made banks less willing to make construction loans to builders, especially for multi-family projects. Installment lending to consumers is healthy, although not as strong as in previous months.
Liquidity at most District banks seems ample. Regional banks are experiencing strong trend growth in private demand deposits and growth in small time deposits seems to be holding up fairly well. Deposit growth at regional thrifts has virtually halted except for 6-month money market deposits. It does not appear that ATS services offered by regional commercial banks are drawing funds away from thrift institutions.
Bumper harvests are in prospect for most District field crops except cotton and peanuts. Farmers' cash income from farm marketings continued to improve through August, with some improvement over a year ago beginning to show up in crop receipts as well as in receipts from livestock. Further gains in cash receipts appear likely as the large crops are harvested and sold. Farmers' gross returns from the 1978 flue-cured tobacco crop, most of which was sold after the month of August, were at a record level some 26 percent above a year ago.