January 31, 1979
A surge in consumer spending seems to have improved businessmen's attitudes and brought retail inventories under better control, but activity in most other sectors has been waning. Both loans and deposits have grown slowly. The easing of housing markets continues, and recent nonresidential construction news has been less upbeat. Current and prospective job growth is lackluster. Industrial output levels are generally holding strong, with perhaps some increase in stocks. Agricultural prices remain on an uptrend.
A late December spurt in consumer spending allowed merchants throughout the District to equal or exceed 1977's sales records and reduced their inventories almost to desired levels. Since Christmas, markdowns and promotions have been only slightly heavier than usual and sales have continued good. Big-ticket expenditures have been described as growing slowly in some areas; brisk demands for luxury items, home furnishings, and small appliances have been noted in others. Some banks, but few retailers, have noted an upward drift in consumer loan delinquencies, although these have largely proved collectible. One Birmingham banker reported that local credit card sales have fallen below the year-earlier level.
Auto sales reports have been mixed but generally point to weakness in the new car market. Sales of trucks and used cars remain very strong. Auto stocks appear to be relatively light, with dealers complaining loudly about the high cost of inventory financing and floor planning. A few are offering discounts to customers who order from the factory.
The recent unexpected strength in the national economy and the pickup in southeastern consumer spending appear to have ameliorated businessmen's expectations. Many still look for recession later this year but anticipate it to be mild and consider the economy in good shape to weather it. Most believe that their own areas or businesses will fare better through any slowdown than will the nation as a whole. Retailers are less anxious about prospects than they were in early December but remain among the most pessimistic respondents. Bankers, too, look to 1979 with caution; the fast food industry is expecting real trouble from rising beef prices, wages and utility costs, and higher unemployment among their teen-aged customers. Contractors hope that home repair business can take up the slack left by a housing slowdown.
Bank lending has turned unexpectedly sluggish; tightening of loan terms and credit standards has been widespread across loan types, lenders, and locations. Deposit growth has been largely confined to money market certificates; at both banks and thrifts, passbook savings inflows have been weak or negative. One director commented on the "amazing speed" of shifts from passbook accounts to six-month certificates. Most S&Ls have felt obliged to continue to offer these at ceiling rates, but a significant amount of these funds are being channeled into the money, rather than housing, markets. Tennessee's financial institutions are facing rather dismal prospects, possibly a state credit crunch, if the legislature fails to liberalize the usury ceiling this year. The majority of our contacts in that state expect the pending bill to pass, however.
With the exceptions of south Florida, northeast Tennessee, and some spots along the Gulf coast, all areas of the District have now noted some slowdown in residential construction and real estate sales. While some sources indicate that rising prices and financing costs have reduced housing demand, others claim that the availability of money is the effective restraint, with mortgage applications still rising. Unsold stocks are reported to be low, albeit increasing in some places. Expectations of a substantial slowdown in 1979 are widespread but not universal—some Florida analysts are counting on continued in-migration to keep residential markets at near-boom activity levels in that state.
Given the heavy backlog of contract work and reports that businesses intend to go ahead with planned capital spending, nonresidential construction should continue to grow moderately through 1979. But the plant announcements of the last few weeks, though steady in number, have been primarily for small- to medium-sized projects. The potential for expansion of office and warehouse facilities may not be realized because of zoning restrictions, stringent financial market conditions, or the failure of rents to keep pace with operating expenses, say realtors in two major cities.
We've seen signs of slower job growth in the latest weeks, including a sizable round of layoffs. In response to a denial of a requested rate increase, Alabama Power has cut its work force but not by as much as it threatened. Ingalls Shipyard continues its gradual, large-scale staff reductions. Retailers anticipate some clerical layoffs with the raising of the minimum wage. However, labor supplies are still characterized as tight in some industries, notably paper and shipping.
Production levels remain high in most nonautomotive manufacturing plants. Steel output is brisk, with a heavy backlog of orders, though there appears to be some inventory overhang in the industry and Jacksonville Port's steel import volume has been strong. A paper plant has announced its closing, but generally, production volume is good; transactions prices are rising but not as rapidly as list. Phosphate producers are reported to stockpiling their products in anticipation of higher prices.
Farm product prices continue to advance, led by beef. Damage to Florida's citrus crops from an early January freeze was mainly confined to leaf burn. Harvesting has been stepped up; the earlier California freeze has boosted demand for the Florida fruit. Support for and participation in the recent tractorcade was rather thin.