January 31, 1979
Our latest survey of Fifth District business conditions turns up several signs of a softening of activity over the past few weeks. Manufacturers report weakness in new orders and reductions in backlogs of orders along with some further inventory accumulation. Shipments continue at former levels, however, and inventories, in general, remain at or near desired levels. Increases in prices other than employee compensation have been somewhat less widespread recently than in previous months. Credit conditions in the District seem to reflect generally comfortable liquidity positions at commercial banks and an overall easing in the demand for loans due mainly to weakness in business credit demand. Demand in the consumer and construction areas remains firm.
Manufacturers responding to this month's survey indicated little or no change in total shipments, but noted some weakness in new orders. Nearly one-third of the respondents noted month-to-month declines in the volume of new orders. There was also some working down of backlogs of orders over the month. Further accumulation of inventories occurred during January, but the breadth of this development was limited, particularly as to stocks of finished goods, and concern over excessive inventories diminished somewhat. Our survey results further suggest that there were some scattered reductions in employment and in length of workweek during the past few weeks. A substantial majority of all respondents continue to view both current plant and equipment capacity and current expansion plans as appropriate.
Despite the apparent weakening in the level of activity in recent weeks, the broadly based pessimism we have discerned lately seems to have diminished somewhat since our last survey. The consensus outlook for the level of activity at the national and local levels remains basically negative. Nonetheless, pessimism is now less widespread than formerly and the outlook with regard to individual firms has turned positive. On the inflation front, price increases continue to dominate the picture but to a much lesser extent than in other recent survey periods.
In the financial sector, commercial and industrial loans have not been as strong as expected, even after taking normal seasonal weakness into account. This pause in lending appears to be widely distributed across type of industry and size of firm and also cuts across regional lines. Bankers interpret the weakness as being due to conservative inventory policies, especially among retailers, and to strong fourth quarter profits. Bankers also suggest that their customers are becoming more cautious about capital spending. Growth of loans to individuals for personal expenditures has been robust. There is a noticeable change in emphasis on the part of consumers away from installment contracts and toward revolving credits, and big ticket items are being charged on credit cards to an increasing degree.
Construction loan demand is strong, and banks are generally willing to continue providing funds for building projects. There is no sign of weakness in the construction industry when viewed from the lenders' perspective. Contacts with District S&L's, however, indicate tighter lending terms are having a depressing effect on residential mortgage loan demand. Nonetheless, pockets of undiminished strength in mortgage loan demand do exist.
With a generally good crop year and higher farm product prices—especially for livestock—in 1978, farm income levels rose and the financial position of Fifth District farmers in general improved. With this improvement, bankers responding to our fourth quarter survey of farm credit conditions noted that loan repayment rates were much better than a year earlier and requests for renewals or extensions of existing loans were down sharply. Farmers' demand for bank credit remained fairly strong but showed less strength than a year ago. Bank supplies of farm loan funds continued at the reduced levels of the second and third quarters and were considerably lower than in the fourth quarter of 1977. Bank interest rates on farm loans rose sharply. Moreover, better than one-tenth of the respondents, the same as in the two immediately preceding quarters, indicated that they had been forced to refuse or reduce a farm loan because of a shortage of funds.