January 31, 1979
Overall, the Eighth District economy continues to advance at a modest rate. While retail sales through the Christmas season were generally strong, January sales are reported to be sluggish, possibly reflecting unfavorable weather conditions. Manufacturing activity continues to make advances in a number of industries, such as capital goods and chemicals, but has leveled off for some consumer goods, particularly those closely related to housing. Inventories throughout the marketing sector are reported to be "lean". Overall loan demand continues to increase, but some bankers commented on some recent weakness in business loan demand, and some savings and loan associations noted greater-than-seasonal declines in mortgage demand in recent weeks.
Retail sales during the Christmas and post-Christmas season were reported to be quite good and, in some cases, gains were greater than had been expected by retailers. This optimistic picture changed in January to one termed as sluggish by representatives of department stores and automobile dealers. Retailers, however, are generally attributing slower January sales to bad weather.
Many businessmen expect a slowing down in economic activity sometime this year, although opinions differ about its severity and timing of the slowdown. Consequently, businessmen continue to closely watch their inventories, and, in general, to maintain them at low levels relative to current sales. Automobile dealers in the northern portion of the District, however, report that inventories are somewhat "heavy" because of the January slowdown in sales.
Manufacturing activity has been mixed in recent weeks. The capital goods sector continues to register gains in orders, but a weakening in sales has occurred in consumer products, particularly those related to the housing industry. Producers of such capital goods as industrial motors, aircraft, metal products, welding and cutting equipment, and lubrication equipment report continued increases in orders and, in some cases, large backlogs of orders. A representative of the aircraft and defense industry in the St. Louis area reported a surge of new orders for commercial aircraft last year as well as prospects for increased military spending.
Among industries producing consumer products, appliance manufacturing activity is reported to have leveled off in late 1978 and is continuing unchanged in early 1979. Representatives of two major appliance manufacturers noted larger unit sales in 1978 than in 1977, but expect consumer spending to decline this year. One noted that his firm had already begun to prepare for a decline by reducing both the work force and inventories.
Homebuilders report a sharp decline in buyers actively looking for homes and in sales volume since mid-December. Although home sales normally decline during this time of year, the current decline is more severe than in the previous two years. Several builders and mortgage lenders anticipate a sizable decline in the demand for new homes based on higher interest rates, continued sharp increases in home prices, and difficulties in obtaining credit in some states due to usury ceilings. Builders report that backlogs of orders have been substantially reduced from a year ago. Hence, if home sales do not resume a strong upward pace this spring, cuts in construction will be necessary. Construction of apartments is reported to be quite low except for government-subsidized projects. Although apartment rents are reported to be rising substantially, the increases in rent have not been enough to encourage greater building of multi-family rental properties due to rapidly rising construction costs.
Overall, loan demand at commercial banks continues to advance. Consumer demand for credit continues to increase, but demand for commercial and industrial loans is reported to have slackened in recent weeks. Agricultural loan demand is at a seasonal low and repayments have improved from a year ago, reflecting substantially higher farm income last year. Interest rate ceilings in several District states are having some impact on credit markets. For example, lending institutions have virtually stopped making low down payment mortgage loans, and loan applications are screened with greater care. In Missouri, which has a 10 percent usury ceiling on mortgage rates, several laws have been introduced in the legislature to increase the usury ceilings. One official at a large St. Louis savings and loan association warned that they would be forced to quit making new mortgage loans by this summer if the usury ceiling was not increased.