March 14, 1979
Manufacturing activity in the Fifth District seems to have resumed its expansionary course during the past month. Responses to our monthly survey suggest recent gains in shipments, new orders, and backlogs of orders. Inventories were reported up slightly but still manageable. Retailers apparently experienced little change in either total sales or relative sales of big ticket items over the month. Widespread price increases continue to be reported in all sectors surveyed, although respondents appear to be somewhat less pessimistic about the future than they were earlier in the winter. Recent indications are that credit demand in the District has weakened over the past several weeks. Business loan demand continues sluggish, but in addition there has been a moderation in mortgage loan demand and a weaker pattern of demand for consumer credit.
Responses from manufacturers suggest a widespread pickup in activity since the last survey period. One-third of the manufacturers surveyed report increased shipments over the past month and nearly as many report gains in new orders and in order backlogs. There was also some further inventory accumulation among responding firms, but little change in stocks relative to desired levels. Manufacturing employment was unchanged over the month as was the average workweek. Respondents generally feel that current plant and equipment capacity and current expansion plans are adequate, but there is some scattered sentiment for enlarging existing capacity.
Activity in the retail sector was essentially flat over the past month as retailers reported little or no change in total sales or in relative sales of big ticket items. Inventories were also little changed and remain basically in line with desired levels. Employment among retailers appears to have declined in February.
Among both manufacturers and retailers price increases have continued widespread in recent weeks. In fact, the incidence of increases, particularly of prices paid, has itself increased recently. The problem of inflation remains very much in mind among our survey respondents and directors. In fact, each of our directors surveyed expects the CPI to rise by more than the Administration's forecast of 7.4% during 1979. Otherwise, however, business sentiment appears to have improved since early winter. Manufacturers surveyed are, on balance, much less pessimistic now than at that time. Nonetheless, nearly half of them expect the level of business activity nationally to worsen over the next six months. But only about one-third expect similar results in their respective market areas and only about one in five expects output in his own firm to decline over that time period. Retailers generally expect no change or perhaps a slight improvement in conditions in their firms and market areas, but they too anticipate some weakening at the national level.
Area financial institutions have the liquidity to accommodate more loan demand than has materialized. Commercial and industrial lending continues to follow the pattern of weakness that bankers unexpectedly began to face early in the year. Half of the respondents to our recent survey of bank lending practices report weaker business loan demand over the past few months, and little change is expected in the near term. Some District banks have responded to this soft demand by easing the nonprice terms of lending on commercial loans. There is greater willingness to make fixed rate loans, both short- and long-term. In addition, there is some evidence of moderate concessions being made on compensating balance requirements to stimulate usage of commitments and lines of credit.
Real estate mortgage lending has been somewhat weak, although it is difficult to determine the extent of the influence of bad weather on this development. A number of area mortgage lenders recently lowered interest rates charged on home mortgages in an effort to stimulate demand, but this appears to have been a very temporary response. Rates have come up again, at least partly because the cost of funds does not permit sustained reductions. Money market certificates have, on net, helped District financial institutions meet the demand for mortgage funds, in the opinion of the region's lenders. One consequence is that home building activity in local markets will not suffer sharp declines in 1979, according to our bank directors. In several localities 1979 is expected to be as good a year as 1978 in terms of residential construction. Consumer lending has been flat for several weeks, a development that is in line with the thinking of a number of bankers who expect moderating growth in such credit.