May 16, 1979
The latest reports from Red Book contacts have been more downbeat than any in the last two years. The deep South has been troubled by extensive flood damage in addition to the nationwide problems of rapid inflation and dubious energy supplies. Retail sales, which has shown little strength since Christmas, now appears to be declining in real terms. Housing markets continue to weaken, except in Florida, where thin inventories, high prices, and increasing speculation pose potential problems. While banks have enjoyed strong deposit growth and some pick-up in lending, thrifts have realized little or no net inflows since the regulatory changes vis-a-vis money market certificates. The short-term outlook for industrial production, capital spending, and jobs is largely positive despite some weak spots. Inventories seem well in hand with the exception of autos, where stocks are far out of line with demands. The Southeast is weathering the gas cutbacks with a minimum of problems.
Heavy rains and flooding have caused severe damage in several large sections of the District. Estimates are not yet available for many affected areas, but early estimates indicate damages of well over $1 billion in Mississippi, roughly $30 million in Louisiana, at least $60 million in the Nashville area, and several million more in southwest Alabama and south Florida. Federal disaster relief has been made available to most locales, some $600 million thus far in Mississippi alone.
The floods' agricultural impact included damage to farm structures, severe soil erosion in limited areas, some loss of cattle and vegetable crops, deterioration of pastures, and delays in planting. Agricultural experts estimate that pastures will be restored by mid- June and that soybeans will be planted in time to produce normal yields. The delay, however, mandates a shift from cotton to soybeans that may involve as much as 50,000 acres.
Districtwide, consumer spending has been noticeably weaker since March, with year-over-year retail sales gains lagging or barely keeping pace with inflation in most areas. Directors and their contacts in retail trade characterize consumers as increasingly cautious, angry about inflation and beginning to resist price hikes, and worried by the energy outlook. Undoubtedly, however, the bad weather and early Easter have restrained spending in the latest few weeks. Softness has been particularly noted in sales of nondurable goods and automobiles, although demand for small cars (both domestic and imported) continues to boom. While general merchandise stocks remain under control, inventories of large cars are uncomfortably high but short supplies of fuel-efficient models threaten to dampen sales. In the Atlanta area, Ford has added another idle week to its alternate-week schedule at its full-sized model production facility, while area Volkswagen dealers have stopped taking orders for the rest of the model year.
In most parts of the District, residential construction has continued its shallow decline with nearly all work pre-sold. Inventories are universally reported as thin; existing-home sales have held up well. The growing popularity of converting apartments to condos is aggravating a shortage of rental housing. Observers attribute the slowdown to a variety of causes--poor supplies, high home prices, "availability of money," buyers' difficulty in qualifying for loans, a negative economic outlook—but none believe that high interest rates per se are deterring prospective buyers. In flood-stricken areas, contractors are looking to restoration work to help keep up their business volume.
Florida remains the exception in the housing picture; in south Florida especially, market activity continues at record levels. Supply strains are acute there; large companies are complaining that inadequate inventories and dramatic price increases are thwarting relocation efforts and personnel transfers; realtors are knocking on doors and encouraging owners to consider selling. Several Florida directors expressed concern about speculation; besides builders, local "non-realtors" (doctors, lawyers) have gotten into the act. Mortgage credit supplies appear adequate but not plentiful, evidenced by a trend toward larger downpayment requirements and rising mortgage interest rates (now, atypically, above those of other District states).
Deposit inflows to thrifts were quite weak in April, while banks enjoyed strong gains, particularly in demand deposits and money market certificates. Despite an easing of business loan demand at the "large" banks, bank lending has picked up, with brisk increases in real estate and consumer loans. The May 1 raising of Tennessee's usury ceiling from 10 percent to an effective 14.5 percent brought the first of a series of planned gradual interest rate adjustments at most banks; however, the state's largest bank holding company has "frozen" its rates to "small borrowers" at 10.5 percent. So far, Tennessee banks have noticed little change in lending volume or borrower reaction to the higher rates. The state's S&Ls are back in the mortgage lending business after several dormant months, but many refuse to set rates until closing.
Industrial activity remains healthy, for the most part, and quite profitable, by the latest reckoning. Directors report minor deterioration in sales and order backlogs for home-building materials and some types of equipment, but steel-related industries, suppliers to the paper industry, and railcar producers have taken a rash of new orders. Persistent weakness in the coal market has added to Alabama's unemployment rate and created surplus inventories for some of the industry's suppliers. The textile situation remains a mixed bag, with some mills prospering and expanding and others closing. Generally, capital spending and nonresidential construction show steady growth, although many contacts sense some hesitation with regard to projects still in the planning stages. Inventories continue to be held tightly in rein despite isolated incidents of advance buying. Employment prospects are positive in most industries; the shortage of technicians and engineers appears to have worsened.
The gasoline shortage seems to have created more fear than real problems as yet, although most people expect it to get worse. May allocations to distributors and industrial users range from 70 to 95 percent of May 1978 sales (usage), with the mode at 80 percent. Gas stations throughout the District have cut back their hours; weekend closings are troublesome only in central Florida; purchase limits are relatively rare. Atlanta's Hartsfield airport has and expects to maintain ample supplies of aviation fuel. The State of Tennessee has implemented a contingency plan to help make up for shortfalls of supply to farms, businesses, and school systems.
Given the usual seasonal slowdown, tourism appears to have suffered no ill effects from limited gasoline availability in spite of the industry's grave concern. Huge increases in air passenger traffic and faltering recreational vehicle sales may reflect a substitution effect, but hotel occupancy rates, advance bookings at hotels, travel agencies, and cruiselines, attendance at major attractions, and pleasure boat sales continue strong.