January 2, 1980
Business conditions in the Fourth District continue to be relatively strong, except for the slump in the automotive industry and housing. Steel production and shipments have weakened while aluminum orders and production have held up relatively well. Orders and shipments in capital goods industries, except for trucks, remain strong, but appliance production continues to decline gradually from its spring peak. Retail sales during the holiday season appear better than expected. Retailers, however, are bearish over sales prospects next quarter. Most officials believe that inventories are currently about in line with sales and few are adjusting inventories because of higher interest rates. Bankers report that C&I loans are expanding very slowly and consumer loans have slackened in recent weeks. The real estate market has virtually dried up because of a lack of demand rather than a lack of mortgage credit.
The steel and aluminum industries have experienced a sharp contraction in auto-related orders but only steel producers report low operating rates. Steel shipments have weakened and backlogs have been nearly depleted, according to a steel official. A steel economist reports that steel production over the next three months is not expected to change much from this quarter, but seasonally adjusted, production will decline as the steel industry feels the impact of the fuel-related auto slump and as steel customers cut back inventories. Support for aluminum orders has come from above normal demand from the can industry and exports, which more than offset the drop in auto orders. Strength in aluminum orders may be partly related to a hedge against an expected price increase in January and a possible strike next May when the existing labor contract expires. Aluminum shipments are expected to decline slightly over the next three months, and about 7% in 1980 because of the expected economic slowdown.
Capital goods producers of industrial and electrical equipment report a continued high level of incoming business and some capacity constraints. An official with an industrial equipment firm states that new orders remain strong, especially because of auto-retooling commitments, and that backlogs are expected to remain firm, at least for the near-term. A machine tool economist reports that orders have continued very strong in recent months, although domestic orders in current dollars are off slightly from the September peak. Machine tool backlogs are currently at 18 months and could reach 24 months, as orders press against capacity. An economist for an electrical equipment producer states that orders for motors and telecommunications equipment are still rising faster than shipments because of limited capacity, although orders from small distributors have slowed because of high borrowing costs.
Consumer goods producers, excluding automotive, report a slight decline in durable-goods orders, but a leveling of nondurable goods orders. A supplier to appliance producers states that backlogs are strong. Appliance-related orders are holding steady and are not expected to drop as sharply as auto-related orders. An economist for an appliance manufacturer reports that orders did not increase in October from year-ago levels, but are not yet showing signs of declining. However, substantial reductions in auto production schedules have contributed to a cutback in tire production. Production of new-car tires is down 12% this year, while replacement tire output has held steady, according to a tire official.
Department store officials and other retailers report that holiday season sales are better than expected, although in some cases "real" sales are apparently off from a year-ago. Many explanations are given for the reported increase in November retail sales, including an extra shopping week after Thanksgiving and a "last-gasp" of consumers who are taking advantage of month-long sales promotions.. However, several officials are skeptical over a November sales increase, and are unable to corroborate the reported increase from their own experience. Most department store officials expect weakness in retail sales after Christmas, followed by a very slow recovery.
Inventories at the producer and retail level are generally regarded as being in balance, even where sales have weakened. Exceptions include automotive and steel inventories. Steel inventories being depleted because of ample availability of steel since automotive customers cut back orders. Several retailers state that inventories are in line with current sales, but continued strength in sales during the last two weeks of the holiday season is needed to avoid an inventory problem. Although the high cost of financing inventories has been a factor in controlling inventories, several respondents note that the cost effect has been mitigated by some product prices rising faster than interest rates and by contract provisions that protect a manufacturer with lengthy delivery times from rising interest rates. Nevertheless, the high financing costs for inventories, along with weak sales, have contributed to several auto-dealer closings in the District and could, according to one banker, begin to affect smaller retail stores if interest rates remain high.
Bankers report that C&I loans have been edging up slightly in recent weeks, but consumer loans were off in November. High cost of borrowing, rather than lack of availability, has discouraged many businesses and consumers from applying for loans. Banks have generally become more cautious in making loans. A bank economist reports that speculative loan applications, especially broker and collateral loans, are being rejected and low-margin loans are being reduced to shift funds to more profitable centers. Some banks report greater reliance on borrowed funds, such as money market certificates and repurchase agreements, because core deposits have been very weak.
Mortgage demand is weaker than normal for this time of the year, although lenders typically report that mortgage funds are available. Credit terms tightened following October 6 policy changes, but an S&L economist states that mortgage market conditions have not tightened further in recent weeks and may soon show signs of a little easing. High interest rates and sizable monthly financing costs are said to inhibit loan applications. An FHLB economist in this District reports that S&Ls have cut back borrowing from year-ago levels, even though deposits have not grown. Housing prices have stabilized, and according to a major realty association, prices are now virtually unchanged from a year-ago. They nevertheless expect a rise in prices by next summer. In Pennsylvania, usury ceilings, although recently adjusted upward again, continue to hamper lending by some S&Ls. One official believes S&Ls are facing an intense squeeze on profit margins that will result in a step-up in merger activity in 1980.