April 15, 1980
The economy of the Eighth District has shown signs of deterioration in recent weeks. Most dramatic has been the virtual stoppage of homebuilding. Department store representatives and automobile dealers report reduced sales in real terms. The manufacturing of most capital goods, however, remains relatively strong even though new incoming orders are beginning to slow. Financial institutions, particularly savings and loan associations, are more vulnerable to liquidity pressures because of the fast upward movement of interest rates. Mortgage rates in the St. Louis area are at 15-1/2 to 16-1/2 percent with several points usually required. Few mortgages, however, are being made at these rates as saving and loan associations find that over 50 percent of applicants do not qualify for loans, and that funds can be invested more profitably in short-term money market investments.
Consumer spending has begun to falter. Retail stores continue to post sales gains in current dollars, but after adjustment for inflation, sales volume is reported to be declining. Among items reported to have sluggish sales were shoes, apparel and home furnishings. Even though retail sales are sluggish, retailers report no "excesses" in inventories. Automobile dealers report that March sales were down approximately 25 percent from a year ago.
Overall, manufacturing has declined somewhat in recent weeks as the severe weakness in the automobile and housing industries was translated into reduced demands for a number of manufactured products. The permanent work force at the automobile assembly plants in the St. Louis area has been reduced by 30 percent in the past year, and additional layoffs are scheduled at the St. Louis Chrysler plant. In addition, those not laid off are working only about one-half the time. Manufacturers of automobile brakes, bodies, and tires also report further layoffs. Manufacturing activity has declined in several industries related to home construction and home furnishing. One major appliance manufacturer, with declining sales, reported that sales have held up better than expected. Manufacturing of capital goods generally remains strong-as a result of existing backlogs of orders. Production of aircraft, energy efficient electric motors, railroad and barge equipment remains strong, and carloadings by local railroads have increased in recent weeks. But, some slowing in sales was reported for steel, lubrication equipment, and gas regulators.
Current inventories of most goods are reported to be at desired levels. However, a major chemical manufacturer reported that unwanted inventories are beginning to accumulate in nonagricultural chemicals.
Home sales and home construction have undergone substantial declines relative to a year ago. The St. Louis Homebuilders Association report on a survey of 112 members shows new homes sales and employment down about 60 percent in the first quarter of this year from a year ago. A financial "squeeze" on builders is reported to be particularly severe as interest charges on capital tied up in projects have gone up while cash flow has fallen sharply. In a homebuilders demonstration around this Bank on April 9th, they called for immediate Federal Government action to balance the federal budget, institute a hiring freeze, provide for an eventual 10 percent reduction in staff, and a sunset law.
Financial institutions report lower loan volumes and higher interest rates. Business loan demand has continued to rise but personal loan volume has fallen. Banks report that consumer installment loans are generally unprofitable and delinquencies are beginning to increase. Most thrift institutions have stopped making commitments for mortgage loans, making loans only for other investors and to meet existing commitments. While most financial institutions continue to offer the highest possible rates on CD's, new funds attracted by savings and loan associations primarily are used to purchase Federal funds and large CD's.
In the agricultural sector, farm input costs are reported to be rising very rapidly, up as much as 25 percent from last year with fuel and interest cost posting the largest gains. Bank lenders note that the majority of farmers are obtaining credit, but at higher interest rates. Some farmers, particularly those who are heavily in debt, are reported to be under extreme financial stress.