April 15, 1980
Economic activity has weakened across the country according to this month's Redbook reports. There is, however, considerable variation in the degree of softening; some districts do not see an actual downturn, only fewer and fewer areas of strength, while others, particularly Chicago, see a pervasive weakness. Retail sales are increasing in nominal terms but not as rapidly as prices; big ticket items have been disproportionately affected by the decline in real demand. Auto sales have slumped with the ending of rebate programs. Signs of weakness are also beginning to appear in the manufacturing sector. Overall production is still holding up in most districts but new orders have fallen off. Manufacturers supplying the automobile and construction industries are cutting back production and several districts report substantial layoffs. Both manufacturers and retailers are thought to be watching inventories closely, although recent developments have induced further trimming in some areas. Residential construction is said to be at a standstill. Mortgage lending has fallen sharply; financial institutions are reluctant to lend and customers are reluctant to borrow at interest rates of 16 and 17 percent. Commercial and industrial loan demand remains strong. There has been an abrupt deterioration in farm incomes.
Almost every district has seen a softening in retail sales. San Francisco is the exception reporting firm to brisk activity. Department store sales are down across the country in real, if not always nominal, terms. Big ticket items requiring financing are said to account for a disproportionate share of the decline according to Richmond, Atlanta, Kansas City, and Dallas. Despite the real decline retail inventories are generally thought to be under control. Richmond, however, reports that a majority of their retailing respondents now feel stocks are too high. Domestic auto sales are continuing to decline. Cleveland and Atlanta attribute some of the weakness to the end of rebate programs. New York, Chicago, and Dallas report that the combined effects of weak sales and the record costs of carrying inventories are causing auto dealerships to close.
Residential construction is very weak. Several districts describe the level of activity as at "a standstill." Boston, Dallas, and San Francisco report an increase in the number of homebuilders declaring bankruptcy. However, Minneapolis finds that nonresidential construction is an important source of strength.
Reports on manufacturing activity are highly varied. Weakness in construction and sales of domestic autos is now forcing production cutbacks in related manufacturing industries. Atlanta and San Francisco report substantial cutbacks and layoffs at sawmills, plywood manufacturers, and brick makers; Chicago and San Francisco have seen a decline in the demand for construction equipment associated with residential construction. According to Chicago and St. Louis, layoffs have increased again at the four major automakers and suppliers of brakes, auto bodies, and tires. Boston also reports further cutbacks in the tire industry. On the other hand, demand continues to be strong for commercial aircraft (Chicago, St. Louis, and San Francisco), certain types of electric and electronic equipment (Chicago, St. Louis, and San Francisco), and machine tools (New York and Chicago).
Manufacturing inventories are believed to be satisfactory in most districts, although Philadelphia and Richmond report that manufacturers would like to cut back further. Chicago cautions that inventories which look conservative as long as sales hold up are excessive when demand declines. High interest rates are inducing businesses to rethink capital spending plans, according to New York, Cleveland, and Atlanta. However, Richmond finds no sentiment for reducing expansion plans and Philadelphia reports that capital expenditures are expected to be somewhat higher in six months. Boston and St. Louis observe that the demand for capital goods remains strong.
Farm incomes have deteriorated. All districts with large agricultural sectors report that increases in energy costs and interest rates coupled with low commodity prices have seriously cut into farm earnings. Kansas City and Dallas report that bankers in their districts are concerned about farmers' ability to repay loans. Farmers are trying to reduce borrowing by delaying purchases of equipment and reducing livestock inventories.
There appears to have been a general slowdown in the growth in loan demand. The volume of mortgage lending is very low. Several districts report that a number of financial institutions are temporarily withdrawing from the mortgage markets; at the same time consumers are resisting current high rates. Cleveland, Atlanta, Chicago and St. Louis report mortgage rates around 16-17 percent. Other consumer lending has also weakened. Again this reflects both demand and supply factors; banks are trying to limit consumer lending in response to the credit restraint program and low profit rates on consumer lending. However, respondents in Philadelphia and Cleveland believe that consumers were already reducing their borrowing. On the other hand, the demand for commercial and industrial loans remains strong in many districts. Dallas and Kansas City report that banks in their areas may have difficulty staying under the 9 percent ceiling on credit growth.