May 13, 1981
Overview
Economic activity remained mixed in April, according to
the District reports. Sales at retail stores were up sharply in many
areas. Manufacturing activity, however, was uneven although there
were more positive signs this month than last. Loan demand generally
was weak despite scattered strength in some sectors and in some
geographic areas. While residential construction continued to be
severely depressed, in a few Districts several large commercial and
industrial projects were underway. Recent rains relieved drought
conditions in many areas of the country, but Richmond, Atlanta, and
Minneapolis still reported insufficient soil moisture. Economists
boosted their forecasts for real GNP growth to the 2-3 percent
range, but high interest rates were still anticipated. There is
little evidence that expectations for inflation have been altered.
Consumer Spending
Retail sales picked up sharply in April in many
areas of the country although Boston, St. Louis and Atlanta were
exceptions to this pattern. In several Districts this degree of
selling strength was unexpected; Chicago reported its best increase
in years. Although "big ticket" items continued weak in Philadelphia
and Kansas City, they contributed significantly to sales growth in
Richmond. Inventories were not a problem. In contrast to the marked
improvement of retail store sales, the demand for automobiles
decreased in most Districts after rebate promotions ended.
Nevertheless, Minneapolis and Richmond experienced modest recoveries
after the post-rebate decline, and New York indicated some strength
for foreign and high-priced domestic models. In Dallas some
improvement in automobile sales was expected this month as the
removal of state usury ceilings could make more loan money
available.
Manufacturing
While manufacturing activity continued to vary
considerably from District to District and from industry to
industry, a few new signs of strength have emerged. Cleveland,
Richmond and Dallas reported growth in specific sectors; shipments
in New York still were strong despite decreases in new orders.
Energy-related industries continued to be a source of strength, and
most steel plants were operating near capacity, with the exception
of those supplying automobile manufacturers. However, overall
activity in most Districts was generally flat, and levels remained
especially depressed in Boston and Chicago. Further, demand for
manufactured products by Japan and European countries was down in
some areas, in part a result of the strong dollar and the slowdown
in Europe.
Construction
Residential construction continued sluggish as a
result of high interest rates. Kansas City reported that mortgage
interest rates varied between 14 3/4 and 17 percent; several other
Districts reported rates in the neighborhood of 16 percent. Housing
starts weakened in Dallas and Chicago. Only Atlanta reported that
homebuilding rebounded in March and April and even this recovery was
attributed to mistaken expectations of lower interest rates.
Philadelphia and Richmond indicated some pockets of residential
demand, but housing construction generally remained at low levels.
In contrast to the weakness in the residential sector, Richmond, St.
Louis, and Dallas reported strong nonresidential construction
activity, each with large commercial and industrial projects
boosting activity. Chicago's boom in downtown office construction,
however, was believed to have peaked.
Financial Developments
Loan demand in most Districts continued to
languish in April. Consumer loans were generally weak; Philadelphia
reported levels 16 percent below last year. In Chicago there was no
evidence that the recent easing of variable rate mortgage
regulations had any significant effect on the home loan market. Loan
demand remained depressed in Minneapolis with banks there reporting
increases in federal funds sales. Commercial and industrial loan
activity, however, was strong in Kansas City for energy-related
activities and was strengthened in Dallas by attempts to borrow in
advance of the raising of the state's usury ceilings. In San
Francisco, financial institutions were coping with volatile interest
rates by making almost all loans on a variable rate basis.
Agriculture
Further rainfall has ended soil moisture problems in
several Districts, but Richmond, Atlanta and Minneapolis still need
more rain in some areas. In Minneapolis, agricultural prices are
rising, but still lie below last year's levels. Given current price
levels farmers will have trouble repaying loans according to the
Kansas City and Dallas reports. San Francisco projects a
continuation of ample food supplies that will provide low prices for
consumers.
Outlook
The generally strong showing in the first quarter has
prompted economists to boost their estimates for real GNP growth in
1981 to the 2-3 percent range. Some weakening is anticipated in
the second quarter, but growth is expected to resume by the end of
the year. High interest rates have led some to fear further setbacks
to housing demand, deferment of capital spending, and trimming of
inventories. However, manufacturers in New York, Philadelphia, and
Richmond anticipate improvement in coming months. Although there are
reports of some abatement of inflation, there is little evidence
that expectations have changed. The impact of the United Mine
Workers strike so far has been limited to railroads. Utilities in
the Atlanta area reportedly hold large stockpiles, but those near
Philadelphia have only a 60-day supply of coal.