May 12, 1982
Overview
Economic activity in most sectors slackened further in
April and early May, according to District reports. Consumer
spending was generally lackluster although automobile sales picked
up in a few Districts. The weakness in manufacturing became more
pervasive, spreading to energy-related and high technology fields.
Layoffs did not appear to slow, and capital spending continued to
decline. New residential construction remained depressed, but some
very modest improvements were noted in a few local housing markets.
In the agricultural sector, liquidations and bankruptcies rose as
farm incomes and land values continued to fall. Consumer borrowing
was sluggish although commercial lending varied somewhat among
Districts. In contrast to last month, none of the District reports
expressed any optimism that a turnaround was at hand.
Consumer Spending
Retail sales were lackluster in most areas of the
country although automobile sales picked up in a few Districts.
Despite the general weakness among department stores, merchants in
Boston, Philadelphia and Dallas experienced moderate gains in their
overall sales. In many Districts, increased reliance on markdowns
and promotional activity spurred lagging sales but put considerable
pressure on profit margins. Only retailers in Cleveland, St. Louis
and Kansas City reported excessive inventories. As for automobile
sales, strong response to rebates and special financing plans was
noted in St. Louis and Minneapolis but such measures did little to
stimulate sales in San Francisco.
Manufacturing Activity
Throughout most of the country, conditions
worsened in the manufacturing sector, with weakness spreading even
to industries which had been weathering the recession well. In many
Districts, already distressed industries deteriorated further,
including steel, machine tools, building materials, and textiles.
The weakness spread to other, previously strong industries which had
bolstered the economies of several Districts. Conditions softened in
such high technology industries as computers and telecommunications
equipment, according to the Boston, Atlanta, and Minneapolis
reports. Orders for oil production equipment dropped sharply in
Dallas, Atlanta, and Chicago. Cutbacks in state and local government
dampened purchases by the public sector. Layoffs and reduced hours
were widespread, and many Districts reported several plant
shutdowns, both temporary and permanent. Capital spending was being
postponed or canceled. Inventories were generally lean, although
manufacturers in Richmond still viewed stocks as excessive.
Construction
New residential construction was uniformly described
as depressed, although modest improvements were noted in a few local
housing markets. Demand for luxury cooperative apartments remained
high in Manhattan and housing sales showed some strength in other
parts of New York City. In Dallas, housing sales and new starts
regained year-ago levels, but the slight upturn in new housing
starts in San Francisco—February had marked a post-World War II
low—was offset by further declines in the sales of new homes.
Creative financing was cited as providing some support to sales in a
number of Districts. In the nonresidential sector, construction
activity remained strong in a few urban centers, but San Francisco
reported the cancellations of several commercial projects. Some
softening was evident in New York's previously buoyant office rental
market.
Agriculture
Conditions in the agricultural sector remain generally
grim, especially in the Midwest and California. In California, heavy
rains impeded the Spring plantings, according to the San Francisco
report. With crop prices having fallen to low levels, crop farmers
throughout the country are caught in a squeeze of high interest
charges and low income. As a result, land prices have fallen
sharply, and farmers have had difficulty in paying their bills. Farm
foreclosures and bankruptcies have increased sharply. Livestock
producers, however, have benefited from the recent rise in livestock
prices which, in combination with the low crop prices, have widened
their profit margins. Nevertheless, the generally bleak conditions
in agriculture have strained the solvency of such related businesses
as farm machinery, seed and fertilizer sales, and elevator
operations according to reports from Cleveland and Minneapolis.
Finance
Consumer borrowing was generally weak, while commercial
lending varied somewhat among Districts. In Philadelphia, business
borrowing was slightly ahead of last year, but bankers expected loan
demand to soften. Slackening in the energy sector had divergent
effects on loan demand, increasing lending activity in Dallas and
decreasing it in Kansas City. Flat loan demand was reported in
Cleveland, St. Louis, and Minneapolis. San Francisco banks
experienced a sharp rise in problem and delinquent loans as
bankruptcies increased among forest products; and construction
industries and small firms in general.
Outlook
In contrast to last month none of the District reports
expressed any optimism that a turnaround was at hand. Instead,
conditions appear to have worsened and forecasts of a recovery have
been postponed until later in the year. Economists in Boston felt an
upturn, albeit an "anemic" or "modest" one, would begin in the
second half of the year despite deteriorating conditions in April
and early May. Among manufacturers, some were looking for a pickup
in business activity within the next six months, while others were
less sanguine. Retailers, too, were divided with some expecting an
upturn to follow the July tax cut while others, such as those in
Richmond and in Kansas City, did not see any imminent upturn in
sales.
As for the price outlook, there was little feel for whether the recent slowdown was cyclical or permanent. In Chicago, price discounting is more common than at any time since the l930s and is especially prevalent in steel, nonferrous metals, building materials, paper, and transportation, though a large surge in these prices is anticipated with recovery. Similarly, in Kansas City, prices for new materials were down between 5 and 18 percent from last year but are expected to be stable or rise slightly for the rest of the year. Wage settlements not far below those of a year ago were reported by several Districts. For example some Chicago firms in depressed industries recently negotiated contracts calling for 8 to 10 percent first year wage increases.