Beige Book Report: Richmond
December 1, 1987
Overview
District economic activity rose in some sectors in November and
stayed about even in most others, while optimism about the economic
future generally softened. Manufacturers and department stores
reported increase in activity. Other retail activity and residential
construction were also reported to be generally firm. City bankers
reported loan demand to be even with last month, while agricultural
bankers were optimistic about financial and income prospects for
farmers.
The decline in the stock market has apparently had a significant effect on business expectations, but not on plans for capital spending. Our business and financial contacts are now less optimistic than they were a few weeks ago about prospects for economic growth. Also, a higher percentage now expect inflation to increase. Only a small proportion, however, indicated changes in their capital spending intentions.
Consumer Spending
Most department stores reported that their sales were higher in mid-
November than they were in late October and at this time a year ago.
In general, store managers expect a good Christmas
season.
The combined responses of all kinds of retail establishments indicated that sales have been about flat overall in recent weeks. Several retail executives reported declines in the sale of big- ticket items, and nearly half of the respondents reported increases in their inventories. Retail employment was steady.
Most retailers said the stock market decline had had no effect on their business, although a few thought it had reduced consumer demand somewhat. A small number of retail respondents said their firms had decided to postpone some planned fixed investment.
Manufacturing
District manufacturing activity expanded in early November, although
at a slower pace than earlier this year. Forty percent of the
respondents to our regular mail survey reported increased shipments
in November, as compared with 52 percent who reported increases in
September. The responses also indicated that new orders and
employment grew less rapidly, the workweek increased less, and the
backlog of orders was unchanged. Manufacturers reported somewhat
higher inventories of materials and finished goods.
The prices of raw materials and finished products continued to rise, according to District manufacturers. A small but higher-than-normal percentage of producers reported experiencing shortages of some materials. Perhaps because of these shortages and rising input prices, two-fifths of manufacturers have raised their estimates of inflation in 1988. Only one-sixth have lowered their estimates.
The fraction of manufacturers expecting growth in their firms in the next six months declined from our previous survey. About one-third now believe their shipments and new order will rise, compared with about one-half in the previous survey. Most manufacturers indicated that they plan to reduce their inventories of both materials and finished goods in the next six months.
District manufacturers participating in our survey also appear to have become less optimistic in their outlook for the national economy. Thirty-four percent of the respondents now believe the level of general business activity in the nation will decline in the next six months while 24 percent expect it to increase. In our previous survey of manufacturers, these percentages were 18 and 43, respectively.
Capital Spending
Our survey regularly asks manufacturers about their current and
expected capital spending. This month we included a second question
regarding how the stock market crash had affected their plans.
The distribution of responses to the regular questions showed no change from the two previous surveys. About one-fifth of the manufacturers indicated that they had increased their current capital spending from a month ago, and about three-fourths reported no change. Looking ahead six months, about three of ten producers expect to increase spending, while about two in ten expect to reduce it. It bears repeating that these numbers are virtually identical to those from the previous survey, conducted in late September.
Regarding the second question on the impact of the market crash on spending plans, 80 percent of the respondents indicated that the crash had not affected their plans. However, six percent—all of them producers of durable goods—reported that they had decided to scale back their plans.
Residential Construction
A survey of builders and realtors in the District indicated
generally firm demand for single-family homes over the last few
weeks. Some firms reported that the October stock market decline
decreased customer traffic for a week or two, but others saw no
noticeable effect. Most respondents agreed that recent declines in
mortgage rates have helped stimulate their business.
Agriculture
A mail survey of District agricultural banks indicated increased
optimism about the financial and income prospects for agriculture.
Farmland prices were reported to be higher than in the previous
quarter, and all respondents expect land prices to be stable or to
move higher in the next three months. Respondents said that loan
repayment rates had increased, and over two-thirds of the
agricultural banks indicated that they were actively seeking new
farm loans. Several banks attributed the improved income prospects
for farmers to farm price support programs.
Financial
A survey of District financial institutions indicated that the
demands for commercial, consumer, and home equity loans have not
changed in the last month from previous levels. Opinions about the
outlook for the next six months were mixed, with more than half of
the bankers expecting increased loan activity.
Looking ahead to economic conditions six months from now, most bankers are optimistic that the trade deficit will be lower. However, they expect slower economic growth, higher inflation, and a higher unemployment rate.