Beige Book
SUMMARY OF COMMENTARY ON ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
June 1985
TABLE OF CONTENTS
SUMMARY............................................................
First District - Boston...........................................I-1
Second District - New York ...................................... IIThird Distrct - Philadelphia...................................III-1
Fourth District - Cleveland..................................... IV-1
Fifth District - Richmond........................................V-1
Sixth District - Altanta.........................................I-1
Seventh District - Chicago.....................................VII-1
Eighth District - St. Louis....................................VIII-1
Ninth District - Minneapolis....................................IX-1
Tenth District - Kansas City.....................................X-1
Eleventh District - Dallas......................................XI-1
Twelfth District - San Francisco...............................XII-1
SUMMARY*
The pace of economic activity in all Districts seems to be slowing
across most sectors.
Retail sales generally continue to sag yet inventory
levels appear satisfactory and the outlook remains optimistic.
An important
exception is auto sales which are strong in most areas and the strength is
extending to suppliers.
While primary metals manufacturing is improving in
some areas, manufacturing growth in general seems to be modest or declining.
Residential construction is a source of strength throughout the country, but
signs
of
weakness
construction
exist
is mixed.
in
parts
of
Agricultural
some
districts..
conditions
remain
Non-residential
difficult
almost
everywhere, but financial problems appear concentrated in the Plains states.
Mining and drilling activity is declining throughout the country.
Bank loan
activity is mixed with most growth occurring in the consumer sector.
Consumer Spending
Consumer spending has slowed in recent weeks and continues to vary
widely across the country.
sales
report
Six districts report generally weak sales; strong
are reported by Richmond and St. Louis.
a more
mixed
picture
with
Atlanta and San Francisco
significant
growth
districts but still some sluggishness in certain areas.
in
much
of
their
In general, demand
in the automotive sector appears strong, as a result of lower interest rates
and promotions by manufacturers
and dealers.
Retailers'
inventories were
generally at satisfactory levels, but Chicago, Minneapolis, and Kansas City
report that some actions have been taken to reduce stocks.
Automobile dealers
reported tight inventories, especially for imports, in three midwest Districts.
*Prepared at the Federal Reserve Bank of New York.
The outlook for consumer spending was generally optimistic across
the country; lower interest rates and increased mailings of tax refunds were
Only Dallas mentioned expectations of
commonly expected to boost demand.
further slowing.
Industrial Activity
Manufacturing
activity
seems
to
have
slowed
in
country, but remains varied across districts and industries.
much
of
the
Five districts
reported weak or slowing industrial activity, and four reported stable levels
or
only
modest
The
growth.
only
report
of
sharp
improvement
was
for
The outlook generally is for little change, but Philadelphia and
Missouri.
Cleveland report moderation of growth forecasts, Dallas reports an increase
in optimism,
some observers
and
a slight
in the Eighth District expect
improvement.
Business
for
primary
metals
producers
was
mixed.
Continued
distress for steelmakers was reported in the Cleveland district and in the
Chicago area.
expected.
Minneapolis noted that iron ore processing cutbacks are soon
However, steel and other metals producers report gains
in the
Dallas District as well as in New York, Alabama, and the Detroit area.
Two districts report slowing in high-tech industries.
Boston and
San Francisco both report weakness among semiconductor firms (with signs of
recovery only in Arizona), attributed to weak domestic demand.
New England computer manufacturers was mixed.
have benefitted
from that industry's
Boston and Chicago.
Business for
Suppliers to the auto industry
strength, according to
reports from
Energy-related producers in three districts report slack
demand.
There
were
several
competition and the strong
steelmakers
(Cleveland),
reports
dollar.
of
hardship
caused
by
import
Reports of adverse impacts come from
manufacturers
of
home
appliances
and
capital
equipment
industry
(Chicago),
paper
(San Francisco),
producers
and
apparel
(Atlanta and
and
Dallas),
textiles
firms
the
lumber
(Richmond and
Atlanta).
Construction and Real Estate
Construction
activity varied greatly
across
the United States.
Residential construction has been proceeding at an exceptionally rapid pace
according to New York, Boston, Minneapolis, and Richmond; but Atlanta, St.
Louis
and
Kansas
City
report
some
areas
with
significant
weakness.
Non-residential construction slowed in the New York and St. Louis districts,
and Cleveland indicates that no new construction contracts are expected for
the next few years due to recent overbuilding.
In contrast, absorption is
"strong
"vigorous"
as
ever"
in Atlanta.
The market was
in
the
Chicago
district but observers believe a glut may develop next year when a great deal
of
space
comes
on
line.
Industrial- construction
has
been
increasing
according to reports from Richmond.
Agriculture and Mining
Weak prices across commodities continue to compound the difficult
Dairy prices and output are weakening largely
conditions in the farm sector.
due to reduced federal support.
St. Louis, Dallas, and San Francisco report
attempts to reduce inventory in livestock.
Good weather and early planting
using full acreage should yield large harvests in the autumn in most areas
except
South Dakota and Montana, where dry conditions
This may put additional price pressure on farmers.
currently prevail.
Vegetable, fruit, and
poultry producers in the Mid-Atlantic and the West coast, however, seem to
face a much better outlook than others.
Most natural
resource industries
seem
to be hard hit.
Dallas
notes a continued slide in the number of drilling rigs, primarily due to
declining petroleum prices.
Richmond and San Francisco report employment
declines in mining.
Minneapolis contacts, however, observe a boom in the
wood products industry as a result of strong construction activity.
Forest
fires in the Sixth District have created tremendous, and largely uninsured,
timber losses.
Finance
Despite the sluggishness of retail spending, growth in total loans
seems to be sustained primarily by consumer lending.
St. Louis, for example,
reports a retail lending increase of more than 30 percent over last year.
Chicago notes, however, that the rapid rise in consumer credit is accompanied
by a rising deliquency rate.
For the most part, real estate lending remains
strong, while weakness in commercial lending seems widespread and Dallas has
even been experiencing a decline in business loan volume.
Only Philadelphia
and San Francisco report continued strength.
Financial pressures in agriculture seem to remain concentrated in
the Plains states.
Kansas City reports that agricultural bank closings have
shut many farmers out of the credit markets due in part to higher credit
standards of
the remaining banks.
Chicago adds that pressures seem to be
increasing on the cooperative Farm Credit System.
FIRST DISTRICT - BOSTON
Economic activity in the First District remains sluggish.
This
sluggishness is particularly apparent in the manufacturing sector, where
high technology companies continue to announce layoffs and furloughs.
Firms in more traditional manufacturing industries report that employment
is trending downward in response to fairly flat order rates; but, for most,
layoffs are not required.
Inventory-to-sales ratios are said to be higher
than desired but coming down.
The experience of the retail sector is more
mixed, with some contacts enjoying strong sales increases and others seeing
a slowing in growth.
Retailers remain optimistic about the rest of the
year and are currently ordering winter merchandise based on this optimism.
Increases in both industrial and retail prices remain very moderate.
In
contrast to the sluggishness of the manufacturing sector and the confusing
signals from retailing, the real estate market is booming.
Retail
Retail results continue to be mixed in the First District.
Several
retailers enjoyed a strong performance in May; others reported some
softening in sales growth.
On both sides of the performance scale,
however, retailers with national affiliations felt First District results
were at least as strong as those of their affiliates elsewhere.
Merchants with "upscale" customers appear to be faring somewhat
better than discount stores, although the difference is not great.
Several
contacts mentioned especially strong sales of video-related merchandise,
computers, and VCRs.
Toys and women's apparel are also performing well.
Inventories are higher than last year in several cases, but are not
a source of concern among the merchants contacted.
In one case,
inventories are high because sales did not meet expectations; another
supplier, however, has intentionally increased inventories faster than
sales so as to improve customer service.
Firms are currently ordering merchandise for next winter's holiday
season and are building into those orders expectations for a good sales
season - as good or better than year-over-year growth to date.
A
contributing factor, according to one contact, is that interest rate
declines have reduced the costs of carrying this merchandise.
Prices are
Fall prices for one merchant, for example, will be only 2 1/2
steady.
percent higher than last fall.
Manufacturing
A number of First District high technology companies have announced
layoffs and furloughs in the past two months.
Layoffs have been especially
prevalent among manufacturers of semiconductor test and production
equipment; most of these layoffs have been fairly small, affecting a couple
of hundred people each.
The largest individual layoffs have been at
computer companies; in one case, 1,000 workers in the First District have
been dismissed.
However, the employment situation in the computer industry
appears to be more varied than for firms selling to the semiconductor
industry:
some computer companies have avoided layoffs but are shrinking
staff through attrition; others are still hiring.
A slowing in domestic
orders is said to be the primary reason for the high tech companies'
difficulties.
The effect of the slowdown has been magnified by the rapid
expansion that preceded it; during this expansion firms added to capacity
and built up staff in anticipation of continued rapid growth.
Despite
current difficulties, however, the high tech firms contacted are not
curtailing their capital spending plans; these expenditures are seen as
necessary to bring out new products and remain cost competitive.
Firms in more traditional manufacturing industries report only
small changes in aggregate order rates.
Although one contact reported that
overall business was down and would require layoffs, most manufacturing
respondents have seen order decreases in some divisions offset by gains in
others.
Sales to the auto industry are good.
products are mixed.
Sales of housing related
Sales of capital goods depend very much on the
condition of the customer's industry, but appear to be holding steady
overall.
As in the case of high tech companies, traditional manufacturers
have not changed their capital spending plans.
For the firms contacted,
planned expenditures are about the same as or less than expenditures in
1984; however, spending in 1984 is said to have been unusually high.
The
emphasis in capital spending is on increasing productivity rather than
adding to capacity.
In particular, there seems to be little need for
additional floor space; according to one respondent, today's machinery is
much more compact for the same power and value.
Inventory-to-sales ratios are a little higher than desired but
coming down.
Industrial prices remain very well behaved.
All respondents
report that price increases for materials and supplies continue to be very
modest; several commented that they are encountering greater resistance to
increases in their own prices.
Real Estate
The real estate market is booming, especially in the Boston area.
Realtors report a low number of listings while demand, said to be fueled by
declining mortgage interest rates, is running very high.
report that it is a "sellers" market.
Many realtors
They expect this situation to
continue in the near future and intensify if mortgage interest rates
decline further.
New residential construction centers on condominium developments
and higher-priced homes.
Realtors report that very few moderately priced
housing units are being constructed.
continuing at a rapid pace.
Also, condominium conversions are
II-1
SECOND DISTRICT--NEW YORK
Activity in most sectors of the Second District economy slowed in
recent weeks.
Sluggishness of consumer spending has continued for the last
few months, although many stores in the area were still doing somewhat better
than
for the nation as a whole.
conditions
than did earlier
Fewer firms reported improving business
in the year.
Commercial
real estate brokers
indicated growing concern that their "boom" may be over.
A major bright spot
was in residential construction, where homebuilders reported the best market
conditions
in years.
On the financial side, consumer loan rates began to
decline, reflecting the trend in general market interest rates.
Consumer Spending
The pace of consumer spending in the Second District continued to
slow over
the
last
two months.
Although
several
reported that
retailers
business in the metropolitan area was slightly better than in other parts of
the nation, gains over 1984 averaged only about 2 percent for April and 4
percent
for
May.
Sales
for
some
expectations by significant margins.
merchants
continued
to
fall
short
of
Nevertheless, inventories were generally
close to planned levels, and promotions continued at a normal pace with few
special
price
markdowns.
One
department
store
chain,
however,
reported
especially weak sales even with extensive promotions, and was returning some
unsold summer merchandise to suppliers.
Business Activity
The erratic business expansion seems to have slowed recently in the
District.
stable
While the majority of purchasing agents still reported improved or
business conditions,
fewer firms
reported improvements
in May.
In
II-2
Buffalo, moreover, more firms indicated that new orders had fallen.
with
moderation
this
economic
of
activity,
firms
been
have
In line
undertaking
inventory reductions in recent weeks.
Major
however,
capital
investment
projects
continued
to
be
announced,
including two joint ventures involving foreign investors.
and Westinghouse will
retool
and restaff an Elmira plant
Toshiba
(which had been
closed for nine years) to produce TV tubes and computer display screens.
In
addition,
to
the
government of
Yugoslavia
will
participate
in a project
convert part of Bethlehem Steel's abandoned Lackawana plant to an aluminum
mill.
These undertakings would
add
several hundred jobs
to areas
facing
persistently high unemployment rates.
Other large projects recently begun or announced in the District
include the construction of a new shopping mall and the expansion of two
existing
ones
in
Niagara
County,
as
well
as a new financial
center and
corporate headquarters in downtown Albany.
Construction and Real Estate
Residential
and suppliers
construction activity remained robust,
the best market
reporting
conditions
with builders
in many years.
Lower
mortgage rates have added an additional stimulus in recent weeks, according to
Home prices have risen above year-earlier levels, sharply in
our contacts.
some areas.
and
The outlook for the rest of the year is for continued strength,
some homebuilders
remained scarce
delayed.
already
in some areas,
Observers
are
optimistic
about
1986.
Skilled
and some construction schedules
in various parts
of
the District also
labor
have been
reported price
increases for developed lots, lumber, or other materials.
The New York City government has proposed major zoning revisions to
reduce
the
construction
costs
for
apartment
houses.
The
changes
could
II-3
encourage the construction of up to 5,000 new units annually, at 25 percent
below current costs, according to the City's estimates.
Real estate brokers are becoming concerned that the "boom" in the
region's office market may be over.
Availability rates remain very high, over
20 percent in some areas, yet net absorption is not increasing.
The outlook
is uncertain, with the strength of commercial construction depending on the
performance of the general economy in the coming months.
Our contacts also expressed uncertainty regarding the impact of the
President's
tax proposals.
attractive
investment,
Most
especially
agreed
to
that
small
real
estate would
investors
and
be
a
less
syndications.
A
slower pace of investment could depress property values, at least in the short
run, but one observer was optimistic about the longer-term stimulus of the tax
plan.
Some brokers also believed that investment in Manhattan and Long Island
might be discouraged to some extent by the elimination of state and local tax
deductibility.
Fairfield County (Connecticut) and northern New Jersey might
derive some relative benefit.
Financial Developments
Consumer
levels,
reflecting
lending
the
rates began
downward
trend
to
recede
in
market
from
their recent high
interest
rates.
Some
commercial banks in the District already have cut consumer rates, and our
contacts all agreed
narrow soon.
that the spread between consumer and market rates will
Auto loan rates appeared to have fallen the most sharply, and
bankers expect this downward trend to continue.
fallen
only
further.
In
expected to
slightly
contrast,
fall
and
remain
credit
very
card
in the near future.
Rates on personal loans have
high, but
rates
have
are
not
expected
declined
to
and
decline
are
not
Bankers attributed the reluctance to
lower finance charges to high operating costs.
III-1
THIRD DISTRICT - PHILADELPHIA
Economic conditions in the Third District are mixed..Manufacturing activity
is basically
are flat and, for some major stores, below expectations for
this
and consumer loan volume at area banks in June is greater than it was
time
last
year,
but
the
rate
of
increase
some
the
at
this
is slowing. Mortgage lending is
increasing rapidly, reflecting increased real estate sales.
sector,
of
time
Both commercial
The financial and real estate sectors are more positive.
year.
Retail sales
in June for the third consecutive month.
unchanged
In the agricultural
area farmers are under financial pressure, but overall conditions
appear to be better than in other parts of the nation.
On balance, the outlook for the Third
than
it
was
a
few months ago, is still positive.
percent of the industrial establishments
Outlook
Survey
District
improvement
anticipate
the
weaker
In manufacturing, about 40
participating
over
although
economy,
next
in
the
six
June
Business
months.
Retail
merchants expect a slight improvement in sales between now and the start of
holiday
shopping
season,
despite the present slowdown.
slower but sustainable growth in commercial lending
growth
of
consumer
and
the
Area bankers forecast
a
slackening
credit from its rapid pace earlier this year.
in the
Real estate
sales and mortgage lending are expected to accelerate as long as interest
rates
do not rise.
MANUFACTURING
Manufacturing
activity
in the Third District remains generally stable in
June for the third month in a row, according to the most recent Business Outlook
III-2
Survey.
Seventy
percent of this month's survey respondents say there has been
no change from May in their rate of operations; however, the portion reporting a
decline
(18
percent)
exceeded the portion indicating an increase (11 percent)
for the first time since September 1982.
same
as
in
May,
but
new
The rate of shipments in June was
orders dropped marginally, pulling down producers'
backlogs and delivery times. Although workforces were reduced
the
industrial
plants
the
surveyed
in
June,
at
one-fifth
of
most survey respondents said their
employment was stable.
In reply to questions about general business activity during
the
year,
40
percent
rest
of
of the June survey respondents said they expect present
conditions to persist, more than one-third look for improvement,
quarter
the
expect further deterioration.
capital investment is growing dimmer.
and
nearly
a
The outlook for increased employment and
The portion of
manufacturers
scheduling
increases in expenditures on new plant and equipment fell to 20 percent of those
participating in the survey this month, the lowest level yet this year.
change
Little
in factory employment is likely in the near future. Less than 20 percent
of the June survey respondents plan increases in either payrolls or
the
length
of the workweek over the next six months.
RETAIL
Retail sales have been flat in the Third District over the past two months.
Local merchants say there has been no increase in sales in either
compared
last year.
to
April.
May
or
June
Sales volume is also unchanged compared to the same period
Sales of home goods and higher priced items have
been
particularly
weak.
Cautiously
optimistic
short-term outlook.
For the
is the
months
term
store managers use to describe their
remaining
until
the
Christmas
shopping
III-3
season,
retail
sales are generally expected to post gains of 5 percent or more
above year-earlier periods, with the most optimistic retailer forecasting
percent
Lower
increase.
rates
interest
and
a
10
faster pace of income tax
the
refunds are cited as factors tending to boost consumer spending.
FINANCE
Borrowing in the Third District remains
consumer
loans
up
substantially
from
a
strong,
year
with
ago.
both
automobile
loans
accounting
for
most
of
the
and
Consumer loan volume is
approximately 25-30 percent higher than it was in June 1984,
and
business
with
credit
card
increase. Commercial and
industrial loan volume at Third District banks in early June is approximately 17
percent
higher
it was twelve months ago. Business borrowing is likely to
than
ease off in coming months, however; many borrowers have
their
balance
funds.
sheets
recently
and
Lending officers see economic
summer,
been
able
to
improve
are likely to have less need for borrowed
growth
tapering
off
further
over
the
resulting in year-over-year increases of about 10 percent in commercial
loan volume.
Mortgage lenders report large increases in the demand for housing
in
recent
weeks,
with
year at commercial banks.
receiving
one-third
more
outstanding mortgage volume up 14-20 percent from last
A major thrift institution in the Third
mortgage
applications
this
reports the dollar volume of new mortgages made this April
greater
than
that in April 1984.
the
major
is
than last, and
spring
to
District
be
three
times
The average rate on conventional, fixed-rate
30-year mortgages is 12 percent in mid-June.
be
finance
Falling mortgage rates
appear
to
force behind the boom in housing demand, offsetting any downward
pressure stemming from concern over the effect of proposed tax
cost of home ownership.
changes
on
the
III-4
Third District banks lowered their prime rate to 9.5 percent on June 18.
Some local bank economists feel interest rates in general will drop further
in the short-run, but they expect higher interest rates later in the year.
The consensus of their forecasts is a prime rate of 11 percent by December,
federal funds above 8 percent, and Treasury bills and bonds at about 8 and 11
percent, respectively.
Consumer loan
rates are expected to fall
in the
immediate future and then parallel the movement of other rates.
AGRICULTURE
The financial and market conditions of the Third District agricultural
sector are not as critical as in other areas of the country.
Farms in the
Third District are not as highly leveraged as farms elsewhere, and farmland
prices have not declined substantially.
Dairy farming is the weakest of the District's agricultural industries,
as the end of the federal diversion program and reduction of the milk price
support have contributed to lower dairy prices and incomes.
farm products face better markets.
Other important
Poultry sales are expected to increase
during the rest of the year, with prices remaining stable.
Income from fruit
and vegetable products in the region this year should meet or exceed the
level of last year if prices hold at current levels.
IV-1
FOURTH DISTRICT - CLEVELAND
The
pattern
of
economic
activity
little since the last Beigebook.
although
manufacturing
continue
to
sell
beginning
to
production
remains
Firms
steel.
expansion.
while
recover
from
flat,
Fourth
unchanged.
ticket
weak
sales
with
Multi-family
was
big
output
emphasis
continue
the
District
has
changed
District employment rose slightly in May,
employment
well,
in
on
residential
Cars
store
department
in
strong
and
automobiles
remains
are
Manufacturing
and
cost-cutting modernization
construction
goods
hardgoods
mid-spring.
in
soft
weak
rather
volatile
in
than
because
of tax law uncertainty while office construction is being reduced because of
excess
space.
Business
loan
demand
has
been
flat
while
real
estate
and
consumer installment loan demand has been good.
Labor Market Conditions.
Ohio's unemployment rate fell from 9.0% sa to 7.7%
sa
in May.
A slight
rise in employment was accompanied by a large drop in the labor force, which
is
a
phenomenon
analysts
agree
not
with
witnessed
the
in
direction
Pockets of high unemployment
ten
but
years
not
of
with
data.
the
in the District in many
Therefore,
magnitude
some
reported.
cases are attributable
to continuing weakness in mining and agriculture.
Retail Sales.
Fourth
District retailers
report
mention brief periods of weakness
Dealers
continue
to
have
continued
sales
in early May.
problems
stocking
growth,
Car sales
popular
although most
remain strong.
domestic
models
and
IV-2
report
no
difficult
excess
time
inventories.
obtaining
Import
cars.
Some
dealers
dealers
have
feel
had
an
the market
more competitive, but most think little additional discounting
some
Although
consumers
purchased
sales
to
cars
as
continue
long
in
April
and
as
rates
in
is becoming
is
May
that recently ended,
interest rates
because of below-market
strong
new
especially
specifically
dealers
do
general
possible.
not
expect
rise
and
personal income does not falter.
In
contrast
to
big-ticket
items
mid-April.
These items
may be
to
due
dealers,
auto
like
the
furniture
and
stores
appliances
report
have
that
been
sales
weak
of
tax
exceedingly
refunds.
well
and
Apparel
sellers
and
other
expect
continued
to
continue.
Retailers are optimistic about the rest of 1985.
soft
this
to
recover
some
of
their
margins
lost
to
this
goods
trend
to
Inventories are
at desired levels and most stores do not expect to cut prices further.
hope
of
since
are beginning to recover and retailers believe
arrival
move
department
earlier
They
discounting by
a
continued drop in their costs for some goods.
Manufacturing and Investment.
A survey of manufacturing firms
increasing
slightly
1984
Surveys
little
but
by
a
substantially
of manufacturing
change
than in
the
first
indicates new orders are
quarter but
Planned capital spending in 1985 exceeds
being decreased.
in
faster
in the midwest
firms
smaller
in
margin
than
the Cincinnati
in production, new orders
and
in
inventories are
the amount spent
the March
Cleveland
and inventories.
The
survey.
areas
show
consensus of
the three surveys is that prices paid and received are changing very little.
Manufacturers
their
capital
expansion of
of automobiles and automobile and truck parts report
that
rather
than
spending
capacity.
is
almost
Even when
entirely
a
new
for
plant
modernization
is
built
it
is
usually
to
IV-3
replace an old, inefficient plant.
One manufacturer of truck parts reports
that orders are being stretched out but not cancelled.
The firm's cash flow
is weakening, so the firm may cut back its spending on plant and equipment.
Despite a sharp increase in imports, an auto producer will not cut prices
because it is operating at full capacity.
distress.
Prices
remain soft,
Major steel producers continue in
imports high, and profits
low or negative.
Most major steel producers are reducing their costs but the benefits seem to
go into lower prices rather than higher profit margins.
Housing and Construction.
Housing
market
participants
expect
a
moderate
rebound
in
activity in this District during the second and third quarters.
housing
As a result
of a substantial recovery in listings and closings, realtors have cancelled
previous plans to scale down operations.
Although builders expect at least
to minimize
a two-quarter housing rebound, they have positioned themselves
downside risk and thus will forego potential profits if the housing reversal
is
or
stronger
optimistic
Builders
longer
than realtors
expect
Mortgage
than
anticipated.
about
the duration and
volatility
in
multi-family
lenders
strength of
housing
to
are
the
less
rebound.
continue
in
this
District until there is less uncertainty over tax-reform legislation.
Office construction in the District's major cities has been robust since
1980, resulting in an oversupply of office space.
District's
major
cities
are
currently
Consequently, all of this
experiencing
a
substantial
downtrending or complete stoppage in new contracts for office construction,
which is expected to persist over the next three to
speaking,
the
office
construction
market
is
best
four years.
Generally
characterized
as
an
"orderly buyers' market," inasmuch as prices are being discounted 10% to 20%
but suppliers are not panicky.
IV-4
Commercial Banking.
District
banks
demand
registering
has
commercial
demand
and
loan
been
a
has
slight
flat,
been
for real
mixed
decline
and
into
with
loan
outstandings
the
past
month.
over
contacts
industrial credit
and
contacts
demand
anticipate
the
Summer.
estate and consumer installment
expect
consumer
loan
demand
to
continued
On
at
large
Business
softness
the other hand,
loan
for
the
loans has been quite good,
remain
particularly with lower and falling interest rates.
relatively
strong,
FIFTH DISTRICT - RICHMOND
Two distinct pictures
time.
emerge
economy
Most areas and sectors are offering very upbeat reports.
generally rising, and in many
levels.
housing
Such reports
sectors, and
cases,
come from
manufacturing
the service sector.
sector,
this
Activity is
sector,
the
construction and
On the other hand,
the manu-
are giving off very negative signals.
in particular,
production, and employment.
at
from already record or near record
the retail
facturing and agricultural sectors
The
from the District
is
reporting
declining
sales,
Manufacturers continue to cite foreign competi-
tion as a major factor in the current situation, and quite a few are apparently
relying more
heavily on
offshore production
themselves,
either by
moving production facilities or by importing parts or materials.
In ag-
riculture, recent rain has ameliorated difficulties in some areas, but crop
outlooks remain less than satisfactory.
Manufacturing
Once again, as
slowed.
earlier in the
activity has
Our respondents report declines in shipments, new orders, and order
backlogs during the past several weeks.
ment has
year, manufacturing
fallen in most
reduced workweeks.
areas,
In addition, manufacturing employ-
and several
industries
are
generally on
Most indications are that while these conditions may be
concentrated in the textile, apparel, and furniture industries, they are by
no means peculiar to those segments of manufacturing.
very
few, if
any, industry groups actually showing
There appear to be
growth at
this time,
V-2
although several related to commercial and residential construction activity
remain above year earlier levels of activity.
Coal production remains slightly below the record levels of last
year, but is still quite strong.
not
holding
up
so
well.
Mining employment, on the other hand, is
During
April
coal mining
employment
in West
Virginia was more than 5 percent below the year earlier level.
Consumer Activity
Consumer
manufacturing.
activity in
the District
appears
quite
different
from
Sales are strong and rising very nearly across the board.
Non-durables, durables, automobiles, and services are all doing well in most
areas.
Despite the general perception of strong sales, automobile dealers
are aggressively promoting attractive
also an area of
financing arrangements.
Tourism is
strength, although some areas report slight declines from
the extraordinary levels of activity a year ago.
Tourist activity, in fact,
is prompting quite a bit of development activity in several tourist oriented
areas of the District.
Housing and Construction
Construction
activity
in
the
District
remains
almost
uniformly
strong, with both residential and commercial building contributing heavily.
Also, there is little indication that any slowing of activity is in prospect.
Most industry observers and participants expect continued buoyancy in
construction activity and adequate absorption of new space.
Housing sales
are generally robust, and are even reported to be breaking records in some
areas.
There are even pockets
of strength in industrial
type building,
V-3
particularly around industrial and office parks where new facilities make up
most or all of the activity.
Financial Sector
District
financial
institutions
strong growth in loan demand.
slightly,
since
although
are
still reporting moderate
to
Business loan demand is rated as flat to up
business
needs
are
perceived as having quite a bit of cash on hand.
expanding,
businesses
are
Consumer demand for credit
is generally strong, and mortgage credit, of course, reflects the strength
of the residential real estate market.
The financial institutions seem able
to continue financing this loan growth, since deposit growth is also holding
up very well.
The Outlook
The
activity.
outlook around the District
reflects the state
of business
Manufacturers, as a group, do not expect to see any improvement
in business activity over the next six months or so, although few envision
any further actual deterioration of the economy.
outlook is much more positive.
In most other sectors the
Clearly, there is some uncertainty stemming
from the debate on taxes, but there appears to be general agreement that
business investment will continue on a strong upward path for at least the
rest of the year.
Plans for construction activity and purchases of produc-
ers' goods are largely in place, and there does not seem to be any general
tendency to cancel or otherwise reduce planned investment.
Consumer confi-
dence remains strong, as job and income growth continue despite the lull in
manufacturing activity.
VI-1
SIXTH DISTRICT - ATLANTA
Indications have surfaced that southeastern economic activity has begun to
slow but areas of strength still outweigh weaker sectors.
Labor markets have shown
little overall employment growth. Conditions have not improved for the region's import
sensitive industries such as textiles and apparel where employment rolls continue to
shrink.
Consumer spending has been strong for seasonal goods and the outlook for new
car sales is positive.
Real estate activity has been diverse in recent months with real
estate loan growth strengthening in parts of the region.
strong.
Commerical building remains
However, total loan growth has begun to weaken at the region's large banks.
Tourism is lackluster in some areas and the summer outlook is mixed. Despite continuing
financial stress in agriculture, little acreage is being idled this year.
Employment and Industry.
Labor market conditions have basically remained
unchanged from the last reporting period with the District unemployment rate hovering
around 8 percent.
A notable exception was that Alabama's unemployment rate moved
to the single digit range for the first time since June of 1981.
Alabama's recent employment growth is mainly attributable to job recalls
in the steel industry and a booming construction sector.
up over seven percent from last year.
Construction employment is
Shipbuilding has revived in the state; new
defense related contracts portend still more job growth in the sector.
Imports continue to batter the region's textile and apparel industry.
In
Georgia alone, textile and apparel employment is down by 9,000 workers from a year
ago.
Spokesmen for the forest products industry note that market prices are stable
and builders are buying.
paper mills.
The strong dollar has slowed exports of the region's pulp and
Foreign imports have impacted coated paper products and new orders for
packaging material have contracted resulting in excessive inventory accumulations.
VI-2
The chemical industry is producing at a constant level, however, industry
officials note a recent softening of product prices.
Uncertainty about the terms of
the new federal tax policy has held down oil and gas drilling activity in Louisiana.
Consumer Spending.
reported sales growth
Retailers in Alabama, Florida, Georgia and Tennessee
through May
comparable period a year ago.
to be up approximately
10 percent over the
Retailers in Mississippi reported mixed sales activity
while Louisiana reported activity below its year-ago level.
Strong sales of seasonal
goods such as summer apparel, home furnishings and gardening supplies were reported
throughout the region.
The outlook for car and truck sales remains bright in most parts of the
region.
Manufacturers' incentive programs aimed at both consumers and dealers also
have been instrumental in boosting sales activity.
Financial and Construction.
Housing markets in the Southeast have been
mixed, in contrast to the fairly consistent growth of only six months ago.
While the
Atlanta and Nashville markets may have been stimulated by the continued decline in
mortgage rates, New Orleans, and Baton Rouge markets remain depressed.
A factor
favoring residential activity has been the intense rate competition between local
mortgage lenders.
apparent.
Miami's housing market has been slowing down and overbuilding is
New home prices in parts of the metropolitan area have been declining.
The condominium market continues to look bleak, with unsold inventory at an all-time
high of around 13,000 units.
Jacksonville,
Fort Lauderdale,
upswing in nonresidential building activity.
and Nashville
are experiencing a further
VI-3
The Atlanta office space absorption
figures are keeping up with their
corresponding levels of a year ago, and demand is seen to be as strong as ever.
Rents
are rising in most markets despite falling occupancy rates, reflecting expectations of
continued strong demand.
Large banks in the district have reported weakening growth in total loans
for the past four consecutive months, relative to the same months of last year. Business
lending, which showed virtually no increase from April to May, contributed significantly
to the moderating growth of total lending.
Real estate lending, the strongest component of total loan growth,
is
responsible for much of the expansion of total loans from April to May.
Tourism.
Conditions in the tourist industry are mixed.
Most major vacation
destinations appear to be faring well, but other locations more dependent on local
visitors have experienced little or no growth, especially in areas where local economic
conditions are weak.
Lodging tax receipts for April showed healthy increases.
Attraction attendance has also shown disparate signs.
State and national
parks report excellent visitations thus far and, along with some private mountain
attractions and resorts, are expecting healthy growth this summer.
However, attraction
attendance to date in Florida has been lackluster.
Agriculture. Abnormally dry spring weather in Florida has resulted in almost
150,000 acres of woodland being destroyed by fire.
Most forests were uninsured and
the loss to owners will amount to several million dollars.
Despite earlier concerns
about farmers obtaining operating credit, reports throughout the District indicate little
acreage is being idled.
Various farm lenders have noted no substantive increases in
rejections of farm loan applications.
VII-1
SEVENTH DISTRICT--CHICAGO
[Summary]-Observers of economic developments in the Seventh District generally view the
current situation and outlook with caution. No recession is anticipated, but neither does an
upturn appear in prospect from the sluggish overall trend, and weakening manufacturing sector,
of recent months. Construction of office buildings and stores, rehabilitation of older
structures, and highway and bridge work continue vigorous. Residential sales and building are
rising in response to lower mortgage interest rates. Auto and truck sales are at high levels,
and a large rise in auto output over last year is planned for the third quarter. Major home
appliance sales are at record levels, but the recent rise is centered in microwave ovens, many
imported. Other areas of consumer spending for goods have flattened or declined. Consumer
debt levels are high, and delinquencies are up significantly for some lenders. Manufacturing
jobs in the Seventh District have declined since January, adjusted for seasonal patterns.
Employers trying to force down labor costs in air transport, auto production, trucking, and
food retailing have been met with work stoppages and costly litigation. Most District capital
goods producers have experienced only limited recovery, at best, from reduced operating rates
of 1982. Some lines, including heavy construction equipment, railcars, and farm machinery,
have remained at very low levels, with numerous plant closings. Steel orders are rising,
chiefly due to auto industry buying, but demand and pricing remain short of satisfactory
levels, and vigorous cost cutting continues. The recent weakening in personal computers and
semiconductors has had relatively little impact in this region. Continued declines in
agricultural commodity prices have added to strains on farmers, suppliers, and rural
communities. Strains on farm lenders apparently have also intensified. Business executives
are studying and commenting on the Administration's tax reform plan, with mixed reactions.
Tax Plan Reaction. Most District executives recognize the merits of the Administration's
goal of simplifing the federal income tax system and reducing marginal rates. However,
VII-2
equipment producers strongly oppose elimination of the investment tax credit, and many are
concerned about the effect on future cash flow of tighter depreciation rules and "recapture" of
so-called windfalls from past accelerated depreciation.
Builders decry the proposal to end tax
credits on renovations of older commercial structures, which have been accounting for a
substantial share of current construction activity. There is also concern over the proposed
requirement that equipment and buildings must be in service on January 1, 1986, to qualify for
existing incentives. However, many believe that the abrupt cutoff will be modified to permit a
more gradual transition. Home builders will strongly oppose elimination of deductibility on
personal returns of state and local taxes and interest on second homes. Attitudes of state and
local governments on deductibility of taxes are mixed. In Illinois, there is sentiment that
existing rules comprise a subsidy to other states with heavier taxes. Despite these
apprehensions, the proposed tax legislation does not play a large role in projections of demand
or profits for the remainder of 1985.
Import Competition. Heavy import competition, attributable largely to the strong dollar
and lower labor costs abroad, is gradually squeezing down manufacturing activity in the
District in a broad variety of industries. It is widely believed that the growth of imports is
understated because of lags in "documentation" at ports of entry. Meanwhile, more and more
operations are being shifted abroad--to Europe, Latin America (especially Mexico), and the Far
East. Examples include electrical apparatus, auto parts, household appliances, and farm and
construction equipment. Pressures to seek lower costs abroad are so strong that changes in tax
laws, or even significant weakening of the dollar, are unlikely to arrest the trend.
Capital Goods. Seventh District capital equipment producers continue to be battered by
the strong dollar. A more sluggish domestic economy apparently also has cut growth of capital
spending plans and reduced orders. Demand is generally weak for various types of heavy capital
equipment. Railcar orders are down from very low levels last year.
Motor Vehicles. Sales of cars and trucks continued strong through May, helped by cut-rate
VII-3
financing, dealer incentive programs, and easing of shortages. However, inventories of some
models are still tight. Planned third quarter auto production would be highest for the quarter
since 1977, and 16 percent above year ago. Truck sales in May were highest ever for the month.
Sales of medium and heavy trucks are expected to rise 3-5 percent in 1985, with only small
gains in the second half. Truck trailer orders and shipments have fallen substantially,
following the surge in production of larger and tandem trailers last year in response to
changed Federal regulations. A small Midwestern auto producer has given notice that it plans
to end car production in the U.S. unless labor agrees to sizable concessions.
Steel.
Steel production at Chicago area mills has declined somewhat since spring, but
output has increased in the Detroit area. Third quarter bookings indicate a smaller than
seasonal decline in output, mainly because of auto industry needs. Construction fabricators'
backlogs are rising, especially for bridges and commercial buildings. Demand for steel remains
very weak for heavy industrial projects, oil and gas, and farm and construction equipment.
With continued losses, steel companies are still drastically cutting costs, eliminating
marginal facilities and workers and contracting out additional functions.
Construction. Office and retail construction, renovation, and highway work continue
vigorous in the Chicago area. The market for large blocks of office space in and near the Loop
is tight, but a substantial amount of space is available in smaller blocks. A large volume of
new space will hit the market in Chicago next year and may cause a serious glut. A record
volume of highway contracts will be let by the State of Illinois in June. No shortages of
materials are anticipated.
Mortgage Rates. Lower interest rates are boosting housing sales and construction.
Residential building has strengthened, with midrise suburban rental apartments up strongly,
perhaps in part to "grandfather" current tax treatment. Home resales have also improved.
Fixed-rate 30-year mortgages are being quoted by Chicago area lenders at contract rates as low
as 11.5 percent.
First-year rates on adjustable rate loans are quoted by numerous lenders at
VII-4
rates under 10 percent, with some being offered at 9 percent or less. Lower rates are
encouraging a shift toward fixed-rate loans.
Consumer Spending. Major chain stores in the Seventh District report weaker sales growth
in recent months, for both durables and nondurables. Distribution of delayed tax refunds did
not discernibly boost spending, according to a large retailer. Consumer buying on credit has
been heavy, and delinquencies have been rising. With inventories somewhat heavy, retailers
have been scaling back orders. Total shipments of major home appliances have been at an
all-time high.
Agriculture. Low commodity prices continue to plague District corn and soybean farmers.
Average farm commodity prices fell further in May, to 11 percent below a year earlier and
lowest for the month since 1980. Unexpected weakness in livestock prices has paced the decline
in recent months. Hog prices are down 14 percent from a year ago, in part reflecting large
increases in competing supplies of poultry and escalating imports from Canada. Crop plantings
progressed well ahead of normal. Early plantings usually enhance yield prospects. Without a
large rise in crop exports, not now anticipated, a big harvest would add to stocks and hold
prices at support levels.
Recent developments are reportedly adding to the pressures on the cooperative Farm Credit
System. Stock requirements of several PCAs in Iowa were frozen. In addition, the Omaha FLB
raised its farm mortgage rates 75 basis points. These developments reportedly triggered a
"flight" of good borrowers from PCAs and FLBs to other lenders. In some cases, the flight has
been encouraged by heavy advertising of lower rate loans on the part of competitive lenders.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Most District economic indicators have declined recently.
Retailers, however, reported single-digit sales increases in May over
year-ago levels.
District employment declined slightly in April, though
the unemployment rate remained unchanged.
Both residential and
nonresidential construction contracts declined from the year-ago level in
April.
District respondents expect very little change in business
conditions over the next three months.
Total loan growth at large
District banks has slowed from last year's pace.
growth has outpaced the year-ago growth rate.
Only consumer loan
In the agricultural
sector, the prospect of large harvests has lowered futures prices for
most major crops to new life-of-contract lows.
Outlook
A majority of District respondents surveyed early in the second
quarter expects business conditions to be about the same through
September of this year.
Half of those surveyed expect the real volume of
business to increase slightly, while one fourth of respondents expect no
change.
Prices near current levels over the next three months are
planned by about 60 percent of respondents, while almost 20 percent plan
to raise prices and only 2 percent expect to lower prices.
Survey
respondents also indicate that no work force changes are planned in the
near future.
Most respondents are comfortable with current inventory
levels and plan no change in those levels in the next three to six months.
VIII-2
Consumer Spending
All indications suggest that retail sales in the District have
been fairly good, a condition unchanged since the last report.
Some
District department and discount stores reported sales gains of 5 to 10
percent in May over last year's level.
Employment
Eighth District payroll employment declined at a 3 percent
annualized rate in April, bringing the year-to-date rate of growth to
just over 1 percent.
The District unemployment rate remained unchanged
in April at 7.5 percent despite the small decline in employment.
The
unemployment rate declined slightly in Arkansas and Kentucky while
Missouri's unemployment rate remained unchanged and Tennessee experienced
a small increase.
Business Activity
Business activity in April, as measured by an index of seven
indicators, rose sharply in Missouri at an 11 percent rate.
Arkansas
business activity also increased in April, but only at a 1 percent rate.
The business activity index was 1.5 percent above the year-ago level in
both states in April.
Construction
Total construction contracts in April declined 14 percent from
the April 1984 figure.
Both residential and nonresidential construction
contracts fell from their year-ago levels, at 18 and 7 percent rates,
respectively.
Reports from the District suggest, however, that interest
in new homes and home improvements has increased recently.
VIII-3
Banking and Finance
The most recent bank data indicate a continuation of lending
trends that have been evident since the beginning of this year.
Total
loans at large weekly-reporting District banks grew at a 12 percent
annualized rate (not seasonally adjusted) over the three month period
ending in May.
This is considerably slower than the 24 percent rate of
loan growth for the same period of the previous year.
Slower growth in
both commercial and real estate lending were the most important factors
contributing to the slower overall loan growth.
Commercial loans grew at
a 10 percent pace this year compared to a 15 percent rate last year while
real estate loans grew at only a 5 percent rate as compared to a 17
percent rate over the three month period last year.
Consistent with recent experience, consumer lending has grown
more rapidly over the past 3 months of this year (33 percent) than for
the same period last year (12 percent).
Over the last three months,
however, the month to month growth rates have been declining, suggesting
a slowing in consumer borrowing.
Agriculture
Early planting and timely rains have lowered futures prices for
most major crops to new lows.
With export demand weak, it appears as if
grain, soybean, and cotton prices will stay near current levels unless
yields are below average.
Cattle supplies remain abundant with producers
still attempting to market a large number of overfinished animals.
prices have increased somewhat recently, partially in response to
widening restrictions on the importation of hogs from Canada.
Hog
IX-1
NINTH DISTRICT - MINNEAPOLIS
Mixed signals have recently
Ninth
District
economy.
While
been received
labor
market
from key indicators
conditions
have
improve generally, most of the improvement has been seasonal.
of
the
pace
of
consumer
spending
has
been
noted
is
the
only
resource-related
industry
throughout
reporting
continued
to
Some slackening
although car sales and housing activity rose in some parts.
sector
of the
the
district,
The wood products
good
news,
while bad
news is still the norm for agriculture.
Employment
Labor market conditions have continued to show improvement, although
most
improvement has been seasonal.
unemployment
slight
rate
drop in
employment was
fell
seasonally
less
to
only
in
rate
4.2
April
adjusted
than normal
April's unemployment
sonally
a bit
in
in
the
percent,
The Ninth District's seasonally adjusted
to
just
employment.
under
and teenage
Paul metro area.
dropped a
little
increases
employment
rate to
cent.
last
were
5.1
noted
percent
This April's unemployment
April's,
at
6.4
percent.
stagnation was primarily in
affected
by
a
curtailment
in
South
and the
unemployment there,
Falls MSA's
North Dakota
A Bank
director
energy
production
at
around
10
rate
state's
un-
to 4.4 per-
remained unchanged from
notes
western part,
But
Normal seasonal
dropping the
rate in
the state's
of
Dakota,
Sioux
a
more than sea-
percent, is about as low as in any metro area in the nation.
employment
despite
Also, the increase in April
the Minneapolis-St.
Twin Cities
6 percent,
that
North
Dakota's
which has been adversely
projects.
Bank
directors
IX-2
report that Montana has been suffering from deteriorating conditions in its
agricultural
and
sectors;
resource-related
the
state's
fell
unemployment
between March and April at less than the seasonal norm.
Consumer Spending
Some softening in
the
consumer purchases of general mer-
district's
chandise was noted in May and early June.
One large retailer, noting that its
speculated that some of its normal May
April sales were better than expected,
business may have instead come in April this year.
tailer's year-to-date
sales were
up
By May's end, the re-
10 percent over last year's.
Another
large retailer found that large discounts were the only way to keep business
brisk in May, curbing store profits.
Furthermore, this retailer's inventories
are still high and will have to be brought back in line by more discounts.
Recreational clothing--particularly jogging togs--has been an excellent seller
thanks to the unusually warm weather
in
the district's
population
centers.
Bank directors concur that retail sales are generally flat-to-slowing throughout the district, with the possible exception of eastern South Dakota.
Low-cost financing deals have propped up car sales into June.
large
trucks
domestic
and
have been
manufacturers
cars.
sales--especially
left with
have
Both manufacturers
low current
experienced
Two
inventories
year-to-date
truck sales--in excess of last year's good results.
of
vehicle
Sales
were off in Montana, though, and also slowed in Sioux Falls, South Dakota.
Aided
grown.
by
falling
interest
rates,
housing
activity
generally
has
Sales of Minneapolis homes are up a whopping 31 percent this April,
compared with last April.
members had
A major home builder association reports that its
a record number
of homes
in the planning and building stages.
Apartment construction has also taken off in the Twin Cities metro area, due
to a combination of low interest and vacancy rates as well as to attempts to
IX-3
beat the possible enactment
of federal tax
laws unfavorable to real estate
investment.
Early reports from tourist centers indicate that the pace of tourist
spending--an
important
contributor
to the
district's
economy
above last year's level in several spots in Minnesota.
in
in
summer--is
But tourist spending
North Dakota and Montana has been slowed by the strong U.S.
dollar, which
has kept Canadian visitors away.
Resource-Related Industries
District Bank directors
resource sectors.
all
report mixed conditions across several key
Imports, input substitution, and scrap iron processing have
hurt the iron ore business in northeastern Minnesota.
As a result,
ex-
tended shutdowns in ore processing later this summer have been announced.
Oil
and gas exploration is
cut in
way down in
North Dakota and Montana,
British oil prices boding ill
Indicative of this,
with the recent
for future exploration in
these states.
a Bank director notes that only 30 rigs were operating in
North Dakota last month, compared with 70 in operation a year earlier.
contrast,
sector.
high demand
for housing
and paper
In
is spurring the wood products
A Bank director reports that a new wood-products plant is
opening in
the Upper Peninsula of Michigan.
Agriculture
Bad news continues
to crop up in
Farm prices continue to fall:
percent in
mid-May from its
the district's
The Minnesota farm price index was down 14
level a year earlier.
more precipitously than livestock prices did.
crop
development
in Minnesota
Crop prices
declined even
In Minnesota, the average price
for all milk was the lowest in almost five years.
aided
agriculture sector.
While warm, wet weather has
and North Dakota, crop development
western South Dakota and Montana has been hurt by a lack of moisture.
in
TENTH DISTRICT--KANSAS CITY
Economic activity in the Tenth District appears to be
relatively sluggish.
Retail sales are down slightly from a year ago, although
auto sales remain comparable to sales a year earlier.
stable, at retail and for manufacturers' inputs.
Prices remain generally
Housing starts are also off
from a year ago, though sales of new homes are generally up.
Future mortgage
demand is expected to be stronger, as rates are expected to decline further.
Agricultural lenders and borrowers in the district are both facing continuing
difficulties.
states.
A good winter wheat harvest is well under way in Tenth District
Bank loan demand is flat while deposits are generally higher.
Retail trade.
year-ago levels.
Most retailers report that sales are down slightly from
Clothing, home furnishings, appliances, and electronic items
are all selling more slowly.
inventories.
As a result, some retailers are trimming their
Most retailers expect sales to pick up before yearend, however,
and plan no major cutbacks in inventories.
Retail prices remained stable
during the past three months and are expected to remain stable in the near
future.
Automobile dealers.
Automobile dealers report that sales
comparable with year-ago levels.
are
Sales are being spurred by manufacturers'
low financing rates and, to a less extent, by recent declines in other
interest rates.
Inventory levels are largely satisfactory, and caution rules
out inventory building in the near future.
Most dealers, however, are
optimistic that 1985 sales will be as good or slightly better than strong 1984
sales.
Purchasing agents.
Purchasing agents report that input prices remained
constant during the past three months.
through the end of the year.
Most expect constant input prices
No difficulties in obtaining materials are
X-2
reported, and none are anticipated.
inventories is mixed.
Satisfaction with current materials
Most agents report some trimming of inventories due to
seasonal and firm-specific factors.
Housing activity and finance.
Homebuilders report that housing starts
are down slightly to sharply from a year ago.
Starts are expected to remain
steady or increase slightly through the end of the year.
Building materials
are readily available, and materials prices are stable or rising slowly.
Sales of new homes are generally up, as are new home prices.
Savings and
loans report that mortgage demand and commitments are up except in Colorado
and Wyoming.
Future mortgage demand is expected to be strong, since mortgage
rates have declined recently and are expected to decline further.
Savings and
loans report larger savings inflows than a year ago but expect inflows to slow
in the near future.
Agriculture.
Agricultural lenders throughout the Tenth District are
continuing to write down the value of farm assets, both because examiners are
pressing banks to keep up with declining asset values, and for closer
monitoring of loans.
Some lenders in Missouri and Oklahoma report that their
banks have already written farm asset values down to market levels.
Aggressive writing down of asset values may cause these banks to reconsider
the creditworthiness of some borrowers.
Agencies of the farm credit system --
Production Credit Associations (PCAs) and Federal Land Bank Associations
(FLBAs) -- appear to be writing down farm asset values as well.
Bankers in
Nebraska and Colorado report that some farm credit system borrowers are
looking for new lenders due in part to rising interest rates on farm credit
loans, and to perceived risk associated with capital stock in the PCA's and
FLBA's.
X-3
Nebraska and Colorado have been especially hard hit by agricultural bank
closings this year.
In both states, farm borrowers at closed banks are having
difficulty finding alternative sources of credit.
Agricultural lenders in
these states report that successor banks have applied higher credit standards,
and other banks generally are not picking up customers of failed banks.
As
many as half of these customers may be unable to find new sources of credit.
The wheat crop in the Tenth District is expected to be very good.
Until
interrupted by recent rains, the harvest in Oklahoma and southern Kansas was
running a week to ten days ahead of schedule, and is 95 percent complete in
southwest Oklahoma.
Spring planting of corn, soybeans, and sorghum in the Tenth District is
generally on schedule, and in some cases well ahead of the usual date.
Successful spring planting has produced optimism about crop production
prospects for the 1985 season, with crop conditions overall reported as good
to excellent.
Banking.
Tenth District banks report total loan demand was constant
during the last month.
Commercial and industrial loans were steady, but
consumer loan demand grew somewhat.
Residential and commercial real estate
lending were stable, although the strength of real estate loan demand varied
widely by locality.
Several bankers note that the level of agricultural
lending remains low and that loan quality problems persist.
All surveyed
banks reduced their prime rate during the last month, but only half lowered
consumer loan rates.
Total deposits were generally higher with widespread
growth in demand deposits, Super NOW's, and MMDA's.
Although inflows subsided
after the April 15 tax deadline, IRA and Keogh accounts still rose slightly
over the month.
XI-1
ELEVENTH DISTRICT--DALLAS
The economic expansion in the Eleventh District remains slow.
Manufacturing respondents, overall, report little change in output.
rate of decline in drilling activity is accelerating.
The
Auto sales have
slipped below last year's spectacular performance, but remain quite strong.
Retail sales are expanding less vigorously than a year earlier.
Nonresidential construction maintains its pattern of strong increases,
while residential construction is in decline.
banks continues to slow overall.
Loan growth at District
Agricultural production is expected to
equal record levels, but prices are sharply lower than last year.
Demand growth for District manufacturing firms remains modest, but
respondents have lately become more optimistic about the prospects for
future expansion.
The recent mild resurgence in overall construction
activity has boosted purchases of lumber and wood products and primary and
fabricated metals.
Nonelectrical machinery manufacturers, especially those
serving the energy industry, report slack demand.
Sales of electrical
machinery are sluggish and inventories in the industry are undesirably
high.
Paper and allied products makers complain of weakness in their
markets and say it is because of import competition and ebbing general
economic activity.
Apparel firms report that their customers are buying
substantially more than in the recent past.
Refiners have been expanding
output and accumulating inventories in expectation of the usual summer
increase in demand.
The number of active drilling rigs in the Eleventh District states
continues to slide, in part, because of currently weak energy prices and of
XI-2
expected price reductions.
Another reason cited for falling rig usage is
that some firms find takeover activity offers a higher rate of return than
does exploration and development.
Respondents say that some firms have
taken funds formerly committed to drilling and exploration and redirected
them to takeover-related expenditures.
While retail sales growth is sluggish overall, spending for some
lines remains strong.
Consumer purchases of apparel are climbing at a
particularly rapid rate.
Demand for durable goods is low, however.
Many
respondents expect further deceleration of overall sales expansion.
Retailers indicate that they are monitoring inventories with unusual
caution.
Some stores are now contemplating employment reductions.
Auto sales remain brisk, although they are down slightly from last
year's exceptionally strong levels.
Dealers report that they are
optimistic about the future, as a result of recent declines in interest
rates and of indications that the demand for high-priced luxury and sports
models will remain unabated.
Their optimism is tempered by concerns that
overall economic conditions may weaken.
Nonresidential construction activity in the District continues to
advance very substantially, despite increasing vacancy rates, rent
discounting, and other evidence of overbuilding.
Both non-residential
building and nonbuilding construction contracts are growing rapidly.
Contracts for streets and roads are expanding at a particularly high rate.
The value of residential construction contracts continues to slip
from its year-earlier level, but the rate of reduction has slowed.
number of building permits also continues to fall.
accounted for the bulk of recent declines.
The
Multifamily permits have
XI-3
At District large banks and Texas savings and loans, growth in
assets and liabilities has lately decreased somewhat.
At large District
banks, the pace of expansion in total loans and securities subsided during
the first quarter and again in May.
absolutely since March.
Business loan volume has been falling
The pace of real estate loan lending has been
slipping lately, but it still remains very high.
At Texas savings and
loans, both mortgage and construction loans have been expanding at rapid
rates.
Large banks are funding their asset growth primarily with increases
in large time deposits and MMDAs.
strong year-over-year gains.
Both categories have been registering
Borrowings at large banks have been declining
since the fourth quarter of last year.
Asset expansion at S&Ls has been
funded chiefly by large increases in Jumbo CDs, other time deposits and
borrowings.
Eleventh District agricultural production is surging because of
good weather.
Winter wheat yields are likely to match record levels.
Increased world crop output, however, has led to significant declines in
crop prices from its year-earlier level.
Livestock prices have also
declined over the last year, although somewhat less than crop prices.
Texas cattlemen continue to liquidate their herds.
In April, placements on
feed were the lowest for that month since 1982 and the number of Texas
cattle slaughtered was the highest April total in many years.
Overall,
Texas farm income is expected to be lower this year than in 1984.
XII-1
TWELFTH DISTRICT -
SAN FRANCISCO
The economy of the Twelfth District, in general, continues to be
healthy.
Activity weakened by the continued strength of the dollar appears
to have been partly offset by the stimulus provided by recent declines in
interest rates.
The semiconductor industry, for example, has weakened
considerably since last year but home construction activity is proceeding
at long-term trend levels.
Retail sales activity also has been generally
vigorous, although there is considerable variation in retail sales growth
reported within the District.
The agricultural sector, although still
struggling to overcome the problems of the high value of the dollar and
extensive debt obligations, does not appear to be losing ground.
The
forest products industry and the mining industry also continue to be
weakened by the strength of the dollar and by local production cost
problems.
Fortunately, in those states in which these industries are
important, growth in the service sector or in manufacturing activity has
helped to avoid the more serious implications of continued weakness in
these industries.
Consumer Spending
The available data on retail sales activity presents a mixed picture.
In the far west, recent retail sales activity is up comfortably from last
year.
Department stores in southern California, for example, report an
increase of 10 percent over last year.
In the intermountain states,
however, retail sales activity has been less healthy.
Idaho, for example,
reports a sharp decline in retail sales over the past two months.
XII-2
Automobile sales also are reported as being up from last year due in part
to consumer awareness of increased price competition as the result of
elimination of Japanese import restrictions.
In California last month, the
import share of the automobile market was above 50 percent.
Manufacturing and Construction
Manufacturing activity in the Twelfth District generally has
experienced the slowdown exhibited nationwide and employment has been
maintained primarily by growth in the service sector.
The most important
development has been in the regionally significant high-technology
industries which are now displaying considerable weakness.
In California,
Idaho, and Utah, significant layoffs and decreases in earnings have been
reported.
The "book-to-bill" ratio, an important indicator of the
prospects for future activity in the semiconductor industry, continues to
be disappointingly low.
Only the Arizona semiconductor industry reports
a significant recovery in this leading indicator.
Construction activity generally is strong.
In California, housing
starts are running at the rate of 230,000 units per year, up 4 percent from
the first quarter of 1984.
In Utah, housing starts are down from last
year, but non-residential construction activity is up nearly 40 percent.
Generally speaking, vacancy rates in manufacturing facilities appear to be
drifting upward, whereas vacancy rates in commercial structures are
declining.
This has been particularly important in the overbuilt Wilshire
corridor in Los Angeles.
Despite relatively healthy construction activity, the forest products
industry in the Pacific Northwest continues to be plagued by local labor
problems, strong competition for plywood products from Japanese imports and
XII-3
competition for other wood products from Canada.
Lumber exports out of the
Port of Portland decreased by 58 percent between the first quarters of 1984
and 1985.
Agriculture and Mining
Although western farmers continue to face difficulties because of weak
export markets and high debt burdens, recent modest increases in potato,
bean, and livestock prices have been helpful.
In addition, smaller cattle
and hog inventories in the District suggest that there may be future
improvement in prices.
Wheat farmers, however, continue to have faced
serious difficulties in world markets despite some recent slight
improvements in price.
The reduction in interest rates that has occurred
recently, however, is seen as providing some assistance to farmers until
world product prices strengthen.
In California, vegetable and other row
crop farmers have been facing less severe difficuluties than their midwest
counterparts, but have complained recently of sharp increases in
transportation costs.
Mining and smelting activity in the district continues to be weak,
again largely because of the strength of the dollar and competitiveness of
foreign supply.
In Utah, the recent closure of a major copper mining
complex was a serious blow to the industry, but was offset in the aggregate
by growth elsewhere in the Utah economy.
The unemployment rate in Utah
actually fell between April and May from 6.5 to 6.2 percent.
Financial Sector
The recent decline in interest rates has spurred commercial and
mortage loan demand at district financial institutions.
The increase in
XII-4
demand has been most marked in the consumer loan and mortgage sector, where
some institutions are now offering adjustable rate mortgages with initial
rates below 10 percent.
Commercial loan demand had grown extremely rapidly
in the latter half of 1984 so that the 6 percent increase in 1985 over 1984
thus far seems modest in contrast.
Nevertheless, the decline in interest
rates is a sign of optimism for many lenders, except those with
undiversified loan portfolios in the agriculture and forest products
sectors.
Cite this document
Federal Reserve (1985, July 9). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19850710
@misc{wtfs_beige_book_19850710,
author = {Federal Reserve},
title = {Beige Book},
year = {1985},
month = {Jul},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19850710},
note = {Retrieved via When the Fed Speaks corpus}
}