Beige Book

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICTS

December 1985

TABLE OF CONTENTS

SUMMARY . . . . . . . . . . . .

. . . . . .

. . . . . .

. . . . . . . . i

First District - Boston . . . . . . . . . . . . . . . . . . . . . . . ISecond District - New York. . . . . . . . . . . . . . . . . . . . . .II-1

Third District - Philadelphia . . . . . . . . . . . . .

Fourth District - Cleveland .

Fifth District - Richmond . . .

Sixth District - Atlanta . . . .

Seventh District - Chicago . . .

. .

III-

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . .

. V-l

. . . . . . . . . . . . VI-1

. . . . . . . . . . . . . . . .

Eighth District - St. Louis. . .

. . . . . . . . . . . . . . .

Ninth District - Minneapolis .

. . . . . . . . . . . . . . . .

Tenth District - Kansas City .

IV-1

VII-I

. VIII-1

. XI-1

. . . . . . . . . . . . . . . . . . .X-l

Eleventh District - Dallas . . . . . . . . . . . . . . . . . . .

Twelfth District - San Francisco . .

.

.

. XI-1

. . . . . . . . . . . . . .XII-1

SUMMARY*

Overview.

The

economy

appears

to

be

growing

slowly

at

best.

Only

Richmond

describes its District economy as strong, although there is some optimism in

the reports from Philadelphia and New York.

Retail sales gains are uneven,

and less-than-robust Christmas sales are expected.

that

special

activity

interest

continues

depreciation.

rate

quite

sluggish

Residential

construction is uneven.

incentives

have

with

construction

largely

few

is

Auto sales are

ended.

gains

yet

improving

but

low now

Industrial

from

dollar

non-residential

Agricultural prices remain weak despite some rises

in meat prices; agricultural land prices continue to fall and farm finances

remain weak.

Commercial

bank consumer and

real

estate

lending

is

rising

further but business lending is declining in most Districts.

Retail Sales.

October retail sales

other than autos

reporting moderate year-over-year gains.

strong

for

apparel

and

weak

for

are mixed,

with most

Districts

Sales are frequently described as

various

hardgoods.

Inventories

are

generally at desired levels and are being built cautiously as most retailers

expect Christmas sales to show only moderate increases

sales

continue

to

run

well

below

year-ago

reaction to the end of most special financing.

levels

from 1984.

in most

New car

Districts

in

However, Richmond and Dallas

report sales were stronger than usual in October.

*Prepared at the Federal Reserve Bank of Cleveland

Manufacturing and Mining.

Industrial

activity

continues

to

be

quite

sluggish.

There

is

little

indication in the District reports that dollar depreciation has resulted in

higher

prices

or

stronger demand

reports

"limited

goods."

Defense goods producers

Domestic

levels

auto

into

declined.

evidence

of

manufacturers

early

Prices

reports

continued

reports

textile

1986.

and

for

domestic

increased

report

are

said

weakness

employment

of

in

to

primary

that

a

recent

small

gain

in

in

textile

mechanical

and

of

rising

recent

trucks

Atlanta

after

and apparel

employment

is

have

Cleveland

prices.

months

textile

capital

production.

weak.

and

Chicago

high production

heavy

remain

orders

in

although

continue

sales

tool

decline, and Richmond reports "some pickup

and

to

metals

stabilized

for

gains

plan

and

machine

has

orders

order

Production

sales

producers,

being

a sharp

exports"

sustained.

Manufacturing firms generally report prices of materials and components

stable.

large

levels

Boston reports many firms are unable to raise

firms

refusing

to

accept

generally

considered

semiconductor industry

inventories

materials

falling

lumber

the

are

"are

inventories

industry in

decline has been

Columbia,

smaller

lower than in 1984.

this

are excessive

San

continues

and by

year

than

Drilling activity in

decline at accelerating rates."

from

satisfactory,

sharply.

the Northwest

South and British

increases

to

suppliers."

although

hurt by

Coal

even

Inventory

Dallas

and Cleveland

low prices,

last.

their own prices and

Francisco

be

are

reports

reports

reports

that

competition

though the

production

the Dallas District

raw

the

from

price

continues

"continues to

Construction and Real Estate.

Residential real estate markets are doing well generally but not in all

areas.

and

Listings

sales

of

used

homes

are

rising

construction and starts of new homes are increasing.

are

a

source

of

strength,

but

credit

standards

and

for

plans

Mortgage rate declines

are

being

tightened

by

lenders and mortgage insurers, leading to some concern that effective demand

may be crimped.

District reports generally are moderately optimistic about

1986.

Non-residential

Construction

Chicago,

is

St.

property

construction

reported as

Louis,

and

still

Dallas

and

strong

in

vacancy

some

Districts.

San

rates

parts

of

Francisco

are

the

uneven.

Atlanta,

reports

high

commercial vacancy rates

in many areas are causing construction permits to

slow.

that

New

York

reports

generally remains

billion

community

Manhattan."

overall

demand

for

satisfactory and that work has

planned

Chicago

for

and Dallas

the

New

report

Jersey

strong

commercial

real

estate

recently begun on a "$10

waterfront

road

across

from

building and repaving

activity.

Agriculture.

Most harvests are bountiful, most agricultural prices are low, and farm

financial difficulties continue.

Although wet weather has delayed the corn

and soybean harvest in some parts of the midwest, yields are high and prices

remain weak.

Grain sorghum yields are high.

Cattle and hog prices are low

but

have

risen

Minneapolis

yields

recently,

report

and

favorable

are expected

to

be

meat

production

conditions

normal

in

for

has

been

damaged

by

hurricanes.

Kansas

lower.

Atlanta

poultry

producers.

but

in

Oklahoma

District, and the cotton price remains low.

is

high

and

Cotton

the

Atlanta

The Louisiana sugarcane crop

City

reports

that

continuing

liquidations and foreclosures have "saturated the farm real estate market,"

causing farmland prices to continue to fall although very

little land

is

changing hands.

Commercial Banking.

Most Districts

report

increases

in commercial bank consumer

lending,

with some noting it has been boosted by the ending of most special financing

rates

on

continues

autos

by

automobile

finance

companies.

Real

estate

to grow, partly because of mortgage rate reductions.

loan volume

is falling

in most Districts.

lending

Business

However, Philadelphia

reports

substantial growth in business loan demand, particularly "from middle-market

companies

market."

that

do not

have

convenient

access

to

the

commercial

paper

Kansas City reports agricultural lending is flat or slightly down,

and Kansas City and Minneapolis report continued banker concern about the

quality of agricultural credit.

FIRST DISTRICT - BOSTON

The First District economy appears to be in a holding pattern.

While

retail sales continue to exceed year ago levels, increases have been below

plan in some cases.

period.

Retailers are anxious about the critical Christmas

Manufacturing respondents report that sales are flat, continuing the

experience of the past five or six months.

One significant change has been a

falling off in the demand for products associated with non-residential

construction.

Price increases are said to be negligible.

expect 1986 to be very similar to 1985.

The First District real estate market

is healthy, but entering a seasonal slowdown.

for most realtors contacted.

Manufacturers

Listings fall short of demand

However, the market for condominiums is said to

be saturated.

Retail

Retailers in the First District report that sales in October exceeded

those in October 1984 by 4 to 17 percent; but for several contacts increases

were smaller than expected.

Merchants attribute their somewhat disappointing

performance to a lack of consumer enthusiasm, which they fear will also affect

November and December results.

However, very early and incomplete November

figures show sales for some merchants exceeding plan.

Areas of strength in October included video computers, other home

electronics, toys, records and tapes, high quality ladies' sportswear, and

womens' accessories.

Furniture was weak.

The atmosphere is highly

competitive, although the prices of high quality items are said to be holding

up fairly well.

Substantial markdowns have affected margins for some

respondents.

Inventories are reported to be at or below planned levels, except for

one retailer that "over-reacted" to short supplies in the last Christmas

season.

In spite of favorable current positions, several chains said sizable

inventory reduction sales were likely in January, given the current outlook

for Christmas.

Retailers are increasing staff as usual for the Christmas season.

Some reported that low unemployment rates have forced them to offer recruiting

incentives to current employees, raise wages, or reduce the quality of their

new hires in order to staff up.

None of these adjustments is said to pose

serious problems.

Uncertainty about the volume of Christmas season sales is pervasive,

although everyone expects sales to grow.

According to one contact, "we're

holding our breath and hoping for the best."

Manufacturing

Manufacturing activity in the First District is flat to down.

Most

respondents report that sales are about the same as a year ago or slightly

lower; this situation has persisted for some months.

One contact reports

that the auto industry's demand for materials and components is quite strong

but attributes this strength to Detroit's ambitious production plans for the

fourth quarter and questions whether the strength will persist.

Another

contact, a manufacturer of electrical equipment, reports a softening in sales

to the auto industry.

strong but flat.

Demand for housing related products is said to be

Demand for products related to nonresidential construction,

I-3

which had been strong, has recently weakened.

Sales of a variety of capital

goods are disappointing for this stage in an expansion.

Several firms report

that overseas subsidiaries are experiencing stronger sales than domestic

operations.

Small layoffs have recently occurred at some high technology firms.

However, most of the firms contacted have adjusted to current activity levels

and can continue without further cutbacks in personnel.

Although one

respondent will be increasing capital spending substantially in 1986, most are

reducing expenditures.

Most contacts face heavy price competition and have

been unable to raise their prices; large firms, in turn, are refusing to

accept increases from suppliers.

First District manufacturers expect 1986 to be a difficult year.

While most think their own firms' performance will be about the same as in

1985, they seem to have revised downward their expectations for the economy as

a whole.

Real Estate

The New England residential real estate market remains healthy despite

the start of a seasonal slowdown.

Price movements are mixed.

While Boston

agents claim that prices are stabilizing, agents in other parts of the region

report that prices are still climbing.

short of demand.

Listings, as reported by most, are

Multi-family buildings, in which a family lives in one unit

and rents out the others, are especially popular.

More people are buying lots

with intentions of later building, as they see appreciation rates out-running

building costs.

Condominiums have become less popular.

The condominium

market is said to be saturated; as prices approach those of free standing

I-4

homes, buyers are opting for the latter.

Tighter mortgage qualification

standards may be hurting some potential buyers, particularly first timers.

New England Economic Project Outlook

The New England Economic Project (NEEP), a non-profit corporation

comprised of New England business firms, government agencies and educational

institutions has just released its semi-annual forecast for the New England

economy.

The forecast is based on state models developed by a local-area

consulting firm and managed by NEEP representatives.

According to the NEEP forecast, New England's employment growth will

be considerably slower in 1986 than in the past two years.

Even so, growth is

expected to be sufficient to maintain the region's unemployment rate at its

current level of roughly 4 1/2 percent.

New England's growth will also

continue to surpass the nation's.

All of New England's employment growth in 1986 will come from the

nonmanufacturing sector.

at healthy rates.

level off.

Services, trade and finance will continue to expand

Construction employment, on the other hand, is forecast to

Manufacturing employment will be flat, with little change expected

for most individual manufacturing industries.

II-1

SECOND DISTRICT--NEW YORK

The Second District economy has maintained its improved tone in

recent weeks.

business

A higher percentage of purchasing managers reports better

conditions,

September slowdown.

and

consumer

spending

has

recovered

from

its

Residential building remains strong while demand in

the commercial real estate market is satisfactory.

Small banks in the

District note an increasing use of fixed fees rather than compensating

balances in the pricing of business loan commitments.

Consumer Spending

Consumer

spending

regained

momentum

in

October

following

a

September slowdown attributed to Hurricane Gloria and unseasonably warm

weather.

slightly

across

The average over-the-year rise of 8 percent

below

the

expectations,

District.

affluent consumers

some

discount

however,

Although

and

department

gains

in October was

varied

stores

considerably

catering

to

more

indicated that sales met or exceeded expectations,

and

suburban

chains

posted

disappointing

gains.

In

general, apparel and other soft goods sold well but electronics and home

furnishings remained weak.

retailer

is

concerned

Early November sales show little change.

that

he

will

lose

business

diverted toward car purchases by low-cost financing.

if

consumers

One

are

Another merchant,

stuck with slow-selling hard goods since mid-summer, plans to intensify a

television advertising campaign he began in August.

Inventories

that

were

trimmed

to

began to climb during the September slowdown.

desired levels

last summer

Although several merchants

managed to reduce stocks to planned levels by the end of October, others

report an excess.

Inventories are currently being increased to meet the

II-2

Christmas demand, but stores that have had abrupt sales shortfalls are

Since the 1985 Christmas season will be

adopting a conservative posture.

a

week

shorter

than

1984,

some

retailers

will

push

Christmas

items

earlier than usual.

Business Activity

Second District

weeks.

A

substantial

economic

percentage

activity

improved somewhat in recent

of purchasing

favorable business conditions in September.

improved production and new orders

generally

remain

despite

some

reported more

Most firms also experienced

stable or

satisfactory

managers

in October.

increase

in

Inventories

the share

of

managers reporting higher levels.

The outlook for the District's manufacturing sector is unclear.

On the negative side, several firms have recently announced plans to move

from or reduce their operations in the region.

reductions

could

manufacturer.

lower-cost

occur

over

the

next

two

One of the largest such

years

at

an

auto

parts

While apparently still open to discussion, this move to a

area

could

affect

some

1100

District

workers.

More

positively, General Motors plans a $340 million expansion program at a

car

engine

factory.

Elsewhere

in

the

District,

ground

broken for a $125 million state-of-the-art chemical plant.

Force

contract

recently

awarded

to

a

District

aerospace

was

recently

And an Air

firm

should

provide additional employment.

By far the biggest new project announced for the District is a

$10 billion community planned for the New Jersey waterfront across from

Manhattan.

Work was recently begun on the first phase of this project:

four high-rise apartment buildings and a shopping center.

new community

is

expected

to

By 1995 this

include hotels, office buildings, parks,

cultural facilities, a large marina, waterfront stores and restaurants,

and up to 9000 residential units.

II-3

Construction and Real Estate

Residential construction remains in excellent condition and a

Because of the cyclical

boom continues in several parts of the District.

nature of the industry, however, some homebuilders are concerned that

this prolonged period of strong residential building activity is due for

a reversal.

As yet there are no indications of an imminent slowdown, and

applications

for

additional

residential

development

are

still

being

presented to local planning boards.

Except for the usual slackening due

to winter weather conditions, most

observers anticipate no decline in

activity for at least six months.

The District's commercial real estate market appeared stable in

recent weeks

rates.

While

reported

with

only minor

changes

few

large-scale

transactions

in

rents

are taking

and vacancy

place, overall

demand generally remains satisfactory except in some parts of northern

New Jersey.

There is still concern, however, about the outlook in lower

Manhattan and Fairfield County where older office space is being vacated

by tenants moving to newly-constructed buildings.

Financial Developments

Small banks report that business borrowers now pay for at most

ten percent

of unused loan commitments

through compensating balances.

This is a much lower percentage than five years ago, and it is expected

to decline further.

to

pay

an

Several banks suggest that many corporations prefer

explicit,

fixed

commitment

fee

rather

fluctuating opportunity cost of compensating balances.

than

incur

the

However, one bank

notes that it has few formal compensating balance arrangements, yet it

still encourages many of its customers to maintain demand deposit balances.

III-1

THIRD DISTRICT - PHILADELPHIA

Economic conditions in the Third District in late October and early

November appear to be improving.

Manufacturing activity is turning up after

several flat months and retailers report sales in line with optimistic

expectations.

Consumer and commercial lending is growing at a slightly faster

pace now than earlier in the fall.

Expectations about Third District conditions are mixed, although generally

optimistic.

Manufacturers look for business to improve and plan to step up

capital spending over the next six months.

Retailers are somewhat uncertain

about the strength of upcoming holiday sales at this point; nevertheless, they

predict healthy sales for 1985 as a whole.

Bankers expect commercial loan

demand to remain strong for the fourth quarter and they say that current

consumer loan demand levels can be maintained or increased with possible

interest rate reductions.

MANUFACTURING

Industrial activity in the Third District is picking up, according to the

latest Business Outlook Survey.

Thirty-six percent of the companies

participating in the November survey report increasing business while only 11

percent say that their business is slowing down.

More nondurable goods

producers indicate improvement than do durable goods producers, who report

fairly steady activity.

Manufacturers note improvement in the levels of new orders and shipments,

but report little change in employment.

Industrial prices in the Third District

III-2

are stable; over three-fourths of the manufacturers polled say neither input

costs nor output prices have changed this month.

Third District manufacturers are generally optimistic about the near

future.

A third of the November survey respondents expect the current level of

activity to continue over the next six months, and about half anticipate further

growth.

Manufacturers expect increases in new orders and shipments, and are

planning to step up capital spending.

Durable goods makers, however, foresee

some weakening in employment.

RETAIL

Third District retailers report that October sales fell slightly below

expectations, but indications are that a rebound had taken hold by mid-November.

As of the third weekend of the month, sales for 1985 year-to-date generally

conformed to earlier forecasts of an 8-12 percent increase over 1984.

Philadelphia area retailers attribute the October dip in sales to a strike that

kept the city's two major newspapers out of circulation for more than a month,

disrupting advertising and the distribution of promotional inserts.

Another

factor cited for weak October and early November sales is abnormally mild

weather which has held down demand for seasonal apparel.

As the Christmas selling season approaches, Third District retailers are

stepping up promotional efforts that, they say, are necessary to maintain store

traffic.

Department store and general merchandise executives are still

uncertain about prospects for holiday sales, and are reluctant to make forecasts

until they see post-Thanksgiving results.

Some merchants have expressed

concern that consumers may have reached their limit of comfort on installment

debt, and that this may dampen end-of-year sales.

One major chain, however,

reports that credit purchases are growing as a percentage of sales.

III-3

FINANCE

Total loan volume at large Third District banks rose just over 1 percent

from September to October, reaching a level 15 percent above that of October

1984.

Commercial and industrial loan volume also rose at a similar rate, and

now stands 17 percent above its year-ago level.

Third District banks say that

loan demand continues to be strong from middle market companies that do not have

convenient access to the commercial paper market.

Demand is also high for

receivables financing and other types of secured loans.

Bankers expect

commercial loan demand to remain strong through the fourth quarter but do not

expect loan growth to match the third quarter's pace.

Consumer loan volume increased approximately 1.5 percent in October to

about 18 percent above its year-ago level.

Some Third District banks report

that demand for consumer installment loans has been very responsive to lower

interest rates and promotional efforts and that further reductions in rates may

be made in the near future.

Local bank economists have scaled back their predictions of growth for the

next two quarters.

Consequently, they have lowered their interest rate

forecasts for the next six months.

Their predictions now range from a general

increase of up to 50 basis points to drops of 50 basis points or more in yields

on Treasury securities of all maturities.

the federal funds rate.

They also expect a comparable drop in

IV-1

FOURTH DISTRICT - CLEVELAND

Summary.

The Fourth District economy remains lackluster.

remains

high

and employment

positive but not robust.

and

machine

tool

shows

The unemployment rate

little growth.

Retail

sales growth

is

Manufacturing activity remains flat with the steel

industries

continuing

in

difficulty.

House

strengthening and builders plan to step up construction.

sales are

Commercial

bank

loan demand remains moderate.

Labor Market Conditions.

Labor

market

Unemployment

from as

mining

conditions

the

Fourth

District

remain

mixed.

rates range widely around Ohio's current rate of 9.2% (s.a.),

low as about 4.5%

regions

employment

in

of

shows

in Lexington, Ky.

southeastern Ohio

little

net

change

and

in

to around

20%

eastern Kentucky.

recent

months.

manufacturing firms in the Cincinnati area indicates

in

some

coal

Manufacturing

A

survey

of

that, on balance, they

expect a slight decline in their employment in 1986.

Retail Sales.

Retail

sales

in

the

Fourth

non-auto retailers, but sales

Year-to-year

growth

rates

of

District

improved

in

October

for

most

growth was quite mixed within the District.

7%

to

9%

were

commmon

in

the

southern

IV-2

half of Ohio (Cincinnati), but nearer 0% to 4% in the northern portions of

the

state

(Akron, Cleveland,

particularly

women's

September and

declining.

rates of

Toledo,

apparel,

October, while

One

department

increase

and Youngstown).

showed

most

store

relatively

hardgoods

analyst

Sales of apparel,

strong

sales

are

anticipates

gains

still

between

moderate

"near-double

or

digit

for the Christmas selling period", although in general,

retailers are only guardedly optimistic over holiday selling prospects.

Similar to the national market, new-car sales in this District are down

so far in

sales.

the fourth quarter

Sales of

because

larger models are

of

especially soft.

reported strong and getting stronger.

not unusual for this area.

exceptionally high

third-quarter

Import car sales are

Truck sales are moderate, which

is

Large inventories of used cars accumulated from

third quarter trade-ins are beginning to thin out.

Manufacturing and Mining.

Manufacturing activity in the District is flat while coal mining remains

depressed.

On balance, contacts

indicate

industrial production

up slightly, new orders are down, and backlogs are falling.

are

holding employment

steady,

although

overtime being worked in his area.

sharply

while

finished

goods

one

contact

is flat or

Manufacturers

reported

increasing

Raw materials inventories are falling

inventories

are

flat.

Prices

paid

by

manufacturers for materials are unchanged.

In

the

steel

industry,

domestic sales and prices.

import

competition

continues

to

hold

down

One senior executive asserts that it will take a

very large depreciation of the dollar to get a significant price increase in

basic

steel.

A

major

steelmaker

in

Chapter

11

bankruptcy

recently

negotiated a 16% compensation cut with its union, ending a 98-day strike.

IV-3

An aluminum industry executive

spilled

over

into

additional

reports

that turmoil in

downward

pressure

on

the tin market has

already

low

aluminum

prices.

Producers

of

machine

tools

continue

to

report

weak

orders

and

low

prices.

Employment at many firms remains well below its pre-recession peak,

and

firm expects

one

to

cut

employment

further next

year

unless

improve

quickly.

strong.

Machine tool orders are weak also because an increasing

Competition

from

imported

machine

tools

remains

orders

very

share of

capital spending is for computers and other information processing equipment.

A

producer

of

components

for

heavy

production of heavy trucks and buses

trucks

reports

North

American

is down about 9.5% in 1985; the firm

expects it to fall another 6% or 7% in 1986.

A major diversified producer

of components for capital goods reports all lines of business are "on hold"

except for strength in defense goods.

Coal

production

remains

low

and

the

outlook

for

the

District

coal

industry weak.

Housing.

The

optimism

unabated.

rates,

evident in District housing markets last month continues

Builders, who had been cautious and waiting for lower mortgage

are now

stepping up

construction plans.

District builders expect

housing demand to rise steadily in coming months if mortgage rates continue

to ease.

The confluence of

lower mortgage rates, further income advances,

the availability of state of Ohio-subsidized mortgage funds,

of housing's

consensus

and retention

favored status in pending tax reform legislation has led to a

among

builders,

mortgage

lenders,

and

realtors

housing conditions should prevail through at least mid-1986.

that

favorable

IV-4

Realtors

closings

in

in

the

recent

District

months.

report

a

resurgence

Particularly

strong

in

listings

and

are

reported

for

sales

both

Columbus, Dayton, and Cincinnati.

However, realtors are uncertain how much

the

mortgage

recent

tightening

of

private

insurance

standards

by lenders

will reduce the number of prospective house buyers.

According to a major mortgage lender, mortgage loan volume remains lower

than expected at the current level of mortgage rates, because many potential

borrowers are waiting for even lower rates.

all of its fixed rate mortgages

growing

number

of

midwestern

This lender continues to sell

in the secondary mortgage market.

lenders,

this

lender

may

shorter-term fixed rate mortgages in its loan portfolio

prepayments of

shorter-term mortgages

will

be

begin

to

Like a

retain

if it decides

substantially

less

that

than on

30-year mortgages.

Commercial Banking.

Overall

loan demand

at

District banks

remains

moderate.

Declines in

commercial and industrial loans are being more than offset by gains

estate and consumer installment loans.

improve the demand for real estate

banks has

in real

Lower interest rates are helping to

loans.

Consumer installment

lending at

received a boost from the end of the cut-rate financing through

auto dealers, even though car sales have declined significantly.

Contacts anticipate a small pickup in business lending primarily because

of seasonal factors.

While consumer loan demand is expected to remain good,

the rate of growth is expected to decline in the months ahead.

FIFTH DISTRICT - RICHMOND

Overview

Most reports from around the Fifth District suggest that economic

and business activity remains quite strong.

Seasonal factors are causing

some churning of employment activity, and special factors such as the end of

the automobile financing opportunities of

also causing some confusion.

late summer and early fall are

Nonetheless, employment, retail

sales, con-

struction, and housing sales are all reported, on balance, to be holding at

quite high levels.

trends,

regions.

with

Retail sales seem to be running well ahead of national

experience

varying

significantly

across

District employment has drawn recent support

product

lines

and

from construction,

government, and to a lesser extent from manufacturing, sufficient to offset

seasonal losses in agriculture related areas and tourism services.

Manufacturing

Manufacturing activity in the District, after leveling out in the

past few months, is showing some signs of trying to bounce off of the bottom

reached last summer.

Several District states have experienced manufacturing

employment gains lately, and even where employment shows continued weakness,

average weekly hours

of

production workers

has

turned up

sharply.

The

modest gains achieved in the textile, apparel, and furniture industries a

month ago are being held, and in some cases even built upon.

Some pickup in

textile and apparel exports has developed of late providing some support for

those

industries, while

in

the

furniture

group, strong

beginning to feed back into production gains.

retail

sales

are

Another encouraging note is

V-2

found in the attitude of District manufacturers concerning current inventory

levels.

Although there does not seem to have been any significant change in

current

stocks, present

levels

appear to be viewed as about

right.

For

quite some time, most District manufacturers had found existing inventory

levels excessive.

Coal production continues to run behind last year's levels despite

high rates of consumption and improved export demand.

In the Fifth District,

production for the year is running more than 5 percent behind 1984 levels

(compared to about

3 percent

nationwide),

despite improved production in

Virginia.

Consumer Spending

Consumer spending is reported to be making major gains around the

District.

strong,

An important

despite

motions.

the

factor seems to be that automobile sales continue

end of

the manufacturers' attractive

financing

pro-

Car sales are down, to be sure, but remain at what would normally

be considered

quite healthy

levels.

Spending

patterns

lines are being affected by seasonal and weather factors.

in

other product

Warm weather in

much of the District has put a damper on sales of fall clothing, for instance.

Most general merchandise lines continue to move well, however, as do building

materials, food, furniture, and appliances.

Housing and Construction

The construction industry continues

to the level of District business activity.

level

of

activity vary

around

to lend considerable strength

Although recent changes in the

the District,

our

impression

is

that

on

balance construction has at least held its own over the past several weeks,

and may have even strengthened somewhat.

In addition, sales of houses, both

new and existing, continue to be very strong in most areas.

In Virginia,

for instance, single family dwellings under contract in October were nearly

3 percent ahead of

1984.

September, and more than 21 percent

ahead of October

Year to date the gain has been more than 13 percent.

The Financial Sector

Financial institutions report some pickup in consumer installment

loan demand since the end of the financing incentives offered by the auto

manufacturers

earlier

described as slight.

relatively stable.

in

the

year.

That

pickup,

however,

is

generally

More generally consumer loan demand is moderate, and

VI-1

SIXTH DISTRICT - ATLANTA

The weather has combined with some other factors to cloud the economic

picture of the Southeast economy in the fall As summarized by the broad unemployment

rate yardstick, the regional economy weakened somewhat in September. With the ending

of cheap auto financing deals, car-buying plummeted in October, pulling down consumer

spending.

Total consumer borrowing has slowed as buyers' appetites apparently have

been temporarily satiated. Construction activity indicators show that sector rebounding

in response to easing credit conditions. The pace of tourism has been uneven and below

last year's Fair-boosted levels in some states, and wet weather has further depressed

farm revenue estimates, particularly in Louisiana.

Employment and Industry.

Labor markets continued to weaken in September,

with the District unemployment rate edging upward to 8.1 percent.

Total employment

dropped, moderately,

trends in factory

for the first time since June.

However,

employment are little changed since the last reporting period.

Textile employment,

while down sharply from a year ago, has stabilized in recent months.

Textile industry

contacts are encouraged by the recent weakening of the dollar but they look to the

protectionist measures now in Congress for fundamental relief from import pressure.

Employment growth in the region's auto assembly and parts plants has plateaued

temporarily, but industry spokesmen are encouraged by the planned renovation of an auto

assembly plant in Atlanta that will add 900 jobs and the selection of a Tennessee site for

a major new assembly plant. Estimates indicate the latter facility will provide 6,000 jobs

directly and an additional 14,000 support jobs at parts suppliers' plants. At 11 percent in

September, Louisiana continues to have the highest unemployment rate in the region.

The petrochemical and oil field machinery industries continue to suffer, with the latter

losing an additional 2,400 jobs in the year ending in September. Southeastern timbermen

VI-2

expect lumber and wood prices to remain depressed in the year ahead despite the

encouraging building outlook suggested by falling mortgage interest rates.

Canadian

import pressure is likely to continue keeping prices below break-even levels for many

domestic producers.

Consumer Spending.

Most merchants posted moderate gains in October

although some stores, including a large national chain, fell short of October 1984 sales

levels. On a year-to-date basis, sales activity remains above last year's levels throughout

the region, with women's and children's apparel, electronics, appliances, and jewelry the

best selling items.

Retailers generally are projecting only moderate gains in year-end

holiday sales and are consequently holding leaner inventories relative to 1984, when

holiday sales were not as strong as expected.

region were off sharply from October

October car sales in most areas of the

1984 and September 1985 levels.

During

September, more cars were registered than in any other month in the 1980s.

Construction.

Residential housing markets are slowing as usual as winter

approaches, but sales levels are above those at this time last year, probably because of

lower mortgage rates.

The strong economic performances of Atlanta and Nashville are

reflected in their healthy, migration-induced single-family home sales, and projections

are for a continuation of high sales levels. Meanwhile, the Miami market is also showing

notable growth over last year and the outlook is favorable, while the performance and

outlook for Louisiana and Mississippi are poor.

maintained its mixed growth course.

Office construction activity also has

Completion of new space has led to what are

thought to be temporary increases in vacancy rates in Tampa and Orlando and to a more

lasting increase in Miami.

An unusually low vacancy rate makes Birmingham a good

market for new construction, and the Nashville retail market is expected to boom in the

next year. The Atlanta market keeps zooming along.

VI-3

Financial Services.

The growth rate in loan demand continues to trend

downward for a sample of large commercial banks in the Southeast. October's growth in

total loans, although still strong, represents the continuation of an unbroken pattern of

softening growth since January.

Both consumer and real estate lending account for

recent weaknesses which follow unprecedented high growth in such lending earlier in this

economic expansion.

Tourism.

Consumer purchases of travel services in the Southeast do not seem

to have accelerated appreciably in the fall, although the reports available indicate that

air travel increased in September at most regional airports.

Auto travel fell in both

September and October in most District states, although sharp declines in Louisiana,

Alabama, and Mississippi no doubt reflect the unusually high levels of auto travel last

year in conjunction with the World' Fair.

Attraction attendance showed little growth.

State parks, for example, had fewer visitors in October, and most private attractions

surveyed had only modest gains.

In the lodgings sector, activity was mixed, and hotel

occupancies in several markets, including Orlando, remain extremely depressed.

Agriculture. Low market prices continue to dim revenue prospects for District

crop farmers.

damage.

Louisiana farmers have had to cope additionally with multiple hurricane

Apparently, the sugarcane crop suffered most, with its projected yield falling

by one-twelfth from earlier estimates. Prospective regional production of grain sorghum

and cotton is the highest in this decade; yields of other major crops are also generally

favorable throughout the region.

The cattle, pork, and egg industries are experiencing

low prices and poor returns but the poultry meat producers enjoy profitable conditions.

VII-1

SEVENTH DISTRICT--CHICAGO

Summary. Recent developments suggest a relatively stable near-term outlook for business

activity in the District--no new vigor and no significant setbacks. Growth of total employment

in the District continues to trail the U.S.

Auto and light truck output are expected to remain

strong into 1986. Steel production and orders continue at disappointing levels, with strength

mainly in motor vehicles, appliances, and construction, and at service centers. Demand for

most types of capital goods remains weak--not getting worse, but not improving either.

Residential, commercial, and highway construction are strong, but generally far short of past

peaks. Sales of suburban industrial buildings have picked up. Inventories are judged to be

fairly lean. General merchandise sales recently have been sluggish. Modest recoveries in

grain and livestock prices in recent weeks have been encouraging, but far from sufficient to

alter the distressed conditions facing the District agricultural sector.

St. Lawrence Seaway. Round-the-clock repair work on the 53-year old Welland Canal allowed

vessels to resume passage of this section of the St. Lawrence Seaway on November 7. A line of

waiting vessels had grown since October 14 when a 150-foot concrete section of a lock wall

collapsed. The 24-day cutoff caused consternation among ship operators, shippers, sailors, and

terminal employees directly affected, but no significant wider impact on output and employment

in the District. Attractiveness of the Seaway for shippers is limited by the winter closing,

bottlenecks at locks in peak periods, availability of improved and often cheaper and faster

alternative means of transport, limits on size of vessels which increase costs, and

vulnerability to delays caused by accidents or breakdowns.

The Seaway has never played the

major role envisaged for it when it opened in 1959.

Motor Vehicles. Auto sales fell sharply as expected in October, after being boosted to

record levels in September by auto makers' buyer incentive programs. Inventories, very low at

the end of September, have been increased to more normal levels. Domestic auto makers plan

high production levels into next year. Truck sales continue to set records, but the strength

VII-2

is in light-duty models, especially imports. Sales of heavy-duty trucks have declined, and

growth of demand for medium trucks has slowed.

Steel. Total demand for steel continues slow. Buying by heavy capital goods producers

remains soft. Strength is concentrated in motor vehicles, appliances, and construction.

Shipments to steel service centers also continue strong, as steel users try to hold lower

inventories. Major steel producers, whose steel operations have been at unprofitable levels,

are attempting to push through price increases.

Capital Goods. Orders for most types of mechanical business equipment are still slow.

Oil development gear and food processing equipment are off substantially from last year. Farm

equipment remains severely depressed. An airline recently announced a "record" order for

aircraft, but the only firm order was for 20 aircraft to be delivered starting in the fall of

1986. As a result of the decline in the foreign exchange value of the dollar since February,

some District equipment manufacturers are receiving inquiries from abroad again after a long

lapse. Although there is only limited evidence yet of increased orders for mechanical capital

goods as a result of the lower dollar, one District company reported that some orders are being

placed with domestic suppliers for types of machinery which had previously been ordered abroad,

in response to the shift in relative prices.

Nonresidential Construction. Over the past year, and since the end of recession in 1982,

nonresidential building has risen more vigorously in the District than in the nation, despite

weakness in Iowa, but remains far below the good levels of the 1970s. The rise in Michigan has

been strongest. Commercial construction, mainly stores and office buildings, has accounted for

much of the increase in activity. Office vacancies are large and growing as new buildings are

completed. However, new starts on major office buildings in downtown Chicago are expected.

Commercial mortgage rates have eased about 1/4 percentage point since September, to 11 percent

on 10-year loans and 11-1/2 percent on 15-years loans. The resale market for smaller

industrial and warehouse properties in suburban areas of Chicago has strengthened significantly

in recent months. Overbuilding in industrial parks is being absorbed rapidly. But

VII-3

construction of large manufacturing buildings is at a low level, except for motor vehicle

assembly plants and parts plants of domestic and Japanese companies. Highway construction,

mostly repaving, continues strong.

Residential Building. Construction of housing has continued to recover in the District,

but is still only about half of the pace of 1978. Recovery has been uneven, with Michigan up

most strongly, and Iowa weakest. Used home sales, which did not fall off as sharply as new

homes in the recession, are highest ever (number of units as well as dollars) at some large

realtors. Residential mortgage rates have eased slightly. Lenders and mortgage insurers are

applying tighter standards, but credit is readily available for qualified buyers. Last year's

market was dominated by first-time buyers. This year more sales have reflected people "trading

up". In the Chicago area, there has been a strong rise in apartment construction, but from a

low base and not enough to approach past peaks.

Consumer Spending. Major District retailers report continued sluggish sales of general

merchandise. Inventories are mostly within a normal range. Appliance sales have been good.

Airline traffic has flattened, and excess capacity has led to severe and widespread price

cutting. Increases in prices paid by consumers generally remain low, but rates for auto and

home owners' insurance are rising at least 5-6 percent this year in most areas, and much more

in some localities.

Agriculture. Lower meat production and an unusually heavy movement of grain under price

support loan with the Commodity Credit Corporation account for most of the recent upturn in

farm commodity prices. Corn and soybean production estimates for District states were revised

upward again in November. Corn production is projected up 16 percent from last year and

soybean production up 24 percent. However, wet weather continues to delay completion of the

fall harvest. Hardest hit areas include Iowa, Michigan, and Wisconsin. Some yield losses will

likely result, inflicting more adversity on the financially-stressed farmers affected by the

delays. But any weather-related yield losses will not materially alter the fundamental

situation of excess grain supplies.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary.

Little change in business conditions is expected through next April.

the

third

quarter,

District nonfarm employment

grew

faster

than

nation despite a regional decline in manufacturing employment.

construction activity

construction

September,

increased in the

declined.

District

After

retail

heavy

sales

in

In

the

Residential

third quarter, while nonresidential

consumer

declined

in

spending

October.

in

August

District

and

lending

activity in August through October was characterized by strong consumer and

slugglish commercial

lending.

Record yields

recorded, despite heavy November

for most District crops

were

rains that delayed the completion of

the

harvest in some areas.

Outlook.

Slightly more than half of the 240 District small businesses surveyed in

October expect business conditions to be about the same through April 1986.

Although

42.5

percent

expected

an

increase

in

real

volume

January, only 17 percent thought the period was a good time

through

next

to expand and

most planned no change in employment levels, average compensation, or prices.

Business Activity.

Business activity in District states, as measured by an index of

indicators,

exhibited

widespread

weakness

in

recent

months.

After

seven

only

VIII-2

moderate gains in all four states in July and August,

the indices

declined

in September in Arkansas, Kentucky, and Tennessee and rose only slightly in

Missouri.

Employment.

Eighth

District

nonfarm employment

percent

(annual rate) exceeding

quarter

strength

in

the

grew

in

the national

District

the

quarter

2.5

percent.

rate of

nonmanufacturing

percent decline in manufacturing employment.

third

sector

by

2.9

Third

offset

a

2.3

The District unemployment rate

remained unchanged in September from the August rate of 8.3 percent.

Construction.

District residential

building

contracts

increased

2.0

percent

(simple

rate) in the third quarter but were only 0.2 percent higher than in the same

period last year.

Although nonresidential construction declined 2.8 percent

in the third quarter, the level was 20.3 percent higher than year-ago levels.

Consumer Spending.

Despite an August increase, District retail sales declined 1.1 percent

last

summer

(June-August)

from

the

previous

three-month

period.

Recent

reports suggest the August expansion continued into September, resulting in

a strong

rates

third quarter.

on

contributed

domestic

to

the

Vigorous auto sales

models

and

expansion.

greater

Reports

in response to low financing

availability

from

of

Mississippi,

imported

Tennessee,

cars

and

Arkansas indicate retail sales, particularly car sales, declined sharply in

October from September levels.

VIII-3

Banking and Finance.

For the three-month period ending October, total loans at large District

banks grew at a 6.6 annual rate.

This activity represented a slower rate of

growth than that recorded for the same period in 1984 and was characterized

by sluggish commercial lending and strong consumer loan volume.

Commercial

loans declined at a 9.0 percent rate compared with a 5.0 percent

last

year.

Consistent with

more rapidly over

period last year

13.0

percent

recent experience, consumer lending has grown

the past three months

(11.2 percent).

a 4.5 percent rate during

rate

over

(26.9

percent) than for the

same

same

Real estate lending slackened, growing at

the three months ending

the

increase

period

last

October compared with a

year.

Total

deposits

grew

slightly over the three most recent months, with increased activity in MMDA

and NOW accounts.

Agriculture.

Harvests of most District crops have been completed with record-breaking

yields in many instances.

corn harvest

in northern

Heavy rains in November, however, have slowed the

sections of

the District.

have been delayed in southern sections of

harvested later due to double

cropping.

Soybean harvests also

the District where soybeans are

Efforts

to unify and consolidate

lending operations at the farm credit banks of Louisville and St. Louis are

making

some

associations

out

of

35

production

credit

Stockholders

(PCA's)

the St. Louis farm credit district have approved a

in

of

32

progress.

proposal to merge their associations into a single PCA for the purpose of

more effective pooling of resources.

federal

land

bank

associations.

The

A similar proposal

Louisville

similar plan to stockholders in the coming month.

District

is pending for

will

offer

a

IX - 1

NINTH DISTRICT - MINNEAPOLIS

While employment growth has slowed in the Ninth District this fall,

several positive developments have occurred in the labor market.

spending generally

fell in

October,

but it

may be rebounding

Consumer

in November.

Sharp increases in cattle and hog prices are the main bright spots in the

agricultural sector, where future farm finance remains a major concern.

Employment

The most recent available data indicate slow job growth throughout

the Ninth District.

Minnesota's seasonally adjusted unemployment rate in-

creased to 6.2 percent in September, marking the fourth consecutive month it

has risen.

In Montana, the seasonally adjusted unemployment rate also rose

this fall and is

crease

now hovering around 8 percent.

in nonfarm employment,

Despite a 3.5 percent in-

South Dakota's unemployment

rate rose a bit

during the second quarter.

Major labor market

developments

in the district included the long-

awaited reopening of the old White Pine mine in the Upper Peninsula of Michigan.

Also, a Bank director notes that a preliminary agreement was signed to

build and operate a big paper mill in the hard-pressed area around Duluth,

Minnesota.

In Sioux Falls, South Dakota, a large, divisive strike at a meat-

packing plant was settled.

But in Livingston, Montana, a railroad closed its

repair operation, causing that area to lose 350 jobs.

Consumer Spending

Spending

for general merchandise

in the district

October, but it may be accelerating in November.

slowed

some in

One diversified retailer

IX -2

that

notes

October.

menswear

and

large

Another

sales

accessories

retail chain notes

that

sales

exceeded their generally lackluster level in October.

crease

in

consumer

indebtedness,

retailers

are

lagged

particularly

had

so

far

in

in November

Due to the large in-

closely

watching

credit lines to detect any deterioration in creditworthiness.

customer

Careful plan-

ning of inventories have helped the two retailers maintain good profit margins.

Retailers

around

the

district generally aren't

expecting

land-rush

holiday business and are fearful of accumulating excessive inventories.

Motor vehicle sales have slowed, following an avalanche of September

orders.

Regional offices of domestic manufacturers report that, car and truck

sales were lower during this October than during last October.

Inventories,

which were very low earlier this fall, have now increased to more comfortable

levels.

The Bank's directors from North and South Dakota report that vehicle

sales in their vicinities were still slow in November.

Housing activity continued to pick up in the Minneapolis-St. Paul

area, but activity was spotty elsewhere in the district.

In the Twin Cities,

home sales were 12 percent higher during this September and October than they

were during these months last year.

Residential construction contracts

Minnesota were substantially higher this September than last.

directors

find that

in

But while Bank

housing starts were up in the area around Great Falls,

Montana, they also note that activity was down around Bismarck, North Dakota,

and in western North Dakota.

In general, tourist expenditures in both summer and fall appeared to

have

increased

from 1984 levels.

In the Upper Peninsula of Michigan, the

increase appeared to be about 5 percent.

Good tourism activity in both north-

western Wisconsin and western Montana was also noted by the Bank's Advisory

Council.

IX -3

Agriculture

Because

of a sharp

price index rose in

rise in

cattle and hog prices,

October for the first

major crop prices continued to fall,

Minnesota's

time since last December.

farm

However,

with both corn and soybean prices drop-

ping--the latter to their lowest level since April 1976.

In Minnesota and

South Dakota, the corn and soybean harvest looks bountiful, promising large

government

future

crop payments.

cattle prices

Also,

a drop in

the cattle supply bodes well for

and could help ranchers

recover their summer losses.

Turkey prices are also higher than they were a year ago,

Thanksgiving

for growers in

which will brighten

Minnesota, one of the largest turkey-producing

states.

Farm Finance

Farm finance

concerns.

About

issues were

once again

in

the forefront

of district

one-third of the bankers responding to our late-September

survey of rural bankers in

the district said they referred an abnormally high

number of poor farm-credit risks to nonbank lenders, such as the Farmers Home

Administration.

A Bank director thinks that from 5 to 10 percent of his farm

borrowers won't obtain refinancing for next year.

TENTH DISTRICT - KANSAS CITY

Overview.

Economic activity in the Tenth District appears to be

generally sluggish, with little improvement anticipated in the near future.

Retailers report flat sales and stable prices, conditions that are expected to

continue into next year.

yearend and into 1986.

Automobile dealers are pessimistic for sales through

Inventories of retail goods and materials inputs are

both considered satisfactory.

Homebuilders are cautiously optimistic for

1986, though current conditions are mixed.

Savings and loan institutions also

expect mortgage demand and mortgage commitments to improve slightly in 1986.

Tenth District banks report relatively constant loan demands, deposits, and

loan rates over the last month.

Fall crop yields are well above normal.

Further, but slower, declines in farm land values are expected.

Retail trade.

Retailers report flat sales in the last three months, and

no significant change in sales this year over last year.

Women's wear and

home furnishings sales have been strong while sporting goods and housewares

sales have been weak.

Retailers have been expanding inventories in

anticipation of sales increases during the coming holidays.

Most report that

they are planning on having special sales and promotions for Christmas this

year.

For 1986 retailers expect sales to remain fairly constant and inventory

levels to fluctuate only seasonally.

Prices are stable and are expected to

remain so the rest of this year and through next year.

Automobile Sales.

Automobile dealers report sales have declined

recently, due largely to the elimination of financing incentives.

Sales

currently are about the same to down slightly compared with a year ago.

Most

dealers expect sales to be flat to down slightly through yearend and down in

1986.

Sluggish sales and large shipments of 1986 models have resulted in

expanding inventories.

X-2

Purchasing agents.

Most purchasing agents report that input prices have

remained nearly unchanged over the past three months as well as from a year

earlier.

They generally expect input prices to remain constant for the rest

of the year and foresee no major price increases in 1986.

Very few

difficulties in obtaining materials are reported and few problems are expected

to arise.

All firms report that materials inventories are satisfactory and no

major changes are expected for the rest of the year or in 1986.

Housing activity and finance.

Homebuilders give mixed reports about

current housing conditions, but are cautiously optimistic for 1986.

Housing

starts range from slightly up to significantly down for both single-family and

relative to a year ago.

multi-family structures,

But most area builders

expect starts in 1986 to be as good as or better than 1985.

homes,

prices of new homes,

Sales of new

and the inventory of unsold homes vary widely

Prices of materials are generally steady and

across reporting areas.

materials availability is

good, with no changes expected.

Savings and loan institutions also give mixed reports about current and

future mortgage behavior.

Respondents report a moderate increase in savings

inflows relative to last year, along with slightly lower to constant mortgage

Generally,

demand and commitments.

stable inflows are expected for 1986,

along with slightly higher to constant mortgage demand and commitments.

Most

savings and loans report declining mortgage rates recently, but expectations

for 1986 rates are mixed.

Banking.

Total loan demand,

total deposits, and loan rates have been

relatively constant at Tenth District banks over the last month.

report unchanged demand for commercial and industrial loans.

Most bankers

Half of the

respondents experienced a stronger demand for consumer credit, while the other

half report no change.

Several bankers note that their automobile loans have

not been competitive lately, but credit card lending has increased.

Agricultural lending was flat to slightly down, and bankers continue to

express concern about the quality of agricultural credit.

constant at Tenth District banks.

consumer loan rates.

The prime rate is

Most respondents also report no change in

Total deposits have been stable.

Half of the

respondents had lower levels of demand deposits, but modest increases were

registered for NOW accounts, Super NOW accounts, and MMDA's.

contributions were steady to slightly higher.

IRA and Keogh

Most banks had no change in

passbook savings accounts, although a few report decreases.

Large

certificates of deposit and small time deposits generally were unchanged.

Agriculture.

Fall crop yields are above normal and paydowns on

livestock loans are improving, but liquidations and foreclosures continue with

farm land values still falling.

Fall harvest in the Tenth District is

generally on schedule, although wet weather has delayed fieldwork in some

states.

Corn, soybean, and sorghum yields are reported well above normal in

several district states.

In Oklahoma, normal cotton yields are expected.

Paydowns on livestock loans in Nebraska, Kansas, Wyoming, and New Mexico are

much better than a year ago.

Much of this improvement is attributed to the

recent rebound in cattle prices.

Farm liquidations and foreclosures have

saturated the farm real estate market, and very little land is changing hands.

Some financial institutions that have acquired farmland through foreclosure or

liquidation are not selling at current low prices.

Lenders expect further

declines in farm real estate values in the coming months, but the rate of

decline may not be as sharp as it was a year ago.

Agricultural lenders in

most district states are encouraging their farm borrowers to apply for

Farmers'

Home Administration (FmHA)

guarantees.

Lenders in Colorado and

Wyoming, however, report that they no longer send borrowers to the FmHA,

many sent in the past have failed to qualify.

as

XI-1

ELEVENTH DISTRICT--DALLAS

Evidence of overall expansion in the District economy is scant.

The energy industry continues to weaken.

change in conditions.

Manufacturers report little

Retail sales are rising very sluggishly.

The value

of construction contracts has been increasing, but some signs of a downturn

in office building construction are emerging.

has slowed at District banks.

The rate of asset expansion

Agricultural prices have recently edged up,

but they remain well below a year earlier.

District manufacturers report little change in conditions.

With

the exception of lumber and wood products, respondents find that declines

in the value of the dollar have not yet resulted in increased orders.

Despite some recent improvement in sales, lumber and wood producers expect

the usual seasonal declines in demand to result in temporary plant

shutdowns.

Primary and fabricated metals manufacturers report reductions

in orders, which they attribute to slowing current activity in commercial

construction.

These same manufacturing industries, together with producers

of nonelectrical machinery, also face declining demand from the troubled

oil and gas drilling industry.

Continued sparse sales and excessive

inventories have recently led a number of firms in the District's

semiconductor industry to announce layoffs.

Growing defense spending is

pushing up production and employment in the District's aircraft and parts

industry.

Output is rising in the food processing and chemical industries,

while petroleum refinery activity is slipping and apparel industry demand

remains weak.

XI-2

Drilling activity in the Eleventh District continues to decline at

accelerating rates.

The number of active drilling rigs in Texas is falling

at slightly faster rates than in the U.S.

Leading indicators of drilling,

including the seismic crew count and the number of well permit

applications, are also slipping.

Retail sales respondents report weak growth and say they expect a

poor fourth quarter, overall.

They also note that fashion lines are

selling well while demand for big ticket items, such as home furniture and

electronics, is low.

Retailers say they are managing their inventories

more closely than last year.

The seasonal reduction in auto sales was much smaller in October

of this year than is normal for the period.

Dealers attribute this strong

performance to interest rate promotions offered by domestic manufacturers.

More recently, respondents have begun to report further reductions in

sales, which they attribute to consumer expectations of new financing

incentives.

Price increases for the 1986 models are said to be modest and

dealers expect increased price competition in the coming year.

The value of nonresidential construction contracts increased

strongly in the third quarter despite a slight dip in September.

Non-building construction, particularly of streets and highways, continues

to register the largest yearly gains of any major category.

Construction

contract values for retail stores and office buildings remain above a year

earlier.

The October permit totals for the Dallas/Forth Worth metropolitan

area show a large decline in office building construction, although other

types of construction buoyed nonresidential construction.

XI-3

The rebound in residential construction that has been evident

since mid-1985 has abated.

The value of residential construction contracts

The

fell in August and September, after strong growth earlier this year.

number of housing permits issued in the District fell in September,

reversing the upturn in permit issuance that began early in the year.

of the downturn is due to renewed declines in multifamily building.

Much

Single

family permits continue to rise gradually in response to lower interest

rates.

In October, both total loans and securities at the District's

large banks declined absolutely from a year earlier.

The rate of growth in

loans and securities also declined in both August and September, although

it remained positive in those months.

The pace of decline in October for

loans was substantially larger than for securities, and was concentrated in

consumer loans, business loans, and other loans.

Much of the weakness in

consumer loans is said to reflect past special financing programs offered

by U.S. auto manufacturers.

Real estate loans continued to increase, but

the rate of expansion has lately been ebbing.

Deposits at large banks fell

absolutely from a year earlier and from a month earlier, but MMDA growth

accelerated substantially.

District agricultural prices increased slightly in October from

September, but remained 9 percent below a year earlier.

overall prices masked declines in some crops.

The increase in

Cattle prices are higher

than expected and cattle futures prices for near-term deliveries suggest

continued upward pressure.

The impetus for higher prices comes from

reduced supplies, however, so that total revenue may not increase.

XII-1

TWELFTH DISTRICT -

SAN FRANCISCO

Summary

Overall,

path,

with

among

variations

substantial

District.

Forest

retrenching,

although

deterioration

in

lumber

and

early

activity

semiconductor

signs

is

suggest

slowing.

space

nonresidential

in many

building,

parts

of

the

residential

West

firms

that

has

construction

continue

the

Agricultural

however, continue to suffer from low prices in key crops.

commercial

the

within

to be slowing down in many parts of

products

some

areas

and

sectors

slow growth

on its

economy continues

District

Consumer spending appears

District.

the

the Twelfth

pace

of

producers,

While a glut of

caused

a

activity

slowdown

in

continues

to

vary with location.

Consumer Spending

The

parts

growth in consumer spending appears

of

the Twelfth District.

Although

to be slowing down in many

this

could

be

related

to

the

recent surge of auto purchases, recent substantial declines in shipments by

a

large

freight

further.

carrier

suggest

that

retailers

expect

sales

to

slow

Oregon, Utah, Alaska, and Idaho all report flat or even falling

retail sales.

In contrast, in relatively healthy Southern California and

Washington, where sales growth was relatively soft during the first half of

the

year,

growth

District, more

sales

traditional stores.

spending --

has

strengthened

are

being made

in

by

recent

volume

months.

Throughout

discounters

rather

the

than

Moreover, most areas report a recent shift in consumer

even excluding autos --toward soft goods

such as apparel and

away from durable items such as consumer electronics and furniture.

XII-2

Manufacturing and Mining

sectors

and mining

manufacturing

general,

In

Some

weak.

continue

isolated exceptions including strong drilling activity in Nevada and Utah,

For the most part.

and the opening of some small specialty mines in Utah.

particular,

industries

electronics

the

in

activity

District

Twelfth

however,

these

continue

sectors

In

down.

is

Layoffs

to suffer.

and

losses continue to be reported from California, Utah, Oregon, and Arizona.

Some

suggest

signs

stabilizing after the

remain.

dollar

the

that

troubles of

forest

the

past

products

may

industries

few years,

although

be

problems

Some report increased lumber shipments to Asia as the value of the

falls,

adjustments

but

attribute

this

in Japan and China.

movement

They

to

short-term

inventory

also point out that the declining

value of the dollar does not improve producers' position relative to their

principal

competitors

in

Canada

and

the

southern

United

States.

Nevertheless, the continuing shakeout among lumber producers is yielding a

leaner,

lower

respond

to

cost,

these

more

threats.

softwood lumber prices

of

efficient

One

industry,

positive

the

downslide

for

is

the

better

able

industry

to

is

that

in October were less than 1 percent below the level

October 1984, compared to a 6 percent

while

sign

which

may

be

slowing,

the

drop

the

industry

previous

remains

year.

Thus,

troubled,

as

low-priced competition from British Columbia and the South continue to cause

consternation in the Pacific Northwest.

Agriculture

Producers of agricultural products continue to suffer from low prices

induced

by

growing

worldwide

production

and

relatively

weak

demand.

XII-3

Spurred by a continuing downward price slide, cotton acreage has fallen by

300-400 thousand acres in recent years.

well

recent

year-ago

their

below

On

weeks.

although

levels,

the

side,

bright

the

Prices for wheat and cattle remain

inched

prospects

for

upward

in

are

potatoes

prices are reviving from a

crop quality is good and

improving, as

they have

short

slide late in the summer.

Construction and Real Estate

In many parts of the Twelfth District, high commercial vacancy rates

are

starting

to

authorizations.

be

reflected

in

slower

nonresidential

permit

Exceptions are primarily in smaller metropolitan areas in

Idaho and California's San Joaquin Valley, where vacancy rates remain below

10 percent and nonresidential activity is, in the words of one respondent,

"on a roll".

Residential

District.

construction

activity

varies

Despite Oregon's economic problems,

substantially

within

the

some report an upswing in

residential construction activity there, particularly of multifamily units.

Multifamily

Arizona

construction is also

have

curtailed

strong in Idaho,

apartment

and

but gluts

in Utah

condominium developments

in

and

those

areas.

Finance

Trends

in

Interestingly,

consumer

some

of

the

loan

volume

areas

whose

likewise

economies

including Oregon and Alaska report steady -growth

in

volume, while

California

vary

are

by

location.

struggling

more,

although relatively modest --

and Washington,

whose

economies

are

XII-4

among the strongest in the District, report a slowdown from their earlier

borrowing binges.

Banks report that delinquency rates are either stable or

rising, and range from less than 1 percent to almost 3 percent.

reported

delinquencies

for

bank

cards

and

installment

and frequently rising --

invariably showed higher --

credit

Those who

separately

delinquency rates for

credit cards.

Reported mortgage

interest

hover at or below 12 percent.

rates

for

30-year

fixed

rate

instruments

Several banks reported slightly lower rates

than in the previous month, but one bank reduced its mortgage rate by 50 to

75

basis

points

overall,

although

reported

that

during

the

past month.

Mortgage

there

are

exceptions.

One

volume

Oregon

through August its volume had fallen

bank,

appears

for

strong

example,

16.3 percent from the

same period a year earlier.

The few reports on commercial loan activity suggest that it is weak.

respondents reported strong commercial loans.

No