Beige Book
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
March 1986
TABLE OF CONTENTS
SUMMARY ..............................................................
First District - Boston
i
........................................................
I-1
Second District - New York............................................II-I
Third District - Philadelphia ..............
..
........... .........
...... III-1
Fourth District - Cleveland ............................................
Fifth District - Richmond .............................
Sixth District - Atlanta .......
IV-1
..................
.............................
V-1
.......
VI-1
Seventh District - Chicago ..........................................
VII-1
Eighth District - St. Louis ......................................................
VIII-1
Ninth District - Minneapolis ...........................
Tenth District - Kansas City ..........
................
............. ....................
Eleventh District - Dallas ............................................
Twelfth District - San Francisco ......................................
IX-1
X-1
XIXII-1
SUMMARY*
Moderate economic expansion has continued in most regions of the country in
recent weeks, despite unevenness across sectors.
Recent improvements in economic
activity are noted by New York, Cleveland, Kansas City, and Philadelphia.
Richmond
and Atlanta report sustained growth at a relatively strong pace, while Minneapolis and
Boston indicate mixed conditions with no clear direction for the overall economy.
The major sectors of strength included construction and selected manufacturing
industries.
Although industrial activity varied across Districts, general improvements
were noted for energy-intensive manufacturers such as the lumber, paper, aluminum, and
steel industries.
Both commercial and residential construction continue strong in most
Districts, with several reports noting benefits from falling mortgage interest rates.
Major economic weaknesses continue to be concentrated in the agricultural and energyproducing sectors, and further deterioration is anticipated because of continuing price
declines, especially for oil.
Consumer spending growth, although characterized as
moderate, was noted in nearly all Districts.
Industry
Industrial
activity
appears
improvement in manufacturers
mixed,
according
to
District
reports.
Solid
shipments and orders was reported by Cleveland in
contrast to substantial declines earlier. Philadelphia reports continuing healthy increases
in orders but little change in employment. Orders are improving for both the aluminum
and steel industries, according to Cleveland and Chicago.
Boston reports increased
orders for manufacturing products related to housing, and signs of an upturn for the
forest products industry are reported by San Francisco, Cleveland, and Richmond.
In
contrast, Minneapolis reports mill closings due to continuing imports of forest products
*Prepared at the Federal Reserve Bank of Atlanta.
from Canada.
The aerospace industry is prospering.
The steep drop in oil prices has
stimulated energy-intensive industries, according to Atlanta.
Although chemical firms
have yet to benefit from lower prices for petroleum based inputs, producers are
optimistic about the outlook.
Richmond states that textile producers' workweeks are
increasing and inventories are favorable.
Other Districts continue to show declines in industrial activity.
Large scale
cutbacks in manufacturing employment were cited by New York, and staff reductions
related to business mergers and cost containment programs are noted by Chicago.
Manufacturers' inventories are reported to be tolerable, and there appears to be little
upward pressures on prices.
Minneapolis, Dallas, San Francisco, and Atlanta report further weakness in their
energy sectors following recent declines in oil prices.
Minneapolis reports rig counts in
North Dakota at the lowest level in five years, and Dallas reports a 30 percent reduction
from last year's depressed levels. In Alaska, where oil revenues contribute 85 percent of
state revenues, the Governor has already taken steps to reduce state spending.
Consumer Spending
There was widespread agreement among commentaries that consumer spending
was up moderately in January-February from year-earlier figures.
Consumer goods
inventory levels across much of the country tended to be lean and under control. Boston
reported that sales were somewhat volatile, in part because consumers are promotionminded.
"Cautious" consumer spending was reported by Chicago and New York, with the
latter attributing it to uncertainty over the course of the economy. As usual early in the
year, sales of nondurable goods tended to outpace durables.
Dallas suggested that
declining seasonally adjusted housing activity also contributed to relative weakness in
durable goods sales there, and that sales in energy-dominated regions were rising less
than in other areas.
Kansas City reported some unwanted inventory build-up at retail
with slightly reduced prices as a consequence, while Boston noted that prices of imported
goods are rising.
The outlook for tourism in the Southeast has improved as a result of
discount airfares, according to Atlanta.
Auto sales are apparently showing varied temporal and geographical results.
Atlanta's report of volatile activity, related to waves of limited-time cut-rate financing
deals, was a typical commentary.
However, Cleveland reported fairly strong and stable
growth
City,
of sales,
while
Kansas
Dallas,
and
San
Francisco
reported
flat,
disappointing, or declining auto sales.
The dominant range of outlooks for overall consumer spending and for autos,
particularly, seems to be moderate-to-bright.
raising their sales forecasts.
Philadelphia reported that retailers are
Exceptions are those areas most adversely affected by
declining energy prices, where spending growth prospects are considerably dimmed.
Construction
Residential real estate markets are generally strong, and most Districts report
some improvement in both sales and construction.
The notable exceptions were in the
Dallas District, where residential activity declined due to the uncertain
regional
economic outlook, and in the New York District, where cold weather, snow, and a labor
shortage have slowed construction.
Atlanta reports severe residential real estate
weakness in Louisiana, which shares the energy sector problems of the Dallas District.
Commercial construction also continues strong generally, although it is clearly
weakening in the Dallas District.
Atlanta noted a significant shift of commercial
construction resources away from offices and stores toward light industrial buildings.
Financial Services
Although reports vary among regions,
increase in recent weeks.
the nation's total loans continued to
Dallas, Richmond, and Philadelphia indicate an increase in
total loan growth, while Atlanta reports that the decline in growth in its region was
checked for the first time in almost a year. New York, Philadelphia, and San Francisco
reported that declining mortgage rates are sustaining mortgage volume and boosting the
rate of refinancings.
There are indications of declining or softening commercial lending
at Dallas, Kansas City, and Atlanta and weaker consumer lending at Cleveland and St.
Louis, the latter probably due to competition from auto dealer special financing
packages.
Agriculture
Most of the farm sector remains under heavy financial pressure resulting from
large crop supplies and weak demand, which have continued to reduce market prices of
most farm commodities.
Depressed returns prevent heavily indebted borrowers from
meeting scheduled loan payments, and farm foreclosure rates are rising principally
throughout the areas of field crop production.
Kansas City reports that from 6 to 10
percent of farm borrowers will be denied credit this spring.
The Farmers Home
Administration has mailed notices of potential foreclosure to 40 percent or more of their
borrowers in several states in the Southeast.
Minneapolis reports a banker's projection
that one-third of indebted farmers in South Dakota will eventually leave farming.
San
Francisco relates that in addition to low prices and heavy import competition, some
orchard producers suffered severe losses from recent flooding.
On the brighter side,
Richmond and Atlanta point out that poultry producers are doing relatively well with
firm prices, expanding output, and falling feed costs contributing to growing profits.
Conversely, Dallas indicates beef cattle feeders are stressed by depressed cattle prices
and declining marketings.
I-1
FIRST DISTRICT-BOSTON
The pace of economic activity in the First District is quite
unbalanced.
Retail sales are expanding modestly,
according to plan.
The
manufacturing situation is mixed, with some responders experiencing a
softening in order rates and others, most notably those in housing-related
areas, enjoying an upturn.
The residential real estate boom continues.
Perhaps the most notable development in
this month's report is
the
divergent import price experience of manufacturers and retailers.
manufacturing
While
respondents have not observed any appreciable increases in
the prices of imported components and materials, several retailers have
seen very substantial increases in
import prices.
These increases will
appear in prices to the consumer in a month or so.
Retail
Retail sales in
the First District in
January and February were
generally consistent with plan, but contacts reported an increase in
volatility.
contacted.
Inventories are also according to plan for most merchants
Several firms expressed concern about consumer acceptance of
projected price increases for imported goods resulting from the decline in
the dollar.
Aside from one chain experiencing a downward sales trend, contacts
report moderate sales growth in January and February,
levels.
about at planned
Several contacts said consumers are becoming even more promotion-
minded,
with sales revenues swinging widely in
perceived value.
rise in
For example,
response to advertising and
a home furnishings chain reported that sales
a predictable way for major promotional events, but that the
traditional correlation between sales and new home production has
disappeared.
Inventories were reported to be as planned.
Firms with increasing
sales have been increasing inventories to support them while
the one contact with weak sales has been reasonably successful in keeping
inventories in check.
Prices are reported to be stable except by firms with considerable
imports.
One respondent cited a 30-35 percent increase in costs for
selected home furnishing items from Europe.
The firm is
concerned that
consumers will balk when these price increases are passed on in the next
month or so.
First District merchants expect moderate but not robust sales
growth in 1986.
schedule,
Warehouse expansions and store openings continue on
but several contacts said they will be more comfortable after a
few months of steadier growth.
Manufacturing
Reports from the manufacturing sector are mixed.
Some respondents
have experienced a softening in orders relative to a year ago, while others
have enjoyed a pickup.
Orders for housing-related products and
communications equipment are rising.
According to one respondent, demand
I-3
for housing products is increasing daily.
Sales of both capital equipment
and supplies to the U.S. automakers are holding up well.
Sales to the
machine tool and apparel industries, on the other hand, are disappointing;
respondents attribute the poor sales to the effects of foreign competition
on their customers.
Respondents continue to encounter strong resistance to price
increases, except when they have a unique product.
Prices of purchased
materials and components, including imports, are well behaved.
For this
group of manufacturers, the most important effect, to date, of the decline
in the value of the dollar has been to make the earnings of foreign
subsidiaries appear more attractive.
However, one contact from the machine
tool industry reported that a colleague had received a number of orders
from Europe as a result of the dollar's decline and another contact
reported that European shoe producers are finding it more difficult to sell
in the United States.
Most respondents will spend as much or more on plant and equipment
in 1986 as they did in 1985.
Employment levels are expected to be fairly
steady.
Real Estate
The residential real estate market in the Boston metropolitan area
is very strong.
Housing prices, which increased about 70 percent over the
past two years, are still rising.
In a number of communities prices are
said to have risen 5 to 10 percent just since the end of 1985.
Realtors
attribute the sharp rise in
prices to the strong economy and tight supply.
Home production is up, but has not kept pace with demand - in part because
of limited building space and no-growth attitudes in many communities.
The
greatest growth in housing has been in the outer suburbs to the west and
southwest of Boston.
The housing market is also said to be strong in
southern New Hampshire and the Providence area.
In commercial real estate, many new office buildings have recently
been built in
the Boston suburbs and more are coming on-line.
rates have been healthy,
but so much space is
Absorption
available that the vacancy
rate has reached 20 percent and developers expect it to go higher.
and supply are more in
is
about 10 percent.
balance in
downtown Boston, where the vacancy rate
While a lot of new space has been added,
percentage increase was not as large as in the suburbs.
vacancy rates are still
Demand
the
Because Boston's
lower than those of other major cities, developers
from other parts of the country are becoming interested in Boston.
At the
same time, some Boston developers are beginning to look at other New
England cities.
about 15 percent.
Providence and Hartford are said to have vacancy rates of
Vacancy rates in
southern New Hampshire are about 25 to
30 percent but some developers find the area attractive because absorption
rates are high and there is a lot of land available to develop.
II-1
SECOND DISTRICT--NEW YORK
The
weeks.
Second
Department
District's
store
sales
earlier, resulting in generally
in
office
leasing
homebuilding
activity
remained
activity
were
announced
sizable cutbacks.
were
improved
moderately
somewhat
higher
in recent
than
satisfactory inventory levels.
was
strong
business
economy
noted
where
mixed,
in
a
number
weather
however,
Small banks
of
several
year
A pickup
areas,
permitted.
and
a
Reports
and
on
manufacturers
in the District have not
yet
adjusted mortgage rates to reflect the latest sharp declines in market
rates.
Consumer Spending
During
the
first
two
months
of
1986,
District
consumer
spending grew only moderately from year-earlier levels, more or less in
line
with
retailers'
expectations.
As
a
result,
inventories
were
generally reported close to target.
Bad weather
during
the
February President's
Week promotions
was cited as a factor in the moderate performance of District department
stores.
because
Moreover,
some
retailers
of uncertainty over
believe
the course of
consumers
spent
the economy.
cautiously
Also,
several
stores noted that consumers seem to be increasing their buying at small
specialty and discount stores, leading to lower sales at the department
stores.
Business Activity
Second District business conditions continued mixed in recent
weeks.
Buffalo purchasing managers
reported a marked increase in new
II-2
orders
and
December.
The
in
during
production
However, managers
percentage
of
January,
following
in Rochester noted
Buffalo
firms
with
higher
the
a
slowdown
in
opposite pattern.
inventories
also
rose
somewhat, but by far the majority of purchasing managers in both cities
reported inventories at stable or lower levels.
While some plant expansions and new projects were announced,
plans for large-scale employment cutbacks by District manufacturers have
recently dominated the news.
have
terminated
period.
By
1200 jobs
year's
end,
By the end of March, Eastman-Kodak will
in
the Rochester
Kodak plans
a 10
worldwide workforce from the 1985 level.
area over
percent
a
three-month
reduction
in
its
A full 10 percent decline in
Kodak's Rochester employment would mean the eventual elimination of 5400
jobs
there.
Also
reduction
of
producing
a less
a GM unit has
in Rochester,
1500 workers
as
it
labor-intensive
changes
fuel
announced a
from making
system.
possible
carburetors
to
In addition, while GE
plans to hire 270 workers for a new subway repair shop which will begin
operating in the Buffalo area by July, it also will eliminate some 1500
jobs at a Schenectady plant because of depressed demand for the turbines
and generators produced there.
(In February, the unemployment rates of
6.8% in New York State and 5.9% in New Jersey remained below the national
average.)
Construction and Real Estate
Homebuilding
and
snow,
but
a
good
in the District has slowed somewhat due to cold
deal
foundations laid earlier.
of
activity
continues
on
structures
with
In Manhattan, where an unusually large number
II-3
of multifamily units was started to qualify for local tax benefits before
they
expired
in
November, a
shortage
currently
reported
Throughout
the District, builders
due
to
the
of
high
structural
level
expect 1986
of
wall
laborers
building
to be
is
activity.
another good year
following the record level of housing starts in several areas during 1985.
High
or
rising
levels
of
leasing
activity are
reported
in
office markets throughout the District, and improving occupancy rates are
anticipated.
Despite a softening market for downtown Manhattan office
space,
observers
retail
development
are
in
encouraged
the
by
area.
the
resurgence
However,
residential
an
oversupply of such space is prompting caution on the part of lenders.
In
Connecticut
fewer new
office projects
midtown
and
Manhattan,
Fairfield,
in
of
are being undertaken
because of concerns that a shortage of affordable housing will limit the
county's ability to attract new office tenants.
Financial Developments
Mortgage
rates
at
small
Second
District
banks
have
been
trending down for several months, but they do not yet reflect the sharp
drop in market rates since mid-February.
Fixed rate mortgages are still
in the 11 to 12 percent range but are expected to come down in the near
future.
rate
The consensus among bankers
declines
forestalling
is
any
keeping
sizable
is that the expectation of further
mortgage
shift
out
demand
of
relatively
adjustable
constant
rate
and
mortgages.
Refinancings account for as much as 40 to 50 percent of business at some
banks, but this percentage has been relatively stable over the past few
years.
III-1
THIRD DISTRICT - PHILADELPHIA
The Third District economy is healthy, on the whole.
Business continues to
improve in the manufacturing sector, although order backlogs and employment have
edged downward slightly in recent weeks.
Retail sales in January and February
were in line with or above merchants' expectations, and unplanned discounting
was minimal.
Bankers report continued growth in lending, although not at the
rapid rate of increase of early 1985.
The outlook for the next six months is generally positive.
Manufacturers
expect continued improvement, although they do not foresee any near-term
increase in employment.
Retailers see no signs of slackening consumer demand,
and they are raising their sales forecasts for the first half of the year.
Bankers predict steady growth in commercial and consumer loan demand, as well as
mortgage lending at current interest rate levels.
MANUFACTURING
Industrial activity in the Third District is expanding marginally,
according to the latest Business Outlook Survey.
Twenty-three percent of the
firms replying to the March survey say their business has picked up from a month
earlier while 13 percent say business is down.
respondents report no change.
Sixty-four percent of the survey
Conditions are substantially the same for
manufacturers of durable and nondurable goods.
Third District manufacturers have increased shipments, but made only slight
gains in winning new orders; the level of unfilled orders has dropped
fractionally.
Employment rose at 10 percent of the plants covered by the March
survey but declined at 25 percent, thus offsetting last month's slight gain.
III-2
Prices of industrial goods are steady in the region.
More than 80 percent of
the companies surveyed report no change in the prices of either goods purchased
or goods sold this month.
Optimistic views prevail among the local manufacturers participating in the
latest survey.
More than 40 percent forecast continued expansion and look
forward to increases in new orders and shipments over the next six months;
another 40 percent expect a continuation of present conditions.
Employment
prospects are not as bright, however; most manufacturers surveyed in March do
not expect any change in payrolls or working hours between now and autumn.
RETAIL
Third District retailers say sales during January and February ran above
the same period a year ago.
One major department store reports sales up by
nearly 8 percent over January-February 1985, and a retailer with stores
throughout the Third District says an upgrading of product lines has been very
successful.
Most products are selling well, including appliances, which had not
been strong performers during the Christmas shopping season, and stores have not
had to take unanticipated markdowns to maintain post-Christmas sales.
Third District retailers contacted in March have raised their sales
forecasts.
They expect the strength exhibited by most product lines in January
and February to continue.
Although sales of spring merchandise have been
restrained by cold weather recently, merchants are carrying sizable inventories
of these items in anticipaton of strong sales once warmer weather takes hold.
FINANCE
Total loans outstanding at large Third District banks in February were
approximately 10 percent higher than a year earlier.
A dip in commercial and
industrial loans outstanding in late January and early February had been
recouped by the beginning of March, according to lending officers.
Third
III-3
District bankers expect the current economic expansion to continue throughout
1986, providing the impetus for growth in business lending of 10 percent or
more during the year.
Commercial leasing has declined substantially.
Local bankers do not expect
this business to revive unless proposed tax changes, which have negative
implications for leasing, are modified, or the date of their implementation is
postponed.
Although consumer lending is still moving up, the rate of increase has
eased at Third District banks.
Automobile manufacturers' incentive financing
programs have taken installment lending market share from banks.
Growth in
credit card loan volume has been slowed by seasonal repayments of credit
balances by consumers as well as by more cautious lending by Third District
banks in response to rising delinquencies. Mortgage lending is brisk, both for
refinancings and home sales.
Third District bank deposits are increasing at about the same rate as they
did during 1985, with growth relatively stronger in money market deposit
accounts and longer-term CDs.
With slower growth in loan portfolios than last
year, banks are committing a larger portion of new funds to money market
instruments than they did in 1985.
Local bank economists are raising their forecasts of economic growth in
response to the drop in oil prices, a depreciating dollar, and a sustained high
level of consumer demand.
Nevertheless, they do not expect much upward pressure
on interest rates until later in the year.
Most economists anticipated the
recent cuts in the discount rate and prime rate.
As for long-term rates, they
expect Treasury bonds to remain at 8 to 8.5 percent.
Rates are expected to rise
by year-end, however, with short term rates up about 30 basis points and long
term rates up about 50 basis points.
IV-1
FOURTH DISTRICT - CLEVELAND
Summary.
This
but
District's
not
economy continues
to
improve.
robustly.
Unemployment
rates
especially in Ohio.
Manufacturers
report
softness
remain.
Some
oil
wells
have
fallen
signs of
being
are
Retail
sales
but
are
rising
remain
high,
strength, but pockets of
closed
of weak prices.
because
House construction, sales, and mortgage refinancings are being stimulated by
falling
rates.
interest
Banks
are
optimistic
business
about
loan
demand,
but their consumer loan growth is slowing.
Consumer Spending.
Consumer
Major
national economic trends.
to
are
7% above
year-ago
categorized
which
their
retailers
report
nominal
Household nondurable
levels.
strong,
particularly
retailers
District continues for the most part to mirror
spending in this
is
typical
for
inventory
February
the
sales
roughly
goods and apparel
season.
positions
as
Although
4%
sales
most
"manageable,"
inventories appear to be somewhat above year-ago levels.
District
auto
express
dealers
report
that
sales
prospects,
and
auto-sales
data have not reflected
the national auto market.
of
domestically
made
new
growing
to
in
are
1986
sales
Surprisingly,
local
about
good.
the monthly volatility
During the
cars
date
optimism
first two months of
this
area were
nearly
their
characteristic of
1986,
5%
unit
above
sales
year-ago
IV-2
levels.
Most
auto
dealers,
including
some
import
dealers,
report
that
new-car inventories are high.
Labor Market Conditions.
The Ohio and Pennsylvania unemployment rates (s.a.)
8.7% and 7.1%, respectively.
of
erratic monthly
unemployment
while
changes,
was
fell in February to
Ohio's unemployment rate continued on its path
dropping
in
February because
essentially unchanged.
employment
Pennsylvania's
rose
unemployment
rate continued its downward trend as employment rose while unemployment fell.
Manufacturing.
Manufacturing activity in this District shows solid signs of improvement
in the doldrums.
after several months
not
but
yet
robustly.
Firms
months.
continues
firms
manufacturing
Despite
continue
also
New orders and production are rising
this
the
slow
to
reduce
good
of
decline
the
raw materials
past
and
four
or
finished
five
goods
slightly higher
On balance, manufacturing firms report paying
inventories.
at
employment
performance,
that dollar
depreciation
has begun to increase their export sales or increase the prices
they pay for
prices
for
raw materials.
A few contacts report
Carbon steel prices are reported to have begun to firm
imported materials.
and some industry representatives expect the industry profit/loss
be
better
this
year
aluminum industry.
parts
of
this
than
last.
Some
strength
Nevertheless, a great deal
District;
for
example,
one
also
is
reported
of softness
contact
results to
reports
remains
concern
for
the
in many
that
major manufacturing plant may shut down temporarily because of weak orders.
a
IV-3
Energy.
Some oil wells in southern Ohio are being closed because of weak prices
and because buyers
price
cuts.
declines
reports
Gas
in
steam
that
the
reluctant
are
capital
are
costs
prices
are
price of coal
In many locations coal
is
to
good
oil
in
being
they
when
reported,
expect
Ohio.
southern
is quite insensitive
but
to
a
further
Some
major
slight
producer
falling oil prices.
relatively cheaper than oil, and very
still
required
purchase
remains
production
coal
to
a coal-fired
convert
oil prices
conversions won't be made unless
to oil-fired so
boiler
to
are expected
large
low
for
expect
the
1986,
but
remain
an extended period.
Housing and Construction.
mortgage
Realtors,
strength
current
of
and
lenders,
housing
in
builders
to be
markets
this
District
throughout
sustained
they are skeptical of the rosier national forecasts.
Mortgage
deluge
of
mortgages
mortgage
or
and
They expect
particularly
fixed-rate
that
refinancings
adjustable-rate
for the lenders.
persist,
report
lenders
as
the
falling
by
borrowers
the strong demand for
gap narrows
rates
have
high
rate
with
generating
mortgages,
substantial
prompted
are
for
a
fixed-rate
fee
income
fixed-rate mortgages
between rates
mortgages
Fifteen-year
mortgages.
mortgage
to
adjustable-rate
popular
despite
the
higher monthly payments.
Housing and commercial
this
District,
home
builder
single-digit
although
doubts
interest
construction
there
that
a
rate
is
is doing very well
in some parts of
some concern about overbuilding.
A major
the
evolving
building
boom
environment
will
because
result
there
from
is
little
pent-up
IV-4
demand
for
housing
and
lower
interest
rates
are
needed
merely
to
keep
housing activity at current levels.
Realtors
listings
staff
is
soon
report
closings
declining
because
to
they
a
surged
low
are
in
level.
wary
February
Most
about
and
the
inventory
realtors have no plans
how
long
and
strong
the
of
to add
housing
market rebound will remain.
Commercial Banking.
Business
industrial
loan
loans
commitments
are
demand
banks
is
growing
District
outstanding
generally
future loan demand.
of expansion has
at
at
up,
Consumer
fallen.
only
at
large
and
is
banks
contacts
installment
Consumer
a
banks
improving.
continue
are
continues to be hurt by cut-rate auto loans
companies of domestic auto manufacturers.
fairly
lending remains
installment
single-digit
to
pace.
credit
Bank
Commercial
and
increase.
Loan
optimistic
about
good but
outstanding
installment
the
at
rate
large
lending
being offered by captive finance
FIFTH DISTRICT - RICHMOND
Overview
Economic activity in the Fifth District, on average, remains
moderately strong.
There are, however, many booming areas, such as
the Research Triangle area in North Carolina and suburban Washington,
as well as depressed areas such as West Virginia.
Consumer spending
has not shown signs of accelerating, and reports of increasing
delinquencies on installment debt are beginning to appear.
Manufacturing, on the whole, is steady.
Single-family housing appears
to be the strongest segment of the construction industry.
High
inventories are depressing prices and expected production for several
crops; the demand for poultry products, however, is high and growing.
Consumer Spending
Consumer spending in early 1986 has not been as robust in most
areas of the District as many observers had wished.
Two executives
from major department stores noted that January and early February
sales were flat, and they were concerned about the success of spring
promotions.
It was noted, however, that some specialty stores in the
District had fairly strong sales gains.
A furniture manufacturer also
noted lackluster retail sales in January and early February.
A survey
of directors revealed that none saw rapid growth in consumer spending
in their own areas, a few saw little or no growth, and most saw
moderate growth.
Projections for tourism in the Carolinas call for
further gains in 1986.
V-2
Manufacturing
In contrast to 1985, inventories of textiles and textile products
are, on the whole, tolerable, and are not putting severe pressure on
manufacturers to cut production and employment.
Although employment
is not increasing, some evidence of an increase in the length of the
workweek is beginning to surface.
The strength of the housing market has begun to affect the lumber
industry.
Mill orders for products made from southern pine have
increased in January and February from levels in the fourth quarter of
1985.
Also, a chemical producer expressed guarded optimism concerning
the outlook for the chemical industry in 1986, due to low oil prices
and rising growth in Europe.
In South Carolina, several new
manufacturing plants have recently been announced, including plants
owned by Pirelli, Mack Trucks, and United Technologies.
In general,
manufacturers' inventories in the District appear to be in line with
sales.
Construction
Concern continues to be expressed about the potential for
overbuilding in office space in several areas of the fifth District.
Also, vacancy rates of apartments appear to be rising in some, but not
all, areas of the District.
Single-family housing has recently been
strong in many localities in the District, with observers noting the
possibility of even stronger growth in 1986 in response to recent
declines in mortgage interest rates.
Demand for residential mortgages
is high, due to the strength of home sales and the refinancing of
existing mortgages.
V-3
Financial Institutions
Most directors associated with financial institutions are seeing
rising delinquencies of consumer installment debt.
A few directors
are also noting higher delinquencies for revolving credit and home
mortgages.
The volume of lending is following the national pattern,
with large increases over year ago levels.
Agriculture
Inventories of most crops, including peanuts, corn, wheat, and
soybeans, are very high, resulting in downward pressure on prices
(excluding some seasonal increases).
Corn production in the District
will not necessarily decline, however, due to strong demand from
poultry raisers.
Also, in North Carolina, it is estimated that
growing corn will be profitable for many producers, due to low
production costs.
Production of cotton, however, is likely to be
unprofitable due to declining demand from textile mills.
High
inventories are putting downward pressure on peanut prices.
Weak
export demand for tobacco is also evident.
Cattle prices are at unusually low levels.
Producers of pork and
beef products are expected to benefit from lower grain costs, however.
The poultry industry is the bright spot of District agriculture,
with production high in 1985 and expected to rise in 1986.
Per capita
chicken consumption is expected to rise by two pounds in 1986.
production is also rising.
Turkey
Scattered outbreaks of avian flu, however,
concern poultry producers in the District.
VI-1
SIXTH DISTRICT - ATLANTA
Economic activity in most sectors of the Southeast sustained the stronger pace
that emerged around the turn of the year.
Reductions in borrowing costs and prospects
for substantial declines in energy prices have begun to stimulate regional industries, and
employment
has been growing.
construction
activity
With some exceptions, residential and commercial
remain strong.
With
regard to commercial
space,
building
continues despite high office vacancy rates. The outlook for tourism has improved, and
regional airline traffic has responded to declines in fares and prospects of further cuts.
Consumer spending has moderated.
Many of the region's crop farmers are delinquent on
their loans, though prospects are better in a few selected agricultural areas.
Employment and
Industry.
Unemployment
District states from December to January.
national jobless rates.
Alabama
rates
fell moderately
in most
Florida and Georgia continue to post below-
and Tennessee are slightly above the nation, but
continued weaknesses in energy and agriculture have kept rates in the double-digit zone
in Mississippi and Louisiana.
inventories
The region's paper producers have trimmed excessive
to near-normal levels, and plant operating
rates have begun
to climb.
Sawmills are being helped by declining energy prices and imports of low-cost timber from
Canada.
Lower oil prices are expected to stimulate demand for petrochemical products
by lowering costs and prices.
Home appliance producers in Alabama and Tennessee are
encouraged by the better housing situation.
In contrast to declines for other textile
producers, Georgia carpet mills have added 2,700 workers over the year in response to
strong demand for carpets used in automobiles, offices, and homes.
Consumer Spending.
Retail contacts report that sales in early 1986 are only
moderately higher than a year ago.
Most respondents also report a continued tight
inventory stance in an effort to control costs more closely in an environment where
VI-2
profit margins are narrow.
Although merchants expect only a slight improvement in
March compared to last year, mild optimism prevails for the second quarter.
Changing
manufacturers' incentives are credited with getting 1986 auto sales off to a weak start
compared to last year.
Construction.
In most of the region, construction and sales of single-family
housing remain firm to good.
However, severe weakness is evident in Louisiana's
markets, and several large Florida markets exhibit growing softness.
building has begun to concentrate in the stronger leasing markets.
Multi-family
Apartment vacancy
rates continue to rise in most areas as new construction outpaces absorption.
Office vacancy rates remain high throughout the Southeast, yet construction
continues in many markets.
In those markets where office construction is dropping off,
light industrial space seems to have grabbed the attention of developers.
Overall,
construction of retail space has attracted little new interest, and the market for
industrial and warehouse space is also sluggish. All sectors of nonresidential construction
are facing a slowdown in the New Orleans area, and the continuing decline in oil prices
dashes hopes of any turnaround in the near future.
Financial Services. Loan growth at large District banks held steady in January
after almost a year of consistently slowing growth.
The strength of real estate and
consumer lending balanced January's softer business loan demand. In February Alabama
passed a regional interstate banking law which will become effective in July 1987. Now
four of the six District states have interstate laws, including Alabama, Florida, Georgia,
and Tennessee.
Of the remaining two states without such laws, Mississippi currently has
a bill in the state legislature, and a bill is expected in Louisiana when the legislature
convenes in April.
VI-3
Tourism.
Data for airline passengers, auto travel, and lodging receipts indicate
strong early-year performance, and contacts continue to hold positive outlooks for the
remainder of 1986. Throughout the Southeast hotel/motel industry personnel are looking
for an increase in domestic travel and occupancy rates due to the dollar's decline relative
to currencies of most other advanced economies. There are also predictions of increased
foreign travel to the United States, particularly Latin Americans to Florida.
convention bookings are looking good in most District markets.
Advance
Regional air travelers
have recently experienced much cheaper air fares, and, with the intended acquisition of
the region's second largest airline by a confirmed discount carrier, air travel costs seem
likely to drop further.
Agriculture.
indebted crop farmers.
Financial conditions remain precarious for the Southeast's heavily
Thirty-five percent of the region's borrowers from the Farmers
Home Administration (FmHA) are delinquent on their loans compared with 20 percent for
the nation. Mississippi and Georgia are the second and third ranking states nationally in
number of FmHA delinquencies.
About half (over 3,700) of Georgia's FmHA borrowers
and around 40 percent of such borrowers in Florida, Mississippi, and Louisiana are
delinquent on payments, and most have been mailed notices of potential foreclosure.
sharp
In
contrast to most other farmers, poultry and vegetable producers are doing
relatively well. Reduced feed costs have raised profit margins for broiler growers, while
the prospective returns to Florida's winter vegetable producers are being boosted by
increased acreage, with prices averaging about one-fifth above the year-ago level.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. Reports from respondents and other information indicate that moderate overall
expansion in the Seventh District continues. The plunge in oil prices and the recent sharp drop
in interest rates (which some analysts believe is related to lower oil prices) are contributing
to favorable expectations regarding the economic outlook. Chicago purchasing managers reported
a healthy upturn in orders and production in January and February, but not in employment.
Commercial and industrial electric power usage in the region has been on an upward trend since
last summer, breaking the sluggish trend of recent years. Construction activity continues at a
vigorous pace in portions of the District, notably the Chicago area and southeast Michigan, but
is soft in other areas, particularly in Iowa, primarily an agricultural state. Demand for motor
vehicles remains strong, but will require ongoing incentive programs. Orders for steel are
improved. Employment growth in this region continues to trail the nation. Heavy emphasis on
cost containment, merger-related staff reductions, and plant closings have restrained hiring and
caused layoffs, in a wide range of industries. Agriculture remains depressed. Farmers are
confused over details of the recent farm legislation.
Labor Markets. After more than three years of expansion, payroll employment in the
District is 3 percent below the late 1970s, with only Wisconsin higher. Manufacturing in the
five-state region is 21 percent below 7 years ago, with Illinois down 27 percent. Numerous
firms in various industries continue efforts to increase efficiency and competitiveness, by
controlling costs, often through layoffs. Mergers and acquisitions often bring job cuts as
positions deemed duplicative are eliminated. In some cases, job cutbacks result from work being
shifted abroad. Examples include processing of manufacturers' coupons in Iowa and manufacturing
of material handling equipment in Michigan. Announcement of 3,300 jobs to be filled at Mazda's
new Michigan plant brought 110,000 requests for applications. Temporary layoffs to control
inventories have recently been announced in railroad equipment and farm equipment. Permanent
job cuts, often following earlier staffing reductions, have recently been reported in various
industries including steel, trucking, farm equipment, medical technology, hospitals,
VII-2
communications gear, chemicals, and gas transmission. In some cases, job cuts are associated
with shutdowns of production facilities.
Plant Closings. Producers of several lines of heavy capital goods in the District are
responding to feeble recoveries with temporary and permanent plant closings. The leading
producer of locomotives will cease production for two months at its main plant in the Chicago
area and lay off 2,000 because of slack orders. An extended summer shutdown is planned at an
Iowa farm equipment plant. Permanent plant closings are planned by a maker of home videodisc
equipment, a manufacturer of parts for transmissions, and a producer of heavy forgings. A major
producer of material handling equipment will shift one-third of its manufacturing overseas, and
permanently close plants in Michigan, which had been its main facilities. In contrast, a large
maker of construction equipment cancelled plans to shift certain output abroad, due to a more
favorable cost picture at home. Threatened phaseout of auto assemblies at an Illinois plant was
averted as a labor pact was reached after hard bargaining.
Nonresidential Construction.
The office building boom is continuing in downtown Chicago.
Despite an apparent glut of space, announcements of major new structures still appear. Soil
testing work, in advance of construction, also continues at a good pace, despite concerns that
contracts were being shifted from 1986 into 1985 to grandfather current tax treatment, and would
slacken after the turn of the year. The pace of office building is reported to be slackening
somewhat in suburban areas where it has been strong. Highway renovation definitely will be at a
high level again in 1986, because funds are set aside, and work is sorely needed.
Home Building. Spurred by sharply lower mortgage interest rates, home construction is
expected to remain at a high level in many parts of the District in 1986, relative to the early
1980s, though still well short of peaks in the 1970s. The upturn has been particularly vigorous
in southeast Michigan, while activity in Iowa has been slipping. Demand for existing homes is
strong in some areas, and realtors complain of a paucity of listings. The move-up share of the
market has been larger than earlier in the expansion. A heavy volume of refinancing of existing
mortgages at lower rates is underway.
Steel. District steel producers report improved orders and output. Demand from motor
VII-3
vehicle makers is in line with that industry's high production schedules. Activity has been
very strong at steel service centers, which are doing more processing and holding more inventory
for customers. User inventories are low and expected to rise. Prices are firming but remain
low. Imported steel prices have risen, but much less than would be indicated by the fall in the
dollar. Price increases will be reflected in steelmakers' revenues gradually as existing
contracts expire.
Motor Vehicles. Vigorous car production plans, bolstered by a new round of sales
incentives from major domestic automakers, promise a high level of activity at District assembly
plants and parts suppliers in 1986. Forecasts for motor vehicle demand in 1986 generally call
for a decline in total sales from 1985, and an increase in import market share. Japanese
renewal of their quota on auto exports to the U.S. at last year's level supports this
projection. A leading District producer of motor homes has sharply increased production, partly
because of completion of an inventory adjustment in 1985, and partly in anticipation of
increased demand resulting from lower gasoline prices.
Consumer Spending. Major chain stores in the District report 1986 sales ranging from
small declines to modest increases. Retailers blame weather problems, high consumer debt
levels, and generally cautious attitudes for the anemic performance of sales. The sharp drop in
oil prices since late 1985 should bolster consumers' discretionary income, and may tend to raise
forecasts for consumer spending.
Agriculture. Prices of farm commodities important in the District have trended lower
since mid-January, pressured by seasonally large supplies and weak demand. Corn and wheat
exports will decline again this year, probably by more than current USDA forecasts. Soybean
exports, however, are rising. Exports will benefit eventually from lower U.S. support prices,
lower oil prices, and the lower value of the U.S. dollar. A flurry of late Congressional
actions created confusion over details of various federal farm income and price support
programs. Farmers must decide whether to participate in these programs within the next few
weeks, as planting decisions are finalized.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
The Eighth District economy continues its moderate expansion.
District retail sales growth exceeded national trends while employment
and nonresidential construction trailed national performance.
The
outlook from business and academic contacts throughout the District is
generally favorable, suggesting the expansion will continue at a modest
pace during 1986.
Outlook
Slightly more than 80 percent of the 265 District small
businesses surveyed in January expected business conditions to be
unchanged or better through July.
Less than a quarter of the respondents
foresaw a decline of their real business volume through April, while 44
percent expected an increase.
Despite this generally favorable outlook,
only 19 percent thought the period was a good time to expand.
Most of
the respondents expected no changes in their prices, work force or
average compensation through April.
These responses reflect little
change in the expectations of District businessmen since the last survey
was conducted in October 1985.
A forecast by the University of Arkansas indicates the Arkansas
economy will grow faster than the nation in 1986, spurred by increases in
manufacturing, trade and services employment.
A forecast for Tennessee
economic growth in 1986 was less optimistic with nonagricultural
employment predicted to grow by only 1.9 percent.
Employment declines in
VIII-2
the manufacturing and mining sectors are expected to contribute to the
state's sluggish growth.
Consumer Spending
District retail sales increased at a 4.8 percent rate in the
fourth quarter while a 3.7 percent decline was reported nationally.
December retail sales in the District were 21.8 percent above year-ago
levels, exceeding the 6.7 percent national gain.
Extremely strong
December sales in Kentucky were largely responsible for the District
growth.
Employment
Employment growth in the Eighth District continues to trail
national trends.
District nonagricultural employment increased at a 0.6
percent annual rate in the fourth quarter compared to a 3.5 percent rate
of growth nationally.
Despite a December increase, District
manufacturing employment decreased at a 0.9 percent rate in the fourth
quarter while no change was reported nationally.
The District
unemployment rate dropped from 8.3 percent in November to 7.9 percent in
December.
Construction
District residential construction contracts grew by 3.3 percent
in the fourth quarter while nonresidential construction declined by 3.6
percent.
Residential contracts, while 6.0 percent above year-ago levels,
trailed the national increase of 14.0 percent.
Over the same period
District nonresidential construction declined by 12.2 percent compared
with a 2.0 percent national increase.
VIII-3
Banking and Finance
February data from large District banks indicate distinct
changes in lending trends that have persisted over the past year.
Commercial lending, which had been sluggish, showed a reversal in
February with volume growing at an annual rate of 34 percent compared to
a sharp decrease last February.
Consumer lending, which has shown strong
growth over the past year, declined at a 5 percent rate in February.
After approval by the Missouri Senate, a regional reciprocal
interstate banking bill awaits House approval.
The bill has no
provisions for transition to nationwide banking.
The Mississippi Senate
has approved a bill allowing statewide banking in 1986 and regional
interstate banking in 1988.
Agriculture
In response to the lower loan rates of the 1985 farm bill,
futures prices for the new crops of major District commodities such as
corn and cotton are significantly lower than futures prices for the old
crop.
Given these price expectations for the coming year, participation
by farmers in the government's price support programs is likely to be
high, leading to large government stocks of agricultural commodities.
Analysts in Kentucky expect further declines in tobacco prices associated
with falling demand and continued large surplus stocks.
IX-1
NINTH DISTRICT - MINNEAPOLIS
Aided by lower interest
trict
have
stabilized
construction
strong,
and
have
many
resource-related
all
early
rates,
conditions
year.
Consumer
this
done
fairly
new construction
industries,
well.
spending,
Construction
projects
however,
in much of the Ninth Dis-
are
are
has
planned.
still
mixed,
employment,
been
generally
Conditions
and
and
only
a
in the
little
improvement was evident in the agricultural sector.
Consumer Spending
Retail
well so
sales of general merchandise in the district have done fairly
far this year.
After experiencing strong year-end holiday sales, one
diversified retailer reports
reasonable sales growth in January, traditionally
a slow month, and even stronger sales in February.
In addition, the retailer
notes that the sharp growth in credit sales, a cause of concern in some quarReports from large shopping malls in Sioux
ters, finally slowed late in 1985.
Falls,
evident
South
Dakota,
have
been
Growth
in February.
the district, however.
encouraging,
in retail
strengthening
with
sales
also
sales has not been uniform throughout
For example, Bank directors from northern and central
Minnesota note lackluster sales in their communities.
Despite some slowing late in February, motor vehicle sales have been
good
so
trictwide
far
this
quarter.
One
sales were up about 15
domestic
manufacturer
reports
that
its
dis-
percent through February, although it has a
large inventory of cars and trucks available.
Spurred by
lower mortgage
rates,
housing
district areas with stable or growing populations.
activity
has picked
up
in
Compared with year-earlier
IX-2
levels,
residential building contracts awarded in January were up 12 percent
in Minnesota and up 19 percent in the Minneapolis-St. Paul metro area.
ary home sales
Janu-
in the Twin Cities area were also up a healthy 12.2 percent
from a year ago.
In parts of North Dakota and in Sioux Falls, South Dakota,
existing home sales appear to be up this year.
Employment
After worsening somewhat in the last half of 1985, employment conditions have stabilized in some district areas but have worsened in others.
The
district's overall seasonally adjusted unemployment rate fell a few tenths to
6.5 percent
in
January.
In South Dakota, January employment was virtually
unchanged from its January record level a year earlier.
The typical seasonal
employment decrease between December and January was the smallest there since
January 1976.
lower
In North Dakota, though, unemployment was up, primarily due to
employment
adjusted
in the oil
and construction sectors.
Although seasonally
employment in Minnesota increased between December and January, the
unemployment rate still rose;
however, part of the increase was probably due
to some changes, made in December, in how the rate is measured.
Resource-Related Industries
Conditions
in resource-related
industries in the
district have re-
mained mixed.
The drop in oil prices has continued to slow district oil and
gas activity.
A Bank director reports that the rig count in North Dakota was
down to its
lowest level
in
five years--22
rigs
(compared with 150 at its
peak).
In contrast, the falling dollar bodes well for district paper produc-
tion.
In Duluth, Minnesota, financing is now arranged for a big new paper
mill, and another paper mill in northern Minnesota is modernizing its plant.
But a Bank
director
reports that
wood pulp logging for paper mills
in the
IX-3
Upper Peninsula of Michigan has been hurt by imports, and a lumber mill in
Montana has closed.
An iron pellet plant in northern Minnesota is reopening
in
over
March,
there.
but
with
100
fewer workers
than
were
originally
employed
A reopened copper mine in the Upper Peninsula is now hiring workers.
Construction
Construction activity in the district has generally been strong, and
many new projects have been announced.
January were up 5 percent
Nonresidential building contracts in
in Minnesota since January 1985.
Bank directors
report numerous ambitious construction projects in the works.
Duluth,
Minnesota,
several
projects--including
a
large
In and around
paper mill, a mall
expansion, and expansions of several public facilities--are expected to bring
$500 million of construction activity to that hard-pressed area.
future
projects
in
South
Dakota
include a
convention
center
and hotel
Pierre and a new community to house B-1 bomber personnel in the
area.
Noteworthy
in
Rapid City
North Dakota also expects to benefit from $200 million in military-
related construction, in connection with nuclear missiles.
Agriculture
Little improvement was seen in the district's agricultural sector in
the past months.
areas.
there
Bank directors
report little change in conditions in their
One banker in South Dakota thinks that a third of the indebted farmers
will
eventually
leave
farming,
brighter note, a Bank director reports
looks
good.
And prices
of
farm goods
although
not
all
this
year.
On
a
that the winter wheat crop in Montana
have increased
some
recently.
The
Minnesota farm price index rose again in January, although it still remained 9
percent below
its year-earlier
level.
Livestock
prices have
however, even though ranchers have kept herd sizes small.
deteriorated,
X-1
TENTH DISTRICT - KANSAS CITY
Overview.
Both current economic activity and the economic outlook have
improved recently in the Tenth District, apart from the difficulties of the
agricultural and energy sectors.
further increases.
Retailers report improved sales and expect
Auto dealers remain optimistic about 1986 sales.
While
inventories of materials inputs are generally satisfactory, some retail
inventories are still viewed as too large.
further increases in housing
further rate declines.
little change in loans.
Most area homebuilders expect
starts, as mortgage demand increases with
Tenth District banks report increased deposits but
Agricultural lenders continue to deny credit to a
significant proportion of farm borrowers.
Retail trade.
appears bright.
The outlook for sales, prices, and inventory purchases
Retailers report moderate to strong increases in sales over
year-ago levels and flat to slightly improved sales over the last three
months.
Women's apparel and fine jewelry sales have been strong.
expected to rise moderately through 1986.
and are expected to stabilize.
Sales are
Prices have been reduced slightly
Inventory levels are satisfactory to heavy,
leading retailers to expect steady to slightly reduced inventory purchases for
the remainder of the year.
Automobile sales.
Although auto sales are below year-ago levels, dealers
are optimistic about 1986 sales.
auto sales.
Good credit market conditions are helping
Most dealers report adequate inventory levels, although some
report that inventories are too high.
Purchasing agents.
Most purchasing agents surveyed experienced a slight
increase in the prices of their major inputs over the year ago period, and
they expect prices to increase by 2 to 4 percent during the remainder of 1986.
Although some firms are satisfied with current materials inventory levels,
most have been trimming inventories in recent months.
X-2
Housing activity and finance.
Area homebuilders report that starts of
single family dwellings have increased over the year ago period, while multifamily starts have declined.
Sales of new homes are above year ago levels,
and new home prices have remained steady.
Most area homebuilders expect
housing starts to increase slightly during the remainder of this year.
Housing materials availability is good, prices are steady, no slow delivery
problems are reported, and these conditions are expected to continue
throughout the year.
Savings and loan institutions give mixed reports regarding current
savings inflows relative to a year earlier, but they expect savings inflows to
Mortgage demand has increased,
increase slightly during the next quarter.
primarily because the demand for refinancing has increased.
Mortgage demand
is expected to increase further during the upcoming spring and summer home
buying season.
Mortgage rates have been declining, and most respondents
expect rates to remain at their current level or fall a little further.
Most
savings institutions have not taken advantage of the opportunity to reduce the
minimum deposits on MMDA's, Super NOW accounts, and 7-31 day CD's.
Banking.
Total loan demand was mixed and total deposits were higher at
Tenth District banks compared with a month earlier.
Consumer loans,
commercial and industrial loans, residential real estate loans, and
agricultural loans were generally constant.
decreased at most of the banks surveyed.
Commercial real estate lending
Tenth District bankers did not
change their prime rate during the last month, but more than half of those
surveyed expect their prime rate to fall in the near term.
Most respondents
either lowered their consumer loan rates during the last month or anticipate
lowering those rates in the near future.
Total deposits rose at Tenth
District banks, with MMDA's and seasonal increases in IRA's and Keogh accounts
X-3
leading the way.
CD's.
Most respondents report higher or unchanged levels of large
NOW accounts and small time deposits typically were constant.
Passbook
savings accounts and demand deposits were unchanged or lower.
Agriculture.
Many commercial lenders in the district have nearly
completed credit reviews of their farm borrowers, but the results are mixed.
On average, bankers reported that 6 to 8 percent of their farm borrowers will
be denied credit this spring, a percentage at least as high as a year ago.
However, bankers in some states said a lower percentage of their farm
borrowers would be denied credit, apparently because a large number of bad
loans were written off during the past year.
Farm Credit System outlets in
the district are less than halfway through their credit reviews, but reported
that perhaps 10 percent of their farm borrowers will not get credit this
spring.
Both the Farm Credit System and commercial banks referred more of
their farm borrowers to the Farmers' Home Administration (FmHA) than a year
ago.
Because it is extremely difficult to qualify for direct loans from FmHA,
referred borrowers have been encouraged to apply for FmHA loan guarantees.
All lenders surveyed had acquired a substantial amount of farm real
estate through foreclosure.
Most bankers reported that they would sell
acquired property if they could do so without taking a loss.
Only a few
lenders said they are selling land as soon as possible after foreclosure,
regardless of price.
Others expressed concern about "flooding the market."
In the meantime, many banks are leasing acquired farmland.
XI-1
ELEVENTH DISTRICT--DALLAS
The District economy continues a slow expansion, although the
recovery is threatened by the recent precipitous drop in oil prices.
and gas drilling is declining rapidly.
Oil
Sales by manufacturers are
slipping, overall, but demand has expanded in a number of industries.
value of construction contracts is falling.
modest and auto sales have declined.
District banks is ebbing.
The
Retail sales growth has been
The rate of loan growth at large
Prices for District agricultural commodities are
falling.
District manufacturers report mixed conditions, but declining
orders from the construction and energy sectors have caused overall demand
to fall.
Sales by primary and fabricated metals producers are shrinking
because of reduced orders from construction and energy-related firms.
Although a slowdown in District construction has led to reduced sales by
manufacturers of lumber and wood products and stone, clay, and glass,
construction demand outside the District has dampened the decline.
The
fall in the dollar has allowed domestic producers of electronics, glass,
and apparel to compete more effectively against foreign producers and sales
have expanded in those industries.
Electronics and transportation
equipment producers continue to benefit from increasing defense contracts,
but respondents report increased uncertainty about future growth in orders.
Increased world production of crude oil has expanded output at District
refineries.
Chemical firms, however, have not yet observed lower prices
for petroleum-based inputs.
XI-2
Construction activity is declining in response to rising vacancy
rates and to uncertainty over the economic outlook for the District.
The
largest drop has been in nonresidential construction, but residential
building is also declining.
The value of nonbuilding construction
contracts, including those for streets and highways, continues to grow
rapidly.
District energy exploration, drilling, and extraction activities
are on the decline.
In January, the District drilling rig count was
30 percent below the already-depressed level of a year earlier.
Drilling
permits, a leading indicator of drilling activity, had shown evidence of
reaching a floor, but the recent hard fall in oil prices has led to
expectations of additional reductions.
Another leading indicator of
drilling activity, the seismic crew count, has been dropping steadily.
Retail sales continue to expand at a slow pace.
Rates of increase
vary widely across the District.
Sales in energy-dominated regions are
rising less than in other areas.
The strongest retail sales growth is
taking place in apparel and fashion lines.
Sales of consumer durables are
weak, partly because of their close link to housing sales, which have been
declining in the District.
Retail respondents report that they are trying
to hold their inventory-to-sales ratios at very low levels.
After several years of brisk auto sales respondents are reporting
declines in sales.
The largest reductions are in the energy-dominated
portions of the District.
Inventories are rising to undesired levels and
price competition has intensified.
Although some popular models are in
short supply, the overall availability of automobiles is greater than at
any time in the last two years.
XI-3
At the District's large banks, growth in total loans increased
slightly in January, compared to last year's fourth quarter pace.
The
year-over-year rate of expansion, however, remains considerably below the
average gains during the first three quarters of 1985.
business loans fell absolutely.
The volume of
Real estate loan growth has slowed
considerably and has remained in the single-digit range for several months.
Consumer lending booked at District banks is growing at a healthy rate.
Deposit expansion at these institutions has slowed considerably and total
borrowings continue to fall below year-earlier levels.
At thrifts, deposit
growth was 23.3 percent in January, compared with 28.1 percent in the
fourth quarter of 1985 and with rates in excess of 30 percent in the two
previous quarters.
In District agriculture, the average level of crop prices in
January was unchanged from a year earlier, but livestock prices were down 9
percent.
Total marketings of fed cattle were also reduced, resulting in a
decline in income for producers.
prices are widespread.
Expectations of future declines in grain
XII-1
TWELFTH DISTRICT - SAN FRANCISCO
Summary
The Twelfth District economy continues to grow at a moderate pace, but
performance
across
sectors
remains
uneven.
Consumer
spending
growing, although at a slower pace than was seen last fall.
their
continuing problems with
low prices
and foreign
is
still
In addition to
competition,
some
agricultural producers in California sustained damage in the recent floods.
The oil price drop, while welcome in most parts of the District, is causing
concern in oil producing areas.
strength,
from
and robust
lower
interest
The aerospace industry remains a source of
construction
The
rates.
activity has
financial
received a
sector
further boost
to
appears
be
on
the
upswing, but for some institutions delinquency rates and questionable asset
quality continue to cause concern.
Consumer Spending
In most parts of the District, consumer spending is growing modestly.
The growth
rate
in
retail
sales
volume
appears
to
have
slowed
in
many
areas, as no respondents reported that January 1986 sales volume was more
than
level.
above its year-earlier
5 percent
Auto
sales
were generally
flat or down in January.
Agriculture
Agricultural producers
by
low prices
are
producers
foreign
recent
and
in most parts of the District remain troubled
foreign competition.
experiencing price
imports
of
apple
juice.
flooding in California
the state.
For example, Washington's
declines,
Adding
caused
induced
to
these
apple
by
increased
continuing
problems,
in
substantial damage
part
in
some parts of
Preliminary observations suggest that the floods will probably
not be a critical factor
in determining farm income or prices this
year.
XII-2
Some individual
Orchard crops,
suffered severe damage.
farmers, however,
particularly almonds, appear to have been among the hardest hit, although
it will be months before the full extent of the damage is known.
the trees were in bloom,
Because
some blossoms were destroyed either by flooding
itself or by the rain and wind, while the weather impeded pollenation of
some
remaining
flowers.
In
addition,
pest
control
measures
were
interrupted, so many fear that pest problems will be unusually severe this
also
that had just been planted when the rains hit
Some grain crops
summer.
appear
to
have
suffered water
damage.
appear
Vineyards
to
have
suffered relatively minor losses, as they were in their dormant state when
floods hit.
The many field crops that had not yet been planted should also
escape serious harm.
Manufacturing and Mining
Aerospace
in
strength
continues.
industries
both
in the
Twelfth District continue to
spending
defense
and
demand
for
prosper
commercial
However, companies that built problem components
as
aircraft
of the Space
Shuttle are concerned that the Challenger accident may lead to program cuts
and layoffs for their firms.
The dramatic oil price decline seen recently is welcomed in many parts
of
the
However,
District.
there
are
already
signs
in
Kern
County
(California) that drilling activity may slow further from its already low
1985
level.
state's
In
Alaska,
income, and
the
where
oil
revenues
provide
85
state provides over 35 percent
of
the
jobs,
the
percent
of all
governor has already taken steps to reduce state spending.
Alaskan crude
oil was recently selling for $12 per barrel, and it costs about $7.50 per
barrel to pump and transport.
Consequently, further price drops could be
disastrous for the state of Alaska.
XII-3
Although some early signs suggest that activity in the forest products
industries may pick up soon, parts of Oregon that depend heavily on forest
products continue to experience little economic growth.
Construction and Real Estate
In many parts of the District, construction activity has strengthened,
largely due to the favorable
adequately
absorbing
the
interest rate climate.
supply
of
office and
rates remain close to 20 percent in many areas,
Washington, and California.
The
slowdowns
in
in
building
both
lower oil
Alaska
in
space,
apartment
vacancy
including parts of Utah,
prices
and
While some areas are
have,
oil
however, caused
parts
producing
of
California.
Financial Sector
Many thrift institutions in the Twelfth District enjoyed a banner year
in
1985
as
of higher
interest
rate spreads
due
to
lower funds
Nevertheless, poor asset quality caused some to founder.
costs.
volume
a result
continues
to
gain
in
strength,
spurred
by
lower
Mortgage
interest
rates.
Moreover, consumer loans, in the form of credit card, installment, and auto
continue
loans
to
show
volume
strong
in
parts
most
of
the
District.
Nevertheless, in some cases delinquency continues to be a problem.
respondents believe that poor asset quality will continue to
Several
some
plague
lending
applications
quality.
banks
sectors.
improving,
which
in
the
argue
long
run
that
the
should
quality
improve
However, a troublesome number of problem loans remain.
have
problems
is
Many
institutions.
problems
are
in
in
different
the agriculture,
sectors
of
their
portfolios,
energy, LDC, consumer,
and
of
asset
Different
but most
real
estate
Cite this document
Federal Reserve (1986, March 31). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19860401
@misc{wtfs_beige_book_19860401,
author = {Federal Reserve},
title = {Beige Book},
year = {1986},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19860401},
note = {Retrieved via When the Fed Speaks corpus}
}