Beige Book
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
MARCH 1987
TABLE OF CONTENTS
SUMMARY .... ...................................................
First District - Boston.....................................
Second District - New York..
.
..................................
Third District - Philadelphia..................................
i
I-1
II-1
III-1
Fourth District - Cleveland...................................
IV-1
Fifth District - Richmond.....................................
V-1
Sixth District - Atlanta.......................................
VI-1
Seventh District - Chicago....................................
VII-1
Eighth District - St. Louis...................................
VIII-1
Ninth District - Minneapolis..................................
IX-1
Tenth District - Kansas City...................................
X-1
Eleventh District - Dallas....................................
XI-1
Twelfth District - San Francisco..............................
XII-1
SUMMARY*
Assessments of general economic conditions ranged from uneven or steady
to improving.
Expanding activity or optimism were reported by contacts in
the Boston, New York, Richmond, and Atlanta Districts.
slow expansion.
Cleveland reported
Kansas City indicated recent slight improvement.
Chicago
noted the effects of the mild winter in that District in boosting activity.
Business conditions were described as on an even keel in Philadelphia,
steady in Minneapolis, and uneven in San Francisco.
Dallas noted signs of
recovery but said important segments of the District remain weak.
Manufacturing.
manufacturing.
Most reports noted rising orders and activity in
Increases were described as gradual or small, overall, by
Boston, Philadelphia, and Cleveland.
Manufacturers in the Boston,
Philadelphia, and Richmond Districts were optimistic about further expansion
in manufacturing activity.
Dallas.
Orders were described as still very sluggish by
More production cutbacks or plant closings were reported by New
York, Cleveland, and Chicago.
New foreign-owned auto assembly and parts
plants are being built in the Midwest and Southeast.
Capital spending was
projected about flat by contacts in the Boston and Philadelphia Districts.
San Francisco said many firms plan less capital investment in 1987 than in
1986.
Chicago reports that demand for mechanical capital goods remains
slow.
Cost containment continues as a high priority.
noted upward pressures on prices.
Several Districts
Higher orders were reported for
appliances, products used in housing construction, some communications and
*Prepared at the Federal Reserve Bank of Chicago
computer equipment, medical equipment, plastics, chemicals, and paper,
attributed in part to the lower dollar.
Dallas reports that semiconductors
have stabilized after 2 years of falling orders and plant closings.
Atlanta
and Dallas report that demand remains weak from the construction and energy
sectors.
Consumer Spending.
retail sales.
Most Districts report further growth of nonauto
Boston and New York said some retailers saw "astoundingly" or
"unbelievably" strong sales in February.
At the other extreme, retail sales
were weak in the Dallas and San Francisco Districts.
were flat to only slightly higher than a year earlier.
Kansas City said sales
Inventories were
described as at generally satisfactory levels, though some respondents told
New York that stocks are low.
Strength on the East Coast was attributed to
the healthy regional economy and, in New York, to buying by foreigners whose
currencies have strengthened against the dollar.
Retail price increases,
resulting in part from the lower dollar, are likely to be moderate.
Tourism
was described as good, except resort business curtailed by lack of snow in
the Minneapolis District.
Motor Vehicles.
Most Districts report improvement in auto dealer sales
in February or early March, from very low levels in January following
tax-related December strength.
Dallas, however, saw little improvement from
the January pace in February, which was attributed to local economic
weakness.
Dealers there expect continued slow sales.
Chicago reported auto
production cuts and layoffs at some District plants, in response to slower
sales.
Demand for heavy trucks has improved.
Residential Construction.
Most Districts report strength in
residential building.
An exception is Dallas, burdened by a large stock of
unsold homes and high rental vacancy rates.
Housing markets in Alaska and
parts of the Minneapolis District are also soft because of the weak energy
sector.
Home building permits have trended down recently in the Atlanta
District, but builders there are optimistic.
Chicago reported that
residential building was boosted by mild winter weather, but Richmond said
construction in that area was slowed by bad weather.
Sizable home price
increases were reported in some local markets on the East and West Coasts.
Building material costs are expected to rise because of the Canadian duty on
lumber exports.
Nonresidential Construction.
Office construction is slowing in most
major cities, and office vacancies are high or rising.
Chicago, however,
reported that work on new buildings continues at a high level in that city.
New York said that office leasing has increased.
Chicago indicated that
industrial construction had slowed in that region.
short supply in parts of northern New Jersey.
Industrial space is in
Extensive work on military
bases in upstate New York will be adding to construction activity in that
region.
Energy and Mining.
Investment in the energy sector remains very weak,
except for construction of natural gas pipelines noted by Atlanta.
Dallas
reports that the drilling rig count declined in February, seasonally
adjusted, after rising since July.
February's level was about half of a
year earlier, and little or no increase is expected.
decline in coal production.
led to further layoffs.
Minneapolis reported a
Lack of demand for iron ore in that area has
Agriculture and Forestry.
stabilizing.
Conditions in the farm sector appear to be
Chicago reported that the decline in land values has slowed,
farm earnings have improved, and agricultural debt repayments are faster.
Minneapolis noted improved profits for livestock producers, but crop farmers
remain dependent on the government for much of their income.
Favorable
prices for potatoes and beans have helped stabilize land prices in that
area.
St. Louis reported that farm incomes have stabilized.
Dallas
indicated that higher cotton prices are expected to help farmers in that
District.
Florida citrus growers have benefited from the lower dollar.
Frost damaged the southern California avocado and citrus crops, and higher
prices are expected for some fruits, vegetables, and nuts.
Adverse weather
delayed expansion of lumber production in the Atlanta District following
imposition of the Canadian tax on lumber exports to the U.S.
Demand for
southern pine has remained strong.
Finance.
equity loans.
Several Districts reported continued strong growth of home
Philadelphia noted that a significant portion of usage of
these lines was initially to pay down credit cards, but usage has shifted
toward net increases in total debt.
Some credit card issuers are tightening
credit scrutiny in response to higher delinquency rates.
New York
attributes a slowdown in IRA deposits to confusion over the new tax law, low
interest rates on IRA deposits, and restrictions on withdrawals.
FIRST DISTRICT - BOSTON
This month's reports from First District retailers and
manufacturers were the most positive in some time.
Retailers were both
pleased and surprised by the strength of February sales.
For the most
part, auto dealerships were exceptions to the generally favorable sales
picture, but within this group too there were reports of surprisingly good
sales volumes.
Reports from the manufacturing sector still indicate little
vitality; nevertheless, there is some evidence of a gradual pickup in
orders and respondents seem more optimistic about the future.
Retail inventories have increased, but respondents express no
concern about this development.
Manufacturing inventories are low by
historic standards and respondents intend to keep them this way.
No
significant price changes have been observed by either retailing or
manufacturing respondents.
Retail
Most retailers contacted were very pleasantly surprised in
February.
Reports on February sales included such phrases as "astoundingly
good" and "unbelievable;" year-over-year increases ranged from 9 to 30
percent on a comparable stores basis.
February is usually a slow month
even with considerable price reductions, but stores did well with spring
merchandise as well as with discounted older items.
One merchant commented
that if consumers are really going to pull back in response to high debt
levels, they have postponed it.
For the fiscal year as a whole, which
ended in January, results were 6 to 10 percent ahead of 1985.
above plan for all contacts but one.
This was
Inventories were reported to be somewhat high.
by design.
Some increases were
Others were not, but contacts did not regard these unplanned
increases with much concern.
Prices are said to be stable, except for pharmacy items.
However,
one department store owner reported "reliable rumors" that prices will be
up noticeably for fall merchandise because of the decline in the value of
the dollar.
First District retailers are expecting a good first half of the
year although they do not expect February's surprisingly high rates of
increase to be sustained.
The representative of a chain concentrated in
the more rural areas of the East and Midwest said its stores in the
Northeast are doing better than those elsewhere - a pattern he expects to
continue.
Motor Vehicle Sales
The high level of automobile sales in December appears to have
dipped into January's and early February's sales volumes for most of the
dealerships surveyed.
While the end-of-the-year rush to take advantage of
the sales tax break is seen as a major factor in the slowdown, some claim
that cold weather has also played an important role.
are typically slower months.)
(January and February
Signs of improvement are reported, however,
by both domestic and foreign dealerships.
A few contacts are experiencing
surprisingly good sales activity, which they attribute to product quality
and reputation.
less seasonal.
Used cars continue to do well as their sales pattern is
Trucks typically sell well during the winter months; light
trucks are said to be especially popular because of their affordability.
I-3
Manufacturing
The pace of manufacturing activity in the First District seems to
have inched up in the past couple of months, and there is a slightly more
optimistic tone to respondents' reports.
Orders are continuing to increase
for such products as appliances and housing products, some communications
and computer equipment, medical equipment, and plastics.
have started to pick up, according to one contact.
Semiconductors
While demand in most
other areas remains flat, there were no reports of deteriorating orders or
shipments.
For high tech respondents, sales to Europe are said to be quite
good; some progress is also being made in selling in the Far East (from
plants located in the Far East), although one contact reported that
Japanese customers have cut back their orders because of declining export
sales.
Cost containment continues to be a high priority.
sales ratios are generally low by historic standards.
Inventory-to-
One contact
commented that large purchases to take advantage of volume discounts are a
thing of the past; his firm now buys precisely what it needs.
observed that his firm's customers are doing the same thing:
bought in lots of 5,000; now they order exactly "2,112" items.
Another
formerly they
In a
similar vein, employment levels are stable to slightly down, even for
companies experiencing volume growth.
One high tech firm noted that,
because of automation, his firm must increase volume 15 percent just to
maintain its manufacturing work force; the firm is currently growing at a 5
to 10 percent rate.
Most respondents expect capital spending in 1987 to be
fairly similar to that in 1986.
were observed.
No significant increases in vendor prices
One contact had successfully increased its own prices at
year end, while another reported that its prices have been falling on
average.
II-1
SECOND DISTRICT--NEW YORK
Second
The
report.
District's
economy
showed
gains
the
since
last
January retail sales were mixed, but a decided improvement was noted
While residential construction was seasonally
in February.
in office leasing was noted in several areas.
in
some
District
business
activity.
Most
small
slack, a pick-up
Some improvement also occurred
and
mid-sized
banks
report
a
noticeable slowdown in IRA deposits for this time of year.
Consumer Spending
The pattern of sales at District department stores was mixed during
January as consumer spending ranged from somewhat below to considerably above
However, a decided improvement was noted in February
retailers' expectations.
by those stores reporting early results, and one respondent characterized the
month as "unbelievably good".
Foreign
visitors
utilizing
their
stronger
mentioned as one factor bolstering'District
health of its
economy
Items for which
apparel,
jewelry
relative
there
and
was
to
accessories;
oil and farm debt
during January were
February's
strength in
sales and
a conscious
most
gains
sales
still
problems.
types
resulted
of
from
As a result of both
consumer buying across a wide spectrum of merchandise.
the recent
are
spending; another factor is the
areas with
good demand
currencies
effort
to
monitor
stocks,
retailers report inventories ranging from well below desired levels to on plan.
Business Activity
Some
recent weeks.
improvement
occurred
in the
District's
economic
expansion
More than one-third of the purchasing managers in the Buffalo
in
II-2
and Rochester surveys reported that general business conditions were better in
January, up from 25 percent in December.
Overall
employment
has
grown
in
manufacturing sector continues to decline.
the
District,
though
The February unemployment rates of
4.1 percent in New Jersey and 4.9 percent in New York were the lowest
the
early
'70s
and
are
well
below
the
the
national
average.
since
Moreover,
the
over-the-year reduction in the New York and New Jersey rates was three times
the national decline.
Recent
economy.
announcements
point
to
a
mixed
impact
on
the
District's
On the one hand, G.M.'s decision to produce its new mini-vans in
Westchester County will secure several thousand
years.
On
the
other
curtail
or phase
hand,
several
out operations
other
with a
jobs there for a number of
long-established
resultant
loss
of
firms
many
plan
jobs.
to
In
addition, while central New York will gain hundreds of jobs as the result of a
recent merger, Buffalo and northern New Jersey will lose at least the same
number due to that same consolidation.
Construction and Real Estate
Residential construction has been seasonally slack, but homebuilders
in most areas
1987.
continue to
for new homes in
Plans for several new types of housing development have been announced
in recent weeks.
office
anticipate considerable demand
In downtown Stamford, Connecticut, where until now only new
building has
been
undertaken,
condominium is to begin this summer.
construction
of
the
first
high-rise
In Newark, New Jersey the mayor recently
signed a contract for the construction of 650 moderately-priced townhouses,
the largest addition to that city's housing stock in decades.
Finally, in New
York City several programs are planned or underway to provide new middle- and
low-income housing.
being mentioned as a
Since a shortage of affordable housing is
increasingly
deterrent to further economic growth in the New York
metropolitan area, these new undertakings should help in this regard.
II-3
A pick-up in office leasing activity was noted in several parts of
slowdown in new
the District during recent weeks, and with the continued
construction projects,
lower vacancy rates are anticipated in a number of
Westchester, for example, reports strong demand for both large and
areas.
small blocks of space in its new buildings, while in Manhattan some observers
expect the office vacancy rate to decline to 9 or 10 percent in 1987 from its
10 to 13 percent range last year.
Elsewhere in the District, industrial space
is reported in short supply in northern New Jersey, particularly in areas near
New York City or major highways, and prices of land and buildings have risen
sharply.
Upstate New York expects 1987 to be a busy year for nonresidential
construction
as
the
result
of
congressional appropriations
for extensive
expansion and renovation of three military bases in the area.
Financial Developments
Most small and mid-sized banks in the Second District report that
there has been a noticeable slowdown in IRA deposits from the usual inflow at
this time of year.
Most of the banks surveyed indicated that the decline
stems from confusion concerning the impact of the new tax law, and the low
interest earned on IRA deposits.
Many bank customers are unaware that there
is still time to make an IRA deposit and claim a deduction for the 1986 tax
year.
In addition,
others have
reservations
about making
the
investment
because of concerns about the future impact of the tax law on money already
placed in IRAs.
One of the banks indicated that some of its own officers were
not well informed about the implications of the tax reform, and were reluctant
to suggest IRAs as an investment.
Most banks added that these problems have
been compounded by the current low interest rates available on IRA deposits
and restrictions concerning withdrawal of
indicated
interest
that uncertainty
concerning
these funds.
the tax law
rates would have an even more
and
All
of the banks
the low level
striking impact
activity which usually occurs as the April 15 deadline nears.
on
the
surge
of
of
III-1
THIRD DISTRICT - PHILADELPHIA
Reports from the Third District in March indicate that the regional economy
is on an even keel.
Manufacturers are operating at a steady rate, while
retailers say that business has been good since the beginning of the year; many
merchants indicate that sales are currently running above expectations.
Automobile dealers report a pickup in sales early in March, after a slow start
for the year.
Bankers say business loan demand dropped in January but rose in
the past month, while consumer lending has been growing steadily since the start
of the year, bringing total loan volume outstanding in February about even with
year-end 1986.
The consensus outlook in the Third District business community is positive.
A majority of manufacturers predict expanding activity over the next six months,
although they do not expect increasing orders to outstrip capacity.
expect the current growth of sales to continue through the spring.
Retailers
Automobile
dealers also predict continued improvement during the next few months.
Bankers
expect business loan demand to grow moderately throughout the year, in pace with
continued economic expansion.
They also expect consumer lending to be strong,
with home equity loans adding significantly to growth in this category of
credit.
MANUFACTURING
Preliminary results for the March Business Outlook Survey indicate that the
gains posted by local industry in February have held, although the pace of
activity has levelled off this month.
Conditions are similar in both the
durable goods and nondurable goods sectors.
Overall, one-half of the companies
III-2
participating in the March survey report no change in the pace of their
operations from February, one-fourth indicate improvement, and one-fourth report
slower business.
Specific measures of industrial activity are mixed, but
indicate little change overall.
New orders and shipments are up marginally, but
order backlogs have eased slightly.
Employment is steady.
Industrial prices in the region are generally stable.
Over 70 percent of
the firms polled in March say both input and output prices are unchanged from
February.
However, 22 percent report higher charges for the goods they purchase
and 13 percent have raised the prices of their own products.
Looking ahead, area manufacturers remain mostly positive, although
optimistic sentiment is no more widespread now than it has been for the past
year and a half.
Forty-four percent of the March survey respondents predict
improved business over the next six months and 35 percent expect steady
conditions; however, 20 percent anticipate slower business ahead.
On balance,
survey respondents expect gains in orders and shipments but no change in order
backlogs.
Local industrial firms' employment and capital spending plans call
for little change over the next six months.
RETAIL
Retailers report that consumer spending has continued at a strong pace
since Christmas.
Sales in January and February were above sales in the same
months of last year by more than 10 percent for many department and specialty
stores.
Discount stores posted more modest results.
Most product lines are
selling well, with apparel doing best and hard-goods sales relatively slower.
Traditional Presidents Day sales were very successful for most stores.
Retailers attribute the continued strength of sales to the region's healthy
economy, but some merchants speculate that consumer spending may be getting a
temporary boost because many individuals currently have higher take-home pay
III-3
than they did late last year due to delays in adjusting their payroll
withholding to the levels required by the new tax law.
Retailers say their first quarter (February-April) should be very good, and
they are optimistic that the current growth of sales will continue through
spring.
However, although their outlook for 1987 as a whole is positive, store
officials say there could be a weakening in the second half.
Merchants believe
that higher tax liabilities will cause more affluent customers to cut back on
discretionary spending, and that consumers will hold the line on financed
purchases in any case, in order to bring their rising debt under control.
In
addition, some stores are tightening credit qualifications for their proprietary
cards in response to rising delinquency rates, and, according to some retailers,
proposed legislation to cap merchant credit card rates will likely result in
even more restrictions on store credit.
Automobile dealers say that January and February have been slow, but they
are seeing some pickup in sales in early March and are optimistic that sales
this spring will be good.
Dealers selling domestic cars say they have improved
their competitive position against imports due to the dollar's decline, longer
warranties on U.S. cars, and low finance rates.
They expect manufacturers'
financing programs to be a regular part of their marketing strategy from now on.
FINANCE
Total loan volume at major Third District banks in late February was about
even with the year-end 1986 level, and approximately 13 percent above the level
of a year ago.
Lending officers say the lack of growth in total loans in the
first two months of the year is due to an abnormal pattern of business
borrowing, resulting from the movement of some normal January business into
December due to changes in tax law.
The drop was recouped in February, however,
and bankers contacted in early March say they expect further growth in
III-4
commercial lending as economic expansion continues.
Demand for fixed-rate
business loans, in particular, is growing, and some banks are accommodating this
demand, hedging interest rate risk through the use of interest rate swaps and
financial futures.
Consumer loan volume has been growing at an annual rate of about 10 percent
since December.
Banks offering home equity credit lines report strong growth in
commitments as well as usage, with drawdowns of up to 50 percent.
Although
consolidation of credit card debt was significant in early use of home equity
loans, bankers now say that consumers are using this form of borrowing for new
debt, giving consumer installment lending a further boost.
IV-1
FOURTH DISTRICT - CLEVELAND
Summary
The
regional
and
New orders, production,
Ohio
inventories
of
number of manufacturing sectors showing continued
are
sales
higher
than
Residential construction
are
manufacturers
up
slightly.
to expand at a rate equal to the nation, but with a
continues
employment
a slow and somewhat unsteady expansion.
continues
economy
Retail
decline.
ago, and automobile purchases have picked up.
a year
has
employment
also
accompanied
rebounded,
by
sizable
price
increases in several local markets.
Retail Sales
Retailers
reported
that
sales
in January
Clothing and other soft
percent higher than a year ago.
selling
home
appliances
are
spotty
throughout
were 7 to 10
are
goods
among
a weak dollar.
to
from
primarily
prices
expect
Retailers
Ohio.
increase from 2 to 3 percent in 1987, resulting
due
February
the
items at present, while sales of hard goods such as furniture and
best
prices
and
higher
to
import
Although many buyers have switched to suppliers
currencies,
from countries with relatively weaker
comparable
substitutes
are
not always available.
February
automobile
sales
began
However,
due to the end-of-year buying spree.
and
that
now
the
Japanese
significantly below last year's levels
mid-month
appear to be on par with last year's sales.
weaker
import
dollar
dealers
is helping
reported
them
slightly
prices increased slightly in March in order to
margin.
by
compete
picked
sales
up
Domestic dealers reported
with
Japanese
higher inventories.
maintain
an
imports.
In addition,
acceptable
profit
IV-2
Labor Markets
number
The
of
jobless
Ohioans
increased
December, raising the seasonally adjusted unemployment
percent.
During
percent.
21.9
period,
from
November
rate
from
7.2
for
Columbus area.
November
to
coal-producing
areas
to
remained
had
Workers
7.9
from
a
high
of
a low of 5.4 percent for the
Seasonally adjusted manufacturing
December.
nondurables
industries
the
to
to
the U.S. rate declined from 6.9 percent to 6.7
Within the state of Ohio, unemployment rates ranged
percent
month.
this
39,000
employment
rose
4,000
from
The increase occurred in durable-goods industries while
unchanged.
higher
earnings
averaged
a
Workers
in
43.2
in
December,
workweek
nearly
up
in
all
$11.32
December,
manufacturing
from
up
the previous
.6
hours
from
November.
Manufacturing
Manufacturing
activity
in
the
region is mixed.
agents in Northeast Ohio showed very little change in
month.
Production,
new
orders,
and
inventory
prices were higher, and employment was lower.
Ohio
showed
signs
of
continued
A
improvement.
A survey of purchasing
manufacturing
levels
similar
New
respondents
reported
a
last
fairly stable,
survey
for
Central
orders, inventories, and
prices were significantly higher than December's figures.
more
were
from
On
the
other
hand,
decrease in employment in January than those who
reported an increase in employment.
Raw
continually
steel
production
increased
for
throughout
the
Lake
February.
Erie
and
Employment
Pittsburgh
in
the
basic steel
industries also increased, reflecting to some extent the resolution of
work stoppage.
regions
the
USX
IV-3
that
area
Cincinnati
Greater
be
a
for
target
For
facilities.
parts
foreign
plans
At the same time,
plants
close
the
in
the
Firestone and
region
continues
especially automobile assembly and
investment,
Electric
Mitsubishi
example,
to
affect over 8,000 workers.
will
Goodyear have also announced layoffs.
to
large scale plant closings and
by
marked
announced
recently
General Motors
layoffs.
be
to
continues
region
The
announced plans to build a $25 million plant to
produce
recently
Corporation,
car
audio
equipment,
car electronics and electrical parts for the U.S. auto industry.
Housing
Residential
in
Ohio
year.
picked up considerably from last
Akron,
for
example,
sale
a year
ago.
While
multifamily
rose
percent
16
from
number of housing permits issued in Ohio during December 1986
The
increased 7 percent from a year ago.
were
has
Value of future residential construction in Ohio
year.
last
construction
housing
in
prices
the
is sluggish,
new
adjustable
many
mortgages,
values
also
increased.
In
market
appears
very
strong,
is partly due to the less favorable
which
tax
have
January were 20 percent above what they
single-family
depreciation rules under the
rate
House
code.
mortgage
Despite
borrowers
heavy
advertising
for
are choosing fixed-rate
mortgages with a shorter maturity.
Banking
District loan demand
registered
during
has
December.
softened
Loans
outstanding
significantly during the first six weeks of
bank
lending
was
broadbased.
Both
considerably
this
commercial
from
the
strong
pace
at large district banks fell
year.
and
The
slower
industrial
rate
loans
of
and
IV-4
consumer
installment
loans
fell
at
an
annual
pace
of
over
Although real estate loans have expanded at an annual rate of 25
the
beginning
December.
of
the
20
percent.
percent
since
year, this pace is slower than the growth registered in
Moreover, some of the recent real estate loan
to the rise in home equity loans.
volume
is
attributed
FIFTH DISTRICT -- RICHMOND
Overview
Manufacturing
activity in the District increased again in February
as it did in January, in line with the trend
Producers
are
optimistic
that
following
an
unusually
began
last
Retail sales rose
this
the
year
Resort and other hotel room reservations for the summer are
running ahead of last year's pace, and 1986 was a good year for
in this
past
weak January, and store managers remain
optimistic that consumer spending will increase moderately as
progresses.
summer.
local and national business conditions
will improve further in the months ahead.
month
that
area.
tourism
The market for single-family homes continued strong in
recent weeks except where depressed by unusually bad weather.
Realtors
and homebuilders are optimistic about prospects for their businesses and
In agriculture there are signs of some
the economy.
in credit
easing
conditions.
Manufacturing
activity
Manufacturing
in the
region
according to the results of our latest survey.
report
increases
unfilled orders.
length
of
the
as
report
declines
increased
in February
Twice as many
in shipments,
producers
new orders, and
Producers also report increases in employment and
workweek.
Manufacturers
inventories of materials slightly outnumber
the
reporting increases in their
those
reporting
Inventories of finished goods appear to have increased.
declines.
Prices
of
raw
materials
rose
in the past month according to 36
percent of the producers; 5 percent report
the
producers
report
declines.
increases
of
no change in the prices they charge for finished
goods, with the remaining one-fourth about evenly
reporting
Three-fourths
and
those
reporting
split
between
declines.
those
Responding to a
separate survey question, 45 percent of the manufacturers
report
that,
since the first of the year, the prices of their imported materials have
risen.
Optimism among producers is growing.
month's
Sixty-eight percent
this
respondents anticipate increases in shipments and new orders in
the next six months, as compared with 61 percent last month.
one-third
of
month,
More
than
the respondents now believe they will increase employment
and lengthen the workweek over the next six months.
last
of
this
month's
survey
next six months.
that
indicates
producers expect improvement in general
As
business
was
over
the
of the
half
conditions
case
over
the
Added optimism is evident in that a smaller proportion
of the respondents--one eighth this month as
compared
with
one
fifth
last month--expect conditions to deteriorate.
Consumer Demand
Retail
sales
increased
in February
according
to
our
survey.
Fifty-nine percent of the responding retailers report increases in sales
and
23
expect
percent
that
report increases in employment.
their
business
activity
as
well
conditions will improve in the next six months.
Nine of ten retailers
as
general
business
Resort
and
other
hotel bookings for the summer are stronger than
already
last year this time.
Overnight spaces at many state parks
booked
Public and private sector respondents to a special
to capacity.
are
telephone survey say they expect even stronger tourist activity in 1987
than
in the
stronger-than-average
1986
season.
Tourist businesses
expect their profits to rise commensurately.
Residential Real Estate
Realtor
construction
and
of
home
builder
single-family
associations
homes
were
report
quite
that
sales
and
strong in February,
although activity was depressed by unusually bad weather in parts of the
District.
Industry
representatives believe 1987 will be on a par with
1986 if interest rates decline or stay where they are now.
Agriculture
Our most recent survey of agricultural lenders indicates that
credit
conditions
instances of farm
rates,
however,
may
be
customers
remain
easing
somewhat.
extending
sluggish.
interest rates across all categories
or
Lenders
renewing
report
loans;
farm
fewer
repayment
Agricultural bankers report falling
of
agricultural
loans
surveyed,
although these rates are declining more slowly than nonagricultural loan
rates.
new
Loanable funds are plentiful, and
farm
loans.
bankers are actively
seeking
Collateral requirements remain high, however, because
of uncertainty over agricultural income prospects.
Financial
Several banks and thrifts have extended deadlines
their
promotions for home equity lines.
the heavy flow of applications.
associated
with
Approvals have been delayed by
VI-1
SIXTH DISTRICT - ATLANTA
Economic activity has picked up
in recent weeks.
Manufacturing in the
region is showing more life, reflecting better export demand and a reduction
in
import competition.
Florida's citrus
slowing imports of orange juice.
industry is prospering because of
Most of the energy sector remains depressed,
but capital spending is rising in a few natural gas companies.
Retail sales
were unexpectedly strong in several District states, though auto sales were
in February.
even weaker than they were in the nation
The region saw a
moderate decline in single-family building permits, but builders seem quite
optimistic that this decline was temporary.
Tourism remains a strong positive
force in the District.
The region's manufacturing sector appears to be
Employment and Industry.
rebounding
from recent
sluggishness.
Strong demand
textile mill products is boosting employment.
recovery as orders for
some goods
for
a wide
range
of
Prospects look good for further
into
are booked
1988.
The
paper
and
chemicals industries have benefited from recent restructuring and the decline
Prices for pulp and linerboard are expected to
in the value of the dollar.
continue to rise as
Merger and consolidation activity are
exports expand.
said to have increased the strength of domestic paper firms.
dollar has
The cheaper
improved U.S. chemical producers' ability to compete in export
Spokesmen expect both exports and productivity to increase further
markets.
in coming months.
The outlook is not as bright for the metals and machinery
Aluminum producers
steel mills
Specialty
profitable
market.
anticipate 1987
and
are beginning
steel
to
feel
industries.
to be only marginally better than 1986.
fabricators
the
Reduced demand for oil well
that have managed
effects of
a sagging
drilling equipment
prospects for the region's machinery industry.
to remain
construction
continues
to dim
VI-2
Consumer Spending.
quite
favorable,
sluggish.
February sales for most southeastern retailers were
although
activity in
Louisiana
and
Mississippi
remained
Retailers in Georgia, Florida, and Tennessee, in particular, report
surprisingly strong sales activity.
Regional car sales in February posted improvement from January's dismal
activity, but they were weaker than the nation's sales, which declined 9.1
percent from a year ago.
Over the past year market shares of imports have
risen to about one-third of total sales in at least two District states.
Construction.
Single-family building permits in the Sixth District have
registered a modest downtrend
recently, but builders
are
still
optimistic
about prospects for the single-family home market because of rising incomes
and comfortable mortgage rates.
active construction
in the
Birmingham is
Southeast,
and
enjoying
some of
east Tennessee
strong demand and a slight inventory shortage.
the most
contacts report
Although there is very little
construction of multifamily rental units, the condominium market seems to be
picking up slightly.
Miami and Knoxville realtors say current sales of condos
are the highest in recent years.
Commercial
overbuilding.
construction
construction
continues
New
reports
related
and
glutted, demand
Orleans
is healthy
businesses.
to
slow
drastic
as
the
region
employment
While
the
Miami
adjusts
cutbacks
office
in
both
market
for smaller owner-occupied buildings.
to
is
Improved
occupancy of the overbuilt retail sector in Jackson, Mississippi, is renewing
the interest of developers who had fled the market.
Financial Services.
After a spurt of tax-induced activity in December,
January's loans at the District's larger commercial banks resumed the gradual
decline of previous months.
strong
in Atlanta
Louisiana
also
and
report
in
However, residential construction lending remains
the
slight
larger
cities
residential
agricultural banks are not faring well.
of
loan
Alabama.
growth,
Urban banks in
but
some
small
VI-3
The region's savings and loans are generally performing well, although a
few
have
According
had
to
some
difficulties,
District
particularly
financiers,
problems
in
can be
Louisiana
and
attributed
Florida.
to
several
sources, including principally a heavy reliance on long-term lending and weak
economic conditions in certain areas.
Tourism.
The tourism industry continues to boost the Southeast economy.
Contacts in New Orleans term the Mardi Gras celebration a huge success as
hotel occupancy rates reached their highest level in five years.
Travel to
Miami has been unusually strong as the number of foreign visitors has surged.
In Birmingham, a brand-new horse-racing operation opened its doors in March,
welcoming thousands of eager racing enthusiasts.
Atlanta and New Orleans are
beginning to gear up to host the 1988 political conventions.
Both cities will
increase hotel/motel tax rates.
Agriculture. Forestry, and Mining.
Capital spending remains weak in much
of the energy sector with a few exceptions in the natural gas industry.
New
construction of natural gas pipelines is planned for Florida and the Mobile
Bay area.
The increased activity reflects deregulation in the gas industry
and expectations that the excess gas .supply will be eliminated and prices will
improve either in late 1987 or early 1988.
Weather problems have delayed the regional production expansion that was
expected following the imposition of the Canadian export tax on lumber.
Very
strong prices for southern pine have been characteristic this year, but once
the weather improves prices are expected to fall.
Demand has remained strong
throughout the winter.
Orange producers
increases and reduced
are
earning favorable
imports
of
Brazil's
returns as a result of price
orange
products.
Although
the
domestic grapefruit market is languishing, the export market is flourishing
thanks to the weak dollar and growing foreign consumption.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary.
A mild winter in the Seventh District has boosted activity,
and resulted in fewer than usual seasonal layoffs, particularly in
construction.
Residential building continues vigorous.
office buildings remains strong in downtown Chicago.
construction has slowed.
Construction of
Industrial
Several more plant closings in the District
recently have been announced.
Slower car sales have led District producers
to scale back production and increase layoffs, but total planned motor
vehicle production in the first half is near year-earlier levels.
Appliance buying continues at a high level.
Supplies of steel for autos
and appliances are reported tight as USX gradually returns to production
following a labor settlement.
soft.
Demand for mechanical capital goods remains
Though the farm sector continues under serious stress, farm earnings
have improved and the decline in farmland values has slowed.
Nonresidential Construction.
Building activity has remained strong,
partly because of the very mild winter.
Progress on some projects in the
Chicago area consequently is three months ahead of schedule.
Several more
large office buildings have been announced or are being started in downtown
Chicago.
Slower activity on new commercial buildings had been expected but
is not yet evident, though renovation work has slowed.
Construction of
manufacturing buildings in the region has weakened.
Residential Construction.
building in the Midwest.
The mild winter boosted residential
Building permits in January, normally very low,
were sharply higher than last year in Illinois, Michigan, and Wisconsin.
Home mortgage interest rates in the Chicago area have stabilized at around
VII-2
8.75-9% for 30-year fixed rate loans, and 7-8% for the first year on
adjustable rate mortgages (ARMs).
Our contacts indicate that area lenders
are increasingly using interest rates above first-year rates in determining
whether would-be borrowers qualify under their ARM programs.
Plans for car and truck production in the first half
Motor Vehicles.
remain near last year's levels despite slow sales in January and February.
Output reductions scheduled by domestic producers are largely offset by
increases at "quasi-domestics"--U.S. assembly plants of foreign
producers--located outside the District.
Quasi-domestic plants being built
in Illinois, Indiana, and Michigan are not yet in operation.
have led to more layoffs at some District plants.
Slower sales
American Motors
announced plans to close its Wisconsin assembly plant in 1989, but
subsequently agreed to resume critical negotiations over labor
concessions.
Demand has improved for heavy trucks and related components
such as diesel engines.
Consumer Spending.
Major chain stores in the District reported
further gains in sales in January and February.
appliances continue at a high level.
Sales of household
A District producer of large
appliances again added to employment to meet strong demand.
Production of
television sets at an Indiana plant is being increased 30%, as the producer
reduces its purchases of TVs made abroad.
Capital Goods.
remains slow, overall.
Demand for capital goods produced in the District
Sales of industrial robots are projected to fall
30% in 1987, chiefly because of capital spending cuts by the auto
industry.
Machine tools, large construction equipment, and railroad
VII-3
equipment continue weak.
A District producer of sophisticated medical
equipment will cut costs by buying, rather than making, certain components
and reducing area employment 20%.
North American sales of farm equipment,
of which the District is an important producer, are projected to stay
around 1986's low level in 1987.
Steel.
Following settlement of its 6-month work stoppage, USX
announced plans to leave shut, probably permanently, more than one-fourth
of its steelmaking capacity, at plants outside of the District.
Despite
ample total steel capacity, supplies of steel sheet have remained tight as
USX gradually has returned to production.
Two other integrated steelmakers
with plants in the District announced plans for sizable investments in
facilities.
Agriculture.
For the deeply distressed farm sector, recent
developments cast a somewhat more optimistic tone.
Farm earnings continue
to improve because of massive federal payments, lower production costs, and
better returns to livestock producers.
Higher earnings have contributed to
faster repayments on farm indebtedness and indications that the previous
uptrend in problem farm loans at banks reversed in 1986.
Exports of some
agricultural commodities have exhibited a sustained upturn in recent
months.
But prospects for corn and soybean exports, which are vital to
this District's farmers, remain dismal.
Farmland values continued to
decline through late 1986, but at a slower pace.
Moreover, declining
mortgage rates, new Federal Land Bank policies for liquidating acquired
farm properties, and recent changes enhancing the attractiveness of the
federal government's 10-year program for retiring land from production have
raised hopes that land values may be close to a bottom.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
The expansion of District nonfarm employment slowed in the
fourth quarter, despite faster manufacturing job growth.
Construction
activity also decelerated, with a sharp drop in nonresidential building
activity.
Loan growth at large District banks has been rapid but recent
data indicate a slowing in commercial and real estate loans.
crop production declined in 1986 farm income was flat.
Although
The financial
position of the region's agricultural banks improved during 1986.
Employment
District nonagricultural employment grew at a 2.1 percent annual
rate in the fourth quarter, about half its third quarter rate and
1 percentage point less than the national pace.
While the
goods-producing sectors grew more rapidly in the region than nationally,
service-producing sectors trailed national growth rates.
Spurred by mild
weather, District construction employment grew at a 11.2 percent rate in
the fourth quarter.
District manufacturing grew at a 1.4 percent rate
during the period, with gains in non-electrical machinery, food
processing, textile/apparel, and printing/publishing.
Despite these
gains, manufacturing employment remained 0.4 percent below year-ago
levels.
The fourth quarter expansion of District manufacturing was
constrained by a sharp drop in Missouri, where losses in motor vehicle
production contributed to the decline.
Moreover, while the number of
jobs in aircraft production increased in Missouri last year, the value of
federal prime defense contracts received in the state declined by 27.1
VIII-2
percent in fiscal year 1986, suggesting slower employment growth in the
future.
Construction
The value of District residential construction contracts grew by
4.1 percent in the fourth quarter--similar to the nation's expansion--but
the growth was concentrated entirely in Missouri.
Similarly, the number
of residential building permits issued in the District increased 4.2
percent in 1986 with Missouri again responsible for the entire gain.
While regional single-family permits increased 24 percent last year,
permits for multi-family buildings declined 14.2 percent.
January
residential building activity slowed from year-ago levels, with
single-family permits down 16.7 percent, and multi-family permits off 3.1
percent.
The weakness in multi-family construction reflects overcapacity
and changes in the federal tax code.
The same factors contributed to weakness in nonresidential
building.
December surveys indicate that office vacancy rates in
downtown Memphis and St. Louis were above the national average.
The
value of nonresidential construction contracts declined 9.2 percent in
the fourth quarter, following a 15.4 percent increase in the third
quarter.
Banking
Total loans outstanding at large District banks continued to
increase over the three most recent months.
Spurred by growth in
commercial and real estate loans, total loans expanded at a 20 percent
annual rate, more than double that for the same three-month period last
year.
Commercial loans advanced at a 23.3 percent rate, far outpacing
VIII-3
the 2.5 percent rate for the equivalent December-February period last
year.
A survey of the five largest banks in the District indicated
approximately 5 percent of their December increase of business loans
outstanding was induced by tax reform.
Most of these borrowings,
however, were paid-off by mid-February.
Real estate loans grew at a 29.5
percent rate compared with 13.9 percent for the three months ending
February 1986.
Agriculture
Final data for 1986 indicate wide variations in crop production
and yields across the District.
Despite overall lower crop production
levels, District total net farm income in 1986 should remain at the same
level as in 1985 due to higher livestock profits and increased government
payments.
In Tennessee, the value of the state's major crops was down 29
percent from 1985 and down 36 percent from 1984 due to acreage reductions
linked to government farm programs, low yields caused by early season
dryness and falling crop prices.
In contrast, Missouri enjoyed nearly
ideal growing conditions that resulted in a new record corn yield and
near-record yields of other major crops.
The average financial position of agricultural banks in the
District, which had declined over the previous three years, appears to
have stabilized and improved in 1986.
This improvement is evident in
third quarter measures of bank profitability, loan defaults, loan
delinquencies and bank capital.
The number of individual agricultural
banks with negative earnings and deficient capital increased slightly,
however, indicating a widening dispersion of performance among the
institutions.
IX-1
NINTH DISTRICT--MINNEAPOLIS
Economic conditions in
far
in
sonal.
1987.
the Ninth District have remained steady so
Unemployment rates
rose,
but most of the
In resource-related indus-
Consumer spending picked up in February.
tries, conditions remained mixed.
to show scattered
increase was sea-
And while some agricultural areas continued
signs of stabilization, farmers of major crops are still
dependent on government programs for much of their income.
Employment
So far this year, employment conditions have kept steady.
unemployment rates
Although
in district states rose in January, much of the increase
appears to be seasonal. Large layoffs of temporary retail workers, hired for
the holidays,
resulted in higher unemployment rates.
In the
Minneapolis-
St.Paul metro area, however, January's unemployment rate was still 0.4 percentage points lower than it was in January 1985.
And the number of initial
unemployment claims filed during January in Minnesota was 12.8 percent lower
than those filed a year earlier.
In South Dakota, nonfarm employment was 1.5
percent higher during January than it was a year earlier.
reports that
employment conditions
little better than last year.
in western
Wisconsin
A Bank director
appeared
to
be a
But in Montana, unemployment appeared to in-
crease during January.
Consumer Spending
Retail sales of general merchandise by larger retailers posted solid
gains in February.
One chain in the Minneapolis-St. Paul metro area reports
that February was its best overall month in the last five years or so.
chain experienced double-digit sales gains in almost every major line.
That
An-
IX-2
other large retailer also experienced double-digit gains compared to February
1985.
This retailer also notes that consumers seem to be using their credit
cards more moderately by carrying lower balances and defaulting less.
retailers say their inventories are at satisfactory levels.
Both
Another chain,
operating throughout the district, reports that even though general conditions
in rural areas have stopped declining, they haven't yet picked up.
Sales of motor vehicles, after a very slow January, accelerated in
February.
One domestic manufacturer notes that its district car sales were
much higher, while its truck sales only posted a modest gain.
Another domes-
tic manufacturer reports
to
sales
that unusually
warm weather
of trucks and four-wheel-drive vehicles.
seemed
hamper
its
Existing incentive programs
seem to be sufficient to stimulate sales.
Housing market conditions in Minnesota are still favorable, although
residential building contracts fell throughout the state in January.
A repre-
sentative of Twin Cities realtors is more positive about single-family housing
prospects than a year ago.
In contrast, housing activity is still way down in
Montana's and North Dakota's largely inactive oil-drilling areas.
While not all resort areas experienced good winter tourism conditions, many that did had good business.
large resort
A Bank director reports that one
in Michigan's Upper Peninsula had its best season ever, while
lack of snow created problems for another resort
Montana report
that an influx of Canadian
there.
Two observers
tourists helped resort
in
business
there.
Resource-Related Industries
Little change was evident in the district's major resource-related
industries, where conditions remained mixed.
In Montana and North Dakota, oil
IX-3
and gas activity remained in the doldrums, and coal production decreased.
A
continued lack of demand for iron ore was evident from the decision to permanently lay off 400 workers from a northeastern Minnesota ore-processing facility.
But demand for forest products remained firm.
As a result, a plywood
plant in Michigan's Upper Peninsula is expanding, says one Bank director.
Agriculture
Agricultural
conditions
continued
to
stabilize
early
this
year.
Bank directors note that the winter-wheat crop appears to be in good condition
in Montana and parts of South Dakota.
remained at profitable levels.
They also report that livestock prices
A Bank director reports that favorable prices
for potatoes and beans have helped stabilize farmland prices in northeastern
North Dakota, where
farm equipment
sales have
picked up.
But major
farmers are still dependent on payments from government programs.
crop
And a lack
of snowfall has led some observers in western North Dakota and eastern Montana
to worry about the adequacy of soil moisture.
X-1
TENTH DISTRICT - KANSAS CITY
Some recent slight improvement in Tenth District economic
Overview.
activity appears evident.
While the energy sector remains weak, retail sales
continue to improve somewhat and inventories are regarded as lean but satisfactory.
inputs.
Price increases remain moderate, both at retail and for materials
Housing starts are up somewhat, but the demand for mortgage funds is
somewhat weak and rates have softened a bit in some areas.
Loan demand at
district commercial banks is down slightly, while deposits are up.
Credit
conditions for farm borrowers vary widely.
Retail sales.
Tenth District retailers report that sales are generally
unchanged to slightly above year-earlier levels, depending partly on type of
store and geographic location.
during the last three months.
Sales have shown some further improvement
Price increases have been moderate, and prices
are expected to remain relatively stable to slightly higher.
Inventories are
reported to be at satisfactory levels after some recent trimming.
Retailers
are optimistic that sales will be solid during 1987.
Automobile sales.
Auto dealers report that February auto sales were
generally down from previous months, partly due to the elimination of the
sales tax deduction.
Most dealers have been trimming their inventories, and
are not overly optimistic about the outlook for future sales.
Purchasing agents.
Purchasing agents generally report slightly to
moderately higher prices for major inputs but expect little additional change
in the period ahead.
Materials supplies have been somewhat difficult to
maintain in some industries, with a few firms experiencing longer lead times.
Inventories have been kept lean deliberately and are generally regarded as
satisfactory.
Energy.
None of the respondents report any production bottlenecks.
The district's energy industry remains weak.
Uncertainty
X-2
about the ability of OPEC members to adhere to an agreement to restrict output
and fix prices has caused oil prices to remain somewhat volatile.
As a
result, exploration and development activity in the district remains generally
depressed.
The average weekly number of operating drilling rigs in the Tenth
District decreased from 272 in January to 226 in February, slightly more than
half the number recorded a year earlier.
Housing activity and finance.
Area homebuilders report that housing
starts are mixed compared to year-earlier levels but have strengthened somewhat over the past month.
Multi-family housing construction is weak through-
out the District, while single-family housing construction is somewhat stronger.
Builders expect overall housing starts in 1987 to match those of 1986.
Sales of new homes remain good, with prices generally stable to up slightly.
Builders report no problems with either the availability or delivery of
housing materials, and materials prices are stable.
However, the U.S.-induced
export duty on Canadian shingles and lumber leads most builders to anticipate
a jump in materials prices in the near future.
Most savings institutions report weak inflows or moderate outflows of
savings over the last twelve months, but with some improvement in the last
month.
Most respondents expect some further improvement in the near future.
Demand for mortgage funds is fairly weak, and opinions vary about future
demand.
Mortgage interest rates have softened a bit in some areas, but
respondents generally expect slight increases in the future.
Banking.
Total loan demand fell slightly at Tenth District banks
during the past month, while total deposits rose.
Demand weakened for agri-
cultural, commercial and industrial, and commercial real estate loans, but was
constant for residential real estate and consumer loans.
All respondents
report that their prime rate did not change and that they did not expect it to
X-3
change in the near future.
Consumer loan rates were generally constant and no
changes are expected in the near-term.
Balances in conventional NOW's, Super-
NOW's, MMDA's, IRA's, and passbook savings accounts tended to increase.
Demand deposits and large CD's tended to decrease, and small time deposits
remained constant.
Agriculture.
Commercial lenders in the district are in the midst of
annual credit reviews for their farm borrowers.
Some bankers expect to
approve credit for all their farm borrowers, although some borrowers may not
receive all that they request.
Other agricultural lenders expect a smaller
proportion of their borrowers to be denied credit this year than last year.
A
number of bankers, however, expect that up to 15 percent of their farm borrowers will be denied credit this spring, a proportion as high or higher than a
year ago.
These mixed results suggest that while some agricultural lenders
have successfully rid their portfolios of problem loans, others have not.
The Farmers' Home Administration's (FmHA) loan guarantee program has also
met with mixed results.
Some agricultural lenders are using few or no guaran-
tees, because of the additional paperwork and past difficulties in securing
FmHA approval.
Other bankers are gradually increasing their use of FmHA loan
guarantees, while still others are enthusiastically using the loan guarantee
program for as many as 20 percent of their borrowers.
Most bankers have acquired farm real estate through foreclosures, and are
handling the acquired property in a variety of ways.
A few lenders are
selling farmland as soon as possible after foreclosure, with little regard for
price.
In most cases, however, lenders note that most properties are not
selling due to a lack of interested buyers.
In the meantime, acquired farm-
land is being leased out by lenders--in some cases for the third consecutive
year.
XI-1
ELEVENTH DISTRICT--DALLAS
Some important sectors of the Eleventh District economy remain
weak, but signs of recovery are evident.
growing, although very sluggishly.
Orders to manufacturers are
The drilling rig count slipped in
February, after growing at a fairly steady pace since July.
have dropped considerably and retail sales remain low.
Auto sales
Construction is
declining at a quickening pace, chiefly because of reductions in
residential building.
The balance sheets of District banks reflect the
area's general economic performance, which is still below year-earlier
levels.
District cattlemen are selling their livestock at substantially
higher prices than last year.
An increasing number of manufacturers are reporting some expansion
in orders.
Nevertheless, reductions in demand from the weak construction
and energy sectors have left most durable goods producers with sales that
are unchanged since the last survey.
Orders from outside the District are
helping to prevent further declines in output by construction-related
manufacturers.
Stability has returned to the semiconductor industry after
two years of declining orders and plant shutdowns.
Sales by nondurable
goods manufacturers are up slightly, on average, but conditions vary widely
among individual industries.
increasing demand.
Chemical producers report gradually
A growing number of District manufacturers--including
producers of lumber, paper, electronics, and chemicals--report that the
decline of the dollar has led to expansion in orders for their products.
The drilling rig count in the District states fell in February, on
a seasonally-adjusted basis, after rising in almost every month since July.
XI-2
Despite the increases, the February 1987 count was 55-percent below that of
February 1986, although the year-over-year rate of decline has been
slowing.
Leading indicators of drilling activity are mixed but overall
they point to little if any gain in the rig count.
Sales of automobiles fell dramatically in January from December
and showed little growth in February, according to District auto dealers.
Most respondents ascribed the low sales in part to local economic weakness.
They said that heavy auto buying in December, in anticipation of tax law
changes, had also diminished recent sales.
result.
Inventories have risen as a
Although dealers hope for some seasonal increase in the next few
months, their overall outlook is for continued slow sales.
Retail sales remain sluggish and retailers report small cutbacks
in employment.
Sales of big ticket items such as furniture and appliances
remain particularly low while demand for some lines of clothing is showing
modest increases.
Most respondents say they expect continued weak sales
for the next few months, but they anticipate some gains by midyear.
Construction values continue to decline in the District, with the
largest reductions occurring in residential building.
The number of
building permits issued in the District has fallen significantly, with
large year-over-year declines in multifamily and, more recently, in
single-family permits.
Respondents attribute the residential building
decline to a large stock of unsold single-family homes and to high vacancy
rates for rental units.
The values of nonbuilding and nonresidential
construction contracts have also showed recent declines.
rates in the District's large cities continue to rise.
Office vacancy
XI-3
The balance sheets of large District banks still show declining
deposits, increased reliance on borrowings, and reductions in some types of
loans.
Deposit reductions are being led by declines in large time
deposits, but transactions deposits are also slipping.
falling.
Business loans are
Real estate loans continue to increase, but at a decreasing rate.
Securities holdings are markedly up from a year earlier.
In contrast to
the situation at the large banks, total deposits at all commercial banks in
the District remain stable, with declines in large time deposits offsetting
the gains in other types of deposits.
Income prospects for District farmers and ranchers are mixed.
Projected reductions in world cotton supplies, together with increases in
world demand, should result in higher prices for cotton farmers.
Feed
grain prices are down by more than 30 percent from a year earlier and show
little likelihood of a marked increase.
Feeder cattle are in heavy demand
with prices 11 percent higher in mid-February 1987 than a year before.
In
January, the index of prices paid to Texas farmers increased 3 percent from
December but still remained slightly below a year earlier.
Rising
livestock prices were responsible.for the increase in the farm price index.
The crop component of the index declined and it is substantially below the
year earlier level.
XII-1
TWELFTH DISTRICT - SAN FRANCISCO
Summary
The Twelfth District economy continues to present an uneven picture, across
states as well as across sectors. The first two months of 1987 have seen weak retail
sales, at least partially due to the tax-related buying binge at the end of 1986.
Nevertheless, demand for consumer credit continues strong in some areas.
investment activity, while uneven, appears to be weakening overall.
Capital
Prices of many
products are edging upward, particularly in sectors strongly affected by exchange
rates. Housing market activity has been robust in fast-growing
states such as
California and Arizona, but slow in hard-hit Alaska.
Consumer Spending
Retail sales have been weak during the early part of 1987, although it is not yet
clear how much of the weakness is fundamental and how much is a result of the
year-end tax-related buying binge.
California retail sales reportedly have shared in
the weakness during January and February.
Car sales have fallen since the first of the year in most parts of the District, as
the tax-induced sales surge in December suggested they would. Auto sales decreased
dramatically between December and January in California, Washington, Oregon, and
Utah.
Manufacturing
Surveys of purchasing managers in Oregon and Arizona suggest that prices of
some products are starting to creep upward.
In January, the fractions of both
surveys' respondents reporting rising prices increased while the proportions reporting
falling prices declined.
Price increases have been most pronounced in sectors
heavily influenced by exchange rate fluctuations.
Despite these inflationary
XII-2
tendencies, many respondents pointed out that substantial market competition and
limited consumer demand should keep any price increases modest.
Many firms plan to spend less on capital investments during 1987 than they did
during 1986. These decreases are attributed to slow economic activity overall, to an
increased focus on cost-cutting associated with recent restructurings, or to the
reduced investment incentives under the new tax bill. One savings and loan plans to
spend 15 to 20 percent less in 1987 than it did in 1986, while a survey of pulp and
paper producers reveals that they plan to decrease investment spending by an
average of 24 percent.
On the other hand, a survey conducted during January in Arizona suggests that
investment spending in that state is likely to remain stable, since about 20 percent
of the respondents said they would increase capital spending, while another 20
percent planned decreases and the remainder planned to continue spending at their
1986 levels.
Throughout the District, investment spending is expected to increase
for firms whose economic fundamentals indicate substantial investments, including
an energy distribution company and a retailer that are expanding their territories,
and a forest products firm newly flush with funds.
Agriculture and Resource Related Industries
The price of oil is expected to increase during 1987.
Utilities disagree as to
whether higher oil prices would cause significant increases in their rates.
In the
Pacific Northwest, the Bonneville Power Administration faces enormous debt
obligations and has requested a 15 percent rate hike to pay them off.
An unusual mid-January frost in southern California caused extensive damage
to avocado and citrus crops in Ventura and San Diego counties.
The estimate of
total damage currently stands at $60 million, although the California Avocado
Commission reports avocado damage alone at $110 million. The damage, compounded
XII-3
by more generalized low yields, is likely to cause price increases for some fruits,
vegetables, and nuts.
Western farmers should benefit from the last-minute trade pact agreed upon
between the U.S. and the European Economic Community since it averts stiff
European tariffs on such products as avocados (California), roasted nuts (California),
and flower and vegetable seeds (Oregon), as well as further tariffs that could have
been imposed on other specialty crops if the trade war had escalated.
Construction and Real Estate
California housing market activity has continued at a robust pace, although the
number of residential building permits issued in January fell sharply from
December's inflated level due to the January imposition of a new school fee.
The
single-family segment of the market remains healthy in most parts of the District.
In California, the median home price rose by 9.4 percent during 1986.
In Alaska,
however, where the drop in oil prices has affected the economy severely, singlefamily home prices reportedly fell 10 to 20 percent during 1986. The Alaska Housing
Finance Corporation has foreclosed on many homes, and in December 23 percent of
its condominium mortgages were in default.
Financial Sector
The performance of consumer lending in the West appears to be highly uneven.
Some banks and savings and loans are experiencing a slowdown, which they attribute
to a combination of high consumer debt levels, refinancing of consumer debt through
home equity loans, and more favorable terms offered by auto companies' finance
subsidiaries.
Other financial institutions continue to experience growth in both
installment and credit card outstandings.
In some cases, the increase seems to be
driven by continued strong consumer spending, but in other cases the growth is
attributed to aggressive marketing that has increased their market share. In most
areas, installment loans appear to be losing ground to home equity instruments.
Cite this document
Federal Reserve (1987, March 30). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19870331
@misc{wtfs_beige_book_19870331,
author = {Federal Reserve},
title = {Beige Book},
year = {1987},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19870331},
note = {Retrieved via When the Fed Speaks corpus}
}