beige book · August 17, 1987

Beige Book

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICTS

AUGUST 1987

TABLE OF CONTENTS

SUMMARY. .

First

. .

District

. .

Boston.

Second District

Third District

. ...

. .

New York.

. .

. ...

.....

. . ...

...

. .

Cleveland. .

. .

. ...

. .

. . ...

. .

. ...

Richmond.

Sixth District

Atlanta

Eighth District -

Chicago. .

. .

St. Louis. .

Minneapolis.

Tenth District

Kansas City.

. . .

Eleventh District

. ... .

. .

. ...

San Francisco.

. .

V-1

VI-1

. .VII-1

. .

VIII-1

. ..

...

III-

. .IV-1

. ....

II-

. ..

I-

.. ...

...

Dallas.

. .

Ninth District

. . .

Fifth District

Twelfth District

Philadelphia.

Fourth District -

Seventh District

IX-1

X-1

. .

XI-1

XII-1

SUMMARY*

Regional reports filed in late July show little change from those filed in

mid-June and

indicate

activity

rising

signs of revival.

common

continued

moderate

economic

growth.

Manufacturing

in most of the country, and the energy sector shows some

Retail sales are still

increasing.

producer and consumer levels.

Price

increases

are

Construction activity appears

somewhat weaker than reported six weeks ago, primarily because of declines

homebuilding.

Bank loan and deposit activities are mixed to slightly weaker

The financial outlook for farmers has brightened.

than reported in June.

CONSUMER SPENDING

Most of the Reserve Banks report moderate growth in retail sales in

Philadelphia and Chicago say that the hot weather has helped move

districts.

The New York district's retailers are selling more

summer goods.

furniture,

and

rugs,

but

retailers

the

Philadelphia,

Richmond districts say that demand for big ticket items is low.

executives

their

across

the

housewares,

Cleveland, and

Retail

store

country are generally optimistic about prospects for

sales in the coming months.

The prices of apparel and certain other goods such as imported electronics

continue to rise, and retail inventories are higher.

Large stocks of goods in

department stores have retailers somewhat concerned in the Boston

districts.

Dealer

and

Dallas

inventories of new cars are up in Cleveland, Atlanta, and

Minneapolis, but they are lower in Richmond and tight in Kansas City.

*Prepared at the Federal Reserve Bank of Richmond

prior to July 28, 1987.

from

information

gathered

Three

Reserve

Banks

see signs of a good summer tourist season.

notes increases in

hotel

occupancy

rates,

and

both

Atlanta

Minneapolis

and

San

Francisco report heavy highway traffic.

MANUFACTURING

Districts

generally

report modest increases in shipments and new orders,

although activity within particular manufacturing sectors varies by

Atlanta

indicates

stimulated the

districts,

oil

price

equipment

however,

oil prices.

the

are

increases

industry.

have

the

encouraged drilling and

Kansas

City

producing

Cleveland,

sheet

but

steel

other

nonelectrical

machinery,

while

product

automobile, housing, and utility industries are slow.

note

declines

offset

big-three

increases

automobile

truck

mills

products at capacity.

area, sharp output gains are evident in specialty textiles

and

Dallas

energy sector has responded only slightly to higher

Steel production fell

district

Chicago

that

district.

production,

production

and

lines

the

In the Boston

computers

dependent on the

Chicago

and

Cleveland

some of which is being

increases

domestic

automobile production by foreign manufacturers.

Input

prices

may

Philadelphia, Cleveland,

rising

Richmond,

faster.

Chicago,

Reports

and

from

Kansas

Boston,

City

all

New York,

include

references to price increases.

CONSTRUCTION

slowing

residential activity is indicated by the Boston, New York,

Richmond, Atlanta, Chicago, and St. Louis Reserve

notes

mixed

activity.

Cleveland,

increases in housing activity.

Banks,

while

Kansas

City

Minneapolis, and Dallas, however, report

Nonresidential activity is mixed.

the

San

Francisco

district

St. Louis reports

strong

growth,

experiencing a severe downturn.

Relatively

stable activity is reported by New York, Atlanta, Chicago, and Dallas.

Within

these and other districts, however, are pockets of strength and weakness.

York indicates that commercial and industrial leasing

activity

but

New

generally

good but is threatened by overbuilding.

AGRICULTURE

Farm

income

prospects

have improved.

Higher prices for hogs and cattle

are helping, and crops are in generally good condition in most districts.

the

negative

Francisco

side,

says

Atlanta

that

notes

labor

that

shortages

are

poultry

cutting

prices

have

fallen, San

harvests,

and

Atlanta

Richmond, and Minneapolis report some weather-related crop damage.

The

financial

position

agriculture is looking better in other ways.

Richmond and Chicago observe upward pressure on farmland prices.

farm

operating

loans

The

reported to be falling by St. Louis.

volume

Richmond

reports lower interest rates for agricultural loans, and both Richmond and St.

Louis are witnessing stronger loan repayment rates.

FINANCE

Loan

and

deposit

reported in mid-June.

and

Kansas

City

slowing growth.

Deposits

are

activity

banks remains at the generally weak pace

Cleveland reports a decline in

report

little

total

loans,

change, and Philadelphia and Atlanta report

St. Louis, however, indicates faster growth in

reported

growing slowly by Philadelphia.

Richmond

total

loans.

down by Dallas, unchanged by Kansas City, and

Continuing strength in the

demand

equity loans is mentioned by New York, Philadelphia, and Richmond.

for

home

FIRST DISTRICT - BOSTON

The pace of economic activity in the First District picked up in

Recent retail sales results have been well ahead of

early summer.

year-earlier levels and equal to or better than plan.

Manufacturers are

experiencing encouraging increases in orders and shipments, although they

remain cautious about the future.

common.

Reports of price increases are more

Several retail contacts expect rising input costs to lead to

higher prices next year.

Manufacturers are seeing modest rises in

materials prices and are encountering less resistance to increases in their

own prices.

Reports from the housing market contrast with the more

positive tone from the retail and manufacturing sectors:

in many areas in

the region the residential market is slower than normal for this time of

year.

Retail

Retail sales in the First District were equal to or better than

plan in the early summer.

For the merchants contacted, sales through June

ranged from 6 to 40 percent ahead of a year earlier, with early returns for

July suggesting a continuation of current trends.

plan or 3 to 4 percent higher than planned.

These results are on

The strength is fairly general

across product lines and geographic areas within New England.

Two retail respondents have purposely built up inventories in

recent months.

Although the buildup has successfully bolstered sales, they

are nervous about the costs and risks involved in heavy inventory

I-2

investment and, therefore, are reexamining their inventory policies.

Pricing remains very competitive, especially at the low end of the

market.

However, several contacts expressed concern with increases in

vendor prices.

Although retail price increases remain in the 2 to 3

percent range, this pace shows signs of accelerating during the coming year.

New England retailers are optimistic about the coming year.

They

expect the positive results to date to continue through the close of the

year and are budgeting for comparable or slightly more conservative

increases next year.

Manufacturing

First District manufacturers report moderately encouraging

increases in orders and shipments.

the recent pickup will last.

However, they are not convinced that

Producers of specialty textiles and computers

and other nonelectrical machinery cite some of the sharpest gains.

Paper

and appliance manufacturers are experiencing more modest increases, while

product lines dependent on the auto, housing, and utility industries are

"slow."

Firms serving the aerospace industry give mixed reports.

Most contacts stress the continuing need to cut costs, improve

quality, and avoid becoming overextended.

Accordingly, inventories, which

have been slim for some time, are being squeezed even further.

While

capital spending is generally running above last year's level, its primary

purpose remains improving efficiency and quality control.

the result of plant closings and consolidation.

Some spending is

However, a small part

represents bricks-and-mortar expansion within New England - a relatively

new development.

I-3

First District manufacturers are reluctant to hire additional

workers.

Two contacts indicated that they would prefer to invest in more

productive equipment, while another is only hiring on a temporary basis.

While one respondent is planning a large layoff, for the most part

employment levels are stable or rising slightly.

Most contacts report modest increases in materials prices,

particularly pulp, paper, aluminum, lead, copper, and steel.

In contrast

with the recent past, respondents are now finding it easier to pass these

costs on to customers and to make small (2 to 4 percent), "selective" price

increases stick.

On the whole, First District manufacturers expect a reasonably good

year, with improvements in profits ranging from small to significant.

general, they attribute this improvement to their own strict attention to

costs and to the effect of the dollar's depreciation on reported profits

rather than to any marked increase in economic growth.

Residential Real Estate

The residential real estate market in most parts of the First

District has experienced a slower than traditional summer season.

has been picking up recently in some sections, however.

Business

The market is said

to be flooded with over-priced, lesser-quality properties and, as a result,

selling times have increased.

resisting over-inflated prices.

Buyers have become better informed and are

Many property owners are reluctant to

lower asking prices on properties that are not selling, but others are

becoming more responsive to the market and reducing prices accordingly.

Properties that have sold recently have often had their prices cut.

II-1

SECOND DISTRICT--NEW YORK

Developments in the Second District economy varied somewhat among

sectors during recent weeks.

General business conditions continued to be

stable or improved and office leasing remained good in most areas.

Some

slowing in residential construction activity occurred, however, and consumer

spending was not uniformly on or above plan.

Small and mid-sized banks

reported a decline in primary mortgage rates during June and July.

Consumer Spending

The pattern of sales at District department stores was mixed during

June, but for the most part respondents reported results that were on or above

plan.

One retailer with lower-than-targeted June sales noted that its stores

ran a special promotional in May with very strong sales, and this detracted

from some of their usual Father's Day business in June.

Consequently, the

chain is viewing the two months as a single unit this year, the combined results

for which were slightly above plan.

Overall, June sales among respondents

ranged from 4 percent to 12 percent above year-earlier levels.

Items for which there was good demand in June were apparel of all

types, not just for Father's Day, and housewares, furniture and rugs.

Inventories continue to be monitored closely and generally are on or slightly

above target.

One retailer whose chain has had higher-than-desired stocks in

recent months plans an additional promotional in the near future to try to pare

inventories.

II-2

Business Activity

The improved tone in the District's economic activity continued in

recent weeks.

The Buffalo survey of purchasing managers registered a sizable

increase in the percentage reporting better conditions while in Rochester, for

the second consecutive month, no respondents experienced a worsening.

Both

area surveys, however, found an increase during June in the percentage of firms

reporting higher commodity costs following a decline in May.

Several recent developments point to a positive impact on the

District's economy.

The New York Times announced plans to spend $400 million,

its largest capital investment ever, on a new printing plant in New Jersey.

Estimated to be the size of 20 football fields, the plant will ease production

constraints at existing sites and permit growth of the Sunday edition.

Also in

New Jersey, Governor Kean has just presented plans for a $200 million state

center for the performing arts to be erected in Newark, plus expenditures of

about $50 million on other performance facilities in the District.

In another

development, ground was recently broken in Manhattan for Shearson Lehman's new

office tower which, upon completion, will house 1500 new employees together

with 5000 workers currently employed by the firm.

Construction and Real Estate

A slackening in the pace of District residential construction occurred

in recent weeks which was described in terms ranging from "negligible" to

"definitely slower".

The main reasons cited for the slowdown were a two percen-

tage point rise in mortgage rates in some areas and the high level to which land

and home prices have risen in others.

near-term outlook.

Responses were also mixed as to the

Some homebuilders reported a pickup had already begun while

others anticipated that the slower pace would continue.

For the most part,

however, District builders still expect this year's activity to run at or

II-3

close to the rate in 1986, which for many was a record.

Leasing activity in the District's commercial and industrial markets

generally remains good.

Among new undertakings, construction has begun on a

large mixed-use office, residential and commercial complex at a four-acre site

in mid-Manhattan which for many years had served as a parking lot.

A major

tenant has already been announced for the office skyscraper to be built there.

While conditions have generally been good, some concern has been voiced

recently regarding developments in Westchester County and northern New Jersey

where office vacancy rates remain at 20% or above.

Leasing activity in much

of Westchester has been slow in recent months, and while northern New Jersey

continues to attract new tenants, a spate of newly announced large office

projects has raised the possibility of increasing vacancy rates.

Financial Developments

Small and mid-sized banks in the Second District report that primary

mortgage rates have mirrored the national pattern, rising during April and May

and declining by a smaller amount since then.

The banks attributed the recent

decline to consumer resistance to higher rates and competitive pressures from

other banks. Most banks expected that the reduced demand for primary mortgages

would put additional downward pressure on rates in the near future.

However, a

few respondents thought that rates had stabilized. As interest rates rose

earlier in the year, the demand for adjustable rate mortgages relative to fixed

rate loans increased dramatically.

This trend has reversed itself since

interest rates turned down, and the portfolio mix now is very close to that at

the beginning of the year.

Despite the lower demand for primary mortgages,

banks do not expect that home equity loans will be negatively affected because

of the low rates and tax advantages associated with them.

III-1

THIRD DISTRICT - PHILADELPHIA

Economic activity in the Third District is growing at a moderate pace, as

indicated by information obtained in July.

Manufacturers reported that business

is improving at about the first half's modest rate.

A reversal of the first

half's downward trend in orders and a slight pickup in employment in July are

encouraging signs for the industrial sector.

Retailers contacted in July said

the healthy pace of sales they have experienced for the past few months is

continuing, with warm weather bolstering sales of summer clothes and seasonal

goods.

Growth in total bank lending in the region has slackened a bit since the

beginning of the year, but Third District bankers report that business and real

estate lending has been growing steadily for the past four months.

Consumer

lending, as classified for reporting purposes, appears to have fallen off, but

some bankers say a drop in credit card lending has been offset by home equity

loans.

Deposit growth, however, has slowed, largely due to a run off in

long-term certificates of deposit.

The outlook in the Third District business community is for continued

growth but at a somewhat slower pace.

Manufacturers expect improving business

for the rest of the year, although they are not planning significant increases

in hiring or capital spending.

Retailers expect the current growth of sales to

slacken, but still forecast a good second half.

Bankers expect slower growth in

economic activity in the region in the next several quarters to result in

smaller increases in loan volume than were booked in the first half of the year.

Nevertheless, they express some concern that they may not be able to fund

planned loan growth without raising interest rates paid on deposits.

III-2

MANUFACTURING

The modest growth that the region's industrial sector experienced in the

first half of the year is continuing, according to the latest Business Outlook

Survey.

Just over one-fourth of the firms participating in the July survey

stepped up production from June's pace, while 16 percent cut back; around half

Conditions appear to be slightly better for

were operating at a steady rate.

durable goods producers than for nondurables makers.

Reflecting the overall

trend of slow growth, most measures of industrial activity made only fractional

gains in July.

half's pace.

New orders and shipments rose slightly, continuing the first

Showing more improvement, order backlogs turned up after declining

for five months in a row, and employment rose fractionally for the third time

this year.

Although three-fourths of the companies surveyed in July reported

steady payrolls, 17 percent added workers, while only 8 percent made cuts.

Industrial prices in the region remain generally stable, although input costs

are showing some upward movement.

Looking to the future, area manufacturers contacted in July are mostly

optimistic, but remain conservative in their planning.

On balance, survey

participants forecast gains for new orders and shipments, and larger order

backlogs by the end of the year.

However, local manufacturers do not expect the

recent improvement in employment to continue, and they are planning only modest

increases in capital spending.

Price expectations are mixed.

Half of the firms

polled in July intend to hold the line on the prices of their own products, but

one-third plan increases in the next six months; 60 percent anticipate higher

prices for purchased goods in the next six months, while one-third expect no

change.

III-3

RETAIL

Merchants contacted in late July reported healthy rates of sales continuing

from June.

Store officials say sales for their fiscal second quarter (May-July)

will probably meet or exceed plans, with increases from the year-ago period

around 10 percent in dollar terms.

Retailers say a long spell of hot weather

has resulted in greater than expected sales of summer apparel and seasonal

items.

Less robust performance has been turned in by home furnishings and major

appliances.

Looking past the usual summer lull to the fall, retailers expect sales

growth to slow from its current pace and to run about "average."

They do not

believe that business can continue to increase substantially unless overall

economic growth accelerates.

FINANCE

Total loan volume outstanding at major Third District banks in early July

was about 5 percent above the level at the beginning of the year.

Loan volume

appeared to be increasing at about a 10 percent annual rate in July, consistent

with the second quarter's rate but slower than the first quarter's pace.

Bankers contacted in July say that commercial and industrial lending and real

estate lending are growing, but that consumer lending has fallen off.

However,

some commercial bank credit officers have analyzed the shift from credit card

borrowing to home equity loans by their customers, and they conclude that total

lending for personal expenditures is still increasing at about the same rate as

it has grown over the past twelve months, around 10 percent annually for large

Third District banks as a group.

Third District bankers generally expect a period of sluggish economic

growth ahead, resulting in a smaller increase in overall loan demand in the

second half of the year than in the first half.

With slower loan growth, some

III-4

bankers say gains from the purchase and sale of securities will account for an

increasing share of revenues, and that this will increase the variability of

their earnings.

Most large banks contacted in July reported that deposit growth has been

slower than expected since May.

Long-term certificates of deposit are not being

rolled over and bankers believe these funds are being reinvested outside the

banking industry.

However, total deposits continue to rise as a result of

strong growth in other accounts, especially interest-bearing checkable deposits.

Nevertheless, bank asset/liability managers say they may have to raise rates on

money market deposits and other short-term accounts later in the year in order

to maintain deposit growth in line with planned asset growth.

IV-1

FOURTH DISTRICT - CLEVELAND

Summary

changed

Economic activity in the Fourth District has

from

the

conservative pace.

but

The region's economy continues to grow at a very

report.

last

employment

Increases are reported in production

the

grow but at a slower pace than during

are

starts

higher,

and

new

orders,

Retail sales continue to

down and inventories are up.

slightly

only

month.

housing

New

Demand

though mortgage rates continue to rise.

even

for consumer and commercial loans has weakened.

Retail Sales

Retail sales grew at a slower pace

month.

Most

the

sluggishness

partly attributable to a

Another

factor

others

to expand.

However,

June

than

the

appears to be in hard goods, which is

housing

sales

earlier

Some retailers report

increase

note a leveling of credit use.

the

year.

deliquency

rates,

Sales of soft goods continue

Some retailers note that inventories

due

are

starting

build.

to the initially low inventory levels, few retailers foresee

any need to liquidate inventory in the near future.

generally

is that consumers appear to be reaching the limit of their

debt capacity.

while

drop

expected

modest

Price

increases

are

3 percent per annum), although

import quotas could provide additional upward pressure on prices.

Domestic auto sales in

percent

below

sales

June

year

are

ago.

reported

Dealers

confusing incentive programs, weak real income

better

deals

come.

blame

growth,

much

sluggish

and

the

sales

prospect

Foreign auto dealers also report slow sales.

IV-2

with

The slowed pace of import sales combined

the

has

U.S.

pushed

well above those of previous

levels

inventory

capacity

production

added

years.

Labor Markets

Total employment in Ohio increased by 44,100

increase

the

May.

However,

civilian labor force of 71,000 over the month pushed the

unemployment rate from 7.2 percent in April to 7.9

percent

May.

The

national rate was unchanged at 6.3 percent.

Increases

manufacturing.

total

Retail trade and

increase

vacation-related

instance,

nonmanufacturing

eating

services

employment.

businesses

sectors

Much

prepared

offset

accounted

this

for

the

continued losses in

for

over

half

the

increase was seasonal as

summer

months.

For

and drinking establishments and amusement and recreation

services registered the largest increases.

Manufacturing lost 2,600 jobs over the month, half of which

primary

metals.

equipment also

edged

Electrical

and electronics equipment and transportation

experienced

slightly

were

sizable

42.5

job

hours,

losses.

The

average

workweek

helping to raise average earnings of

production workers by $4.69 over April's earnings.

Manufacturing

A survey

continues

purchasing

improve

agents

conservative

increases in production and new orders.

the

production

outsourcing

heavy

machinery

trucks

work.

Ohio

indicates

pace.

that

business

Positive signs include

Of particular note

are

increases

and

military

the

negative side, inventories and

orders

and

the

IV-3

prices are higher, employment lower, and the backlog of orders

fallen

has

off.

Raw

production in Ohio fell by 8 percent last month.

steel

this recent downturn in production, several major steel

have

area

reported

profits

quarterly

productivity

from

reducing

for

employment,

producers

the

first time in

the

They attribute their healthier financial

several years.

gains

positive

Despite

standing

closing

the

inefficient

facilities, and upgrading more efficient ones.

Domestic automobile production in the region is

this

period,

substantially

compared to the same period a year ago.

Among the Big Three

producers, scheduled output will drop by 15.3 percent at

Ford,

and

17.5

percent

at Chrysler.

GM,

impact

in the region.

area.

For

instance,

percent

should

have

Somewhat offsetting domestic cutbacks is the

continued expansion of production facilities of

the

4.3

Since transportation equipment

production is heavily concentrated in Ohio, these cutbacks

large

lower

Honda

foreign

manufacturers

recently announced a $450 million plant

expansion project at its Anna, Ohio

plant,

which

will

enable

Honda

produce 360,000 motorcyle and auto engines a year.

Housing

starts

the previous month.

past

month

the region were 14 percent higher in May than in

Home mortgage rates have edged up

percent

Nonetheless, many developers are optimistic

region

will

for

30-year

that

slightly

over

fixed-rate

housing

starts

the

loans.

the

continue to grow as the major urban areas continue to recover

and relatively inexpensive land remains available.

IV-4

Banking

District loan demand has weakened in the

outstanding

large

last five weeks,

industrial

contraction.

continued

addition

rapid

loans outstanding fell at

decline

slight

consumer and real estate lending

increasing

Total

month.

loans

banks fell at an annual rate of 15 percent over the

following

loans

last

account

the

for

the

softness

have

tapered

off

May.

and

Commercial

majority

business

loan

considerably.

the loan

demand,

After

clip in May, consumer installment and real estate

annual

rates

respectively, over the last five weeks.

percent

and

percent,

FIFTH DISTRICT - RICHMOND

Overview

special

telephone

respondents

Directors and

much in recent weeks.

in the District have not changed

conditions

economic

speaking,

Broadly

Homebuilding

levels.

and

mail

activity

Manufacturing

moderately from June to July, while retail sales were

increase

Wage and price pressures

unchanged.

regular

surveys reported generally positive current conditions and

widespread optimism about prospects for the economy.

continued

our

and

intensified

producer

and

consumer

of single family homes were steady.

sales

Large

banks reported strength in consumer and home equity loans, no clear change

commercial

reserves.

and

industrial

loans,

extraordinary additions to loan-loss

and

Reports from agricultural bankers indicate that farmers

are

under

less financial stress than a year ago, although July's hot and dry weather has

probably reduced prospective crop yields.

Retail Activity

their

sales

through the first part of July were about even with those in late June.

Forty

Retailers responding to our

survey

regular

reported

percent of the survey respondents reported increases

with

33 percent who reported declines.

strength

this

automobiles, were reported to be

sales,

compared

Weakness in sales of big ticket items

was noted by one-fourth of the respondents, as

reported

that

Retail

category.

higher.

compared

Retail

with

one-sixth

inventories,

employment

except

showed

who

little

change.

Upturns

were

evident

retail

prices

and

wages

from June to July.

One-third of the retailers reported increases in the prices they charge and in

employee

compensation,

declines.

compared

with

negligible

percentages reporting

Retailers were about evenly split between those reporting increases

and those reporting no change in the prices they pay for goods at wholesale.

Retailers

remain

optimistic about sales in the months ahead, with almost

two-thirds anticipating increases.

rise

further.

Few,

however,

Most expect wholesale and retail prices to

expect an increase in their employee numbers,

even though over half currently report job openings.

doubtful

that

Evidently retailers

are

they will be able to fill these positions, given the tightness

of markets for service workers.

Manufacturing and Mining

Manufacturing activity continued to grow

moderate

rate

Shipments, new orders, employment, and the workweek increased.

orders

has

Inventories

been

generally

materials

goods were unchanged.

raw

materials

and

unchanged

increased

our

last

two

July.

The backlog of

regular

surveys.

slightly, while inventories of finished

Manufacturers again reported increases in the prices of

finished

products, and over one-third of the respondents

reported that they had raised wages in the past month.

Manufacturers

believe

their business activity will improve further in coming months.

Coal production is above its year-ago level, but below the level predicted

a few months ago.

Export demand is weaker

than

had

been

anticipated,

and

electrical generating utilities are not buying at the expected rate.

Housing

Homebuilders

most of the District report July activity was about even

with June, but down from a year ago.

buyers

are

Builders believe that

many

prospective

staying out of the market, waiting for mortgage rates to decline.

Meanwhile, current buyers of new homes are seeking more

amenities,

including

higher ceilings and larger rooms.

In the Washington, D.C., area, homebuilding

activity -- particularly condominium construction -- continues to increase.

Realtors in the District report that their sales of

were

unchanged

July

from

June.

single

family

homes

They expect mortgage interest rates to

remain steady for three months, and then to rise.

Financial

Large District banks report that

summer

compared

last,

and

home

consumer

loan

demand

strong

equity

loan

demand

also strong.

Commercial and industrial loan demand is mixed.

other

than

home

this

Residential mortgage activity

Variable rate mortgages

equity loans is lower this summer.

that allow conversion to a fixed rate mortgage at the borrower's option -- the

convertible ARMs -- are being offered by only a few District banks,

so-called

and only one bank reported strong customer interest.

Almost half of the banks surveyed reported

their

additions

The increases were mostly due to foreign debt

reserves.

loan-loss

out-of-the-ordinary

exposure and were expected to be one-time adjustments.

Agriculture

Preliminary results from our recent survey of District agricultural

suggest

Agricultural

lessening

loan

the

repayment

financial

rates

are

optimistic that farmland values will rise.

stress

facing

improving

and

problem

now

facing

bankers

farmers.

are

Further, interest rates across all

Hot, dry weather is the

loan categories eased somewhat in the second quarter.

predominant

District

banks

District farmers.

If it doesn't rain soon,

corn and soybean yields will suffer, which would reduce

prospective

revenues

from crop sales at harvest and the ability of some farmers to service debt.

VI-1

SIXTH DISTRICT - ATLANTA

The Sixth District's economy shows signs of moderate strengthening in a number

of sectors.

Unemployment in the Southeast continues its downward trend assisted by

sizable job gains in services and a slow rebound in manufacturing. Retail sales are rising

moderately, and tourism is also providing a positive impact.

mixed

picture

with pockets

Construction presents a

of brisk activity interspersed among slowing areas.

Prospects in agriculture appeared generally favorable at mid-July although hot, dry

weather again threatened crop yields.

Employment and Industry.

District.

Unemployment rates continue to decline in the Sixth

The May rate of 6.8 percent was the lowest in seven years for the region, and

the downward trend apparently continued according to preliminary June reports.

The

largest employment gains have been posted in the service-producing sectors; however,

manufacturing employment has improved steadily since the first of the year.

The chemical industry is rebounding, aided by the weak dollar and low raw

material costs.

The recent upturn in oil prices has encouraged drilling activity, which

has stimulated the oil equipment industry.

shipments

for furniture

Bank directors report that orders and

manufacturers remain strong, and consumer

furniture are accelerating.

purchases of

Textile inventories are reported to be at acceptable levels,

and many plants in the region are operating near capacity at present.

Consumer Spending.

Retailers in the District report sales are matching modest

national gains, on balance.

Atlanta sales, according to some retailers, show signs of

picking up. Florida is the Southeast's best performer, while Mississippi and Louisiana are

the worst.

Georgia, Alabama, and Tennessee are performing about on par with the

nation.

District car dealers report mixed trends for June and July as foreign car sales

outperformed the sluggish movements of domestic cars.

As in recent months, most

dealers handling GM models report weak sales and unwanted inventory accumulation.

VI-2

One surprising bright spot emerged in New Orleans, where the stabilization of oil prices

and renewed drilling activity spurred the best June car sales performance in that location

in four years.

Overall, the Southeast's new car registrations this year through the end of

May were off by 1 percent compared to the first five months of 1986, while the nation's

rate dropped by 9 percent.

Construction.

Single-family building permits in the Sixth District (three-month

average, seasonally adjusted) declined in May after holding steady for three months.

However, District realtors anticipate that the softening of mortgage rates in recent

weeks will boost housing activity.

The spring uptick in rates discouraged residential

builders and apparently priced many first-time buyers out of the market for new homes.

Some have turned to lower-priced existing homes, which, contacts report, are generally

selling well.

Market performance varies throughout the District. Jacksonville reports strong

sales, and new residential construction continues at a healthy pace in the suburbs of

Jackson, Mississippi. The worst performance is reported in New Orleans, where sales are

slow and prices are stagnant.

The Southeast's prolonged slowdown of commercial construction has enabled

Orlando reports a decline in vacancy rates for commercial

markets to firm slightly.

space, and prices for industrial space in Atlanta are strong. Montgomery contacts note

active commercial construction.

Financial Services.

downward in June.

Total loan growth at the largest commercial banks edged

Growth of both business and real estate loans slowed, while consumer

loans grew only slightly.

Around 50 percent of the total credit available through home

equity lines is currently in use, say District bankers.

While many line holders are using

the credit to pay off consumer debt, many are also using it to make major purchases.

Tourism. Tourism throughout the Southeast is matching last year's performance.

Florida leads the District as it benefits from Disney's anniversary publicity. The state's

VI-3

hotel occupancy rates have increased from last year.

There is positive news for

Mississippi in the revival of tourism in Natchez and Vicksburg and for Louisiana in the

planning of the Pope's visit in September. Alabama, Georgia, and Tennessee are realizing

earlier expectations of a good summer tourism season.

Port Activity.

Rising exports are gradually offsetting the volume lost from the

sluggish pace of imports at several District ports.

In Miami, for example, increased

exports to Latin America are more than compensating for reduced imports.

In New

Orleans, port revenues are up from last year, and the prospects for continuing gains in

export cargo and employment are quite promising.

In Savannah, exports are also

gradually rising, led by higher shipments of kaolin to Europe, machinery to Brazil, and

forest products to many countries.

Mining. The number of active oil and gas drilling rigs in the District rose sharply

in early July to reach the highest level since April 1986. Most of the increase occurred

in Louisiana and Alabama.

The upsurge is in response to higher petroleum prices and

expectations of improvement in the price of natural gas. Substantial drilling activity is

occurring in the Gulf of Mexico with plans for further exploration and development.

Because almost one-third of the nation's natural gas supply is located in the Gulf, this

area will continue to be developed, which bodes well for southeastern seaports.

For the first half of 1987, District coal production was 11 percent less than the

same period of 1986, and coal prices averaged 6 percent lower.

Agriculture.

Crop conditions in the Southeast are favorable at present, but if

recent hot, dry weather continues, yields could deteriorate.

The broiler industry may

experience losses as prices have fallen 20 percent below a year ago in the face of slowing

demand and large supplies.

VII-1

SEVENTH DISTRICT--CHICAGO

Summary. Business activity in the Seventh District continues to expand.

Contacts

appear more optimistic about the near-term outlook. Purchasing managers in Chicago and

Milwaukee reported further improvement in June. Total employment growth in District

states from the end of 1986 to May about equaled that in the U.S., seasonally adjusted.

District steel mills are operating at capacity for some products and at high levels for

others. In response to slower car sales and high inventories, auto makers have cut

production, but truck sales and output are strong. Contacts continue to report rising

demand for some types of business equipment. Nonresidential construction is slowing in

some areas, including Chicago suburbs, but continues strong in downtown Chicago and in

Michigan. Residential construction has trailed 1986 since the strong first quarter, and

the rest of 1987 is projected at a high level but below last year. Retail sales of

seasonal merchandise have been boosted by hot weather, and home improvement products are

also reported selling well. Farmland values are edging upward, reversing a six-year

decline.

Purchasing Managers. Chicago and Milwaukee purchasing managers' reports show

continued expansion in activity through June. Both groups report further increases in

output, orders, and inventories, accompanied by rising prices. The Chicago report

indicates slower growth of orders than earlier in the year with backlogs and employment

unchanged after earlier increases. Milwaukee, in contrast, saw faster growth of orders

and backlogs, and rising employment. Both reports have been more favorable this year

than in 1985 and 1986, with the improvement particularly sharp in Milwaukee.

Steel. Chicago-area steel mills are operating at capacity for sheet products used

in the automotive, appliance, and construction industries. Production of structural

steel has slowed but by less than usual in the third quarter. The market for steel plate

VII-2

has tightened. Steel service centers have been setting sales records. Price increases

have continued to be reported for various steel products, reflecting improved demand from

some sectors, rebuilding of low inventories, lower imports in response to higher prices

for foreign steel and the Administration's trade restraint program, and cuts in domestic

steelmaking capacity due to plants being closed in recent years and not reopened.

Motor Vehicles. As expected, extended shutdowns for model changeovers are being

scheduled in the auto industry to cut inventories. Car sales have continued to trail

last year's levels. Permanent as well as temporary cutbacks in auto production are

having a particularly sharp impact on industrial activity in southeast Michigan, where

the industry is heavily concentrated. However, a knowledgeable contact thinks forecasts

of a Michigan recession with double-digit unemployment in 1987 or 1988 are unduly

pessimistic. Buyers continue to substitute vans and other light trucks for cars. Sales

of heavy trucks are strong. A supplier projects a 16 percent rise in production of heavy

trucks this year, to 4 percent above 1985. In contrast with cutbacks in car output, an

Indiana truck plant is adding a second shift and 1,100 workers. Unions are expected to

emphasize job security in negotiations on new contracts in the industry; management is

expected to prefer bonus or profit-sharing plans over increases in base pay.

Equipment. Reports indicate rising demand for various types of equipment, but

continued weakness in other lines. A producer of diesel engines is working overtime to

fill orders from truck makers, and backlogs have increased. Demand for diesels from

other sectors is a little stronger, except from makers of farm equipment. A steel

supplier is seeing increased orders from makers of railcars (up from a very low level),

construction equipment, and pressure vessels used in the chemical process industry.

Buying of machine tools, volatile from month to month, remains weak, hurt by auto

industry cutbacks.

Nonresidential Construction. Contracts for construction of nonresidential

buildings in the District, in square feet, during the first half of 1987 were about even

with last year. A further sizable rise in Michigan was about offset by a large decline

in Illinois. Commercial construction continues strong in downtown Chicago. New large

buildings continue to be announced, additional structures are being planned, and more

announcements are expected. Commercial building has slowed substantially in Chicago

suburbs. A steelmaker notes an upturn in buying of pipe for use in oil and gas well

drilling, and strength in construction of gas pipelines.

Residential Construction and Sales. Construction contracts for residences in the

District states during the first half were above a year earlier, in contrast with the

U.S. which was lower. However, the rise in the District was entirely in the first

quarter, helped by unusually mild weather. Higher mortgage interest rates since late

March and uncertainties over possible future rate declines have caused potential home

buyers to wait. Mortgage rates have eased since May, to 10 percent or a little lower for

30-year fixed-rate loans. Inventories of used homes for sale in the Chicago area are

low, and lending activity has slowed. A number of housing projects are expected to start

soon in this area. Residential building for the rest of the year is expected to stay at

a high level but below 1986.

Retail Chain Store Sales. Exceptionally hot weather has encouraged buying of

seasonal merchandise, according to a contact at a large retailer. Sales of home

improvement items have been doing well. Higher prices, particularly for women's and

other apparel, have added to the dollar volume of sales. These higher prices are

attributed less to the fall in the dollar than to bilateral trade agreements sharply

limiting growth of U.S. apparel imports from Asian countries.

Agriculture. Preliminary results from our latest survey of agricultural banks show

that, on average, District farmland values rose about 1.5 percent in the second quarter.

Banks from each of the five District states reported an increase. This marks the second

consecutive quarter of modest increases, reversing the six-year slide that extended

through 1986.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The District's economy continued to weaken in the most recent

period.

Employment and construction slowed since the last report.

outlook for consumer spending, however, was positive.

The

Favorable farming

conditions suggest large harvests of District crops.

Employment

District employment has stagnated in recent months after rapid

growth in early 1987.

Nonfarm employment grew at a 0.4 percent annual

rate in the three months through May compared with the nation's 2.6

percent pace.

Kentucky and Missouri posted declines during the period.

The District labor force dropped in May for the fourth consecutive month.

District manufacturing employment declined at a 3.3 percent rate

in the March-May period with losses concentrated in Missouri auto

production.

It was recently announced that $563 million will be invested

to expand a Louisville assembly plant and produce a new line of light

trucks.

The expansion will directly create several hundred jobs.

Reports indicate that price increases for imported goods have

allowed expanded sales of regionally produced textiles and apparel,

electronic parts and metal-cutting equipment.

Continued cost-cutting and

automation, however, are expected to slow employment increases in these

industries.

Employment in the region's textile and apparel sector

leveled off in recent months following gains since last fall.

Jobs in

electrical and non-electrical equipment have declined since 1985.

VIII-2

Consumer Spending

Reports from District retailers suggest that sales were quite

strong in April and May but weakened in June.

Most report that sales of

durables were recovering from first quarter softness.

Several

respondents reported sharply higher clothing prices for both foreign and

domestically produced clothing.

There was a general feeling of cautious

optimism among retailers regarding third quarter sales because consumers

have been readily accepting fall clothing in early July and consumer debt

levels have dropped lately.

Of 67 small retail businesses in the

District surveyed in April and May, 60 percent expected an increase in

their real volume in the near future.

Construction

Despite strong growth of nonresidential building, overall

building activity slowed in the region as residential construction

activity declined.

The value of District residential building contracts

dropped 10 percent in the second quarter, following a moderate first

quarter gain.

Residential activity remained strong in the Louisville and

St. Louis areas, however.

District nonresidential contracts grew 20.6

percent in the second quarter.

Nonresidential building was particularly

vigorous in Arkansas and Missouri.

Despite the recent slowing, general construction activity

remained stronger in the District than in the nation in the second

quarter, due to the strength of the region's nonresidential sector.

VIII-3

Banking

Total loans outstanding at large District banks grew at a 9.7

percent annual rate for the second quarter compared with a 7.4 percent

rate for the same period last year.

Second quarter loan activity saw an

acceleration in real estate lending being partially offset by slower

commercial loan growth.

Real estate loan volume grew at a 21.6 percent

annual rate in the second quarter versus a 0.6 percent rate for the same

period in 1986.

In contrast, commercial loans grew at a 7.3 percent rate

during the second quarter compared to an 11.6 percent rate over the same

period last year.

Agriculture

District crop development is as much as two weeks ahead of

average due to early planting and recent widespread rains.

The

District's corn crop has already passed its critical stage which

guarantees a large crop even with dry weather in the future.

The soybean

crop's critical growth period falls in early August when additional rains

will be needed.

The volume of farm operating loans continued to fall both at

commercial banks and at Production Credit Associations during the first

quarter of the year.

Overdue farm loans at agricultural banks improved

from 10.4 percent in the first quarter of 1986 to 9.0 percent one year

later.

Net loan losses at agricultural banks also improved from .28

percent to .20 percent over the same period.

IX-1

NINTH DISTRICT--MINNEAPOLIS

The district economy has continued to improve this summer.

Strong

seasonal employment growth has helped many parts of the district, causing a

general decline

in state unemployment rates.

Consumer spending has grown

modestly, while housing activity may be starting to pick up a bit again.

The

tourist industry, a major summer employer, has done well so far this summer.

The agricultural

sector has at least done better than last year, thanks

warm weather, high livestock prices, and income from government farm programs.

Employment

Labor market conditions have

trict

states

report

good

declines during May.

percent

April

dropped from 5.2

seasonal

improved in early summer.

employment

growth

Most dis-

and unemployment

In South Dakota, the unemployment rate fell from

3.5

percent

in May,

while

North

percent to a historically low 4 percent.

estimates from Montana also

indicate a healthy decline

Dakota,

the

rate

Preliminary May

its unemployment

rate, down more than a full percentage point from April and down two percentage points from May 1986.

particularly heartening;

Statistics from the Upper Peninsula of Michigan are

they show a three percentage point drop in its unem-

ployment rate between April and May coupled with a sizable increase of 3,300

jobs over the last year.

And while both Minnesota's nonfarm employment and

its unemployment rate deteriorated a bit during May, its Minneapolis-St.Paul

metro area continued to register improvement in both statistics.

Consumer Spending

Retail sales of general merchandise have continued to grow moderately.

One retail chain reports sales 4 percent higher this June than last.

Its recent sales promotions did quite well.

Its inventories are at acceptable

IX-2

Scattered reports

levels, and management is optimistic about fall business.

from cities around the district indicate that retail sales are holding up in

Sioux Falls, South Dakota, as well as in Missoula, Montana, where a new large

discount store is slated to open this August.

Motor vehicle sales seem to be picking up.

One domestic manufac-

turer experienced its best June sales ever in this district.

While its inven-

tories are still a bit high, its dealer profits have been good.

A large Twin

Cities dealer of another domestic manufacturer reports that its recent sales

have been quite good, too.

Directors of this Bank's branch in Montana give

mixed reports about auto sales in their hometowns.

Housing activity

may have

rebounded a

bit

recently.

After a 22

percent drop in May, Minneapolis-St.Paul home sales posted a 9.5 percent gain

in June over the level of June 1986.

Sales for the second quarter were still

around 20 percent lower than a year earlier, though.

Tourism

The

tourist

industry,

a major

contributor

throughout the district, has done well so far.

grizzly bears,

the number of visits

to major

the

summer

economy

Despite a few incidents with

tourist attractions

in Montana

was 4 percent higher this June than last, leaving the year-to-date number up 6

percent.

ago.

percent

Reservations

Attractions

increases

for

the rest of the year are also ahead

of a year

the Black Hills area of South Dakota report 15 to 20

over

last year.

During

one week

Airstream homes brought 7,000 people to that area.

in June, a caravan of

Industry representatives

in western North Dakota report activity up about 10 percent this June.

reports also come from most areas in the Upper Peninsula of Michigan.

Good

Traffic

into the Upper Peninsula over the Mackinac bridge this July is running ahead

of last year's record level.

IX-3

Agriculture

Agricultural conditions have continued to improve.

commodities have continued to rise.

Prices of farm

The Minnesota farm price index rose in

June to a level 3 percent higher than in May and 4 percent higher than in June

1986.

Meat prices account for much of the

reached their highest level in eight years.

increase, as beef cattle

prices

Government land idling programs

have helped lower plantings of major crops currently in excess supply.

example,

corn

acreage in Minnesota

is now at

its lowest level

since

For

1983.

Income from livestock sales and a variety of government agricultural programs

led to an increase in district farm income during the second quarter, according

to this

Bank's

survey of agricultural bankers.

This survey also shows

that the higher farm income helped farmers service their bank debt, which has

improved the portfolios of agricultural banks.

Unseasonable warmth has helped

row crops to develop very rapidly, but it has also led to moisture stress in

some parts of the district.

hoppers and hail.

And some areas are having problems with grass-

TENTH DISTRICT - KANSAS CITY

Overview.

sluggish pace.

Economic activity in the Tenth District is continuing at a

Retail sales have stabilized over the past three months, but a

Auto sales are steady to slightly stronger in

few retailers report declines.

Retail prices have remained steady, although manufacturers' purchasing

July.

agents continue to report moderate increases in input prices and continue to

expect further slight increases.

The housing industry in Oklahoma and

Colorado is depressed, while other parts of the district report that housing

starts are near last year's levels.

slightly to higher oil prices.

show little change.

The energy sector has responded only

Deposits and loan demand at district banks

Winter wheat yields in the district were about average.

Strong prices have brought little expansion in the livestock sector.

Retail Sales.

District retailers report mixed sales, with half the

respondents reporting sales above year-ago levels and half reporting sales

below year-ago levels.

Sales have mostly stabilized over the past three

months, but a few retailers report declines.

Prices have been generally

constant over the past three months, and retailers expect this trend to

continue for the near future.

considered to be satisfactory.

After some recent trimming, inventories are

Most respondents express optimism for future

sales.

Automobile Sales.

Automobile dealers generally report that auto sales

are steady or slightly stronger in July.

Inventories are generally considered

tight, and some dealers report difficulty obtaining automobiles due to end-ofmodel-year conditions.

Dealers expect auto sales to remain constant or

improve during the remainder of 1987.

Purchasing Agents.

Purchasing agents report that input prices are

moderately higher than last year and are expected to increase slightly during

X-2

the remainder of 1987.

Most agents report that materials are readily

available, although one purchasing agent reports problems obtaining steel.

Steel will likely become easier to obtain during the remainder of the year,

and few other problems obtaining materials are expected during 1987.

Inventory levels are satisfactory.

Energy.

Firming oil prices have brought some stability to the

district's energy industry.

A strong rebound in activity remains elusive,

however, despite recent domestic spot prices in excess of $22 per barrel.

Exploration and development activity in the district remains generally flat.

The average weekly number of operating drilling rigs in the Tenth District

fell slightly from 238 in May to 232 in June.

This number compares favorably

with the 200 drilling rigs operating in the district a year earlier, but

remains less than one-sixth of the record set in 1982.

Housing Activity and Finance.

varies widely across the district.

Strength in the homebuilding industry

Conditions in Oklahoma and Colorado are

particularly depressed; other parts of the district report that housing starts

are near last year's levels.

Builders expect that the trends already estabNew home sales are generally steady, except

lished this year will continue.

for sluggishness in Colorado.

No problems are

Prices are generally stable.

reported with either the availability or delivery of housing materials.

Materials prices are stable, or up only slightly.

Deposit growth at Tenth District savings institutions is reported weak

for the first six months of 1987.

More recently, there has been a slight

improvement in savings inflows at institutions that have increased rates to

levels comparable with commercial banks.

Demand for mortgage funds is down,

but respondents hope for slight improvement over the remainder of 1987.

Mortgages rates have fallen off a little due to slack demand.

Rates are

expected to remain at about their current levels for the rest of 1987.

X-3

Agriculture.

The wheat harvest is nearly complete in Oklahoma,

Missouri, and Kansas and is well under way in the northern areas of the

district.

Yields appear to be about average, except for disappointing yields

in some areas of Kansas and Oklahoma.

There appears to be sufficient storage

for this year's wheat crop.

The corn, milo, and soybean crops are doing well throughout the

district.

Most district states have received good moisture and expect

excellent harvests this year.

There is some concern that the fall harvest may

meet with isolated storage problems.

Feedlots generally remain full in the Tenth District as beef prices

remain strong, but no expansion in capacity is reported.

There are only

scattered reports of herd expansion, as operators are generally holding

steady.

Hog prices remain high, but bankers report continuing fear of a

downturn.

Consequently, operators are somewhat hesitant to expand and bankers

are reluctant to finance new facilities or large increases in inventories.

There are, however, a few reports of small inventory increases.

Banking.

Reports of total loan demand and total deposits at Tenth

District banks are evenly divided:

one-third of the respondents report that

loan demand and deposits are down, one-third report they are unchanged, and

one-third report they are up.

This pattern is consistent for all categories

of loans except for some general decline in commercial real estate loans.

with loan demand, there are scattered reports of changes, both up and down,

in each category of deposit, but the consensus clearly reflects no change in

deposits.

Respondents report no change in their prime rates, and none expect

any change in the near term.

Virtually all the respondents report no change

in their consumer loan rates, and, again, no change is expected.

XI-1

ELEVENTH DISTRICT--DALLAS

Although the District economy remains weak overall, several of its

most important sectors are showing some growth.

Most manufacturing

industries report slow output growth, but industries tied to construction

remain weak.

The energy sector is expanding very mildly.

contracts have registered recent gains.

Construction

Retail sales remain sluggish, but

respondents are guardedly optimistic about the fall season.

have picked up slightly.

Auto sales

Outflows of large time deposits continue to occur

at District financial institutions.

District manufacturers report mixed business conditions, but

overall manufacturing activity has picked up since the beginning of the

year.

Only manufacturers of durable goods tied to the construction

industry note a continued decline in business conditions.

Producers of

steel and military durables continue to show strength, with respondents in

both industries reporting continued strong sales and expressing a favorable

outlook for the coming months.

Respondents in the chemical industry also

report strong sales but note that increasing oil prices could make it

harder to compete overseas.

Producers of electric and electronic equipment

report steady sales growth, with some recent gains reported in computer

equipment.

Manufacturers of energy-related durable goods report that their

industry has bottomed out, but they do not expect much increase in the next

few months.

Apparel producers note a mild year-over-year improvement in

sales.

The District drilling rig count has continued to climb on a

seasonally adjusted basis in response to higher oil prices.

In June the

XI-2

rig count finally rose above year-earlier levels, and it subsequently

surged in the first two weeks of July.

Well permit applications rose

strongly in June, portending additional increases in drilling.

Indicators of new construction activity in the District have shown

some recent gains.

After reaching a trough in the fourth quarter of 1986,

the value of construction contracts increased mildly in the first quarter

of 1987 and rose again in April and May.

Moreover, new activity has

recently been near or above year-earlier levels.

Recent increases have

been fueled by small improvements in the residential and nonbuilding

sectors, while new nonresidential construction has been fairly stable.

Single-family housing permits have strengthened, but multifamily permits

remain at extremely low levels.

Despite these increases in new

construction activity, the lagged effects of last year's declines in

contract values have resulted in continued reductions in construction

employment.

Despite some reports of modest sales increases, District retailers

generally say their sales are sluggish across all lines and that their

inventories are somewhat higher than planned.

In cases where sales growth

was reported, it was linked to special promotions.

Most respondents

expressed guarded optimism concerning the upcoming fall season.

Rising

prices were cited for electronics items and were linked to the increased

value of the yen.

Some retailers expect apparel prices to rise this fall

as a result of new import quotas.

District auto dealers report a slight upswing in sales, with

volume increasing above year-earlier levels.

The gain came as a surprise

to dealers, and they are cautious about extrapolating this growth into

XI-3

future months.

An upturn in domestic auto sales more than offset continued

weakness in sales of foreign models.

Foreign auto sales have been stifled

by rising prices stemming from the higher value of the yen and the

deutchmark.

Deposits at the District financial institutions have slipped in

recent months and are now only slightly above year-earlier levels.

Commercial bank deposits were below a year earlier in June, with declines

coming in demand and large time deposits.

Despite positive annual deposit

growth at thrift institutions, their large time deposits are also

declining.

Furthermore, a significant portion of total thrift deposit

growth is said to reflect the accrual of interest, rather than new inflows

of cash from depositors.

District farmers face divergent income prospects for 1987.

Livestock producers indicate that profits are likely to increase in the

second half of the year, while great uncertainty is attached to the income

outlook for cotton farmers.

With the anticipated decline in beef supplies

in the second and third quarters, cattle prices are expected to remain

relatively high, spurring the demand for feeder cattle.

Adverse

late-spring weather hit most major cotton regions of the District, forcing

growers to replant almost a million acres in June.

Given average yields

and a price of $.50 per pound, about $160 million in Texas High Plains

gross cash receipts depends crucially on warm weather in September.

index of livestock prices received by Texas farmers and ranchers slipped 1

percent in June, compared with May, but was 19 percent above a year

earlier.

A comparable index for crop prices showed a 3-percent monthly

reduction in June, and it was 4 percent below a year earlier.

XII-1

TWELFTH DISTRICT - SAN FRANCISCO

Summary

Overall, the Twelfth District economy appears healthy, although wide variations across regions and industries exist. Trade and the services are among the

strongest sectors in most areas.

Manufacturing activity appears to be picking up,

and the forest products industry remains strong despite the rise in interest rates that

occurred last spring. The new immigration bill has caused some disruptions in the

apparel and agriculture industries, although production levels do not appear to have

suffered substantially. Construction activity has slowed markedly, particularly in the

multi-family and nonresidential segments of the market.

The higher interest rates

seen this spring appear to have reduced the overall demand for mortgage financing,

and many banks have changed mortgage features in order to boost demand.

Consumer Spending

The trade and service sectors continue to pace economic growth throughout the

Twelfth District.

In Tacoma, a recent survey found that 41 percent of the area's

employers intended to increase staff during July, August, and September, a sharp

increase from 11 percent last year. The strong demand has led to wage increases for

many categories of office workers in the Puget Sound area. Tourist activity in the

Puget Sound area also is reported strong, with the number of ferry passenger trips

running 10 percent ahead of last year, and highway traffic up 6.5 percent.

Manufacturing

Several aluminum plants in Washington have come back on line after complete

shutdowns, due to a combination of higher output prices, the lower value of the

dollar, increased demand generated by economic expansion during the first quarter,

and accommodative pricing by the Bonneville Power Administration. In Utah, USX is

reopening its Geneva steel plant.

XII-2

Apparel production in the Los Angeles area reportedly exceeds last year's pace,

although the uncertainty generated by the new immigration bill has created problems

for some producers. For example, some small apparel firms are operating below full

capacity due to labor shortages, while other southern California producers reportedly

have moved their plant operations to Mexico to take advantage of easier access to

low-priced labor.

Agriculture and Resource Related Industries

In many areas, agricultural labor markets have been affected by uncertainties

associated with the new immigration bill, but reports of actual crop losses have been

relatively infrequent.

The impact has been mitigated in most regions by strong

recruiting efforts, changes in enforcement procedures, and wage increases.

For

example, in Washington, wages reportedly rose from $3-4 per hour to $5-6 per hour.

Unusually large strawberry harvests in the Northwest and grape and tree fruit

shipments in the San Joaquin Valley confirm that crop losses thus far appear to have

been relatively minor.

However, one estimate puts crop losses in Oregon due to

labor shortages at $300 million to $1 billion.

Several growers report that their

paperwork and administrative costs have increased substantially, and many are

devoting significant resources to providing documentation for workers seeking legal

residency. In Washington, the upcoming apple harvest is expected to be larger than

usual, which could increase labor demand and, along with possible lower product

prices, create a tight squeeze on profit margins. Moreover, an Oregon rancher says

that farmers of some labor-intensive crops, such as sugar beets and onions, may cut

back on plantings of those crops in future years if difficulty in recruiting good

workers continues.

Production and profitability in the Northwest lumber industry appear to be

holding up despite concerns regarding the impact of higher interest rates. The low

value of the dollar continues to make U.S. exports attractive on world markets.

XII-3

addition, Northwest producers' competitive positions vis-a-vis Canada have been

enhanced by the 15 percent tariff on Canadian lumber exported to the U.S. and by a

recent increase in the value of the Canadian dollar relative to the U.S. dollar. The

industry continues to operate at or near capacity in Oregon, while strong Japanese

demand for pulp is stimulating Alaska's timber industry.

Construction and Real Estate

Construction activity has slowed markedly in most parts of the District, with

relatively mild declines in single-family construction activity exacerbating the more

severe downturns in multifamily and nonresidential building. In the Seattle area, the

number of housing permits currently stands 9 percent below its year-earlier level. In

the Phoenix area, construction employment has dropped by about 11 percent during

the past year. In Utah,

multifamily construction is down 76 percent from last year

and single-family starts are down 12 percent. In Alaska, which has been hard hit by

oil-related weakness, real estate values reportedly have fallen by some 21 percent

over the past year. Finally, in the San Diego area, one of the fastest growing regions

of the country, a banker reports that new construction loans dropped 56 percent

between March and June.

Financial Sector

The changes in financial conditions during the second quarter have tilted the

mix of mortgage lending away from fixed and toward variable-rate instruments for

most lenders.

One California banker reports that fixed-rate mortgage business has

dropped by 50 to 60 percent from the levels of early this year, raising average

overhead costs, reducing profit margins, and leading to a virtual price war over

ARMs. However, a Seattle-area banker reports no such change, arguing that buyers

are doing all they can to qualify for fixed-rate instruments.

The rise in rates has squeezed many banks' profit margins, and the decrease in

buying activity has reduced mortgage fee income as well.

Some larger banks have

XII-4

developed new mortgage products to boost demand.

Innovations include lower

mortgage fees, longer loan rate commitments, shorter maturities, balloon mortgages, bimonthly and biweekly payment plans, and ARMs that are convertible to

fixed rates at some point early in the life of the mortgage.

Cite this document

APA

Federal Reserve (1987, August 17). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19870818

BibTeX

@misc{wtfs_beige_book_19870818,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1987},
  month = {Aug},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19870818},
  note = {Retrieved via When the Fed Speaks corpus}
}