Beige Book
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
October 1987
TABLE OF CONTENTS
SUMMARY...................... ........................
.......... i
First District--Boston...........................................ISecond District--New York....................................II-1
Third District--Philadelphia...............................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*
Business
conditions
continue
to
improve
in most districts,
with
Reports from Boston, New
particular strength in the manufacturing sector.
York, Cleveland, and San Francisco are particularly upbeat, whereas growth in
the Kansas City and Dallas districts has been less robust.
ues
to
report generally
less
economic
satisfactory
St. Louis contin-
performance.
Even
the
three relatively weaker districts have enjoyed recent strength in manufacturRetail sales are showing modest gains in many regions, with
ing, however.
particular strength in the Boston and Atlanta areas, but sluggishness in the
Cleveland, Kansas City, and Dallas areas.
Auto sales are flat, or even down a
bit, according to most district reports.
Construction activity is mixed, as
it was last month, with commercial building a bit better than residential in
many parts of the country.
oil drilling
tions
have
Mining is strong, and all districts commenting on
report some increases in rig counts.
been
favorable
almost
everywhere.
Crops and harvest condi-
Only
the
Richmond
reports reduced corn yields, due primarily to adverse weather.
district
Two districts
report continued improvement in the financial condition of farmers and ranchers.
Reports indicate demand/supply imbalances in some markets.
continued
mention
of
tightness
retail and service industries.
some raw materials and
in
certain
labor markets,
There is
particularly
in
And many districts report rising prices for
imported inputs.
Several note price hikes and even
spot shortages for certain types of steel.
*Prepared at the Federal Reserve Bank of Minneapolis and based on information
gathered before October 9, 1987.
Manufacturing
Almost all
districts
the trend noted last month.
report strength
the manufacturing sector.
increases
orders, employment, and the workweek.
much the same.
continuing
Even St. Louis, with weaker overall economic
activity, reports a recent upturn in
survey of manufacturers shows
in manufacturing,
Richmond's
in shipments, new orders, unfilled
Results of a Philadelphia survey are
The San Francisco district emphasizes strength in manufactured
exports, due to
the dollar's decline
Asian countries.
As San Francisco says, "Manufacturers of commodities such as
chemicals and
and "buy American" campaigns
paper were affected first, but gains now are spreading to
whole range of
light manufactured products,
industrial valves."
layoff
of
a
including medical equipment and
Of course, weakness in auto sales does not bode well for
manufacturing activity in that important industry.
nite
in some
2,000 workers
at
a
Chicago reports an indefi-
truck assembly
plant
in September
planned closings of two more motor vehicle plants by year-end.
and
Heavy truck
sales have been quite good, reflecting in part the strength of manufacturing.
Consumer Spending
Retail sales are mixed. Boston, New York, and Atlanta report considerable strength, with sales generally above plan for the month of September.
More modest results are noted in the Philadelphia, Chicago, and Minneapolis
districts.
But retail sales in the Cleveland, Kansas City, and Dallas dis-
tricts are sluggish or flat.
tic about
the coming
fall
In general, retailers appear guardedly optimis-
and Christmas
seasons.
Auto sales were weak in
almost all districts in September and early October, and most industry representatives are pessimistic about
a quick
turnaround.
Minneapolis seems
buck the trend, reporting fairly good auto sales in recent weeks.
to
Construction
Construction activity
is mixed, with some evidence that commercial
Richmond reports "firm demand for new
building is stronger than residential.
construction
nonresidential
but
weakening
demand
for residential
The situation is similar in the Atlanta district.
tion."
note
City, and Dallas
apolis, Kansas
some weakness
But there are numerous bright spots.
ally.
construc-
St. Louis, Minnegener-
in construction
The demand for New York City
office space has been good in recent weeks, and upstate New York builders are
Homebuilders
busy.
commitments.
western
ton.
in
the
a backlog of
district have
Philadelphia
sales
And residential construction is still quite healthy in several
states,
including
California,
Hawaii,
Nevada, Oregon,
and
Washing-
Also, southern California has an abundance of real estate buyers from
foreign countries, especially Japan.
Mining
Strength is apparent in the mining sector.
Mining operations in the
Minneapolis district are generally active, particularly
which are running at capacity.
the four gold mines
U. S. copper has become more competitive in
world markets, stimulating output
in Montana.
Increases
in rig counts are
noted by all districts reporting on petroleum drilling, including Minneapolis,
Kansas City, and Dallas.
Analysts in Texas, however, believe that drilling
activity has nearly completed its shift upward, as long as oil prices stay in
their present range.
Agriculture
Reports
from
the
agricultural
sector are
generally
quite
strong.
Crops and harvest conditions have been good in most parts of the nation, with
only the Richmond district reporting weakness.
There "corn yields are running
20 to 40 percent below normal
drought."
and even
less in areas
severely affected by
Nationally, livestock farms are generally profitable due to favor-
able price structures.
Both Minneapolis and Kansas City note that farm finan-
cial problems have eased somewhat and that ranchers are using recent profits
to pay down loans.
Tightening Markets
Demand is outstripping supply in some markets.
There is continued
and even increasing mention of tightness in specific labor markets, including
reports from Boston,
Richmond, Minneapolis,
and San Francisco.
Retail and
service industries are generally the most affected, and several districts note
recent wage increases in those sectors.
Rising prices are noted for some raw
materials and imported inputs, and several districts mention higher prices for
imported apparel.
Cleveland, Chicago, and Dallas note price hikes and even
spot shortages for certain types of steel.
Both the Boston and Philadelphia
districts observe
that most manufacturers
their own prices.
However, nearly half the manufacturers queried in a Phila-
delphia district survey
next six months.
are, so far, holding the line on
indicate that they plan to raise prices during the
FIRST DISTRICT - BOSTON
Economic activity appears to be picking up in the First District.
Retailers are quite upbeat about their recent sales results.
Most of those
contacted show double-digit percentage increases in September compared to a
year earlier.
However, the tight labor market in New England is creating
cost pressures for retailers as wages rise and hiring difficulties cause
delays.
In manufacturing, most respondents have also experienced recent
gains in orders and sales.
Despite rising costs for some raw materials and
imported inputs, most manufacturers are holding the line on their own sales
prices.
Manufacturers and retailers are both moderately optimistic about
the remainder of the year and 1988.
Many foresee continuing cost pressures
but no real upsurge in inflation.
Retail
Sales in comparable stores posted increases over the year ranging
from 0 to 22 percent, with all but one contact reporting increases of 10
percent or more.
Sales growth was quite widespread across product lines,
with seasonal items and heavily promoted products showing better than
average gains.
The one chain showing no growth, a building materials
supplier, had budgeted accordingly since new construction has leveled off
in the limited geographic area it serves, after booming for four years.
Inventories are generally in line with plans, mostly higher than
last year to support increased sales.
One chain reported selected
inventories below plan because of difficulties obtaining consumer
electronics merchandise from "over-cautious" manufacturers who were stung
by slow sales in the spring.
Hiring difficulties are an important source of concern among First
District retailers.
High-quality applicants to fill all job categories are
in short supply despite wage increases.
Some convenience stores have
intermittently curtailed hours for lack of help, and some chains have had
to postpone opening new stores because of hiring delays.
Sales for the remainder of 1987 are expected to continue as they
have during the year to date, including a "good but not outstanding"
Christmas selling season.
Next year's sales are expected to be 5 to 10
percent ahead of 1987.
Manufacturing
Most First District manufacturers report a recent pick-up in
orders.
Respondents representing the machinery, fabricated metals and
instruments industries cite gains ranging from 10 to 25 percent or more
above their 1986 levels; however, some of these increases reflect defense
and other large contracts that have been under negotiation for a long
time.
At many firms sales are also up 10 to 15 percent above 1986
figures.
Medical and electronic testing instruments and fabricated metal
products and plastics for the auto industry are especially buoyant, while
textiles and other consumer and housing-related goods show little
strength.
Exports have played only a minor role in these increases.
Respondents say that their major exports are too specialized to be very
price-sensitive and that foreign producers have too much excess capacity to
buy many U.S. capital goods right now.
I-3
Manufacturers' sales prices generally remain stable in the First
District.
Contacts mention that foreign competitors have raised prices far
less than exchange rate changes would suggest; thus, despite rising costs
for raw materials (such as pulp, paper, copper and chemical feedstocks for
plastics) and for imports from their off-shore affiliates, most respondents
are holding their own prices steady.
slightly.
Textile prices have even eroded
Respondents also cite price resistance from the U.S. auto
industry and the U.S. Department of Defense.
The employment report is mixed although the situation is muddled by
some major restructurings and the first reported strike in many months.
Declining employment - at about one-third of the firms - generally reflects
restructuring efforts.
Hiring is occurring at another third of the
companies, primarily those producing tools, parts and other materials for
the aerospace and auto industries.
Capital spending is generally running at or above last year's
levels.
By contrast with the recent past, when almost all capital spending
was devoted to raising productivity, four firms indicate that some
expenditures reflect expansions, including five new plants (two in New
England).
First District manufacturers anticipate ending the year with good
increases in sales and profits.
In 1988 they expect sales to "chug along"
at or slightly above the pace of GNP.
resurgence of inflation.
Only one was concerned about a
Several believe raw materials prices will
continue to rise faster than their own, however.
II-1
SECOND DISTRICT--NEW YORK
In general, the Second District economy registered some improvement since
the last report.
in
firms
The latest purchasing managers' surveys showed a sizable increase
reporting
better
business
satisfactory sales in recent weeks.
conditions,
have
raised
retailers
experienced
Office leasing activity was also good, but the
residential construction market remains mixed.
and mid-sized banks
and
their
On the financial side, most small
lending rates
in
response
to
prime
rate
increases at money center banks.
Consumer Spending
In part reflecting the lateness of Labor Day this year, sales at District
department
August.
stores
registered
Promotionals
August were
postponed
and
stronger
over-the-year
back-to-school
to early September
September was also relatively strong.
buying
this
gains
which
year.
in
September
typically
However,
occur
than
in
in
late
the remainder
of
Our respondents reported year-to-year gains
of 11 to 13 percent in September, up from a range of 2 to 8 percent in August.
September sales were generally above plan whereas August sales at some stores were
on or slightly below target.
Items in strong demand during recent weeks were most kinds of apparel,
accessories,
and
home
furnishings.
One
retailer,
however, noted a weakness
in
women's apparel throughout his chain, possibly reflecting disenchantment with some
of the more extreme new fashions.
Inventories were reported from 4 percent below
to 4 percent above plan, levels which respondents found tolerable.
II-2
Business Activity
The improved tone in the District's
economy continued in recent weeks.
The latest purchasing managers' surveys from Buffalo and Rochester showed a sizable
increase in the percentage
conditions.
Inventories
of firms
were
reporting an improvement in general business
also
somewhat
higher,
but
the
level
was
not
burdensome.
Plans were
announced
for
several major
new
projects
in the
District.
These include a proposal for a new residential community of some 1200 condominiums
on a waterfront site
in New Jersey where an
auto assembly
plant was
formerly
located and a project in Brooklyn to build 2500 middle-income apartments along the
waterfront together with a public park, promenade, and space for light industrial
use.
On Long Island work is scheduled to begin in November on a 362-room hotel,
resort, and conference center, the first phase of a $150 million mixed-use development which will also include town houses and an office building.
In addition, the
lifting of a 7-month building ban elsewhere on Long Island is expected to result
in the construction of several residential and commercial projects that have been
on hold.
Unemployment rates in the District showed little change in September when
both New York and New Jersey posted rates of 4.5%.
rate also fell to 4.5%, its lowest
New York City's unemployment
level in 17 years.
have dropped substantially throughout
While unemployment rates
the District in recent years, analysts in
some labor markets such as Buffalo view the decline with caution.
much
of
the
improvement
to
substantial
outmigration
and
the
They attribute
substitution
of
low-paying service jobs for the high-paying manufacturing positions which once were
prevalent.
Construction and Real Estate
The pattern of District residential construction activity was again mixed
in recent weeks.
Builders in upstate communities remain quite busy, and starts in
II-3
In the downstate
some of these areas are expected to equal last year's high levels.
and New Jersey markets, however, builders continued to experience a slowdown and
little traffic from potential buyers.
High prices
suitable land are cited as the major deterrent.
from a shortage of
resulting
The high cost
of new homes is
reportedly stimulating a boom in the remodeling and expansion of existing homes.
In the District as a whole 1987 starts are expected to trail the year-earlier pace.
Observers were generally reluctant to speculate about the longer term outlook.
The
demand
generally good.
for
office
space
in
the
District
during
recent
weeks
was
A large number of modest-sized leasings strengthened Manhattan's
midtown market while the downtown market was bolstered by steady demand
withdrawal of a large block of space for subleasing.
and
the
In their continuing battle to
induce firms not to relocate, New York City officials were recently heartened by a
survey showing that manufacturing firms more than doubled the amount of office space
which they leased in Manhattan during the first half of this year compared with a
year earlier.
less expensive
City officials are particularly concerned by the abundance of new,
quarters
across
the Hudson River
in New Jersey,
fearing
that a
decline in New Jersey's high vacancy rates will come at the City's expense.
Financial Developments
Most small and mid-sized banks in the Second District have raised
their
lending rates in response to the recent increases in the prime rate charged by money
center banks.
Despite
rates,
the rise in interest
demand
for
commercial loans
remains strong, according to senior officers who cited the robust regional economy
as responsible for the steady demand for business loans.
for consumer installment
rising rates.
and home mortgage
On the retail side, demand
loans also has
not been dampened by
However, one conspicuously weak segment of the market is the demand
for bank auto loans.
Respondents stated that
the generous promotional offers by
the auto finance companies have drastically reduced the market for bank auto loans.
III-1
THIRD DISTRICT - PHILADELPHIA
Business conditions, overall, are improving modestly in the Third District
in October.
Manufacturing continues to expand, maintaining the trend that began
in the second quarter.
Industrial employment has been moving up in recent
months and the October increase, as reported in the Third District survey,
represents a new high for the current expansion.
The retail and financial
sectors also show improvement, although slowdown
in their growth is evident.
Retailers say sales in early September met planned year-over-year increases of
5-10 percent, although growth has eased somewhat since then.
Third District
bankers report increases in most categories of lending, but say only real estate
loan demand is heavy.
The volume of business and personal loans, while still
moving up, is not advancing as strongly as in the first half of the year.
Views of the future are mixed, but mostly positive.
Manufacturers
generally expect growth to continue at its current pace, but they plan only
small increases in capital spending and no changes in employment levels.
Retailers believe sales this fall will be slightly ahead of last year, but
concern is growing that Christmas sales may show little improvement over 1986.
Bankers expect real estate loan demand to remain strong through next spring, and
they believe business lending will grow moderately if interest rates stabilize,
but they say consumer loan volume will only edge up in the months ahead.
MANUFACTURING
Industrial activity in the region is continuing the upward trend that began
last spring, according to the latest Business Outlook Survey.
Thirty-five
percent of the area manufacturers participating in the October survey report an
increased rate of production compared to last month, while only 3 percent
III-2
indicate their business is slower; 60 percent are operating at a steady pace.
Conditions are similar in the durable and nondurable goods sectors.
All measures of manufacturing activity indicate growth this month.
New
orders and shipments are increasing, order backlogs are rising fractionally, and
inventories are being trimmed.
Employment indicators are giving their highest
Although
readings since the early months of the current business expansion.
most survey respondents report steady payrolls and working hours, 23 percent are
adding workers and 30 percent are increasing hours.
Industrial prices in the area continue to drift upward, with half of the
October survey respondents noting higher input costs compared to last month,
none reporting lower costs, and about half indicating no change.
For their own
products, 80 percent are holding the line, and 20 percent are raising prices.
Looking ahead, area manufacturers have mostly positive views.
Forty-one
percent foresee continued growth during the next six months, 44 percent
anticipate steady business, and only 12 percent expect a slowdown.
On balance,
survey respondents forecast further gains in new orders and shipments, but they
expect order backlogs to decline somewhat.
Local firms project virtually no
change in employment or working hours during the next two quarters, although
they plan modest increases in capital spending.
On the price front, 72 percent
of the survey participants expect to pay more for purchased goods over the next
six months, and nearly half plan to hike charges for their own products.
RETAIL
Third District retailers generally report that sales were good during the
early September back-to-school shopping period, with most stores meeting their
sales targets.
However, some store officials noted that gains slackened in the
latter half of the month.
Year-over-year increases for September as a whole
averaged 5-10 percent, in dollar terms.
Upscale stores are experiencing better
III-3
sales growth than other outlets, a trend that has characterized Third District
retailing for much of the year.
Merchants contacted in early October think sales for the rest of the fall
will probably run about 10 percent higher than last year.
However, some believe
that the colder than normal weather in early October will boost sales of fall
clothing, possibly driving total sales above expectations.
Although most
retailers say it is too soon to forecast the Christmas shopping season, one
store executive reports that current opinion in the industry is that the
year-over-year gain will be slight.
FINANCE
Most categories of lending at major Third District banks are growing, but
the rate of increase is slackening, continuing a trend to slower growth that set
in at the beginning of the year.
Local bankers say commercial and industrial
loan volume is increasing moderately and that home equity lending is expanding,
although the volume of other types of consumer credit is virtually flat.
Only
real estate lending is increasing at a strong, steady rate.
Commercial bank credit officers believe current trends in loan demand will
continue for at least another quarter.
While growth in commercial and
industrial loan demand is slowing, bankers say good business conditions in the
region should sustain volume in this credit category.
However, lending officers
say business loan demand will drop substantially if rates move much higher.
Bankers do not believe consumers will add significantly to present indebtedness
unless economic growth accelerates.
They say real estate lending should grow
strongly through next spring because home builders in the region have a backlog
of sales commitments for new houses yet to be built.
IV-1
FOURTH DISTRICT - CLEVELAND
Summary
The Fourth District's economy has picked
Employment
has
increased
in
unemployment rates
to their
The
sector
manufacturing
backlog
orders
continue
nearly
lowest
appears
to
every
pressure
sector,
report.
pushing
area
levels during the current expansion.
to
rise,
be
heating
inventories
capacity is reportedly above 80 percent.
put upward
up since the last
up;
are
new
lower,
orders
and
and overall
The increase in production has
on commodity and service
prices and has
commodities, including steel and paper products,
left some
in short supply.
Weekly
earnings of factory workers have also increased, but much of this is due
to overtime pay.
Retail Sales
Retail sales continue to fall below expectations.
durables have been sluggish, partly because of
construction.
Area
merchants
prices of many apparel
sales
in soft goods.
area are flat
that
the
despite
recent
report
lines during
that
Sales of household
slowdown in housing
the
higher-than-expected
the past few
months
have
import
dampened
Both domestic and foreign automobile sales in the
recent
incentive
incentive
programs
1987 models, but many dealers
feel
programs.
have helped
that
have drained the local demand for autos.
Some
to
last year's
dealers
report
clear out remaining
incentive programs
IV-2
Labor Markets
Unemployment rates in the Fourth District continue to edge downward.
In Ohio, the unemployment rate
to
fell
7.0 percent
from
in August
7.1
percent in July as the number of unemployed workers declined by 8,000 and
employment
increased
in
every
nearly
declines
Similar
in
in western Pennsylvania and eastern
unemployment rates were experienced
Kentucky.
division.
The Pittsburgh area's unemployment rate fell below 7.0 percent
after hovering around 8.0 percent for most of
the year.
The decline was
laid-off
manufacturing
workers and industrial growth in nonmanufacturing sectors.
The Lexington
due principally to
a
of
combination
of
recalls
area, bolstered by a protracted building boom, once again registered one
of
the
lowest
unemployment
rates
in
the
District
at
4.4
percent
in
August.
Factory employment rebounded slightly in August in many parts, of the
District.
signaling the first
since
February.
industries.
For
in Ohio
employment
Manufacturing
was
up
11,000
from
July,
solid gains in the state's manufacturing employment
the
of
Most
the
instance,
came
increase
in
the
Youngstown-Warren area,
durable-goods
over
which
the
last year lost 4,000 manufacturing jobs, saw a healthy increase of 2,000
factory
workers,
as
a
number
substantial
of
transportation
equipment
workers were recalled.
Employment prospects
throughout the District.
for
the
fourth quarter are generally favorable
Employment
gains in wholesale and
expected to exceed those of other industries.
nondurable
manufacturers
appear
much
more
retail
are
However, both durable and
positive
about
additional workers than in comparable periods of the past two years.
hiring
IV-3
Average weekly earnings also increased in August primarily due to an
increase in the workweek.
In Ohio and Pittsburgh,
the average workweek
lengthened by one-half hour to 42.5 hours.
Manufacturing
The Ohio Manufacturing Index rose in August by a seasonally adjusted
All major sectors registered monthly gains, except
rate of 1.4 percent.
for clay and glass products.
Primary metals showed the largest increase
(3.2%), with instruments (2.2%) and nonelectrical machinery (1.8%) close
behind.
August
marks
the
third
straight
month
that
the
index
has
increased, after falling throughout the first half of 1987.
The Purchasing Managers survey supports this outlook by reporting an
increase in production and new orders.
and a reduction
prices.
in inventories has
In addition, a backlog of orders
put
upward
pressure
on
commodity
The Cincinnati survey reports that increases in commodity prices
are the highest since the survey began in 1982.
report problems with
steel products.
Purchasers in the area
late deliveries and a shortage of some paper and
A similar, though less dramatic, situation is reported
for Northeast Ohio.
Steel shipments from Ohio's mills increased by less than 1 percent in
August
over
July,
compared
with
a
2.3
percent
increase
nationwide.
However, shipments in the Pittsburgh area increased 15 percent between July
and September as USX continued to increase output after its six-month
work stoppage.
IV-4
Banking
District
outstanding
mid-August
been
loan
at
to
large
the
broadbased,
installment
percent.
demand
loans
has
banks
end of
with
improved
rose
at
September.
real
increasing
estate
at
an
an
in
recent
annual
The
weeks.
pace
recent
loans
and
annual
rate
of
8
pickup
in
business
of
Home-equity lending also continues to rise.
7
Total
loans
percent
from
lending
and
percent
has
consumer
and
14
FIFTH DISTRICT-RICHMOND
Overview
Growth remains the predominant trend in the Fifth District.
Manufacturing
is leading the way, but retail sales continue to edge upward and
is
strong.
Labor
markets
increased number of reports
Agriculture
have
of
tightened
rising
further
wages
in
attests
loan
demand
some areas, and an
to
labor
shortages.
faces lower fall yields due to the summer drought, but late rains
have helped some crops.
Although
commercial
construction
remains
strong,
residential construction has weakened.
Consumer Spending
According
to
our
regular survey of retailers, total retail sales in the
District during the last ten business days in September were
by
the
lifted
slightly
higher sales at department stores, where business had been poor earlier in
month.
Sales
inventories
showed
of
big
ticket
items
were
mostly
unchanged.
Retail
little change except at department stores where they were
reported to be higher and were expected
to
rise
further
in
the
next
six
months.
As
compared with respondents to our previous survey, more retailers
month reported they had job openings that they were unable to fill,
over
half indicated that they had raised wages in the last month.
and
this
well
While they
remain optimistic that their sales will increase in the next six months,
most
retailers do not plan to increase employment.
Manufacturing and Mining
Our October survey of manufacturers indicates that activity in this sector
continued to grow through September.
Respondents reported increases in
V-2
shipments, new orders, unfilled orders, employment, and the workweek.
Inventories of materials rose slightly while
fell.
Over
half
inventories
of
finished
goods
of the respondents indicated that raw materials prices had
risen from the month before, while almost one-fourth
reported
higher
prices
received for finished products.
Manufacturers
look
for
increases
over the remainder of the year in all
measures of their activity except employment and
that
the
workweek.
It
appears
the slower expected growth in employment is due primarily to tight labor
markets.
survey
In our survey this month, more
indicated
they
had
unfilled
respondents
than
in
our
previous
job openings for skilled and unskilled
labor, and 39 percent reported they had raised wages recently.
The nondurable goods sector showed a slightly
the
durable goods sector.
stronger
performance
Within the nondurable sector, textile and apparel
respondents reported capacity utilization rates averaging 94 percent.
increases
than
Further
in shipments and new orders are expected in these industries in the
next six months.
In the mining sector, last month's data on coal production and comments by
our
directors
indicated
that
electric
utilities
in
the
stockpiling coal, possibly in anticipation of a labor dispute
miners
early
next
Coal
year.
District
were
involving
coal
production rose in late September, and coal
stocks at utilities also rose in recent weeks.
Agriculture
Crop harvesting in the District is generally progressing at the same
as last fall, although some areas report lower than normal activity.
yields
are
running
20
to
severely affected by drought.
40
percent
pace
Corn
below normal and even less in areas
Late crops show improvement due to September
V-3
rains.
Some recent strength in grain prices was noted by directors, but crop
prices remain weak by historical standards.
Livestock prices are generally
strong, but recent dips in poultry prices have decreased producer margins.
A good crab catch and strong prices helped Chesapeake
Bay
watermen
this
summer, but a parasite in oyster beds threatens to cut this year's oyster
harvest in half.
This reduction is likely to place severe financial stress on
watermen and on small shucking houses.
Tourism
A telephone survey of hotels and motels in District resort areas indicated
more
empty
rooms
Fall bookings are running ahead of
this summer than last.
last year and the majority of respondents expect stronger activity this fall.
Finance
A special survey of our banking
demand
for
mortgages.
commercial
and
directors
industrial
loans,
and
advisors
home
rising
showed
lines and home
equity
the
Respondents expect demand to strengthen further in
next
six
They also noted that the use of consumer credit cards remains strong.
months.
Construction
Several
District building contractors were contacted by telephone.
They
indicated firm demand for new nonresidential construction but weakening demand
for
residential
construction.
Stable
regional
growth was the reason most
often cited for the strength in commercial construction, and
was
rates
the
reason
most
rising
interest
often cited for the weakness in the residential
outlook
for
the
next
market.
Contractors were cautious about the
months.
In general they expect little change from current activity.
several
VI-1
SIXTH DISTRICT - ATLANTA
Employment continues to expand in the District. The oil and chemical industries
are increasing output and adding workers.
Retail sales are mixed, with consumer
durables and autos showing some weakness. Housing construction has slowed, although
commercial construction shows some strength. Exports are increasing; the weaker dollar
is in part responsible.
Employment and Industry.
healthy employment growth.
Most labor market indicators suggest continuing
The region's unemployment rate has ranged between 6.5
and 6.9 percent since April. Employment continues to improve in the energy-producing
regions, with Louisiana's unemployment rate having fallen 4 percentage points since the
first of the year to 10.4 percent.
Demand for drilling machinery has strengthened, expanding employment rolls.
The chemical industry is posting rapid productivity growth and high capacity utilization
rates as a result of efficiency measures and strong product demand. The pulp and kraft
components of the paper industry also continue to benefit from the drop in the value of
the dollar.
The weakening of the dollar has helped to curb tire imports to the point
where some domestic producers have been able to raise prices. Prospects are bright for
the region's aluminum producers, and prices are strengthening as a result of strong
demand.
Recent government contracts are helping aerospace firms in the region.
Electronic components continues to benefit from defense spending and a resurgence in
computer sales.
Consumer Spending. Retailers throughout the District report strong sales during
the month of September.
heavy promotions.
However, sales of appliances remain lackluster in spite of
Prices on foreign apparel are increasing, but foreign electronics
producers are holding the line on them.
Domestic car sales in the District have been
disappointing in the last month of the model year.
New vehicle registrations through
July continued to reflect the sluggish car market, particularly for domestic autos.
VI-2
Registrations in the Southeast rose 2 percent, with the rise accounted for by light trucks
and vans. By July, imported cars accounted for 38 percent of sales, up from 31.7 percent
a year earlier.
Construction. August home prices increased 8 percent over the same period last
year.
decade.
Experts say the uptick has been the biggest leap in home prices in the past
New starts, however, continue to decline throughout the District.
Housing
starts seem to have bottomed out in Louisiana, and sales of existing homes had the best
second quarter performance since 1981.
Apartment, condominium, and retirement
construction remains firm in Florida, the only state in the District to show no decline in
multifamily permits.
Commercial construction markets are mixed.
The value, square footage, and
number of commercial projects in the Southeast increased in August over year-ago
figures and are now expanding at rates similar to the nation's.
Office construction is
strong in Nashville, central Florida, and metro Atlanta. Commercial construction slowed
in Mississippi from year-ago levels, and commercial property values declined.
After
weakness in nonresidential construction earlier in the year, new highways, streets, and
bridges helped boost each state's August total nonresidential construction figures over
those of August 1986.
Financial Services.
Total loans at large commercial banks have turned up
following a first- and second-quarter decline. A large jump in real estate loans seems to
be fueling the growth while consumer loans are close behind.
Consumer loans have
grown more slowly at large commercial banks because of competition from nonbank
sources.
Business loans have slowed as corporations turn to increased issuance of
commercial paper.
Atlanta, Birmingham, Miami, and Nashville report improvements in mortgage
collections.
Consumer foreclosures are decreasing, although commercial foreclosures
are increasing.
Mobile, New Orleans, Jackson, and most of south Georgia report
VI-3
increases in delinquency rates.
Mississippi thrifts note that an increased number of
bankruptcies are being filed.
Tourism. Tourism ranged from relatively flat to moderately increasing over last
year. In Miami and Jacksonville, two festival malls that opened during the summer are
exceeding expectations.
Orlando is projecting a 17 percent increase in convention
activity over last year, and its civic center expansion is expected to be completed late in
1988. Georgia, Tennessee, and Alabama have had moderate increases in tourist activity.
Port Activity.
Except for New Orleans, total shipments from all District ports
exceeded the nation's 6.8 percent gain for the 12 months ending in July 1987 over the
previous 12 months. Georgia's exports of forest products, kaolin and manufactured goods
are growing rapidly, and the state is becoming a major entry point for imported cars. In
Miami, exports are growing faster than imports for the first time since early 1987
because of growing shipments to Latin America.
Mining.
District coal production for the first three quarters of 1987 was
approximately 8 percent less than during the same period in 1986.
The cost of coal to
electric utilities in the region has also fallen about 8 percent.
There are one-third more exploratory drilling rigs in operation in the District
than a year ago, but this is still only 40 percent of the number operating in 1985. Crude
oil production in the District continues a slow decline begun in early summer, reaching a
level 6 percent below 1986 average daily production.
There is considerable interest in
the natural gas reserves at Mobile Bay because Florida's gas consumption is expected to
increase 42 percent over the next decade.
Agriculture.
1986 levels.
Although drier weather has lowered crop yields, they remain above
Except for feed grains and rice, total crop output is up from last year.
Reductions in acreage, higher yields, and stable or higher prices, are expected to improve
net revenue substantially.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. Business activity continues to expand in the Seventh District, restrained
by the slowdown in the auto industry. Chicago purchasing managers report vigorous growth
in September, accompanied by further price increases, and are optimistic about the
outlook for business activity over the next six months. Milwaukee purchasers see further
strengthening, particularly in orders and backlogs, with some hedge buying thought to be
taking place to beat rising raw materials prices. The impact of auto production cuts, in
response to slow sales, has been particularly sharp in southeast Michigan, and further
cutbacks are planned by year-end. Nonresidential construction has remained relatively
strong in the District. Residential building in the District is also outpacing the
nation. Demand for steel has shown the most broadly based strength since 1981. Consumer
spending reports are mixed. The District's corn and soybean harvests are ahead of the
usual pace. Pork production is expected to rise through 1988.
Motor Vehicles. The strike at Chrysler Canada, settled after 6 days, halted
production at one District plant and reduced output at another for one to two weeks.
However, agreements were reached on contracts at Ford in the U.S. and Canada and at GM in
the U.S. with no interruption of output. Although third quarter sales incentives and
production cuts brought car inventories down substantially, the restrained response of
buyers to the incentives is a source of concern for the fourth quarter. Truck sales
continue strong, but the District's share of U.S. truck assemblies is considerably
smaller than its share of cars. In September, a southeast Michigan truck assembly plant
eliminated its second shift, indefinitely laying off 2,000. Closings of two motor
vehicle plants in southeast Michigan are planned by year-end. In contrast, a Japanese
car assembly plant began production in September in that area. Two more assembly plants
are being constructed in Illinois and Indiana. Heavy truck sales remain well above last
year's pace, and also well above long-run replacement needs according to an industry
analyst. Further small increases in sales of medium and heavy trucks are projected for
1988.
VII-2
Nonresidential Construction. The pace of nonresidential construction continues
relatively vigorous in the District. Contracts for nonresidential buildings, in square
feet, were 10 percent above a year earlier in the District states during this year's
first 8 months. Contracts for construction projects other than buildings, in dollars,
were 15 percent higher. Construction activity continues at a high level in downtown
Chicago. Additional large office buildings have recently been announced. Office
construction has slowed in Chicago suburbs but remains at a high level, and light
industrial building has picked up. Plans for auto parts plants have been announced for
Illinois and Michigan to supply new Japanese assembly plants. Paving activity is
expected to be strong in parts of the District this fall. Sections of the large
construction project at O'Hare Airport are being pushed to completion.
Steel. The strength in steel demand is described as the most broadly based, in
terms of product types, since 1981. Steel buyers and service centers reportedly are
trying without success to add to stocks, reflecting demand for some types of steel near
production capacity, and uneconomic mills not reopened or being renovated. Prices have
been raised for most types of finished steel. Sharply higher prices for steel scrap
reflect shortages at Chicago-area mills which have been buying scrap from other steel
districts. Steel imports are expected to decline. Mills producing for the auto industry
are booked to year-end and running behind schedule.
Other Manufacturing. Markets have improved considerably for abrasives and other
"low-tech" products widely used in industry. Demand in the Midwest continues strong for
paperboard. A box price increase went into effect in September with little resistance.
Reflecting relatively good construction markets in the Midwest, cement shipments to
District states have shown stronger gains from a year ago than the nation. Shipments of
electrical equipment for installation in nonresidential buildings are expected to be
strong in the fourth quarter. Export markets for large construction equipment remain
restrained by the limited number of big projects around the world. A home appliance
maker and a producer of ball bearings are shifting production out of the District to
plants in other states with lower labor costs.
VII-3
Residential Sales and Construction. Residential building permits in District
states during the first 8 months of 1987 were about even with a year earlier, but have
been below last year since April. Contacts reported an upturn in Chicago-area home
buying and loan applications in August, prior to the September round of mortgage interest
rate increases which appears to have pushed activity down again. The August rise was
attributed to action by former "fence sitters" who had delayed buying and financing
decisions following the spring upturn in mortgage interest rates. Mortgage interest rate
volatility is viewed as more of a problem than somewhat higher but stable interest rates,
because interest rate uncertainty causes would-be buyers and sellers to wait.
Chicago-area mortgage interest rates have risen further over the past month, with 30-year
fixed-rate loans commonly quoted at rates of 11% or higher. Sources also report an
upturn in the number of Chicago-area mortgage bankers looking for jobs.
Consumer Spending. A large retail chain reports that sales in Illinois and
Michigan remain fairly high, up from earlier this year. Iowa, which had been weak,
continues to show improvement. Another large retailer located in the District indicated
sizable sales gains from low year-ago levels, but not much strength in the seasonally
adjusted trend in recent months. Gains from a year ago in apparel sales reflect in part
the sharp rise in prices of imported clothing. Appliance sales were reported strong in
September at this retailer, after showing less strength in July and August, but have
tailed off in early October.
Agriculture. The fall harvest continues at a rapid pace in District states. Some
63 percent of the soybean acreage and 43 percent of the corn acreage had been harvested
as of October 4, two to three times the normal progress for that date. Pork production,
which turned above year-earlier levels in the third quarter, will likely record sizable
gains throughout 1988. Hog numbers in the ten major producing states are up 9 percent
from a year ago and producer intentions point to an 8 percent rise in farrowings over the
next six months. Somewhat larger increases are reported for Iowa, but the gains for
Illinois and Indiana are smaller than elsewhere.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
District economic activity has been uneven and generally weak.
Despite a recent upturn in manufacturing, District employment has
Construction activity has declined as
stagnated in recent months.
nonresidential building decreased.
District lending activity slowed
during the third quarter as consumer and commercial loan growth
slackened.
Agricultural conditions have been generally favorable for
both crop and livestock producers.
Employment
The District unemployment rate dropped to 7.2 percent in August
from 7.4 percent in July.
The August jobless rate was below 7.0 percent
in Missouri and Tennessee, but above 8.0 in Arkansas and Kentucky.
District payroll employment was virtually unchanged between March and
August, after growing at a 3.4 percent annual pace since the end of
1982.
Employment in mining, construction, manufacturing and services has
declined since the first quarter while growth in the remainder of the
economy has been sluggish.
Growth of services has been inhibited by a
slowdown in health services.
Despite the decline since the first quarter, District
manufacturing employment has picked up in the most recent months, growing
at a 2.4 percent rate in the three months through August.
The recent
growth was due to the continued expansion of food processing and
turnarounds in the electrical equipment and textile/apparel industries.
VIII-2
The number of transportation equipment jobs also increased as auto
assembly workers returned from layoffs.
Planned layoffs of auto workers
in the St. Louis area in mid-October were postponed due to increased car
sales.
Regional production of shoes, concentrated in Missouri, has been
growing steadily in recent months.
The increase was attributed by some
local analysts to the declining exchange value of the dollar.
Construction
Although District residential construction has advanced slightly
compared with a year earlier, recent evidence is not encouraging.
The
value of residential contracts fell 4.5 percent in the June-August
period.
Contacts anticipate continued declines in residential
construction due to recent and expected future interest rate increases.
Multi-family housing construction has exhibited particular weakness over
the past year as well as over more recent periods.
Multi-family permits
issued in the June-August period were 63.7 percent lower than a year
earlier.
The pace of District nonresidential building has slowed recently
due to weakness in Arkansas and Kentucky.
District nonresidential
contracts expanded by only 2.4 percent in the three months through August
following a 20.9 percent gain in the previous three-month period.
Banking
Total loans outstanding at large weekly reporting District banks
grew at a 2.8 percent annual rate for the third quarter.
For the same
period in 1986, total loans expanded at a 13.3 percent annual rate.
slowing in consumer and commercial lending contributed to the recent
A
VIII-3
quarter's slow growth.
Consumer loans grew at a 9.1 percent rate during
the quarter compared to 18.7 percent for the same period last year.
Commercial lending in the District has also slackened, declining at a 2.4
percent annual rate.
In particular, the St. Louis and Little Rock
markets experienced notable declines in commercial lending during the
third quarter.
Real estate lending, however, picked up during the most
recent period, rising at a 27.5 percent rate compared to a 19.3 percent
rate for third quarter 1986.
Agriculture
The 1987 crop year has been generally favorable for District
farmers.
Harvests are far ahead of average due to early planting and
ideal harvest conditions.. Early harvested crops such as corn and cotton
have recorded near-record yields due to favorable early summer
conditions.
Cotton prices have risen due to strong domestic and
international demand.
Yields of later crops such as soybeans have been
reduced due to extremely dry conditions since mid-summer.
The condition
of pastures has also deteriorated for lack of rain.
Livestock producers have enjoyed a profitable year due to low
feed costs and favorable meat prices.
Beef prices remain high and prices
for feeder cattle are the highest since 1979.
Pork prices also remain
high but are expected to fall because increased production is anticipated.
IX-1
NINTH DISTRICT - MINNEAPOLIS
Recent
economic
quite positive.
spending has
news
from
the
Ninth
District has
been generally
In many areas, labor markets are actually tight.
been mainly
Consumer
favorable, although housing and construction,
surprisingly, have
weakened.
Among resource-related
been exceptionally
strong and oil drilling has even perked up a bit.
not
industries, mining has
And
reports from the region's important ag sector are the most positive in some
time.
Employment
District labor markets have remained exceptionally strong in recent
months.
In most states, unemployment rates
(not seasonally adjusted) were
lower in August than they were a month or year ago.
inary
unemployment
1986.
rate
was
5.8
percent,
down
In Montana, the prelim-
from 6.8 percent
in August
In North Dakota, the unemployment rate was 3.8 percent, down from 4.1
percent in July and 5.2 percent in August 1986.
In South Dakota, unemployment
was also 3.8 percent, and nonfarm employment rose slightly over a year ago,
reaching its highest August level on record.
sula, the July unemployment
1979.
Minnesota's
Minneapolis-St.
And in Michigan's Upper Penin-
rate was 8.3 percent, its lowest since October
labor markets
Paul metro area,
proved an exception to the
rule.
In
the
the unemployment rate increased slightly in
August, to 4 percent from 3.9 percent in July and 3.5 percent a year earlier;
the Twin Cities' labor force and total employment also declined modestly in
August.
Labor market developments statewide were similar.
Consumer Spending
Reports on retail merchandise sales have generally been good, except
for essentially flat sales in North Dakota.
sales were up.
Throughout South Dakota, retail
In Montana, retail markets also showed signs of recent
im-
IX-2
provement, especially in the state's western part.
One large Upper Midwest
retail chain reports that back-to-school sales didn't meet its expectations,
but the chain expects much better October sales and is optimistic about the
fourth quarter.
Another large retailer says September sales were quite good,
with fall fashions moving well.
For the most part, goods have been selling at
regular prices, with few markdowns, and some price increases may be expected
in the months ahead.
District sales of motor vehicles have been quite good.
One domestic
auto manufacturer indicates that September sales were good, even compared to
an excellent August.
The new 1988 vehicles have been selling well, and more
equipment is being included as standard
domestic manufacturer
reports that
features on these models.
sales are strong,
brisk business at this time last year.
up
slightly
Another
over
the
The manufacturer says consumers can
expect about a 4 percent increase in car and light truck prices.
In general, reports on tourist spending have been
favorable.
In
Montana, North Dakota, and western South Dakota, tourist traffic has been up
slightly over last year's respectable levels.
vers say the weather has been perfect.
In the Upper Peninsula, obser-
Motel business there has been from 20
to 40 percent higher than last year's.
Although
reports
are
mixed,
recent
developments
in
housing
and
construction run counter to the favorable conditions of most district sectors
by showing considerable signs of weakness.
In Montana, the housing market has
been poor, and new construction there is virtually nonexistent, except in the
Great Falls area.
In Minnesota, August housing permits fell about 11 percent
from a year ago, and in Minneapolis-St. Paul, August permits were down about
22 percent from last year.
Multifamily permits have been hit most severely.
In North Dakota, housing markets seem a bit stronger than elsewhere in the
IX-3
district.
There, sales have bottomed out and prices have firmed, although new
construction is low in most of the state.
Resource-Related Industries
The news is good in the district's resource-related industries.
In
North Dakota, 17 oil rigs are now drilling, and there is renewed interest in
oil exploration in the Williston Basin.
In Montana, 11 oil rigs are running
with 14 total expected to be operating by year-end.
important source of extra
income to
Land-lease payments, an
some farmers and ranchers, have risen.
Mining operations in the district are also picking up.
In South Dakota, two
gold mines are expanding output and hiring additional miners.
In Montana, two
other gold mines are running around the clock, seven days a week, and a third
is beginning operations.
Elsewhere in Montana, an aluminum plant at Columbia
Falls is operating near capacity, and the Butte copper pit mine, closed for a
number of years, is back in production and profitable.
Agriculture
Reports
from the district's
they've been in some time.
agricultural
sector are as strong
as
Crops and harvest conditions look good to excel-
lent throughout the district--from the trefoil crop in the Upper Peninsula to
cherries in Montana.
There have been some complaints about cash small grain
prices and, as always, scattered problems with the weather and insects.
But
the general ag picture has surely improved and the tone of reports received
has been upbeat.
From Montana:
"The small grain crop is excellent.
financial situation is improving."
fast and well.
From North Dakota:
Weather has cooperated."
"The harvest is going
From South Dakota:
longer going out of business because of economic stress.
Farmers'
"Farmers are no
Livestock producers
are 'out of the hole' and are from 20 to 40 percent ahead of our projections."
X-1
TENTH DISTRICT - KANSAS CITY
Overview.
sluggishness in
Economic activity in
the Tenth District is
retailing and housing, some improvement in
mixed, with some
agriculture and the
energy sector, and some evidence of strength in the industrial sector.
sales have been flat in recent months,
Manufacturers'
accumulation is
Retail
and are expected to continue so.
input prices are increasing significantly and sane inventory
occurring.
and development activity.
Limited improvement continues in oil exploration
Housing starts are flat and are expected to slow in
the near future, developments that are paralleled in the demand for mortgage
funds.
Loan demand at commercial banks continues weak.
Crop conditions and
harvests are generally good, and farm loan paydowns are expected to be above
normal in the fourth quarter.
Retail Sales.
While district retailers generally report sales above
year-ago levels, sales over the past three months have been mostly flat.
Soft goods appear to be selling somewhat better than hard goods.
Prices are
reported as generally stable with this trend expected to continue into the
near future.
Inventories are considered to be at satisfactory levels with a
few respondents trimming their inventories.
show little
growth in the
Automobile Sales.
Most retailers expect sales to
near future.
Automobile dealers report that September sales were
steady to slightly weaker compared with August and a year earlier.
tories are expanding as dealers receive 1988 models.
Inven-
Overall, dealers are
hopeful that sales will be stable or up slightly during the remainder of 1987.
Purchasing Agents.
Purchasing agents report that prices have generally
increased significantly over year-earlier levels.
Most agents report
increases in the past three months and all agents surveyed expect general
price increases for the next three months.
Most materials are readily
X-2
available, but some agents report longer lead times.
Though inventory levels
are satisfactory overall, some increases are being made in response to
seasonal factors and general market conditions.
Energy.
Although a strong rebound in the district's energy industry is
not likely to occur soon, some significant improvement in exploration and
development activity has been observed in recent weeks.
The average weekly
number of operating drilling rigs in the Tenth District increased from 311 in
August to 351 in the first three weeks of September, 63 percent above the
average weekly level recorded in September 1986.
Nevertheless,
the rig count
in the district remains less than one-fourth its 1982 peak.
Housing Activity and Finance.
District homebuilders report that housing
starts are at or below last year's levels and are generally down from a month
ago.
Single-family home construction remains flat while multi-family unit
construction has decreased.
to slow further.
Looking ahead, homebuilders expect housing starts
Most homebuilders report that new home sales are down and
inventories are steady.
Builders report that materials prices remain gen-
erally unchanged or lower due to competition among suppliers and they expect
no problems with material availability, delivery,
or price increases.
Deposit growth at Tenth District savings institutions is reported down
from a year ago, although respondents believe that aggressive rate increases
could attract deposits.
different pricing.
Any changes in deposit growth would depend on
Demand for mortgage funds has fallen sharply and is
expected to be sluggish during the remainder of 1987.
Mortgage rates, which
have risen substantially, are generally expected to increase slightly during
the rest of 1987.
Banking.
Respondents at Tenth District banks report total loan demand
as either down slightly or unchanged during the month.
Demand weakened for
X-3
consumer, commercial and industrial, and residential real estate loans.
Respondents reporting reduced demand for commercial real estate loans were
about balanced by respondents reporting increased demand for these loans.
Demand for agricultural loans held steady.
Most respondents report having
raised prime rates and expect to increase them further in the coming months.
Responses concerning recent changes in consumer loan rates were split evenly
Most respondents expect to make no
between no change and slight increases.
change in consumer loan rates in the coming months.
Balances in all types of
deposit accounts except large CD's generally remained constant, while a number
of respondents report growth in large CD's.
Agriculture.
The fall harvest and winter wheat seeding are progressing
The corn and soybean harvests are
well across most of the Tenth District.
nearing completion in the southern parts of the district with a few excepGood conditions have prevailed in the northern areas of the district
tions.
as the harvests reach the half-way mark.
close to normal or a little
above normal.
and excellent yields are expected.
in district states.
Corn and soybean yields appear to be
The milo harvest is also under way,
Winter wheat seeding is almost complete
Good moisture and warm weather have prevailed throughout
most of the district and good stands of wheat are appearing.
Bankers expect farm loan paydowns in the fourth quarter to be above
normal.
Strong crop yield prospects contribute to this expectation, but the
increased paydown levels are primarily attributed to livestock producers.
Increased profits and fears that livestock prices may soon weaken have
encouraged ranchers to pay down debt.
In addition, continued high feeder
cattle prices have discouraged operators from buying replacement cattle.
XI-1
ELEVENTH DISTRICT--DALLAS
The District economy continues to grow very slowly.
manufacturing sector is rebounding.
The
Drilling continues to recover, but
some analysts believe the end of growth is in sight.
Although new
construction activity has fallen slightly, it remains above its trough of
the end of last year.
declined.
Retail sales are sluggish and auto sales have
Deteriorating conditions predominate at the District's financial
institutions.
The income outlook is favorable for District livestock and
cotton producers.
Manufacturers indicate that, overall, demand for their products
continues to improve.
output is up.
Orders to apparel producers have increased and
Chemical manufacturers and refiners cite strong orders and
they say that sales prospects for the coming months are favorable.
Recent
high demand for steel has led to shortages of some products and to rising
prices.
Producers of electrical and electronic equipment report that sales
have been fairly stable in recent months and remain above year-earlier
levels.
Defense contractors say that output and prospects for new orders
remain strong.
Orders are unchanged overall in the energy-related durable
goods industries and respondents expect no significant increases in demand
for the remainder of this year.
Some manufacturers of durable goods tied
to the construction industry note that orders are stabilizing at very low
levels, but others report continued declines.
The District drilling rig count continues to climb, but analysts
believe that it has nearly completed its upward adjustment to oil prices in
the $19-20 per barrel range.
The rig count rose in both August and
XI-2
September but well permit applications and the seismic crew count, both of
which are leading indicators of drilling activity, have remained nearly
constant over the past few months.
Overall, new construction activity has fallen slightly in recent
months, but remains above its trough of the end of last year.
The monthly
average value of total construction contracts was lower for July and August
than for the second quarter, owing to reductions in both nonbuilding and
residential contracts.
steady.
The value of nonresidential contracts held fairly
The modest weakness in new nonbuilding construction is especially
noteworthy because recent growth in total new construction had been focused
in that category.
The decline in new residential construction reflected
substantial declines in both the single-family and multifamily sectors.
Declines in construction employment have slowed in recent months.
Retailers report sluggish sales that, in real terms, are about
unchanged from a year earlier.
Respondents say that inventories are
slightly above their desired levels and that they do not expect much sales
growth in upcoming months.
Auto sales are showing renewed weakness.
Dealers say that, after
receiving a boost from interest rate incentive programs in August, sales
fell in September and weakened further in the first week of October.
Because the decline in sales was unexpectedly large, inventories are
slightly above their desired levels.
Demand for some foreign autos has
fallen because of price increases linked to the diminished value of the
dollar.
All respondents expect sluggish sales in the foreseeable future.
The District's financial institutions continue to show weakness in
the wake of the regional economic downturn.
In August, deposits at a
XI-3
sample of all District financial institutions fell 0.9 percent below a year
earlier.
This decline occurred despite continued, but slowing, growth in
deposits at thrifts.
The delinquency rate on mortgage loans at the Texas
thrifts rose in July to 24.4 percent, compared with a 16.8 percent rate in
December and 12.8 percent in September 1986.
Regulatory net worth at these
institutions fell further into the red, hitting negative $3.25 billion in
July compared with a positive value of $289 million last December.
At the
District's large commercial banks, deposits, total liabilities, and loans
all continue to decline.
In August, total deposits at the District's
commercial banks fell 2.7 percent below their year-earlier level.
In District agriculture, prices paid to crop and livestock farmers
are up substantially over a year earlier.
Earnings are particularly high
for District livestock producers because of increases in beef prices and
declines in feed costs.
Although the number of Texas cattle and calf
operations has dropped by 4 percent since 1985, producers who have remained
in business are receiving feeder cattle prices almost 29 percent higher
than a year earlier.
The increases in feeder cattle prices, although
favorable to the cow-calf operations that predominate in the District, have
cut profit margins for cattle feeders.
Last June, Texas High Plains cotton
farmers replanted their fields after earlier plantings were damaged by hail
and heavy rains.
A warm September was required to protect this late crop
and favorable weather did materialize.
Further warm weather is needed in
order to ensure full maturation of the cotton crop.
XII-1
TWELFTH DISTRICT - SAN FRANCISCO
Summary
Economic conditions in the West generally continue to be positive.
Growth in
some sectors and regions is creating shortages of some types of labor, and putting
upward pressure on wages. Manufacturing, agriculture, and forest products are seeing
further improvements in their competitiveness on world markets. Construction activity
continues to vary widely across regions, with the coastal states generally strong.
The
rate of growth in loan demand has declined considerably during the past year, so many
financial institutions are attempting to increase their loan portfolios rather than sell
assets.
Consumer Spending
The market for automobiles currently is weak. Purchases of new mid-priced cars
reportedly are weakening, and used cars are expected to claim a greater share of the
market next year.
In some regions, trade and service firms are experiencing difficulty recruiting
qualified workers, which in some cases is creating upward pressure on wages and
salaries. Among unskilled workers, the new immigration law and possible increases in
state minimum wages also may push wages up. In the Seattle area, employment service
professionals report that it is an "applicant's market", with many job openings but high
quality workers increasingly difficult to find.
Workers either are staying with their
current jobs, or are requiring more money to be induced to move.
In contrast, wage
pressures appear to be absent for the most part in Arizona, Utah, and eastern
Washington, while Oregon's general economic health appears to have had little effect on
wages thus far.
XII-2
Manufacturing
The dollar's decline, together with campaigns in some Asian countries to "buy
American" in order to ease the threat of trade restrictions, has opened up significant
opportunities for makers of computers, semiconductors and aircraft.
Manufacturers of
commodities such as chemicals and paper were affected first, but gains now are
spreading to a whole range of light manufactured products, including medical equipment
and industrial valves.
Export-financing companies in California reportedly are being
inundated with requests from trading companies in Hong Kong and Singapore, which just
recently have begun seeking US products to sell in various Asian countries.
One respondent notes that his paint manufacturing company is turning increasingly
to domestic suppliers for titanium dioxide, a raw material supplied both domestically
and abroad. The price of this material, which is a key ingredient of paper and plastics
as well as of paint and coatings, has increased substantially due to the dollar's slide.
In Utah, a previously closed steel plant has been reopened, largely becaue its new
owner has contracted with a large German firm, which reportedly will purchase about
40 percent of the tonnage the mill produces during the next five years.
Throughout the District, reports indicate that manufacturing industries have
adequate labor available at current wages, contrasting in some regions with labor
market conditions in trade and the services. In California, despite a substantial pickup
in orders, computer, electronics, and semiconductor firms only now are beginning to
increase hiring. Aerospace firms, anticipating a slowdown in future defense orders, also
are maintaining relatively cautious hiring policies unless they have major contract
deadlines to meet. Nevertheless, pressure probably is building for larger wage increases
in a number of sectors, including a potential increase for apparel workers due to the new
immigration law.
XII-3
Agriculture and Resource Related Industries
Western forest products companies have seen dramatic improvements in exports
during the past year. Volumes generally are greater than they were last year, and prices
have increased as well.
An Oregon respondent reports that the volume of lumber
exported rose 20 percent, to well over a billion board-feet, between the first half of
1986 and the first half of 1987.
Log exports rose 13 percent to 1.7 billion board-feet.
During the same period, the value of exports of logs, lumber, and plywood rose by $1.73
million, a 24 percent increase.
One Alaska timber company's exports decreased from
114 million board-feet to 102 million, but the value of that timber posted a dramatic 75
percent increase.
Conditions also have improved for other agriculture and resource products.
Cotton exports, for example, are up sharply from last year.
Moreover, the weakened
dollar has made domestically produced copper more competitive, lowering copper
imports and improving US competitiveness in western Europe and Asia.
Construction and Real Estate
Construction activity continues to be mixed in the Twelfth District. Geographical
differences are reflected in sharp differences in construction labor market conditions.
For example, in California, Hawaii, Nevada, Oregon, and Washington, where overall
construction activity is healthy, construction employment grew by 5 to 10 percent
during the past year. In contrast, construction employment has declined by close to ten
percent during the past year in Alaska, Arizona, and Utah.
In southern California, demand for real estate continues strong, due in part to an
abundance of foreign buyers, particularly from Japan.
Financial Sector
Loan demand in many parts of the District currently is slow, leading many banks
to seek additional assets rather than sell loans on the secondary market.
A Seattle
banker reports that installment loan volumes are increasing at a 3 or 4 percent pace
XII-4
compared to 1986, whereas last year at this time they were growing at about a 13 percent rate. Likewise, commercial loan volume at the same bank is off about 3 percent
(year-to-date through August) compared with last year. A Kern County banker reports
that the demand for both consumer and business credit has been slack. Banks in Idaho
and southern Oregon also report slow asset growth, with most institutions attempting to
add to their loan portfolios.
Cite this document
Federal Reserve (1987, November 2). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19871103
@misc{wtfs_beige_book_19871103,
author = {Federal Reserve},
title = {Beige Book},
year = {1987},
month = {Nov},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19871103},
note = {Retrieved via When the Fed Speaks corpus}
}