Beige Book

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICT

January 1988

TABLE OF CONTENTS

Summary

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I-

First District - Boston ..........................................

Second District -

New York

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Third District - Philadelphia

Sixth District - Atlanta

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Tenth District - Kansas City

Eleventh District - Dallas

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Ninth District - Minneapolis

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San Francisco

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II-1

I-1

IV-1

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V-1

VI-1

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Eighth District - St. Louis

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Seventh District -- Chicago .

Twelfth District -

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Fourth District - Cleveland

Fifth District - Richmond

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VII-1

VIII-1

IX-1

X-1

XI-1

XII-1

SUMMARY*

Most Districts report modest economic growth, with particular strength in New

England and weaker conditions in the Dallas and Kansas City Districts.

Few District

reports cite economic impacts from the stock market decline last October.

The

Christmas retail season appears to have been satisfactory nationwide, with modest

dollar sales gains over last year's levels. In some areas, however, discounting reduced

profit margins significantly.

Agriculture and forest products industries have seen

improved conditions in recent months, with higher prices and strong export demand for

many products. Manufacturing orders and production have strengthened considerably in

recent months, due in part to expanding exports.

many raw materials and finished products.

Inventories have accumulated for

Construction and financial activity are

mixed, both among different types of activity and among regions.

Consumer Spending

Most Districts report 5 to 10 percent gains in the value of Christmas sales over

last year's level, with St. Louis and Dallas near the bottom of the range, and Boston and

New York close to the top. Boston and Minneapolis report that surveyed retailers held

profit margins steady, but reports from New York, Atlanta, St. Louis, and Dallas

indicate that heavy discounting in those Districts cut into many stores' profit margins.

Retailers in the Philadelphia area report that stores' profit margins on imported

products are being squeezed between rapidly increasing costs and consumer resistance

to higher prices, so these stores increasingly are turning to domestic suppliers.

In

contrast, Boston area retailers report that domestic suppliers are unable to meet their

needs, so the falling dollar will cause them to switch to suppliers whose currencies have

not appreciated with respect to the dollar.

* Prepared at the Federal Reserve Bank of San Francisco and based on information

gathered prior to January 15, 1988.

Reports on retail inventories are mixed, with about equal numbers of Banks

reporting inventory accumulation and inventory depletion.

December auto sales are reported to be weak in the Kansas City, Dallas, and San

Francisco Districts, and auto inventories have accumulated in these areas as a result. In

contrast, Cleveland and Atlanta report satisfactory December sales.

Manufacturing

Manufacturing activity is reported to be strong in all Districts, with increased

orders and, in many cases, increased backlogs as well.

Currently, a large western

aerospace firm has more than two years' worth of orders for commercial aircraft on its

books.

Cleveland and San Francisco report that exports continue to be largely responsible

for their regions' increases in manufacturing activity, and respondents noted changes in

relative prices that should lead to further improvements.

A Cleveland area business

now is able to sell machine tools to various Asian countries for the first time, and

respondents in the San Francisco District reported sharp increases in foreign equipment

prices during early January.

Reports from most Districts indicate increased inventories of raw materials and

manufactured products.

Several automobile plants in the Chicago and St. Louis

Districts have been closed temporarily to control inventories.

However, Richmond

reports stable inventories of finished goods, and respondents to the Kansas City survey

generally are satisfied with current inventory levels.

Airplane inventories at western

aerospace companies are very lean, due in part to strong export demand.

Manufacturers in many Districts note increases in input and output prices, with

steel prices up dramatically.

Several Districts report problems obtaining sufficient

supplies of some raw materials, particularly steel products, and some textile and apparel

producers in western Tennessee are having difficulty finding sufficient workers for their

rapidly expanding operations.

Kansas City reports that, despite shortages of quality

steel materials, most materials are readily available and few respondents noted

bottlenecks in labor or plant capacity.

Agriculture and Resource Related Industries

The lower exchange value of the dollar continues to stimulate demand for many

U.S. products.

As a result, exports of several agricultural and forest products are up,

depleting inventories in some cases. Prices for soybeans and some other major products

have risen.

Price increases for poultry in the Texas area are widely expected in the

wake of extensive snow damage to poultry operations.

The outlook for the energy

sector remains weak, with a number of analysts increasingly "bearish" about energy

prices.

Construction and Real Estate

Homebuilding and real estate activity were seasonally slack during late 1987 in

most of the nation, but have resumed modest activity levels in New England, New York,

and Minnesota since the new year began. The winter slowdown, coupled with continued

economic uncertainty, has reduced housing sales and construction in the Atlanta

District.

Nonresidential construction activity continues mixed, with several Banks reporting

continued high vacancy rates and slow building activity. The New York Bank reports

that the turmoil in the financial markets apparently has had little or no effect on office

leasing outside the New York Metropolitan area, but that activity has slowed in

downtown and midtown Manhattan, and on Long Island.

Atlanta reports that high

absorption and a cutback in development in 1987 caused a significant drop in Orlando's

office vacancy rate.

Financial Sector

In New York City, additional cutbacks are taking place in the brokerage and

banking sectors as a result of both the stock market crash and basic restructuring.

Applications for consumer loans are weak overall, with significant declines in the

rates of growth reported in the New York, Philadelphia, Atlanta, St. Louis, and Seattle

areas. Some banks attribute the current weakness in part to declines in applications for

car loans, and none attribute it to the stock market crash.

Demand for mortgages is weaker than it was last year in most parts of the

country, partly due to vigorous refinancing activity last year.

Several western bankers

report that demand for home equity loans was strong throughout 1987, and Atlanta

reports that homeowners drew down home equity lines to finance Christmas purchases.

In the suburbs surrounding New York City, demand for home equity loans generally is

weak.

FIRST DISTRICT - BOSTON

First District merchants and manufacturers ended the year with

satisfactory growth in sales and earnings.

In the aftermath of the stock

market decline, retailers achieved relatively robust sales increases

without shaving margins.

Most manufacturers also felt little or no impact

from the stock market decline.

The few who sensed some weakening in demand

late in the year report a recent rise in orders.

Both groups view 1988

with cautious optimism and are proceeding with spending plans unchanged.

Although the residential real estate market has been unseasonably weak,

many realtors also note a recent pick-up in sales activity.

Retail

Despite fears that the stock market decline would seriously cut

consumption expenditures, a sample of First District retailers report

Christmas sales up a satisfactory 8 to 10 percent above year-ago levels.

Some major chains stepped up promotions, but most retailers did not.

Thus

margins generally held steady, and price increases paralleled the 1 to 3

percent rise in the cost of goods sold.

Most respondents are optimistic about the new year, and all intend

to build up their inventories and expand their operations.

One major

discount chain is, however, reassessing its building program in light of

the stock market decline.

The respondents do not anticipate that the fall in the dollar will

cause them to increase orders from domestic sources significantly.

Where

import costs have risen substantially, firms expect to switch to foreign

suppliers whose currencies have appreciated relatively little.

Some

retailers also report that they can no longer find domestic manufacturers

capable of supplying their needs.

The District's tight labor market remains a major concern.

The

situation is causing rising wages and understaffed operations.

Manufacturing

Most First District manufacturers enjoyed a good fourth quarter

with real gains in sales and orders of 3 to 12 percent from year-ago

levels.

Increases in earnings ranged from 15 to 45 percent.

Makers of

producer goods and consumer essentials report no impact from the stock

market decline.

Those serving the auto industry or producing discretionary

consumer goods saw some weakening in November or December but almost

universally report a recent pick-up in orders.

the importance of exports.

Respondents were divided on

Half serve foreign markets from foreign

affiliates; thus, exports played little role in their sales gains.

The

other half cited significant increases in exports or export orders.

Contacts continue to stress efforts "to run lean."

Inventories are

being monitored carefully and are generally termed "satisfactory."

Employment levels are stable or increasing slightly.

Several firms

mentioned that 1987 productivity gains of 5 to 6 percent allowed them to

meet increased demand with only modest growth in employment.

Capital spending will generally continue at or above the 1987

pace.

Several firms plan increases of 10 to 25 percent, while only one

anticipates a significant decline.

These plans reflect the introduction of

new products, maintenance needs and continued efforts to increase

productivity. Little expansion of capacity is likely.

In no case has the

stock market caused any change in respondents' plans.

Increases in the cost of materials are widespread - with steel,

copper, precious metals, glass, pulp and paper, plastic resins, DRAMs from

Japan and various imports from Europe all cited.

Contacts expect materials

prices to rise considerably faster in 1988 than in the last 18 months.

In

particular, spot steel prices are reported to be up 10 to 15 percent, and

availability is a potential problem.

In contrast to the situation a year

ago, contacts are now able to pass some of these increases on to their

customers.

Most expect their own prices to rise an average 3 to 4

percent.

First District manufacturers view 1988 with cautious optimism.

No

respondent foresees a recession this year, although one-third expect sales

growth to be slightly less than in 1987 or than they forecast in early

October.

Another third, however, expect a very good year with sales

increases of 15 to 25 percent.

Many are keeping a wary eye on consumer

spending, and a few expressed concern about self-fulfilling prophecies.

Residential Real Estate

Throughout most of the First District, the residential real estate

market is making a moderate comeback after an unusually slow pre-holiday

and holiday season.

Although sales have generally increased since the turn

of the new year, they are weaker than they were last year at this time.

In

most of the region, reports suggest little variance in sales activity among

small homes, large homes, and condominiums.

Many realtors expect the

recent increase in activity to continue through the spring.

II-1

SECOND DISTRICT--NEW YORK

Developments in the Second District economy varied among sectors during

recent weeks.

Consumer spending was stronger than many retailers had anticipated

had little effect on office leasing

and the turmoil in the financial markets

outside the New York metropolitan area.

Business activity was somewhat mixed,

however, and residential construction was seasonally slack.

Small and medium-sized

banks reported no appreciable decline in the demand for consumer loans since the

stock market crash.

Consumer Spending

District

retailers reported

that,

on

the whole, consumer

spending in

recent weeks was more spirited than many had anticipated, given the stock market

crash and its retrenching effects.

While sales in the District were somewhat weak

during the first half of November, they strengthened as the month progressed, and

during December were either on or slightly below plan.

Because of exceptionally

heavy discounting during the Christmas season, however, several retailers stated

that they anticipate a substantial drain on profit margins.

Respondents reported over-the-year sales changes ranging from -2.5 percent

to +8 percent in November and from +6 percent to +12 percent

annual survey by the Retail Council

of New York

in December.

State, which

An

primarily covers

stores outside New York City, found an average increase of 5-6 percent during the

Thanksgiving Friday to Christmas Sunday period.

Items

in

good demand

were certain

types of

women's

apparel,

perfumes,

jewelry, and other accessories while sportswear and electronics sold poorly.

An

II-2

unusually large number of foreign buyers was noted at several New York stores,

attributed to the relative strength of most foreign currencies.

Business Activity

Economic conditions in the Second District have been somewhat mixed since

the

last

seasonal

report.

While

slowdown

in

purchasing

manufacturing

agents

the

in

activity,

area

Rochester

responses

from

noted

firms

in

only

a

Buffalo

indicate that some slackening of business activity may have occurred there.

In New

York City additional cutbacks are taking place in the brokerage and banking sectors

as a result of the stock market crash as well as some basic restructuring.

Despite

the recent

and

layoffs

continuing

in New York

unemployment rates remain lower than the national average.

rate

of

3.9 percent

4.5 percent.

more

layoffs

in

December

while

New

York's

City, District

New Jersey posted

was

a

slightly

higher

New York City's rate of 5.0 percent also was relatively low.

scheduled

in

the

City

during

anticipate a negative impact on District

the

weeks

ahead,

unemployment rates

many

a

With

observers

in the near future.

Since announcements of new and expanding industries have been made in other areas,

however, the net effect on District employment remains to be seen.

Construction and Real Estate

Homebuilding activity has been seasonally slack in much of the District,

in December

but ground was broken

Roosevelt

Island,

a

part

of

New

for

York

an

1107-unit

City.

This

multifamily development

is

the

first

on

residential

construction on that island in more than ten years and, in contrast to the luxury

condominiums which characterize most new apartment buildings in the City, will be

primarily middle-income rental housing.

to

start

in

February

is

the

Another large development which is slated

construction

of

1000

units

of

townhouses

and

condominium apartments as part of a $225 million mixed-use project in central New

Jersey.

In another attempt to deal with the shortage of affordable housing, more

II-3

than 24 employers on Long Island recently formed a partnership to foster additional

middle-income housing citing the increasing difficulty in attracting and keeping

employees there due to the high price of homes.

The turmoil in the financial markets has apparently had little or no effect

However, activity has

on office leasing outside the New York metropolitan area.

slowed in downtown and midtown Manhattan and on Long Island, and many observers

expect vacancy rates to

brokerage

and

banking

rise

in the wake

Citing

firms.

this

of continuing employment cutbacks at

softening

commodity exchanges recently abandoned plans to

downtown

Manhattan, and considerable

uncertaintly

real

build a

estate

market,

five

in

65-story skyscraper

the

surrounds

for

proposal

a

large midtown project which originally was to have housed a major brokerage firm.

Financial Developments

Senior officers of small and medium-sized banks in the Second District

reported that

they have

not

noticed

an

appreciable

consumer loans since the stock market crash.

decline

in

the

demand

for

Most did state that demand is not as

strong as it was a year ago, but several linked this to the Tax Reform Act

provision reducing interest expense deductions rather than to the crash.

Many

officers noted delinquencies on their consumer loans have risen recently, though

Those surveyed expressed uncertainty as

not to alarming levels.

rise

should be attributed

to the

crash or

delinquencies following the holiday season.

rates,

only

one

bank

in

the

applicants in recent months.

survey

has

to the

normal

to whether

seasonal

increase

tightened

credit

for

standards

loan

Consumer demand for mortgages and home equity loans

real estate market is typically slow during

Though the

the winter months, some

bankers thought that the crash may have made some individuals more reluctant

purchase

homes.

In

in

In spite of the rising delinquency

is generally weak, especially in the suburbs surrounding New York City.

residential

the

contrast,

demand

for

bank

credit

cards

remains

to

steady.

III-1

THIRD DISTRICT - PHILADELPHIA

There are mixed signals in the Third District economy as 1988 begins.

Manufacturing activity was flat in January, although factory employment

continued on an upward trend.

Retail sales for the holiday season increased

year-over-year, except for women's apparel and consumer electronics, and met or

exceeded merchants' expectations.

The growth of aggregate bank lending was

slowing, with consumer loan volume at a standstill and business lending up just

slightly; however, real estate lending continues to move up strongly.

Most business contacts expect little growth in 1988.

Manufacturers

forecast only steady business for the first half, and they do not expect to

continue adding to payrolls.

Retailers said sales in January were good, but

they expect consumers to step up their buying only slightly, if at all, as the

year progresses.

Bankers, citing the improvement in the manufacturing sector in

1987, are optimistic that commercial lending will regain momentum this year, but

they do not expect strong demand for consumer credit.

MANUFACTURING

The region's manufacturing sector marked time in the first month of the

year, after expanding through most of 1987.

Two-thirds of the industrial firms

participating in the January Business Outlook Survey reported steady business,

and the number of companies starting the new year at a slower pace nearly

equaled the number stepping up production.

Durable goods makers reported some

improvement, while nondurable goods producers said business was steady.

III-2

Specific measures of industrial activity in January showed little change

from December.

Order backlogs leveled off and inventories moved higher,

indicating an easing from last year's operating pace.

increases in new orders and shipments were reported.

However, fractional

Employment also posted a

slight gain for the ninth consecutive month; although 75 percent of the

companies surveyed in January were maintaining steady payrolls, 19 percent added

workers while only 6 percent made cuts.

Despite the apparent interruption of growth in January, survey respondents

reported continuing upward movement in prices--60 percent said input costs were

higher than in December, and nearly 40 percent raised prices for their own

products.

Looking to the first half of 1988, 72 percent of the respondents

predict further increases in the prices of goods they purchase and 41 percent

plan to charge more for the goods they make.

January's pause in manufacturing growth appears to be coloring survey

participants' views of the future.

Neither production nor employment is

expected to change from current levels in the first half of 1988.

These

expectations, combined with an anticipated modest increase in shipments, should

work to reverse this month's inventory buildup.

RETAIL

Most Third District retailers queried in January said sales for the

Christmas season met expectations, and some department stores and general

merchandise stores reported that sales were above plan.

Overall, area merchants

said sales were about 5-7 percent above 1986 results, in dollar terms.

Discount

stores and department stores catering to relatively affluent clienteles turned

in better performances than stores selling middle price range merchandise.

While promotional discounting in the days just before Christmas was greater

than planned for many stores, most retailers said margins were not seriously

III-3

reduced.

This was not the case for specialty shops, however.

Despite large

markdowns, stores selling women's apparel and consumer electronics did not have

a good season.

Some reported sales declines of up to 10 percent from 1986.

Merchants contacted in mid-January said sales were running at a healthy

pace, but they are worried about the year as a whole.

Most have adjusted their

purchasing plans for a year of slow or no growth in sales, in real terms, and

many specialty stores have cut back plans for renovations and expansion.

Store executives said cost containment will command attention this year.

Labor costs are rising as stores face shortages of salespeople and other

workers.

Also, retailers reported that costs of imported goods are rising more

rapidly now than in the past few years, and consumers are resisting stores'

attempts to pass cost increases through to selling prices; consequently, profit

margins on imported goods are falling and stores are turning to domestic

suppliers.

FINANCE

Loan growth at major Third District banks was slowing as 1987 came to a

close, continuing a trend that began at the start of last year.

Among the major

credit categories, real estate lending is strongest and consumer lending is

weakest.

Total personal loan volume outstanding near year-end 1987 was only 3

percent higher than in December 1986, and bankers surveyed in mid-January said

consumer lending has been flat or down in recent weeks.

Most bankers expect

little growth in this type of lending in 1988.

Although growth in commercial and industrial lending eased during 1987,

bank credit officers contacted recently believe lending to businesses will

accelerate, and some have already noticed an increased demand for commercial

credit.

Bankers believe economic conditions in the region will remain good for

III-4

most of 1988, spurring financing needs of local businesses, particularly

manufacturers.

Total deposits at large Third District banks in December were at the same

level as in December 1986.

Demand deposit balances have declined since October,

ending the year lower than where they started.

Growth in nontransactions

deposits, while slow, has accelerated in recent months.

Some bank

asset/liability managers indicated in January that they were boosting interest

rates on certificates of deposit in anticipation of tighter money market

conditions in the second half of 1988.

IV-1

FOURTH DISTRICT - CLEVELAND

Summary

The year 1987 closed on several optimistic notes.

Manufacturing, boosted by

increased export activity, continued its recent rebound with output, new orders, and

employment up over the previous month. Holiday retail sales were slightly better than

expected, aided by an increase in auto sales.

Many local area unemployment rates

remained at or below the national rate. District loan demand continued to increase at a

modest rate.

Retail Sales

An increase in auto sales in December helped boost Holiday retail sales in the

Fourth District above last year's sales levels. Most car dealers reported increased sales

in December over the previous two months, as incentive programs once again attracted

consumers.

Sales volume differed widely across cities and across product lines. For instance,

one major retailer reported that sales were up 12.5 percent in their Pittsburgh stores

but up only 5 percent in their Cleveland stores. Sales of apparel were up, due partly to

the deep discounting before Christmas. On the other hand, sales of durable home goods

were down, reflecting consumer caution after October's stock market decline. Discount

retailers reported a greater increase in sales than top-of-the-line outlets. The consensus among retailers was that sales will slow down during the first half of 1988.

Prices

are expected to show only a modest increase as price pressure from imports eases.

Manufacturing

The manufacturing sector continued to show positive signs.

Output, as measured

by the Ohio Manufacturing Index, increaed by 0.2 percent in November, rebounding

IV-2

slightly from the previous month's decline.

Gains in durable goods, especially primary

metals, transportation equipment, fabricated metals, and instruments, were primarily

responsible for the November turnaround.

Manufacturing in nondurable goods fell 0.1

percent in November, due to continued decline in printing and publishing and food

processing.

Reports from purchasing managers concurred with the uptick in the output index.

In the Cleveland area, all indicators were higher in November than in previous months.

Respondents to the purchasing managers survey indicated higher employment, higher

raw material, supply, and finished product inventories, and an increase in new orders.

Two-thirds of the respondents reported higher prices. Specialty steel items and plastics

products were reported to be in short supply.

Purchasing managers in the Cincinnati

area reported these indicators to be "at strong levels," but down slightly from the threeyear highs of the past few months.

Steel production in the Youngstown and Pittsburgh areas remained strong.

Youngstown producers shipped 6 percent more steel in December than they did in

December of 1986. Pittsburgh producers shipped 13 percent more than a year ago.

Exports continued to be largely responsible for the increase in manufacturing

activity.

Machinery, chemicals, and instruments contributed significantly to the

increase in export activity. One local business person remarked that for the first time

he is now able to sell machine tools to various Asian countries.

Labor Markets

Ohio's total employment increased by 14,000 workers, led in part by a 4,000

worker advance in manufacturing.

However, despite the recent increase

in

manufacturing employment, Ohio lost 7,500 factory jobs between November 1987 and

November 1986.

The largest losses over the year occurred in fabricated metals,

machinery, autos, and aircraft and parts. Primary metals posted the largest gain of the

IV-3

major manufacturing sectors, adding 5,400 workers.

Continued strength in the service

sector boosted the year-to-year increase in total employment for Ohio to 111,500, a 2.4

percent increase. November's unemployment rate stood at 5.9 percent, up slightly from

previous months but still equal to the national rate.

Area businesses anticipated moderate hiring in the first quarter of 1988. In Akron,

43 percent of local employers surveyed by a nationwide employment agency planned to

increase staff, while only 3 percent expected cutbacks. Pittsburgh area businesses were

less optimistic. Only 17 percent of those surveyed planned to increase staff during the

next three months. Twenty percent said that they anticipated cutbacks. The Cleveland

area hiring outlook appeared mixed. Twenty-five percent of local businesses expected

to increase their workforce, while the same percentage expected to cut back. Overall,

job opportunities looked best in services and durable manufacturing.

Banking

District loan demand continued to be modest.

Total loans outstanding at large

banks grew at an annual rate of 5 percent during November and December. Most of the

loan growth was in business and consumer installment lending.

Commercial and

industrial loans rose at an annual rate of 5 percent over the last two months, up slightly

from October's pace.

Consumer installment lending increased at a double digit rate in

November and December, but much of the growth may have been attributed to seasonal

factors.

Mortgage rates generally rose in October and November, contributing to a

slight fall in outstanding real estate loans in November and December.

FIFTH DISTRICT - RICHMOND

Overview

The District economy has apparently expanded further in recent weeks.

Most of

our directors and advisory council members reported that their local economies were

robust at year-end, and our regular surveys showed a continuation of rising employment

in retailing and manufacturing.

Retail sales for the most part held up well through

Christmas and retailers look for good winter and spring sales. Manufacturers reported

generally strong activity and higher input prices, but they were somewhat less

optimistic than they were a few weeks ago about their growth prospects.

In other

selected District sectors, financial institutions said they expect a pickup in some

categories of loan activity, and most seaports reported increases in volume.

Consumer Spending

Most District retailers responding to our regular survey reported that Christmas

sales were above year-ago levels.

However, 38 percent of the respondents reported

lower sales of big ticket items, while 43 percent reported no change.

Additionally,

nearly half of the retailers said that post-Christmas inventory levels were higher than

last year's.

District retailers expect their sales to increase in the next six months. Sixty-five

percent of those surveyed believe their sales will rise over the period, although about

one-third expect weakness in big ticket items.

Manufacturing

Manufacturing activity in the District has apparently continued to increase in

recent weeks.

Thirty-five percent of the respondents to our regular mail survey

reported increases in shipments -- the same percentage as in the previous survey. The

V-2

survey results indicated that orders, inventories of materials, and employment rose,

while unfilled orders and inventories of finished goods remained unchanged, and the

workweek declined slightly.

The percentage of manufacturers who expect shipments and orders to increase

over the next six months were unchanged from the previous survey. In our two latest

surveys, both conducted since the stock market crash, about 40 percent of the producers

indicated that they believed their shipments and new orders would grow during the first

half of the year, as compared to about 50 percent who anticipated growth before the

crash. Most manufacturers plan to reduce their inventories of materials in the next six

months, but most also expect their inventories of finished goods to rise.

The prices of both raw materials and finished products evidently rose further in

recent weeks according to District manufacturers.

Fifty-seven percent of the

respondents reported higher raw materials prices and 32 percent reported higher prices

for their finished products.

Additionally, one-third of the respondents said they had

been unable to obtain adequate supplies of some raw materials, particularly metals.

Reports from District manufacturers were somewhat less optimistic about the

outlook for the general economy than about their own business prospects for the first

half of 1988.

Half of the respondents anticipated no change in the level of general

business activity in the nation, while the remainder were equally divided between those

expecting growth and those expecting contraction.

Mining

District coal production during the last weeks in December was slightly ahead of

production in the same period a year ago. However, utilities have reportedly not been

stockpiling much coal.

The United Mine Workers' contract expires on January 31, but

coal industry sources said that apparently utilities believe they can obtain sufficient

coal supplies from non-union companies if a strike occurs. District coal production for

1988 is expected to remain at 1987 levels.

Financial

Fifth District financial institutions responding to our recent survey reported little

change in business conditions from a month ago, and they remained optimistic about the

months ahead.

Seventy-two percent expect the nation's rate of economic growth to

increase in the coming six months, and 64 percent look for increased economic growth in

their local areas over the same period.

Although executives of financial institutions reported little change in loan activity

in recent weeks, they anticipate increases in the demand for home mortgage loans and

for commercial and industrial loans in the months ahead.

Rural bankers reported that

their banks were doing well and had bright prospects for the future. These bankers also

indicated declines in the number of financially troubled farmers and farm foreclosures.

Ports

Representatives of the Port of Hampton Roads and the Port of Charleston, South

Carolina - two of the three major District ports - noted general increases in both

loadings and unloadings for the month of December.

The Port of Baltimore, however,

reported declines in imports and unchanged exports in recent weeks.

expecting increased volumes in 1988.

All ports are

VI-1

SIXTH DISTRICT - ATLANTA

Unfolding national economic trends also are evident in a reading of business

conditions in southeastern states. Manufacturing activity is strong in many foreign trade

Producers in housing and

related activities such as agriculture, paper and chemicals.

consumer

goods industries are becoming

concerned about soft demand.

Holiday

spending, while not great, turned out to be better than retailers expected in the

immediate aftermath

of the stock market crash.

Although

construction

activity

continues to slow, the regional economy is comparatively healthy on balance.

Employment

industries.

and Industry.

Manufacturing

activity

remains brisk for most

There is no evidence of significant cutbacks in capital spending or orders for

major regional industries, but consumer goods producers are edgy.

Textile producers

continue to operate at high utilization levels, with carpet producers reporting tight labor

conditions. Increases in prices of imported and domestic clothing plus softening demand

is resulting in an unwanted apparel inventory buildup at the manufacturing level, possibly

signaling a production slowdown this year.

The chemical and paper industries are benefitting from higher prices, improved

domestic and foreign sales, and lessened import competition. Strong textile markets also

have helped segments of the chemical industry, and the cheaper dollar has encouraged

foreign paper mills to buy U.S. wood pulp.

New paper mills and plant expansions have

recently been announced.

Defense

related government

contracts

continue

to

benefit

the

region;

in

Huntsville, the new space station contract will eventually add 2000 new jobs to payrolls.

In metals, more than 500 steelworkers in Alabama are expected to return to work earlier

than originally planned and an aluminum smelting plant is returning to full production in

Tennessee.

On the other hand, home appliance manufacturers are concerned about

scaled-back consumer spending, lower housing start levels and rising raw material prices.

VI-2

Consumer Spending.

Major department stores made slight-to-moderate real

gains in holiday sales over the previous Christmas but sales at specialty stores such as

women's fashion shops were disappointing. Retailers boosted sales volume by promoting

heavily and reducing gross profit margins in the process.

Efforts to clear excess

merchandise in January have been hampered by poor weather. Orders and inventories for

spring sales are conservative and expected to be about the same as last year's levels.

Many retailers expect to see more discounting this spring than last year and a more

highly promotional environment, particularly in products experiencing the sharpest

slowdown in spending such as women's sportswear and electronic items.

Auto dealers feel that December's sales compared rather well with year-end 1986

considering strong tax incentives at that time.

Light trucks continue to be the star

performer offsetting some weakness in domestic car models. The geographic pattern of

vehicle sales in 1987 mirrored the overall consumer spending pattern in the District-activity in the eastern part was stronger than that nationally, while the western part

lagged behind the nation's performance.

Construction.

The

winter

slowdown,

coupled

uncertainty, has reduced housing sales and construction.

with

continued

economic

Markets in Louisiana and

Mississippi are hampered by distressed local economies and outmigration as well

Activity is mixed in Tennessee--Nashville has become overbuilt in both single-family and

multifamily homes while Knoxville's housing market seems to be building momentum.

The huge Florida and Georgia markets, which were fairly stable in 1987, are expected to

soften in 1988.

Analysts expect the widspread commercial construction and leasing slowdown to

continue this year.

large markets.

The office market, in particular, remains overbuilt in most of the

A notable exception is Orlando, where high absorption and a cutback in

development in 1987 caused its office vacancy rate to drop significantly.

According to

recent reports, foreign investors' interest and participation in Atlanta's commercial real

VI-3

estate market is growing.

The Japanese have been the most active, but European

investors' activity is also growing.

Financial Services. Consumer and real estate loan growth fell in December, with

consumer borrowing actually declining in Alabama and Louisiana. The slower expansion

of consumer credit in the other states reflects a smaller increase in borrowing for car

purchases.

Homeowners also are reported to have drawn down home-equity lines to

finance Christmas purchases.

Other residential mortgage financing is sluggish due to

seasonal factors and low volumes of refinancing relative to late in 1986. Regional banks

are requiring commercial developers to pre-lease more space to qualify for loans.

Tourism. The U.S. cruise industry is growing at a fast clip. Ports such as Miami-currently the world's most used cruise liner port--Fort Lauderdale, Tampa, and New

Orleans should benefit from this increased traffic, which peaks during the winter.

The

airline industry has yet to note any negative impacts attributable to the stock market's

crash, and the dollar's most recent decline has not spurred any noticable trends in air

travel. Airline officials anticipate an eventual increase in tourists to the southeast as a

consequence of the dollar's decline. The air fare war now going on in Atlanta and Florida

was designed to fill more seats during the slack winter quarter. In Georgia, Florida, and

Louisiana, business travel to attend conventions and meetings during January is running

ahead of last year's performance.

Mining, Agriculture and Forestry.

The kaolin industry is prospering as export

activity increases and demand from paper companies remains strong. Industry expansion

projects, prompted by favorable short- and long-term prospects,

Georgia.

are underway in

The phosphate industry continues its recovery after several years of poor

performance, aided chiefly by a fast-growing export market.

Southeastern crop farmers are enjoying higher prices. Florida's citrus industry is

especially benefitting from a larger crop and stable to higher prices.

are continuing to prosper, with a bright outlook for 1988.

Forest industries

VII-1

SEVENTH DISTRICT - CHICAGO

Summary

Business activity in the District is expanding, overall, with many manufacturers

reporting strength tied to rising exports, improved competitiveness with imports, and

rising capital spending.

truck market.

Continued slow car sales are partly offset by the expanding

Purchasing managers' reports for District metro areas continue robust,

though our contact with the Milwaukee group was concerned about prospects for early

1988. Employment continued to trend upward in District states through November, but

the effects of widening layoffs, particularly in autos, cut Michigan employment in

December and probably in January.

Demand for steel has shown no letup from the

strong pace of much of last year. Construction activity appears to be holding up in the

District.

Several lines of consumer goods are reported selling well, helped by cold

weather and promotions.

Recent USDA reports have firmed 1988 price prospects for

most District farm commodities.

Purchasing Managers

December purchasing managers' surveys in the Chicago, Indianapolis, and

Milwaukee areas show continued expansion. The Chicago survey indicates strong growth

in production, orders, and backlogs as well as delays in filling orders and further price

increases.

Activity in the Indianapolis area is described as still moving along briskly,

with continued strength in the area's industrial sector. Orders and backlogs continued to

rise in the Milwaukee area, though increases were not as widespread as earlier.

The

slower rise is thought to be mostly seasonal, but our contact was concerned that orders

placed in response to lengthening lead times and rising prices could quickly evaporate if

the late 1987 slowdown in additions to bookings proves to be more than seasonal.

VII-2

Employment

District states' payroll employment continued to expand through November, but

the year-to-date rise trailed that in the U.S.,

with slower gains concentrated in

Michigan and Illinois. Manufacturing employment in Michigan was below a year earlier,

reflecting layoffs at auto assembly and parts plants, and cuts in related industries. With

nonmanufacturing payroll employment in Michigan showing relatively large gains,

however, total nonfarm payrolls in November were about 1% above a year earlier. The

household survey also shows total Michigan employment above a year earlier in

November, but December was lower.

Sources in Michigan indicate that the weaker

employment situation in December principally reflects announced layoffs.

Some of

those who reported themselves as laid off in the December household survey are thought

to have taken accrued vacation time initially, and consequently to have been counted as

employed in the December payroll figures. Other companies in the District which have

recently announced employment cuts include financial service firms in Chicago, and an

appliance manufacturing plant in Michigan which closed and shifted production to plants

outside the District. Corporate staffs in Chicago were cut by a large railroad, a maker

of building materials, and a diversified producer of consumer products.

GM's

Electromotive Division plans to cut employment by 2,000, to 2,300, at its Chicago-area

plant, one of only two U.S. plants that build new locomotives, and shift locomotive

production to Canada.

Motor Vehicles

Auto production plans have been trimmed, bringing first quarter schedules more in

line with analysts' expectations based on fourth quarter sales trends. Announced cuts in

assembly schedules are feeding back to parts plants. In addition to temporary closings

to control inventories, five Michigan auto assembly and parts plants were closed

VII-3

permanently in December.

In contrast, total truck output in the first quarter is

projected at a record level, for any quarter, in line with the strength in sales.

Steel

Demand for steel bounced back strongly following normal year-end customer

shutdowns.

Lead times are strengthening, with the first quarter booked and delivery

times for orders currently placed extending into the second quarter.

Demand from

appliance makers is holding up. Structural steel fabricators generally are quite active,

though the level of activity varies considerably among geographic areas.

Sales people

foresee no letup in incoming contracts. The Chicago market is described as active with

numerous small and medium-size orders.

Projects being put out for bid indicate

strength in spending on shopping centers and power plants.

Warehouse business,

generally for smaller projects, was highest ever last year and remained extremely strong

through year-end. Upward price pressures continue.

Other Manufacturing

Reports from other manufacturers are generally quite positive.

Shipments of

corrugated containers in North Central states were very strong in November, and one

company's results suggest that the industry uptrend continued in December.

Seasonal

closings in late 1987 at box plants' customers were described as normal, with no

extended shutdowns reported.

A linerboard price increase announced for February 1 is

expected to go through without resistance.

Makers of capital goods and equipment for

installation in new construction projects are seeing strong business.

Other lines noted

by our sources as showing good gains include medical supplies, printing and publishing

supplies, abrasives used in industry and construction, and materials for highway signs.

Construction and Real Estate

Construction activity continues at a high level in District states, apart from the

normal seasonal slowing.

(Comparisons of early 1988 with year ago will appear weak

VII-4

because of last winter's unusually mild weather.) Nonresidential construction contracts

in District states, in square feet, were 14% above a year earlier in the first 11 months

of 1987, and residential contracts were 4% higher, both stronger performances than the

U.S.

Demand for building materials, including cement and gypsum board, showed

stronger gains in the District than the nation.

New high-rise buildings continue to be

announced for downtown Chicago. Paving activity will be strong in the Chicago area in

1988.

Home prices in the metro area are estimated to be about 10% above a year

earlier.

Consumer Spending

December sales were "satisfactory," in the view of a major general merchandise

retailer.

Sales in early 1988 started strong, helped by cold weather as well as

promotional activity.

Lines showing good gains include home improvement, household

appliances, personal care, hardware (especially cordless tools), furniture, and children's

apparel. Retail inventories are regarded as in good shape.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The District's economy continues to expand at a moderate pace.

Employment growth, one of the broadest indicators, has been particularly

strong in the District.

Holiday sales growth, while less than in recent

years, was stronger than many analysts and retailers had anticipated in

light of the stock market crash.

Construction activity was mixed with

expanding residential construction and declining nonresidential

building.

Bank lending slowed in the fourth quarter due to weakness in

consumer borrowing.

Consumer Spending

District retailers report that holiday sales were 2 percent to

6 percent above year-ago levels, representing little or no gain after

inflation.

Sales were stronger in Louisville, where several contacts

reported double-digit gains.

Retailers initially feared that the stock

market crash would lead to sharp declines in consumer buying.

sales, particularly women's wear, were soft.

Apparel

Nonetheless, retailers

indicated that, while consumers were cautious, they did spend.

Respondents reported that numerous holiday promotions were used

this year to counter the possibility of sharp spending declines.

In

addition, many indicated that sales had slowed before the October 19

market crash, prompting retailers to stock their stores conservatively.

As a result, most contacts had inventories at or below desired levels.

Sales since Christmas have been slow, due, in part, to harsh weather in

VIII-2

some areas.

Retailers expect first quarter sales to be only slightly

above levels of a year earlier.

One respondent concluded that holiday

sales promotions have borrowed from first quarter sales.

Employment

District unemployment rates tended to decline throughout 1987.

An exception is Missouri, where the jobless rate increased slightly.

District nonfarm employment growth outpaced the nation in the three

months ending November, expanding at a 4.1 percent annual rate compared

with 3.2 percent nationally.

Regional growth was concentrated in the

services, construction and manufacturing sectors.

District manufacturing

employment grew at a 4.5 percent rate in the September-November period

with strong gains in the fabricated metals and textile/apparel

industries.

Some textile and apparel producers in Western Tennessee are

having difficulty finding workers for their rapidly expanding

operations.

The transportation equipment sector was the only major

manufacturing industry to suffer employment declines.

District auto

makers, concentrated in Missouri, continue to lay off assembly workers to

trim excessive inventories; further lay-offs and plant closings are

planned for the first quarter.

Construction

In recent months, residential construction has grown more

rapidly in the District than in the nation.

The value of contracts for

residential building expanded 3.2 percent in the three months ending

November, while dropping 3.2 percent nationally.

continue to account for most of the growth.

Single-family homes

The value of nonresidential

VIII-3

contracts declined by 11.8 percent in the three months through November,

primarily due to a sharp drop in Missouri.

Banking

Total loans at weekly-reporting District banks grew at an 8.7

percent rate in the fourth quarter compared to 13.4 percent for the same

period in 1986.

Commercial and real estate lending grew at rates similar

to those recorded last year.

Consumer loans, however, slowed

considerably, declining at a 3.7 percent rate compared to a 25.4 percent

increase for the fourth quarter of 1986.

Fourth-quarter deposits at these banks grew at an 11.1 percent

rate versus 18 percent for the same 1986 period.

Large time deposits

increased at a 36.5 percent annual rate over third-quarter levels

compared to a 0.6 percent rate of decline for the same period last year.

Time deposits totaled $4.9 billion or 21 percent of total deposits at the

twelve weekly-reporting District banks.

were only 17 percent of all deposits.

Last year, total time deposits

The surge in large time deposit

growth may be related to investors getting out of the stock market after

the October crash.

Demand deposit growth in the fourth quarter slowed to

a rate of 11.3 percent compared to 41 percent for the same period last

year.

NOW account growth also slowed during the quarter while MMDAs

declined at a 15.3 percent rate.

IX - 1

NINTH DISTRICT - MINNEAPOLIS

The year

economy.

1987 ended positively

the Ninth District's

for most of

Labor market conditions continued to be favorable.

Consumer spend-

ing was generally healthy, not crippled by the stock market decline as some

Among resource-related industries, mining and wood products firms

had feared.

were quite active.

Agricultural conditions remained stable.

Only nonresi-

dential construction appeared to weaken in recent months.

Labor Markets

Labor market conditions in the district continued to be reasonably

Minnesota's market continued its recent trend of concurrent in-

favorable.

creases in employment levels and unemployment rates.

unemployment rise to statistical aberrations;

Analysts attribute the

they note that the number of

unemployment insurance claimants in the state has stayed below year-earlier

levels.

Furthermore, the Minneapolis index of help-wanted advertising was 13

this November than last.

percent higher

In the Dakotas

and Montana, only

normal seasonal employment declines occurred during November, leaving unemployment rates there below year-earlier levels.

Consumer Spending

Retail

merchandisers

were

generally

pleased

with

the

results

of

One large chain reports a healthy increase in Midwest sales

holiday sales.

this December, compared to December 1986.

holiday sales were better than it

Another big chain reports that its

had forecasted in October.

A smaller group

of stores concentrated in smaller cities experienced double-digit sales growth

this December

also notes

compared to last, even when excluding new stores.

that

its profit margins were

better

than last year.

This group

And from

IX - 2

eastern North

Dakota, a

Bank director and a newspaper

editor

report good

holiday retail sales there.

District managers of two domestic-vehicle manufacturers ended

the

Both

year on an optimistic note, expecting 1988 to be as good a year as 1987.

managers mention that truck inventories were low for this time of year, while

car inventories were not.

Housing activity has been fairly normal in recent months.

For the

usually slow month of December, home sales in Minneapolis and St. Paul were a

bit lower than a year ago.

Minnesota.

But some signs of a pickup appeared elsewhere in

Residential building

contracts in the state

rose significantly

this November, and the head of a builders' association says that most builders

look to 1988 as being "a pretty good year."

Resource-Related Industries

In general, favorable news continues to be reported about the district's major mining and resource-processing sectors.

and the

lower exchange value

Lower production costs

of the dollar are continuing

to

improve

the

Indicative of this improvement is the signifi-

outlook for iron-ore mining.

cant increase in shipments of iron ore and pellets through the Duluth-Superior

Port during 1987.

Some industry analysts predict that, in 1988, total ship-

ments from Minnesota could increase to

year of 1981.

their highest levels since the boom

A Bank director notes that

in Montana, coal production

creased during November, although oil-drilling activity slacked off.

where in the state, additional gold mines are likely to open.

in-

Else-

A Helena branch

director says that the timber industry in Flathead County, Montana, was doing

the best it has in five years.

Michigan's Upper Peninsula.

Wood products mills are busy in Montana and in

According to a Bank director, the Upper Peninsula

has also benefited from unusually high copper prices.

IX - 3

Agriculture

Agricultural conditions remained stable in the district.

sota index of prices

December 1987.

The Minne-

received by farmers held steady between November and

Cattle prices remained high while hog prices, which had been

plummeting, leveled

off.

production conditions

The lower

overseas are

exchange value

of the dollar

aiding demand for U. S. crops,

boost prices for major district crops, such as soybeans.

and

bad

helping

This Bank's most

recent survey of district farm lenders indicates that they believe farm income

continued to improve in the fourth quarter.

The lenders say fewer of their

farm borrowers are loaned up to their credit limits than in previous quarters.

Nonresidential Construction

Although 1987 was largely a good year for nonresidential construction, preliminary signs are not as favorable for 1988.

In Minnesota, nonresi-

dential contracts fell during November, to 18 percent below the November 1986

level.

A director of this Bank's Helena branch notes that commercial

struction in the Billings, Montana, area remained strong late in 1987.

the Minneapolis-St.

Paul

metro

area,

con-

But in

the near-completion of much unleased

office and retail space is dampening the outlook for further commercial starts

in the district's largest market.

TENTH DISTRICT - KANSAS CITY

Overview.

Little improvement is apparent in the Tenth District economy,

in spite of relatively high farm income in 1987.

Christmas retail sales were

generally higher than a year earlier but lower than expected, and new car

sales are slow.

Manufacturers' input prices continue to rise moderately.

If

recent world oil market conditions continue, some of the 1987 improvement in

Home mortgage demand and

the district energy industry may be eroded.

residential construction activity both remain weak.

at commercial banks are both up slightly.

Loan demand and deposits

Agricultural banks report an

improvement in yearend loan repayment rates.

Retail Sales.

Tenth District retailers report sales equal to or above

year-ago levels, and unchanged or slightly improved over the past three

months.

expected.

Christmas sales were generally higher than a year ago but lower than

Sales of apparel, cosmetics, and other soft goods are strong while

durable sales are weak.

Nearly all respondents plan to trim inventories or

hold them at present levels.

Expectations for future sales are cautiously

optimistic and only small price increases are anticipated in the next few

months.

Automobile Sales.

slow in December.

Automobile dealers generally report that sales were

Although dealers desire leaner inventories, slow sales are

keeping inventories steady.

Adequate financing is available for both dealer

inventories and customer purchases.

Overall, dealers are hopeful that 1988

sales will be near 1987 levels.

Purchasing Agents.

Purchasing agents report that their input prices are

moderately higher than a year ago.

The steepest price increases in the last

several months have been for steel-related inputs and further increases are

expected for these inputs in the near term.

Most materials are readily

available, although quality steel materials are reported to be in short

supply.

Respondents are generally satisfied with current inventory levels and

most report no unusual bottlenecks in labor or plant capacity.

Energy.

The inability of OPEC to agree on production quotas in December

1987 has caused world oil prices to weaken and become more volatile.

If

these market conditions continue, some of the stability established in the

district's energy industry during 1987 could begin to erode.

The average

weekly number of operating drilling rigs in the Tenth District increased only

slightly from 360 in November to 363 in December, about 23 percent above the

average weekly level a year earlier but less than one-fourth its 1982 peak.

Housing Activity and Finance.

Area homebuilders report that housing

starts are below both last year's and last month's levels.

Multi-family

construction is expected to weaken further but single-family construction is

expected to stabilize.

Most homebuilders report steady sales of new homes.

Respondents express no immediate or future problems regarding materials

prices, availability, or delivery times.

District savings institutions generally report that savings deposit

inflows are somewhat above year-ago levels.

Deposit inflows have changed

little since November and are expected to improve slightly during the first

quarter.

Mortgage demand remains weak, although some respondents foresee a

pickup in activity in the spring.

Mortgage rates have been stable, with

little change expected in the near term.

Banking.

loan

Respondents at district banks report slightly higher total

demand for the month.

Demand for commercial and industrial loans and

consumer loans is up slightly, while demand for residential and commercial

real estate loans and agricultural loans is unchanged on average.

The prime

rate remains unchanged among all respondents, with only one respondent

expecting a slight decline in the future.

Consumer loan rates are unchanged

and expected to remain at current levels.

Total deposits rose slightly

because of small increases in the demand for conventional and super NOW

accounts, demand deposits, MMDAs, and small time deposits.

Large CDs were

down slightly, while IRAs and passbook savings accounts were about unchanged.

Agriculture.

Strong livestock prices, a good fall harvest and

substantial government payments produced relatively high farm incomes for

1987.

As a result, 1987 year-end loan repayment rates at agricultural banks

were generally high, showing some improvement over a year ago.

Some bankers

also report that they expect borrowings for 1988 to be down, as cautious farm

borrowers are putting more cash earnings into operations.

Most agricultural

lenders continue to look for sound borrowers as loanable funds remain readily

available and demand for loans weakens.

Farm machinery sales are also beginning to reflect an improved farm

income situation in the district.

After two relatively stable years for farm

incomes, some operators are now upgrading worn equipment.

The used machinery

market has shown more activity, but high prices and a cautious outlook are

still keeping many farmers out of the new equipment market.

Although livestock prices have contributed significantly to the strength

in farm income, there has not been much expansion in district livestock

operations.

Feedlots in the region remain full, but cow/calf operators are

reluctant to hold back high priced heifers to increase breeding herds.

High

cattle prices have also forced the price of replacement animals up, causing

some stocker cattle operations to actually reduce herds.

Most district hog

growers have been running at capacity, but there has been little facilities

expansion.

The recent downturn in hog prices has not yet had a visible effect

on district hog operations.

XI-1

ELEVENTH DISTRICT--DALLAS

The District economic expansion continues, led by manufacturing

growth, but some other sectors are showing renewed weakness.

decreasing.

New construction activity is declining.

Drilling is

Retail sales

strengthened late in the holiday season, but auto sales are very weak.

Total deposits at District financial institutions remain below a year

earlier.

Unusually widespread and heavy snowfall has caused severe damage

to District agriculture.

Most District manufacturers report continued expansion in orders.

The principal exception is construction-related industries, where sales are

declining or are unchanged at low levels.

Manufacturers of chemicals and

of refined petroleum products cite strong orders and expect growth in the

first quarter.

District apparel producers say their sales are increasing

and some firms are adding to their workforces.

Defense contracts let to

District manufacturers have been increasing lately and defense contractors

in the District say they anticipate continued high levels of production in

1988.

Respondents in industries tied to oil and gas drilling report slight

increases in orders and product prices, but they say that profit margins

remain low.

Production of electric and electronic equipment is growing at

a modest pace, while steel production is growing strongly.

The District drilling rig count fell moderately on a seasonally

adjusted basis in each month of the fourth quarter.

Recent declines in

well permit applications, a leading indicator of drilling, point toward

further declines in District drilling.

A number of analysts are becoming

increasingly bearish about energy prices.

XI-2

District construction activity has been declining.

In October

and November, the value of construction contracts fell substantially from

its third-quarter average.

Declines in new residential and nonresidential

construction more than offset the increasing values of nonbuilding

construction contracts.

Most of the additional weakness in residential

building was in single-family homes.

Despite recent declines in

construction contract values, construction employment has been growing in

recent months.

District retailers say that holiday sales were higher than they

had expected, but they noted that the gains came at the expense of deep

markdowns.

The majority of retailers reported year-over-year nominal gains

in the 3 percent to 7 percent range.

District apparel sales did not grow

as rapidly as those of other traditional gift items, however.

District auto dealers report substantial dropoffs in sales.

Respondents attribute the weakness to sluggishness in the District economy

and to heightened consumer uncertainty.

Several firms said they believed

that consumer uncertainty has risen in the District because of renewed

weakness in oil prices and because of growing concerns over the possible

imminence of a national recession.

Dealers also say that prices of imports

are continuing to rise and that inventories of imports are far above

desired levels.

Total deposits at the District's financial

below year-earlier levels.

institutions remain

The weakness in deposits is focused on

continuing declines at the commercial banks.

District thrifts report

year-over-year increases in deposits, despite declines in transaction

XI-3

deposits, nontransaction savings deposits, and large time deposits.

time deposits are growing at the thrifts.

Small

Regulatory net worth at Texas

thrifts continues its steady decline, after initially having fallen into

the negative range in January 1987.

Business and real estate loans at

large District banks are decreasing at accelerating rates.

In the fourth

quarter, large District banks' holdings of securities also fell below a

year earlier.

District agriculture has suffered severe weather damage in recent

weeks.

Snow damaged some unharvested cotton and it also collapsed large

numbers of poultry sheds.

Current estimates are that a half-million birds

perished as a result of these collapses.

The Texas All Crops Price Index

was up 11 percent in December from a year earlier, but it declined by 2

percent from November's level.

The Texas Livestock and Livestock Products

Price Index in December was 8 percent above a year earlier, but was

unchanged from November.

Price increases for poultry are widely expected

in the wake of the snow damage to poultry operations.

Analysts generally

expect real net cash farm income in the District states to be lower in 1988

because of falling revenues from cotton and livestock production.

XII-1

TWELFTH DISTRICT - SAN FRANCISCO

Summary

The Twelfth District economy continues to exhibit good health overall.

Retail

sales during the Christmas season appear to have registered modest increases, of about

5 percent, over last year's levels.

Manufacturing, agriculture, and forest products

industries continue to show improved sales, with much of the growth attributed to

exports. Construction activity, however, is flat or down in many parts of the West, as

builders wait for current inventories to be sold. Lending activity shows mixed trends.

For most western banks, the number of mortgage applications is higher than it was

earlier in the fall, but below last year's levels, while installment lending is on a

downward trend. Few bankers noted changes in lending patterns that they attributed to

the stock market decline last October.

Consumer Spending

Reports suggest that Twelfth District retailers experienced sales gains averaging

around 5 percent over last year's Christmas season, with a range of zero to 10 percent.

For several stores, sales gains were close to the original plans made before October 19.

Many respondents said that price cuts were deeper and earlier this year than they were

last year, but several others reported discounting patterns similar to those of previous

years.

Reports on retail inventories were mixed, with about equal numbers of

respondents reporting higher and lower inventories compared with last January.

Car sales are reported to have been slow in December in most parts of the

District, and many dealers have accumulated inventories compared with three months

ago and with year-earlier levels.

One banker noted strong demand for boat loans

through late fall, although there was a normal seasonal slowdown in December.

XII-2

Manufacturing

Manufacturing activity continues to strengthen in the West, buoyed by the lower

foreign exchange value of the dollar.

Some respondents reported sharp increases in

foreign equipment prices during early January. In addition, aluminum producers in the

Northwest are enjoying a surge of activity generated by a combination of higher

aluminum prices, lower wages, and a favorable electric rate schedule recently

negotiated with the Bonneville Power Administration.

Airplane inventories at western

aerospace companies are very lean, due in part to strong export demand. Currently, one

large firm has more than two years' worth of orders for commercial aircraft on its

books.

Agriculture and Resource Related Industries

Energy sector activity in the West remains higher than it was a year ago. In 1987,

oil service firms posted losses equal to 4 percent of sales, an improvement over the

dismal performance of 1986.

Although the recent price decline did not reduce the

demand for oil services, it did dash hopes of further gains.

At present, industry

observers expect drilling plans to remain stable if prices stay at or above $15 per barrel.

Inventories are very lean in many export-oriented firms that produce paper,

plywood, lumber, and logs. Drought- related logging restrictions have exacerbated the

inventory tightness, so that log inventories stand at only 30 to 40 percent of their

normal levels. The importance of export-related demand to these firms is illustrated by

a major wood products firm, active only in the domestic market, which is experiencing

just moderate growth, and is maintaining merely ordinary inventory production and

inventory levels.

Many agricultural products also have seen strong exports in recent months.

example, wheat exports are up 25 percent compared with a year ago.

For

Inventories of

some western crops are slightly higher than they were a year ago, due primarily to

XII-3

higher 1987 yields. Inventories of principal California crops (almonds, cotton, rice) are

expected to fall quickly due to the strong export activity.

Wine inventories are down, partly due to substantially lower imports, but also due

to low grape yields last fall.

Construction and Real Estate

Construction activity is relatively sluggish in most parts of the West. In Arizona,

housing starts are down nearly 40 percent, with multifamily construction at a virtual

standstill. In contrast, the strong export-led growth in the coastal areas of the Pacific

Northwest has buoyed both housing starts and commercial construction in that area.

Financial Sector

Mortgage applications in December were down from their year-earlier levels in

most parts of the District, but some bankers pointed out that the strong refinancing

activity of a year ago accounts for much of the decline.

Some bankers reported

increases in mortgage applications between the third and fourth quarters of 1987, which

they attributed to the decline in long-term interest rates. However, one banker noted a

substantial decline in the number of requests for new construction loans compared with

six months ago and with a year ago.

Several bankers reported that demand for home

equity loans was strong throughout 1987.

Applications for consumer installment loans also were below their year-earlier

levels at many western banks. In the Seattle area, one banker reported installment loan

applications up about 2 percent from last year which, although better than most banks'

experiences, represents a marked deterioriation from the 13 to 14 percent growth rate

this bank registered a year earlier.

Several bankers noted no discontinuities in credit

patterns associated with the stock market decline in October, although a few argued

that the October crash reduced loan demand dramatically.