Beige Book
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
June 1994
TABLE OF CONTENTS
SUMMARY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. i
First District - Boston
.............................I-1
...
Second District - New York ............................ II-1
Third District - Philadelphia ..... .... .. .. ... .. ... .....
.. II-1
............................I -1
Fourth District - Cleveland
Fifth District - Richmond
... ... ...... .. ... .. ... .. ... V.-1
Sixth District - Atlanta ...
......... .................
Seventh District - Chicago.
.. .........
Eighth District - St. Louis
.. .....
...
.. ....
...........................
VI-1
VIII-1
IIX-1
Ninth District - Minneapolis ............ .. ... .. .... ... ..I -1
Tenth District - Kansas City . ........... ............... x -1
Eleventh District - Dallas
.
............................
Twelfth District - San Francisco
XI-1
. . . . . . . . .. XII-1
i
SUMMARY¹
Districts report continued economic expansion, although in some areas growth has
moderated recently. Contacts in a number of districts report slower-than-expected growth
in May retail sales but some signs of increasing sales in early June.
Manufacturing
continued to show strength in most districts, with many contacts reporting increases in new
orders and shipments. Defense-related industries, however, continue to be the weak spots.
Home sales in most areas continued at a strong pace, and residential construction remains
generally brisk, but some slowdowns in response to rising mortgage rates were noted.
Industrial materials prices continue to rise; however, competitive pressures are mitigating
price increases for finished goods.
Some districts report tightening labor markets, but
wage pressures appear moderate at this point.
Loan demand is generally increasing,
although rising interest rates have precipitated declines in some areas. Crop conditions are
generally favorable in most agricultural areas; nevertheless, some districts are expressing
rising concern over warm, dry weather.
Consumer Spending
Most districts report moderate gains in retail sales, although contacts in the Atlanta,
Cleveland, Dallas, New York and Philadelphia districts report slower-than-expected sales.
In particular, they cite declines in apparel sales and attribute this to unseasonably cool
weather. Sales activity in the Boston district varied from slight declines to increases of
almost 20 percent over last year, with strong demand for outdoor-related items since
Memorial Day. The Kansas City, Minneapolis and St. Louis districts report moderate-tostrong sales in general merchandise, particularly in apparel. The Chicago, New York,
Philadelphia, Richmond and San Francisco districts report strong sales in household goods
and furniture, and strength in consumer durables and other big-ticket items. The Atlanta,
'Prepared at the Federal Reserve Bank of St. Louis from information collected before
June 14, 1994. This document summarizes comments received from businesses and other
contacts outside the Federal Reserve and is not a commentary on the views of Federal
Reserve officials.
ii
Cleveland and New York districts found that discounting was needed to move
merchandise; the Chicago, Dallas and Kansas City districts note that strong competition
is keeping prices in line. The Kansas City, Minneapolis, Philadelphia, St. Louis and San
Francisco districts report strong auto sales; the Chicago, Cleveland and Dallas districts
report some recent slowing in auto sales. A number of districts report that a shortage of
popular models is constraining sales.
Business Activity
Most districts report continued growth, particularly at manufacturing firms,
although the San Francisco district has mixed reports from its contacts. The Chicago and
St. Louis districts report strong growth, while the Boston, Cleveland, Minneapolis, New
York and Richmond districts report accelerating activity. The Atlanta district reports a
rebound of industrial production in May after a modest slowing in April. Machinery and
heavy equipment orders and production are up in the Boston, Chicago, Dallas,
Philadelphia and St. Louis districts.
The San Francisco district says the aerospace
industry, especially commercial jets, has stabilized, but this industry is weak in the Boston
district. Business contacts in the St. Louis district report sales increases of between 10
percent and 20 percent in some instances. The Atlanta district reports that the demand for
building materials in the Southeast is up recently, and that auto suppliers are receiving a
steady stream of new orders. The New York district says that its manufacturing contacts
are more optimistic than a year ago.
A survey of contacts in the Philadelphia and
Richmond districts revealed increases in new orders and shipments.
The Dallas and
Richmond districts also report a steady-to-moderate increase in demand in the service
sector, particularly at law firms, hotels and cargo carriers.
Contacts in parts of the Kansas City, Minneapolis and St. Louis districts are having
difficulty finding qualified employees.
The St. Louis and San Francisco districts both
report a shortage of skilled construction workers.
Contacts in the New York district
anticipate few employment cuts and see wage increases of between 2 percent and 4
iii
percent. Contacts in the Richmond district plan no employment changes, but do expect
to increase the average length of the workweek.
Foreign demand for products from most districts remains somewhat sluggish. The
Dallas and St. Louis districts, however, report some strengthening demand from Latin
America and the Pacific Rim countries, respectively.
In addition, the Dallas district
reports strong chemical sales to Europe. The Kansas City district reports that exports are
stable overall.
Both the Atlanta and St. Louis districts report defense-related layoffs; the San
Francisco district reports its defense-related industries remain weak. The Boston district
says its durables producers are concerned that rising interest rates will reduce demand for
their products, and Philadelphia district contacts are less optimistic now than they were at
the beginning of the year.
Construction and Real Estate
Most districts report generally strong or improving home sales, although many also
cite increased mortgage rates as a source of emerging or potential weakness. Residential
construction remains brisk in many districts, with the majority of the construction
occurring in single-family houses. The Minneapolis district stressed multifamily housing
as its construction strength.
The Philadelphia district, though, reports some recent
slippage in residential construction. The Atlanta and St. Louis districts observed rising
house prices, while the Dallas and Richmond districts report stable or slightly falling house
prices. Contacts in the Atlanta district say mid-priced homes have replaced starter homes
as the big sellers, but low and mid-priced homes are still the big sellers in the Philadelphia
district. The shortage of construction workers in the St. Louis district is adding to the
already large backlogs previously built up because of weather delays and strong demand.
The Minneapolis district reports that the commercial construction market is strong,
and the Richmond district reports recent improvements in this market. The Philadelphia
district, however, reports a soft commercial market with slightly increasing vacancy rates.
The Boston district reports declining vacancy rates in Boston, although Hartford's have
increased.
The New York district reports falling vacancy rates in Manhattan, and the
Richmond district says that vacancy rates are falling throughout the district except in
northern Maryland and West Virginia.
Prices and Wages
Most districts report that competitive pressures continue to temper price increases
on the output side.
Contacts in many districts report cost pressures on the input
side-albeit modest in many instances. Increases in manufacturers' raw materials prices
were noted in more than half of the districts. The Boston, Dallas and Philadelphia districts
report increases in chemicals prices and certain metals prices, while the Atlanta, Kansas
City, and Richmond districts report increases in construction materials prices. Tightening
labor markets were noted in the Atlanta, Chicago, Minneapolis and Richmond districts.
Nevertheless, upward pressure on wages, while noted by some districts, appears to be
modest. In addition, Philadelphia reports continued increases in employment costs, mainly
in benefits.
Banking and Finance
Despite weakness in some areas, loan demand has generally picked up in most
districts. Dallas reports that loan demand is up strongly, and San Francisco indicates
similar sentiment about loan demand in Idaho and Utah. Business loans have reportedly
increased in the Cleveland, Kansas City, New York, Philadelphia and St. Louis districts,
while demand for consumer loans has risen in the Kansas City, Richmond and St. Louis
districts. The New York district reports that total loan demand has subsided because of
increases in short-term interest rates; loan demand is reported to be flat in the Atlanta and
Philadelphia districts. Loan demand also remains weak in California, although the San
Francisco district reports that an uptick in business lending has occurred in southern
California and Hawaii. Demand for auto loans has weakened in the Atlanta and Cleveland
districts. The Dallas, Philadelphia and San Francisco districts noted increased competition
among lenders, leading some banks to offer more attractive terms to borrowers. Most
other districts report little or no change in lending standards, although some report higher
lending rates. For instance, the New York district reports that all of its surveyed banks
have increased their rates charged on commercial and industrial loans. Despite recent
increases in long-term rates, mortgage lending is mixed. New mortgage lending remains
relatively strong in the Dallas, Kansas City and St. Louis districts, but has ebbed in the
Atlanta, New York, Philadelphia and Richmond districts.
Most districts report a
pronounced decline in mortgage refinancing activity. After a strong first quarter, the
Boston district reports that mutual fund sales in the second quarter have slowed
considerably.
Agriculture and Natural Resources
Crop conditions were generally favorable in most areas, with crop development and
planting ahead of schedule. Richmond reports that some recently planted crops may have
suffered from unseasonably warm, dry weather. Likewise, St. Louis reports increasingly
drier conditions, and some insect problems were noted in the wheat and corn crops.
Dallas reports that the winter wheat crop is expected to be off 25 percent from last year
because of adverse weather. Minneapolis and Kansas City report adequate soil moisture
with most crops in good-to-excellent condition. Kansas City reports that the recent drop
in cattle prices produced feedlot losses in excess of $100 per head. As a result, the
Kansas City district expects lower farm income in the livestock sector, although prospects
are substantially more favorable for crop producers.
Recent increases in crude oil prices have spurred slightly higher drilling activity
in the Kansas City district, but little noticeable increase in the Dallas district.
Minneapolis, on the other hand, reports a decrease in petroleum drilling activity in North
Dakota and Montana. The Minneapolis and San Francisco districts reports that lumber
prices have increased, while Minneapolis indicates that recent increases in copper and steel
prices have benefited district producers.
FIRST DISTRICT - BOSTON
Economic activity continues to pick up in the First District.
Among manufacturers, the recovery appears to have broadened
considerably.
Retailers, by contrast, seem to fall into either a high-
growth or a no-growth camp.
While prices charged by manufacturing and
retail contacts are generally holding steady, some materials costs
reportedly are increasing.
Retail
First District retail sales results varied widely in recent
months.
Two discount specialty chains reported increases in sales of
roughly 20 percent in April and May compared to year-earlier levels.
By
contrast, other retail contacts experienced a drop in sales for one or
both months, which they attribute to unseasonably cool weather, rising
interest rates, and a truckers' strike.
Even these retailers, however,
have seen a sharp rise in shopping since the arrival of hot weather just
before Memorial Day, especially for summer goods, such as garden
supplies, patio furniture, and barbecue equipment.
Retail contacts' expectations also vary widely, with a range from
0 to 20 percent in anticipated sales growth over the next six months
compared to a year earlier.
Most contacts report little or no change in
their own or vendor prices, with the exception of increases for wood
products.
Many retailers say they are struggling to maintain gross
margins by cutting operating costs and reducing inventories.
Employment
levels remain flat, but a few contacts plan major capital expansions
this year or next.
I-2
Manufacturing
Overall manufacturing sales growth appears to be accelerating,
according to reports from First District contacts.
Producers of
automotive parts, computer components, and residential construction
materials note double-digit rates of increase from a year ago.
Sales of
industrial machinery and replacement parts are rising strongly, with
some contacts remarking that this phenomenon is relatively new.
Makers
of aircraft parts report scattered increases in demand, while noting
broader signs of weakness in aerospace.
Demand for consumer nondurables
is growing in the low single-digit to low double-digit range.
Contacts
report declining medical equipment and mixed utility equipment sales.
Manufacturers producing consumer nondurables have increased prices
by 2 to 5 percent, but most others report no possibility of raising
prices.
A majority of respondents cite some materials cost increases.
Prices of steel, aluminum, copper, paper, chemicals, and plastics are
reported to be creeping up, although one producer notes that paper
prices remain below their level of a year ago.
Prices of cotton and
flax fibers have risen noticeably since the beginning of the year.
Most contacts do not appear concerned about materials inflation,
in part because some other costs are falling.
One-third of the
respondents report success in negotiating reductions in purchased goods
and services prices.
Half express intentions to continue to prune their
work force or introduce other efficiencies.
Manufacturers generally expect continued growth in the U.S.
economy and their own business.
However, those who depend on consumer
durables spending expect their growth to slow as a result of rising
interest rates.
I-3
Commercial Real Estate
Commercial real estate markets are improving throughout most of
New England, except Connecticut.
Vacancy rates in the Boston area
office market continue to decline, with the conventional wisdom now
suggesting that new office construction will be proposed in Boston
within two or three years.
bility of class A space.
Portland is reported to have limited availaHartford office vacancy rates are increasing.
The nonresidential construction industry is reported to be in
fairly good shape after a hard winter, with one contact reporting that
new business is coming from renovations of existing retail and institutional space.
Margins are up and are expected to continue to rise.
Nonbank Financial Services
Investment management companies report that after a very strong
first quarter, mutual fund sales have slowed considerably in April and
May.
The decrease was primarily in bond funds and was attributed to
rising interest rates.
Sales of equity funds continue to grow, though
more slowly than in the first quarter, with international funds
particularly popular.
Even after the recent slowdown, the investment
companies surveyed plan to increase employment at least 2 to 3 percent
in 1994.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting
group, released its semi-annual regional forecast in mid-May.
NEEP
projects 2 percent growth in total New England employment in 1994.
forces in construction, services, and retail trade are expected to
expand at above-average rates, while manufacturing employment in the
region continues to contract.
Work
SECOND DISTRICT--NEW YORK
The Second District continued its moderate expansion since the last report although
some signs of softness were noted. Unemployment rates fell substantially in May, and
discussions with manufacturing firms suggest a continuing improvement in that sector. Office
leasing activity in Manhattan resulted in lower vacancy rates in both the downtown and
midtown areas. In addition, several recent and upcoming events indicate a pickup in the
District's entertainment and tourist sectors. On the other hand, most District retailers reported
disappointing sales results in May, and though homebuilders were generally positive, a
slowing of traffic was noted in some areas. Officers surveyed at small and midsized banks
reported a recent drop in mortgage loan demand but some strength in the demand for business
loans.
Consumer Spending
Most District retailers reported disappointing sales results in May following April
year-over-year changes that were better than expected at several chains. The slowdown in
May was attributed in part to unseasonably cool weather which dampened interest in summer
apparel. In addition, several contacts noted greater reluctance to spend.
Almost all retailers reported over-the-year sales gains in April despite the fact that
Easter shifted from April in 1993 to this year's March. Sales results generally ranged from
-2 percent to +10 percent with athletic apparel, jewelry, furniture, and electrical appliances
cited as most in demand. With activity slackening in May, several retailers stated that sales
were flat over the year and only one chain had results that were greater than plan. Durable
goods sold more readily than soft goods in May. Inventories were generally at comfortable
levels, aided by greater-than-planned markdowns at some stores. Retailers were hopeful that
the May slowdown will prove to be a short-lived aberration.
Residential Construction and Real Estate
Homebuilders in the District were generally positive about conditions in the market for
new homes though in some areas a slowing of traffic was noted in recent weeks. Higher
II-2
mortgage rates were cited as the reason for this slowing, but observers in other areas stated
that rates were still relatively low and the increases had motivated buyers to act before rates
moved still higher. A majority of respondents expected starts to be somewhat above last
year's level, but this was on the assumption that interest rates would not rise much further.
In New York City, two long-delayed projects are scheduled to get underway in June.
In Queens, ground will be broken for the $2.3 billion Hunters Point riverfront project, under
discussion for some ten years, which when completed is to comprise 15 apartment buildings
and four commercial buildings. In Brooklyn, construction of the first in a group of 126 threefamily homes is to start. The project, initially planned in the 80's, will eventually include
two large retail centers as well.
Office leasing activity in Manhattan during recent weeks resulted in lower vacancy
rates in both the downtown and midtown areas. The midtown vacancy rate on primary
properties is now at its lowest level since the end of 1989, but, on balance, the downtown rate
has shown little overall improvement.
Other Business Activity
As was true nationally, unemployment rates in the District dropped substantially in
May. New York's State's rate fell to 6.5 percent from 8.2 percent in April while New
Jersey's declined to 6.9 percent from 7.2 percent in April. It is possible that the seasonal
adjustment factors for the revised household survey exaggerated New York's improvement.
Nonfarm employment has been growing steadily in New York since last October and rose
strongly in New Jersey during April following a moderate increase in March and a decline in
February. No major new layoffs or expansions were announced lately in the District.
The results of recent discussions held with 25 manufacturing firms suggest a
continuing improvement in the District's manufacturing sector. While a few large firms plan
further employment cuts, most firms anticipate flat or rising employment, increasing unit
sales, wage growth of 2-4 percent, and flat or rising capital spending. Such expectations
contrast sharply with discussions a year ago which were dominated by anticipated sales
II-3
declines, and contracting employment and capital expenditures. Price competition, however,
remains intense. All but one firm expect that unit prices will remain unchanged or decline in
the next six months. A sizable majority anticipate strong gains in exports, well in excess of
the expected growth rates for domestic sales.
Several recent and upcoming events indicate a pickup in the District's entertainment
and tourist sectors. During the 1993-4 season attendance at Broadway theaters reached its
highest level in six years, and hotel occupancy has been steadily rising since last fall in New
York City. Looking ahead, more than one million visitors from all over the world are
expected in late June to attend three World Cup soccer games in East Rutherford, New
Jersey, and to participate in and watch the eight-day Olympic-style Gay Games and Cultural
Festival to be held at numerous locations in the New York metropolitan area. In addition, the
New York Knicks made the NBA finals, and the Rangers won their first Stanley Cup in 54
years--the extra games played in the City aided the region's economy as well as dominated
the headlines.
Financial Developments
Senior loan officers surveyed at small and midsized banks in the District reported a
marked difference in mortgage and business loan demand. There was a pronounced decline
in the residential mortgage and refinancing segments where four-fifths of the officers reported
a decrease. The demand for commercial and industrial loans was stronger, with about a
quarter of loan officers reporting higher demand and fewer than one-sixth, lower demand.
Overall, loan demand was down, and most bankers attributed the decline to higher interest
rates. Without exception, surveyed banks were charging higher rates on commercial and
industrial loans, and almost all reported higher mortgage rates as well.
More than two-thirds of loan officers noted that spreads have widened between their
average lending and deposit rates. Credit standards have generally remained unchanged, and
most officers are as willing to lend now as they were two months ago. Delinquency rates
have been stable.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports
from businesses
in
the Third District
suggest
that economic
activity in the region was increasing modestly in early June.
Manufacturers
indicated that orders and shipments were rising moderately.
Retailers had mixed
results: apparel sales were down from a year ago but sales of home furnishings
were on the rise.
Auto dealers generally indicated that sales were healthy.
Bankers
growth in consumer
said that
lending remained
fairly strong while
commercial and industrial lending was just edging up and real estate lending was
dropping.
Realtors generally reported that the pace of home sales remained good
while demand for office space continued to be weak.
Homebuilders reported that
construction activity has eased recently.
The general outlook among the businesses polled is positive, although
contacts have
trimmed their forecasts
somewhat since earlier in the
year.
Manufacturers anticipate continued improvement, but they do not expect demand for
their products
to grow as
rapidly as
they had forecast this
past winter.
Retailers remain optimistic, but they also have reduced the amount of growth they
are forecasting for the balance of the year.
industrial lending to continue moving up slowly.
Bankers expect commercial and
They expect consumer lending
to expand further, but several bankers said they anticipate some slowing in the
rate of growth. Realtors believe the rate of home sales will remain good unless
mortgage rates begin to climb again, but builders are growing less optimistic
about prospects for construction during the rest of the year.
III-2
MANUFACTURING
Third District manufacturers polled in early June reported that activity
continued to move up at a modest pace. New orders were on the rise at about onequarter of the firms surveyed, and about one-third were stepping up shipments.
However, conditions varied across major goods-producing sectors in the region:
manufacturers of machinery and transportation equipment were experiencing the
largest gains while orders were either just steady or down somewhat at companies
producing primary metals and metal products and at printing plants.
Most local manufacturers were holding inventories steady, although reports
of decreases slightly outnumbered reports of increases.
unchanged, on balance, as was employment.
Delivery times were
Manufacturers continued to report
increases in employment costs, primarily as a result of increased costs for
employee benefits, with relatively smaller increases in wage rates.
Manufacturers' expectations for the balance of the year are positive,
although the level of optimism has edged down a bit since the first quarter.
Just over 40 percent of manufacturers contacted for this report forecast gains
in orders and shipments for the second half, while about 20 percent anticipate
decreases.
area plants
Based on these forecasts of demand, about half of the managers at
intend to hold inventories steady and one-third plan to make
reductions.
Almost two-thirds of the manufacturers contacted for this report said input
prices were steady, although nearly one-third said they were paying more in June
than they had in May for certain raw materials, such as metals and chemicals, and
for electricity and natural gas. Around 80 percent of the firms polled indicated
they were holding the prices of their own products steady, but around 15 percent
were raising prices.
Looking ahead, around half expect both input and output
III-3
prices to remain at current levels, but 40 percent expect both to increase.
RETAIL
Third District retailers gave mixed reports on sales for May and early
Most of those surveyed said apparel sales were off from last year, and
June.
merchants attributed the decline
to unseasonably cool weather that dampened
demand for spring and summer clothes.
supplies were
generally described
as
Sales of home furnishings and building
good.
Several
merchants noted
that
consumers continue to look for price discounts, making markdowns necessary to
maintain sales growth.
With the traditionally slower sales pace of the summer
months approaching, merchants said they are being very cautious in inventory
planning.
Retailers' sales forecasts for the fall are conservative as well.
Auto dealers continued to report year-over-year gains in unit sales for May
and early June.
Some dealers said they are unable to meet demand for a few
popular models, but, in general, dealers said their inventories were adequate and
they had no plans to increase them.
Dealers forecast that unit sales for all of
1994 will be above sales in 1993 by 5 to 10 percent as long as auto loan rates
do not rise from current levels.
FINANCE
Most of the Third District bankers contacted for this report in early June
said trends in lending had changed little from earlier this spring. Overall loan
growth was moderate, with gains resulting mainly from credit card and auto
lending.
Commercial and industrial lending was just edging up, and real estate
lending was
declining.
Bankers generally described
loan pricing for both
business and consumer lending as very competitive, and some expressed concern
that margins were narrowing as loan rates lagged behind increases in funding
costs, despite the recent increase in the prime rate.
III-4
Looking ahead, the bankers surveyed in June generally said they expect
commercial and industrial lending to grow just slightly in the months immediately
ahead. They expect further growth in consumer lending but several mentioned that
the pace may slacken, partly as a result of the
slower growth in consumer
spending that they predict and partly as a result of less aggressive marketing
of consumer loans.
REAL ESTATE AND CONSTRUCTION
Commercial real estate markets remain soft, according to leasing officials,
with the vacancy rate somewhat higher in central Philadelphia than in suburban
areas.
No major office construction projects are expected to be started this
year. Contacts point out that pharmaceutical companies have expansion plans, but
they have put them on hold while new legislation on national health care policy
is debated.
Reports from homebuilders indicated that the pace of housing construction
was slipping in May and June, and some builders said they were operating below
last year's rate.
Conversely, realtors continued to indicate that home sales
were continuing at a healthy pace, especially for low- and mid-priced homes.
However, they caution that home buying will drop if mortgage rates start moving
up again.
FOURTH DISTRICT - CLEVELAND
General Business Conditions
District business conditions remain positive and manufacturing activity is brisk. The
agricultural sector appears to be off to an excellent start this year and increased investment
in farm-related equipment has been noted, although a drier-than-usual spring threatens to
affect crop size. Consumer spending is thought to have cooled some from the strong firstquarter pace, although spending on durable goods is still growing at a substantial rate.
Manufacturing
Manufacturers are reporting similar conditions to those seen here since last fall-orders remain high and generally growing, and orders backlogs have lengthened
somewhat. However, cost pressures are moderate for most materials, including steel
scrap. The industrial employment picture is still somewhat mixed, with only limited signs
of new hires. Hours worked in manufacturing remain at historically high levels.
Many District manufacturers report a modest improvement in foreign orders,
although the domestic economy, led by automobile-related manufacturing, is apparently
providing the primary thrust to the region's industrial sector. Capital goods orders and
shipments are reportedly running 10% or more above year-ago levels, and of these, metalforming equipment is noted to be particularly strong, perhaps because of the rapid
expansion of consumer durable-goods production.
Consumers
While not sounding as optimistic about summer prospects as in their April report,
District retailers appear confident that sales will hold steady over the next few months.
Part of the dampened expectations stems from unseasonably cool weather in May, but
retailers also report a generally more cautious consumer.
Apparel sellers were the least positive of the respondents. Specialty stores are
"struggling" to boost sales with promotions and special pricing, and clothing demand at
department stores has been flat. Colder-than-average temperatures in May account for
some of the slowdown. Cool weather is being blamed for slower-than-desired sales of
seasonal building materials and garden supplies.
However, sellers of appliances and, to a lesser degree, furniture continue to report
a very positive performance. Appliance dealers note that while year-over-year sales at
comparable outlets are not improving at the double-digit rates seen in the first quarter,
high single-digit gains are not uncommon. Sales growth has been broad based, but
demand for computers and related equipment has been especially strong.
Autos
Similar to other District retail numbers, auto spending appears to have shifted to a
slightly slower gear. Although auto sales continue to improve on a year-over-year basis,
the pace has slowed from the first quarter. Dealers blame decreasing consumer
confidence and continuing shortages of some popular models (mostly trucks and sportutility vehicles) for the slowdown. Floor traffic is not quite as strong as earlier in the year,
and demand for higher-priced vehicles and options has diminished somewhat.
In contrast to dealers of domestic nameplate vehicles, Japanese auto dealers report
sufficient stocks of most vehicles. They also note slower sales improvements relative to
U.S. manufacturers.
Although auto lending rates have risen 1/4 to 1/2 percentage point in the past
month or so, area dealers see little direct effect on sales. Some dealers suggest that the
rapidly expanding lease market may have partially insulated consumers from the cost of
higher interest rates.
Banking and Credit
Although lending activity has slowed from its winter peak, major banks in the
District report a steady growth in loans. With the exception of the widely noted falloff in
mortgage refinancing, rising interest rates have not yet appreciably impacted borrowers.
Although automobile loan growth has slowed somewhat, sources conjecture that this may
be due to shortages of certain popular models that have dampened the pace of auto sales.
Business lending is generally growing, with one respondent reporting that activity
is stronger now than six months ago. Inventory financing needs and capital spending plans
that had previously been financed internally lead some observers to anticipate a
continuation of business loan growth. However, a cautionary note was sounded by at least
one respondent, whose institution saw commercial loans dip in May.
On the deposit side, flows of funds into small certificates of deposit and money
market mutual funds appear to have increased substantially, apparently attracted by the
recent rate increases on these instruments.
FIFTH DISTRICT-RICHMOND
Overview
District economic activity increased moderately in May and early June. Tourism was
robust, particularly over the Memorial Day weekend. Manufacturing indicators and retail
sales increased, but service-producing firm activity rose only moderately and trade volume
through District ports changed little. Mortgage lending activity declined although conditions
in commercial real estate and housing improved. Reports indicated scattered labor shortages
and some modest upward pressure on prices. In agriculture, spring planting neared
completion, but some crops experienced heat stress.
Consumer Spending
Respondents to a regular mail survey indicated that District retail activity increased in
May. Retailers reported gains in employment, wages, and sales, including those of big-ticket
items. Other contacts, however, noted that auto sales weakened after April 15. Survey
respondents indicated that retail prices increased 0.4 percent in May and foresaw price
increases of 1.1 percent during the next six months. Looking ahead, retailers expected
demand for their products to strengthen in the coming months.
Manufacturing
A mail survey of District manufacturers showed increased factory activity in May.
Shipments, new orders, and employment were higher in recent weeks. Finished goods prices
increased slightly, and raw materials prices rose by less than the general inflation rate.
V-2
Producers expected no change in employment, a longer average workweek, lower finished
goods inventories, and a slight increase in prices during the next six months.
Service-Producing Sector
District service-producing firms indicated that activity increased moderately in May.
Revenues and wages rose, but employment was steady. Respondents reported a 0.6 percent
increase in the prices of their services. They expected that in the coming months their prices
would rise 1.4 percent and demand for their services would increase.
Tourism
A telephone survey of hotels, motels, and resorts throughout the District indicated
robust tourist activity in recent weeks. Over the Memorial Day weekend, many beach areas
were booked to capacity and several reported record-setting activity. Other tourist areas also
experienced strong increases in bookings, which they attributed to unusually favorable
weather and a surge in group reservations. Based on current bookings, respondents
anticipated that summer tourist activity would far exceed last year's level.
Ports
Representatives at the ports of Baltimore, Charleston, and Hampton Roads (Norfolk)
indicated that the volumes of exports and imports remained about the same in May as in
April. Compared to a year ago, imports were higher and exports were unchanged.
Baltimore and Hampton Roads expected exports to increase faster than imports during the
next six months, but Charleston expected no change in activity.
Finance
District financial institutions indicated that credit conditions were mixed during the
last six weeks. Interest rates rose on both commercial and consumer loans. Consumer loan
V-3
demand remained fairly strong, but commercial loan demand declined slightly. Mortgage
lenders indicated that originations were relatively slow and that refinancing activity virtually
disappeared. Commercial and mortgage loan officers were cautious but optimistic about loan
demand in the months ahead.
Residential Real Estate
According to District contacts, housing sales and building permits were steady in
April and May, but buyer traffic decreased. Homebuilders indicated that they started fewer
houses because of the recent rise in mortgage rates and their uncertainty about future rates.
Home prices remained stable, although lumber prices and construction wages increased.
Some builders reported that non-lumber materials prices also rose, but at a slower pace than
in previous months.
Commercial Real Estate
Commercial real estate improved further in recent weeks, according to industry
analysts. Office building vacancy rates fell in most areas of the District, but were unchanged
in northern Maryland and in West Virginia. Commercial rents were steady, but contacts
expected slight increases in the near future. The availability of large blocks of office space
continued to tighten, particularly around Charlotte and Washington, D.C. Some construction
of office buildings for owner/occupants was underway across the District, but no new
speculative projects were reported. Several contacts indicated that renovations of older office
buildings temporarily lessened the need for new office building construction in their areas.
Large discount retailers continued to expand in North Carolina, Virginia, and West Virginia,
and demand for warehouse space remained strong in northern Maryland and in Greenville,
S.C.
V-4
State Revenues
State government tax revenues continued to grow at healthy rates in most areas of the
District. Based on May sales tax receipts, state forecasters indicated that retail sales ranged
from "good" in Maryland to "booming" in North Carolina. Analysts suggested that overall
revenue collections were consistent with real economic growth rates of 2.5 to 3.5 percent,
except in the District of Columbia, where revenue growth was just keeping pace with
inflation.
Agriculture
Unseasonably warm, dry weather in recent weeks aided farmers' planting and
harvesting activity but stressed some recently planted crops. District planting activity was
ahead of its normal pace, as was the harvesting of wheat and other small grains in the
Carolinas. Early yields indicated that the small grain crop had not been substantially
damaged by the severe cold of last winter. Inadequate soil moisture in many areas of the
District, however, hampered the development of corn, soybeans, and peanuts. In West
Virginia, the peach crop was in poor condition as a result of damage to orchards from last
winter's ice storms.
VI-1
SIXTH DISTRICT - ATLANTA
Overview: According to business contacts, the Southeast economy continued to expand
through May and early June, but at a more subdued pace than earlier in the year. Most retailers
reported an unseasonably large drop in May sales, although some noted a rebound in consumer
spending in the first week of June. Auto dealers also noted a slowdown in sales in May. While
home sales slowed modestly in the last month, contractors report that single-family home building
remains brisk. Multifamily and commercial real estate markets continue to improve, with several
new apartment and commercial developments being announced in the last month.
Bankers,
however, generally report that business and consumer loan demand was flat in May. Wages and
prices were reported to be stable for the most part, although several manufacturers said that they
have begun to pay higher prices for raw materials.
Consumer Spending:
After posting strong gains in the first quarter, retailers
throughout the District reported disappointing sales in late April and May.
However, most
contacts noted an upturn over the Memorial Day weekend and stronger sales in the first week
of June. Women's apparel sales, which had improved earlier this year, softened in May, and
sales of men's and children's apparel also slowed. As a result, several retailers reported that
they have had some unintended inventory accumulation. According to contacts, pricing at both
the wholesale and retail level remains very competitive, with several merchants reporting deep
discounting.
Although retailers generally have revised downward their projections for sales
through the summer and early fall, many remain hopeful that back-to-school shopping will be
relatively strong this year.
Manufacturing:
According to factory contracts, industrial production rebounded
slightly in May after slowing modestly in April. Suppliers of building materials continue to
report increases in production and new orders, although rising interest rates have led some
VI-2
producers to adjust downward their long-term demand projections. Suppliers to the auto industry
continue to receive a steady stream of new orders, and several firms reported that they have
begun to invest in new plant and equipment in order to meet expected future increases in
demand. Producers of industrial equipment and machinery noted that they have extended their
average workweeks to meet recent increases in the volume of new orders. District carpet
producers report that order backlogs have risen, while strong demand for bedding and healthcare
textiles reportedly has stimulated new hiring at several firms in this industry. On a less positive
note, NASA and Defense Department budget cuts continue to produce layoffs at regional
aerospace and defense electronics firms, particularly in Florida and Alabama.
Tourism: Reports from tourism industry contacts were mixed in May. In Florida,
contacts said that tourism has been flat in key market areas, largely because of competition from
other vacation destinations and negative publicity about crime. Convention business in the state,
however, has been better than anticipated, and is expected to remain good through the end of the
year. Similarly, convention business in New Orleans and Atlanta has been unexpectedly strong
this year. Casino gambling along Mississippi's Gulf coast continues to draw large numbers of
visitors to the area. Tourism in the state of Alabama also was reported to be up significantly
over year-ago levels.
Construction: According to District realtors, May home sales were down slightly
compared with last year's relatively strong levels. Although they said that rising mortgage rates
initially stimulated an increase in home buying from "fence sitters" pushed into the market, more
recently they have begun to put a brake on single-family home sales. Nevertheless, most contacts
continue to characterize current sales levels as very good. Mid-priced homes have replaced
starter homes as the most popular sellers, while sales of luxury homes also have improved.
Although District building contractors have noted a decrease in traffic through new subdivisions,
VI-3
the pace of new home construction remains brisk. The rising cost of home building materials
continues to push new home prices higher, but most realtors and builders remain optimistic that
new and existing homes will continue to sell well into the fall.
Contacts in commercial and multifamily real estate markets report sustained
improvement in these sectors. Multifamily occupancy rates continue to rise, and rental rates also
have been increasing. New apartment developments have been announced recently in many areas
of the District. Commercial real estate agents report that falling vacancy rates and rising rental
rates have led to the possibility that some speculative building may occur within the next year.
Currently, most construction continues to be build-to-suit and public buildings, although the
number of these projects has increased in the last few months.
Financial Services: According to District bankers, overall loan demand remains flat
in the Southeast. While some reported that business loan demand improved slightly in May,
others noted that consumer lending, particularly auto loans, had weakened. Residential mortgage
refinancings have dried up completely, while mortgages for home purchases were down slightly
compared with month-ago levels.
Wages and Prices: Reports of increasing wage pressures continue to be limited to
those areas where skilled construction workers are in great demand.
Although some
manufacturing contacts have reported price increases for raw materials, competitive market forces
have made it difficult for firms to pass these costs on in terms of higher prices for finished
goods.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. Seventh District economic growth slowed during the second quarter, as both
consumer spending growth and manufacturing activity moderated. Light vehicle production declined on
a seasonally adjusted basis in recent months, and preliminary schedules show flat to slightly declining
output in the third quarter. District payroll employment has grown more closely in line with the national
average during 1994, but household survey data and help-wanted advertising indicate that labor markets
in the region remain tighter than for the nation as a whole. The consensus forecast of 30 Midwest
economists prepared for an auto industry outlook conference called for moderate GDP growth to continue
during 1994 and 1995.
Manufacturing. District manufacturing activity generally remained quite vigorous in recent
months, with purchasing managers' surveys depicting slower but still-strong growth through May. The
composite index of production components of purchasing managers' surveys in Chicago, Detroit and
Milwaukee declined from 75.0 percent in April to 70.6 percent in May. The May level was still
consistent with moderate-to-robust expansion in manufacturing activity, however, and this indicator
remained well above the national average. The Chicago production index climbed to 76.5 percent in
April -- nearly its highest level since 1970 -- but then fell back slightly during May. A larger drop was
registered in the Detroit index during May, however, consistent with the slower momentum seen in auto
industry output. A large utility reported that growth in power sales to industrial customers in Michigan
eased during early June, after outpacing total sales through most of 1994.
Among key industries, District steel production rose on a seasonally adjusted basis in April and
May, climbing to its highest level for May since 1989. Output is expected to slow somewhat in coming
months, however, partly because some large integrated mills are bringing production facilities down for
necessary maintenance and repair. Third quarter production is still "sold out," with continued strength in
orders from the motor vehicle, appliance, farm machinery, and construction equipment industries.
Reports from manufacturers of farm machinery and construction equipment remained upbeat. Production
and retail sales of heavy-duty trucks continued to climb in recent months, although current schedules
imply a small decline in output in the third quarter. An industry analyst stated that any output gain in the
latter half of the year is not likely to be significant, given current capacity levels, but order backlogs are
still believed to be of high quality, and the order cancellation rate remains below year-earlier levels and
well within historical norms.
VII-2
Consumer Spending. Surveys and reports from large retail chains suggest that retail sales
growth moderated (on a year-over-year basis) during April and May. An index of same-store sales
growth constructed by a check authorization firm showed a declining rate of growth in retail sales in the
Midwest during April and May. A survey of a large number of retail locations in Illinois and Indiana
showed sales growth moderating in April, except for hardware and other housing-related outlets, where
sales growth remained relatively strong. A survey of shopping centers also pointed to a slower sales
growth during April. While the April slowing has been partly attributed to the early Easter holiday this
year, reports from a number of retail chains as well as a group of single store owners suggested sales
growth remained sluggish during May. One large retail chain reported that modest growth was little
changed during May and early June, and this contact stressed that competitive pressures on price and
margins continue to intensify in most of its market areas.
Autos. District light vehicle output has increased slightly more than the national average during
1994, but assemblies declined on a seasonally adjusted basis in recent months, and preliminary schedules
show little sign of any substantial rebound during the third quarter. Reports from large automakers and a
small sample of large auto dealerships suggested that vehicle sales have also slowed in recent months,
partly due to capacity constraints in production of some popular models. One large automaker stated that
"we can no longer confirm that the market is red-hot." Higher interest rates have increased vehicle
financing costs and dealer floor planning expenses, curtailing some sales gains. Another large automaker
reported that dealer showroom traffic flattened out in March and April, while sales closures rates declined
slightly. Reports from a small sample of large auto dealers were mixed but still suggestive of slower
sales, with most of them indicating that increased interest rates have cut into sales gains.
The recent slowdown in auto industry momentum is coming from high sales levels, however, and
most industry contacts expressed optimism about renewed growth in the latter half of the year. Some
industry analysts have expressed concern that a surge in cars coming off lease could curb new car sales
during 1994 and into 1995, much like the bubble of "nearly new" cars that arose after the acceleration in
deliveries to captive rental car fleets in the early 1990s. A large automaker emphasized that it has
planned its leasing promotions to avoid a serious problem in this area. No car dealers expressed concern
about the phenomenon, with one noting that "the average person holds on to a new car for three years, if
they buy it or if they lease it. We don't see this being a very big deal." Another dealer expected the
increased share of leasing to promote new car sales by encouraging people to buy new cars more often.
Asked what happened when 2-3 year old cars started coming back into the dealership, this contact stated
VII-3
"we can't buy enough 2-3 year old cars as it is." An automobile dealers' association reported that its
measure of dealer optimism rose to an all-time high in April. A large automaker stated that pent-up
demand for motor vehicles remains substantial and should provide a strong base for growth over the
balance of 1994 and into 1995.
Employment. District labor markets continued to strengthen in April and May. A survey of
employer hiring plans conducted by a large personnel services firm showed a slight decline (to still-high
levels) in the majority of Midwest employers planning to add to their workforce next quarter. Hiring
plans among durable goods manufacturers continued to top the list of 10 industrial categories within the
region, and remained significantly stronger than their national counterparts. Purchasing managers
surveys generally confirmed the upward momentum in District manufacturing employment during May.
Reports from a number of retailers and manufacturers pointed to shortages of workers in lower-wage
level positions, adding to wage pressures in this area.
Growth in total payroll employment in the District has fallen in line with the national average
during 1994, but help-wanted advertising and unemployment rate estimates point to relatively tight labor
markets in the region. For example, among the 11 large states for which the Bureau of Labor Statistics
computes direct unemployment rate estimates, Michigan and Illinois had the second and third lowest
unemployment rates, respectively, during May, while the unemployment rate in Michigan has fallen to a
20-year low during 1994. The unemployment rates for Indiana, Iowa and Wisconsin are below those for
Illinois and Michigan, and the gap between the District unemployment rate and the national average
continued to widen in the District's favor this year.
Outlook Conference. The Federal Reserve Bank of Chicago's annual Auto Outlook Conference
was held in early June. The consensus GDP forecast of 30 economists from around the District that was
prepared for the meeting called for a 3.6 percent increase in real GDP in 1994. While a significant
improvement from the forecast prepared in December 1993, the growth rate implied by the latest forecast
over the balance of 1994 was unchanged from the pace expected last December for 1994 as a whole. The
consensus called for car and light truck sales in 1994 to total 15.4 million units, up from 13.9 million
units in 1993, while a smaller gain was anticipated for 1995. Presentations by auto industry
representatives were largely upbeat about the underlying upward momentum in the marketplace, although
several expressed a note of caution about recent sales trends. Competitive price and market pressures
continue to concern many industry suppliers.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
District economic activity continues to expand vigorously as contacts report growth
in both employment and sales. Defense-related firms, though, reported some layoffs.
Contacts also report minimal cost pressures and see future price increases as unlikely.
Retailers and auto dealers report generally brisk sales and are optimistic about the second
half of the year. While recent increases in long-term interest rates have slowed residential
construction activity somewhat, they have not had much effect on home sales, which
remain robust. Consumer and business loan demand continues to rise at District banks.
Favorable crop conditions are reported in most areas of the District.
Manufacturing and Other Business Activity
District firms report strong growth, citing plant expansions and sales increases.
In some places, particularly in St. Louis, contacts are beginning to report shortages of
available workers, forcing some to offer higher wages. This shortage is reflected in St.
Louis' low April unemployment rate, 4.8 percent, its lowest since July 1979. One contact
said that his firm had trouble retaining newly hired employees.
Growth is occurring in both manufacturing and nonmanufacturing firms in all parts
of the District.
For example, two poultry processors report new plants opening in
Kentucky, one initially bringing 850 jobs, and the other bringing 1,300. An apparel maker
will also move to Kentucky and employ 600 by year's end. Contacts in western Tennessee
report the opening of a new auto parts plant, employing 500 workers, and the expansion
of a paper factory, adding 200 workers.
A greeting card company, expanding into
northeast Arkansas, will employ 250 workers. Because of a new contract, a St. Louis
corporate services firm hired an additional 400 workers. A heavy equipment dealer says
demand has outpaced supply, creating severe shortages but leading to sales increases of
more than 20 percent over last year. Other contacts also report sales increases over last
VIII-2
year and expectations that this will continue at least through next quarter. For example,
a building supplies company and a pallet manufacturer both report sales increases of 15
percent, while a die casting company's sales grew 10 percent.
Domestic markets remain strong for most products, particularly animal feed,
although some slowdowns in the hospitality and metal plate products industries were noted.
Reports about foreign markets vary with company and destination. Most say that overall
exports are weak with only the Pacific Rim countries as a source of rising demand.
Most reports of layoffs in the District are defense-related. An army base reports
it will lay off about 250 civilian employees by the end of September because of
restructuring within the military. An electronics company producing engines and other
parts for defense aircraft laid off 100 white-collar employees because of spending cuts, and
a missile producer will eliminate about 240 positions because of scheduled production
decreases. Separately, the catfish industry reports that nationwide shortages of catfish are
causing firms to release workers. One firm laid off its entire night shift of 295 people.
Most discussions with area business people suggest that cost pressures are minimal.
In general, the largest average reported increase was about 3 percent. Many of these
contacts state that increased foreign competition prevents them from increasing prices on
their products.
Some even stipulated that when presented with opportunities to raise
prices, they decided not to. In addition, some claim they can now find their raw materials
overseas when there is a shortage domestically, which helps to keep prices down. The
consensus among contacts was that District wage increases are running between less than
1 percent and 3 percent.
Consumer Spending
Retailers throughout the District report moderate to strong sales in recent months,
with some contacts reporting increases as large as 25 percent over one year ago. Most
contacts report that recent sales have met or exceeded their expectations, and most are
optimistic about the second half of 1994. Auto dealers also report strong sales, and most
VIII-3
expect sales growth at or above its current pace over the remainder of 1994. Rising
interest rates have had a minimal effect on sales thus far. Truck and sport utility vehicle
sales are particularly strong. In addition, sales of imports have picked up some of the
momentum they had lost in recent years.
Construction and Real Estate
Though residential construction activity remains brisk in most parts of the District,
some areas are reporting a slowdown, which contacts attribute to recent increases in
mortgage rates. Still, the single-family housing market can be characterized as strong,
with sales of new and existing homes at or above last year's pace. A shortage of homes
for sale, rising prices and quick turnaround are reported in many areas. Some areas also
report a shortage of skilled tradesmen for construction jobs, which is further adding to
backlogs previously built up because of weather delays and strong demand.
Banking and Finance
District bankers report continuing improvement in consumer and commercial loan
demand. While refinancing activity has come to a standstill, mortgage lending is still
relatively strong, with consumers increasingly showing a preference for adjustable-rate
mortgages. Commercial loan demand from small businesses is especially strong. Some
bankers report that deposit growth is not keeping pace with loan demand growth, which
is increasing funding costs.
Agriculture and Natural Resources
Crops appear to be in mostly fair-to-good condition across the District. In parts
of Illinois and Missouri, however, an outbreak of insects has affected the wheat crop, and
in parts of Arkansas the cotton crop has suffered some herbicide damage. Moreover,
some contacts report a significant upsurge of European corn borer activity in parts of the
Midwest.
In general, soil moisture seems adequate, although drier conditions are
becoming increasingly prevalent in many areas.
IX-1
NINTH DISTRICT--MINNEAPOLIS
Strong growth is evident in the Ninth Federal Reserve District. Automobile sales are booming,
general merchandise sales continue to increase, and summer tourism appears off to a strong
start. Both commercial and residential construction remain strong. Manufacturing output
apparently continues to grow. Iron ore shipments are up, and prospects for other metal mining
have improved. Crops are in excellent condition across most of the district, while livestock
numbers remain high. Employment levels continue about 2 percent to 3 percent above yearearlier levels, while unemployment rates have dropped from one-half to one full percentage
point in the same period. Despite this strong growth, there is little evidence of significant
upward movement in wages or prices. Employers in certain areas continue to report problems
in securing qualified new employees, some manufacturers report difficulty in obtaining steel,
and price increases are reported for industrial metals.
Consumer spending and tourism
A North Dakota auto dealer's comment, "My inventory has never been so low,"
characterizes the strong pace of vehicle sales across the district. Dealers' association
spokespersons echo this sentiment and note that some popular models are in very short supply.
General merchandise sales continue to strengthen. "Traffic has been very good," reports a
North Dakota mall manager. Another mall manager in North Dakota commented that sales of
appliances and electronics seemed particularly strong but that virtually all stores in his facility
had good business. Regional department store chains also report very good sales, and a
Minneapolis Fed poll of district business leaders disclosed that nearly half expected consumer
spending to be up in coming months. Only 4 percent expected it to drop.
The 1994 tourist season is apparently off to a strong start. Visits at several South Dakota
sites since January 1 were up as much as 19 percent over year-earlier levels and tourism
officials in that state predict an excellent season. Their counterparts in Minnesota and Montana
express similar optimism.
IX-2
Construction
Residential and commercial construction continues strong in all states of the Ninth District.
New housing permits in Minnesota for April were 13 percent above 1993 levels, which already
reflected a fast-pace. Virtually all of the increase over 1993 was in multifamily construction.
In the rest of the district, residential construction reportedly is active in most regional centers,
including Sioux Falls and Rapid City, S.D.; Billings, Bozeman and Missoula, Mont.; Grand
Forks and Fargo, N.D.; and LaCrosse and Eau Claire, Wis.
The strong pace of commercial and heavy construction set last year continues in the 1994
season. In Minnesota and the Dakotas, contracts through April were down about 1 percent
from 1993's very active levels but still 22 percent above 1992.
Strength in this sector is indicated in April construction employment, which is up nearly 6
percent in Minnesota, 7 percent in South Dakota, 16 percent in North Dakota and 18 percent in
Montana compared to year-earlier figures.
Manufacturing and natural resource industries
District directors note growing business for manufacturers. One reported that a small plastic
components producer was running three shifts seven days a week. Electricity sales to industry
by one large Minnesota and South Dakota utility is growing at twice the five-year trend rate.
Some of the increase is attributable to a major expansion at a petroleum refinery, but sales to
machinery manufacturers increased at nearly three times the overall trend.
There are some positive notes in natural resource industries. Copper prices have increased
over 25 percent in recent weeks, allaying fears of possible mine closings. Strong demand from
the steel industry has buttressed iron ore shipments from Lake Superior ports. And substantial
new drilling for gas is under way in Montana. However, petroleum production continues to
drop in North Dakota and Montana.
IX-3
Agriculture
In spite of localized problems with hail and topsoil dryness, 1994 crops are reported good or
excellent in virtually all farming areas. Moisture levels are adequate in most areas, and very
little land in the Ninth District suffers any of the lasting damage from the 1993 floods that is
reported in downstream states. Development of all major crops was generally equal to or ahead
of five-year averages in all district states. Yields on the first cutting of hay in Minnesota and
Wisconsin are reportedly down slightly from 1993 but quality is excellent.
In the livestock sector both cattle and hog numbers remain high in comparison to historic
levels. Hog slaughter levels are largely unchanged in spite of sharp price declines in recent
weeks. Cattle slaughter is down slightly from year-earlier figures, but industry observers
continue to expect hog and cattle numbers to grow modestly through the rest of the year.
Employment, wages and prices
Strength in the Ninth District economy is demonstrated in tightening labor markets.
Employment shows increasing growth. April non-farm employment numbers across the
district are 2 percent to 3 percent above year-earlier levels. Unemployment rates have dropped
from April 1993 levels in all areas of the district. Drops range from 0.6 percent in the Dakotas
to 1.1 percent in Minnesota. Excepting Montana and Michigan's Upper Peninsula,
unemployment levels throughout the Ninth District are about two points below the national
average. Directors and other sources report that many firms have difficulty in attracting
qualified new hires, but wage increases remain modest. One Minnesota computer
manufacturer did announce a 200-worker reduction, largely through early retirements, and the
reassignment of an additional 300 workers in a cost reduction move.
Despite indications of strong economic growth there is little evidence of generally
increasing prices. However, raw materials are one area with some evidence of price pressures.
Prices of steel, copper and aluminum have increased and several firms report delays in securing
steel, particularly in specialty grades. Wood particle board for manufacturing remains difficult
to procure. Lumber prices remain higher than a year ago. Petroleum fuels, however, continue
3 to 10 cents per gallon below early 1993 levels.
X-1
TENTH DISTRICT - KANSAS CITY
Overview.
pace.
The Tenth District economy continues to grow at a healthy
Retail sales are increasing and manufacturers are operating at high
levels of capacity use.
While sales of new homes are showing signs of
slowing, residential construction remains on the increase.
In the farm
sector, weak cattle prices are bringing steep losses to the cattle industry
but conditions for crop producers are favorable.
District energy activity is
generally sluggish although firmer oil prices are beginning to spur drilling
activity in some areas.
Retail prices remain stable, while manufacturers'
input prices are increasing modestly.
Retail Sales.
Most district retailers report moderate sales increases
led by strong apparel sales relative to both a year ago and the past month.
Retail sales are expected to increase in the next few months.
Competition
continues to keep retail prices stable and is expected to preclude any
significant price increases in the near term.
Most retailers are satisfied
with current inventory levels, although some respondents expect to increase
inventory purchases in response to rising demand.
Auto dealers generally report sales increases from last month.
Dealers
are optimistic that sales will continue to grow over the next few months and
thus are expanding or maintaining inventories.
A few respondents report
difficulty in obtaining enough new cars from manufacturers to meet their
demand.
Financing is available for both dealers and potential buyers.
Manufacturing.
Most purchasing agents report input prices are modestly
higher than a year ago, but few expect further price increases in the near
term.
Some agents report longer lead times and difficulties in getting
materials.
Most respondents are boosting inventory levels but expect a
X-2
reduction in the coming months due to increased sales.
operating at high levels of capacity use.
Firms are generally
Some firms are experiencing
bottlenecks due to shortages of skilled labor.
Export sales have been stable
and are expected to remain so in the next few months.
Energy.
District energy activity remained sluggish in May restrained by
a further dip in natural gas prices.
The average number of drilling rigs in
the district fell to 207 in May from 213 in April.
However, steady increases
in crude oil prices are beginning to boost district drilling activity.
For
the first week of June, the district's rig count stood at 225.
Housing.
Housing starts increased over the past month and remain higher
than a year ago.
Single-family homes accounted for most of this increase.
For the remainder of the year, builders generally expect starts to level off.
Sales of new homes are slowing, but builders continue to report tight
inventories.
Prices of building materials remain high.
All respondents
report problems with cement availability.
The demand for mortgage funds continues to subside with increasing
mortgage rates.
However, most respondents expect rates to level off and the
demand for mortgage funds to remain stable or increase slightly.
Banking.
Loan demand rose last month at almost all reporting banks.
Most banks reported higher demand for commercial and industrial loans,
consumer loans, home mortgages, and residential construction loans.
Demand
was flat to up for commercial real estate loans and mixed for home equity and
agricultural loans.
Loan-deposit ratios were up from the previous month.
About equal numbers of banks reported that security investments were up, down,
and unchanged.
X-3
All respondents raised their prime rate last month and almost all expect
to leave the rate unchanged in the near term.
Banks also raised their
consumer lending rates last month, although most banks anticipate no further
change in the near future.
Lending standards were unchanged.
About half of the banks reported no change in deposit levels last month,
while the other half were divided between increases and decreases.
Changes in
deposits were mixed in all deposit categories.
Agriculture.
Recent rainfall has improved prospects for district crops.
The winter wheat crop is generally in fair condition and normal yields are
expected throughout most of the district.
swing by late June.
The wheat harvest should be in full
The corn and soybean crops are in excellent condition due
to favorable weather and adequate soil moisture.
With crop inventories
unusually lean, prices are likely to remain volatile as crop prospects shift
during the growing season.
An abundance of market-ready cattle and large supplies of competing
meats have pushed fed-cattle prices to the lowest level in nearly three years.
As a result, losses in many district feedlots exceed $100 per head.
Little
recovery in cattle prices is expected until autumn, pointing to further losses
for the district's most important agricultural enterprise.
Farm income prospects for 1994 diverge widely by type of farming due to
the bleak outlook for the district cattle industry and a more favorable crop
outlook.
Most district bankers expect a sharp downturn in incomes among
district cattle producers.
But higher crop prices and a rebound in crop
production after last year's weather-induced losses are expected to boost
incomes for district crop producers.
ELEVENTH DISTRICT--DALLAS
The rate of economic growth appeared to be unchanged in May and early
June. Demand remained moderately strong in many industries, and most contacts
did not expect a change in the rate of growth of economic activity through the
end of the year. Manufacturing orders were steady, and demand for business
services remained moderate. However, retail sales growth was reported to be
sluggish and below expectations, particularly for apparel. Although
construction and real estate activity continued at fairly high levels,
softness in the homebuilding industry has begun to appear. Energy production,
drilling and services continued to rise at a moderate pace, but did not
accelerate with higher oil prices. District bankers said that loan demand had
increased strongly, but competition for loans was intense. Planting and crop
growth was generally on schedule, but weather damage affected some areas.
Manufacturing orders were steady. Demand for construction-related
materials remained strong, with brick, cement and glass producers reporting
higher demand and prices. Brick and cement producers were operating at 100
percent capacity, and said that they were having trouble filling orders.
Several non construction-related manufacturers expect demand growth in 1994 to
be good but lower than in 1993. Demand continued to be strong for electrical
and electronic machinery, particularly telecommunications products. Selling
prices of semiconductors stopped declining, and demand decelerated slightly as
manufacturers had expected. Although orders for primary and fabricated metals
remained strong, contacts said that steel and scrap metal prices had fallen.
Sales of lumber and wood products were steady to slightly higher but below
this time last year. Demand for paper products was up, and contacts reported
that they had increased their prices slightly. Apparel producers said that
sales were steady or slightly higher. Garment contacts were mixed about
upcoming changes in the industry resulting from NAFTA. Some contacts have
found entering the Mexican market to be harder than they expected but believe
that Mexico will be a source of future sales. One contact is concerned that
XI-2
increased demand for labor in Mexico will raise the firm's production costs
there. Sales of food and kindred products were down slightly. Demand for
drilling services and machinery was steady for natural gas but down slightly
for oil. Foreign demand for services and equipment remained sluggish,
especially from the Middle East and Nigeria. However, sales had increased to
Latin America, particularly Venezuela after privatization of its oil industry.
The arrival of the summer driving season increased demand for gasoline, but
higher crude oil prices squeezed refinery profits. Demand for chemicals
continued to increase, and prices rose 10-15 percent for some products. Sales
were strongest for the styrene chain, especially polystyrene, and went up for
ethylene and polyethylene as well. Chemical sales to Europe increased
strongly, but Asian markets generally remained weak.
Most business service firms reported steady demand. Activity at
temporary service firms remained unchanged overall with higher demand from
electronics and telecommunications firms. Law firms said that activity was
slightly higher, and they were trying to do more work without hiring. Demand
for advertising and communications had declined. Hotels reported increased
bookings but fewer than they had expected for the World Cup. Airlines noted
slower passenger demand than expected, although traffic was above a year ago.
Air, rail and trucking cargo continued to increase strongly. Competition and
lower fuel prices kept transportation prices unchanged despite higher demand.
Many contacts reported that May retail sales growth was slower than
expected. Sales picked up slightly in early June leading retailers to be
cautiously optimistic that sales growth would continue. Demand for apparel
products remained weak, while sales of building and home improvement products
were strong. Some national contacts reported that Texas retail sales growth
was slower than the rest of the nation's with particular weakness along the
Texas-Mexico border. Competition was keeping selling prices below last year's
levels, and contacts said that they were purchasing fall merchandise at the
same price or slightly higher than in 1993. Automobile sales were sluggish in
May but picked up in early June. Still, dealers reported that they would like
XI-3
to increase their inventories of some vehicles. Auto prices were stable.
Construction and real estate markets remained fairly strong, but
homebuilders reported a slowdown in new home sales and traffic. Although
contacts were optimistic about the outlook for the rest of the year, home
prices have generally flattened, and some builders reduced their prices.
Apartment markets, however, remained tight and occupancy rates and rents moved
higher. A pickup in demand for office and industrial space boosted commercial
construction. Prices and rents increased for office and industrial property.
Energy production and drilling continued at a moderate pace but did not
accelerate with higher oil prices. Oil prices rose to $18 per barrel in midMay from a low of $14 in March. Natural gas prices fell briefly in May
encouraging distribution companies to make major injections into storage tanks
that had been depleted by winter's cold weather. Drilling had not staged its
normal seasonal turnaround, but the rig count remained well ahead of last
year. Most drilling continued to be for natural gas and in the Gulf of Mexico.
District bankers said that although loan demand continued to increase
strongly, competition for loans was intense. Contacts said that some banks
were loosening their credit standards to extend business loans. Bankers
complained that regulations, such as mandatory appraisals, were making it
difficult for them to compete with mortgage bankers and other lenders. Home
mortgage refinancing had fallen dramatically, but originations for home
purchase had not.
Planting and crop growth was on schedule, but unfavorable weather
weakened some agricultural production. Heavy rain prevented some cotton
producers from planting their crop, although planted cotton was in good
condition. Dry conditions had stressed ranges in the Trans-Pecos and South
Texas, but livestock remained in fair to good condition. Texas farmers expect
to harvest about 25 percent less wheat than last year because the crop was
damaged by dry weather and a hard freeze earlier in the year. The Texas May
All Crops Price Index was 7.2 percent above 1993's level, while the Livestock
and Livestock Products Price Index declined 10.6 percent from last year.
XII-1
TWELFTH DISTRICT -- SAN FRANCISCO
Summary
While economic conditions are reported to be improving slowly in California and
Hawaii, activity is strong in most other parts of the Twelfth District. Business leaders remain
optimistic overall. Retail sales and tourism continue strong in many areas of the District.
Manufacturing activity still is mixed, as weakness is reported in the aerospace industry while
improvement is expected by some Silicon Valley firms. Livestock and dairy prices are soft.
Construction and real estate activity generally remains strong, although home sales in some
parts of the District are reported to have slowed in May in response to higher interest rates.
Lending activity is rising, and banks are reported to be more aggressive in pursuing loans.
Business Sentiment
Twelfth District business leaders remain optimistic. Almost two-thirds of respondents
continue to expect national growth to exceed 2 1/2 percent during the next four quarters.
Respondents in Arizona and the intermountain states expect especially strong growth in their
regions. However, only about two-fifths of business leaders now expect housing starts to
improve during the next four quarters, down from more than one-half in April. Less than a
third of respondents now expect the inflation rate to rise during the next four quarters,
compared with over one-half in April.
Retail Trade and Services
Retail and service industry conditions remain strong in most parts of the District.
Consumer durable sales are reported to be especially strong, with only a little evidence of
slowing in response to higher interest rates. Prices for food and clothing show little increase.
XII - 2
Auto sales in Idaho are reported up 25 percent in the first quarter of 1994 from the level of a
year earlier, although sales in May slowed somewhat. Auto and light truck sales in the
Pacific Northwest are reported strong, and sales are improving in parts of California.
In
Arizona, furniture and building materials sales through April are reported to be increasing at
double-digit annual rates. Retail sales are reported to have picked up in California, especially
for replacement furniture and appliances in the areas affected by the Northridge earthquake.
Tourism is strong in many parts of the District. Strong gains are reported in eastern
Oregon. The Portland airport reports a 16 percent increase in passenger traffic in the first
four months of the year from a year earlier. Tourism is reported to be rebounding in Hawaii,
giving a boost to retail sales.
The demand for telecommunication services in California is reported to be
strengthening slowly. Cellular subscriptions in the Pacific Northwest are reported to be
increasing at a substantially accelerated pace. In Idaho, computer programmers are earning
higher wages as the growth in demand outstrips the increase in supply.
Manufacturing
District manufacturing activity is reported mixed. Commercial aircraft activity in the
District is reported stable as manufacturers await the certification of Boeing's new 777. One
aircraft parts supplier noted a pickup in sales to Sweden, Indonesia, and Brazil. Defenserelated aerospace industries remain weak in Southern California. In Silicon Valley, the
demand for executives with marketing skills is reported to be increasing as companies begin
to position themselves for future growth.
XII -3
Agriculture and Resource-Related Industries
Agricultural conditions generally are good. Prices are high for field crops, like wheat,
cotton, and rice, as well as for vegetables, including tomatoes, beans, and peas. Lower prices
are expected for almonds, walnuts, and peaches. Milk prices are expected to fall sharply by
July. High cattle inventories have pushed beef prices below production costs in some areas.
Oil prices have risen, but remain relatively low. The proposal to allow Alaskan crude
oil to be exported may improve prices for oil producers in California's Central Valley by
reducing supplies on the West Coast. Lumber and plywood prices are reported to be firming
after falling between December 1993 and mid-May. Electricity prices in the Pacific
Northwest are reported lower because of the additional water being spilled over the dams in
the area to help the salmon run.
Real Estate and Construction
Real estate markets generally remain strong, but residential activity in many parts of
the District slowed somewhat in May in response to rising interest rates. Home sales are
reported to have slowed recently from the strong pace of March and April in the Pacific
Northwest, parts of Northern California, and parts of Arizona, although the Tucson market
remains strong. Sales in the intermountain states remain brisk, and May home sales in
Hawaii are reported up 31 percent from April and up 67 percent from a year earlier. Home
prices are reported up in the Pacific Northwest, Arizona, and in the intermountain states, and
prices have stabilized in California's Central Valley.
In Washington, office vacancy rates
have fallen and rents are up. In San Francisco, vacancy rates remain high and rents are below
the costs of maintaining the buildings in some instances.
XII - 4
Construction activity remains strong in many parts of the District. In Arizona and the
intermountain states, both residential and commercial building is reported strong, with
shortages of construction materials and skilled labor reported in these areas. Residential
construction is reported flat in Northern California, improving in Southern California, and
down from earlier levels in the Central Valley. In Salt Lake City, the airport is expanding
and several new hotels are under construction. Interest rate increases are reported to have
slowed the development of affordable housing in Southern California.
Financial Institutions
Banks in the District are reported to be pursuing loans more aggressively by easing
lending criteria and offering more attractive terms. Loan demand remains strong in Idaho and
Utah. In Arizona, loan demand is reported to be increasing, especially for consumer credit.
In California, loan demand generally remains weak, but some strengthening is noted in
Northern California and in business lending in Southern California. Loan demand also is
reported to be showing signs of life in Hawaii, but delinquencies remain high. Throughout
the District, interest rate increases are reported to have put an end to the refinancing boom.
Cite this document
Federal Reserve (1994, July 5). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19940706
@misc{wtfs_beige_book_19940706,
author = {Federal Reserve},
title = {Beige Book},
year = {1994},
month = {Jul},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19940706},
note = {Retrieved via When the Fed Speaks corpus}
}