Beige Book
For use at Noon, E.S.T.
Wednesday
January 18, 1995
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
January 1995
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
JANUARY 1995
TABLE OF CONTENTS
i
SUMMARY ...........................................
I-1
..................
First D istrict--Boston ..................
II-
...............
Second District--New York ..................
III-1
..............
Third District--Philadelphia ..................
IV-1
Fourth District--Cleveland .................................
V-
.................
Fifth District--Richmond ..................
V I-1
Sixth District--Atlanta ....................................
Seventh District--Chicago .................................
VII-1
Eight District--St. Louis ..................................
V III-1
Ninth District--Minneapolis ..........
Tenth District--Kansas City .........
IX-1
...................
....
........
Eleventh District--Dallas ..................
Twelfth District--San Francisco ...................
...
.........
................
.........
..
X-1
XI-1
. XII-1
i
SUMMARY 1/
Summary. Economic expansion remained vibrant around much of the nation in recent months,
and conditions seem to have grown more uniform among the Districts. The underlying momentum in
consumer spending growth remained quite strong. Manufacturers continued to offer some of the brightest
reports within the Districts, although the overall pace of expansion in industrial output may have eased
somewhat. Assessments of auto industry conditions remained upbeat. Higher mortgage interest rates
appear to have slowed single-family housing activity, but multifamily residential and commercial
construction remained relatively strong. Expansion in bank loans slowed, led by weaker demand for
home mortgage, home equity, and residential construction loans. Production responses to livestock price
declines are anticipated to bolster farm income in the current year. Labor markets continued to
strengthen, with most reports indicating unchanged to somewhat higher wage increases. Price increases
seemed somewhat more widespread than were reported in early December, while higher inflationary
expectations were apparent in business surveys.
Retail Sales. Retail sales increased at a moderate pace in the holiday season. Sales gains may
have fallen modestly below expectations formed just after the Thanksgiving weekend, but weather effects
and other factors point to stronger underlying momentum in spending growth. Nearly every District
reported continued strength in sales gains for hard goods and/or big-ticket items, including personal
computers, other consumer electronics items, home furnishings and appliances. Assessments of auto
sales remained quite positive in much of the nation. Apparel sales were weaker in normally cold Districts
that experienced relatively warm winter weather, and many apparel retailers reported heavier-thananticipated discounting. However, there were signs of underlying strength even in the apparel category.
Several Districts in the northern part of the country noted that apparel sales weakness was concentrated in
outerwear, while retailers in the Atlanta District noted that warmer-than-usual weather held back overall
holiday sales gains, except for apparel,which showed relatively strong gains.
1Prepared at the Federal Reserve Bank of Chicago based on information collected before
January 10, 1995. 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.
Manufacturing. Manufacturers continued to provide some of the strongest reports within the
Districts, although the overall growth rate may have slowed modestly. Philadelphia's survey of
manufacturers showed output continuing to grow in the fourth quarter, although somewhat more slowly
than a strong year-earlier period; looking ahead, about twice as many respondents expected
order increases than decreases during the first half of 1995. Richmond's mail survey also suggested that
most manufacturers expect further gains in output, with little change in the pace of current growth
reported since the last survey. Purchasing managers' surveys in the Chicago region pointed to vigorous
gains in industrial output as 1994 came to a close, although expansion was not quite so strong as earlier in
the year.
Production and orders trends in durable goods industries continued to lead growth within the
overall manufacturing sector. Cleveland's industrial contacts indicated that orders growth remains solid,
with particular strength in capital goods industries. Automotive contacts reported some of the strongest
sales gains within Boston's manufacturing sector. Cleveland and Chicago reported strength in demand for
steel, with Chicago noting that steel output plans for the first quarter were recently increased in response
to stronger automotive orders. Auto parts suppliers continued to announce construction of new
production facilities in the Atlanta region. Increased exports to Europe boosted recent results among
Cleveland's manufacturing contacts. Uncertainty over Mexican developments clouded expectations in
several regions, however.
Construction and Real Estate. Higher mortgage interest rates appear to have slowed
homebuilding and residential real estate activity around much of the nation. Seasonal patterns account for
some of the recent weakness, but home sales weakened in normally cold regions that enjoyed relatively
warm and favorable weather. Multifamily and commercial construction were stronger than single-family
homebuilding in nearly every District. For example, Dallas reported that overall demand for
construction-related products edged up; lumber producers reported lower sales for residential building but
increased orders for commercial construction, and glass producers reported record sales partly for the
same reason. Declining commercial vacancy rates were widely reported, and continued growth in
commercial and multifamily development was generally anticipated in 1995. However, a wider group of
iii
contacts expressed concern about the future impact of higher interest rates on real estate and commercial
construction activity.
Banking. Expansion in bank loans slowed, led by weaker demand for home mortgage, home
equity, and residential construction loans. Most Districts indicated that commercial and industrial loan
demand remains relatively strong. "Outside of housing," San Francisco noted, "bank lending activity is
reported to be brisk." A number of Districts reported slower growth or declines in business loan demand,
however. After a relatively strong group of reports in December, assessments of trends in consumer loan
demand were mixed, with some new slowing apparent even in Districts with relatively strong retail sales
gains. Wherever noted, delinquency rates continued to decline. Philadelphia characterized loan officers'
outlooks as "positive but cautious," with overall loan growth expected to ease as the year progresses.
Reports of tighter lending margins were noted in several Districts, and Philadelphia stated that officers
may review future lending plans as a result. Agricultural banks in the Kansas City District reported that
crop loans were in better condition than a year ago, while a slump in hog and cattle prices weighed on
livestock loan quality.
Agriculture. Production responses to livestock price declines are anticipated to help bring some
recovery in farm income in the current year. Kansas City reported that bankers generally expect farm
income to improve slightly in its region during 1995, assuming normal crop yields, as livestock prices are
anticipated to return to break-even levels. Chicago noted that hog production was up only marginally
from last year and well short of expectations. Producers in the Chicago region account for a substantial
share of national output, and they have made sizable cuts in planned production. Minneapolis noted that
modest recent improvement in livestock prices have improved producer outlooks for 1995, and there are
signs of increased farmer willingness to invest in new machinery.
Labor Markets. Continued strengthening and/or increasingly tight labor markets were widely
noted, although a minority of Districts suggested that wage pressures may have eased in some
occupations. Minneapolis stated that "evidence of tight labor markets abounds." Retailers in the St.
Louis and Chicago Districts reported difficulty meeting holiday seasonal labor needs, and St. Louis found
that retailers were actively recruiting personnel from other stores. Strong demand for temporary workers
was reported in the Boston, Atlanta, and Dallas Districts, with Dallas also noting increasing wage
pressures for temporary labor. Chicago reported that shortages of machine tool operators caused some
production bottlenecks, and prompted some capital spending delays because workers were not available
to operate new machinery. Reports on permanent manufacturing employment trends were mixed; growth
was noted by contacts in Cleveland, Chicago and Richmond, while employment seemed to remain
relatively flat among manufacturers contacted by Boston and Philadelphia. At the same time, Boston
reported a tighter market for clerical workers, with increased opportunities for permanent employment.
New York reported significant job cut announcements in the financial services sector.
Increasing wage pressures were reported more frequently in the Atlanta, St. Louis, Minneapolis,
Dallas, and San Francisco Districts, while Kansas City stated that tightness in markets for skilled
manufacturing and construction labor had eased. Surveys by compensation consulting companies in the
Chicago region suggest that salary increases for exempt salaried employees of large firms will remain in
line with 1994, while pay varying with sales growth, profitability, customer service, or other
organizational goals will continue to take an increased share of total compensation.
Prices. The pace of price increases seemed steady to somewhat higher since reports in early
December, while higher inflationary expectations were apparent in business surveys conducted in San
Francisco and Chicago. District reports continued to emphasize shortages and increasing input prices in
manufacturing and construction, coupled with stability in most retail prices. Price discounting during the
holiday season ran heavier than many retailers had anticipated, particularly in apparel.
Manufacturers continued to report strong (but perhaps diminishing) pressure against output price
increases. Boston stated that long-term agreements with suppliers, low labor cost increases, pressure
from customers and greater operating efficiency continue to limit many manufacturers' needs for output
price increases. Reports from a minority of Districts included a growing set of exceptions to this rule,
however.
Retailers in Dallas and San Francisco noted higher price pressures from rising packaging costs.
Labor shortages and strong demand increased price pressures among service firms in the Dallas region.
Agricultural businesses in the San Francisco region expressed concern about rising labor, transportation,
packaging, and raw materials costs.
FIRST DISTRICT - BOSTON
Reports from First District businesses in early January were
similar to those in October and November.
Manufacturers' gains are
widespread, while retailers' results vary considerably.
Prices of
selected inputs are reportedly rising.
Retail
First District retail sales results were highly varied during the
holiday season.
Two "category" chains reported sales increases of 15 to
30 percent compared to year-earlier levels.
Department stores and food
chains cited more modest growth of less than 5 percent.
And contacts at
off-price discount and specialty apparel chains experienced declines in
December sales of 3 to 6 percent, which they attributed, in part, to
department stores' huge promotions prior to Christmas.
Products that
fared best were hard goods such as electronics, appliances, audio
equipment, sporting goods, and furniture.
State tourist agencies report
exceptional fall and winter tourism in New England because of increased
business and international travel.
Retail contacts' expectations for the first half of 1995 also vary
widely, ranging from 0 to 20 percent sales growth from a year earlier.
Vendor and retail prices remain fairly level, although the number of
exceptions is growing, including plastics, resin-based products, paper,
and cotton.
Most contacts report higher profits in fiscal 1994, and
only one mentioned lower gross margins because of holiday promotions.
Major capital and employment expansions in 1995 are limited to the topperforming large category chain-stores.
Temporary Employment Firms
Contacts in the temporary services industry report steady growth
in business in the fourth quarter of 1994.
The market for clerical
I-2
workers has tightened, a development which personnel firms attribute to
increased opportunities for permanent employment; client companies are
encouraging more temporary workers to "go permanent" and hiring new
staff directly.
Temporary employment firms sense an overall upswing in
optimism among their business clients and expect demand for their
services to remain strong.
Winter activity is somewhat weather-
dependent, as weekday storms can force workers to cancel assignments.
Manufacturing
First District contacts report that demand for manufactured goods
continues to increase, with variations across products similar to the
recent past.
Automotive and computer-related sales show double-digit
increases from a year ago, while electrical and paper products generally
show solid single-digit growth.
Appliance sales reportedly continue to
increase, although more slowly than in early 1994.
Demand for textiles
and medical and pharmaceutical equipment remains sluggish.
Manufacturers report significant cost increases for paper and
packaging, plastics, steel, polyester fibers, and postage; moderate cost
increases for chemicals; unchanged costs for cotton fibers; and
declining costs for electronics components.
flat or slightly higher than a year ago.
Selling prices mostly are
Some contacts report that
their industrial customers are imposing limits on price increases.
In
other cases, negotiated agreements with suppliers, a lack of labor cost
pressures, or greater operating efficiencies are limiting the need for
price hikes.
At most respondent companies, U.S. employment has remained flat
or has decreased at a single-digit rate over the past year.
couple of smaller firms have expanded their work force to any
significant degree.
Only a
I-3
Most manufacturers expect good results in 1995, although the
majority anticipate a slowdown in U.S. GDP growth by the second half of
the year.
Exports are projected to be a bright spot.
Several contacts
say that they will try to raise prices before the anticipated slowdown.
Residential Real Estate
Contacts report that recent increases in mortgage rates are
starting to depress the residential real estate market, particularly for
existing homes, but normal winter slow-downs make current trends hard to
identify.
Respondents in the three southern New England states and
Maine note that fourth quarter sales of existing homes were at or below
year-ago levels.
By contrast, newly constructed homes in the middle and
upper price ranges are selling well, although more slowly than last
fall.
Housing prices are stable in most places.
Several contacts
express concern that higher interest rates will further dampen the
spring market.
Nonbank Financial Services
Respondents at insurance companies report increases in sales
between 2 and 20 percent in the fourth quarter of 1994 compared to a
year earlier.
Annuities and variable life insurance continue to be
strong sellers, while whole life products are lagging. A number of
respondents have added distribution channels for their products or are
exploring doing so, particularly distribution through banks.
Employment was flat in the fourth quarter at all but two insurance
contacts (who expanded slightly).
Half the respondents plan to cut
employment in 1995, some significantly; the rest plan either small
increases or no change.
II-1
SECOND DISTRICT--NEW YORK
Reports on District developments in recent weeks by and large indicated some improvement.
Most retail contacts reported that holiday sales were on or slightly above their expectations and
office leasing activity was sufficient to reduce the vacancy rates in several parts of the District.
District unemployment rates fell sharply in December. Homebuilding activity, though, has been
seasonally slow. Almost 90 percent of the senior loan officers surveyed at small and midsized
banks reported steady or lower aggregate loan demand compared with two months earlier.
Consumer Spending
Most District retail contacts reported that holiday sales results were on or slightly above
plan though their own targets were apparently lower than many analysts saw for the industry as a
whole. The weak sales plans were at least in part based on lackluster sales of apparel and
outerwear during much of October and November. As a result, some respondents had reduced their
orders for soft goods prior to Thanksgiving, and all prepared for what several described as the most
promotional holiday selling season they could remember. As a result, profit margins are expected
to have suffered.
The annual survey of the Retail Council of New York State found that sales gains
throughout the state averaged 3 to 5 percent above the 1993 level for the day-after-Thanksgiving
through day-after-Christmas period. Household durable goods, computers, VCRs, jewelry,
accessories and in-line skates were some of the best-selling items. Individual retail contacts in the
District reported over-the-year changes ranging from virtually flat to +8 percent during December.
Inventories were generally in satisfactory shape by year-end with most contacts expecting to
eliminate any excess amounts during January clearance sales.
Residential Construction and Real Estate
Homebuilding activity has been seasonally slow in most of the District recently. Looking
ahead, some contacts expressed concern that higher interest rates may become more of a deterrent
in the spring (when buyer traffic typically picks up substantially) than they have been up to now.
Others are apparently more optimistic as witnessed by the fact that several large, long-stalled
projects have recently been revived in the District. These include waterfront developments in
Jersey City and the Bronx as well as a townhouse project on Staten Island.
While office leasing activity has reportedly slowed somewhat from earlier months, it was
sufficient to reduce the vacancy rates in several parts of the District recently. In downtown
Manhattan the office vacancy rate has moved down in each of the last three months after a jump in
September, while in midtown Manhattan, the rate in December was a full percentage point lower
than three months earlier. Among other areas reducing office vacancy rates between the third and
fourth quarters were Fairfield County, Connecticut and, in New York State, Westchester County,
where the rate fell more than two percentage points, and Nassau County. Office vacancy rates rose
in the fourth quarter in Northern New Jersey and Suffolk County.
Other Business Activity
District unemployment rates fell sharply in December as New York's rate dropped to
5.4 percent from 6.3 percent in November and New Jersey's declined to 6.1 percent from
6.6 percent. State unemployment rates are very volatile, however, and could bounce higher in the
near future. There have been several recent announcements and reports which point to future job
cuts. Chemical Banking plans to eliminate 3700 positions, 9 percent of its staff, and further layoffs
are slated in the brokerage industry as well.
Cutbacks and reduced profits in the financial industry
have been cited as one major factor in the recent widening of New York City's budget gap.
II-3
The City, New York State, and New Jersey all face budget gaps in the billions of dollars which at
best will mean further declines in services and could involve additional employment cutbacks.
Finally, as an outcome of the Macy-Federated merger, A&S will close its executive offices in
Brooklyn, laying off some 650 employees there.
On a more positive note, New York City was one of six cities chosen nationwide as urban
empowerment zones, each of which will receive $100 million in social service grants and tax
breaks for businesses located in the zones. In addition, KMart recently signed a lease to open its
first Manhattan store--the latest of the chain stores making their first forays into the borough in
response to lower rents and the enticement of population density.
Financial Developments
Almost 90 percent of the senior loan officers surveyed at small and midsized banks in the
District reported that aggregate loan demand was either steady or lower when compared with two
months earlier. The residential mortgage and refinancing segments saw the largest declines in
activity. About half of the banks experienced less residential mortgage demand while over threefourths experienced lower or no refinancing activity. The commercial and industrial loan segment
was the strongest, with over half of the survey participants reporting steady demand and about onefourth reporting higher demand.
Loan rates are mainly higher or the same across all categories of lending. Almost all of the
respondents noted that recent increases in deposit rates resulted in no change or a narrowing of the
spread between the average lending and deposit rates. Of the senior loan officers surveyed, about
80 percent maintained and about 20 percent increased their willingness to originate various types of
loans. Very few banks changed their credit standards, and almost all had stable or lower
delinquency rates.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports from Third District business contacts in early January suggested
that economic activity was continuing on an upward path, but the rate of growth
had eased somewhat from the pace set in the fourth quarter of last year.
On
balance, manufacturers reported increases in orders and shipments, but the gains
were not as widespread in January as they had been in December.
mixed reports for the Christmas shopping period.
goods
were
up
strongly
from
the
prior
year,
Retailers gave
Sales of consumer electronic
but
apparel
sales
were
below
expectations, leading to widespread discounting to clear out inventories in the
weeks after Christmas.
Auto dealers said sales slowed seasonally in December,
but the overall trend continued to be up, with strong demand for certain models
leading to price increases and waiting periods for buyers.
Bankers generally
indicated that lending continued to move up moderately as the new year began,
with business and credit card lending being the strongest categories of credit.
Forecasts for the new year in the Third District are generally positive,
although guarded.
Manufacturers expect activity to continue to rise, but they
anticipate just steady employment over the next six months.
unit
sales
in 1995
to exceed
those
in
1994, but
Auto dealers expect
other retailers
difficult to make a forecast for the year at this time.
say it
is
Bankers expect some
continued growth in lending in the months ahead, but some believe loan growth may
taper off in the second half.
MANUFACTURING
Reports from Third District manufacturers in early January indicated that
industrial activity continued on an upward trend, although the rate of growth had
III-2
slackened from the final quarter of last year.
Slightly more than one-fourth of
the firms polled reported that they were receiving more orders and making more
shipments in January compared with December, while about half indicated that
orders and shipments were steady.
Gains were more common among producers of
metal products and equipment, while steady conditions or declining activity were
more frequently noted by makers of nondurable goods.
Employment conditions were virtually steady at manufacturing plants in the
District. While there were a few reports of stepped-up hiring, three-fourths of
the
industrial establishments contacted were holding employment steady.
On
balance, area firms were reducing working hours slightly in early January.
Industrial prices in the region continued to move up as the new year began.
More than half of the firms commenting on prices said they paid more for inputs
in January than they had in December, and there were very few reports of price
declines. About one-fourth of the manufacturers contacted said they were raising
prices for their own products; most said they were holding prices steady.
Looking ahead, Third District manufacturers expect business to continue
moving up through the first half of the year.
About four in ten of the firms
contacted for this report forecast increases in orders and shipments, and two in
ten anticipate declining demand for their products.
Overall, Third District
manufacturers plan to hold employment and working hours steady, and to reduce
inventories.
While most will also keep capital spending on an even pace, more
than one-fourth have scheduled increased investment expenditures for the first
half of the year.
RETAIL
Retailers
in the Third District gave
Christmas shopping period.
mixed reports
on sales
for
the
Stores selling consumer electronic items--personal
III-3
computers, large-screen televisions, and camcorders--said sales were well above
the year-ago period.
Home furnishings were also listed among the categories of
merchandise that sold well.
Apparel retailers had disappointing results; with
sales falling below expectations, they were prompted to offer deep discounts both
before and after Christmas.
The pace of retail sales in early January appeared
to be somewhat subdued, with price reductions being continued in efforts
to
reduce inventories, especially for apparel.
Third District auto dealers said sales slowed seasonally in December but
rose above the level of December 1993.
In general, dealers reported sales gains
for 1994 over 1993, and they expect continued increases in unit sales in 1995.
Sport-utility vehicles continued to be in demand, and price increases and waiting
lists were becoming common for these and some other popular models.
FINANCE
Third District commercial bank lending officers contacted in early January
said loan volume was growing moderately.
Several mentioned modest growth in
commercial and industrial lending, with middle-market companies prominent among
new borrowers.
as competitive.
Bankers continued to describe the market for new business lending
In general, bankers also said consumer credit was growing, with
credit card borrowing being the strongest category of personal lending.
Some
bankers noted that while there were signs of increased interest by institutional
investors
in commercial real estate, banks
in the District did not plan to
increase their exposure in office or industrial properties.
The outlook among the commercial bank officers interviewed for this report
is generally positive but cautious.
While most expect the region's economic
performance to be good, at least through the first half of the year, they foresee
a slowdown in the growth of consumer spending that will limit growth in total
111-4
business activity for the year as a whole.
In line with this forecast, they
expect overall loan growth to ease as the year progresses.
Several bankers also
noted that loan profitability, for both business and consumer lending, has been
coming under pressure and that they may review their own lending plans for the
year as a result.
IV-1
FOURTH DISTRICT - CLEVELAND
Summary
Business activity in the District is holding steady at a high level, with industrial
producers reporting continued growth in production and orders. Employment levels have
picked up recently, although not in all regions or sectors. Further, there are few
indications of any broad-based wage pressures, and price pressures remain largely
centered in industrial commodities. District retailers indicate sales were good over the
holiday period, and undesired inventory accumulations were limited. In fact, area auto
dealers continue to complain about inventory shortfalls of 1995 models.
Lending is active in most institutions, and credit margins are still narrowing. Only
in the mortgage area has there been a significant drop-off in loan growth since the last
District report.
Manufacturing
District manufacturers continue to report solid orders growth, and the orders
backlog in capital goods industries remains unusually long. Export orders are also
reported to be holding up well. Chemicals, plastics, steel, heavy truck, and some machine
tool industries are reporting production levels near historic highs. Surprisingly, capacity
constraints in these industries are not generally seen to be holding down production, and
many District producers anticipate expanding productivity further to meet current demand.
Nevertheless, resistance to adding new workers seems to have diminished somewhat, and
a few firms here indicate more willingness to add to their permanent staffs.
Capital goods producers continue to report a further growth in orders, with the
domestic auto industry a heavy source of demand. Orders for metal-cutting and metalforming machine tools are strong, following the upward trend in steel demand: The orders
backlog here extends well into 1995. Export orders for capital goods are improving
IV-2
gradually for European customers, and District manufacturers expect sales to Europe to
improve further in 1995. Small growth in the Japanese market is also hoped for this year.
However, there still is reported to be little room for substantial price increases for finished
capital goods, despite reports of production constraints by many capital goods producers.
Industrial materials producers also note strong business conditions, especially steel
and chemicals suppliers. Both industries are also reporting improved sales volume in
Europe. Industrial materials production is reported to be near capacity, and raw materials
prices are still increasing, particularly for steel and certain industrial chemicals. However,
plans to increase employment in these areas remain modest.
Retailing
Retail sales were strong overall during the holiday period, but activity is reported
to have diminished in late December. Some retailers indicated a small inventory overstock
at period's end, prompting increased discount activity in early January. Indeed,
competitive pressures in the retail sector continue to exert downward pressure on prices,
and at least one major retailer noted an easing of prices from suppliers. In general,
though, inventory positions appear to be in line with sales, with a notable exception for
apparel items, where sales performance has deteriorated further in the wake of
unseasonably warm temperatures during the period. Seasonal employment patterns in
retailing were about average, and no shortages of temporary workers were reported.
District auto sales in December were also average for this time of year, but some
vehicle types are still reported in short supply. Most dealers indicated availability
problems with the 1995 models, particularly light trucks and utility vehicles. There is a
presumption that low inventory positions dampened dealers' sales performance in
December.
IV-3
Banking and Credit
Virtually every respondent reported strong and growing loan demand. District
bankers indicate a particularly high level of commercial lending activity--presumably a
response to inventory floor plans, although most categories of commercial lending activity
were reported to be somewhat stronger (notably new construction and expansion).
However, credit margins are narrowing, particularly for commercial loans, where one
District banker had concerns about the erosion of credit quality.
Consumer borrowing remained high during the holiday period, and revolving credit
balances are reported to be substantially above this time last year. Mortgage credit
activity has fallen off, and although some of this is typical for the season, higher mortgage
rates are presumed to have flattened mortgage refinancing.
V-1
FIFTH DISTRICT - RICHMOND
Overview: Economic activity in the Fifth District grew moderately in late November
and December. Areas experiencing growth included the service-producing sector, state
revenues, and agriculture.
Strong holiday sales boosted consumer spending.
Port trends
were mixed, and manufacturing and commercial real estate activity were flat. Loan demand,
home sales, and tourist activity declined.
Consumer Spending: Retail associations and retail analysts contacted by telephone
reported that Christmas sales increased between 8 percent and 12 percent from last year's
level and that after-Christmas sales were good. They also said that retailers offered fewer
after-Christmas discounts than they did last year. Analysts' outlooks for early 1995 sales
were mixed. Those expecting weaker sales compared to 1994 pointed to higher consumer
debt levels, while those expecting stronger sales pointed to last year's unusually harsh
weather that kept shoppers at home.
Service-Producing Firms: Preliminary results from a mail survey indicated that
activity in the service-producing sector increased in December. Revenues rose, except in
health services, where they decreased. Wages also rose, and employment changed little.
Service producers indicated that prices rose 0.5 percent in December. They expected
increased demand for their services and an increase of 1.3 percent in their prices during the
next six months.
Manufacturing: Indicators of factory activity changed little in December from their
November levels, according to preliminary results of a mail survey of District manufacturers.
Raw materials inventories were up compared to six months ago, and respondents expected a
further increase during the next six months. Manufacturers expected shipments and
employment to increase during the next six months, but they anticipated little change in the
V-2
workweek. Finished goods prices increased faster in December than in November, but at a
rate less than the general inflation rate. Raw materials prices increased more in December
than in November, and at a rate higher than the general inflation rate. In December,
respondents expected prices to rise more during the next six months than they had in
November.
Tourism: A telephone survey of hotels, motels, and resorts throughout the District
indicated that tourist activity generally decreased in December from November. December
activity at ski resorts was below its year-ago level because of warmer weather, but bookings
were up for the rest of the winter. Contacts expected better-than-normal business and slight
price increases during the next six months.
Ports: Telephone interviews with representatives at the District ports of Baltimore
and Hampton Roads (Norfolk) indicated that import and export levels in November were
higher than those of a year ago but were mixed compared to their levels in October.
Charleston's representative, however, reported that the Charleston port experienced one of its
busiest months ever. Representatives at Charleston and Baltimore expected imports and
exports to increase during the next six months, but the representative at Hampton Roads
expected both to decrease.
Finance: District financial institutions contacted by telephone reported that loan
demand continued to slow during late November and December. Consumer and commercial
loan demand fell moderately, while mortgage loan demand declined slightly. Interest rates
were higher on consumer, commercial, and mortgage loans. Many District lenders
expressed concern that future interest rate increases might dampen loan demand. Most
consumer and commercial lenders in North Carolina, however, were confident that loan
demand would remain strong in that state.
V-3
Residential Real Estate: According to a telephone survey of District realtors and
builders, residential real estate activity declined in December. District home sales decreased
despite increased sales of lower-priced houses. Building permits, buyer traffic, and housing
starts, however, were unchanged.
Most real estate agents attributed the decline in home
sales to increased mortgage interest rates. Home prices remained stable, although prices of
nonlumber building materials rose slightly.
Commercial Real Estate: District contacts reported that commercial real estate
activity in December grew at the same pace as in November. Real estate contacts reported
little change in construction, except in West Virginia, where retail outlet building activity
increased.
Posted commercial rental rates increased throughout the District. Commercial
vacancy rates remained steady except in North Carolina and Virginia, where they declined.
Leasing agents reported that the availability of prime office space tightened, especially
around Washington, D.C.
State government forecasters said that tax collections grew
State Revenues:
moderately in November and December. Real revenue growth was strong in Maryland,
North Carolina, Virginia, and West Virginia, somewhat weak in South Carolina, and flat in
the District of Columbia.
Agriculture: Agricultural conditions were better than a year ago, according to
District farm analysts.
Small grains were in good-to-excellent condition because
temperatures were above normal in December and early January.
Tobacco prices remained
strong, and farmers' 1995 production quotas rose because tobacco companies purchased
farmers' excess stocks of tobacco.
Hog and poultry output rose despite sharply lower hog
prices and slightly lower poultry prices. One contact said long-term contracts insulated
North Carolina hog producers against plunging prices on national markets.
VI-1
SIXTH DISTRICT - ATLANTA
Overview:
According to contacts around the District, business activity in the Southeast
continued to expand through the end of 1994, although more slowly than earlier in the year.
Most
retailers reported that the holiday shopping season went well. Sales generally met expectations, but many
contacts had to use more discounting than they would have liked in order to generate business. Auto sales
were reported as steady. Tourism and business travel contacts say activity remains above year-ago levels
in most of the District; however, parts of the Florida tourism industry have not yet fully recovered from
their year-long slowdown. Single-family home building and sales have continued to slow, and most
contacts expect a moderately slower 1995. On the other hand, commercial real estate market reports
continue to improve. District wages and prices were generally steady; however, there were an increasing
number of reports of tight labor markets and higher materials prices.
Consumer Spending: District retailers reported that sales in December met or exceeded their
expectations; however, retailers attributed much of their success to aggressive promotions.
Several
merchants stated that unseasonably warm weather held sales down a bit. Once again, men's apparel and
home products were strong sellers and several retailers noted substantial improvements in women's
apparel over last year. Retailers said after-holiday inventories were, for the most part, at anticipated
levels. Most contacts expect year-over-year sales gains to continue, although some are concerned that
the credit card debt incurred during December will curtail consumer's purchases more than usual during
the first quarter of 1995.
Manufacturing: District manufacturers reported ongoing spotty growth in December and early
January. Strength in orders for paper, pulp, metals, and industrial chemicals is keeping plants in these
industries operating near capacity.
production facilities in the region.
Auto parts suppliers continue to announce construction of new
Some producers of electronics for cable television and data
communications report order backlogs increasing at double-digit rates. Producers of home textiles such
as sheets and towels are optimistic that business will remain strong. However, respondents note that the
VI-2
market has softened for other products linked to housing such as building products and heating and airconditioning equipment.
Contacts in the apparel industry continue to report a shrinking factory workweek and payrolls.
Temporary help firms supplying personnel for manufacturers report that the pace of placements remains
brisk. Foreign orders for military aircraft have brightened the outlook for Lockheed's Marietta, Georgia,
facility. However, recent cancellations or scalebacks of U.S. Department of Defense contracts continue
to adversely affect many defense-related firms in the District.
The recent peso devaluation has some regional manufacturers concerned that exports of their
products will slow as U.S.-made products become more expensive in Mexico. A broad range of regional
industries has posted significant gains in exports to Mexico since NAFTA was enacted last January. Most
industrial contacts remain optimistic about the near-term outlook.
Tourism and Business Travel: Winter bookings and occupancies are up for some Florida
destinations; however, state officials are concerned that rival destinations are capturing a significant
portion of the state's market. Weak early winter cruise bookings are expected to pick up in February
following an unusually soft fall season, partly attributed to unseasonable weather. Although overall casino
traffic in Mississippi continues to grow and larger firms continue to expand, contacts report that weaker
firms are laying off employees or filing for bankruptcy. Interest in the 1996 Olympic Games is sharply
increasing foreign visits to Atlanta.
Construction: A majority of real estate contacts reported that single-family home sales and
construction slowed slightly in December. However, contacts in the Miami and Nashville markets stated
that December sales exceeded year-ago levels. Most real estate agents and builders continue to anticipate
a modest decline in home sales and construction in 1995.
Commercial and multifamily real estate contacts continue to report improving market
conditions. The apartment market is characterized by steadily rising rental rates and high occupancy
levels. Contacts say that, as a result, multifamily construction is on the rise in many areas of the District.
VI-3
Commercial realtors also report declining vacancy rates and steadily increasing rental rates.
While
commercial construction is reportedly accelerating, the majority of current construction is build-to-suit
with most of the space leased prior to building, leaving very little speculative space available. However,
builders say that shortages of skilled labor continue to push building costs up. Realtors anticipate both
commercial and multifamily markets will exhibit continued strong growth in 1995.
Financial Services:
According to District bankers, overall loan demand has been rising
modestly. Most contacts reported that business loan demand was up, while consumer loan demand was
slightly off. Commercial real estate lending was reported to be fairly active by several contacts.
Weakness in consumer loan demand was accounted for mainly by auto lending. Residential mortgage
lending has declined. Commercial and consumer default rates remain low.
Wages and Prices: Reports of upward pressures on wages are becoming more frequent among
contacts surveyed. Demand in the areas of skilled construction and food services personnel is especially
strong in parts of the District. Manufacturers report that prices of raw materials continue to escalate, and
more producers expect to be able to increase final product prices. Paper, chemicals, metals, and textile
contacts continue to report rising raw materials prices. Apparel and fabric producers are coming under
increasing pressure from raw materials price increases but are reportedly not able to raise finished product
prices because of consumer bargain hunting pressures at the retail level. A few companies report that
higher than usual inventories at the end of 1994 are designed to help offset anticipated additional price
increases in 1995. Residential home builders throughout the District report that both materials and labor
costs have stabilized, generally steadying home prices.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. The District economy expanded at a moderate to vigorous pace in recent
months. The underlying momentum in retail sales growth remained strong during the holiday
season, and probably exceeded its third quarter pace on a seasonally adjusted basis.
Manufacturing activity remained robust for the time of year. Labor markets continued to
strengthen, with little sign of softening in employers' hiring intentions heading into the new year.
Transaction price increases seem to remain centered in basic materials and intermediate goods, as
retailers continued to stress intense competitive constraints on pricing.
Retailing. The underlying trend in retail sales growth remained quite strong during the
holiday season. Sales gains reported by large retail chains were generally in line with or
somewhat better than pre-season expectations, except for apparel sales, where relatively warm
weather held back sales prior to the last week of December. Apparel retailers blamed shifts in
consumption toward hard goods, and not weakness in total consumption, for their relative sales
weakness. Apparel sales have strengthened in early January, but as one retailer noted, "a good
December is a heck of a lot better than a good January."
Most large retailers indicated that year-over-year sales gains improved as the season
matured, except in apparel sales. For example, one large durable goods retailer characterized
sales in the last week of the season as "booming," with sales gains running well ahead of previous
weeks. A number of retail chains indicated that toy sales gains were in line with or stronger than
companywide averages, and home entertainment software and computers were among the
strongest gift-giving categories.
Excluding apparel sales, most large retailers reported better overall sales gains in the
District than their national average. A late December survey by an accounting firm suggested
that Midwest consumers had higher planned and actual spending levels than consumers in any
other major Census region. Large prospective and actual bonuses in the auto industry boosted
retail sales in Detroit and other areas of the District.
The District has experienced large-scale expansion in retailing capacity in recent years.
As a result, survey data, reported same-store sales gains, and anecdotal evidence on individual
store chain results may well understate the strength of aggregate sales growth. Increased retailing
VII-2
capacity also helps explain why discounting ran more aggressively than many retailers
anticipated at the onset of the 1994 season, in spite of strong demand and customer traffic. The
strongest holiday sales gains seem to have arisen in products where prices have been declining
(such as computers and electronics) and in outlets where prices are relatively low. Several
retailing analysts suggested that discount stores took a larger share of holiday sales growth in the
region during 1994, as consumers turned more aggressive in their search efforts after a lesscautious shopping season in 1993. One large outlet mall characterized its holiday sales season as
"awesome." Customer traffic was up nearly 30 percent based on vehicle counts, and the number
of motor coach trips to the mall were up 36 percent. Separately, this contact noted that charitable
gift giving rose markedly from 1993.
Manufacturing. District manufacturing activity remained robust as the year came to a
close. The composite production index for purchasing managers' surveys in Milwaukee, Detroit
and Chicago has eased back from especially high levels in the second quarter of 1994, but in
December still remained at a level consistent with vigorous growth in District industrial output.
A similar trend was evident in surveys conducted in Western Michigan. Reflecting continued
gains in durable and capital goods output, District steel production posted relatively sharp
increases in October, November and December, in contrast to a normal seasonal slowing.
A large automaker stated that dealer orders and showroom traffic remained stable or even
picked up a little around the industry in recent months, on a seasonally adjusted basis. A large
steelmaker stated that first quarter production plans were recently raised in response to modestly
higher auto industry demand than originally anticipated. An association of machining shops
reported that production continued to trend higher in recent months, with machine tool purchases
among its membership surging since the industry trade show in September. One machine tool
manufacturer stated that customers' capacity expansion projects accounted for a greater share of
orders growth in recent months, joining continued gains in orders for tools designed more closely
for productivity improvement.
Labor Markets. District labor markets continued to tighten up, and there was little sign
of softening in employer hiring intentions entering the new year. A substantial number of
retailers expressed difficulty meeting seasonal labor needs during the holiday season, although
this experience was not universal. An association of machining companies stated that skilled
VII-3
worker shortages continue to raise production bottlenecks, although they haven't intensified
greatly since mid-1994. In some cases these shortages have even prompted capital spending
delays, as firms postpone the delivery of needed equipment because workers aren't available to
operate the machinery. Staffing services firms have suggested that labor shortages and associated
wage pressures are more closely concentrated in blue-collar than white collar labor. Separate
surveys by two compensation consulting companies suggested that salary increases in large firms
during 1995 will remain in line with 1994, on average, but variable pay (contingent on sales
growth, profitability, customer service or other goals) will continue to take an increased share of
total compensation.
Agriculture. Hog production during the fall months was up only marginally from the
year before and well short of expectations. Moreover, producers have made sizable cuts in both
the inventory of foundation stock and in the intended number of litters to be farrowed this winter.
As a result, analysts now believe the gains in pork supplies will end early in the second half.
Production cuts have been especially apparent in this District, which normally accounts for about
half of all hogs raised nationwide.
Prices. Price increases seem to remain centered in basic materials and intermediate
goods, as retailers continued to stress intense competitive constraints on pricing. A number of
large retailers indicated that holiday season discounting and promotional activity were more
aggressive than expected a few months ago. Inflationary expectations continued to rise in the
industrial sector, however. The price components of District purchasing managers' surveys
climbed further in recent months, pointing to faster industrial price inflation even as output
growth slowed a little from its extremely rapid pace earlier in 1994. The price component of the
Chicago survey has climbed steadily this year, but remains below levels during the late 1980s.
The price component of the Detroit survey has depicted higher price increases for most of the last
year, and in December climbed to its highest level since late 1987. A large share of respondents
to surveys in Western Michigan continued to express frustration with shortages and lengthy lead
times. Looking ahead, another regular survey of District businesses showed a significant increase
in the share of respondents expecting higher inflation. When asked to name the most serious
threat to 1995 business conditions, rising interest rates and rising inflation were the most
frequently mentioned factors in this survey.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
District economic activity, buoyed by relatively strong holiday sales, continues to
increase at a moderate pace. Unseasonably warm weather hindered apparel sales, but bigticket items like jewelry were large sellers. While a recent survey of small businesses
reveals that the majority expect little change in business conditions over the first half of
1995, one-fifth anticipate improving conditions. Tight labor markets remain a major
concern among contacts. Firms in various industries report sales and employment growth.
Residential construction continues to slow because of higher interest rates, and average
single-family home prices are up slightly. Total loans outstanding at large District banks
continue to increase, though by less than they had previously.
Consumer Spending
Most retailers in the District report that holiday sales were up an average 6 percent
to 7 percent over last year's season. Electronics, jewelry and other big-ticket items were
the strongest sellers. Apparel sales were well below expectations because of unseasonably
warm weather; however, some retailers in Memphis credit it for their strong holiday sales.
Many retailers discounted apparel before Christmas to try to move the merchandise.
After-Christmas sales generally met expectations, with most retailers employing their
normal price reductions to reduce remaining inventories.
Car dealers generally report increased sales in December, in some cases of up to
20 percent over last year, although some dealers lost sales because of continued shortages
of popular models. Many cite creative leasing programs and improved local economic
conditions as boosting sales, despite slightly higher prices on 1995 models.
VIII-2
Outlook
A December 1994 survey of 87 District small businesses shows that slightly more
than one-fifth expect a more favorable outlook in general business conditions over the next
six months; this proportion is up about 5 percentage points from a similar survey
conducted in November.
More than half, however, expect little change in business
conditions over the next six months. Slightly more than one-quarter of respondents plan
to increase prices over the next three months, compared with just under one-quarter in
November. Nearly half plan no change in prices in the next three months, down from
about three-fifths in November who indicated a similar sentiment.
Manufacturing and Other Business Activity
Contacts throughout the District continue to report that labor markets are the
tightest they have seen in years. Higher starting wages and increased benefits have not
helped many firms find and keep qualified employees.
For example, a nonprofit
organization that regularly hires seasonal workers to aid with its holiday fund raising was
unable to find people, which translated into reduced collections. One contact reports that
retail stores were actively recruiting employees from other stores.
Growth in sales and employment continues around the District. Farm equipment
dealers report that although sales were down slightly in the most recent period, 1994 was
a record year, with sales up about 12 percent over the year before. Various manufacturers
in western Tennessee and eastern Arkansas report sales and revenue increases of between
15 percent and 40 percent in late November and early December over the prior month.
These contacts report, though, that profit margins are much tighter because of competition
and rising costs.
VIII-3
Reports suggesting that many firms are facing capacity constraints are increasing.
For example, a food processor reports significant overtime, a printing establishment has
all plants running at capacity, and a maker of packaging products now operates three shifts
to meet increased demand. In addition, announcements of new plants come from the Little
Rock area, northern Kentucky, central Arkansas and northwest Mississippi.
Each will
bring at least 200 jobs into their areas, most by June.
Construction and Real Estate
Contacts in most parts of the District continue to report slowdowns in residential
construction activity, which they attribute to higher interest rates. Northwest Arkansas,
however, is enjoying an extended construction boom; the value of its residential
construction contracts is up more than 60 percent from a year ago. Most contacts also
report that homebuilding in the high end of the market is still relatively strong; east-central
Mississippi, though, sees softening in this market. Single-family home sales are down in
Louisville and western Kentucky, western Tennessee and St. Louis. Average home prices
are up slightly in most parts of the District; contacts in Memphis also report sharp
increases in apartment rents.
Banking and Finance
Total loans outstanding at 11 large District banks rose 1.8 percent from midOctober to mid-December after increasing 2.2 percent from mid-August to mid-October.
All major loan categories-commercial, real estate and consumer-increased in both
periods. Although commercial loans increased more in the latter period than they had in
the former, smaller increases in consumer and real estate loans from mid-October to midDecember dragged down the increase in total loans.
IX-1
NINTH DISTRICT--MINNEAPOLIS
As 1995 opens, the economy of the Ninth District shows robust growth in most sectors. Manufacturing
is very strong. Construction is active for the winter season, with commercial projects replacing residential
building as the focus of strength. Iron mining expects its best year in over a decade and other metal
mining faces favorable conditions. Forest product output remains high, with paper production continuing
to gain strength. Modest recovery in depressed farm prices reportedly is fueling some increases in farm
capital spending. Consumers are actively buying vehicles, and sales of general merchandise are generally
good.
But not all is favorable. Winter tourist businesses are having a slow year so far, largely due to
unfavorable weather rather than lack of demand. Residential building remains below year-earlier levels,
and sales of existing housing have slackened.
Moreover, some problems associated with strong economic growth persist. Urban labor markets are
very tight and many businesses have difficulty in securing employees. Businesses continue to report higher
wage increases than were common in recent years. Reports of price increases in raw materials and
intermediate goods are common and some such goods are increasingly difficult to secure.
Manufacturing
"Virtually all of our manufacturing customers are doing very well," reports a small business lending
supervisor from a major Minneapolis bank. "It is really a boom," he adds. Commercial printers and firms
manufacturing circuit boards, other electronic components, die castings, building components and
hardware are described as doing particularly well across the district A Japanese firm opened a small
engine plant in Wisconsin citing the current dollar-yen exchange rate as a key factor. A major window
manufacturer announced plans for a new plant in Fargo, N. D. Two mainframe computer manufacturers
did announce layoffs, but these seem to result from long-term changes in that industry and ongoing
restructuring in the particular companies involved rather than any overall weakness in the economy.
Natural resource industries
"The taconite industry is on a roll," is how one newspaper described iron mining in northeastern
Minnesota. Production was about 42 million tons in 1994 and is expected to vault to 47.5 million tons in
1995, the highest level in over 15 years. As an exception to overall brightness in this sector, a Michigan
mine announced a layoff as part of a consolidation into one site. Copper and other non-ferrous producers
IX-2
have not expanded output to the extent that iron mines have, since they had less slack capacity, but
extremely favorable prices are allowing these operations to replace old or worn-out equipment.
Production of corrugated cardboard and other packaging as well as printing paper continues to increase.
Output of other forest products, including lumber and building board, continues strong, and Montana
timber employment and output have regained much of the ground lost when a major mill closed in 1993.
Construction and real estate
"Office glut lessens as businesses take up lots of space," is one recent Minneapolis headline. "People
have to build, there just isn't any decent commercial space left," comments a suburban St. Paul lender.
Commercial projects clearly have passed up housing as the locomotive for the construction sector. New
warehouses, distribution centers and other retail facilities are in particular demand. "Retail is to the
1990s what office buildings were to the 1980s," comments one major national developer and builder based
in Minneapolis. Long lead times on new commercial buildings are reported in some areas.
However, residential construction clearly has retreated from earlier highs in many areas of the Ninth
District. Single-family home permits issued in the Minneapolis-St. Paul area were somewhat below yearearlier figures in October and November, and industry spokespersons indicate that the same will be true
when the December numbers are available. A major home builder noted that actual slowing was less than
originally anticipated and stated that business was still good. He cited increasing numbers of new home
buyers opting for adjustable rate mortgages as the primary reason why residential housing activity has not
slowed more than it has. This pattern, of some slowing from year-earlier levels, but of still maintaining
good levels of activity reportedly is true in other urban areas of the district.
Markets for existing homes are cool, however. A Minnesota residential realtor describes sales of
existing homes as depressed from levels that prevailed in the two previous winters. Existing home sales
reportedly remain strong in rapidly growing urban areas such as Sioux Falls, S.D., and Billings, Mont., but
have slowed slightly in other areas.
Agriculture
With crop production in its mid-winter dead season, Ninth District farmers are focused on livestock
production and on marketing the 1994 crop. Modest improvements in both crop and livestock prices have
reportedly improved producer outlooks for 1995, and a few observers see increased farmer willingness to
invest in new machinery before the 1995 crop season. Unseasonably warm weather in December raised
IX-3
fears that stored, unprocessed sugar beets might spoil, but cold weather in early January has alleviated that
threat, at least temporarily. Lack of snow cover in dairy areas is causing concern about alfalfa survival.
Consumer spending and tourism
"The day after Christmas was phenomenal," according to a manager of a Montana discount store.
Holiday retail sales apparently were very strong in Montana and the Dakotas. The Minneapolis-St. Paul
area mimicked national patterns: Appliances and consumer electronics sold briskly, but apparel sales were
disappointing.
Consumers continue to go for new vehicles. North Dakota's registrations of new passenger vehicles for
December were nearly 5 percent above the already healthy sales experienced a year earlier. Reports from
registration agencies and dealers' associations in other states confirm this pattern.
Winter tourism activity was slow in parts of the Ninth District apparently due more to sparse snow
cover than to weak demand. Officials in Michigan's Upper Peninsula and northwest Wisconsin report a 50
percent decline for December 1994, compared to the prior year. Business stayed even for December at a
northern Minnesota ski resort, while snowmobiling dropped from year-earlier levels. Despite unfavorable
exchange rates for Canadian skiers, a northwest Montana resort reports a slight increase this season.
Employment. wages and prices
Evidence of tight labor markets abounds. Help wanted signs are posted in all sorts of establishments
and classified advertising sections are bulging. Even temporary agencies are scraping the bottom of the
labor barrel, the CEO of a computer manufacturer reports, noting that over of half of the workers
forwarded by agencies fail a drug screening test, up from less than 8 percent a year ago. Several
executives of large Minnesota firms who participated in an economic roundtable hosted by the
Minneapolis Fed cited increasing difficulty in securing needed workers and noted that they were raising
wages much more than in preceding years. And a small Wisconsin firm that produces ribbon candy, a
holiday season specialty, was unable to do so because it could not secure the needed temporary workers.
Both manufacturers and building contractors report price increases for materials they need. Some steel
uses still experience delivery delays. Precast concrete panels also reportedly are in short supply, in spite of
plants running seven-day a week, 24-hour schedules. However, prices of petroleum fuels continue to drop.
TENTH DISTRICT - KANSAS CITY
Overview. The pace of economic expansion in the Tenth District remains strong.
Holiday retail sales increased from a year earlier and manufacturers continue to operate
at high levels of capacity. Construction of multifamily residential buildings has offset
slower single-family homebuilding. Agricultural bankers report improvement in the
condition of their crop loans but a deterioration in the condition of their livestock loans.
Tightness in markets for skilled labor has eased, and there is little evidence of upward
pressure on wages. Retail prices have remained stable, while materials prices have
increased in both the manufacturing and construction sectors.
Retail Sales. District retailers report that sales improved throughout the month
of December and were well ahead of year-ago sales. Despite disappointing sales of
outerwear due to unseasonably warm weather, sales of basic lines were strong during the
holiday season. Retailers indicate they are satisfied with current inventory levels. Most
auto dealers report slightly declining sales over the past month, due primarily to seasonal
factors, but expect sales to be strong over the next few months.
Manufacturing. Most firms continue to operate at high levels of capacity.
Shortages of skilled labor, however, are much less widespread than at the time of our
last Beigebook survey. Manufacturing lead times have increased but are expected to
shorten in the second half of 1995. Most respondents plan to trim inventories in the
near term.
Energy. Drilling activity in the district fell slightly in December. As a result, the
X-2
average number of drilling rigs operating in district states stood somewhat below the
year-ago level. Despite lackluster performance overall in the region's energy industry,
parts of the district benefited from some firming in natural gas prices near the end of the
year.
Housing. Builders report a slight increase in housing starts from both last month
and a year ago due to a pickup in construction of multifamily buildings. Most
respondents expect building activity to remain stable in the coming months. Sales of new
homes increased slightly in some parts of the district over the past month, despite higher
home prices. Most builders report materials are available with few delays. Mortgage
demand continues to decline with higher interest rates, although most lenders expect
demand to level off or increase slightly in the months ahead.
Banking.
Loan demand rose last month at most reporting banks. Most banks
report higher demand for commercial and industrial loans and for consumer loans.
Demand was largely unchanged for home mortgage loans and home equity loans, flat to
down for residential construction loans, and up somewhat for commercial real estate
loans. Demand for agricultural loans was mixed. Loan-deposit ratios were constant to
up from the previous month, while security investments were unchanged.
Most respondents raised their prime rate last month, and almost all expect to
raise the rate again in the near term. Consumer lending rates were increased last
month, and almost all banks anticipate further increases in the near future. Lending
standards were unchanged.
Bank deposits increased slightly last month. NOW accounts, money market deposit
X-3
accounts, and large time deposits were up somewhat, while demand deposits and small
time deposits were little changed.
Agriculture. Agricultural banks in the district indicate their farm loan portfolios
had a mixed performance in 1994. Most crop loans are in better condition than a year
ago. Crop yields were up significantly from 1993, more than offsetting lower prices.
Nearly all bankers surveyed report weaker livestock loan portfolios, however, due to a
slump in hog and cattle prices. Nevertheless, most bankers have been surprised that
livestock loans did not fare as poorly as large summer losses had suggested.
The district's winter wheat crop is in good condition, although bankers in some
areas are concerned that the 1994-95 winter may be too warm and dry to support a good
wheat stand in the spring. District bankers generally expect farm income to improve
slightly in 1995. With normal crop yields in 1995, incomes for crop farmers may be
nearly equal to those of 1994. Incomes for livestock producers should improve in 1995
as input prices fall and livestock prices return to breakeven levels.
Prices and wages. Retailers report that prices remained stable in December.
Manufacturers' purchasing agents report input prices increased in the past month and are
higher than a year ago. Fewer agents report tightness in markets for skilled labor than
in past months, and none report upward pressure on wages. New home prices rose over
the last month. Most builders report that prices of materials have increased, although
tightness in the market for construction labor has eased.
XI-1
ELEVENTH DISTRICT--DALLAS
The Eleventh District economy continued to grow at a solid pace in late November and
December. Increasing strength was reported in the service sector, and manufacturing orders continued
to rise at a steady rate. Strong commercial construction activity offset a further decline in the singlefamily sector. Retail sales growth slowed after the Thanksgiving holiday and Christmas sales were
lower than expected. Growth in loan demand continued at a strong pace, but competition between
banks for customers squeezed margins. District energy activity remained unchanged but was slightly
below last year's levels. Year-end agricultural production was up.
Contacts in several manufacturing industries, including petrochemicals, paper and steel,
reported price increases resulting from strong demand. Apparel and food contacts said that higher
costs--especially for packaging--were raising price pressures in their industries. Service sector
respondents reported continued wage and price pressures resulting from labor shortages and strong
demand. Retailers said competition kept prices at or below last year's levels. Oil prices held steady,
but warm winter weather depressed natural gas prices. Sharp declines in livestock prices led to a
decline in a regional index of agricultural prices.
District manufacturers reported continued growth in orders with strong growth in the
demand for paper products, electronics, apparel and chemicals. Orders increased modestly for
construction-related products. Domestic and foreign sales of packaging materials, boxes and paper
products continued to rise. Prices were up for all types of paper products and contacts expected
further price increases in 1995. Despite additional capacity, electronics orders outpaced supply
leading to lower inventories. Electronics prices were reported as no longer falling, resulting in higher
profits for manufacturers. A December surge in orders for jeans led to hiring in apparel
XI-2
manufacturing. Demand for construction-related products edged up. Lumber producers reported
lower sales of residential lumber but increased orders from commercial builders. Demand for concrete
and cement increased with improving weather. Glass sales were at a record high due to rising
commercial construction and robust auto production. Orders for primary and fabricated metals
accelerated, and producers reported that demand for steel had picked up recently in anticipation of
near-term price increases. Food manufacturers reported steady demand and had increased hiring
because of strong growth earlier in the year. Petrochemical orders remained extremely strong, and
despite added capacity, inventories were low and prices continued to rise. Improved business overseas
kept demand for oil and gas machinery steady at high levels, but respondents expressed concern over
low domestic natural gas prices. Unseasonably warm weather lowered fuel oil costs, reducing refining
margins to record lows. Several refiners said they plan to shut in capacity until margins improve.
Demand for business services grew at a slightly faster pace. Legal firms reported a pickup in
demand associated with real estate transactions, mergers and acquisitions, and initial public offerings.
Growing labor market tightness for experienced accountants increased upper level salaries in the
accounting industry. Demand accelerated for temporary placement services. Both trucking and
temporary service firms continued to report increasing wage pressures associated with strong demand
and a shortage of qualified workers. Demand for business communications and advertising services
slowed slightly from their previous fast pace.
Seasonally adjusted, retail sales growth slowed slightly after Thanksgiving and many retailers
said Christmas sales did not meet expectations. Holiday sales were reported to be strongest for
electronics, jewelry, toys and other hard goods. Sales of fragrances, cosmetics and most fashion
apparel were less than expected. Heavy discounting and competition kept selling prices unchanged or
below a year ago. Stores along the Mexican border said that sales dropped following the peso
devaluation and are not expected to pick up for at least 3 to 4 months. Contacts in the auto industry
XI-3
reported that sales growth had slowed somewhat in December after an extremely strong November.
Popular car models were said to be in short supply.
Contacts in the construction and real estate industry reported that higher mortgage rates
continued to cause a decline in single-family construction. Commercial construction--especially for
retail space--remained strong, but contacts voiced uncertainty about the year ahead. Demand for
suburban office and retail space remained at high levels, and the apartment market was reported to be
tight despite a number of recently completed projects.
Bankers reported that loan demand continued to increase at a strong pace, but said higher
interest rates and competition had squeezed margins. Consumer lending remained very competitive,
and strong demand for commercial loans had offset the decline in residential mortgage lending
activity.
District energy producers reported that activity was unchanged. Strong global demand kept oil
prices between 17 and 18 dollars per barrel, but warm winter weather pushed natural gas prices
below last year's level. The district rig count was slightly below that of a year ago, but drilling
activity in the Gulf of Mexico was still at good levels, according to contacts.
Most district agricultural producers reported higher production than expected. Livestock
conditions were reported to be well above average across the district. Although prices for cotton,
wheat, sweet corn and lettuce were higher, lower livestock, corn and soybean prices pushed the Texas
All Farm Products Index down 6.2 percent from a year ago.
XII- 1
TWELFTH DISTRICT -- SAN FRANCISCO
Summary
Economic growth in the District as a whole appears to be accelerating slightly,
bringing higher rates of resource utilization. Strengthening of activity in Arizona, California,
and the Pacific Northwest appears to have been only partly offset by a slight moderation in
the fast-growing states of Idaho, Nevada, and Utah. Retail sales during the holiday season
were reported to be moderately strong in most of the District. The services sector continues
to expand noticeably. Except for aerospace, manufacturing activity generally remains at high
levels in most of the District outside California, with a few industries reporting capacity
constraints and large price increases. In response to higher interest rates, home sales and
construction appear to have dropped back a bit, but business investment continues to pick up.
Outside of housing, bank lending activity is reported to be brisk.
Business Sentiment
Twelfth District business leaders generally remain optimistic about the outlook for real
activity in the nation and region. Survey respondents expect that over the next four quarters
national growth will exceed the long-run historical average pace, the unemployment rate will
fall further, and inflation will accelerate slightly. Within the region, growth in most states is
expected to exceed the national pace. Among regional spending components, business
investment is expected to strengthen further, but housing starts generally are expected to drop
back; the main exception is California, where some respondents anticipate a slight
improvement in housing construction from relatively weak levels.
XII - 2
Retail Trade and Services
Holiday season retail sales were reported to be moderately strong in most parts of the
District and in some areas to be substantially stronger this season relative to weak levels a
year earlier.
Big-ticket items reportedly sold better than less expensive merchandise; for
example, sales of computer peripheral equipment, software, other electronic goods, and
automobiles generally were reported to be robust, but lower-end apparel sales were weak,
leading to substantial price discounting in many areas. Within California, the relative strength
in holiday sales was particularly noticeable in Central and Southern California, where activity
last holiday season was at low levels. Retail sales in Idaho and Utah reportedly were boosted
by the addition of recent domestic in-migrants to the pool of shoppers in the states, with
furniture, housewares, and other items used in new homes said to be particularly strong.
Respondents from the border region of Arizona noted that the late-December devaluation of
the Mexican peso noticeably inhibited trans-border shopping by Mexican residents, but this
devaluation reportedly had less immediate effect on holiday sales in the San Diego area.
The services sector continues to expand moderately, boosted by gains in tourism and
business services and less of a drag from restructuring in the health care industry. Hospitals
were reported to be more willing to make investment purchases recently. Hotel occupancy
rates were reported to be high in most of California and Utah, owing in part to convention
activity and a strong start to the ski season. Among business services, software development
has been strong, and in tight labor markets--such as in Idaho--wages for computer
programmers were reported to be increasing rapidly.
The government sector remains weak, and new concerns about budgetary pressures
XII - 3
have been expressed in some areas. In Oregon, wages of state government employees are
scheduled to be cut in mid-1995. In eastern Washington, expectations of a significant
reduction in the workforce at the Hanford site this year are dampening the business outlook in
that area. In Southern California, respondents expect the Orange County bankruptcy and
investment pool losses to result in a combination of local government layoffs, service cuts,
infrastructure project delays and cancellations, and higher "user fees."
Manufacturing
Outside of aerospace, manufacturing activity generally remains at high levels in most
of the District outside California, with a few industries reporting capacity constraints and
large price increases. In the Pacific Northwest, electronics manufacturing industries were
reported to be producing at high levels, but growth appears to have slowed somewhat
recently.
In the pulp and paper industry group, all segments were reported to be tight now,
with strong demand and low inventories. Newsprint prices reportedly jumped 20 percent in
1994 and are expected to climb about 25 percent further this year. A major food retailer
noted that paper and other packaging costs were increasing and indicated that the increases
will have to be passed on to consumers.
Agriculture and Resource-Related Industries
District farmers report generally good conditions but express concern about rising costs
of labor, transportation, and raw materials.
Crop and cattle grazing conditions generally have
been aided by high levels of precipitation; water levels in most parts of California are well
above normal so far this winter, and an Arizona rancher reports enough rain to let cattle feed
over a wider than usual range. In California, some pressure on wages was reported,
XII - 4
particularly for drivers of trucks containing agricultural products, and transportation costs also
have been boosted by an increase in diesel fuel prices. Several agricultural sector respondents
noted that chemical, water, and packaging costs are increasing rapidly.
Real Estate and Construction
Homes sales and construction appear to have dropped back a bit in many parts of the
District recently. In Central and Southern California, new home construction reportedly
weakened, and sales of existing homes were off. In many other areas, housing sale and
construction activity typically are at seasonal lows this time of year; changes in activity were
less discernible in the thin markets.
Financial Institutions
Bank lending activity is reported brisk, but margins appear to be shrinking in some
areas, as pricing has become more competitive.
In California, some banks expressed
concern about the effects of past lending to businesses that sold products and services to
Orange County and uncertainty about the effects of the Mexican peso devaluation. However,
this was not expected to slow the improving economic conditions in the state or banking
industry substantially, and community banks in Northern California were particularly upbeat.
In Utah, banks were reported to be experiencing strong deposit growth and strong demand for
consumer and commercial loans.
Cite this document
Federal Reserve (1995, January 31). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19950201
@misc{wtfs_beige_book_19950201,
author = {Federal Reserve},
title = {Beige Book},
year = {1995},
month = {Jan},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19950201},
note = {Retrieved via When the Fed Speaks corpus}
}