Beige Book
For use at Noon, E.D.T.
Wednesday
May 8, 1996
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
April 1996
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
APRIL 1996
TABLE OF CONTENTS
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SU M M ARY ......................
First District - Boston
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I-1
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Second District - New York ...................
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II-1
Third District - Philadelphia ...................
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II-1
Fourth District - Cleveland ...................
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IV-1
Fifth District - Richmond ............
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Sixth District - Atlanta ...................
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V-1
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VI-1
Seventh District - Chicago .....................................
VII-1
Eighth District - St. Louis ...................................
VIII-1
IX-1
Ninth District - M inneapolis ...................................
Tenth District - Kansas City ..................
Eleventh District - Dallas ...................
Twelfth District - San Francisco ..................................
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XI-1
XII-1
i
SUMMARY*
Economic activity advanced at a moderate pace in March and April, according to
reports from the Federal Reserve Banks. All the districts with the exception of New
York indicated that economic activity expanded, and several noted that the pace of
expansion had quickened recently. Both retail sales and manufacturing activity picked up
somewhat. In addition, manufacturers' inventories appeared to be at or near expected
levels in several districts. Activity also picked up in nonfinancial services, commercial
and consumer lending, and real estate. Mortgage loan activity slowed, as did tourism in
several districts, and agriculture suffered from adverse weather.
Price increases remained generally subdued and there were only scattered reports
of wage pressures despite continued tight labor markets and somewhat stronger
economic growth. Several District banks noted the sharp increases that had occurred in
oil and grain prices, but Dallas observed that oil price futures pointed to a near-term
decline.
CONSUMER SPENDING
Most districts reported gains in retail sales, but the Boston and New York districts
indicated that retail sales were mixed and San Francisco said that sales were stable. Six
districts noted that apparel sales were up from the previous year and several attributed
the uptick to warmer weather. Retailers in several districts expected a moderate
increase in sales over the next few months. The Minneapolis, Kansas City, and Dallas
*Prepared at the Federal Reserve Bank of Richmond and based on information
collected before April 30, 1996. 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
districts reported strong auto sales, while the Philadelphia and Chicago districts reported
that auto sales were sluggish. Most districts said that retail inventories were near desired
levels and were consistent with their contacts' expectations of increased sales.
MANUFACTURING
Manufacturing output strengthened by varying degrees in nine of the twelve
districts. The growth rate picked up in Boston, Philadelphia, Cleveland, Richmond, St.
Louis, and Minneapolis; Chicago, Kansas City, and San Francisco reported that plants in
their districts were operating at moderate to high levels of capacity. However,
manufacturing conditions were mixed in New York and weakened somewhat in Atlanta.
Dallas said activity was below the level of a year ago but that April manufacturing orders
rebounded from March. The Boston, Chicago, Dallas, and Minneapolis districts
indicated that manufacturers' inventories were at or near desired levels; Kansas City,
Philadelphia, and San Francisco reported that inventories were edging down; and Atlanta
said that inventories were increasing moderately.
District banks reported varying pockets of strength and weakness in
manufacturing. Cleveland, Chicago, and St. Louis noted increased demand for auto and
auto-related products. Boston, Atlanta, and Minneapolis all reported stronger demand
for electronic and computer-related equipment. Boston, Atlanta, St. Louis, and Dallas
indicated that the market for building materials showed gains.
In contrast, Philadelphia noted that some of their firms which produce
homebuilding products and materials saw declining demand. Dallas indicated that the
growth in demand for semiconductors and telecommunications equipment had weakened
iii
in recent months. Boston, Philadelphia, Atlanta, and St. Louis reported excess capacity
and rising inventories of paper products.
NONFINANCIAL SERVICES
Philadelphia, Richmond, Dallas, and San Francisco reported that the service
sector was generally healthy in their districts. Philadelphia reported strong demand for
computer-oriented businesses, while San Francisco noted an increase in demand for both
computer and telephone communication services.
An earlier Easter and colder-than-normal temperatures hampered beach tourism
activity in the Richmond and Atlanta districts. Minneapolis indicated that the long
winter was damping tourism activity in February and March. In contrast, Philadelphia
reported that tourism was healthy in their district, with increased bookings for
conferences and business meetings in the Pocono Mountain region of Pennsylvania.
Spring bookings were also higher in the Richmond and Atlanta districts, and Minneapolis
said that business owners were optimistic about bookings for the spring and summer.
REAL ESTATE AND CONSTRUCTION
Most Districts reported that residential real estate activity increased; some
contacts characterized the activity as "brisk." Housing sales strengthened in the Atlanta,
Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco districts. The
Richmond and Kansas City districts indicated that housing starts were steady. Kansas
City reported that the stock of unsold homes was lean, while Atlanta said that home
inventories were "in good shape." Pockets of strength in western and southern New York
were overshadowed by sluggish markets in northern New Jersey and upstate New York;
one New Jersey contact described the market there as "listless."
iv
Commercial real estate activity also increased in most districts. Dallas,
Richmond, and Atlanta reported strong leasing activity with low vacancy rates and high
rental rates. The Dallas, St. Louis, Minneapolis, and San Francisco districts noted strong
growth in construction activity; Atlanta reported that several speculative projects were
under way and more were anticipated. Boston indicated that its commercial real estate
market improved somewhat, and New York reported a stable commercial real estate
market. San Francisco, however, indicated that the market was soft in the Los Angeles
area, and Chicago noted that commercial development remained slow, despite positive
absorption rates and firming rents in office and retail space.
The recent uptick in mortgage rates had mixed effects on real estate and
construction activity. Chicago and Richmond reported that the rise may have spurred
potential homebuyers to take action. The New York district reported that the increased
rates had no apparent effects.
FINANCIAL SERVICES
Overall lending activity increased slightly in most districts with moderate gains in
commercial and consumer lending activity offsetting weaker residential mortgage and
home refinancing activity. The demand for consumer loans was mixed across districtsincreasing in Atlanta, Philadelphia, and Dallas but decreasing in Chicago and St. Louis.
In the Cleveland, Richmond, and Kansas City Districts, the demand for consumer loans
remained steady. New York and Cleveland reported that loan delinquency rates were
unchanged. However, Chicago reported that loan delinquency rates rose, although
overall credit quality was unchanged. St. Louis reported a slight increase in
nonperforming consumer loans.
AGRICULTURE
Agriculture was adversely affected by the weather and high feed costs in March
and April, according to district bank reports. Kansas City, Dallas, and San Francisco
reported that severe drought conditions had damaged the winter wheat crop; Richmond
and St. Louis said that crops there suffered from the lingering effects of winter's severe
temperatures. In contrast, Minneapolis indicated that the wheat crop held up well.
Several banks cited the small wheat crop and tight carryover stocks as reasons for
soaring grain prices. Dallas, Minneapolis, Kansas City, and San Francisco noted that
high livestock feed costs combined with low livestock prices were leading to financial
stress among ranchers and some feedlot operators. San Francisco and Richmond
reported that fruit trees were in worse than normal condition, and St. Louis indicated
that an early spring freeze resulted in the loss of 75 percent of the Arkansas peach crop.
Kansas City noted that spring planting activity may be delayed by the drought;
Minneapolis reported that planting delays have resulted from unseasonably wet weather.
EMPLOYMENT AND WAGES
Most Districts reported tight labor markets but only scattered upward pressure on
wages. Tighter markets for manufacturing workers were noted by St. Louis and Kansas
City. Chicago said that labor shortages were the main concern of businesses there,
although demand for manufacturing workers had softened. Boston indicated that some
manufacturers experienced difficulty in filling software and telecommunication positions.
The Atlanta and Kansas City districts reported shortages of retail workers. While Dallas
reported fewer labor shortages overall, a short supply of skilled workers had caused
vi
delays in the construction of warehouses and office buildings. Cleveland indicated that
labor shortages were occurring less frequently than a year ago.
Districts generally reported only modest wage pressures, although St. Louis said
several industries experienced increased labor costs and Minneapolis reported wage
increases of 4 to 5 percent. Kansas City said that wages rose for skilled workers such as
welders and machinists.
PRICES
Most districts reported little upward pressure on prices other than sharply higher
prices for grains and energy-related items. Boston, New York, and Atlanta reported that
prices in their districts changed little. Price increases in the San Francisco district
continued to be moderate overall. Retail prices were steady in Kansas City and
increased slightly in Richmond. Materials prices rose in the Kansas City and St. Louis
districts but declined slightly in Richmond. Richmond indicated that service-sector and
finished goods prices increased slightly. Atlanta reported some pockets of price deflation
in lumber and paper, and Dallas reported that oil prices were likely to decline soon.
Contacts in the Philadelphia district expected increases in the prices of purchased
supplies and materials over the summer.
Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco reported
sharp increases in grain prices; however, the Dallas, Kansas City, and Minneapolis
districts noted lower livestock prices. St. Louis, Minneapolis, and San Francisco
indicated prices for fuels rose, and Dallas and Minneapolis reported price hikes in
plastics.
I-1
FIRST DISTRICT - BOSTON
The First District economy is expanding at a moderate pace.
Retail
results in March and early April were mixed, ranging from double-digit sales
gains to double-digit declines from a year earlier; some of the laggards saw a
pickup in recent weeks.
Manufacturers are more upbeat, with most reporting
solid first-quarter gains.
Inventory levels are not out of line, according to
both retail and manufacturing contacts.
input prices are said to be stable.
New England are improving slowly.
With few exceptions, selling prices and
Commercial real estate markets in most of
Insurance sales are increasing.
Retail
First District retailers report extremely varied results in March and
April.
Chains selling upscale apparel or specialty non-apparel cite sales
increases ranging from 4 to 13 percent over year-earlier levels, and one food
chain notes unusual gains of 2½ percent.
losses in March and early April.
Other contacts posted 0 to 10 percent
A few of the latter, however, are encouraged
by a very recent pickup in sales activity, attributed to the long-awaited
arrival of spring.
Retail respondents are moderately optimistic about the
economy over the next six months and anticipate sales growth of 0 to 5 percent.
They continue to express concern, however, about tough competition, particularly
from national chains which are strengthening their position in the region.
Vendor and retail prices remain stable.
holding, profits vary greatly.
While gross margins are typically
Retailers are satisfied with current inventory
levels; many contacts have updated their inventory systems in recent years.
Less than one-third of respondents anticipate growth in capital spending and
employment this year.
Wage increases of 2 to 5 percent are expected.
Manufacturing
Almost all First District manufacturing contacts indicate that first
quarter 1996 revenues increased from a year earlier, with close to half
experiencing double-digit growth over this period.
For most, recent sales
trends are similar to those in the second half of 1995.
Especially large gains
relative to a year ago are reported for computer networking and miscellaneous
microelectronics products, industrial machinery, and equipment used in
residential and commercial construction.
(Some contacts alluded to press
reports of a slowdown in the semiconductor industry while indicating that their
own related business is in good shape for the next 6 to 12 months.)
Respondents
report that sales of equipment to the pharmaceutical and health care industries
are growing faster than in 1995, while sales to the automotive industry have
slowed slightly.
Demand for apparel textiles generally remains weak, although
one contact cites positive trends for materials used in upscale clothing.
Inventories generally are in line with plans.
Many respondents indicate
long-term efforts to reduce their inventory-to-sales ratio, however, and some
firms in the textile and paper products industries report modest degrees of
overstocking.
One contact expects customers to stock packaging materials in
anticipation of a price increase for polyethylene.
Selling prices and materials costs are reported to be largely stable.
Some respondents have raised prices to reflect higher-cost steel and other
metals or to improve margins.
Paper and wool prices reportedly have softened
after rising considerably last year.
About three-quarters of the respondents have increased employment during
the past year, but future trends are expected to be more mixed.
Some
I-3
manufacturers report difficulties filling software and telecommunications
positions, but none indicates generalized wage pressures.
Investment plans vary
widely; over one-third of those contacted mention efforts to rein in capital
spending.
Commercial Real Estate
Commercial real estate in New England has improved somewhat lately.
markets are beginning to recover from the long winter.
Most
Contacts report gradual
absorption of the existing stock, leading to slowly decreasing vacancy rates.
No major new construction is reported.
In addition, confidence is said to be
low, preventing developers from making new investments and banks from lending
them money.
Rental rates have been going up slightly or have levelled off in most
markets.
However, contacts view these price movements as too small to make up
for the large price decrease that took place over the last several years.
While
downtown Boston and the greater Boston area have been doing very well, Maine,
Rhode Island, and Connecticut have seen only very minor increases in activity.
In all the states, the retail market seems to be the slowest to recover, while
the industrial sector and apartment building sales are stronger.
Nonbank Financial Services
Respondents at insurance companies reported an increase in sales in the
first quarter of 1996 compared to the first quarter of 1995.
Employment,
however, continued its downward trend, mostly because of continuing
consolidations and mergers in the region.
The consolidation trend reflects the
spread of managed care, as insurance companies providing fee-for-service health
insurance merge with managed care providers.
II-1
SECOND DISTRICT--NEW YORK
Second District economic conditions have weakened somewhat over the past two months,
despite a modest pickup in job growth. Reports from retailers were very mixed in March and April, with
year-over-year changes ranging from outright declines to double-digit gains; but on balance, sales were
weaker than in February and a bit below plan.
Job growth has accelerated somewhat, but a
corresponding increase in labor force participation has kept unemployment rates from declining.
Finally, banks' delinquency rates, which had been rising, leveled off in the past two months, while
demand for commercial and industrial loans picked up.
Consumer Spending
March and April retail sales in the region varied substantially among the retailers surveyed but
were generally weaker than in February. An early Easter distorted monthly sales figures, boosting
March at the expense of April; for the two months together, year-over-year changes in same-store sales
ranged from a decline of 1 percent to a double-digit increase-overall gains averaged slightly more
than 3 percent, down from 6 percent in February. A number of contacts reported that sales were below
plan, but all reported that inventories were close to desired levels by late April.
Unseasonably cold weather reportedly had a moderately negative impact on sales, particularly
in March. One contact attributed February's strength-and March-April weakness-to earlier-thanusual tax refunds. Apparel, especially women's, generally outperformed other merchandise categories
and demand was considerably stronger for upscale apparel than for more moderate lines. Most
retailers are holding prices steady, though reports suggest somewhat less discounting than a year ago.
Costs for merchandise and labor are generally flat.
Construction & Real Estate
Commercial real estate markets in the New York metro area were stable in March. A dip in
leasing activity pushed Midtown Manhattan's office vacancy rate back up to 14.2 percent (matching
December's level), from 13.9 percent in February.
But downtown's rate edged down for the fifth
consecutive month, to 24.6 percent in March, versus 24.7 percent in February and 25.7 percent last
II-2
October. In the first quarter, northern New Jersey's office vacancy rate fell from 19.2 to 18.7 percent
(a six-year low); rates edged up in Westchester and Fairfield counties, but are lower than a year ago.
Reports on the residential real estate market were mixed in April. Contacts in downstate New
York continue to experience a better spring selling season than last year-both traffic and sales are
up. However, builders report no recovery in the Albany area (which has been depressed by state
government downsizing), and only a moderate pickup in the western tier of the state in recent weeks.
New home sales across upstate New York remain weaker than a year ago; while the inventory of new
homes is very low, a large supply of existing homes for sale is depressing the overall market.
New Jersey builders say that sales and traffic have slowed a bit in recent weeks, following a
first-quarter pickup, and that sales are lower than a year ago-one contact described the market as
"listless", noting that while consumer pessimism has diminished, so has the sense of urgency to buy.
Apparently, the recent rise in mortgage rates has, thus far, not been much of a factor.
Manufacturing
Regional surveys of purchasing managers were mixed in April.
Business conditions in
metropolitan New York City's manufacturing sector improved in April but were still on the weak side
(outside the manufacturing sector, local conditions continued to be mildly positive). Conversely,
purchasing managers in the Buffalo area reported that business conditions in the manufacturing sector,
which had been quite favorable throughout the first quarter, deteriorated sharply in April. Apparently,
this incipient weakness was not directly related to the GM strike, which is estimated to have idled 6,000
Buffalo-area workers at its peak in mid-March.
Purchasing managers in New York City report
continued declines in prices paid, but those in Buffalo cite modest increases.
Other Business Activity
The district's labor market strengthened somewhat in the first quarter. Payroll employment
growth was above trend in New York and New Jersey, both for the month of March and year-to-date.
New Jersey's unemployment rate has remained fixed at 6.4 percent since January, while New York
State's rose from 6.0 to 6.5 percent in March, after edging down by 0.2 points in February. (New York's
II-3
rise was due to a sharp increase in labor force participation, which was accompanied by a more
moderate rise in employment). New York City's ongoing fiscal difficulties have prompted the mayor to
accelerate job cuts for the upcoming fiscal year, while a number of large corporations-General Public
Utilities, Perkin-Elmer, Kraft, and Prodigy -announced
job cuts totaling about 1,000 in the region. On
a brighter note, tourism continues to boom, with first-quarter hotel occupancy rates in New York City
climbing to a 16-year high.
Financial Developments
At small and medium-sized banks surveyed in the district, overall demand for new loans in April
was higher at about 40 percent of the surveyed banks and steady at another 40 percent compared to
two months earlier. According to senior loan officers at the surveyed banks, the largest increase was
seen in the commercial and industrial loan segment, with demand higher at nearly 35 percent of the
banks and steady at about 45 percent. Growth in demand for residential mortgage loans weakened
slightly; demand is lower at about 30 percent of the banks and steady at another 30 percent.
Refinancing activity for all types of loans dropped sharply, reversing the upward trend that began last
November.
Average loan rates, which had been trending down, leveled off in April-only 35 percent of
respondents reported declining loan rates, down from 76 percent in February; residential mortgage
rates have increased, on balance. With average loan rates leveling off, more banks than previously
reported a widening of spreads between average loan and deposit rates. Delinquency rates have
decreased or remained the same at more than 80 percent of the banks. Banks were more or just as
willing to lend in April as in February, and credit standards have generally remained the same.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports from various sectors of the Third District economy indicated that business
activity was moving up slightly in April. Around one-third of the manufacturers surveyed
reported some gains during the month, although producers of building materials noted recent
declines in sales. Retailers said sales were picking up modestly with the beginning of the spring
season. Auto dealers described the sales rate in April as good, although a bit below their
expectations. Bankers noted some increased commercial loan demand and a modest increase in
consumer lending. Tourism in the District has been healthy, and contacts in resort areas said
advance bookings for summer vacations have been strong. Among service industries, computer
consultants and service firms reported increased hiring and contracting for computer network
installations.
MANUFACTURING
Third District manufacturers reported some improvement during April. Although about
half of those contacted said their business was steady, a little over one-third indicated that orders
and shipments of their products were on the rise. The gains were spread among almost all the
major manufacturing sectors in the region; however, some firms that produce products and
materials for the homebuilding industry said demand for these goods was slipping. In addition,
some firms that export, as well as those that compete with imports, noted that the dollar's recent
strength has adversely affected their competitive position.
In general, area manufacturers reported they were working down inventories and planned
III-2
to continue to do so, but there were some reports that inventories in the paper industry were
rising above desired levels. Local manufacturers noted some increases in input costs in April,
and they expect some additional increases in the prices of purchased supplies and materials over
the summer. Manufacturing employment remained nearly steady in April: nearly two-thirds of
the local firms surveyed noted no changes in employment levels or working hours, and the
number of firms adding workers was matched by the number making reductions in their work
forces.
RETAIL
Third District merchants generally reported modest increases in sales for the March-April
period compared with the first two months of the year. An early Easter boosted March sales but
held down sales in the first half of April, according to store officials. But they also noted that
warm weather in recent weeks has spurred sales of summer apparel and seasonal merchandise.
In particular, new styles and colors for women's clothes have encouraged more buying of apparel
this spring than last, according to some retailers, and helped to lift performance at department
stores and women's clothing stores. Also, recent above-normal temperatures have encouraged
purchases of lawn and garden-care merchandise. Most retailers in the District described their
inventories as appropriate for the current sales rate and consistent with their expectations for a
modest year-over-year gain in sales for the spring season.
Auto dealers generally reported that sales in April were running at a healthy rate,
although a bit below their earlier expectations. Some General Motors dealers said their sales
were limited by the strike at a parts plant and attendant production cutbacks in March. Most
dealers for all makes indicated that their inventories were at satisfactory levels.
III-3
FINANCE
Bank lending in the Third District was moving up slightly in April, according to loan
officers at major banks. They noted some recent small gains in commercial lending, primarily to
manufacturers. Bankers continued to characterize the competition for business lending as very
strong. Some banks also have seen increased demand for consumer installment credit and home
equity loans. Credit card lending has also picked up a bit, but some bankers indicated they were
implementing more conservative credit standards, which could restrain the growth of this type of
lending.
TOURISM
The region's tourism industry has been healthy, according to tourism officials and hotel
executives. Hotel occupancy rates continued to be strong in Philadelphia. Real estate agents in
New Jersey and Delaware shore resorts reported that more rental contracts for the summer have
been signed through April of this year than last and rental rates have been edging up. Tourist
officials in the Pocono Mountain region of Pennsylvania indicated that hotels in the area have
seen increases in bookings for conferences and business meetings.
SERVICES
Data processing firms and consultants in the Third District reported strong demand for
systems design and installation as well as hardware upgrading. Computer consultants and
contractors said a continuing trend toward personal computer networks was generating demand
for their services and for the hiring of permanent staff with expertise in personal computer
systems design and installation. Demand for programmers was steady, and the need for
mainframe computer operators continued to decline.
IV-1
FOURTH DISTRICT - CLEVELAND
General Business Conditions
Business activity is expanding in the District, after having shown only mixed and
generally small gains since the first of the year. Even in western Pennsylvania, an area that
has not fared especially well in the past year, production and employment are both up.
That region still lags Ohio, however, where growth has generally been stronger.
Unemployment remains low in most parts of the District and is particularly low in
manufacturing-intensive northwestern Ohio. Reports of labor shortages are still heard in
some areas, although perhaps less frequently than at this time last year. Still, wage
increases are running only in the 2 percent to 3 percent range.
Weather conditions this spring have been cool, but mild, and early crop production
estimates are favorable. The combined effect of good harvests and substantially lower
inventories compared to last year suggests the potential for a profitable agricultural sector
in 1996.
Manufacturing
Industrial activity is still gaining ground after a relatively weak year-end
performance. Many manufacturers indicated that orders have picked up since the first
quarter. Capital goods producers continue to lead most other manufacturers in growth and
production rates. Auto and auto-related companies are reporting higher production levels
following the strike-induced shutdowns last quarter, although a few lingering aftereffects
of the strike were noted. Firms with significant export markets see business from abroad
IV-2
growing moderately from earlier in the year. Only a few industrial producers indicated
higher-than-desired inventory levels, also an improvement from the District report of a few
months ago.
Cost pressures remain remarkably light given the continued high production levels
seen here. Area purchasing managers report that prices have risen on only a limited
assortment of commodities, including some metals and most energy goods. Only a few
commodities are noted to be in short supply.
General Retailing and Auto Sales
District retail activity strengthened in March and April, but cool temperatures were
a negative factor, especially in building supplies and lawn and garden equipment. Apparel
sales were stronger in April, with women's apparel, sportswear, and some categories of
men's apparel much improved from earlier in the year. Major appliances and consumer
electronics have also been selling well (although sales of computing equipment are off
substantially.) Still, the April retail performance was generally good, and one contact
suggested the potential for the start of another retail growth cycle. Indeed, one national
retailer reports plans to add six or more stores in the District by year's end. Inventory
levels are "on plan" at most of the retail establishments we contacted.
Auto sales were mixed across the District during March and April. Several
dealers attribute much of the poor sales performance to colder-than-usual temperatures
and most were optimistic that sales would improve this spring. Dealers are continuing to
use special financing plans and factory incentives. Current interest rates seem to be
IV-3
having little or no effect on sales, but most dealers are quick to note the potential for a
drop-off should interest rates rise appreciably.
The General Motors strike appears to have had only a small effect on sales,
although inventory stocks were noticeably depleted. In most cases, the inventory decline
helped trim excess supplies (although one dealer saw inventories plunge to a 4-day supply
and reportedly lost some sales as a result.) The majority of dealers describe their stocks as
"desired" or "slightly lower than desired," with the typical inventory ranging between a
50- and 75-day supply.
Banking
The majority of banks indicated that loan demand has picked up a bit from earlier
in the year. However, most of the recent growth in credit extensions has centered in the
commercial credit categories, despite a rather pronounced drop-off in inventory floor
plans. Presumably, credit extensions for business expansion are rising again. Some
institutions also report a modest increase in new mortgage credit. Consumer borrowing
remains basically flat, although a number of larger institutions report greater securitization
of a variety of consumer loans.
Competition for credit is keen and spreads between deposit and lending rates are
said to be narrow. However, profit reports from District banks last quarter were good.
Moreover, while a continuing deterioration in credit quality is noted, there are no reports
of any significant rise in either commercial or consumer debt delinquencies.
V-1
FIFTH DISTRICT-RICHMOND
Overview: Economic activity in the Fifth District grew moderately in late March and
April. Retailers, manufacturers, port representatives, temporary employment agencies, and
service producers reported that growth was higher in their sectors. Activity in the tourism
and financial sectors was mixed, while the growth of state revenues varied across states.
Residential real estate activity grew more slowly but commercial real estate activity
strengthened.
Conditions in agriculture were normal.
Retail Trade: Most indicators of retail activity suggested increased growth in April,
according to preliminary results from a mail survey of District retailers. Sales revenue and
shopper traffic growth increased. Employment growth increased slightly; wage growth
changed little; and the growth of inventories and big-ticket sales slowed. Survey respondents
indicated that their prices rose less in April than in March. Respondents' six-month outlook
was for their prices to rise more slowly than was their forecast in March.
Service Production: The pace of expansion in the service-sector rose in April,
according to preliminary results from a District mail survey. Revenue and employment
growth was higher and wage growth changed little.
prices rose at the same rate in April as in March.
Service producers reported that their
Respondent's six-month outlook was for
their prices to rise more slowly than was their forecast in March.
Manufacturing: Most indicators of manufacturing activity growth increased in
April, according to preliminary results from a monthly mail survey of District manufacturers.
Except in Maryland, survey respondents reported a faster pace of expansion in shipments,
new orders, and order backlogs. Maryland manufacturers reported that growth weakened,
and one contact there attributed the weakness to defense cutbacks. Manufacturing
V-2
employment and the workweek changed little and respondents continued to report a scarcity
of skilled labor. Manufacturers indicated that finished goods prices increased slightly in
April from the month before, but that raw materials prices declined.
Respondents' six-
month outlook was for their prices and the prices of raw materials to rise faster than was
their forecast in March.
Tourism: A telephone survey of hotels, motels, and resorts throughout the District
indicated that April tourist activity was above March levels but below those of a year ago.
Baltimore contacts reported that baseball boosted tourism above last year's strike-affected
level. Compared to a year ago, District beach activity was hampered by an earlier Easter
and colder-than-normal temperatures, but spring bookings were up. Contacts expected betterthan-normal business and slight increases in prices during the next six months.
Port Activity: Representatives at District ports indicated that both export and import
levels in March were higher than in February and a year ago. Contacts continued to expect
exports and imports to increase during the next six months, with exports expected to rise
faster than imports.
Temporary Employment: A telephone survey of District temporary employment
agencies indicated that the demand for temporary workers was higher than in early March
and a year ago. Wages paid to temporary workers increased faster than the general price
level during the past year, but were unchanged during the last six weeks. Contacts indicated
that companies were hiring more temporary workers into permanent positions than a year
ago. Looking forward, contacts expected the demand for temporary workers to strengthen
during the next six months.
Finance: Contacts at District financial institutions reported that lending activity was
mixed during late March and April. Lenders indicated that the demand for commercial and
V-3
consumer loans was unchanged from early March and that the demand for mortgage loan
refinancings weakened. Compared to the previous six weeks, interest rates were unchanged
on commercial and consumer loans but were higher on mortgage loans.
Residential Real Estate: According to a telephone survey of District real estate
agents and homebuilders, residential real estate activity increased more slowly in late March
and April. Housing starts, sales, and customer traffic grew at a somewhat slower pace.
Homebuilders claimed that the recent increase in mortgage interest rates had negatively
impacted their markets. Real estate agents said that the recent increase had forced some
potential buyers out of the market but had led others to close more quickly on open
transactions. Construction wages and building materials prices increased slightly.
Commercial Real Estate: District contacts reported that commercial real estate
activity picked up in late March and April. Leasing activity increased, landlord concessions
all but disappeared, and commercial rents continued to rise. Vacancy rates fell, except in
West Virginia where they were unchanged. The availability of prime office space continued
to tighten in most of the District and nearly half the respondents reported shortages; one
Maryland contact characterized the shortage in his area as "desperate." Contacts continued
to report new construction, especially in the Carolinas and the District of Columbia.
State Revenues: State tax collections were mixed in March compared to February.
Real revenue growth was stronger in North Carolina, Virginia, and West Virginia; flat in
South Carolina; and somewhat slower in Maryland and the District of Columbia.
Agriculture: Activity in agriculture progressed at a normal pace according to district
agricultural analysts. Warmer weather in late April allowed farmers to catch up on planting
activity delayed by a colder-than-usual March. Winter's bite still affected crops; analysts
reported that the condition of small grains and fruit trees were worse than normal.
VI-1
SIXTH DISTRICT - ATLANTA
Overview
According to contacts around the District, the Southeast economy continued
to expand in early spring, although reports showed some softness as well as strength. Retail
contacts reported that same store sales in March and early April exceeded year-ago levels, despite
increased competition and bad weather.
Manufacturing activity fell in March for the second
month in a row. Recent reports from the tourism and convention sectors were largely positive,
and the outlook remains upbeat. According to real estate contacts, the single-family housing
market continues to maintain its strong performance from earlier in the year, and expectations
among builders and Realtors are positive. Commercial and multifamily markets continued to
improve. Bankers characterized overall loan demand as steady. There were scattered reports of
wage pressures in parts of the District, but also reports of price deflation in lumber and paper.
Consumer Spending: Most District retailers report that sales in March and early April
exceeded year-ago levels. However, some retailers did note that increasing competition and cold
weather in early March did cut into sales. Most contacts reported that inventories were currently
on target, but several did say that their inventories were uncomfortably high. Home-related
products continue to be a strong seller across the District but apparel sales were mixed. The
outlook remains positive as most contacts anticipate second quarter sales will exceed last year's
level, even if only moderately.
Manufacturing: The majority of industry contacts reported that factory activity edged
down or was steady in March and early April. A plurality of manufacturers anticipate a modest
increase in production over the next few months, and they expect the volume of new domestic
orders to slow, while the volume of new orders for export is expected to increase. More contacts
now intend to trim factory payrolls and substitute capital equipment than was the case early in the
VI-2
year. Finished goods and materials inventories at the plant level increased moderately over the
past month.
A recent pickup in new orders and production for some textile and carpet
manufacturers is encouraging. One contact thinks that increasing building activity will stimulate
carpet production over the next few quarters. However, reports of downsizings and plant closings
of weaker, less competitive, apparel firms continue in parts of Mississippi and Alabama, and
stubborn inventory excesses continue to plague apparel manufacturers in other parts of the
District. Some contacts express concern over building paper inventories, and several lumber mills
have cut back on total hours worked. Slack new orders are forcing a heavy-duty truck supplier
to cut its workforce, and a supplier of components to the auto industry notes decreasing orders and
shipments. More positively, strong business activity is reported for producers of electrical and
electronic machinery. A large consumer durable manufacturer is also expanding in the western
part of the District.
Tourism and Business Travel
The outlook is positive for the tourism and convention
sectors, according to industry contacts. South Florida destination resorts are fully booked and
summer advance bookings are ahead of last year. The average length of stay has reportedly been
several days longer at south Florida resorts than last year at all price levels. The number of
European visitors to central Florida is up at double-digit rates from a year ago, and attendance at
central Florida theme parks is expected by local tourism officials to continue to post strong gains.
However, spring break attendance at some Florida destinations was not as strong as a year ago,
and the number of Venezuelan visitors to south Florida is likely to decline as a result of the
devaluation of the bolivar. In Nashville, hotel managers feel that the third and fourth quarters will
be strong with rising occupancy rates. Casino operators along Mississippi's Gulf Coast report
continued good traffic with gambling revenues rising moderately over last year.
VI-3
Construction: Most real estate contacts reported that single-family home sales were
ahead of year-ago levels in March and anticipate April sales will be strong as well. Throughout
most of the District, inventories are in good shape. Overall, inventories are on the rise in Atlanta
and Nashville, but demand remains extremely strong in these markets and real estate contacts do
not anticipate market saturation. In the Birmingham market, new home inventory is said to be
less than normal, while demand is strong. As a result, some District contacts report a rise in
home prices. However, a contact in south Florida reports that home inventories are too high and
prices are stagnant, although first time buyer homes are moving fast.
Contacts from across the District report that commercial and multifamily real estate
markets continue to improve. Low vacancy rates and higher rents are propelling new apartment
and office development.
While most commercial projects are still build-to-suit, several
speculative developments are underway and more are anticipated this year. Most real estate
professionals continue to anticipate that new commercial and multifamily construction will grow
this year.
Financial Services: Contacts in the banking industry described overall loan demand as
steady. Bankers report that commercial lending continues to outpace consumer lending. Some
contacts reported that commercial lending was up over earlier in the year but down from last year's
levels, and that consumer loans were slightly stronger than early in the year. Bankers also found
automobile financing to be performing extremely well, and mortgage lending up slightly.
Wages and Prices: Contacts report a few instances of wage pressures in scattered parts
of the region. Some merchants and other service industry spokesmen report that the ability to fill
entry level positions has become a challenge. Atlanta's boom in new retail and service businesses
has forced many employers to pay well over minimum wage. Manufacturing contacts report
VI-4
fewer increases in prices for both finished goods and materials than was the case in late winter.
Some factory contacts note price deflation, especially in paper products. One contact expects
timber product prices to continue to decline for the next few months. A large chemical producer
notes price erosion because of foreign competition.
An oversupply of heavy equipment
manufacturing capacity is keeping prices down for some producers, according to one industry
spokesman.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. Economic activity in the Seventh District remained at relatively high levels in recent
weeks, although a few pockets of slowing or declining activity existed. Retail sales growth increased
slightly from earlier this year, but results varied by state. The District's housing activity picked up in
March and April, with several contacts seeing buyers motivated by concern of possible further mortgage
interest rate increases. With some exceptions, manufacturers were reporting increases in overall activity.
Bank lending activity remained at high levels, and some banks even reported strong loan growth. Labor
market shortages continued to be the main concern of businesses, despite softening demand for workers
from the manufacturing sector. Grain prices increased sharply in recent weeks due to a combination of
strong demand, both here and abroad, and weather-related problems which threaten to exacerbate already
tight supplies.
Retail sales. Retail sales improved slightly in March, with further sales increases reported through
much of April. Several retailers stated that Midwest sales were above year-ago levels and slightly ahead
of gains in other regions. However, unseasonably cold weather may have hindered sales growth of spring
merchandise, particularly in Michigan. Several retailers were concerned that sales lost to poor weather
may not be made up in coming months, although one retailer reported a seasonal buildup of inventory in
anticipation of increasing sales in May and June. While a survey of small independent Michigan retailers
showed that sales continued to be slow in March, most respondents were optimistic that pent-up demand
will boost second quarter sales, especially when warm weather settles in. Several auto dealerships
reported that sales over the last several weeks were somewhat sluggish for this time of year, mostly due to
a reduction in fleet sales. However, dealers are expecting marked improvement in the months ahead and
dealer confidence remains high. One regional distributor of foreign cars reported that their new- and usedcar sales were doing very well and dealers were "screaming" for more stock.
Housing/Construction. Housing activity picked up more than seasonally in March and contacts
reported that this pace continued through April. However, several sources surmised that the sharp increase
in fixed-rate mortgage loan rates may have prompted indecisive buyers to take action. Existing home
sales in the Midwest increased sharply in March to their highest level since April 1994. Contacts across
the District reported that sales activity remained brisk in April, with one realtor adding that "if a home is
sharp, it's gone in a day." New home sales in the Midwest posted modest gains in March and a national
VII-2
survey of builders suggested that the sales pace of new homes in April continued to exceed the nation's.
Midwest builders were the most optimistic of any region in the country about prospective sales for the
next six months. Commercial development remains slow, despite positive absorption rates and finning
rents in both office and retail space. An industry analyst noted, however, that rental rates are not yet high
enough to prompt much new commercial building activity in most downtown areas.
Manufacturing Activity. Manufacturing activity continued to expand at a moderate pace in March
and early April, despite declines in some key industries. Recent purchasing managers' surveys from
around the District were generally indicating flat-to-moderately increasing activity, including the survey
from one major metropolitan area that had been signaling a contraction in overall activity in its two
previous reports. Most durable-goods producers were upbeat, reporting recent orders or sales to be
slightly stronger than they were expecting at the beginning of the year. Several pointed to exports as a
key source of strength. A supplier of specialized equipment to the mining and paper industries reported
strong demand for new equipment. A machine tool producer reported a modest slowdown in demand for
small- and medium-sized metal-cutting machines, but total demand was boosted by orders from the auto
industry. A steel analyst stated that integrated mills supplying the auto and appliance industries had full
order books through the second quarter and demand for structural steel continued to rise. Mills had been
running behind on filling orders from the auto industry and were able to use the recent strike-related
disruptions to catch up. Most producers reported that inventories were lean or, at worst, slightly above
plan and would only increase, if necessary, to keep in line with any sales gains. However, some seasonal
inventory building was taking place to prepare for summer plant closings. The pricing environment
continues to be described as "tough." However, a March survey of businesses around the nation indicated
that finns in the Midwest were more likely to be experiencing increases in prices paid and prices charged
than in other regions.
A few industries reported declining activity. A producer of heavy construction equipment
experienced weaker-than-expected orders in recent months and reported that production had been cut to
levels below the end of last year. An analyst for the heavy-duty truck industry reported rising dealer
inventories and cuts in build plans, although the industry is postponing major adjustments until the
summer shutdown period due to better-than-expected gross new orders. Auto assemblies in the District
declined sharply in March due to a strike against a major automaker, but few businesses reported being
impacted by the strike unless they were a direct supplier to the plants affected. Auto production bounced
back in April as strike-related plants reopened and efforts were made to recapture some of the lost
production.
VII-3
Banking Conditions. Most bankers reported stronger-than-expected loan demand, with growth
rates generally described as moderating from earlier months but still strong. Commercial and industrial
lending was strongest among mid- and small-sized businesses, with one bank economist attributing some
of the strength to recent merger and acquisition activity among local businesses. A large regional bank
detected less pessimism among corporate borrowers than was prevalent at the beginning of the year, and
one bank noted a decline in C&I loans for inventory financing. However, several banks noted some
slowing in consumer lending. Every bank contacted reported that mortgage applications were down
sharply in recent weeks, mostly for refinancing. Most banks viewed credit quality (excluding retailer
loans) as remaining unchanged at very good levels, despite some increase in delinquency rates.
Labor markets. Labor markets remained much tighter in the District than in the nation as a whole;
with unemployment rates well below the national average. Temporary help agencies reported that a
shortage of qualified workers in the technology and information industries persists throughout the District
and demand for skilled clerical workers is very strong. The employment component of purchasing
managers surveys in March and April were mixed, supporting other reports of a stagnant employment
situation in the manufacturing sectors. However, several sources reported that there are signs, including
increases in average weekly hours, that manufacturers will again be increasing employment soon. Most
sources also indicate that there is very little upward pressure on wages.
Agriculture. Grain prices have soared recently, setting new highs in both the cash and futures
markets. The latest surge reflects strong domestic and foreign demand for corn,as well as a realization
that the winter wheat crop suffered extensive damage from weather related problems during the fall and
winter months. Higher grain prices are a major concern for livestock producers, although the District's
pork producers have fared reasonably well so far. In addition, some observers question whether the
depleted grain stocks might result in pipeline disruptions to feed supplies prior to the new harvest crop.
An extended period of high grain prices may trigger cuts in livestock production which would, in time,
tighten supplies of meat, milk, and eggs. However, the high prices will likely add to the large increase
already expected in spring crop plantings now underway in the Midwest. Increased grain prices are, in
part, responsible for rising farmland values. Our latest survey showed that District farmland values
increased by over 4 percent in the first quarter and are now 10 percent higher than a year ago.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
District economic activity has increased since the last report. Most contacts report
stronger growth recently relative to the first two months of the year. Noticeable cost pressures
are reported for several industries because of tight labor markets and substantial increases in fuel
and feed grain prices. Residential and nonresidential construction have picked up after a slow
January. Home sales have also improved in most parts of the District. Recent District loan
growth is on par with that of last year, and many respondents report strong loan demand and
aggressive competition for loans. A large percentage of the District's weather-damaged winter
wheat crop will be plowed under and replanted with other crops.
Manufacturing and Other Business Activity
Reports from District contacts are more upbeat than they have been in the past few
months. Expansions and new plant openings are leading to increased employment, and, once
again, reports of tight labor markets are prevalent. Some firms have cut back production,
however, usually because of company consolidation or cost cutting.
A snack food maker is expanding into northeast Arkansas where it will initially hire 200
to 400 workers by early next year. A large Missouri manufacturer of chemicals and related
products reports a noticeable uptick in demand for materials used in the housing and auto sectors;
an even larger increase is noted for agricultural-related products. A bank card processing center
is expanding to southwest Missouri, bringing 750 jobs by year's end. A new Tunica County,
Miss., casino has already hired 600 workers and is looking for 3,000 more. A concern, though,
is that there are not enough workers in the area to satisfy this demand.
Other contacts also report tight labor markets. Restaurant and other food service
establishments are having a difficult time finding staff. One restaurant delayed its opening for two
VIII-2
months because it could not find enough help, and a Tennessee hotel had to hire labor from
overseas. The temporary employment industry is also encountering staffing problems.
Production has slowed at some firms, though, usually because of company consolidation
or cost cutting. A national railroad is shutting a diesel shop in Missouri to cut costs; most of the
240 workers will be offered transfers, however. A contact in the paper industry reports that
production of coated paper has been halted because of excess inventory. Sales of bleached paper,
used in milk and juice cartons, are strong, though.
Wages and Prices
Contacts continue to report increasing costs for raw materials and labor. In contrast to
previous reports, however, some contacts have indicated that these higher costs are being
successfully passed along to consumers. Most of the cost increases are between 2 and 3 percent.
One contact notes that his firm is able to increase prices now because the government has
restricted foreign competition and his firm's major domestic competitor has left the market.
Substantial increases in wheat and feed grain prices have caused most large poultry producers in
the District to curtail planned production by about 7 percent. Because stocks of poultry meat are
already high, retail price increases are not expected in the near term. The recent uptick in oil
prices has boosted fuel costs for the transportation industry and increased consumer gasoline
prices. An industry analyst notes that, through negotiated contracts, some trucking firms have
been able to pass along a portion of this additional cost. A large manufacturer of synthetic
materials reports that there has been a modest rise in petrochemical prices over the last month or
so; however, it has been unable to pass along this price increase.
Real Estate and Construction
After a slowdown in January because of bad weather, residential construction activity
picked up in February and March. In some parts of western Kentucky, there is still a backlog of
VIII-3
houses under construction, which is keeping contractors busy. Most contacts report that sales
activity has also picked up; in some cases, existing homes are selling better than new homes. Midpriced homes ($125,000 to $165,000) are the strongest sellers in most markets. Average sale
prices in most District areas have remained stable, though. Contacts in most parts of the District
continue to report strong nonresidential construction.
Banking and Finance
Total loans outstanding at 11 large District banks increased 2 percent between midFebruary and mid-April, just slightly less than the increase in the same period last year.
Commercial and industrial loans declined 0.1 percent, and consumer loans declined 0.8 percent,
while real estate loans rose 3.6 percent. District banking contacts still describe loan demand as
moderately strong and competition as aggressive, with one noting that loan pricing is "predatory."
Several contacts note a slight increase in nonperforming consumer loans, but indicate that current
levels are not troublesome.
Agriculture and Natural Resources
Harsh winter weather conditions caused substantial damage to much of the District's
winter wheat crop, with the crops in Illinois, Indiana and Missouri generally in poor to very poor
condition. Reports from Illinois suggest that as much as half of the state's crop will be plowed
under and planted with corn, soybeans or milo, while a quarter or more of the Missouri crop will
be replanted. An early spring freeze in Arkansas caused an estimated 50 to 75 percent loss of the
peach crop. Corn planting is generally proceeding ahead of schedule. Heavy rainfall across
Missouri, southern Illinois and southern Indiana in late April caused isolated flooding in low-lying
areas and along minor rivers and streams. As a result, some farmers may be forced to replant
portions of their corn crops.
IX-1
NINTH DISTRICT--MINNEAPOLIS
The pace of economic growth in the Ninth District is picking up somewhat after perceptible
slowing in late winter. Vehicle sales are improving after a midwinter slump and there are some
reports of increases for general merchandise. Manufacturers still have some slack, but a number of
firms report that orders are once again increasing. Soaring grain prices are improving prospects for
farmers, though optimism is tempered by a cold, late spring and depressed livestock prices. Once
again, construction is very strong in most parts of the district. Metal mining and oil drilling and
exploration are at the highest levels in this decade. As throughout the winter, tourist business varies
by location, with eastern areas of the district fairly upbeat, but Montana and the Dakotas less so.
Skilled employees remain hard to get, and unemployment rates are low. There are few reports of
wage pressures. Price increases are concentrated in grains and energy-related items such as fuels
and basic plastics. Inventories are reportedly normal for most firms except for paper products,
some slow-moving automobile models and a few manufacturers.
Construction and real estate
"Building activity booms" and "Developers gearing up" are headlines in a Minneapolis paper
describing office development in that city's central business district, but they apply equally well to
Ninth District construction as a whole. Builders in most areas of the district expect a strong
construction season for the third or fourth year running. "Commercial builders in Minot expect to
be very busy," reports a North Dakota director. Minnesota single-family housing permits issued in
February were 28 percent and 5 percent above the same month in 1995 and 1994. Home builders in
Sioux Falls, S.D., and other regional centers also expect good business.
A fourth consecutive strong year for large, publicly let projects is developing in Minnesota,
South Dakota and North Dakota. Contracts let through March are about 25 percent above the same
period last year. State highway and bridge projects predominate, but construction of schools,
municipal buildings, churches and private commercial building are all strong.
Markets for existing real estate are also active. March 1996 sales of existing homes were up
nearly 13 percent over March 1995 in the Minneapolis-St. Paul metropolitan area and realtors
report continued strength in listing and sales in April. Strong markets for existing housing are
similarly reported in several other areas.
Natural resource industries
Ninth District resource extraction industries are feeling their oats. "With the plants already
running wide open and order books full, there's little room for more downtime," is an area
newspaper's recent description of the predicament of Lake Superior iron mines as they try to make
up for slowdowns caused by harsh weather earlier in the year. Iron shipments from Lake Superior
IX-2
ports began in early April in spite of adverse weather. The principal gold mine in South Dakota
reported a large addition to its known reserves, and its ratio of reserves to annual production is now
the highest in two decades. Oil drilling and especially seismic exploration are at their highest level
in North Dakota in 15 years, and production continues to inch upwards after having declined slowly
for the decade through 1994. In contrast to strength in the minerals sectors, paper output continues
to slow, with increased reports of selective downtime.
Agriculture
Unseasonably cold, wet weather has delayed tillage planting in all district states. Such spring
activities are two weeks or more behind five-year averages. But soil moisture levels are as near
optimal as at any time in the past four years, with few areas having either strongly surplus or
strongly deficient soil moisture levels. Bankers and extension agents expect planting to progress
rapidly once temperatures rise. Fall-seeded crops such as winter wheat and rye, which constitute a
small fraction of total crop plantings, are in fair to good shape in contrast to the much-publicized
deteriorating condition of such crops in other states.
Continuing increases in grain prices are improving farm incomes, although many rural elevators
continue to report difficulty in securing railroad cars to transport grain to ports. Most observers
expect higher prices to persist through harvest, and farmers reportedly are responding by planning
the highest plantings of major crops in years. Supplies of inputs such as fertilizer, pesticides and
seed are generally adequate, although some seed suppliers report that farmers are already trying to
exchange longer-season varieties for shorter-season ones, and that short-season varieties will be
extremely scarce if adverse weather persists.
Manufacturing
Manufacturing apparently is picking up, although reports vary considerably by sector and firm.
"Business is pretty good," says the owner of a Minnesota chemical products firm. "Things picked
up a bit after January," reports a farm machinery firm in North Dakota. Makers of some industrial
machinery and metal components continue to describe soft orders, but printers and electronic
equipment and medical device manufacturers note some strengthening. And one circuit board
manufacturer announced plans to add 1,000 more workers by early 1997. Industrial electrical use
has not grown from year-earlier levels, however. Most manufacturers report normal inventories for
their own businesses and their suppliers
Consumer spending
"Cars are selling pretty well, things picked up in February and haven't slowed down," reports a
South Dakota industry spokesperson. Vehicles and farm machinery are both selling pretty good," is
IX-3
the word from North Dakota. "We can't get enough of the light pickups and sport/utility vehicles
says a St. Paul, Minn., auto dealer.
General merchandise sales also show some improvement from earlier in the year. "Traffic
picked up in March and sales are excellent now," reports a South Dakota mall manager. A
Minnesota department store executive notes improvements in sales for most lines since late winter.
"Business is booming," says a retail spokesperson from Fargo, N.D., "but I think much of it comes
from the way this town is growing." Other industry sources point to the difficulty of separating
structural changes in retailing from changes in consumer spending. "Sales tax receipts at the state
level from retail sales are consistently well above year-earlier levels, but our Main Street stores are
dying," says a North Dakota director.
Tourism
Montana had a disappointing winter tourist season, but hopes are that warmer weather will bring a
good summer season. Unseasonably cold weather hurt business in all states in late February and in
March, although the late spring prolonged cross-country skiing and smowmobiling in Minnesota,
Wisconsin and the Upper Peninsula of Michigan. "But even the snowmobilers are getting sick of
it," says one Upper Peninsula business owner. Prolonged ice cover in lakes and cold temperatures
is raising concern about spring fishing opener participation. But overall, business owners and
tourist officials are optimistic about prospects for the spring and summer.
Employment. wages and prices
"First 19-year old bus driver" headed a recent article describing how the Minneapolis-St. Paul
metropolitan transit system lowered its hiring age to secure desperately needed drivers. This is yet
another indicator of how tight labor markets remain, especially for skilled blue collar workers.
Fast-food and other service businesses employing low-skill workers have similar problems filling
rosters. "I hate to see service slip the way it is," said one manager, apologizing for long checkout
lines, "but we just can't get the people we need." Unemployment rates continue well below
national averages. There are scattered reports of wage increases in the 4 percent to 5 percent range.
One large telemarketing firm announced a layoff of nearly 600 workers, but explained that these
jobs are being moved to Florida because of a need for bilingual Spanish-English workers.
Energy price increases, particularly for spot buyers of natural gas and for trucking firms, are the
most widely noted price pressure. Some manufacturers who use polyethylene or polystyrene for
packaging report rapid price increases from mid-February on, and low inventories by producers.
"But cardboard prices are just in a freefall," reports one. Cash grain prices are soaring, and flour
prices are following with only a slight lag. But a price war among breakfast cereal producers and
plummeting livestock prices have thus far limited perceptible food price increases for consumers.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The district economy continued to grow at a moderate pace during the past
month. Retail sales strengthened, manufacturing and homebuilding activity remained brisk, and
activity in the energy industry increased slightly. In agriculture, farm income prospects weakened
due to dry weather and weak profits in the cattle industry. District labor markets remained tight,
with some manufacturers reporting rising wages for skilled labor. Prices of manufacturing
materials and retail products generally held steady.
Retail Sales. Most retailers report that sales increased moderately last month and
remained above last year's level. Apparel sales were strong while furniture and appliance sales
were weak. Reports were evenly divided on sales prospects for the months ahead, with some
retailers expecting sales to hold steady and others expecting sales to strengthen modestly. Most
retailers indicate inventories are in line with expected sales, although some plan to trim
inventories. Automobile dealers also report sales increased last month and remained above the
year-ago level. Dealers note that high consumer debt has eroded the quality of automobile loan
applications. Nevertheless, sales are expected to remain strong, and most dealers are expanding
automobile inventories in anticipation of continued sales strength.
Manufacturing. District manufacturers report that plants are operating at moderate to
high levels of capacity use. Few manufacturers report production bottlenecks due to capacity
constraints. Manufacturing materials remained readily available, and lead times required to obtain
materials continued to decline. Nearly all of the manufacturers were trimming inventories, with
some indicating the reduction was a normal seasonal occurrence.
Housing. Most builders report starts of both single-family and multifamily homes held
steady last month and remained well above last year's pace. Builders generally expect steady
X-2
construction activity through the summer. Sales of new homes also held steady last month and
stayed much stronger than last year's level. Builders report the inventory of unsold homes
remained lean with home prices somewhat higher than the year-ago level. Building materials are
readily available, although materials prices have increased slightly during the past year. Builders
expect little change in materials availability or prices in coming months. Mortgage lenders report
mortgage demand remained strong last month and should increase seasonally this summer.
Banking. Banks generally report total deposits grew faster than loans last month, slightly
lowering loan-deposit ratios. Most banks report gains in demand deposits, NOW accounts,
MMDAs, small time and savings deposits, and IRA and Keogh accounts. Large CD deposits
were steady. Banks also report gains in commercial and industrial loans, home mortgages, home
equity loans, and commercial real estate loans. Consumer loans and construction loans held
steady, and agricultural loans declined slightly. Security investments increased.
Most banks held their prime rate steady last month, and few expect to change their prime
rate in the near future. A few banks raised their consumer lending rates slightly, but most expect
no change in the near term. Some banks also tightened their lending standards slightly.
Energy. Despite strong energy prices, activity in the district energy industry picked up
only slightly last month. Prices of natural gas and crude oil stayed well above year-ago levels,
even though natural gas prices declined recently. The average number of drilling rigs operating in
the district during the first three weeks of April rose slightly from the month before and matched
last year's level.
Agriculture. The driest winter and spring in decades has hurt yield prospects for the
district's winter wheat crop. Among district states, the drought is most severe in Oklahoma and
Kansas, where about 60 percent of the crop is rated in poor or very poor condition. In Kansas,
X-3
usually the nation's leading wheat producing state, current estimates suggest the harvest may be
half as large as normal. The dry spring weather has been ideal for preparing fields for the
district's spring-planted crops, but concerns are growing that a continued dry spell could also trim
corn and soybean yields.
Large supplies of beef and competing meats continue to hold down cattle prices, while
soaring grain prices boost feed costs. As a result, many district cattle feedlots and ranches are
operating at a loss. With financial losses accumulating and forage supplies limited by the
continued dry weather, some district ranchers have begun to reduce the size of their herds.
District bankers generally expect the quality of their agricultural loan portfolios to weaken
somewhat in 1996. High grain prices will help offset crop losses caused by the drought, shoring
up incomes for grain producers. But bankers expect profits to be scarce in the district cattle
industry in 1996. Overall, district bankers expect strong balance sheets to enable most farmers
and ranchers to withstand the rough year.
Wages and Prices. Although labor markets remained tight in much of the district,
employers report few wage increases. Some retailers report a shortage of available workers, but
wages have held steady since a normal annual increase at the beginning of the year.
Manufacturers report shortages and rising wages for some kinds of skilled labor, especially
welders and machinists. Prices of manufacturing inputs were generally flat during the past month,
although several manufacturers report a decline in steel prices. Prices at the retail level held
steady last month but remained somewhat higher than last year's level.
XI-1
ELEVENTH DISTRICT--DALLAS
Eleventh District economic activity picked up in March and April. More contacts reported
price increases and lower inventories than in January and February, but there were fewer reports of
wage pressures or labor shortages. Manufacturing orders rebounded, although several producers said
activity was below the level of a year ago, and demand for semiconductors and telecommunications
equipment remained weak. Business service firms reported a seasonal increase in demand, and retail
sales improved. The financial services industry reported mixed lending activity over the past 6 weeks.
Construction and real estate activity remained brisk, and energy activity strengthened. Drought, low
cattle prices and high costs continued to stress the agricultural community.
Prices were up for crude oil, crops, petrochemicals, plastic packaging, steel, lumber and
some primary metals, and semiconductor prices had stopped falling. Apparel, paper, computer and
livestock prices were lower. Producers of cement, brick, crude oil and petrochemicals said that their
inventories were below desired levels, while inventories were up for newsprint, lumber, and
semiconductors, particularly memory chips. Semiconductor inventories were much too large-roughly
50 percent higher than 6 months ago-but are "not even close to inventory levels of the big
semiconductor cycles in the 1970s and 1980s." Telecommunications and computer manufacturers said
inventories were slightly larger than desired, and heavy competition was keeping downward pressure
on personal computer prices. Shortages of cement led producers to ration customers. Brick plants in
Texas are reported at near capacity, but strong demand had not yet led to higher prices. Low
inventories pushed up crude oil prices to between $23 to $25 per barrel for most of April, although
oil futures suggest prices will decline. Prices were up for plastic packaging materials, but prices
continued to fall between 5-8 percent for all types of paper products, and producers said their
XI-2
customers had excess inventory of newsprint. In March, lower prices for livestock outweighed higher
prices for most crops, pushing down the Texas All Farm Products Index of Prices Received to 1.0
percent below last month's level. Food processors said high grain prices raised costs and caused some
producers to reduce production and boost selling prices.
Manufacturing orders rebounded, although several producers said activity was below the
level a year ago and demand for semiconductors and telecommunications equipment remained weak.
Demand was up for apparel, lumber, brick, cement, primary and fabricated metals. Paper producers
reported a notable rebound in demand for corrugated boxes, although demand for newsprint dropped.
Demand for petrochemicals began to increase from both domestic and foreign customers, after what
producers report was a successful soft landing for their industry, with continued profitability and no
inventory build-up. Oil field machinery firms continued to report strengthening demand and good
profits. Cold weather and snow in New England stimulated demand for heating oil at District
refineries, causing a delay in the switch over to gasoline production. Gasoline inventories were 5
percent under last year's levels, with the driving season starting at the end of May. Electronics firms
reported a slight increase in demand for computers, but demand for memory computer chips and
microprocessors continued to be below expectations. Overall, semiconductor demand in real terms
was growing at about a 10 percent annual rate, compared to 30 percent five months ago. Demand for
telecommunications equipment also weakened, mainly due to softer sales in Europe. Electronics
contacts were very cautious about the outlook for sales, expecting only slight increases in the volume
of sales into 1997.
Business service firms reported a seasonal increase in demand. Several firms were hiring and
there were fewer reports of difficulty finding qualified workers. Demand was up for passenger and
cargo transportation, temporary, accounting and legal services. Firms supplying temporary workers
said that demand for workers to staff telephone call centers was particularly strong.
XI-3
Retail sales continued to improve, although contacts said competition remains very stiff.
Retailers must use heavy promotion to attract the "price-driven consumer" because there are "too
many stores in Texas." Auto sales picked up, particularly for used cars.
The financial services industry reported mixed lending activity over the last 6 weeks. Higher
long-term interest rates led to a slight decrease in residential real estate lending, and a sharp drop in
refinancings. Contacts reported some increases in consumer and commercial real estate loans. District
lenders were cautiously optimistic in their outlook for loan demand in the next 3 to 12 months.
Construction and real estate activity remained brisk. Homebuilders reported a pickup in new
and existing home sales, although they are concerned that rising mortgage rates could damp demand
later in the year. Apartment leasing remained strong despite a large number of new units that were
completed in the first quarter. Apartment builders continued to cut back on starts in anticipation of
rising vacancies and slower growth in rents in the coming months. Office and warehouse leasing
remained very strong and rents continued to rise. Contacts said construction of warehouse and office
space increased, although labor shortages were causing some delays.
Energy activity continued to strengthen. Demand for oil services was boosted by increases in
international and U.S. drilling activity. Seasonally-adjusted, the U.S. rig count was up by over 50
rigs in April-to over 825 rigs-with two-thirds of the increase in Eleventh District states. Natural gas
drilling is pulling the rig count upward, and the Gulf of Mexico is well positioned to sell gas to the
East Coast. International drilling continues to increase, particularly in Latin America and Africa.
Drought, low cattle prices and high costs continued to stress the agricultural community.
Bankers reported an increase in the number of farmers and ranchers starting the year with large debt
carryover, and expressed concern about the "serious problems" facing the agricultural community and
the increased likelihood that some farmers and ranchers will quit or be forced out of business.
XII
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TWELFTH DISTRICT -
1
SAN FRANCISCO
Summary
Reports from 12th District survey respondents indicate a healthy pace of economic activity
throughout most sectors and areas in the District. Retail sales reportedly have firmed slightly
since earlier in the year, and services continue to expand at a brisk pace. Manufacturing activity
appears mostly solid. The District banking and real estate markets are very active, although the
real estate sector in Los Angeles has not fully recovered from its lengthy slump. Price and wage
increases continue to be moderate overall, with the notable exception of gasoline prices in
California. However, respondents expect higher national inflation in the near term.
Business Sentiment
District respondents remain very optimistic regarding their respective regional economies,
and their expectations regarding national economic growth improved markedly since the last
survey. Among respondents, 70-80 percent see stable or improved prospects for national GDP
growth and unemployment, up from 40-50 percent earlier this year. However, their outlook on
national inflation deteriorated; nearly 50 percent expect higher inflation in the near term, up from
15-20 percent earlier this year. Approximately 80 percent of District respondents expect more
rapid growth in their region than in the U.S. as a whole, with large majorities expecting stable or
improved business investment, housing starts, consumer spending, and trade balances in their
respective regions.
XII
-
2
Retail Trade and Services
Retail sales are mostly stable in the District, and services continue to expand rapidly.
Sales of clothing and other consumer goods improved somewhat relative to their pace earlier in
the year, and inventories have been reduced for many retail goods. Grocery prices currently are
stable but may soon increase due to continued high grain prices.
Among services, demand for communications services continues to rise rapidly; this
includes both telephone and computer communication. Transportation demand also is robust.
Both volume and prices are increasing on flights to and from Portland, and shipping port
expansion is planned there. Shipping activity also is vigorous in Southern California, although a
recent sharp rise in gasoline prices is affecting the costs of land transportation in the state.
Manufacturing
District manufacturing activity is solid overall, although with variability across sectors and
states. In Nevada and Utah, respondents noted strong demand for heavy equipment and machine
tools; order backlogs for the latter have persisted despite accelerating shipments. A Southern
California manufacturer reports rising prices and reduced inventories for aluminum ingots, and
substantial delivery lags on new trucks were reported in Oregon. In contrast, declining truck
demand is prompting consolidation by a major truck manufacturer in Washington, and aluminum
producers are operating well below capacity in that state. Also in the Pacific Northwest, prices
for wood pulp and paper products have stabilized after substantial declines earlier in 1996, but
slowed growth and reduced investment spending were reported for Oregon's food processing
industry.
XII -
3
For the District's key high-tech electronics sector, respondents noted that growth has
decelerated in recent months, and prices of semiconductors (particularly computer memory chips)
remain at low levels. However, inventories of semiconductors and personal computers are
coming down at rates characterized as "acceptable," and substantial expansion of semiconductor
manufacturing capacity is planned in the Portland area.
Agriculture and Resource-Related Industries
Reports regarding western agricultural production are mixed, but respondents note that it
is too early in the growing season to assess overall prospects for 1996. Demand is strong and
prices are high for several crops, notably wheat and corn. Continuing high feed prices and
drought conditions in the Southwest are leading cattle ranchers to ship large quantities of beef to
market earlier than preferred. Production of tree fruit and grape crops in Central California are
down from normal; although better than last year, farm earnings are somewhat low there, which
reportedly is limiting investment and expansion plans.
Real Estate and Construction
Real estate sales and construction activity remain strong in most of the District. Brisk
home construction activity and sales along with significant price increases over last year were
reported for Washington, Oregon, Idaho, Nevada, and Utah. Commercial construction and sales
also are strong in those states. In contrast, the commercial real estate market in Los Angeles
remains soft, with high vacancies and limited new construction. Conditions appear slightly
improved for residential real estate in the Los Angeles area; although sales are limited, prices are
XII - 4
no longer declining. Elsewhere in the state, residential and commercial real estate markets are
very tight in the San Francisco Bay Area.
Financial Institutions
District banks report good earnings and loan quality in 1996. The one exception is
Southern California, where consumer loan demand is still sluggish and real estate loan
delinquencies are up, despite some signs of improved credit quality overall. Loan demand is very
strong in most other areas of the District, although intense competition is holding margins down
in fast-growth states. District banks continue to invest in computer equipment and other
hardware at rapid rates, largely to facilitate increased reliance on electronic banking.
Cite this document
Federal Reserve (1996, May 20). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19960521
@misc{wtfs_beige_book_19960521,
author = {Federal Reserve},
title = {Beige Book},
year = {1996},
month = {May},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19960521},
note = {Retrieved via When the Fed Speaks corpus}
}