September 16, 1984
The economic expansion appears to be moderating to a slower but still quite brisk pace. Manufacturing remains strong despite weaknesses in certain sectors that have been adversely affected by the increased strength of the U.S. dollar. Defense and energy are the chief sources of current expansion. Retail spending remains generally strong, but several Districts are experiencing a slower growth rate. Auto sales continue to advance in most areas; where some deceleration has occurred, the reason is lack of inventory rather than dampened demand. Consumer spending for domestic travel, however, has been disappointing in some areas because of the high exchange rate of the dollar as well as rainy weather. Residential construction is slowing in most Districts, but nonresidential building is proceeding at such a heady pace in certain areas that concerns about overbuilding are mounting. Lending remains strong primarily because of expanded consumer borrowing. Farm conditions are mixed: several Districts anticipate higher yields and revenues, but poor weather reduced supplies in some states.
Manufacturing and Industry
Manufacturing activity generally remains strong, but most regions
report slower growth in orders and employment. Inventory levels are
satisfactory, for the most part, although some steel customers are
cutting inventories in anticipation of an auto strike. Price
increases have been modest, at worst, and some Districts report flat
or declining supply prices. There is no evidence of materials
shortages. Capital goods spending has been strong, but Boston
reports that plans for 1985 show no increase over current levels.
Defense orders are a source of manufacturing strength for St. Louis,
New York, San Francisco, and Atlanta. Energy demand is sustaining
industry's momentum in the Dallas, Minneapolis, Richmond, and
Atlanta Districts. Demand for coal as well as pulp and paper is
contributing to the strength of manufacturing reported by Richmond,
Minneapolis, and San Francisco. Auto and related production is
another source of continuing growth, especially in New York,
Richmond, and St. Louis.
Weakness is concentrated in industries sensitive to import competition, but this effect appears widespread geographically more than half the Districts mention it. Industries affected include aluminum, steel, copper, machine tools, shoes, textile, apparel, and lumber. Setbacks in the lumber industry are also attributable to slower residential construction, which is precipitating layoffs by furniture producers and building material suppliers as well.
Consumer Spending
Retail sales, spurred by back-to-school spending, generally
strengthened in late summer. However, Cleveland, Minneapolis,
Dallas, and San Francisco report a slower rate of growth. The
relative strength of spending on hard goods and soft goods varies.
Boston and Richmond report that hard goods are increasing their
share, but Dallas and San Francisco note a softening of spending on
consumer durables. Auto demand remains strong in most parts of the
country and would be higher if more of the popular models were
available. In contrast to the shortage of new cars, inventories of
other retail goods generally are reported to be satisfactory.
Inventory-to-sales ratios in the Philadelphia District are
intentionally high because of anticipated strong demand through the
fall. Price competition and promotions appear to be helping
retailers attract buyers and move goods. Many buyers are using
available credit lines but seem to be paying their bills without
difficulty. Looking ahead, retailers, as usual, are optimistic,
although auto dealers fear the consequences of the threatened
strike.
Summer tourist expenditures are below expectations in most areas. The effect is greatest on attractions; business and convention travel is helping to boost the lodgings and air transportation sectors of the industry. However, St. Louis and Philadelphia report that late summer visitations at certain resort areas were up substantially. Boston, Philadelphia, Atlanta, and Minneapolis attribute the lackluster performance of vacation goers on rainy weather and the strong value of the U.S. dollar, which discourages Canadian tourists from visiting border resort areas and encourages increased travel abroad by Americans.
Construction
The residential sector continues to slow in most Districts despite
generally declining mortgage rates. Atlanta, New York, Cleveland,
and Richmond are experiencing continued or renewed strength, but
most other Districts report substantial slowing in residential
construction and sales, particularly of single-family houses. The
August issuance of mortgage revenue bonds in Ohio stimulated an
otherwise sluggish residential sector there. High-income home
buyers, many of whom are making purchases with cash, account for New
York's strong showing. Apartment vacancy rates are increasing, and
some regions express concern about overbuilding in the multifamily
sector.
Nonresidential construction is characterized as surging in Atlanta, Minneapolis, Richmond, San Francisco, and St. Louis. Concern over high and rising office vacancy rates is widespread and mounting, especially in Atlanta, Dallas, and San Francisco. However, commercial vacancy rates in Minneapolis have been declining, and New York reports low office vacancy rates in Manhattan.
Finance
Loan demand remains firm in most Districts. Consumer lending is the
leading component of current growth. At least half the Banks report
increased consumer borrowing, and New York and Chicago note that
delinquency rates are quite low, given the increase in consumer
credit. Many Districts report an increased pace of real estate
lending, especially for nonresidential projects, although
Philadelphia, San Francisco, and Dallas report a slowdown in such
lending. The rate of business loan growth varies between regions.
Deposit growth is advancing in Atlanta and Kansas City, but Dallas,
Philadelphia, and Cleveland describe the pace as flat or declining,
and deposit growth has slowed in Minneapolis.
Agriculture
The outlook for agriculture is mixed. Notwithstanding a drought in
June and potential crop damage from Hurricane Diana, the Southeast
is experiencing favorable growing conditions, and farmers may enjoy
near-record yields. St. Louis and Minneapolis also anticipate good
yields except in areas most affected by poor weather. The
Philadelphia District had adequate rain, and farm income there
should be improved, especially for growers of corn, potatoes,
soybeans, and blackberries. Several Banks also note the positive
effect of increased Soviet purchases. However, droughts in portions
of the Dallas and Kansas City areas should depress yields. San
Francisco describes price conditions for fruit and vegetable farmers
as "dismal." In addition, the farm sector, especially in Minneapolis
and Kansas City, continues to face financial difficulties
exacerbated by low prices for many commodities, falling land values,
and the high cost of servicing existing debt. Farm equipment sales
are below expectations, and Chicago notes manufacturers are cutting
back even more.