October 23, 1985
This month's commentaries by the twelve Federal Reserve Banks suggest that the economy has advanced slightly since the end of summer and is poised for further growth. Representatives from the retail trade sector say auto sales have been strong and sales of general merchandise, though lower than expected, are still well ahead of last year. Retailers expect a good fourth quarter and continued strength as the economy resumes growth. Bankers say loan volume continues to expand, with strong gains in consumer and real estate loans leading the way. Residential construction, especially of single family houses, is also up in early fall. Sales of homes are brisk and are expected to remain so. Nonresidential construction also remains healthy, and, although some signs suggest a slowdown say be starting, projects already underway should provide momentum to keep the industry going at least through the first quarter of 1986. In the manufacturing sector, industrial activity remains unchanged, but manufacturers are more optimistic about the outlook for 1986.
The sector with the most significant problems and the bleakest outlook remains agriculture. Farmers continue to face financial distress in many areas of the country. Crop farmers in particular may find themselves sinking deeper as near-record crop yields depress already low farm prices further.
Manufacturing and Mining
Business conditions in the industrial sector appear to be holding
steady in October with most districts reporting mixed or unchanged
manufacturing activity. Specific indicators, such as new orders and
shipments, vary among geographic areas and among industries, but
reveal no clear trend. Employment also varies across districts and
businesses, but little change is noted. Producers' inventories
appear to be at acceptable levels, except in electronics, where some
involuntary accumulation has resulted from the slump in that
industry. Prices are generally steady; some districts report some
downward movement.
Among the stronger industries are autos, auto related products, defense products, and aerospace products. Housing related items, chemicals, and building materials are mixed. The paper industry, one of the strongest in this expansion through 1984, is starting to show signs of weakening according to reports from Atlanta, Minneapolis, and San Francisco. Steel, electronics, and farm equipment are reported to be the biggest drags on the industrial sector at this time. The energy industry is also lagging far behind, with Dallas reporting the lowest oil rig count in Texas since 1976.
Looking ahead, some districts report a slightly better outlook for manufacturers for 1986, which is reflected in increased capital spending plans for the coning year. In many cases, however, planned increases will only replace spending originally scheduled for 1985 and then cancelled. Moreover, according to indications from Boston and Richmond, most of the expenditure on plant and equipment will be for cost containment, productivity enhancement, and the introduction of new products, rather than for capacity expansion.
Cleveland reports that coal mining remains very depressed in many areas with unemployment in many mining counties running in double-digits. Richmond also notes that coal production is down from last year, although many mines are producing at high levels.
Consumer Spending
Cut-rate financing arrangements provided by auto manufacturers gave
auto sales a strong boost in September and helped overall retail
sales to turn in a good third quarter performance in most parts of
the nation. Sales of general merchandise, while still posting gains
on balance, have slowed from their pre-Labor Day pace and are behind
retailers' projections in some areas. Some merchants say general
sales might have been stronger and on target, but were weakened by
bad weather conditions in many areas and a surge in spending on
autos. Reports of retail inventories range from slightly tight to a
little heavy; overall stock levels appear to be about where
retailers want them, and no significant change is planned aside from
the fourth quarter seasonal buildup.
Merchants' near-term outlook is generally optimistic, with renewed economic growth expected to result in continued strength in sales. Many store managers expect the fourth quarter to be good, with year-over-year gains in the 5 to 10 percent range, despite a shorter shopping season and growing concern over the consumer debt burden.
Finance
Total loan demand remains strong in most areas, with loan volume
outstanding at major U.S. banks running 8-to-9 percent ahead of a
year ago and nearly 1 percent higher than in August. San Francisco
notes that small banks are experiencing greater loan demand than are
large banks, as many customers of larger institutions have turned to
the commercial paper market and have reduced bank borrowing.
Loan categories posting the biggest gains include real estate and consumer loans. Consumer loans might have been even stronger were it not for special financing deals offered by auto manufacturers. A major portion of the demand for real estate loans results from refinancing of existing mortgages. The weakest performance is observed in agricultural loans. Farm loans are falling in many districts, as banks both cut back borrowing and increase write-offs.
Deposit growth is strong in most areas. Bankers in Philadelphia say they have been able to meet time deposit targets without aggressive pricing. Kansas City reports that many thrifts have yet to lower minimum balance requirements on MMDAs and SuperNOWs.
Real Estate and Construction
Residential construction is reported to be stronger in September,
except in Kansas City and St. Louis, where homebuilding is
continuing at the same rate as in late summer. The most significant
gains are being posted in single family housing construction, while
multi-family construction is holding steady in some areas and
weakening in others. No shortages of either labor or materials are
reported, except in parts of New York where Hurricane Gloria caused
substantial damage. Residential sales are strong in most areas,
spurred by stable mortgage rates at just over 12 percent, rising
incomes, and the availability of subsidized mortgage money in some
states. House prices are reported to be firm and new listings
strong.
Nonresidential construction is generally weaker than residential building, but still healthy in many regions. There is some evidence that new construction may be slowing slightly, but projects already underway should provide continued strength. Many observers are surprised that nonresidential construction has not already lost steam, in view of rising vacancy rates and a general feeling that the office market is already overbuilt. Chicago notes that some projects have been started recently so that they will be grandfathered under the current tax code and thereby protected from future tax changes.
Office leasing activity is mixed, with vacancy rates at suburban locations generally higher than in downtown areas. As a result, rents in suburban areas may hold steady or even fall in coming months.
Agriculture
While livestock farmers have gotten some measure of relief recently
from higher livestock prices, crop farmers remain in financial
stress in many areas, and may find their plight worsening. Harvests
currently underway are likely to yield bumper crops that will drive
farm prices and revenues even lower. Many farmers are storing their
harvest under Commodity Credit Corporation loans. Others, however,
are selling at current prices in order to get cash to pay off loans
and stave off foreclosure.
Farm land values dropped further in the third quarter. Kansas City reports that a great deal of farm land is for sale, but that very little is actually changing hands. Credit has become tighter and many suppliers have become less willing to deal in terms other than cash.