March 20, 1986
Moderate economic expansion has continued in most regions of the country in recent weeks, despite unevenness across sectors. Recent improvements in economic activity are noted by New York, Cleveland, Kansas City, and Philadelphia. Richmond and Atlanta report sustained growth at a relatively strong pace, while Minneapolis and Boston indicate mixed conditions with no clear direction for the overall economy.
The major sectors of strength included construction and selected manufacturing industries. Although industrial activity varied across Districts, general improvements were noted for energy-intensive manufacturers such as the lumber, paper, aluminum, and steel industries. Both commercial and residential construction continue strong in most Districts, with several reports noting benefits from falling mortgage interest rates. Major economic weaknesses continue to be concentrated in the agricultural and energy producing sectors, and further deterioration is anticipated because of continuing price declines, especially for oil. Consumer spending growth, although characterized as moderate, was noted in nearly all Districts.
Industry
Industrial activity appears mixed, according to District reports.
Solid improvement in manufacturers shipments and orders was reported
by Cleveland in contrast to substantial declines earlier.
Philadelphia reports continuing healthy increases in orders but
little change in employment. Orders are improving for both the
aluminum and steel industries, according to Cleveland and Chicago.
Boston reports increased orders for manufacturing products related
to housing, and signs of an upturn for the forest products industry
are reported by San Francisco, Cleveland, and Richmond. In contrast,
Minneapolis reports mill closings due to continuing Imports of
forest products from Canada. The aerospace industry is prospering.
The steep drop in oil prices has stimulated energy-intensive
industries, according to Atlanta. Although chemical firms have yet
to benefit from lower prices for petroleum based inputs, producers
are optimistic about the outlook. Richmond states that textile
producers' workweeks are increasing and inventories are favorable.
Other Districts continue to show declines in industrial activity. Large scale cutbacks in manufacturing employment were cited by New York, and staff reductions related to business mergers and cost containment programs are noted by Chicago. Manufacturers' inventories are reported to be tolerable, and there appears to be little upward pressures on prices.
Minneapolis, Dallas, San Francisco, and Atlanta report further weakness in their recent declines in oil prices. Minneapolis reports rig counts in North Dakota at the lowest level in five years, and Dallas reports a 30 percent reduction from last year's depressed levels. In Alaska, where oil revenues contribute 85 percent of state revenues, the Governor has already taken steps to reduce state spending.
Consumer Spending
There was widespread agreement among commentaries that consumer
spending was up moderately in January-February from year-earlier
figures. Consumer goods inventory levels across much of the country
tended to be lean and under control. Boston reported that sales were
somewhat volatile, in part because consumers are promotion-minded.
"Cautious" consumer spending was reported by Chicago and New York,
with the latter attributing it to uncertainty over the course of the
economy. As usual early in the year, sales of nondurable goods
tended to outpace durables. Dallas suggested that declining
seasonally adjusted housing activity also contributed to relative
weakness in durable goods sales there, and that sales in energy-
dominated regions were rising less than in other areas. Kansas City
reported some unwanted inventory build-up at retail with slightly
reduced prices as a consequence, while Boston noted that prices of
imported goods are rising. The outlook for tourism in the Southeast
has improved as a result of discount airfares, according to Atlanta.
Auto sales are apparently showing varied temporal and geographical results. Atlanta's report of volatile activity, related to waves of limited-time cut-rate financing deals, was a typical commentary. However, Cleveland reported fairly strong and stable growth of sales, while Kansas City, Dallas, and San Francisco reported flat, disappointing, or declining auto sales.
The dominant range of outlooks for overall consumer spending and for autos, particularly, seems to be moderate-to-bright. Philadelphia reported that retailers are raising their sales forecasts. Exceptions are those areas most adversely affected by declining energy prices, where spending growth prospects are considerably dimmed.
Construction
Residential real estate markets are generally strong, and most
Districts report some improvement in both sales and construction.
The notable exceptions were in the Dallas District, where
residential activity declined due to the uncertain regional economic
outlook, and in the New York District, where cold weather, snow, and
a labor shortage have slowed construction. Atlanta reports severe
residential real estate weakness in Louisiana, which shares the
energy sector problems of the Dallas District.
Commercial construction also continues strong generally, although it is clearly weakening in the Dallas District. Atlanta noted a significant shift of commercial construction resources away from offices and stores toward light industrial buildings.
Financial Services
Although reports vary among regions, the nation's total loans
continued to increase in recent weeks. Dallas, Richmond, and
Philadelphia indicate an increase in total loan growth, while
Atlanta reports that the decline in growth in its region was checked
for the first time in almost a year. New York, Philadelphia, and San
Francisco reported that declining mortgage rates are sustaining
mortgage volume and boosting the rate of refinancings. There are
indications of declining or softening commercial lending at Dallas,
Kansas City, and Atlanta and weaker consumer lending at Cleveland
and St. Louis, the latter probably due to competition from auto
dealer special financing packages.
Agriculture
Most of the farm sector remains under heavy financial pressure
resulting from large crop supplies and weak demand, which have
continued to reduce market prices of most farm commodities.
Depressed returns prevent heavily indebted borrowers from meeting
scheduled loan payments, and farm foreclosure rates are rising
principally throughout the areas of field crop production. Kansas
City reports that from 6 to 10 percent of farm borrowers will be
denied credit this spring. The Farmers Home Administration has
mailed notices of potential foreclosure to 40 percent or more of
their borrowers in several states in the Southeast. Minneapolis
reports a banker's projection that one-third of indebted farmers in
South Dakota will eventually leave farming. San Francisco relates
that in addition to low prices and heavy import competition, some
orchard producers suffered severe losses from recent flooding. On
the brighter side, Richmond and Atlanta point out that poultry
producers are doing relatively well with firm prices, expanding
output, and falling feed costs contributing to growing profits.
Conversely, Dallas indicates beef cattle feeders are stressed by
depressed cattle prices and declining marketings.