September 10, 1986
Overview
Manufacturing and retail sales remain sluggish, and producers and
retailers expect only slow growth over the next six months. Service
firms are experiencing gradual expansion and foresee continued
improvement in their sales. Import and export activity at seaports
is strong and is expected to increase. Business and financial
executives expect only minor short-run effects on the economy from
tax reform and from the August cut in the discount rate. Bankers are
somewhat reluctant to reduce interest rates on deposits and are
therefore experiencing a squeeze on their interest margins. State
and local government officials and employees are becoming less
optimistic about prospects for increased revenue. August rains have
provided relief from drought and have improved the outlook for the
agricultural harvest.
Retail Sales
Auto dealers, department stores, and other retailers report lower
sales in August after generally flat activity earlier in the summer.
Although 50 percent of retailers expect sales to increase over the
next six months, that percentage has declined from 60 percent last
month. On the other hand, only 8 percent now expect declines in
sales, compared with 20 percent a month ago.
Manufacturing
Manufacturing remained generally weak in August. Capacity
utilization rates averaged 76 percent, the same as in July, although
shipments, new orders, and the length of the workweek were up
slightly in both durable and nondurable goods industries. Raw
material and finished goods inventories declined marginally for the
second consecutive month. Although most manufacturers expect the
U.S. economy and their own businesses to improve in the coming
months, the proportion of optimists is smaller than a month ago.
Manufacturers report that current prices for their raw materials and finished goods are generally stable. But the proportion of respondents expecting prices to rise over the next six months has increased. Thirty-nine percent of firms surveyed this month, as compared with 23 percent last month, expect increases in the prices of their finished goods; 50 percent this month, compared with 40 percent last month, expect the prices of raw materials to rise.
Services
Services sector growth has slowed. Forty-two percent of this month's
respondents, compared with 53 percent of last month's, report an
increase in sales. But 71 percent of the respondents expect
increases in their sales over the next six months.
District seaport officials report increases in both export and import shipments. Industry spokesmen expect these increases to continue in the months ahead, unless shipping activity is interrupted by an unanticipated work stoppage. Longshoreman contracts expire in October.
Government
Survey respondents in state and local governments are less
optimistic about funding than a month ago; 50 percent now foresee an
increase in general revenue in the next six months while 19 percent
expect a decrease. Last month, 71 percent expected revenue increases
and 6 percent expected declines.
Agriculture
A stalled weather front provided some much needed rainfall across
the District during mid-August. Soybean yields are expected to
benefit, and tobacco and fruit are generally in good condition, but
the rain came too late to help the corn crop. Pasture and hay
conditions are still poor but have improved enough to lessen early
marketings of livestock. The peanut yield is expected to be
excellent, but the quality of the peanuts is now threatened by a
mold that appeared with the August rains.
Policy
Most respondents expect only a slight stimulus to the economy from
the August reduction in the discount rate. Bankers say their margins
are squeezed when the discount rate is reduced. Competition, they
say, rapidly forces down interest rates on loans but delays or
prevents reductions in interest rates on deposits. The squeeze is
especially severe when discount rate reductions come in rapid
succession.
Respondents are about evenly divided on the short-run effects of tax reform on the economy. Half expect the effects to be expansive, and half believe they will be contractive.