May 4, 1987
The economy appears to be continuing on a course of moderate expansion, according to reports gathered in April. The agricultural sector, while certainly not in the clear yet, is showing signs of improvement. Manufacturers continue to post modest gains, bolstered by growth in both domestic sales and exports. Residential construction remains strong, especially in the single-family market, and has been relatively unaffected by the recent climb in mortgage rates. Retailers are making slight gains over year-ago levels in sales of general merchandise, although auto sales are about the same as or lower than last year. Bankers say business and real estate loans are growing, but demand for consumer loans is subsiding.
The only uniformly negative reports are those on the energy industry, which remains depressed despite the higher price of oil. As a result, the regional economies heavily dependent on energy remain in the doldrums.
Agriculture and Forestry
Conditions appear to be improving somewhat in the farm sector.
Atlanta and Chicago indicate that farmland values are stabilizing;
in the Dallas and Minneapolis Districts 1987 farm incomes are
expected to increase; and St. Louis and Kansas City report improved
agricultural credit conditions. It should he noted, however, that no
reports predict a significant overall turnaround for agriculture.
Livestock farmers are expected to benefit from a combination of lower production costs and stronger prices for cattle, hogs, and sheep. Severe weather in some parts of the mid-west had an adverse effect on livestock, but the outlook there remains positive as well. Crop farmers in the southeast and mid-west have had spring field work delayed by wet weather. When planting is completed, however, acreage devoted to corn and soybeans is expected to be significantly reduced from 1986 levels. Wheat acreage should stay about ever, with last year's level. Cotton prices have increased significantly this year, and production is expected to follow suit. A late frost in the southeast destroyed as much as 50 percent of the peaches in that area; reports from Richmond, however, indicate expectations of a good yield for fruit farmers in that District.
Demand for lumber is growing. Atlanta reports increasing prices for southern pine; San Francisco indicates orders for lumber in the northwest have risen by over 20 percent from a year ago, in part because of substantial increases in exports to Europe.
Energy
The energy industry remains depressed despite the higher price of
oil. The number of operating rigs, while up slightly from earlier in
the year, is still as much as 50 percent below a year ago. Many
wells remain shut down in the Atlanta District, and reports from
Minneapolis say that drilling is "almost nonexistent" in that area.
Dallas, however, indicates that the rig count may be bottoming out,
and that the slight growth in recent months is expected to continue.
Manufacturing
Most Districts indicate stable or slightly improving manufacturing
sectors. Philadelphia, Cleveland, Atlanta, Chicago, and Dallas all
note at least moderate growth in new orders and production.
Employment gains, however, are less uniform. Industries mentioned as
leading the pack include defense contractors, chemicals, steel, and
paper products. Steel and paper specifically seem to be experiencing
broad-based expansion of demand, and firms in these industries in
the Chicago District are reported to be operating near capacity.
Lagging industries include transportation equipment (specifically
domestic automobiles) and capital goods.
Industrial prices are headed up at least slightly in most areas, with rising prices for steel and pulp specifically mentioned by Boston, Chicago, and Minneapolis.
While domestic sales seem to be stronger, at least some of the improvement in the industrial sector has been related to the export market as well. Dallas reports that the falling value of the dollar on foreign exchange markets specifically has contributed to an uptick in the chemical industry. Manufacturers in the San Francisco District say the trade tension between the U.S. and Japan has helped to open markets not only in that country but in South Korea and Taiwan as well.
Construction and Real Estate
Residential construction and sales are reported to be strong in
virtually all Districts except Dallas, where the market is adversely
affected by the depressed regional economy. Elsewhere, sales are
reported to be up as much as 35 percent from a year ago. Activity
appears to be strongest in the single-family market; several
Districts say multifamily construction is lagging. There is
widespread concern that the recent jump of as much as 200 basis
points in mortgage rates will choke off demand for housing. The only
effect actually noted so far, however, has been a rush by buyers to
close deals already in progress or to purchase property.
Office-leasing activity is reported by Boston and New York to be good. There are some pockets of excess capacity in both Districts, however, with vacancy rates as high as 20 percent in some areas of suburban New York. Atlanta indicates that commercial construction is slow, and that some lenders are requiring pre-leasing before they approve financing for projects.
Retail
Most Districts report that retailers are posting "slight" or
"modest" gains in March and/or April. Dallas, however, reports slow
sales and San Francisco describes sales as mixed. Inventories remain
generally in line with sales expectations, with neither shortages
nor discounting prevalent. There have been some price increases in
general merchandise as a result of the increasing cost of imports,
and some retailers are trying to switch to domestic or non-Japanese
Asian suppliers. Boston reports that merchants in that District are
sometimes having difficulty finding domestic suppliers who can meet
their volume needs.
Auto sales are running at or below year-ago levels. Sales of domestic cars are uniformly sluggish. Japanese imports show more strength but are also slow in some areas: Atlanta indicates that demand for Japanese cars remains strong despite price hikes, while Cleveland reports that import dealers in that District are accumulating unwanted inventories and are considering sales incentives.
Finance
Total loan volume at banks continues to grow in most Districts,
fueled mainly by real estate and business borrowing. Consumer
borrowing is widely reported to be weakening, a phenomenon that New
York and Philadelphia attribute to the relatively high level of
consumer debt and to the availability of low-rate financing by auto
manufacturers. Atlanta and Richmond note that several banks have cut
interest rates on credit cards recently.