September 8, 1987
Business conditions improved in recent weeks for most regions of the country although weakness persists in some areas. Chicago, New York, Philadelphia, Minneapolis, and Boston report moderate economic expansion while Atlanta and San Francisco note brisk growth. Cleveland and St. Louis, in contrast, indicate weakening business activity.
A resurgence in industrial activity has boosted many regional economies recently. Orders and production for electronic equipment, lumber, steel and textiles are increasing. Contracting domestic auto production, however, is blunting economic expansion in some areas. Construction activity is generally mixed; residential building has slowed in most regions, but commercial construction continues to grow, especially the non-building component. Consumer spending has been moderate, and retailers are cautious but positive about the outlook for fall sales. Several Districts report moderate merchandise price increases. Auto sales have been stimulated by manufacturers' incentives. Favorable crop conditions have led to greater-than-average yields in some regions, and farm credit problems are declining.
Industry
Most Districts report improvement in industrial activity and point
to continued expansion, at least for the near term. Factory orders,
production, and shipments are generally above June-July levels and
are trending upward. Inventories are for the most part at desired
levels. Although input costs are expected to rise modestly, most
producers do not plan to increase prices at the present time.
Chicago notes that demand for steel is strong. Cleveland reports that firm prices have helped specialty steels, and Atlanta sees increasing activity for small steel producers. Boston reports increased demand for computer equipment, and San Francisco notes that orders and shipments are strong for electronic equipment producers.
Philadelphia, Richmond, and Atlanta report increasing tightness in certain labor markets. Philadelphia notes that housing construction has slowed because of a lack of skilled carpenters, while Atlanta reports that carpet shipments are being delayed because producers have not been able to hire enough workers to keep up with orders. Minneapolis bank directors are concerned that tight labor markets may deter firms from locating in parts of the region. Although total manufacturing employment continues to decline in St. Louis, textile plants are operating near capacity; apparel orders are growing, as they are in Atlanta and Dallas. Less positively, Chicago and Cleveland suggest that weak domestic auto sales could result in further production cuts and layoffs in assembly plants in their regions.
Consumer Spending
Retail activity in July and August was up moderately compared both
to previous months' and year-ago levels in Boston, New York,
Cleveland, Atlanta, and Kansas City; sales growth was somewhat
lackluster in other Districts. Boston reported that fine summer
weather boosted sales of seasonal items, and Cleveland, Atlanta, and
San Francisco noted that soft goods sales were outperforming hard
goods sales. A pick-up in appliance sales in Dallas, following a
prolonged period of weakness, is attributed to a rise in first-time
home purchases; sales of big-ticket items accelerated in mid-August
in Richmond. Philadelphia and Chicago report that the late Labor Day
this year is delaying back-to-school purchases, while sales of these
items are strong in Atlanta, where school starts early. Hardly any
Districts reported unusual imbalances in inventory levels. Retailers
typically are reported to be "cautious or moderately optimistic"
about the sales outlook for this fall compared to fall 1986.
Boston, Cleveland, and Richmond noted moderately rising prices or expectations of moderate price hikes ahead. In Boston, prices are expected to rise significantly more by next spring because of imports; prices of electronics and apparel items are already rising across the nation because of import quotas and the failing dollar. The tight New England labor market is making it difficult for retailers to attract and retain employees.
Manufacturers' financing and rebate incentives apparently have sparked auto sales and reduced inventory levels to more manageable levels although Chicago received reports that consumer response has been restrained. The outlook for sales apparently has generated dealer concern in much of the country.
Construction
Construction activity is mixed across the country. Residential
construction is slowing in a majority of Districts although
conditions vary within many areas. While single-family construction
is generally increasing, Chicago, Kansas City, and San Francisco
mention a continuing decline in multifamily construction. Sales of
existing homes soared above last year's levels in Atlanta. Kansas
City and upstate New York also report an active residential market.
Commercial construction continues to show a mixed pattern of strength and weakness, but it remains relatively strong. Non- building construction is strengthening in Dallas, and Philadelphia notes that recent and prospective completions of major highway links in the suburbs will boost all types of commercial real estate in these areas.
Financial Services
Loan growth in the nation's larger commercial banks is slowing.
Philadelphia, Cleveland, and Atlanta report a slackening in
commercial and industrial lending, but Philadelphia expects business
lending to Increase moderately over the next few months.
This uptick may be enhanced by improving conditions for the region's manufacturers. Passbook savings account balances are rowing rapidly in several western locations. Dallas notes a further slowing of deposit growth at both banks and thrift institutions. An increasing rate of decline In large time deposits is being offset partially by increases in small time deposits.
Agriculture, Forestry, and Mining
Livestock producers are experiencing more favorable returns with St.
Louis, Minneapolis, and Dallas reporting a profitable year as the
result of lower feeding costs and higher product prices. Crop
conditions have been favorable in most Districts this growing
season; Atlanta, St. Louis, Minneapolis, and Kansas City expect
above-average yields. Excessive heat and dry weather have damaged
crops in the Richmond District.
St. Louis notes that the volume of farm loans outstanding in their District is down over 15 percent from last year. Farm loan delinquencies and losses at agricultural banks have also dropped. Dallas notes that farm credit problems are diminishing in the Eleventh District as well.
More volatile crude oil prices have characterized the petroleum industry in recent weeks, but drilling rates have continued to rise. Kansas City suggests that such volatility will likely prevent a strong rebound in the energy industry in the near future.
San Francisco and Atlanta note an increase in lumber exports. In addition, imports of Canadian lumber have fallen slightly, while demand for southern pine remains strong.