June 15, 1988
Most Federal Reserve Districts report sustained economic growth, but some note a somewhat slower pace of growth than earlier in the year. Manufacturing remains strong in most Districts, and export demand continues to grow. Retail sales have generally been somewhat sluggish recently, and construction and real estate activity have been mixed. In the resource sector a further pickup in oil drilling has occurred, but conditions in the forest product industry vary and the lack of rainfall is a concern in crop-growing regions. Several Districts report a recent increase in loan demand.
Consumer Spending
Most Districts report that retail sales were sluggish during April
and May due in part to the early Easter and unseasonable weather.
Minneapolis and Richmond had favorable sales results, however, and
Boston, Cleveland and San Francisco noted some improvement late in
the period. Weakness in women's apparel was frequently mentioned and
attributed to unpopular styles and resistance to higher prices.
Despite the recent sluggishness of sales, retail inventories are
generally at acceptable levels, primarily as a result of tight
monitoring and generous markdowns on slow-moving items. Philadelphia
described inventories as excessive, however, particularly at
specialty stores. Views concerning the outlook are mixed. Those
Districts with generally satisfactory sales anticipate more of the
same, while those with weaker gains are less optimistic. For
example, although some improvement occurred late in May, Cleveland
department store executives believe the economy is in a consumer
recession and expect no improvement before the fall.
Atlanta reports that autos are selling well, while San Francisco has had strong sales of used cars but only moderate new car results. Cleveland and Kansas City found auto sales to be steady but not robust, while Dallas had mixed results.
Manufacturing
Manufacturing activity remains strong in most Districts though
Dallas and Atlanta report a slowing of new orders in some
industries. Boston, Chicago, and Cleveland cite export demand as a
factor in their manufacturing strength and Philadelphia notes that a
year-long uptrend in manufacturing employment has continued. Chicago
and Cleveland report sustained strength in the steel industry with
Cleveland noting that the Great Lakes shipping industry is
reportedly getting close to its cargo-handling capacity. San
Francisco states that a number of industries are experiencing
capacity constraints but that plans to expand are cautious. Several
Districts mentioned rising input prices, particularly for paper,
petrochemicals and steel, and Philadelphia reports an increase in
factory wages resulting from a shortage of basic production workers.
While Boston and Kansas City find that materials are still generally
available, San Francisco reports shortages of raw materials, farm
equipment and heavy machinery.
Boston and Richmond report that factory inventories are at satisfactory levels, and Kansas City states that firms plan no inventory changes in the next six months. However, Atlanta notes, with new orders falling, textile producers find that their inventories are building. Most other manufacturers in Atlanta, and especially producers of paper and chemicals, remain strong. Factory employment levels are satisfactory or rising in Boston, Cleveland, Philadelphia and Richmond, but St. Louis reports that, except for transportation equipment, all major manufacturing sectors have reduced employment recently.
Construction and Real Estate
Construction and real estate activity has varied among Districts.
While residential construction is relatively strong in Chicago,
Minneapolis, and Richmond, most other Districts report some
weakening. Boston notes, however, that the prospect of rising
interest rates may stimulate some activity in its currently slowing
residential real estate market, and Kansas City states that most
observers anticipate an increase in housing starts there. Commercial
construction shows a more consistent pattern. Chicago and New York
note a substantial amount of new office building underway and
Atlanta and St. Louis report an expansion in nonresidential
construction as well. Plans for several big projects have recently
been announced in the Minneapolis District, and Dallas reports some
recent stability in its nonresidential sector though at a low level
of activity.
Agriculture and Natural Resources
Districts reporting on agriculture present a mixed picture. The lack
of rainfall is a concern in all of the crop-growing regions, but
only Dallas and St. Louis spoke of reduced yields as a major threat
thus far. Atlanta and Richmond have good crop conditions and
Chicago, though noting a surge in crop prices as a result of the
drought, states that the extent of irreversible crop damage is
believed small at this time. Cattlemen in the San Francisco and
Atlanta Districts are getting sharply higher prices and enjoying
substantial income gains. However, livestock producers in Dallas and
Richmond expect lower profit margins due to falling demand and
increased feed costs.
Oil production has stabilized in Atlanta and Kansas City and drilling activity in both Dallas and Kansas City is above year- earlier levels. While Minneapolis describes a booming paper mill industry, Atlanta reports that prices for lumber and building products have declined, and San Francisco also notes some slowing in its forest products industry.
Financial Developments
More than half the Districts mention an increase in loan demand.
Philadelphia notes an acceleration in business loans and strong
growth in real estate lending. An increase in real estate loans was
also reported in the Atlanta, Cleveland, Kansas City and St. Louis
Districts and Richmond, Kansas City and St. Louis note stronger
demand for business loans as well. Dallas states that the rates of
decline in assets and liabilities at its large banks have moderated.
New York and San Francisco note that higher interest rates are
causing a shift to adjustable rate mortgages.