November 30, 1988
Most Districts report continued economic growth, but at an apparently slower pace than in previous months. Only Dallas, St. Louis, and Kansas City report generally sluggish business conditions and cite persistent weakness in many sectors. Much of the activity in the faster-growing Districts appears to be generated from strong exports and a steady demand for capital goods. The brisk production pace continues to be supported by growing new orders. Wage increases are moderate, although labor markets continue to be tight. Capacity pressures, and consequently price pressures, have reportedly eased slightly in several industries, including paper, chemical, steel, and textiles.
Improvement is noted in the drought-stricken Districts, except Dallas, as damage estimates are revised downward and more favorable weather improves soil conditions. Residential construction is sluggish throughout most of the Districts, but nonresidential construction remains brisk in several Districts. Retail sales are slow, but some optimism is expressed about prospects for the holiday shopping season. The moderate increase in loan demand has been driven primarily by strong commercial loans.
Retail Trade
Retailers report flat to moderate sales as they enter the holiday
shopping season. Several Districts in the eastern half of the
nation, including Boston, New York, Philadelphia and Cleveland,
express optimism about the apparent turnaround in women's apparel,
which has been particularly weak for several months. However,
department store managers in Cleveland and Philadelphia expect price
increases to dampen to some extent the recent rebound in apparel
sales.
Inventories generally remain light, as retailers anticipated the recent sluggishness in sales and continue to be cautious in stocking shelves for the winter months. Merchants in Kansas City, Minneapolis, and Philadelphia report that inventories are at acceptable levels. Only Richmond reports that inventories, especially in large departments, were higher than desired.
Despite the slim inventories, many retailers are pursuing widespread discounting. However, Philadelphia managers report that the price discounting is in line with their planned pricing strategies. Several Districts, including Kansas City and Cleveland, report some pressure on wholesale prices, which may squeeze even further the profit margins of these businesses.
Retailers express guarded optimism about sales prospects for the holiday season. New York, Minneapolis, and Kansas City merchants anticipate good holiday sales, especially compared with the post- October consumer sentiment of last year. St. Louis and Philadelphia managers were less optimistic and expect only slight increases from a year ago.
Automobile sales are sluggish in most Districts, except for reports of strong sales in Chicago and Minneapolis. Philadelphia, Richmond, and Kansas City report expanding inventories, which could prompt more dealer incentive and rebate programs.
Manufacturing
All Districts report expanding production, but many report a slower
rate of growth than in previous months. Traditional durable-goods
industries show considerable strength, even more so than many "high-
technology" industries. Cleveland reports that strong capital-goods
demand and rising exports have fueled rapid advances in
nonelectrical machinery and primary metals. Chicago and Atlanta also
note strength in durables and steel production. Boston, Dallas, and
San Francisco, on the other hand, report sluggishness in defense and
computer-related industries, especially electronic equipment
manufacturing and semiconductors.
The expansion in manufacturing continues to be supported in most Districts by rising new orders. However, some of the pressure on capacity has been eased, as evidenced by a reduction in the backlog of orders and shorter delivery times.
Many industries, including paper, chemical, and aerospace, are still operating at or near capacity. San Francisco reports that capacity constraints are clearly evident in the commercial aircraft industry. Atlanta reports that the chemical industry is running close to capacity, bidding up wages for skilled labor and creating tight supplies of ethylene and propylene. However, these same Districts also report some retreat from the high levels of capacity seen earlier in the paper, textile, and apparel industries.
Despite general tightness in many District labor markets and reports of shortages of skilled workers, only moderate wage increases have been observed. Cleveland reports that area compensation managers are budgeting about the same level of wage and salary hikes for the coming year (4.6 percent) as granted in 1988.
Prices continue to increase in many sectors, but do not appear to be as large or as widespread as recorded in previous months. Chicago reports that upward pressures on steel prices have eased after sharp increases earlier. For the first time in several months, less than half the purchasing managers surveyed in Cleveland report general commodity price increases. Manufacturers in the Atlanta District say they have not increased their prices because domestic competition is strong.
Only a few Districts mention plans to increase capital spending. Boston mentions plans for several new plants in their District, but notes that overall capital spending plans are mixed. Chemical, textile, and nonelectrical machinery manufacturers in the Philadelphia District have announced planned increases for both modernization and capacity expansion.
Agriculture and Forestry
Drought-ridden areas generally report improving conditions as fall
rains begin to replenish soil moisture. Some Districts are revising
downward earlier estimates of crop damage. Chicago reports that crop
yields are slightly higher than earlier estimates. More current
estimates show corn production to be 41 percent lower and soybeans
29 percent lower than last year in the District. St. Louis reports
that conditions continue to improve as recent rains have benefited
the winter wheat crop and have improved pastures. Kansas City also
reports that the severity of the drought has been revised downward.
Lenders in that District expect strong farm incomes from higher
prices and anticipate little change in loan repayment rates.
Dallas is the only District reporting worsening drought conditions. Many pastures and ranges are bare, and without significant rainfall this winter, the cost of supplemental feeding may threaten the profitability of cattle operations in some parts of the District.
San Francisco reports that the demand for lumber and plywood has fallen in recent weeks, causing prices to erode slowly. However, log and timber prices remain firm due to continued exports. Atlanta notes that foreign demand for hardwoods by Japan and the United Kingdom has helped support prices of hardwood logs.
Construction and Real Estate
Housing construction remains slow in most Districts except for a few
isolated pockets of strength. Richmond reports fairly strong demand
for single-family homes, and San Francisco notes relatively brisk
activity in California, Oregon, and Washington. New York attributes
the weak demand for new homes and a slow resale market in much of
their District to persistently high prices.
Several Districts find relatively brisk activity in nonresidential construction. St. Louis notes that the expansion of nonresidential construction exceeds the national rate. Atlanta attributes the increase in warehouse and industrial construction in their District to strong exports. Chicago reports vigorous commercial building activity in downtown Chicago.
Financial
Loan activity among Districts ranges from flat to moderate.
Philadelphia reports good loan growth, particularly for commercial
lending, but notes some easing in recent months. St. Louis and
Kansas City record weak loan demand, on the other hand. San
Francisco reports continued competition for quality loans and cites
some reports that credit requirements are being relaxed in order to
attract additional business. However, despite the relatively low
loan volume in the San Francisco District, many financial
institutions show improved net income.