January 25, 1989
Most District reports indicate somewhat stronger regional economic activity on balance in December and early January than at the time of the last reports in November, with much of the growth centered in the retail and industrial sectors. It would appear, on the basis of these reports, that the national economy gained momentum in recent weeks as consumer spending strengthened, manufacturing activity continued to rise, and producers scheduled more investment in plant and equipment.
Reports on activity outside of the retail and industrial sectors were mixed and showed little change from the levels of recent months. In banking, loan demand was generally flat. In construction, commercial and residential activity evidently remained subdued in most of the country, although some areas of strength were reported. In agriculture, the continuing dry weather in some areas threatened the winter wheat crop.
Although the overall tone of the District reports was upbeat, one District (Philadelphia) cited indications that the pace of activity may be slowing. Another (St. Louis) reported that growth was still sluggish even though conditions had improved in recent months.
Consumer Spending
Eleven of twelve Districts reported on consumer activity. All eleven
indicated that retail sales in December met or exceeded retailers'
expectations. Three Districts also observed that the moderate-to-
strong pace of sales in December continued through early January.
New cars sold well over this period, and truck sales were even
stronger. Cleveland indicated that luxury goods such as electronic
equipment and fine jewelry had sold especially well, which might
indicate higher consumer confidence.
Increases in retail prices were reported as moderate by Boston and Minneapolis, and Kansas City found prices to be generally steady to slightly higher. San Francisco observed that apparel prices were still rising faster than the prices of most other items. Boston reported that wages for retail clerks were still rising briskly.
Manufacturing and Mining
All Districts reported on manufacturing activity, and most of the
reports suggested that production levels were currently at or above
November levels. San Francisco indicated expansion in the aerospace
and electronics industries, and Boston noted strong demand for
manufactured items used by the commercial aircraft and automobile
industries and most capital goods industries. Dallas and Chicago
noted increased demand for steel products, but Cleveland indicated a
sharp slowdown in steel production, and reports from a few Districts
stated that activity was down in some construction-related
industries such as lumber.
Several industries were reported to be operating at high capacity utilization rates, but only a few, such as chemicals, claimed capacity limits had constrained production. A majority of Districts indicated that manufacturers plan to increase capital expenditures in 1989 over 1988 levels. Mast of this spending will be for new equipment rather than plant expansion.
Labor market conditions in the manufacturing sector appear to be about the same as in November in most Districts. Factory labor was reported to be scarce in some areas. Boston indicated that producers expect wages to rise this year at about the same rate as last year. Cleveland noted moderate increases in wages. Cleveland and Atlanta mentioned significant increases in employee benefit costs. About 60 percent of the respondents to both the Philadelphia and Richmond surveys reported rising input prices. Boston indicated that the prices of some raw materials such as paper, wood, and most metals appeared to be stabilizing but that the prices of semi-finished goods such as petrochemicals were still rising.
Reports on mining were mixed. Minneapolis and San Francisco indicated strong activity in silver and copper mining, and San Francisco also noted strength in gold and phosphate mining. But oil drilling activity in the Dallas, Kansas City, and San Francisco Districts was apparently restrained because of uncertainty about future prices.
Construction
Reports on current nonresidential building activity varied widely
across Districts, ranging from strong in Chicago and San Francisco
to weak in St. Louis. Construction of industrial facilities was
reported to be robust in some areas. Chicago indicated work on
industrial buildings was very strong in the Midwest, and San
Francisco mentioned new plants and continued expansion of
manufacturing facilities in the West. Philadelphia, however, stated
that despite a high demand for industrial space, "...construction of
new industrial buildings may decline this year due to a pullback in
lending to builders by financial institutions." Prospects for
nonresidential building overall in 1989 appear to be relatively weak
as new contracts declined in Chicago, Dallas, and St. Louis.
In the residential sector, housing contracts and starts declined in the Chicago and Kansas City Districts, which suggested a future slowing of homebuilding activity in those regions. Dallas, however, indicated some growth in permits for single-family homes, and San Francisco reported healthy homebuilding activity in some parts of its District.
Agriculture and Forestry
Six Districts commented on conditions in the agricultural sector and
four of these—Richmond, St. Louis, Kansas City, and Dallas—
reported concern about the impact of continued dry weather. Dallas
noted that the winter wheat crop had already been damaged by
drought, and Kansas City and St. Louis said that dry conditions
threatened the wheat crop in their Districts.
Several Districts noted higher grain and livestock prices. While crop farmers have benefited, livestock farmers have been adversely affected to some extent because of higher feed costs. Kansas City noted that cattle operators in its District had not expanded herds, despite strong beef prices, because low moisture had reduced the use of winter wheat pastures for grazing.
Reports of a slowdown in lumber production were recorded by Atlanta, Dallas, and San Francisco, but Minneapolis characterized lumber output in its District as strong. The softening in domestic demand for lumber, which was attributed to sluggish homebuilding, was reportedly offset somewhat by increased foreign demand.
Banking
Loan demand varied among the Districts that reported or banking
conditions. The demand for commercial and industrial loans was said
to be weaker in the St. Louis District, largely unchanged in the
Richmond and Kansas City Districts, and growing slowly in the
Cleveland District. Philadelphia reported a strong increase in
commercial and industrial loans so far in January, but a reduction
in inquiries and applications. Both Philadelphia and Richmond
indicated continued healthy demand for consumer credit, but
Cleveland and St. Louis noted slower growth.