January 23, 1991
Overview
Growth in the Tenth District economy has slowed in recent weeks, but
is apparently still positive. Farm income prospects have dimmed
somewhat while growth in the number of operating drilling rigs has
leveled off. A disappointing Christmas season failed to boost
sluggish retail sales, prompting both retailers and manufacturers to
trim inventories. Mortgage demand and housing starts both continue
to fall, despite lower mortgage interest rates. Loan demand at
commercial banks continues to drop as well, due mainly to sluggish
demand for commercial real estate loans and residential construction
loans.
Retail Sales
Most district retailers report worsening sales over the past three
months, accentuated by disappointing results from the Christmas
season. Sales during the holiday season were generally flat and
often worse than expected, although discounters enjoyed slight
gains. Retailers report weak sales in most merchandise categories
other than clothing and expect further weakness in the coming
months. Most respondents have been trimming inventories and expect
to continue this trend. Product prices have leveled off and are
expected to remain flat or increase only slightly in the coming
months. New auto sales have fallen in most district states over the
last month and are expected to be sluggish again this year.
Financing is generally available for inventories and for potential
buyers, although some dealers report tightening credit standards.
Most automobile dealers are trimming inventories.
Manufacturing
Purchasing agents report stable to slightly higher input prices over
the past three months, leaving prices moderately higher than a year
ago. Expectations about future prices are mixed, in part due to
uncertainty about the Persian Gulf crisis. Materials availability
and lead times pose no problems for most manufacturers. Most firms
continue to trim inventories. A bright spot in the manufacturing
picture is strong exports, thanks both to the weaker U.S. dollar and
to healthy economic growth abroad, especially in Europe and South
America. One manufacturer of steel pipe and tubes noted that a sharp
drop in penetration of the U.S. market by Japan, Europe, and Canada
leaves more room for domestic producers.
Energy
Oil prices declined in December due to abundant supplies of crude
oil and expectations of a peaceful settlement in the Gulf crisis.
Uncertainty about the outcome of the crisis and its impact on world
crude oil supplies continues to moderate gains in district drilling
activity. The average number of operating drilling rigs in district
states rose from 336 in November to 341 in December, only slightly
higher than a year ago.
Housing Activity and Finance
Housing starts have declined in recent weeks, sinking below year-ago
levels in most areas of the district. Most builders expect starts to
fall on balance over the course of the year, even though new home
sales and prices should generally remain stable. Sales of building
materials are down substantially from both three months and a year
ago, prompting suppliers to predict 1991 will be a "tough year."
Respondents from thrifts report moderate outflows of deposits over
the past month and expect little change in deposit flows over the
next three months. Mortgage demand has dipped below seasonal norms.
Mortgage rates have been falling, and most respondents expect rates
to continue to fall slightly over the first quarter of 1991.
Banking
Most commercial bankers report loan demand decreased last month. In
most cases, the decrease reflects lower demand for commercial real
estate loans and residential construction loans. Results for
commercial, consumer, and home mortgage loans were mixed, while
agricultural loan demand increased somewhat. Most bankers report no
change in credit standards over the last month. While most
respondents have not changed their prime rate or consumer lending
rates, they expect to reduce both in the near future. Total deposits
increased at most banks last month. Demand deposits were up, and NOW
accounts and money market deposit accounts were stable to higher.
Changes in small time deposits varied widely, while large
certificates of deposits generally fell.
Agriculture
District farmers and their lenders approach 1991 with caution. The
winter wheat crop is in good to excellent condition in most of the
district, as extensive crop damage was avoided during the recent
period of cold weather. The crop remains vulnerable to winter kill,
however, due to low soil moisture and the absence of a protective
blanket of snow. A sharp drop in crop prices since mid-1990, a
cutback in government payments under the new farm bill, and higher
fuel and agricultural chemical prices have lowered prospects for
farm income. As a result, spending on new farm equipment fell
sharply in the last quarter of 1990, and bankers expect sluggish
spending in the year ahead. Dimmer prospects for farm income have
also slowed sales of farm real estate in the district. Still,
concerns about the health of the national economy and about lower
farm incomes have affected spending in district rural communities
only slightly. Retail sales in most rural communities remain solid.