January 23, 1991
The level of economic activity appears to be declining in most districts. The Persian Gulf situation is frequently cited as a key determinant of both current and future economic activity. Nominal retail sales during the holiday season differed little from a year earlier. Inventories are near their desired levels. Despite continued export growth, manufacturing orders, employment and shipments have weakened. Construction activity continues to slow in most districts, and interest rate declines have done little to stimulate residential housing demand Inflation does not appear to be accelerating. Widespread weakness exists in home sales and consumer and business loan demand. Some state and local governments are experiencing revenue shortfalls. Farm income prospects have weakened somewhat, while the mining sector shows strength.
Consumer Spending
Nominal retail sales during the holiday season were near year-
earlier levels, implying declines in real terms. Sales of big-ticket
items were particularly weak. Boston, New York, Philadelphia,
Richmond, Atlanta, Chicago, Minneapolis and Dallas mention that
price discounting was used to move goods. Despite the reported
dampening effect of the Persian Gulf conflict throughout the holiday
season, some Districts noted improved sales toward the end of
December. Most districts that mention inventories report they are
generally near desired levels. The outlook for retail sales in most
districts is for continued sluggishness, with retailers in
Philadelphia and Cleveland not expecting any upturn before the third
quarter of this year.
Four districts indicate that car sales are weakening or lower than a year earlier while Dallas indicates increasing sales, especially in the Houston area. Auto inventories are moderate to high in the Minneapolis district, while Kansas City reports that dealers are trimming their inventories. Cleveland indicates that domestic car dealers are not adding to their inventories, in contrast to their Japanese counterparts who are increasing inventories in anticipation of higher spring sales.
Manufacturing
Nearly all districts report weak or declining manufacturing
activity. While domestic demand is generally weakening, Boston,
Atlanta, Chicago, Minneapolis, Kansas City, Dallas and San Francisco
indicate that export growth continues to be strong, or at least
stronger than domestic growth. Cleveland, Chicago and St. Louis note
a downturn in auto production that had spread to related sectors.
Cleveland and Chicago, for example, note sharp declines in steel
production. Boston and St. Louis report that layoffs are expected
among defense contractors, and San Francisco reports that defense-
related aerospace activity remains weak. The outlook for the
manufacturing sector is clouded by the Persian Gulf situation, with
some districts indicating that the timing of an upturn is dependent
on a resolution of that conflict. Contacts in the Boston,
Philadelphia, Richmond and Dallas districts, however, do not expect
a turnaround before the third quarter.
Construction and Real Estate
Despite pockets of strength, most districts describe residential and
nonresidential construction activity as down more than usual for
this time of year. Housing starts are below year-ago levels in most
districts, and high and climbing vacancy rates in many large urban
areas have discouraged commercial office space development. Contacts
in the Dallas district, however, report a modest increase in
construction activity, especially in Houston and South Texas. Recent
declines in interest rates and home prices have done little to buoy
demand for new or existing homes in most districts. Contacts cite
uncertainty about the future course of economic activity and the
Persian Gulf crisis as the major factors dampening residential
housing demand. New York reports that some district lenders and
developers have held auctions to pare housing inventories.
Prices
Several districts report little evidence of increasing inflation.
San Francisco reports that wage and price increases continue to
slow, and Minneapolis notes that they have remained moderate.
Cleveland contacts expect the inflation rate to decline from recent
levels. Manufacturing input and output prices are generally stable,
although Richmond reports increased raw materials prices. Districts
report declining oil and natural gas prices, but mixed movements in
motor fuel prices. Grain prices are generally falling, while beef,
citrus and log prices are showing strength.
Banking and Finance
The majority of districts report weakness in business and consumer
loan demand, largely due to the slowdown in the economy and the
Persian Gulf. Real estate lending is edging downward in many
districts, despite declines in mortgage interest rates. Commercial
real estate and construction lending are especially weak. Atlanta
reports that many businesses have reduced or delayed planned capital
expenditures. Cleveland notes that signs of consumer financial
difficulties are emerging, as evidenced by increases in auto
repossessions and home foreclosures in some parts of the district.
State and Local Government Finance
State and local governments in the New York, Richmond, St. Louis and
Dallas districts are either expecting or experiencing revenue
shortfalls because of weakening economic conditions. In some cases,
increased government spending was also cited as contributing to the
governments' financial strain. A variety of measures, including
reduced spending and layoffs, are being taken or are anticipated to
avoid budget deficits.
Agriculture and Natural-Resource-Related Industries
Kansas City and Richmond indicate that farm income prospects for
1991 have dimmed because of an expected cost-price squeeze. Chicago
notes that agricultural exports have fallen sharply in recent
months. A recent freeze and a continuing drought are causing major
problems for California's agricultural sector. Winter grain crops
are reported to be in good condition, although Minneapolis notes
potential problems later this year because of below-normal
precipitation this winter.
Energy extraction has increased in the Dallas and St. Louis districts, while Kansas City indicates that growth in the number of operating drilling rigs has leveled off. Minneapolis reports that conditions in the mining industry have been fairly good. San Francisco, St. Louis and Atlanta report weak or declining activity in the forest products industries.