August 7, 1991
According to contacts across the country, national economic conditions continue to improve, but at a slow, uneven pace. Retail sales are said to be flat or edging up on average. Nevertheless, respondents from all areas expect a modest recovery in retail sales during the second half of 1991. Manufacturers report some increase in activity, on balance, but recovery is not uniform; demand for consumer goods is said to be stronger than demand for capital equipment; demand for manufacturing labor shows signs of stabilizing. By contrast, several districts report that state and local governments and some service industries are cutting employment. The pickup in home sales in the spring has lost some momentum, and commercial real estate markets and nonresidential construction remain weak. In most districts, business loan demand shows little strength. Hot, dry weather threatens crops in several regions.
Retail
Retail sales during June and early July are described as flat or
edging up in one-half of the Federal Reserve districts. In the
remaining districts, New York, Cleveland, and Richmond respondents
report declines, while those in Atlanta, Minneapolis, and Dallas
report moderate increases.
Retailers east of the Mississippi note month-to-month variability. Unseasonably warm weather in May caused an acceleration in purchases of summer items, thereby weakening June results. Hot weather in July boosted demand for some seasonal products, but discouraged other purchases, especially automobiles.
In recent weeks, apparel sales were strong in the New York, Philadelphia, Atlanta, Kansas City, and Dallas regions. Major home furnishings were more often a source of weakness than of strength. Sales figures at automobile dealerships differed widely both across and within districts as a result of economic and credit conditions, weather, consumer preferences, and the timing of fleet purchases. Retail inventories are generally described as satisfactory, and many retailers remain conservative in placing new orders.
The consensus outlook calls for a modest recovery in retail sales during the latter half of 1991. However, some contacts believe that a noticeable pickup will not occur until the fourth quarter.
Manufacturing
In a majority of Federal Reserve districts, manufacturing contacts
report that, on balance, demand is strengthening very gradually.
However, respondents in the Cleveland, Atlanta, and San Francisco
regions describe conditions as mixed, while those in Dallas and
Boston note a recent softening in incoming orders. Although
manufacturing inventories generally appear satisfactory, contacts in
the Atlanta, Boston and Dallas districts note cases of unwelcome
buildups.
Producers of consumer goods and auto supplies are said to enjoy the greatest improvement in demand. Contacts in a number of districts report stronger orders for appliances, furniture, carpets, textiles and apparel, and for plastics, steel and parts for the auto makers. By contrast, the capital equipment industries remain relatively weak, according to the Boston, Atlanta, Chicago, Dallas, and Philadelphia regions. Demand for oil field and agricultural machinery and products for aerospace was also described as soft. Exports are a source of strength in several coastal districts, but contacts in Dallas and Chicago mentioned slowdowns in exports of steel and agricultural equipment.
The demand for labor in the manufacturing sector is stabilizing. Contacts in the Minneapolis and Atlanta districts report longer hours, while respondents in Chicago and St. Louis speak of smaller cutbacks and shutdowns averted (in steel and heavy-duty trucks).
Input prices are generally said to be flat to down. According to Dallas district contacts, metals prices are down, chemicals prices are falling but at a slower rate, and lumber prices have stabilized after surging earlier in the year. Competition is forcing most manufacturers to maintain or reduce their selling prices. Retail respondents report few wage or wholesale cost pressures.
Most manufacturers expect to see a gradual improvement in orders and production over the next three to six months. Producers of consumer durables generally believe the trough is behind them, while producers of capital goods and construction machinery say they are close to the bottom and expect a revival in the second half. Respondents from the steel and auto industries and the Boston district remain very cautious, however.
Services and Related Industries
Respondents in several districts report cost cutting efforts by
service industries and state and local governments. In the New York
district, mergers in the banking and airline industries are expected
to cause sizable employment losses. In St. Louis, the trucking
industry is retrenching, while weak economic growth in both Europe
and North America is hurting express shipping. Contacts in the San
Francisco region note employment losses in the professional services
sector. In Dallas, however, engineering firms, business services,
and temporary employment agencies report weak growth. The tourist
business is improving in many parts of the nation.
Real Estate and Construction
The spring pickup in home sales appears to have moderated, with
respondents in half the districts reporting a loss of momentum. In
Minneapolis the slowing was attributed to increases in the cost of
FHA mortgages; in contrast, the prospect of higher FHA costs was
seen as a spur to sales in the Dallas district. Residential
construction was said to be edging up in the Atlanta, St. Louis, and
Minneapolis districts, steady in Richmond and mixed in Kansas City.
Although contacts in the New York and Philadelphia districts have seen recent increases in commercial leasing activity, commercial real estate markets are weak across the country. Nonresidential construction is depressed by high vacancy rates and, according to contacts in New York and San Francisco, difficulties securing construction financing.
Banking
Loan demand from creditworthy businesses is generally said to be
weak. In New York, banking contacts say they remain willing to lend
to qualified business borrowers, but credit standards have tightened
in recent months and borrowers' credit quality has declined.
Philadelphia district banks are actively promoting business loans
but are meeting slack demand from creditworthy borrowers. Moreover,
Chicago respondents say that businesses are issuing long-term debt
and are using improved cash flow to reduce their bank debt. However,
Atlanta banking contacts report that improvements in customers'
financial condition are resulting in slightly higher loan approval
rates; in the Cleveland district lenders' interest in development
loans has revived a bit.
Agriculture and Natural Resources
Although Dallas and San Francisco report good conditions for most
crops, hot, dry weather has reduced expected yields of corn,
soybeans, and cotton in parts of the Richmond, Chicago, St. Louis
and Kansas City districts. Contacts note that increased expenses,
weak demand, and declining production prospects are clouding the
outlook for farm incomes in some areas. Nevertheless, the cattle
industry remains strong in all reporting regions, despite a recent
drop in prices.
Kansas City and Dallas contacts describe oil and gas activity as fairly stable. Rig counts remain low, and natural gas prices are at their lowest level in 12 years. In the San Francisco region, lumber industry conditions are said to have weakened in recent weeks. By contrast, St. Louis and Minneapolis lumber producers see better prospects.