January 22, 1992
Reports by business and banking sources contacted by Federal Reserve districts suggest that activity was lackluster as the year drew to a close. Retailers in most districts report that holiday sales were at or modestly above year-ago levels before adjustment for price changes. Manufacturing sources generally note steady or declining production and employment. Except for export goods, orders and backlogs generally softened into 1992. According to realtors, lower mortgage rates have aided home sales, particularly of lower-priced properties. Single-family construction expanded modestly, while new commercial activity remained dormant. Aside from a surge in mortgage refinancing, banking sources suggest that consumer and business loan demand has not revived. Bankers report no change in credit standards. While some bank contacts report ongoing loan quality problems, others are optimistic about prospects for improvement as borrowers work down debt service burdens. Energy industry contacts confirm that lower oil and natural gas prices are leading to cuts in expenditures for drilling and energy-related products. District reports indicate that commodity and materials prices were generally unchanged or declining; pressures on wages and retail prices have been minimal. Despite softness as the new year began, business and banking contacts generally anticipate that economic conditions will improve by mid-year.
Consumer Spending
Retailers generally confirmed that holiday sales were flat to
slightly higher than year-ago 1evels before adjustment for
inflation. Discounters and some specialty stores posted better
performance at the expense of traditional department stores. Sources
in Atlanta, Cleveland, Kansas City, Minneapolis, and Dallas report
modest sales gains led by nondurable goods, particularly basic
apparel and other small-ticket items. Sales in several districts
were below expectations, and retailers in the Philadelphia district
have continued to cut prices through early January.
Inventories held by retailers in Chicago, Cleveland, Dallas, and Philadelphia were above target levels in early January, while retailers in Atlanta, New York, and Kansas City were content with current inventories. Retail contacts generally do not plan to expand stocks aggressively in the first quarter.
According to auto dealers, new car sales were generally weak in Atlanta, Chicago, Dallas, Kansas City, and San Francisco districts. However, Minneapolis and Cleveland report some improvement in auto and truck sales.
Retailers and auto dealers generally expect sales to recover in 1992, but not until the second half of the year. Strict inventory control, competitive pricing, and continued cost-cutting were cited by several districts as the general strategy for the near future.
Manufacturing
Factory activity faltered in most districts through early 1992
according to those surveyed. Renewed weakness in production and
orders was cited by most contacts. Dallas contacts report that
chemical production is flat and demand for oil field machinery is
declining with oil prices. Weak auto output has hurt auto suppliers,
according to Cleveland and Atlanta. Chicago also cites continued
weakness in auto production and few signs of a turnaround in orders
for appliances, heavy equipment, or primary metals.
St. Louis and Atlanta report stable or increasing demand for packaging materials, where some price increases are sticking. Export demand continues to rise for some firms, according to sources in Kansas City, Boston, Richmond, and St. Louis. Manufacturers in Philadelphia report steady industrial output.
Boston contacts indicate that capital spending is restrained by adequate or excess capacity and concerns about debt. Cleveland sources confirm that capital goods orders recently declined. Plants are generally operating below capacity, according to industry contacts in Kansas City, and Dallas chemical producers are concerned about overcapacity. Several districts report that, despite recent reductions in interest rates, capital expenditures will remain at 1991 levels until economic conditions improve, although there were several reports of productivity-enhancing capital projects.
Kansas City, Philadelphia, Atlanta, and Richmond report generally stable prices for material inputs and products. Factory product prices are flat in the Boston district; the weakest lines are being discounted.
Inventories in the Kansas City and Philadelphia districts continue to drift downward, though no district reports excessive inventories as a major problem. Plans to expand stocks are conspicuously absent. Manufacturers' general expectations for the first quarter are for continued weak sales and flat prices, but sources are relatively uniform in expecting significant improvement in sales and production in the second half of 1992.
Real Estate and Construction
Realtors in most regions report that lower mortgage rates have
prompted modest gains in home sales. In Atlanta and New York, real
estate contacts note that a significant portion of the home sales
originated with first-time buyers and lower-priced properties. Sales
in the Boston and Richmond districts remained mostly flat over the
past six weeks. Except in the San Francisco district, which reports
some continued decline, sources in most areas find home prices to be
relatively stable.
Reports from St. Louis, Kansas City, Dallas, and Atlanta note some improvement in single-family starts, but starts in the New York district remain slow due to generally sluggish demand. Multifamily activity remains stalled in Atlanta but is accelerating in Dallas.
Realtors, mortgage lenders and home builders are generally optimistic for the spring. Bankers in Philadelphia, Cleveland, and Kansas City believe residential mortgage activity could post healthy gains. Atlanta realtors expect strengthening sales and St. Louis builders believe that conditions will improve significantly by mid- 1992.
In the Dallas district, industrial and office real estate demand is flat. Office leasing declined in the New York area since the last report. Commercial activity in the Minneapolis district as mixed. Dallas and St. Louis report moderate increases in public construction.
Banking and Finance
Aside from a surge in mortgage refinancing, most districts report
consumer and business loan demand has not expanded significantly.
Contacts in several districts say that households are refinancing
from adjustable-rate to fixed-rate mortgages. San Francisco also
suggested that savings from lower monthly payments are being used
for household debt reduction. Gains in new mortgage activity are
much spottier. Demand for other consumer and business loans was
generally reported flat or down.
Reports on loan quality were mixed. New York contacts report increased delinquency rates on all types of loans, forcing some restructuring. San Francisco found that bank profits are still restrained by deteriorating real estate loans. Philadelphia bankers expect improving portfolio quality as lower interest rates reduce debt service costs. Bankers in Atlanta noted either stabilization or improvement in the quality of their portfolios during the fourth quarter.
Credit standards, on balance, remain unchanged. The consensus among banking contacts is that aggregate loan demand will remain flat until the second or third quarter of 1992.
Agriculture and Natural Resources
Winter crops are generally said to be in good condition across the
nation with the exception of the Dallas district, which reported
severe weather damage to agricultural production. Livestock
producers in several districts are struggling with lower prices.
Declining oil and gas prices have resulted in reduced drilling activity in the Kansas City and Dallas districts. Dallas reported that lower prices are creating a somber energy outlook for 1992 and added that some producers are shifting exploration overseas, while many energy and related companies have announced layoffs.