September 23, 1992
Economic activity has been improving slowly in most of the nation, but the pace of recovery has been uneven across regions and sectors. Cleveland, Dallas, Kansas City, Philadelphia, and Richmond report modestly improved conditions in their Districts since our last report. Some weakening of economic conditions is reported by Chicago, and in California by San Francisco. The remaining Districts generally report a continuation of slowly expanding activity. Retail sales are reported steady or slightly higher by most Districts, but auto sales are lackluster. Manufacturing activity has weakened in autos, aerospace, and defense-related industries. In manufacturing outside of these sectors, however, improvement is noted in orders, production, and sales. Residential construction activity appears to be improving slowly in most of the nation, particularly in low to mid-priced housing, but nonresidential construction remains weak. Agricultural conditions are good in most Districts. The clean-up and reconstruction from Hurricane Andrew is expected to stimulate economic activity in southern Florida and Louisiana. Little upward pressure on prices has been evident, except for products such as lumber and natural gas associated with storm-related damage.
Consumer Spending
Retail activity is mixed across the nation, with some Districts reporting steady or slightly improving sales, and others reporting sluggish conditions. Contacts in the Minneapolis, Philadelphia, and Richmond Districts indicate that sales picked up in recent weeks. Chicago and New York also report that, after accounting for the late Labor Day holiday, underlying sales growth rose in both August and early September. Chicago reports increased demand for appliances and home improvement items, while New York reports increased demand for fall clothes due to cool weather. Back-to-school sales in early September are reported strong by Cleveland, New York, and St. Louis. Dallas, however, reports sluggish conditions in most of its major markets, and Boston reports that two-thirds of its retail contacts experienced sales declines in the summer from year-earlier levels. Retailers in the San Francisco District also report weak demand for soft goods in most markets. In particular, retail activity in southern California is said to have declined. Outside of California, however, retail sales are reported to have improved. Inventories are at or below projections in most Districts.
Auto sales are reported as steady to rising by Dallas, Kansas City, Minneapolis, and St. Louis. Generally sluggish conditions, however, were observed by other Districts. Chicago and Cleveland report that major automakers are disappointed by these recent sales trends, and that dealers have cut orders below sales in order to prevent an unwanted buildup of new car inventories. While sales of light trucks outperformed those for cars during August, dealer orders for light trucks also began to lag sales in recent weeks. According to Chicago, one domestic automaker attributes the weak car sales to an erosion in consumer willingness to purchase, rather than to income trends. Showroom traffic has improved, but sales closures have weakened.
Several Districts said this has been a good summer for tourism. Atlanta reports good convention activity and moderate increases in tourism boosted by discounted air fares and an influx of European visitors responding to the weak dollar. Boston-area tourism also has benefited from an increase in foreign visitors, and Minneapolis reports a good summer tourist season at national parks in its District. Tourism in Hawaii, however, was reported down due to a large drop in California visitors, and contacts report that tourist-related retail and service sector jobs are down in Los Angeles.
Manufacturing
Auto production has fallen in recent weeks, and job losses continued to be reported in aerospace and defense-related industries. Outside of these sectors, however, several Districts report general increases in manufacturing activity.
Chicago and Cleveland report that due to disappointing sales and a recent labor dispute, auto production has failed to meet earlier expectations. Auto production in the fourth quarter is expected to remain near the relatively low third-quarter rate, even if the production losses due to the recent labor dispute are fully made up. Inventories remain lean, however, and production would respond quickly to any sales pickup. Cleveland reports that steel producers anticipate little change in production over the next few months, as the pace of new orders for October and November is slower than expected.
San Francisco reports that aviation production rates are dropping, and that layoffs among defense and aerospace manufacturers were announced in southern California and Utah. St. Louis reports that consolidation in the aircraft industry has preserved jobs in its District, at the expense of other regions. Boston and Cleveland also report cutbacks in orders and production among suppliers to the aerospace industry.
Outside of these sectors, most Districts report general improvement. According to Cleveland, manufacturing output appears to be picking up due to increased demand for high-tech products and a slowly reviving industrial equipment market. Increased production of non-military electronic equipment is noted by several Districts. Chicago, Cleveland, and San Francisco note increased production of heavy trucks to meet both domestic freight needs and export demand. Several Districts report increased demand for building products due to Hurricane Andrew, and Chicago and Dallas note that industries tied to single-family home construction are experiencing strong sales. Farm equipment demand and production, however, are reported to have fallen by Chicago, Minneapolis, and San Francisco.
Construction and Real Estate
Several Districts note some improvement in residential real estate and construction activity. Boston reports that real estate sales have been fairly strong over the past few months, with first-time home buyers taking advantage of low interest rates and relatively low prices. Dallas, Kansas City, and Minneapolis report strong increases in housing starts and demand, and note increases in both building material costs and home prices. An increase in home sales and prices is noted in the St. Louis District, although construction activity is mixed. Atlanta, New York, Philadelphia, and Richmond also note increased sales activity. Ample existing home inventories, however, have kept prices stable in these Districts. San Francisco reports that while residential sales and construction activity is increasing in several states, residential markets in California are sluggish, with price decreases reported for higher priced properties. In general, Districts are observing that activity is strongest for homes in the low to mid-price range.
Weakness persists in nonresidential construction activity, according to most Districts. Demand for office space remains weak in Philadelphia, in part due to ongoing consolidation by local companies. Older buildings are said to be especially vulnerable to decreasing demand. New York reports that vacancy rates remain at high levels, so plans to construct four new office towers in Times Square have been put on indefinite hold. Office demand also remains weak in the Dallas District, where a turnaround in office construction is not likely to occur for at least three years. San Francisco reports that nonresidential construction activity in California continues to weaken. In addition, contacts in Oregon report that several major nonresidential projects are on hold until next year. Minneapolis, however, notes that contract awards for public school buildings are more than offsetting declines in commercial and industrial construction.
Financial Institutions
Financial institutions report that loan demand is generally flat, with some increase in mortgage lending, in part due to refinancings, offset by weakness in demand for consumer and commercial credit. Bankers in the St. Louis District describe loan demand as soft. Weak demand for auto loans is noted by New York, which cites competition from automobile financing companies as a reason. Dallas reports that the largest constraint on loan demand is the lack of qualified borrowers. San Francisco reports that low interest rates are improving the profitability of District financial institutions, but demand remains soft for commercial, industrial, and consumer loans in most markets. The weakest loan demand in the San Francisco District was found in California, where delinquency rates for commercial real estate also continue to rise. Several Districts note that currently low interest rates have increased the level of mortgage refinancings. While some Districts observe that the rate of refinancings is below that seen in early 1992, contacts in Atlanta expect that the volume may eclipse the record posted earlier this year.
Agriculture and Resource-Related Industries
Cool and damp weather has affected agricultural conditions across much of the nation. Slower maturing crops are delaying the fall harvest in the Midwest. In the absence of an early, crop-damaging frost, however, Minneapolis and Chicago expect bumper harvests of corn and soybeans in their Districts. Kansas City also expects above average yields of these crops in Kansas and Missouri, but reports crop damage in parts of Oklahoma and Nebraska due to heavy rains and hail. Dallas notes that cotton yields are likely to decline because of the cool weather.
Hurricane Andrew damaged the lime, avocado, mango, and foliage plant crops in Florida, and the sugarcane crop in Louisiana. Except for limes, however, fruit and vegetable prices have remained relatively stable as lost supplies have been replaced by imports. Drought conditions are expected to lower farm income in Idaho and eastern Oregon. The unusually sunny weather, however, has produced sharp increases in tree fruit crops in Oregon and Washington.
Several Districts report that lumber prices, which decreased in July, have rebounded to high levels as result of Hurricane Andrew. Dallas reports that hurricane damage to platforms and pipelines in the Gulf of Mexico has reduced the supply of natural gas and has boosted natural gas prices. Prices are likely to rise above their normal seasonal increase for the next three to four months as repairs take place. Elsewhere, electricity prices are up in the Pacific Northwest due to drought-related reductions in hydroelectric power. A 20 percent increase in wholesale electricity rates has been proposed in Oregon; this would increase average retail bills by 5 to 10 percent.