January 18, 1995
Summary
Economic expansion remained vibrant around much of the nation in
recent months, and conditions seem to have grown more uniform among
the Districts. The underlying momentum in consumer spending growth
remained quite strong. Manufacturers continued to offer some of the
brightest reports within the Districts, although the overall pace of
expansion in industrial output may have eased somewhat. Assessments
of auto industry conditions remained upbeat. Higher mortgage
interest rates appear to have slowed single-family housing activity,
but multifamily residential and commercial construction remained
relatively strong. Expansion in bank loans slowed, led by weaker
demand for home mortgage, home equity, and residential construction
loans. Production responses to livestock price declines are
anticipated to bolster farm income in the current year. Labor
markets continued to strengthen, with most reports indicating
unchanged to somewhat higher wage increases. Price increases seemed
somewhat more widespread than were reported in early December, while
higher inflationary expectations were apparent in business surveys.
Retail Sales
Retail sales increased at a moderate pace in the holiday season.
Sales gains may have fallen mostly below expectations formed just
after the Thanksgiving weekend, but weather effects and other
factors point to stronger underlying momentum in spending growth.
Nearly every District reported continued strength in sales gains for
hard goods and/or big-ticket items, including personal computers,
other consumer electronics items, home furnishings and appliances.
Assessments of auto sales remained quite positive in most of the
nation. Apparel sales were weaker in normally cold Districts that
experienced relatively warm winter weather, and many apparel
retailers reported heavier-than-anticipated discounting. However,
there were signs of underlying strength even in the apparel
category. Several Districts in the northern part of the country
noted that apparel sales weakness was concentrated in outerwear,
while retailers in the Atlanta District noted that warmer-than-usual
weather held back overall holiday sales gains, except for apparel,
which showed relatively strong gains.
Manufacturing
Manufacturers continued to provide some of the strongest reports
within the Districts, although the overall growth rate may have
slowed modestly. Philadelphia's survey of manufacturers showed
output continuing to grow in the fourth quarter, although somewhat
more slowly than a strong year-earlier period; looking ahead, about
twice as many respondents expected order increases than decreases
during the first half of 1995. Richmond's mail survey also suggested
that most manufacturers expect further gains in output, with little
change in the pace of current growth reported since the last survey.
Purchasing managers' surveys in the Chicago region pointed to
vigorous gains in industrial output as 1994 came to a close,
although expansion was not quite so strong as earlier in the year.
Production and orders trends in durable goods industries continued to lead growth within the overall manufacturing sector. Cleveland's industrial contacts indicated that orders growth remains solid, with particular strength in capital goods industries. Automotive contacts reported some of the strongest sales gains within Boston's manufacturing sector. Cleveland and Chicago reported strength in demand for steel, with Chicago noting that steel output plans for the first quarter were recently increased in response to stronger automotive orders. Auto parts suppliers continued to announce construction of new production facilities in the Atlanta region. Increased exports to Europe boosted recent results among Cleveland's manufacturing contacts. Uncertainty over Mexican developments clouded expectations in several regions, however.
Construction and Real Estate
Higher mortgage interest rates appear to have slowed homebuilding
and residential real estate activity around much of the nation.
Seasonal patterns account for some of the recent weakness, but home
sales weakened in normally cold regions that enjoyed relatively warm
and favorable weather. Multifamily and commercial construction were
stronger than single-family homebuilding in nearly every District.
For example, Dallas reported that overall demand for construction-
related products edged up; lumber producers reported lower sales for
residential building but increased orders for commercial
construction, and glass producers reported record sales partly for
the same reason. Declining commercial vacancy rates were widely
reported, and continued growth in commercial and multifamily
development was generally anticipated in 1995. However, a wider
group of contacts expressed concern about the future impact of
higher interest rates on real estate and commercial construction
activity.
Banking
Expansion in bank loans slowed, led by weaker demand for home
mortgage, home equity, and residential construction loans. Most
Districts indicated that commercial and industrial loan demand
remains relatively strong. "Outside of housing," San Francisco
noted, "bank lending activity is reported to be brisk." A number of
Districts reported slower growth or declines in business loan
demand, however. After a relatively strong group of reports in
December, assessments of trends in consumer loan demand were mixed,
with some new slowing apparent even in Districts with relatively
strong retail sales gains. Wherever noted, delinquency rates
continued to decline. Philadelphia characterized loan officers'
outlooks as "positive but cautious," with overall loan growth
expected to ease as the year progresses. Reports of tighter lending
margins were noted in several Districts, and Philadelphia stated
that officers may review future lending plans as a result.
Agricultural banks in the Kansas City District reported that crop
loans were in better condition than a year ago, while a slump in hog
and cattle prices weighed on livestock loan quality.
Agriculture
Production responses to livestock price declines are anticipated to
help bring some recovery in farm income in the current year. Kansas
City reported that bankers generally expect farm income to improve
slightly in its region during 1995, assuming normal crop yields, as
livestock prices are anticipated to return to break-even levels.
Chicago noted that hog production was up only marginally from last
year and well short of expectations. Producers in the Chicago region
account for a substantial share of national output, and they have
made sizable cuts in planned production. Minneapolis noted that
modest recent improvement in livestock prices have improved producer
outlooks for 1995, and there are signs of increased farmer
willingness to invest in new machinery.
Labor Markets
Continued strengthening and/or increasingly tight labor markets were
widely noted, although a minority of Districts suggested that wage
pressures may have eased in some occupations. Minneapolis stated
that "evidence of tight labor markets abounds." Retailers in the St.
Louis and Chicago Districts reported difficulty meeting holiday
seasonal labor needs, and St. Louis found that retailers were
actively recruiting personnel from other stores. Strong demand for
temporary workers was reported in the Boston, Atlanta, and Dallas
Districts, with Dallas also noting increasing wage pressures for
temporary labor. Chicago reported that shortages of machine tool
operators caused some production bottlenecks, and prompted some
capital spending delays because workers were not available to
operate new machinery. Reports on permanent manufacturing employment
trends were mixed; growth was noted by contacts in Cleveland,
Chicago and Richmond, while employment seemed to remain relatively
flat among manufacturers contacted by Boston and Philadelphia. At
the same time, Boston reported a tighter market for clerical
workers, with increased opportunities for permanent employment. New
York reported significant job cut announcements in the financial
services sector.
Increasing wage pressures were reported more frequently in the Atlanta, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while Kansas City stated that tightness in markets for skilled manufacturing and construction labor had eased. Surveys by compensation consulting companies in the Chicago region suggest that salary increases for exempt salaried employees of large firms will remain in line with 1994, while pay varying with sales growth, profitability, customer service, or other organizational goals will continue to take an increased share of total compensation.
Prices
The pace of price increases seemed steady to somewhat higher since
reports in early December, while higher inflationary expectations
were apparent in business surveys conducted in San Francisco and
Chicago. District reports continued to emphasize shortages and
increasing input prices in manufacturing and construction, coupled
with stability in most retail prices. Price discounting during the
holiday season ran heavier than many retailers had anticipated,
particularly in apparel.
Manufacturers continued to report strong (but perhaps diminishing) pressure against output price increases. Boston stated that long- term agreements with suppliers, low labor cost increases, pressure from customers and greater operating efficiency continue to limit many manufacturers' needs for output price increases. Reports from a minority of Districts included a growing set of exceptions to this rule, however.
Retailers in Dallas and San Francisco noted higher price pressures from rising packaging costs. Labor shortages and strong demand increased price pressures among service firms in the Dallas region. Agricultural businesses in the San Francisco region expressed concern about rising labor, transportation, packaging, and raw materials costs.