March 13, 1984
Introduction
The expansion continues in all Federal Reserve Districts, but with
variations in vigor among regions and sectors. Several banks
emphasize a revival of consumer and business confidence, and
widespread views that strong momentum will sustain the recovery
through the year. Virtually all sectors are expanding or at least
holding level, with oil and gas well drilling a significant
exception. Geographically, the strongest gains are occurring on the
West Coast, with much of the Midwest and Northeast still reporting
substantial slack in durable goods manufacturing. Almost all
districts noted exceptional strength in retail sales, often
exceeding expectations. Demand for housing also is showing
surprising strength, helped by wider use of adjustable rate
mortgages. Capital expenditure plans are being raised cautiously,
with emphasis on productivity and cost cutting. Employment and
consumer income are rising at a good pace, but markets are still
generally soft in many northern states. Inventories, overall, remain
quite low relative to sales. Inventory rebuilding is expected,
mainly at the retail level. The farm sector remains depressed, but
is being aided by higher prices and increased plantings. Pressures
are building on capacity in some industries. Some shortages are
reported. Price inflation is accelerating, but still only moderately
overall. Credit demands are stronger, especially for home mortgages
and installment loans.
Retail Trade
Consumers continue to lead the expansion, increasing spending since
the turn of the year more than had been expected. While all products
are selling well, the list is headed by larger domestic cars,
imported cars (limited by quotas), small trucks, appliances,
consumer electronics, furniture, and recreational equipment.
Philadelphia and San Francisco report a rising share of retail sales
on credit.
Housing
Demand for new and used homes continued "surprisingly" strong in
January and February. The housing revival has been particularly
vigorous in the West. Cleveland reported a leveling in activity.
Stronger than expected buying is widely attributed to adjustable
rate mortgages offered at interest rates initially well below those
charged on fixed-rate mortgages. Richmond notes a revival of
speculative building, in anticipation of strong spring sales.
Atlanta notes a sharp drop in permits for multifamily construction,
as first-time buyers move out of apartments. Dallas also reports
concern about overbuilding of multifamily structures.
Employment
Job markets have strengthened in all districts, but unemployment
remains disturbingly high, especially north of the Ohio river.
Cleveland reports that cautious employers are increasing use of
overtime and part-time help in preference to permanent increases in
force. Chicago notes much slower advance in wages than in past
years, and widespread moves to curtail non-wage benefits, especially
soaring medical costs.
Manufacturing and Mining
Factory output continues to advance on a broad front. Output of some
car and truck models is at capacity, restricted by component
availability. District reports tell of strength in paper, carpets,
farm chemicals, and fertilizer (Atlanta), defense and high tech
capital goods (Boston, New York, and Minneapolis), and lumber,
aircraft, and missiles (San Francisco). One of the few weak areas is
oil and gas well drilling (Dallas), with associated manufactured
goods. Steel is up sharply from the low point, but still far below
capacity. Agricultural equipment output remains at low levels.
Capital Goods
The upturn in outlays for business equipment, earlier concentrated
in electronic types, is becoming more widespread among heavier
mechanical equipment. Further improvement is expected. A few capital
goods industries are operating near effective capacity, but most are
well short of these levels. Investment is frequently oriented toward
controlling costs and enhancing productivity, rather than adding to
capacity. Industries experiencing strong demand or sharply improved
orders include electronics and robotics, heavy trucks, trailers, and
aircraft. Machine tool orders have improved modestly, restrained by
severe foreign competition. Orders are also up for freight cars,
construction equipment, and mining equipment, but remain far short
of prosperous levels.
Nonresidential Construction
Although office building construction continues strong in Chicago,
New York, and Dallas, there are fears of excess space in some areas.
San Francisco sees a strong rise underway ~n shopping centers and
hotels. Richmond notes an improving outlook for commercial
construction. With manufacturers' capital spending mainly to improve
productivity, factory space is still generally ample. But some firms
are expanding. San Francisco indicates that electronics and defense
suppliers are investing in new structures. Most firms, however, are
reluctant to add new space or even bring marginal facilities back on
stream. An expected increase in highway construction this year may
be hampered by Congressional delays in approving funding.
Agriculture
Higher farm prices and increased plantings, mainly because of the
expiration of the PIK program, suggest a stronger agricultural
sector in 1984. However, farmers continue under financial stress.
Atlanta reports a high rate of farm loan delinquencies, especially
on government agency loans. Kansas City finds farmland sales sick
and values soft. Chicago mentions the low sign-up for the new dairy
program intended to reduce the milk surplus. San Francisco reports
plantings of fruits and vegetables going well, with good prices for
product, partly because of the freeze in Texas and Florida.
Inventories
Manufacturers and trade firms are keeping inventories at low levels
relative to activity. Boston, New York, and St. Louis report
retailers building stocks to accommodate stronger sales. While most
companies say inventories are at "acceptable" levels (Richmond) or
"satisfactory" (Kansas City), leadtimes are increasing; and some
shortages are evident. A number of districts report low inventories
of motor vehicles—especially imported cars—electronic components,
paper and paperboard, and gypsum board.
Inflation
Prices are rising at a faster pace, but still not to an alarming
degree. Philadelphia and Kansas City state that purchasing managers
expect prices to rise faster as the year moves on. Higher prices are
related to shortages and longer leadtimes, which reflect pressures
on capacity. So far the largest price increases have been for
purchased materials, but increasingly tags are being raised on
finished goods. Chicago finds large rate increases under discussion
for electric utilities and telephone service. College tuitions have
been boosted sharply. Cleveland states that price increases for
tires have been held back by availability of imports, an observation
that also applies to a wide range of products.