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National Summary: December 1986

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Beige Book: National Summary

December 1, 1986

District Reserve Banks report economic conditions ranging from sluggish to generally good with more than half indicating some recent improvement. Strength in consumer spending is somewhat more widespread than in the last report, and most retailers anticipate a moderate to good holiday season. Residential construction continues at a healthy pace, but nonresidential construction has slowed as a result of oversupply. Manufacturing is still relatively weak, and some increase in input prices has been noted. While the energy sector remains depressed, an increase in the number of operating oil rigs has occurred. Farmers experienced near-record corn and soybean yields in some areas despite heavy rainfall, and livestock producers are benefitting from higher prices. Commercial bank loan activity has improved because of some upturn in business lending and strength in real estate and consumer lending. Many commercial banks are actively promoting the use of home equity lines of credit for consumers to retain interest deductibility under the new tax law.

Consumer Spending
Most districts see an improvement in retail sales. Philadelphia states that sales were up strongly, and California and Richmond also had generally good gains. Sales were sluggish in Boston, Cleveland, Dallas and St. Louis, but the remaining districts report moderate increases. Items in strong demand were apparel, electronics, furniture, and other home furnishings. As a result of the recent improvement in sales, retailers for the most part anticipate a moderate to good holiday season. Inventories are at satisfactory or manageable levels. Prices (when mentioned) were generally reported as stable. However, Chicago attributed a jump in textile and apparel prices to recently imposed import restraints, and Dallas saw a significant increase in prices of imported electronics.

All districts reporting on auto sales had strong gains in September and a sharp dropoff in October, mirroring the national pattern.

Construction and Real Estate
Most districts report healthy residential construction activity, though at a somewhat slower pace than earlier this year. The Richmond district notes that home sales have been weakening due to the high level of home prices there. Atlanta reports a shift away from construction of multi-family units because of a high level of condominium inventories and generally poor demand. In contrast to most other areas, residential building in the Dallas district is substantially below a year earlier.

Nonresidential construction has slowed in Atlanta, Dallas and parts of New York where an oversupply of office space now exists. In Chicago and Minneapolis, however, work on new office buildings continues at a steady pace. Reflecting higher demand for space, vacancy rates in the Minneapolis district fell between June and September for both office and industrial buildings.

Manufacturing
Industrial activity remains relatively weak, and plans have recently been announced for additional plant closings and layoffs in several districts. The largest is the scheduled G.M. cutback, which will result in more than 20,000 job losses in the Chicago district and will affect other areas as well. Some industries and districts do report gains, however. The Philadelphia and Cleveland districts have seen an overall improvement in their manufacturing sectors in recent months. Both Boston and San Francisco state that the aerospace industry is doing well, and the USX strike continues to benefit competing steel producers in the Chicago and Cleveland areas. Many districts (Boston, Chicago, New York, Philadelphia. Cleveland, Kansas City and Dallas) mentioned an increase in input prices, which some attributed to the decline in the dollar. Most manufacturers are holding their own prices firm, however. Several districts reported no discernible benefit from the dollar's decline. San Francisco noted that increased exports of electronic products and higher capital goods orders have resulted from the weaker dollar.

Energy and Resources
The stabilization of oil prices at a somewhat higher level led to an increased number of operating oil and gas drilling rigs. However, the total is less than half the number in operation a year ago in the oil-producing states. Chicago found that the oil and gas industry's demand for steel pipe is up somewhat from a recent very low level. The wood and forest products industries of Minneapolis and San Francisco have improved further. These districts also report an upturn and brighter outlook in copper mining.

Agriculture
Despite heavy rainfall and flooding in many areas, farmers experienced record or near-record corn and soybean yields in the Cleveland, Kansas City, Minneapolis and St. Louis districts. Moreover, a feared storage crunch was alleviated by the rain-induced stretch-out of the harvest season. Attractive alternatives that encouraged farmers to redeem their PIK certificates and sell rather than store grain also helped avert excess stockpiling. Livestock producers and dairy farmers in several districts are benefitting from lower feed costs and from higher livestock and milk prices. The San Francisco district reports a record pistachio crop and higher potato and grape prices, while Florida expects an 8 percent increase in orange and grapefruit production over the year.

Financial Sector
Loan activity improved somewhat in recent weeks. Philadelphia reports continued strength in commercial and industrial loans and an upturn in consumer loans, and Atlanta also states that lending has remained strong. Cleveland notes that loan demand rose slightly in all major categories, with real estate and consumer loans registering the greatest growth. A marginal increase in Cleveland's C&I loans represents an improvement following no growth in the third quarter. St. Louis also reported strong real estate and consumer lending as well as some growth in commercial loans.

Several districts noted that banks are promoting the use of home equity lines of credit as a means for consumers to retain some measure of interest deductibility under the new tax law. Atlanta reported that demand for home equity loans "has surged across the region", while Chicago, New York, Philadelphia, Richmond and St. Louis noted an expansion in banks' promotion of these credit lines.