Beige Book: National Summary
January 28, 1987
The pace of economic activity appears to have quickened slightly at year-end, according to this month's commentaries on regional economic conditions. Retailers in most Districts enjoyed moderate year-over-year sales increases, in line with expectations. Auto sales were very strong in December, although the loss of the sales tax deduction in 1987 is widely regarded as the reason for this strength. Manufacturing employment increased in several Districts. The improvement was spotty, however, with an industry expanding in one District but not in another. Residential construction activity remains strong in some Districts, but has slowed in others. The rate of nonresidential construction also varies considerably from one part of the country to another. Oil and gas drilling is gradually increasing from very depressed levels. The agricultural situation is improving. While agricultural prices remain weak, higher production levels and lower prices for petroleum-based inputs are positive factors. Banks in most Districts experienced very strong commercial and real estate loan demand in December. Some of this strength is attributed to efforts to complete transactions before the new tax laws are in effect.
Consumer Spending
Christmas sales in most Districts were described as moderately ahead
of year-ago levels and consistent with retailers' expectations. The
most notable exceptions were the Boston and New York Districts,
where retail respondents reported strong sales increases ranging
from 5 to 25 percent over year-ago levels, and the Dallas District,
where sales were said to be below year-ago levels although still
consistent with expectations. Sales were generally slow in the early
part of December but strengthened as Christmas drew closer. January
sales were reported as healthy in the Philadelphia District and weak
in Richmond.
Retail inventories at the end of the Christmas season were said to be at comfortable levels and, in two or three Districts, lower relative to sales than in past years. For the most part, changes in exchange rates have not had much effect on retail prices, although merchants in several Districts expect rising import prices to show up more in 1987. Retailers are generally optimistic about future sales, but there is some concern that the first quarter will be soft as consumers start paying for the cars and other large items purchased late in 1986.
Reports of motor vehicle sales were all the same. Sales were very strong in December; dealers are generally satisfied with current inventory levels; sales are expected to be slow for at least the first several months of 1987. Most reports attribute the strength in December and the weakness projected for early 1987 to consumers' shifting purchases from 1987 to 1986 in order to take advantage of the deductibility of the sales tax. In this regard, San Francisco notes that in Oregon, where there is no sales tax, sales did not pick up appreciably.
Construction and Real Estate
Reports of residential construction were mixed across the Districts.
Activity has been particularly strong in the New York, Chicago and
St. Louis Districts. Mild weather was said to have contributed to
the strength in New York. Where home building has slowed,
overbuilding, overpricing and a shortage of suitable land were cited
as the primary causes. In the San Francisco District, multifamily
construction has slowed but single-family building is doing well;
the new tax laws are thought to have made multifamily units less
attractive for investment purposes, whereas they are expected to
have little effect on the single-family unit. Home sales are strong,
according to most reports, and are expected to remain so into 1987.
Nonresidential construction levels vary from busy in Minneapolis and Chicago to slow in San Francisco. About half the Districts mentioned that some office markets face an oversupply of space; absorption rates are said to be strong in many areas, however. Similarly, in areas with newly constructed retail space, occupancy rates are improving. Construction for retail buildings has continued at a healthy rate in Atlanta, in part because of net in-migration. Substantial growth in nonresidential construction was reported in parts of the Chicago and St. Louis Districts.
Manufacturing
Manufacturing activity appears to have picked up slightly in the
last months of 1986. Several Districts reported modest increases in
employment, and in the Dallas District, where manufacturing activity
had been declining, "Manufacturers are noting more positive signs
than at any time in the last two years." The industries cited as
responsible for this improvement varied from District to District:
in the Dallas District orders are bottoming out for energy-related
durable goods; San Francisco reported that commercial aerospace is
gaining strength; employment increases occurred in glass and general
industrial machinery in the Cleveland District, in textiles and
electrical equipment in St. Louis and in printing and publishing and
textiles in Atlanta. Several Districts mentioned increasing defense
activity. For many industries, however, there appears to have been
no improvement. San Francisco noted that the electronic, and
semiconductor industries continue to suffer from fierce competition
and low prices. Boston and Chicago both reported that reduced
capital spending by domestic auto manufacturers is hurting the
machinery and metalworking industries.
Manufacturers in different Districts vary considerably in their views of the future. Those in the Philadelphia and Richmond Districts think that business will improve over the next six months, those in Boston foresee little change, and those in Cleveland expect the first quarter of 1987 to be very poor and are uncertain whether the national expansion will continue.
The number of oil and gas drilling rigs in operation increased in December in the Kansas City and Dallas Districts, but remains far below the number a year ago. Drilling in Atlanta was at its highest level since last spring. Coal production increased over the year in the Richmond District but decreased in Atlanta. Gold mining in the Minneapolis District is reported to be doing fairly well and the San Francisco District's copper industry is hiring after an extended period of layoffs.
Agriculture
The situation in agriculture shows some signs of improvement.
Agricultural prices remain generally weak, but low grain prices have
helped livestock producers, especially those raising poultry. Lower
prices for petroleum-based inputs such as fuel and fertilizer are
also a positive factor. Prices rose slightly in December for wheat,
corn and soybeans in the Minneapolis District and farm crops in
Texas, but most prices remain below year-earlier levels.
Farm incomes are not as weak as farm prices in all cases, since production levels are higher. Good weather contributed to a bountiful vegetable and citrus harvest in Florida, more calves were held over the winter in the Kansas City District, and crop production in the Richmond District should be higher than this year's drought-reduced levels. On the down side, a significant decline in Texas cotton production projected for 1986 means lower incomes in already distressed areas of the state.
Banking
In most Districts, commercial and real estate lending increased
strongly in December, although in the Dallas District business loans
were far below year-ago levels. Banks in the New York, Philadelphia
and San Francisco Districts attributed some of December's strength
to tax changes and the desire to complete transactions before year-
end. In the Philadelphia and Atlanta Districts consumer loan growth
has slowed and in San Francisco construction loans dropped off
sharply in the last months of the year. Home equity lending is
increasing, according to several reports.
In the St. Louis District agricultural lending by banks continues to decline as a result of reductions in the costs of inputs and land, on the one hand, and more rigorous scrutiny by lenders, on the other. In the Kansas City District loan paydowns are reported to have improved over last year.