March 16, 1987
Assessments of general economic conditions ranged from uneven or steady to improving. Expanding activity or optimism were reported by contacts in the Boston, New York, Richmond, and Atlanta Districts. Cleveland reported slow expansion. Kansas City indicated recent slight Improvement. Chicago noted the effects of the mild winter in that District in boosting activity. Business conditions were described as on an even keel in Philadelphia, steady in Minneapolis, and uneven in San Francisco. Dallas noted signs of recovery but said important segments of the District remain weak.
Manufacturing
Most reports noted rising orders and activity in manufacturing.
Increases were described as gradual or small, overall, by Boston,
Philadelphia, and Cleveland. Manufacturers in the Boston,
Philadelphia, and Richmond Districts were optimistic about further
expansion in manufacturing activity. Orders were described as still
very sluggish by Dallas. More production cutbacks or plant closings
were reported by New York, Cleveland, and Chicago. New foreign-owned
auto assembly and parts plants are being built in the Midwest and
Southeast. Capital spending was projected about flat by contacts in
the Boston and Philadelphia Districts. San Francisco said many firms
plan less capital investment in 1987 than in 1986. Chicago reports
that demand for mechanical capital goods remains slow. Cost
containment continues as a high priority. Several Districts noted
upward pressures on prices. Higher orders were reported for
appliances, products used in housing construction, some
communications and computer equipment, medical equipment, plastics,
chemicals, and paper, attributed in part to the lower dollar. Dallas
reports that semiconductors have stabilized after 2 years of falling
orders and frequent closings. Atlanta and Dallas report that demand
remains weak from the construction and energy sectors.
Consumer Spending
Most Districts report further growth of non-auto retail sales.
Boston and New York said some retailers saw "astoundingly" or
"unbelievably strong" sales in February. At the other extreme,
retail sales were weak in the Dallas and San Francisco Districts.
Kansas City said sales were flat to only slightly higher than a year
earlier. Inventories were described as being at generally
satisfactory levels, though some respondents told New York that
stocks are low. Strength on the East Coast was attributed to the
healthy regional economy and, in New York, to buying by foreigners
whose currencies have strengthened against the dollar. Retail price
increases, resulting in part from the lower dollar, are likely to be
moderate. Tourism was described as good, except resort business
curtailed by lack of snow in the Minneapolis District.
Motor Vehicles
Most Districts report improvement in auto dealer sales in February
or early March, from very low levels in January following tax-
related December strength. Dallas, however, saw little Improvement
from the January pace in February, which was attributed to local
economic weakness. Dealers there expect continued slow sales.
Chicago reported auto production cuts and layoffs at some District
plants, in response to slower sales. Demand for heavy trucks has
improved.
Residential Construction
Most Districts report strength in residential building. An exception
is Dallas, burdened by a large stock of unsold homes and high rental
vacancy rates. Housing markets in Alaska and parts of the
Minneapolis District are also soft because of the weak energy
sector. Home building permits have trended down recently in the
Atlanta District, but builders there are optimistic. Chicago
reported that residential building was boosted by mild winter
weather, but Richmond said construction in that area was slowed by
bad weather. Sizable home price increases were reported in some
local markets on the East and West Coasts. Building material costs
are expected to rise because of the Canadian duty on lumber exports.
Nonresidential Construction
Office construction is slowing in most major cities, and office
vacancies are high or rising. Chicago, however, reported that work
on new buildings continues at a high level in that city. New York
said that office leasing has increased. Chicago indicated that
industrial construction had slowed in that region. Industrial space
is in short supply in parts of northern New Jersey. Extensive work
on military bases in upstate New York will be adding to construction
activity in that region.
Energy and Mining
Investment in the energy sector remains very weak, except for
construction of natural gas pipelines noted by Atlanta. Dallas
reports that the drilling rig count declined in February, seasonally
adjusted, after rising since July. February's level was about half
of a year earlier, and little or no increase is expected.
Minneapolis reported a decline in coal production. Lack of demand
for iron ore In that area has led to further layoffs.
Agriculture and Forestry
Conditions in the farm sector appear to be stabilizing. Chicago
reported that the decline in land values has slowed, farm earnings
have improved, and agricultural debt repayments are faster.
Minneapolis noted improved profits for livestock producers, but crop
farmers remain dependent on the government for much of their income.
Favorable prices for potatoes and beans have helped stabilize land
prices in that area. St. Louis reported that farm incomes have
stabilized. Dallas indicated that higher cotton prices are expected
to help farmers in that District. Florida citrus growers have
benefited from the lower dollar. Frost damaged the southern
California avocado and citrus crops, and higher prices are expected
for some fruits, vegetables, and nuts. Adverse weather delayed
expansion of lumber production in the Atlanta District following
imposition of the Canadian tax on lumber exports to the U.S. Demand
for southern pine has remained strong.
Financial
Several Districts reported continued strong growth of home equity
loans. Philadelphia noted that a significant portion of usage of
these lines was initially to pay down credit cards, but usage has
shifted toward net increases in total debt. Some credit card issuers
are tightening credit scrutiny in response to higher delinquency
rates. New York attributes a slowdown in IRA deposits to confusion
over the new tax law, low interest rates on IRA deposits, and
restrictions on withdrawals.