Beige Book: National Summary
August 2, 1988
Economic expansion continues at a pace varying from sluggish in two Districts to moderate or strong elsewhere. Employment levels are stable or rising, with tight labor market conditions noted in some areas. While retail sales are generally lackluster, auto sales have picked up. Manufacturers report moderate to healthy gains in sales and orders, although four Districts note signs of a possible slowing. Capacity constraints and shortages have developed in some Districts and materials price increases are widespread. Construction activity is mixed, with home construction reported to be weaker than nonresidential building. While the impact of this summer's drought varies, even within states, the corn and wheat crops have suffered extensive damage. The recent rains may save much of the soybean crop, however.
Consumer Spending
Most Reserve Banks find retail sales to be sluggish, with only
Atlanta and Minneapolis reporting any real vigor. Respondents cited
apparel and furniture sales as particularly weak; moreover, the
rising cost of imported clothing has reduced margins as well as
sales volumes. Inventories, however, are said to be in balance: only
in the Cleveland and St. Louis Districts were buildups reported.
Boston and San Francisco retailers attribute this healthy inventory
situation to careful monitoring: retailers in New York,
Philadelphia, Cleveland, and St. Louis, are reportedly resorting to
heavy promotions to clear the shelves.
Retailers expressed mild optimism about the next six months, with those in the Atlanta, Minneapolis, Richmond and Dallas Districts expressing greater confidence in the future than merchants in Philadelphia, Cleveland, Kansas City, and St. Louis.
In marked contrast to general retail conditions, many Districts characterize auto sales as strong and above dealer expectations. Only Richmond finds car sales declining. Domestic makes, aided by manufacturer incentives, are said to be moving briskly. Foreign autos, by contrast, are reportedly rising in price and languishing in the showrooms. San Francisco finds inventories of unsold imports now standing at "unsustainably high levels."
Manufacturing
Manufacturing sales and orders continue to grow at a moderate to
healthy pace in most Districts. Respondents credit manufacturers'
investment and export activity for much of this growth. While
contacts in Philadelphia and Dallas see some pick-up in demand from
earlier months, Boston, New York, Richmond and San Francisco report
recent signs of slowing. Strong sectors include steel and other
primary metals, machinery—particularly machine tools—fabricated metals, commercial aircraft and railcars. Atlanta and
Chicago also see strength in autos, tires and some other consumer
goods. Among the weaker sectors were agricultural equipment and most
defense goods, as well as energy-related and construction-related
products.
Increases in the prices of such materials as metals, paper and food were widely noted. While a few contacts expect these prices to stabilize, more think they will continue to rise. Kansas City, Cleveland, Richmond and San Francisco report that shortages of steel, valves, castings, motors and chemicals have developed. Cleveland, Dallas and San Francisco also mention capacity constraints, especially in petro-chemicals and pulp and paper. In this environment, manufacturers are reportedly choosing to hold higher inventories and are finding it easier to raise their own finished goods prices.
Manufacturing employment is generally stable or increasing slightly. Cleveland and Philadelphia report healthy gains while Atlanta and Boston report recent layoffs. Most contacts foresee little or no acceleration in wage pressures. San Francisco respondents were evenly divided on this issue, however, and Dallas and Minneapolis noted some industry-specific pressures.
Cleveland
Residential construction is down from year-ago levels, although the
Richmond District reports strong housing construction and sales. In
the San Francisco District residential building is very healthy
along the coast but weak in some of the inland states. Richmond,
Atlanta, Minneapolis and Kansas City also observe substantial
variations in the strength of housing sales and construction within
their districts, with larger cities experiencing stronger activity
than more rural areas.
Reports on nonresidential construction and real estate activity were positive for the most part. Although nonresidential construction contracts were down from a year ago in the St. Louis District, office building construction has surged in some cities in the Atlanta District and leasing has picked up in New York. Office building construction has slowed somewhat in Chicago, but remains at a high level; industrial real estate and construction activity in the District has strengthened. Dallas reports that both nonresidential and residential construction contracts have stabilized, a development suggesting that a prolonged downturn in construction may be at an end.
Agriculture and Natural Resources
The impact of this simmer's drought varies considerably by crop-even
within a given state. In the Kansas City District, winter wheat
matured on time and the harvest was normal, but in the Chicago and
Minneapolis Districts recent rains were too late for the spring
wheat, barley, oats and hay. The July rains were also too late for
much of the corn crop. In some parts of the Kansas City, St. Louis
and Minneapolis Districts, corn yields are expected to be down 50
percent or more. However, if the recent improvement in the weather
holds, Chicago, St. Louis, Atlanta and Minneapolis suggest that the
soybean crop could recover to near normal levels. Cotton, rice,
sugar cane, peaches and citrus fruits are also in good shape, but
the state of vegetable crops varies. In the Chicago District (an
important source of processing supplies), vegetables were severely
damaged, but in Atlanta the crop is satisfactory. While ranchers
have sold more animals than usual and cattle prices have fallen, no
large-scale liquidation has occurred. Instead, according to reports
from Dallas, Atlanta and Kansas City, record numbers of cattle have
been put on supplemental feed; as a result, ranchers' profits will
be squeezed. Nevertheless, the Kansas City and Minneapolis Districts
point out that improvements in the financial positions of farm
borrowers and lenders over the last two years will help most
withstand the impact of the drought.
Atlanta reports that demand for forest products has weakened recently with the slowdown in building activity, while San Francisco sees no such decline. Both are experiencing strong export activity.
With the price of oil below $15 per barrel in mid-July, Atlanta finds oil production slipping and Dallas and Kansas City report or expect a fall in the rig count. Atlanta and Richmond see coal output rising with help from the weak dollar and strength in steel.
Financial Activity
Except in the Dallas District, loan demand is healthy. Business
lending is reported to have accelerated in the Philadelphia and
Atlanta Districts, while consumer lending has grown vigorously in
Cleveland, Kansas City and San Francisco. In the Cleveland District
consumer installment loans have recently increased at an annual rate
greater than 50 percent. Consumer lending is said to be rather weak
in the Philadelphia and New York Districts, but demand for home
equity loans remains very strong. New York respondents also note
that delinquency rates on consumer loans are equal to or lower than
year-ago levels. Reports on commercial real estate lending are
mixed, with Cleveland reporting relatively strong growth and Atlanta
and Philadelphia seeing some tapering off.
Richmond bank executives report substantial increases in deposits in July; Philadelphia bankers have also seen a pickup. In the Dallas District, however, deposits and assets—particularly business loans—both continue to decline.