September 6, 1988
The pace of business activity reflected in most District reports ranges from healthy expansion to stable or mixed, with weakening noted only by St. Louis. However, contacts in several Districts were less optimistic than earlier about the outlook. A number of manufacturing industries are operating near capacity, and further upward pressures on prices were noted. Retail spending is generally lackluster though some segments are doing better. Several Districts report weakness in residential construction, but home sales are strong on the West Coast and in the Richmond District. Nonresidential construction has slowed in various areas of the country, though industrial building has strengthened in the Midwest. Rainfall in the second half of the summer relieved drought stress to agriculture in several Districts, though parts of the St. Louis District suffered further crop damage from hot, dry weather.
Manufacturing Activity is expanding in numerous manufacturing industries and in most Districts. Rising exports and transfer of production from overseas as well as strength of domestic demand have contributed to manufacturing's rise. Some industries are at or near capacity including paper, chemicals, steel, and aluminum. Other sectors doing well include electronics; nondefense aerospace; and electrical equipment and instruments, particularly for installation in new plants and factory expansion projects. Demand for various types of nonelectrical machinery has strengthened, in some cases from low levels. Motor vehicle output plans have been revised upward in line with better-than-expected sales. San Francisco says that output of forest products is strong, though industry sources are concerned about weakening in housing. In contrast, Dallas and Boston report sluggishness in construction supplies. Other manufacturing sectors showing softness include personal care products and government purchases, including defense. Atlanta, however, notes an increase in shipbuilding to fulfill new Navy contracts. Apparel is mixed, with foreign competition still strong. Several Districts indicate that the overall manufacturing expansion is expected to continue, though Richmond noted somewhat less optimism among its contacts than earlier.
Construction and Real Estate
Housing market conditions vary widely around the country, from
healthy to weak. Recent interest rate increases are thought to have
prompted some potential buyers to act before rates rose further (New
York) but discouraged other would-be buyers (Richmond). San
Francisco reports strength in West Coast housing markets and rapid
increases in home prices. Richmond indicates that new home sales
stayed strong in August. Dallas reports that residential
construction contracts and permits are rising but from low levels.
Slowing in homebuilding is noted by New York, Atlanta, Chicago, St.
Louis, Minneapolis, and Kansas City, though some parts of the New
York District have shown recent improvement or less slowing than
expected. Weak multifamily building was reported by Chicago and
Atlanta, though the latter has seen an upturn in two District
cities.
Construction of factories has strengthened in the Chicago District, and industrial park construction has increased in south Florida with the boom in exports. The pace of office building construction varies considerably among major cities. Hotel building is booming in Orlando. Chicago contacts expressed concern about overbuilding of retail stores in some areas. Boston described capital spending by profitable stores as cautious; weak retailers are selling stores. Strong or increased highway construction was noted by Chicago and San Francisco.
Consumer Spending
Consumer spending was reported sluggish in most Districts. Cleveland
and Minneapolis, however, noted an upturn in apparel sales in recent
weeks. Other Districts were hopeful that an end to hot, humid
weather would bring stronger sales of fall apparel and back-to-
school items. Lines described as selling well include conservative
clothing (Boston) and accessories, handbags, and women's at-home
clothing (New York). Cleveland sees some strength in home
furnishings, appliances, and electronics, but sales of furniture
were reported lagging by Boston, New York, and Richmond. Sales of
home improvement items were reported strong by Kansas City, but
Boston said hot weather deterred sales of building materials. Retail
sales have picked up in rural areas following recent rains,
according to St. Louis. Motor vehicle sales have been mixed.
Ordering by retailers is described as conservative and cautious. Inventories were viewed as generally satisfactory in the New York, Minneapolis, and Kansas City Districts, but Dallas noted stocks above desired levels, and Boston District stores with weak profits are cutting inventories. Extensive markdowns were reported by New York and Chicago. Dallas noted reports of continued high square footage per customer, holding down profits.
Resource Industries
Crop conditions vary widely. Timely rains in August helped crop
conditions according to Richmond, Atlanta, Kansas City, and Dallas.
However, hot dry weather in mid-August caused further crop
deterioration in the St. Louis District. Minneapolis reports
conditions largely unchanged there over the past month. This
summer's drought caused a sharper loss of corn and soybean
production in the Chicago District than for the nation as a whole.
Higher feed costs have squeezed livestock producers' margins, as
have higher water costs in the San Francisco District, but Kansas
City indicates that drought-induced cattle liquidation has been
limited. Richmond notes that higher livestock prices are expected to
help offset the adverse effects on margins of the rise in feed
costs. The past year's climb in agricultural land values in the
Chicago District slowed in the second quarter.
This has been a "roller coaster" year for forestry, according to Atlanta. Increased timber supply due partly to the drought, and reduced demand reflecting concerns about lagging housing starts, have cut lumber prices.
Oil exploration and development is expected by Dallas contacts to remain sluggish. The number of active drilling rigs has fallen since May in the Dallas District but risen, contrary to expectations, in the Kansas City District. Atlanta reports new oil discoveries in Alabama and Mississippi, and moderately lower oil production in the District.
Other Drought Effects
Low Mississippi River levels this summer because of the drought
caused diversion of freight from barges to higher-cost rail and
Great Lakes shipping. However, recent rains in the upper Midwest
have helped raise barge traffic above a year ago at Memphis, where
delays had been lengthy. The drought cut into demand for farm
equipment, which was recovering in the spring from low levels, but
added to demand in some other industries including pump
manufacturing and well drilling.
Inflation
Rising raw materials costs continue widespread, and higher prices
for components are increasingly being noted. Further price increases
are expected. Some firms, however, are experiencing little or no
cost pressure, because of long-term contracts or because they have
worked closely with suppliers on cost reduction, according to
Boston. Richmond reports that materials and finished goods price
increases in August were less widespread than in July. Various
materials and components are in short supply, and lead times have
lengthened further, prompting producers to try to raise their
inventories of these items. Cleveland comments that concerns about
rising costs and capacity limits are allayed by sizable profit and
productivity gains, but Chicago notes that margins at some firms are
being squeezed by increasing materials costs.
Reports on wage gains are mixed. Cleveland sees signs of somewhat higher labor costs, partly reflecting increased overtime. Boston's contacts are evenly divided between those who see accelerating labor costs, especially for fringe benefits, and those who do not. San Francisco reports shortages of entry and low-skill workers, partly tied to the immigration law. Shortages of qualified retail salespeople are exerting upward pressures on wages. In contrast, St. Louis sees no substantial upward wage pressures even in industries running at capacity.
Finance
Trends in lending have been mixed. Business lending has been strong
except in the Dallas District where business and real estate loans
are leading the decline in total loans. Consumer lending ranges from
soft to strong, with increases generally led by financing of car
purchases. Real estate lending is weak in some areas and showing
moderate gains in others. Business and consumer loan rates have
risen as have funding costs. Boston area bankers expect further
interest rate increases over the rest of 1988.