October 18, 1988
Most districts report continuing growth in their regional economies. New York, Philadelphia, Cleveland, Richmond, Chicago, and San Francisco all report further expansion over the past six weeks. Four districts—Atlanta, St. Louis, Kansas City, and Dallas—report slow or sluggish growth. Boston represents general business sentiment as cautious, and Minneapolis says business conditions have held steady.
Though conditions in agriculture vary across districts, it now appears that, in the aggregate, the drought will have a much smaller impact on farm income than was originally thought. The slump in oil prices has depressed the energy industry in the Dallas district, but the effect has been minimal elsewhere. Construction of residential dwellings, especially multifamily structures, is slow and homebuilders are preparing for further declines; nonresidential construction, though, remains healthy. The manufacturing sector continues to expand, bolstered by a growing demand for exports. The outlook calls for caution and some easing in activity, however. Retail trade remains sluggish in most parts of the country, and store operators are anticipating only modest gains in the fourth quarter. In the financial sector, demand for consumer loans remains strong, led by home equity borrowing. Business lending is holding up as well.
Agriculture
Agricultural conditions vary considerably by area. In the aggregate,
however, it appears that the impact on farm income of any reduction
in yield due to the drought will be largely offset by higher crop
prices in general and federal aid to affected farmers in particular.
And, while livestock producers' profits are being squeezed by rising
feed costs, livestock prices are heading up as well, which will
allow producers to pass on some of the increased costs. Kansas City
reports that some cattle ranchers are maintaining herds through the
winter in anticipation of higher prices in the spring. Feedlot
operators, on the other hand, are seeing profits eaten away.
Mining and Energy
Dallas reports significant weakness in oil and gas drilling and
indicates that the rig count in the Eleventh District has dropped by
14 percent since May. The slump has had little noticeable effect in
other regions, however. While the rig count in the Atlanta District
is down 7 percent from a year ago, operators of offshore
installations say they would expand production if they could find
qualified labor. In the San Francisco District, drillers are waiting
to see if prices rebound before they change plans, and refiners and
retailers are enjoying wider profit margins as a result of the drop
in the wholesale price of oil.
Minneapolis reports that gold-mining operations in Montana have expanded in the last year and that the stage may be set for expansion in copper mining as well. As a result, mine employment may be headed for its highest level in that district since 1983.
Construction
All districts except Kansas City and Dallas report a slowing or
weakening in residential construction and real estate; St. Louis and
Atlanta note softening house prices as well. Overall, multifamily
residential construction is weaker than single-family construction.
Several districts indicate that homebuilders expect mortgage rates
to head upward and are therefore bracing for further slowing.
Nonresidential construction, however, remains healthy in most areas.
Chicago specifically mentions public works projects as being strong.
Manufacturing
Virtually every district indicates continuing strength or expansion
in the industrial sector. Many cite rising exports as a primary
source of demand for manufactured goods; Cleveland indicates that
domestic production is displacing imports in some cases. The
expansion in manufacturing spreads across a wide range of
industries. Among the strongest are chemicals, paper and pulp,
primary metals (specifically steel), fabricated metals, automobiles
and trucks, electrical and electronic machinery, and nonelectrical
machinery. Weaker industries include textiles and apparel, equipment
related to oil and gas drilling, and defense-related operations.
Despite the continued growth in manufacturing and the expansion of factory employment, wage pressures do not appear to be mounting at this time. Price movements vary by region and industry, but are generally moderate.
Plans for increased capital spending by manufacturers are reported by several districts. In the New York District, major manufacturers of steel, automobiles, and electronic equipment have announced plans to establish new plants or enhance existing operations. Dallas indicates that chemical producers are straining capacity and are planning expansion. In the Philadelphia District, over 40 percent of the respondents to the monthly Business Outlook Survey say they plan to spend more on plant and equipment in the next six months.
Despite the current boom in the sector, manufacturers are becoming less optimistic about coming months. Several districts say a slight slowdown became evident in late summer and that manufacturers, foreseeing a leveling off of activity through the first half of 1989, have become very cautious. For the second month in a row, manufacturers in the Richmond District are anticipating a drop in business activity from current levels over the next six months.
Retail Trade
Although several districts report a recent pickup in sales of
general merchandise, retail business can accurately be described as
weak or slow in most areas. Women's apparel is mentioned by several
districts as a particularly weak line. Philadelphia says a slight
pickup has occurred recently in higher priced merchandise.
Despite continued sluggishness in sales, retail inventories at stores in most districts are at acceptable, lean levels thanks to strict monitoring and tight ordering policies. And, although sales remain low relative to plan, Boston, Philadelphia, and San Francisco all report difficulty in hiring qualified, in-store help and note some upward pressure on wages as a result.
Retail prices are mixed. Boston reports that prices of lower-end merchandise are fairly stable, but that prices of higher-end items are rising fairly quickly. Minneapolis says price increases have been moderate and that some retailers in that region have switched to domestic suppliers as the prices of imported goods have gone up.
Sales of cars and, especially, of trucks are reported to be strong in most districts. Cleveland reports slower sales stemming from a small inventory of 1988 leftovers and the reluctance of dealers to make price concessions to clear them out. In St. Louis, sales have leveled off after seven months of strong gains.
The outlook for retail sales can be sunned up in one word: cautious. Store officials' forecasts for the fourth quarter range from "moderate" to "slightly improved." No one, however, is predicting a boom in holiday sales and most are likely to continue their policies of tight inventory management.
Finance
Business loan volume is growing or stable in most districts, while
consumer loam demand is generally described as strong. Mortgage
lending, however, has tapered off. Home equity loans, on the other
hand, are reported to be strong by New York and Richmond.
Philadelphia notes that some bankers are concerned about funding the
growth in loans and expect to have to raise interest rates on
deposits to attract funds.