Beige Book: National Summary
March 9, 1994
Federal Reserve district reports indicate that the economy expanded moderately in January and February despite unusually severe weather in the East and the Midwest. The weather adversely affected consumer spending and construction, delayed shipments, interrupted some production, and boosted selected tourism and energy markets, but these effects were largely temporary. Manufacturing activity increased in most regions and sectors, with the auto industry and its suppliers and building products showing the most strength. Weather-related retail sales losses were sizable in some areas, but elsewhere consumer spending rose steadily; almost all district reports suggest that merchants expect solid sales growth in coming months. Real estate markets are mostly improving compared with a year ago, with exceptions noted in southern California and Connecticut. Several districts indicate that rising interest rates have slowed mortgage refinancings. In agricultural regions, financial distress stemming from last summer's floods is generally abating. Overall, only limited price pressures are reported; prices of building materials, selected metals, and some chemicals are said to be rising, but prices of manufactured products and consumer goods generally are not experiencing upward pressure.
Retail
Although unseasonably cold and snowy weather hampered retail sales
in two-thirds of the country, districts report that merchants are
optimistic, expecting sales to increase during the first half of
1994.
The effect of winter weather on retail sales varied considerably. Eastern retailers were disappointed, citing substantial declines in sales (up to 20 percent) and minimal rebounds after storms. Midwest reports of sales performance were mixed, but retailers affected by storms expected to recoup sales losses, unlike their eastern counterparts. Several districts (particularly Chicago, Minneapolis, and Cleveland) indicated moderate to strong sales. In the West, retail conditions are generally good; California's consumer spending showed modest signs of improvement, except in the Los Angeles region.
Durable goods are selling well in all districts. Over half reported solid growth in car sales and expectations of continued strength throughout the spring. In contrast, several eastern districts noted sluggish sales of nondurables, particularly apparel. Retailers in only one district, Richmond, expect retail prices to rise slightly; others anticipate stable prices because of competitive pressures.
Services
Scattered comments on services industries, including temporary
employment firms, freight forwarders, and utilities, generally
suggest improvements in economic activity. A few services industries
in the Chicago district reportedly face shortages of items such as
cable supplies and broadcast equipment.
In several districts, the cold weather affected tourism, in some cases for better, in others for worse. Richmond reports that both ski resorts and beaches in the district are enjoying an unusually good season. By contrast, in the Minneapolis district, tourism is just starting to pick up, now that the weather has moderated. Hawaiian tourism has been sluggish, but advance bookings suggest improvement. Despite the earthquake, tourism in southern California is also gaining strength.
Manufacturing
The manufacturing sector generally remains on a positive course,
although severe weather substantially weakened early 1994 growth in
the Philadelphia, Chicago, and St. Louis districts. Winter storms
also produced minor setbacks in production, shipments, and/or orders
for manufacturers located in the Boston, Atlanta, Kansas City, and
Dallas districts.
Durable goods and construction account for most of the advance throughout the nation. Boston, Cleveland, Atlanta, and Chicago indicate very strong auto-related sales demand, although Chicago notes temporary slowdowns as a result of weather and truck-part shortages. Some areas also are experiencing growing sales of home furnishings, electronics products, or other durables. Even though cold weather is delaying some construction, Boston, Atlanta, Chicago, Minneapolis, and Dallas note strong demand for building materials and equipment.
Cleveland and San Francisco report that defense and aerospace markets are damping economic progress; Boston, New York, and Atlanta also mention cutbacks. Clothing and shoe business has been slow in the Philadelphia, Atlanta, and St. Louis districts, while energy- related manufacturing is weak in the Atlanta and Dallas districts. Food processing is reported to be sluggish by Philadelphia and Dallas, but St. Louis and Minneapolis cite increased demand for poultry.
Most districts indicate that prices for finished goods have remained relatively stable, despite increases for selected materials. Strong demand and scattered capacity constraints are contributing to rising prices for building products, according to Atlanta, Chicago, Minneapolis, Dallas, and San Francisco. Prices also are increasing for some types of paper, chemicals, and metals.
Almost all districts report hiring and capital expansion plans on the part of some contacts, especially those supplying automotive and construction markets. However, streamlining and caution continue to temper general gains in manufacturing employment.
Real Estate and Construction
Real estate markets continue to improve, despite severe winter
weather in many districts. Construction activity has borne the brunt
of weather problems, with five districts reporting delays, although
builders in the Minneapolis and Kansas City districts reported
little effect on their activity. Philadelphia and Chicago indicated
that weather temporarily slowed residential sales activity. The Los
Angeles earthquake will increase demand for residential repair
services over the next 6 to 12 months and freeway repair will push
into 1995.
Residential sales activity is strong or growing in over half the districts and three-quarters observed positive developments in construction. Sales are reportedly flat only in the Kansas City district and California. Price increases for existing homes were noted in two districts. Low interest rates were cited as contributors to current and expected increases in residential sales in several districts. However, contacts from Cleveland and Chicago expressed concern that recent sales bursts induced by low interest rates might be short-lived.
On the commercial side, news is less positive, although construction is starting to increase. Boston, Philadelphia, Dallas, and San Francisco reported new construction of industrial and distribution facilities, while New York, Atlanta, Minneapolis, and Dallas indicated building activity in the apartment market. Demand for office space is flat or slowly increasing in the Boston, New York, Philadelphia, Atlanta, and Dallas districts. Richmond and Atlanta report modest rent increases. Office construction has begun in those districts, and in Minneapolis and parts of the San Francisco district.
Financial Services
Financial institutions report that higher interest rates slowed
mortgage refinancings, but in a few districts this slowdown was
partly offset by stronger demand for home-purchase mortgages.
Overall loan demand is characterized as stronger by the Kansas City,
Atlanta, and Dallas districts and described as weaker by New York,
Philadelphia, and St. Louis. Among loan categories, business loans
exhibited the greatest strength, with New York, Richmond, Cleveland,
and Kansas City all registering increases. Increases in auto
financing were cited by Cleveland and Philadelphia. San Francisco
reports stronger business loan activity in Washington and very
strong overall loan demand in Oregon, especially for real estate
loans.
Agriculture and Resource-Related Industries
Dry weather in the Kansas City and Dallas districts has stunted the
winter wheat crop and reduced the pasturage available for grazing.
With cold weather also increasing the need for supplemental feeding,
several districts--Richmond, Kansas City, Dallas, and San Francisco-
note rising hay and feed grain prices. Accordingly, producers are
reducing their livestock inventories, and cattle prices are expected
to soften, with adverse consequences for farm incomes in cattle-
raising regions. Calving and lambing survival rates are close to
normal despite the severe weather, according to contacts in the
Richmond and Minneapolis districts. The financial stress caused by
last summer's floods generally appears to be easing, although
Chicago district bankers suggest that land values and credit
conditions still vary with the flood damage suffered.
The frigid weather caused a flurry of activity in the energy industry. Dallas and Kansas City report that natural gas prices rose, and drilling for natural gas increased in the Dallas region. Oil exploration fell, by contrast, in the Kansas City and Dallas districts, with glutted oil markets keeping a lid on the price of crude. While drilling in the Minneapolis district remained unchanged, refinery output was significantly above year-earlier levels. Minneapolis district contacts expect 1994 to be the best year thus far in the 1990s for iron ore production.