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Beige Book: National Summary

June 22, 1994

Districts report continued economic expansion, although in some areas growth has moderated recently. Contacts in a number of districts report slower-than-expected growth in May retail sales but some signs of increasing sales in early June. Manufacturing continued to show strength in most districts, with many contacts reporting increases in new orders and shipments. Defense-related industries, however, continue to be the weak spots. Home sales in most areas continued at a strong pace, and residential construction remains generally brisk, but some slowdowns in response to rising mortgage rates were noted. Industrial materials prices continue to rise; however, competitive pressures are mitigating price increases for finished goods. Some districts report tightening labor markets, but wage pressures appear moderate at this point. Loan demand is generally increasing, although rising interest rates have precipitated declines in some areas. Crop conditions are generally favorable in most agricultural areas; nevertheless, some districts are expressing rising concern over warm, dry weather.

Consumer Spending
Most districts report moderate gains in retail sales, although contacts in the Atlanta, Cleveland, Dallas, New York and Philadelphia districts report slower-than-expected sales. In particular, they cite declines in apparel sales and attribute this to unseasonably cool weather. Sales activity in the Boston district varied from slight declines to increases of almost 20 percent over last year, with strong demand for outdoor-related items since Memorial Day. The Kansas City, Minneapolis and St. Louis districts report moderate-to-strong sales in general merchandise, particularly in apparel. The Chicago, New York, Philadelphia, Richmond and San Francisco districts report strong sales in household goods and furniture, and strength in consumer durables and other big-ticket items. The Atlanta, Cleveland and New York districts found that discounting was needed to move merchandise; the Chicago, Dallas and Kansas City districts note that strong competition is keeping prices in line. The Kansas City, Minneapolis, Philadelphia, St. Louis and San Francisco districts report strong auto sales; the Chicago, Cleveland and Dallas districts report some recent slowing in auto sales. A number of districts report that a shortage of popular models is constraining sales.

Business Activity
Most districts report continued growth, particularly at manufacturing firms, although the San Francisco district has mixed reports from its contacts. The Chicago and St. Louis districts report strong growth, while the Boston, Cleveland, Minneapolis, New York and Richmond districts report accelerating activity. The Atlanta district reports a rebound of industrial production in May after a modest slowing in April. Machinery and heavy equipment orders and production are up in the Boston, Chicago, Dallas, Philadelphia and St. Louis districts. The San Francisco district says the aerospace industry, especially commercial jets, has stabilized, but this industry is weak in the Boston district. Business contacts in the St. Louis district report sales increases of between 10 percent and 20 percent in some instances. The Atlanta district reports that the demand for building materials in the Southeast is up recently, and that auto suppliers are receiving a steady stream of new orders. The New York district says that its manufacturing contacts are more optimistic than a year ago. A survey of contacts in the Philadelphia and Richmond districts revealed increases in new orders and shipments. The Dallas and Richmond districts also report a steady-to-moderate increase in demand in the service sector, particularly at law firms, hotels and cargo carriers.

Contacts in parts of the Kansas City, Minneapolis and St. Louis districts are having difficulty finding qualified employees. The St. Louis and San Francisco districts both repast a shortage of skilled construction workers. Contacts in the New York district anticipate few employment cuts and see wage increases of between 2 percent and 4 percent. Contacts in the Richmond district plan no employment changes, but do expect to increase the average length of the workweek.

Foreign demand for products from most districts remains somewhat sluggish. The Dallas and St. Louis districts, however, report some strengthening demand from Latin America and the Pacific Rim countries, respectively. In addition, the Dallas district reports strong chemical sales to Europe. The Kansas City district reports that exports are stable overall.

Both the Atlanta and St. Louis districts report defense-related layoffs; the San Francisco district reports its defense-related industries remain weak. The Boston district says its durables producers are concerned that rising interest rates will reduce demand for their products, and Philadelphia district contacts are less optimistic now than they were at the beginning of the year.

Construction and Real Estate
Most districts report generally strong or improving home sales, although many also cite increased mortgage rates as a source of emerging or potential weakness. Residential construction remains brisk in many districts, with the majority of the construction occurring in single-family houses. The Minneapolis district stressed multifamily housing as its construction strength. The Philadelphia district, though, reports some recent slippage in residential construction. The Atlanta and St. Louis districts observed rising house prices, while the Dallas and Richmond districts report stable or slightly falling house prices. Contacts in the Atlanta district say mid-priced homes have replaced starter homes as the big sellers, but low and mid-priced homes are still the big sellers in the Philadelphia district. The shortage of construction workers in the St. Louis district is adding to the already large backlogs previously built up because of weather delays and strong demand.

The Minneapolis district reports that the commercial construction market is strong, and the Richmond district reports recent improvements in this market. The Philadelphia district, however, reports a soft commercial market with slightly increasing vacancy rates. The Boston district reports declining vacancy rates in Boston, although Hartford's have increased. The New York district reports falling vacancy rates in Manhattan, and the Richmond district says that vacancy rates arc falling throughout the district except in northern Maryland and West Virginia.

Price and Wages
Most districts report that competitive pressures continue to temper price increases on the output side. Contacts in many districts report cost pressures on the input side-albeit modest in many instances. Increases in manufacturers' raw materials prices were noted in more than half of the districts. The Boston, Dallas and Philadelphia districts report increases in chemicals prices and certain metals prices, while the Atlanta, Kansas City, and Richmond districts report increases in construction materials prices. Tightening labor markets were noted in the Atlanta, Chicago, Minneapolis and Richmond districts. Nevertheless, upward pressure on wages, while noted by some districts, appears to be modest. In addition, Philadelphia reports continued increases in employment costs, mainly in benefits.

Banking and Finance
Despite weakness in some areas, loan demand has generally picked up in most districts. Dallas reports that loan demand is up strongly, and San Francisco indicates similar sentiment about loan demand in Idaho and Utah. Business loans have reportedly increased in the Cleveland, Kansas City, New York, Philadelphia and St. Louis districts, while demand for consumer loans has risen in the Kansas City, Richmond and St. Louis districts. The New York district reports that total loan demand has subsided because of increases in short-term interest rates; loan demand is reported to be flat in the Atlanta and Philadelphia districts. Loan demand also remains weak in California, although the San Francisco district reports that an uptick in business lending has occurred in southern California and Hawaii. Demand for auto loans has weakened in the Atlanta and Cleveland districts. The Dallas, Philadelphia and San Francisco districts noted increased competition among lenders, leading some banks to offer more attractive terms to borrowers. Most other districts report little or no change in lending standards, although some report higher lending rates. For instance, the New York district reports that all of its surveyed banks have increased their rates charged on commercial and industrial loans. Despite recent increases in long-term rates, mortgage lending is mixed. New mortgage lending remains relatively strong in the Dallas, Kansas City and St. Louis districts, but has ebbed in the Atlanta, New York, Philadelphia and Richmond districts. Most districts report a pronounced decline in mortgage refinancing activity. After a strong first quarter, the Boston district reports that mutual fund sales in the second quarter have slowed considerably.

Agriculture and Natural Resources
Crop conditions were generally favorable in most areas, with crop development and planting ahead of schedule. Richmond reports that some recently planted crops may have suffered from unseasonably warm, dry weather. Likewise, St. Louis reports increasingly drier conditions, and some insect problems were noted in the wheat and corn crops. Dallas reports that the winter wheat crop is expected to be off 25 percent from last year because of adverse weather. Minneapolis and Kansas City report adequate soil moisture with most crops in good-to-excellent condition. Kansas City reports that the recent drop in cattle prices produced feedlot losses in excess of $100 per head. As a result, the Kansas City district expects lower farm income in the livestock sector, although prospects are substantially more favorable for crop producers.

Recent increases in crude oil prices have spurred slightly higher drilling activity in the Kansas City district, but little noticeable increase in the Dallas district. Minneapolis, on the other hand, reports a decrease in petroleum drilling activity in North Dakota and Montana. The Minneapolis and San Francisco districts report that lumber prices have increased, while Minneapolis indicates that recent increases in copper and steel prices have benefited district producers.