Beige Book

SUMMARY OF COMMENTARY ON ECONOMIC CONDITIONS BY FEDERAL RESERVE DISTRICTS June 1985 TABLE OF CONTENTS SUMMARY............................................................ First District - Boston...........................................I-1 Second District - New York ...................................... IIThird Distrct - Philadelphia...................................III-1 Fourth District - Cleveland..................................... IV-1 Fifth District - Richmond........................................V-1 Sixth District - Altanta.........................................I-1 Seventh District - Chicago.....................................VII-1 Eighth District - St. Louis....................................VIII-1 Ninth District - Minneapolis....................................IX-1 Tenth District - Kansas City.....................................X-1 Eleventh District - Dallas......................................XI-1 Twelfth District - San Francisco...............................XII-1 SUMMARY* The pace of economic activity in all Districts seems to be slowing across most sectors. Retail sales generally continue to sag yet inventory levels appear satisfactory and the outlook remains optimistic. An important exception is auto sales which are strong in most areas and the strength is extending to suppliers. While primary metals manufacturing is improving in some areas, manufacturing growth in general seems to be modest or declining. Residential construction is a source of strength throughout the country, but signs of weakness construction exist is mixed. in parts of Agricultural some districts.. conditions remain Non-residential difficult almost everywhere, but financial problems appear concentrated in the Plains states. Mining and drilling activity is declining throughout the country. Bank loan activity is mixed with most growth occurring in the consumer sector. Consumer Spending Consumer spending has slowed in recent weeks and continues to vary widely across the country. sales report Six districts report generally weak sales; strong are reported by Richmond and St. Louis. a more mixed picture with Atlanta and San Francisco significant growth districts but still some sluggishness in certain areas. in much of their In general, demand in the automotive sector appears strong, as a result of lower interest rates and promotions by manufacturers and dealers. Retailers' inventories were generally at satisfactory levels, but Chicago, Minneapolis, and Kansas City report that some actions have been taken to reduce stocks. Automobile dealers reported tight inventories, especially for imports, in three midwest Districts. *Prepared at the Federal Reserve Bank of New York. The outlook for consumer spending was generally optimistic across the country; lower interest rates and increased mailings of tax refunds were Only Dallas mentioned expectations of commonly expected to boost demand. further slowing. Industrial Activity Manufacturing activity seems to have slowed in country, but remains varied across districts and industries. much of the Five districts reported weak or slowing industrial activity, and four reported stable levels or only modest The growth. only report of sharp improvement was for The outlook generally is for little change, but Philadelphia and Missouri. Cleveland report moderation of growth forecasts, Dallas reports an increase in optimism, some observers and a slight in the Eighth District expect improvement. Business for primary metals producers was mixed. Continued distress for steelmakers was reported in the Cleveland district and in the Chicago area. expected. Minneapolis noted that iron ore processing cutbacks are soon However, steel and other metals producers report gains in the Dallas District as well as in New York, Alabama, and the Detroit area. Two districts report slowing in high-tech industries. Boston and San Francisco both report weakness among semiconductor firms (with signs of recovery only in Arizona), attributed to weak domestic demand. New England computer manufacturers was mixed. have benefitted from that industry's Boston and Chicago. Business for Suppliers to the auto industry strength, according to reports from Energy-related producers in three districts report slack demand. There were several competition and the strong steelmakers (Cleveland), reports dollar. of hardship caused by import Reports of adverse impacts come from manufacturers of home appliances and capital equipment industry (Chicago), paper (San Francisco), producers and apparel (Atlanta and and Dallas), textiles firms the lumber (Richmond and Atlanta). Construction and Real Estate Construction activity varied greatly across the United States. Residential construction has been proceeding at an exceptionally rapid pace according to New York, Boston, Minneapolis, and Richmond; but Atlanta, St. Louis and Kansas City report some areas with significant weakness. Non-residential construction slowed in the New York and St. Louis districts, and Cleveland indicates that no new construction contracts are expected for the next few years due to recent overbuilding. In contrast, absorption is "strong "vigorous" as ever" in Atlanta. The market was in the Chicago district but observers believe a glut may develop next year when a great deal of space comes on line. Industrial- construction has been increasing according to reports from Richmond. Agriculture and Mining Weak prices across commodities continue to compound the difficult Dairy prices and output are weakening largely conditions in the farm sector. due to reduced federal support. St. Louis, Dallas, and San Francisco report attempts to reduce inventory in livestock. Good weather and early planting using full acreage should yield large harvests in the autumn in most areas except South Dakota and Montana, where dry conditions This may put additional price pressure on farmers. currently prevail. Vegetable, fruit, and poultry producers in the Mid-Atlantic and the West coast, however, seem to face a much better outlook than others. Most natural resource industries seem to be hard hit. Dallas notes a continued slide in the number of drilling rigs, primarily due to declining petroleum prices. Richmond and San Francisco report employment declines in mining. Minneapolis contacts, however, observe a boom in the wood products industry as a result of strong construction activity. Forest fires in the Sixth District have created tremendous, and largely uninsured, timber losses. Finance Despite the sluggishness of retail spending, growth in total loans seems to be sustained primarily by consumer lending. St. Louis, for example, reports a retail lending increase of more than 30 percent over last year. Chicago notes, however, that the rapid rise in consumer credit is accompanied by a rising deliquency rate. For the most part, real estate lending remains strong, while weakness in commercial lending seems widespread and Dallas has even been experiencing a decline in business loan volume. Only Philadelphia and San Francisco report continued strength. Financial pressures in agriculture seem to remain concentrated in the Plains states. Kansas City reports that agricultural bank closings have shut many farmers out of the credit markets due in part to higher credit standards of the remaining banks. Chicago adds that pressures seem to be increasing on the cooperative Farm Credit System. FIRST DISTRICT - BOSTON Economic activity in the First District remains sluggish. This sluggishness is particularly apparent in the manufacturing sector, where high technology companies continue to announce layoffs and furloughs. Firms in more traditional manufacturing industries report that employment is trending downward in response to fairly flat order rates; but, for most, layoffs are not required. Inventory-to-sales ratios are said to be higher than desired but coming down. The experience of the retail sector is more mixed, with some contacts enjoying strong sales increases and others seeing a slowing in growth. Retailers remain optimistic about the rest of the year and are currently ordering winter merchandise based on this optimism. Increases in both industrial and retail prices remain very moderate. In contrast to the sluggishness of the manufacturing sector and the confusing signals from retailing, the real estate market is booming. Retail Retail results continue to be mixed in the First District. Several retailers enjoyed a strong performance in May; others reported some softening in sales growth. On both sides of the performance scale, however, retailers with national affiliations felt First District results were at least as strong as those of their affiliates elsewhere. Merchants with "upscale" customers appear to be faring somewhat better than discount stores, although the difference is not great. Several contacts mentioned especially strong sales of video-related merchandise, computers, and VCRs. Toys and women's apparel are also performing well. Inventories are higher than last year in several cases, but are not a source of concern among the merchants contacted. In one case, inventories are high because sales did not meet expectations; another supplier, however, has intentionally increased inventories faster than sales so as to improve customer service. Firms are currently ordering merchandise for next winter's holiday season and are building into those orders expectations for a good sales season - as good or better than year-over-year growth to date. A contributing factor, according to one contact, is that interest rate declines have reduced the costs of carrying this merchandise. Prices are Fall prices for one merchant, for example, will be only 2 1/2 steady. percent higher than last fall. Manufacturing A number of First District high technology companies have announced layoffs and furloughs in the past two months. Layoffs have been especially prevalent among manufacturers of semiconductor test and production equipment; most of these layoffs have been fairly small, affecting a couple of hundred people each. The largest individual layoffs have been at computer companies; in one case, 1,000 workers in the First District have been dismissed. However, the employment situation in the computer industry appears to be more varied than for firms selling to the semiconductor industry: some computer companies have avoided layoffs but are shrinking staff through attrition; others are still hiring. A slowing in domestic orders is said to be the primary reason for the high tech companies' difficulties. The effect of the slowdown has been magnified by the rapid expansion that preceded it; during this expansion firms added to capacity and built up staff in anticipation of continued rapid growth. Despite current difficulties, however, the high tech firms contacted are not curtailing their capital spending plans; these expenditures are seen as necessary to bring out new products and remain cost competitive. Firms in more traditional manufacturing industries report only small changes in aggregate order rates. Although one contact reported that overall business was down and would require layoffs, most manufacturing respondents have seen order decreases in some divisions offset by gains in others. Sales to the auto industry are good. products are mixed. Sales of housing related Sales of capital goods depend very much on the condition of the customer's industry, but appear to be holding steady overall. As in the case of high tech companies, traditional manufacturers have not changed their capital spending plans. For the firms contacted, planned expenditures are about the same as or less than expenditures in 1984; however, spending in 1984 is said to have been unusually high. The emphasis in capital spending is on increasing productivity rather than adding to capacity. In particular, there seems to be little need for additional floor space; according to one respondent, today's machinery is much more compact for the same power and value. Inventory-to-sales ratios are a little higher than desired but coming down. Industrial prices remain very well behaved. All respondents report that price increases for materials and supplies continue to be very modest; several commented that they are encountering greater resistance to increases in their own prices. Real Estate The real estate market is booming, especially in the Boston area. Realtors report a low number of listings while demand, said to be fueled by declining mortgage interest rates, is running very high. report that it is a "sellers" market. Many realtors They expect this situation to continue in the near future and intensify if mortgage interest rates decline further. New residential construction centers on condominium developments and higher-priced homes. Realtors report that very few moderately priced housing units are being constructed. continuing at a rapid pace. Also, condominium conversions are II-1 SECOND DISTRICT--NEW YORK Activity in most sectors of the Second District economy slowed in recent weeks. Sluggishness of consumer spending has continued for the last few months, although many stores in the area were still doing somewhat better than for the nation as a whole. conditions than did earlier Fewer firms reported improving business in the year. Commercial real estate brokers indicated growing concern that their "boom" may be over. A major bright spot was in residential construction, where homebuilders reported the best market conditions in years. On the financial side, consumer loan rates began to decline, reflecting the trend in general market interest rates. Consumer Spending The pace of consumer spending in the Second District continued to slow over the last two months. Although several reported that retailers business in the metropolitan area was slightly better than in other parts of the nation, gains over 1984 averaged only about 2 percent for April and 4 percent for May. Sales for some expectations by significant margins. merchants continued to fall short of Nevertheless, inventories were generally close to planned levels, and promotions continued at a normal pace with few special price markdowns. One department store chain, however, reported especially weak sales even with extensive promotions, and was returning some unsold summer merchandise to suppliers. Business Activity The erratic business expansion seems to have slowed recently in the District. stable While the majority of purchasing agents still reported improved or business conditions, fewer firms reported improvements in May. In II-2 Buffalo, moreover, more firms indicated that new orders had fallen. with moderation this economic of activity, firms been have In line undertaking inventory reductions in recent weeks. Major however, capital investment projects continued to be announced, including two joint ventures involving foreign investors. and Westinghouse will retool and restaff an Elmira plant Toshiba (which had been closed for nine years) to produce TV tubes and computer display screens. In addition, to the government of Yugoslavia will participate in a project convert part of Bethlehem Steel's abandoned Lackawana plant to an aluminum mill. These undertakings would add several hundred jobs to areas facing persistently high unemployment rates. Other large projects recently begun or announced in the District include the construction of a new shopping mall and the expansion of two existing ones in Niagara County, as well as a new financial center and corporate headquarters in downtown Albany. Construction and Real Estate Residential and suppliers construction activity remained robust, the best market reporting conditions with builders in many years. Lower mortgage rates have added an additional stimulus in recent weeks, according to Home prices have risen above year-earlier levels, sharply in our contacts. some areas. and The outlook for the rest of the year is for continued strength, some homebuilders remained scarce delayed. already in some areas, Observers are optimistic about 1986. Skilled and some construction schedules in various parts of the District also labor have been reported price increases for developed lots, lumber, or other materials. The New York City government has proposed major zoning revisions to reduce the construction costs for apartment houses. The changes could II-3 encourage the construction of up to 5,000 new units annually, at 25 percent below current costs, according to the City's estimates. Real estate brokers are becoming concerned that the "boom" in the region's office market may be over. Availability rates remain very high, over 20 percent in some areas, yet net absorption is not increasing. The outlook is uncertain, with the strength of commercial construction depending on the performance of the general economy in the coming months. Our contacts also expressed uncertainty regarding the impact of the President's tax proposals. attractive investment, Most especially agreed to that small real estate would investors and be a less syndications. A slower pace of investment could depress property values, at least in the short run, but one observer was optimistic about the longer-term stimulus of the tax plan. Some brokers also believed that investment in Manhattan and Long Island might be discouraged to some extent by the elimination of state and local tax deductibility. Fairfield County (Connecticut) and northern New Jersey might derive some relative benefit. Financial Developments Consumer levels, reflecting lending the rates began downward trend to recede in market from their recent high interest rates. Some commercial banks in the District already have cut consumer rates, and our contacts all agreed narrow soon. that the spread between consumer and market rates will Auto loan rates appeared to have fallen the most sharply, and bankers expect this downward trend to continue. fallen only further. In expected to slightly contrast, fall and remain credit very card in the near future. Rates on personal loans have high, but rates have are not expected declined to and decline are not Bankers attributed the reluctance to lower finance charges to high operating costs. III-1 THIRD DISTRICT - PHILADELPHIA Economic conditions in the Third District are mixed..Manufacturing activity is basically are flat and, for some major stores, below expectations for this and consumer loan volume at area banks in June is greater than it was time last year, but the rate of increase some the at this is slowing. Mortgage lending is increasing rapidly, reflecting increased real estate sales. sector, of time Both commercial The financial and real estate sectors are more positive. year. Retail sales in June for the third consecutive month. unchanged In the agricultural area farmers are under financial pressure, but overall conditions appear to be better than in other parts of the nation. On balance, the outlook for the Third than it was a few months ago, is still positive. percent of the industrial establishments Outlook Survey District improvement anticipate the weaker In manufacturing, about 40 participating over although economy, next in the six June Business months. Retail merchants expect a slight improvement in sales between now and the start of holiday shopping season, despite the present slowdown. slower but sustainable growth in commercial lending growth of consumer and the Area bankers forecast a slackening credit from its rapid pace earlier this year. in the Real estate sales and mortgage lending are expected to accelerate as long as interest rates do not rise. MANUFACTURING Manufacturing activity in the Third District remains generally stable in June for the third month in a row, according to the most recent Business Outlook III-2 Survey. Seventy percent of this month's survey respondents say there has been no change from May in their rate of operations; however, the portion reporting a decline (18 percent) exceeded the portion indicating an increase (11 percent) for the first time since September 1982. same as in May, but new The rate of shipments in June was orders dropped marginally, pulling down producers' backlogs and delivery times. Although workforces were reduced the industrial plants the surveyed in June, at one-fifth of most survey respondents said their employment was stable. In reply to questions about general business activity during the year, 40 percent rest of of the June survey respondents said they expect present conditions to persist, more than one-third look for improvement, quarter the expect further deterioration. capital investment is growing dimmer. and nearly a The outlook for increased employment and The portion of manufacturers scheduling increases in expenditures on new plant and equipment fell to 20 percent of those participating in the survey this month, the lowest level yet this year. change Little in factory employment is likely in the near future. Less than 20 percent of the June survey respondents plan increases in either payrolls or the length of the workweek over the next six months. RETAIL Retail sales have been flat in the Third District over the past two months. Local merchants say there has been no increase in sales in either compared last year. to April. May or June Sales volume is also unchanged compared to the same period Sales of home goods and higher priced items have been particularly weak. Cautiously optimistic short-term outlook. For the is the months term store managers use to describe their remaining until the Christmas shopping III-3 season, retail sales are generally expected to post gains of 5 percent or more above year-earlier periods, with the most optimistic retailer forecasting percent Lower increase. rates interest and a 10 faster pace of income tax the refunds are cited as factors tending to boost consumer spending. FINANCE Borrowing in the Third District remains consumer loans up substantially from a strong, year with ago. both automobile loans accounting for most of the and Consumer loan volume is approximately 25-30 percent higher than it was in June 1984, and business with credit card increase. Commercial and industrial loan volume at Third District banks in early June is approximately 17 percent higher it was twelve months ago. Business borrowing is likely to than ease off in coming months, however; many borrowers have their balance funds. sheets recently and Lending officers see economic summer, been able to improve are likely to have less need for borrowed growth tapering off further over the resulting in year-over-year increases of about 10 percent in commercial loan volume. Mortgage lenders report large increases in the demand for housing in recent weeks, with year at commercial banks. receiving one-third more outstanding mortgage volume up 14-20 percent from last A major thrift institution in the Third mortgage applications this reports the dollar volume of new mortgages made this April greater than that in April 1984. the major is than last, and spring to District be three times The average rate on conventional, fixed-rate 30-year mortgages is 12 percent in mid-June. be finance Falling mortgage rates appear to force behind the boom in housing demand, offsetting any downward pressure stemming from concern over the effect of proposed tax cost of home ownership. changes on the III-4 Third District banks lowered their prime rate to 9.5 percent on June 18. Some local bank economists feel interest rates in general will drop further in the short-run, but they expect higher interest rates later in the year. The consensus of their forecasts is a prime rate of 11 percent by December, federal funds above 8 percent, and Treasury bills and bonds at about 8 and 11 percent, respectively. Consumer loan rates are expected to fall in the immediate future and then parallel the movement of other rates. AGRICULTURE The financial and market conditions of the Third District agricultural sector are not as critical as in other areas of the country. Farms in the Third District are not as highly leveraged as farms elsewhere, and farmland prices have not declined substantially. Dairy farming is the weakest of the District's agricultural industries, as the end of the federal diversion program and reduction of the milk price support have contributed to lower dairy prices and incomes. farm products face better markets. Other important Poultry sales are expected to increase during the rest of the year, with prices remaining stable. Income from fruit and vegetable products in the region this year should meet or exceed the level of last year if prices hold at current levels. IV-1 FOURTH DISTRICT - CLEVELAND The pattern of economic activity little since the last Beigebook. although manufacturing continue to sell beginning to production remains Firms steel. expansion. while recover from flat, Fourth unchanged. ticket weak sales with Multi-family was big output emphasis continue the District has changed District employment rose slightly in May, employment well, in on residential Cars store department in strong and automobiles remains are Manufacturing and cost-cutting modernization construction goods hardgoods mid-spring. in soft weak rather volatile in than because of tax law uncertainty while office construction is being reduced because of excess space. Business loan demand has been flat while real estate and consumer installment loan demand has been good. Labor Market Conditions. Ohio's unemployment rate fell from 9.0% sa to 7.7% sa in May. A slight rise in employment was accompanied by a large drop in the labor force, which is a phenomenon analysts agree not with witnessed the in direction Pockets of high unemployment ten but years not of with data. the in the District in many Therefore, magnitude some reported. cases are attributable to continuing weakness in mining and agriculture. Retail Sales. Fourth District retailers report mention brief periods of weakness Dealers continue to have continued sales in early May. problems stocking growth, Car sales popular although most remain strong. domestic models and IV-2 report no difficult excess time inventories. obtaining Import cars. Some dealers dealers have feel had an the market more competitive, but most think little additional discounting some Although consumers purchased sales to cars as continue long in April and as rates in is becoming is May that recently ended, interest rates because of below-market strong new especially specifically dealers do general possible. not expect rise and personal income does not falter. In contrast to big-ticket items mid-April. These items may be to due dealers, auto like the furniture and stores appliances report have that been sales weak of tax exceedingly refunds. well and Apparel sellers and other expect continued to continue. Retailers are optimistic about the rest of 1985. soft this to recover some of their margins lost to this goods trend to Inventories are at desired levels and most stores do not expect to cut prices further. hope of since are beginning to recover and retailers believe arrival move department earlier They discounting by a continued drop in their costs for some goods. Manufacturing and Investment. A survey of manufacturing firms increasing slightly 1984 Surveys little but by a substantially of manufacturing change than in the first indicates new orders are quarter but Planned capital spending in 1985 exceeds being decreased. in faster in the midwest firms smaller in margin than the Cincinnati in production, new orders and in inventories are the amount spent the March Cleveland and inventories. The survey. areas show consensus of the three surveys is that prices paid and received are changing very little. Manufacturers their capital expansion of of automobiles and automobile and truck parts report that rather than spending capacity. is almost Even when entirely a new for plant modernization is built it is usually to IV-3 replace an old, inefficient plant. One manufacturer of truck parts reports that orders are being stretched out but not cancelled. The firm's cash flow is weakening, so the firm may cut back its spending on plant and equipment. Despite a sharp increase in imports, an auto producer will not cut prices because it is operating at full capacity. distress. Prices remain soft, Major steel producers continue in imports high, and profits low or negative. Most major steel producers are reducing their costs but the benefits seem to go into lower prices rather than higher profit margins. Housing and Construction. Housing market participants expect a moderate rebound in activity in this District during the second and third quarters. housing As a result of a substantial recovery in listings and closings, realtors have cancelled previous plans to scale down operations. Although builders expect at least to minimize a two-quarter housing rebound, they have positioned themselves downside risk and thus will forego potential profits if the housing reversal is or stronger optimistic Builders longer than realtors expect Mortgage than anticipated. about the duration and volatility in multi-family lenders strength of housing to are the less rebound. continue in this District until there is less uncertainty over tax-reform legislation. Office construction in the District's major cities has been robust since 1980, resulting in an oversupply of office space. District's major cities are currently Consequently, all of this experiencing a substantial downtrending or complete stoppage in new contracts for office construction, which is expected to persist over the next three to speaking, the office construction market is best four years. Generally characterized as an "orderly buyers' market," inasmuch as prices are being discounted 10% to 20% but suppliers are not panicky. IV-4 Commercial Banking. District banks demand registering has commercial demand and loan been a has slight flat, been for real mixed decline and into with loan outstandings the past month. over contacts industrial credit and contacts demand anticipate the Summer. estate and consumer installment expect consumer loan demand to continued On at large Business softness the other hand, loan for the loans has been quite good, remain particularly with lower and falling interest rates. relatively strong, FIFTH DISTRICT - RICHMOND Two distinct pictures time. emerge economy Most areas and sectors are offering very upbeat reports. generally rising, and in many levels. housing Such reports sectors, and cases, come from manufacturing the service sector. sector, this Activity is sector, the construction and On the other hand, the manu- are giving off very negative signals. in particular, production, and employment. at from already record or near record the retail facturing and agricultural sectors The from the District is reporting declining sales, Manufacturers continue to cite foreign competi- tion as a major factor in the current situation, and quite a few are apparently relying more heavily on offshore production themselves, either by moving production facilities or by importing parts or materials. In ag- riculture, recent rain has ameliorated difficulties in some areas, but crop outlooks remain less than satisfactory. Manufacturing Once again, as slowed. earlier in the activity has Our respondents report declines in shipments, new orders, and order backlogs during the past several weeks. ment has year, manufacturing fallen in most reduced workweeks. areas, In addition, manufacturing employ- and several industries are generally on Most indications are that while these conditions may be concentrated in the textile, apparel, and furniture industries, they are by no means peculiar to those segments of manufacturing. very few, if any, industry groups actually showing There appear to be growth at this time, V-2 although several related to commercial and residential construction activity remain above year earlier levels of activity. Coal production remains slightly below the record levels of last year, but is still quite strong. not holding up so well. Mining employment, on the other hand, is During April coal mining employment in West Virginia was more than 5 percent below the year earlier level. Consumer Activity Consumer manufacturing. activity in the District appears quite different from Sales are strong and rising very nearly across the board. Non-durables, durables, automobiles, and services are all doing well in most areas. Despite the general perception of strong sales, automobile dealers are aggressively promoting attractive also an area of financing arrangements. Tourism is strength, although some areas report slight declines from the extraordinary levels of activity a year ago. Tourist activity, in fact, is prompting quite a bit of development activity in several tourist oriented areas of the District. Housing and Construction Construction activity in the District remains almost uniformly strong, with both residential and commercial building contributing heavily. Also, there is little indication that any slowing of activity is in prospect. Most industry observers and participants expect continued buoyancy in construction activity and adequate absorption of new space. Housing sales are generally robust, and are even reported to be breaking records in some areas. There are even pockets of strength in industrial type building, V-3 particularly around industrial and office parks where new facilities make up most or all of the activity. Financial Sector District financial institutions strong growth in loan demand. slightly, since although are still reporting moderate to Business loan demand is rated as flat to up business needs are perceived as having quite a bit of cash on hand. expanding, businesses are Consumer demand for credit is generally strong, and mortgage credit, of course, reflects the strength of the residential real estate market. The financial institutions seem able to continue financing this loan growth, since deposit growth is also holding up very well. The Outlook The activity. outlook around the District reflects the state of business Manufacturers, as a group, do not expect to see any improvement in business activity over the next six months or so, although few envision any further actual deterioration of the economy. outlook is much more positive. In most other sectors the Clearly, there is some uncertainty stemming from the debate on taxes, but there appears to be general agreement that business investment will continue on a strong upward path for at least the rest of the year. Plans for construction activity and purchases of produc- ers' goods are largely in place, and there does not seem to be any general tendency to cancel or otherwise reduce planned investment. Consumer confi- dence remains strong, as job and income growth continue despite the lull in manufacturing activity. VI-1 SIXTH DISTRICT - ATLANTA Indications have surfaced that southeastern economic activity has begun to slow but areas of strength still outweigh weaker sectors. Labor markets have shown little overall employment growth. Conditions have not improved for the region's import sensitive industries such as textiles and apparel where employment rolls continue to shrink. Consumer spending has been strong for seasonal goods and the outlook for new car sales is positive. Real estate activity has been diverse in recent months with real estate loan growth strengthening in parts of the region. strong. Commerical building remains However, total loan growth has begun to weaken at the region's large banks. Tourism is lackluster in some areas and the summer outlook is mixed. Despite continuing financial stress in agriculture, little acreage is being idled this year. Employment and Industry. Labor market conditions have basically remained unchanged from the last reporting period with the District unemployment rate hovering around 8 percent. A notable exception was that Alabama's unemployment rate moved to the single digit range for the first time since June of 1981. Alabama's recent employment growth is mainly attributable to job recalls in the steel industry and a booming construction sector. up over seven percent from last year. Construction employment is Shipbuilding has revived in the state; new defense related contracts portend still more job growth in the sector. Imports continue to batter the region's textile and apparel industry. In Georgia alone, textile and apparel employment is down by 9,000 workers from a year ago. Spokesmen for the forest products industry note that market prices are stable and builders are buying. paper mills. The strong dollar has slowed exports of the region's pulp and Foreign imports have impacted coated paper products and new orders for packaging material have contracted resulting in excessive inventory accumulations. VI-2 The chemical industry is producing at a constant level, however, industry officials note a recent softening of product prices. Uncertainty about the terms of the new federal tax policy has held down oil and gas drilling activity in Louisiana. Consumer Spending. reported sales growth Retailers in Alabama, Florida, Georgia and Tennessee through May comparable period a year ago. to be up approximately 10 percent over the Retailers in Mississippi reported mixed sales activity while Louisiana reported activity below its year-ago level. Strong sales of seasonal goods such as summer apparel, home furnishings and gardening supplies were reported throughout the region. The outlook for car and truck sales remains bright in most parts of the region. Manufacturers' incentive programs aimed at both consumers and dealers also have been instrumental in boosting sales activity. Financial and Construction. Housing markets in the Southeast have been mixed, in contrast to the fairly consistent growth of only six months ago. While the Atlanta and Nashville markets may have been stimulated by the continued decline in mortgage rates, New Orleans, and Baton Rouge markets remain depressed. A factor favoring residential activity has been the intense rate competition between local mortgage lenders. apparent. Miami's housing market has been slowing down and overbuilding is New home prices in parts of the metropolitan area have been declining. The condominium market continues to look bleak, with unsold inventory at an all-time high of around 13,000 units. Jacksonville, Fort Lauderdale, upswing in nonresidential building activity. and Nashville are experiencing a further VI-3 The Atlanta office space absorption figures are keeping up with their corresponding levels of a year ago, and demand is seen to be as strong as ever. Rents are rising in most markets despite falling occupancy rates, reflecting expectations of continued strong demand. Large banks in the district have reported weakening growth in total loans for the past four consecutive months, relative to the same months of last year. Business lending, which showed virtually no increase from April to May, contributed significantly to the moderating growth of total lending. Real estate lending, the strongest component of total loan growth, is responsible for much of the expansion of total loans from April to May. Tourism. Conditions in the tourist industry are mixed. Most major vacation destinations appear to be faring well, but other locations more dependent on local visitors have experienced little or no growth, especially in areas where local economic conditions are weak. Lodging tax receipts for April showed healthy increases. Attraction attendance has also shown disparate signs. State and national parks report excellent visitations thus far and, along with some private mountain attractions and resorts, are expecting healthy growth this summer. However, attraction attendance to date in Florida has been lackluster. Agriculture. Abnormally dry spring weather in Florida has resulted in almost 150,000 acres of woodland being destroyed by fire. Most forests were uninsured and the loss to owners will amount to several million dollars. Despite earlier concerns about farmers obtaining operating credit, reports throughout the District indicate little acreage is being idled. Various farm lenders have noted no substantive increases in rejections of farm loan applications. VII-1 SEVENTH DISTRICT--CHICAGO [Summary]-Observers of economic developments in the Seventh District generally view the current situation and outlook with caution. No recession is anticipated, but neither does an upturn appear in prospect from the sluggish overall trend, and weakening manufacturing sector, of recent months. Construction of office buildings and stores, rehabilitation of older structures, and highway and bridge work continue vigorous. Residential sales and building are rising in response to lower mortgage interest rates. Auto and truck sales are at high levels, and a large rise in auto output over last year is planned for the third quarter. Major home appliance sales are at record levels, but the recent rise is centered in microwave ovens, many imported. Other areas of consumer spending for goods have flattened or declined. Consumer debt levels are high, and delinquencies are up significantly for some lenders. Manufacturing jobs in the Seventh District have declined since January, adjusted for seasonal patterns. Employers trying to force down labor costs in air transport, auto production, trucking, and food retailing have been met with work stoppages and costly litigation. Most District capital goods producers have experienced only limited recovery, at best, from reduced operating rates of 1982. Some lines, including heavy construction equipment, railcars, and farm machinery, have remained at very low levels, with numerous plant closings. Steel orders are rising, chiefly due to auto industry buying, but demand and pricing remain short of satisfactory levels, and vigorous cost cutting continues. The recent weakening in personal computers and semiconductors has had relatively little impact in this region. Continued declines in agricultural commodity prices have added to strains on farmers, suppliers, and rural communities. Strains on farm lenders apparently have also intensified. Business executives are studying and commenting on the Administration's tax reform plan, with mixed reactions. Tax Plan Reaction. Most District executives recognize the merits of the Administration's goal of simplifing the federal income tax system and reducing marginal rates. However, VII-2 equipment producers strongly oppose elimination of the investment tax credit, and many are concerned about the effect on future cash flow of tighter depreciation rules and "recapture" of so-called windfalls from past accelerated depreciation. Builders decry the proposal to end tax credits on renovations of older commercial structures, which have been accounting for a substantial share of current construction activity. There is also concern over the proposed requirement that equipment and buildings must be in service on January 1, 1986, to qualify for existing incentives. However, many believe that the abrupt cutoff will be modified to permit a more gradual transition. Home builders will strongly oppose elimination of deductibility on personal returns of state and local taxes and interest on second homes. Attitudes of state and local governments on deductibility of taxes are mixed. In Illinois, there is sentiment that existing rules comprise a subsidy to other states with heavier taxes. Despite these apprehensions, the proposed tax legislation does not play a large role in projections of demand or profits for the remainder of 1985. Import Competition. Heavy import competition, attributable largely to the strong dollar and lower labor costs abroad, is gradually squeezing down manufacturing activity in the District in a broad variety of industries. It is widely believed that the growth of imports is understated because of lags in "documentation" at ports of entry. Meanwhile, more and more operations are being shifted abroad--to Europe, Latin America (especially Mexico), and the Far East. Examples include electrical apparatus, auto parts, household appliances, and farm and construction equipment. Pressures to seek lower costs abroad are so strong that changes in tax laws, or even significant weakening of the dollar, are unlikely to arrest the trend. Capital Goods. Seventh District capital equipment producers continue to be battered by the strong dollar. A more sluggish domestic economy apparently also has cut growth of capital spending plans and reduced orders. Demand is generally weak for various types of heavy capital equipment. Railcar orders are down from very low levels last year. Motor Vehicles. Sales of cars and trucks continued strong through May, helped by cut-rate VII-3 financing, dealer incentive programs, and easing of shortages. However, inventories of some models are still tight. Planned third quarter auto production would be highest for the quarter since 1977, and 16 percent above year ago. Truck sales in May were highest ever for the month. Sales of medium and heavy trucks are expected to rise 3-5 percent in 1985, with only small gains in the second half. Truck trailer orders and shipments have fallen substantially, following the surge in production of larger and tandem trailers last year in response to changed Federal regulations. A small Midwestern auto producer has given notice that it plans to end car production in the U.S. unless labor agrees to sizable concessions. Steel. Steel production at Chicago area mills has declined somewhat since spring, but output has increased in the Detroit area. Third quarter bookings indicate a smaller than seasonal decline in output, mainly because of auto industry needs. Construction fabricators' backlogs are rising, especially for bridges and commercial buildings. Demand for steel remains very weak for heavy industrial projects, oil and gas, and farm and construction equipment. With continued losses, steel companies are still drastically cutting costs, eliminating marginal facilities and workers and contracting out additional functions. Construction. Office and retail construction, renovation, and highway work continue vigorous in the Chicago area. The market for large blocks of office space in and near the Loop is tight, but a substantial amount of space is available in smaller blocks. A large volume of new space will hit the market in Chicago next year and may cause a serious glut. A record volume of highway contracts will be let by the State of Illinois in June. No shortages of materials are anticipated. Mortgage Rates. Lower interest rates are boosting housing sales and construction. Residential building has strengthened, with midrise suburban rental apartments up strongly, perhaps in part to "grandfather" current tax treatment. Home resales have also improved. Fixed-rate 30-year mortgages are being quoted by Chicago area lenders at contract rates as low as 11.5 percent. First-year rates on adjustable rate loans are quoted by numerous lenders at VII-4 rates under 10 percent, with some being offered at 9 percent or less. Lower rates are encouraging a shift toward fixed-rate loans. Consumer Spending. Major chain stores in the Seventh District report weaker sales growth in recent months, for both durables and nondurables. Distribution of delayed tax refunds did not discernibly boost spending, according to a large retailer. Consumer buying on credit has been heavy, and delinquencies have been rising. With inventories somewhat heavy, retailers have been scaling back orders. Total shipments of major home appliances have been at an all-time high. Agriculture. Low commodity prices continue to plague District corn and soybean farmers. Average farm commodity prices fell further in May, to 11 percent below a year earlier and lowest for the month since 1980. Unexpected weakness in livestock prices has paced the decline in recent months. Hog prices are down 14 percent from a year ago, in part reflecting large increases in competing supplies of poultry and escalating imports from Canada. Crop plantings progressed well ahead of normal. Early plantings usually enhance yield prospects. Without a large rise in crop exports, not now anticipated, a big harvest would add to stocks and hold prices at support levels. Recent developments are reportedly adding to the pressures on the cooperative Farm Credit System. Stock requirements of several PCAs in Iowa were frozen. In addition, the Omaha FLB raised its farm mortgage rates 75 basis points. These developments reportedly triggered a "flight" of good borrowers from PCAs and FLBs to other lenders. In some cases, the flight has been encouraged by heavy advertising of lower rate loans on the part of competitive lenders. VIII-1 EIGHTH DISTRICT - ST. LOUIS Most District economic indicators have declined recently. Retailers, however, reported single-digit sales increases in May over year-ago levels. District employment declined slightly in April, though the unemployment rate remained unchanged. Both residential and nonresidential construction contracts declined from the year-ago level in April. District respondents expect very little change in business conditions over the next three months. Total loan growth at large District banks has slowed from last year's pace. growth has outpaced the year-ago growth rate. Only consumer loan In the agricultural sector, the prospect of large harvests has lowered futures prices for most major crops to new life-of-contract lows. Outlook A majority of District respondents surveyed early in the second quarter expects business conditions to be about the same through September of this year. Half of those surveyed expect the real volume of business to increase slightly, while one fourth of respondents expect no change. Prices near current levels over the next three months are planned by about 60 percent of respondents, while almost 20 percent plan to raise prices and only 2 percent expect to lower prices. Survey respondents also indicate that no work force changes are planned in the near future. Most respondents are comfortable with current inventory levels and plan no change in those levels in the next three to six months. VIII-2 Consumer Spending All indications suggest that retail sales in the District have been fairly good, a condition unchanged since the last report. Some District department and discount stores reported sales gains of 5 to 10 percent in May over last year's level. Employment Eighth District payroll employment declined at a 3 percent annualized rate in April, bringing the year-to-date rate of growth to just over 1 percent. The District unemployment rate remained unchanged in April at 7.5 percent despite the small decline in employment. The unemployment rate declined slightly in Arkansas and Kentucky while Missouri's unemployment rate remained unchanged and Tennessee experienced a small increase. Business Activity Business activity in April, as measured by an index of seven indicators, rose sharply in Missouri at an 11 percent rate. Arkansas business activity also increased in April, but only at a 1 percent rate. The business activity index was 1.5 percent above the year-ago level in both states in April. Construction Total construction contracts in April declined 14 percent from the April 1984 figure. Both residential and nonresidential construction contracts fell from their year-ago levels, at 18 and 7 percent rates, respectively. Reports from the District suggest, however, that interest in new homes and home improvements has increased recently. VIII-3 Banking and Finance The most recent bank data indicate a continuation of lending trends that have been evident since the beginning of this year. Total loans at large weekly-reporting District banks grew at a 12 percent annualized rate (not seasonally adjusted) over the three month period ending in May. This is considerably slower than the 24 percent rate of loan growth for the same period of the previous year. Slower growth in both commercial and real estate lending were the most important factors contributing to the slower overall loan growth. Commercial loans grew at a 10 percent pace this year compared to a 15 percent rate last year while real estate loans grew at only a 5 percent rate as compared to a 17 percent rate over the three month period last year. Consistent with recent experience, consumer lending has grown more rapidly over the past 3 months of this year (33 percent) than for the same period last year (12 percent). Over the last three months, however, the month to month growth rates have been declining, suggesting a slowing in consumer borrowing. Agriculture Early planting and timely rains have lowered futures prices for most major crops to new lows. With export demand weak, it appears as if grain, soybean, and cotton prices will stay near current levels unless yields are below average. Cattle supplies remain abundant with producers still attempting to market a large number of overfinished animals. prices have increased somewhat recently, partially in response to widening restrictions on the importation of hogs from Canada. Hog IX-1 NINTH DISTRICT - MINNEAPOLIS Mixed signals have recently Ninth District economy. While been received labor market from key indicators conditions have improve generally, most of the improvement has been seasonal. of the pace of consumer spending has been noted is the only resource-related industry throughout reporting continued to Some slackening although car sales and housing activity rose in some parts. sector of the the district, The wood products good news, while bad news is still the norm for agriculture. Employment Labor market conditions have continued to show improvement, although most improvement has been seasonal. unemployment slight rate drop in employment was fell seasonally less to only in rate 4.2 April adjusted than normal April's unemployment sonally a bit in in the percent, The Ninth District's seasonally adjusted to just employment. under and teenage Paul metro area. dropped a little increases employment rate to cent. last were 5.1 noted percent This April's unemployment April's, at 6.4 percent. stagnation was primarily in affected by a curtailment in South and the unemployment there, Falls MSA's North Dakota A Bank director energy production at around 10 rate state's un- to 4.4 per- remained unchanged from notes western part, But Normal seasonal dropping the rate in the state's of Dakota, Sioux a more than sea- percent, is about as low as in any metro area in the nation. employment despite Also, the increase in April the Minneapolis-St. Twin Cities 6 percent, that North Dakota's which has been adversely projects. Bank directors IX-2 report that Montana has been suffering from deteriorating conditions in its agricultural and sectors; resource-related the state's fell unemployment between March and April at less than the seasonal norm. Consumer Spending Some softening in the consumer purchases of general mer- district's chandise was noted in May and early June. One large retailer, noting that its speculated that some of its normal May April sales were better than expected, business may have instead come in April this year. tailer's year-to-date sales were up By May's end, the re- 10 percent over last year's. Another large retailer found that large discounts were the only way to keep business brisk in May, curbing store profits. Furthermore, this retailer's inventories are still high and will have to be brought back in line by more discounts. Recreational clothing--particularly jogging togs--has been an excellent seller thanks to the unusually warm weather in the district's population centers. Bank directors concur that retail sales are generally flat-to-slowing throughout the district, with the possible exception of eastern South Dakota. Low-cost financing deals have propped up car sales into June. large trucks domestic and have been manufacturers cars. sales--especially left with have Both manufacturers low current experienced Two inventories year-to-date truck sales--in excess of last year's good results. of vehicle Sales were off in Montana, though, and also slowed in Sioux Falls, South Dakota. Aided grown. by falling interest rates, housing activity generally has Sales of Minneapolis homes are up a whopping 31 percent this April, compared with last April. members had A major home builder association reports that its a record number of homes in the planning and building stages. Apartment construction has also taken off in the Twin Cities metro area, due to a combination of low interest and vacancy rates as well as to attempts to IX-3 beat the possible enactment of federal tax laws unfavorable to real estate investment. Early reports from tourist centers indicate that the pace of tourist spending--an important contributor to the district's economy above last year's level in several spots in Minnesota. in in summer--is But tourist spending North Dakota and Montana has been slowed by the strong U.S. dollar, which has kept Canadian visitors away. Resource-Related Industries District Bank directors resource sectors. all report mixed conditions across several key Imports, input substitution, and scrap iron processing have hurt the iron ore business in northeastern Minnesota. As a result, ex- tended shutdowns in ore processing later this summer have been announced. Oil and gas exploration is cut in way down in North Dakota and Montana, British oil prices boding ill Indicative of this, with the recent for future exploration in these states. a Bank director notes that only 30 rigs were operating in North Dakota last month, compared with 70 in operation a year earlier. contrast, sector. high demand for housing and paper In is spurring the wood products A Bank director reports that a new wood-products plant is opening in the Upper Peninsula of Michigan. Agriculture Bad news continues to crop up in Farm prices continue to fall: percent in mid-May from its the district's The Minnesota farm price index was down 14 level a year earlier. more precipitously than livestock prices did. crop development in Minnesota Crop prices declined even In Minnesota, the average price for all milk was the lowest in almost five years. aided agriculture sector. While warm, wet weather has and North Dakota, crop development western South Dakota and Montana has been hurt by a lack of moisture. in TENTH DISTRICT--KANSAS CITY Economic activity in the Tenth District appears to be relatively sluggish. Retail sales are down slightly from a year ago, although auto sales remain comparable to sales a year earlier. stable, at retail and for manufacturers' inputs. Prices remain generally Housing starts are also off from a year ago, though sales of new homes are generally up. Future mortgage demand is expected to be stronger, as rates are expected to decline further. Agricultural lenders and borrowers in the district are both facing continuing difficulties. states. A good winter wheat harvest is well under way in Tenth District Bank loan demand is flat while deposits are generally higher. Retail trade. year-ago levels. Most retailers report that sales are down slightly from Clothing, home furnishings, appliances, and electronic items are all selling more slowly. inventories. As a result, some retailers are trimming their Most retailers expect sales to pick up before yearend, however, and plan no major cutbacks in inventories. Retail prices remained stable during the past three months and are expected to remain stable in the near future. Automobile dealers. Automobile dealers report that sales comparable with year-ago levels. are Sales are being spurred by manufacturers' low financing rates and, to a less extent, by recent declines in other interest rates. Inventory levels are largely satisfactory, and caution rules out inventory building in the near future. Most dealers, however, are optimistic that 1985 sales will be as good or slightly better than strong 1984 sales. Purchasing agents. Purchasing agents report that input prices remained constant during the past three months. through the end of the year. Most expect constant input prices No difficulties in obtaining materials are X-2 reported, and none are anticipated. inventories is mixed. Satisfaction with current materials Most agents report some trimming of inventories due to seasonal and firm-specific factors. Housing activity and finance. Homebuilders report that housing starts are down slightly to sharply from a year ago. Starts are expected to remain steady or increase slightly through the end of the year. Building materials are readily available, and materials prices are stable or rising slowly. Sales of new homes are generally up, as are new home prices. Savings and loans report that mortgage demand and commitments are up except in Colorado and Wyoming. Future mortgage demand is expected to be strong, since mortgage rates have declined recently and are expected to decline further. Savings and loans report larger savings inflows than a year ago but expect inflows to slow in the near future. Agriculture. Agricultural lenders throughout the Tenth District are continuing to write down the value of farm assets, both because examiners are pressing banks to keep up with declining asset values, and for closer monitoring of loans. Some lenders in Missouri and Oklahoma report that their banks have already written farm asset values down to market levels. Aggressive writing down of asset values may cause these banks to reconsider the creditworthiness of some borrowers. Agencies of the farm credit system -- Production Credit Associations (PCAs) and Federal Land Bank Associations (FLBAs) -- appear to be writing down farm asset values as well. Bankers in Nebraska and Colorado report that some farm credit system borrowers are looking for new lenders due in part to rising interest rates on farm credit loans, and to perceived risk associated with capital stock in the PCA's and FLBA's. X-3 Nebraska and Colorado have been especially hard hit by agricultural bank closings this year. In both states, farm borrowers at closed banks are having difficulty finding alternative sources of credit. Agricultural lenders in these states report that successor banks have applied higher credit standards, and other banks generally are not picking up customers of failed banks. As many as half of these customers may be unable to find new sources of credit. The wheat crop in the Tenth District is expected to be very good. Until interrupted by recent rains, the harvest in Oklahoma and southern Kansas was running a week to ten days ahead of schedule, and is 95 percent complete in southwest Oklahoma. Spring planting of corn, soybeans, and sorghum in the Tenth District is generally on schedule, and in some cases well ahead of the usual date. Successful spring planting has produced optimism about crop production prospects for the 1985 season, with crop conditions overall reported as good to excellent. Banking. Tenth District banks report total loan demand was constant during the last month. Commercial and industrial loans were steady, but consumer loan demand grew somewhat. Residential and commercial real estate lending were stable, although the strength of real estate loan demand varied widely by locality. Several bankers note that the level of agricultural lending remains low and that loan quality problems persist. All surveyed banks reduced their prime rate during the last month, but only half lowered consumer loan rates. Total deposits were generally higher with widespread growth in demand deposits, Super NOW's, and MMDA's. Although inflows subsided after the April 15 tax deadline, IRA and Keogh accounts still rose slightly over the month. XI-1 ELEVENTH DISTRICT--DALLAS The economic expansion in the Eleventh District remains slow. Manufacturing respondents, overall, report little change in output. rate of decline in drilling activity is accelerating. The Auto sales have slipped below last year's spectacular performance, but remain quite strong. Retail sales are expanding less vigorously than a year earlier. Nonresidential construction maintains its pattern of strong increases, while residential construction is in decline. banks continues to slow overall. Loan growth at District Agricultural production is expected to equal record levels, but prices are sharply lower than last year. Demand growth for District manufacturing firms remains modest, but respondents have lately become more optimistic about the prospects for future expansion. The recent mild resurgence in overall construction activity has boosted purchases of lumber and wood products and primary and fabricated metals. Nonelectrical machinery manufacturers, especially those serving the energy industry, report slack demand. Sales of electrical machinery are sluggish and inventories in the industry are undesirably high. Paper and allied products makers complain of weakness in their markets and say it is because of import competition and ebbing general economic activity. Apparel firms report that their customers are buying substantially more than in the recent past. Refiners have been expanding output and accumulating inventories in expectation of the usual summer increase in demand. The number of active drilling rigs in the Eleventh District states continues to slide, in part, because of currently weak energy prices and of XI-2 expected price reductions. Another reason cited for falling rig usage is that some firms find takeover activity offers a higher rate of return than does exploration and development. Respondents say that some firms have taken funds formerly committed to drilling and exploration and redirected them to takeover-related expenditures. While retail sales growth is sluggish overall, spending for some lines remains strong. Consumer purchases of apparel are climbing at a particularly rapid rate. Demand for durable goods is low, however. Many respondents expect further deceleration of overall sales expansion. Retailers indicate that they are monitoring inventories with unusual caution. Some stores are now contemplating employment reductions. Auto sales remain brisk, although they are down slightly from last year's exceptionally strong levels. Dealers report that they are optimistic about the future, as a result of recent declines in interest rates and of indications that the demand for high-priced luxury and sports models will remain unabated. Their optimism is tempered by concerns that overall economic conditions may weaken. Nonresidential construction activity in the District continues to advance very substantially, despite increasing vacancy rates, rent discounting, and other evidence of overbuilding. Both non-residential building and nonbuilding construction contracts are growing rapidly. Contracts for streets and roads are expanding at a particularly high rate. The value of residential construction contracts continues to slip from its year-earlier level, but the rate of reduction has slowed. number of building permits also continues to fall. accounted for the bulk of recent declines. The Multifamily permits have XI-3 At District large banks and Texas savings and loans, growth in assets and liabilities has lately decreased somewhat. At large District banks, the pace of expansion in total loans and securities subsided during the first quarter and again in May. absolutely since March. Business loan volume has been falling The pace of real estate loan lending has been slipping lately, but it still remains very high. At Texas savings and loans, both mortgage and construction loans have been expanding at rapid rates. Large banks are funding their asset growth primarily with increases in large time deposits and MMDAs. strong year-over-year gains. Both categories have been registering Borrowings at large banks have been declining since the fourth quarter of last year. Asset expansion at S&Ls has been funded chiefly by large increases in Jumbo CDs, other time deposits and borrowings. Eleventh District agricultural production is surging because of good weather. Winter wheat yields are likely to match record levels. Increased world crop output, however, has led to significant declines in crop prices from its year-earlier level. Livestock prices have also declined over the last year, although somewhat less than crop prices. Texas cattlemen continue to liquidate their herds. In April, placements on feed were the lowest for that month since 1982 and the number of Texas cattle slaughtered was the highest April total in many years. Overall, Texas farm income is expected to be lower this year than in 1984. XII-1 TWELFTH DISTRICT - SAN FRANCISCO The economy of the Twelfth District, in general, continues to be healthy. Activity weakened by the continued strength of the dollar appears to have been partly offset by the stimulus provided by recent declines in interest rates. The semiconductor industry, for example, has weakened considerably since last year but home construction activity is proceeding at long-term trend levels. Retail sales activity also has been generally vigorous, although there is considerable variation in retail sales growth reported within the District. The agricultural sector, although still struggling to overcome the problems of the high value of the dollar and extensive debt obligations, does not appear to be losing ground. The forest products industry and the mining industry also continue to be weakened by the strength of the dollar and by local production cost problems. Fortunately, in those states in which these industries are important, growth in the service sector or in manufacturing activity has helped to avoid the more serious implications of continued weakness in these industries. Consumer Spending The available data on retail sales activity presents a mixed picture. In the far west, recent retail sales activity is up comfortably from last year. Department stores in southern California, for example, report an increase of 10 percent over last year. In the intermountain states, however, retail sales activity has been less healthy. Idaho, for example, reports a sharp decline in retail sales over the past two months. XII-2 Automobile sales also are reported as being up from last year due in part to consumer awareness of increased price competition as the result of elimination of Japanese import restrictions. In California last month, the import share of the automobile market was above 50 percent. Manufacturing and Construction Manufacturing activity in the Twelfth District generally has experienced the slowdown exhibited nationwide and employment has been maintained primarily by growth in the service sector. The most important development has been in the regionally significant high-technology industries which are now displaying considerable weakness. In California, Idaho, and Utah, significant layoffs and decreases in earnings have been reported. The "book-to-bill" ratio, an important indicator of the prospects for future activity in the semiconductor industry, continues to be disappointingly low. Only the Arizona semiconductor industry reports a significant recovery in this leading indicator. Construction activity generally is strong. In California, housing starts are running at the rate of 230,000 units per year, up 4 percent from the first quarter of 1984. In Utah, housing starts are down from last year, but non-residential construction activity is up nearly 40 percent. Generally speaking, vacancy rates in manufacturing facilities appear to be drifting upward, whereas vacancy rates in commercial structures are declining. This has been particularly important in the overbuilt Wilshire corridor in Los Angeles. Despite relatively healthy construction activity, the forest products industry in the Pacific Northwest continues to be plagued by local labor problems, strong competition for plywood products from Japanese imports and XII-3 competition for other wood products from Canada. Lumber exports out of the Port of Portland decreased by 58 percent between the first quarters of 1984 and 1985. Agriculture and Mining Although western farmers continue to face difficulties because of weak export markets and high debt burdens, recent modest increases in potato, bean, and livestock prices have been helpful. In addition, smaller cattle and hog inventories in the District suggest that there may be future improvement in prices. Wheat farmers, however, continue to have faced serious difficulties in world markets despite some recent slight improvements in price. The reduction in interest rates that has occurred recently, however, is seen as providing some assistance to farmers until world product prices strengthen. In California, vegetable and other row crop farmers have been facing less severe difficuluties than their midwest counterparts, but have complained recently of sharp increases in transportation costs. Mining and smelting activity in the district continues to be weak, again largely because of the strength of the dollar and competitiveness of foreign supply. In Utah, the recent closure of a major copper mining complex was a serious blow to the industry, but was offset in the aggregate by growth elsewhere in the Utah economy. The unemployment rate in Utah actually fell between April and May from 6.5 to 6.2 percent. Financial Sector The recent decline in interest rates has spurred commercial and mortage loan demand at district financial institutions. The increase in XII-4 demand has been most marked in the consumer loan and mortgage sector, where some institutions are now offering adjustable rate mortgages with initial rates below 10 percent. Commercial loan demand had grown extremely rapidly in the latter half of 1984 so that the 6 percent increase in 1985 over 1984 thus far seems modest in contrast. Nevertheless, the decline in interest rates is a sign of optimism for many lenders, except those with undiversified loan portfolios in the agriculture and forest products sectors.

Federal Reserve (1985, July 9). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19850710

@misc{wtfs_beige_book_19850710,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1985},
  month = {Jul},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19850710},
  note = {Retrieved via When the Fed Speaks corpus}
}