Beige Book

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS BY FEDERAL RESERVE DISTRICTS MARCH 1987 TABLE OF CONTENTS SUMMARY .... ................................................... First District - Boston..................................... Second District - New York.. . .................................. Third District - Philadelphia.................................. i I-1 II-1 III-1 Fourth District - Cleveland................................... IV-1 Fifth District - Richmond..................................... V-1 Sixth District - Atlanta....................................... VI-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* Assessments of general economic conditions ranged from uneven or steady to improving. Expanding activity or optimism were reported by contacts in the Boston, New York, Richmond, and Atlanta Districts. slow expansion. Cleveland reported Kansas City indicated recent slight improvement. Chicago noted the effects of the mild winter in that District in boosting activity. Business conditions were described as on an even keel in Philadelphia, steady in Minneapolis, and uneven in San Francisco. Dallas noted signs of recovery but said important segments of the District remain weak. Manufacturing. manufacturing. Most reports noted rising orders and activity in Increases were described as gradual or small, overall, by Boston, Philadelphia, and Cleveland. Manufacturers in the Boston, Philadelphia, and Richmond Districts were optimistic about further expansion in manufacturing activity. Dallas. Orders were described as still very sluggish by More production cutbacks or plant closings were reported by New York, Cleveland, and Chicago. New foreign-owned auto assembly and parts plants are being built in the Midwest and Southeast. Capital spending was projected about flat by contacts in the Boston and Philadelphia Districts. San Francisco said many firms plan less capital investment in 1987 than in 1986. Chicago reports that demand for mechanical capital goods remains slow. Cost containment continues as a high priority. noted upward pressures on prices. Several Districts Higher orders were reported for appliances, products used in housing construction, some communications and *Prepared at the Federal Reserve Bank of Chicago computer equipment, medical equipment, plastics, chemicals, and paper, attributed in part to the lower dollar. Dallas reports that semiconductors have stabilized after 2 years of falling orders and plant closings. Atlanta and Dallas report that demand remains weak from the construction and energy sectors. Consumer Spending. retail sales. Most Districts report further growth of nonauto Boston and New York said some retailers saw "astoundingly" or "unbelievably" strong sales in February. At the other extreme, retail sales were weak in the Dallas and San Francisco Districts. were flat to only slightly higher than a year earlier. Kansas City said sales Inventories were described as at generally satisfactory levels, though some respondents told New York that stocks are low. Strength on the East Coast was attributed to the healthy regional economy and, in New York, to buying by foreigners whose currencies have strengthened against the dollar. Retail price increases, resulting in part from the lower dollar, are likely to be moderate. Tourism was described as good, except resort business curtailed by lack of snow in the Minneapolis District. Motor Vehicles. Most Districts report improvement in auto dealer sales in February or early March, from very low levels in January following tax-related December strength. Dallas, however, saw little improvement from the January pace in February, which was attributed to local economic weakness. Dealers there expect continued slow sales. Chicago reported auto production cuts and layoffs at some District plants, in response to slower sales. Demand for heavy trucks has improved. Residential Construction. Most Districts report strength in residential building. An exception is Dallas, burdened by a large stock of unsold homes and high rental vacancy rates. Housing markets in Alaska and parts of the Minneapolis District are also soft because of the weak energy sector. Home building permits have trended down recently in the Atlanta District, but builders there are optimistic. Chicago reported that residential building was boosted by mild winter weather, but Richmond said construction in that area was slowed by bad weather. Sizable home price increases were reported in some local markets on the East and West Coasts. Building material costs are expected to rise because of the Canadian duty on lumber exports. Nonresidential Construction. Office construction is slowing in most major cities, and office vacancies are high or rising. Chicago, however, reported that work on new buildings continues at a high level in that city. New York said that office leasing has increased. Chicago indicated that industrial construction had slowed in that region. short supply in parts of northern New Jersey. Industrial space is in Extensive work on military bases in upstate New York will be adding to construction activity in that region. Energy and Mining. Investment in the energy sector remains very weak, except for construction of natural gas pipelines noted by Atlanta. Dallas reports that the drilling rig count declined in February, seasonally adjusted, after rising since July. February's level was about half of a year earlier, and little or no increase is expected. decline in coal production. led to further layoffs. Minneapolis reported a Lack of demand for iron ore in that area has Agriculture and Forestry. stabilizing. Conditions in the farm sector appear to be Chicago reported that the decline in land values has slowed, farm earnings have improved, and agricultural debt repayments are faster. Minneapolis noted improved profits for livestock producers, but crop farmers remain dependent on the government for much of their income. Favorable prices for potatoes and beans have helped stabilize land prices in that area. St. Louis reported that farm incomes have stabilized. Dallas indicated that higher cotton prices are expected to help farmers in that District. Florida citrus growers have benefited from the lower dollar. Frost damaged the southern California avocado and citrus crops, and higher prices are expected for some fruits, vegetables, and nuts. Adverse weather delayed expansion of lumber production in the Atlanta District following imposition of the Canadian tax on lumber exports to the U.S. Demand for southern pine has remained strong. Finance. equity loans. Several Districts reported continued strong growth of home Philadelphia noted that a significant portion of usage of these lines was initially to pay down credit cards, but usage has shifted toward net increases in total debt. Some credit card issuers are tightening credit scrutiny in response to higher delinquency rates. New York attributes a slowdown in IRA deposits to confusion over the new tax law, low interest rates on IRA deposits, and restrictions on withdrawals. FIRST DISTRICT - BOSTON This month's reports from First District retailers and manufacturers were the most positive in some time. Retailers were both pleased and surprised by the strength of February sales. For the most part, auto dealerships were exceptions to the generally favorable sales picture, but within this group too there were reports of surprisingly good sales volumes. Reports from the manufacturing sector still indicate little vitality; nevertheless, there is some evidence of a gradual pickup in orders and respondents seem more optimistic about the future. Retail inventories have increased, but respondents express no concern about this development. Manufacturing inventories are low by historic standards and respondents intend to keep them this way. No significant price changes have been observed by either retailing or manufacturing respondents. Retail Most retailers contacted were very pleasantly surprised in February. Reports on February sales included such phrases as "astoundingly good" and "unbelievable;" year-over-year increases ranged from 9 to 30 percent on a comparable stores basis. February is usually a slow month even with considerable price reductions, but stores did well with spring merchandise as well as with discounted older items. One merchant commented that if consumers are really going to pull back in response to high debt levels, they have postponed it. For the fiscal year as a whole, which ended in January, results were 6 to 10 percent ahead of 1985. above plan for all contacts but one. This was Inventories were reported to be somewhat high. by design. Some increases were Others were not, but contacts did not regard these unplanned increases with much concern. Prices are said to be stable, except for pharmacy items. However, one department store owner reported "reliable rumors" that prices will be up noticeably for fall merchandise because of the decline in the value of the dollar. First District retailers are expecting a good first half of the year although they do not expect February's surprisingly high rates of increase to be sustained. The representative of a chain concentrated in the more rural areas of the East and Midwest said its stores in the Northeast are doing better than those elsewhere - a pattern he expects to continue. Motor Vehicle Sales The high level of automobile sales in December appears to have dipped into January's and early February's sales volumes for most of the dealerships surveyed. While the end-of-the-year rush to take advantage of the sales tax break is seen as a major factor in the slowdown, some claim that cold weather has also played an important role. are typically slower months.) (January and February Signs of improvement are reported, however, by both domestic and foreign dealerships. A few contacts are experiencing surprisingly good sales activity, which they attribute to product quality and reputation. less seasonal. Used cars continue to do well as their sales pattern is Trucks typically sell well during the winter months; light trucks are said to be especially popular because of their affordability. I-3 Manufacturing The pace of manufacturing activity in the First District seems to have inched up in the past couple of months, and there is a slightly more optimistic tone to respondents' reports. Orders are continuing to increase for such products as appliances and housing products, some communications and computer equipment, medical equipment, and plastics. have started to pick up, according to one contact. Semiconductors While demand in most other areas remains flat, there were no reports of deteriorating orders or shipments. For high tech respondents, sales to Europe are said to be quite good; some progress is also being made in selling in the Far East (from plants located in the Far East), although one contact reported that Japanese customers have cut back their orders because of declining export sales. Cost containment continues to be a high priority. sales ratios are generally low by historic standards. Inventory-to- One contact commented that large purchases to take advantage of volume discounts are a thing of the past; his firm now buys precisely what it needs. observed that his firm's customers are doing the same thing: bought in lots of 5,000; now they order exactly "2,112" items. Another formerly they In a similar vein, employment levels are stable to slightly down, even for companies experiencing volume growth. One high tech firm noted that, because of automation, his firm must increase volume 15 percent just to maintain its manufacturing work force; the firm is currently growing at a 5 to 10 percent rate. Most respondents expect capital spending in 1987 to be fairly similar to that in 1986. were observed. No significant increases in vendor prices One contact had successfully increased its own prices at year end, while another reported that its prices have been falling on average. II-1 SECOND DISTRICT--NEW YORK Second The report. District's economy showed gains the since last January retail sales were mixed, but a decided improvement was noted While residential construction was seasonally in February. in office leasing was noted in several areas. in some District business activity. Most small slack, a pick-up Some improvement also occurred and mid-sized banks report a noticeable slowdown in IRA deposits for this time of year. Consumer Spending The pattern of sales at District department stores was mixed during January as consumer spending ranged from somewhat below to considerably above However, a decided improvement was noted in February retailers' expectations. by those stores reporting early results, and one respondent characterized the month as "unbelievably good". Foreign visitors utilizing their stronger mentioned as one factor bolstering'District health of its economy Items for which apparel, jewelry relative there and was to accessories; oil and farm debt during January were February's strength in sales and a conscious most gains sales still problems. types resulted of from As a result of both consumer buying across a wide spectrum of merchandise. the recent are spending; another factor is the areas with good demand currencies effort to monitor stocks, retailers report inventories ranging from well below desired levels to on plan. Business Activity Some recent weeks. improvement occurred in the District's economic expansion More than one-third of the purchasing managers in the Buffalo in II-2 and Rochester surveys reported that general business conditions were better in January, up from 25 percent in December. Overall employment has grown in manufacturing sector continues to decline. the District, though The February unemployment rates of 4.1 percent in New Jersey and 4.9 percent in New York were the lowest the early '70s and are well below the the national average. since Moreover, the over-the-year reduction in the New York and New Jersey rates was three times the national decline. Recent economy. announcements point to a mixed impact on the District's On the one hand, G.M.'s decision to produce its new mini-vans in Westchester County will secure several thousand years. On the other curtail or phase hand, several out operations other with a jobs there for a number of long-established resultant loss of firms many plan jobs. to In addition, while central New York will gain hundreds of jobs as the result of a recent merger, Buffalo and northern New Jersey will lose at least the same number due to that same consolidation. Construction and Real Estate Residential construction has been seasonally slack, but homebuilders in most areas 1987. continue to for new homes in Plans for several new types of housing development have been announced in recent weeks. office anticipate considerable demand In downtown Stamford, Connecticut, where until now only new building has been undertaken, condominium is to begin this summer. construction of the first high-rise In Newark, New Jersey the mayor recently signed a contract for the construction of 650 moderately-priced townhouses, the largest addition to that city's housing stock in decades. Finally, in New York City several programs are planned or underway to provide new middle- and low-income housing. being mentioned as a Since a shortage of affordable housing is increasingly deterrent to further economic growth in the New York metropolitan area, these new undertakings should help in this regard. II-3 A pick-up in office leasing activity was noted in several parts of slowdown in new the District during recent weeks, and with the continued construction projects, lower vacancy rates are anticipated in a number of Westchester, for example, reports strong demand for both large and areas. small blocks of space in its new buildings, while in Manhattan some observers expect the office vacancy rate to decline to 9 or 10 percent in 1987 from its 10 to 13 percent range last year. Elsewhere in the District, industrial space is reported in short supply in northern New Jersey, particularly in areas near New York City or major highways, and prices of land and buildings have risen sharply. Upstate New York expects 1987 to be a busy year for nonresidential construction as the result of congressional appropriations for extensive expansion and renovation of three military bases in the area. Financial Developments Most small and mid-sized banks in the Second District report that there has been a noticeable slowdown in IRA deposits from the usual inflow at this time of year. Most of the banks surveyed indicated that the decline stems from confusion concerning the impact of the new tax law, and the low interest earned on IRA deposits. Many bank customers are unaware that there is still time to make an IRA deposit and claim a deduction for the 1986 tax year. In addition, others have reservations about making the investment because of concerns about the future impact of the tax law on money already placed in IRAs. One of the banks indicated that some of its own officers were not well informed about the implications of the tax reform, and were reluctant to suggest IRAs as an investment. Most banks added that these problems have been compounded by the current low interest rates available on IRA deposits and restrictions concerning withdrawal of indicated interest that uncertainty concerning these funds. the tax law rates would have an even more and All of the banks the low level striking impact activity which usually occurs as the April 15 deadline nears. on the surge of of III-1 THIRD DISTRICT - PHILADELPHIA Reports from the Third District in March indicate that the regional economy is on an even keel. Manufacturers are operating at a steady rate, while retailers say that business has been good since the beginning of the year; many merchants indicate that sales are currently running above expectations. Automobile dealers report a pickup in sales early in March, after a slow start for the year. Bankers say business loan demand dropped in January but rose in the past month, while consumer lending has been growing steadily since the start of the year, bringing total loan volume outstanding in February about even with year-end 1986. The consensus outlook in the Third District business community is positive. A majority of manufacturers predict expanding activity over the next six months, although they do not expect increasing orders to outstrip capacity. expect the current growth of sales to continue through the spring. Retailers Automobile dealers also predict continued improvement during the next few months. Bankers expect business loan demand to grow moderately throughout the year, in pace with continued economic expansion. They also expect consumer lending to be strong, with home equity loans adding significantly to growth in this category of credit. MANUFACTURING Preliminary results for the March Business Outlook Survey indicate that the gains posted by local industry in February have held, although the pace of activity has levelled off this month. Conditions are similar in both the durable goods and nondurable goods sectors. Overall, one-half of the companies III-2 participating in the March survey report no change in the pace of their operations from February, one-fourth indicate improvement, and one-fourth report slower business. Specific measures of industrial activity are mixed, but indicate little change overall. New orders and shipments are up marginally, but order backlogs have eased slightly. Employment is steady. Industrial prices in the region are generally stable. Over 70 percent of the firms polled in March say both input and output prices are unchanged from February. However, 22 percent report higher charges for the goods they purchase and 13 percent have raised the prices of their own products. Looking ahead, area manufacturers remain mostly positive, although optimistic sentiment is no more widespread now than it has been for the past year and a half. Forty-four percent of the March survey respondents predict improved business over the next six months and 35 percent expect steady conditions; however, 20 percent anticipate slower business ahead. On balance, survey respondents expect gains in orders and shipments but no change in order backlogs. Local industrial firms' employment and capital spending plans call for little change over the next six months. RETAIL Retailers report that consumer spending has continued at a strong pace since Christmas. Sales in January and February were above sales in the same months of last year by more than 10 percent for many department and specialty stores. Discount stores posted more modest results. Most product lines are selling well, with apparel doing best and hard-goods sales relatively slower. Traditional Presidents Day sales were very successful for most stores. Retailers attribute the continued strength of sales to the region's healthy economy, but some merchants speculate that consumer spending may be getting a temporary boost because many individuals currently have higher take-home pay III-3 than they did late last year due to delays in adjusting their payroll withholding to the levels required by the new tax law. Retailers say their first quarter (February-April) should be very good, and they are optimistic that the current growth of sales will continue through spring. However, although their outlook for 1987 as a whole is positive, store officials say there could be a weakening in the second half. Merchants believe that higher tax liabilities will cause more affluent customers to cut back on discretionary spending, and that consumers will hold the line on financed purchases in any case, in order to bring their rising debt under control. In addition, some stores are tightening credit qualifications for their proprietary cards in response to rising delinquency rates, and, according to some retailers, proposed legislation to cap merchant credit card rates will likely result in even more restrictions on store credit. Automobile dealers say that January and February have been slow, but they are seeing some pickup in sales in early March and are optimistic that sales this spring will be good. Dealers selling domestic cars say they have improved their competitive position against imports due to the dollar's decline, longer warranties on U.S. cars, and low finance rates. They expect manufacturers' financing programs to be a regular part of their marketing strategy from now on. FINANCE Total loan volume at major Third District banks in late February was about even with the year-end 1986 level, and approximately 13 percent above the level of a year ago. Lending officers say the lack of growth in total loans in the first two months of the year is due to an abnormal pattern of business borrowing, resulting from the movement of some normal January business into December due to changes in tax law. The drop was recouped in February, however, and bankers contacted in early March say they expect further growth in III-4 commercial lending as economic expansion continues. Demand for fixed-rate business loans, in particular, is growing, and some banks are accommodating this demand, hedging interest rate risk through the use of interest rate swaps and financial futures. Consumer loan volume has been growing at an annual rate of about 10 percent since December. Banks offering home equity credit lines report strong growth in commitments as well as usage, with drawdowns of up to 50 percent. Although consolidation of credit card debt was significant in early use of home equity loans, bankers now say that consumers are using this form of borrowing for new debt, giving consumer installment lending a further boost. IV-1 FOURTH DISTRICT - CLEVELAND Summary The regional and New orders, production, Ohio inventories of number of manufacturing sectors showing continued are sales higher than Residential construction are manufacturers up slightly. to expand at a rate equal to the nation, but with a continues employment a slow and somewhat unsteady expansion. continues economy Retail decline. ago, and automobile purchases have picked up. a year has employment also accompanied rebounded, by sizable price increases in several local markets. Retail Sales Retailers reported that sales in January Clothing and other soft percent higher than a year ago. selling home appliances are spotty throughout were 7 to 10 are goods among a weak dollar. to from primarily prices expect Retailers Ohio. increase from 2 to 3 percent in 1987, resulting due February the items at present, while sales of hard goods such as furniture and best prices and higher to import Although many buyers have switched to suppliers currencies, from countries with relatively weaker comparable substitutes are not always available. February automobile sales began However, due to the end-of-year buying spree. and that now the Japanese significantly below last year's levels mid-month appear to be on par with last year's sales. weaker import dollar dealers is helping reported them slightly prices increased slightly in March in order to margin. by compete picked sales up Domestic dealers reported with Japanese higher inventories. maintain an imports. In addition, acceptable profit IV-2 Labor Markets number The of jobless Ohioans increased December, raising the seasonally adjusted unemployment percent. During percent. 21.9 period, from November rate from 7.2 for Columbus area. November to coal-producing areas to remained had Workers 7.9 from a high of a low of 5.4 percent for the Seasonally adjusted manufacturing December. nondurables industries the to to the U.S. rate declined from 6.9 percent to 6.7 Within the state of Ohio, unemployment rates ranged percent month. this 39,000 employment rose 4,000 from The increase occurred in durable-goods industries while unchanged. higher earnings averaged a Workers in 43.2 in December, workweek nearly up in all $11.32 December, manufacturing from up the previous .6 hours from November. Manufacturing Manufacturing activity in the region is mixed. agents in Northeast Ohio showed very little change in month. Production, new orders, and inventory prices were higher, and employment was lower. Ohio showed signs of continued A improvement. A survey of purchasing manufacturing levels similar New respondents reported a last fairly stable, survey for Central orders, inventories, and prices were significantly higher than December's figures. more were from On the other hand, decrease in employment in January than those who reported an increase in employment. Raw continually steel production increased for throughout the Lake February. Erie and Employment Pittsburgh in the basic steel industries also increased, reflecting to some extent the resolution of work stoppage. regions the USX IV-3 that area Cincinnati Greater be a for target For facilities. parts foreign plans At the same time, plants close the in the Firestone and region continues especially automobile assembly and investment, Electric Mitsubishi example, to affect over 8,000 workers. will Goodyear have also announced layoffs. to large scale plant closings and by marked announced recently General Motors layoffs. be to continues region The announced plans to build a $25 million plant to produce recently Corporation, car audio equipment, car electronics and electrical parts for the U.S. auto industry. Housing Residential in Ohio year. picked up considerably from last Akron, for example, sale a year ago. While multifamily rose percent 16 from number of housing permits issued in Ohio during December 1986 The increased 7 percent from a year ago. were has Value of future residential construction in Ohio year. last construction housing in prices the is sluggish, new adjustable many mortgages, values also increased. In market appears very strong, is partly due to the less favorable which tax have January were 20 percent above what they single-family depreciation rules under the rate House code. mortgage Despite borrowers heavy advertising for are choosing fixed-rate mortgages with a shorter maturity. Banking District loan demand registered during has December. softened Loans outstanding significantly during the first six weeks of bank lending was broadbased. Both considerably this commercial from the strong pace at large district banks fell year. and The slower industrial rate loans of and IV-4 consumer installment loans fell at an annual pace of over Although real estate loans have expanded at an annual rate of 25 the beginning December. of the 20 percent. percent since year, this pace is slower than the growth registered in Moreover, some of the recent real estate loan to the rise in home equity loans. volume is attributed FIFTH DISTRICT -- RICHMOND Overview Manufacturing activity in the District increased again in February as it did in January, in line with the trend Producers are optimistic that following an unusually began last Retail sales rose this the year Resort and other hotel room reservations for the summer are running ahead of last year's pace, and 1986 was a good year for in this past weak January, and store managers remain optimistic that consumer spending will increase moderately as progresses. summer. local and national business conditions will improve further in the months ahead. month that area. tourism The market for single-family homes continued strong in recent weeks except where depressed by unusually bad weather. Realtors and homebuilders are optimistic about prospects for their businesses and In agriculture there are signs of some the economy. in credit easing conditions. Manufacturing activity Manufacturing in the region according to the results of our latest survey. report increases unfilled orders. length of the as report declines increased in February Twice as many in shipments, producers new orders, and Producers also report increases in employment and workweek. Manufacturers inventories of materials slightly outnumber the reporting increases in their those reporting Inventories of finished goods appear to have increased. declines. Prices of raw materials rose in the past month according to 36 percent of the producers; 5 percent report the producers report declines. increases of no change in the prices they charge for finished goods, with the remaining one-fourth about evenly reporting Three-fourths and those reporting split between declines. those Responding to a separate survey question, 45 percent of the manufacturers report that, since the first of the year, the prices of their imported materials have risen. Optimism among producers is growing. month's Sixty-eight percent this respondents anticipate increases in shipments and new orders in the next six months, as compared with 61 percent last month. one-third of month, More than the respondents now believe they will increase employment and lengthen the workweek over the next six months. last of this month's survey next six months. that indicates producers expect improvement in general As business was over the of the half conditions case over the Added optimism is evident in that a smaller proportion of the respondents--one eighth this month as compared with one fifth last month--expect conditions to deteriorate. Consumer Demand Retail sales increased in February according to our survey. Fifty-nine percent of the responding retailers report increases in sales and 23 expect percent that report increases in employment. their business activity as well conditions will improve in the next six months. Nine of ten retailers as general business Resort and other hotel bookings for the summer are stronger than already last year this time. Overnight spaces at many state parks booked Public and private sector respondents to a special to capacity. are telephone survey say they expect even stronger tourist activity in 1987 than in the stronger-than-average 1986 season. Tourist businesses expect their profits to rise commensurately. Residential Real Estate Realtor construction and of home builder single-family associations homes were report quite that sales and strong in February, although activity was depressed by unusually bad weather in parts of the District. Industry representatives believe 1987 will be on a par with 1986 if interest rates decline or stay where they are now. Agriculture Our most recent survey of agricultural lenders indicates that credit conditions instances of farm rates, however, may be customers remain easing somewhat. extending sluggish. interest rates across all categories or Lenders renewing report loans; farm fewer repayment Agricultural bankers report falling of agricultural loans surveyed, although these rates are declining more slowly than nonagricultural loan rates. new Loanable funds are plentiful, and farm loans. bankers are actively seeking Collateral requirements remain high, however, because of uncertainty over agricultural income prospects. Financial Several banks and thrifts have extended deadlines their promotions for home equity lines. the heavy flow of applications. associated with Approvals have been delayed by VI-1 SIXTH DISTRICT - ATLANTA Economic activity has picked up in recent weeks. Manufacturing in the region is showing more life, reflecting better export demand and a reduction in import competition. Florida's citrus slowing imports of orange juice. industry is prospering because of Most of the energy sector remains depressed, but capital spending is rising in a few natural gas companies. Retail sales were unexpectedly strong in several District states, though auto sales were in February. even weaker than they were in the nation The region saw a moderate decline in single-family building permits, but builders seem quite optimistic that this decline was temporary. Tourism remains a strong positive force in the District. The region's manufacturing sector appears to be Employment and Industry. rebounding from recent sluggishness. Strong demand textile mill products is boosting employment. recovery as orders for some goods for a wide range of Prospects look good for further into are booked 1988. The paper and chemicals industries have benefited from recent restructuring and the decline Prices for pulp and linerboard are expected to in the value of the dollar. continue to rise as Merger and consolidation activity are exports expand. said to have increased the strength of domestic paper firms. dollar has The cheaper improved U.S. chemical producers' ability to compete in export Spokesmen expect both exports and productivity to increase further markets. in coming months. The outlook is not as bright for the metals and machinery Aluminum producers steel mills Specialty profitable market. anticipate 1987 and are beginning steel to feel industries. to be only marginally better than 1986. fabricators the Reduced demand for oil well that have managed effects of a sagging drilling equipment prospects for the region's machinery industry. to remain construction continues to dim VI-2 Consumer Spending. quite favorable, sluggish. February sales for most southeastern retailers were although activity in Louisiana and Mississippi remained Retailers in Georgia, Florida, and Tennessee, in particular, report surprisingly strong sales activity. Regional car sales in February posted improvement from January's dismal activity, but they were weaker than the nation's sales, which declined 9.1 percent from a year ago. Over the past year market shares of imports have risen to about one-third of total sales in at least two District states. Construction. Single-family building permits in the Sixth District have registered a modest downtrend recently, but builders are still optimistic about prospects for the single-family home market because of rising incomes and comfortable mortgage rates. active construction in the Birmingham is Southeast, and enjoying some of east Tennessee strong demand and a slight inventory shortage. the most contacts report Although there is very little construction of multifamily rental units, the condominium market seems to be picking up slightly. Miami and Knoxville realtors say current sales of condos are the highest in recent years. Commercial overbuilding. construction construction continues New reports related and glutted, demand Orleans is healthy businesses. to slow drastic as the region employment While the Miami adjusts cutbacks office in both market for smaller owner-occupied buildings. to is Improved occupancy of the overbuilt retail sector in Jackson, Mississippi, is renewing the interest of developers who had fled the market. Financial Services. After a spurt of tax-induced activity in December, January's loans at the District's larger commercial banks resumed the gradual decline of previous months. strong in Atlanta Louisiana also and report in However, residential construction lending remains the slight larger cities residential agricultural banks are not faring well. of loan Alabama. growth, Urban banks in but some small VI-3 The region's savings and loans are generally performing well, although a few have According had to some difficulties, District particularly financiers, problems in can be Louisiana and attributed Florida. to several sources, including principally a heavy reliance on long-term lending and weak economic conditions in certain areas. Tourism. The tourism industry continues to boost the Southeast economy. Contacts in New Orleans term the Mardi Gras celebration a huge success as hotel occupancy rates reached their highest level in five years. Travel to Miami has been unusually strong as the number of foreign visitors has surged. In Birmingham, a brand-new horse-racing operation opened its doors in March, welcoming thousands of eager racing enthusiasts. Atlanta and New Orleans are beginning to gear up to host the 1988 political conventions. Both cities will increase hotel/motel tax rates. Agriculture. Forestry, and Mining. Capital spending remains weak in much of the energy sector with a few exceptions in the natural gas industry. New construction of natural gas pipelines is planned for Florida and the Mobile Bay area. The increased activity reflects deregulation in the gas industry and expectations that the excess gas .supply will be eliminated and prices will improve either in late 1987 or early 1988. Weather problems have delayed the regional production expansion that was expected following the imposition of the Canadian export tax on lumber. Very strong prices for southern pine have been characteristic this year, but once the weather improves prices are expected to fall. Demand has remained strong throughout the winter. Orange producers increases and reduced are earning favorable imports of Brazil's returns as a result of price orange products. Although the domestic grapefruit market is languishing, the export market is flourishing thanks to the weak dollar and growing foreign consumption. VII-1 SEVENTH DISTRICT--CHICAGO Summary. A mild winter in the Seventh District has boosted activity, and resulted in fewer than usual seasonal layoffs, particularly in construction. Residential building continues vigorous. office buildings remains strong in downtown Chicago. construction has slowed. Construction of Industrial Several more plant closings in the District recently have been announced. Slower car sales have led District producers to scale back production and increase layoffs, but total planned motor vehicle production in the first half is near year-earlier levels. Appliance buying continues at a high level. Supplies of steel for autos and appliances are reported tight as USX gradually returns to production following a labor settlement. soft. Demand for mechanical capital goods remains Though the farm sector continues under serious stress, farm earnings have improved and the decline in farmland values has slowed. Nonresidential Construction. Building activity has remained strong, partly because of the very mild winter. Progress on some projects in the Chicago area consequently is three months ahead of schedule. Several more large office buildings have been announced or are being started in downtown Chicago. Slower activity on new commercial buildings had been expected but is not yet evident, though renovation work has slowed. Construction of manufacturing buildings in the region has weakened. Residential Construction. building in the Midwest. The mild winter boosted residential Building permits in January, normally very low, were sharply higher than last year in Illinois, Michigan, and Wisconsin. Home mortgage interest rates in the Chicago area have stabilized at around VII-2 8.75-9% for 30-year fixed rate loans, and 7-8% for the first year on adjustable rate mortgages (ARMs). Our contacts indicate that area lenders are increasingly using interest rates above first-year rates in determining whether would-be borrowers qualify under their ARM programs. Plans for car and truck production in the first half Motor Vehicles. remain near last year's levels despite slow sales in January and February. Output reductions scheduled by domestic producers are largely offset by increases at "quasi-domestics"--U.S. assembly plants of foreign producers--located outside the District. Quasi-domestic plants being built in Illinois, Indiana, and Michigan are not yet in operation. have led to more layoffs at some District plants. Slower sales American Motors announced plans to close its Wisconsin assembly plant in 1989, but subsequently agreed to resume critical negotiations over labor concessions. Demand has improved for heavy trucks and related components such as diesel engines. Consumer Spending. Major chain stores in the District reported further gains in sales in January and February. appliances continue at a high level. Sales of household A District producer of large appliances again added to employment to meet strong demand. Production of television sets at an Indiana plant is being increased 30%, as the producer reduces its purchases of TVs made abroad. Capital Goods. remains slow, overall. Demand for capital goods produced in the District Sales of industrial robots are projected to fall 30% in 1987, chiefly because of capital spending cuts by the auto industry. Machine tools, large construction equipment, and railroad VII-3 equipment continue weak. A District producer of sophisticated medical equipment will cut costs by buying, rather than making, certain components and reducing area employment 20%. North American sales of farm equipment, of which the District is an important producer, are projected to stay around 1986's low level in 1987. Steel. Following settlement of its 6-month work stoppage, USX announced plans to leave shut, probably permanently, more than one-fourth of its steelmaking capacity, at plants outside of the District. Despite ample total steel capacity, supplies of steel sheet have remained tight as USX gradually has returned to production. Two other integrated steelmakers with plants in the District announced plans for sizable investments in facilities. Agriculture. For the deeply distressed farm sector, recent developments cast a somewhat more optimistic tone. Farm earnings continue to improve because of massive federal payments, lower production costs, and better returns to livestock producers. Higher earnings have contributed to faster repayments on farm indebtedness and indications that the previous uptrend in problem farm loans at banks reversed in 1986. Exports of some agricultural commodities have exhibited a sustained upturn in recent months. But prospects for corn and soybean exports, which are vital to this District's farmers, remain dismal. Farmland values continued to decline through late 1986, but at a slower pace. Moreover, declining mortgage rates, new Federal Land Bank policies for liquidating acquired farm properties, and recent changes enhancing the attractiveness of the federal government's 10-year program for retiring land from production have raised hopes that land values may be close to a bottom. VIII-1 EIGHTH DISTRICT - ST. LOUIS Summary The expansion of District nonfarm employment slowed in the fourth quarter, despite faster manufacturing job growth. Construction activity also decelerated, with a sharp drop in nonresidential building activity. Loan growth at large District banks has been rapid but recent data indicate a slowing in commercial and real estate loans. crop production declined in 1986 farm income was flat. Although The financial position of the region's agricultural banks improved during 1986. Employment District nonagricultural employment grew at a 2.1 percent annual rate in the fourth quarter, about half its third quarter rate and 1 percentage point less than the national pace. While the goods-producing sectors grew more rapidly in the region than nationally, service-producing sectors trailed national growth rates. Spurred by mild weather, District construction employment grew at a 11.2 percent rate in the fourth quarter. District manufacturing grew at a 1.4 percent rate during the period, with gains in non-electrical machinery, food processing, textile/apparel, and printing/publishing. Despite these gains, manufacturing employment remained 0.4 percent below year-ago levels. The fourth quarter expansion of District manufacturing was constrained by a sharp drop in Missouri, where losses in motor vehicle production contributed to the decline. Moreover, while the number of jobs in aircraft production increased in Missouri last year, the value of federal prime defense contracts received in the state declined by 27.1 VIII-2 percent in fiscal year 1986, suggesting slower employment growth in the future. Construction The value of District residential construction contracts grew by 4.1 percent in the fourth quarter--similar to the nation's expansion--but the growth was concentrated entirely in Missouri. Similarly, the number of residential building permits issued in the District increased 4.2 percent in 1986 with Missouri again responsible for the entire gain. While regional single-family permits increased 24 percent last year, permits for multi-family buildings declined 14.2 percent. January residential building activity slowed from year-ago levels, with single-family permits down 16.7 percent, and multi-family permits off 3.1 percent. The weakness in multi-family construction reflects overcapacity and changes in the federal tax code. The same factors contributed to weakness in nonresidential building. December surveys indicate that office vacancy rates in downtown Memphis and St. Louis were above the national average. The value of nonresidential construction contracts declined 9.2 percent in the fourth quarter, following a 15.4 percent increase in the third quarter. Banking Total loans outstanding at large District banks continued to increase over the three most recent months. Spurred by growth in commercial and real estate loans, total loans expanded at a 20 percent annual rate, more than double that for the same three-month period last year. Commercial loans advanced at a 23.3 percent rate, far outpacing VIII-3 the 2.5 percent rate for the equivalent December-February period last year. A survey of the five largest banks in the District indicated approximately 5 percent of their December increase of business loans outstanding was induced by tax reform. Most of these borrowings, however, were paid-off by mid-February. Real estate loans grew at a 29.5 percent rate compared with 13.9 percent for the three months ending February 1986. Agriculture Final data for 1986 indicate wide variations in crop production and yields across the District. Despite overall lower crop production levels, District total net farm income in 1986 should remain at the same level as in 1985 due to higher livestock profits and increased government payments. In Tennessee, the value of the state's major crops was down 29 percent from 1985 and down 36 percent from 1984 due to acreage reductions linked to government farm programs, low yields caused by early season dryness and falling crop prices. In contrast, Missouri enjoyed nearly ideal growing conditions that resulted in a new record corn yield and near-record yields of other major crops. The average financial position of agricultural banks in the District, which had declined over the previous three years, appears to have stabilized and improved in 1986. This improvement is evident in third quarter measures of bank profitability, loan defaults, loan delinquencies and bank capital. The number of individual agricultural banks with negative earnings and deficient capital increased slightly, however, indicating a widening dispersion of performance among the institutions. IX-1 NINTH DISTRICT--MINNEAPOLIS Economic conditions in far in sonal. 1987. the Ninth District have remained steady so Unemployment rates rose, but most of the In resource-related indus- Consumer spending picked up in February. tries, conditions remained mixed. to show scattered increase was sea- And while some agricultural areas continued signs of stabilization, farmers of major crops are still dependent on government programs for much of their income. Employment So far this year, employment conditions have kept steady. unemployment rates Although in district states rose in January, much of the increase appears to be seasonal. Large layoffs of temporary retail workers, hired for the holidays, resulted in higher unemployment rates. In the Minneapolis- St.Paul metro area, however, January's unemployment rate was still 0.4 percentage points lower than it was in January 1985. And the number of initial unemployment claims filed during January in Minnesota was 12.8 percent lower than those filed a year earlier. In South Dakota, nonfarm employment was 1.5 percent higher during January than it was a year earlier. reports that employment conditions little better than last year. in western Wisconsin A Bank director appeared to be a But in Montana, unemployment appeared to in- crease during January. Consumer Spending Retail sales of general merchandise by larger retailers posted solid gains in February. One chain in the Minneapolis-St. Paul metro area reports that February was its best overall month in the last five years or so. chain experienced double-digit sales gains in almost every major line. That An- IX-2 other large retailer also experienced double-digit gains compared to February 1985. This retailer also notes that consumers seem to be using their credit cards more moderately by carrying lower balances and defaulting less. retailers say their inventories are at satisfactory levels. Both Another chain, operating throughout the district, reports that even though general conditions in rural areas have stopped declining, they haven't yet picked up. Sales of motor vehicles, after a very slow January, accelerated in February. One domestic manufacturer notes that its district car sales were much higher, while its truck sales only posted a modest gain. Another domes- tic manufacturer reports to sales that unusually warm weather of trucks and four-wheel-drive vehicles. seemed hamper its Existing incentive programs seem to be sufficient to stimulate sales. Housing market conditions in Minnesota are still favorable, although residential building contracts fell throughout the state in January. A repre- sentative of Twin Cities realtors is more positive about single-family housing prospects than a year ago. In contrast, housing activity is still way down in Montana's and North Dakota's largely inactive oil-drilling areas. While not all resort areas experienced good winter tourism conditions, many that did had good business. large resort A Bank director reports that one in Michigan's Upper Peninsula had its best season ever, while lack of snow created problems for another resort Montana report that an influx of Canadian there. Two observers tourists helped resort in business there. Resource-Related Industries Little change was evident in the district's major resource-related industries, where conditions remained mixed. In Montana and North Dakota, oil IX-3 and gas activity remained in the doldrums, and coal production decreased. A continued lack of demand for iron ore was evident from the decision to permanently lay off 400 workers from a northeastern Minnesota ore-processing facility. But demand for forest products remained firm. As a result, a plywood plant in Michigan's Upper Peninsula is expanding, says one Bank director. Agriculture Agricultural conditions continued to stabilize early this year. Bank directors note that the winter-wheat crop appears to be in good condition in Montana and parts of South Dakota. remained at profitable levels. They also report that livestock prices A Bank director reports that favorable prices for potatoes and beans have helped stabilize farmland prices in northeastern North Dakota, where farm equipment sales have picked up. But major farmers are still dependent on payments from government programs. crop And a lack of snowfall has led some observers in western North Dakota and eastern Montana to worry about the adequacy of soil moisture. X-1 TENTH DISTRICT - KANSAS CITY Some recent slight improvement in Tenth District economic Overview. activity appears evident. While the energy sector remains weak, retail sales continue to improve somewhat and inventories are regarded as lean but satisfactory. inputs. Price increases remain moderate, both at retail and for materials Housing starts are up somewhat, but the demand for mortgage funds is somewhat weak and rates have softened a bit in some areas. Loan demand at district commercial banks is down slightly, while deposits are up. Credit conditions for farm borrowers vary widely. Retail sales. Tenth District retailers report that sales are generally unchanged to slightly above year-earlier levels, depending partly on type of store and geographic location. during the last three months. Sales have shown some further improvement Price increases have been moderate, and prices are expected to remain relatively stable to slightly higher. Inventories are reported to be at satisfactory levels after some recent trimming. Retailers are optimistic that sales will be solid during 1987. Automobile sales. Auto dealers report that February auto sales were generally down from previous months, partly due to the elimination of the sales tax deduction. Most dealers have been trimming their inventories, and are not overly optimistic about the outlook for future sales. Purchasing agents. Purchasing agents generally report slightly to moderately higher prices for major inputs but expect little additional change in the period ahead. Materials supplies have been somewhat difficult to maintain in some industries, with a few firms experiencing longer lead times. Inventories have been kept lean deliberately and are generally regarded as satisfactory. Energy. None of the respondents report any production bottlenecks. The district's energy industry remains weak. Uncertainty X-2 about the ability of OPEC members to adhere to an agreement to restrict output and fix prices has caused oil prices to remain somewhat volatile. As a result, exploration and development activity in the district remains generally depressed. The average weekly number of operating drilling rigs in the Tenth District decreased from 272 in January to 226 in February, slightly more than half the number recorded a year earlier. Housing activity and finance. Area homebuilders report that housing starts are mixed compared to year-earlier levels but have strengthened somewhat over the past month. Multi-family housing construction is weak through- out the District, while single-family housing construction is somewhat stronger. Builders expect overall housing starts in 1987 to match those of 1986. Sales of new homes remain good, with prices generally stable to up slightly. Builders report no problems with either the availability or delivery of housing materials, and materials prices are stable. However, the U.S.-induced export duty on Canadian shingles and lumber leads most builders to anticipate a jump in materials prices in the near future. Most savings institutions report weak inflows or moderate outflows of savings over the last twelve months, but with some improvement in the last month. Most respondents expect some further improvement in the near future. Demand for mortgage funds is fairly weak, and opinions vary about future demand. Mortgage interest rates have softened a bit in some areas, but respondents generally expect slight increases in the future. Banking. Total loan demand fell slightly at Tenth District banks during the past month, while total deposits rose. Demand weakened for agri- cultural, commercial and industrial, and commercial real estate loans, but was constant for residential real estate and consumer loans. All respondents report that their prime rate did not change and that they did not expect it to X-3 change in the near future. Consumer loan rates were generally constant and no changes are expected in the near-term. Balances in conventional NOW's, Super- NOW's, MMDA's, IRA's, and passbook savings accounts tended to increase. Demand deposits and large CD's tended to decrease, and small time deposits remained constant. Agriculture. Commercial lenders in the district are in the midst of annual credit reviews for their farm borrowers. Some bankers expect to approve credit for all their farm borrowers, although some borrowers may not receive all that they request. Other agricultural lenders expect a smaller proportion of their borrowers to be denied credit this year than last year. A number of bankers, however, expect that up to 15 percent of their farm borrowers will be denied credit this spring, a proportion as high or higher than a year ago. These mixed results suggest that while some agricultural lenders have successfully rid their portfolios of problem loans, others have not. The Farmers' Home Administration's (FmHA) loan guarantee program has also met with mixed results. Some agricultural lenders are using few or no guaran- tees, because of the additional paperwork and past difficulties in securing FmHA approval. Other bankers are gradually increasing their use of FmHA loan guarantees, while still others are enthusiastically using the loan guarantee program for as many as 20 percent of their borrowers. Most bankers have acquired farm real estate through foreclosures, and are handling the acquired property in a variety of ways. A few lenders are selling farmland as soon as possible after foreclosure, with little regard for price. In most cases, however, lenders note that most properties are not selling due to a lack of interested buyers. In the meantime, acquired farm- land is being leased out by lenders--in some cases for the third consecutive year. XI-1 ELEVENTH DISTRICT--DALLAS Some important sectors of the Eleventh District economy remain weak, but signs of recovery are evident. growing, although very sluggishly. Orders to manufacturers are The drilling rig count slipped in February, after growing at a fairly steady pace since July. have dropped considerably and retail sales remain low. Auto sales Construction is declining at a quickening pace, chiefly because of reductions in residential building. The balance sheets of District banks reflect the area's general economic performance, which is still below year-earlier levels. District cattlemen are selling their livestock at substantially higher prices than last year. An increasing number of manufacturers are reporting some expansion in orders. Nevertheless, reductions in demand from the weak construction and energy sectors have left most durable goods producers with sales that are unchanged since the last survey. Orders from outside the District are helping to prevent further declines in output by construction-related manufacturers. Stability has returned to the semiconductor industry after two years of declining orders and plant shutdowns. Sales by nondurable goods manufacturers are up slightly, on average, but conditions vary widely among individual industries. increasing demand. Chemical producers report gradually A growing number of District manufacturers--including producers of lumber, paper, electronics, and chemicals--report that the decline of the dollar has led to expansion in orders for their products. The drilling rig count in the District states fell in February, on a seasonally-adjusted basis, after rising in almost every month since July. XI-2 Despite the increases, the February 1987 count was 55-percent below that of February 1986, although the year-over-year rate of decline has been slowing. Leading indicators of drilling activity are mixed but overall they point to little if any gain in the rig count. Sales of automobiles fell dramatically in January from December and showed little growth in February, according to District auto dealers. Most respondents ascribed the low sales in part to local economic weakness. They said that heavy auto buying in December, in anticipation of tax law changes, had also diminished recent sales. result. Inventories have risen as a Although dealers hope for some seasonal increase in the next few months, their overall outlook is for continued slow sales. Retail sales remain sluggish and retailers report small cutbacks in employment. Sales of big ticket items such as furniture and appliances remain particularly low while demand for some lines of clothing is showing modest increases. Most respondents say they expect continued weak sales for the next few months, but they anticipate some gains by midyear. Construction values continue to decline in the District, with the largest reductions occurring in residential building. The number of building permits issued in the District has fallen significantly, with large year-over-year declines in multifamily and, more recently, in single-family permits. Respondents attribute the residential building decline to a large stock of unsold single-family homes and to high vacancy rates for rental units. The values of nonbuilding and nonresidential construction contracts have also showed recent declines. rates in the District's large cities continue to rise. Office vacancy XI-3 The balance sheets of large District banks still show declining deposits, increased reliance on borrowings, and reductions in some types of loans. Deposit reductions are being led by declines in large time deposits, but transactions deposits are also slipping. falling. Business loans are Real estate loans continue to increase, but at a decreasing rate. Securities holdings are markedly up from a year earlier. In contrast to the situation at the large banks, total deposits at all commercial banks in the District remain stable, with declines in large time deposits offsetting the gains in other types of deposits. Income prospects for District farmers and ranchers are mixed. Projected reductions in world cotton supplies, together with increases in world demand, should result in higher prices for cotton farmers. Feed grain prices are down by more than 30 percent from a year earlier and show little likelihood of a marked increase. Feeder cattle are in heavy demand with prices 11 percent higher in mid-February 1987 than a year before. In January, the index of prices paid to Texas farmers increased 3 percent from December but still remained slightly below a year earlier. Rising livestock prices were responsible.for the increase in the farm price index. The crop component of the index declined and it is substantially below the year earlier level. XII-1 TWELFTH DISTRICT - SAN FRANCISCO Summary The Twelfth District economy continues to present an uneven picture, across states as well as across sectors. The first two months of 1987 have seen weak retail sales, at least partially due to the tax-related buying binge at the end of 1986. Nevertheless, demand for consumer credit continues strong in some areas. investment activity, while uneven, appears to be weakening overall. Capital Prices of many products are edging upward, particularly in sectors strongly affected by exchange rates. Housing market activity has been robust in fast-growing states such as California and Arizona, but slow in hard-hit Alaska. Consumer Spending Retail sales have been weak during the early part of 1987, although it is not yet clear how much of the weakness is fundamental and how much is a result of the year-end tax-related buying binge. California retail sales reportedly have shared in the weakness during January and February. Car sales have fallen since the first of the year in most parts of the District, as the tax-induced sales surge in December suggested they would. Auto sales decreased dramatically between December and January in California, Washington, Oregon, and Utah. Manufacturing Surveys of purchasing managers in Oregon and Arizona suggest that prices of some products are starting to creep upward. In January, the fractions of both surveys' respondents reporting rising prices increased while the proportions reporting falling prices declined. Price increases have been most pronounced in sectors heavily influenced by exchange rate fluctuations. Despite these inflationary XII-2 tendencies, many respondents pointed out that substantial market competition and limited consumer demand should keep any price increases modest. Many firms plan to spend less on capital investments during 1987 than they did during 1986. These decreases are attributed to slow economic activity overall, to an increased focus on cost-cutting associated with recent restructurings, or to the reduced investment incentives under the new tax bill. One savings and loan plans to spend 15 to 20 percent less in 1987 than it did in 1986, while a survey of pulp and paper producers reveals that they plan to decrease investment spending by an average of 24 percent. On the other hand, a survey conducted during January in Arizona suggests that investment spending in that state is likely to remain stable, since about 20 percent of the respondents said they would increase capital spending, while another 20 percent planned decreases and the remainder planned to continue spending at their 1986 levels. Throughout the District, investment spending is expected to increase for firms whose economic fundamentals indicate substantial investments, including an energy distribution company and a retailer that are expanding their territories, and a forest products firm newly flush with funds. Agriculture and Resource Related Industries The price of oil is expected to increase during 1987. Utilities disagree as to whether higher oil prices would cause significant increases in their rates. In the Pacific Northwest, the Bonneville Power Administration faces enormous debt obligations and has requested a 15 percent rate hike to pay them off. An unusual mid-January frost in southern California caused extensive damage to avocado and citrus crops in Ventura and San Diego counties. The estimate of total damage currently stands at $60 million, although the California Avocado Commission reports avocado damage alone at $110 million. The damage, compounded XII-3 by more generalized low yields, is likely to cause price increases for some fruits, vegetables, and nuts. Western farmers should benefit from the last-minute trade pact agreed upon between the U.S. and the European Economic Community since it averts stiff European tariffs on such products as avocados (California), roasted nuts (California), and flower and vegetable seeds (Oregon), as well as further tariffs that could have been imposed on other specialty crops if the trade war had escalated. Construction and Real Estate California housing market activity has continued at a robust pace, although the number of residential building permits issued in January fell sharply from December's inflated level due to the January imposition of a new school fee. The single-family segment of the market remains healthy in most parts of the District. In California, the median home price rose by 9.4 percent during 1986. In Alaska, however, where the drop in oil prices has affected the economy severely, singlefamily home prices reportedly fell 10 to 20 percent during 1986. The Alaska Housing Finance Corporation has foreclosed on many homes, and in December 23 percent of its condominium mortgages were in default. Financial Sector The performance of consumer lending in the West appears to be highly uneven. Some banks and savings and loans are experiencing a slowdown, which they attribute to a combination of high consumer debt levels, refinancing of consumer debt through home equity loans, and more favorable terms offered by auto companies' finance subsidiaries. Other financial institutions continue to experience growth in both installment and credit card outstandings. In some cases, the increase seems to be driven by continued strong consumer spending, but in other cases the growth is attributed to aggressive marketing that has increased their market share. In most areas, installment loans appear to be losing ground to home equity instruments.

Federal Reserve (1987, March 30). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19870331

@misc{wtfs_beige_book_19870331,
  author = {Federal Reserve},
  title = {Beige Book},
  year = {1987},
  month = {Mar},
  howpublished = {Beige Book, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/beige_book_19870331},
  note = {Retrieved via When the Fed Speaks corpus}
}