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SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS

SEPTEMBER 1986

TABLE OF CONTENTS

SUMMARY. . . . ..

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First District - Boston .

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Second District - New York . .

1V-1
h-i
Third District - Philadelphia.

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a
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Fourth District - Cleveland..
Fifth District - Richmond. . .
Sixth District - Altanta . . .

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o

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VII-l

Seventh District - Chicago . .

VIII-l
'x-l

Eighth District - St. Louis..

IX-1

Ninth District - Minneapolis .
Tenth District - Kansas City .

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X-1

. .o .. o. .. .. e. .. .. e. e o o o . . .
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XI-I

Eleventh District - Dallas . .
Twelfth District - San Francisco . .

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XII-1

SUMMARY*

All districts continue to report sluggish economic growth.
Retail sales continued to improve over the summer with most districts
reporting strong consumer demand.

Prices are stable and largely

unaffected by the lower value of the dollar.
generally remains weak.

Manufacturing, however,

Homebuilding continues strong, but high vacancy

rates and the provisions of the new tax legislation have caused
nonresidential construction to lag.

Both commercial and consumer lending

have slowed, while mortgage lending remains strong.

Crop yields will set

new records in many Midwestern states, but will strain grain storage
capacity.

Recent rains have improved prospects for some crops in the

drought-affected Southeast, but have arrived too late to help the corn
crop.
Consumer Spending
Most districts report strong retail sales.

This general

strength represents an improvement over the last Beige Book.
New York indicated sales above retailers' expectations.

Boston and

New York

reported that merchants feel that the lower value of the dollar is
responsible for increased sales to foreign visitors.

Dallas indicated

that, although sales remain depressed, retailers anticipate improvements
later in the year.

Inventories were reported to be at desirable levels.

All districts reporting on prices signaled continued price stability and
little or no evidence of increasing import prices due to the lower value
of the dollar.

*Prepared at the Federal Reserve Bank of St. Louis

Most districts reported sluggish domestic auto sales.
Philadelphia and Chicago, however, reported strong sales.

Sales of

imported cars were strong in all reporting districts despite recent price
increases.
Employment
Cleveland and Minneapolis reported declines in unemployment
rates, while weakening labor markets were noted by Atlanta and
St. Louis.

The steel industry showed little improvement, with the

month-long shutdown of USX lingering and a layoff of 2,000 workers in the
Midwest.
Chicago indicated that work stoppages this year have held back
production more than in recent years.

Both New York and Chicago reported

shortages of skilled labor for the homebuilding industry.
Manufacturing
Although Philadelphia and Richmond noted that shipments and new
orders were up in August, widespread reports of flat or slightly
decreased industrial activity suggest little improvement in the
performance of the manufacturing sector in most parts of the country.
San Francisco indicated that the dollar's depreciation has had
little impact on most manufacturers, while Atlanta reported that it has
helped the pulp and paper industry by allowing higher prices for some of
their products.

Boston reported downward pressure on the prices of

manufactured goods due to competition from both importers and domestic
producers.

Philadelphia and Atlanta indicated manufacturers in their

districts expect improvement in the next six months; those in the Fourth
District anticipate little change.

Chicago reported that demand for

steel for appliances and construction has increased this year, but is
down for autos and the oil and gas industries.

iii

Energy
Kansas City, Dallas and San Francisco reported lower levels of
oil rig activity.

All three districts, however, indicated that the

recent increases in the price of oil may signal a bottom to the decline
of oil drilling activity.

Minneapolis also indicated lower production of

oil, gas and coal in North Dakota and Montana.
Construction and Real Estate
Most districts continue to report healthy homebuilding
activity.

Contacts in Cleveland expect a robust residential housing

market for the remainder of 1986 and into 1987.

The Southern Florida and

Atlanta markets are softening, and contacts in Kansas City anticipate
housing starts to flatten or decline for the rest of the year.
Nonresidential construction is slowing in most areas.

High

vacancy rates reported by New York and Atlanta and concern over tax
reform have affected commercial construction.

Atlanta noted, however,

that the national concern over the effects of tax reform on commercial
real estate is not shared by local developers who feel that regional
economic conditions will far outweigh any negative effects of tax reform.
Financial Sector
Total loans appear to be expanding at a slower rate than
previously reported.

The growth of commercial and industrial lending has

slowed in most districts.

San Francisco attributed this slackening to

reduced loan demand for tax shelter and commercial real estate projects
as a result of expected tax law changes.

Philadelphia and St. Louis,

however, reported strong commercial loan activity.

Small- and mid-sized

banks in the Second District indicated increased competition for
commercial loans stemming primarily from the large regional banks and

smaller bank holding companies.
consumer loan growth is slowing.

Most districts noted that the rate of
Philadelphia reported that the growth

of credit card lending in particular has slackened and Third District
bankers expect a further slowing in consumer lending.

Cleveland, on the

other hand, noted strength in consumer installment lending, expanding at
an annual rate of 15 percent thus far in the third quarter.

Residential

mortgage demand remains strong in most regions with Atlanta attributing
their real estate loan growth to heavy refinancing activity.
Agriculture
Very favorable growing conditions will result in record-breaking
yields of corn and soybeans in Midwestern states.

The expected large

harvests and low prices have caused a shortage of grain storage
capacity.

Livestock producers in most regions are benefitting from low

feed costs and higher livestock prices.

Recent rainfall in the Southeast

has improved prospects for the area's soybeans, cotton and pastures, but
has come too late to help the corn crop.

Reports from San Francisco

suggest the lower value of the dollar has reduced imports of foreign
seafood and has aided the increase in exports of forest products to Far
Eastern markets.

I-1

FIRST DISTRICT - BOSTON

The pace of economic activity in the First District remains
sluggish.

Retail sales are up from a year ago; but, while results are

considered satisfactory, the buoyancy of earlier reports is lacking.
Reports of domestic auto sales are mixed.

Some dealers continue to enjoy
The manufacturing

excellent volumes; others have seen a slowing in sales.
sector continues to experience disappointing order rates.
signs of a pickup.

Price competition remains very fierce.

There are no
Attention to

cost containment seems to have intensified.
Retail
Sales results of First District retailers were fair to good over
the summer, with a strong back-to-school pick-up in late August.
contacts are close to plan for the year to date.

Most

Prices are quite stable,

even for imported goods, with the exception of furniture.
not regarded as a problem by the retailers contacted.

Inventories are

Merchants remain

optimistic about the second half of the year.
Most respondents reported sales growth this summer, but at slower
rates than a year ago.
is "satisfactory."

For these stores, the verdict on the summer season

Back-to-school items have sold quite well, at least

partly because poor weather has brought customers into the stores and
increased interest in clothing for "transitional" weather.

In addition to

school clothes, sales have been strong for summer seasonal items, microwave
ovens, and electronics (TVs, VCRs, stereos, radios, and computers).

I-2

Several contacts commented that consumer sensitivity to promotional
activity has increased, and one voiced concern that too many merchants are
chasing too few consumer dollars.

At least partly because of such

competitive pressures, merchants are holding prices relatively steady, in
some cases reducing margins.

One noteworthy exception is a furniture

retailer; this store successfully passed substantial import price increases
on to its customers with only a brief slackening of demand.

The other

merchants contacted have not seen significant increases in the prices of
imported goods since the dollar began to decline.
First District merchants expect a strong second half because of tax
reform and the robust New England economy.

Firms targeting moderate income

customers are pleased with the tax relief for their customer group, while
stores with more upscale customers expect an end to consumer uncertainty to
encourage spending.
Auto Sales
Reports on automobile sales at New England dealerships are mixed.
Sales of imports are generally strong.

Some dealers also report excellent

sales volumes for domestic models, but others have seen a recent softening
in the market.

Low-interest financing and the appeal of popular new models

are cited as the factors behind strong sales, while slow sales are blamed
on the vacation season.

Dealers not doing well anticipate a rebound after

the summer season is over.

Truck and used car sales remain strong.

Manufacturing
The performance of the manufacturing sector remains lackluster.
Orders are flat to down.

The defense business remains very good, although

I-3

it is no longer increasing.

Commercial aircraft activity is picking up.

Sales of telecommunications equipment are up from a year ago, although not
as much as earlier.
year ago.

Furniture sales may also be a little stronger than a

However, sales to most industrial markets are down, in some

cases very substantially.

There has also been a pronounced weakening in

the nonresidential building market.
A number of contacts are reducing headcounts.

While attrition will

take care of the excess in most cases, some layoffs may be necessary.

For

the most part, contacts are also taking a very cautious approach to capital
spending.

Several noted that it is very difficult to get projects

approved; one respondent in the textile industry said that a payback period
of less than two years is required.
Price competition is fierce, regardless of industry, and raising
prices is seen as very risky.

In some cases, the downward pressure on

prices comes from domestic producers, in other cases from imports.

A

couple of contacts expressed concern about competition from Japanese-owned
firms in the United States.
Faced with sluggish demand and strong price competition, the
manufacturing respondents are emphasizing cost containment.

Many also have

recently been involved with acquisitions, divestitures and other changes in
ownership and financial structure.

SECOND DISTRICT--NEW YORK

In

general,

the

Second

District

improvement since the last report.

economy

registered a modest

Most retailers had sales gains that

Residential

construction remained strong, and

business activity showed some pickup.

Demand for office space was slack

were at or above plan.

(as usually is the case this time of year), and few new projects were
announced.

the past year,

Over

small District banks have experienced

increased competition from larger banking organizations in the market for
business loans.
Consumer Spending
Consumer spending was stronger than had been expected at several
District
gains

in

retailers reported satisfactory

during July, and most

stores
sales.

As a result,

planned levels throughout

inventories

the region.

are currently at or below

Higher priced stores registered

sales growth of 11-19 percent, well above plan in some cases, while sales
at

medium-priced

retailers

grew between

6 and

12 percent.

Discount

stores were the only major group with lower-than-expected gains of just
3-4 percent.
While July is traditionally a month in which retailers clear out
summer stock, sales of apparel were particularly strong during the recent
period.

In addition, a pickup in demand for consumer durables was also
reporting

"exceptional"

sales of

furniture and

noted,

with one store

rugs.

Continuing interest on the part of foreign visitors was cited as

an important factor in the improved consumer spending, particularly in
New York City.

Industry sources attribute this increased foreign buying

to the decline in the value of the dollar.

II-2

Business Activity
Economic conditions in the Second District were somewhat better
in

recent

reporting

weeks.
an

Groundbreaking
trash-to-energy

The

percentage

improved

business

ceremonies
power

were

plant.

of

Rochester

situation

recently

purchased by a major utility in the area.

increased

held

Electricity

purchasing

at

New

produced

managers

during

July.

Jersey's

first

there

will

be

A large pharmaceutical firm in

New Jersey has also undertaken a multimillion dollar expansion of its
research and development laboratory which should result in additional
employment

by

1987.

Other

recently

construction of a frozen food

announced

plans

include

the

factory in central New York, which

a

British food manufacturer will begin this fall, and the building of an
aircraft parts facility on Long Island.
In upstate New York some 2000 of an expected 10,000 soldiers
have already arrived at Fort Drum where a new Army division is being
assembled.

The Pentagon plans to spend some $1 billion on construction

in the area, and the addition of these soldiers and their families is
expected to provide a significant stimulus to the regional economy.

This

should offset to some extent the impact of GM's recently announced plans
to lay off or transfer 1200 of its foundry workers in that area over the
next two years.
Construction and Real Estate
Homebuilders

remain

busy throughout

the

Second District,

but

conditions are somewhat less hectic than in the spring and early summer
when buyer activity peaked.

A major problem continues to be getting

homes completed on time, since certain types of skilled labor are still
in short supply.

In some areas, particularly where the stock of suitable

land is almost depleted, a substantial increase in home prices has also
been noted.

In Manhattan, however, where a large amount of apartment

II-3

building is underway (that was started prior to the November 1985 cutoff
date for city tax abatement), some observers question the viability of
the high prices and rentals that will be asked for the new units.
The
little

Second

change

in

commercial

District

has shown

conditions remain somewhat mixed.

and

recent weeks,

estate market

real

Only a few major new projects have been announced as most areas adjust to
the ample supply of office space currently available.

Leasing activity

has been seasonally slow in many areas, and the prolonged sluggishness in
northern New Jersey persists.

Some pickup has been noted in Manhattan,
firm recently announced that it will

however, where a major brokerage
occupy the

last of

the World Trade Center buildings

in its entirety.

Throughout the District observers anticipate that the new tax reform bill
will curtail the pace of speculative office building.
Financial Developments
in the Second District report that

Small and mid-sized banks

competition in the business loan market from larger banking organizations
Most of the increase has been from

has increased over the past year.

large regional banks and smaller bank holding companies, rather than from
money center banks.
those

banks

affected.

large

The responses from those surveyed suggest that only
enough

to

service

mid-sized

companies

have

been

Moreover, the intensity of the competition seemed to increase

directly with the size of the bank surveyed.

While most banks indicated

that all types of business loans were equally affected, a few felt that
the

commercial

competition

has

sector

mortgage
taken

the

solicitation of borrowers.

form

had

received

of

increased

special

attention.

advertising

The

and direct

Among the steps which the small banks have

taken to preserve their share of the commercial lending market are faster
handling and approval of loans, greater customer contact, and increased
efforts to match, though not undercut, competitors' rates.

III-1

THIRD DISTRICT - PHILADELPHIA

Business conditions are improving somewhat in the Third District although there
are some signs that the consumer sector may be backing off slightly.
activity rose marginally from July to August.

Industrial

Retail sales are mixed, with

back-to-school merchandise selling well, but the late summer lull holding down sales
of other goods.

Automobile sales are strong.

Total loan volume at major Third

District banks is growing at about the same healthy rate as it has during most of the
year.

However, bankers note a decelerating trend in the growth of consumer lending.

Commercial and industrial lending, including construction financing, is described by
bankers as showing good growth.
The outlook in the Third District business community is for steady or slightly
improved conditions in the near term.

On balance, manufacturers foresee some pickup

in activity over the next six months.

Retailers say the fourth quarter and year as a

whole should show moderate gains from last year.

Bankers expect continued strength

in business lending in the region as long as the national economy does not weaken.
However, they expect the growth of consumer lending to taper off further.
MANUFACTURING
The pace of industrial activity in the Third District has risen marginally in
the last month.

Twenty-three percent of the local manufacturers participating in the

August Business Outlook Survey said they stepped up operations from July, while only
16 percent indicated slower business and 61 percent reported no change.

Business

conditions improved for makers of nondurable goods, but are essentially stable for
durable goods producers.
Specific indicators of manufacturing activity varied in August, either
reflecting growth or showing no change.

New orders and shipments were up, but the

III-2

level of unfilled orders was only steady.
and working hours virtually constant.

Employment was stable, with both payrolls

Overall, prices of industrial goods in the

region were flat during the month.
Looking ahead, Third District manufacturers are generally optimistic.
Forty-nine percent of those contacted for the August survey expect business to pick
up over the next six months, and only 23 percent anticipate a slower period ahead.
Overall, survey respondents predict gains in new orders and shipments, and a slight
increase in order backlogs.

However, they expect employment to remain at current

levels for the next six months, and plan to maintain capital spending at a steady
rate.
RETAIL
Sales of children's clothes and other back-to-school items were brisk in August,
and as the month came to a close, other goods were selling at about last year's rate.
This represents a pause in the expansion of retail sales the region has been
experiencing, but store officials say a slowdown at this time of the year is not of
serious concern.

They note that inventories are still at acceptable levels.

Third District merchants say there have been no developments that would cause
them to alter the sales forecasts they made earlier in the year.

These call for

increases ranging up to 10 percent for the fourth quarter, and a similar increase for
1986 as a whole.
Automobile sales are strong, and dealers say the import share of the market
appears to be stabilizing.

However, dealers say people shopping for cars are

concerned about potential changes in the income tax treatment of sales taxes and
interest, and may move some purchases planned for 1987 forward to the end of this
year.

Such borrowing from next year could keep a lid on sales in early 1987.

III-3

FINANCE
Total loan volume outstanding reported by major Third District banks in early
August was approximately 17 percent above the level of August 1985.

Bank lending

officers contacted in late August say that demand for commercial and industrial loans
remains strong.
sector.

Real estate and construction lending is also brisk in the commercial

Bankers attribute this strength to generally good economic conditions in the

region; but recent indications of a less robust national economy have prompted some
concern for the sustainability of healthy business conditions locally.
Consumer lending is still growing, but the rate of increase has diminished.

The

growth of credit card lending in particular has fallen off from its pace earlier in
the year.
spring.

Demand for residential mortgages has also fallen from its peak this
Third District bankers note a trend toward slower growth in consumer lending

of all types, and they expect this to continue along with a slackening in consumer
spending in the months ahead.
Total deposits at large Third District banks in early August were approximatley
12 percent above the August 1985 level.

Transactions deposits show the most growth

currently, as they have throughout the year, and savings deposits show the least.
The growth in market-rate deposits has slowed considerably, as interest rates have
fallen.

FOURTH DISTRICT - CLEVELAND

Summary.
The economy of the Fourth District is continuing its uneven but overall
slow

growth.

sales

Retail

manufacturing continues
sectors
and

continues

the

two

largest

continues

steel

are

in

the services-producing

The manufacturing sector

growth.
firms

Employment

to be strong.

to fall while employment in
solid

its

growth

experiencing

major

is stagnant

shutdowns.

The

housing boom is moderating, and overall loan demand at banks has weakened.

Retail Sales
Fourth

district retailers generally report

strong

the range of 5.5% to 10%, for July and August.
particularly strong sales

growth for the

sales

increases,

in

One major retailer reports

Cleveland

area

for

August.

The

major retailers report that sales increased steadily throughout their second
fiscal

quarter

and

that

merchandise categories.

from

economist
durable

dollar

at a

have

been

fairly

even

among

None of the retailers contacted report much price

depreciation

major

goods will

increases

Inventory levels appear to be well under control as

a result of strong sales.
impact

the

chain

on

expects

be noticeable

foreign
higher

exchange

imported

in the fall

markets,

prices

as retailers

for

but

one

consumer

pass on higher

costs to consumers.
Most of the domestic-auto dealers contacted report generally flat sales
of

new

cars.

New

levels, but all of

car

inventories

remain

at

slightly

higher-than-normal

the dealers contacted report the desire to keep a tighter

control on inventory levels.

All of the dealers reiterate their belief that

IV-2

cut-rate financing

incentive

programs have

lost appeal, but the latest GMC

sales incentive program caused a spurt in interest and sales of GMC cars the
day following
local

its public

dealers indicate

strong

first-half

announcement.

that

sales

On the

started

performances.

A

to

few

import side of the market,
soften

import

in

August,

dealers

following

state

that

a

cumulative 10%-11% price increase on 1986 model-year cars may be having some
adverse affect on their sales.

Labor Market Conditions.
The

unemployment

percentage
increased

points
3.1%

in

rate

below
the

for
its

last

Ohio

level

fell
of

in

July

12 months, as

July
1985.

employment

to

8.0%

(s.a.),

1.3

employment

has

manufacturing

has

Total
in

fallen 1.9% and employment in service-producing industries has risen 4.8%.

Manufacturing.
Manufacturing activity in

this District

and new orders are down slightly.

is

stagnant.

inventories

Manufacturers
unchanged
month

ago.

of

report

but

raw

materials,

the prices

production

Order backlogs continue to decline, and

more firms are reducing than are increasing employment.
their

Both

components,

they pay

transaction

prices

for

Manufacturers

expect

their

for

their

Firms are reducing

and

commodities
finished

sales

to

finished
is,

goods

be better

on

are
in

goods.
balance,

up from a
the

third

quarter than in the second quarter but expect the second half of 1986 to be
no better than the first half.
Cleveland-based

LTV

Steel

Company, whose parent

LTV Corporation

filed

Chapter 11 bankruptcy in July, recently announced layoffs of more than 2,000
workers

as

the

firm

closed

bar

and pipe facilities

in Ohio,

Indiana

and

IV-3

orders, despite

The firm cited a continuing weakness of

Illinois.

a work

stoppage at USX.
A strike against LTV over the
retirees

while

the

firm

is

issue of

continuing certain benefits to

in

bankruptcy

and

industry

ended

when

the

payments

were

resumed.
Steel
damaging

industry
shutdown

analysts
as

a

result

of

the

officials

month-long

predict

work

a

long

and

at

USX

stoppage

Corporation (the nation's largest steelmaker).

Housing
The housing boom in this
pace.

Builders

propelled

the

District is moderating

and realtors

post

Memorial

report
Day

that

housing

to a more

sustainable

the pent-up housing demand
boom has

waned.

Housing

that

market

participants are confident that housing activity will stay moderately robust
throughout the balance of 1986 and into 1987 if mortgage rates

continue

to

drift downward.
The backlog of mortgage applications was reduced by mortgage lenders in
August,

and

mortgage

normal 60-day period.

application

processing

times

have

returned

to

the

The volume of real estate listings is still ample and

in August there was a resurgence of sales contracts being negotiated.
Lenders
additional

report
1/8%

they

mortgage

rates

will

drop

soon

by

an

to 1/4%, which would bring the 30-year fixed rate mortgage

to approximately 9 3/4%.
affect

expect

on mortgage

Recent

demand

early summer because of the

declines

in mortgage

than did comparable

rates have had less

declines in

the spring and

lack of pent-up demand and because

mortgage refinancings has been weak.

demand for

IV-4

Builders

in this

District

home building during August.
July.

anticipate

Builders

construction,

which

report

a

seasonal

slowing of

single-family

Traffic and new orders are down about 10% from

eventually

refom

tax

that

should

have

a

reduce

will

apartment
effect

positive

on

single-family construction.

Commercial Banking
Overall

loan

demand

has

weakened

at

District

banks.

outstanding at large banks fell over the past six weeks.

Total

loans

The contraction in

loan volume was primarily in commercial and industrial loans and reflected
the recent softness

in business loan demand.

installment credit,

however, continues

consumer installment

loans at

The

demand for mortgage and

to be strong.

Both real estate and

large banks have been growing

rate of more than 15 percent thus far in the third quarter.

at

an

annual

FIFTH DISTRICT - RICHMOND
Overview
Manufacturing and retail sales remain sluggish, and producers and
retailers expect only slow growth over the next six months.

Service firms are

experiencing gradual expansion and foresee continued improvement in their
sales.

Import and export activity at seaports is strong and is expected to

increase.

Business and financial executives expect only minor short-run

effects on the economy from tax reform and from the August cut in the discount
rate.

Bankers are somewhat reluctant to reduce interest rates on deposits and

are therefore experiencing a squeeze on their interest margins.

State and

local government officials and employees are becoming less optimistic about
prospects for increased revenue.

August rains have provided relief from

drought and have improved the outlook for the agricultural harvest.

Retail Sales
Auto dealers, department stores, and other retailers report lower
sales in August after generally flat activity earlier in the summer.

Although

50 percent of retailers expect sales to increase over the next six months,
that percentage has declined from 60 percent last month.

On the other hand,

only 8 percent now expect declines in sales, compared with 20 percent a month
ago.

Manufacturing
Manufacturing remained generally weak in August. Capacity utilization
rates averaged 76 percent, the same as in July, although shipments, new

V-2

orders, and the length of the workweek were up slightly in both durable and
nondurable goods industries.

Raw material and finished goods inventories

declined marginally for the second consecutive month.

Although most

manufacturers expect the U.S. economy and their own businesses to improve in
the coming months, the proportion of optimists is smaller than a month ago.
Manufacturers report that current prices for their raw materials and
finished goods are generally stable. But the proportion of respondents
expecting prices to rise over the next six months has increased.

Thirty-nine

percent of firms surveyed this month, as compared with 23 percent last month,
expect increases in the prices of their finished goods; 50 percent this month,
compared with 40 percent last month, expect the prices of raw materials to
rise.

Services
Services sector growth has slowed. Forty-two percent of this month's
respondents, compared with 53 percent of last month's, report an increase in
sales.

But 71 percent of the respondents expect increases in their sales over

the next six months.
District seaport officials report increases in both export and import
shipments.

Industry spokesmen expect these increases to continue in the

months ahead, unless shipping activity is interrupted by an unanticipated work
stoppage.

Longshoreman contracts expire in October.

V-3

Government
Survey respondents in state and local governments are less optimistic
about funding than a month ago; 50 percent now foresee an increase in general
revenue in the next six months while 19 percent expect a decrease.

Last

month, 71 percent expected revenue increases and 6 percent expected declines.

Agriculture
A stalled weather front provided some much needed rainfall across the
District during mid-August.

Soybean yields are expected to benefit, and

tobacco and fruit are generally in good condition, but the rain came too late
to help the corn crop.

Pasture and hay conditions are still poor but have

improved enough to lessen early marketings of livestock.

The peanut yield is

expected to be excellent, but the quality of the peanuts is now threatened by
a mold that appeared with the August rains.

Policy
Most respondents expect only a slight stimulus to the economy from
the August reduction in the discount rate.
squeezed when the discount rate is reduced.

Bankers say their margins are
Competition, they say, rapidly

forces down interest rates on loans but delays or prevents reductions in
interest rates on deposits.

The squeeze is especially severe when discount

rate reductions come in rapid succession.
Respondents are about evenly divided on the short-run effects of tax
reform on the economy.

Half expect the effects to be expansive, and half

believe they will be contractive.

VI-1
SIXTH DISTRICT - ATLANTA

The pace of southeastern economic activity slackened toward the end of
summer for most sectors. Unemployment rates continued to edge upward, consumer loan
growth slowed, auto sales have not met expectations, and consumer spending has been
mixed.

High vacancy rates are slowing office construction, and residential construction

has cooled in some areas. More positively, building permits are up and tourism has been
strong.

Textile employment

has stabilized.

Rains are helping to ease drought

conditions. However, drought-induced damage to timber and crops has been substantial.
Employment and Industry.
according to available statistics.

Labor markets weakened from June to July,

Double-digit unemployment rates continue to plague

Alabama, Mississippi, and Louisiana. Florida's unemployment rate rose to 6.5 percent, its
highest level in a year.
Manufacturing employment trends have been mixed recently.

Roughly 1,000

persons have lost jobs at Florida's Space Center since the Challenger accident.

More

layoffs are expected by major space center contractors due to delayed shuttle flights.
Although District petrochemical companies have been aided by the lower dollar and
falling raw

material costs, demand is weak for specialty chemicals used in the

semiconductor and computer industry.

Agricultural chemical production has taken a

downturn as a result of slack demand for fertilizer.
Textile industry consolidation and restructuring programs initiated during 1985
are beginning to benefit producers by making firms more competitive, although product
prices are still under pressure.

Firms are focusing on products in low-labor-content

niches such as home furnishings. District textile employment is currently slightly above
that of last year.
The drop in the value of the dollar has benefited the pulp and paper industry by
allowing higher prices for linerboard and packaging.
to rise.

Exports of paper products continue

VI-2
Consumer Spending.

Year-over-year retail sales growth varies widely across

Sixth District states. Through May, Tennessee and Florida reported double-digit year-todate sales increases, while sales in Louisiana were down from last year. Bargain-hunting
consumers around the District have been shifting purchases from traditional department
stores to discount retailers.
Domestic car sales during July and August were disappointingly below the yearearlier sales levels in most areas of the region.

Dealers complain that the incentives

offered by domestic manufacturers have gradually lost their appeal to consumers and
that competition from imports is limiting sales, particularly in the subcompact market.
Industry-wide, new vehicle registrations were still ahead of the District's year-earlier
levels through June.
Construction.

Southeastern single-family building permits (seasonally adjusted,

three-month moving average) rose in June for the fourth consecutive month. Nashville's
new home sales appear to be outpacing those of the rest of the District.

Economic

growth attributable to Nashville's General Motors' Saturn plant and the city's new role as
a hub of American Airlines have led to a surge in home sales and construction.
The south Florida and Atlanta housing markets, however, are softening.
Realtors in south Florida say their area is attracting ever smaller shares of Florida's inmigration.

They describe their markets as flat with only moderate increases in sales

over year-earlier levels.

Similarly, Atlanta realtors note a slowdown.

With mortgage

rates declining, potential buyers seem inclined to delay loan applications.
The recent intense national concern over effects of tax reform on commercial
real estate is discounted by commercial developers in the Sixth District, who believe that
local economic conditions will

far outweigh any effects of tax reform.

Office

construction in Nashville, Atlanta, and South Florida is expected to slow because of high
vacancy rates.

Market softness is causing lenders to enforce increasingly stringent

preleasing requirements.

VI-3
Financial Services.
from June to July.

Total loan growth at large District banks edged upward

For the second consecutive month, real estate lending exhibited

strong growth and led all other categories.

District bankers report, however, that

refinancing continues to be responsible for much of the gain. Following a national trend,
the Sixth District experienced slowing growth of new consumer borrowing, resulting in a
significant decline in consumer loan growth.
Tourism.

Travel to the Southeast remains very strong. Lower gasoline prices

are especially boosting auto travel.

However, the dollar's decline has not stimulated

domestic travel as much as expected. Travel agents report vacationers are shifting their
destinations to areas that have not experienced currency realignment such as Canada,
Mexico, and the Caribbean.

Many are also choosing West Coast and Hawaiian locations.

Still, for the Sixth District, the current trend reflects a 10 to 12 percent gain in tourist
volume over last year.
Agriculture.

Recent rain is helping pastures return to normal in drought-

stricken areas and may prevent further crop losses, especially for soybeans and cotton.
Even so, existing damage to major crops suggests that revenue of farmers in Alabama,
Georgia, and Tennessee will fall far short of production costs.
In addition to severe crop losses from the summer drought, the Southeast is
experiencing substantial damage to its timber industry.

In Georgia and Alabama total

forestry losses may exceed $30 million.
At mid-year, the Federal Land Bank of Jackson, Mississippi, was one of four in
the nation requiring a transfer of funds from the eight other FLB's to maintain
solvency.

The severe drought in the Southeast will likely increase losses to the Farm

Credit System during the remainder of 1986. In response, the FCS has increased reserves
for losses and instituted a number of belt-tightening measures, including office mergers
and consolidations and reductions in personnel.

VII-1
SEVENTH DISTRICT--CHICAGO

Summary. The Seventh District's economic performance continues to lag the nation, with no
evidence of either a drop-off or an acceleration in the pace of overall activity. Total
employment in the five District states has been about flat since early this year, with losses of
manufacturing jobs about equaled by increases in other sectors. Consumer spending and residential
building continue relatively strong. However, domestic automakers recently pared production plans
as inventories of some models became excessive. Commercial construction continues at a high
level, but important new projects have been postponed indefinitely. Most lines of mechanical
capital goods remain weak. Labor disputes have cut output of steel and construction equipment.
Bumper grain crops are exerting downward pressure on prices, and are expected to strain available
storage capacity.
Labor Negotiations. Labor-management negotiations in the District in 1986 have been more
prolonged and heated than in recent years in steel, construction equipment, meat packing, building
trades, and local government.

Workers in distressed industries are strongly resisting pay and

benefit cuts. Unions are demanding job security guarantees. Managements are pushing for changes
in restrictive work rules. Work stoppages have halted production to a greater extent than in
recent years. USX, with a major plant in Gary, Indiana, was shut down August 1 after labor
rejected a management proposal to cut wages and benefits substantially. The union called the
shutdown a lockout after USX rejected a union offer to work under terms of the old contract while
bargaining continued. Where courts agree with the union position, workers are eligible for
unemployment compensation.

Deere, the leading farm equipment producer, closed all its farm

equipment plants (mainly in Illinois and Iowa) after three facilities were struck. Farm equipment
inventories are described as larger than normal.

A strike at a Caterpillar parts plant caused

layoffs at other facilities. A strike by Detroit municipal workers was settled in early August,
after 19 days.
Steel. The strike at the USX Gary Works has cut steel output in the District sharply, and

VII-2
shifted orders to other producers. One District steelmaker is operating at 85 percent of
capacity, compared with the low 50's for the industry. Cold-rolled sheet orders have been
extended 6 to 8 weeks beyond normal leadtimes at this producer. Encouraged by the USX strike,
several large steelmakers announced selective price increases. Demand for steel has increased
this year for appliances, furniture, construction, and grain storage facilities. Buying of steel
by the auto industry is about 5 percent below last year. Steel for oil and gas, and for the
railroads, is off sharply.
Capital Equipment. Output of mechanical capital goods is generally weak, even below last
year's low level. Farm equipment output was extremely low, even before the Deere strike, with
good used equipment in ample supply. Sales of replacement parts, to keep existing agricultural
equipment operating, are described as good. A leading producer of industrial robots is cutting
employment due to cancellations of orders by automakers. Railroad equipment output continues at a
very low level. Oil and gas equipment output has fallen near zero. Two manufacturers of diesel
engines, faced with depressed demand, recently announced an agreement to combine those
operations. Some types of construction equipment have improved, supported by strong residential
and highway work. The latter consists mainly of repair and upgrading of existing routes. Reports
indicate that defense equipment orders come in spurts, but apparently are increasing overall.
Motor Vehicles. Sales of cars and trucks are near last year's high levels, supported by
cut-rate financing as low as 2.9 percent and rebates from domestic producers, with imports
accounting for a larger share of the market. A credit union trade association is asking the FTC
to determine whether below-market financing programs of the automakers' captive finance companies
constitute unfair competition. Domestic car and truck makers have scaled back production in the
current quarter from earlier plans through temporary plant closings and slower line speeds. Light
truck sales are still strong, particularly imports. One industry analyst projects sales of medium
trucks in 1986 slightly ahead of last year, but expects sales of heavies to be down 12 percent.
Sales of both mediums and heavies in 1987 are expected to be near 1986 levels. Competition is
fierce for heavies, with prices below last year and at unprofitable levels. Further

VII-3
consolidations and employment cuts by heavy truck makers are expected by analysts. There is an
unusually large supply of good used truck tractors and trailers, partly reflecting the sharp
increase in failures of trucking firms under deregulation.
Nonresidential Construction. Commercial construction activity in major District centers
remains at a high level. But a large amount of prime office space in the Chicago area, downtown
and in suburban centers, is vacant with more coming on the market. Some major projects have been
delayed awaiting anchor tenants. Furthermore, proposed tax treatment of "passive income" is said
to be discouraging equity investors. Demand for suburban office space is up from last year.
There has been some pickup in the Chicago area in construction of strip shopping centers, small
industrial warehouses, and a variety of smaller business projects.
Residential Construction. Housing construction and resales continue at good levels in many
parts of the District. Residential building permits for 7 months are 27 percent above last year
in the District states, versus a rise of 7 percent for the U.S., with particularly large gains in
the Chicago, Indianapolis, and Milwaukee areas, and in parts of Michigan. Average prices of homes
in the Chicago area rose 12 percent in the first 6 months of this year, according to a realtor's
analysis, with increases of 15-20 percent reported in favored suburbs. Similar increases are been
reported for portions of the Detroit area. Rates on 30-year fixed-rate mortgages have fallen to
about 10 percent, according to a survey of Chicago-area lenders, down from 10.6 percent in
mid-June. Despite improvement, residential building in the District as a whole is still well
short of the pace of the late 1970s. Shortages of skilled tradesmen--including bricklayers,
carpenters, and drywall installers--are reported in the Chicago and Detroit areas. One District
lender describes several steps taken earlier this year to restrain loan applications (including
refinancings) which had overwhelmed processing capacity. These included higher application fees,
elimination of rate lock-ins, and higher mortgage rates. A newspaper survey points to a 5-10
percent rise in apartment rents this fall.
Consumer Spending. Most large general merchandise chains reported seasonally-adjusted
dollar sales records in July. Strongest lines have been appliances and home furnishings. Hot

VII-4
weather in July boosted sales of air conditioners and apparel. Credit sales continue to account
for a near-record share of total sales at one large chain. Delinquencies have declined since
spring, but remain relatively high. With inventories described as moderate, the improved pace of
sales is expected to stimulate orders to suppliers soon. Airline traffic is very strong, helped
by discount fares.
Agriculture.

District crop prospects remain excellent. Record per acre corn yields are

forecast in each of the five District states. Three of the states are likely to reach new highs
in soybean yields. Abundant harvest prospects and record stocks from previous harvests threaten a
storage crunch this fall. This has triggered a flurry of activity for bin manufacturers. The
prospective shortage of storage space has pushed grain prices down further as farmers, leery of
even lower prices when the large crop is harvested, sell existing stocks to make room for the new
crop. A change in government regulations permitting increased use of temporary storage facilities
will ease, but not eliminate, the distortions that arise from a storage crunch.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary
Economic conditions in the District remained sluggish in the
most recent period with growth of employment, construction and retail
sales trailing national growth.

Bank lending expanded moderately.

Agricultural conditions vary widely due to dryness in the southern
regions and nearly ideal conditions in northern parts of the District.

Outlook
A survey of small businesses in the District revealed that most
respondents expect business conditions to be unchanged for the remainder
of the year, and planned little change in their work force, prices or
inventory levels.

A survey of corporate purchasing managers in Missouri

indicated that new orders were down sharply in the second quarter.

Construction
The value of District residential building contracts awarded in
the three months through July declined by 8.5 percent compared with a 1.9
percent national expansion.

While down from the pace of earlier this

year, single family construction remained above last year's levels;
multifamily building, however, declined from a year ago.

District

nonresidential construction contracts declined by 4.8 percent and were
4.8 percent below the level of the same period last year.

Employment
District nonfarm employment grew at a 0.6 percent rate in the
second quarter compared with the national rate of 1.8 percent.

Recent

VIII-2

gains continue to be concentrated in the services, financial, and trade
sectors; losses have been primarily in manufacturing.

An automaker

announced that, due to excess inventories, the three-week closing of a
St. Louis area assembly plant will be extended by a week.

The closing of

the plant, originally shut down for model changeover, will affect 5,000
workers.

Contrary to regional and national trends, Memphis has

experienced employment gains in manufacturing in recent months while
service-producing sectors have contracted.

The District unemployment

rate increased to 7.8 percent in June from 7.5 percent in May.

Consumer Spending
Despite strong April growth, District retail sales decreased at
a 6.3 percent rate in the February-April period compared with a 2.3
percent national growth rate.

Nevertheless, sales during the three-month

period were 2.6 percent above their year-ago levels.

Based on reports

from automobile dealer associations, year-to-date sales have grown at an
8 to 14 percent rate.

Despite substantial price increases, foreign auto

sales have grown faster than sales of domestic cars.

Inventories of new

cars have decreased but remain slightly higher than desired.

Banking
Total loans at large District banks grew at an 11 percent annual
rate for the three-month period ending July, compared with a 5.5 percent
rate for the same period last year.

Commercial lending expanded at a 5.4

percent rate in contrast to a 3.8 percent rate of decline for the same
period last year.

Month-to-month changes, however, indicate a slowing in

the rate of growth of commercial loans.

Consumer loans expanded at a

VIII-3

17.6 percent rate for the three months through July verus 25.6 percent
for the comparable period in 1985.

Real estate lending has picked up in

recent months, growing at an 8.6 percent rate, compared with 6.2 percent
for the same three-month period last year.

Agriculture
Nearly ideal weather in northern parts of the District have
resulted in predictions of record-breaking yields of corn and soybeans.
Crops in Missouri, Illinois and Indiana are reported in good to excellent
condition and have progressed one to two weeks ahead of schedule.
Southern parts of the District report significant degrees of
drought-related stress.

Counties in northern Mississippi have requested

federal disaster relief for drought-affected soybean crops.

Arkansas

farmers are estimated to have lost up to $200 million due to the impact
of dry weather on livestock and crops.

Yields of major Tennessee crops

are estimated to be 25 to 35 percent below last year.

While less severe

than in Tennessee, Kentucky agricultural officials also report lowered
yields of most crops.

IX-1

NINTH DISTRICT - MINNEAPOLIS

During recent months, economic conditions in the Ninth District held
In some areas, employment grew better than seasonal norms.

steady.

sumer spending and tourist activity made some gains.
try performance remained mixed.

Both con-

Resource-related indus-

Although crop conditions have generally been

excellent, higher yields will probably lead to lower market prices.

Employment
The most recent data indicate that the Ninth District's labor markets continued

Seasonally adjusted employment

to improve.

in the district

rose in June, driving the unemployment rate down from 5.9 to 5.6 percent.

For

the first time in several months, the Minneapolis-St. Paul metro area's unemployment rate fell below its year-earlier level, and even manufacturing employment

there

rose

for the

in the service

employment

first time in over a year.

In South Dakota,

industry hit a record June high.

Among district

states, only North Dakota failed to post employment gains during June.

And

despite growth in June, Montana's second-quarter employment was lower than its
1985 level.

Consumer Spending
Scattered

reports

suggest

that

over

general merchandise may have strengthened a bit.

the

summer, retail

sales

of

One retail chain reports a

July sales increase of 10 percent, with no inventory accumulation.

Another

retail chain reports August sales to be a bit stronger than sales earlier this
year.

Both chains had successful back-to-school promotions, and both noted a

pickup in cash sales relative to proprietary credit card sales.

IX-2

Motor vehicle sales in the district have been good in metro areas
but poor in rural areas.

One large domestic manufacturer reports that its

district sales of cars and trucks are still above last year's levels.
manufacturer

says

that its sales in farm communities were flat in July but

expects sales to increase after the harvest.
inventories.

Another

Neither manufacturer has high

One Bank director reports slow auto

sales in Bismarck, North

Dakota, while another reports increased sales during June and July in parts of
western Wisconsin.
Homes are still selling well in many parts of the district.
the unit

and dollar values of Twin Cities

earlier levels by over 35 percent in July.
slowed the cash flow to realtors.
percent

higher in

Both

home sales exceeded their yearHowever, a logjam of closings has

Building permits in the Twin Cities were 25

the second quarter than they were a year earlier.

director from the Upper Peninsula of Michigan reports
the Iron Mountain area have been good.

A Bank

that new home sales in

In contrast, both building permits and

home sales in Montana have been substantially lower than last year's.

Tourism
Tourist

spending in the district's hard-pressed nonmetro areas has

been good, although not as good as expected this spring.

Crossings over the

Mackinac Bridge into Michigan's Upper Peninsula reached a record high in June,
rising

5 percent

Keweenaw

Peninsula

above
has

last
been

year's

level.

exceptionally

Also,
good.

travel
While

to

that

area's

statistics

aren't

available yet, summer tourism looks good so far in northern Wisconsin.

Tour-

ist activity is up somewhat in the Dakotas, but not by nearly as much as many
had hoped.

In Montana, visits to campgrounds have been quite popular, al-

though attendance at the state's national parks has been mixed.

IX-3

Resource-Related Industries
The performance of the district's resource-related industries conWood product industries are still generally a bright

tinues to be uneven.
spot.

Paper and waferboard plants are outperforming lumber mills, though, and

loggers are dissatisfied with the slack poplar market.

A Bank director thinks

that the poplar market may be stimulated by new plywood and waferboard operations in Michigan's Upper Peninsula.

Declines in oil, gas, and coal produc-

tion continue to plague North Dakota and Montana.

In Montana, construction

has started on a gold mine near Helena, while a copper mine has reopened in
Butte.

Agriculture
Crop conditions in the district still
prices have continued

look good, but market crop

Minnesota's farm price

to fall.

dropping to 3 percent below last July's level.

index fell in July,

The decline may help stimulate

government

deficiency payments will help insulate many

farmers from the falling prices.

Some isolated snippets of good news apply to

export

sales, while

the district's farm sector.
lower feed prices, and prices

Hog and cattle operations have benefitted from
for these animals rose.

Dairies in Minnesota

and Wisconsin shipped milk to drought-stricken southeastern states, helping
firm dairy prices here.
in

signed

contracts

And a two-week marketing trip to the Orient resulted

for the export

of bee pollen products produced on the

southern edge of Montana's Flathead Indian Reservation.

TENTH DISTRICT - KANSAS CITY

Overview.
sluggish.

Economic activity in the Tenth District remains generally

While housing activity continues to be stronger than a year

earlier, starts are expected to flatten or decline for the rest of the year.
Retail sales are up slightly from a year earlier and some further improvement
is expected.

Auto dealers are not optimistic, however.

Both retail

inventories and manufacturers' inventories of materials inputs are generally
Large additions to supplies of wheat, corn, and

regarded as satisfactory.

cattle on feed have occurred or are expected.

Savings and loan institutions

expect a leveling off of both mortgage demand and savings inflows.

Loan

demand at district commercial banks decreased in the past month while deposits
increased.
Retail trade.

Retailers report that year-to-date sales are moderately

better than levels established a year ago.
expected to run slightly higher as well.
expected to remain stable.

Sales in coming months are
Prices have been stable and are

Inventories are generally satisfactory.

No

unusual sales or promotions are anticipated, and inventory purchases should be
only slightly below last year's levels.
Automobile sales.
during the last month.

Most dealers report that auto sales have been slow
Financing is readily available, but favorable credit

conditions have not stimulated sales.
levels are high.

All dealers report that inventory

Most dealers are not optimistic that sales will improve in

the near future.
Purchasing agents.

In general, purchasing agents report slightly higher

input prices, satisfactory inventory levels, and adequate availability of
materials.

Most purchasing agents surveyed report that input prices are

slightly higher than a year ago but are expected to remain stable for the

remainder of the year.

With some trimming behind them, firms are now

satisfied with current materials inventory levels.
Housing activity and finance.

Area homebuilders report starts of single

family dwellings up over a year ago, with starts of multifamily dwellings also
up but to a lesser degree.

However, most homebuilders expect housing starts

to remain flat or fall slightly during the remainder of the year.

Sales of

new homes are near year ago levels, and new home prices have remained steady.
Builders generally report good availability and steady prices of materials.
Savings and loan institutions have been experiencing slightly lower
savings inflows compared to those of a year ago.
to remain flat in the near future.

Most expect savings inflows

Demand for mortgage funds has been

declining lately after large increases earlier in the year.
for a leveling off of mortgage demand in the near future.

Expectations are
Mortgage interest

rates have been falling slightly and are expected to continue to do so over
the remainder of the year.
Energy.

The district's energy industry remains beset both by the

substantial drop in world crude oil prices earlier this year and by recent
price volatility.

The average weekly number of operating drilling rigs in the

District was 188 in July, compared with 550 in January and 200 in June.
Despite an agreement by OPEC members to cut output temporarily, domestic
exploration and development activity is expected to remain depressed.

The

OPEC agreement has caused oil prices to firm in recent weeks, however,
possibly stalling the decline in drilling and production in district states.
Agriculture.

Following a winter wheat harvest that was average to above

average throughout the Tenth District, agricultural lenders report that most
wheat farmers have been able to service operating loans on schedule.

The rate

of loan paydown has improved since last year except in northcentral Oklahoma,

X-3

where wheat yields were well below average.

Some farmers in this area are now

refinancing operating debt.
Storage space for the wheat harvest was generally adequate.

A severe

shortage of storage space is expected to develop with the harvest of the milo
and corn crops.

Farmers unable to secure sufficient storage space for their

crops will be forced to store grain in temporary facilities or to sell grain
at very low harvest-time prices.
District agricultural bankers report that the ranching industry remains
depressed.
solvency.

Nonetheless, most cow-calf ranchers have been able to maintain
Ranchers with adequate cash flow are expected to hold spring-born

calves through the winter to be sold as yearlings next spring.

Cattle feeding

activity in the district has increased over that of one year ago, and feedlots
are expected to be filled to capacity by yearend.
Banking.

Loan demand at Tenth District banks fell during the past

month, largely due to a decrease in commercial and industrial loans.
Agricultural loans were also down slightly.

Among the remaining loan

categories, residential real estate loans rose while consumer and commercial
real estate loans were flat.

Most banks lowered their prime rate one-half

percentage point and expect further declines.

Consumer lending rates fell at

one-half of the respondent banks and remained constant at the other half.
Further changes in the near term were expected by one-half of the respondents
and not expected by the other half.
largely due to an increase in MMDA's.
rose slightly.
were flat.

Deposits rose at the respondent banks,
NOW and passbook savings accounts also

Demand deposits, IRA's, large CD's, and small time deposits

XI-1

ELEVENTH DISTRICT--DALLAS

The District economy continues to suffer from the weakness in
energy and construction, but there is some evidence that the rate of
decline in economic activity has slowed.
in June and has increased slightly since.

The drilling rig count hit a low
The value of construction

contracts grew during the three months ending in July, but remained well
below a year earlier.

The manufacturing sector is still sluggish overall,

owing to weakness in construction and energy, but there are signs of
improvement in some industries.

Falling retail and automobile sales

reflect the overall deterioration of the District economy.
liabilities in the District's large banks is declining.

The level of

Ranchers in the

District are expected to benefit from higher meat and poultry prices, but
agricultural credit conditions continue to deteriorate.
Although District manufacturers generally note continued sales
declines, reports of reductions are less widespread than earlier in the
year.

Makers of electrical and electronic machinery and of transportation

equipment note some expansions in sales, but they expect little growth for
the rest of the year.

Orders are up for paper and allied products and for

fabricated metal products.

Among apparel firms, sales are flat to slightly

higher, as import competition abates.

Prices for lumber and wood have been

deteriorating recently due to large supplies, but District respondents
express optimism that strikes and possible tariffs may reduce the strong
competition from Canadian producers.

Orders for chemical and allied

products are mixed, with no pronounced pattern either of increase or
decline.

Sales by stone, clay, and glass producers are falling from a year

XI-2
earlier, as a result of continuing weakness in the construction sector.
Orders of primary metals and of nonelectrical machinery are dropping due to
decreases in demand from energy and construction firms.
The drilling rig count continues to register slight increases
after the decline was arrested in June.

The number of well permits being

issued and the seismic crew count are still falling, although the rate of
decline for well permits has slowed.

Respondents say that OPEC's current

attempt to raise oil prices is not likely to lead to a significant
resurgence in drilling.
Auto and retail sales remain depressed.

The largest declines are

in the weak, energy-dependent portions of the District.
not expect sales improvement this year.

Auto dealers do

They believe that the high sales

levels of recent years mean that replacement sales will continue to be
weak.

Retailers, who generally expect the District economy to begin to

recover later in the year, anticipate some growth in their business.
The total value of construction contracts increased in July for
the third consecutive month, but it remains well below a year earlier.
Gains in nonresidential and nonbuilding construction stimulated the recent
upturn.

Nonresidential construction has shown some vigor, despite a

significant decline in the value of contracts for office buildings and
retail space.

Recent strength in virtually every other category of

nonresidential construction has helped to sustain contract values.

The

value of residential construction contracts continues to slip, in response
to the overall weakness of the District economy and to past overbuilding of
multifamily housing.

The rate of decline has been very small.

Increasing

vacancy rates have left the number of permits issued for multifamily

XI-3
building 40-percent below the first quarter level.

Further declines in

residential contracts are likely as soon as the weakness in multifamily
permits begins to be reflected in construction contract values.
Single-family construction remains fairly steady.

Although all types of

construction remain below a year earlier, the difference has narrowed to
the 20-percent range from 40-percent earlier in the year.
The balance sheets of the District's banks reflect the overall
weakness of the District economy.

At the large banks, lending activity is

declining in all categories, with the exception of real estate.

The rate

of increase in real estate lending, while positive, has slowed
dramatically.

The level of total liabilities is slipping.

decline has been in large time deposits.

The largest

In a reflection of the lackluster

economic activity in the District, transaction deposits at all District
banks have diminished, despite double-digit growth rates in the nation as a
whole.
District farmers and ranchers are expected to earn higher incomes
in the second half of the year because of increased payments from
government programs and higher meat prices.

In July, the index of prices

received by Texas farmers and ranchers was above a year earlier for the
first time in almost two years, largely owing to strength in meat and
poultry prices.
deteriorate.

Nevertheless, agricultural credit conditions continue to

Many farmers and ranchers are still in financial trouble as

land values continue to decline sharply.

Agricultural bankers expect 5

percent of their farm and ranch borrowers to leave agriculture in 1986
because of financial stress, up from 4 percent in 1985.

XII - 1

TWELFTH DISTRICT - SAN FRANCISCO
Summary
The

Twelfth

Consumer
most

spending

local

commercial
value

District

of

and

while

real estate sectors

sectors,

continues

residential

economies,

the dollar

dependent

economy

has

yet

real

the

shelter

to

code.

These

industrial

is

economic

loan

strong

to

buoy

agriculture,

and

The reduced

foreign exchange

improvements

to

pending

reflected

demand

for

in

in trade

seafood products

in commercial

partly
are

continue

oil,

picture.

some forest and

Weakness

conditions
but

of

a mixed

activity

produce widespread

attributed

demand,

present

manufacturing,

although producers

activity

estate

remain weak.

have noted positive developments.
tax

to

real

estate and

changes
weak

in

the tax

commercial

residential

real

and

estate

loans.

Consumer Spending
Overall, moderate growth in consumer spending continues to provide an
economic boost to most parts of the Twelfth District.

Moreover, a paper

products manufacturer reports that box shipments, which depend primarily on
retail

sales,

Level.

were

up nearly

Despite the overall

8

percent

in

strength, the

June

over

their

volume of retail

year-earlier
sales in some

economically troubled areas continues to languish.
The overall growth in consumer spending is not reflected in car sales.
Compared
County

with

last

year's

(California), where

have combined

to weaken

pace,

car

problems

the area's

sales

are

down

60

percent

in the agriculture and oil
economy, and

10 to

15

in Kern

industries

percent

in

San

XII - 2

Diego.

In Utah, domestic car sales are reported to be sluggish, although

foreign cars continue to sell well.

Manufacturing
In

most

parts

tinues to stagnate.

of

the

Twelfth District,

manufacturing activity

con-

The reduced foreign exchange value of the U.S. dollar

has yet to affect most manufacturers.

Indeed, one respondent reports that

in the Pacific Northwest the dollar volume of imports has risen 22 percent
during the past year, while the dollar volume of exports has risen only 13
percent.

One sign of a possible improvement in the U.S.

that a Japanese car company reportedly has
ratio in the car industry.

trade balance is

the highest inventory-to-sales

If this is any indication of future activity,

auto imports can be expected to decline during the next few months.
Respondents

throughout

delaying investment
Exceptions

include

the

District

plans pending passage
companies

with

strong

report
and
cash

that

study of

some

positions

are

new tax

the

firms

law.

and

those with

longstanding investment plans.

Agriculture and Resource Industries
Prices

of

most

agricultural

products

remain

weak,

and

the

reduced

value of the dollar has done little to stimulate exports of these products
as yet.

Almond growers expect to harvest only about half as much product

as they did last year due to poor weather during pollination, and almond
prices have strengthened as a result.
Fisheries
of

product

at

in Oregon and Alaska are reportedly selling a large volume
high

prices.

Moreover,

the

reduced

value

of

the

dollar

XII -

have

to

appears

some

improved

3

although

example,

For

positions.

firms'

exports of seafood products from Alaska remain stagnant, domestic producers
are

reduced

from

benefitting

increased volume

exporter reports

to

In

imports.

seafood

rim

exports

and

countries,

their

Pacific

one

Seattle,

food

renewed

Japanese interest in taking on more products.
producers

Timber

Alaska

in

that

report

Moreover, total lumber exports

Korea have risen.

to

Japan

and

(measured in board-feet)

for the first half of the year were 22 percent above the same period a year
Linerboard exports have risen

earlier, despite falling 9 percent in June.

from Europe are holding

and newsprint imports are down, but paper imports
steady

because

suppliers

have

cut

prices

to

maintain

their

U.S.

market

share.
Oil related

industries

continue to

prices.

suffer from low oil

been slashed

company's budget for Kern County has

example, one major oil

For

from $100 million to $13 million, just sufficient to maintain the company's
fields.
low,

Moreover,

with

only

the

27.5

county's drilling
percent

of

rig count

has

operating,

rigs

reached a record

although

some

local

respondents report that rig activity appears to have bottomed out.

Construction and Real Estate
Homebuilding
District.

activity

However,

in

continues

some

states,

to

be

strong

including

in

most

Alaska

and

parts

of

the

Idaho,

weak

apartment

and

economies have slowed residential construction activity.
Respondents

throughout

commercial real estate
hold

due

to

questions

the

District

report

developers have cancelled
regarding

tax

reform.

that

some

projects or put
Moreover,

some

them on

banks

are

XII -

4

reluctant to lend for real estate projects because they are concerned about
their future profitability.

In the Puget Sound Area, where vacancy rates

reportedly are lower than they are in most large cities, tax reform appears
to be having a less detrimental effect on office construction than it is in
most other areas.

Financial Sector
Business
Weakness

in

widespread

lending

volumes

agriculture

caution

reform legislation.

that

and
is

are

low

in

many

manufacturing

attributed

partly

parts

sectors
to

of
is

the

District.

aggravated

uncertainty

about

by
tax

Loan demand for tax shelter and commercial real estate

projects has fallen off particularly sharply.
Mortgage lending
areas.

continues

to

provide a

source

of

strength

in many

For example, mortgage lending volume at one Utah bank was about 30

percent higher during the first half of 1986 than it was during the first
half of 1985.

Continued strength in mortgage lending is also reported in

Oregon and California.