Economy’s Good and Bad News : Most Regions Are Looking Better, but California’s Slump Worsens

WASHINGTON — Business activity appears to be gradually improving in most of the United States, but conditions continue to deteriorate in California because of mounting layoffs, declining construction and increasing pessimism, the Federal Reserve Board reported Wednesday.

The Fed, in its “Beige Book” assessment of economic conditions across the nation, cites steady or slightly higher retail sales and increased agricultural output as positive developments, but notes that manufacturing fell in automobile, aerospace and defense-related industries.

In a separate report released Wednesday, Dun & Bradstreet Corp. found that the economy’s sluggish recovery is putting such a heavy drag on business that the number of failures has soared, and more are expected. Business failures increased 11.6% in July to 8,580 from 7,688 a year earlier, the report says.

California and New York had sharp increases in bankruptcies. California’s accelerated 37.9% to 1,815, while New York’s were up 41.4% to 693, the report says.

The Fed survey, which the central bank issues every six weeks, is the last regional assessment of the economy to be published by the Fed before November’s presidential relection. It is based on informal interviews conducted with businesses before Sept. 15, and does not purport to be scientific. But analysts said the report’s comments confirm recent statistical studies, especially those showing California in the doldrums.

Of the 12 regions surveyed by the Fed, the economy appears to be weakening significantly in California and the industrial areas of Michigan and Illinois.

Pessimistic sentiment in California is accelerating to such an extent that more than 80% of the businesses interviewed said they now doubt that the economy will grow even at modest rates over the next year. That sentiment was held by about two-thirds of those surveyed in July and only about half of those interviewed in June, the report says.

Cutbacks in aerospace and defense-related manufacturing, as well as budget reductions by state and local governments, are expected to add to the state’s 9.8% unemployment level, which is already 2% above the nation’s average. Construction continues to decline, particularly in non-residential buildings, and loan markets in California are the weakest in nation, the report says.

Cutbacks in the defense and real estate industries, and consolidation in the retail sector, are hitting the Los Angeles area more severely than other areas, the report says.

“Especially in Los Angeles County, there are a number of industries that are downsizing quicker than in the nation as a whole,” said Michael Penzer, senior economist at the Bank of America in San Francisco.

Despite the economic weakening in California, the report’s assessment was fairly upbeat for other areas. As a whole, regional banks in Cleveland, Dallas, Kansas City, Philadelphia and Richmond reported “modestly improved conditions,” the report says. “The remaining districts generally reported a continuation of slowly expanding activity.”

The report also acknowledges a lack of inflationary pressures in the nation, a finding that could serve as a basis for cutting interest rates further to boost the economy. The report will be used by ranking policy makers when they meet to review interest rates Oct. 6.

The Fed has reduced interest rates continually over the last few years, and on Sept. 4 brought key lending rates down to 3%, their lowest level since 1963. If unemployment increases this month as expected, the central bank might reduce interest rates further.

The report’s prediction of a recovery may be received favorably by the White House, but the improvement is so meager that it is unlikely to subdue criticism of the Administration’s economic record.

“It’s clear to me that the Fed is telling us that the recovery is not a steady pattern of strength, but is quite divergent from a regional point of view,” said Ken Ackbarali, senior economist at First Interstate Bancorp in Los Angeles.

“We see the earliest time for a turnaround, especially in regards to an increase in jobs, sometime around the middle of 1993,” he said.

The Dun & Bradstreet report found that in the first seven months of 1992, business failures rose 16% to 59,188 from 51,012.

Reuters contributed to this report.

Regional Economic Outlook

The following is a district by district breakdown of economic conditions reported in the latest Federal Reserve Beige Book:

1) Economic activity “remains sluggish” as both retailers and manufacturers await recovery. About the only bright spot was housing sales.

2) Conditions in the district were “marginally more positive” than in recent months. Most department stores reported increased sales. Loan demand, however, continued to be lackluster.

3) Activity “appeared to edge up slightly.” Manufacturers noted increases in orders and shipments. Gains were also reported in retail and home sales. Most loan demand was weak.

4) Economic activity showed “scattered signs of picking up.” Retailers reported stronger sales, except for autos. Loan demand weakened, except for mortgages and refinancing.

5) There were signs of improvement in business conditions. Retail sales, prices and wages were up. Manufacturing showed improvement. Retailers were optimistic about the next six months.

6) Economic activity expanded “quite slowly.” Merchants recorded higher sales and factories increased production. Home sales and construction were up. Hurricane Andrew caused disruption, but economic activity will increase with rebuilding.

7) The pace of the recovery slowed, with a notable weakness in auto production. Retail sales and housing activity were holding steady. Hiring and consumer spending were sluggish.

8) Economic activity “continues to increase slowly.” Car dealers and retailers reported increased sales. Manufacturing was growing. Farmers reported favorable harvest prospects.

9) Conditions were steady after slight recent declines. General merchandise, auto and home sales showed strength. Construction and tourism were strong, but labor market was weak.

10) Economic growth improved slightly. Retail and auto sales were up. Home sales and starts were boosted by low mortgage rates. Some manufacturers continued to benefit from export sales.

11) Overall growth remained sluggish, but there was growing optimism. Slight growth in the service and auto sectors and strong gains in manufacturing and home construction reported.

12) Weakness persisted in California, and conditions were mixed in other district states. California is suffering from cutbacks in aerospace and defense. Outside California, moderate improvement was reported in retail, non-defense manufacturing and home construction.

Source: Federal Reserve