December 3, 1997
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Prepared at the Federal Reserve Bank of New York and based on information collected before November 24, 1997. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
On balance, Federal Reserve Districts report a continued moderate pace of economic growth since the last report. Non-auto retail sales improved in most regions. While a number of Districts report that sales were still a bit below plan, retailers are generally optimistic about the sales outlook. Inventories are deemed to be in good shape. Automobile sales continued to be sluggish, with inventories on the high side. Manufacturers report continued high levels of activity, with some constrained by capacity limitations; contacts in the West and South report continued shipping problems due to rail bottlenecks. Asian financial turmoil and currency weakness have adversely affected demand for manufactured and agricultural exports, and some Districts report increased competition from imports. Residential real estate markets are mixed, but commercial real estate markets continue to tighten in most areas.
Virtually all regions are experiencing tight labor markets, with some reporting increased wage pressures in specific industries and occupations with labor shortages. Retailers are having a particularly difficult time in hiring and retaining seasonal workers. More generally, businesses are using a variety of nonwage incentives to attract and retain workers. Business respondents report that price pressures remain neutral, on balance, as steady to declining commodity prices, productivity gains, and increasing overseas competition appear to be offsetting any effects of wage gains.
Automobile sales generally remain soft, with a corresponding rise in inventories. Overall, sales of light motor vehicles were sluggish in Philadelphia, Cleveland, Chicago, St. Louis, and Kansas City, though the latter three Districts report strong demand for sport utility vehicles.
By industry, heavy equipment manufacturers and steel producers in Chicago and Dallas report strengthening demand. In contrast, demand for apparel, textiles and electronic equipment appears to be weakening in a number of Districts.
Construction and Real Estate
Residential real estate markets are reported to be fairly strong in most Districts, though some recent slowing is noted in Atlanta, Kansas City, and San Francisco. Boston and Philadelphia report that demand has been strongest for higher-end homes, but Dallas reports a shift toward more starter homes. Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco report brisk homebuilding activity. However, Boston and New York note low levels of construction, despite recent strength in the market.
Banking and Finance
A number of Districts indicate ongoing strength in business services. Boston and Dallas report continued solid growth in the temporary employment industry; St. Louis notes strength in the gaming industry and mortgage and insurance claim processing; Minneapolis reports that computer consulting firms are "swamped with orders"; San Francisco reports strength in telecommunications and business services.
Labor Markets, Wages and Prices
Wage pressures have increased somewhat but are generally isolated to a few industries and occupations with severe labor shortages. Boston, Richmond, Dallas, and San Francisco report increasing labor demand in the financial services sector, with some reports of increased wage pressures. Retailers in almost all Districts are having particular trouble hiring and retaining workers for the busy holiday season. While some retailers in Boston and Minneapolis have hiked wages, certain stores in the New York and San Francisco Districts have resorted to offering nonwage incentives, such as bonuses and steeper in-store discounts.
More generally, businesses are dealing with labor shortages in a variety of ways. Some are tapping broader geographic labor markets: Atlanta reports that shipyards are recruiting from overseas; Chicago cites businesses recruiting in nearby rural areas or relocating to the inner-city. Cleveland reports that firms are offering increased benefits and more flexible work rules, while retailers and banks in the San Francisco District are converting part-time to full-time jobs.
Despite the increase in wage pressures, prices for goods remain flat, although there are scattered reports of price pressures in areas such as commercial real estate and hotel lodging. Businesses report that steady to declining commodity prices, increasing competition from overseas and productivity gains appear to be counteracting effects of wage gains on selling prices for goods. In particular, Dallas and San Francisco indicate that the strong dollar has lowered import prices, and Cleveland notes that increased steel imports have held prices down. Boston, New York, Cleveland, Atlanta, and Kansas City indicate that finished goods prices are steady or down slightly, while Richmond reports modest increases.
Agriculture and Natural Resources
Dallas reports "extremely high levels" of activity and labor shortages in the oil services sector, while Minneapolis notes a boom in gas and oil development. Kansas City reports that energy-sector activity has recently declined but remains above year-ago levels.