September 16, 1998
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Prepared by the Federal Reserve Bank of Cleveland based on information collected before September 8, 1998. This document summarizes comments received from businesses and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
The overall tenor of the District reports suggests that the economy is continuing to expand at a moderate pace, although several Districts indicated slowing in some sectors. Notably, the New York District reports that significant segments of its economy were slowing, and the Dallas District notes that economic activity decelerated in August as the manufacturing sector declined. Still, most Districts see at least modest growth in business activity from generally high levels. Despite some continuing--and in some cases increasing--softness in certain industries due to the weakened Asian economies, many Districts indicate unusually high levels of construction and good retail sales growth.
While there appear to be only marginal changes in the strength and pattern of the business expansion since the last report, several Districts indicate a sharp deterioration in both business and household expectations regarding the economy in the fourth quarter and in 1999. The Philadelphia, Atlanta, St. Louis, and San Francisco Districts all report a less buoyant economic outlook than earlier, and the Boston District sees increased uncertainty about 1999. In the Minneapolis District, "the number of sources expressing concern about the near future is striking."
A large number of Districts continue to exhibit labor market tightness, which appears to be pushing wages up at a faster pace. On the other hand, retail prices remain generally steady or are declining slightly in most Districts, and falling import prices have helped push industrial commodity prices lower.
The unusually strong growth in building activity appears to be constrained by the availability of construction workers in some areas. The Cleveland, Atlanta, and Chicago Districts note shortages of construction workers; for the San Francisco District, finding qualified construction workers posed a significant obstacle to new construction in areas where building is brisk. Rents are rising in the New York and Philadelphia regions.
Retailers were mixed in their reaction to the recent fluctuations in U.S. and foreign capital markets. Boston notes some uncertainty among retailers they contacted concerning a possible fallout from financial market turmoil for 1999 and beyond, although the St. Louis District reports that retailers there have not yet observed a falloff in sales because of swings in the stock markets and are optimistic about sales prospects for the rest of the year. Similarly, contacts in the Richmond District remarked that retailers there do not expect the recent volatility in financial markets to trim their sales in the coming months.
Nevertheless, domestic demand continues to keep industrial activity steady at a relatively high level in many, if not most, regions. Domestic orders growth appears to be holding nearly steady or rising slightly in many regions. In the Boston District, orders for medical equipment are said to be rising strongly. A few Districts indicate a drop in computer-related manufacturing. In the Dallas region, demand for semiconductors is said to be still weak; in the San Francisco District, sales and market conditions weakened for computer and electronics manufacturers.
The Districts report that the combined influence of generally good harvests and weak foreign demand has exerted considerable downward pressure on agricultural commodity prices. In several cases, these influences are thought to be putting stress on farmers' balance sheets. The Dallas District indicates that low yields and low prices have led to serious financial stress for many crop producers; in the Minneapolis region, where high yields are not sufficient to offset the low crop prices, farmers reportedly face the most serious financial situation in a decade. Kansas City, however, reports that agricultural bankers in its region were not especially concerned about low crop prices.
Labor Markets and Wages
Most, although not all, Districts have seen a pickup in compensation growth this year. Wage increases are somewhat higher in many areas, although sharply higher growth rates are seen only in fields where labor shortages have become critical, such as information systems. The Chicago District sees wage growth as stable but reports increased nonwage compensation. Minneapolis notes that strikes have become a more prominent feature of the collective bargaining environment than in recent years.
Manufacturing prices are flat, and in some industries, such as lumber, petrochemicals, steel, and a number of other commodities, prices have been falling. The only significant upward movement has occurred in the construction materials industry, with prices rising in the Cleveland, Atlanta, and Kansas City regions.
Credit quality also varies by region. Delinquency rates are reported unchanged in the Cleveland District and are stable to slightly lower in the New York District. In the Richmond, Minneapolis, and San Francisco regions, credit standards have deteriorated, although a few banks in the Dallas District have tightened lending standards recently.