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Prepared at the Federal Reserve Bank of St. Louis and based on information collected before September 13, 1999. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
All district economies continue to exhibit overall strength, with most experiencing moderate-to-brisk rates of growth. Retail sales are generally up in most districts, with back-to-school sales meeting or exceeding retailers' expectations in many cases. Vehicle sales remain robust, although some dealers are unable to meet demand for popular models. Industrial activity is on the rise in most parts of the country, with orders and production both up. In some cases, resurgent Asian demand is contributing to this rise in activity. Although commentary from most district reports continues to highlight widespread labor shortages, several districts have noted a slackening in the demand for labor. There are few reports of acceleration in nominal wages and salaries, although some districts note a substantial upswing in the cost of health-care benefits. While price pressures at the consumer level remain mostly calm, numerous districts report significant increases in some materials prices. Home sales and construction remain elevated, but many districts have begun noticing a slowdown. Commercial real estate markets are tight in many districts. Loan demand, except for residential real estate loans, is well-sustained across districts. Credit quality and standards remain unchanged, for the most part. The recent drought has worsened crop and livestock conditions in the East and parts of the Midwest.
Most districts report that retail sales are up from their year-ago levels. Back-to-school sales, in particular, either met or exceeded expectations in the Boston, Chicago, Philadelphia, Richmond and St. Louis districts. The Atlanta district, however, reports declining sales from a year earlier, while the Kansas City and New York districts indicate mixed or flat sales. The San Francisco district notes that back-to-school shoppers remained cautious this year, searching for bargains and delaying purchases until Labor Day sales arrived. Apparel sales have been brisk in the Atlanta, Cleveland, Kansas City, Philadelphia and St. Louis districts, but not in the Chicago district or parts of the New York district. The Minneapolis district reports strong sales of high-end electronics in Minnesota. Hot weather hampered sales of lawn-and-garden goods in the New York, Richmond and St. Louis districts. Most districts report that retailers' inventories are at desired levels, although some contacts in the Cleveland district note that their inventories are a bit lean. On the other hand, some contacts in the Kansas City district believe that their inventories are too high.
Auto sales, particularly of new vehicles, remain strong in most parts of the country. The Cleveland, Dallas, Kansas City and St. Louis districts note substantial gains in auto sales, while the Richmond district reports a weakening of sales, due mostly to hot weather. Consequently, dealer inventories in the Richmond district are up. On the other hand, some dealers in the Cleveland, Philadelphia and St. Louis districts are still having difficulty stocking enough popular models to meet demand; inventories are not a concern for dealers in the Kansas City district.
Manufacturing activity appears to have accelerated in almost every district. The Richmond district, however, reports some moderation in the rate of growth. The Kansas City district notes that its contacts are experiencing their highest capacity-utilization levels in a year. The Chicago, Cleveland and St. Louis districts report solid demand for steel and other metal products, particularly from the auto industry. The Boston, Dallas and Minneapolis districts note strong demand for semiconductors and computer components. The San Francisco district reports that improving demand from East Asia has boosted orders in the electrical equipment, wood, chemicals, processed food and industrial machinery industries. Industrial machinery production also accelerated in the Atlanta district and rebounded in the Boston district.
The production of apparel appears to be down across the board. Orders for heavy trucks and construction and agricultural equipment have weakened at Chicago district firms. While the tobacco industry in the St. Louis district is experiencing a slackening in domestic demand, tobacco shipments from Richmond district firms remain strong. The commercial aerospace industries in the Atlanta and San Francisco districts report weakening demand.
The Philadelphia district notes that manufacturing inventories are at desired levels. The Atlanta district comments that a maker of batteries and flashlights expects heavy demand around year-end and, therefore, plans to increase its inventory accordingly. Cleveland district contacts report no inventory stockpiling, while San Francisco district contacts have seen their excess inventories drawn down recently. Contacts in the Kansas City district plan to trim inventories soon because they are getting too high.
For the most part, the theme of this report is unchanged from recent reports: The demand for labor continues to outstrip the readily available supply of labor in most areas. The Atlanta, Chicago, Minneapolis and Philadelphia districts note that tight labor markets remain the norm. Retailers in the Boston, Kansas City and New York districts reported that they cannot find enough staff to fill vacancies. Manufacturers in the Boston and St. Louis districts express the same concern. A couple of districts continue to highlight the construction industry's ongoing labor supply problems, although the number of these reports has lessened somewhat. Demand at temporary employment agencies remains on the upswing in the Boston, Dallas and Richmond districts, while remaining steady in the Cleveland district. In contrast, a few districts have noticed a slight easing of labor market tightness. The Richmond district reports that manufacturing employment and hours have grown at a slower pace than they had previously. The completion of Y2K-compliance work in some industries in the Dallas district has reduced the demand for technology workers, while weakness in the San Francisco district's commercial aircraft industry has led to layoffs at major producers and suppliers.
Wages and Prices
On balance, wage and salary increases remain within the range noted in previous reports. Wages at manufacturing firms are reportedly picking up in the Minneapolis, Philadelphia and Richmond districts, remaining steady in the St. Louis district, and easing somewhat in the Kansas City district. The Boston and Minneapolis districts note that wages at retail establishments are growing between 3 and 5 percent; in the Kansas City district, retailers report feeling increased wage pressures. The Cleveland and Dallas districts note accelerating wage growth, particularly among some classes of temporary workers. The Atlanta and Minneapolis districts report sharp increases in the employer costs of health-care benefits.
The majority of district reports indicate that price pressures at the retail level are not readily apparent. Where they are apparent, they are categorized as temperate. Prices pressures at the wholesale level appear to be somewhat greater. The Chicago, Cleveland and Richmond districts report price increases at manufacturers, with steel makers in the Cleveland district announcing hikes of between 5 and 7 percent. The Atlanta, Cleveland, Kansas City, Philadelphia and Richmond districts all report that higher raw materials costs are evident. The Dallas district adds that construction costs (both labor and materials) are up between 5 and 8 percent so far this year. The San Francisco district, however, notes that prices for manufacturers' inputs have been "stable or declining."
Real Estate and Construction
The consensus across most districts is that while home sales remain elevated, some slowing has recently become apparent in both sales and construction. Home sales have already weakened somewhat in the Atlanta and Chicago districts. The New York district, however, reports that real estate activity in New Jersey is increasingly being hampered by supply constraints--low inventories of existing homes and a shortage of usable land for new construction. The San Francisco district notes that real estate markets in Southern California, the San Francisco Bay Area and Washington's Puget Sound region are robust; elsewhere in the district, they have slowed. Just about all districts cite higher mortgage rates as a primary reason for the recent slowing. Other reasons include rising building costs and market saturation. Many districts are still reporting labor and/or material shortages, which are delaying construction. The Richmond district, however, notes that fewer complaints about labor or material shortages were received, perhaps signaling an easing in the pace of residential construction. Still, it seems that numbers of sales and new construction permits/starts in most districts are ahead of year-ago levels.
Commercial real estate markets are tight in the Boston and Philadelphia districts, although real estate agents in the Philadelphia district believe that demand there may be peaking. The Cleveland district reports that nonresidential market conditions remain at a high level. Speculative nonresidential building is up in the St. Louis district. Apartment construction is strong in parts of South Dakota because of low vacancy rates.
Banking and Finance
Despite a drop in demand for mortgage and home-refinance loans, lending activity remains relatively strong. Only the Philadelphia and St. Louis districts report weaker overall loan demand. The strength of business lending varies by district, with only the Chicago, Cleveland, New York, Philadelphia and Richmond districts citing growth in the commercial-and-industrial loan category. Consumer lending has strengthened further in the Atlanta, Dallas and Kansas City districts, has weakened in the Philadelphia and St. Louis districts, and has remained unchanged in the Richmond district. The Dallas and Philadelphia districts add that residential real estate lending remains healthy. The Cleveland and St. Louis districts report that competition for deposits is strong, while banks in the Dallas district report steady loan growth. Banks in the Kansas City and New York districts have recently tightened credit standards; banks in other districts report no change in standards. Outside of a concern about agricultural loan performance, credit quality remains good.
Agriculture and Natural Resources
Drought conditions in much of the East and parts of the Midwest have taken their toll on both crops and livestock. The Chicago, Cleveland, Richmond and St. Louis districts all indicate that their corn and soybean crops are in poor-to-fair condition. The Cleveland district notes that the tobacco crop is also suffering. The rice and cotton crops in the St. Louis district are in good condition, though. The San Francisco district reports that unseasonable weather has lowered the quality and yield of many of its grains, fruits and vegetables. In contrast, the Dallas, Kansas City and Minneapolis districts report favorable agricultural conditions, with their corn and soybean crops in good-to-excellent condition and with above-average yields expected.
Livestock in the Cleveland, Dallas and Richmond districts are in poor-to-fair condition. Many farmers in the Cleveland and Richmond districts have begun feeding hay to their herds because of poor pasture conditions. Some farmers in the Cleveland district have even started paring down the sizes of herds. In the Kansas City district, however, low feed costs, stronger cattle prices and increasing profits are leading to a rebuilding of herds.
Strong demand for natural gas has increased prices and drilling activity in the Dallas and Kansas City districts. With the price of oil also on the rise, the number of rigs on-line in the Kansas City district has been rising. In the Minneapolis district, though, the rig count is below year-ago levels.