June 14, 2000
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Prepared at the Federal Reserve Bank of Boston and based on information collected before June 6, 2000. 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.
Reports from the Federal Reserve Districts indicate that solid economic growth continued in April and May, but that signs of some slowing from the rapid pace earlier in the year are also present. In Minneapolis, "economic activity remains hot," and in Chicago and Richmond, growth is said to be strong. Most of the other District reports characterize growth as moderate or steady. All but Minneapolis said scattered signs of cooling are in evidence or the pace of growth is slowing. Indications of worsening price inflation, while not widespread, are reported by several Districts.
Labor markets are tight across all 12 Districts, but the tightness does not appear to have intensified since the last report. Contacts across the country report worker shortages and difficulties in recruiting and hiring; half the Districts indicate that labor shortages are constraining output growth. The St. Louis, Richmond, Cleveland, New York, and Boston Districts report that shortages would be even more severe in the absence of inflows of immigrants or students. Base wages of permanent employees are not said to be accelerating in most Districts, but seasonal help and temporary workers are being recruited only with sizable raises. Similarly, some occupations experiencing severe shortages--skilled building trades in New York, for example, and Internet and other technical workers in the Boston and Atlanta Districts, entry-level workers in Richmond, and truck drivers in Chicago--have seen larger pay increases.
Merchants in all Districts report very tight labor markets for retail workers, with corresponding pressures to increase wages in order to attract employees. Districts mentioning wage increases in the retail sector said they were in the 3 to 7 percent range, with double-digit wage growth in highly skilled occupations and among seasonal workers. Tourist-related businesses are said to be having great difficulty filling seasonal positions.
Retailers in the Boston, New York, Atlanta, Chicago, Kansas City, and San Francisco Districts say that wage inflation is not carrying over to prices. Of those, all but Chicago indicate that prices for consumer goods are mostly stable. Retailers in Chicago report that prices are rising modestly. However, retail contacts in Cleveland said that increased supply costs are being passed along, raising consumer goods prices faster than previously. By contrast, Richmond reports that price increases have eased in the retail sector.
Strong and rising demands for steel, fabricated metals, petroleum products, semiconductors, and high-tech equipment are mentioned frequently in District reports. Shortages of labor, materials, and capital are said to be constraining actual or expected output for manufacturers of these or other products in the Boston, Philadelphia, St. Louis, Minneapolis, Kansas City, and Dallas Districts. Where mentioned, exports are said to be rising across a variety of products, mostly durable goods.
Reports on the interest-sensitive automotive and construction-related sectors are mixed. Chicago and Cleveland indicate declining demand for heavy trucks. Chicago notes a slowdown in light vehicle demand (from an exceptionally high level last year); however, Atlanta reports a ramp-up in production among auto parts suppliers. Boston, Philadelphia, and Richmond cite strong demand for building components and furnishings. Dallas indicates continuing strong demand for brick and glass but declines for lumber and wood products. San Francisco indicates that lumber orders are sluggish. Cleveland and Chicago mention that public sector construction is providing a boost for some manufactured products, although Chicago also reports that orders for construction equipment are down.
Most Districts mention some evidence of increasing inflationary pressures. Prices paid for petroleum-based products, natural gas, metals, paper, and some construction materials are said to be rising. However, reports generally indicate that manufacturers are raising their selling prices less than the increase in input costs. Only Richmond explicitly states that the prices of manufactured goods accelerated in the most recent survey period, describing the increase as slight. By contrast, Chicago characterizes pricing in the manufacturing sector as soft.
Banking and Finance
Three Districts report that deposits are down, although New York notes an increase. There appears to be little change in credit standards since the last survey.
Construction and Real Estate
Commercial real estate markets are strong, and commercial construction has escalated in many parts of the country. The Philadelphia and Cleveland Districts report new industrial construction, while the Atlanta District reports speculative office construction. Construction is also expanding in the Chicago, Minneapolis, and Kansas City Districts, but it has slowed in the Dallas District. Office vacancy rates are very low in some metropolitan areas, mainly Boston, New York City (where record low vacancy rates were reported in Manhattan), and the San Francisco Bay area. Both office and industrial space is scarce in the Richmond and Atlanta Districts. Office rental rates are increasing in Boston, Manhattan (where rents have risen at an annual rate of 35 percent so far this year), Philadelphia, and Washington, DC. Contacts in most Districts expect activity in commercial markets to continue at a high level, but predict possible further slowdowns in residential markets due to higher interest rates.
Agriculture and Natural Resources
Activity in the energy sector has improved. Atlanta, Minneapolis, Kansas City, and Dallas all cite sharply increased rig counts in response to low inventories, strong demand, and higher energy prices. With natural gas prices up over 50 percent year-on-year and forecast to rise, Dallas reports that gas is leading the sector's recovery and that drilling in the Gulf of Mexico is at late 1997 peaks. In Atlanta and Dallas, contacts note that the energy sector is having trouble hiring. The iron ore and platinum industries in the Minneapolis District are operating near capacity.