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Prepared at the Federal Reserve Bank of Richmond and based on information collected before September 11, 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 twelve Federal Reserve Districts indicated that economic activity expanded at a moderate pace in August and early September, even though further signs of slowing growth were noted in several Districts. Most Districts characterized economic conditions as strong and several said that economic growth continued to be solid. Richmond reported that growth had picked up from earlier in the summer. In contrast, reports from Atlanta, Chicago, St. Louis, and Minneapolis indicated that the overall pace of growth had softened in their Districts. Consumer spending was flat to modestly higher in most Districts in August compared with late spring and early summer. Several Districts noted that sales growth strengthened in early September. Manufacturing activity generally grew on pace, despite the recent shutdown of a few automobile assembly plants because of a lack of tires. Home sales and construction continued to soften, but several Districts reported that commercial real estate activity was robust. Overall loan demand remained strong, as firmer business demand more than offset continued weak mortgage activity. In agriculture, crop prices remained low and yield prospects dimmed in areas of the Southeast and Midwest experiencing prolonged drought conditions. Oil field and mining activity grew rapidly in several Districts.
Labor markets remained tight in most Districts, although signs of some easing were reported by Boston and Kansas City. Reports of wage increases were widespread and some firms indicated that higher labor costs were an increasing problem. Nevertheless, there were few indications that higher wages were being passed through to consumers as higher productivity and competitive pressures held firms' prices in check. However, several Districts indicated that the recent sharp increases in the costs of health care and energy might eventually be passed through to consumers. In contrast, reports from several Districts noted that prices of some metals, lumber, and other basic commodities had declined in recent weeks.
Several Districts reported sluggish retail sales growth during August, although expectations for sales through year-end were upbeat. Reports noted that apparel sales had been particularly weak in late summer. However, strong back-to-school sales in the New York, Richmond, Chicago, and Kansas City Districts, and improved sales of electronics in some areas, appeared to have boosted activity recently. Chicago said that overall retail sales grew at a rate above the national average, while Philadelphia and Atlanta indicated that sales fell short of retailers' expectations. Retailers' inventories were described as "in balance" and "at desired levels." Sales of electronics were generally higher, except in the San Francisco District, where they were flat. Despite a spate of manufacturers' incentives, automobile sales were slower in Atlanta, St. Louis, Minneapolis, Kansas City, and San Francisco. In Philadelphia, overall auto sales also eased, but luxury cars were selling well. In Cleveland and Richmond, auto sales picked up. Retail prices were steady in most Districts. Tourism and travel were softer in Richmond, partly due to memories of last year's storms, and in Montana where forest fires kept outdoors vacationers at bay. In contrast, tourism was stronger in the Atlanta and Minneapolis Districts.
Reports indicated that business activity in services industries generally increased. Service providers in San Francisco "noted an acceleration in growth above an already rapid trend." Internet-related firms displayed strength in the Boston, New York, Richmond, and St. Louis Districts. In Dallas, demand facing transportation firms remained robust. Labor shortages persisted, especially of employees with technology-related skills. The outlier was Boston, which reported that some layoffs in "dot-coms" had eased the labor shortages facing more established firms. District reports indicated that wage pressures have had little effect on final prices. Employers in Atlanta and Chicago expressed concern about higher health care benefits costs. Surging electricity prices were raising costs in the San Francisco District. New York reported, however, that there was some leveling off of previously skyrocketing electricity prices.
Construction and Real Estate
Most reports indicated that residential construction had softened further and that sales were flat or lower on a year-over-year basis. In contrast, Dallas reported strengthening residential conditions, and Richmond and Kansas City reported stronger sales of higher-priced homes. In most Districts, inventories of houses have declined in recent weeks.
In the commercial real estate sector, reports from Boston and Philadelphia indicated that new construction had slowed, but that rents continued to rise in markets facing strong demand for space. New York reported that a severe shortage of office space in Manhattan continued to keep availability rates at historic lows. Boston contacts also reported low levels of office space availability in New England because of strong demand and relatively little new construction. In contrast, reports from Atlanta, Dallas, and San Francisco indicated that new construction had kept pace with rising demand.
Manufacturing activity remained generally strong, although there were reports of moderation in some Districts. Over half of the Districts indicated that output at factories increased modestly to strongly, while Cleveland, Atlanta, St. Louis, Minneapolis, and Dallas noted signs of softening activity. Tire recalls led to shutdowns at automobile assembly plants near St. Louis and in Minnesota for two and three weeks, respectively. District reports suggested that the light vehicle, aircraft, industrial machinery, and construction and building industries demonstrated substantial vigor, while the production of heavy trucks fell. Assessments of the furniture, appliances, and apparel industries were mixed. Reports indicated that increases in input costs were more widespread, particularly for paper, transportation, and energy-related goods. Boston and Minneapolis reported that input prices had increased for paper, while Atlanta said that rising energy prices had boosted transportation costs. The majority of the Districts noted that increased fuel and energy prices continued to raise production costs. Despite rising costs for inputs, competitive pressure prevented manufacturers in most Districts from raising prices.
Banking and Finance
Overall lending activity remained strong in most Districts, despite sluggish demand for residential mortgages in many areas. Chicago reported brisk business lending, while Philadelphia said that commercial lending had advanced at a fairly steady pace in recent months. Atlanta characterized commercial loan demand as "brisk," but noted that it was less vigorous than in previous quarters. Overall consumer lending was said to be strong in the Atlanta District and relatively robust in Chicago. Automobile loans were the fastest growing category of lending in Dallas and "quite strong" in Cleveland. Residential mortgage lending, on the other hand, slipped in Philadelphia, Cleveland, Atlanta, and St. Louis. New York reported that demand for all types of loans had fallen since their last report.
Several Districts reported that credit conditions had tightened. New York said that credit standards were generally tighter, particularly on commercial and industrial loans. Chicago reported that bank contacts indicated that credit standards were being tightened, but said that competition had constrained "how far they could go." Philadelphia noted that some banks said they would consider implementing more restrictive credit standards in the fourth quarter if business conditions weakened. There were only a few reports of changes in delinquency rates; Cleveland said that some contacts had reported a rise in loan delinquencies because of higher debt burdens, while New York reported a decline in delinquency rates.
Most Districts reported that labor markets remained tight. Several Districts continued to report that administrative workers with computer skills and information technology (IT) professionals were in short supply. New York cited a severe shortage of computer "techies" as well as unmet demand for office workers. However, Boston reported that layoffs at dot-coms and other start-ups were helping temporary employment firms meet the strong demand for employees from more established firms. In Atlanta, skilled labor such as nurses and IT professionals were said to be in short supply. In that District, businesses relied increasingly on overtime and investment in labor-saving technology to help counter labor shortages. Chicago noted that competition for qualified workers remained intense in most areas. Recruiting and retaining employees remained difficult for firms in the San Francisco District where rapid employee turnover and rising wage and benefit costs were tempering profits. Firms in that District were said to be considering additional investment in labor-saving technologies.
Most Districts said that wages edged up in August and early September. Boston said that firms had increased spending on benefits to retain workers, while New York reported that salaries for office workers were up more than 10 percent from a year ago. Wage pressures in Kansas City eased from earlier in the year although some firms were still offering sizable signing bonuses. Richmond indicated that wage pressures had intensified because of a continued strong demand for workers.
Agriculture and Natural Resources
Drought conditions in many areas of the Midwest and Southeast ravaged crops and impeded livestock production. Atlanta noted that production losses for some crops would run as high as 50 percent. Dallas reported that the Texas cotton crop had been declared a disaster--1 million acres of the usual 6.3 million planted had been abandoned. Chicago and St. Louis said that dry weather had resulted in lower-than-expected corn yields. In contrast, Cleveland and Richmond reported that farmers expected higher-than-normal corn and soybean yields this year, and in Minneapolis, a potential bumper crop had farmers scrambling for storage space. Nearly half the Districts reported that low prices, caused in part by bumper yields, remained a concern for corn and soybean producers.
Dry weather in the Dallas and San Francisco Districts hindered livestock production. Dallas indicated that producers were providing supplemental feed and hauling water to livestock. Both Dallas and San Francisco reported that livestock farmers were paring herds. In Cleveland, however, dairy and livestock farmers reported excellent production. In Kansas City, strong consumer demand for meat continued to support livestock prices, while San Francisco noted that stable prices for beef cattle had benefited ranchers in that District.
Reports from Minneapolis, Kansas City, and Dallas indicated that oil-drilling activity continued to increase rapidly. Dallas noted that international drilling activity was also rising, but that it remained well below the peak levels of 1997 and 1998. Minneapolis reported that the iron ore and palladium industries continued to operate at full capacity, but that huge increases in electricity costs had halted production at a copper mine in Montana until at least November.