January 17, 2001
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Prepared at the Federal Reserve Bank of Kansas City and based on information collected before January 10, 2001. 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.
Reports from Federal Reserve Districts indicate that economic growth slowed in December, easing labor shortages somewhat and limiting price pressures for finished goods and services. Most districts reported a further deceleration in growth from the previous survey. Philadelphia reported an actual decline in activity, while Cleveland said that economic growth remained at the same slow rate as in the previous report. New York and San Francisco indicated that growth remained solid but showed some signs of softening.
Despite heavy discounting, nearly all districts reported lackluster retail sales growth during the holiday season. Automobile sales slowed substantially and most districts reported a sizable buildup of dealer stocks. All districts reported weaker manufacturing activity in December. Residential construction cooled in most districts but remained strong in New York and San Francisco. Commercial real estate activity also showed some signs of slowing. The tourism industry reported a strong start to the winter season, but other service activity weakened, particularly for trucking and other transport. Activity in the energy sector expanded as fast as drillers could find workers and rigs. Banks did not report any deterioration in credit quality but kept a watchful eye over their loans.
Labor markets eased somewhat but remained tight. Layoffs in a wide variety of industries were announced in most districts. However, business contacts expected laid-off workers to be quickly reabsorbed due to strong pent-up demand for labor at other firms. In most districts, wage pressures were similar to or slightly less intense than those in the previous survey. Prices for most manufactured goods were flat to down despite higher costs for energy and other inputs. Consumer product prices were constrained by heavy holiday discounting.
Automobile sales in all districts reporting on such activity were characterized as either weak or slowing. Sales of domestic cars and light trucks were reported to be especially weak in the Philadelphia and Chicago districts. St. Louis noted that used car dealerships experienced the largest decline in sales. Dealers in the Kansas City district had difficulties moving all makes and models of motor vehicles. Inventories of unsold cars throughout the country were high, and in most districts expectations for auto sales in coming months remained subdued.
High input costs, the strong dollar, and weaker domestic demand were cited the most often as reasons for the slowdown in factory activity. Boston, Richmond, and St. Louis reported that higher input costs were squeezing profits for some firms. Half the districts also mentioned widespread concern among manufacturers about higher energy costs. Some fertilizer, chemical, and smelting plants in the St. Louis, Minneapolis, Kansas City and San Francisco districts have even shut down in order to resell their electricity or natural gas supplies on the open market. Philadelphia, Cleveland, Richmond, Atlanta, and Kansas City reported that heavy import competition, due largely to the strength of the dollar, was hampering manufacturing sales. Atlanta also reported that uncertainty about the U.S. stock market was adversely affecting firms' capital expenditure plans.
Real Estate and Construction
There were also signs of slowing in commercial real estate activity in some districts. Commercial construction slowed in the Dallas, Richmond, and Atlanta districts, and was described as mixed in the St. Louis and Cleveland districts. Commercial building remained solid in the Kansas City district. New York and Richmond reported that contraction by dot-com enterprises has helped free up some office space, although the office market in the New York district remains very tight. Shortages of office space were also reported in parts of the Richmond, St. Louis, and San Francisco districts.
Tourism and Services
Activity in other service industries was generally down. Demand for trucking services fell considerably in the New York and Cleveland districts, and was down slightly in the Dallas district. Meanwhile, trucking firms' fuel, insurance, and labor costs continued to rise, resulting in an increase in bankruptcies and truck repossessions in the New York district. St. Louis reported a slowdown in barge traffic on the Mississippi River due to low water levels. Richmond and Dallas reported that revenues fell at most business service firms. In contrast, revenues were up in the Boston district's insurance industry.
There were no new reports of decreases in credit quality, but banks generally continued to tighten credit standards and said they were keeping a watchful eye on the financial condition of their borrowers. Banks in the New York, Philadelphia, Atlanta, Chicago, and Dallas districts reported they were continuing to tighten their credit standards. Banks in many districts also said they were monitoring credit quality carefully to detect any deterioration. Bankers in the Chicago district reported they were keeping an especially close eye on loans to retail and manufacturing sectors, while bankers in the Richmond district said they were paying special attention to loans to cyclical industries.
Agriculture and Natural Resources
In the farm economy, the onset of winter weather across the country has had mixed effects. Minneapolis reported that moisture from heavy snowfalls has benefited the winter wheat crop and is expected to reduce the likelihood of drought conditions in the coming growing season. However, severe winter weather also contributed to a worsening in pasture conditions for livestock and an increased use of alternative forages in the Richmond, Minneapolis, Kansas City, and Dallas districts. The alternative supplies seem to be generally available except for some reports of hay shortages in the Dallas district.
Labor Markets, Wages, and Prices
Wage pressures in most districts either held steady or decreased slightly in response to the easing in labor markets. Chicago, Dallas, Kansas City, and San Francisco all reported some moderation in overall wage pressures. New York described wage pressures as strong but steady, while Minneapolis reported that wages continued to increase at a moderate pace. Despite the overall slowdown in economic growth, a number of districts reported strong wage pressures for certain types of workers, including information technology workers in the Boston district, retail workers in the Richmond district, construction workers in the San Francisco district, and union workers in the Cleveland district.
Price pressures for consumer goods were subdued, while prices for most manufactured goods were flat to down despite higher input costs. Extensive discounting by retailers during the holiday shopping season helped constrain consumer prices in most districts. Retail prices increased at a slower rate in the Richmond district, held steady in the Boston district, and declined somewhat in the Kansas City and Dallas districts. Manufacturers in many districts reported that their input costs rose in December, especially for energy, but that they were unable to pass these cost increases on to customers due to intense foreign and domestic competition and slowing demand. The most notable reports of downward pressure on selling prices were for steel firms in the Cleveland and Chicago districts and for a wide variety of manufacturing firms in the Dallas district, including producers of metals, cement and concrete, paper, and lumber. In the service-producing sector, telecommunications firms in the Dallas district reported their prices were falling rapidly, but insurance firms in the Boston district said that reduced price competition had enabled them to raise premiums to more profitable levels.