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New York
St. Louis
Kansas City
San Francisco

Full report

Prepared at the Federal Reserve Bank of St. Louis and based on information collected before March 3, 1997. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

District economies generally continue to expand at a relatively moderate pace. Retail sales are up in most districts from a year ago. Most districts report high levels of manufacturing activity, with only pockets of weakness. Tight labor markets still dominate in almost all parts of the country. Nevertheless, wage gains generally remain moderate. Price pressures, such as those reported by most retail and manufacturing contacts, appear to have been temperate. Most districts report strong residential real estate markets, with many citing increases in year-over-year building permits, increases in new or existing home sales and rising home prices. Commercial real estate markets continue to strengthen, with many districts reporting declining vacancy rates, rising rents and new nonresidential construction activity. Loan demand conditions are decidedly mixed across districts in all major categories of loans�commercial, consumer and real estate. Most districts report that prospects for livestock producers have brightened recently. Despite moderate drops in oil prices, activity has picked up noticeably in the energy extraction industries.

Consumer Spending
Most districts report that January and February sales are up from one year ago. The Atlanta, Boston and New York districts report that sales have exceeded expectations. The San Francisco district describes sales growth as moderate, while the Cleveland district reports retail conditions as essentially unchanged from its previous report. Apparel has been a strong seller in the Atlanta, Chicago, Kansas City and New York districts; however, apparel sales are down in the Boston district and unchanged in the Richmond district. Cosmetics, building materials, pharmaceuticals and home furnishings are also strong sellers, according to contacts. The New York district reports that a �tax-free� week in New York City spurred sales, but severe winter weather in the Minneapolis and San Francisco districts hampered sales at many local stores. Current inventories are generally at or slightly below desired levels.

Vehicle sales are mixed across districts. The Kansas City district reports slightly higher auto sales levels, while the Minneapolis district notes strong sales of pickup trucks. Car sales in the Philadelphia district remain unchanged, while the Cleveland and Dallas districts note slower-than-expected sales. Vehicle inventories are generally adequate, although a few reports of shortages of popular vehicles have been received.

Most districts report that manufacturing activity remains at a high level and is, in many cases, growing. Pockets of weakness, however, are interlaced with this growth in many districts. The Dallas and Richmond districts report their manufacturing sectors as either �still in a seasonal lull� or down slightly. The Minneapolis district, on the other hand, describes its manufacturing sector as �hale and hearty.� The St. Louis district notes that even though the level of activity has not changed much from the last report, contacts are still optimistic about the near term.

Auto suppliers in both the Atlanta and Boston districts and heavy-duty truck manufacturers in the Chicago and Cleveland districts report strong business, while the San Francisco district notes that the aircraft and high-technology industries in the Pacific Northwest are expanding. In the Philadelphia district, metal and chemical products are showing recent strength, while furniture and home furnishings producers in the Boston, Chicago and St. Louis districts report that orders are up.

Most districts are experiencing an ongoing contraction in the apparel industry, with some of this production heading overseas. Several districts also note that their paper and textile industries are in decline. The New York district notes a moderate slowing of manufacturing activity in New York City, and the San Francisco district reports that the electronics industry in California has slowed somewhat. Growth in the steel industry is slowing in the Chicago district, while remaining strong in the Cleveland district.

Labor Markets
Contacts in almost every district report difficulty finding and retaining new workers because of tight labor markets. Shortages of engineers and construction, skilled manufacturing and high-tech workers are most often noted. The Boston and Dallas districts report that temporary employment agencies are also having difficulties finding workers. The San Francisco district reports worker shortages in the hospitality industry, but notes a surplus of financial-sector workers because of consolidation in the banking industry. A survey of manufacturers in the Philadelphia district found that about 40 percent plan to hire employees in the near term, while a survey of businesses in the St. Louis district found that 20 percent are looking to hire.

Wages and Prices
Despite tight labor markets in nearly every district, nominal wage gains show no signs of breaking out of the 3 to 4 percent range that has been cited in the last several reports. Pockets of persistently upward wage gains associated with fast-growing sectors and regions remain, however. In particular, wage pressures remain in the Chicago district but are most pronounced at the upper end of the pay scale, while the Minneapolis and San Francisco districts report sector-specific wage increases tied to the high-technology and aircraft sectors. The Dallas and Kansas City districts, on the other hand, report a lessening of wage pressures.

Aside from higher raw materials prices reported in a few districts, price increases at retailers and manufacturers�both on the input and output side�have generally been temperate, as many districts report that competitive pressures have stemmed price hikes. The Boston, Cleveland, New York, Philadelphia and Richmond districts report that retail prices are �mostly flat� or �steady.� Moreover, in the Atlanta, Boston and Cleveland districts, wage and input price advances have been offset or negated by increased productivity gains. Materials and finished goods prices have reportedly accelerated in the Atlanta and Richmond districts; however, contacts suggest that these increases may be temporary.

Construction and Real Estate
Most districts report strong residential and even stronger commercial real estate markets. Contacts in the Minneapolis, Philadelphia, Richmond and San Francisco districts report increases in single-family residential construction. Contacts in the Boston, Chicago, Cleveland and St. Louis districts also report strong residential market conditions. Mild winter weather is credited for some of the strength in the Boston, Philadelphia and Richmond districts, while poor weather is blamed for moderate weakness in the Chicago and Dallas districts. The Atlanta and Kansas City districts report little change in year-over-year construction activity. Sales of new or existing homes are reported to be up in the Kansas City, New York, Philadelphia, Richmond and San Francisco districts. Slight price increases, some due to increases in material prices, are reported in the Boston, Minneapolis, Philadelphia, Richmond and San Francisco districts.

Commercial real estate markets continue to improve in most districts. Declining office vacancy rates and rising rental rates are reported in the Atlanta, Dallas, New York, Philadelphia and Richmond districts. New nonresidential construction is reported in the Atlanta, Dallas, Minneapolis, Richmond and San Francisco districts. Contacts in the Chicago, Cleveland and St. Louis districts also describe their commercial real estate markets as strong.

Banking and Finance
Loan demand conditions are decidedly mixed across districts, although more districts report declining or steady loan demand than rising demand. The Dallas district reports little change in overall demand since its last report, and the San Francisco district reports healthy overall demand. Commercial and industrial (C & I) loan demand is reported to be strong in the Chicago district and steady in the Atlanta, Cleveland and Philadelphia districts. The Kansas City, New York, Richmond and St. Louis districts report slight declines in C & I loan demand. A number of districts continue to report low margins and fierce competition among lenders for C & I loans; a contact in the Richmond district characterized margins as �ridiculously low.�

Consumer loan demand is reported to be increasing, but at a slower rate, in the Chicago district and mixed or flat in the Atlanta and Cleveland districts. The Philadelphia, Richmond and St. Louis districts report declines in consumer loan demand. There appears to be no consistent trend in consumer loan quality; the Cleveland and New York districts report rising delinquencies, while the Atlanta and San Francisco districts report improving consumer loan quality. Residential mortgage demand is mixed. The Atlanta, Philadelphia and Richmond districts report increases in residential mortgage demand, while the Kansas City, New York and St. Louis districts report decreases.

Agriculture and Natural Resources
Other than weather-related cattle deaths in the Minneapolis district, increased profit margins are the rule rather than the exception among livestock producers. For example, the Kansas City district reports that bankers expect wider margins for cattle and hog producers because of lower feed costs. Increased cattle prices have also been noted in the Dallas and Richmond districts, buoying producers.

In the natural resources industries, the Dallas, Kansas City and Minneapolis districts report that their energy extraction industries are experiencing an uptick of economic activity; this has occurred despite modest drops in crude oil prices. The Dallas and Minneapolis districts also report higher lumber prices, which, in Minneapolis at least, have been passed on to builders.

Weather-related problems have and will likely continue to affect economic activity in many districts. Severe winter weather in the Minneapolis district has reportedly hampered weight gains in the cattle industry. The Minneapolis district also reports a potential for the worst flooding in several decades because of substantial snowpack. Flooding and wind-related damage stemming from severe winter storms in early March have also been reported in the St. Louis district.

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Last update: March 12, 1997