January 21, 1998
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Prepared at the Federal Reserve Bank of Kansas City and based on information collected before January 12, 1998. 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.
Federal Reserve Districts reported that as 1997 came to a close the pace of economic growth continued to be moderate. After a slow start in early December, retail sales gathered momentum in the days before Christmas and during the post-holiday weeks. Overall, retail sales for the holiday season were mainly at or slightly above expectations. Motor vehicle sales picked up at yearend due mainly to strong sales of sport utility vehicles, minivans, and light trucks. Manufacturing activity remained fairly strong, although some Districts reported signs of easing. Construction and real estate markets were strong at yearend, with tight markets for office and industrial space in several regions. Some Districts reported evidence of more speculative construction in response to increasing rental rates. Lending activity was brisk throughout the nation despite softer demand for consumer loans. Agriculture reports were generally favorable, although adverse weather has hurt livestock production in some Districts. The impact of Asian financial turmoil was felt in most Districts. Manufacturers and agricultural firms report weaker exports to Asia, and there was some evidence of increased competition from Asian products in U.S. markets. Despite lower prices, oil and natural gas drilling activity was strong last month.
Labor markets remained tight or very tight in all Districts. Reports of firms scaling back production or expansion plans due to labor shortages were more common. Some Districts reported increased wage pressures, particularly for retail workers and some skilled occupations. According to business respondents, prices were generally flat due to intense competition and lower import prices.
Automobile dealers enjoyed good overall results last month, although sales were mixed across vehicle categories. Sales of sport utility vehicles, minivans, and light trucks remained stronger than sales of passenger cars.
Labor availability remained a major concern in most Districts. Manufacturers continued to report difficulties in hiring skilled technical workers, such as engineers. Some contacts in the St. Louis District could not meet demand because of a shortage of workers, and a major producer of high-tech equipment in the Chicago District had to cancel some projects because of the shortage of engineers.
Construction and Real Estate
Low and declining vacancy rates for retail, office, and other commercial space in urban areas began to put upward pressure on rental rates. Evidence of some speculative construction was cited by Boston, Atlanta, St. Louis, and Dallas as a response to persistently strong demand for commercial and industrial space.
The housing market remained strong in most regions. Unseasonably warm weather in many areas of the country boosted traffic and sales of new homes above their average December levels. Housing markets showed further signs of strength in New York and Dallas and a slight rebound in Chicago. In the Minneapolis District a fast construction pace became the norm.
Banking and Finance
Most Districts reported that demand for mortgage refinancing was strong due to falling mortgage rates but that demand for consumer loans remained sluggish. New York, Cleveland, and Dallas noted that loan delinquency rates declined or stabilized at moderate levels.
Lenders in most Districts reported that strong competition was reducing the spread between borrowing and lending rates, particularly for quality borrowers. In contrast, contacts in Richmond indicated that pricing spreads had been maintained. In general, lending standards were unchanged in most of the Districts.
Agriculture, Energy, and Natural Resources
In the livestock sector, Kansas City and Minneapolis reported favorable conditions, while Dallas reported that snow and cold temperatures hurt some livestock operations. San Francisco also reported herd losses due to unfavorable weather and grazing conditions, particularly in the mountain states. Chicago noted that a seasonal rise in domestic hog marketings and a bulge in hog imports from Canada contributed to a decline in U.S. hog prices.
Minneapolis, Kansas City, and Dallas reported strong drilling activity for oil and natural gas last month despite weak energy prices. Minneapolis noted that output for iron ore and most forest products may stabilize in 1998 after strong or moderate growth in the last two years. San Francisco reported that a number of western mines had shut down operations due to falling gold prices.
Labor Markets, Wages and Prices
Some Districts reported increased wage pressures, especially for some specific industries and skilled occupations. Boston and Richmond reported upward wage pressures in the retail sector. Boston also noted that some manufacturers began offering double-digit pay increases in categories such as engineering. San Francisco reported that wage and salary pressures remained high in financial institutions. Some employers in the Dallas District began offering higher compensation for skilled and semiskilled workers in the service sector and for skilled workers in construction, fabricated metals, bricks and lumber. Atlanta, Chicago, and Minneapolis reported that wage pressures were generally being held in check, with more significant wage pressures confined to specific skilled workers.
Most Districts suggested that employers continued to be creative in finding and recruiting additional labor. Some companies were subsidizing transportation for employees located far away from their work sites. Employers in several Districts adopted flexible work schedules and more generous benefit packages.
While reports of price changes for goods and services were mixed, prices overall remained generally flat. At the retail level, many Districts reported that most of the holiday sales occurred late in the season at large discount levels. Richmond reported that prices in the retail, service, and manufacturing sectors grew at a somewhat slower pace than in the last report, except for soaring prices for starter homes in a specific area of North Carolina. Manufacturers in most areas reported stable prices for their inputs and final goods, due to intense competition and lower import prices. Minneapolis noted that manufacturers of intermediate goods continued to receive pressure from customers to lower prices. Tourism appeared to be an exception from the overall price picture, with Boston, New York, and Atlanta reporting higher rates for hotel rooms. Higher rental rates were also reported for commercial and industrial space in many urban areas.