March 18, 1998
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Prepared at the Federal Reserve Bank of St. Louis and based on information collected before March 9, 1998. 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.
All district economies continue to show overall strength, but a few have noted some recent moderation in their rates of growth. Retail sales are generally up in most districts, exceeding retailers' expectations in many of them. Auto sales, however, are generally down, although demand for pickup trucks and sport utility vehicles remains high. Industrial activity is on the rise in most parts of the country, with orders and production up. Most districts, though, are experiencing a decline in exports to Asia. Continuing the theme of recent reports, the demand for labor remains strong, with nearly all districts reporting shortages of workers at the entry level and in certain skilled categories. Widespread labor market tightness appears to have increased the degree of wage pressures compared with recent reports. Pressures on product prices remain eerily calm, as domestic competition, productivity gains and the Asian situation help to constrain production costs. Residential housing markets, buoyed by low interest rates and mild weather in many districts, are unseasonably hardy. Commercial real estate markets are healthy across districts. Loan demand, especially for residential mortgages, remains strong in most districts. Agricultural conditions are mixed, with some districts reporting that an abundance of precipitation has harmed crop prospects and delayed field preparation activities.
Auto sales in most districts are down from one year ago. While sales of pickup trucks, sport utility vehicles and minivans remain strong, sales of passenger cars are either flat or down. The Richmond district reports, though, that sales of new and used vehicles have exceeded expectations. The Dallas district notes that vehicle sales surged in January, before slowing somewhat in February. Almost all districts report that vehicle inventories are too high, although contacts in the Kansas City district are satisfied with their stocks. Contacts in most districts expect some strengthening in sales this spring.
Makers of building materials and related products generally report continued brisk or rebounding sales due to strength in construction markets. The Dallas district, however, notes that sales of construction materials are down because of a wetter than usual February. Aircraft and heavy truck parts, primary and fabricated metals, and steel production are reportedly strong in the Boston, Chicago, Cleveland, Minneapolis, St. Louis and San Francisco districts. Demand for business services, particularly real estate services, and telecommunications services is up in the Richmond and San Francisco districts. Contacts in the Dallas district, though, report that sales of telecommunications equipment are essentially flat.
The apparel industry is in decline in almost all districts. Plant closings, falling sales and declining orders are common, reflecting both increased import penetration and a weakening of export demand. Just about every district reports that exports of many goods to Asia are dropping. The Richmond district, however, notes that activity in the district, except in the textiles industry, has not been affected by the Asian situation. The Boston district adds that the strong dollar has been hurting exports to all parts of the world, not just to Asia.
Firms have used a variety of methods to ameliorate these shortages. For example, in the Boston and Cleveland districts, firms are hiring temporary workers and outsourcing production more often, while in the Atlanta, Chicago and Kansas City districts, firms are resorting to worker training programs and various incentive or award programs.
Wages and Prices
Price pressures appear to be less pressing than wage pressures, according to most district reports. Manufacturing raw materials costs have reportedly increased little, if at all, in the Boston, Chicago, Cleveland, New York and Philadelphia districts. At the same time, nonmanufacturing firms in the New York district, as well as manufacturing firms in the Kansas City and St. Louis districts, note higher input prices. In addition, a few districts continue to report that competitive pressures and productivity gains have worked to offset higher materials prices and to limit product price increases. Although a few firms in the Chicago district have attempted to raise their selling prices, these efforts have not been entirely successful.
The evolving Asian situation has had some depressing effect on prices, according to most district reports. The Dallas district reports that Asian currency movements against the U.S. dollar have caused widespread declines in the prices of commodities, computer components and petrochemical products. In the Atlanta district, some import prices have fallen, although not among importers with fixed contracts. Meanwhile, retailers in the New York district report that no significant price declines in consumer goods have occurred.
Construction and Real Estate
Commercial real estate markets are uniformly described as strong by reporting districts. Contacts in a number of districts are reporting declining vacancy rates, rising rental rates and increasing speculative construction. The commercial real estate market has "picked up dramatically" in the Richmond district, with "floods of tenants looking for space." Nonresidential construction and prices are up in California, while the Dallas district reports a sharp increase in land prices. Contacts in several other districts, however, see signs of an impending slowdown and are worried about the pace of speculative building.
Banking and Finance
Agriculture and Natural Resources
The unseasonably warm winter weather has affected the energy extraction industries to varying degrees. The Dallas and Minneapolis districts report increased activity, while energy output increases have begun to decline in the Kansas City district. Solid demand for steel continues to bolster iron ore output in the Minneapolis district.