August 5, 1998
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Prepared at the Federal Reserve Bank of San Francisco based on information collected before July 27, 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.
Reports from Federal Reserve Districts generally indicated a high level of economic activity and further expansion recently, though with moderation in growth for some regions and sectors. In most Districts, retail sales were in line with retailers' expectations, and inventories generally were characterized as balanced. Manufacturing activity remained at a high level, although the GM strike, weakening demand for exports, and general slowing in the high-tech sector damped expansion. Robust sales growth in residential and commercial real estate markets continued to fuel construction activity in most of the nation. Reports on the agricultural sector were mixed, with drought-like weather in the South and low prices for some products tempering the outlook. Financial institutions across the country continued to report healthy loan demand and generally accommodative credit conditions. Despite the high level of economic activity in recent weeks, many Districts noted that labor shortages, shipping bottlenecks, and continued weakness in East Asia were beginning to temper growth in their regions.
For the most part, retailers reported that inventories were adequate for anticipated sales growth. However, shortfalls were noted for some products. Unseasonably hot weather caught Midwest retailers with inadequate inventories of fans and air conditioners. Declining inventories of GM products constrained sales at GM dealers and service centers across the country, but other auto dealers reportedly maintained sufficient supplies of new cars and parts.
Tourist activity picked up in recent weeks, as the summer travel season got under way. At beach resorts along the East Coast, hotel bookings and day trip traffic reportedly surpassed year-earlier levels. In Boston, increased tourist traffic from Europe offset declines in business from East Asia and contributed to the sector's robust growth. Fires depressed tourism in much of Florida, but other parts of the Southeast attracted visitors, including those interested in riverboat gambling and Mississippi Gulf Coast casinos. In the West, tourism-related restaurant sales, car rentals, and hotel occupancy rates reportedly were strong, and attendance at parks such as Yellowstone and Mount Rushmore rose above year-earlier levels.
The GM strike and continued weakness in East Asia slowed manufacturing growth in many regions. In the Atlanta, Chicago, Richmond, New York, and St. Louis Districts the GM strike directly reduced manufacturing employment, idling workers at GM plants and related suppliers in these areas. The GM strike also affected electronics manufacturers in Dallas and chemical, plastic, and steel producers in Cleveland. Weakness in East Asia and increased low-cost imports continued to depress demand for a variety of U.S. products. Manufacturers reported that sales and orders for apparel and textiles, computing equipment, electronic components, industrial machinery, paper, and wood products fell in many Districts. Reports also indicated employment reductions through layoffs or attrition at some companies.
Construction and Real Estate
Commercial real estate demand also grew rapidly in many areas, although growth was less uniform across Districts than for residential markets. Declining vacancy rates and increasing rental prices were present in a number of cities. In Boston, low availability and limited new construction of commercial space have forced some large and growing firms to relocate to the suburbs. In Manhattan, asking rents on Class A properties have risen 25 percent since last year. In Minneapolis and St. Paul, construction of large office buildings was at its highest level in a decade. In the West, respondents from California reported that low vacancy rates for commercial office and warehouse space have prompted commercial and industrial construction in the tightest markets. Only Dallas expressed concern about over building.
Banking and Finance
Overall, Districts characterized financial markets as intensely competitive, with quality borrowers receiving good terms and rates. Most Districts reported no signs of deteriorating credit quality. Cleveland, Dallas, and New York reported that loan delinquencies and writeoffs fell in recent weeks.
Agriculture and Natural Resources
In other Districts, reports focused on prices rather than weather. Minneapolis and San Francisco reported that low prices have reduced profitability among agricultural producers. Price declines for some commodities have been so large that producers cannot cover costs. In addition, many storage facilities remain stocked with the 1997 crops, thereby producing higher storage costs for farmers as they seek alternative facilities.
Labor Markets, Wages, and Prices
Goods prices remained stable during the recent survey period, although there were scattered reports of increases in some services. In general, declining input prices and intense competition were credited with keeping retail prices in check. Manufacturers and retailers reportedly cannot sustain price increases in the current competitive environment.