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New York
St. Louis
Kansas City
San Francisco

Full report

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.

Consumer Spending
Retail sales increased in most Districts in late June and July. Boston, Cleveland, Dallas, and Minneapolis reported strong sales growth since the last report, often exceeding merchants' expectations. Among other Districts, Chicago, Kansas City, New York, Philadelphia, and San Francisco reported steady but healthy retail sales, while reports from Atlanta and Richmond indicated mixed sales results. In general, consumer spending remained robust across many product lines and types of outlets. Sales were strongest for seasonal women's and children's apparel and big-ticket items such as motor vehicles, home furnishings, and major appliances. Retailers attributed the continued strength of retail sales to strong consumer confidence, robust home sales creating demand for complementary items, and favorable financing terms for large purchases.

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.

Manufacturing activity remained at a high level in recent weeks, although growth slowed in most Districts. Boston, Chicago, Dallas, Kansas City, and St. Louis reported good growth in non-GM related manufacturing. In Boston and Dallas, telecommunications manufacturers reported good sales gains; in Chicago strong demand for construction equipment and building materials kept producers running near capacity in recent weeks; in St. Louis, robust demand for refrigerators and other appliances induced overtime hours for some producers. In general, manufacturers reported no difficulties obtaining materials or supplies, and prices on many inputs to production were either flat or declined.

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
Construction activity and real estate markets remained robust in most parts of the nation. Home sales were characterized as strong to booming in Dallas, Kansas City, Minneapolis, Richmond, and St. Louis, and above year-earlier levels in Atlanta, Chicago, Cleveland, and San Francisco. Low mortgage interest rates continued to attract first-time buyers, fueling demand for low to moderately priced homes in many regions. Only Richmond reported concerns about an excess supply of homes on the market; all other Districts indicated that housing inventories were low to moderate and consistent with the strong growth in home demand.

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.

Non-Financial Services
Districts reporting on the services sector indicated continued strong growth in recent weeks. In Dallas, demand for business services continued to rise, fueled by initial public offerings, mergers, and acquisitions. In San Francisco, sales of telecommunications and cable television products rose above an already high level. Cleveland reported that transportation and shipping activity remained very strong in the District, largely due to increased import volumes from East Asia. Unbalanced trade flows to and from East Asia produced an oversupply of empty containers at West Coast ports, while in East Asia new containers were being built to meet the demands of their exporters. In New York, one large retailer stocked up on holiday-season imports earlier than usual due to shipping bottlenecks at West Coast ports.

Banking and Finance
Loan demand was steady but strong in most Districts in recent weeks. However, the composition of loan demand differed among regions. Growth in loan demand in Chicago, Cleveland, Kansas City, and San Francisco was broad-based. In Philadelphia, commercial and industrial lending was flat, while consumer lending rose slightly. In Dallas, demand for home and auto loans increased, while in Richmond demand for home mortgage and commercial construction loans increased.

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
Reports on agricultural conditions were mixed across the Districts. Reports from Cleveland, Chicago, Kansas City, and St. Louis highlighted generally good agricultural conditions in their regions, as favorable weather put many crops at or ahead of schedule. In the South, unseasonably hot, dry conditions distressed crops, in many cases destroying fields that could not be irrigated. These drought-like conditions also have damaged range and pasture lands.

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
All Districts reported that labor markets remained tight in recent weeks. Labor shortages were broad-based, and some skilled workers were in especially short supply. Most areas noted problems finding information technology workers and construction tradesmen, such as framers. In addition, a number of Districts noted shortages of quality entry-level workers for retail positions; certain skilled workers such as machinists and welders; finance and banking personnel; and drivers for both short- and long-haul delivery. However, general wage increases remained limited, as employers chose to use one-time payments and merit increases to attract and retain specific types of employees.

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.

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Last update: August 5, 1998