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New York
St. Louis
Kansas City
San Francisco

Full report

Prepared by the Federal Reserve Bank of Cleveland based on information collected before September 8, 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.

The overall tenor of the District reports suggests that the economy is continuing to expand at a moderate pace, although several Districts indicated slowing in some sectors. Notably, the New York District reports that significant segments of its economy were slowing, and the Dallas District notes that economic activity decelerated in August as the manufacturing sector declined. Still, most Districts see at least modest growth in business activity from generally high levels. Despite some continuing--and in some cases increasing--softness in certain industries due to the weakened Asian economies, many Districts indicate unusually high levels of construction and good retail sales growth.

While there appear to be only marginal changes in the strength and pattern of the business expansion since the last report, several Districts indicate a sharp deterioration in both business and household expectations regarding the economy in the fourth quarter and in 1999. The Philadelphia, Atlanta, St. Louis, and San Francisco Districts all report a less buoyant economic outlook than earlier, and the Boston District sees increased uncertainty about 1999. In the Minneapolis District, "the number of sources expressing concern about the near future is striking."

A large number of Districts continue to exhibit labor market tightness, which appears to be pushing wages up at a faster pace. On the other hand, retail prices remain generally steady or are declining slightly in most Districts, and falling import prices have helped push industrial commodity prices lower.

Construction activity is characterized as very strong across the nation, although a few Districts report signs of slowing in some markets from high levels of activity. New and existing home sales remain high in most areas, and low inventories of unsold homes were noted in the Atlanta and Kansas City regions. Office vacancies are low or falling in the New York, Philadelphia, Atlanta, and Chicago Districts, although the St. Louis District has seen vacancy rates creep up slightly. In the Dallas region, there is concern about overbuilt industrial space.

The unusually strong growth in building activity appears to be constrained by the availability of construction workers in some areas. The Cleveland, Atlanta, and Chicago Districts note shortages of construction workers; for the San Francisco District, finding qualified construction workers posed a significant obstacle to new construction in areas where building is brisk. Rents are rising in the New York and Philadelphia regions.

Retail Sales
Retail sales remain strong in many Districts. Leading categories in recent sales growth include electronics, appliances, and furniture. Apparel items were also thought to be selling especially well. While a few Districts describe back-to-school sales as spotty, these results may have been affected by the timing of the Labor Day holiday weekend (which is not captured in this report.) In addition, auto sales were mixed by region and by model. In some cases, a continued shortage of General Motors products was thought to be still restraining auto sales.

Retailers were mixed in their reaction to the recent fluctuations in U.S. and foreign capital markets. Boston notes some uncertainty among retailers they contacted concerning a possible fallout from financial market turmoil for 1999 and beyond, although the St. Louis District reports that retailers there have not yet observed a falloff in sales because of swings in the stock markets and are optimistic about sales prospects for the rest of the year. Similarly, contacts in the Richmond District remarked that retailers there do not expect the recent volatility in financial markets to trim their sales in the coming months.

The industrial sector continues to be affected by softness in the Asian economies. Chemicals, construction materials including steel, textiles, and some types of capital goods industries have been hurt by reduced exports to Asia.

Nevertheless, domestic demand continues to keep industrial activity steady at a relatively high level in many, if not most, regions. Domestic orders growth appears to be holding nearly steady or rising slightly in many regions. In the Boston District, orders for medical equipment are said to be rising strongly. A few Districts indicate a drop in computer-related manufacturing. In the Dallas region, demand for semiconductors is said to be still weak; in the San Francisco District, sales and market conditions weakened for computer and electronics manufacturers.

Agricultural conditions vary greatly by region. In the Midwest, including the Cleveland, Chicago, Minneapolis, and northern St. Louis Districts, crop conditions are highly favorable. The Kansas City District expects a bumper crop of corn and soybeans, except in Oklahoma where drought damage has been severe. Bad weather conditions are thought to have reduced yields in the Dallas and San Francisco regions, and Hurricane Bonnie is reported to have caused significant crop damage in some parts of the Richmond District.

The Districts report that the combined influence of generally good harvests and weak foreign demand has exerted considerable downward pressure on agricultural commodity prices. In several cases, these influences are thought to be putting stress on farmers' balance sheets. The Dallas District indicates that low yields and low prices have led to serious financial stress for many crop producers; in the Minneapolis region, where high yields are not sufficient to offset the low crop prices, farmers reportedly face the most serious financial situation in a decade. Kansas City, however, reports that agricultural bankers in its region were not especially concerned about low crop prices.

Labor Markets and Wages
Labor shortages are still being reported in most regions, and many Districts have seen an accelerated rate of compensation growth. The workers in greatest demand are information systems personnel, including programmers. Construction and retail workers are generally thought to be in short supply. The District reports also note insufficient numbers of engineers, architects, investment managers, bus drivers, and administrative assistants. The Boston District indicates that worker shortages are impinging on retail expansion plans. In the Cleveland District, there are concerns that farm worker shortages will make it difficult to harvest Kentucky's tobacco crop. In the Kansas City region, employers are having difficulty hiring at almost all levels.

Most, although not all, Districts have seen a pickup in compensation growth this year. Wage increases are somewhat higher in many areas, although sharply higher growth rates are seen only in fields where labor shortages have become critical, such as information systems. The Chicago District sees wage growth as stable but reports increased nonwage compensation. Minneapolis notes that strikes have become a more prominent feature of the collective bargaining environment than in recent years.

The District reports show wide agreement that price pressures remain relatively subdued. Falling import prices are said to be having a major impact on a variety of retail goods prices, such as apparel, consumer electronics, and food. However, the San Francisco region notes that prices for services such as airline travel, health care, and cable TV have started to rise significantly.

Manufacturing prices are flat, and in some industries, such as lumber, petrochemicals, steel, and a number of other commodities, prices have been falling. The only significant upward movement has occurred in the construction materials industry, with prices rising in the Cleveland, Atlanta, and Kansas City regions.

Loan demands are mixed by region and by category. In the New York and Philadelphia Districts, loan volumes have been declining recently, although seasonal factors may be at work in the former case. On the other hand, lending activity remains brisk in the Richmond, Dallas, and San Francisco regions. In the Cleveland District, demand for commercial loans continues to strengthen, but consumer borrowing has been flat. In the Kansas City region, consumer, mortgage, and agricultural loans increased, while other loan categories held steady.

Credit quality also varies by region. Delinquency rates are reported unchanged in the Cleveland District and are stable to slightly lower in the New York District. In the Richmond, Minneapolis, and San Francisco regions, credit standards have deteriorated, although a few banks in the Dallas District have tightened lending standards recently.

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Last update: September 16, 1998