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Prepared at the Federal Reserve Bank of Chicago and based on information collected before October 26, 1998. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
District reports suggested that the pace of economic expansion moderated in September and October amid signs of slowing in some sectors. Retail sales were mostly at or below merchants' expectations, but there were only scattered reports of unanticipated inventory accumulation. Real estate and construction activity remained generally robust, especially in residential markets, but most Districts reported that more stringent credit standards were a factor slowing commercial real estate activity. Manufacturing activity continued at relatively high levels, but was the sector most often cited as showing signs of softening. Lending activity varied by region, with demand remaining strong, although many lenders were reported to be tightening standards somewhat, mostly on business loans. Labor markets remained very tight in most Districts, although demand for workers in manufacturing industries was softening in some areas. Crop conditions varied across Districts as the fall harvest progressed. Low commodity prices and adverse weather conditions in some areas were increasing concerns among farmers and agricultural banks. Upward pressure on most wages remained subdued. Prices at the retail level were little changed, while producers' prices for intermediate inputs were generally flat to down.
Virtually all Districts reported that businesses and consumers remained cautious about the economic outlook. Boston and St. Louis noted increasing concern while Philadelphia, Atlanta, and Minneapolis reported a modestly improved outlook.
Consumer Spending & Tourism
Most Districts reported slowing retail sales growth with results coming in at or slightly below most merchants' expectations. However, the Boston, Cleveland, Richmond, and San Francisco reports suggested that sales gains were moderate to strong. Discounters were reported to be outperforming other retailers in some Districts. Light vehicle sales were picking up in the Cleveland, Richmond, and Chicago Districts while softening in Philadelphia, Dallas, and Kansas City. Sales of other big-ticket items (such as jewelry, home furnishings, electronics, appliances, etc.) were strong in many Districts, but mixed in Chicago and soft in San Francisco. Apparel sales picked up as the weather cooled in the Chicago District but remained slow in New York and San Francisco. Retailers in most areas reported satisfactory inventory levels, but there were a few reports of inventory overhangs. However, only the Chicago District noted greater-than-usual promotional activity to clear them. Tourism and travel spending was reported to be very strong in the Boston, Minneapolis, and San Francisco Districts, but slowed in the Atlanta region where Hurricane Georges and weakness in Latin American economies hindered travel.
Construction & Real Estate
Residential building and sales continued strong, but generally flat, in most of the country. The Richmond District reported an increase in new housing activity, while Atlanta and Kansas City suggested some softening. New York indicated general strength with pockets of weakness, particularly in the New York City area. The pattern was similar for existing home sales, with most regions reporting solid, but flat, sales volumes. The Chicago District noted exceptional activity in September, with no signs of the typical seasonal slowdown in October. Atlanta and Richmond said sales of existing homes had softened somewhat recently. The Chicago and Richmond Districts reported some weakness in sales of higher priced homes, the former attributing this to recent volatility in financial markets.
Nonresidential construction activity, both private and public, remained strong in most Districts, although there were signs of softening in commercial real estate markets. St. Louis and Richmond reported noticeable decreases in speculative building. A contact in the Richmond District attributed the weakness, in part, to the lack of credit, adding that "spec" development that wasn't already underway had come to a halt. Minneapolis, on the other hand, was reporting the strongest office market in over a decade.
Reports indicate that growth in overall manufacturing activity slowed in 11 of the 12 Districts. St. Louis was the only District not reporting overall softening, with its strength due largely to production of transportation equipment. Three-quarters of the Districts indicated that economic turmoil abroad, especially in East Asia, was at least partially responsible for softening demand. Steel producers in the Cleveland, Atlanta, and Chicago regions attributed a significant slowdown to a dramatic increase in imported steel over the late summer and early fall. Producers of semiconductors and other high-tech equipment noted decreased shipments in half of the Districts. Agricultural equipment makers cut fourth-quarter output schedules, but producers of other heavy equipment continued to run near capacity. Production in the auto industry picked up amid efforts to restock strike-depleted inventories. Increased shipments of personal computers were noted by the Dallas and San Francisco Districts.
Business lending activity was mixed across Districts, while low interest rates buoyed consumer and home mortgage lending activity. Philadelphia, Cleveland, and St. Louis reported increasing business lending, while Atlanta, Minneapolis, and Kansas City noted declines. Most regions continued to experience strong demand for business loans, but increased uncertainty about economic conditions made lenders more cautious. Tightening of credit terms or standards on business loans was reported in two-thirds of the Districts, with the majority of them pointing to a less favorable economic outlook as justification. Commercial real estate was the segment most often targeted for tightening though there were a few reports of tightening on merger and acquisition lending. Contacts in the Philadelphia, Cleveland, and San Francisco Districts suggested that there was a pickup in loan demand from borrowers who typically would have gone through other channels such as capital and equity markets.
Consumer lending activity was reportedly strong in most Districts, especially in New York, Chicago, and Kansas City. Cleveland noted a further softening of consumer lending conditions from their last report. Mortgage originations and refinancing activity picked up as mortgage interest rates fell. Asset quality on consumer loans was generally unchanged from the last Beige Book report, and only two Districts--New York and Kansas City--reported tightening standards, albeit modest.
Concerns at agricultural banks continued as low commodity prices persisted. Chicago reported that after a few good years most farmers could withstand the low prices this year, but could falter if soft prices continued well into next year. Banks in the Minneapolis District continued to be very concerned, as some banks sought to diversify by branching into urban markets. Lenders in the Kansas City District noted a deterioration in their agricultural portfolios from last year.
Labor Markets, Wages, and Prices
Labor markets remained very tight in most Districts, but there were few new reports of intensifying wage pressures. Dallas was the only District to indicate "marked" slackening in some labor market segments. Reports suggested that labor market tightness continued to hamper business creation and expansion plans in some areas. Contacts in the Atlanta District reported difficulty in finding mid-level managers for positions that were downsized just a few years ago. Shortages of workers persisted in most areas, but appeared to be no more pronounced than in previous reports. Information technology, skilled trades, and construction workers were most often cited as being in short supply.
Reflecting a general softening in the industrial sector, manufacturing employment reportedly declined in nearly half the Districts, while St. Louis and Kansas City indicated increased hiring in some segments. The Boston and New York Districts noted layoffs and bonus reductions in the financial services industry due to recent volatility in financial markets. By contrast, the Chicago District noted little effect.
Upward pressure on wages and prices remained generally subdued, according to most District reports. Cleveland, however, noted that temporary help agencies had increased wages in order to fill positions in the last three months. Contacts in the Atlanta District suggested that, while wages continued to go up in parts of the region, employers were absorbing most of the added costs and not passing them along in the form of higher prices. Most producers' input prices declined while output prices generally remained flat. The general tone of District reports suggests little, if any, change in retail price pressures.
Agricultural conditions varied widely across regions and concern about deterioration in financial conditions in the industry increased. The fall harvest generally progressed at or ahead of normal in the Midwestern Districts. Chicago, Cleveland, St. Louis, and Minneapolis reported that corn and soybean yields and quality were good to excellent. However, crop conditions in the southern and western U.S. were decidedly less favorable. Dallas noted that conditions remained very difficult, with the combination of bad weather, high costs, and low prices leaving many agricultural operations in serious financial shape. St. Louis observed that weather conditions in the southern part of its District had adversely affected crop conditions. San Francisco reported that poor yields and a late harvest adversely affected the California industry.
With the exception of dairy producers, who were benefitting from low feed costs and near record product prices, the industry was facing low prices that resulted from the squeeze generated by a substantial carryover, large new crop production, and a marked cutback in demand from foreign markets, Asia in particular. Contacts in the Dallas District noted that as many as 25 percent of the region's producers would discontinue production over the next year. Kansas City observed that the downturn in the farm economy was also being felt by rural "Main Street" businesses, and farm equipment dealers and manufacturers.
Other Natural Resources
Activity in the extractive industries continued weak. Kansas City noted that an increase in oil prices in September had resulted in a marginal gain in energy activity; however, declining prices in October were expected to reverse that move. Dallas observed that energy activity continued to decline in that region and that oil directed drilling was near an all-time low. Severe weather conditions in the Gulf of Mexico forced temporary abandonment of some drilling rigs, but damage was less than expected. Minneapolis noted that an increase in steel imports forced the curtailment of activity in some Minnesota iron mines.