January 20, 1999 Summary

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Prepared at the Federal Reserve Bank of Boston and based on information collected before January 11, 1999. 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. According to reports from business contacts in the twelve Federal Reserve districts, most regions are showing solid economic growth overall, despite mixed or weak results for individual sectors in some areas. New York, Philadelphia, and Richmond report a pickup in activity recently, while Boston, Atlanta, Cleveland, Kansas City, and San Francisco indicate that the pace of growth for at least some sectors has slowed. Most districts report generally stable or declining prices for both producers and consumers, but exceptions exist. For example, home prices are rising in some districts, fees for services are said to be up in Dallas, and Boston mentions price increases by selected manufacturers. Energy and most agricultural prices are low by historical standards. Retail discounting just before Christmas and around the turn of the year was more extensive than usual in some areas. Reports from all districts mention labor market tightness, with Atlanta, Chicago, and Richmond recording heightened wage pressures in some sectors and St. Louis citing increased worker "poaching." However, the Kansas City, Boston, and San Francisco districts say some extreme shortages have eased. Looking forward, business contacts in most districts remain optimistic about 1999, especially the first half. Philadelphia and Atlanta indicate that some contacts expect business activity to accelerate early this year. However, respondents in most districts expect somewhat slower growth in 1999 than in 1998. Consumer Spending Most districts report that retail sales grew at a moderate pace during the holiday period. By exception, the Kansas City, Philadelphia, and Minneapolis districts experienced brisk sales growth. Respondents in the Boston and Philadelphia districts cite mixed sales results, with some sectors showing strong activity and other sectors experiencing softness. Only in the Atlanta district do contacts report weak holiday sales, up only slightly from a year earlier. Retailers in many districts report a surge in sales late in the season, led by extensive price discounting, which brought inventories to desired levels. Only in the St. Louis district are retail inventories said to be higher than desired. Sales of consumer durables are reportedly strong in every district, with the most robust results in home appliances, home furnishings, consumer electronics, and automobiles. By contrast, unseasonably warm weather in most of December weakened sales of winter apparel and tourist activity in many districts; some districts report a pickup in winter merchandise sales with the advent of cold weather. Discount retailers reportedly profited more from the late buying surge than did department stores. There is little evidence of price pressures at the retail level and most districts say that retail wages are rising moderately. In almost all districts, retailers discounted extensively, but where consumer demand was very strong, less discounting occurred, leaving consumer prices about flat. Manufacturing Many districts report mixed results in manufacturing. On the whole, Dallas notes continuing expansion, and Philadelphia and St. Louis indicate some recent pickup. By contrast, New York and Kansas City report overall declines, while Atlanta indicates that factory activity remains sluggish. The Cleveland and Chicago reports cite strong production and expectations of continued strength in the motor vehicle industry. Respondents in Chicago, St. Louis, and San Francisco indicate positive trends in construction-related manufacturing; in Dallas this sector is flat, although orders for cement remain at a high level. Boston and San Francisco cite medical equipment as a bright spot. Various districts mention depressed revenues for producers of paper, steel, agricultural equipment, and oil-related products. Boston and Dallas report that the semiconductor industry is doing substantially worse than a year ago but seems poised to stabilize or improve in coming months. Almost every district cites examples of manufacturers whose business is being hurt by weak exports, particularly to Asia. In most cases, industrial prices are flat or falling. Steel and paper prices reportedly are under intense downward pressure as a result of import competition (and, in the case of paper, weak demand). Prices for refined petroleum and petroleum derivatives remain low or have fallen, and Dallas reports that full capacity utilization has resulted in "huge" inventories of home heating oil. Chicago and Kansas City mention price increases for some construction materials. Manufacturers face disparate labor market conditions across the country, according to district summaries. For instance, Chicago indicates ongoing softness in the demand for manufacturing help, while San Francisco says that filling vacancies remains difficult. On the whole, pay pressures in manufacturing seem unchanged or slightly more moderate than in the recent past. Some workers are experiencing a weaker job market because of recent layoffs, especially in trade-sensitive sectors or regions. Business Services Districts reporting on the business services sector describe an extremely tight labor market. Most districts also report both wage increases and stable selling prices. In Cleveland, New York, and Dallas, temporary employment firms are having difficulty finding workers to fill their orders. Customer service workers, secretaries, and receptionists are in high demand in Cleveland. In Dallas, contacts report strong demand for system programmers and other computer-related workers. Though job growth in business services appears generally strong, some exceptions exist. Contacts at temporary employment firms in Richmond and Chicago note ongoing softness in the manufacturing sector. In both Richmond and San Francisco, service activity, including legal and accounting, was flat. Construction and Real Estate Many districts report unusually high levels of real estate activity in November and December. Residential construction did not experience typical slowdowns in December; unseasonably mild winter weather and favorable demand conditions are cited as explanations. High levels of new home construction are reported by the New York, Cleveland, Richmond, Chicago, St. Louis, Kansas City, Dallas, and San Francisco districts. Chicago and Minneapolis are experiencing very strong markets for new construction, with large increases in the number of permits and new home sales. Commercial development is also robust in the Chicago and San Francisco districts. Labor markets are tight in several districts, with especially short supplies of skilled tradesmen, such as plumbers and electricians. Existing home sales are strong as well. Parts of the Boston, New York, and Chicago districts tallied record sales of existing homes in November or December. Other districts, including Richmond, St. Louis, and San Francisco report high but stable levels of sales. Small or moderate increases in home prices are reported by Boston, New York, Richmond, and St. Louis. The commercial real estate market is moderately active. New York and Richmond report small increases in office rental rates. Office vacancy rates are increasing slightly in the tight Manhattan market, but declining in Minneapolis-St. Paul and the Richmond district. Financial Services Districts reporting on banking activity indicate that demand for commercial loans is mixed. Dallas reports that an earlier slowing in commercial lending has abated, while New York notes a seasonal decline in commercial lending in December. Business lending expanded at a healthy pace in Atlanta. Some tightening of underwriting standards is reported by Philadelphia, San Francisco, and New York. Some banks in Cleveland note adverse effects of the Asian crisis on their industrial customers. Most districts report continued strong demand for residential mortgages. Refinancing activity was especially strong in Atlanta while Philadelphia reports large increases in mortgages to finance newly built homes. Agriculture and Natural Resources Agriculture, oil, and mining continue to face financial pressures. According to contacts in the Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco districts, low prices for cattle, hogs, wheat, feed grains, cotton, and some vegetables have been squeezing profits and, in some cases, failing to cover production costs. Large domestic supplies, falling demand for feed stocks, and reduced exports are reportedly responsible for the low prices. Hog farmers have been particularly hard hit; hog prices in mid-December were at 30-year lows and nearly 60 percent below late 1997 levels, although Chicago reports that hog prices recovered modestly in early January. In general, unless prices improve, many farmers expect to lose money in 1999, and agricultural lenders in the Minneapolis and Kansas City districts express some concern about future loan repayments and borrower solvency. By contrast, dairy farmers are facing the most favorable milk-to-feed-cost ratios in years. Looking ahead, some contacts in the San Francisco district report a pickup in export orders, especially for meat. The late December freeze did little apparent harm to winter crops except in California, where the cold damaged 50 to 70 percent of the citrus crop. Conditions in energy and mining worsened late last year, according to respondents in Atlanta, Minneapolis, Kansas City, and Dallas, despite the cold snap in late December that pushed natural gas prices up slightly. Contacts in Minneapolis, Kansas City, and Dallas report that U.S. rig counts are near post-World War II lows. The rig count has fallen 34 percent, year-over-year, in the Kansas City district and by even larger percentages in Montana and North Dakota. Energy producers have cut exploration, capital spending, and production plans; demand for capital equipment and oil services is deteriorating, and, in the Dallas district, energy sector layoffs are widespread. Contacts in the Minneapolis district also report that copper prices are near shutdown levels at Montana mines, while Minnesota and Michigan iron mines expect to see significant drops in output in 1999 because of increased imports of iron ore and finished steel. Return to top         Boston