June 16, 1999
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Prepared at the Federal Reserve Bank of Kansas City and based on information collected before June 7, 1999. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
District reports indicate that the U.S. economy remains strong, with gains in activity widespread. Retail activity in most districts has shown little sign of slowing, and consumers remain upbeat about the economy. Home furnishings and motor vehicles sold particularly well in April and May. Manufacturing activity continues to improve in most areas from the sluggish conditions of the past year and a half. Production of such items as electronics, machinery, heavy trucks, and construction equipment has been especially strong, although some sectors, such as steel and apparel, continue to face stiff competition from foreign producers. Construction continues to grow at a brisk pace throughout the nation, spurred by strong home sales in most parts of the country. Shortages of labor and materials, however, have resulted in higher building costs in some districts. Lending activity remains strong in most districts despite a slowdown in refinancings due to slightly higher mortgage rates. In the agricultural economy, growing and planting conditions have been mixed. There is little optimism about farm incomes in 1999, as most agricultural commodity prices remain low. Energy activity in most regions has been slow to react to the recent increases in oil prices, although expectations of a solid recovery are high.
Labor markets remain very tight in almost all districts, with increased reports of upward pressure on wages in many parts of the country. There have been some reports that labor supply constraints are impeding employment growth in many sectors. Prices, however, with the exception of several construction materials, remain well behaved.
Automobile sales increased in most districts in April and May due largely to the continued popularity of light trucks and sports-utility vehicles. Inventories of new trucks have been tight in most places, particularly in the St. Louis and Kansas City districts. Auto dealers in the Chicago district have been able to push through modest price increases.
Manufacturers in several regions have expressed concern about labor availability and continue to report difficulties in hiring skilled technical workers, especially in the information technology area. As a result of a shortage of qualified workers, not all of the increase in demand for manufactured goods in the St. Louis district has been met. Additionally, labor costs have become a major concern for most contacts in that district. On a positive note, many districts continue to report healthy productivity gains, with Richmond noting that several manufacturers are experiencing record productivity, in part because of increased capital spending.
Construction and Real Estate
Commercial real estate markets have improved in most districts. Demand for office space in downtown Boston continues to increase. Retail, office, and warehouse leasing commitments in the Richmond district have been stronger as well, especially in Virginia and the Carolinas. In Chicago, the retail segment has been particularly vibrant.
Builders in most districts continue to complain of substantial shortages of labor, especially for framers. Several construction materials, particularly sheetrock, also remain in short supply. The shortages have created rising construction costs, and project schedules in some districts have been affected, but builders in general remain optimistic about the future.
Banking and Finance
Higher mortgage rates appear to have slowed refinancing activity across the country, but real estate loan origination and consumer lending remain strong overall. Chicago, New York, and Philadelphia report some signs of weakness on the consumer side, however. Loan delinquency rates have shown some improvement across districts.
Agriculture, Energy, and Natural Resources
There is little optimism about farm incomes across districts, as commodity prices remain low. As a result, agricultural credit markets are somewhat stressed, with Minneapolis reporting increases in farm liquidations and bankruptcies and Chicago reporting a general slowing in agricultural loan repayments.
Oil exploration has been slow to react to price increases in most areas, but expectations of a solid recovery are high if the price increase is sustained. Some increases in activity have been seen recently, such as in the Kansas City district, but rig counts remain well below year-ago levels.
Labor Markets, Wages, and Prices
Although labor shortages are reported in almost all sectors, some skilled workers have been in especially short supply and many employers have broadened their searches from local to regional and national levels. Information technology workers, in particular, are very difficult to find. As an employment agent in Northern Virginia put it: "Anyone that can operate a personal computer can get a job." Skilled tradesmen in the construction sector are also extremely scarce, especially in urban areas where the building boom continues. The Minneapolis district reports that builders in Duluth imported 200 trade workers due to the lack of available local workers.
Persistently tight labor markets have resulted in many reports of increased wage pressures, especially for some specific industries and skilled occupations. Chicago, St. Louis, and Richmond report upward wage pressures in almost all sectors, while other districts report more scattered wage increases. For example, retailers in the Boston district report a recent increase in the use of higher wages as a recruiting tool, while a large retail chain in New York notes increased wage pressures primarily for entry-level positions. In Dallas, wages have risen for truckers, secretaries, legal assistants, and workers with technical skills. Similarly, wage changes in San Francisco have been generally limited, but increases were noted for some types of workers. Cleveland and Philadelphia report that wage pressures have generally been held in check, but rising benefits costs have become more common. The Kansas City district is an exception, as wage pressures there appear to have eased somewhat from previous surveys.
Many districts suggest that employers have continued to be creative in finding and recruiting additional labor. Employers in the Atlanta district, for example, appear to be using more bonuses and incentives as part of total labor compensation, and many companies are using more part-time workers and consultants as well as allowing employees to work at home. Some firms in the Boston district are avoiding higher labor costs for new hires by outsourcing and changing work assignments internally.
Prices remain generally subdued, but many districts report pockets of higher prices for some specific sectors and goods. At the retail level, price increases have been marginal and infrequent. Retailers indicate that stiff competition continues to restrain price increases. Dallas, for example, reports that smaller markdowns have resulted in a slight increase in average selling prices and Kansas City notes that retail prices continue to edge up. Chicago suggests there have been a few signs that consumer resistance to price increases has softened somewhat. In contrast, retailers in the New York district report that selling prices and merchandise costs have been flat to slightly down. Prices for manufacturing goods and materials have held steady, with modest increases for a few items, such as cardboard, packaging materials, metals, and ethylene-based petrochemicals. The big exception has been building materials, especially sheetrock, which continues to experience substantial price increases. Housing prices and commercial rental rates have also increased in several districts.