Wednesday, December 3, 1997
SUMMARY OF COMMENTARY ON
CURRENT ECONOMIC CONDITIONS BY
FEDERAL RESERVE DISTRICT
TABLE OF CONTENTS
First District - Boston
Second District - New York
Third District - Philadelphia
Fourth District - Cleveland
Fifth District - Richmond
Sixth District - Atlanta
Seventh District - Chicago
Eighth District - St. Louis
Ninth District - Minneapolis
Tenth District - Kansas City
Eleventh District - Dallas
Twelfth District - San Francisco
On balance, Federal Reserve Districts report a continued moderate
pace of economic growth since the last report. Non-auto retail sales
improved in most regions. While a number of Districts report that sales
were still a bit below plan, retailers are generally optimistic about the
sales outlook. Inventories are deemed to be in good shape. Automobile sales
continued to be sluggish, with inventories on the high side. Manufacturers
report continued high levels of activity, with some constrained by capacity
limitations; contacts in the West and South report continued shipping
problems due to rail bottlenecks. Asian financial turmoil and currency
weakness have adversely affected demand for manufactured and agricultural
exports, and some Districts report increased competition from imports.
Residential real estate markets are mixed, but commercial real estate
markets continue to tighten in most areas.
Virtually all regions are experiencing tight labor markets, with
some reporting increased wage pressures in specific industries and occupations
with labor shortages. Retailers are having a particularly difficult time
in hiring and retaining seasonal workers. More generally, businesses
are using a variety of nonwage incentives to attract and retain workers.
Business respondents report that price pressures remain neutral, on
balance, as steady to declining commodity prices, productivity gains, and
increasing overseas competition appear to be offsetting any effects of
Most Districts report that retail sales have improved since the last
report, buoyed by the late arrival of winter weather in the eastern half
of the country. Boston, Minneapolis, Kansas City, Dallas, and San Francisco
report steady improvement, while New York, Philadelphia, Cleveland, Richmond,
Atlanta, and Chicago note a weather-related rebound from the sluggish performance
indicated in the last report. Inventories are reported to be in good shape
in all parts of the country, with retailers in most regions expressing
optimism about the sales outlook for the holiday season. However, New York
reports that consumers are budgeting less than last year for holiday spending,
and Boston notes that some retailers are concerned about possible fallout
from the Asian financial market turmoil.
Automobile sales generally remain soft, with a corresponding rise in
inventories. Overall, sales of light motor vehicles were sluggish in Philadelphia,
Cleveland, Chicago, St. Louis, and Kansas City, though the latter three
Districts report strong demand for sport utility vehicles.
Manufacturers report high levels of capacity utilization, but a variety
of supply and demand factors are constraining current output growth and
future expansion plans. On the supply side, bottlenecks in rail shipments
are cited by Atlanta, Dallas, and San Francisco; labor constraints are
noted in Boston, Richmond, Atlanta, Minneapolis, and San Francisco. On
the demand side, there is some concern about the fallout from Asian financial
turmoil and currency weakness with respect to both exports and competition
from imports. Weakening Asian demand is noted in Boston, Philadelphia,
Cleveland, Dallas, and San Francisco, while Atlanta reports that manufacturers
have scaled back production levels in anticipation of softening sales to
the Far East; on the other hand, Chicago notes that there has been no immediate
impact from the events in Asia.
By industry, heavy equipment manufacturers and steel producers in Chicago
and Dallas report strengthening demand. In contrast, demand for apparel,
textiles and electronic equipment appears to be weakening in a number of
Construction & Real Estate
Commercial real estate markets continue to tighten, while residential
markets are mixed but generally firm. Low and declining office vacancy
rates have led to rising rents in New York, Philadelphia, and Atlanta,
and have spurred increased construction in Philadelphia, Cleveland, Atlanta,
Dallas, and San Francisco. Chicago, St. Louis, and Minneapolis report high,
though not rising, levels of construction activity.
Residential real estate markets are reported to be fairly strong in
most Districts, though some recent slowing is noted in Atlanta, Kansas
City, and San Francisco. Boston and Philadelphia report that demand has
been strongest for higher-end homes, but Dallas reports a shift toward
more starter homes. Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and
San Francisco report brisk homebuilding activity. However, Boston and New
York note low levels of construction, despite recent strength in the market.
Banking and Finance
Loan demand is mixed but stronger, on balance, with strength in commercial
loans more than offsetting some softening in the consumer segment. Kansas
City, however, reports a pickup in consumer lending, and strong growth
in commercial loan demand is reported from Philadelphia, Cleveland, and
Atlanta. The only Districts to note softer loan demand overall are New
York and St. Louis. Delinquency rates were little changed, on balance Philadelphia
and San Francisco report some deterioration in credit quality but New York
notes improvement. Intense competition for commercial and industrial lending
is reported in a number of Districts: Philadelphia, Cleveland, Richmond,
Dallas, and San Francisco.
Tourism, including business travel, continues to boom along the Eastern
seaboard regions. Boston, New York, Richmond, and Atlanta report that tourism
remains exceptionally strong, with Boston and New York noting a shortage
of hotel rooms and rising rates. In contrast, Minneapolis reports that
tourism is one of the few weak sectors of late.
A number of Districts indicate ongoing strength in business services.
Boston and Dallas report continued solid growth in the temporary employment
industry; St. Louis notes strength in the gaming industry and mortgage
and insurance claim processing; Minneapolis reports that computer consulting
firms are "swamped with orders"; San Francisco reports strength in telecommunications
and business services.
Labor Markets, Wages and Prices
All regions report tight labor markets. Boston, Richmond, Atlanta, and
Minneapolis specifically note shortages of technical computer workers and
engineers. More generally, temporary employment agencies in Boston, Cleveland,
Richmond, Atlanta, and Dallas report strong growth in labor demand.
Wage pressures have increased somewhat but are generally isolated to
a few industries and occupations with severe labor shortages. Boston, Richmond,
Dallas, and San Francisco report increasing labor demand in the financial
services sector, with some reports of increased wage pressures. Retailers
in almost all Districts are having particular trouble hiring and retaining
workers for the busy holiday season. While some retailers in Boston and
Minneapolis have hiked wages, certain stores in the New York and San Francisco
Districts have resorted to offering nonwage incentives, such as bonuses
and steeper in-store discounts.
More generally, businesses are dealing with labor shortages in a variety
of ways. Some are tapping broader geographic labor markets: Atlanta reports
that shipyards are recruiting from overseas; Chicago cites businesses recruiting
in nearby rural areas or relocating to the inner-city. Cleveland reports
that firms are offering increased benefits and more flexible work rules,
while retailers and banks in the San Francisco District are converting
part-time to full-time jobs.
Despite the increase in wage pressures, prices for goods remain flat,
although there are scattered reports of price pressures in areas such as
commercial real estate and hotel lodging. Businesses report that steady
to declining commodity prices, increasing competition from overseas and
productivity gains appear to be counteracting effects of wage gains on
selling prices for goods. In particular, Dallas and San Francisco indicate
that the strong dollar has lowered import prices, and Cleveland notes that
increased steel imports have held prices down. Boston, New York, Cleveland,
Atlanta, and Kansas City indicate that finished goods prices are steady
or down slightly, while Richmond reports modest increases.
Agriculture and Natural Resources
Favorable crop conditions are reported from most agriculture-intensive
Districts Cleveland, Minneapolis, Kansas City, Dallas, and San Francisco.
However, heavy rain caused delays in fall planting and harvesting of wheat,
barley and oats in Richmond and cotton in St. Louis. Rail disruptions were
reported to be minimal in the St. Louis District, but some problems related
to the handling and storage of perishable crops were cited by San Francisco.
Minneapolis reports that grain producers in North Dakota have been hurt
by severe plant disease problems. Livestock conditions are also said to
be generally favorable in Richmond, Minneapolis, Kansas City, Dallas, and
San Francisco. Only San Francisco and St. Louis indicate some adverse impact
from the Asian currency crisis on agricultural export demand.
Dallas reports "extremely high levels" of activity and labor shortages
in the oil services sector, while Minneapolis notes a boom in gas and oil
development. Kansas City reports that energy-sector activity has recently
declined but remains above year-ago levels.
* Prepared at the Federal Reserve Bank of New York and based on information
collected before November 24, 1997. 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.
FIRST DISTRICT - BOSTON
The First District economy continues to expand at a moderate pace. Sales
and revenue gains are reported to be healthy, but manufacturers and retailers
express concern about whether the current pace of activity is sustainable.
Prices are said to be generally flat, although wage pressures are increasing
in some submarkets. Contacts say the residential real estate market is
Most retail contacts report that sales continue to grow at a moderate
pace in the current quarter. Areas of strength are building supplies, tourism,
office and graphic reproduction supplies, and home furnishings, all of
which are said to be growing at a 10 to 20 percent pace. Areas of weakness
are apparel sales and discount retailing. Across the board, sales growth
is said to be at or slightly above expectations, with inventories at desired
Employment is reported to be either increasing moderately or holding
steady. Contacts mention pockets of tightness in labor markets, most notably
the faster-growing sectors. In these submarkets, significant wage premiums
are being offered to attract labor from competitors. In contrast, contacts
that are mainly hiring for normal turnover report little difficulty in
attracting help. Wages are generally said to be increasing at a 3 to 5
percent annual rate.
Respondents indicate that most prices are holding steady because of
an extremely competitive retail environment. The exception is tourism,
where rates are rising to ration the short supply of hotel rooms. Materials
costs are said to be unchanged. Contacts say that profit margins are either
level or increasing slightly because of efficiency improvements that outweigh
wage increases. The two exceptions are office/graphics supplies and tourism;
hotels are realizing increases in profits as prices rise, while office
supply stores report wage-driven declines in profitability.
Most contacts plan modest capital expansions for 1998. Looking forward,
retailers expect moderate growth continuing through the first quarter of
1998. However, a significant minority of retailers mention the possibility
of the stock market and international events negatively affecting growth
prospects for next year.
Three-quarters of First District manufacturers contacted report that
recent business is unchanged or up at a single-digit rate compared to a
year ago. Most of the remaining firms cite revenue or order gains in the
range of 10 to 20 percent. Although manufacturers are continuing to experience
strong trends for furnishings, some computer products, and aircraft parts,
a number of contacts are disappointed by recent demand for electrical,
electronic, consumer, and medical goods. Contacts report a slowdown in
Asian sales; demand generally continues to grow in other export markets,
but revenues are down in dollar terms. Holiday sales in the U.S. are expected
to be solid but not outstanding.
Manufacturers indicate that most materials costs are flat to down. However,
high-grade lumber prices are considerably higher than a year ago and expected
to increase further as a result of strong demand. Contacts are also paying
higher prices for packaging, upholstery materials, and natural gas. Only
one contact (a manufacturer of upscale furnishings) has implemented a meaningful
increase in selling prices. The remainder report that selling prices are
flat to down as a result of competition, resistance on the part of retail
chains, or productivity gains. A sizeable minority express concern that
competition will exert further downward pressure on prices.
With some exceptions, employment at respondent firms is holding steady.
Manufacturers are experiencing very tight labor markets for information
technology and engineering positions, as well as some shortages of production
workers in rural areas. Average pay is said to be rising at a rate of 3
to 6 percent, with greater increases for some technically-oriented and
senior professional categories.
On the whole, projections for 1998 are somewhat guarded. Some manufacturers
foresee revenue growth in the low single digits. Others expect better results
but most hasten to add that rates of growth are unlikely to match this
Temporary Employment Firms
Expansion in the temporary employment industry continues. Most contacts
report revenues to be growing 14 to 40 percent annually. Temp labor markets
are said to be extremely tight across all industries and occupations, with
the exception of low-skilled entry-level workers. However, respondents
cite little or no effect on wage growth, which continues to range between
3 and 10 percent annually. Some contacts note their profit margins are
being squeezed, primarily because of increasing price competition; others
say prices are rising in line with wages. Many mid-size firms are merging
or being acquired. Smaller agencies reportedly avoid competition with large
"one-stop shopping" firms by specializing or operating as secondary vendors.
Residential Real Estate
The residential real estate market in New England is doing well. Contacts
report active markets with moderate increases in sales and little, if any,
price pressure. Relative to a year ago, third quarter sales were slightly
lower in Vermont, but up in Connecticut and Massachusetts. Rhode Island
and Maine experienced minor changes in sales. Only Massachusetts contacts
report price increases for existing homes. Several respondents say existing
homes are in short supply, but some also note excess supply of new homes.
There has been little speculative new construction, even though high-priced
new homes are selling well.
Nonbank Financial Services
In September and October of 1997, cash flows into mutual funds continued
at a robust pace. Because of recent market volatility, October cash inflows
were 19 percent below September's, but still 50 percent greater than in
August. Latin America and Asia/Pacific funds report net cash outflows in
the past two months. This cash is said to be flowing into domestic stock
funds. Assets in Asia/Pacific funds have dropped by half since August because
of cash outflows and the drop in their market value. Respondents at local
investment management firms indicate that they are increasing employment
because of the growing volume of business and plan to increase employment
further during the rest of the year.
SECOND DISTRICT--NEW YORK
Most reports in recent weeks show the Second District economy maintaining
a steady pace of growth. Major retailers report that sales were mixed but,
on balance, below plan in late October and early November, though some
note a modest pickup by the middle of the month; retail selling prices,
merchandise costs and wages remain flat. The housing market maintained
a positive tone across most of region. The New York City area's increasingly
tight commercial real estate market has pushed up office rents, while a
shortage of hotel space in Manhattan has caused a sharp rise in room rates.
Regional purchasing managers' reports indicate steady growth in manufacturing
activity but little in the way of price pressures. Finally, local banks
report some softening in loan demand especially for home mortgages and
falling delinquency rates in all categories.
Major retailers offer a mixed assessment of sales performance during
late October and early November. At major discounters, same-store sales
were up 6-8 percent from a year earlier, and above plan. However, traditional
department stores report that comparable-store sales were little changed
from a year ago and generally below plan, though most contacts note some
improvement in mid-November. They also emphasize that sales have improved
from the dismal levels recorded in September and early October. All contacts
say that inventories are in good shape even those with sluggish sales.
Retail selling prices, merchandise costs and wages are all reported to
be flat. Most contacts indicate that finding and retaining holiday-season
workers has been more difficult than a year ago; one contact notes that
rising wages have been fully offset by productivity gains; the rest have
not seen any measurable rise in wages. However, some smaller retailers
in New Jersey are offering larger in-store discounts and bonuses as incentives.
Recent surveys conducted by the Conference Board suggest a mixed outlook
for holiday spending. Consumer confidence in the Middle Atlantic states
(New York, New Jersey, and Pennsylvania) rose to a cyclical high in October;
it retreated modestly in November but is still sharply higher than a year
ago. However, in response to a supplementary question posed every November,
consumers in the region say they are budgeting less for holiday spending,
on average, than last year.
Construction & Real Estate
The region's housing market remains fairly strong. New Jersey homebuilders
report that new home construction remains at a low level, due largely to
supply constraints. Due to the high cost of land, new construction is increasingly
restricted to the high end of the price range, pushing up the median price
of a new home. Contacts report that the resale market continues to gain
momentum, with prices appreciating at a 6-7 percent annual rate, led by
the high end. New York State realtors report that existing-home sales picked
up slightly in September, running 5-6 percent ahead of a year ago; home
prices continued to run 4-5 percent ahead of a year ago, with modest declines
upstate offsetting rapid appreciation in the New York City area.
Office markets in New York City and northern New Jersey continue to
tighten, as a shortage of available space appears to be boosting rents.
Midtown Manhattan's office availability rate (space coming available within
the next six months) declined to 10.3 percent at the end of October, from
10.7 percent a month earlier. Downtown's rate tumbled to 17.7 percent from
18.9 percent strong leasing activity, largely from the financial sector,
combined with commercial-to-residential conversions has pulled a substantial
amount of office space off the market in recent months. Builders in New
Jersey report that the market for Class A commercial space is "tight as
a drum", with virtually no large space available; moreover, this strength
is spilling over into the Class B market and boosting rents in both segments.
One contact notes that landlords now have pricing power for the first time
in eight years.
In the Buffalo area, a number of large public sector-driven construction
projects are reported to be in the pipeline, including a convention center
and a zoo downtown, as well as a few large renovation and redevelopment
projects; altogether, an estimated $580 million in public funds will be
Other Business Activity
Regional purchasing managers report continued strength in the manufacturing
sector, along with subdued price pressures in October. New York purchasing
managers report strong growth in both the manufacturing and non-manufacturing
sectors in October, along with a moderate increase in price pressures.
Buffalo purchasing managers report steady growth in new orders and production
activity, but little change in employment and prices. Rochester purchasers
report steady improvement in general business conditions, along with a
slight increase in price pressures. Rochester-based Eastman Kodak confirmed
expectations that it will cut 10,000 jobs over the next two years and take
a $1 billion charge in the fourth quarter; it is estimated that roughly
half the job cuts will be in the Rochester area.
In New York city, tourism and business travel continue to boom. Hotel
occupancy rates remained close to 85 percent in the third quarter. Meanwhile,
room rates surged 13 percent in September (seasonally adjusted), and were
up 14 percent from a year earlier.
Bankers at small and medium-sized banks in the District report weaker
demand for loans since the last report. In particular, demand for residential
mortgages, nonresidential mortgages and consumer loans declined, while
commercial and industrial loan demand remained stable.
Bankers' credit standards across all categories remained the same. Interest
rates on all types of loans declined especially mortgage rates: 45 percent
of banks report a decline in residential mortgage rates and 53 percent
report lower nonresidential rates. Deposit rates, however, continued to
increase, on net. The quality of credit improved, as reflected in falling
delinquency rates across all categories.
THIRD DISTRICT - PHILADELPHIA
Economic conditions in the Third District were improving modestly in
November. Manufacturers' shipments and orders were moving up slightly.
Retail sales have shown only slight improvement since October, with the
increase primarily in apparel. Auto sales have been steady, but dealers'
inventories remain high. Bankers generally noted some recent increases
in borrowing by both businesses and consumers. Commercial real estate markets
continued to tighten; office vacancy rates have declined slightly since
mid-year, and construction of office and industrial buildings has increased.
Home builders and residential real estate agents reported that demand for
both new and existing homes has been healthy in November.
Manufacturing activity in the Third District expanded modestly in November,
according to reports from industrial plants in the region. Around one in
four of the companies contacted indicated that shipments and orders increased
during the month; around one in five noted declines. Overall, order backlogs
at firms in the District continued to drop. Producers of textiles and apparel
noted slower business. Although some firms said this was a normal seasonal
pattern, a few said they have been seeing falling demand for their products.
Some companies that manufacture capital goods reported that the strength
of the dollar and increased uncertainty in Asian markets have had a negative
impact on their foreign sales. Producers of metals and metal products also
noted slipping sales. In contrast, manufacturers of chemicals, machinery,
and instruments said demand has picked up. Several firms in these sectors
were increasing capital spending to add capacity.
Industrial prices remained steady at three-fourths of the firms contacted
for this report. The number of companies noting increases, for both input
costs and output prices, slightly exceeded the number reporting declines.
Some companies commented that the magnitude of the increases was slight.
Retailers gave mixed reports for November. With the onset of cold weather,
department and apparel stores had slight improvements from October. Stores
specializing in hard goods and home furnishings had only steady sales,
at best. Merchants have announced sales to prod early holiday shopping.
Forecasts for the Christmas shopping period vary; on balance, store executives
believe sales this year will probably be better than last year, but only
by a small amount.
Auto dealers reported that sales have been running at a steady pace
in recent weeks. The sales rate has been below dealers' expectations, however,
and inventories have risen above desired levels. Manufacturers' rebates
and financing incentives have been increased.
Loan volume outstanding at major Third District banks picked up slightly
in November after being flat in October, according to lending officers
contacted for this report. They indicate that companies in most of the
region's industries have been seeking modest increases in financing to
support growing business. Several banks noted that borrowing to refurbish
and modernize office and retail facilities has increased significantly.
Nonetheless, bankers continue to describe commercial and industrial lending
as very competitive. Consumer lending, which slowed in October, was increasing
in November at most of the banks surveyed. Bankers remain concerned, however,
that the upward trend in consumer loan charge-offs has not yet peaked.
REAL ESTATE AND CONSTRUCTION
Commercial real estate agents reported an improvement in sales and leasing
activity in the third quarter. According to one recent market survey, the
office vacancy rate for the Philadelphia area, including southern New Jersey
and northern Delaware, dropped from 12.6 percent at mid-year to 12.2 percent
at the end of the third quarter. The vacancy rate in Philadelphia's central
business district was relatively unchanged. Vacancies did decline in suburban
markets around Philadelphia, and office construction activity increased
in suburban markets. Rents for Class A space in the Philadelphia region
as a whole moved up a bit. The vacancy rate for industrial buildings in
the region increased to 13 percent at the end of the third quarter from
10 percent at the end of the second quarter, but real estate agents said
the availability of modern facilities remains tight, and rents have increased
slightly. Construction of industrial buildings has increased.
In general, residential builders reported healthy sales in November
equal to the year-ago pace or higher. They also indicated that prices have
increased. Customer traffic has been high at new residential developments
and construction backlogs have been rising. Residential real estate agents
indicated that sales of existing homes have been good and that the supply
of homes for sale has declined. Demand has increased relatively more for
newer, existing homes and homes in the higher price ranges than for older
and less expensive homes. Overall, real estate agents said price appreciation
for existing homes has been slight
FOURTH DISTRICT - CLEVELAND
General Business Conditions
The Fourth District economy continues to grow at a moderate to good
pace. Labor markets are strong, and price pressures remain light. Residential
and commercial construction is very active in the District, with sales
and prices rising in both markets (particularly in central Ohio).
District retailers indicate difficulty finding seasonal workers, although
no more so than in recent years. One notable exception appears to be in
central Ohio, where reports of more extreme labor shortfalls are heard.
Temporary employment agencies note a further rise in the already heavy
demand for workers, especially clerical help and general laborers. Only
a few sources report increased wage growth, although a number of firms
are offering increased benefits and more flexible work rules.
Industrial activity has strengthened considerably since summer. Orders
growth has been good, production and employment levels are increasing,
and inventories are shrinking. Moreover, order backlogs are rising again,
and some shortage of skilled workers is seen. Steel producers indicate
good orders growth from a variety of sources, although additions to capacity
and an increase in steel imports have helped to hold price increases down.
A similar report is heard in heavy truck manufacturing, where production
and order levels have reached or surpassed the historic peaks of 1995.
The order books in this industry look solid through early 1998, and little,
if any, price pressure is noted.
Firms with significant sales in Asia have seen a falloff in orders recently.
In particular, orders for semiconductor manufacturing equipment declined
substantially between August and October.
Retailers in the District report that unseasonably warm weather during
the first two weeks of October restrained spending a bit. However, sales
have recovered and are currently at, or slightly above, retailers' expectations.
The recent sales growth has been broadly based, but is particularly strong
in domestics (linens and towels), certain apparel lines, and electronics,
including personal computers.
Retailers surveyed indicate that year-over-year sales are currently
running about 3% to 5% above last year's level, with a few reporting substantially
higher growth rates. Inventory levels are thought to be adequate for the
season, although a strong holiday sales period is generally anticipated.
Retailers continue to report steady prices. In some cases, wholesale costs
actually seem to be falling.
Auto sales in early November continued a string of generally soft reports
that began in September, and many dealers expressed concern over their
growing inventories. Price incentives are reported to be on the rise. Sales
activity in the used car market is seen as especially slow, and deep price
discounts are being offered.
Overall, crop conditions have been favorable this year. Combined corn
production for Ohio, Pennsylvania, and Kentucky is expected to exceed last
year's level by 18%, with yields much stronger in Ohio than elsewhere in
the District. The region's soybean crop is projected to be 22% above 1996's
harvest. Again, yields are slightly higher in Ohio than elsewhere. Soybean
prices fell between September and October, while corn and hay prices firmed
Kentucky tobacco production is expected to be 8% higher that last year,
down slightly from preliminary projections. The quality and condition of
the crop are variable, and there is some concern about poor color and weight.
Major auctions during the first two weeks of November suggest a strong
demand in the District's horse farm industry. At one auction, more than
2,000 horses were sold over the period and gross sales topped $200 million,
a record high. Dealers and breeders report that the improved numbers are
due to high stock quality and a healthy domestic economy. Selling prices,
while strong, were not judged to be unusually high.
Banking and Finance
Lending activity in the District is strong overall, with commercial
loan demand continuing to grow, while a few banks are reporting a slight
softening in consumer loans. A recent drop in mortgage interest rates has
spurred a sharp rise in mortgage refinancing. Consumer delinquencies have
recently leveled off, and a few banks indicate that they may be seeing
The spread between borrowing and lending rates remains narrow, and competitive
pressures are still reported to be fierce. A few banks note that competitive
pressures have prompted an easing of commercial credit standards.
Most sectors of the District's economy continued to expand moderately
in late October and November, and growth picked up noticeably in a few
sectors. Retail sales grew faster after September's lull. Manufacturing
output increased; however, the rate of expansion was tempered by a slowdown
in some industries. In the financial sector, District banks indicated that
demand remained strong for all loan categories. Activity in residential
and commercial real estate changed little, although commercial contacts
in a few areas reported heightened development and investment. Labor markets
tightened further but, outside of the service sector, only scattered reports
of higher wage growth were received. Prices for goods and services increased
at slightly faster rates.
Retailers in the Fifth District reported that sales strengthened during
October and early November, driven by stronger-than-normal sales of fall
and winter apparel. In addition, there were scattered reports that customers
were taking advantage of well-stocked stores to shop early for the approaching
holidays. Seasonally-adjusted employment in the retail sector continued
to edge lower, although the decline was more moderate. Despite widespread
reports of labor shortages, wage hikes were somewhat less pronounced than
in September. Retailers indicated that prices rose slightly faster than
indicated in our last report.
Activity in the service sector expanded at a slightly lower rate since
September. Real estate and wholesale trade revenues increased more slowly,
while those for health service providers increased more quickly. Employment
growth in the service sector remained steady. Sources reported heightened
wage pressures, especially in financial services. Contacts continued to
expect stronger demand for services in coming months. Compared to September,
prices in the service sector grew at a slightly higher rate.
District manufacturers continued to post strong growth since our last
report. The volume of new orders expanded at a somewhat more moderate pace,
while that of shipments generally grew more briskly. Nevertheless, producers
of electronic equipment, paper products, and furniture reported decreased
shipments. Shortages of skilled workers continued to hamper manufacturing
activity; wage growth remained strong. Both raw materials and finished
goods prices rose at slightly higher rates than in September.
Tourist activity continued to strengthen during October and early November.
Several sources said that increased convention bookings helped boost growth
in their areas, while others attributed growth to a lengthening of the
post-summer season. One Virginia Beach hotelier indicated that his normal
fall discounts had been reduced, and contacts at many other coastal hotels
and restaurants told us that they had extended their season this year.
Some sources said that holiday bookings had not lived up to those of a
year ago. Nevertheless, contacts were generally optimistic that bookings
soon would pick up and that activity in coming months would be above normal.
Hotel and restaurant prices were little changed since our last report.
Activity at District ports strengthened. Increased agricultural commodity
shipments pushed exports higher, while inbound shipments of metals and
ores boosted imports. A North Carolina contact reported that shipments
of wood chips from his port declined because of a strike at a Canadian
Temporary Employment:s Employers made greater use of temporary employment
agencies during October and early November. Shortages of workers, especially
those with computer training, were widely reported. According to one agent
in Charlotte, N.C., recruiters were taking advantage of recently announced
layoffs to enlist workers with proven computer experience. Other sources
indicated that employers were screening applicants more carefully after
being "seriously burned" by poor performances of some recent hires. Wage
pressures remained largely in check.
District banks reported little change in lending activity since our
last report. Demand for consumer, commercial, and mortgage loans remained
generally strong, but funds remained ample. A North Carolina banker said,
"there is more money available now than I've seen in many years." Several
bankers noted that profit margins in commercial lending continued to be
squeezed by competitive pressures.
Residential Real Estate:
Residential real estate activity remained healthy across the District
during late October and November, although home sales waned in some localities.
A Charlotte, N.C., realtor characterized the market in his area as "steady,
but not a rocket ship." Homebuilders generally reported little change in
housing starts and building permits; several contacts commented that low
interest rates were helping to maintain the current level of activity.
A Baltimore, Md., contractor noted "more competition and tighter margins"
in the housing market there.
Commercial Real Estate:
In recent weeks, commercial real estate activity changed little in most
areas, but picked up in South Carolina and suburban Washington, D.C. Realtors
in Columbia, S.C., cited a spate of commercial property sales to institutional
investors. Institutions have recently purchased four large office buildings
in Columbia's downtown business district. Contacts also noted strength
in the office sector with one realtor in Washington, D.C., reporting that
vacancy rates there had fallen to nearly one percent. Despite the large
demand, there was virtually no new speculative construction. The current
level of commercial rents concerned a Richmond, Va., contact who, believing
that retail rents are "too high, [doesn't] see how people are going to
Rains in recent weeks delayed fall planting and harvesting activity
across much of the District, according to agricultural analysts. Inadequate
time between rains limited farmers' ability to get into their fields. Wet
weather delayed the sowing of winter wheat, barley, and oats. Soybean harvesting
activity was behind schedule in many areas, and some farmers reported yield
reductions because of deteriorating crop conditions. In addition, cotton
producers expected a reduction in the quality of their crop. On a positive
note, the rains improved pasture conditions and reduced the current need
for supplemental feeding of livestock.
SIXTH DISTRICT - ATLANTA
The Southeastern economy continues to expand moderately in mid-fall,
according to most contacts. Retail sales exceeded last year's levels, while
home sales and construction varied across the District. Manufacturing activity
has changed little and the outlook remains generally positive. The tourism
and hospitality sectors continue to post strong numbers, and overall loan
demand has increased slightly throughout the Southeast. Despite continuing
reports of labor shortages, escalating wages remain isolated to only a
Most District retailers reported that sales in October exceeded year-ago
levels slightly. Several retailers noted that overall sales improved with
the advent of cooler temperatures during the last half of the month. Early
November sales results have been spotty. However, many retailers report
that recent sales have met their expectations, and inventories are generally
appropriate. Apparel sales have strengthened since our last report, while
home-related product sales have softened. Looking forward to holiday sales,
most retailers continue to be optimistic. Many retailers expect that big-ticket
items and better brands will do extremely well during this holiday season.
Generally, retailers expect moderate levels of discounting. Most retailers
report that it is extremely difficult to employ and retain good personnel
for the holiday rush.
Reports from contacts indicate that recent home sales and construction
have varied by area. However, on a year-over-year basis the single-family
market weakened somewhat from October to early November. The majority of
Realtors continue to report that home inventories and new home construction
are balanced, but a growing number, especially in Tennessee, note rising
inventories. Builders across the region continue to report that construction
is flat to down compared with last year. Realtors expect home sales will
be similar to last year during the fourth quarter, while builders expect
construction activity will decline.
District commercial real estate markets remain healthy. Most suburban
and central District office markets continue to report rising occupancy
and rental rates. A good deal of speculative construction is underway.
Retail construction continues to be dominated by grocery store chain expansions
and the move by retailers into secondary marketplaces. Multifamily construction
has begun to decline in many parts of the District in response to higher
vacancy rates and the presence of leasing concessions in several key markets.
Manufacturing activity was little changed for the current reporting
period and the factory outlook remained positive. Several contacts noted
that their companies are increasingly investing in ways to promote efficiency,
such as using information technology to predict production needs and purchase
inventory. Increasing activity in the Gulf of Mexico's petroleum industry
is boosting demand for regional firms producing energy extraction equipment.
Less positively, the workweek is decreasing and factory payrolls are contracting
for some producers of industrial machinery and textiles. One contact notes
that Far East financial market disruptions are expected to adversely impact
his electrical equipment sales and orders within the next few months. Some
Southeastern manufacturers have been negatively impacted by problems in
rail transport caused by the merger of the Union Pacific and Southern Pacific
Tourism and Business Travel:
The tourism and hospitality sectors continue to post strong numbers
and the outlook remains positive. Local tourism organizations expect theme
parks in central Florida to have above-average attendance for the holidays.
The recent announcement of a large expansion by Universal Studios should
further stimulate central Florida's tourism industry. South Florida hotels
and resorts report high occupancies and strong advance bookings. Tourism
from South America and Europe has been especially strong, with guests reportedly
staying a day or two longer than last year. Contacts note that destination
hotels in Miami will be packed through the winter season. Cruise demand
is at high levels with stable pricing. A drop-off in convention business
that led to low hotel occupancy in New Orleans has apparently reversed
itself with improved bookings.
Most banking contacts throughout the Sixth District report that overall
loan demand has increased slightly. Consumer loan demand remains flat,
and automobile loan demand is mixed. Commercial lending remains strong,
mortgage demand has increased. Loan quality varies across the District.
Wages and Prices:
Although a continuing labor shortage is adversely affecting parts of
the region, reports of escalating wage pressures remain isolated to a few
industries. Some contacts, mostly retailers, are concerned about a shortage
of holiday workers. A temporary agency reports that their recent orders
for holiday help are surpassing last year's. The boom in casino and industrial
construction has reportedly compounded the Gulf Coast's shipyard worker
shortage by absorbing skilled workers; yards are resorting to bringing
in skilled workers from overseas. One large chemical plant in the region
was forced to curtail its expansion plans because of a dearth of skilled
workers. Increasing wage pressures were noted by regional firms bidding
for specific technical workers, such as computer programmers, systems analysts,
or those with shipbuilding or energy extraction skills. The competitive
environment and consumer bargain hunting continue to hold down attempts
to raise materials and finished goods prices.
Economic conditions in the Seventh District remained very similar to
those cited in our last report, according to most contacts. Retail sales
picked up in recent weeks as colder weather set in, and most contacts expected
the holiday season to be good. Construction and housing activity remained
strong, buoyed by low interest rates and readily available funds. Strong
new orders continued to keep the District's manufacturing industries running
near capacity. Overall lending activity remained robust, though there was
some softening noted on the business side in some areas. Labor markets
were still very tight, yet wage pressures remained subdued. Farmland values
continued to rise, while farm credit conditions were mixed. Contacts throughout
the District indicated that there was no immediate impact resulting from
the financial turmoil in Southeast Asia.
Overall consumer spending by market segment was mixed heading into the
holiday season, though the onset of colder weather has helped increase
sales in recent weeks. Most contacts reported that same-store sales gains
were running in the low single digits over last year and one described
results as "ho-hum." One retailer suggested that sales strength varied
by market segment, with discounters showing the most strength, luxury stores
strengthening, and middle-market merchandisers doing okay. Overall apparel
sales were generally described as "on plan," having picked up as colder
weather arrived in late October and early November. Cold weather also boosted
sales of seasonal items. A few of the major chains reported strengthening
sales of big-ticket items, such as electronics, appliances, and furniture.
Inventories were reported to be in better shape than at the same time last
year and, as a result, none of the merchants contacted were planning on
increasing promotional activities. Most retailers were expecting a good
holiday sales season, while their major concern continued to be the availability
of seasonal workers. District dealers noted some softening in auto sales,
while light trucks were reported to be selling well.
Overall construction activity remained strong and most contacts reported
that conditions were nearly the same as a month or two ago. One large realtor
in the Chicago metropolitan area noted that resale strength continued to
surprise on the upside. Sales had picked up throughout the third quarter
and, by October, were off last year's very high levels by only 1 percent
on a year-to-date basis. This contact pointed to low mortgage interest
rates and the availability of funds as key drivers of the market. The downtown
housing market in Chicago continued to boom, led by strength in condo conversions.
Existing home sales tapered off in Michigan, according to one contact,
who pointed to the unseasonably cold weather as a contributing factor.
New home construction in the state had also slowed from last year's very
high levels, but to "a much more comfortable pace for everyone," according
to one analyst. Commercial construction activity remained very strong in
most of the District, yet there were some reports of slowing growth. Several
contacts indicated that the pricing and availability of funds continued
to make commercial developments attractive.
Reports on manufacturing activity were essentially the same as in our
last report -- production levels remained very high, new orders continued
to be strong, inventories were lean, and upward price pressures were subdued.
Steel producers are expecting 1997 to go down as a record shipment year.
Despite new capacity coming on stream recently, the industry continues
to operate near capacity and order books are full through the end of the
year. The strength in steel demand was broad-based, with notable orders
coming from the construction and plant and equipment segments. Producers
of heavy equipment (land-moving, agricultural, heavy trucks, etc.) were
very optimistic heading into the new year with domestic shipments picking
up and exports to Canada strengthening. New orders remained strong and
the general feeling among contacts was that inventories were slightly low
and backlogs high. One large producer of agricultural and construction
equipment reported that the company was at capacity and running "all out."
Automobile manufacturers indicated that overall demand remained strong
and was holding steady. One automaker reported that its inventories were
lean, but industry-wide stocks were generally at desired levels. The pricing
environment remained very competitive in most manufacturing industries.
Despite strong demand and plants operating near capacity, prices of most
steel products were below last year's levels. Automobile manufacturers
reported that new model sticker prices were flat and they were using more
incentives than they anticipated a few months ago.
Overall lending activity remained strong in October and early November,
though there was some slowing of growth reported on the business side.
Most contacts reported that business lending continued to increase, but
growth fell below some lenders' expectations. One large bank reported an
uptick in merger and acquisition activity. There was reportedly no change
in asset quality of business loans. On the consumer side, falling mortgage
interest rates have prompted a mini-boom in refinancing activity in recent
weeks. Rates on 30-year fixed-rate mortgages dropped below 7.5 percent
in the region, the lowest level since early 1996. Personal bankruptcies
stabilized over the last two months, but at high levels.
The District's labor markets remained very tight, with few new reports
of intensifying wage pressures. The general consensus among contacts was
that there was little discernable change in labor market conditions in
October and the first half of November. Most retailers continued to express
concerns about the availability of holiday help. Small businesses were
becoming increasingly creative in their recruiting efforts. One contact
noted that small businesses in one metro area were recruiting in nearby
rural communities where labor markets were not as tight. An analyst in
Wisconsin reported that a small manufacturer (100 employees) was planning
on closing its plant in a tight labor market area and reopening in Milwaukee's
central city, in hopes of being able to find workers at reasonable wage
rates. The practice of temporary help firms recruiting through state employment
agencies was becoming more widespread. The few new reports of intensifying
wage pressures were confined to areas where severe worker shortages existed
in occupations particular to those areas.
Our latest survey of agricultural bankers found that farmland values
continued to rise in most areas of the District this summer, culminating
in an average gain of 7 percent for the year ending October 1. The bankers
expected gains to continue this fall and winter because of stronger demand
to acquire land, both among farmers and nonfarmer investors. Agricultural
credit conditions varied across the District but, in general, appeared
to have tightened somewhat. Farm loan demand was up from year-earlier levels
in most areas. However, the funds available for making farm loans tightened,
partly reflecting "higher-than-desired" loan-to-deposit ratios at many
banks. Farm loan repayment rates slowed somewhat, especially in areas hard
hit by the squeeze on dairy earnings.
EIGHTH DISTRICT - ST. LOUIS
The District economy continues to grow at a steady pace. District retailers
report moderate sales growth during September and October, but are expecting
a strong holiday season. General business contacts remain optimistic, seeing
relatively strong sales and demand growth despite increasingly tight labor
markets. Some building wage pressures have been noted. Residential construction
picked up somewhat in many District metropolitan areas in September. Loan
demand, although still moderately strong, appears to be softening. Rainfall
reportedly continues to slow the cotton harvest in parts of the Delta.
The Union Pacific rail disruption is affecting mainly Arkansas.
Retail contacts generally report sales growth in the neighborhood of
3 to 4 percent in September and October compared with a year earlier. Inventories
are at desired levels, so greater-than-usual discounting has been unnecessary.
Most retailers anticipate a strong holiday season this year, surpassing
sales of previous years.
On average, car dealers report that sales were up about 1 percent in
September and October over a year earlier. Most dealers are offering rebates
to help compensate for the sluggish sales. Contacts also note that, while
demand for sport utility vehicles is strong and rising, the market for
minivans seems to have dried up. Overall, contacts are expecting sluggish
sales to persist through the end of 1997, and are approaching the first
quarter of 1998 with guarded optimism.
Manufacturing and Other Business Activity
District contacts remain optimistic about economic conditions, although
many continue to have difficulty finding qualified workers. Some contacts,
especially retailers, have noted recently that labor market conditions
have tightened more, putting a squeeze on merchants just before the holiday
season. In some instances, contacts have reported increasing wage pressure
along with the tighter labor markets. But most contacts are planning for
a "usual" 4 percent salary increase in 1998.
Sales remain strong, and many manufacturers expect to hire additional
workers to meet the increasing demand. Ford, for example, is expanding
its truck production in Louisville, creating about 1,000 new jobs. Processing
centers for mortgages and insurance claims are opening or expanding, bringing
200 jobs to St. Louis and almost 400 jobs to Louisville. The gaming region
of northwest Mississippi will employ 15,000 by the end of this year, and
expectations are that it will add another 1,800 workers next year, although
it is unclear where the workers will come from.
The District's apparel industry sustained several new blows. After letting
2,000 workers go from two Kentucky plants this past August, Fruit of the
Loom has announced that another 1,000 will be let go from the same two
plants; production is moving overseas. And because the demand for jeans
has dropped so much, Levi Strauss will close two plants in Arkansas, eliminating
Real Estate and Construction
Monthly residential construction permits in September picked up in nine
of the District's 12 metropolitan areas, a turnaround from earlier reports
when only two or three metro areas showed gains. Year-to-date permit levels,
however, were still below last year's levels in nine metro areas. Nonresidential
construction remains strong in many parts of the District, especially in
northern Mississippi where public school renovation and university student
housing construction are quite active.
Banking and Finance
Loan demand appears to have eased somewhat over the past several months,
according to contacts at several mid-sized District banks. Nevertheless,
contacts still describe demand as moderately strong. Consumer loan demand
appears to have softened the most, although contacts expect some rebound
because of the holiday season. Business loan demand has also softened in
recent months. Credit quality is still very high, and a number of banks
expect record earnings again this year. Deposits are still hard to come
by, and many banks continue to seek other funding sources.
Agriculture and Natural Resources
Favorable weather during much of October compressed this fall's harvest
schedule in many areas. In the Delta region, however, persistent rainfall
continues to disrupt harvest of the cotton crop, with some farmers about
two weeks behind schedule. In general, though, there appears to have been
only a slight effect on quality. A contact in the cotton industry reports
that, with a vibrant U.S. economy, domestic mill consumption is the strongest
in several years. Moreover, foreign demand is reported to be very strong.
However, there is heightened concern in the industry that the Asian currency
crisis will take a significant bite out of U.S. cotton exports this marketing
Rail disruptions in the Eighth District, stemming from the Union Pacific-Southern
Pacific merger, continue to be confined primarily to Arkansas, where the
bulk of UP's rail lines in the District are located. Accordingly, a contact
in the grain supply and delivery industry in St. Louis notes minimal disruptions
in Illinois, Indiana and Missouri.
As 1997 draws to a close, the Ninth District economy continues to enjoy
robust, broad-based economic growth. Retail sales are strong, many manufacturers
report full order books, and gas and oil development is at a high for the
decade. While construction has cooled from the spirited pace seen earlier
in the year, building activity remains at a high level. Crop yields and
harvesting weather were generally favorable to farmers, and the financial
condition of previously hard pressed ranchers continues to improve. There
are few indications of price increases at any level. On the negative side,
tourism firms continue to report somewhat disappointing business. Wage
pressures are reported in virtually all sectors and in most geographic
areas. Finding qualified workers is a near-universal problem for employers.
Manufacturing and business services
"This is turning out to be our best year, better than we expected, and
next year looks even better," says a North Dakota furniture manufacturer.
"Business is very strong," reports a Minnesota-based vehicle and heavy
equipment component manufacturer. Reports such as these are echoed across
the manufacturing sector. Computer consulting firms, particularly those
which design, install or train for computer networks, or review software
for year 2000 problems, are reportedly swamped with orders.
Construction and real estate
Construction of all types continues very strong in most areas of the
district. In Minnesota, residential building permit numbers were especially
strong in September, but in October were about 2 percent below record levels
of a year earlier. Western Wisconsin and southeastern South Dakota also
report strong home building. Commercial and heavy construction is not posting
the sort of year-over-year increases seen in spring and summer, but contractors
continue to have plenty of work. There are two large office towers under
way in Minneapolis. Commercial building also reportedly is strong in several
towns in eastern Montana. Builders were favored with fall weather that
allowed many projects to "get out of the hole" by completing foundation
work before the ground freezes.
Natural resource industries
With 32 rigs drilling in North Dakota and Montana, gas and oil development
is at its hottest pace this decade. With new wells in production, North
Dakota oil production is 7 percent above year earlier levels. Iron ore
output is largely stable, but low gold prices have led a Montana mine to
delay a permitted expansion. Little change is apparent in forest product
industries, with output reportedly unchanged from earlier in the year.
"We had an ideal fall," reports a central Minnesota farm banker. "Everyone
got their crops out and corn drying bills are lower than expected." Similarly
favorable harvesting weather prevailed across most of the district and
contributed to a general mood of optimism in the farm sector. But the price
picture is mixed, and corn/soybean producers reportedly are doing better
financially than wheat or barley producers, while cattle and hog raisers
are doing better than dairy farmers.
After more than two years in the doldrums because of low cattle prices,
farm income, spending and loan repayment rates have climbed to near normal
levels in the western Dakotas and in Montana. One negative note, severe
plant disease problems combined with low prices have been a blow to small
grain producers in eastern North Dakota, where bankers say incomes and
spending are down notably. While cattle production continues above year-ago
levels, veterinarians in parts of the Dakotas touched by severe cold last
winter report unusually high rates of beef cows that did not conceive this
season, a lingering reaction to stress suffered earlier in the year.
Despite high loan-to-deposit ratios, most banks that responded to the
Minneapolis Fed third quarter survey of agricultural credit conditions
had adequate supplies of loanable funds. Interest rates on most types of
loans fell 20 to 50 basis points, to their lowest levels in two years.
Consumer spending and tourism
A Minnesota-based national retailer reported very strong sales for the
third quarter of 1997, and regional hardware and department store chains
echo with accounts of good business across most lines of general merchandise.
Furthermore, industry sources generally agree on optimistic expectations
for holiday season sales. However, many continue to express concern about
the continuing expansion of retail space in major regional markets and
resulting stiff competition and tight margins.
Auto sales show moderate strength, according to registration numbers
and reports from dealers association spokespersons. A businessman from
northeastern Montana noted that improved cattle prices are resulting in
strong demand for pickups, as ranchers make long-deferred replacements
of their vehicles. As in general merchandise, structural change in auto
retailing is accentuating competitive pressures for smaller independent
dealers, particularly those in small towns. But sources in the sector are
generally optimistic in their outlook for 1998.
Tourism is the weakest component of consumer spending. Reports are mixed,
with some resorts in Minnesota and Wisconsin reporting moderate to good
fall business. But visits to major tourist destinations in the Dakotas
and Montana were disappointing overall. Good weather and ample game in
key hunting areas is one bright spot.
Employment, wages and prices
Securing needed employees in a tight labor market remains a knotty problem
for virtually all employers. A major manufacturer of personal computers
located in South Dakota feels that further expansion in that state is stymied
by a lack of workers. Many employers reportedly are giving wage increases,
in the 3 percent to 6 percent range. But there are several reports of firms
that have given boosts of 10 percent to even 20 percent to keep skilled
manufacturing technicians or computer specialists. Moreover, a chain of
airport shops hiked starting wages from $6 to $8 per hour to maintain needed
Reports of product price increases are less common than those of decreases.
Propane for heating and crop drying is in better supply than last year,
and dealers expect lower prices. Some manufacturers report price drops
for general and some specialty grades of steel. Those who manufacture components
for other firms also report continuing pressure to lower their prices and
are doing so through increased productivity.
TENTH DISTRICT - KANSAS CITY
The district economy continued to grow moderately the past month, while
showing a few signs of easing. Manufacturing activity remained fairly strong
and retail sales edged up. Construction activity was generally unchanged,
while energy activity declined slightly. In the farm economy, good results
have been reported for the completed fall harvest, the winter wheat crop
appears to be in good conditions, and ranchers face favorable feeder cattle
prices. Labor markets remained tight in much of the district, with limited
evidence of wage pressures. Prices generally held steady at the retail
level, while increasing slightly for some construction and manufacturing
Retailers report sales increased last month and were slightly higher
than a year ago. Retailers are optimistic that sales will increase over
the holiday season. Most retailers were satisfied with current stocks but
expect inventories to decline slightly according to seasonal patterns.
Automobile dealers report sales were generally unchanged last month and
slightly lower than a year ago. Sales of light trucks and sport utility
vehicles remained strong. Dealers have been expanding inventories slightly
as they expect sales to improve somewhat in the coming months.
Manufacturers continued to operate at moderately high levels of capacity
last month. Manufacturing materials were generally available, with lead
times holding steady for most items and increasing somewhat for a few others.
Inventories edged down last month and no major changes are expected in
coming months. A quarterly survey of district manufacturers indicated that
production, shipments, and new orders all increased at a healthy rate from
September to October.
Builders report housing starts generally held steady last month and
were unchanged from a year ago. Builders anticipate a normal seasonal slowdown
in construction activity in the coming months. Sales of new homes edged
down. Most building materials were readily available and delivery times
were normal. Mortgage lenders report slightly higher demand last month
but expect demand to slacken in coming months.
Bankers report that loans increased and deposits remained unchanged
last month, raising loan-deposit ratios slightly. Consumer loans, home
equity loans, home mortgages, and residential construction loans all increased,
while other loan categories were little changed. Increases in demand deposits,
money market deposit accounts, and large CDS were offset by a decline in
small time deposits.
Almost all respondent banks left their prime lending rates unchanged
last month and expect to hold rates steady in the near term. Most banks
did not change their consumer lending rates and anticipate no future changes.
Some banks tightened their lending standards, citing concerns over credit
quality or the economic outlook.
District energy activity declined slightly for the second consecutive
month but remained somewhat stronger than a year ago. Crude oil and natural
gas prices increased last month, but both prices remained below the peaks
reached at the end of last year. The district rig count fell 6 percent
in October to a level 8 percent higher than a year ago.
The fall harvest was completed with average to slightly above average
yields for corn and soybeans reported in most areas. The district's winter
wheat crop appears to be in good condition and was not affected by the
recent snowstorm. Likewise, winter wheat pasture is expected to be plentiful
and of good quality this season. Feeder cattle prices remain strong and
ranchers are earning healthy profits. Prices for fed cattle have edged
up recently and feeders are making modest profits. Hog production in the
district is profitable, and has been expanding significantly. Although
hog prices have dropped seasonally in recent weeks, strong exports have
kept prices at profitable levels.
Main street businesses in the district are benefiting from the health
of the farm economy. District bankers indicate that the rural businesses
are experiencing slightly higher profits than a year ago.
Wages and Prices.
Labor markets remained tight last month in much of the district, with
some limited evidence of wage pressures. Retailers report short supplies
of entry-level and clerical workers, and manufacturers say skilled workers,
such as engineers, were hard to find. A few companies say they raised wages
more than normal to attract or retain workers, but many say wage increases
were about normal. Prices held steady at the retail level but increased
slightly for some manufacturing and construction materials. Retailers expect
no major price changes in coming months.
Eleventh District economic activity expanded at a slightly slower rate
in late October and early November. Although respondents remained optimistic
about the coming months, some voiced concerns about future Asian demand.
Those surveyed reported more wage increases and continued difficulties
in hiring. A few manufacturing sectors reported slower growth. Business
services and construction expanded, while loan demand remained stable.
Recent rainfall improved agricultural conditions, but more rain is needed.
More respondents reported wage increases than in the last survey, with
greater use of incentive bonuses. Salary increases at some real estate
firms were more than 15 percent during 1997, and respondents expect about
another 5 percent next year. One contact reported paying secretaries $5,000
in monthly incentive bonuses.
Passenger fares, business and telecommunication service fees, and prices
for paper and packaging all increased. Construction costs were up slightly,
due to increases in wages and prices for brick, fabricated steel and some
lumber products. Prices for scrap metal, freight service and cement remained
unchanged. Contacts reported downward price pressure in the apparel industry
due to international competition. Prices softened for some petrochemical
products, and more declines are expected. Unseasonably cold weather, delays
in coal shipments by rail, and natural gas production problems in the Gulf
of Mexico pushed natural gas prices upward sharply. Increased demand for
heating oil had little effect on its price because inventories were high.
Crude oil prices were somewhat volatile during the tensions with Iraq.
Memory chip manufacturers reported that increased industry capacity and
customer inventory reductions combined to depress prices.
Sales slowed in electronics and apparel, while demand continued to grow
at the same rate in most other sectors. Sales of semiconductors and other
electronic components grew more slowly as uncertainty about international
demand, particularly in Asia, caused customers to trim inventories. Shipments
of apparel products are flat to down. Refining margins and capacity utilization
continued to fall due to a seasonal decline, which was exacerbated by higher
than normal heating oil inventories. Telecommunications manufacturers reported
continued slow growth of sales and cautious optimism for the coming months,
particularly for U.S., European and Latin American markets. They revised
downward expectations for growth in Asian markets. Sales of paper products
were down seasonally, but above year-earlier levels. Production of petrochemical
products remained strong, but contacts expressed concerns that weakening
Asian demand would stimulate exports to the United States. Sales of commercial
construction-related products increased over the past six weeks, but demand
for residential construction-related products softened seasonally. Both
remain above year-earlier levels. Strong demand for commercial construction
products caused steel mills to ration wide-flanged steel beams.
Demand for temporary staffing, accounting, consulting and legal services
continued to increase, and respondents were optimistic about 1998, but
they also reported being unable meet increasing demand because labor market
tightness constrained their hiring. Legal and accounting services were
stimulated by growth in initial public offerings, mergers, and acquisitions.
Although the use of transportation services slowed seasonally over the
past six weeks, contacts reported stronger market conditions than a year
earlier, particularly for passenger travel and hi-tech freight. Shippers
reported no significant improvement in rail bottlenecks.
Retailers reported good sales growth throughout most of the district,
with booming sales growth in Houston. Contacts expect a good holiday season.
The strong dollar has lowered import prices and softened upward pressure
on selling prices. Prices for some imported goods are expected to continue
to fall in coming months.
Bankers reported steady loan demand over the past six weeks, with strong
competition continuing in commercial lending. Credit unions reported a
slowing in auto loans, but expect them to pick up in the first quarter.
Loan rates are stable, with the exception of slight declines in auto and
mortgage rates. Credit unions reported that credit quality remains high.
Construction and Real Estate.
Construction activity increased in the past six weeks, driven by increases
in office and residential construction. Residential and commercial real
estate activity was also very strong. Office rents increased, although
at a slightly slower pace and vacancy rates declined further with continued
strong absorption. Existing home prices have risen as construction and
land costs have pushed up new home prices. Nonetheless, average and median
prices for new homes have fallen slightly as the result of increased sales
of lower priced "starter" homes. Contacts reported that in general, new
home prices have increased over the past year only by as much as the five
percent increase in construction costs. Inventories of new homes are slightly
Activity in oil services and machinery remains unchanged at extremely
high levels. Strong demand cannot be met by existing capacity in the oil
field services industry, and work is being rationed to customers as backlogs
continue to build. Shortages of pipe, casing, and basic equipment were
widely cited. Although there is still a general reluctance to expand capacity
throughout the industry, shortages of skilled workers--such as engineers,
welders, machinists and electronic technicians--pose difficulties for those
Producers have nearly completed the cotton harvest and reports suggest
that the crop is good. Recent rainfall was beneficial to winter pastures
and small grains, but contacts indicated more rain is needed, as many wheat
fields and pastures are reported to be in poor shape. Feeding of livestock
increased in most areas, but winter pastures have responded favorably to
cooler, wet conditions. The livestock sector remained in mostly fair to
TWELFTH DISTRICT--SAN FRANCISCO
Reports from Twelfth District Beige Book contacts indicate solid growth
along with a high level of economic activity in recent weeks. Retailers
reported moderate gains in recent months, and service providers in the
District noted an acceleration in growth from an already rapid trend. Manufacturing
activity remained strong in much of the District, with many high-technology
equipment manufacturers and Boeing operating at or near capacity. Steady
demand for commercial real estate kept construction activity strong in
most of the District, despite a slowdown in many housing markets. Respondents
from financial institutions reported ample supplies of bank capital and
liquidity, creating excellent terms for quality borrowers. Despite the
healthy level of economic activity in recent weeks, respondents noted that
labor shortages, shipping bottlenecks, and the strong dollar were beginning
to dampen the District's rapid pace of growth.
Twelfth District respondents expect continued strong performance in
the U.S. economy, with District growth outpacing the national rate. Slightly
more than one-half of the respondents expect U.S. GDP growth to be at or
near its long-run average pace, leaving the national unemployment rate
at its present level. An increasing number of respondents anticipate a
slight increase in prices in coming quarters, although a majority expect
inflation to remain constant over the next 12 months. With regard to regional
conditions, nearly all respondents expect growth in their area to outpace
national growth in the coming year, with District business investment and
consumer spending expected to post relatively fast growth.
Retail Trade and Services
Retailers in most District states reported moderate growth in retail
sales. In California and the Pacific Northwest, contacts reported solid
sales in recent months, boosted by strong demand for apparel and home furnishings.
In contrast, retail contacts in Utah noted slower department store sales
and reduced demand for "big-ticket" items, such as cars and trucks. Nearly
all District retailers reported difficulty finding entry-level workers
and many reported offering increased wages and larger employee discounts
to attract temporary holiday help.
Service industry respondents continued to report strong growth. Respondents
from Northern California and the Pacific Northwest reported healthy demand
for telecommunication and business services. Demand for shipping and freight
services continued to increase in many District states. In Southern California
port traffic growth reportedly accelerated over an already rapid trend.
Throughout the District, service industry respondents reported a dearth
of employees at the desired skill levels. Contacts also noted that high
turnover rates and short employee tenure were becoming primary concerns.
However, many respondents remained reluctant to raise overall wage levels
and instead have begun to take other actions, such as converting part-time
to full-time jobs and giving periodic merit awards.
Reports on District manufacturing activity were generally positive,
although the strong dollar, shipping bottlenecks, and labor shortages have
tempered growth in some areas and industries. High-technology equipment
manufacturers reported healthy growth and firms involved in commercial
airplane manufacturing reportedly are running at full capacity. In the
Pacific Northwest, the wood product industry continued to benefit from
improved orders for pulp and paper products. Growth in the unprocessed
lumber and food processing industries weakened in recent weeks, but remained
at healthy levels. Respondents cited the strength of the dollar relative
to East Asian currencies as the primary reason for this slowdown. Shipping
bottlenecks and labor shortages, particularly for skilled workers, continued
to constrain activity in many industries and areas. Manufacturing contacts
in the Pacific Northwest, where shipping bottlenecks have been particularly
troublesome, reported shifting to higher cost providers of freight services
in order to meet scheduled production goals. To fill employment vacancies,
respondents in the manufacturing sector reportedly have resorted to hiring
unskilled labor to fill skill positions.
Agriculture and Resource-related Industries
Agricultural conditions generally were favorable throughout the District.
Contacts reported healthy conditions for most crops and livestock. However,
recent railroad capacity constraints reportedly resulted in handling and
storage difficulties for producers of perishable crops, particularly grain.
In addition, the depreciation of East Asian currencies reportedly softened
demand for many raw agricultural products, as the relative price of U.S.
crops increased significantly.
Real Estate and Construction
Commercial real estate activity continued to increase in most areas
of the District, keeping District construction activity at high levels
despite a slowdown in many housing markets. Respondents in many areas of
the District noted slowing sales of both new and existing homes. Contacts
in the Pacific Northwest and Utah noted that high material, land, and labor
costs have made it difficult for developers to build housing that buyers
can afford. However, commercial real estate and construction activity in
these areas remains strong and has kept demand for contractors, subcontractors,
and materials well beyond the available supply.
Twelfth District banking conditions continued to be strong. Respondents
reported that bank capital and liquidity were in ample supply and competition
for loans remained fierce, with quality borrowers receiving excellent terms
and rates. On the other hand, some respondents noted that overall consumer
credit quality has deteriorated as borrowers continue to overextend themselves
through excess credit card usage. Despite ongoing bank consolidation, the
pool of available labor for the financial industry continued to tighten.
In some areas of the District, labor shortages have induced banks to convert
part-time positions to full-time jobs in an effort to attract employees.