Beige Book
For use at Noon, E.S.T.
Wednesday
October 30, 1996
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
October 1996
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
OCTOBER 1996
TABLE OF CONTENTS
SUMMARY ................................................................... i
First District - Boston...................................................I-1
II-1
Second District - New York ..............................................
Third District - Philadelphia ............................................ I-1
Fourth District - Cleveland ............................................. IV-1
Fifth District - Richmond.................................................V-1
Sixth District - Atlanta.................................................VI-1
Seventh District - Chicago..............................................VII-1
Eighth District - St. Louis............................................VIII-1
IX-1
Ninth District - Minneapolis ............................................
Tenth District - Kansas City
X-1
.............................................
Eleventh District - Dallas...............................................XI-1
Twelfth District - San Francisco.........................................XII-1
SUMMARY 1
/
Moderate expansion of business activity characterizes the economy in most Federal Reserve districts,
but on balance the pace of growth reportedly has slowed somewhat. Slower growth is reported in the
Southwest and along the eastern seaboard except for New England. The Midwest continues to show
moderate to strong growth. Boston and San Francisco, two districts which had lagged much of the
rest of the nation through the first half of the 1990s, indicate an improved performance. Although
there are few indications of significant price increases for raw materials, goods or services, reports of
upward pressure on wages are more widespread.
Consumer spending
On balance, consumer spending is best characterized as moderate. There are some signs of strength,
but no areas where sales are booming. There is considerable variation in patterns of spending both by
region and by category of merchandise. Boston describes double-digit growth in furniture and
hardware, but slow sales for discounters and a shoe chain. In the New York district, apparel is
strongest and durables such as appliances lag. The same pattern is true for Kansas City. Philadelphia
describes strong women's and youth clothing sales, but notes that some retailers ascribe this strength
to price cuts. Cleveland reports strength in sportswear and major appliances, with weakness in
computers, toys and home items. Retailers in the Atlanta district are meeting their targets, with
greatest strength in apparel. Conditions are similar in Chicago, where apparel leads home
improvement goods and appliances in gains over year-earlier levels. Chicago and Dallas characterize
the retail sector as one of intense competition, but they are generally optimistic about the upcoming
holiday season. Competition is also sharp in the Minneapolis district, but sales tax revenues indicate
moderate strength in general merchandise sales. San Francisco indicates that demand for retail goods
and services was solid overall.
Reports on the auto sector are mixed. They are particularly strong in the Minneapolis district,
where favorable crop incomes and overall economic strength bolstered September vehicle sales. For
1/Prepared at the Federal Reserve Bank of Minneapolis based on information collected before October 22, 1996.
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.
Cleveland, sales are up compared to a year ago, but somewhat below early 1996. Kansas City saw
some slowing in September, but dealers expect sales to be "fairly strong over the remainder of the
year." For Philadelphia, vehicle sales are reportedly steady, and for Dallas sales have slowed more
than expected.
Tourist spending is similarly mixed, with greatest strength along the East Coast. Tourism
"remains strong" in New York. Richmond reports substantial strength in inland areas not affected by
hurricanes. Atlanta lists brisk activity in Florida, the Mississippi Gulf Coast and New Orleans, and
notes an upbeat outlook for tourism and convention activity. The Upper Midwest is less favored, with
Minneapolis reporting a slow or somewhat disappointing summer season in its states.
Manufacturing
On balance, the manufacturing sector is largely stable to stronger, with considerable regional
variation. Boston reports that a near majority of firms "indicate solid sales gains from a year ago."
Cleveland describes the sector as strong with "some pickup noted between August and September."
For Atlanta, "contacts report increasing activity." And for Chicago, activity increased in the district
through early October. St. Louis notes reports of sales and employment increases and plant
expansions far outnumbering reports of declines and closures. San Francisco's manufacturing sector
expanded further, led by the aircraft sector.
However, obvious strength in these districts contrasts with Minneapolis, Kansas City and Dallas,
where manufacturing was steady to mixed; Philadelphia, where manufacturing gains in October were
less widespread than in summer; and New York, where surveys of purchasing managers reported
sharp improvement in local manufacturing in September. Several districts report localized effects
from the auto workers strike in Canada, but none foresee significant or long-term effects.
A number of districts report that manufacturing inventories are generally normal to somewhat
below normal, and show little indication of either production bottlenecks or of weakening demand.
Construction and real estate
Construction is strong in several districts, but slackening in a few. New York notes that rising
demand for apartments is spurring new construction, which had been dormant for some years. The
Midwest is generally strong, with Minneapolis and St. Louis noting particular strength. Chicago
reports increases in commercial and retail work are "offsetting some slowing on the residential side."
Kansas City notes some slowing, but says that activity is still above a year ago. San Francisco
characterizes the sector as generally robust, but with deceleration or weakness in some regions.
However, slowing is apparent in the Southeast. Richmond describes some decrease in residential
construction overall, but notes increases in materials prices and a shortage of skilled construction
labor in North Carolina. In Atlanta, construction activity has fallen below year-earlier levels.
Market conditions for residential and commercial real estate are mixed, with strength in the
Northeast and West (New York, Boston, San Francisco) and some slackening in the Southeast
(Richmond, Atlanta) and Midwest (Chicago, St. Louis, Kansas City).
Agriculture
The 1996 crop is turning out better than many anticipated this spring, when drought scourged the
Southwest and unseasonably cold, wet weather delayed planting on the Northern Plains and in the
Midwest. Although crop development still lags usual levels in several districts, there is little damage
from early frosts. Cleveland reports that the corn harvest was past the halfway mark in Kentucky and
starting in Ohio. Chicago describes the harvest as "well underway." St. Louis says that corn and
soybeans have generally "reached full maturity," but notes that the harvest is slow in Illinois and
Indiana. Minneapolis and Kansas City both tell of good to excellent yields, but with some harvest
delays due to rain. The effects of drought continue to plague the Dallas district, especially corn and
cotton. St. Louis also notes problems with cotton, in this case due to boll rot. Most winter wheat is
grown in the Dallas and Kansas City districts; Dallas reports the new-crop condition as good, but
Kansas City relates that fall planting is delayed by rain.
Conditions are less favorable for livestock producers; a number of districts report continued
losses for cattle ranchers. San Francisco notes a decline in beef exports to Japan. But there are some
glimmers of improvement: Minneapolis reports that beef prices are not as bad as had been
anticipated, while Kansas City says that profitability has returned to the feeding end of the sector and
that "feedlots are filling quickly." Minneapolis and St. Louis report sharp increases in milk prices, in
response to higher feed costs. The Chicago district has had more apparent cuts in hog and milk
production than elsewhere but says that the rate of decline has slowed as feed costs have dropped.
Energy, mining and forestry
Natural resource sectors are generally robust. Dallas describes shortages of offshore rigs, drill pipe,
and drilling crews and "little capacity available anywhere" in oil services. Kansas City activity
improved somewhat from August to September, but the rig count was unchanged from a year ago.
Minneapolis reports continued strong oil activity in North Dakota and very strong output in iron
mines. Forest product output is reportedly steady.
Financial institutions and credit
Districts describe a financial sector that is stable to slightly stronger. New York lists increases in
nonresidential mortgage loans and stability in other categories, along with some increase in
delinquency rates. Philadelphia reports steady to slower loan activity. Richmond, Atlanta, St. Louis
and Dallas describe little significant change. Kansas City and San Francisco note strength in loan
demand. St. Louis and San Francisco describe banking competition as "fierce" and "sharp."
Labor markets
Employment continues to grow in most districts. A majority, including Minneapolis, Chicago,
Cleveland, Richmond, Philadelphia, Kansas City, Dallas and San Francisco, describe labor markets
as tight. For Minneapolis, labor markets "constitute a constraint to increased output." "Labor
shortages continue to be a problem in most areas," reports Chicago. Labor markets remained tight
and wage increases more common, according to Kansas City, while Philadelphia reports that
employers have had increasing difficulty finding qualified workers. The Northeast is an exception to
this pattern. Labor availability is not a problem, according to Boston sources, and New York notes
an acceleration in manufacturing job losses.
Wages and prices
Indications of upward pressure on wages continue to spread geographically and to grow in terms of
affected occupations and ranges of skill levels. Wage pressures appear most quiescent in the East.
Boston reports that a couple of manufacturers have frozen wages, but that most are granting increases
of 2 percent to 4 percent. New York notes increases only in bonuses from Wall Street firms, and
while Philadelphia lists labor shortage difficulties, it notes acute wage increases only for some entrylevel clerical workers. Similarly, while Atlanta identifies increasing reports of labor shortages, wage
pressures have apparently not systematically emerged.
In the rest of the country, more pay increases are evident. Cleveland identifies "steady pressure to
increase wages" for some specialties, while Richmond sees wage increases in low-unemployment
areas and reports expectations of upward pressures in the next six months. Chicago says that "wage
pressures appear to have remained concentrated at the lower end of the pay scale, and ... this pressure
may be intensifying." For Kansas City, "reports of rising wages increased," and in the Dallas district
"there were more reports of labor shortages leading to wage pressures." San Francisco describes
wage pressures as "moderate overall," but points to "upward pressure on the wages of entry-level
workers ... has been added to existing upward pressure on wages for some categories of skilled
workers." The Minneapolis district apparently has the tightest labor markets, and notes "increasing
reports of compensation increases."
In contrast to some proliferation of wage increases, reports of price increases for raw materials,
goods and services remain limited. Boston reports some increases in chemicals prices, but notes that
half of manufacturers report no change in selling prices. New York reports that merchandise costs
are generally flat. The cost of raw materials has not increased for most industrial firms surveyed by
Philadelphia. Retailers contacted by Cleveland "have not experienced any substantial price pressures"
and "note price declines in consumer electronics." Most of Atlanta's contacts expect no change in
material or finished goods prices. St. Louis relates that some firms have experienced increases in raw
materials prices but have been unable to pass them along, while other firms reported recent declines
in raw material prices. From Minneapolis, price hikes generally remain scattered and small, while
Dallas indicates "more reports of lower prices than in the last beige book," although energy and some
other materials were higher. Specific exceptions to this general pattern of low price pressures include
Richmond, where manufacturers report increasing prices for finished goods and raw materials in
September, and Kansas City, where retail prices held steady but those for some manufacturing and
construction materials rose.
I-1
FIRST DISTRICT - BOSTON
Economic expansion remains solid in New England.
Reports from contacts
in retailing, manufacturing, and commercial real estate all have a positive
Insurance companies indicate mixed results.
tone.
Input and materials prices
are generally little changed; some manufacturers are raising prices.
A recent
forecast of the New England economy predicts current trends will continue,
with employment growing more slowly than in the nation and unemployment
remaining low.
Retail
First District retailers report varied results in September and the
first half of October.
Non-apparel contacts, such as furniture and hardware
chains, cite steady double-digit sales growth in the past six weeks.
By
contrast, several off-price discounters and one shoe chain note soft September
sales, ranging from level to 15 percent declines compared with year-earlier
levels, followed by modest gains in early October.
Respondents' expectations
for the upcoming holiday season range from 1 to 15 percent sales growth over
last year.
Retail contacts believe the economy is strong in most areas of New
England and that consumers are more confident and optimistic than a year ago.
Vendor and customer prices generally remain flat; one contact, however,
noted a temporary price hike for European shoe leather.
Gross margins and
profits vary, and most inventories are high in anticipation of the holiday
season.
Several contacts plan new store openings in 1997 and expect small
gains in employment as a result.
Wage increases of 2 to 5 percent are
anticipated.
Manufacturing
A slight majority of the First District manufacturers contacted indicate
that sales are little changed from a year ago.
Some of these firms, however,
report improved profits through cost reductions.
indicate solid sales gains from a year ago.
The remaining contacts
Manufacturers generally say that
they are successfully managing their inventories.
I-2
A couple of contacts note medical supply markets as a source of rapid
growth.
A textile manufacturer detects a small improvement in apparel
retailing, after several slow years.
effects of foreign imports.
Several respondents mention adverse
For example, a maker of high-quality furniture
notes that while his own business is thriving, the U.S. furniture parts
industry is shrinking because of competition, especially from China.
Automotive suppliers indicate a need to develop other products because
Exporters
carmakers increasingly are turning to low-cost offshore suppliers.
tend to be experiencing slow business in Europe, but rapid growth in Asian
markets.
Most manufacturers report that overall materials prices are similar to
or lower than a year ago.
Chemicals prices are rising, but contacts indicate
that the increases are selective or smaller than a year earlier.
About one-
half of the contacts report that their selling prices remain unchanged.
However, a maker of consumer durables recently raised prices by 7 percent, and
several nondurables manufacturers, including firms in the paper products
industry, report price increases in the 3 to 4 percent range.
In contrast, a
machinery manufacturer whose business has recently slowed has instituted a
temporary price reduction for one product line.
About one-half of the manufacturing contacts report stable employment
over the past year; most of the remainder have reduced their head counts.
Currently, more respondents are adding than are cutting employment, but
contemplated changes generally are modest.
Although a couple of contacts
report wage freezes, most have raised pay 2 to 4 percent this year.
Most
respondents state that labor availability is not a problem.
Commercial Real Estate
The New England commercial real estate market is doing well.
economy in most states has improved, resulting in increased demand.
The
In
Massachusetts, Connecticut, and Rhode Island, vacancy rates have declined and
rental rates increased.
The Greater Boston area continues to enjoy a modest
boom, with vacancy rates around 5 to 6 percent in all sectors, both downtown
I-3
and in the suburbs.
Connecticut is said to have experienced significant
improvements in its economy, leading to lower vacancy rates even in downtown
Hartford.
Maine and Vermont are not doing as well, with more variation across
sub-regions and sectors.
Despite strong markets, most contacts report little new construction.
The low rate of construction constitutes the main difference between the
current boom and the 1980s, and it reflects banks' reluctance to extend credit
for speculative construction as well as more caution by everyone.
Most
contacts predict, however, that continued favorable economic conditions may
soon lead to more construction.
Nonbank Financial Services
Respondents at insurance companies report mixed sales for the third
quarter of 1996 compared to the third quarter of 1995.
in sales are for variable annuities and mutual funds.
The biggest increases
Sales are also strong
in international subsidiaries, particularly in Latin America and Asia.
of traditional life insurance are weak.
in employment in the third quarter.
Sales
Only two respondents report increases
The rest cite a downward trend in
employment which they expect to continue for the rest of the year.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting group,
released its semiannual regional forecast in mid October.
NEEP expects
regional employment to continue expanding 1.2 to 1.4 percent per year, with
modest declines in manufacturing and most of the net job additions in services
and trade.
New England's unemployment rate is forecast to remain below 5.0
percent over the next several years, although the size of the labor force
should begin to expand.
II-1
SECOND DISTRICT--NEW YORK
Economic growth in the Second District has moderated somewhat since the last report. Sales
at large retailers slowed a bit in September but were back above plan in early October. The commercial
real estate and multi-family housing markets continued to strengthen in the third quarter, while the
single-family sector lost some momentum. Private-sectorjob growth moderated in September, though
the general trend is still fairly positive. The region's manufacturing sector gave mixed signals in
September: strong reports from purchasing managers belie an acceleration in manufacturing job losses.
Price pressures remain generally subdued, aside from New York City apartments and hotel rooms.
Finally, an increasing proportion of banks report rising delinquency rates in all major lending categories.
Consumer Spending
Retail sales in the district were, on balance, close to plan in September, but rose above plan in
early October. For the first half of October, same-store sales gains ranged from 2 to 10 percent. All
of the major retail chains surveyed cite apparel (especially high-end apparel) as the strongest category
of merchandise. Home appliances and electronics continued to lag other categories of merchandise,
though one contact noted strength in home-improvement goods. Inventories were generally at desired
levels, as the industry stocks up for the holiday season. Most retailers are planning for 2 to 4 percent
same-store sales gains during the Christmas season, though a few expect stronger gains.
Retailers report stable input costs but some increase in effective selling prices. Merchandise
costs are generally flat, though a few contacts cite cost reductions resulting from intensive negotiating;
wage growth remains steady and modest. However, effective selling prices are up moderately, as
retailers are discounting less aggressively than a year ago-a trend that is expected to prevail through
the holiday season.
Construction & Real Estate
The region's commercial real estate markets continued to strengthen since the last report, with
brisk leasing activity and declining availability rates across most of the New York metropolitan area.
(Availability rates include vacant space, as well as space coming on the market over the next six months
to a year). Office availability rates continued to decline in both downtown and midtown Manhattan in
September. Availability rates in Long Island, northern New Jersey, and southwestern Connecticut fell
during the third quarter and were well below year-earlier levels; however, rates edged up in the smaller
Westchester County market. Asking rents for prime (Class A) office space throughout the metropolitan
area have been essentially flat over the past year.
The District's residential real estate markets were mixed in the third quarter. Realtors in New
York and New Jersey report that sales of existing single-family homes slowed from the second quarter's
brisk pace. Builders in New Jersey describe the market for new single-family homes as steady; while
traffic is fairly good, potential buyers still seem to be concerned about corporate layoffs and relocations.
Despite a modest rebound from depressed 1995 levels, construction of single-family homes is still low.
In contrast, the multi-family sector continued to gain momentum. Rising demand for apartments
in and around New York City-along with lean inventories-is evidently boosting prices and spurring
new construction, which had been mostly dormant since the late 1980s. A quarterly survey covering
prime Manhattan co-op and condo sales shows prices up 11 percent in the third quarter from a year
earlier. Over the same period, permits to build apartments in down-state New York surged more than
three-fold, pushing the cumulative year-to-date total to a seven-year high.
Manufacturing
Regional surveys of purchasing managers suggest continued strength in the manufacturing sector
in September.
New York City area purchasing managers report sharp improvement in local
II-3
manufacturing-sector conditions in September. The Buffalo-area survey indicates that production
expanded at a somewhat slower pace than in August, but new orders and job growth accelerated. Both
groups report a modest increase in price pressures.
Other Business Activity
New York's unemployment rate declined from 6.1 percent to 5.9 percent in September, but New
Jersey's edged up 0.1 point to 6.2 percent. Private-sector job growth slowed moderately in September,
largely reflecting an acceleration in manufacturing job losses. The region's bellwether industry, Wall
Street, has generated strong job and income growth, and is expected to pay out record bonuses in the
months ahead. Historically, this sector has been a fairly good leading indicator of job growth in other
local sectors. Tourism remains strong, with hotels persistently running close to full occupancy. The
baseball playoffs and World Series may have given a modest boost to local tourism-related businesses
(restaurants, bars, souvenirs, etc.) but likely had a negligible impact on the region's overall economy.
Financial Developments
Based on the latest survey of senior loan officers at small and medium sized banks in the Second
District, demand for nonresidential mortgage loans strengthened moderately since the last report;
however, demand for consumer loans, residential mortgages and commercial and industrial loans was
stable. Refinancing activity for all types of loans was down. Willingness to lend continued to increase
for all categories; however, there was a general tightening in credit standards. Delinquency rates, which
had been fairly steady for most of the year, rose in all loan categories-overall, 44 percent of banks
report that delinquency rates increased since the last report, while 22 percent report that they declined.
The survey results suggest mixed trends in loan rates. Residential mortgage rates increased;
consumer loan and nonresidential mortgage rates remained fairly stable; commercial and industrial loan
rates declined slightly. Average deposit rates continued to rise.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports from businesses in the Third District during October suggested that the region's
economy continued to expand but the pace of growth had eased recently. Manufacturers posted
gains in shipments and orders in October, but the improvement was not as widespread as it had
been in the summer months. Area industrial firms noted increased prices for some of their
purchased inputs but there did not appear to be a general increase in the cost of raw materials.
Retailers reported mixed results for early October. Apparel retailers said back-to-school buying
carried over from late September into the first few weeks of the month, boosting their year-overyear gains; but, in general, merchants said sales growth was slow. Auto dealers said sales have
been steady. Reports from several area banks indicated that growth in consumer lending had
eased in the most recent few weeks while commercial lending had picked up slightly.
Employers in the Third District have had increasing difficulty finding qualified workers
for certain job openings, especially clerical and administrative positions requiring computer
skills. In addition, some firms reported that the recent implementation of stricter licensing or
qualification standards by governments or industry groups has reduced the pool of qualified
applicants for certain manufacturing and other jobs.
MANUFACTURING
Manufacturers in the Third District continued to report improvement in October, but
accounts of increased business were not as widespread as they had been during the summer
months. About one-third of the firms polled said they were seeing gains in shipments and orders
III-2
in October while about one in five said they were experiencing declines. Among the major
industrial sectors in the region, manufacturers of lumber, rubber and plastic products, chemicals,
primary metals, and machinery noted improvement; producers of textiles and furniture reported
decreased demand.
On balance, area industrial firms indicated that order backlogs were edging down.
Looking ahead, one-third of the firms contacted said they expect orders to increase over the next
six months while one-fourth anticipate further declines. In line with these modest expectations,
manufacturers were trimming payrolls.
Industrial prices in the region, while mostly steady, have shown some signs of increasing.
One-quarter of the firms commenting on prices noted higher costs in the past month for the
goods they buy. Most, however, said the cost of raw materials has not increased despite the rise
in prices for some other purchased inputs. With regard to the prices of the products they make,
three-fourths of the surveyed firms are holding the line; only a few report they have raised prices.
RETAIL
Third District retailers gave mixed reports for October, with the overall picture apparently
one of modest year-over-year gains. Some department stores and apparel retailers said there
appeared to have been some continuing momentum in back-to-school sales in early October,
especially for women's and youth apparel and sporting goods. Some merchants pointed out,
however, that the increased sales were due in large measure to storewide price cuts during late
September and early October. Auto dealers said sales have been steady recently. General
Motors dealers expect some slowdown in new vehicle deliveries because of the strike at
Canadian plants; this slowdown will result in some lost sales in the last quarter of the year.
III-3
Several retail executives noted that there appeared to be growing use of cash and debit
cards rather than credit cards recently. They speculated that consumers may be starting to limit
their buildup of debt and that this may portend slower growth in consumer spending.
FINANCE
Banks in the Third District have seen some slowing in the growth of consumer lending
recently, and some reported actual declines in outstanding loans. Bankers contacted in October
said the easing in consumer lending is due partly to a tightening of credit standards for new credit
card customers and partly to reduced borrowing by current customers. Some banks have seen
recent increases in borrowing by businesses, especially local companies, while others have just
been able to keep outstandings level. Also, some bankers said they were declining to participate
in large loans with low margins. On balance, real estate loan volumes at banks in the region have
been steady in recent weeks.
LABOR DEMAND
Employers and employment agencies in the Third District have been reporting increased
difficulty in finding qualified entry-level workers despite the large number of applicants for
employment openings. A major part of the problem, according to these sources, is that minimal
qualifications for many jobs now typically include at least some ability to use computers and
computer-based systems. This is especially the case for clerical and administrative jobs, and
some employment agencies have initiated training programs to prepare workers for these jobs.
Employers note that entry-level clerical workers with this type of training are now being paid 10
to 20 percent more than such workers received just a year ago.
Besides clerical workers, employers say there are inadequate numbers of truck drivers,
III-4
computer programmers and other data processing workers, and skilled trades workers in hightech manufacturing and construction. Some of these shortages are at least partially due to the
recent implementation of higher skills standards for certain manufacturing trades and stricter
licensing requirements for truck drivers, both of which have reduced the pool of qualified
applicants for these jobs. Where feasible, some employers have established training programs to
provide new workers with the required specialized skills, and some are cooperating with
educational institutions to develop such programs.
IV-1
FOURTH DISTRICT - CLEVELAND
General Business Conditions
The District's economy is still expanding and labor-market conditions are generally
considered quite strong. Still, overall price and wage pressures are reported to be light.
Although employment growth in the District continues to lag the national average,
with most areas reporting year-to-year jobs growth at or below 1 percent, unemployment
continues to inch lower in most areas. The jobless rate is very low in a broad corridor
running from central Ohio to northern Kentucky. Wage growth is generally steady.
Employment agencies report that the demand for temporary workers has been
consistently high. Clerical and light industrial workers are still in great demand, and a few
respondents say that skilled workers in accounting, healthcare, and technical support have
also recently become much sought after. Agencies blame tight labor markets for difficulty
in finding workers with specialized skills, such as registered nurses and laboratory
technicians, and note steady pressure to increase wages.
Agriculture
Only minor crop damage was reported following the District's first frost in early
October. Some frost damage to immature corn crops was recorded in West Virginia, and
soybean crops sustained minimal damage in the Ohio Valley.
As of mid-October, corn in Kentucky was fully matured, and 64 percent had been
harvested. In Ohio, however, only slightly more than half of the corn crop was mature
(compared to an average of 88 percent in recent years), and only 9 percent has been
IV-2
harvested. Ohio's soybeans are also behind schedule, but to a lesser degree. Kentucky's
tobacco harvest, now nearly complete, is reported to be better than average. Apple
harvests in Ohio and Kentucky are nearing completion and are in good condition.
Manufacturing
Manufacturing activity remains strong. Orders growth is continuing in most areas,
with some pickup noted between August and September. Export orders in the past month
or two are considered particularly good.
Production and employment levels are rising moderately or holding steady at a
high level in many sectors and regions, and inventories are declining. Still, cost and price
pressures are not appreciably greater than earlier in the year. Price increases are noted in a
variety of materials, including some types of steel and agricultural products. However,
price declines are also reported, including those for aluminum, stainless and rolled steel,
and copper.
Retailers
District retailers reported mixed results for September. Men's and women's
sportswear are still selling well. Sales of major appliances are also robust, but some
weakness is evident in sales of personal computers, toys, and certain home items.
Inventories are described as normal for this time of year, and District retailers are now
increasing stocks in preparation for the holiday shopping season.
Retailers say they have not experienced any substantial price increases recently. In
fact, they note price declines in consumer electronics goods. Some retailers anticipate
IV-3
difficulties in holiday-season hiring, especially in central Ohio, where the labor market is
considered "very tight."
Retail businesses appear to be proliferating in the region. An electronics chain
plans five store openings in Ohio and one in Pittsburgh this year. A major mall, with a
capacity of about 130 stores and about 3,000 jobs, opened this month in northeast Ohio.
It is expected to attract between 150,000 and 200,000 customers weekly.
Autos
The impact of the Canadian Auto Workers' strike against General Motors has been
difficult to gauge. Layoffs are minimal as stockpiles have been generally sufficient to
maintain regular production. Auto dealers expressed little concern about product
availability as a result of the strike. Only one contact reported stockpiling units in
anticipation of strike-related shortages. The introduction of new products has been on
schedule and dealers say they have sufficient inventory to meet current demand (with the
exception of a slight shortage of four-wheel-drive trucks).
Sales continued to show moderate strength through September and early October.
The majority of dealers report sales higher than last year's, but down just a bit from their
level earlier this year. Inventories were at or very slightly above desired levels.
Banking and Credit
Lending activity in the District is mixed, but good overall. Consumer loans
generally remain fairly steady, with some banks reporting slight declines between August
and September. Commercial loan demand increased moderately at most banks, but was
IV-4
off at a few. Delinquencies continue to rise mildly, but overall levels are not high enough
to concern District bankers. Although a couple of banks have begun to tighten their credit
standards, the majority report leaving them unchanged.
Competition for borrowers remains a concern for District bankers. The spread
between lending and deposit rates is getting narrower for most banks. Deposits are flat,
and most banks are finding it difficult to retain them because customers continue to move
funds into higher-yielding accounts like money-market mutual funds and small time
deposits.
V-1
FIFTH DISTRICT-RICHMOND
Overview: The Fifth District economy expanded at a more modest pace in recent
weeks. Growth slowed in the manufacturing, service, and residential real estate sectors,
while adverse conditions from Hurricane Fran damped tourist and farming activity. In
addition, state revenues grew more slowly. Lending and port activity changed little, while
retail sales grew faster and commercial real estate continued to gain momentum. Contacts in
several sectors reported persistent labor market shortages and higher raw materials prices.
Retail Trade: Retail sales grew faster in September, although most other indicators
of retail activity were steady or slowed. District retailers reported that big ticket sales and
shopper traffic grew at the same pace as in September. However, wage and employment
growth declined and some retailers expected negative impacts from recent minimum wage
legislation. A North Carolina retailer said the minimum wage increase "will force layoffs,"
and a Maryland retailer noted that it "will raise our costs and prices." Contacts reported
slower growth in inventory levels. Respondents indicated that retail prices rose more quickly
in the last several weeks, but they expected their prices and demand for their products to rise
more slowly during the next six months than they had in August.
Services: District service producers indicated that business activity increased more
modestly in September. Revenues, wages, and employment all grew more slowly in recent
weeks than they had in August. A Wilmington, N.C., real estate broker attributed slower
September activity to the effects of Hurricane Fran, but noted that "the phone is slowly
starting to ring again." On a positive note, a Raleigh hotelier remarked that the storm
brought in "insurance adjusters, repair workers, and emergency-agency workers," and that
"all hotels are filled." Service prices rose at a faster pace in September, but respondents
expected prices and demand for their products to increase more slowly over the next six
months.
Manufacturing: Manufacturing activity grew more slowly in September. Most
paper product suppliers, printing firms, and durable-goods producers indicated that new
orders had weakened in September. Some textile manufacturers reported that slack apparel
demand, coupled with excess capacity, pushed their prices lower. However, complaints of
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labor shortages remained widespread, particularly for industrial machinery and equipment
producers. Manufacturers indicated that finished goods prices and raw materials prices grew
at faster rates in September than in August. Respondents' six-month outlook was for higher
finished goods and raw materials prices.
Tourism: Tourist activity continued to weaken at coastal areas in September in the
wake of Hurricane Fran, but showed strength elsewhere. A hotel manager in the Myrtle
Beach area said storm-related vacancies reduced his revenues by $45,000; a contact from the
Outer Banks' chamber of commerce noted that after the soft September, October activity was
looking better. A respondent from a popular mountain resort said the September tourist
activity was the best in the resort's history and continued to show strength during the first
two weeks of October. Contacts reported that fall bookings were about the same when
compared to a year ago.
Port Activity: Representatives at District ports indicated that import levels were
lower in September than in August and that export levels were higher. Most port contacts
continued to expect higher levels of imports and exports during the next six months, with
export activity outpacing imports.
Temporary Employment: Fifth District temporary employment agencies reported
increased demand for contingent workers during September and early October. Contacts
from areas with low unemployment rates said that wages increased and they expected worker
shortages and upward wage pressures to continue during the next six months. One contact
remarked that employers in his area were reducing the time necessary for temporary
employees to gain full-time status in an effort to retain the workers.
Finance: Lending activity in the District showed little change during September and
early October. Lenders reported that mortgage interest rates fell slightly, but the demand for
home loans was steady. District banks continued to price commercial loans aggressively,
and banks' margins on these loans were being squeezed. One contact said that the quality of
consumer loan applications at her bank had deteriorated, leading to a marked increase in loan
refusals.
Residential Real Estate: Residential real estate activity continued to decline in recent
weeks. Housing starts and permits, as well as home sales and prices, decreased. Contacts
V-3
reported that buyer interest had waned; one realtor noted, "it's the slowest traffic in 15
years." Despite the slowdown in activity, wages and materials prices increased.
Homebuilders indicated that sheetrock and lumber prices rose, while contacts in North
Carolina reported shortages of skilled labor.
Commercial Real Estate: Commercial real estate activity strengthened in the last six
weeks. Leasing activity continued to escalate; one South Carolina contact characterized the
market there as "frantic." Vacancy rates fell further and rental rates climbed again across
the District. The availability of prime office space continued to tighten, and many contacts
reported shortages. Respondents noted an increase in new construction, although a North
Carolina broker remarked that "lenders aren't excited about speculative construction."
State Revenues: State tax collections generally increased, but at a slower pace in
September than in August. Withholding tax collections rose at a slightly higher rate. Sales
tax collections increased in all jurisdictions except North Carolina and Virginia. One North
Carolina contact said that the shutdown of retail businesses because of Hurricane Fran
lowered sales tax receipts there. Individual estimated payments and corporate income tax
collections rose at a faster pace, but real estate recordation tax receipts grew more slowly.
Agriculture: The effects of Hurricane Fran were still being felt across the District.
Agricultural analysts said that, in areas hardest hit by the strong winds and heavy rains, crop
harvesting activity remained behind the average pace of the last five years. Excess rains
associated with Fran and other severe storms delayed farmers' planting of winter small grain
crops. In areas not directly affected by the storms, agricultural activities appeared to
progress at a near-normal pace.
VI-1
SIXTH DISTRICT - ATLANTA
Overview: With a few notable exceptions, contacts report moderating growth of economic
activity throughout the Southeast in September and early October. Retailers indicate that sales are
exceeding last year's levels. Contacts generally have an optimistic outlook for tourism and business
travel. The single-family housing market slowed, while commercial real estate markets continued
to improve. Banking contacts report that overall loan demand held steady. Despite current increases
in production and new orders, manufacturing contacts are less optimistic about future production.
Wage and price pressures have apparently not systematically emerged, in spite of increasing reports
of labor shortages.
Consumer Spending: According to District retailers, sales in August and September
modestly exceeded year-ago levels. More than half of the retailers contacted said that recent sales
have met their expectations, and most merchants report that inventories are on target. Apparel and
shoes continue to make a strong showing, while home-related product sales have rebounded
somewhat recently. Looking toward the holidays, most respondents anticipate strong sales growth,
despite this year's shorter than usual selling season.
Manufacturing: Factory contacts report increasing activity in early fall, with rising
production and a growing volume of new orders following the modest growth posted through most
of the summer. The manufacturing outlook, however, was not as optimistic as before with fewer
plant managers expecting significant increases in output, orders, or employment rolls in the next few
months. Moreover, several expect a moderate contraction in the factory workweek. Although
contacts continue to report weakness in the region's apparel sector and are concerned about newly
VI-2
reported layoffs and continuing competitive pressures, other sectors appear to expand, or at least,
preserve their workforces. Contacts report that business continues to improve for plywood and
building product producers. Order backlogs for electrical equipment are up for regional plants.
Reduction in paper prices is stimulating Tennessee's printing and publishing industry.
Auto
component suppliers are also adding to employment rolls and expanding capacity in Georgia and
Alabama.
Tourism and Business Travel: The outlook for tourism and convention activity is upbeat.
Tourism and business travel to Florida resorts have been stronger than expected, with a notable
increase in the number of overseas visitors. The future continues to look good for central Florida
with a number of new attractions coming on line. Newly added flights to the Mississippi Gulf Coast
areas are expected to boost tourism there. New Orleans contacts expect continued tourism strength
for the remainder of 1996. Tourism officials are confident that Olympic recognition will boost
future tourism and convention activity for Georgia and Atlanta.
Construction: According to real estate contacts, the single-family housing market slowed
in September throughout much of the District. Home sales during September and early October
were mixed according to Realtors, while a majority of builders contacted said that construction
activity had fallen below last year's levels. Inventories of new and existing homes are said to be
adequate throughout most of the District. Most builders anticipate that activity will decrease through
the remainder of the year, while a majority of Realtors expect sales during the fourth quarter to
exceed year-ago levels.
Contacts from across the District generally report that commercial real estate markets
continue to improve. Low vacancy rates and higher rents continue to propel new industrial, office,
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and retail development. Most commercial projects continue to be build-to-suits, several speculative
developments are underway, and more are anticipated this year and next. Overall, the multifamily
sector remains healthy; however, some markets have weakened.
Financial: Most contacts in the banking industry report that overall loan demand held steady
in September and early October. Consumer loan activity was flat to slightly up, while commercial
loan demand was said to be mixed throughout the District. Mortgage activity has slowed slightly.
There are scattered reports of some deterioration of loan quality.
Wages and Prices: Wage pressures are not evident in the region at this time; however,
reports of labor shortages are becoming more frequent, and unemployment rates in parts of the
region are approaching historically low levels.
Some contacts note that strong demand for
management talent is bidding up benefits and fringes instead of resulting in higher wages and
salaries. Craftsmen such as carpenters, masons, and plumbers are in especially short supply. One
contact expects the shortage of skilled laborers to get worse before it gets better. Although there
have been a few scattered reports of increasing material prices for residential builders, most contacts
expect no change in material or finished goods prices over the next few months.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. The Seventh District economy continued its moderate pace of expansion in
September and early October, while wage and price pressures were generally constrained. Retail
sales growth in the District remained at or above national averages, due in large part to strong
apparel sales. Overall construction activity was robust, led by strong growth in commercial
construction. Manufacturing activity continued at high levels but the Canadian auto strike in
October was causing minor disruptions for a few auto suppliers. Employment growth continued
at a moderate pace with shortages of skilled labor persisting. Improving crop prospects began to
moderate the decline in livestock production in September and October.
Consumer spending. Retail sales improved moderately from August to September, but
early October results were mixed. Several large retailers attributed overall sales gains to strong
year-over-year sales of men's and women's fall apparel. Several retailers reported that sales
gains in District states were in line with or slightly above national gains in September. Home
improvement goods and appliances have been performing better than last year, but not as well as
apparel. One major retailer noted intense competition leading to downward price pressures,
which--along with continuing modest wage gains--was squeezing profit margins. One discount
retail chain, which experienced weaker-than-expected sales in early October, began cutting
prices in an effort to regain market share lost earlier in the year. Most retailers contacted were
very optimistic about sales heading into the upcoming holiday season, with Midwest
performance expected to continue at or above the nation's.
Housing/construction. Overall construction activity remained strong with a pickup in
business construction offsetting some slowing on the residential side. Commercial and retail
construction was particularly strong and momentum appeared to be mounting, with building
taking place in both the suburbs and inner cities. Industrial construction, notably warehouse
space, continued to be sluggish in the region. Realtors and builders reported that sales of both
new and existing homes continued to edge down from May's very high levels in the western half
of the District, while sales growth remained positive in Michigan and Indiana. Mortgage lenders
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also reported that applications were down in the western half, while noting slowing growth in
Michigan and Indiana. Several home builders reported an increased use of incentives recently,
while at the same time there were no new reports of unwanted inventory buildup. A national
survey of home builders indicated that Midwest builders are less optimistic than earlier in the
year, though the survey results clearly suggest a very strong housing market. A builder in one of
the District's largest metro areas reported that traffic remained high and moderating mortgage
interest rates could lead to slightly stronger sales in the fourth quarter. Builders also reported
that the less robust housing market had nearly allowed them to catch up on the projects delayed
by inclement weather earlier in the year.
Manufacturing activity. Manufacturing activity in September and early October
increased throughout the District, but indicators were mixed as to whether the pace of expansion
was picking up or slowing down. Purchasing managers' surveys for September generally
showed strong gains in both production and orders, even in metropolitan areas where the overall
pace of activity appeared to be slowing from a month earlier. The prices-paid component of the
surveys suggested modest price increases. However, lead times in most cases were either
increasing at a slower pace or actually shorter than in August. Reports from individual
producers suggested that demand remained at relatively high levels, especially among auto
suppliers, although some of that strength was attributed to inventory building in anticipation of a
possible auto strike in October. A steel producer reported that the order book for the first quarter
of 1997 was beginning to fill up, but noted that hopes for an increase in contract prices for steel
were fading. Several machine tool producers experienced a plateauing of orders in September
and early October, even though order levels have been somewhat higher than expected at the
beginning of summer. A producer of heavy construction equipment noted that dealers were very
optimistic about sales going into next year, although foreign competition (aided by a
strengthening dollar) has resulted in a rollback of virtually all of the modest price increase
announced earlier in the year.
VII-3
The October Canadian auto strike began to have an impact almost immediately on about
a dozen GM plants in the District, but only a few have been closed. Independent auto suppliers
reported little effect through the first three weeks of the strike. If the strike continues into the
last week of October, several GM suppliers expect that their sales to GM will be halted. If the
strike is perceived to be nearing a conclusion, several auto suppliers stated that they expected to
continue production and stock the parts, based on the expectation that auto assembly plants will
work overtime to recapture any lost production. One auto analyst expects workers to return to
work within two days of a settlement.
Labor markets. District labor markets tightened slightly through September and early
October while reports of new wage pressures were virtually non-existent. Labor shortages
continued to be a problem in most areas, with demand for skilled machinists, computer-literate
clerical workers, technology workers, and skilled construction workers outstripping supply.
Manufacturing employment appeared to be on a slow downward trend in the region, with Indiana
experiencing the most significant decrease. Purchasing managers' surveys from across the
District support this point, with the employment components signaling flat to slightly lower
employment levels. Most manufacturers contacted indicated that they had not been hiring in the
last six months. Overall wage pressures appear to have remained concentrated at the lower end
of the pay scale, and several contacts indicated that this pressure may be intensifying. Some fast
food restaurants were reportedly advertising bonuses on their marquees to attract help.
However, none of our contacts reported that wage increases at the lower levels were translating
into price increases.
Agriculture. The fall harvest, after a late start, is well underway. Despite some local
exceptions, most of the District's slow developing crops have reached maturity with little or no
frost damage. As a result, harvest prospects have improved in recent weeks and grain prices
have fallen sharply. Livestock production continued to lag year-ago levels, with the cuts in hog
and milk production more apparent in this District than elsewhere. However, the rate of decline
in livestock production appears to have slowed in response to lower feed costs.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
The pace of District economic activity has changed little since our last report. Sales
and employment levels are generally up, and inventories are, for the most part, at or near
desired levels. Contacts from around the District continue to report tight labor markets. Firms
that have experienced price increases for materials have generally still not been able to pass
them along to customers. Residential construction permit levels are ahead of last year, with
recent upticks in most areas. Total loans outstanding at large District banks rose slightly
during the past two months, led by consumer lending. Prices received by District milk
producers have risen substantially over the past 12 months, although they are expected to fall
somewhat before the end of the year. Record rice yields were reported in many areas, while
some District cotton producers report a higher-than-usual outbreak of boll rot.
Manufacturing and Other Business Activity
Reports of sales increases, employment gains and plant expansions from contacts
around the District far outnumber reports of declines and closures. Labor markets remain tight
in most parts of the District. Striking McDonnell Douglas machinists voted to accept the
company's contract offer in mid-September, allowing the 6,700 striking workers to return to
their jobs. The strike lasted slightly more than three months. The strike by Canadian auto
workers against General Motors has had little effect on District manufacturers and parts
suppliers.
Contacts from a paper products company and a poultry processor report plant
expansions, resulting in additional employment. A package delivery service has increased the
size of its planned expansion, which will dramatically increase local employment and
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capacity.
The District's heating and cooling industry is again posting a record year for
shipments and profits. Firms in the District's apparel industry, though, are still feeling the bite
of layoffs, predominantly because of price competition and inventory pressures. More than
900 jobs will be eliminated by year's end.
The largest bank in the Eighth District, Boatmen's Bancshares, agreed to merge with
NationsBank of North Carolina. The precise employment consequences of this merger remain
uncertain, although plans call for St. Louis to be the headquarters for the bank's western
operations and to house the combined company's trust business.
Inventories and Prices
Most firms relaying information about inventories state that current levels are either
at or slightly below desired levels. Some contacts continue to report increases in the prices
of raw materials, which they are generally not able to pass along to customers. In some rare
instances, large buyers have requested price cuts, threatening to take away business otherwise.
In others, increased productivity has offset the higher costs. Several contacts, including carpet
makers, furniture manufacturers and textile producers, have reported recent declines in raw
material prices.
Real Estate and Construction
Sales of new and existing homes have slowed somewhat in parts of the District.
However, the number of construction permits for new homes was up in August in more than
half of the District's 12 metropolitan areas. All but two of the District's metro areas have
posted permit levels that are above those of a year ago. Some builders in the southern part of
the District are either behind schedule or unable to take on new projects because of a lack of
workers. Reports from commercial real estate agents are still mixed, although some increase
in the demand for suburban office space was noted.
VIII-3
Banking and Finance
Total loans on the books of 11 large District banks rose 0.2 percent between early
August and late September, after declining 1.4 percent in the prior two-month period and 0.1
percent in the same period one year ago. Business loans rose 0.3 percent in August and
September, while consumer loans increased 2.6 percent. Real estate loans, which comprise
about 40 percent of the total, declined 0.8 percent. Banking contacts continue to describe loan
and deposit competition as fierce.
Agriculture and Natural Resources
A Missouri dairy industry contact reports that milk prices paid to producers in
September were up 27 percent from last year-an increase that is expected to prevail into
November. Not all of the increase, however, has been passed on to retailers. In response,
some farmers have reportedly increased their use of production-enhancing hormones, while
very few have yet to increase their herd size. This same contact says that, with increased
production and expected declines in feed costs, prices should start to decline in December.
High feed costs have also spurred some cattle producers in the southern parts of the District
to increase the number of acres planted for grazing purposes.
With a hard frost yet to hit most of the northern reaches of the District, the corn and
soybean crops, generally speaking, have reached full maturity. Nevertheless, the pace of the
corn and soybean harvest, at least in parts of Illinois and Indiana, is well below normal; in
general, it is on or ahead of schedule elsewhere. Parts of the Arkansas cotton crop have been
substantially afflicted with boll rot. An industry contact, however, reports that the Mid-South
cotton crop will probably have only slightly higher-than-average boll rot this season. Rice
yields in parts of Arkansas were reportedly the highest on record.
IX-1
NINTH DISTRICT-MINNEAPOLIS
In late fall, blue economic skies prevail in the Ninth District as moderate to strong growth
continues in most sectors. September vehicle sales were markedly strong, and some indicators
point to favorable overall retail sales in a very competitive sector. Construction remains an
economic workhorse with stamina in all district states. The 1996 crop is turning out well, despite
localized harvest difficulties due to wet weather. Natural resource industries follow the same
pattern as earlier in the year: strong oil exploration and drilling, strong iron ore production and
stable output in most forest products. Manufacturers report good, but not exceptional, business.
Very tight labor markets are producing increasing reports of wage hikes, and form a drag on
possible output for some firms. But few price pressures for goods are evident at any level.
Tourism continues somewhat slow, especially in the Dakotas and Montana.
Construction and real estate
"Business has been good so long that we don't think of it as a boom anymore," comments a St.
Paul, Minn., light commercial contractor. Indeed, while strength in the construction sector attracts
little attention in its fourth consecutive year of growth, Minnesota's September construction
employment was 3 percent and August housing permits about 8 percent above year-earlier levels.
"We are trying to get several projects out of the ground before it gets cold," says the manager at a
large Minneapolis commercial project. "We can always lay block in the winter and if we get this
foundation work done we can keep busy for a long time." Western Wisconsin, southeast South
Dakota, western Montana and eastern North Dakota also continue to enjoy brisk construction
activity. Localized shortages of Portland cement are one indication of the brisk pace of
construction. St. Cloud, Minn., concrete suppliers were rationing supplies in September.
Through September, highway and other publicly let infrastructure construction continues brisk
in Wisconsin, Minnesota and the Dakotas, but in Montana has dropped a bit from 1995 levels.
Natural resource industries
"We are producing just about as much as we can," remarks a representative of a Michigan iron
mining firm. The same is true for mines in Minnesota, where the highest tonnage in two decades
may be shipped if severe cold does not set in early. Oil exploration and drilling continue apace in
North Dakota.
In contrast to iron mining and oil, forest product output is best described as steady. Lumber
production through late summer is down in Montana from 1995 levels. Oriented-strand board
production in eastern district states through September reportedly is modestly above a year ago.
The paper industry appears to have stabilized after sharp price and order drops over the last year,
but output remains below capacity.
IX-2
Manufacturing and technology
"Business is pretty good," reports a spokesperson for a Minnesota die casting firm. "We have
plenty of work," is the word from an electronics component assembler in South Dakota. On the
whole, manufacturers report good business conditions, but perhaps somewhat slower growth than
the rest of the regional economy. In Minnesota, September manufacturing employment was 0.5
percent above September 1995, while overall employment was up about 2 percent. Manufacturing
growth appears somewhat stronger around Eau Claire, Wis., Fargo, N.D., and Sioux Falls, S.D. A
poll of manufacturers in Michigan's Upper Peninsula indicated that a majority anticipate increased
investment and sales in the next year, but few expect to increase employment.
Agriculture
Crop producers have largely dodged the early frost bullet, and most crops have reached maturity.
The harvest of wheat and other small grains is nearly complete, with generally good yields,
comparable to five-year averages, but not setting new records. Some soybeans and much corn
remains to be harvested, with work in some areas slowed by wet weather. Prices have dropped
sharply from spring highs, but remain well above year-earlier prices for corn and soybeans,
somewhat less so for wheat.
Cattle and hog slaughter prices are slightly higher than in early summer, and the situation for
cattle producers, while still bad, is not as grim as many had anticipated in late spring. Higher than
usual proportions of cull cows in total cattle slaughter indicates that needed adjustments in the beef
sector are taking place. Milk prices are up sharply in response to reduced output from higher feed
costs.
Bankers responding to the Minneapolis Fed's third quarter survey of credit conditions indicate
that farm income and spending has generally increased from earlier in the year, except in Montana.
Bankers also report that Minnesota, North Dakota and eastern South Dakota farmers are increasing
their machinery purchases compared to the previous three years. Repayment rates have improved,
and interest rates are unchanged from early summer.
Consumer spending
"September was the best month we have had in 23 years," reports an auto dealer from western
Montana. In Minnesota, sales and excise tax receipts from vehicles for September ran 10 percent
above projections. Moreover, reports from other dealers, association representatives and state
registration officials indicate that early fall auto sales were strong across the district.
For general merchandise, separating same-store performance and manager perceptions in
general retailing from overall consumer spending continues difficult in a sector that has
experienced major additions to capacity in recent years. Many retailers report business only
IX-3
slightly stronger in early fall than in prior periods, but nonvehicle sales tax revenues generally
indicate more strength than individual firms' sales figures.
Tourism
"Tourism is mixed, " reports a Michigan state official, who could be speaking for the entire Ninth
District. On the whole, the season has been somewhat slow, but not disastrous. Montana officials
note adverse publicity about wildfires, increased gasoline prices and competition from the Atlanta
Olympics as reasons for a slow year. The wet, cold weather prevailing well into spring hurt
Minnesota, Wisconsin and Michigan businesses, and while the pace reportedly picked up in the
summer and early fall, improvements were not enough to make up for early losses. "We are
hoping for a good winter skiing and snowmobiling season," remarks one banker from Michigan's
Upper Peninsula, where tourist spending is important.
Employment, wages and prices
Labor markets in many areas of the district have tightened to the point where they constitute a
constraint to increased output for some firms. A recent newspaper article described one fast-food
outlet that repeatedly has closed either its dining room or its drive-up window due to lack of
workers. Another news story noted the plight of food processing firms in southern Minnesota
towns that have outgrown local labor markets and are mounting extensive campaigns to attract
workers from other states. Still other Minnesota firms are offering $50 payments for bona fide
applications and $25 to $250 referral bonuses to current employees. A major printer seeks more
than 100 skilled press operators. Skilled workers are also hard to find in Sioux Falls, S. D.
These tight conditions bring increasing reports of compensation increases, in base pay for some
workers and in increased benefits, bonuses and incentives for many others. The personnel director
for a major Minnesota financial institution says, "Good database people can pretty much write
their own check." Fast food outlets in Missoula, Mont., reportedly are offering $6.50 per hour for
starting part-time help, a level previously unheard of in that area. But some other employers report
moderate pay increases. Over 80 percent of business owners in Michigan's Upper Peninsula who
responded to a Minneapolis Fed poll expect that wages would increase 2 percent to 3 percent in
the next 12 months. Moreover, a survey of compensation managers for Minnesota firms indicated
pay increases averaging 4 percent.
In spite of these reported pressures in labor markets, price increases in markets for raw
materials, intermediate goods and final goods generally remain scattered and small. The drop in
agricultural commodity prices over the summer eased pressures on food prices, with the exception
of dairy products. Petroleum costs remain above year-ago levels, and trucking firms continue to
complain of the resulting squeeze on their operating margins.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The district economy continued to grow at a moderate pace during the past
month. Retail sales edged up, manufacturing and construction activity remained moderately
strong, and energy activity improved somewhat. In the farm economy, favorable weather
brightened income prospects for crop producers, and stronger cattle prices brought profits to
some cattle producers. Labor markets remained tight in much of the district, and reports of wage
increases became more common. Prices increased for some materials used in manufacturing and
construction. At the retail level, prices were generally steady.
Retail sales. Retailers report sales edged up during the past month but changed little
from last year's level. Sales of women's apparel were strong, while sales of appliances and other
"big-ticket" items were weak. Retailers remain optimistic that sales will increase over the rest of
the year. Most retailers were satisfied with their inventory levels, and only a few plan to trim
inventories during the next several months. Automobile dealers report sales slowed slightly last
month as a result of some easing in demand and limited availability of popular models. Sales are
expected to be fairly strong over the remainder of the year, however. Dealers have been
expanding inventories but still do not have as many light trucks and sport utility vehicles as they
would like.
Manufacturing. Manufacturers operated last month at moderately high levels of
capacity. Manufacturing materials were generally available, with lead times increasing
somewhat for steel but holding steady for other items. Most manufacturers were satisfied with
their inventory levels.
X-2
Housing. Builders report housing starts slowed last month yet remained stronger than a
year ago. Starts of both single-family homes and multifamily units declined. Builders expect no
further decline in construction activity, except for the normal seasonal slowdown toward the end
of the year. Sales of new homes also slipped last month. Most building materials were readily
available, and delivery times were normal. Mortgage lenders report some slowing in demand last
month and expect some further slowing the rest of the year.
Banking. Bankers report that both loans and deposits were up slightly last month,
leaving loan-to-deposit ratios essentially unchanged. Commercial and industrial loans,
consumer loans, home equity loans, and commercial real estate loans all edged up. Demand
deposits and money market deposit accounts increased slightly, outweighing a modest decrease
in large CDs and small time and savings deposits.
All respondent banks held their prime lending rates steady last month, and almost all
expect to leave rates unchanged in the near term. Most banks also held their consumer lending
rates steady and plan no changes in the near future. Lending standards were unchanged at most
banks.
Energy. District energy activity improved somewhat last month, as higher oil prices
offset the negative effect of lower natural gas prices. The district rig count rose 3.5 percent from
August and was unchanged from its year-ago level.
Agriculture. The district's corn and soybean harvest is slightly behind schedule due to
wet weather. Reported crop yields are mostly good to excellent, except in parts of western
Nebraska and northeast Colorado, where crops sustained extensive hail damage. The wet
weather has delayed planting of the district's winter wheat crop. Most cattle ranchers continue to
X-3
post losses but cattle feeders have returned to profitability. As a result of stronger fed cattle
prices, feedlots are filling quickly. The large inflow of cattle is expected to put downward
pressure on prices as the cattle are marketed next winter and spring.
Wages and prices. Labor markets were still tight last month and reports of rising wages
increased. Almost all retailers report they have increased wages recently to attract qualified
workers. Manufacturers report skilled and unskilled workers remained in short supply, and a
greater fraction of companies than in past months say they have responded by increasing wages.
Prices held steady at the retail level but rose for some manufacturing and construction materials.
Retailers expect no major price changes in the months ahead.
XI-1
ELEVENTH DISTRICT--DALLAS
In September and early October, Eleventh District economic activity expanded at a slightly
slower pace than reported in the last beige book. There were more reports of lower prices than in the
last beige book, but some prices were higher, including energy, and there were more reports of labor
shortages leading to wage pressures. Manufacturing activity was mixed. Strengthening energy activity
led to an increase in energy-related manufacturing, and the electronics industry reported a slight
increase in demand, but slower growth in home building led to softer demand for construction-related
manufacturing. The financial services industry reported little change in loan demand over the last six
weeks. Retail sales were sluggish in September but picked up in early October. Rain improved
agricultural conditions, but the effects of the 1996 drought continue to be evident.
More industries reported falling prices than in the last beige book, but some reported rising
prices. Overcapacity in the trucking industry led to a drop in shipping prices, despite higher fuel
costs. Falling demand led to lower aluminum and scrap iron prices. Lumber producers said prices
were down 20 percent over the last 6 weeks, but some types of lumber experienced price increases.
Prices continued to fall for semiconductors and personal computers, although a few contacts said
some semiconductors prices were "flat" or "stabilizing." Telecommunications prices were flat to
slightly down. Most retailers reported no change in selling or input prices, and a few reported that
prices were lower. Selling prices for apparel products were unchanged despite some reports of rising
input costs, particularly for chemicals and wages. New home prices softened, while office rents
continued to rise. Selling prices for paper products were up, partly due to higher raw material prices,
and contacts expect more increases next year. Crude oil prices were pushed as high as $25 per barrel
from $21, thanks to strong demand, continued tension in the Middle East and the collapse of the Iraqi
XI-2
oil for aid package. Continued low inventory levels for heating oil have kept its price steadily rising
over the past six weeks. Heating oil prices are the highest since the Persian Gulf War began, and are
expected to increase if the winter is normal or colder.
A shortage of low-wage workers led to scattered wage pressures in a few industries, such as
apparel, retail and the hospitality industry. One contact attributed the labor shortage to a recent influx
of telemarketing firms. Contacts reporting wage pressures said they were already paying above the
minimum wage, with the exception of a couple of apparel firms and one retailer. Engineers are
reported to be in short supply, particularly for the telecommunications industry. Wages were rising
for engineers and production workers in Dallas, as well as computer programmers and computer
scientists. Highly skilled construction workers continued to be in short supply, leading to wage
pressures, but reports suggest there are plenty of construction workers in the less skilled crafts.
Manufacturing activity was mixed. Electronics firms reported a slight increase in orders, but
demand was down for construction-related products. Demand for energy-related manufacturing was
up. An increase in demand for personal computers led to a slight increase in computer and
semiconductor manufacturing, and contacts said inventories are approaching desired levels for most
products. Telecommunications manufacturing increased, and the industry is hiring in anticipation of
further growth. Slower home building reduced demand for brick, primary and fabricated metals, and
led to some layoffs. Aluminum and scrap metal producers reported demand had fallen by 25 percent
and 15 percent, respectively. Lumber sales were steady, but down from last year. Paper producers
said demand was up over the last three months, but not as good as a year ago. Apparel sales were up
slightly, and several firms said they are hiring. Cement sales increased recently, due to increased
demand from the oil industry. Petrochemical demand is up along with prices and profits. Synthetic
fibers are the weakest part of the market, but sales of plastics for film and packaging are strong.
Refiners on the Gulf Coast said crude prices continued to rise as fast as product prices, cutting into
XI-3
profits, and contacts said the Gulf Coast seems to be suffering from overcapacity.
Retail sales were sluggish in September but picked up in October. Many contacts said sales
were below expectations. Several retailers noted that competition is stiff, and one said "we're all
fighting over market share." Contacts are cautiously optimistic about the holiday season. One contact
said "we are expecting sales will improve because they will have to improve to meet our forecast."
Auto sales slowed more than expected, and a Texas contact was surprised that "you can walk into a
showroom and purchase a Suburban immediately." Sales jumped 12 percent in Houston, however.
The financial services industry reported little change in loan demand. Refinancings continued
to decline and other residential real estate loans were down overall. Commercial real estate lending
was flat, although credit standards had tightened somewhat over the last three and twelve months.
Construction and real estate industries reported steady growth in demand for new and
existing commercial space but weakening demand for residential space. Respondents said sales of new
homes were falling and backlogs-which had kept construction strong in the past several
months-were lessening. Sales of existing homes were reported to be flat at good levels, however. In
the commercial sector, demand for new warehouses and retail space kept construction activity strong,
and rising demand for office space continued to push up rents, especially in suburban areas.
Energy activity strengthened. High prices kept demand for oil services extremely strong, with
little capacity available anywhere in the industry. Offshore activity is particularly strong, operating
near 100 percent of capacity. Contacts mentioned shortages of offshore rigs, drill pipe, geophysical
skills, and drilling crews.
Rain improved agricultural conditions, but the effects of the 1996 drought continue to be
evident. The winter wheat crop is looking good although planting has been delayed by rain and
armyworms. Still, the corn crop is forecast to be 21 percent below 1995. The Upland cotton crop is
expected to be down 18 percent, but in many areas cotton yields are turning out less than expected.
XII -
TWELFTH DISTRICT -
1
SAN FRANCISCO
Summary
Most contacts from the 12th District reported strong economic growth in their areas and
industries in recent weeks. The District manufacturing sector continued its solid expansion, and
the pace of retail goods and service sales was brisk. Construction and real estate sales activity
was robust in most regions, although some deceleration was reported in several fast-growth
states, and the Southern California market continues to be weak. Banking respondents reported
good conditions for their industry throughout the District. With regard to the outlook,
respondents' generally sanguine views were tempered only by expectations of increasing inflation.
Although wage and price pressures in the District reportedly were moderate overall, upward
pressure on the wages of entry-level workers in some areas recently has been added to existing
upward pressure on wages for some categories of highly skilled workers.
Business Sentiment
District respondents expect the performances of the national economy and their respective
regional economies to remain on track in the near term. Over half expect national GDP growth to
continue at about its long-run potential, with most of the remaining respondents expecting
improvement rather than deterioration. Most also expect their region to outperform the nation in
coming months. However, respondents' inflationary expectations worsened in the most recent
survey period, with 56 percent expecting inflation to accelerate during the next 12 months,
compared to 39 percent in the last survey period; only 5 percent in both periods expected an
improvement.
XII -
2
Retail Trade and Services
Demand for retail goods and services was solid overall. Sales were particularly rapid at
large grocery and drugstore chains, though a Pacific Northwest respondent noted flat demand for
consumer sporting goods. In the services sector, firms that provide services to other businesses
did particularly well in the recent period. District software companies continued to expand,
benefitting from gains in both domestic and international markets; the primary beneficiaries are in
the Seattle, Washington area and in California. Also in California, demand for
telecommunications services was very strong, with the introduction and expansion of new
products helping to fuel an ongoing surge in this sector. More generally, continued tightness in
retail and related labor markets reportedly has led to noticeable wage pressures for entry-level
workers in several states.
Manufacturing
The District manufacturing sector expanded further in recent weeks. Employment, sales,
and investment in aircraft production and related industries expanded at a rapid pace in
Washington State, due largely to a push to fill a substantial order backlog at Boeing. In
California, makers of metal products expanded their employment and sales at a healthy pace, and
reports indicate similar strength in chemical production. Furthermore, manufacturers of high-tech
electronics and computer products did well overall in that state and in most of the rest of the
District. Although the District high-tech manufacturing sector had been held back somewhat by
saturation in the computer memory chip market during much of 1996, several respondents
reported recent signs of bottoming-out or slight recovery in this sector. Respondents also noted
XII -
3
rising labor market tightness for skilled high-tech workers in several areas, and an Oregon
respondent noted the need for deferred vacation plans to meet orders at local high-tech firms. In
another sign of strength in the Pacific Northwest, employment and output by lumber producers
reportedly have picked up.
Agriculture and Resource-Related Industries
Reports indicate generally good conditions for District agricultural products. Sales of
various California crops were stimulated by rising export demand, largely coming from China and
other countries in Southeast Asia. California wheat producers had a good harvest, and they
benefitted from high prices arising from low worldwide supply; high prices also benefitted
Washington wheat growers. In contrast, although increasing District beef exports to some
countries helped to offset a recent decline in beef exports to Japan, the glut in the District beef
market continued, with feed cattle prices sitting as much as 40 percent below break-even levels.
Real Estate and Construction
Construction activity and real estate sales generally were strong in the District, with the
exception of somewhat weak markets for residential property in California. Activity in that state
was mixed, with the southern portion of the state still lagging behind the northern portion.
Substantial residential building activity, home price appreciation, and rent increases were reported
for Silicon Valley, the high-tech manufacturing center in the southern part of the San Francisco
Bay Area, and some pickup in permits for lower-priced "entry level" homes was reported for
Southern California. For California as a whole, however, any existing strength primarily was in
XII -
4
nonresidential markets; residential construction and sales remain low at the state level. Although
building and sales activity continued at high levels and wages for construction workers rose
noticeably in the District's fast-growth intermountain states and Oregon, several respondents in
these states reported recent slowing in residential construction activity and plans. Reports also
suggested some slowing in commercial construction in Idaho, Arizona, and Nevada.
Financial Institutions
Respondents representing banks and savings and loans reported strong loan demand and
generally good credit conditions throughout the District. Reports from Southern California
suggested somewhat improved conditions there, with increased loan demand at banking and thrift
institutions; however, delinquencies also have increased a bit. San Francisco Bay Area banks
registered strong performance, although some deterioration in consumer loan quality was
reported. Elsewhere in the District, financial institutions continued to do very well, despite sharp
competition for loans.
Cite this document
Federal Reserve (1996, November 12). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19961113
@misc{wtfs_beige_book_19961113,
author = {Federal Reserve},
title = {Beige Book},
year = {1996},
month = {Nov},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19961113},
note = {Retrieved via When the Fed Speaks corpus}
}