Beige Book

For use at Noon, E.S.T.

Wednesday

December 4,1996

Summary of Commentary on

Current

Economic

Conditions

by Federal Reserve District

November 1996

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICT

November 1996

TABLE OF CONTENTS

SUMMARY................................................i

First District - Boston..............................I-1

Second District - New York..........................II-1

Third District - Philadelphia.......................III-1

Fourth District - Cleveland

.........................

Fifth District - Richmond.............................V-1

Sixth District - Atlanta ............................ VI-1

Seventh District - Chicago..........................VII-1

Eighth District - St. Louis .......................VIII-1

Ninth District - Minneapolis.........................IX-1

Tenth District - Kansas City..........................X-1

Eleventh District - Dallas...........................XI-1

Twelfth District - San Francisco....................XII-1

IV-1

SUMMARY 1

/

Moderate economic growth continues to be reported in nearly all Federal Reserve

Districts. Labor markets in most Districts remain tight, although wages pressures are generally

not increasing except for some technical occupations and skilled workers. Retail prices are stable

in most Districts although some firming, mainly in prices for materials and intermediate goods, is

noted by Richmond, Atlanta, Kansas City, and Dallas.

Consumer Spending

Retail sales have increased in most Federal Reserve Districts. Sales have moved up in

Boston, New York, Philadelphia, Minneapolis, Kansas City, and Dallas in the past four to six

weeks, and San Francisco reported moderate improvement in recent months. Atlanta and St.

Louis have had year-over-year increases. Chicago reported that retail sales have been flat in the

past month but above last year's level. The only reports of weaker sales come from Cleveland,

where sales were down compared to a year ago, and Richmond, where sales have moderated in

the past month.

By product line, apparel sales have been relatively strongest in New York, Cleveland,

Atlanta, St. Louis, Minneapolis, Kansas City, and Dallas. Home products were also selling well

in Atlanta and St. Louis. Electronic products were selling strongly in Minneapolis and Kansas

City but poorly in New York, Cleveland, and Chicago. Appliances were not selling as well as

other types of products in New York, Chicago, and Minneapolis.

1/

Prepared at the Federal Reserve Bank of Philadelphia based on information collected

before November 23, 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.

ii

All Districts that obtained information on inventories reported that stocks were in line with

merchants' current or expected sales. Price discounting was increasing in Boston, New York,

Philadelphia, and Cleveland.

Retailers' expectations for sales in the upcoming holiday season are modestly optimistic.

In the Boston, New York, and Philadelphia Districts, merchants forecast gains ranging from 2 to 6

percent, year-over-year. Atlanta merchants expect a slight increase. In St. Louis, Kansas City,

Dallas, and San Francisco the season is expected to be strong.

Auto sales were mostly steady in Districts that got reports from dealers. In Philadelphia,

St. Louis, Kansas City, and San Francisco, sales were roughly unchanged in recent weeks but at a

high level. The sole negative report came from Dallas where sales were characterized as sluggish.

Tourism has been strong in the nation's coastal states. Richmond, Atlanta, New York,

and San Francisco report high hotel occupancy rates. Theme park attendance and bookings for

winter stays at coastal resorts have been high in Florida. Minneapolis, however, reported

lackluster tourism, although early snow has boosted business in areas popular with skiers and

snowmobilers.

Manufacturing

Nearly all Districts reported continued expansion of manufacturing activity in October and

November. The improvement was generally modest, although manufacturers in the Boston District

said they were seeing year-over-year gains in orders and revenue of up to 15 percent. Less

positive conditions prevailed in the Cleveland District, where production was just steady, and in

the Atlanta District, where "an increasing number of factories are reporting decreasing production

and shipments."

Boston noted strong orders for consumer durables, furniture, appliances, computers, and

medical equipment. Dallas and Atlanta reported stronger demand for electronic products and

iii

industrial equipment. Boston and San Francisco indicated that production of aircraft and related

equipment was moving up. Dallas noted strong demand for energy equipment and oil machinery.

Some disruption in the production of autos and related equipment because of strikes was reported

by New York, Cleveland, and Chicago; Cleveland also noted that lost production was not

scheduled to be made up.

Inventories were described as "normal" in the Cleveland District and "satisfactory" in the

Kansas City District. Inventories were declining in Philadelphia. Producers of electronic goods in

the Dallas District said their inventories were high but coming down.

Real Estate and Construction

All seven of the Districts reporting on commercial real estate markets noted improvement.

New York and Dallas indicated continued improvement in office markets, and Richmond and

Atlanta noted increases in rental rates and drops in vacancy rates. Commercial construction

activity increased in the Districts of Richmond, Atlanta, St. Louis, Minneapolis, and Dallas.

Richmond and Atlanta received reports of increased speculative construction of office buildings.

Development of light industrial and retail space was also under way in Atlanta and Minneapolis.

Minneapolis reported robust public infrastructure construction, and Dallas reported strong

construction of extended-stay hotels in that city.

Districts reporting on residential real estate mainly observed slowing sales, although sales

levels remained high. Richmond, Chicago, Minneapolis, and Kansas City reported slower sales.

In the San Francisco District sales fell back somewhat in Arizona, Idaho, and Utah but increased

in Washington, Oregon, and the San Francisco Bay area. Home prices were steady in Boston and

New York, falling in Richmond, and rising in St. Louis and the stronger markets in the San

Francisco District mentioned above.

Agriculture

In general, Federal Reserve Districts that surveyed agricultural conditions received good

reports. Minneapolis noted that grain yields were "excellent and better than had been expected

through the growing season." St. Louis said that "initial reports suggest that yields were generally

above average." The soybean crop was plentiful in the Cleveland and Dallas Districts.

Minneapolis and Cleveland received positive reports on the potato crop. Other crops for which

yields were said to be good were rice, peanuts, and sugar beets. Kansas City reported an excellent

corn harvest, but Cleveland said the corn harvest in Ohio was about 20 percent below normal.

Minneapolis and Kansas City reported that recently planted winter wheat was in good condition in

their Districts, but Cleveland said seeding was hampered by muddy field conditions.

Dallas described livestock conditions as "good overall," and Kansas City and Minneapolis

said higher cattle prices have led to an increase in cattle at feedlots.

Natural Resource Industries

The current level of oil prices is prompting high and growing oil-field activity. Dallas

noted that "high prices continued to boost demand for oil services," and Kansas City reported that

the District's rig count rose 2.4 percent in October and was above the year-ago level. Minneapolis

reported that "iron ore mining and oil drilling continue at the brisk pace that has prevailed for

several months."

Financial Services and Credit

Credit demand varied among Districts. Only Cleveland and San Francisco indicated

growth in overall bank lending. In other Districts, lending was mixed. Competition for new

lending was characterized as aggressive for business loans in Philadelphia and St. Louis, for

consumer loans in Richmond, and in general in Cleveland.

v

In New York, Philadelphia, Cleveland, Atlanta, and San Francisco, banks reported

deterioration in credit quality, especially for consumers. Tightening of credit standards was

mentioned in New York, Philadelphia, Chicago, St. Louis, and Kansas City.

No Districts

reported easing credit standards.

Employment and Wages

Labor markets were characterized as tight in a majority of Districts. Districtwide labor

market tightness persisted in Richmond, Chicago, Minneapolis, St. Louis, and Kansas City.

Atlanta and Cleveland said labor markets were tight in many parts of their Districts. In most

Districts employers said skilled trades workers and specialized technical workers were in

particularly short supply. Boston reported that "demand for highly skilled temporary workers

continues to outpace supply." Richmond, Chicago, and San Francisco also noted strong demand

for skilled construction workers. Chicago and Minneapolis said retailers were having difficulty

hiring temporary help for the holiday season.

Reports from District banks do not indicate a generalized acceleration in wage increases

despite growing reports of labor shortages. Cleveland, for example, said that its contacts see "few

signs of any significant rise" in wages, and Atlanta said "reports of increasing wages are

infrequent in the region." Minneapolis reported that "many employers say there is no generalized

upward pressure on compensation." Nonetheless, there appear to be more instances of stepped up

compensation, especially for highly skilled technical workers. Boston reports that in the area

around that city "compensation packages to attract key technical employees are said to be

escalating rapidly." Richmond contacts reported more pronounced wage pressures in October

than in September. A large temporary help agency reported to Chicago that wages in the

Midwest were rising. Also in the Midwest, Kansas City noted "continued evidence of wage

pressures," especially in manufacturing.

Prices

District reports on prices suggest there has been virtually no change in trend recently.

Boston contacts said "prices remain generally stable." New York indicated "there has been little

change in price pressures." Cleveland and Richmond characterized price increases as "modest."

Chicago reported that "price pressures remained largely in check." Minneapolis received "few

reports of price increases for raw materials, consumer goods, or services." Most manufacturers in

Philadelphia and Cleveland indicated that both input costs and output prices were steady.

Manufacturers in Chicago said their input costs were flat, and firms in St. Louis said the cost of

materials were "stable to up somewhat."

Exceptions to the relatively steady price picture are petroleum products and fuels, whose

prices rebounded after falling in early November. Also, there were more reports of rising

industrial prices in recent surveys in Richmond and Atlanta. Kansas City observed rising costs of

"some manufacturing and construction materials," and Dallas noted that "several industries

reported a general firming in prices."

I-1

FIRST DISTRICT - BOSTON

The New England economy continues to expand at a moderate pace. Most First District

manufacturers are posting solid gains, retailers report scattered pick-ups in activity, and personnel supply

firms continue to grow, but at a less hectic pace than in the recent past. The region's residential real estate

markets are steady and growth continues at money management firms. Prices remain generally stable,

contacts say, while wages are rising 2 to 6 percent and some employers note selective hiring difficulties.

Retail

Most retail contacts in the First District report a pick-up in sales activity for some period during

October and the first half of November. They attribute these improvements, in some cases temporary, to

colder weather, early holiday shopping, or increased promotions. Overall results for the six weeks vary,

however, ranging from 10 percent sales declines to gains of 13 percent compared with a year earlier. Most

respondents detect a rise in consumer confidence and view the economy as "OK but not exciting." They

predict 2 to 6 percent sales growth in December; growth will be restrained because four fewer shopping days

between Thanksgiving and Christmas could cut gains by as much as 3 to 5 percentage points.

Vendor and customer prices remain stable, although one respondent cites continued declines in

apparel prices. Lumber prices have stabilized, following a significant rise and fall earlier this year. Retailers

have intentionally trimmed inventories compared with a year ago to avoid last January's overstock. Most

contacts are posting increased profits and gross margins, which they attribute to better inventory

management. Only one retail chain noted major increases in capital spending and employment. Merchants

plan to increase wages 2 to 5 percent in 1997.

Manufacturing

Most First District manufacturing contacts report continued 5 to 15 percent growth in revenues

and/or orders from year-ago levels, and they are at least cautiously optimistic about future business. Demand

I-2

for furniture, appliances, other consumer durables, and medical and computer equipment is said to be strong.

Contacts are experiencing moderate to rapid growth in automotive-related business, but some express

concern about a possible slowdown late next year or thereafter. Aircraft-related orders are picking up

significantly, mostly as a result of improved profitability of commercial airlines. The semiconductor industry

remains in a slump. One maker of consumer durables expects to raise production in order to replenish

depleted inventories. Some of the remaining contacts express a desire to reduce inventories as part of an

overall cost containment strategy.

Materials costs and selling prices remain fairly stable. A recent drop in component costs has led to a

larger-than-normal drop in computer prices. Contacts report slight increases in the cost of selected metals,

furniture-grade lumber, and chemical products, but falling costs for paper and packaging.

Just over half the respondents report fairly stable U.S. employment levels; most others have

increased employment. A couple of manufacturers indicate difficulties finding production workers, but an

equal number indicate ample applicants. Companywide pay increases range from 2.5 to 6 percent. In the

Boston area, compensation packages to attract key technical employees are said to be escalating rapidly.

Temporary Employment Firms

Personnel supply contacts in the First District report solid growth into the fourth quarter of 1996.

The outstanding growth that earlier characterized the industry leveled off for most firms in the third quarter:

revenues are now expanding 10 to 20 percent annually, down from 20 to 30 percent in 1995 and the first half

of 1996.

Industrywide consolidation has increased contacts' reliance on partnerships and subcontracts with

other personnel supply firms. Vendor-on-premises operations dominate, hurting smaller local temp firms and

favoring national companies large enough to meet the full range of employment demands of clients.

Demand for highly skilled temporary workers continues to outpace supply, especially in technical and

clerical fields. Wages have risen 8 to 10 percent over the past year, but this reflects primarily an influx of

I-3

workers from higher-paying sectors rather than expanding wages of individual workers. Tightness in the

labor market has forced temp agencies to adopt more aggressive recruiting techniques, including automated

resume retrieval, personal networks, and the Internet, as well as enhanced pay and benefit packages.

Residential Real Estate

The residential real estate market in most of New England was stable in the third quarter. Sales

volumes have been constant in most states, and contacts report no significant changes in prices. Contacts in

Rhode Island, Vermont, and Maine report that buyers have a large selection of houses to choose from in all

price ranges. However, no price reductions have been observed so far. Low-end houses have been selling

better than higher-priced ones.

The market in Massachusetts is doing better. Sales have gone up throughout the state, especially in

the condominium and new construction markets. Massachusetts had the highest increase in existing home

sales in the country in both the second and third quarters. Despite the increase in activity, inventory grew

slightly during the third quarter. While median sales prices rose moderately in most of the state, the increases

largely reflect a shift in mix as people trade up to more expensive homes.

Overall, most contacts predict that the market will remain steady over the next few months. While

low interest rates and a generally positive economic outlook should stimulate sales, activity usually slows in

the winter.

Nonbank Financial Services

Investment management firms report substantial increases in assets under management since the

beginning of the third quarter of 1996. Inflows into stock funds were high in September and slowed

somewhat in October. Bond funds experienced inflows in September but were in net liquidation in October.

Most respondents increased employment in the third quarter. Salary increases are reported to be about 5

percent, the same as last year.

II-1

SECOND DISTRICT--NEW YORK

The Second District's economy continues to expand at a moderate pace, with little change since

the last report. Sales at large retailers slowed in late October, but were generally back on track in early

November, with sales running on or above plan. Manhattan's commercial real estate markets remain

strong, while the housing market has improved slightly. Unemployment leveled off at a cyclical low

of about 6 percent in October, while private-sector job growth continued to slow. The Canadian GM

strike reportedly had some effect on manufacturing activity in upstate New York in October, although

purchasing managers surveys indicate only a modest deceleration in growth. There has been little

change in price pressures since the last report; however, retailers report somewhat heavier discounting

in recent weeks. Finally, regional banks report weaker loan demand, slightly tighter credit standards

and some further increase in consumer delinquency rates.

Consumer Spending

Most general merchandise retailers report that sales were on or above plan in early November,

following a bit of a slump in the second half of October. Large retail chains continue to cite apparel as

the strongest category with two contacts noting particular strength in children's apparel. Home goods

(especially electronics and appliances) remain the weakest segment, though one large home

improvement chain reports that sales are ahead of plan and up more than 10 percent from a year ago,

on a same-store basis.

Virtually all retailers report that inventories are at desired levels; only one contact reports that

they are a bit high. Looking ahead to the upcoming holiday season, all of the retailers surveyed still

anticipate the same sales gains as in the last report-these range from 2.5 to 6 percent on a same-store

basis. A Conference Board survey conducted every November shows consumers in the region planning

to spend 13 percent more than last year, on average, despite low levels of consumer confidence.

II-2

Selling prices are essentially flat; a number of contacts note a pickup in discounting activity in

recent weeks, although some simply attribute this to merchants eager to get a jump on the shorter-thanusual holiday season (due to a late Thanksgiving). Merchandise costs remain virtually flat, and there

has been no reported increase in wage pressures.

Construction & Real Estate

The region's housing markets appear to have strengthened somewhat since the last report. Sales

of existing single-family homes were brisk in October (however, this reflects contracts signed a few

months prior and so may be a lagging indicator). While home prices are running less than 2 percent

higher than a year ago, unit sales are up nearly 10 percent; moreover, in October, seasonally-adjusted

unit sales surged to their highest level of the year. In general, market conditions remain strongest downstate, though there has been a substantial pick-up in the Albany area in recent months (albeit from low

levels). Home builders in New York and New Jersey report that the market for new homes remains

fairly stable.

Manhattan's commercial real estate markets remained strong in October. Midtown's office

availability rate declined from 14.2 to 13.9 percent, led by an "outburst of leasing activity"; downtown's

rate held steady at 23.4 percent. (Availability rates include vacant space, as well as space coming on

the market over the next six months to a year). Commercial rents were essentially flat.

Manufacturing

The Canadian GM strike reportedly had a temporary ripple effect on upstate New York's autorelated industries and jobs in October. Still, regional surveys of purchasing managers suggest that

manufacturing activity continued to expand in October, though at a more moderate pace than in

September. New York City area purchasing managers, though less euphoric than a month ago, still

expressed a favorable view of the local manufacturing sector. The Buffalo-area survey indicates that

II-3

production expanded at roughly the same pace as in September, although growth in new orders and

employment slowed. Respondents in both localities reported little or no change in price pressures.

Other Business Activity

Job growth continues to slow, while regional unemployment-which had been trending down

earlier this year-has leveled off at a cyclical low. New York's unemployment rate held steady at 5.9

percent in October, while New Jersey's edged down from 6.2 to 6.1 percent. Private-sector job growth

in New York and New Jersey slowed further in October, partly due to the GM strike in Canada.

However, income growth remains strong, largely fueled by the bull market on Wall Street, and

tax receipts continue to grow at a fairly strong pace-New York City recently revised up its projected

FY 1997 revenues by $450 million. Tourism remains strong, with hotel occupancy rates holding steady

at 16-year highs and room rates up more than 15 percent from a year ago.

Financial Developments

According to a survey of senior loan officers at small to medium sized banks in the District,

overall demand for loans fell during the past two months. The sharpest decline was in the residential

mortgage segment, with demand down at 45 percent and up at only 16 percent of the banks surveyed

(possibly signaling an incipient slowdown in housing). Demand for consumer loans, however, rose

moderately. Refinancing activity for all types of loans was flat. Fewer banks than in the prior survey

reported increased willingness to lend, and more banks tightened than eased their credit standards.

Average loan rates declined for all types of loans.

The residential mortgage segment

experienced the largest decline, with rates lower at almost 40 percent of banks and higher at only 7

percent.

In contrast, average deposit rates were flat at almost two-thirds of participating banks.

Delinquency rates continued to climb, on balance, with 31 percent of banks reporting a general increase

and 22 percent indicating declines; the largest reported increases were for consumer loans.

III-1

THIRD DISTRICT - PHILADELPHIA

Economic activity in the Third District was up modestly in November according to

reports from the region's businesses. Manufacturers noted increases in orders and shipments,

although employment in this sector appeared to be just steady. Retailers said customer traffic

increased near the end of the month and sales picked up seasonally. Auto dealers reported that

sales for the month were steady and at a healthy pace. Inventories at both manufacturers and

retailers appeared to be in line with sales. Bankers generally said overall loan growth continued

during November but the pace of growth slowed. Consumer and real estate lending remained on

an upward trend, but commercial and industrial lending was flat.

Looking ahead, Third District business contacts see further improvement, but they do not

expect strong gains. Manufacturers forecast increasing demand for their products that will lead

to some stepped-up hiring in the next six months. Retailers forecast about a 5 percent increase in

the dollar value of sales this Christmas season compared to a year ago. Auto dealers expect sales

to continue at their current rate. Bankers expect consumer and real estate lending to continue

moving up, although they anticipate some slowing in the growth of consumer lending, especially

credit cards, as they implement somewhat tighter credit standards. They expect business loan

volumes outstanding to remain near current levels.

MANUFACTURING

Manufacturing activity in the Third District moved up slightly in November, according to

reports from plants in the region. About three often of those polled noted gains in orders and

III-2

shipments while two often reported declines. Most of the drops were reported by manufacturers

of durable goods, while producers of nondurable goods generally experienced improved business

in November compared to October. Despite the apparent lower demand for durable goods, firms

in this sector reported declining inventories, on balance, and little change in working hours.

Producers of nondurable goods gave similar reports. Total employment at Third District

manufacturers in all sectors was steady during the month.

Industrial prices in the region were mainly steady, according to comments from

manufacturers. Eight of ten said both their input costs and their own selling prices were

unchanged in November compared to October. Two-thirds of the firms contacted for this report

expect prices to remain level during the next six months, although one-third anticipate increases

in the costs of the goods they purchase and one-fifth plan to raise the prices of the products they

make.

Nearly half of the manufacturers polled in November expect demand for their products to

increase during the next six months while fewer than one-fifth expect demand to decline. Onethird of the surveyed companies plan to hire more workers over the period, twice the number of

firms planning employment cutbacks.

RETAIL

Most of the Third District merchants surveyed in November said customer traffic had

increased sharply recently and the seasonal upswing in sales had begun. Department stores, in

particular, noted a higher sales rate in November compared to October, although some store

executives cautioned that promotional pricing was responsible for a significant share of the gains.

For all types of stores, inventories were generally described as consistent with the current sales

III-3

rate.

While some merchants expressed concern that there will be fewer shopping days than

usual between Thanksgiving and Christmas this year, most said consumer confidence appears to

be high and they do not expect calendar effects to have a negative impact on sales. Retailers

forecast increases in the dollar value of sales for the Christmas shopping period of about 5

percent, on average, above last year's level. Retailers of apparel, toys, books, and recorded

music expect to match or exceed the gains they have posted in recent years while some stores

specializing in consumer electronic products anticipate lower annual increases this season than in

past years.

Auto dealers in the region indicated that sales were steady and at a healthy pace in

October and November. They expect a seasonal slowing in December and January, but generally

anticipate that sales will return to their current rate after that. While some dealers expressed

concern that rising consumer debt levels may begin to trim auto sales, others cited continuing

high measures of consumer confidence in support of optimistic expectations for sales in the near

future.

FINANCE

Most of the Third District bankers interviewed for this report said loan volumes were

growing slowly as consumer and real estate lending moved up while commercial and industrial

loan levels were mostly flat. Credit card and direct personal loan volumes increased at most of

the banks in the region in November. As bankers implement more restrictive credit standards to

stem the increase in consumer loan charge-offs that they have experienced recently, they expect

some slowing in the growth of consumer lending, absent seasonal factors. Despite such

III-4

limitations, bankers continue to focus on consumer markets for new business, for both loans and

investment products.

Lending to businesses remains very competitive as nonbank lenders and banks not based

in the region continue to solicit local firms. Bankers also said the market for real estate lending,

both residential and commercial, is competitive on rates; they added, however, that commercial

real estate borrowers are expected to have substantial equity interests in their properties.

IV-1

FOURTH DISTRICT - CLEVELAND

General Business Conditions

The District economy remains strong overall and is growing moderately in most

areas. Price and wage increases are modest.

Labor markets are characterized as "tight" in many parts of the District, but

especially in central and southwestern Ohio and northern Kentucky. Many areas report

unemployment rates under 4%, and in a few locations the rate has dipped below 3%.

While several sources are expressing concern over the potential for substantially higher

wage growth, there are few signs of any significant rise at present.

Employment agencies report the demand for temporary workers is strong, with

low-skilled workers in short supply. In the past few months, a growing number of

corporate clients have begun hiring temporary workers on a permanent basis.

Manufacturing

Production at a wide variety of manufacturing facilities is holding steady at a high

level. Capital goods producers generally note good production and orders numbers,

although heavy truck manufacturing is still off substantially from earlier in the year. Firms

with significant export markets have seen a recent strengthening in foreign orders, and one

source indicated that orders growth in Latin America has been especially strong.

Manufacturers continue to report pressure to hold prices down, and few are seeing any

unusual cost pressure. A shortage of engineers and other technical workers has also been

reported.

IV-2

In mid-November, a few large District auto assembly and manufacturing plants

were temporarily shut down because of parts shortages stemming from the Canadian Auto

Workers' strike against GM. Some plants were closed for up to two weeks, resulting in

nearly 7,000 layoffs Districtwide. Production has since returned to normal, although no

makeup of lost production is currently scheduled.

Agricultural Conditions

Recent cold and wet weather caused minor problems for the District's farmers.

Snow fell in parts of all four District states during the first two weeks of November,

ranging from a few inches in some areas to as much as 70 inches in parts of northeast

Ohio. Farm activity was curtailed in many places because of muddy fields, hindering

winter wheat seedings.

The soybean crop is reported to be plentiful and in good condition. Potato and

apple harvests in Pennsylvania and Ohio are nearly complete, and reports for these crops

are also favorable. However, as of mid-November, the corn harvest was still about 20

percentage points below average in Ohio. In Kentucky, blue mold has affected the weight

and quality of burley tobacco.

Retailing

District retailers report mixed sales patterns, but overall, sales seem to be running

behind last year's pace. Sales of furniture and consumer electronics have been particularly

slow, while major appliances and apparel have been moving well. Seasonal items, such as

IV-3

winter apparel, are also selling well, especially in areas of the District that received heavy

snowfall early in November.

Despite some disappointments with the overall sales picture, retailers seem

cautiously optimistic about the holiday shopping season. Inventories are being expanded

in line with expectations of increased store traffic. Prices are reportedly stable, except in

electronics, where deep discounts are common. Many stores have already hired seasonal

help, but a few report difficulty finding qualified workers for some positions. A variety of

chain stores have recently expanded into the District, particularly in Ohio.

Auto Dealers

While dealers are pleased with year-to-date sales levels, the past few months have

been disappointing, with most dealers reporting sales at or slightly below last year's levels.

Some of the slowdown has been attributed to the recent heavy snows, but in parts of the

District where the weather remained mild, sales were only slightly better. Sales incentives

have been unusually generous and widespread for a new model year. A few dealers are

anticipating an end-of-year surge, but the majority note that year-end sales upticks have

been negligible in the past few years.

Inventories remain near desired levels, with shortages reported only for the most

popular models and for light trucks.

Banking and Finance

Loan demand is mixed, as community banks report strong growth in credit while

larger institutions are seeing more moderate gains. Overall, loan delinquency rates remain

IV-4

stable, although a few large banks have noted an increase in credit card delinquencies.

Declining credit quality--based on fierce competition for borrowers--remains an issue at

many institutions. To date, though, the deterioration is generally characterized as modest.

In general, bankers are experiencing a narrower spread between borrowing and

lending rates. Profits, however, are substantially improved from this time last year.

Refinancing activity is picking up as mortgage rates drop.

V-1

FIFTH DISTRICT-RICHMOND

Overview: Fifth District economic activity expanded at a slightly faster rate in the

last six weeks, although the retail and housing sectors showed signs of slower growth.

Manufacturing shipments expanded somewhat faster, and the service sector grew more

quickly. Tourism improved, spurred largely by a recovery in the coastal areas. Loan

activity edged up, and state tax revenues accelerated modestly. Tight labor markets and

wage pressures persisted, but contacts noted only modest price pressures. The commercial

real estate market continued to strengthen at a healthy pace, and fall harvesting and planting

activity picked up in agriculture.

Retail: The pace of activity in the retail sector moderated in October. District

retailers reported that sales grew more slowly and that shopper traffic and big-ticket sales

declined. Employment fell slightly, but wage growth accelerated. Retailers continued to

indicate that the federal minimum wage increase was leading them to reduce their workforce.

Respondents noted that retail prices rose more slowly in October. Contacts continued to

expect slightly higher prices and modestly lower demand for their products over the next six

months.

Services: Service sector activity expanded at a faster rate in October as revenues,

average wages, and employment grew more rapidly than in September. Several contacts to a

survey noted that the minimum wage hike would cause them to trim employment in coming

months. Service prices rose more slowly in October, and respondents expected larger price

increases and greater product demand over the next six months.

Manufacturing: Growth in the manufacturing sector increased slightly in October.

Respondents to a survey indicated that, compared to September, shipments edged higher and

new orders strengthened somewhat. Employment growth changed little, and contacts

indicated that labor shortages were somewhat more widespread. Several firms reported that

V-2

they had difficulty finding workers to replace those lost through normal attrition.

Manufacturers indicated that prices for finished goods and raw materials grew at slightly

faster rates than in September. However, some textile and primary metal manufacturers

reported that foreign competition, aided by a strong dollar, caused them to lower their prices.

Respondents continued to expect finished goods and raw materials prices to rise slightly

during the next six months.

Tourism: Tourist activity rebounded in coastal areas, and continued to show strength

at mountain resorts in October. A Virginia Beach hotelier noted that his business improved

from last year, when federal furloughs hampered tourism. A respondent from a popular

mountain resort in Virginia stated that tourist spending in October surpassed the levels of

previous years and remained strong during early November. Contacts reported that fall

bookings were about the same as those of last year.

Port Activity: Representatives at District ports indicated that import and export

levels were higher in October than in September. Most port contacts expected import levels

to rise during the next six months, but expected little change in exports.

Temporary Employment: Reports of strong demand for contingent workers

persisted, and agencies indicated that employers were now seeking workers across a broader

range of job categories and skill levels. Contacts to a phone survey noted that wage

pressures were more pronounced than in September. Respondents indicated that it had

become increasingly difficult to find "decent" help, even with offers of higher wages.

Finance: District banks reported steady consumer lending and modest gains in

commercial and mortgage lending. An increase in company acquisitions pushed commercial

loan demand higher. Lower interest rates led many borrowers to refinance their home loans.

Several contacts attributed the increase in refinancings to homeowners switching from

adjustable-rate to fixed-rate mortgages. One respondent reported that fixed-rate mortgages

V-3

now represented three-quarters of his lending activity--up from one half. Lenders faced

increased nonbank competition for consumer financing; one respondent said that she couldn't

match the low interest rates offered by auto dealers.

Residential Real Estate: Residential real estate activity fell slightly during October

and early November. Customer traffic, as well as home sales and prices, declined; housing

starts and permits were steady. Many contacts across the District reported that lumber prices

soared. Some builders in competitive markets like the Washington, D.C. suburbs reported

that these higher prices squeezed their profit margins. In less competitive areas such as

Charlottesville, Va., builders indicated that they were able to pass the price increases through

to homebuyers. Builders continued to report skilled-labor shortages.

Commercial Real Estate: Commercial real estate activity accelerated in recent

weeks. Office, industrial, and retail leasing activity remained at a high level, except in

North Carolina, where activity escalated. One commercial leasing agent there reported that

business was "incredible." Commercial vacancy rates declined further, and rents rose

throughout most of the District. The availability of prime office space continued to tighten.

Many contacts reported increases in speculative office construction in their areas.

State Revenues: State tax collections generally increased faster in October than in

September. Individual estimated payments rose at a faster rate and real estate recordation tax

receipts increased in all jurisdictions except West Virginia. In contrast, sales tax collections

decreased and withholding and corporate income tax collections grew more slowly.

Agriculture: The pace of harvesting and small grain planting activity picked up

during late October and early November. In the Carolinas and Maryland, drier weather

allowed farmers to get planting and harvesting activity back on schedule. However, in

Virginia and West Virginia, harvesting progress continued to lag somewhat behind the fiveyear averages because of unfavorable weather.

VI-1

SIXTH DISTRICT - ATLANTA

Overview: Contacts around the Sixth District suggest that economic activity continues its

moderate rate of growth on net, with signs of slowing apparent in some sectors. Retail sales

continued to exceed year-ago levels in both October and early November, although retailers noted

weaker sales in the latter period. District manufacturers indicate that production has recently

weakened slightly, while their outlook has improved somewhat. Reports on tourism within the

region remain overwhelmingly positive. Real estate contacts report that home sales and construction

activity slowed in October. However, the single-family market continues to operate at a healthy

level, and commercial real estate markets continue to improve throughout the District, with falling

vacancy rates and robust levels of construction in many areas. Overall loan demand is characterized

as moderate. Labor shortages persist in many areas of the District, but wage pressures reportedly

remain subdued.

Consumer Spending: According to District retailers, sales in October and early November

exceeded year-ago levels. Sales increases were stronger in October than in early November on a

year-over-year basis. More than half of the retailers contacted said that recent sales had met their

expectations, and most retailers report that inventories are on target. Apparel, cosmetics, shoes, and

home-related products are among the top sellers within the region. Looking toward holiday sales,

most retailers anticipate a slight increase over last year, while the remainder expect a more

significant increase.

Manufacturing: Since the last Beigebook, an increasing number of factories are reporting

decreasing production and shipments. However, more reported expectations for improved future

business activity, and most manufacturers expect to maintain current employment levels for at least

VI-2

the next few months. Contacts in the food, paper, and lumber and wood industries report slowing

activity. Although weakness persists for the region's apparel producers, one contact says that there

have been fewer reports of shrinking employment rolls in the industry, perhaps indicating that a

large portion of weaker firms have been culled out. More positively, orders for industrial machinery

and electronic equipment have recently picked up at regional plants, and some Louisiana chemical

plants are reportedly running at 100 percent capacity and are announcing expansions. Recently

announced additions to Tennessee's automotive industry are expected to further industrial growth

in the state.

Tourism and Business Travel: New attractions, expanded airline service, and strong

international traffic are resulting in filled theme parks and high hotel occupancies in central Florida.

Resorts on Florida's Gulf Coast and in south Florida report strong winter bookings, and spokesmen

are confident that the trend will carry over into next year. Recently renovated hotels and recognition

of the trendy South Beach area are boosting tourism to the southern part of the state; European and

South American tourism is up from a year ago in Miami. Strong 1997 booking numbers show that

Atlanta's convention business will bounce back from a pre-Olympic slowdown. Although the end

of the year is traditionally slow for the Gulf Coast's casino business, spokesmen expect 1997 to

usher in the fruits of large construction projects and new jet services.

Construction: According to real estate contacts, the single-family housing market slowed

in October from the previous month. On a year-over-year basis, home sales were mixed within the

District in both October and early November, while construction was generally characterized as flat.

Despite the overall slowdown in the market, home sales and construction remain relatively high.

Inventories of new and existing homes are said to be adequate for expected sales throughout most

VI-3

of the District. Most builders anticipate no change in the level of construction through the end of

the year, while Realtors' expectations are more mixed.

Contacts from across the District generally report that commercial real estate markets

continue to improve. Declining vacancy rates and higher rental rates continue to propel new

industrial, office, and retail development. Although most commercial projects continue to be

build-to-suits, several speculative projects 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 a moderate level of loan demand.

Consumer lending remains subdued with some strength in automobile financing reported.

Commercial lending remains mixed throughout the District. Mortgage lending is said to be flat.

There are also continuing reports of some softness in loan quality.

Wages and Prices: Reports of increasing wages are infrequent in the region at this time.

However, reports of labor shortages in parts of the District remain common. Workers from overseas

are being recruited and imported into some parts of the region to fill job vacancies. Craftsmen are

in especially short supply. Contacts continue to report that strong demand for management talent

is being met with benefits and fringes instead of higher salaries. Materials prices have increased

slightly recently and are expected to continue to escalate moderately, but most contacts expect prices

received for finished products to weaken or be unchanged over the next few months.

VII-1

SEVENTH DISTRICT--CHICAGO

Summary. The Seventh District economy, as in our last report, expanded at a moderate

rate in October and early November, while price pressures remained largely in check. Consumer

spending appeared to have rebounded from a sluggish September, and regional retailers reported

that they were aggressively seeking seasonal workers. Housing activity continued to slow

moderately, although most contacts continued to rate the market as strong. Manufacturers were

operating at very high levels and indicators suggest a near-term pickup. Banking activity

remained strong despite some softening in commercial and industrial lending. Very tight labor

markets persisted, while overall job growth in the District lagged that of the nation.

Consumer spending. While still above year-ago levels, retail sales remained relatively

flat in early November, following October's improvements. Several large retailers attributed

overall sales gains to strength in apparel sales, aided partly by the onset of cold weather. Home

appliance and electronic sales were soft compared to earlier months, but retailers expect a pickup

in December. Inventory levels were considered to be in good to excellent shape by retailers.

Several retailers noted that there will be a big push in promotional activity ahead, mainly

because November sales targets will be hard to achieve with Thanksgiving coming so late in the

month. One retailer, trying to maintain market share, reported plans to increase their pricediscounting promotions. Most retailers, however, appeared to be focusing on boosting

advertising to attract customers as early in the holiday season as possible. Retailers contacted

remained very optimistic about sales during the holiday selling season (despite fewer shopping

days), with Midwest sales expected to outperform other regions of the country. One major

retailer felt that sales for the holiday selling season as a whole would not be affected by the late

Thanksgiving because many consumers start their holiday shopping around mid-December.

Housing/construction. Housing activity continued to slow in the District, but most

contacts reported that the market remained very strong. One of the region's largest realtors

reported that October's existing home sales had decreased from the torrid pace earlier in the

year, but it was still their second best October ever. New home sales also declined in October

and early November in most areas but, again, remained at very high levels. A national survey of

home builders suggested that the Midwest's early November sales continued to decline slightly

from the late summer's weather-delayed gains. Builders noted a sharp drop-off in foot traffic,

causing several builders to lower their expectations for the remainder of 1996 as well as the first

VII-2

quarter of 1997. Among building material suppliers, one major wallboard producer reported that

shipments to the Midwest remained very strong, noting that there is about a three-month lag

between changes in housing starts and wallboard shipments. This producer reported that the

industry was able to push through a modest price increase in September and has announced

another for December. If it holds up, as the industry expects, it would be the first time in several

years that the industry was able to push through an increase this late in the year, a sign which

this contact said indicates the strength in the market. Activity on the commercial side of the real

estate market picked up slightly in recent weeks, due in large part to declining interest rates.

One contact also reported that commercial refinancing activity was increasing.

Manufacturing. Despite some disruptions from the auto strikes, manufacturing activity

remained strong in October and early November, with some reports suggesting a slight pickup in

the pace of expansion. Several purchasing managers' surveys indicated moderate increases in

October and November from already high levels of overall activity in September. New orders

were particularly strong, but inventory building was also evident. However, prices paid

remained relatively flat and, in one area surveyed, delivery times were shortening. A sharp

increase in new orders of heavy-duty trucks was reported by the industry for October, with

orders strength continuing into November. Heavy ordering occurred from the major haulers,

something that was absent a year ago due to already huge backlogs at that time. A producer of

heavy construction equipment reported that unit sales for the industry in October were slightly

above year-ago levels. Appliance shipments, which declined in September on a year-over-year

basis, rebounded in October and appeared to be holding up in November. Steel orders into the

first quarter are strong, but new capacity coming online (albeit more slowly than the industry

expected) is holding down price increases. Although a slowdown in auto production from the

third quarter was widely expected, several auto suppliers reported a drop in their shipments

related to auto production cutbacks during the GM strikes. A major supplier of chemicals noted

a plateauing of demand in recent weeks that was at least partly linked to the auto strikes. Despite

solid sales growth so far this year, this producer also reported that they have staunchly resisted

price increases from their raw material suppliers.

Banking. Lending activity remained strong in October and early November, but growth

in most areas of the District has plateaued. On the commercial side, several large regional banks

described loan demand as flat to slightly down. Most of the recent activity has been driven by

VII-3

mergers and acquisitions, with little currently going to new plant and equipment purchases.

However, some increase in inventory financing was also noted. On the consumer side, lending

activity was still increasing, but at a slower pace than two months ago. Several medium-sized

banks reported that home equity and home improvement lending was accounting for much of

their activity. However, several area bankers cited lengthening terms on auto loans and less

equity being put into loan transactions as an indication that consumers were getting stretched

out. A consumer finance institution reported a rise in revolving credit balances, which also was

interpreted as a potential sign of an increasingly debt-constrained consumer. However, this

contact emphasized that overall credit quality in the Midwest remained very good. Several

financial institutions reported some tightening of standards, but also indicated that much less was

required in their Midwest markets.

Labor markets. The District's labor markets remained very tight in October and early

November, with shortages in some sectors becoming particularly acute. Retailers have been

finding it especially difficult to attract holiday help this year. A recent direct-mail promotion in

Michigan advertising a retail "jobs fair" received a minuscule one percent response rate.

Retailers in the state have teamed up with the state employment agency in a promotional effort to

recruit seasonal workers. In addition, a temporary help agency in one of the District's large

metro areas reported that orders were already coming in for tax help (accountants, business

analysts, etc.) in mid-November, a month earlier than in past years. Perhaps because of

historically low unemployment rates, most sectors' job growth was well below the national

average (retail trades being an exception). Construction employment remained strong, while

home builders in several areas reported that shortages of skilled labor persisted. Manufacturing

employment levels continued a pattern of bouncing up and down slightly from month to month,

with no trend evident in either direction. However, a national survey of hiring plans indicated

that more manufacturers in the Midwest plan to increase their payrolls in the first quarter of 1997

than was reported a year ago. A contact at a national temporary help agency reported that

margins were being squeezed in the Midwest due to demands for higher wages from workers and

lower prices from clients.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The Eighth District economy continues to grow at a steady pace. District retailers report

that sales were up about 4 percent in September and October over one year ago, and most are

expecting a strong holiday season. Auto sales were mixed over the same two-month period, but

most contacts expect a pickup through year's end. Most other contacts report continued growth

in their industries, although some have noted a slowing in this growth. Labor markets remain tight

around the District. Materials prices are generally stable to up slightly. Real estate markets are

strong in most parts of the District. Loan demand, particularly for business loans, remains

relatively strong. Farmers appear to have had a good crop year, with prices and yields generally

above average.

Consumer Spending

Retail contacts report that September and October sales were up about 4 percent from one

year ago. Toys, home improvement products and women's apparel were the biggest sellers.

Contacts also report that their inventories are at desired levels. Most are expecting a strong

holiday season, with electronic products, toys and jewelry leading the way. Moreover, most

believe that the first quarter of 1997 will yield better sales than a year earlier.

Car dealers were split in their sales reports for September and October. While about half

saw sales increase about 8 percent over the year before, the rest saw sales decline about 10

percent. Rebates have not been used any more than usual to move product. Most dealers are

optimistic about sales prospects through year's end, and are even more upbeat about the first

quarter of 1997.

VIII-2

Manufacturing and Other Business Activity

Most District contacts continue to report growth at their firms and in their industries.

Hiring and keeping qualified workers because of tight labor markets remains a big concern for

many companies. One contact remarked that firms are having particular difficulty finding qualified

workers because the skills needed today are much more specialized than they were in the early

1970s, when similar unemployment rates existed.

Providers of transportation and delivery services are growing in the District, with both

railroads and trucking firms adding workers. Trucking companies report that there is currently a

severe shortage of drivers. The food and beverage industries also report sales and employment

growth, with poultry processing firms adding workers and a beverage firm reporting sales increases

over last year.

Other firms, while still reporting growth, have recently noted a slowing in this growth. A

chemicals company reports that sales are still above last year's, but they are not as robust as they

were a few months ago. Die cast producers have also seen a slowing in their volumes. A contact

in the scrap metal industry has noted a slowdown in the steel industry's rate of inventory increase,

perhaps portending a downturn in that industry. The District's apparel industry is still contracting,

with two more plants closing because of foreign competition. About 750 jobs will be lost in total.

Prices

Most firms report that materials prices have been stable to up somewhat, but any increases

have generally not been passed along to customers. Lumber, aluminum and natural gas prices, in

particular, are reportedly higher, while scrap steel prices have recently fallen. Contacts also report

nominal wage increases of between 3 percent and 4 percent for the coming year. One contact

mentioned that some large customers are requesting rebates from suppliers in lieu of lower prices

VIII-3

for large contracts.

Real Estate and Construction

Residential real estate markets are strong in most parts of the District. Prices for both new

and resale houses are rising. Monthly residential construction permits in September were up in

only five of the District's 12 metropolitan areas. On a year-to-date basis, permits were up in nine

metro areas. The three areas that were below last year's levels are all in the southern part of the

District. Nonresidential construction is particularly strong in the southern part of the District,

especially in northwest Mississippi. Parts of southern Illinois and western Kentucky are also seeing

strong commercial construction.

Banking and Finance

Bankers across the District report continued strength in loan demand, especially on the

commercial side. Credit is described as plentiful by most District contacts. Bankers in St. Louis

and central Kentucky report aggressive competition for business loan customers. Some bankers

have noted a softening of consumer loan demand and report being much more cautious in

extending consumer credit in response to rising personal bankruptcies and consumer debt loads.

Agriculture and Natural Resources

With the fall harvest winding down, substantial rainfall during early- to mid-November in

several parts of the District slowed the pace of activity to a near standstill. Initial reports suggest

that yields were generally above average and, in some instances, outstanding for most crops. For

example, Arkansas rice farmers expect yields to surpass the all-time high set just two years ago.

Southern pine lumber mills report that orders on a year-to-date basis continue to outstrip last

year's pace by a little more than 7 percent.

IX-1

NINTH DISTRICT--MINNEAPOLIS

As winter sets in, the Ninth District continues to enjoy moderate economic growth with few

problem areas. Unemployment remains low, and indications of very tight labor markets are

widespread. In spite of reports of labor market tightness and of some wage increases, there are

few reports of price increases for raw materials, consumer goods or services. Construction is

brisk in many areas. Iron mining and oil drilling are very strong and paper production displays

some signs of recovery from the slump experienced over the last year. Retail sales of general

merchandise apparently are picking up, and increased strength in vehicle sales continues. The

1996 crop was excellent in most respects, the profitability of livestock production has recovered

somewhat, and farmers reportedly are increasing their spending on household and capital items.

Manufacturing shows moderate growth. Tourism is the weakest sector, continuing a pattern

set earlier in 1996.

Employment, wages and prices

"Stores shop for workers," headlined a South Dakota news article describing the extra efforts

retailers are making to secure needed seasonal workers in an extremely tight labor market.

Labor scarcity continues as the most-cited problem confronting businesses in the district.

Reports of increases in pay or benefits to attract entry-level workers or skilled technical

specialists remain frequent, but many employers say there is no generalized upward pressure on

compensation.

Notwithstanding reports of compensation increases for entry-level and certain specialist

employees, there are few reports of increases in the prices for goods and services. Petroleum

products are one exception. Increased fuel prices are cited as a major cost increase for trucking

firms and a Minnesota-based airline. One Minnesota chemical product manufacturer cites

increases in the cost of all chemicals derived from petroleum or natural gas or whose

production is energy intensive. At the consumer level, milk prices increased sharply from late

September into November, but farm level milk prices were falling sharply in late November,

and retail prices are expected to follow shortly.

IX-2

Construction and real estate

"There are quite a few new motels going up in Sioux Falls." "The 'nuclear winter' is over in

downtown St. Paul commercial real estate market." "Construction in western Wisconsin has

been at record levels for six months." "Twin Cities building permits up 15 percent from a year

ago." Reports such as this are widespread, revealing a construction and real estate sector that

still has stamina after four years of expansion. The strength is broad-based across residential,

commercial, light industrial and public infrastructure projects. Regionally, there are some

reports of a slowing pace of residential construction in western Montana and eastern North

Dakota, areas that had been strong for three years. Realtors in Minneapolis-St. Paul report good

business for both residential and commercial property.

Natural resource industries

Iron ore mining and oil drilling continue at the brisk pace that has prevailed for several months,

and industry spokespersons expect that pace to continue into 1997. An advisory council

member from Michigan's Upper Peninsula describes increased production at a paper mill in his

area. Other paper industry contacts also describe some expansion of output, but production has

not returned to the high levels experienced two years ago. Building board producers in the

eastern portion of the district continue producing near capacity.

One exception to this pattern of strong activity in natural resources industries is traditional

sawmills in western South Dakota and Montana, where output reportedly is stagnant or

declining, largely due to reduced federal timber sales. Environmental concerns have blocked

the partial reopening of a Michigan copper mine closed last year.

Manufacturing

"Sales are really pretty good, a bit slow in the summer, but getting better steadily in the fall,"

says one Minnesota electronics manufacturer. "We are seeing a lot of small factories coming

in, mostly metal fabrication," says a utility manager from Michigan's Upper Peninsula. On the

whole, manufacturing in the Ninth District appears healthy, with good orders and growing

output, but with few bottlenecks or input shortages. Contacts report generally normal

inventories and no delays or difficulties in securing raw materials.

IX-3

Agriculture

"Prices are somewhat better than we had expected," comments a South Dakota rancher who

believes that the price trough of the beef cycle was passed last spring and that both fat and

feeder cattle prices will trend upward in 1997. Higher prices for feeder cattle are due in part to

lower feed costs as favorable grain yields have put downward pressure on prices.

Grain producers generally have completed harvesting in most areas, and yields were

excellent and better than had been expected through the growing season. Winter wheat seeded

in South Dakota and Montana is generally in good condition. But the late harvest and early

onset of very cold weather prevented much fall tillage, and farmers in Wisconsin, Minnesota

and South Dakota will have to rush to catch up next spring. Overall production of sugar beets

and potatoes in North Dakota and northwest Minnesota was also good.

Consumer spending

There are some indications that consumer spending has increased in late fall and early winter.

Vehicle sales are described as good in many areas, with sales of pickup trucks reportedly very

robust in North Dakota, South Dakota and much of Minnesota.

A large national retailer based in Minnesota reported improved earnings for the third

quarter compared to somewhat sluggish performance earlier in 1996. A regional department

store chain also describes improved sales in October and November. Reports from advisory

council members around the district indicate general optimism among retailers in regard to the

holiday season. Some sources indicate sluggish sales of major appliances, but say that sales of

apparel and consumer electronics are stronger than in the first two quarters.

Tourism and recreation

"Tourism has been down 11 percent this year," reports a motel owner from Rapid City, S.D.

He is echoed by sources in other regions, who sketch a general pattern of lackluster tourist and

recreation business continuing through the year. Western Wisconsin, where tourism has grown

to match that of better-known scenic areas of the state, is one exception. The pheasant hunting

season in South Dakota was about even with 1995. Early snow in northern areas has been

encouraging to businesses serving cross-country skiers and snowmobilers.

X-1

TENTH DISTRICT - KANSAS CITY

Overview. The district economy continued to grow moderately during the past month.

Retail sales increased, manufacturing and construction activity remained fairly strong, and

energy activity improved somewhat. In the farm economy, an excellent harvest has brightened

income prospects for crop producers, and higher cattle prices have restored profits to cattle

feeders. Labor markets remained tight in much of the district, prompting a number of firms to

increase wages. Prices rose for some materials used in manufacturing and construction. At the

retail level, prices generally held steady.

Retail sales. Retailers report sales increased last month and were moderately higher than

a year ago. Sales of apparel and electronics were brisk. Most retailers expect a strong Christmas

season even though the late Thanksgiving may hurt sales somewhat. Retailers were generally

satisfied with their inventory levels. Automobile dealers report sales were unchanged last

month and expect sales to increase somewhat the rest of the year. Dealers have been expanding

inventories, and some still do not have as many light trucks and sport utility vehicles as they

would like.

Manufacturing. Manufacturers continued to operate last month at moderately high

levels of capacity. Manufacturing materials were generally available, with lead times either

holding steady or declining. Most manufacturers were satisfied with their inventory levels. A

quarterly survey of district manufacturers indicated that production, shipments, and new orders

all increased modestly from September to October.

Housing. Builders report housing starts slowed last month yet remained higher than a

year ago. Starts of both single-family homes and multifamily units declined. Builders expect

X-2

little change in construction activity, except for the normal seasonal slowdown toward the end of

the year. Sales of new homes also fell last month. Most building materials were readily

available, and delivery times were normal. Mortgage lenders report slightly higher demand last

month and expect little change the rest of the year.

Banking. Bankers report that loans remained unchanged and deposits edged up last

month, slightly reducing loan-to-deposit ratios. Home mortgage loans, home equity loans, and

commercial real estate loans edged up, while residential construction loans fell slightly.

Demand deposits, NOW accounts, and money market deposit accounts all rose slightly,

outweighing declines in large CDs and small time and savings deposits.

All respondent banks held their prime lending rates steady last month and expect to leave

rates unchanged in the near term. Banks also held their consumer lending rates steady and plan

no changes in the near future. A greater fraction of banks than in past months tightened their

lending standards.

Energy. District energy activity improved somewhat last month, helped by higher prices

for oil and natural gas. The district rig count rose 2.4 percent in October and was above its yearago level.

Agriculture. District farmers are just completing an excellent fall harvest, including the

largest district corn crop in a decade. The newly planted winter wheat crop is in very good

condition and should provide plenty of wheat pasture for cattle, in sharp contrast with a year ago

when there was virtually none. Prices for fed cattle have jumped well above breakeven levels

recently due to a seasonal decline in beef supplies. The higher prices brought a huge inflow of

cattle into district feedlots during the past two months. Many industry analysts expect prices to

X-3

soften when the cattle now in feedlots are slaughtered early next year. In contrast to cattle

feeders, ranchers were still posting losses and continued to reduce the size of their herds.

The bumper harvest and record grain prices earlier in the year have improved the overall

quality of farm loan portfolios at district banks. The quality of some cattle loans has declined

somewhat after sizable losses in the cattle industry. Most cattle producers still have strong

balance sheets, however, and an uptick in the demand for feeder cattle loans suggests producers

are gearing up to take advantage of the recent increase in cattle prices.

Wages and prices. Labor markets were still tight last month, and there was some

continued evidence of wage pressures. Manufacturers report skilled and unskilled workers

remained in short supply, and a number of companies say they have responded by increasing

wages. Prices held steady at the retail level and rose for some manufacturing and construction

materials. Retailers expect no major price changes in coming months.

XI-1

ELEVENTH DISTRICT--DALLAS

From mid-October to mid-November, Eleventh District economic activity rebounded from

sluggish growth in September and early October. Several industries reported a general firming in prices

after reporting falling prices in the last beige book, and contacts continued to report that labor market

tightness was leading to some wage pressures. Rebounding home sales led a pick up in construction,

which helped stimulate demand for some construction-related manufactured products. The electronics

industry also reported rebounding sales and, overall, manufacturers were more optimistic about the

sales outlook than reported in the last beige book. Retailers reported "good" sales growth over the past

six weeks, while high prices continued to boost demand for oil services. The financial services industry

reported a decline in the demand for loans. Continued rainfall improved agricultural conditions overall.

Prices. Several industries reported a general firming in prices after reporting falling prices in

the last survey. Prices were stabilizing with a downward trend for semiconductors (including memory

chips), after falling precipitously earlier this year. Prices remained very competitive with a downward

trend for personal computers and telecommunications products. Retailers were pleased that prices were

mostly holding steady, and a few noted that they are now able to pass on cost increases that they had

eaten in the past. Still, retailers said that the market remains very competitive limiting price increases.

Auto dealers said prices on new models are expected to be slightly higher "but nothing unusual." Low

inventories are causing energy prices to swing with the weather. Crude oil prices weakened to $22.50

in early November but rebounded to near $25 per barrel after a cold spell in the Northeast. Heating oil

and natural gas prices also fell and then rebounded, as low inventories are contributing to weatherrelated price volatility. Scrap metal prices continued to fall.

XI-2

Wages. Hiring difficulties in several manufacturing and service industries continued to lead to

upward wage pressures for specialized skills and some low-wage workers.

Manufacturing. Sales of manufactured products rebounded slightly, and manufacturers were

generally more optimistic about the sales outlook than reported in the last beige book. Demand was up

for most electronics and a few construction-related products, such as fabricated metals and brick, while

equipment sales to the energy industry continued to be very strong. Contacts in the electronics industry

seemed relieved to report a seasonal increase in orders for semiconductors, computers and

telecommunications equipment, and were more optimistic about the outlook for the industry than they

were earlier this year. Electronics inventories were reported to be in better shape than earlier this year,

although several contacts said inventories were still too large. Apparel manufacturers said sales were up

over the past month, partly as a result of increased sales to Mexico. Oil machinery companies continue

to report extremely strong demand. Demand for corrugated boxes and packaging supplies increased

seasonally, as expected, and most contacts said inventories were appropriate. However, packaging

contacts were less optimistic than earlier this year about the outlook for sales. Petrochemical producers

are being hurt by higher prices for natural gas liquids and oil. Demand remains strong, but not strong

enough to pass through all of the increased feedstock costs. Refiners have seen profit margins improve

with higher gasoline and heating oil prices, but regard margins to not be high on a historical basis.

Food and cement manufacturers said there was no change in demand for their product. Lumber sales

were down slightly, although contacts were more optimistic about the outlook than six weeks ago.

Scrap metal sales continued to fall.

Retail Sales. Retailers reported "good" sales growth over the past six weeks. Most contacts

were more optimistic about holiday sales, despite some nervousness about the shorter holiday season.

Inventories were in line with expectations, and some contacts suggested there will be less pressure to

discount prices than last year. Sales were reported to be particularly strong for better men's and

XI-3

women's apparel. Consumer electronics retailers reported sluggish personal computer sales, although

demand for peripheral equipment remained strong. Auto dealers reported continued sluggish sales.

Dealers do not expect sales growth to improve for the next few months "with nothing to make the

market snap given that interest rates are pretty low already."

Financial Services. Lending activity was weaker than six weeks ago, led by a drop in demand

for commercial and industrial loans, and residential real estate loans in San Antonio and Houston.

Refinancings continued to decline. Consumer auto loan demand was up in Dallas. Contacts remain

cautious about the outlook for lending, although some respondents are looking for a pickup in

residential real estate loan demand over the next year.

Construction and Real Estate. Contacts said demand for construction and real estate was up

since the last beige book. Home sales rebounded after a drop in September and early October.

Apartment construction continued to increase at a steady pace, and the construction of extended-stay

hotels was strong in Dallas. Contacts said the office market continued to improve, especially in Dallas,

where a lack of vacant space in the suburban market continues to drive rents upward.

Energy. High prices continued to boost demand for oil services, and contacts continued to

report that there is no excess capacity of equipment or services available anywhere on a global basis.

Contacts reported a shortage of land rigs, and said the availability figures for land rigs are greatly

overstated "if you want a decent piece of equipment." One contact said that their backlogs are so long

that they are not taking any new orders.

Agriculture. Continued rainfall improved agricultural conditions. Harvest was being completed

across the District and most producers were reporting good yields for soybeans, peanuts and corn.

Frost damaged some cotton and late planted sorghum but facilitated harvesting and provided needed

relief from bollworms and armyworms. Livestock conditions were rated good overall. Supplemental

feeding picked up as cooler temperatures arrived, but hay supplies are good.

XII-1

TWELFTH DISTRICT -

SAN FRANCISCO

Summary

Reports from Beige Book contacts portray a moderate pace of economic growth in most

Twelfth District states in recent months, with an expectation of picking up to a faster underlying

growth trend. Retailers generally reported moderate growth in overall sales through October and

an intended inventory build-up that reflects expectations of a strong holiday sales season.

Producers of services noted further growth of demand, and reports on District manufacturing

production and orders generally were favorable. Residential real estate market activity reportedly

was strong in most District states, with relatively high levels of residential construction continuing

in the fastest-growing states.

Business Sentiment

District respondents generally expect continued favorable national economic performance,

with regional economic growth outpacing the national rate. Most respondents expect U.S. real

GDP growth next year to continue at about the long-run average pace of around 2 percent,

leaving the national unemployment rate near the current relatively low level. Inflation is expected

to pick up only slightly. More than three-quarters of respondents expect their local economies to

do better than the nation. This optimism is apparent in California and in the fast-growing states of

the Intermountain area and the Pacific Northwest.

Retail Trade and Services

Most District states reported moderate growth in overall retail sales in recent months. In

many cases inventories have been built up in anticipation of a strong Christmas selling season, and

XII-2

current stocks generally were reported to be under control. The sanguine view of current

inventory levels also was held by motor vehicle dealers, even though October truck sales

reportedly dropped back, and auto sales remained flat.

Among respondents from service-producing industries, providers of telecommunications

services continue to report a strong pickup in demand. Demand for other utility services is

increasing. Tourism activity in the District also continued to be strong. Hotel occupancy rates

reportedly increased in several areas, including Utah, where the ski business is benefitting from an

early snowfall.

Manufacturing

Reports on District manufacturing activity generally were favorable. The positive

spillovers from the ramp-up in production of commercial aircraft at Boeing reportedly are

extending to the aircraft parts industry and fueling demand for some types of primary and

fabricated metals, electrical machinery, and components. However, except for titanium, material

supplies have not been a problem thus far; other metal products such as aluminum appear to be in

abundant supply. Lumber producers in the Pacific Northwest reported a recent pickup in demand

for their products, owing both to increased building activity and increased market share, given

reduced Canadian supply. Demand for pulp and paper products also reportedly improved

recently. Elsewhere, in the machine tool industry, slowing domestic orders are being offset by a

slight pickup in foreign orders.

Agriculture and Resource Related Industries

District agricultural conditions were good through the fall. In the Pacific Northwest,

bountiful harvests of most crops were reported. California's Central Valley vegetable growers

XII-3

were able to produce enough to take advantage of high prices, which have been elevated by short

crops elsewhere in the nation. Cotton yields in California also generally were high, with the

exception of some southern areas that experienced hot weather. A large drop in feedgrain prices

increased the demand for feeder cattle.

Real Estate and Construction

Residential real estate market activity reportedly was strong in most District states,

although activity slowed in some of the strongest markets and picked up in other areas.

Respondents from the Intermountain states of Arizona, Idaho, and Utah reported that the recent

rapid pace of sales and of price gains for existing homes was not sustained in recent months.

Within California, notable increases in home prices generally were confined to the San Francisco

Bay Area. In contrast, housing sales and prices reportedly picked up in Washington and Oregon,

owing to strengthening economic conditions, population inflows, and increasingly binding

constraints on the availability of urban land.

Relatively high levels of residential construction appear to have continued in the fastgrowing states where home prices have been appreciating rapidly, but home building remained

weak in California. In the fast-growing Intermountain and Pacific Northwest states, nonresidential construction also was reported at high levels this fall. The overall strength in demand

for construction labor in such areas is exerting significant pressure on wages, given also the

tightness in the broader labor market.

Financial Institutions

District financial institutions generally report continued favorable conditions. Loan

demand increased in most areas, including Southern California, where overall economic

XII-4

conditions have been weaker than elsewhere. However, even in the fastest-growing areas, banks

report some concern about deteriorating consumer credit quality, as measured by increasing

delinquencies and bankruptcies.