Beige Book

For use at 2:00 p.m., E.S.T.

Wednesday

January 22, 1997

Summary of Commentary on

Current

Economic

Conditions

by Federal Reserve District

January 1997

SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICT

January 1997

TABLE OF CONTENTS

SUMMARY

First District - Boston

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I-1

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Second District - New York ...................................

Third District - Philadelphia ...............................

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III-1

Fourth District - Cleveland ...................................

V-1

Fifth District - Richmond .....................................

V-1

Sixth District - Atlanta .....................................

VI-1

Seventh District - Chicago ..................................

VII-1

Eighth District - St. Louis ................................

VIII-1

Ninth District - Minneapolis .................................

Tenth District - Kansas City

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Eleventh District - Dallas ...................................

Twelfth District - San Francisco ............................

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X-1

XI-1

XII-1

SUMMARY*

Economic growth in December and early January was moderate in most parts of the

country. Holiday season sales were in line with retailers' expectations of moderate growth.

Manufacturing activity continued to grow, with significant strength coming from capital

equipment and materials manufacturers. Bank loan activity continued at high levels, with mixed

growth across Districts; some Districts reported signs of slight deterioration in consumer credit

quality. Residential real estate markets remained stable or improved in most areas, and

commercial real estate markets were almost uniformly tight. District reports provided scattered

evidence of increasing wage pressures, particularly for skilled workers, but in general did not

indicate significant price pressures other than for energy items.

Consumer Spending

Holiday sales improved over last year by small to moderate amounts that generally met

retailers' expectations. Among Districts providing numerical reports, year-over-year holiday sales

growth was 4 to 8 percent in New York, around 5 percent in Philadelphia, 7 percent in St. Louis,

and 0 to 2 percent in Minneapolis. Virtually all Districts noted that the strongest sales were in

small-ticket items such as apparel and toys; New York and St. Louis reported that jewelry also

sold well. In contrast, consumer electronics showed weak year-over-year sales gains, with the

* Prepared at the Federal Reserve Bank of San Francisco based on information collected

before January 13, 1997. This document summarizes comments received from businesses and

other contacts outside the Federal Reserve System and is not a commentary on the views of

Federal Reserve officials.

ii

exception of solid growth for large screen televisions and satellite dishes in Cleveland, noncomputer electronics in New York, and general electronics in St. Louis. Retail sales of computer

equipment in particular were disappointing, according to Philadelphia, Richmond, and San

Francisco.

Accurate planning among retailers in general kept inventories on target for most product

lines. As a result, price discounting was limited; the exceptions include reports of widespread

discounting by retailers in Minnesota and discounting on apparel in Boston. Strong post-holiday

sales in the New York and Chicago Districts contributed further to lean inventories in those areas.

Reports on the automobile market were slightly downbeat. Philadelphia, Kansas City,

Dallas, and Minneapolis all reported slow December sales. In the Cleveland District, however,

strong sales during the last two weeks of December left dealers optimistic that "marginally high"

inventories there would return to preferred levels by February.

Manufacturing

Manufacturing activity held steady or expanded in most areas. The strongest sectors were

those that produce steel and other metals, machine tools, construction materials such as lumber,

and capital equipment for transportation and construction. Boston, Philadelphia, Cleveland,

Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco all reported heightened

activity in one or more of these sectors. Automobile and parts production reportedly expanded in

Chicago and Atlanta, although Boston reported intense competition among auto suppliers there.

In the high-tech sectors, semiconductor firms exhibited signs of recovery from a weak 1996, and

computer firm shipments reportedly picked up following weak holiday sales. Both the Dallas and

San Francisco Districts benefitted noticeably from these trends, and Minneapolis reported that

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electronics manufacturers did well there. On the down side, furniture orders weakened in

Richmond, and furniture inventories increased in Atlanta.

Among nondurable goods sectors, food processing in Minneapolis and poultry processing

in St. Louis both expanded. However, apparel and textile production was weak in Richmond and

Atlanta, as was the market for paper in Richmond and Boston. Petroleum producers benefitted

from high prices and were operating at or near maximum capacity in Minneapolis and Dallas, with

very low inventories reported by the latter District.

Nonfinancial Services and Tourism

The few reports on nonfinancial service activities were mixed. Richmond reported slower

growth in service employment, due to declines in business and personal services, and Cleveland

reported a decline in temporary employment, perhaps due to seasonal factors. In contrast, San

Francisco reported strong growth in demand for telecommunications services.

Performance in tourist trade varied substantially across regions, due largely to weather

considerations. Warm weather reduced downhill skiing business in the Richmond District but did

not increase coastal tourism over last year's level. Minneapolis reported that extreme cold and

stormy conditions in early January reduced winter sport tourism in the District. San Francisco

reported reduced tourism in Northern California and Nevada due to recent flooding. In contrast,

Atlanta reported excellent tourist activity, particularly in Florida: theme parks set attendance

records there, and Miami was a popular destination.

Real Estate and Construction

Most areas experienced stable or rising demand and active construction, with noticeable

strength coming from tight markets for commercial real estate. Atlanta, New York, Richmond,

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Chicago, and St. Louis reported strong or rising commercial construction activity. Furthermore,

Philadelphia and Dallas reported high levels of commercial leasing and sales and low vacancy

rates. Boston reported increasing prices for commercial properties in Massachusetts.

Residential markets appear stable overall, with small improvement reported in some

Districts and slight slowing reported in others. Where slowing occurred, however, building

activity generally exceeded year-ago levels. New York and Chicago reported firming conditions

in their residential markets. "Boom" conditions persisted for residential markets in many portions

of the Minneapolis district. Residential housing sales eased somewhat in Richmond, although

permits were up there. Kansas City noted some slowing in housing starts and sales, with the latter

confirmed by a reported decline in mortgage lending. Within the San Francisco District, real

estate markets were strong in most areas; California was the primary exception. Although total

building activity in California continued to be weak, home sales and prices rose in some parts of

the San Francisco Bay Area, and the Los Angeles area showed signs of improvement following its

prolonged housing slump.

Banking

Banks reported active loan markets overall, although with limited growth on average and

more strength in commercial loans than in consumer and mortgage loans. Total loan volume

grew in Cleveland, St. Louis, Kansas City, and San Francisco. In contrast, New York reported

declines in all categories, with the sharpest drop in mortgage lending. Richmond reported that

commercial loans "changed little," while demand for consumer and mortgage loans declined.

Total lending was flat in Atlanta, Dallas, Philadelphia, and Chicago; credit card loans, however,

expanded in the latter two districts.

V

Loan quality was reported to be good in most areas, except for concerns about consumer

credit in some Districts. New York and Kansas City noted higher consumer loan delinquencies,

and Cleveland reported rising consumer bankruptcies. Both Cleveland and Richmond described

loan competition as "fierce."

Agriculture

Reports on the agricultural sector were mixed, with inclement weather clouding the

picture in some areas. On the up side, Kansas City reported a good winter wheat crop, and

Richmond noted that its winter wheat crop was "on schedule." Furthermore, Kansas City

reported that reinvestment of strong 1996 farm revenues was reflected in higher sales of new farm

equipment. On the down side, excessive rain interfered with field work and delayed corn

harvesting in Richmond, and flooding damaged some crops in the San Francisco District. A

December cold snap hurt vegetable crops in Dallas, although citrus crops were spared.

Livestock conditions also were mixed. Cattle feeding costs were reduced by warm

weather in Richmond but increased by cold weather in Minneapolis. In San Francisco, heavy rains

improved grazing conditions for a time, but later flooding necessitated herd movement to less

attractive grazing areas.

Employment and Wages

Wage increases were reported to be moderate overall, despite widespread reports of

continued wage pressure for various skilled worker groups. Excess demand for skilled

manufacturing, administrative, or technical workers-particularly computer technicians-was

noted by Boston, Philadelphia, Cleveland, Atlanta, St. Louis, and San Francisco. Richmond

reported that "wage pressures were more evident" in general, and Chicago identified "signs of

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increasing wage pressures." Furthermore, labor markets were uniformly tight in Kansas City, St.

Louis, and Minneapolis. However, no District reported large year-over-year wage increases;

reported numerical increases were 2 to 4 percent in Boston, "less than 4 percent" in Philadelphia,

and 2 to 3-1/2

percent in Minneapolis.

Prices

Price pressures were moderate overall, with the primary exception of sharply rising energy

costs. The prices of manufacturing raw materials or goods were characterized as stable in New

York, Philadelphia, Cleveland, and Minneapolis, and earlier pressure on construction costs in the

Chicago District has eased. In Richmond, however, "price increases were more widely reported"

than earlier, and Dallas noted rising prices for some raw materials and retail products. St. Louis

reported that "recent increases in energy prices are being passed along to customers" in the

transportation industry.

I-1

FIRST DISTRICT - BOSTON

The First District economy continues to expand at a moderate pace. Retailers say sales in the holiday

period were modestly higher than a year earlier and mostly in line with their expectations. Over half the

manufacturing contacts report rising or unchanged revenues. Commercial real estate markets are fairly

stable, with activity more robust in Massachusetts than elsewhere in New England. Insurance company

results vary among products.

Prices of manufactured goods are said to be generally level, although manufacturers report paper

prices are down sharply, while prices of selected other materials have risen modestly; some manufacturers'

selling prices, largely for certain business services and consumer products, are also up modestly. Retailers

also say most prices are stable, but they cite price increases for high-end apparel and tourism, and significant

discounting for low- to mid-range apparel and appliances.

Retail

Most contacts in the retail sector saw a modest increase in sales for the fourth quarter that was in line

with expectations. As a result, their inventories are right on track, with no over- or under-stocking reported.

Some sectors were stronger than expected (building materials, apparel, food, and tourism). Strong apparel

sales, however, are attributed in part to significant price discounting in the low to middle ranges. Sales of

appliances, personal computers, and consumer electronics declined in the quarter, but in line with

expectations. Respondents expect a continuation of modest sales growth through the first half of 1997.

Employment is said to be increasing in line with consumer spending and this steady growth is

expected through 1997. Wages are reported to have risen slightly in the last quarter and this trend is also

expected to continue.

All respondents indicate that competitive pressures are constraining their ability to raise prices, even

with increased demand. Costs are stable, so profit margins are generally holding. However, some sectors

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(low- to middle-range apparel and appliances) report significant price discounting and lower profit margins.

Only two sectors (high-end apparel and tourism) are reporting price increases on account of higher demand,

and these increases are characterized as a recovery of ground lost to discounting earlier in the year; they

expect competition to constrain further price increases. No contacts except those in tourism plan to expand

capital significantly in 1997. Overall, retail respondents see modest and sustainable growth continuing

through 1997.

Manufacturing

Half of the First District manufacturers contacted have experienced revenue gains from a year ago.

Substantial increases are reported for innovative technology products, furniture, selected consumer items, and

some business services provided by manufacturers. Revenues have been flat or declining for the remaining

half of the sample. Paper prices are down sharply as a result of excess capacity in the industry. Intense

competition has resulted in declining business for some automotive suppliers.

Most contacts report that materials prices have been flat or declining. In some cases, this is due to

more aggressive dealings with suppliers or the appreciation of the dollar relative to the yen. Manufacturers

mention small to moderate increases in the cost of plastic resins, gelatin, abrasives, and furniture-grade

maple. Selling prices are reported to be stable or rising up to 3 percent. The increases are largely for

business services and consumer products.

Manufacturers do not anticipate much change in overall employment levels in 1997. Demand is

rising for professional, sales, and services employees, while productivity gains are limiting the need for

production workers. Most contacts indicate pay increases of 2 to 4 percent in 1996, with similar raises

projected for 1997. Compensation packages are escalating more for high tech workers and some managers.

Companies report aggressive competition to hire hardware and software engineers. Health care and other

benefits do not appear to be creating much, if any, cost pressure, especially with the continued adoption of

managed-care health plans.

I-3

Most manufacturers expect a positive macroeconomic environment in 1997, although some mention

a stock market correction or consumer indebtedness as possible sources of weakness. One-half of the

respondents have aggressive capital spending plans.

Commercial Real Estate

The commercial real estate market in New England has not changed much during the last quarter.

Massachusetts continues doing extremely well, Maine is still relatively weak, and activity levels in the other

states in the region remain between those two.

Massachusetts has experienced a significant increase in demand for commercial space, especially in

the Greater Boston area. Since there has been little new construction, vacancy rates are down and prices are

rising. High prices for downtown office space have induced many new companies to locate in the suburbs.

While prices have almost reached their 1980s levels, banks' reluctance to lend for real estate is said to have

limited speculative construction.

Outside Massachusetts, market conditions are mixed. Some sectors are seeing declining vacancy

rates and increasing prices, but others still have high levels of inventory. Retail real estate markets have been

strong in most places, mainly due to the mild winter and a successful holiday season. Contacts report no

major new construction projects in their states. Most respondents are optimistic about the outlook,

anticipating steady prices and decreasing vacancy rates during the coming quarter.

Nonbank Financial Services

Respondents at insurance companies report continued weak sales of life insurance in the fourth

quarter and strong sales of mutual funds and variable annuities. Employment moved down slightly in the

fourth quarter. Consolidations in the insurance industry are expected to continue in 1997, contributing to

further reductions in employment.

II-I

SECOND DISTRICT--NEW YORK

The Second District economy has a slightly firmer tone than in the last report, while price

pressures remain subdued. Major retailers report that holiday-season and post-holiday sales were on or

above plan. Persistent strength in the commercial and multi-family real estate markets finally appears

to be spurring a pickup in development and construction activity; the single-family housing market

continues to lag. Regional purchasing managers' reports were generally upbeat in December. Tourism

remained strong through year end. There has been no evidence of increased price pressures since the

last report. Finally, regional banks report some softening in demand for residential mortgage loans;

delinquency rates rose for consumer and home mortgage loans, but declined for commercial loans.

Consumer Spending

Most major retailers report that holiday sales in the region were above plan, with NovemberDecember same-store sales running 5-8 percent higher than a year ago, helped by a surge in the final

days before Christmas. Post-holiday sales were also reported to be strong, with one contact observing

fewer than usual merchandise returns. A separate survey of small retailers across New York State shows

same-store sales up 4-6 percent from 1995, and generally close to plan, with the strongest reports

coming from Manhattan. Both large and small retailers noted that apparel, as expected, was the

strongest category-

particularly women's and children's apparel-along with jewelry. Big-ticket

durables, such as home furnishings, appliances and electronics were generally weak, though a few

contacts at large chains remarked that toys and electronics (other than computers) sold fairly well. One

major discounter noted strong post-holiday demand in the home improvement category.

Most of the retailers surveyed report that inventories are in good shape; however, many

electronics stores were left with large stocks and one major general merchandise chain mentioned some

overhang of home appliances. There was reportedly less aggressive discounting than a year earlier but

II-2

still more than most contacts had anticipated. Merchandise costs were said to be flat to declining, and

there were no reported wage pressures; thus, most retailers saw improvement in gross margins,

compared with the 1995 season.

New York State sales taxes on most apparel are being waived for the week starting January 18,

prompting many retailers to delay inventory clearance sales until then; this may give some boost to

January retail sales, at the expense of February.

Construction & Real Estate

The region's real estate markets continue to firm. Even the lagging single-family housing market

has registered steady but gradual improvement. Realtors in New York and New Jersey estimate that

fourth-quarter existing home sales rose 3-4 percent from a year earlier, with prices up 2-5 percent.

While builders have grown a bit more upbeat about the market for new homes in recent weeks, they

emphasize that overall building activity is still only barely above the depressed levels of the early 1990s.

In contrast, the tight apartment market in the New York City area is evidently spurring a pickup

in multi-family development. More than twice as many apartment units were authorized by building

permits in 1996 (mostly in the second half) as in any of the prior five years. This is consistent with

anecdotal reports: industry contacts in New York City say that a large number of residential projects are

underway or set to get underway in 1997. In addition, one industry expert estimates that 2,500 new

residential units will be created from a wave of office conversions in Lower Manhattan next year.

Strength in the region's commercial markets is also spurring new development.

Major

commercial projects underway in New York City in 1997 include a new terminal at Kennedy Airport,

a high-tech commodity exchange trading floor, three major entertainment complexes, three new hotels,

and a number of major superstores and supermarkets. The office market also continues to firm; vacancy

rates across the New York City area continue to fall, though asking rents remain virtually flat.

Other Business Activity

Regional purchasing managers reports were generally upbeat in December. Buffalo purchasing

managers report continued strength in new orders and a pickup in hiring activity, but some slowing in

production activity; they also reported a modest increase in cost pressures. New York City purchasing

managers report continued growth in the manufacturing sector, though at a slower pace than in

November. [Those in non-manufacturing sectors reported strong improvement in business conditions

in December.] Prices were reported to be essentially flat.

Unemployment edged up 0.1 point in both New York and New Jersey in November; the payroll

survey showed a sharp decline in government payrolls, offset by an acceleration in private-sector job

growth. Some firms in upstate New York report shortages of educated entry-level workers and

computer programmers. Consumer confidence climbed to its highest level in more than six years in

December, though it is still lower than in any other region. Tourism was reported to be exceptionally

strong in the fourth quarter, with hotel occupancy rates holding near record highs.

Financial Developments

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

demand for all categories of loans weakened somewhat since the last report. The decline was sharpest

in the residential mortgage segment. Refinancing activity for all types of loans declined slightly. Overall

credit standards were largely unchanged, though there was some tightening for consumer loans.

Average loan rates declined for all types of loans, with rates lower at 25 percent of banks and

higher at just 3 percent. In contrast, average deposit rates increased, with 27 percent of the participating

banks reporting an increase and only 6 percent reporting a decline. Delinquency rates continued to edge

up for consumer and residential loans, but they declined for commercial, industrial and nonresidential

mortgage loans.

III-1

THIRD DISTRICT - PHILADELPHIA

Reports from Third District business contacts in early January suggest that economic

activity in the region has been moving up slowly. Manufacturers said orders were increasing and

they have stepped up shipments. Most retailers indicated that they met their planned sales levels

for the Christmas period--around 5 percent above 1995--but electronics and computer stores

failed to match either their expectations or their year-ago results. Auto dealers said sales dropped

seasonally in December but they expect a rebound soon. In general, both manufacturers and

retailers indicated that inventories were around planned levels. Bankers reported a seasonal

increase in credit card lending but said other types of lending have been flat.

Businesses in several areas of the Third District noted continued hiring, especially in

some service industries. However, manufacturers have generally not been seeking to increase

employment, although they continue to say they need skilled workers in some specialized

occupations. According to reports from some major employers in the District, there does not

appear to be an acceleration in the rate of general wage increases.

MANUFACTURING

Manufacturing activity picked up in early January after a slow December, according to

reports received from Third District industrial plants. New orders were moving up, and

shipments were increasing slightly while order backlogs were falling. Inventories increased

slightly. Producers of durable goods reported slightly stronger demand for their products than

did producers of nondurable goods.

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Area manufacturing firms are expecting some improvement in the first half of the year

despite the current slow start. On balance, they predict rising orders and shipments over the

winter and spring, but they are not planning to build up inventories in anticipation of the

increased demand for their products.

Industrial prices have shown virtually no change; manufacturers said both input costs and

output prices have been mainly flat in recent weeks. Although a few manufacturers said they

expect some price increases will be announced by their suppliers early in the year, they are not

certain these higher prices will be effectively implemented.

RETAIL

Most Third District retailers contacted in early January said their sales for the Christmas

shopping period met planned levels, which called for a year-over-year increase of around 5

percent, in current dollars. Several department stores reported that their gains were even greater,

but some stores concentrating in electronics and personal computers failed to meet expectations,

and some of them saw sales decline from the levels of Christmas 1995. Unplanned discounting

appeared to be minimal in the final days before Christmas as well as in the week after. Several

stores noted that they ran out of popular items before Christmas and were unable to replenish

stocks. Most retailers said their inventories were at desired levels as the new year began, and

some described them as below normal.

Auto dealers in the region said sales dipped seasonally in December but they expect a

rebound soon. Inventories varied among dealers but appeared to be around planned levels

overall. In general, dealers expect sales in 1997 to be about even with the 1996 total, and they

expect sales of light trucks and sport-utility vehicles to continue to be relatively stronger than

III-3

sales of sedans. Although some manufacturers' rebate programs have been extended into the

new year and some reduced finance rates have been offered recently, dealers do not anticipate an

extensive increase in these promotional strategies.

FINANCE

Bank lending picked up seasonally for consumer loans, mainly credit cards, in midDecember, according to Third District bankers, but other credit categories have been flat. Most

bankers continued to say competition for new business loans was strong and there was currently

little net growth in business loan volume among major banks in the region. While some bankers

and other business contacts said many firms were planning increased capital spending in 1997,

bankers said they have not seen any indications that this will result in significantly stepped-up

borrowing by either current or new customers.

LABOR DEMAND

Increased employment has been evident in some areas of the Third District recently.

Businesses in central Pennsylvania and Delaware indicated that they have added workers and are

looking for more. Most of the job gains have been in service industries. Manufacturing

employment continued to drift down in most of the District, but demand for skilled

manufacturing workers, such as machinists and tool makers, is reported to exceed the supply of

available workers in many areas. The occupational categories for which there has been relatively

strong demand are administrative and data processing workers and truck drivers. Despite the

signs of increased labor demand, most of the employers reporting on their latest companywide

pay increases are raising wages less than 4 percent, around the same as recent annual increases.

IV-1

FOURTH DISTRICT - CLEVELAND

General Business Conditions

The District economy is holding steady at a good level, with many areas reporting

joblessness near--or below--the national average. Business activity remains especially

strong in the central Ohio and southeastern Ohio/northern Kentucky regions, although

virtually every major area reports favorable economic conditions. Even in southwestern

Pennsylvania, where business activity has been more moderate, joblessness has fallen to a

six-year low.

According to District employment agencies, hiring of temporary workers slowed

slightly in December, mostly likely due to seasonal cutbacks. Still, employment growth

remains above its rate at this time last year, and demand for general clerical, data

processing, and technical positions continues to be strong. Wage growth has picked up

somewhat, especially for technically skilled workers such as engineers. Employment

agencies also report that benefit packages at smaller firms have increased as a result of

tightened labor markets.

Manufacturing

Manufacturing production is rising and orders growth appears to have improved a

bit recently. Capital goods producers continue to be especially upbeat in their appraisal of

business conditions, although materials producers also see improvement. Local reports

indicate that steel demand has strengthened and prices have risen, and many District

IV-2

producers plan to expand their production capacity this year. Elsewhere, commodity

prices were unchanged, or only slightly higher from the last District report.

Manufacturing employment is steady or moderately higher, and wage increases are

reported to be light despite generally tight labor markets. Still, manufacturers say that

finding qualified workers remains a challenge.

Retailing

District retailers report mixed results for late November and December sales.

While retail spending appears to have been stronger than for the same time last year, some

retailers expressed disappointment in holiday-season receipts. Sales of electronics remain

soft (although large screen televisions and satellite dishes are selling well). Items in

demand during the holiday season included apparel, toys, and some household goods such

as appliances. There was no strong consensus that the shortened shopping interval

between Thanksgiving and Christmas had an adverse effect on total sales for the period.

Retail inventory levels are reported to be "on plan," in part because of conservative

stockpiling prior to this shopping season. Several major retail chains have plans to open

stores in the District this year, whereas very few report plans to close stores.

Auto Dealers

1996 was a good year for District auto dealers. All of those surveyed reported

sales at or exceeding 1995's high levels. While October and November were somewhat

weaker than in the previous report, the year ended on a positive note with a surprise surge

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in the last two weeks of December. Overall, the auto sales outlook for 1997 ranged from

uncertain to fairly optimistic.

Dealers describe their inventories as marginally higher than desired, but they

anticipate very little difficulty returning to preferred levels by the end of February. Still,

respondents characterize the new-car market as extremely competitive. Several dealers

note a drop-off in demand for used cars, breaking a two-year upward sales trend in this

market.

Banking and Finance

Lending activity in the District was good at the end of the year, according to

District bankers. Growth in consumer loan demand is moderate overall, with strong gains

in seasonal credit card use. Commercial loan demand is also reported as moderate-tostrong.

The growth rate of delinquencies has leveled off somewhat, with some bankers

reporting a drop in past-due loans. However, many bankers note a rise in household

bankruptcies, which in some cases occur without experiencing credit delinquency.

Most respondents describe competition for borrowers as fierce. The spread

between lending and deposit rates has tightened as depositors continue to move savings

into higher yielding money-market accounts. Bankers report mixed credit quality trends,

about half see no recent change, while the others see a slight deterioration. Some lenders

report a tightening in credit standards for credit cards.

FIFTH DISTRICT-RICHMOND

Overview: Fifth District economic activity remained at a high level in recent weeks,

although the rate of growth has moderated. Retail sales rose sharply since October and the

commercial real estate market remained strong. Service sector growth slowed as did growth in

state revenues. Manufacturing activity was mixed and loan demand slackened. Unfavorable

weather hurt ski resorts' business and hampered crop harvests. Labor markets tightened further,

and wage pressures were more evident. Price increases were more widely reported; retail and

service sector prices rose more quickly, and commercial rents continued to rise.

Retail Trade: The pace of retail activity escalated since the last Beige Book report.

Retailers reported robust gains in apparel sales, but indicated that general merchandise and

computer sales were down. Shopper traffic and inventories at most stores expanded at a faster

pace in recent weeks, although some automobile dealers reported declines in both. Retail

employment grew more quickly, and retailers, particularly in urban areas, had difficulty finding

employees. Wage pressures continued to be widely reported. Respondents noted that retail

prices rose somewhat more quickly, and they expected slightly higher prices and increased

demand for their products over the next six months.

Services: The service sector grew more modestly in recent weeks, held back by declines

in business and personal services. Employment growth remained modest and the rapid pace of

wage growth reported in the last Beige Book slackened. Wage pressures were less pronounced in

the wholesale trade, finance, and insurance industries, however, some contacts in the hotel

industry noted that tight labor markets were "driving [their] pay scales higher." Prices at serviceproducing firms rose more quickly. Looking ahead, respondents expected demand for services to

be steady over the next six months.

Manufacturing: Activity in the District's manufacturing sector was mixed. Shipments

were lower in the textiles, furniture, and paper goods industries. In contrast, shipments of metals,

lumber, chemicals, and transportation equipment strengthened. Generally, the volume of new

orders increased at a faster pace. However, producers of paper products, furniture, and rubber

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and plastics reported fewer orders. Despite increased hiring by tobacco and transportation

equipment firms, manufacturing employment fell somewhat during December, as textiles,

furniture, and chemicals firms trimmed payrolls. Shorter hours at textile, furniture, and paper

plants trimmed the average workweek. Finished goods prices declined and raw materials prices

grew at a slower rate.

Tourism: Unseasonably warm weather hampered tourism in late December and early

January. Respondents reported that a lack of natural snow and the inability to make snow closed

some ski areas and limited the number of trails that others could operate. Despite the shutdowns,

one contact from a popular ski resort stated that if the weather cooperates for the rest of the

winter, they could still surpass their record-breaking 1996 season. Many contacts at coastal areas

noted that despite unseasonably warm weather, tourist activity had slowed from November,

although winter hotel bookings were about the same as last year.

Temporary Employment: The demand for temporary workers increased during

December and early January, as qualified help remained in short supply. Most contacts noted an

increase in the demand for light-industrial workers while the need for information technology

workers remained high. One North Carolina agent reported that more employers in his area were

seeking managerial-level employees. Wage pressures continued, especially in areas of low

unemployment. In the tight Spartanburg, S.C. labor market, a contact said that offers of higher

wages were starting to attract workers from low-paying permanent positions.

Finance: District banks reported somewhat lower demand for mortgage and consumer

loans during December and early January, while commercial loan demand changed little. Contacts

attributed the drop in mortgage lending to an uptick in interest rates. One Virginia banker

indicated that higher rates "put the brakes on" customer interest, bringing the demand for home

loans "to a screeching halt." Several bankers said that high debt levels generally slowed consumer

lending activity, although they noted an increase in debt consolidation loans. The demand for

commercial loans held steady, but contacts reported that the competition for those loans had

become "fierce," leading banks to provide added service and to trim pricing.

Residential Real Estate: Residential real estate activity eased slightly during December

and early January. Housing starts and sales were lower, although the number of building permits

increased slightly. Home prices moved marginally higher. Customer traffic was steady, and

several homebuilders noted that the interest shown by "serious" customers had improved.

Homebuilders reported that subcontractors remained in short supply and that lumber prices rose

sharply through November but have stabilized in recent weeks.

Commercial Real Estate: The pace of commercial real estate activity accelerated in

recent weeks. Office, retail, and industrial leasing activity picked up, except in North Carolina,

where it remained at a high level. Commercial vacancy rates continued to fall, and rents rose

slightly in most jurisdictions. The availability of prime office space tightened further, and

numerous contacts reported shortages. Many respondents noted an increase in build-to-suit

construction.

State Revenues: State revenues have increased at a slower rate since October. General

fund collections were mixed across District states, ranging from modest growth in South Carolina

to a sharp drop in Virginia. A Maryland contact said that poor lottery ticket sales had reduced

general fund collections in her state. Withholding tax collections grew sharply in West Virginia,

but rose modestly elsewhere in the District. Retail sales tax collections increased at a faster rate; a

contact in West Virginia noted that sales tax collections had remained strong for three consecutive

months, following nineteen months of "sluggish" performance.

Agriculture: Wet weather across most of the District during December hampered

farmers' ability to do fieldwork. Persistent rainfall delayed corn harvesting and prevented ground

preparation in many areas. However, winter wheat was developing on schedule. In the livestock

sector, mild temperatures reduced the amount of hay needed to feed cattle. In the dairy industry,

falling prices continued to force some small producers to leave the industry. Hog producers in

North Carolina faced higher costs as the lack of sufficient slaughter facilities required them to ship

hogs to plants in other states.

VI-1

SIXTH DISTRICT - ATLANTA

Overview: Contacts around the Sixth District report that economic activity continues to

grow at a moderate pace. Retailers' reports on December sales were mixed. A slight decline in

production and new orders was noted in the manufacturing sector, while tourism and business travel

was generally reported to be at high levels. Single-family home sales varied across the District,

while commercial real estate markets continued to improve. Banking contacts reported flat loan

demand. In spite of shortages of qualified workers, industry contacts report that wages generally

appear to be holding steady.

Consumer Spending: District retailers give varied reports on December sales; on balance

these are positive. The majority of retailers reported that sales exceeded year-ago levels, with a

significant number of those reporting strong increases. Almost two-thirds of the retailers contacted

said that holiday sales met or exceeded their expectations. Apparel sales had by far the strongest

showing across the region. Inventories were described as low or on target in much of the District.

Looking forward, most retailers anticipate that first quarter District sales will be up slightly

compared with last year. Additionally, most retailers do not expect labor or product prices to rise

over the next six months.

Manufacturing: More factory contacts note declines in production, new orders, and the

factory workweek since the last Beigebook. Despite these declines, more also expect production to

accelerate in the coming months, although over half of the manufacturers contacted expect to

maintain current employment rolls. Suppliers for the region's auto and recreational vehicle plants

note increasing shipments. Lumber manufacturers are pleased with shrinking inventories and paper

manufacturers note improving sales, although a glut of wood pulp is hurting some companies.

VI-2

Producers of electrical equipment and appliances report an increasing workweek and improving new

orders. Commercial and Department of Defense aircraft orders are benefitting aircraft engine

producers in Florida and Louisiana. Less positively, inventories are reported to be excessive for

some furniture producers, orders are falling at a large packaging firm, and employment rolls continue

to contract at some apparel mills.

Tourism and Business Travel: A strong tourism and convention sector is expected to

continue to support the region's economy in coming months. Local markets in central Florida,

where theme parks are breaking attendance records, report increases in hotel occupancy. Theme

parks on Florida's space coast have recently announced expansion plans in addition to park

expansions already underway in central Florida. South Florida appears to be experiencing one of

the best tourist seasons on record with good weather and little negative news about crime, according

to tourism officials. Hotel bookings for spring are up from a year ago in Miami. Trends in the New

Orleans hotel and hospitality industry reportedly remain positive with more emphasis being focused

on foreign travelers.

Construction: According to real estate contacts, single-family home sales and construction

varied widely in markets throughout the District on a year-over-year basis in December. The

majority of contacts report that home inventories are adequate, although several builders expressed

concerns that new home inventories may be moving too high. Realtors generally believe home sales

in the first quarter will exceed the previous year's level, while most builders anticipate construction

activity will be flat to slightly down. Most builders and Realtors contacted expect home prices to

rise over the next six months.

VI-3

Contacts generally report that commercial construction continues to increase. Declining

vacancy rates and higher rental rates continue to drive forward new industrial, office, and retail

development. Most commercial projects continue to be build-to-suits; however, several speculative

projects are now underway and more are anticipated this year. Overall, the multifamily sector

remains healthy; however, some markets have weakened.

Financial: Most contacts in the banking industry reported flat lending. Consumer loan

demand was mixed with softness reported in automobile financing. Commercial loans were level,

and mortgage lending slowed slightly. Overall loan quality held steady.

Wages and Prices: Locating and hiring qualified workers remains difficult, according to

contacts in some industries, but wages appear to be holding steady in most cases. Contacts in

Tennessee report that shortages of skilled workers are a common concern. Demand for qualified

technology workers is said to be especially strong; some employers are resorting to out-of-state

recruitment and signing bonuses in order to secure talent. More company contacts than before

expect prices for materials and finished goods to increase moderately over the next few months.

VII-1

SEVENTH DISTRICT-CHICAGO

Summary. Overall economic activity in the Seventh District continued to increase

moderately in December and early January amid signs of increasing wage pressures.

Holiday retail sales gains came in above last year's lackluster results, but fell short of

many retailer's earlier expectations. Housing and construction activity picked up at the

end of 1996, and manufacturing activity increased at a modest rate. Bankers and other

lenders reported that demand for both business and consumer loans remained strong, but

showed little or no signs of increasing. The District's labor markets tightened further

with many contacts reporting increasing wage pressures across the board. Agricultural

reports show hog production was still behind year-ago levels, but many observers were

skeptical.

Consumer spending. Most contacts reported that consumer spending gains in

December were better than last year, but performance was mixed. Some retailers that met

holiday sales targets reported using heavier than normal sales promotions, both before

and after Christmas, to do so. However, other retailers went into the season with

conservative sales targets and, as a result, had lean inventories which may have limited

sales gains. For the most part, retailers experienced strong apparel sales, while

electronics and home appliance sales remained relatively soft. One major retailer noted

that increased debt levels may have made consumers reluctant to purchase big-ticket

items. Inventories were considered by most merchants to be in good shape during the

holiday period, which limited the need for unplanned price discounting and resulted in

improved profit margins compared to a year ago. Overall, the region's holiday sales

results were described as "OK" or at least in line with results in other regions, but fell

short of earlier expectations. Several retailers stated that post-holiday sales have been in

line with their holiday sales pace.

Housing/construction. Housing activity picked up moderately in December and

early January, on a seasonally adjusted basis, and other construction activity continued to

increase at a modest pace. New housing construction rebounded slightly from a shortlived slump earlier in the fall, with many contacts pointing to lower mortgage interest

rates and strong labor markets as causes for consumer optimism. One home builders'

association in Michigan described the market as "steady, strong" and noted that builders

VII-2

were optimistic heading into the new year. Another association in Wisconsin pointed to

increased membership as a sign of increased activity. This contact also noted that

advertising was down in the association's monthly publication, stating that building

supply producers didn't need to buy advertising space, since they were already selling all

that they could produce. Several realtors reported that sales of existing homes remained

strong but may be off slightly from very high levels. Commercial construction activity

continued to increase moderately with sources pointing to the suburban areas as

particularly strong. One contact reported that construction of "category-killers" (strip

malls anchored by large electronics or office/computer retailers) continued to be robust in

Indiana. There were no reports of materials shortages and, with the exception of volatile

lumber prices, few reports of upward cost pressures.

Manufacturing. Manufacturing activity at the end of the year changed little from

the pattern of moderating growth that had been evident over the previous few months

(aside from any disruptive effects from recent auto strikes.) Purchasing managers'

indexes from across the District indicated flat to slightly increased overall activity in

December compared to a more widespread, albeit slow, expansion in earlier months. A

major appliance producer reported that shipments of their core products had again slowed

toward the end of the year, after a brief uptick in October. An industry analyst noted that

heavy construction equipment ended the year strong, due in large part to the strength in

nonresidential construction. A major producer of machine tools reported that customer

orders slowed in December and backlogs in some plants had eased. However, one of

their plants that mainly supplies equipment to the auto industry reported that backlogs

remained high. Steel producers noted that demand remained strong, with bookings solid

into the second quarter. In addition, a metal fabricator reported strong demand through

the end of 1996 with no sign of weakening in the near term.

Banking. Lending activity continued to be strong around the District in December

and early January, but most financial institutions reported little or no growth in loans. On

the commercial side, several banks noted that lending was being driven largely by

mergers and acquisitions, which was widely dispersed among industries. One large bank

contact stated that aggressive lending targets were exceeded last quarter, and some loans

were shifted to the first quarter. However, one bank reported that loan volumes were

bolstered by lowering credit standards and price, although overall credit quality remained

relatively strong. A small bank noted an uptick in commercial loans in December due to

VII-3

short-term lending to auto distributors for carrying unplanned inventory, which would be

cleared out in January. As a result, the bank's lending activity in January is expected to

be down. Several other small banks characterized lending activity as sluggish. On the

consumer side, credit card usage continued to rise in December. Other forms of consumer

loans were also strong, but growth was modest compared with credit card lending. Most

banks reported that mortgage lending (excluding refinancing) remained relatively strong

but growth performance was varied, with some local markets showing declines and others

showing increases.

Labor markets. Labor markets in the Seventh District continued to tighten amid

more widespread reports of increasing wage pressures. Unemployment rates continued a

downward trend through November (latest month available) from already very low rates.

Several temporary help agencies reported that employers, after several months of

stonewalling, were beginning to raise wages in December to attract qualified help. One

agency contact described clients as "finally realizing that they had to loosen the purse

strings if they wanted to fill a position" and another reported that "employers were upping

their offers across the board." One labor market analyst reported that requests for a statesponsored occupational wage survey were unusually high, a sign that the analyst felt

indicated employers were preparing to raise their offers. All those contacted described

wage increases as very modest but broad-based across occupations, except in those

occupations where shortages (and wage increases) have persisted for some time. The

shortage of accounting professionals noted in our last report intensified, while that of

skilled construction occupations appears to have eased.

Agriculture. Agricultural analysts were surprised by a recent report that showed

hog production continued to be behind year-ago levels. The report noted that hog

numbers were down 3.5 percent from a year ago and the lowest in 6 years. Moreover, it

suggested that the number of sows likely to give birth during the six months ending May

will be down 1 percent. The reported cuts were especially large among District states;

down 8.5 and 5.5 percent, respectively. The cuts imply that this year's rise in meat

production will be somewhat smaller. However, many observers are skeptical of the

reported cuts. The industry continues to undergo enormous structural change, adding to

the larger estimating errors that have become apparent in recent reports. And other signs,

such as a sharp cut in the number of sows shipped to packing plants and strong producer

earnings, suggested that an expansion was already underway.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

Economic activity has picked up since the last report. District retailers report holiday sales

generally met or exceeded expectations, while auto dealers report sales relatively unchanged from a

year ago. Other business contacts report continued growth in their industries and are optimistic about

the near term; however, a survey of small businesses shows a less favorable outlook for the first half

of 1997 compared with a year earlier. Tight labor markets still prevail in many areas. Contacts in

the transportation industry report that recent increases in energy prices are being passed along to

customers. Real estate markets remain strong in most parts of the District. Loan growth picked up

at large District banks during the last two months of 1996.

Consumer Spending

Most retailers surveyed indicated that sales during the 1996 holiday season generally met or

slightly exceeded expectations. On average, sales increased about 7 percent from the previous

holiday season. Electronics, jewelry and toys were the big sellers. Post-holiday inventories are at

desired levels. Most retailers expect moderate-to-good sales to continue during the beginning of this

year.

Auto dealers stated that sales during November and December were generally unchanged

from a year earlier. Used car sales are still increasing, but this has not substantially affected sales of

new vehicles. Most dealers expect sales during the first half of 1997 to remain unchanged from, or

be slightly better than, 1996 levels.

Manufacturing and Other Business Activity

Most District contacts are optimistic about their firms' near-term prospects. Tight labor

VIII-2

markets remain a problem for many employers, particularly those in the construction and information

technology industries. Some retailers in the southern part of the District had difficulty finding holiday

workers.

The District's poultry processing industry has been adding new capacity. In fact, one firm that

will open a new plant this spring has already announced an expansion. Increased demand from fastfood restaurants has been pivotal in much of this growth. Makers of office electronic equipment are

reporting recent capital additions, caused by increased demand, that will also create about 600 new

jobs. Manufactured homes are selling well, leading to a new plant in western Tennessee that will

employ 250 workers. The steel industry is following Toyota into southern Indiana, with the

announcement of a new plant in the area that will employ more than 400 workers. A bank's

mortgage division is adding 200 jobs inLouisville because of increased business from a recent merger.

Merger activity has picked up in the District, especially in the St. Louis area. Boeing

announced it will merge with McDonnell Douglas. Because the company's defense systems division

will stay in St. Louis, however, the merger is expected to have a minimal effect on the regional

economy. Mercantile Bancorporation will buy Roosevelt Bank, the largest thrift in Missouri. About

50 branches are expected be closed, 30 of which are in St. Louis. A Dutch insurance company,

Aegon, is buying the Providian Corporation's insurance business. About two-thirds of the firm's

1,500 Louisville employees may lose their jobs.

A contact in the aerospace industry reports that there has been a 25 percent increase in fuel

costs over the past year, which has negatively affected profits. In this vein, a large package delivery

firm in the District announced that it will pass along recent increases in energy prices to shippers.

Likewise, trucking industry contacts report that large carriers will probably push through a 4 to 5

percent increase in transportation costs.

VIII-3

Outlook

According to a recent survey of 231 small businesses in the Eighth District, the number of

respondents expecting a deterioration in business conditions over the first half of 1997 outnumbers

those expecting an improving outlook by two-to-one, although a little more than half expect little

change. In general, firms in the trade sector were more upbeat, while those in construction and

finance were somewhat less upbeat. A similar survey conducted a year ago indicated more optimism

among small businesses.

Real Estate and Construction

Residential real estate markets remain strong in most parts of the District, with sales of both

new and existing homes up slightly. Monthly residential construction permits in November, however,

were down in all 12 District metropolitan areas. On a year-to-date basis, permits were up in almost

all metro areas. Commercial construction is strong all around the District. Some commercial real

estate agents have noticed a weakening in the apartment and industrial markets in the southern parts

of the District, however.

Banking and Finance

Total loans outstanding at 11 large District banks rose 1.1 percent during the last two months

of 1996. In contrast, total loans increased 0.1 percent in September and October and declined 0.1

percent during the last two months of 1995. All categories of loans showed increases, with consumer

loans posting the largest increase, 1.9 percent. Total deposits rose 0.5 percent in November and

December.

NINTH DISTRICT--MINNEAPOLIS

In the middle of a bitter winter, the economy of the Ninth District is growing moderately.

Construction continues to animate many areas. Oil development is pumping cash into parts of

three states, while mining and forest product output is generally steady. Manufacturers report

generally good business with normal inventories and no price pressures other than in fuels.

Severe weather is causing problems for cattle ranchers, and hog slaughter has dropped slightly

compared to a year ago. Consumer spending apparently is guarded, with holiday retail sales

only slightly above 1995 levels and cold weather reportedly slowing car sales. Tourism sector

reports are mixed, but with some improvement in regions that had been slow. Labor markets

remain very tight. Many employers report difficulty in securing needed workers, but few have

given or anticipate large pay increases. Prices, other than for petroleum products, show little

increase.

Construction and real estate

"Vermillion sees housing binge," is a headline describing construction activity in one small

South Dakota city that could apply equally well to several other towns of the same size in

Minnesota, North Dakota or South Dakota. "The boom rolls on," headed a report on

Minneapolis-St. Paul residential building that concluded, "industry experts expect the good

times to continue." Generally strong fiscal positions for most district state governments point

toward increased public-sector construction in 1997, according to one industry official.

Realtors report good business for the season, after some slowness in mid-1996.

Natural resource industries

Oil and gas continue as the natural resource sector's strongest component. Rig counts are

holding up well despite bitter weather. Western North Dakota is the most active area, but two

or three rigs have been drilling in South Dakota, a state that usually has no such activity. Iron

ore and nonferrous mining output is largely stable. Paper, lumber and building board output

shows little change compared to prior quarter and year-earlier levels. Higher prices for

dimension lumber, described as resulting from curtailed imports from Canada, have improved

profitability for sawmills in the western portion of the district that have faced higher acquisition

costs for timber in recent years.

IX-2

Manufacturing

"Business is very good, our backlog of orders is the highest it has ever been," reports one

North Dakota manufacturer with a national market. Electronics and other technology firms also

reportedly are doing well. A mining equipment manufacturer and fabricators of agricultural

implements reportedly have strong orders. North Dakota continues to add to its agricultural

processing capacity: A 100-employee pasta plant and a corn sweetener plant recently went on

line. One exception to this general pattern is a South Dakota manufacturer of tourist industry

specialties who reports, "We are slow, it was a very soft summer."

Industry sources report

normal inventories, with no delays and few price pressures in raw materials.

Agriculture

Extreme cold and unusually deep snow are the most recent scourge for cattle ranchers. Early

and deep snow precluded the use of winter pastures and forced ranchers to dip into hay supplies

earlier than usual. Extreme cold increases the nutritional requirements of cattle and thus of hay

consumption. These factors have led to sharp increases in the prices of hay in Montana and the

Dakotas, further increasing ranch losses. Blizzards over the first weekend in January reportedly

caused mortality in cow herds in north-central South Dakota, but no good estimate of losses is

yet available. However, if ranchers can weather the season, some hope glimmers in the new

year. Many district livestock market analysts believe the price trough in the cattle cycle was

passed in 1996 and that ranchers should see some return to profitability in 1997 with further

improvement in 1998.

Hog prices are somewhat higher than in the first half of 1996, and with lower feed costs

following harvest, hog producers are doing better than a year ago. Hog slaughter is down

slightly from year-earlier levels.

Consumer spending

"People are a little disappointed," says one St. Paul, Minn., mall manager in an assessment of

the 1996 holiday shopping season that typifies much of the district. A check verification

service estimated that Minnesota holiday sales were up less than 2 percent and the month of

December itself was flat, both compared to year-earlier levels. Retailers in western Wisconsin,

one of the fastest growing areas in the district, are somewhat more positive as are their

counterparts in North Dakota. "Holiday business: merry but not memorable," is how a Grand

Forks retailer summed up the season. Consumer caution, widespread discounting and intense

competition mark the sales environment described by retailing CEOs at a Minneapolis Fed

IX-3

meeting. Reports on vehicle sales are mixed; some dealers reported good sales in late 1996, but

association representatives agree that sales have slowed in recent weeks. Bad weather is

blamed in part. "No one wants to go car shopping when the wind-chill is 60 below," says one.

Tourism and recreation

A Montana newspaper reports ski resorts in that state opened up to two weeks early and posted

large year-on-year increases in November and December. Good snow conditions are keeping

ski and snowmobile trails busy in South Dakota, according to a tourist official. But a ski resort

operator in northern Minnesota reports a slight decrease in the number of visitors compared to

last year's record pace, and the deer hunting season in Michigan's Upper Peninsula was

disappointing for local businesses. These reports of greater strength in western areas of the

district reverses a pattern of more optimism in the east that prevailed through much of 1996.

Winter recreation businesses in Minnesota, Wisconsin and Michigan reportedly continue to

anticipate good business, but extremely cold, stormy weather is eroding those hopes.

General business sentiment

Businesspeople who responded to a Ninth District poll at the end of 1996 generally expressed

expectations of continued moderate economic growth in 1997. Nearly two-thirds expect

business investment to increase in their community in 1997, and over half expected increasing

employment levels. Less than a fifth expected wage increases in their community to exceed 4

percent while about a third expected their own firms would raise product prices. Over 80

percent of respondents characterized themselves as somewhat or very optimistic about their

community's prospects for the next 12 months. Within this generally optimistic outlook,

responses were most positive from northwest Wisconsin, Minnesota and eastern North Dakota.

In general, the view from respondents in Montana and South Dakota was decidedly less bright.

Employment, wages and prices

Unemployment rates remain very low in most areas of the district, except for Montana and

Michigan's Upper Peninsula, which are somewhat above the national average. Employers in

many areas continue to express concern about securing needed workers. But most report pay

increases of 2 percent to 3.5 percent. Flat health insurance rates have helped to keep overall

compensation costs down. Petroleum products remain higher than a year ago, but are the only

frequently mentioned higher price.

X-1

TENTH DISTRICT - KANSAS CITY

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

showing a few signs of slowing. Manufacturing activity remained fairly strong. Holiday retail

sales were somewhat less than expected, and construction activity edged downward. In the farm

economy, the winter wheat crop remained in good condition and farm finances improved after an

excellent fall harvest. Labor markets remained tight in much of the district, leading some firms

to increase wages. Prices were generally stable at the retail level and for materials used in

manufacturing and construction.

Retail sales. Retailers report holiday sales were up only slightly from a year ago and

somewhat lower than expected.

Sales are expected to improve somewhat in the coming months,

and some retailers plan to expand stocks to meet increased demand. Automobile dealers report

sales were generally down from the previous month and a year ago. Sales of sport utility

vehicles and light trucks remained strong, however, and some dealers say they are still short of

such vehicles.

Manufacturing. Manufacturers continued to operate at moderately high levels of

capacity last month. Manufacturing materials were generally available, with lead times either

holding steady or declining. Manufacturers have been trimming their inventories, and some say

they plan further reductions because stocks exceed desired levels.

Housing. Builders report housing starts slowed last month while remaining above yearago levels. Most of the decline in starts was in single-family homes. Builders expect little

change in construction activity in the first part of the year. Sales of new homes also fell

somewhat last month. Most building materials were readily available and delivery times were

X-2

normal. Mortgage lenders report demand was slightly lower last month.

Banking. Bankers report that loans and deposits both increased last month, leaving loanto-deposit ratios little changed. Commercial and industrial loans, consumer loans, commercial

real estate loans, and agricultural loans all edged up. Demand deposits, NOW accounts, and

money market deposit accounts also rose, while small time deposits and large CDs were flat.

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. Some banks tightened their lending standards on consumer loans,

citing increased delinquencies.

Energy. District energy activity declined slightly last month. Oil and gas prices

continued to rise in December and remained well above year-ago levels. Despite the high prices,

the district rig count edged down 2.3 percent in December and was unchanged from a year ago.

Agriculture. The district's winter wheat crop is in good condition, with adequate

moisture but no snow cover to protect it from the winter weather. Wheat pasture is excellent this

winter, in contrast to the past few years. Farm income rose in the district in 1996 due to

excellent crops and high crop prices. The rise in farm income in 1996 appeared to help main

street businesses, and farm vehicle and equipment sales have been quite strong recently.

Bankers report the higher farm income also led to some overall improvement in farm loan

portfolios in the district. The quality of loans made to crop producers improved substantially in

1996. Performance of loans to livestock producers was mixed, with stronger performance by

loans to cattle feeders offsetting weaker loans to ranchers. District bankers expect farm income

will be mixed in 1997. Crop producers may see their income fall as yields and prices return to

X-3

normal after an exceptional year in 1996. Lower feed costs and higher calf prices should help

boost profits in the livestock industry this year.

Wages and prices. Labor markets were still tight last month, and there continued to be

some evidence of wage pressures. Manufacturers report skilled and unskilled workers remained

in short supply, and some companies say they have responded by increasing wages. Prices held

steady at the retail level and for most manufacturing and construction materials. Retailers expect

no major price changes in coming months.

XI-1

ELEVENTH DISTRICT--DALLAS

In December and early January, Eleventh District economic activity continued to expand at the

slightly stronger pace established in late October and November. There were more reports of price

pressures than in the last beige book, partly as a result of low inventory. Two industries reported that

price pressures were less because new capacity had come on line. Most manufacturing activity was in a

seasonal lull, with the exception of energy-related activity, which was strong. Retailers were happy but

not overwhelmed with holiday sales. The financial services industry reported little change in lending,

and construction and real estate activity continued at roughly the same level. High energy prices kept

drilling and oil services activity strong. Agricultural producers reported generally good conditions, but

would like more rain.

Prices. Prices were up for aluminum, brick, scrap metal, retail goods, heating fuel and oil

service companies. Retailers said holiday selling prices were up one to two tenths of a percent above

last year, and one contact said the company is "trying to get margins back to historical levels." Low

inventories of heating fuels and bitterly cold weather in Europe and the U.S. sent fuel prices soaring in

December. Heavy demand for oil service companies pushed their selling prices to a premium. Oil

service firms reported a shortage of some skilled workers, such as machinists, as well as many kinds of

equipment, from offshore rigs to measurement-while-drilling equipment. A shortage of scrap metal

pushed prices up 5 percent over the last 30 days, and contacts expect prices to increase an additional 3

percent over the next quarter. Rising costs are expected to push up prices of corrugated box and liner

board by 6-10 percent in February or March. A slight softening of chemical prices, combined with a

run-up in natural gas and liquids prices, has squeezed profits for petrochemical producers. Some

softening in the price of prefab steel building components was attributed to seasonal factors and

XI-2

additional capacity. Cement producers said a new terminal at the Port of Houston had increased supply

sufficiently to hold prices steady.

Manufacturing. Manufacturing activity was in a seasonal lull, with the exception of computers

and semiconductors which continued to rebound, and energy-related activity which remained strong.

Demand had slowed, seasonally, for boxes and construction-related materials, such as fabricated

metals, brick, lumber and concrete. An increase in demand led to low inventories of steel and scrap

metal. Most construction-related manufacturing contacts expect a good year, although as one said "it

will be hard to top 1996." Very strong demand and high levels of production continue for

petrochemical producers. Gulf Coast refineries have been operating at full capacity in an effort to meet

demands from an inventory running 16 percent under year-ago levels, and to take advantage of high

prices. Maintenance of refineries has been widely delayed to continue heating oil production, and the

usual December turnarounds to begin the transition to summer gasoline production have not taken

place. With gasoline inventories at the lowest levels in recent history, this now raises the possibility of

very tight supplies of gasoline this summer.

Retail Sales. Most retailers were happy but not overwhelmed with holiday sales. Contacts

referred to the period as "O.K", "not great", "solid", "decent" and an "obvious improvement".

Retailers said Texas sales were generally better than those posted by the nation as a whole. Several

contacts reported that inventories were slightly lower than expected, with the exception of one company

with higher inventory who had restocked based on better than expected sales. Contacts expect sales to

continue at roughly the same pace throughout the first half of 1997, with some strengthening towards

the third quarter. Two contacts mentioned concern about the high levels of consumer debt. Auto sales

have been slower than expected.

Financial Services. The industry has seen little change in lending activity over the last six

weeks. Residential real estate and commercial loan demand continued at the same pace, except in

XI-3

Houston where increased construction and restoration of apartments pushed up commercial lending.

Outlooks for the New Year remain cautiously optimistic for all loan types.

Construction and Real Estate. Activity continued at roughly the same level. Construction of

industrial space was still strong, although demand had declined. Some contacts were concerned about

the amount of supply coming on line, but others were optimistic that announced relocations would spur

an increase in demand in 1997. Residential demand remained steady at high levels, and existing home

sales were reportedly up in most major markets, with the exception of Austin where demand has

softened. In the office sector, contacts said demand for space continued to improve, and rising

occupancies are expected to continue pushing up rents in 1997, boosting office construction.

Energy. Oil services companies continue to report very strong demand and full utilization of

capacity. There was no sign of the usual end-of-year build-up in the US rig count, which held steady

between 840 and 860 for the last six weeks of 1996. These levels are the highest of the year, suggesting

industry capacity is maxed out. A substantial increase in capital spending by producers is predicted for

1997, at least 15 percent, but oil service capacity must grow for this to materialize, and much could be

eaten up by higher prices for oil services. Any increased activity will have to be land drilling, because

contacts say every offshore rig available in the world is working now.

Agriculture. Land preparations moved ahead in most areas. Many areas could use a good rain

at this point. In December, cold temperatures led to losses of some vegetables but citrus was spared any

serious damage. A return to warmer conditions improved livestock performance, and haying activity

slowed with the warmer temperatures. As this document was being completed, the effects of a deep

freeze that hit the District are unclear.

XII-1

TWELFTH DISTRICT-SAN FRANCISCO

Summary

Reports from Beige Book contacts indicate continued strong expansion in most Twelfth

District states toward the end of 1996. Retailers reported a good holiday selling season, although

adverse weather conditions in late December and early January held down post-Christmas retail

activity. Early January flooding in Northern California and Nevada also caused extensive damage

to homes, farms, highways, and tourism facilities. Some efforts to repair damage began

immediately, boosting residential and non-residential construction, which have generally been

strong in District states other than California and Hawaii. Manufacturing activity continued to

increase in recent months, putting some pressure on wages for skilled workers, particularly in the

Pacific Northwest and the San Francisco Bay Area.

Business Sentiment

District respondents expect continued expansion of the national economy and their

respective regional economies. Most respondents expect U.S. GDP to continue to grow at its

long-run average pace of 2 to 2-1/2percent in 1997, leaving the national unemployment rate near

its current level. A majority of respondents expect inflation to remain near the current rate this

coming year, although some anticipate a slight pickup in inflation. With regard to regional

conditions, over three-quarters of the respondents expect growth in their area to outpace national

growth in the coming year, with business investment, housing starts, consumer spending, and

foreign trade, all expected to post solid gains in most regions.

Retail Trade and Services

Respondents from most District states reported a high level of retail sales in recent

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months, despite the shortened holiday selling season. Although somewhat below original

projections, holiday season sales compared with one year ago reportedly posted good gains in

California, the Pacific Northwest, and the Intermountain states. Retailers faced reduced pressure

to discount most items prior to Christmas, given the level of sales and relatively lean inventories

going into the season. However, sales at electronics and computer specialty stores reportedly

were lower than expected, leading to some aggressive discounting. Heavy snow in the Seattle

area immediately after Christmas reportedly held down retail activity there near the end of the

year.

Service industries generally reported further growth in recent months. Respondents from

California and the Pacific Northwest reported increasing demand for telecommunications services,

and efforts to keep up with this growing demand reportedly are putting upward pressure on

wages of some types of skilled workers. In Southern California, port traffic was strong, and

tourism activity was brisk. Tourism-related airport traffic and hotel occupancy rates also

increased in several other states, including Utah, where pre-Olympic advertising increased

downhill skiing business. However, heavy rains and flooding constrained tourism in Nevada and

Northern California, largely due to highway and park closures.

Manufacturing

The manufacturing sector continued to expand in most areas of the District.

Manufacturing growth was particularly strong in the Pacific Northwest, owing largely to the

resurgence of the aerospace industry and expansions at manufacturers of high technology

components and equipment. Wood product sales in the Pacific Northwest also were high,

boosted by demand for materials to repair storm-damaged homes and businesses.

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Agriculture and Resource Related Industries

District agriculture conditions have been mixed in recent months. Early rains and warm

temperatures created favorable California grassland conditions, benefiting the range cattle industry

and creating favorable conditions for the new planting season. However, declines in many

agricultural commodity prices combined with increasing production costs reportedly have caused

some farmers to delay purchases of new equipment and other discretionary inputs. Also, in

Northern California and Nevada heavy rains and flooding damaged some crops in fields and

orchards and forced ranchers to move livestock to higher, less attractive grazing areas.

Real Estate and Construction

Residential and commercial real estate markets continued to be strong in most areas of the

District. In the Pacific Northwest and Intermountain states, strong demand for single-family

residences has resulted in considerable home price appreciation, although the pace of gains in the

Intermountain states slowed in recent months. In California, building in the state as a whole

continued to be weak. Within California, San Francisco and Silicon Valley continued to outpace

the rest of the state in the residential real estate market recovery with continued price appreciation

for single-family homes and declining vacancy rates for rental properties. Southern California's

housing market also showed signs of improvement in recent months, as home prices began to rise

and sales increased.

Financial Institutions

District financial institutions generally reported that strong economic conditions continued

to boost loan demand. Despite increasing consolidation of banks, the lending environment was

said to remain highly competitive, both among banks and from non bank competitors.