Beige Book
For use at 2:00 p.m., E.S.T.
Wednesday
March 12,1997
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
March 1997
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
March 1997
TABLE OF CONTENTS
SUMMARY .....................................................
First District - Boston ..................................
I
I-1
Second District - New York ..............................
II-1
Third District - Philadelphia .............................
III-1
Fourth District - Cleveland ..............................
IV-1
Fifth District - Richmond ................................
V-1
Sixth District - Atlanta
................................
VI-1
Seventh District - Chicago ..............................
VII-1
Eighth District - St. Louis .............................
VIII-1
Ninth District - Minneapolis .............................
IX-1
Tenth District - Kansas City ...............................
X-1
Eleventh District - Dallas ...............................
Twelfth District - San Francisco
..........................
XI-1
XII-1
i
SUMMARY'
District economies generally continue to expand at a relatively moderate pace. Retail sales
are up in most districts from a year ago. Most districts report high levels of manufacturing activity,
with only pockets of weakness. Tight labor markets still dominate in almost all parts of the country.
Nevertheless, wage gains generally remain moderate. Price pressures, such as those reported by
most retail and manufacturing contacts, appear to have been temperate. Most districts report strong
residential real estate markets, with many citing increases in year-over-year building permits,
increases in new or existing home sales and rising home prices. Commercial real estate markets
continue to strengthen, with many districts reporting declining vacancy rates, rising rents and new
nonresidential construction activity. Loan demand conditions are decidedly mixed across districts
in all major categories of loans-commercial, consumer and real estate. Most districts report that
prospects for livestock producers have brightened recently. Despite moderate drops in oil prices,
activity has picked up noticeably in the energy extraction industries.
Consumer Spending
Most districts report that January and February sales are up from one year ago. The Atlanta,
Boston and New York districts report that sales have exceeded expectations. The San Francisco
district describes sales growth as moderate, while the Cleveland district reports retail conditions as
essentially unchanged from its previous report. Apparel has been a strong seller in the Atlanta,
Chicago, Kansas City and New York districts; however, apparel sales are down in the Boston district
and unchanged in the Richmond district. Cosmetics, building materials, pharmaceuticals and home
'Prepared at the Federal Reserve Bank of St. Louis and based on information collected before
March 3, 1997. This document summarizes comments received from business and other contacts outside
the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
ii
furnishings are also strong sellers, according to contacts. The New York district reports that a "taxfree" week in New York City spurred sales, but severe winter weather in the Minneapolis and San
Francisco districts hampered sales at many local stores. Current inventories are generally at or
slightly below desired levels.
Vehicle sales are mixed across districts. The Kansas City district reports slightly higher auto
sales levels, while the Minneapolis district notes strong sales of pickup trucks. Car sales in the
Philadelphia district remain unchanged, while the Cleveland and Dallas districts note slower-thanexpected sales. Vehicle inventories are generally adequate, although a few reports of shortages of
popular vehicles have been received.
Manufacturing
Most districts report that manufacturing activity remains at a high level and is, in many cases,
growing. Pockets of weakness, however, are interlaced with this growth in many districts. The
Dallas and Richmond districts report their manufacturing sectors as either "still in a seasonal lull"
or down slightly. The Minneapolis district, on the other hand, describes its manufacturing sector as
"hale and hearty." The St. Louis district notes that even though the level of activity has not changed
much from the last report, contacts are still optimistic about the near term.
Auto suppliers in both the Atlanta and Boston districts and heavy-duty truck manufacturers
in the Chicago and Cleveland districts report strong business, while the San Francisco district notes
that the aircraft and high-technology industries in the Pacific Northwest are expanding. In the
Philadelphia district, metal and chemical products are showing recent strength, while furniture and
home furnishings producers in the Boston, Chicago and St. Louis districts report that orders are up.
Most districts are experiencing an ongoing contraction in the apparel industry, with some of
iii
this production heading overseas. Several districts also note that their paper and textile industries
are in decline. The New York district notes a moderate slowing of manufacturing activity in New
York City, and the San Francisco district reports that the electronics industry in California has
slowed somewhat. Growth in the steel industry is slowing in the Chicago district, while remaining
strong in the Cleveland district.
Labor Markets
Contacts in almost every district report difficulty finding and retaining new workers because
of tight labor markets. Shortages of engineers and construction, skilled manufacturing and high-tech
workers are most often noted. The Boston and Dallas districts report that temporary employment
agencies are also having difficulties finding workers. The San Francisco district reports worker
shortages in the hospitality industry, but notes a surplus of financial-sector workers because of
consolidation in the banking industry. A survey of manufacturers in the Philadelphia district found
that about 40 percent plan to hire employees in the near term, while a survey of businesses in the St.
Louis district found that 20 percent are looking to hire.
Wages and Prices
Despite tight labor markets in nearly every district, nominal wage gains show no signs of
breaking out of the 3 to 4 percent range that has been cited in the last several reports. Pockets of
persistently upward wage gains associated with fast-growing sectors and regions remain, however.
In particular, wage pressures remain in the Chicago district but are most pronounced at the upper end
of the pay scale, while the Minneapolis and San Francisco districts report sector-specific wage
increases tied to the high-technology and aircraft sectors. The Dallas and Kansas City districts, on
the other hand, report a lessening of wage pressures.
iv
Aside from higher raw materials prices reported in a few districts, price increases at retailers
and manufacturers-both on the input and output side-have generally been temperate, as many
districts report that competitive pressures have stemmed price hikes. The Boston, Cleveland, New
York, Philadelphia and Richmond districts report that retail prices are "mostly flat" or "steady."
Moreover, in the Atlanta, Boston and Cleveland districts, wage and input price advances have been
offset or negated by increased productivity gains. Materials and finished goods prices have
reportedly accelerated in the Atlanta and Richmond districts; however, contacts suggest that these
increases may be temporary.
Construction and Real Estate
Most districts report strong residential and even stronger commercial real estate markets.
Contacts in the Minneapolis, Philadelphia, Richmond and San Francisco districts report increases
in single-family residential construction. Contacts in the Boston, Chicago, Cleveland and St. Louis
districts also report strong residential market conditions. Mild winter weather is credited for some
of the strength in the Boston, Philadelphia and Richmond districts, while poor weather is blamed for
moderate weakness in the Chicago and Dallas districts. The Atlanta and Kansas City districts report
little change in year-over-year construction activity. Sales of new or existing homes are reported to
be up in the Kansas City, New York, Philadelphia, Richmond and San Francisco districts. Slight
price increases, some due to increases in material prices, are reported in the Boston, Minneapolis,
Philadelphia, Richmond and San Francisco districts.
Commercial real estate markets continue to improve in most districts. Declining office
vacancy rates and rising rental rates are reported in the Atlanta, Dallas, New York, Philadelphia and
Richmond districts. New nonresidential construction is reported in the Atlanta, Dallas, Minneapolis,
v
Richmond and San Francisco districts. Contacts in the Chicago, Cleveland and St. Louis districts
also describe their commercial real estate markets as strong.
Banking and Finance
Loan demand conditions are decidedly mixed across districts, although more districts report
declining or steady loan demand than rising demand. The Dallas district reports little change in
overall demand since its last report, and the San Francisco district reports healthy overall demand.
Commercial and industrial (C & I) loan demand is reported to be strong in the Chicago district and
steady in the Atlanta, Cleveland and Philadelphia districts. The Kansas City, New York, Richmond
and St. Louis districts report slight declines in C & I loan demand. A number of districts continue
to report low margins and fierce competition among lenders for C & I loans; a contact in the
Richmond district characterized margins as "ridiculously low."
Consumer loan demand is reported to be increasing, but at a slower rate, in the Chicago
district and mixed or flat in the Atlanta and Cleveland districts. The Philadelphia, Richmond and
St. Louis districts report declines in consumer loan demand. There appears to be no consistent trend
in consumer loan quality; the Cleveland and New York districts report rising delinquencies, while
the Atlanta and San Francisco districts report improving consumer loan quality. Residential
mortgage demand is mixed. The Atlanta, Philadelphia and Richmond districts report increases in
residential mortgage demand, while the Kansas City, New York and St. Louis districts report
decreases.
Agriculture and Natural Resources
Other than weather-related cattle deaths in the Minneapolis district, increased profit margins
are the rule rather than the exception among livestock producers. For example, the Kansas City
vi
district reports that bankers expect wider margins for cattle and hog producers because of lower feed
costs. Increased cattle prices have also been noted in the Dallas and Richmond districts, buoying
producers.
In the natural resources industries, the Dallas, Kansas City and Minneapolis districts report
that their energy extraction industries are experiencing an uptick of economic activity; this has
occurred despite modest drops in crude oil prices. The Dallas and Minneapolis districts also report
higher lumber prices, which, in Minneapolis at least, have been passed on to builders.
Weather-related problems have and will likely continue to affect economic activity in many
districts. Severe winter weather in the Minneapolis district has reportedly hampered weight gains
in the cattle industry. The Minneapolis district also reports a potential for the worst flooding in
several decades because of substantial snowpack. Flooding and wind-related damage stemming
from severe winter storms in early March have also been reported in the St. Louis district.
I-1
FIRST DISTRICT - BOSTON
Business contacts in the First District are fairly upbeat at the beginning of 1997. Most retailers
report solid, sustainable sales growth, although a few sectors are weak. Manufacturers are seeing revenue
gains as well, with over half the contacts reporting sales 8 to 20 percent ahead of a year earlier. Input prices
and selling prices are mostly flat. Residential real estate continues to do well in New England and assets
under management continue to rise at investment management firms. Most contacts in all sectors say they
face tight labor markets for some occupations, but they cite only moderate increases in general wage levels.
Retail
A plurality of retail contacts report sales growth of 3 to 5 percent, a few percentage points greater
than expected. The building materials and home furnishings sectors are doing even better, with growth in
the 10 to 20 percent range. On the downside, apparel, discount, and appliance retailers report sales 3 to 8
percent below year-earlier levels. Inventories are generally in line with sales. With the exception of stores
selling building materials and home furnishings, which expect sales to grow 15 percent, and discount and
appliance retailers, who see ongoing consolidation contributing to continued losses, First District retail
contacts expect moderate, sustainable growth to continue through 1997.
Retail employment is reported to be fairly level, and most retailers are expanding capital
moderately. The exception is building materials and furnishings stores, which are expanding their work
forces and making major capital investments. All contacts report rising employee turnover and increased
difficulty replacing workers. Wages are said to be rising about 4 percent.
Respondents report that they are holding their prices steady, largely because competitive pressures
constrain their ability to raise them. Only the discount retail sector engaged in significant price cutting
during the last quarter (primarily to move product in the Christmas season). Profit margins are holding;
retailers say they are operating more efficiently in order to offset rising wage costs.
Manufacturing
Most First District manufacturing contacts report that recent sales are above the levels of a year
earlier, with just over one-half indicating growth as high as 8 to 20 percent. Strong gains are reported by
makers of automotive, general industrial, and computer equipment, as well as furniture. A couple of these
contacts expect to ramp up production in coming months to replenish stocks; another may have to turn down
work because of capacity constraints. Manufacturers note some signs of turnaround in commercial aircraft
and semiconductor markets. Medical sales are reportedly mixed, while markets for textiles and paper
remain quite flat.
Most contacts report that, overall, materials costs are flat or down somewhat. Costs for some metals
and furniture-grade lumber are rising, however. Selling prices also remain largely flat, except for small to
moderate increases for fabricated metals, industrial equipment, and paper products.
Only one-quarter of the respondents have made substantial net new hires over the past year; the
remainder report very little change in head counts. Most contacts anticipate only moderate increases in their
work forces in coming months, while describing capital expenditures as heavy or rising. About one-half
report delays in filling positions in information systems, engineering, technical sales, or finance. Wages and
salaries are mostly rising in the range of 2 to 4 percent but considerably faster for some computer-related
specialists; manufacturers generally do not view these increases as inflationary.
Manufacturers expect current business trends to continue for the remainder of 1997, although
several express concern that the strong dollar could damp exports, and a couple mention upcoming labor
negotiations as a potential challenge.
Temporary Employment Firms
Personnel supply contacts in the First District report 8 to 10 percent growth in revenues over the
year ending in December 1996, with each quarter's growth rate falling short of the previous quarter's. The
slowdown stems from worker shortages, as demand for qualified temporary labor continues to outpace
supply across all industries and occupations. Nonetheless, respondents estimate their New England revenue
I-3
growth to be several percentage points higher than nationwide averages. Most contacts have seen improved
overall performance in February 1997, and they expect revenues to expand at double-digit rates for the rest
of the year. These 1997 growth forecasts are higher than 1996 actuals, but lower than both 1995 actuals and
advance projections for 1996.
Respondents are feeling both wage and price pressures. Wages are rising at an 8 to 10 percent
annual rate. Yet, as temporary services firms attempt to pass these increases on to their client firms, they
face more aggressive price negotiations.
Residential Real Estate
The residential real estate market in New England continues to do well. While sales have increased
in some areas and remained unchanged in others, most contacts report more inquiries and other signs of
increased future activity. Mild winter conditions have contributed to the gains.
Massachusetts is doing particularly well, with 1996 showing the highest-ever annual increase in
residential sales. Despite this record increase in sales volume, house prices continue to increase at a slower
pace than during the 1987-88 real estate boom. Within Massachusetts, areas inside Route 495 are doing
best, while the Springfield area is weakest. Other states are also doing well. Southern Connecticut and
southern New Hampshire are reported to be very strong, and Maine and Vermont are both starting to pick
up.
Nonbank Financial Services
Investment management firms report that in the fourth quarter of 1996, assets under management
increased substantially over the previous quarter. However, assets were lower in December of 1996 than in
November of 1996. Sales were reported to be highest in stock funds, particularly growth funds and growth
and income funds. Most respondents increased employment in the fourth quarter and plan further
employment increases in 1997. Contacts report hiring difficulties and wage pressures in the markets for
computer programmers and equity analysts.
II-1
SECOND DISTRICT--NEW YORK
The Second District economy continued to improve since the last report, while price pressures
remained subdued. Major retailers report that sales were ahead of plan in January and February, helped
by mild weather and a week-long sales tax abatement in New York. Manhattan's commercial real estate
market continued to tighten in January, with office vacancy rates declining and asking rents beginning
to inch up. The market for both new and existing single-family homes has reportedly improved in early
1997, while activity in the multi-family segment remained steady at a fairly strong level. Consumer
confidence rose sharply, to a cyclical high, in February. Regional purchasing managers' reports were
mixed but, on balance, upbeat in the first two months of 1997. Finally, local banks report that overall
loan demand has been steady, while delinquency rates on consumer loans continued to edge up.
Consumer Spending
Most major retailers in the region report that sales were above plan in January and February,
with same-store gains ranging from 2 percent to the low double digits. Some attributed the strength to
unseasonably mild weather-in contrast with last year-as well as New York's "tax-free week" (Jan.
18-25) when state and most local sales taxes were waived on most apparel. This tax waiver reportedly
boosted January sales in New York State, especially in New York City. Moreover, New Jersey retailers,
many of whom ran concurrent promotions and discounts, generally reported that sales were on plan.
Premium apparel continued to be the strongest category, followed by accessories and cosmetics.
Sales of consumer durables were generally weak-most contacts report that home goods and electronics
continued to lag, but one contact noted a pickup in furniture sales, while another cited strong sales of
floor coverings.
One large discounter noted that customer traffic was normal, but that average
purchases were noticeably stronger. Two contacts noted particular strength in new (as opposed to
clearance-sale) merchandise. Most retailers report that inventories are in "great shape"; one contact
II-2
mentioned that stocks are a bit high but "cleaner" (more salable) than in 1996.
Retail selling prices remain steady. Although a number of contacts report that competition is
less aggressive than a year ago, retailers feel they have little if any ability to raise prices. However, the
gradual shift in product mix toward more upscale merchandise has helped to boost retail margins.
Construction & Real Estate
Manhattan's office markets continued to tighten in early 1997. The office availability rate for
Downtown fell from 23.1 percent at year end to 22.4 percent at the end of January; in Midtown, it edged
down from 13.4 percent to 13.2 percent; both are at new cyclical lows. Moreover, while asking rents
remain flat Downtown, they have begun to creep up in the tighter Midtown market. Compared to a year
earlier, rents were up 3.6 percent in January, versus a 1.9 percent rise for all of 1996.
Residential real estate markets have been steady to stronger in early 1997. Permits to build New
York City apartments, which rose sharply in 1996, remained high in January, suggesting brisk
construction activity in 1997. This, along with a wave of commercial-to-residential conversions, may
be alleviating the shortage of multi-family units somewhat-according to a large New York City real
estate broker, prices of prime Manhattan co-ops and condos have been essentially flat since last
summer, and were lower in December and January than a year earlier.
The single-family market appears to be gaining momentum. Sales of existing homes across New
York were up 5.7 percent from a year ago in January, with average prices up 5 percent. (Apparently,
the January 1996 sales pace was little affected by last year's blizzard.) In New Jersey, both realtors and
builders describe the housing market in January and February as stronger than in early 1996; in absolute
levels, existing home sales are reported to be fairly high, but new home sales are still quite low.
Other Business Activity
Regional purchasing managers reports were mixed in January and February. Buffalo-area
II-3
manufacturers report that growth in new orders and employment accelerated sharply in February, after
dipping moderately in January, while production activity accelerated in both months. However, New
York City purchasing managers report that the pace of business activity moderated in both January and
February. Prices were reported to be essentially flat in both the New York City and Buffalo areas.
Consumer confidence surged to a six and a half year high in February, though it was still well
below the national average. The impact of AT&T's recently announced reorganization plans remains
to be seen. Tourism reportedly remained strong in early 1997, with first-quarter hotel occupancy rates
projected to be up nearly three points from a year earlier; room rates continued to rise in early 1997,
though the pace has slowed from the 10-12 percent registered in 1996.
Financial Developments
According to a survey of senior loan officers at small and medium sized banks in the District,
demand for most categories of loans was substantially unchanged during the past two months.
However, there was some slowing of demand in the commercial and industrial sector and continued
weakness in the residential mortgage segment. Loan refinancings were down, on balance, with 26
percent of banks reporting a decline and just 11 percent reporting an increase. On the supply side, most
lenders reported no change in their willingness to lend or in their credit standards.
Interest rates on most categories of loans were unchanged. The exception was residential
mortgages, with 34 percent of banks surveyed reporting lower rates and only 6 percent indicating higher
rates. Average deposit rates rose, with 32 percent of respondents reporting higher rates and only 11
percent indicating declines. Delinquency rates on consumer loans continued to edge up-they were
higher at 30 percent of banks and lower at 20 percent; however, delinquency rates on nonresidential
mortgages were lower than in the prior survey.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports received from Third District business contacts in February were mixed but, on
balance, indicated some slight improvement in economic activity. Manufacturers posted gains in
orders and shipments and reduced inventories. Department stores and discounters boosted sales
in February, compared with the previous month and a year ago, through widespread price
reductions, but small retailers generally did not experience any increases. Most auto dealers
reported steady rates of sales during the month. Bank lending appeared to ease a bit as business
loan volume remained nearly steady and a decline in consumer credit more than outweighed an
increase in residential mortgage lending. Real estate markets have shown some improvement.
Demand for office space has been reducing vacancy rates and giving some upward impetus to
rents, according to property managers in the region. Residential real estate agents noted a recent
pickup in sales of both new and existing homes, but they said price appreciation has been very
slight. Home builders also noted increased demand but said buyers are cautious about prices.
MANUFACTURING
Manufacturers in nearly all the Third District's major industrial sectors reported
improved business in February. New orders increased at more than a third of the plants polled.
The strongest gains were noted among producers of metals and metal products and chemicals; in
contrast, apparel and furniture makers indicated a drop in demand during the month. Overall,
area manufacturers stepped up shipments and reduced inventories.
Employment at Third District plants has been steady, but the number of companies that
III-2
plan to add workers has risen recently. Around four in ten of the firms that commented on
employment plans said they intended to add workers by the middle of the year, while only one in
ten planned to reduce employment.
Industrial prices in the region have been mainly steady. Around three-fourths of the
manufacturers reporting on prices indicated that both input costs and output prices have not
changed since January. While there were slightly more reports of rising than falling prices,
manufacturers continued to note that their ability to set prices for their products was countered by
foreign competition. Suppliers to the automotive industry also noted continuing pressure from
their customers to limit or reduce prices.
RETAIL
Retailers in the region gave mixed reports for February. Department stores and large
discount chains indicated sales were strong but price cutting was pervasive. According to store
executives, aggressive marketing applied to spring goods across the board and was not a
response to inventory levels, which were generally described as lean. In contrast to chain stores,
small specialty retailers said their sales were merely even with or slightly below year-ago levels,
in dollar terms.
Comments from retailers suggested that consumer confidence is relatively buoyant, and
the early discounting of spring merchandise is primarily a competitive tactic rather than a
response to slow sales. Few retailers seemed concerned that the early push for spring sales
would result in lower than usual sales later in the season, but some did say that price-cutting
might limit profitability in the current quarter.
Most of the auto dealers contacted for this report said sales ran at a level pace during
III-3
February, although a few said sales of some popular sport sedans increased. Inventories were
generally described as ample but not high.
FINANCE
Total loan volume outstanding at large Third District banks eased a bit in February.
Gains in residential mortgage lending were being more than offset by declines in consumer
lending. Bankers generally indicated that the drop reflected a seasonal paydown in credit card
balances; however, some bankers believe that when net growth in borrowing resumes it might be
slower than in the past few years because of the implementation of more restrictive credit
standards on both new and existing accounts. Commercial loan volumes have fluctuated since
the beginning of the year but have shown little overall change. Bankers interviewed in February
foresee just slight growth in the months ahead, mainly from local middle market companies. In
general, bankers expect commercial lending to just track the region's economy, which they
anticipate will grow slowly.
REAL ESTATE AND CONSTRUCTION
Commercial real estate agents in the region said markets were improving as 1997 began.
Office vacancy rates were estimated to range from 9 to 16 percent in suburban office markets,
and they were falling while rental rates were moving up. In the Philadelphia central business
district, the vacancy rate has not shown much improvement, although rents were firming. In both
the city and suburbs, demand for Class A space was much stronger than demand for lower
quality space. In a few tight suburban markets, Class A rents were said to have risen by around
$1 per square foot in the past three months and, at $20 per square foot, just exceeded rates for
similar space in the Philadelphia central business district. Demand for industrial space remained
III-4
strong throughout the region, although construction has been keeping pace with new demand,
leaving vacancy rates and rents nearly steady.
Residential real estate agents and home builders also reported some signs of increased
activity in February. Realtors said sales of both new and existing homes were picking up faster
than they had anticipated. They cited a variety of explanatory factors: improved consumer
confidence, relatively low and steady mortgage interest rates in the first two months of the year,
and mild weather. Builders generally, though not unanimously, said they were signing a growing
number of contracts for new homes in a variety of price ranges. Realtors noted that price
appreciation for existing homes has been very slight, and builders indicated that competition
among contractors and price resistance on the part of buyers were limiting their ability to raise
prices.
IV-1
FOURTH DISTRICT - CLEVELAND
General Business Conditions
Business conditions remain good overall, although little net growth has occurred
since the last District report.
Unemployment is holding steady at a low level in most areas, and reports of labor
shortages persist, especially in central and southwestern Ohio and northern Kentucky.
Indeed, unemployment in central Ohio fell to a 27-year low at the end of 1996. In the
Dayton area, labor shortages have reportedly pushed the pay for unskilled workers one
dollar or more above the new federally mandated minimum. In southwestern
Pennsylvania, an area that has lagged the District over much of the current business
expansion, the unemployment rate has recently dipped about 1/2 percentage point below
the national average. A spurt in new business incorporations last year is reportedly a
contributing factor in the area's recent economic rebound. A small rise in joblessness
among construction workers earlier this year appears to have improved substantially with
the relatively warm temperatures of the past month.
According to District employment agencies, hiring of temporary workers increased
in the beginning of 1997 at a greater pace than a year ago. Some occupation mismatch
was noted. For example, while workers with office computer skills were plentiful, lowskilled workers for data entry, accounting, and receptionist positions were scarce. One
contact indicated difficulties finding machinists and welders, perhaps due to a reduction in
training programs. Most agencies report that persistent labor
IV-2
shortfalls have made corporate clients more agreeable to higher pay scales. Indeed, the
rate of wage growth has been steadily increasing over the past year.
District real estate markets remain strong after a very good performance in 1996.
One real estate professional characterized the housing market in southwestern Ohio and
northern Kentucky as "extraordinary." In the commercial real estate area, the availability
of office space in central Ohio is well below the national average, and vacant industrial
space in Cincinnati is virtually nonexistent.
Manufacturing
Industrial activity is holding steady, and most respondents describe it as strong.
Employment, production, and orders are all similar to those noted in the last District
report. Steel orders and production have been good, although imports have increased.
Capital goods producers indicate continued strength in new orders from domestic and
foreign sources. Even heavy truck manufacturing, which retreated in 1996, has begun the
year with a solid rise from the fourth quarter of last year. The dollar's recent runup in
foreign exchange markets has had a negligible impact on foreign orders.
Price reports from industry continue to show little overall increase, with improved
productivity accounting for any profit gains. Two sources noted that manufacturing wage
growth had stepped above the 3 percent level, although these expenditures have also been
matched by higher productivity.
IV-3
Retailing
District retailers report mixed results for January and February, but give no
indications that retail conditions have changed significantly since the previous District
report. Spending activity during the two February holidays was thought to be about
average. However, expectations for the first quarter as a whole are positive, and retailers
are expecting sales to exceed last year's. Household supplies and better apparel items are
considered to be selling particularly well, while electronics, furniture, sporting goods, and
general apparel are not. Retailers indicate that prices are stable and that inventories are in
good to excellent condition.
Auto Dealers
District auto sales slowed in February after a strong performance in January.
Nonetheless, dealers remain optimistic about spring sales prospects and report that
showroom traffic and general consumer interest have been strong. A few dealers stated
that instances of insufficient equity and bad credit have increased. Leasing growth appears
to have leveled off. While most dealers reported inventories slightly above desired levels,
others noted limited supplies of specific models that were selling unusually well.
It is too early to gauge the full impact of a work stoppage at a major automobile
supplier which temporarily idled 3,000 workers at a District auto assembly plant.
However, area auto dealers expressed some concern about the shortage of a popular
model that was caused by the strike.
IV-4
Banking and Finance
Lending activity in the District was mixed by category and region during the first
two months of the year. Commercial loan demand across the District ranged from good
to disappointing. Of the banks reporting lower-than-expected commercial lending, one
noted that a strong economy has allowed some firms to finance borrowing needs
internally. Consumer borrowing trends have been flat throughout the District, with any
growth attributed to seasonal demand.
Competition for borrowers is still sharp, although most respondents indicated that
the spread between borrowing and lending rates has stabilized. Credit unions are
emerging as a competitor for many community banks, particularly with regard to auto
loans.
Credit standards this year are holding steady in most areas and have tightened for
credit cards. Commercial loan quality is seen as very good, but consumer credit quality
has deteriorated slightly due to heavier debt loads. Most District bankers feel that they
have seen the worst of the recent rise in loan delinquencies. However, several respondents
indicated that bankruptcies continue to increase. Despite competitive pressures and a rise
in delinquencies, major District banks reported strong profits in 1996.
FIFTH DISTRICT-RICHMOND
Overview: Economic activity in the Fifth District continued to advance at a moderate
pace in late January and February. Retailers said that after seasonal adjustment, sales
increased at the fastest rate in several years. Service sector growth picked up sharply and
tourism strengthened. Activity surged in both commercial and residential real estate. On a
weaker note, District manufacturing output slipped somewhat and the volume of cargo
moving through ports declined. In the financial sector, demand for consumer and
commercial loans weakened slightly but mortgage demand strengthened. Employers
continued to report difficulty filling vacant positions and indicated that wage pressures
became more pronounced. Price pressures continued in most sectors although retail price
increases moderated.
Retail Trade: District retailers reported that their seasonally-adjusted January and
February revenues grew strongly, particularly at restaurants, pharmacies, and building
materials stores. Apparel sales were steady and auto sales decreased modestly. Other retail
indicators such as employment, shopper traffic, and wage levels remained strong. Contacts
noted that their prices rose somewhat more slowly in recent weeks. Retailers' outlook
remained bright; they expected demand for their products to increase during the next six
months.
Services: Service sector revenues grew more quickly since the last Beige Book
report, especially in health services, wholesale trade, and business services. However,
contacts indicated that revenue growth slowed in transportation, communications, and public
utilities. Employment and wage growth was more pronounced in recent weeks. Wage
pressures were stronger in wholesale trade and business services but slackened considerably
in health services. Contacts reported that their prices rose in recent weeks and they expected
demand for their services to increase over the next six months.
Manufacturing: Activity in the District's manufacturing sector declined modestly.
Durable goods producers indicated that shipments fell somewhat during the past six weeks
although new orders changed little. Employment declined slightly as manufacturers faced
increased employee turnover and experienced greater difficulty locating qualified workers.
V-2
Contacts reported more widespread labor shortages, particularly in the textile and industrial
equipment sectors. Several firms indicated that the productivity of their new hires was
unusually low; one manufacturer in South Carolina said that his firm had to provide more
training "for those [workers] that don't learn as fast." Prices for finished goods and raw
materials grew at slightly faster rates than in December, but respondents expected these
prices to ease during the next six months.
Tourism: Tourism strengthened in late January and February. Respondents indicated
that unseasonably warm weather boosted activity in coastal areas. One hotelier from the
Outer Banks noted that her resort was "booked to capacity" on weekends. Despite the mild
weather, contacts from Fifth District ski resorts reported that the number of visitors was
approaching last year's record level; however, many apparently came to tee off rather than to
ski. A contact at one popular ski resort said that March bookings looked very strong.
Ports: Representatives at District ports indicated that both imports and exports were
lower in January than in December, but remained above year-ago levels. Most port contacts
continued to expect higher volumes during the next six months, with exports outpacing
imports.
Temporary Employment: The demand for temporary workers increased further in
recent weeks; one placement agent in West Virginia described demand as "running about
twice normal." Labor markets remained tight and contacts noted that applicants with
computer skills continued to be in short supply. Several respondents reported that firms
were increasingly turning to temporary employment agencies to fill permanent positions.
Finance: In recent weeks commercial and consumer loan demand weakened
somewhat while mortgage loan demand strengthened. Contacts said mortgage lending was
"surprisingly strong for this time of year," and several reported renewed interest in
refinancings. Competition for commercial loans remained strong; one banker noted that
margins had become "ridiculously low." Respondents indicated that the quality of consumer
loan applicants had deteriorated in recent weeks. A North Carolina contact reported that his
bank tightened credit standards for unsecured and automobile loans.
Residential Real Estate: Residential real estate activity accelerated in late January
and February, fueled primarily by unseasonably warm weather. In general, Fifth District
V-3
contacts reported a surge in customer traffic and moderate increases in housing starts, sales,
and permits. A realtor in the Washington, D.C., area remarked that "the market is
tremendously active," while another respondent there noted that "business is booming." A
Charlotte, N.C., homebuilder said that despite his attempts to avert a backlog of orders by
aggressively raising sales prices, his homes were still selling. Overall, contacts reported that
wages, materials costs, and home prices had increased slightly.
Commercial Real Estate: Commercial real estate activity continued to escalate since
our last report. The leasing of office, retail, and industrial space accelerated in all
jurisdictions except Virginia, where it remained at a brisk pace. Vacancy rates continued to
fall except in North Carolina, where they were pushed higher by an increase in new space
coming to market. Respondents across the District reported increased new construction; one
North Carolina contact remarked that there was "so much dirt [from construction vehicles]
on the road it was impossible to keep a car clean." The market for prime office space
remained tight, and several contacts reported shortages in their areas. Rents rose in most
jurisdictions, and one District of Columbia contact noted that "concessions are drying up."
State Revenues: State revenues increased at a slower pace in recent weeks. General
fund collections grew more slowly in all jurisdictions except the District of Columbia and
Virginia. Virginia's increase primarily reflected large gains in withholding tax collections.
Agriculture: Agricultural analysts indicated that weather conditions had varied
effects on District farming activity. While wet weather this winter had delayed field
preparation in the District, drier weather in recent weeks allowed farmers to catch up on
scheduled activities somewhat. In contrast, milder-than-normal weather and adequate hay
supplies aided livestock producers. Rebounding cattle prices increased producers' optimism
about future profitability; one respondent said that "the tide has turned."
VI-1
SIXTH DISTRICT - ATLANTA
Overview: The Southeastern economy continues to expand moderately in mid-winter,
according to most contacts. Merchants report satisfactory sales and inventory accumulations, but
they are cautious regarding spring sales and anticipate only marginal increases from a year ago.
Contacts report increasing manufacturing activity for most sectors, although weakness persists for
some apparel and textile producers. Tourism and convention activity continues at high rates, and
officials report strong spring bookings. Reports on single-family home sales remain mixed, while
commercial real estate markets are improving, and new development is accelerating. Bankers note
moderate loan demand with quality improvements reported throughout the District. Although low
unemployment rates in parts of the District are making it difficult for some employers to find
qualified workers, wage increases have been relatively stable, according to most contacts. A late
January freeze damaged crops in Florida, but the citrus crop was mostly spared.
Consumer Spending: According to most District retailers, sales during January were up
significantly, while up only slightly during the early part of February on a year-over-year basis. The
majority of retailers reported that recent sales have met their expectations, and that inventories are
on target. Apparel sales continued to be extremely strong; cosmetics and home-related product sales
also made strong showings throughout most of the District. Looking forward to spring sales, most
retailers remain cautious, anticipating only slight increases over last year.
Construction: According to real estate contacts, single-family home sales were uneven in
the District on a year-over-year basis in January and early February. Construction was generally flat.
A majority of real estate contacts report that inventories of unsold homes are adequate for expected
sales. A notable number of Realtors said that inventories were too low in their area of the region,
VI-2
but few Realtors reported overbuilding. Realtors expect an increase in first and second quarter
homes sales compared with a year ago, while builders anticipate home building will remain close
to year-ago levels.
Contacts generally report that commercial real estate markets continue to improve. Declining
vacancy rates and higher rental rates are propelling new industrial, office, and retail development
in much of the District. Although most commercial projects are build-to-suit, a growing number of
speculative projects are underway and more are anticipated this year. Overall, the multifamily sector
remains healthy.
Manufacturing: Manufacturing appears varied but generally positive at this time, according
to factory contacts. Automotive suppliers are expanding and their exports are increasing, resulting
in overtime for employees. The lumber industry is picking up in parts of the District, and orders are
increasing for machinery producers and food processors. Job rolls are expanding in Louisiana's
energy extraction industries where suppliers say foreign sales have been especially strong.
Shipbuilders in Mississippi report new contracts, and development of industrial projects continues
at a rapid pace in northern Tennessee. Less positively, paper company contacts report no significant
diminution of an extended wood pulp glut. Further closings of textile and apparel plants in response
to foreign competition continue to be reported for parts of the region.
Tourism and Business Travel: The tourism and convention sector posts mostly favorable
reports. Reservation trends are strong for south Florida resorts, hotels, and motels, with advance
bookings up from a year ago. Tourism is also off to a good start in central Florida this year, with
increasing airline passenger growth and packed theme parks. Convention activity is picking up in
parts of the region; Huntsville recently hosted the largest convention in its history, and the
VI-3
Supershow sports show in Atlanta attracted about 110,000 visitors. Less positively, gaming
revenues for some Mississippi casinos are down slightly from a year ago as a result of new capacity
coming online. The Super Bowl was a success in New Orleans, filling hotels to capacity; in contrast,
preliminary reports suggest that Mardi Gras didn't attract as many visitors as a year ago.
Financial: Most banking contacts continue to report a moderate level of overall loan
demand. Consumer loan demand varied across the region, while commercial lending remained flat
in the last few weeks. Mortgage demand is accelerating slightly over January's levels but is flat
compared with last year. Loan quality continues to improve across the District.
Wages and Prices: Contacts report that current wage increases appear to be moderate.
However, reports of worker shortages for specific industries continue. In Louisiana, contacts note
shortages of crews needed to work on offshore drilling rigs. Upper management and information
systems personnel remain in high demand in parts of the region, although the overall paucity of
well-qualified candidates has reportedly eased somewhat compared with several months ago. Some
firms cite low unemployment rates as making it difficult to expand their operations. Contacts also
note higher current prices for materials and finished goods; however, they look for price stability
over the longer term.
Agriculture: The late January freeze severely damaged some crops in Florida. Hardest hit
was Dade County where it is estimated that losses to the winter vegetable and tropical fruit crops
could amount to $93 million. Total losses across the state could reach $250 million. The citrus crop
was not as adversely affected by the freeze.
VII-1
SEVENTH DISTRICT-CHICAGO
Summary. The Seventh District economy continued to expand at a modest rate in
January and February, though it lost some momentum from late last year. Growth in
consumer spending was in line with national averages, but below most retailers'
expectations. Housing and construction activity slowed slightly more than the normal
seasonal downturn. Manufacturing activity remained at robust levels, but reports of change
in activity were mixed. Lenders continued to tighten credit standards for consumer loans
while competition was forcing them to ease standards for business loans. Labor markets
remained very tight and wage pressures continued to mount, although productivity gains
were reportedly keeping pressure off prices.
Consumer spending. Retail sales in January and February were moderately above
year-ago levels, but slightly below most retailers' expectations. Post-holiday sales did well
in January but results were mixed in February. Many contacts felt that severe winter weather
may have hampered sales in some areas. Apparel sales, both men's and women's, continued
to outpace overall gains and home electronics sales reportedly rebounded from a somewhat
soft holiday season. While promotional activities were used by some merchants to deal with
excess stock, most felt that inventories were in line with sales expectations. One large
retailer indicated that early spring sales were strong and cited new spring fashions, favorable
weather, and customers being "in a buying mood" as contributing factors. However, another
major department store chain described February sales in the Midwest as "lackluster" with
home appliance sales notably weak. Overall, however, most retailers felt that post-holiday
and early spring sales were doing well, with Midwest sales about in line with those of the
nation.
Housing/construction. Overall construction activity fell off slightly more than is
normal for January and February, but most contacts reported that markets remained strong.
New home construction and sales were adversely affected by the relatively harsh winter
weather through much of the District. Most builders experienced a greater-than-seasonal
VII-2
decrease in single-family home sales while noting that the decline was "nothing to worry
about." However, home builders in eastern Michigan expressed concern over a sharp drop in
permits so far this year. Builders associations in two of the District's largest metro areas
reported that condo and loft renovation activity in the central cities remained very strong,
with one stating that the residential construction market was "the best in the last 10-15
years." Commercial construction activity was strong in the first part of the year, mainly in
suburban areas. Cement dealers reported that demand remained high and most were
anticipating this strength to carry over into the spring in practically every building category-infrastructure, residential, commercial and industrial.
Manufacturing. Manufacturing activity generally remained high in the District,
though some signs of slowing were reported. Responses to purchasing managers' surveys for
January and February were mixed, with some suggesting a modest pickup in activity and
others indicating a slowing pace of expansion, especially in western Michigan. An analyst
for the steel industry noted that, while steel demand remained strong in January and
February, its forward momentum appeared to be gone. A machinery equipment producer
reported that orders for the first quarter were up from a year ago, but much less than expected
given the relative strength in the economy. Most of this company's growth in orders was
accounted for by the aerospace industry. A maker of electrical components for industrial
usage stated that the unexpected strength they experienced last quarter had subsided. An
agricultural equipment manufacturer noted that, while demand remained strong, production
increases were constrained by the company's reluctance to add permanent workers. A major
producer of home furnishings reported that demand was strong in January and February and
showed no signs of softening. Several contacts in the heavy-duty truck industry noted
continued improvement in truck orders. However, the industry is benefitting from a return to
seasonal buying patterns that were absent last year when backlogs were already high.
Banking. Conditions in the banking industry seemed to be divided by customer
segment in the early part of the year--with standards being tightened on the consumer side
and eased on the business side. Most banks reported that consumer demand remained strong
but year-over-year gains in lending were smaller than previous months as a result of
VII-3
tightening standards. One banker noted that approval rates on consumer loans had dropped
from 50 percent late last year to 20 percent so far this year. One large bank noted a switch by
consumers to home equity loans that seemed to be driven by debt consolidation. Growth in
business loans was reported by most bankers to be greater than on the consumer side. While
most contacts indicated that industrial loans were primarily driven by equipment purchases,
one stated that high production volumes were pushing some manufacturers to seek working
capital loans. However, a small bank noted a drop-off in merger and acquisition loans since
the beginning of the year. While one small bank reported strong C&I loan demand, growth
had slowed in recent months largely because their two largest customers had pulled back
their borrowing. Several bankers attributed some of the slowdown in their business lending
to the emergence of alternative sources of funds. Virtually every bank contacted indicated
that fierce competition was causing margins to narrow and concessions to be given in order
to make business loans.
Labor markets. The District's labor markets changed little since our last report,
remaining very tight with total employment growth lagging that of the nation. Respondents
to purchasing managers' surveys from around the District suggest that the slow decline in
manufacturing employment continued through the first two months of 1997. Several
contacts indicated that the tight labor markets may be restraining the region's economic
expansion. The average unemployment rate in the five District states ended the year at a
seasonally adjusted 4.2 percent and there is no evidence suggesting any significant
slackening in the labor markets in January or February. Shortages persisted in the technical
fields (engineering and information technology) and one contact reported that building
contractors in Michigan had resorted to recruiting at competitors' construction sites. Several
contacts indicated that the upward pressure on wages noted in our last report had persisted.
While wage pressures were reported to be broad-based across occupations, they were most
severe at the upper end of the wage scale. One contact at a national staffing firm argued that
any wage gains were being offset by increased productivity. Moreover, there were no reports
of any discernible movement in prices as a result of labor cost increases.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
The District economy continues to operate at a high level. Contacts report little or no change
in the level of economic activity since the last report and continue to be optimistic about the near
term. Labor markets remain tight in much of the District. A few contacts noted some slowing of
sales at the beginning of the year, but are now seeing renewed growth. Tornadoes and severe
flooding ravaged much of Arkansas and parts of Kentucky; effects on economic activity are still
unknown. Residential construction in 1996 was stronger than a year earlier in most areas, despite
the usual slowing at the end of the year. Commercial construction remains strong. Loans
outstanding at large District banks have declined slightly since the start of the year. Surveys of
District employers indicate that prospects for employment gains, although mixed, are expected to
be less favorable in the second quarter of 1997 compared with the same period in 1996. State sales
and income tax receipts for the last three months of 1996 showed strong growth compared with the
last three months of 1995.
Manufacturing and Other Business Activity
Overall, District contacts report little change in sales and employment levels since the last
report and remain optimistic about their near-term prospects. Contacts are concerned that continued
tight labor markets will hamper their ability to hire new employees. Construction workers are very
scarce, especially in southern parts of the District.
Many contacts report stable sales levels overall since the beginning of the year, although
some experienced a slight slowing early on that appears to be reversing itself. For example, a
contact in the heating and cooling industry reports that orders have recently slowed somewhat, but
the industry is currently building inventory for the upcoming cooling season, its strongest season.
VIII-2
A firm that manufactures oil reclamation equipment is seeing orders delayed because of bottlenecks
and postponements by its customers, many of whom are overseas. Several contacts, particularly
from the poultry processing industry, report temporary production delays, as ice and extremely cold
temperatures earlier this winter prevented employees and deliveries from reaching plants. The
furniture industry reports strong sales, especially for wood furniture. The District's apparel industry,
however, continues to shrink, as additional shirt and shoe makers move their production to Mexico
and southeast Asia.
Storm Damage
Many tornadoes struck Arkansas, leaving much devastation in their wake, and severe rains
flooded parts of western Tennessee and northern and western Kentucky, including the Louisville
area. Damage estimates and the impact on short-term economic activity are not yet available.
Real Estate and Construction
Residential real estate markets showed their usual slowing in December. Only two of the
District's 12 metropolitan areas had increases in the number of permits issued in December.
Overall, though, 1996 was a good year in most markets, with eight metro areas experiencing more
building than the year before. In many areas, real estate agents report record levels of sales for 1996.
Commercial construction continues to be strong around the District. One banker noted that
applications for commercial real estate loans were up substantially.
Banking and Finance
Total loans outstanding at six large District banks have declined 1.2 percent since the start
of the year, after increasing 0.4 percent over the same period last year. All major categories show
declines, with consumer loans dropping the most, 0.8 percent. Commercial and industrial loans have
declined 0.2 percent, after rising 2.1 percent during the same period a year ago. Real estate loans
have dropped by 0.5 percent, following a 1.2 percent increase a year ago.
VIII-3
Employment Outlook
Compared with the same period a year earlier, Manpower's second-quarter employment
outlook survey depicts a mixed bag for major Eighth District cities. Employers in Little Rock were
the most upbeat, with nearly half of surveyed firms planning to add to their payrolls, and none
anticipating reductions. Prospects were somewhat less ebullient in Memphis, as the same percentage
of firms plan to increase hiring this year compared with last; however, those planning workforce
reductions have dropped modestly. The outlook was decidedly less upbeat in Louisville and St.
Louis, with a far lower percentage of Louisville firms planning workforce additions, while a
somewhat greater share of St. Louis firms are planning reductions compared with a year earlier. In
general, employment prospects appear more favorable for those in nonmanufacturing than
manufacturing industries.
A separate survey of District small businesses confirms this cautious outlook: Slightly more
than 20 percent of firms plan to increase their payrolls in the second quarter, which is modestly
smaller than the nearly 25 percent that reported they would last year. For the most part, employment
prospects at retailers are more favorable than they were last year at this time, while those in the
manufacturing and construction sectors are more uncertain.
State and Local Finances
State sales and income tax receipts showed fairly robust growth over the last three months
of 1996 compared with a year earlier. Nominal District sales tax receipts (a seven-state total) over
the last three months of 1996 were running a little more than 7 percent above the last three months
of 1995, with receipts from Illinois, Indiana and Tennessee exhibiting the largest increases. District
income tax receipts, on the other hand, showed slightly less growth, increasing by a little less than
7 percent over the last three months of 1996 vs. a year earlier.
IX-1
NINTH DISTRICT--MINNEAPOLIS
Despite record snowfalls and severe cold, the pace of the Ninth District economy apparently is
quickening. Construction and oil drilling are equal to or ahead of year-earlier levels.
Manufacturers generally report continued good business, if anything stronger than at the close
of 1996. Retail sales of general merchandise and vehicles reportedly picked up in January and
February after a subdued holiday season. Tourism reportedly has improved somewhat in recent
weeks. Labor markets remain very tight, with reports of substantial pay increases for some
computer and engineering specialists. But there are few reports of higher prices for goods or
for inputs other than natural gas and lumber.
On the down side, the severe winter has been costly to agriculture. Output and employment
at gold mines and oriented-strand board plants may be reduced due to declining product prices
and large inventories.
General business and economic conditions
Confirming anecdotal reports of a strong economy, the state of Minnesota projects a $2.3
billion surplus for the upcoming fiscal biennium due to extremely strong tax revenues and low
welfare and unemployment outlays. This is up from a preliminary $1.4 billion projection made
only weeks earlier. Most other district states also are in good fiscal positions.
Construction and real estate
"Housing market explodes," headlined a special report in a west-central Wisconsin newspaper
which predicted "activity expected to remain strong." In Sioux Falls, S.D., the value of January
building permits was nearly twice that of a year earlier, and builders expect 1997 to be even
better than 1996. For the Minneapolis-St. Paul metropolitan area, new home permits for
January were up slightly from a year earlier, a time when building already was at a fast pace.
News reports on higher lumber prices noted that this factor was pushing up the cost of new
homes, but that higher prices were doing little to dampen new construction orders.
Construction of two major office buildings was announced recently in Minneapolis. Three
large employers leased office space in downtown St. Paul, significantly lowering vacancy rates.
Natural resource industries
The North Dakota oil boom, which continues at an active pace in spite of a bitter winter, has
extended to Montana, where the rig count is about twice that of a year ago. Iron mining is
straining against the constraints of harsh weather to meet desired shipments. Lumber mills in
IX-2
the western portion of the district are profitable as the result of higher lumber prices, but output
continues below levels of a few years ago due to decreased sale of timber from federal land.
Sources in the paper industry also report stronger prices and output after a slump in 1996.
On the negative side, some Montana gold mines are expected to slow output in 1997 due to
low prices. And a major producer of oriented-strand board announced it will lay off 500
workers at three plants for at least two weeks in March because of growing inventories and
falling prices. The phenomenon of sharply higher dimension-lumber prices coinciding with
lower building board prices occurred because the latter product has not been subject to the same
supply limitations as saw timber.
Manufacturing
"Business boom underway," headlined a Houghton, Mich., newspaper's description of the
expansion of light manufacturing in its area. "Business has been extremely good," reports the
owner of a North Dakota aluminum extrusions producer. In a similar vein, Minnesota
manufacturers of bolts and other fasteners, of air filtration equipment, and of industrial painting
and lubrication equipment reportedly expect strong growth in 1997. In Butte, Mont.,
construction of a $465 million silicon plant is well under way and should employ 165
production workers in mid-year. Overall, Ninth District manufacturing appears hale and hearty,
with generally good sales and few price pressures on the input side. Inventories are described as
normal, and no delays or bottlenecks in delivery of inputs are apparent. Securing skilled labor
is the only problem commonly reported by manufacturers. A steel firm describes sales as
"moderate, but stronger than three months ago."
Agriculture
"You are continually tired, it just never lets up," is how one South Dakota farmer describes the
challenge of caring for livestock in the most severe winter in decades. Many cattle have died,
including at least 40,000 head in South Dakota, or 2 percent of that state's beef herd. Many
farm buildings have collapsed due to abnormal snow loads. In Minnesota, over 5,000 farm
buildings have been damaged or destroyed, and the number is thought to be similar in the
Dakotas. Most farmers have unusually high fuel expense for snow removal, and livestock
weight gains and general condition are poor. Hay prices are well above normal levels in many
areas. Looking ahead to warmer weather, federal hydrologists warn that the potential for
flooding in many areas is the highest in decades.
IX-3
Consumer spending
After a somewhat restrained holiday season, several retailers reported much stronger sales in
January, but at very thin margins. One Montana mall reported January sales up 26 percent
compared to the same period in 1996. This pattern of stronger January sales is confirmed by
mall managers in other district states, although traditional Main Street retailers in western
Minnesota and in North and South Dakota complain of disruption of sales by successive winter
storms.
"Dealers have sold a ton of pickups," reports one South Dakota source. Other industry
spokespersons describe a pattern similar to general merchandise sales, that is general
improvement in spite of episodic slow periods due to bad weather.
Tourism and recreation
"Things are looking good," reports a northern Wisconsin tourism official, citing favorable snow
conditions for snowmobiles and cross-country skiing. After a slow start, tourism and
hospitality firms report some improvement in several areas. January tourist-related tax receipts
were up 11 percent in western South Dakota compared to a year earlier A Minnesota ski resort
owner describes business as moderately good in spite of increasing nationwide competition in
the sector and adverse demographic trends.
Employment, wages and prices
"It got crazy right after New Years," reports the CEO of a software firm with operations in
Wisconsin and Minnesota. "Other companies are paying up to $25,000 additional per year to
pirate programmers away from my company." This phenomenon, confirmed by other sources
in the software industry, is attributed in part to mushrooming attention to the "Year 2000"
problem in much existing software. "It's becoming a feeding frenzy," says another source.
While no other sectors report the 20 percent to 50 percent increases offered to skilled
programming specialists, the market for technical specialists remains very tight. A Minnesota
electronic device and instrument firm reportedly is offering $5,000 signing bonuses plus pay
approaching $40,000 to engineering majors who will receive their B.S. degrees in June.
Despite tight labor markets, there are few reports of increasing prices at producer or
consumer levels. One exception is natural gas, cited by many industrial firms such as foundries
and glass factories that use this resource for process heat.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The district economy continued to grow moderately last month. Retail sales
increased, manufacturing activity remained strong, and energy activity improved. Construction
activity generally held steady. In the farm economy, the winter wheat crop remained in good
condition, and an improved outlook for the cattle industry slowed liquidation of district cattle
herds. Labor markets remained tight in much of the district, although there were fewer reports of
wage increases than in previous months. Prices were generally stable at the retail level and for
materials used in manufacturing and construction.
Retail sales. Retailers report sales increased last month and were higher than a year ago.
Sales of apparel were strong, especially men's clothing. Total sales are expected to increase
moderately in the coming months. Retailers have been trimming their inventories but report they
are generally satisfied with current stocks and plan no major changes in the next several months.
Automobile dealers report sales were up slightly last month and expect sales to increase
somewhat in coming months. Sales of light trucks and sport utility vehicles remained
particularly strong. Dealers have been holding inventories steady but expect to expand stocks
somewhat in the next several months to meet increased sales.
Manufacturing. Manufacturers continued to operate at moderately high levels of
capacity last month. Manufacturing materials were generally available, with lead times holding
steady. Manufacturers have been trimming their inventories, and some say they plan further
reductions because stocks exceed desired levels. A quarterly survey of district manufacturers
indicated that production, shipments, and new orders all increased modestly from December to
January.
X-2
Housing. Builders report housing starts generally held steady last month and were
unchanged from a year ago. Builders expect construction activity to improve somewhat in the
coming months. Sales of new homes increased last month. Most building materials were readily
available and delivery times were normal. Mortgage lenders say demand last month was
unchanged.
Banking. Bankers report that loans decreased and deposits increased last month,
reducing loan-deposit ratios somewhat. Commercial and industrial loans, home mortgage loans,
and residential construction loans declined, while agricultural loans edged up. Increases in
NOW accounts and money market deposit accounts contributed to the rise in deposits.
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. Lending standards were unchanged at most banks.
Energy. District energy activity improved last month. Oil and gas prices fell somewhat
but remained well above year-ago levels. The high prices helped boost the district rig count 10.2
percent in February to a level 27.5 percent higher than a year ago.
Agriculture. The district winter wheat crop remains in good condition. Growing
conditions have been favorable recently, with much of the crop receiving either a protective
cover of snow or beneficial rainfall. Wheat pasture is also reported to be in good condition.
Cropland rents are increasing in much of the district as farmers anticipate that crop prices will
remain well above breakeven levels. While most crop prices have moderated from the record
levels set in 1996, they are still high by historical standards.
Bankers predict that district cattle and hog producers will enjoy a profitable year in 1997,
X-3
thanks to lower feed costs. The favorable outlook for the cattle industry may bring an early end
to the liquidation phase of the cattle cycle. Bankers report that district ranchers appear to have
stopped reducing their cattle herds, and some are making plans to expand.
Wages and prices. Labor markets remained tight last month in much of the district,
although there was less evidence of wage pressures than in recent months. Some manufacturers
report skilled workers were in short supply, and some retailers say qualified salespeople were
hard to find. Fewer companies than in previous months, however, report they raised wages to
attract or retain workers. 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
Eleventh District economic activity continued to expand at a modest pace in January and
February. Price reports were mixed, with somewhat more downward pressure than reported in the last
beige book. Manufacturing remained in a seasonal lull, although energy-related manufacturing was still
strong. Demand for business services continues to increase, but most firms reported difficulty meeting
demand because of a shortage of workers. Retailers reported "good sales," with less discounting than
at this time last year. The financial services industry reported little change in loan demand. Construction
activity increased modestly. Oil service companies continued to report extremely strong and growing
demand for their products, despite falling energy prices. Rain delayed agricultural operations but
provided need moisture for stock ponds, spring crops and summer forages.
Prices. Price activity was mixed, although there were more falling prices reported than in the
last beige book, most notably in the energy industry. After peaking at $26 per barrel in early January,
prices for light sweet crude slipped back to $21-$22 by late February. Crude prices were led by falling
heating oil prices, which fell from over 70 cents per gallon in early January to under 60 cents by late
February. Inventories rose steadily in recent weeks, even as an unusually large number of refineries
shut down late in the season for semi-annual maintenance. Gasoline remains in tight supply on the Gulf
Coast, and the late start in making gasoline for the summer still leaves some concern about supplies for
the coming summer driving season, However, near-term gasoline futures and spot prices have dropped
sharply in recent weeks, from over 70 cents to near 60 cents. Natural gas spot prices have also fallen,
and inventories are running 19 percent ahead of last year. The paper industry also reported falling
prices, where the prices for some products had dropped as much as 14 percent over the last 6 weeks.
Electronics manufacturers said prices had stabilized, with the normal downward trend, and inventories
XI-2
were decreasing, but most respondents said inventories are "slightly too big" still. Producers of lumber
and wood products expect prices to increase in 2 months. Service sector wages and fees have increased,
although most contacts said price increases have not kept pace with rising costs. Escalating office rents
concerned respondents in the Dallas area. Petrochemical producers have raised prices for many
products, including polyethylene, polystyrene and PVC, boosted by low inventories, strong domestic
demand and extremely strong demand from Europe and South America.
Manufacturing. Manufacturing activity remained in a seasonal lull, although energy-related
manufacturing was still strong. Demand for brick, lumber, concrete and construction-related fabricated
metals was down because rainy weather slowed construction activity, but contacts expect a bounce back
will result in "a very strong spring". The paper industry reported a downturn over the last 30 to 40
days, partly due to a drop in demand, but also because overbuilding created excess capacity. Inventory
problems were reported at both the mill and customer levels. Contacts in the semiconductor and
computer industry said demand was up over the last six weeks and the past year. Refinery margins
remained weak as heating oil and gasoline prices fell faster than crude oil prices. Several refiners
continue to look at mergers, restructuring and cuts in capital spending to reduce costs.
Business Services. Demand continues to increase for temporary workers, accounting,
consulting and legal services. Contacts cited the high technology sector, commercial lending activity,
corporate litigation and a growing economy as the primary sources of strength. However, most firms
reported difficulty in meeting demand due to a shortage of workers. One contact said demand had
outstripped supply for both consulting and accounting services Contacts were optimistic about business
conditions over the next several months.
Retail Sales. Retailers reported "good sales," with less discounting than at this time last year.
As one contact said: "I hear over and over again that the markdowns went very well." Contacts
XI-3
reporting the best sales results also noted improvement in sales to Mexican customers. One contact said
that sales to Mexican shoppers were showing a "pretty good resurgence," including evidence of some
wholesale buying, although sales were not back to the pre-peso devaluation levels. Inventories are
reported to be in good shape. Auto sales were reported to be slower than expected.
Financial Services. Contacts reported little change in loan demand over the last six weeks.
Outlooks remain optimistic for all loans types for the rest of the year.
Construction and Real Estate. Construction activity increased modestly. Contacts in
several major Texas cities reported that hotel construction picked up strongly over the last six weeks. In
addition, increasingly tight office markets across the state continued to boost office rents and plans for
new office construction. Demand remained strong for industrial space, but some respondents continued
to report that new supply was outstripping demand. The pace of single-family home construction has
slowed, but some of the slowdown may be seasonal and/or due to extremely wet weather in February.
Contacts are optimistic that 1997 will be a good year for residential construction, but most doubt they
will match the high level of new home construction recorded in 1996.
Energy. Oil service companies continued to report extremely strong and growing demand for
their products, despite falling energy prices, which had been anticipated. The normal seasonal dip in the
rig count all but disappeared in early 1997, with the rig count quickly returning to year-end levels of
drilling. Shortages of selected oil-field skills continue, and the industry continues to hire to meet current
high levels of demand.
Agriculture. Rain delayed land preparations and planting operations but provided needed
moisture for stock ponds, spring crops and summer forages. Livestock conditions remained good across
the state and many auctions continued to report higher prices.
XII-1
TWELFTH DISTRICT-SAN FRANCISCO
Summary
Reports from Beige Book contacts indicate a strong pace of economic growth in most
12th District states in the beginning of 1997, with Hawaii being the most notable exception.
Retailers reported moderate gains in recent months, and service providers in the District noted an
acceleration in growth above an already rapid trend. Manufacturing activity remained strong in
much of the District, lifted by a booming aircraft industry and steady expansion in hightechnology equipment manufacturing. Recent increases in residential and commercial real estate
demand have fueled construction activity in the District. Respondents' generally positive views of
the economy were tempered by many reports of tight labor markets and increasing wage
pressures. High turnover rates, reflecting frequent "job-hopping," were noted by several contacts
in a variety of industries.
Business Sentiment
District respondents expect continued strong performance in the national economy, with
regional economic growth outpacing the national rate. Most respondents expect U.S. GDP
growth to return to its long-run average pace, leaving the national unemployment rate near its
current level. Although slightly more than one half of the respondents expect inflation to remain
near its current rate, a growing proportion of respondents expect inflation to edge up in 1997.
Nearly all respondents expect growth in their local economies to outpace growth in the national
economy. Respondents are optimistic about the strength of business investment and foreign trade
in their areas, as well as about consumer spending and housing starts.
XII-2
Retail Trade and Services
Most District respondents reported moderate growth in retail sales through February.
Retail sales reports were strongest in California and the Intermountain states, where healthy sales
of both durable and nondurable goods were noted. In the Pacific Northwest, inclement winter
weather tempered retail sales in January, particularly in Oregon, but sales reportedly strengthened
in recent weeks. Stiff competition among retailers was credited with keeping prices down, despite
lean inventories and growing wage bills.
Service industry respondents in most District states continued to report robust growth.
In California, the expansion of demand for telecommunications services remained solid, although
growth slowed slightly. Tourism-related restaurant sales, car rentals, and hotel occupancy were
very strong throughout the District. Hotel occupancy rates remained particularly high in Utah and
Nevada, despite increases in the supply of rooms. Respondents indicated that the continued
strength of the tourism sector has tightened the market for hospitality workers, creating a climate
of "job-hopping" and putting upward pressure on wages.
Manufacturing
Reports on District manufacturing activity were generally positive. In the Pacific
Northwest, the aircraft and high-technology sectors continued to expand, fueling demand for
skilled workers, and putting significant pressure on wages. Food processing plants in the Pacific
Northwest noted a substantial pickup in the domestic and foreign demand for their products,
making capacity constraints a binding factor in further growth. In California, growth in the
electronics industry remained healthy, although recent deceleration was noted. Respondents from
several District states reported difficulty in finding skilled employees for manufacturing jobs;
XII-3
reports of labor market tightness were most pronounced in Seattle and the San Francisco Bay
Area.
Agriculture and Resource-Related Industries
Agriculture conditions generally were favorable in the District. Ample moisture and fair
weather conditions were noted throughout the District, benefiting both ranchers and farmers.
Reports from California and Arizona indicate that grazing pastures are full and that heavy demand
for grassland areas is driving up rents. Crop development in most District states is proceeding on
schedule.
Real Estate and Construction
Residential real estate activity reportedly was strong in most District states. Demand for
single family homes continued to grow in the Pacific Northwest, reportedly creating local
shortages of materials and labor. In the Intermountain states, sales of middle-market housing
slowed in recent months, but the demand for entry level homes remained strong relative to
available supply. In California, the housing market continues to gain strength. Sales of new and
existing homes grew in both the San Francisco Bay Area and Southern California in recent
months, and home prices are appreciating in most areas.
Commercial construction activity also was strong in most parts of the District. In the
Pacific Northwest and Intermountain states, respondents report that commercial office and
warehouse space is hard to find and commercial and industrial construction is rising. In Southern
California, respondents report that the volume of commercial construction activity, while modest,
is higher than it has been in several years.
XII-4
Financial Institutions
District financial institutions continued to report healthy loan demand and generally good
credit conditions. Financing remains readily available for qualified businesses and stiff
competition is encouraging lenders to offer more favorable financing terms. Reports regarding
loan delinquency rates and new loan quality are more positive than in previous months. The
ongoing consolidation in the banking industry has left many experienced financial-sector workers
available for hire, minimizing wage pressures in this industry.
Cite this document
Federal Reserve (1997, March 24). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19970325
@misc{wtfs_beige_book_19970325,
author = {Federal Reserve},
title = {Beige Book},
year = {1997},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19970325},
note = {Retrieved via When the Fed Speaks corpus}
}