Beige Book
For use at 2:00 p.m., E.S.T.
Wednesday
March 18, 1998
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
March 1998
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
March 1998
TABLE OF CONTENTS
SUMMARY ......................................................................
i
First District - Boston......................................................
I-1
Second District - New York...................................................II-1
Third District - Philadelphia
..............................................
Fourth District - Cleveland ................................................
III-1
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...................................................XI-1
Twelfth District - San Francisco ...........................................
XII-1
i
SUMMARY¹
All district economies continue to show overall strength, but a few have noted some
recent moderation in their rates of growth. Retail sales are generally up in most districts,
exceeding retailers' expectations in many of them. Auto sales, however, are generally down,
although demand for pickup trucks and sport utility vehicles remains high. Industrial activity is
on the rise in most parts of the country, with orders and production up. Most districts, though,
are experiencing a decline in exports to Asia. Continuing the theme of recent reports, the
demand for labor remains strong, with nearly all districts reporting shortages of workers at the
entry level and in certain skilled categories. Widespread labor market tightness appears to have
increased the degree of wage pressures compared with recent reports. Pressures on product
prices remain eerily calm, as domestic competition, productivity gains and the Asian situation
help to constrain production costs. Residential housing markets, buoyed by low interest rates and
mild weather in many districts, are unseasonably hardy. Commercial real estate markets are
healthy across districts. Loan demand, especially for residential mortgages, remains strong in
most districts. Agricultural conditions are mixed, with some districts reporting that an
abundance of precipitation has harmed crop prospects and delayed field preparation activities.
Consumer Spending
Most districts report that January and February sales are up from one year ago. The
Boston, Chicago, Cleveland, Dallas, New York and Richmond districts report that sales have
generally exceeded retailers' expectations; in the Atlanta and St. Louis districts, sales have
generally met expectations. Almost all districts report that unseasonably mild winter weather has
¹Prepared at the Federal Reserve Bank of St. Louis and based on information collected before March 9,
1998. This document summarizes comments received from business and other contacts outside the Federal Reserve
System and is not a commentary on the views of Federal Reserve officials.
ii
helped boost sales of items in many categories, especially home improvement products, furniture
and building materials. Sales of winter clothes, however, have suffered in most parts of the
country. The New York district notes that contacts experiencing weak retail sales have usually
cited mild weather as a cause. The Atlanta, Chicago, Cleveland, New York and Richmond
districts report strong sales of spring clothes, particularly for women; the Boston and San
Francisco districts note that apparel sales are down. The San Francisco district adds that
department store sales in Southern California are also down. Most districts report that retailers'
inventories are at desired levels, although some contacts in the Kansas City and St. Louis districts
report that inventories are too high.
Auto sales in most districts are down from one year ago. While sales of pickup trucks,
sport utility vehicles and minivans remain strong, sales of passenger cars are either flat or down.
The Richmond district reports, though, that sales of new and used vehicles have exceeded
expectations. The Dallas district notes that vehicle sales surged in January, before slowing
somewhat in February. Almost all districts report that vehicle inventories are too high, although
contacts in the Kansas City district are satisfied with their stocks. Contacts in most districts
expect some strengthening in sales this spring.
Manufacturing
Almost all districts report steady or increasing growth in industrial activity, although the
Dallas district notes a slight weakening in growth. The Chicago district reports that activity is
robust, with nearly every sector operating near capacity, while Kansas City district contacts
report that current operations are at moderately high levels of capacity utilization and expanding.
The Cleveland district notes that, although production is up at most surveyed firms, the number
reporting a slowing in production has risen. The Richmond district describes a resurgence of
iii
activity, with sharp rebounds in orders and shipments. The Chicago, Cleveland, Minneapolis,
New York, Philadelphia, St. Louis and San Francisco districts also report hikes in new orders,
while the Kansas City district has seen a mild decline.
Makers of building materials and related products generally report continued brisk or
rebounding sales due to strength in construction markets. The Dallas district, however, notes that
sales of construction materials are down because of a wetter than usual February. Aircraft and
heavy truck parts, primary and fabricated metals, and steel production are reportedly strong in the
Boston, Chicago, Cleveland, Minneapolis, St. Louis and San Francisco districts. Demand for
business services, particularly real estate services, and telecommunications services is up in the
Richmond and San Francisco districts. Contacts in the Dallas district, though, report that sales of
telecommunications equipment are essentially flat.
The apparel industry is in decline in almost all districts. Plant closings, falling sales and
declining orders are common, reflecting both increased import penetration and a weakening of
export demand. Just about every district reports that exports of many goods to Asia are
dropping. The Richmond district, however, notes that activity in the district, except in the
textiles industry, has not been affected by the Asian situation. The Boston district adds that the
strong dollar has been hurting exports to all parts of the world, not just to Asia.
Labor Markets
The tone of this report is largely unchanged from that of recent reports: Taut labor
markets continue to hamper business activity in a variety of ways. In general, the apparent
imbalance between the demand and available supply of workers remains the dominant theme,
with the majority of district reports suggesting that the supply of entry-level and skilled
workers-most often in technology-related fields, but also in construction and certain skilled
iv
craft positions-appears to be insufficient to meet existing production schedules. In the St. Louis
district, for instance, contacts note that UPS is concerned it will not be able to find enough
workers to staff a major expansion.
Firms have used a variety of methods to ameliorate these shortages. For example, in the
Boston and Cleveland districts, firms are hiring temporary workers and outsourcing production
more often, while in the Atlanta, Chicago and Kansas City districts, firms are resorting to worker
training programs and various incentive or award programs.
Wages and Prices
With labor markets stretched to the limit in many areas, there have been reports of rather
large wage increases-although this is by no means consistent across all districts. In the Boston
district, vigorous demand at temporary employment agencies has produced wage increases of up
to 15 percent; wage increases in the retail sector are running 4 to 6 percent higher than the
previous year, while wage increases in manufacturing are running at 3 to 5 percent. Wage gains
appear to be more measured elsewhere in the country. The Cleveland district reports wage gains
of 3 percent, while the Minneapolis and San Francisco districts report wage increases of
anywhere from 0 to 4 percent. The Atlanta and Richmond districts report somewhat faster wage
growth in the retail sector, but note that overall wage gains are modest to subdued, which is
similar to the Chicago and Kansas City district reports.
Price pressures appear to be less pressing than wage pressures, according to most district
reports. Manufacturing raw materials costs have reportedly increased little, if at all, in the
Boston, Chicago, Cleveland, New York and Philadelphia districts. At the same time,
nonmanufacturing firms in the New York district, as well as manufacturing firms in the Kansas
City and St. Louis districts, note higher input prices. In addition, a few districts continue to
V
report that competitive pressures and productivity gains have worked to offset higher materials
prices and to limit product price increases. Although a few firms in the Chicago district have
attempted to raise their selling prices, these efforts have not been entirely successful.
The evolving Asian situation has had some depressing effect on prices, according to most
district reports. The Dallas district reports that Asian currency movements against the U.S. dollar
have caused widespread declines in the prices of commodities, computer components and
petrochemical products. In the Atlanta district, some import prices have fallen, although not
among importers with fixed contracts. Meanwhile, retailers in the New York district report that
no significant price declines in consumer goods have occurred.
Construction and Real Estate
Every district reports strong residential housing market conditions. New home
construction is described as unseasonably brisk in several districts, including Boston, Chicago,
Cleveland, New York and St. Louis. Mild winter weather, high consumer confidence and low
interest rates are credited with much of this strength. However, in several districts, such as
Atlanta, Dallas, and Richmond, otherwise robust activity is being hampered by wet weather.
Sales of new and existing homes are reportedly strong in most districts, and modest price
appreciation is noted by many districts.
Commercial real estate markets are uniformly described as strong by reporting districts.
Contacts in a number of districts are reporting declining vacancy rates, rising rental rates and
increasing speculative construction. The commercial real estate market has "picked up
dramatically" in the Richmond district, with "floods of tenants looking for space."
Nonresidential construction and prices are up in California, while the Dallas district reports a
sharp increase in land prices. Contacts in several other districts, however, see signs of an
vi
impending slowdown and are worried about the pace of speculative building.
Banking and Finance
Most districts report moderate to vigorous demand for bank loans. Contacts in the
Chicago, Cleveland, Dallas, Minneapolis, Philadelphia and San Francisco districts indicate that
loan competition, especially on the commercial side, is stiff, although there are concerns in some
districts that this competition could compromise credit standards. Mortgage lending, especially
refinancings, is reportedly strong in the Atlanta, Chicago, Cleveland, Dallas, Kansas City, New
York, Philadelphia, Richmond and St. Louis districts. Contacts in the Atlanta and Chicago
districts report robust consumer loan demand, while contacts in the Cleveland, Dallas,
Philadelphia and St. Louis districts note some softening. A reduction in consumer loan
delinquencies is reported in the Chicago and New York districts. The Chicago district notes that
credit card repayments are up and personal bankruptcies are declining.
Agriculture and Natural Resources
Agricultural conditions vary widely across districts. The deluge of rain that hit
California has damaged crops. Near-record precipitation has reportedly worsened the condition
of the winter wheat crop in the Richmond district rather significantly. In the Kansas City district,
however, the winter wheat crop appears to be in good shape. Although rains have delayed field
activities in the Dallas and Minneapolis districts, overall conditions are reportedly good in those
areas. Contacts in the Richmond district are worried that a late frost may harm the apple and
peach crops. The Chicago district reports that corn exports have weakened markedly-not solely
because of Asia-although the soybean export picture is somewhat brighter. In the St. Louis
district, cotton exports to Asia, while still expected to wane, are not declining as much as many
had expected since sales to other markets, such as Mexico, have picked up. The San Francisco
vii
district reports a similar situation for beef and pork exports. Lower cattle and hog prices are
hurting the profit margins of producers in the Chicago, Minneapolis and Kansas City districts.
The unseasonably warm winter weather has affected the energy extraction industries to
varying degrees. The Dallas and Minneapolis districts report increased activity, while energy
output increases have begun to decline in the Kansas City district. Solid demand for steel
continues to bolster iron ore output in the Minneapolis district.
I-1
FIRST DISTRICT - BOSTON
The First District economy continues to expand. Retail activity has picked up recently in many
sectors. Manufacturers' results are mixed, with some contacts experiencing accelerating revenue growth and
about half seeing no increase in sales or orders from a year ago. Many respondents report hiring difficulties,
and contacts in the temporary employment industry say their revenues are expanding at double-digit rates.
Prices are said to be generally steady. Residential real estate markets are doing well.
Retail and Tourism
Most retail contacts report that sales are growing at a healthy pace, with the growth rate higher now
than in the second half of 1997. This unexpected strength in sales is not causing upward revisions of 1998
growth projections, already strong at 4 to 7 percent. Faster-growing sectors are office and graphics supplies,
tourism, consumer electronics, home furnishings, building materials, and health and beauty aids. Areas of
weakness are hardware, automotive parts, and apparel.
Employment is said to be either increasing moderately or holding steady. Half the contacts report
tightness in labor markets and corresponding difficulty finding, attracting, and retaining employees.
Shortages are reportedly concentrated in high-skill areas; low-skill retail help is ample except in selected
small geographic pockets. In most sectors, wage growth has picked up somewhat and is now running at a 4
to 6 percent annual rate. By contrast, in sectors growing only moderately, wages are said to be increasing
only 2 to 3 percent.
With one exception, respondents say that prices are holding steady. The exception is tourism, where
a continuing shortage of hotel rooms in the Boston area is causing room rates to rise. Vendor prices are also
holding steady or, in some cases (lumber and fuel), declining dramatically. Profit margins are increasing
slightly. Except for "aggressive expansion" in the tourism sector, contacts indicate they plan to expand
capital budgets modestly in 1998.
Manufacturing
About one-half of First District manufacturing contacts report that recent business is up from a year
ago, with strong and/or accelerating growth for aircraft and heavy truck parts, furniture, and equipment
servicing. The remaining firms mostly report that overall sales or orders are steady from a year ago. Some
exporters report sharp declines in Asian revenues, while others expect that a slowdown will become
noticeable by mid-year. Several respondents express concern that the strong dollar is impeding export growth
generally, even beyond Asia.
Manufacturers indicate that most materials costs are flat to down compared to a year ago. They cite
reduced prices for copper and oil in particular, as well as greater bargains on components from Asia.
Contacts mention that furniture materials costs are rising, however, along with travel costs. Selling prices are
largely stable because of flat to declining supply prices, improved production efficiencies, competitive
pressures, and retailer resistance. One maker of machine tools recently implemented a price increase,
although another lamented that industry prices are far below normal levels because of intense global
competition. Computer prices are falling sharply.
Employment trends vary widely among the manufacturers contacted, with roughly one-third
implementing layoffs, one-third hiring at double-digit annual rates, and the remaining one-third somewhere in
between. Almost all respondents report some hiring difficulties, usually for selected high-skill jobs. Most
contacts indicate that average pay is rising 3 to 5 percent. Firms differ in the degree to which they are
adjusting compensation packages to deal with labor shortages. In addition, one-half of those facing labor
shortages are outsourcing more work and one-quarter report passing up some business opportunities.
Temporary Employment Firms
Temporary employment firms in the First District continue to expand at a brisk pace. Labor markets
are said to be extremely tight across all client industries and First District locations; wage growth for temps
has reportedly risen to 15 percent annually. Demand continues to far outpace supply for more highly skilled
I-3
workers, from computer programmers to clerical workers with knowledge of multiple software packages.
Contacts foresee continued double-digit growth in revenues over the next year.
Residential Real Estate
The residential real estate market in New England is strong. Most contacts report active markets and
more sales than last year. Activity has risen most markedly in Massachusetts and New Hampshire. The
number of sales increased also in Connecticut and Rhode Island, while the number of sales in Maine was
stable until February, when it rose markedly. Increased activity has not generated price increases except in
New Hampshire and Massachusetts, where high demand and extremely low inventory levels have caused
prices to rise 4 to 9 percent from a year ago. Mild winter weather has allowed Massachusetts builders to
work at full capacity during the past few months, and some spec construction is being undertaken. Contacts
in other states report that it is still a "buyers' market," although the level of inventory is shrinking and price
increases are expected later this year. Contacts are optimistic, however, and stated that unless interest rates
go up, the market will remain strong for the next few months.
Nonbank Financial Institutions
Nationwide cash flows into stock and bond mutual funds were 23 percent higher in January 1998
than in December of 1997. Stock funds experienced moderate outflows which were more than offset by the
doubling of inflows into bond funds. The largest inflows were into high yield bond funds, while international
stock funds experienced their fourth consecutive month of outflows.
Respondents at investment management firms indicate that they have increased employment in recent
months and plan to increase employment further, although these increases have been hampered by labor
shortages. All respondents report significant difficulty hiring and retaining information technology personnel.
Most contacts are implementing targeted wage increases and hiring bonuses for workers in short supply;
many are also broadening their recruitment techniques.
II-1
SECOND DISTRICT--NEW YORK
The Second District's economy continued to grow briskly in the first two months of 1998.
Retailers report that sales were above plan in February, while both selling prices and merchandise costs
held steady. The housing market retained momentum in early 1998, following a strong fourth quarter.
Commercial rents across most of the metropolitan area have risen rapidly in recent months, as office
vacancy rates continued to fall. Regional purchasing managers report a pickup in activity, reduced
price pressures for manufacturing inputs, but an acceleration in some labor costs. Finally, local banks
report a pickup in loan demand, and a continued modest decline in consumer delinquency rates.
Consumer Spending
Retailers report that sales were generally on plan in January but above plan in February. Samestore sales for the two months, compared to a year earlier, varied widely-from no gain to a 10 percent
increase. In general, those retailers with weak sales attributed the softness to unusually mild winter
weather. Those with strong February sales noted that virtually all categories performed well, especially
furnishings, appliances and women's apparel. Most retailers report that inventories are in good shape.
Overall, it appears that discounters continue to fare slightly better than traditional department stores.
Retail selling prices and merchandise costs were said to be mostly flat, and no increases in wage
pressures were reported. Most contacts expect only a modest reduction in merchandise costs as a result
of the Asian currency crisis, though one major retailer anticipates "significant savings." All expect to
pass along any cost savings to customers in the form of price reductions; these lower-cost products may
start to show up on the shelves as early as July, but mostly after Labor Day.
Construction & Real Estate
The region's housing market continued to strengthen in early 1998. New Jersey homebuilders
report that new home sales were brisk in February-especially at the high end of the market, where
II-2
nearly all of the buyers are in the securities industry, as opposed to the usual broad mix of high-level
executives. Aside from large Wall Street bonuses, strong market conditions in early 1998 are attributed
to mild winter weather, low but rising mortgage rates, and increased consumer confidence. One contact
notes that with the supply overhang from the early 1990s now mostly gone, a tight market for singlefamily homes is "finally" spilling over into the new home market. Home remodeling also remains brisk.
New York State realtors report that existing-home sales were steady in January, running 4-5
percent ahead of a year ago. Prices retreated a bit from lofty December levels, but were still ahead of
a year ago by about 4 percent. In general, upstate New York has registered increased volume and steady
prices, while downstate has had the reverse. Following a fourth-quarter surge, prices of prime
Manhattan co-ops and condos held steady at exceptionally high levels in January, according to a major
broker. The average price per room continues to run more than 20 percent higher than a year ago.
Office markets across the New York City area continued to tighten in late 1997 and early 1998.
Midtown Manhattan's office availability rate (space coming available in the next six months) edged
down from 9.1 percent at year end to 8.9 percent at the end of January; similarly, Downtown's rate
slipped from 15.5 to 15.2 percent. Midtown rents continued to rise rapidly in January, running 8 percent
above year-ago levels; Downtown rents have risen a more moderate 4 percent.
Markets also continued to tighten in the rest of the NYC area, where figures are tallied quarterly.
Long Island's vacancy rate tumbled nearly 3 percentage points during the fourth quarter, ending 1997
at an all-time low of 10.6 percent. Vacancy rates fell by roughly a full point in northern New Jersey,
Westchester, and Fairfield. In the final quarter of 1997, office rents continued to rise at their trend pace
of 6 percent in New Jersey but surged at a double-digit rate in Long Island, Westchester, and Fairfield.
Other Business Activity
Regional purchasing managers report a pickup in activity in February. Buffalo purchasing
II-3
managers report that production activity grew at a slower pace in February than January, while
commodity prices were steady. However, new orders rose sharply in February, as did hiring activity.
New York purchasing managers report that manufacturing activity rebounded sharply in February, while
non-manufacturing experienced a more moderate pickup. Prices paid by manufacturers dipped in
February but non-manufacturing costs rose sharply, led mainly by labor costs-specifically, computer
consultants, temps and construction services.
Separately, contacts in various sectors note tight labor market conditions, especially for
computer experts, as well as for office support with modest technical abilities. One contact at a leading
NYC-area employment agency remarked that "the region's labor market has never been hotter," adding
that increased flexibility and efficiency in the labor market are helping to keep a lid on wage inflation.
In New York City, tourism remained fairly robust during the usually slow month of Januaryhotel occupancy rates (seasonally adjusted) held steady at close to 85 percent, while room rates eased
slightly. The local industry expects to get a slight boost from a 23 percent hike in travel stipends for
Federal employees traveling to NYC effective January 1. In western New York, Buffalo convention
bookings set a new record in 1997 and look to be even stronger this year, while Niagara Falls reports
a sharp increase in conventions booked for 1998 versus 1997.
Financial Developments
Bankers at small to medium-sized banks in the District report stronger demand for loans during
the past two months. Demand for residential mortgages strengthened most notably, with 75 percent of
bankers reporting increased demand. Refinancing activity for all types of loans increased. Willingness
to lend increased slightly, while credit standards remained stable across all loan categories. Deposit
rates fell moderately, while lending rates fell sharply across all categories. Delinquency rates declined
for consumer loans, but remained stable for mortgages and commercial and industrial loans.
III-1
THIRD DISTRICT - PHILADELPHIA
Business conditions in the Third District in February and early March were mixed but
positive overall. Manufacturers reported continued increases in shipments and orders. Retailers
said sales were moving up, but auto dealers said sales had eased. Bankers reported some slowing
in overall loan demand as lending to individuals declined, but they were generally posting gains
in real estate and business lending. Both commercial and residential real estate markets were
described as healthy by real estate agents and home builders. Commercial construction was said
to be increasing, and residential construction was characterized as steady at a fairly strong rate.
Contacts in the retail and real estate sectors cited mild weather as a boost to current activity, but
fundamental conditions were also considered to be good, and further gains are anticipated in the
spring.
MANUFACTURING
Manufacturers reported continued improvement in business in February compared to
January. Shipments were up at one-third of the firms surveyed, and four out often said new
orders had increased, twice the number reporting decreases. Firms in nearly all major industry
sectors reported improvement; however, several companies commented that orders from Asian
customers were declining. The industries most affected were machinery, chemicals, and hightechnology products.
On balance, Third District manufacturers boosted employment in February. Around 20
percent of the firms contacted added jobs in the month; 75 percent held employment steady.
Industries with employment increases were textiles, machinery, transportation equipment, and
III-2
instruments. Employment eased among food processors and producers of primary metals. In
other industries, mainly consumer goods manufacturing, employment was steady.
Industrial prices in the region remain nearly steady. More than three-fourths of the
manufacturers contacted for this report said the prices of the goods they buy were unchanged
from January to February, and nine-tenths said the prices they charge for their products have
been level. Some firms said prices of the commodities they use have fallen recently, reducing
their input costs, and several firms noted they were installing new equipment to increase
production efficiency and reduce operating costs in order to keep output prices competitive.
RETAIL
Retail sales in the Third District have been moving up since the start of the year,
according to merchants polled in early March. Based on these retailers' comments, sales in the
region have been running approximately 4 percent above last year's pace, on a current dollar
basis. Store executives believe mild weather boosted sales in January and February, but they
said the usual spring pickup, especially in sales of apparel, appeared to be occurring in early
March.
Auto dealers generally reported a slowdown in sales during February and an increase in
inventories except for some popular models. Sales of both cars and light trucks have eased from
January's rate. Despite the current slowdown, most of the dealers contacted expect sales to
improve this spring.
FINANCE
Most of the Third District banks contacted for this report indicated that their loan
volumes outstanding were falling slightly. In recent weeks, real estate lending and lending to
III-3
businesses have been increasing, but consumer lending has been declining. Both residential and
commercial real estate lending were moving up at the region's financial institutions. Bankers
noted increases in purchase mortgages and home equity loans. Although commercial real estate
lending has increased, bankers said they were becoming increasingly selective, turning down
prospective borrowers who have requested loans of higher amounts in relation to property values
than has been the norm recently. Banks are actively soliciting new commercial and industrial
loans, especially among middle market firms.
Much of the slowdown in consumer lending has been in auto financing. Banks have been
cautious in lease financing in response to declining residual values. According to some reports,
auto manufacturers' finance subsidiaries have taken more of the lease financing business.
REAL ESTATE AND CONSTRUCTION
Commercial real estate agents reported that office vacancy rates declined from the third
quarter to the fourth quarter of 1997 and rents rose. According to recent surveys by commercial
real estate companies in the region, office vacancy rates dropped around 1 percentage point
during the last quarter of 1997 to around 14 percent in central Philadelphia and 10 percent, on
average, in suburban markets. Vacancy rates for Class A buildings were lower, but real estate
agents said vacancy rates for less than Class A buildings were significantly higher and rents were
lower. Demand for industrial space, primarily distribution facilities, remained high. Some
speculative construction of offices and industrial buildings was under way in the region.
Commercial realtors generally agreed that current rents and vacancy rates justify construction of
more buildings, but some were concerned that an oversupply of space could develop if economic
growth in the region eases.
III-4
Residential realtors and home builders said sales of existing and new homes have been
steady in the past month at fairly high levels. There has been some price appreciation for
existing homes and increased demand for higher-priced new homes, although both realtors and
builders said price increases have not been great. Realtors said some of the strength in home
sales this winter, compared to last year, has been due to the mild weather, but they added that
healthy employment conditions and the rising stock market have boosted buyers' willingness to
make home purchases.
IV-1
Fourth District - Cleveland
General Business Conditions
The Fourth District economy continues to grow, but at a moderating pace. Labor
markets are strong and price pressures remain light. Both residential and commercial
construction are flourishing, particularly in the central Ohio and Pittsburgh areas.
Temporary employment agencies report increased demand since the beginning of
the year, especially for data entry employees and administrative assistants. Historically,
the first quarter is a slack season, so the robust activity thus far in 1998 suggests that
temporary employment demand for the rest of 1998 will exceed even the high levels seen
in 1997.
Many companies report that they are increasingly willing to train unskilled
employees, especially those who are willing to learn some computer skills. Some also
mention a shift in the composition of those seeking work, resulting in relatively greater
numbers of younger (19-21 years), older (65 and over), and less educated (those with only
a high school diploma) applicants.
Organized labor reports a small increase in annual wage growth to slightly over
3% per year. Those unions that have not yet seen wage gains expect to see them in the
near future. The main focus of current contract negotiations is wages, which the unions
are targeting in preference to job security issues. Benefits growth is said to be stagnant,
while the trend toward longer contracts has continued into the first part of 1998.
IV-2
Manufacturing
Industrial activity remains strong.
Most manufacturers report an increase in
production levels, but the number of those reporting production declines has risen a bit.
New orders have increased, but not at the rate experienced in January.
Steel producers report strong growth in orders, but stable raw materials prices
have held the product price down. The demand from the auto industry is so strong that
some producers report shipping their steel while it is still hot. Asian developments have
not had a strong effect on final sales due to healthy domestic demand and long contract
lead times associated with exports of higher-performance steel.
Consumer Spending
Most retailers expect 1998 to be a stronger year than 1997. Retail sales in the
District have met or slightly exceeded expectations for the first part of the year, with
January sales significantly above target but February sales only marginally so. Gains
appear to have been led by strong demand for apparel and wireless communication. There
is a wide disparity in reported inventory levels, but the average seems to be slightly above
the desired levels.
January and February auto sales showed strength in the minivan, sport utility
vehicle, and truck categories, but were flat for passenger cars. As a result of heavy
inventory buildup in the slow months leading to the holidays, dealers have an ample supply
of cars. There is some downward price pressure in the used vehicle market because large
numbers of 1996 models are being returned from lease agreements. However, leasing
prices are marginally higher as a result of lower residual values.
IV-3
Transportation
Trucking has benefited from the strong market in structural steel. Generally,
however, business in trucking remains only somewhat better than at this time last year.
The air cargo business has seen steady, if unspectacular, growth since the beginning of the
year, particularly for machine parts and international shipments.
Coal
Eastern Kentucky coal mines expanded output in 1997 by 2.3%, only slightly less
than the U.S. average increase of 2.9%. Coal production is expected to remain high this
year, despite increased foreign competition for the lucrative export markets in steam coal.
Serious concern was expressed about the potential regulatory impact of the Global
Warming Treaty. Producers are particularly worried that provisions of the treaty might
make Kentucky coal production more expensive and harm its competitive position. On
the labor front, the collective bargaining agreement between the United Mine Workers and
the Bituminous Coal Operators Association, which was set to expire this year, has already
been renewed.
Banking and Finance
Lending activity in the District remains vigorous, with commercial loan demand
continuing to strengthen. Consumer loan demand has weakened slightly, but mortgage
refinancing remains very robust Consumer loan delinquencies are edging up slightly,
although commercial delinquencies remain low. The narrow spread between borrowing
and lending rates is resulting in significant interbank competition and small profit margins,
and there is mild concern that banks may be easing consumer credit standards somewhat.
FIFTH DISTRICT-RICHMOND
Overview: The Fifth District economy expanded at a somewhat faster clip in recent
weeks despite weather-related slowdowns in some sectors. Consumers continued to spend
freely, with retail sales growth outpacing that of a year ago. In addition, manufacturers
reported that orders and shipments rebounded sharply from an early winter slumber. Real
estate activity, both in the residential and commercial sectors, picked up considerably, although
residential builders noted that excessive rainfall reduced housing starts somewhat. Unusually
wet weather also kept tourists away from coastal resorts and farmers out of their fields. In the
service sector, growth remained healthy, even though the overall pace was held back by a
reduction in utilities' sales. Shortages of both skilled and entry-level workers worsened, and
reports of higher wages were more widespread. Prices, especially in the service sector,
increased at a somewhat faster rate.
Retail: Since the beginning of the year, the retail sector has hardly missed a beat.
January sales held up better than in past years, and most merchants told us they were
pleasantly surprised by the strength of consumer spending in February. Mild temperatures
hurt winter apparel sales, but got spring clothing off to a fast start. Consumers' purchases of
durable goods strengthened. Sales of both new and used automobiles exceeded dealers'
expectations, and furniture retailers reported that their businesses were finally benefiting from
buoyant housing markets. While maintaining sales growth remained a priority, many
merchants told us that their biggest concern was finding and retaining workers. One said that
the lack of available workers "was keeping [him] awake at night." Reports of wage increases
were more prominent than in our last report. Retailers indicated that prices generally
increased at a faster rate in recent weeks. Restauranteurs and general merchandisers reported
the largest price increases; apparel retailers, however, continued to report widespread price
discounting.
Services: District service producers experienced healthy growth in recent weeks.
Businesses associated with real estate--including mortgage insurance companies, real estate
brokers, and appraisers--noted particularly strong revenue growth, as did both passenger and
V-2
freight airlines. Electric utilities and natural gas suppliers, on the other hand, reported
decreased revenues as unseasonably mild temperatures reduced energy demand. Service sector
employment growth slowed amid widespread complaints of shortages of qualified workers.
Service contacts reported faster price growth since our last report; the pick-up was most
evident in the business services, finance, real estate, and lodging sectors.
Manufacturing: Since our last report, District manufacturers witnessed a resurgence in
activity. Overall shipments and new orders rebounded sharply, even though producers of
transportation equipment and industrial machinery reported disappointing growth. Most
manufacturers continued to indicate that their sales had not been impacted by the financial crisis
in Asia. An exception was a textile producer who suggested that a recent "flood" of Asian
imports had hurt his industry. While a Virginia port representative stated that Asian difficulties
had "hindered textile exports," contacts at other ports noted little impact on either exports or
imports. Manufacturers continued to add employees, but many expressed growing concern over
the quality of their job applicants. Wages grew somewhat faster than in our last report.
Finance: Lending activity increased in January and February. Mortgage lending--both
new originations and refinancings--was particularly brisk; a Charlottesville, Virginia banker
said that "January was pandemonium" in her office because interest rates were so low.
Commercial lending also rose, boosted in part by increased business merger and acquisition
activity. Banks' credit standards changed little since our last report.
Real Estate: Low interest rates and higher consumer confidence sparked real estate
sales in recent weeks, but wet weather hampered homebuilding activity. A Virginia contact
reported "booming" home sales while a South Carolina realtor said that it was the "best
January and February ever" in his area. A number of realtors attributed higher sales to an
influx of new businesses coming to their areas. Frequent rains across most of the District,
however, thwarted contractors' efforts to keep apace of demand. Nevertheless, builders
reported that the rains didn't diminish their optimism or affect the number of building permits
being sought.
Commercial real estate activity picked up dramatically, with one contact noting that
"floods of tenants were looking for space." The continued strength surprised some contractors
who had "expected the market to hit saturation by now." Projects underway in the District
included small office buildings and larger industrial warehouses as well as retail
establishments, a growing portion of which were speculative buildings.
Tourism: Contacts reported that the unseasonably warm, wet weather of recent weeks
had a mixed impact on District tourist activity. Despite mild temperatures which hindered
snowmaking, attendance at ski resorts was near all-time highs. One contact said that the
addition of a snow tubing park had increased his resort's customer base by appealing to those
who do not ski. The warmer temperatures, however, caused ardent skiers to travel further in
search of natural snow, benefiting West Virginia ski resorts. Frequent rains dashed hopes of a
second year of record-breaking winter tourist activity at coastal resorts.
Labor Markets: Employers continued to experience difficulties finding qualified
workers to fill vacant positions. A number of temporary agencies said that their greatest
challenge was finding "trainable" people for entry-level production and customer service
positions. One contact said that, increasingly, businesses were hiring two or more college
students on a part-time basis to fill each full-time vacancy. While overall wage increases
remained modest, workers with highly sought skills were "calling the shots" in their wage
negotiations.
Agriculture: Near-record rainfall in many areas had mixed impacts on small grain
crops. Wet and muddy fields barred farmers from applying fertilizer to the winter wheat and
barley crops and from starting their pre-planting tillage. Standing water in low-lying fields
was common, and one agricultural analyst said that flooded fields could reduce winter wheat
yields in his area by as much as 20 percent. Elsewhere, the rains and milder-than-normal
temperatures apparently benefited small grain crops. Analysts said that fruit trees budded
early, increasing the risk of spring frost damage to peach and apple crops.
VI-1
SIXTH DISTRICT - ATLANTA
Summary: Southeastern economic activity continues to expand at a moderate pace,
according to business contacts. Merchants report that sales have met their expectations, which were
above levels of a year ago. Home sales have been boosted by low mortgage interest rates, but
weather problems have limited building in some parts of the region. Nonresidential construction
spending remains healthy, with new speculative building underway. Factory activity is mixed, with
weakness in some sectors balanced by strength in others. The tourism and hospitality industry
continues to post impressive numbers.
Consumer and commercial loan demand is growing
moderately. Contacts expressed concern over labor shortages for skilled and unskilled workers;
however, reports of escalating wages are infrequent. Overall, prices remain stable.
Consumer Spending: According to retail contacts from across the District, retail sales were
up year-over-year in both January and February; however, February sales were slightly weaker than
January's. Most retailers agreed that recent sales had met their expectations, and inventories are in
good shape. Apparel continues to be a strong seller. Sales during the first quarter are expected to
exceed last year's sales slightly.
Construction: Reports from real estate contacts indicate that both new and existing home
sales were stronger in February than a year ago. These contacts say low mortgage rates are boosting
sales in most areas of the region. Home construction activity has been subdued in some parts of the
District because of inclement weather. However, inventories remain generally in balance. Several
contacts noted that lower priced or starter homes are the strong sellers in their market. Looking
forward, a slight majority of builders expect new home construction will be up compared with last
year in the first and second quarters; most real estate agents agree.
VI-2
Commercial real estate markets remain healthy throughout the region. Most suburban and
central business district office markets are recording rising occupancy rates and rentals, and a
considerable amount of speculative office construction is underway. The industrial sector has begun
to show some signs of slowdown, as new supply and vacancy rates move up in several markets.
Retail markets remain healthy across most of the region. Overall, both developers and real estate
agents' outlooks remain optimistic for the year.
Manufacturing: Factory activity varied by industry. Contacts note further slowing in the
region's apparel sector, with the closure of one large plant and declining orders for others. A few
small apparel companies that have found a market "niche" are reportedly doing well. Some contacts
note that apparel companies are feeling negative "Asian effects," with slower sales to foreign
markets. More positively, the outlook has improved for a plywood producer and a manufacturer of
building products that experienced the factory workweek and shipments weakness not long ago. In
Louisiana, oil field projects are maintaining a steady pace, and there is an overall optimistic outlook
for the industry. Chemical producers are reportedly more concerned with the regulatory climate than
that of the Asian situation, as many plant expansions are underway.
Tourism and Business Travel: The tourism and hospitality industry remains robust,
according to most contacts. Theme park expansions, along with a number of hotels currently under
construction, or in the planning stages, are indicators of the positive outlook for central Florida's
tourist industry. Although the weather in the Northeast has been unusually warm, south Florida
contacts report that March bookings have been strong. Louisiana's Department of Tourism expects
1998 to be another good year and is stepping up encouragement of foreign airlines to expand flights
VI-3
into the state. Revenues for Mississippi's tourism and hospitality industry rose substantially in 1997,
and the state's tourism and hospitality official reports double-digit increases in inquiries.
Financial: Banking contacts report that loan demand has been expanding moderately
throughout the Sixth District.
Consumer and commercial loan demand are growing, and
mortgage-refinancing activity continues to be brisk. Auto loan demand remains healthy, especially
in the luxury car segment.
Wages and Prices: Wage pressures remained constrained, according to most contacts, but
labor shortages are a cause for concern. Along the Mississippi Gulf Coast, job fairs in casinos and
department stores are becoming frequent in order to help ease labor shortages.
Employers in
Louisiana's shipbuilding industry are frustrated by their inability to find qualified workers. In
Tennessee, technical centers have contracted with several industries and are beginning
apprenticeship programs to help provide a continuing supply of skilled workers. Contacts also say
that workers skilled in the construction trades are in demand as are general laborers. The majority
of retail merchants report that labor costs have risen between zero and 4 percent, year-over-year.
Prices remain mostly stable as businesses struggle to keep costs down. Some contacts report
that improved productivity from computers and high-tech goods are helping employers to hold the
line on price increases. Some firms are pushing for lower benefits for workers as a result of rising
benefit and medical costs. One contact reports that the "Asian crisis" is benefiting his suppliers by
allowing them to make purchases at significantly reduced prices, although others note that multi-year
pricing agreements are keeping costs stable.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. The Seventh District's economic expansion picked up modestly in January and
February, led by increases in consumer spending and housing activity. Some contacts, however,
suggested that the unseasonable strength in retailing and housing early in the first quarter may be
borrowing from later in the year. Manufacturers continued to operate near capacity and strong new
orders showed no signs of softening. Lending activity picked up as many consumers refinanced
their existing mortgages. Overall wage pressures remained generally subdued despite very tight
labor markets and worker shortages in some occupations and industries. Credit guarantees
cushioned any Asian impact on crop exports this winter, but low livestock prices triggered heavy
operating losses for many District farmers.
Consumer spending. Most District retailers were quite satisfied with sales results in
January and February. Sales were generally described as above expectations and most merchants
indicated that this strength was broad-based. Unseasonably warm weather in the early part of 1998
increased traffic through most stores and greatly boosted sales of spring items, as well as some
other goods. Spring apparel sales were doing very well with women's lines particularly strong.
Some motorcycle dealers in the region credited the effects of El Nino for record high sales in
January and February, at levels far above their seasonal averages. Exceptionally strong housing
markets boosted the sales of complimentary items, such as furniture, home decor, appliances,
electronics, and household tools. In addition, the spurt in mortgage refinancing activity improved
consumers' debt positions, which some merchants credited with increasing sales of household and
home improvement items. Inventories were in good shape, allowing most retailers to limit their use
of promotional activities and concentrate on profit margins.
Housing/construction. Overall construction activity picked up moderately in January and
February, led by a sharp rebound in new housing construction. A healthy economy, low mortgage
interest rates, and very mild winter weather were frequently cited by contacts as factors
contributing to an unseasonably strong new home market. Most builders described sales as
exceptional for this time of the year, with one adding "if builders aren't selling now, they never
will!" The strength appeared to be broad-based across both geographic and market segments.
Some builders felt that strong sales this early in the year may lead to a slower-than-normal spring
rush. This would not be entirely unwelcome to builders, given some of the labor shortages and
VII-2
materials bottlenecks that have occurred periodically over the last few years. Sales of existing
homes continued to surprise on the upside, with most realtors reporting early 1998 sales results that
were near record levels for this time of year. Broad-based strength in commercial construction
activity was also reported, but contacts indicated that growth may be slowing in some segments.
Manufacturing. Manufacturing activity remained robust in the District with virtually
every sector running near capacity. Contacts in the heavy truck industry indicated that demand was
high and production was running "full tilt," with only capacity constraints restraining stronger
growth. The heavy/agricultural equipment and steel industries experienced similar strength, with
orders booked through the second quarter and plants operating near capacity. One large steel
producer reported having to turn new orders away. Output of light vehicles remained very healthy
in the region amid continued reports of strong sales. There was some concern that momentum in
the industry was being buoyed by discounting, with one contact noting that incentives were at
levels normally reserved for the end of the model year. Inventory levels for most manufacturers
were in good shape, although they were slightly low for producers of heavy and agricultural
equipment and slightly high in the auto industry. Prices for raw materials continued to show very
little movement as did product prices. Steel producers were successful in pushing through very
modest increases, but prices were still below 1994 levels. A producer of supplies to the
construction industry also raised prices, but only expected to reap half the announced increase.
Adverse effects from East Asia's turmoil remained generally concentrated in the heavy/agricultural
equipment sector. There were no reports of these effects spreading or worsening.
Banking/finance. Business lending activity was strong throughout the District and the
consumer segment showed signs of gaining momentum. The unseasonably warm weather and low
interest rates boosted housing activity and, as a result, mortgage originations. The exceptional
activity, however, was in the refinance market. Every banker contacted reported that refinancing
activity was up sharply in January and February, with one stating that activity was like nothing he's
ever seen before. Reports indicated that personal delinquencies, repayments on credit cards, and
bankruptcies were improving. On the commercial side, loan activity remained brisk, but loan
growth appeared to be slowing. Overall asset quality was generally described as good, and
improving slightly on the consumer side. Some bankers expressed concern that fierce competition
in the commercial segments may have slightly eroded asset quality. Continuing a trend noted in
VII-3
our last report, additional contacts indicated that Asian lenders were withdrawing from U.S.
lending markets as a result of the "Asian Contagion" turmoil.
Labor markets. In January and February, conditions in the District's labor markets
changed little from late last year. While unemployment rates remained very low and shortages
persisted in some industries and occupations, wage pressures were relatively unchanged.
Construction help and information technology workers were most frequently cited as being in short
supply. Entry-level positions continued to be difficult to fill and one contact indicated that this was
due, in large part, to skill-matching problems. Most businesses indicated that growth in base
salaries remained relatively subdued (with the exception of occupations in short supply, where
wage increases were more pronounced), while the use of bonuses and other "one-time" incentives
increased. One analyst noted that businesses were becoming ever more creative in their recruiting
efforts, with at least one firm offering modest weekend trips as an incentive. The employment
component of purchasing managers' surveys from throughout the District all showed sharp
increases from January to February as well as in year-over-year comparisons. The same trend was
evident in indexes derived from the volume of help-wanted advertising in local newspapers and
quarterly hiring plans surveys. One contact cited very tight labor markets in Iowa as impeding
economic growth in the state, and a regional manufacturer indicated that increased use of overtime
was cutting into the company's profit margins.
Agriculture. Corn export prospects remain depressed. As of late February, corn export
commitments (shipments-to-date plus outstanding orders) for shipment in the year ending with
August were down one-fourth from a year ago. Ironically, however, the decline in corn export
commitments to all Asian markets was no worse than that for all other destinations. Late-February
soybean export commitments were nominally above the year-ago level, but somewhat weaker for
Asian markets than elsewhere. Export credit guarantee programs offered by the U.S. Department
of Agriculture to hard-hit Asian countries helped sustain new corn and soybean commitments to
those markets during January and February. District livestock farmers experienced extensive
operating losses this winter. Large meat supplies and weak demand, for both domestic
consumption and exports, depressed cattle and hog prices. The losses for pork producers are likely
to continue for several months.
VII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
The District economy continues to generate stable business growth coupled with few signs
of rising consumer prices. Retail sales growth met most contacts' expectations, and they anticipate
stronger growth this spring. District manufacturing firms are experiencing growth in sales and new
orders, while continuing to cope with tight labor markets and moderate wage pressures.
A
Manpower survey of District firms shows the pace of hiring picking up in the second quarter
compared with the first quarter. Unseasonably mild winter conditions supported higher than usual
levels of residential and commercial construction and real estate sales in most parts of the District.
Loans outstanding at large District banks rose 2.4 percent in the first two months of 1998, compared
with a 0.8 percent decline in the same period a year ago. The Asian situation is not yet pulling down
cotton exports to the degree that many District producers expect.
Consumer Spending
Retailers report that January sales were up about 4 percent over the previous year-a pace that
met contacts' expectations. Sales of winter clothes have been very slow due to mild winter weather,
while sales of home furnishings have picked up in anticipation of an early spring. Although most
contacts report that current inventories are at desired levels, several noted that their inventories are
slightly high. Retailers are anticipating a moderate increase in sales growth in the second quarter.
Sales in Missouri may be boosted by the recent refund of state budget surpluses; these refunds
averaged $300 per household.
Automobile dealers report that sales in January were down an average of 12 percent to 15
percent over the previous year. Several speculated that high levels of consumer debt kept buyers
VIII-2
away. More than half of the contacts have been using rebates and incentives more than usual to
move stock. In addition, nearly half of the respondents indicate that their current inventories are too
high. Dealers remain optimistic, though, that sales will pick up in the second quarter.
Manufacturing and Other Business Activity
Overall, District contacts report that business conditions remain favorable, and that growth
in sales and new orders continues to chug along at a moderate pace. Contacts also report that
competitive markets and productivity improvements are keeping price increases at bay, even though
input costs continue to increase modestly. Tight labor markets continue to plague District firms.
Contacts in Kentucky are concerned that UPS will have a difficult time finding the 6,000 workers
or so it will need as part of a just-announced $860 million expansion in Louisville.
Contacts from a variety of District industries report growth in sales and orders. A contact
in the furniture industry, for example, reports that industry sales have been high and growing
modestly recently. That said, some smaller furniture manufacturers aren't faring well compared with
their larger competitors. District auto plants are stepping up production of pickup trucks and sport
utility vehicles, and a tire producer is considering going to seven day (from six), 24-hour shifts to
keep up with demand. To cut costs, however, a maker of home appliances will shift production from
Kentucky to plants in Georgia and Mexico. In anticipation of costly settlements or lawsuits, tobacco
firms are cutting back on workers to preserve profits.
Employment Outlook
According to Manpower's second-quarter employment outlook survey, the pace of hiring will
pick up in Little Rock, Louisville and Memphis relative to the first quarter. Gains are expected to
be most pronounced in Little Rock, where about half of surveyed firms intend to boost their payrolls.
In St. Louis, by contrast, little change in second-quarter hiring is expected. Compared with a year
VIII-3
earlier, though, considerably less hiring is expected, with only Memphis firms anticipating higher
employment levels.
Real Estate and Construction
Mild winter conditions led to unseasonably high levels of residential building construction
in most parts of the District in January. In almost all of the District's 12 metropolitan areas, monthly
and year-over-year building permits were up.
Sales of new and existing homes also were
unseasonably high, with most contacts reporting moderate increases in average selling prices.
Commercial construction-dominated by office, retail and apartment-is also strong in many parts
of the District. Some contacts are concerned, however, that apartment construction might be too
aggressive in some areas, given the expected demand.
Banking and Finance
Total loans on the books of a sample of large District banks have increased 2.4 percent since
the start of the year.
One year ago, total loans declined 0.8 percent over the same period.
Commercial and industrial loans have risen 1.3 percent, while real estate loans have increased 3.3
percent. Consumer loans have declined 1.8 percent over the period.
Agriculture and Natural Resources
Cotton industry contacts report that the Asian situation has not yet affected export quantities
to the degree anticipated a few months back; the largest effect, they believe, has been on prices.
Although exports to certain Asian markets have been reduced, the drop in cotton prices has spurred
additional sales to other markets, such as Mexico and Turkey. Overall, cotton producers still expect
some reduction in exports to Asia, although not to the extent anticipated three months ago. A cotton
industry report suggests that cotton plantings this spring could be the lowest in 15 years.
IX-1
NINTH DISTRICT--MINNEAPOLIS
On balance the Ninth District economy continues to show steady to strong growth in most
sectors. But overall strength and booming urban areas are shaded slightly by slowing in
nonurban areas of the district due to adverse weather and declining commodity prices.
Most sectors and households continue to enjoy a very strong economy. Construction
and manufacturing are striding workhorses that continue to provide impetus to the
economy as a whole. Retail sales of general merchandise are very strong. Oil and iron ore
production levels are at decade highs. Banks reportedly have good loan volumes in a
competitive environment. Unemployment is low and price pressures are scarce.
But declining prices for hogs, corn and soybeans combined with already low wheat
prices and concerns about moisture availability have sharply curtailed farm profitability
and optimism for the new year. Warm weather and poor snow cover hurt revenues for
many winter recreation firms. Many businesses are cramped by labor shortages.
Manufacturing and business services
Manufacturers generally report good orders. Medical electronics and devices continue
strong in Minnesota. Machining, metal finishing, electronic instrumentation, printing,
metal tubing and other firms in Minnesota, Wisconsin and South Dakota also report good
business. North Dakota firms producing specialized mining machinery and wiring
harnesses and remanufacturing aircraft announced expansion plans. An insurance
processing operation will employ 400 in Sioux Falls, S.D., and a software firm will hire 50
in Duluth, Minn. One computer materials plant employing 100 people will close as the
parent firm streamlines operations.
Construction and real estate
"Business building booming," was the headline for a Sioux Falls news story, but could
have applied as well in Minneapolis-St. Paul, Eau Claire, Wis., Fargo, N.D., or other urban
areas where industrial, commercial and office construction is very robust. "New home
sales soaring," was the word in Minneapolis-St. Paul where January new permits ran 7.2
percent above 1997. Residential builders are busy and anticipate a good year in virtually
every city over 10,000 population, with the exception of a few in Montana.
Publicly let building and infrastructure projects are running about even with last year's
record pace.
IX-2
Natural resource industries
Oil output in North Dakota has risen to its highest point this decade, and drillers for both
oil and gas in that state and Montana continue to benefit from a mild winter. However,
while rig counts remain high compared to earlier in the decade, industry sources warn that
dropping energy prices soon will curtail drilling since most wells in the district are highcost relative to yield.
Lake Superior iron mines anticipate overall production slightly above the 16-year
record output set in 1997, but express concern about how lower Asian currency values may
boost U.S. imports of steel and steel-containing products from that region. One mine cut
its projected output slightly and laid off some 20 workers. A Montana gold mine closed
with the loss of nearly 300 jobs due to low gold prices and to unrelated financial problems
in the parent firm.
Forest product output is expected to be largely steady in western areas of the district
due to cutting constraints, but strong in Minnesota and Wisconsin as oriented strand board
plants run at capacity to meet builders' demand. Paper production is described as steady to
moderately stronger.
Agriculture
"The mood among wheat farmers is pretty grim," says one Montana implement dealer.
That observation has been true for several months, but recent declines in corn, soybean and
hog prices have extended the region in which farmers are under financial stress. "The
bloom sure came off the hog market in a hurry," says a southern Minnesota banker.
Slaughter hog prices have dropped to the low $30 per cwt range, down 40 percent from a
year ago and 20 percent from early December. Corn and soybean prices have also
weakened from early winter, though relative to costs are still more favorable than that of
wheat. Farmers in the western Dakotas and Montana are concerned about unusually small
snowpacks, low reservoir levels and inadequate soil moisture.
Banking
Pricing competition reportedly is intense. A senior correspondent banker remarks that
"banks may have come to the point where they simply cannot lower prices." The
competition for loans raises some bankers' concerns about future credit quality. Loan
volume is good overall but there remains considerable variance by locality. Like loan
demand, liquidity is good overall with substantial variation by locality.
IX-3
Consumer spending and tourism
"Retailers report strong February," headed a news article on sales by Minnesota-based
national firms. The report cited warm weather as a positive factor for electronics,
appliance, apparel and other consumer product sales nationwide. A regional chain also
reported good sales, which is supported by reports from mall managers in urban areas.
Several sources report softening sales in nonurban areas of the Dakotas and Montana.
Vehicle sales remain mixed, with continued slowness in Montana and rural areas of
the Dakotas. Minnesota and Wisconsin sales are reportedly "stable" and "a little above
last year." "We aren't getting the benefits of mortgage refinancing that we did a few years
ago," says one auto dealer.
Unseasonable warmth and inconsistent snowfall across the district produced uneven
results for tourism businesses. In the Upper Peninsula of Michigan, a tourism official
reports that the snowmobile season and some ski hills ended early due to lack of snow
during February. A chamber of commerce in northern Wisconsin expects winter tourism to
be 15 percent to 20 percent lower than last year. While snowmobiling was stifled in
northern Minnesota, a downhill ski resort expects a 10 percent increase for the season.
Recent snowfall in South Dakota has boosted snowmobile traffic and inquiries to a local
tourism office.
Employment, wages and prices
The recent headline "Newspapers reap bounty as classified ad volume soars," highlights
one sector benefiting from extreme tightness in labor markets. Minneapolis-St. Paul
newspapers have seen double-digit increases in help-wanted ad revenues in each of the last
three years. With unemployment rates at or near record lows, most urban businesses in the
district feel labor market tightness in one way or another. While extensions of benefits,
hiring bonuses and so forth are quite common, across-the-board wage and salary increases
generally remain in the 2 percent to 4 percent range. Minneapolis-St. Paul hourly earnings
in manufacturing are about 2 percent above year-earlier levels.
Energy prices remain well below year-earlier levels. With such prices and with warm
weather, household heating costs in most areas are the lowest in many years. Gasoline
prices are down as much as 20 cents per gallon from early 1997. Commodity and
intermediate good prices are down or quiescent. Increased prices at the consumer level are
relatively rare.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The district economy continues to grow at a moderate pace. During the past
month retail sales edged up, construction activity picked up slightly, and manufacturing activity
remained fairly strong. One weak note was a slight decline in energy activity. In the farm
economy, the winter wheat crop is in good shape, and the quality of wheat pasture is good to
excellent. Labor markets remain tight in much of the district, with continued evidence of
moderate wage pressures. Prices generally held steady at the retail level and for construction
materials. Price changes were mixed for manufacturing materials, with some slight increases for
some materials and declines for others.
Retail Sales.
Retailers report sales edged up last month, and were moderately above
year ago levels. All respondents expect to continue growing sales over the next three months.
While most retailers thought current stocks were too large, they do not anticipate major changes
in inventories in the coming months. Automobile dealers report mixed results last month, with
sales overall moderately lower than a year ago. Sales of sport utility vehicles and light trucks
remained strong, while sales of passenger cars were weak. Dealers have trimmed inventories
slightly and are generally satisfied with current stock levels. Respondents expect to increase
inventories to match seasonal stronger sales in the coming months.
Manufacturing. Manufacturing plants operated at moderately high levels of capacity
last month as activity continued to expand. Purchasing managers report that raw materials were
generally available and there were no noticeable changes in lead times. Inventories edged down
last month, and further reduction is expected in the near future as stocks exceed desired levels. A
quarterly survey of district manufacturers indicate that production increased slightly, while
X-2
shipments and new orders both posted slight declines from December 1997 to January 1998.
New orders from exports also declined slightly, reflecting lower export demand from Asia and
the effects of a strong dollar.
Housing. Builders report housing starts rose slightly last month, moderately above year
ago levels. Builders anticipate additional gains in construction activity in the coming months as
mild weather provides a seasonal lift. Sales of new homes were slightly higher last month, above
levels reached a year ago. Inventories of unsold new homes remain at moderate to slightly high
levels. Most building materials were readily available and delivery times were normal.
Mortgage lenders say demand was up slightly last month, boosted by a rush of refinancings.
Mortgage demand for home purchases is expected to increase somewhat in coming months while
demand for refinancing is likely to level out from the strong increases registered in previous
months.
Banking. Bankers report that loans and deposits generally held steady last month,
leaving loan-deposit ratios little changed. All loan categories were flat except home mortgages,
which increased somewhat. Money market deposit accounts edged up, NOW accounts declined
slightly, and other deposit categories remained unchanged.
Almost all respondent banks left their prime lending rates unchanged last month and
expect to hold rates steady in the near term. All banks held their consumer lending rates constant
and most banks anticipate no future changes. Lending standards were unchanged.
Energy. District energy activity edged down in the last two months after short-lived
improvement in activity in December. Mild winter weather contributed to further decline of both
crude oil and natural gas prices last month. Both prices remained well below year-ago levels.
X-3
Reflecting lower prices, the district rig count was down 5.0 percent in January and fell another
1.4 percent in February to a level only 1.3 percent higher than a year ago.
Agriculture. The district's winter wheat crop is in good condition, and the quality of
wheat pasture is good to excellent. Relatively high prices for feeder cattle should help ranchers
earn modest profits in 1998. However, operators of cattle feedlots are losing money due to low
prices for slaughter cattle and the losses may persist through the first half of the year. Low hog
prices have not slowed expansion by large, integrated operations, but many smaller producers are
liquidating their herds. Farmland rents around the district have continued to edge up. Rural
businesses are earning modest profits.
Wages and Prices. Labor markets remained tight last month in much of the district,
with continued evidence of moderate wage pressures. Retailers report a shortage of entry-level
workers due to the availability of other jobs at higher wages in other sectors. Manufacturers have
began to report low-skill labor shortages in addition to ongoing problems hiring skilled and
technical workers. Builders say workers are hard to find in general, but framers, brick layers,
and dry wallers are especially difficult to hire. Some companies have raised wages more than in
the recent past to attract or retain workers, while many say wage increases are about average.
Retailers report that prices were generally unchanged last month. Prices increased slightly for
some manufacturing materials, such as rubber and carbon, and edged down for chemicals. Prices
of construction materials held steady. Retailers expect no major price changes in the coming
months.
XI-1
ELEVENTH DISTRICT--DALLAS
Over the past six weeks, Eleventh District economic activity grew at about the same pace as or
a little slower than reported in the last Beige Book. Prices of most manufactured products were flat to
down while service and construction-related industries continued to report upward price pressures.
Manufacturers saw slightly slower sales growth, but retailers reported stronger than expected sales.
Consumer borrowing increased with new home purchases, but wet weather slowed construction starts.
Service industries reported growth was steady, but constrained by a shortage of labor. Energy activity
remained strong but showed some hints of softening. Agricultural conditions remained favorable.
Prices. Goods-producing contacts reported more price declines than in the previous Beige
Book, but some construction materials and service producers reported increases. A number of
contacts reported commodity price decreases because of the Asian crisis, but some contacts indicated
the decreases were not as large as previously anticipated. Excess capacity weakened prices for some
manufactured goods.
Prices were lower for some petroleum products, memory chips, telecommunications products,
and some metals. Crude oil and gasoline prices continued to decline and are lower than last year's
levels. Although natural gas prices are higher than a year ago, they have fallen recently, and some
contacts expect further declines. Respondents reported that excess domestic capacity for ethylene and
propylene, increased imports of polyethylene bottle plastic from Asia, and increased domestic supplies
of plastic resins like acrylonitrile, polyvinyl chloride and butadiene resulting from reduced exports to
Asia have combined to reduce prices for many petrochemicals. Prices for telecommunications
equipment continued a steady downward trend, but most respondents reported an accelerated decline in
the price of memory chips as a result of the combined effects of overcapacity and the Asian crisis.
Contacts also reported that increased imports from Asia lowered scrap metal prices by 2%, and have
put downward price pressure on raw materials such as nickel and ferro-moly alloys.
XI-2
Prices for retail goods, forest products, and heating oil were flat. Retailers reported that prices
of goods imported from Asia did not decline as much as they had expected a few weeks ago, but some
retailers expect further price declines in the third and fourth quarters. Apparel industry contacts
reported that Asian apparel manufacturers and textile producers have not been able to move swiftly
into the United States because they lack the reputations and distribution networks necessary to do so.
Paper manufacturers reported limited effects from the Asian markets because Asian-produced paper
includes more recycled content than does U.S.-made paper. Heating oil prices were unchanged but
well below year-earlier levels.
Strong construction activity translated into a 5% increase in high-grade steel prices, a 2.5%
increase in brick prices, and a slight increase in cement prices. As the weather improves, contacts
expect cement prices to rise another 5% and soft lumber prices to increase 10% to 15%.
Service fees increased, but at a slower rate than service wages and salaries. Salaries for
engineering and software design were up. Construction wages were also up, but contacts reported that
tight margins for builders limited wage increases. Lumber producers reported 10% wage increases.
Conversely, the rise in the minimum wage was binding for retailers and apparel manufacturers.
Manufacturing. The growth of sales for manufactured products was slightly weaker in the
past six weeks, particularly in the telecommunications and petrochemicals industries. While sales of
cellular telephones and Internet products continued to grow, a decline in sales of switching equipment
left overall sales of telecommunications equipment flat. Domestic sales of petrochemicals were
reported to be very strong, but sales to Asian markets were weak. Petrochemical producers said
problems with rail shipping may have worsened. Contacts had difficulty shipping petrochemicals
westward from the Gulf Coast, and said that several customers have temporarily shut down plants
because petrochemicals were undelivered. Refiners reported that the demand for oil products was
weak and inventories of crude and heating oil are large and growing. Prices for refined products have
fallen as fast as crude prices, and contacts reported that margins have stagnated at levels that are
XI-3
considered mediocre to poor. Respondents indicated that they are responding to high inventories and
low margins by extending and increasing the maintenance normally done in the turnaround season,
when they switch the product mix. Sales of some construction-related products-such as cement and
lumber-were slowed by the drop in construction that resulted from a wetter than usual February, and
are expected to grow strongly with drier conditions. Most electronic equipment manufacturers said
that sales continued to grow at the slower pace that was established over the past three or four months.
One respondent reported that he had to seek out new suppliers because capital constraints had reduced
the output of his Korean suppliers. Scrap metal and paper sales were steady at high levels, but scrap
metal inventories were high due to rail shipping delays. Sales of brick and high grade metal increased
over the last 30 days.
Services. Demand for business services, including temporary staffing, accounting, consulting
and legal services, continued to increase, but all respondents reported difficulty meeting demand due to
a dearth of workers from clerical to executive. Respondents also noted a decline in demand for
accounting services in Houston as the result of oil price declines. Overall, respondents had a very
positive outlook for business service conditions in 1998. Demand for transportation services continued
at high levels, both for cargo shipments and passenger air traffic. Contacts reported that Union Pacific
tie-ups have not improved.
Retail Sales. Retailers reported that sales growth was stronger than expected in February,
with particularly strong growth at stores along the Texas-Mexico border. Contacts were optimistic
about the outlook for sales in the coming year. Auto sales slowed in February after surging
"phenomenally" in January.
Financial Services. Credit quality remained steady and competition for commercial loans
remained strong with many customers receiving several loan offers. Contacts also reported increased
consumer borrowing for home purchases, brisk refinancing activity and seasonally soft auto loan
demand.
XI-4
Construction and Real Estate. Real estate activity continued at a hectic pace, but construction
was slowed by unusually wet weather. Respondents expect a surge in construction in the second
quarter-possibly sufficient to create a shortage of skilled workers, project supervisors and estimators.
Home sales were up strongly across the District, including areas which had been weak such as the
Texas-Mexico border, and inventories were lean. New home prices rose at a faster rate, but builders'
margins continued to be squeezed. Office rents "inched up" at the same rate, and industrial rents rose
at a faster pace as office market demand spilled over into flex space. Land prices continued to rise
sharply.
Energy. Energy activity remained strong in February, with some hints of softening. The
outlook has weakened substantially since the last Beige Book. Crude oil inventories are large and
growing, thanks to a very mild winter in the United States and Europe, reduced demand from Asia,
and increased production from OPEC. Still, oil service and machinery companies continued to report
very strong demand and very long lead times, and contacts said that they expect orders to remain
strong for several months. Natural gas production remained flat compared to last year, with contacts
expressing concern that companies may be having trouble bringing new capacity on line because of a
shortage of oil field services. Nonetheless, there were some reports that it was becoming easier to
schedule services and that some oil service price increases had been rescinded. There were also reports
that some oil companies are paring back on their projected office space needs for 1998.
Agriculture. Agricultural conditions are reported as generally good across the District, with
mild temperatures and good rains. Wet conditions temporarily halted land preparations and early
planting activity. Livestock conditions remained good, but wet pastures caused problems in grazing and
feeding.
XII -
TWELFTH DISTRICT -
1
SAN FRANCISCO
Summary
The Twelfth District continued its vigorous economic expansion, though with indications
of moderation in some areas. The pace of retail sales was moderate. Both the manufacturing and
service sectors experienced continued strong growth, although the restraining effect of the East
Asian economic turmoil was evident in several sectors. The District banking and real estate
sectors remained healthy overall, with the reports being more positive for California than for other
parts of the District. Many respondents noted difficulties finding skilled and entry-level workers,
and some reported larger wage increases than in the recent past.
Business Sentiment
Respondents remain optimistic regarding prospects for the national economy and their
respective local economies. More than sixty percent of them expect national GDP to expand at
its long-run trend and the current rates of unemployment and inflation to remain unchanged over
the next year. Nearly three-quarters of the respondents expect more rapid growth in their regions
than in the nation, although this percentage has declined during the last six months. Despite
respondents' generally optimistic views, the percentage expecting deterioration in their region's
foreign trade balance increased sharply, to nearly three-fourths, over the past six months.
Retail Trade and Services
The pace of retail sales was moderate in recent weeks. A respondent from a large
supermarket chain reported flat sales in Idaho, Nevada, and Utah. Sales were somewhat slow at
XII -
2
department stores in Southern California and other areas, and several respondents noted weak
demand and rising inventories for apparel. An automobile dealer in Utah reported that vehicle
sales were weak during February.
Demand for most services, however, continued to expand very rapidly. Sales were
particularly brisk for providers of telecommunications and cable television services. Respondents
also noted rising demand for business and professional services up and down the West Coast.
Deterioration in the trade balance with East Asia was reflected in reduced exports and increased
imports through the ports of Los Angeles, Seattle, and Portland, with some decline in the total
flow. Reports from Utah and Oregon indicated reduced tourist activity, and Hawaii's tourism
sector has been hit hard by a drop in the number of visitors from East Asia. Southern California
contacts reported that tourist business there has been affected somewhat by heavy rains but
remains strong overall. Respondents in most areas noted ongoing shortages of information
technology workers.
Manufacturing
Production and employment expanded further among manufacturing establishments,
particularly those producing durable goods. The strongest demand conditions were reported for
aluminum, for which market prices have risen about 20 percent recently. Orders for some types
of machine tools rose, though the extent of backlogs varied substantially across companies in this
sector. Boeing expanded its aircraft production further. The company still faces order backlogs,
although order delays by East Asian airlines have grown. Respondents in many areasparticularly the Pacific Northwest-reported that the East Asian economic turmoil reduced
XII -
3
District sales of metals, lumber, pulp and paper, processed food, athletic shoes, and some hightech products. Although production bottlenecks were limited overall, many respondents noted
difficulties finding and retaining skilled computer and craft workers.
Agriculture and Resource-related Industries
The usual seasonal lull in the agricultural sector was exacerbated by adverse weather
conditions and reduced demand from East Asia. Persistent severe rainstorms caused early crop
problems in California, although their impact on the complete growing cycle remains uncertain.
Declining demand from East Asian customers has reduced sales of District resource and
agricultural products, particularly those from the Pacific Northwest. For example, both Alaskan
salmon exports and Washington apple exports were down substantially compared to last year, and
District wheat exports and prices were low. District beef and pork exports to East Asia also were
down substantially, although this was partially offset by increased sales to Mexico.
Real Estate and Construction
Respondents reported enhanced real estate market and construction activity in California
but reduced activity in some other areas. In California, construction activity and prices rose both
in the residential and nonresidential sectors. In contrast, housing starts declined and expansion in
nonresidential construction contracts reportedly slowed in Oregon. Housing starts also slowed in
Utah, where most sales prices reportedly fell short of list prices. Nonetheless, the level of building
activity in the District remained high, and respondents noted shortages of skilled construction
workers in many areas, particularly Oregon, Nevada, and Utah.
XII -
4
Financial Institutions
Conditions at District banks were healthy overall, although industry trends appear to be
more positive in California than elsewhere in the District. Loan activity remained high in most
areas. Several respondents from the Pacific Northwest noted erosion of credit quality and use of
less stringent underwriting standards. Loan demand and availability reportedly were high
throughout California, with one respondent noting an easing of underwriting standards in the San
Francisco Bay Area. Due to ongoing economic slack, two major Hawaiian banks announced
large layoffs. Banks in most other areas reported hiring and retention problems, both for skilled
categories such as loan officers and entry-level positions such as tellers.
Cite this document
Federal Reserve (1998, March 30). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19980331
@misc{wtfs_beige_book_19980331,
author = {Federal Reserve},
title = {Beige Book},
year = {1998},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19980331},
note = {Retrieved via When the Fed Speaks corpus}
}