Beige Book
For use at 2:00 p.m., E.D.T.
Wednesday
August 5,1998
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
July 1998
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICT
JULY 1998
TABLE OF CONTENTS
i
SUMMARY ......................................................
Twelfth District - San Francisco ..........................
First District - Boston .....................................
II-1
Second District - New York ................................
Third District - Philadelphia ............................. III-1
Fourth District - Cleveland ................................ IV-1
Fifth District - Richmond ................................... V-1
Sixth District - Atlanta
VI-1
..................................
VII-1
Seventh District - Chicago ................................
Eighth District - St. Louis ..............................
VIII-1
IX-1
Ninth District - Minneapolis ...............................
Tenth District - Kansas City ................................
X-1
Eleventh District - Dallas ................................. XI-1
I-1
XII-1
i
SUMMARY*
Reports from Federal Reserve Districts generally indicated a high level of economic
activity and further expansion recently, though with moderation in growth for some regions and
sectors. In most Districts, retail sales were in line with retailers' expectations, and inventories
generally were characterized as balanced. Manufacturing activity remained at a high level,
although the GM strike, weakening demand for exports, and general slowing in the high-tech
sector damped expansion. Robust sales growth in residential and commercial real estate markets
continued to fuel construction activity in most of the nation. Reports on the agricultural sector
were mixed, with drought-like weather in the South and low prices for some products tempering
the outlook. Financial institutions across the country continued to report healthy loan demand
and generally accommodative credit conditions. Despite the high level of economic activity in
recent weeks, many Districts noted that labor shortages, shipping bottlenecks, and continued
weakness in East Asia were beginning to temper growth in their regions.
Consumer Spending
Retail sales increased in most Districts in late June and July. Boston, Cleveland, Dallas,
and Minneapolis reported strong sales growth since the last report, often exceeding merchants'
expectations. Among other Districts, Chicago, Kansas City, New York, Philadelphia, and San
Francisco reported steady but healthy retail sales, while reports from Atlanta and Richmond
*Prepared at the Federal Reserve Bank of San Francisco based on information collected before
July 27, 1998. This document summarizes comments received from businesses and other
contacts outside the Federal Reserve System and is not a commentary on the views of Federal
Reserve officials.
ii
indicated mixed sales results. In general, consumer spending remained robust across many
product lines and types of outlets. Sales were strongest for seasonal women's and children's
apparel and big-ticket items such as motor vehicles, home furnishings, and major appliances.
Retailers attributed the continued strength of retail sales to strong consumer confidence, robust
home sales creating demand for complementary items, and favorable financing terms for large
purchases.
For the most part, retailers reported that inventories were adequate for anticipated sales
growth. However, shortfalls were noted for some products. Unseasonably hot weather caught
Midwest retailers with inadequate inventories of fans and air conditioners. Declining inventories
of GM products constrained sales at GM dealers and service centers across the country, but other
auto dealers reportedly maintained sufficient supplies of new cars and parts.
Tourist activity picked up in recent weeks, as the summer travel season got under way. At
beach resorts along the East Coast, hotel bookings and day trip traffic reportedly surpassed yearearlier levels. In Boston, increased tourist traffic from Europe offset declines in business from
East Asia and contributed to the sector's robust growth. Fires depressed tourism in much of
Florida, but other parts of the Southeast attracted visitors, including those interested in riverboat
gambling and Mississippi Gulf Coast casinos. In the West, tourism-related restaurant sales, car
rentals, and hotel occupancy rates reportedly were strong, and attendance at parks such as
Yellowstone and Mount Rushmore rose above year-earlier levels.
Manufacturing
Manufacturing activity remained at a high level in recent weeks, although growth slowed
in most Districts. Boston, Chicago, Dallas, Kansas City, and St. Louis reported good growth in
iii
non-GM related manufacturing. In Boston and Dallas, telecommunications manufacturers
reported good sales gains; in Chicago strong demand for construction equipment and building
materials kept producers running near capacity in recent weeks; in St. Louis, robust demand for
refrigerators and other appliances induced overtime hours for some producers. In general,
manufacturers reported no difficulties obtaining materials or supplies, and prices on many inputs
to production were either flat or declined.
The GM strike and continued weakness in East Asia slowed manufacturing growth in
many regions. In the Atlanta, Chicago, Richmond, New York, and St. Louis Districts the GM
strike directly reduced manufacturing employment, idling workers at GM plants and related
suppliers in these areas. The GM strike also affected electronics manufacturers in Dallas and
chemical, plastic, and steel producers in Cleveland. Weakness in East Asia and increased lowcost imports continued to depress demand for a variety of U.S. products. Manufacturers reported
that sales and orders for apparel and textiles, computing equipment, electronic components,
industrial machinery, paper, and wood products fell in many Districts. Reports also indicated
employment reductions through layoffs or attrition at some companies.
Construction and Real Estate
Construction activity and real estate markets remained robust in most parts of the nation.
Home sales were characterized as strong to booming in Dallas, Kansas City, Minneapolis,
Richmond, and St. Louis, and above year-earlier levels in Atlanta, Chicago, Cleveland, and San
Francisco. Low mortgage interest rates continued to attract first-time buyers, fueling demand for
low to moderately priced homes in many regions. Only Richmond reported concerns about an
iv
excess supply of homes on the market; all other Districts indicated that housing inventories were
low to moderate and consistent with the strong growth in home demand.
Commercial real estate demand also grew rapidly in many areas, although growth was
less uniform across Districts than for residential markets. Declining vacancy rates and increasing
rental prices were present in a number of cities. In Boston, low availability and limited new
construction of commercial space have forced some large and growing firms to relocate to the
suburbs. In Manhattan, asking rents on Class A properties have risen 25 percent since last year.
In Minneapolis and St. Paul, construction of large office buildings was at its highest level in a
decade. In the West, respondents from California reported that low vacancy rates for
commercial office and warehouse space have prompted commercial and industrial construction
in the tightest markets. Only Dallas expressed concern about over building.
Non-Financial Services
Districts reporting on the services sector indicated continued strong growth in recent
weeks. In Dallas, demand for business services continued to rise, fueled by initial public
offerings, mergers, and acquisitions. In San Francisco, sales of telecommunications and cable
television products rose above an already high level. Cleveland reported that transportation and
shipping activity remained very strong in the District, largely due to increased import volumes
from East Asia. Unbalanced trade flows to and from East Asia produced an oversupply of empty
containers at West Coast ports, while in East Asia new containers were being built to meet the
demands of their exporters. In New York, one large retailer stocked up on holiday-season
imports earlier than usual due to shipping bottlenecks at West Coast ports.
Banking and Finance
Loan demand was steady but strong in most Districts in recent weeks. However, the
composition of loan demand differed among regions. Growth in loan demand in Chicago,
Cleveland, Kansas City, and San Francisco was broad-based. In Philadelphia, commercial and
industrial lending was flat, while consumer lending rose slightly. In Dallas, demand for home
and auto loans increased, while in Richmond demand for home mortgage and commercial
construction loans increased.
Overall, Districts characterized financial markets as intensely competitive, with quality
borrowers receiving good terms and rates. Most Districts reported no signs of deteriorating
credit quality. Cleveland, Dallas, and New York reported that loan delinquencies and writeoffs
fell in recent weeks.
Agriculture and Natural Resources
Reports on agricultural conditions were mixed across the Districts. Reports from
Cleveland, Chicago, Kansas City, and St. Louis highlighted generally good agricultural
conditions in their regions, as favorable weather put many crops at or ahead of schedule. In the
South, unseasonably hot, dry conditions distressed crops, in many cases destroying fields that
could not be irrigated. These drought-like conditions also have damaged range and pasture lands.
In other Districts, reports focused on prices rather than weather. Minneapolis and San
Francisco reported that low prices have reduced profitability among agricultural producers. Price
declines for some commodities have been so large that producers cannot cover costs. In addition,
many storage facilities remain stocked with the 1997 crops, thereby producing higher storage
costs for farmers as they seek alternative facilities.
vi
Labor Markets, Wages, and Prices
All Districts reported that labor markets remained tight in recent weeks. Labor shortages
were broad-based, and some skilled workers were in especially short supply. Most areas noted
problems finding information technology workers and construction tradesmen, such as framers.
In addition, a number of Districts noted shortages of quality entry-level workers for retail
positions; certain skilled workers such as machinists and welders; finance and banking personnel;
and drivers for both short- and long-haul delivery. However, general wage increases remained
limited, as employers chose to use one-time payments and merit increases to attract and retain
specific types of employees.
Goods prices remained stable during the recent survey period, although there were
scattered reports of increases in some services. In general, declining input prices and intense
competition were credited with keeping retail prices in check. Manufacturers and retailers
reportedly cannot sustain price increases in the current competitive environment.
I-1
FIRST DISTRICT - BOSTON
Economic conditions are mixed in the First District although growth continues overall. While most
retailers report strong sales increases, some manufacturers are seeing a slowdown in business. Price increases
remain minimal but wage growth is said to be picking up a bit. Commercial real estate markets are robust in
the Boston area and varied elsewhere. Investment management firms saw assets rise in June after a dip in
May.
Retail and Tourism
Most retail contacts report that sales continued to show strong growth in the April through June
quarter, either matching or bettering expectations for the period. Sectors of strength were upscale and mailorder apparel and office supplies and office technology products. The tourism industry is also robust. More
recently (since mid-June), upscale apparel and hardware report some weakening. In all sectors, inventories
are at desired levels.
Two contacts note ongoing effects of the Asian crisis: Catalog apparel sales to Asia are weak and
tourist business from Asia is said to be down much more than anticipated. However, these contacts say their
Asian mail order business may be bottoming out and the loss of Asian tourists is being offset by increased
business from Europe.
Retailers indicate that employment is generally level, increasing only with store expansions. Wage
growth has picked up a notch from the earlier 3 to 5 percent range to a 4 to 7 percent annual pace.
Respondents say prices and gross margins are holding steady. The exception is hotel room rates, which
continue to show sizable increases. A majority of retail contacts say significant capital expansions are either
planned or in progress. Looking forward, most retailers express cautious optimism.
Manufacturing
Half of the First District manufacturers contacted indicate that recent business is up from a year ago,
as compared with three-quarters of those responding seven weeks ago. Of the remaining respondents, about
equal numbers report flat trends and declines. Close to half of the manufacturing sample say that inventories
I-2
are too high and/or that employment levels are being reduced through layoffs.
Telecommunications, furniture, and some appliance sales continue to increase at a rapid rate. The
demand for selected aeronautics products is growing robustly, although respondents also indicate that some
customers are canceling or delaying orders. Contacts manufacturing computer hardware, semiconductor
equipment, industrial machinery, and automotive parts report declining sales or orders. Sluggish trends also
are noted by makers of electrical components, power equipment, paper, and apparel textiles. Manufacturers
of consumer items report slow growth or declines in revenues, in part because of aggressive inventory control
measures by retailers.
Exporters typically indicate that sales to Asia are down substantially from a year ago, with some
reporting that their business in countries such as Korea and Indonesia has virtually disappeared. Most expect
that weakness in Asian economies will continue to depress their revenues in 1999.
Almost all manufacturers indicate that their materials costs are flat or down, although some mention
rising costs for services. Petroleum-based products, copper, steel, some grades of lumber, as well as Asian
items in general, are all reported to cost less than a year ago. Reports of higher selling prices are rare. Paper
prices are said to be depressed because of increased domestic capacity and higher imports. Makers of various
types of equipment express concern about their customers' ongoing demands for lower prices, given their
already low margins.
Wage and salary increases are reported to be mostly in the range of 3 to 5 percent, but are 6 to 10
percent in the case of some firms heavily oriented toward research and development. Respondents indicate
somewhat greater delays and upward pay pressures than previously when hiring professional, technical, and
sales workers, with substantial difficulties and/or costs associated with filling engineering, information
technology, and finance positions.
Commercial Real Estate
Commercial real estate markets are doing well in most of New England. The downtown Boston
office market is still very tight. Vacancy rates are around 3 percent in prime buildings and around 5 percent
overall. Downtown rental rates are at record high levels. Although some new development is planned, there
I-3
is currently little new construction downtown and larger firms have been forced to locate in the suburbs or
beyond. The suburban Boston office market is also very strong, with vacancy rates only slightly higher than
downtown. Apartment buildings are in demand, but the retail sector is weak, with higher vacancy rates and
lower rental rates than last year.
Contacts report various market conditions elsewhere in New England. The Connecticut office market
has improved compared to the last two years, but it still has "a long way to go" relative to where it was in the
late 1980s. Office vacancy rates in the Greater Hartford area are around 18 percent while the Stamford office
market is strong. The Maine commercial market, however, has not recovered so far this year. Demand for
commercial space is low and banks have little confidence in the market, leading to a tight credit market and
lack of new construction. The Rhode Island market is very strong, with low inventories and plans for new
industrial and office construction. Moderate increases in rental rates are reported in Connecticut and Rhode
Island. Contacts predict steady markets for the rest of the calendar year.
Investment Management
Assets of long-term (non-money-market) mutual funds rose in June after declining slightly in May.
Stock funds saw an increase in net cash flows between May and June while bond funds had a decrease in cash
inflows.
All contacts at investment management firms report that they have increased employment in recent
months. Respondents indicate that they rely on hiring bonuses to attract workers and that these bonuses
usually exceed 10 percent of base salary. While bonus programs are of long standing in investment
management firms, some have recently expanded them into lower levels of the organization.
II-1
SECOND DISTRICT--NEW YORK
The Second District's economy continued to grow briskly since the last report. Retail sales
slowed a bit in June and early July but, on balance, remain close to plan. Both retail selling prices and
merchandise costs were little changed, though sizable price reductions are anticipated in early 1999.
Retailers report labor shortages but not significant wage pressures. Housing markets remain firm in the
New York City area and have picked up in much of upstate New York; remodeling continues to boom
in northern New Jersey. Office rents continued to surge in Manhattan but have paused in most of New
York City's suburbs; vacancy rates held steady at low levels in most areas.
Regional purchasing managers report that manufacturing activity continued to grow at a steady
pace in June, while input prices continued to edge down. As of July 27, more than 10,000 workers in
the District (mostly in western New York) were affected by the UAW-GM strike. Finally, local banks
report further declines in consumer delinquency rates and continued moderate growth in loan demand.
Consumer Spending
Major retailers generally report that sales in the region were close to plan in June and the first
three weeks of July; year-over-year comparable-store sales gains ranged from 0-9 percent for the full
period. Most contacts note continued firm demand for home durables. Apparel sales are still said to be
fairly brisk but less so than in April and May-a number of retailers note that warm spring weather
translated into an earlier buying season for summer clothing. All contacts say that inventories were at
desired levels at mid-year. One large retailer notes that shipping bottlenecks from West coast ports
prompted them to stock up on imported merchandise for the year-end holiday season earlier than usual.
Retail selling prices and merchandise costs were reported to be steady, on balance, with cheaper
Asian imports offset by higher prices for toiletries and certain other items. Most retailers say that the
Asian crisis has had only a modest impact on the costs and prices of merchandise currently on the
II-2
shelf-mainly apparel, electronics and appliances-as well as merchandise for the upcoming Christmas
season. However, a number say that they have negotiated "surprisingly" good deals for next spring's
merchandise and expect sizable price reductions in early 1999. While there were no reports of increased
wage pressures, most retailers say it is increasingly difficult to staff their stores; one contact says that
labor shortages have forced sharp increases in overtime costs for existing employees.
Construction & Real Estate
Housing markets in New York and New Jersey gained momentum across the board in the second
quarter. Permits to build single-family homes continued to trend up in May and June, with secondquarter levels running 14 percent ahead of a year earlier. More currently, builders in northern New
Jersey report that moderate to mid-priced homes have continued to draw strong traffic and sales in
recent weeks, but that the high end of the market has "definitely slowed." Separately, persistently robust
demand for remodeling New Jersey's aging housing stock has created labor shortages, drawing large
numbers of "amateur remodelers" into the field, according to an industry expert.
New York State realtors report brisk sales of existing single-family homes in the second quarter,
and especially in June. For the quarter overall, average selling prices rose 6 percent from a year earlier,
led by double-digit gains in New York City's northern suburbs. Unit sales rose 12 percent from a year
ago statewide. Upstate New York's chronically sluggish housing markets picked up noticeably in the
second quarter, with unit home sales surging 14 percent from a year ago and prices up 4 percent.
The multi-family sector has also picked up in recent months. Permits to build apartments
rebounded in the second quarter and are running slightly ahead of 1997 levels. Prices of prime
Manhattan co-ops and condos also rebounded in May and June, following a dip in March and April.
Office vacancy rates across most of the New York City area held steady at low levels in the
second quarter. The only areas to register further declines were lower Manhattan (from 14.6 to 13.9
11-3
percent) and Fairfield, CT (from 10.5 to 9.6 percent). Asking rents on Class A properties continued
to surge at a roughly 25 percent annual rate in Lower and Midtown Manhattan, and at a 15 percent pace
in Westchester. However, rents were little changed in northern NJ, Long Island and Fairfield, CT. Still,
rents in Long Island and Fairfield are up roughly 10 percent from a year ago.
Other Business Activity
Local purchasing managers surveys indicate that the District's manufacturing sector continued
to expand at a moderate pace in June. Buffalo purchasing managers note that growth in new orders
slowed in June but that both production and employment continued to expand at a steady pace. New
York purchasing managers report that overall business activity grew at about the same pace as in May.
Both surveys indicate that prices of material inputs were down moderately in June, though New York
purchasers continue to report strong upward cost pressures for contracted services.
As of July 27, the UAW strike against General Motors was affecting an estimated 10,600
workers in the District, mostly in western New York State. In the Buffalo area, approximately 6,650
workers at GM and its major suppliers have been idled by the strike. In addition, roughly 2,350
employees at GM's Linden, New Jersey assembly plant, 1,400 at a Rochester engine plant, and 200 at
a castings plant in Massena, NY have been affected.
Financial Developments
According to a survey of senior loan officers at small and medium-sized banks in the District,
overall demand for loans increased at about the same pace as in the last report. Consumer loan demand
accelerated, while demand for mortgages and commercial and industrial loans leveled off. Refinancing
activity was also stable. Bankers also appear increasingly willing to lend: 34 percent report increased
willingness, while only 3 percent report less. Virtually all respondents indicate no change in credit
standards over the last two months. Interest rates on loans declined over the last two months-
II-4
particularly for commercial and industrial loans-while deposit rates remained steady. Delinquency rates
fell slightly, led by the consumer segment, indicating continued improvement in credit quality.
III-1
THIRD DISTRICT - PHILADELPHIA
Business activity in the Third District remained at a high level in July, but growth
appeared to have eased from the first half of the year. On balance, manufacturers reported gains,
although fewer firms posted increases in orders than in previous months. Falling orders from
Asia continued to affect the region's goods-producing sector. According to merchants, retail
sales held steady at a good rate, and inventories were falling. Auto sales have remained strong
except for a drop in vehicle sales for strike-bound General Motors. Bank loans in the District
have been steady. Tourist activity was reported to be very good throughout the District.
Looking ahead, manufacturers anticipate a lower level of activity in the second half of the
year than in the first. Retailers, however, expect sales growth to resume, and auto dealers see no
evidence that car buying will ease soon. Bankers forecast that demand for credit will show little
or no change in the months ahead.
MANUFACTURING
Third District manufacturing activity was growing slightly in July, according to reports
from the region's goods-producing firms, but gains were much less prevalent than in the first half
of the year. Continuing declines in orders from Asian customers were affecting makers of
industrial goods, especially producers of building materials, chemicals, and machinery. On
balance, area firms reported slight increases in shipments, new orders, and order backlogs, but all
of these measures showed less strength than they did earlier in the year. Inventories decreased at
III-2
most of the plants surveyed, although some manufacturers of electronic parts and other
intermediate goods reported unintended increases in inventories because of declining orders from
their Asian customers.
Industrial prices for both inputs and products sold edged down, according to the firms
surveyed. Manufacturers cited foreign and domestic competition as well as their own costcutting efforts as factors restraining prices.
Looking ahead, area manufacturers forecast slower activity in the second half of the year
than in the first. They expect declines in shipments and orders, and they plan to pare
employment. Although firms in the region plan to increase capital spending on balance in the
second half of the year, fewer firms will be boosting outlays than during the first half.
RETAIL
Third District retailers generally reported a steady but healthy pace of sales in July. Most
of the store executives contacted for this report believe the pause in month-to-month growth is
mainly seasonal. They indicated that the year-to-year increase in July was good. Merchants said
high consumer confidence was supporting purchases, and an increased pace of home sales was
bolstering demand for home goods and appliances. Most of the retailers interviewed in July said
inventories were low as they awaited shipments of fall merchandise. Merchants expect sales
growth to resume with the back-to-school shopping period, although a few expressed concern
that transportation problems in Asia might delay receipt of ordered goods.
Auto dealers in the region said sales continued to be strong, but General Motors dealers
were suffering from a lack of supply as a result of the strike against that manufacturer.
Inventories were said to be near desired levels except for GM vehicles. Manufacturers have
III-3
extended their rebate programs, and dealers expect the sales rate to remain at or near the current
pace.
FINANCE
Reports from Third District bankers indicated that loan volume in the region has been
virtually steady. Commercial and industrial lending has been flat. While some banks said they
were booking more loans to middle market companies, others said they were losing business
borrowers who have obtained nonbank financing. Consumer lending was rising slightly in July.
Some bankers noted that significant amounts of consumer debt were being consolidated into
refinanced home mortgages. Reports on real estate lending were mixed. Some banks were
expanding residential and commercial mortgage lending, but on balance, real estate credit
outstanding at banks in the region was not growing in July. Several bankers said that
commercial property prices appeared to be approaching unsupportable levels, and they were
becoming more selective in considering requests for construction and acquisition financing. In
general, bankers expect credit demand to remain nearly steady in the second half of the year.
TOURISM
Tourist activity throughout the Third District has been strong this summer. Beach resorts
in New Jersey and Delaware and mountain resorts in Pennsylvania report high hotel occupancy,
robust home rentals, and healthy retail activity. Additionally, real estate agents in these areas
have noticed increased interest in both existing and new summer homes, and in several areas,
home sales and construction have picked up. Tourist officials also reported an increase over last
year in day trips to a variety of recreational locations in the region.
IV-1
FOURTH DISTRICT - CLEVELAND
General Business Conditions
The District's economy seems to have slackened a bit, partly as a result of rising
imports and the growing effects of the General Motors strike. Nevertheless, business
activity remains strong overall, and labor markets are still unusually tight. Shortages of
skilled workers remain a problem at many firms, especially in the communications
industry. An electronics firm indicated that labor shortages there have been eased by inmigration from other regions.
Temporary employment agencies in the District report that labor demand has
leveled off after several months of rapid growth. Still, the demand for workers remains
well above year-ago levels. Moreover, temp agencies report that a high proportion of
placements become permanent hires before the standard 90-day contract has expired.
Most firms report a small rise in the rate of wage growth, and retention bonuses have
become common.
Collective bargaining settlements in the District reveal mixed wage patterns.
About half of the union contacts report a slight increase in wage growth from this time last
year, while others see wages holding steady.
Agriculture
Crop development varies throughout the District, depending on soil conditions.
Dry soil is reported in the northwest Ohio and Pennsylvania regions, while flooding has
been a problem in southeast Ohio and Kentucky. Nevertheless, the District's crops are
generally ahead of schedule. The condition of roughly 66% of the region's corn and 65%
IV-2
of its soybean crop is rated good to excellent-about 15 to 20 percentage points better
than in 1997. And although wet weather has encouraged the spread of blue mold disease,
the District's tobacco crop is also rated as improved from last year.
In Ohio, corn plantings are down 7% from last year, acres planted in soybeans are
unchanged, and winter wheat acres harvested increased 6%. Still, corn inventories are
70% above this time last year, soybeans are up 16%, and wheat stocks have risen 156%.
Construction
Residential construction has continued at a rapid pace in Ohio, while western
Pennsylvania has shown signs of diminished activity. In central Ohio, new housing starts
were reported up 35% between the first and second quarters, and June starts this year
were 70% higher than year-earlier numbers. Commercial construction is continuing at a
very strong pace throughout the District.
Construction costs are holding steady, with the exception of a slight increase in
labor costs and land prices. Cost increases are somewhat higher in central Ohio, where
one source indicated that building costs rose 3% to 5% overall during the first half of
1998. A few large construction companies are reported to be buying land in this region in
anticipation of future building.
Industrial Activity
Manufacturing activity remains relatively strong although the GM strike and
further deterioration in foreign economies appear to have taken some of the momentum
out of production growth.
IV-3
Steel producers report a drop in sales resulting from the GM strike and a record
increase in foreign imports. These developments have combined to cause a buildup in
steel inventories and to put downward pressure on steel prices.
Sales have also fallen somewhat in the chemical industry. Prices of many products
are being driven down and profit margins are said to be narrowing due to increased
pressure from Asian competitors. A few companies also report that raw materials prices
are decreasing. Some chemicals and plastic producers also report a drop-offin sales due
to the GM strike.
The transportation and shipping industry remains very strong. Ports and railroads
see increased volumes related to the recent strength in imports. Trucking companies are
also reporting an increase in business from year-ago levels. Some firms expressed concern
that the impact of the GM strike, whose influence on the industry has been only minor
until now, is increasingly being felt in the supplier network.
Consumer Spending
The retail sector continues to show strength, with some discount stores noting
double-digit increases in sales year-over-year. Other retailers report high single-digit sales
growth. Among the various retail categories, women's apparel, especially casual wear and
sportswear, has shown substantially improved sales growth. Sales of men's apparel,
however, has softened relative to a year ago.
The furniture category saw modest sales increases, as did home electronics.
Strength in the electronics segment came from sales of digital satellite systems, home
office equipment, and major appliances. Audio equipment has seen a sales decline.
IV-4
Inventories for every category of retailer appear to be "on plan." Owing to sales
strength and store growth, retail outlets continue to add staff. Most report "no more
difficulty than usual" in acquiring personnel. Retail prices remain flat, with the exception
of electronics, where prices have been declining.
After posting record sales volumes in June, District auto dealers note a drop in
new-car sales in July. GM dealers indicate that inventories have eroded and sales have
dropped dramatically as a result. Other dealers, however, remain generally optimistic
about continued sales strength. Used vehicle sales have been relatively stable, although
prices at auctions are reportedly rising again after many months of decline.
Banking and Finance
Lending activity in the District is strong for both commercial and consumer loans,
and demand for the latter category is continuing to strengthen. However, mortgage
refinancing activity has moderated somewhat following many months of strong gains.
Consumer delinquencies have improved, and commercial delinquencies are holding at a
very low level.
Competition for borrowers is still vigorous in the District. The spread between
borrowing and lending rates continues to narrow.
FIFTH DISTRICT - RICHMOND
Overview: Fifth District economic activity continued to grow at a moderate pace in the
weeks since our last report. Retail sector growth slowed noticeably from its rapid rate earlier in
the year, pulled lower in part by softer consumer-durables sales. In contrast, growth in the
manufacturing sector edged up because of solid domestic demand, and the service sector
expanded at a more rapid clip. Real estate activity and bank lending remained strong throughout
most of the District. Labor markets stayed very tight and employers continued to scramble for
qualified workers, but wage growth remained generally modest. Prices of goods and services
were little changed. In agriculture, hot and dry weather stressed crops and reduced yield
prospects.
Retail: Retail sales grew more slowly, and firms lowered their staffing levels in recent
weeks. Among merchandise categories consumer electronics and hardware and lumber sales
were softer. While some retailers trimmed employee numbers to reduce labor costs, tight labor
markets left other employers unable to fully staff their stores. The manager of a hardware store
in Columbia, S.C., expressed frustration at high employee turnover and has recently purchased
material-handling equipment to reduce his labor needs. In contrast, automobile sales were strong
in June and July, although some General Motors (GM) dealers reported low inventories because
of the United Auto Workers (UAW) strike. Wage growth in the retail sector moderated
somewhat, and of those contacts who reported wage increases, several said that the higher wages
were straining their profit margins.
Services: Service sector revenues grew at a slightly quicker pace since our last report.
Hotels reported a sharp uptick in both business and vacation stays. The Richmond, Va., airport
indicated that air passenger traffic set a record in June. Employment rose in recent weeks, but
the gains were more modest than in our last report. Wage growth eased a bit, while prices for
most services were generally little changed; higher hotel prices were a notable exception.
Looking forward, service providers anticipate increased demand for their services through the
end of the year.
Manufacturing: District manufacturing activity strengthened somewhat in recent weeks
following a sluggish June. Shipments and new orders growth bounced back for most goodsproducing industries. However, employment slipped lower, particularly at textile and apparel
plants. Several textile mills recently announced job cuts because of continued economic
problems in Asia. A contact at one North Carolina textile mill said that these problems were
"getting worse quickly." In contrast, shipments of industrial machinery and electronic
equipment grew more quickly.
The UAW strike against GM is having an impact in the Fifth District. Nearly 2,700
workers at a GM plant and 300 at a GM parts supplier in Baltimore, Md., have been laid off. In
North Carolina, a producer of fabrics used in GM automobiles said that his company had asked
its employees to take vacations on a rotating schedule in order to avoid layoffs. In South
Carolina, some auto parts producers have begun altering their work schedules and eliminating
overtime until a settlement is reached.
Finance: District loan officers reported strong and steady demand for bank loans.
Continued low interest rates and a strong economy have underpinned brisk mortgage lending.
Commercial lending was boosted in some areas by increased construction loans. Vigorous
competition for commercial accounts persists; in the words of a Charleston, S.C., banker there is
simply "too much money chasing too few deals." A few bankers we talked with said that more
intense competition was resulting in "looser" loan covenants in the industry.
Real Estate: Residential realtors described home sales as "very strong" to "excellent"
across most of the District. Less expensive homes sold particularly well, in part because low
interest rates continued to make houses more affordable to first-time buyers. In some areas,
however, contacts said that the supply of new homes rose; a West Virginia realtor noted that
speculative building had caused the normal six-month supply of homes to balloon to a ten-month
supply. Homebuilders reported that building permits and housing starts were "holding steady" at
generally high levels. Labor and materials costs rose only modestly, despite widespread
shortages of skilled workers. House framers were in extremely short supply and one builder said
that framers could "name their price."
Commercial real estate activity remained at a high level, although some contacts noted
evidence of a slowdown. A North Carolina realtor described the market as "static compared to
before" with "no major swings one way or another." In contrast, a South Carolina contact said
that the market there was just "humming along," and a District of Columbia contact
characterized growth in that market as "brisk," driven by the need for more office space for law
firms and telecommunications companies. Realtors' outlooks for commercial real estate activity
were mixed, but most expected no change in market conditions in coming months.
Tourism: Tourist activity continued to strengthen in June and the first three weeks of
July. Bookings for the Fourth of July holiday were somewhat stronger than those a year ago; one
resort operator on North Carolina's Outer Banks credited unusually pleasant weather for
increased business during the holiday. Looking forward, contacts at hotels and resorts expected
tourist activity to remain strong through the end of the year.
Labor Markets: Strong demand for workers persisted throughout the District in almost
all industries. Contacts at employment agencies said that employers were seeking help in many
job categories, but particularly for administrative assistants with computer knowledge.
Employers continued to comment on the disappointing quality of job applicants; a printer in
North Carolina said that the quality and productivity of new hires had declined in recent months
and that "many work a week or two and then fail to return." A Columbia, S.C., lumber retailer
echoed the view of many employers with his comment that the low quality of available workers
is "what you would expect with a two percent unemployment rate." Despite labor market
tightness, wage pressures remained mild; several contacts expressed the general sentiment that
competitive pressures severely limited the wage increases they could offer.
Agriculture: Agricultural analysts report that despite some scattered showers in recent
days, unusually hot, dry conditions across most of the District had stressed crops, especially corn
which is in its pollinating and ear-filling stages. In South Carolina, the heat and drought has hit
crops particularly hard; some fields there were considered a total loss. In other areas, producers
of high-value crops such as tobacco and vegetables turned to irrigation to maintain their yields.
Across the District, yield prospects for many crops have diminished in the last few weeks and
agricultural analysts said that continued heat and drought could quickly broaden crop losses.
VI-1
SIXTH DISTRICT - ATLANTA
Summary: According to most District contacts, growth remained steady in the Southeast
and the outlook remains positive. Retail sales continued to exceed last year's levels in June and
inventories remain balanced. Single-family home sales and construction are also running above
last year's figures, and commercial real estate markets remain healthy. The manufacturing sector
has slowed somewhat from our last report. Recent fires in Florida dampened travel to the state,
while along the District's Gulf Coast, tourism has increased. Bankers report moderate loan
demand. Tight labor markets remain a problem for many regional employers, but wage increases
are not widespread.
Most contacts continue to report that prices are stable because of the
competitive environment.
Consumer Spending: According to retail contacts, sales during June were up slightly
compared with a year ago, while sales results in early July were mixed. As in our last report,
most retailers said that recent sales had met their expectations, although a notable minority was
disappointed with the latest results. Most merchants continue to report balanced inventories and
expect third quarter sales will exceed the prior year's level slightly.
Construction: Once again, reports from real estate contacts indicate that home sales
during June were above year-ago levels in most areas of the District. Most District builders
reported that new home construction was up slightly during June and early July with no signs of
overbuilding. Commercial real estate markets remain healthy throughout much of the region.
Office development generally continues at a strong pace; however, several markets are showing
some signs of slowing. The industrial market remains stable in most areas, and retail markets
VI-2
remain healthy in most areas. Multifamily construction continues at a strong pace despite rising
vacancy rates in several key markets.
Manufacturing: The factory sector appears to have weakened a bit, with slowing current
output and new orders, when compared with our most recent beige book report.
Margins
continued to be squeezed for regional apparel producers because of offshore competition; these
companies are reportedly restricting inventories because of cheap imports flooding the market. The
General Motors strike is adversely affecting parts suppliers in Alabama and Tennessee, as well
as all but one of the District assembly plants. Several paper mills in Alabama have opted for
downtime because of high inventories and decreasing sales. More positively, shipyards in New
Orleans are thriving with large new contracts. Several chemical plants are also expanding in
Louisiana. Shipments are increasing for producers of electronic and electrical equipment.
Tourism and Business Travel: Fires in Florida have resulted in a temporary setback for
the state's important tourism and hospitality industry. Some hoteliers in Miami reportedly were
discounting rooms and offering attractive travel packages to draw visitors. The smoke from the
fires forced the closure of a major highway for four days and the cancellation of a major stock car
race at Daytona Beach, resulting in an estimated economic loss of $300 million to the Daytona
area. Theme parks remained packed in the immediate Orlando area and hotels there had few
vacancies.
One contact noted that some hotels and motels near the fires reported booming
business, thanks to the many firefighters they were housing. In other parts of the District,
riverboat gambling revenues are up from a year ago in Louisiana, and more hotel rooms are about
to come online in New Orleans. Labor shortages are constraining the continued expansion of
casinos along the Mississippi Gulf Coast.
VI-3
Financial: Overall loan demand has continued its moderate pace of expansion throughout
the District. Consumer, commercial, and automobile loan activity remain healthy, and mortgage
demand and refinancing activity continue to be brisk.
Wages and Prices: Although contacts note some escalation in wage and benefit costs,
competition continues to restrain passing on costs to consumers. Pressure in the technology field
is especially intense because of worker shortages. Production at some Tennessee companies is
reportedly growing more slowly than projected because they can not fill certain positions, and
many hotel operators there have resorted to recruiting employees from other countries under
special temporary visas. Benefits such as stock options, extended vacation plans, and bonuses are
increasingly being used to recruit and retain employees. Productivity enhancements have about
reached a peak for some firms contacted, and profits are expected to begin to suffer.
Goods prices remain stable with a few exceptions. In the oil service sector, daily rental
rates for supply vessels have plummeted. Paper prices continue to suffer because of competition
and lackluster sales.
Agriculture: A drought throughout the Southeast has caused a great deal of distress to
crops despite recent scattered rains. Hay and corn for livestock feed have been in short supply
throughout the region. To date, the drought has cost $405 million in lost gross farm receipts in
Georgia, with cotton, hay, peanuts, corn, and tobacco being the hardest hit sectors. In Florida,
the drought has thus far cost the state $175 million in farm revenue and about $300 million in
commercial timber. Corn yield in Alabama is expected to be 50 to 70 percent of the normal level;
the heat has also lowered dairy production by about 20 percent and has stunted chicken growth.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. The Seventh District economy remained quite strong in June and July, though
growth was hampered by strikes against General Motors Corporation. The strikes led to the company
shutting down nearly all of its operations in the region, idling tens of thousands of workers.
However, most contacts outside the auto industry reported very limited effects from the strikes.
Consumer spending picked up in July after slower-than-expected sales results in June. Exceptional
strength in the construction industry was rippling through virtually every segment of the economy.
Consumers were buying home furnishings and appliances to stock their new homes and the region's
steel and construction equipment producers were running near capacity. Lending activity remained
brisk in June and July, in large part due to very strong home sales. Labor markets remained much
tighter in the District than for the nation as a whole, despite the heavy concentration of GM and its
suppliers in the region. Hog prices dropped below the break-even point for many pork producers and
grain prices were pushed downward by the prospect of a large fall harvest.
Consumer spending. Overall retail sales in July were in line with industry expectations after
slower-than-expected June sales results. Reports by individual merchants were mixed, however,
because some retailers were not adequately stocked to meet the demand for air conditioners, fans,
etc., due to warmer-than-expected weather. Women's and children's apparel were most often cited
as selling very well while sales of fall merchandise got off to a slow start. Strong home sales
continued to boost sales of complementary items, such as furniture, electronics, lawn and garden,
appliances, and home improvement items. There were no reports of unwanted inventory
accumulation and promotional activities were virtually unchanged from the same period last year.
For most of the District's retailers, there has been little or no effect so far from the auto strikes. One
national department store chain reported that, in contrast to sales gains elsewhere, sales were down
markedly in the immediate area of the strikes (Flint and surrounding areas); and some
restaurants/lounges and convenience stores in that area were also negatively impacted. Sales of new
light vehicles at GM dealerships were down considerably due to a lack of inventory, and parts
shortages resulting from the strikes were beginning to hamper their service business. Light vehicle
sales remained strong for the region's other automakers, despite a slight pullback in the use of
incentives. On average, the industry's level of incentive spending decreased recently although the
pullback was tempered by the competing goal of increasing market share. Automakers were
VII-2
concentrating on increasing market share through fleet sales. The shortage of new vehicles has been
driving up prices on some used GM vehicles.
Housing/construction. Overall construction activity remained very robust in June and July,
the impact of which has rippled through the rest of the economy. Strength in existing home sales
continued to surprise some realtors, with year-over-year unit sales growth in the double digits. Sales
of new homes did not fare as well. Though still strong, builders across the District indicated that new
home sales had softened somewhat in June and July. Several contacts suggested that the exceptional
sales pace early in the year may have borrowed some from June and July sales. However, there were
no reports of unexpected inventory buildup or increased use of incentives to move new housing units.
As in our last report, business construction remained very robust with the exceptional strength
making it very difficult to find construction workers in many markets. The overall strength in
housing and construction activity could be felt in virtually every economic sector from consumer
spending to the region's manufacturing sector--where producers of construction equipment, steel, and
building materials were all running near capacity.
Manufacturing. Manufacturing activity remained very high in the District, although overall
growth was slowed by the auto strikes in June and July. Production of light vehicles in the District
dipped expectedly, but the slowdown was due entirely to the auto strikes. Other automakers reported
continued high levels of production, with light vehicle sales remaining strong and inventories in good
shape on fast selling models, but slightly high for some of the slower selling lines. The auto strikes
curtailed production at some of the region's steel factories. Due to "just in time" inventory control,
suppliers of steel to GM had a strong incentive to cut production immediately, but one contact
indicated that those suppliers will quickly resume normal production once the strikes are settled.
Steel prices decreased slightly as inventories built up due to the strikes and as imports from Asia
accelerated. Producers of construction equipment and heavy trucks continued to run at or near
capacity with strong demand and desirable to slightly lean inventory levels. Demand for agricultural
equipment softened noticeably as a result of declining food commodity prices. In addition, another
of the region's manufacturing industries (paper) was reporting adverse effects from the economic
malaise in Asia.
Banking/finance. Lending activity generally slowed in June and July though growth
remained positive and "acceptable." The commercial lending market was described by one banker as
"hot as a pistol." Lenders in Michigan and Indiana expressed concern that prolonged auto strikes
VII-3
could erode asset quality on loans to some of the automaker's suppliers. Only a small percentage of
suppliers to the industry are exclusive to GM, however, and to date there were no reports of asset
deterioration resulting from the strikes. Competition in the commercial real estate segment was
leading to a few deals that left some analysts "scratching their heads."
Strong sales of new and
existing homes continued to bolster the consumer side of lending. Though largely past the recent
boom, refinancing activity remained robust and one contact indicated that another 10-15 basis point
drop in the rate on 30-year fixed rate mortgages could lead to another wave of refinancing activity.
Competition continued to squeeze margins, but increased fee income--especially mortgage
underwriting fees--was boosting profits. Many bankers indicated that strong earnings are being used
to shore up loan loss reserves, limiting their exposure in the event of an economic downturn.
Overall asset quality remained very good according to most contacts.
Labor markets. Labor markets in the District remained tighter than for the nation as a
whole, despite the labor strife at GM. The region's unemployment rate was nearly a full percentage
point below the national average in June, and labor markets showed few signs of developing slack in
July. Some auto suppliers and dealers were reluctant to lay off workers, despite the strike-related
slowdown, for fear of losing them to other employers. A District trucking and warehousing firm
reported continued difficulty in finding and retaining quality drivers. A staffing services contact in
central Indiana indicated that the firm had more applicants and fewer permanent hire orders from
mid-June to late July. This contact suggested that these developments, and several requests by
previous applicants to re-open their files, indicated some softening of demand for labor in the area.
Contacts most frequently cited information technology and construction workers as being in short
supply. There were no new reports of intensifying general wage pressures, with District employers
preferring to use targeted wage increases and one-time bonuses to attract and retain workers.
Agriculture. For many hog producers, hog prices have fallen below break-even levels as a
result of weaker-than-expected exports to Asian markets, increased output, and large competing
supplies of beef and chicken. In contrast, strong demand for milkfat-based products, such as butter
and ice cream, firmed up milk prices for dairy farmers. Much of the critical pollination period for
corn occurred in July (rather than August) due to the early spring planting. Generally favorable
weather conditions and a lack of any serious problems contributed to a decline in cash and futures
prices for both corn and soybeans. The well-being of the corn and soybean crop is somewhat
variable, with conditions relatively better in Iowa and Wisconsin than other District states.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
Economic activity remains robust throughout the District. Contacts are reporting growth in
both demand and sales and expect more of the same in the near future. Tight labor markets still
prevail. Fallout from the UAW strike against GM is being felt at suppliers and other firms around
the District. Several District employers report double-digit increases in health insurance costs for
their employees. Real estate markets, both residential and commercial, are strong: Sales and prices
are up. Real estate loans at large District banks, however, are down, which, together with consumer
loans, have pulled down the total number of loans outstanding. The District's wheat crop looks to
be significantly below last year's production.
Manufacturing and Other Business Activity
Most contacts continue to report strong growth and remain optimistic about economic
prospects in the near future. Shortages of skilled workers, especially construction workers, are still
hampering production gains at some firms. With real estate markets booming, this labor shortage is
straining builders' ability to keep up with housing demand. But for contractors, the real estate market
is a dream. As one contact remarked, "Ifyou can't make money in today's market as a contractor,
you'll never make it."
The furniture and household appliance industries are being carried along with the real estate
wave. Demand for high-end furniture has grown, but to some degree at the expense of lower end
merchandise. Demand for refrigerators has also increased; it is being met with overtime. Meanwhile,
contacts at various metals firms are reporting sales growth in the range of 10 percent over a year
earlier.
VIII-2
Labor disputes have also taken their toll on activity. Numerous GM suppliers around the
District are reporting layoffs because of the UAW strike. This is the first time that some of these
firms have had to layoff workers because of a GM strike. Unrelated to the GM strike, a maker of
filters in Louisville closed its plant after management and UAW workers, on strike since April 1,
failed to reach an agreement. And 530 Steelworkers are striking against an aluminum smelting firm
in western Kentucky. The workers struck in late June; there has been no contract since the union was
formed last summer.
Labor Compensation
District firms generally continue to report a ratcheting up of wage rates. To some extent, this
remains most evident for high-skilled positions. Moreover, entry-level wages in many areas and at
a cross-section of industries are reportedly well above the federal minimum wage. An increasing
number of contacts are reporting outsized increases in their cost structure due to health insurance
premiums. Increases in excess of 10 percent compared with a year earlier are not uncommon. In
response, some firms have implemented more cost sharing with their employees.
Real Estate and Construction
Residential real estate markets remain strong throughout the District. Agents continue to
report rising prices and a surge in sales of both new and existing homes. In many metropolitan areas,
year-over-year median sales prices are up between 6 and 14 percent. Sales of homes priced between
$120,000 and $175,000 are particularly strong, while the market for homes priced above $400,000
appears to be softening moderately. New residential construction tapered off somewhat in May from
April, with only five of the District's 12 metro areas posting an increase in building permits. Year-todate permits, however, are up in nine metro areas from a year earlier, with Little Rock and Louisville
posting healthy 25 percent increases. Agents also report vibrant commercial real estate markets.
VIII-3
Construction of new apartment complexes, particularly upscale, luxury apartments, is on the rise in
several areas.
Banking and Finance
Total loans on the books of a sample of large District banks declined 2.7 percent in the two
months between mid-May and mid-July. A large decline in real estate loans of 5.7 percent was mostly
responsible for the downturn in outstanding loans. Consumer loans also declined, but by a much
smaller 1.2 percent. Commercial and industrial lending, on the other hand, continues to expand,
rising 2.8 percent over the period. One year ago, C& I loans rose 1.6 percent during the same twomonth period.
Agriculture and Natural Resources
District row crops are reported to be in good condition in most areas, although some
nonirrigated crops in southern parts of the District have recently deteriorated because of sparse
rainfall and hot temperatures. Overall, though, the recent hot and dry weather throughout most of
the District appears not to have harmed row crops yet significantly. Initial USDA projections indicate
that the 1998 wheat production should be down by an average of nearly 10 percent in all District
states except Arkansas, where increased plantings and a modest uptick in yields are expected to boost
production by nearly 17 percent. In the remaining states, fewer planted acres and, in some instances,
marked yield declines are expected to be the norm. Moreover, initial reports from a few areas
indicate some deterioration in the quality of the harvested wheat crop. Poultry producers, however,
have had higher-than-average death losses because of power outages during the heat spell. District
farmers report that the drought-like conditions in parts of the Southeast have spurred an increase in
the demand for hay.
IX-1
NINTH DISTRICT--MINNEAPOLIS
Growth continues to predominate in most sectors of the Ninth District economy. But ill winds,
especially from Asia, are increasingly retarding the pace of growth. General retailing, autos, tourism
and construction are strong. Real estate markets are very active in both residential and commercial
categories. Unemployment rates remain very low, and labor markets show continuing symptoms of
tightness.
Manufacturing output, while still high overall, is beginning to slacken, especially in those
products or firms with substantial Asian exposure. Manufacturing exports are down on a yearover-year basis. The natural resource sectors, particularly agriculture, mining and energy
development, face low prices, and drilling and mining activity is faltering. Reports of upward
pressure on overall compensation are widespread, despite data showing only moderate increases in
direct, cash compensation.
Real estate and construction
"Sizzling home market continues," headlines a Minneapolis article reporting double-digit increases
in sales of existing homes for the first half of 1998 compared to a year ago. Realtors also report
strong activity in office, commercial and light industrial space.
Construction is similarly booming. Residential building permits for the Minneapolis-St. Paul
area were up 38 percent in June and 22 percent for the year, again compared to the same periods in
1997. In growing regional centers such as Rochester, Minn., Sioux Falls, S.D., Eau Claire Wis.,
and in the Minneapolis-St. Paul metropolitan area, strong residential building is matched by robust
commercial work. The downtown areas of both Minneapolis and St. Paul show the fastest pace of
large office building projects in a decade. Public and private heavy construction reportedly is up 5
percent to 11 percent in Minnesota and the Dakotas through May, compared to 1997, marking a
sixth consecutive season of strong growth.
Manufacturing
"We have the bad luck to have the wrong stuff going to the wrong places," comments one
Minnesota trade expert in explaining a 9.5 percent drop in first quarter exports compared to a year
earlier. The largest declines were to Japan, Canada and Thailand. A major Minnesota manufacturer
also announced plans to cut 4,000 positions worldwide, largely through attrition, in response to
weaker international earnings and flat domestic demand. A computer component manufacturer will
close a 120-employee factory in South Dakota and move production to Mexico. A St. Paul based
financial printing firm announced the closing of three plants, all located in other districts, and the
layoff of 400 employees in a move unrelated to any foreign events.
Nevertheless, many other manufacturers report good sales, and manufacturing employment
IX-2
grew through June - in Minnesota it was some 2 percent above a year ago. And a computer
component manufacturer announced planned expansions for the Eau Claire area that will add more
than 1,000 employees over the next two years. Moreover, publicly traded firms that are not
dependent on trade with Asia continue to report generally strong revenue growth.
Agriculture
Farming is the most troubled sector of the district economy. In terms of output, prospects are
good in most areas. Crop conditions are generally favorable, and late spring rains in Montana
alleviated earlier worries about drought. Output of wheat, corn and soybeans should be at or above
five-year averages for states as a whole. Specific regions face less favorable conditions. Areas of
Minnesota and North Dakota which had severe plant disease problems over several years expect
similar damage this year to wheat and barley. Dry conditions in grazing areas this spring reduced
hay yields and will force some ranchers to buy hay sooner or later.
Prices rather than crop conditions are the main concern. Wheat growers are under the greatest
pressure in terms of output price relative to costs, but corn and soybean prices have also fallen to a
point where many producers will find it difficult to pay all costs. Farm bankers report that
increasing proportions of customers have reached debt limits. Many bankers require higher levels
of collateral than a year ago. Farm implement dealers report extremely slow sales.
Returns to hog raising improved somewhat in late spring, but remain unfavorable. Many cattle
feeders lost money on animals fed over the past winter and spring, but may face somewhat more
profitable feeder cattle and feed prices for animals put on feed this year.
One area of concern is adequacy of transportation and storage facilities for the new crop.
Much on-farm and commercial storage remains tied up with the 1997 crop. Principal railroads have
warned that they may not be able to move as much grain as elevators think necessary to
accommodate the new crop. Work on improvised storage facilities has begun in many areas.
Energy and miningand mining
Oil and gas drilling has stabilized at somewhat more than half of the rate experienced at the height
of the boom two years ago. Oil output remains above the levels that prevailed throughout most of
the decade as a result of the wells completed in the last 30 months. New leasing and seismic
exploration are reportedly very slow. Gold mining apparently continues to contract. Iron mine
output projections for 1998 remain largely unchanged and about equal to 1997 levels.
Consumer spending and tourismspending and tourism
"Sales in June and July have been very good," reports a Montana auto dealer who had experienced
somewhat slower demand earlier in the year. Vehicle sales are strong for most district dealers with
the exception of those located in agriculture-dependent areas.
IX-3
General consumer spending continues robust across many product lines. National and regional
chains based in the district report strong sales. Mall managers describe good traffic; one comments
that successful movies this year are helping business by bringing large crowds into her mall.
After a long period of sluggishness, prospects of the tourist sector are positive. Summer tourism
showed strong growth for June and July compared to a year earlier. According to a chamber of
commerce in northern Wisconsin, tourism businesses are reporting strong sales. A tourism office in
Duluth, Minn., reports about a 9 percent increase for the area. In South Dakota, attendance at
Badlands and Mount Rushmore parks is up 53 percent and 16 percent respectively for June
compared to a year earlier, while motel occupancy for June is up 6 percent. "All reports that we've
been hearing are good," says an official in Montana where visits to Glacier and Yellowstone parks
were up 22 percent and 7 percent respectively in June compared to 1997.
Employment, wages and prices, wages and prices
"Shortage of workers hits region hard," and "Workers Wanted," are headlines to recent stories
describing the tight labor markets in west-central Wisconsin, where unemployment rates are in the
mid 2 percent range. While hourly earnings in manufacturing and other available data on wages
and salaries show only moderate increases in the 3 percent range over year-earlier levels, anecdotal
reports of higher increases in cash and noncash compensation are extremely widespread. A major
credit card processor in South Dakota announced increases in its general wage structure of up to
12 percent for some workers as well as increased flexibility in work scheduling. Total employment
is up strongly in most urban areas and unemployment rates in the mid to low 2 percent range are
common. Montana and Michigan's Upper Peninsula are exceptions, showing higher levels of
unemployment and fewer subjective indications of worker shortages.
Prices for consumer goods as well as commodities and intermediate goods show little increase.
Low gasoline prices and low prices for crop and livestock products are undoubtedly helping to
hold down the general price level, but manufacturers and retailers continue to report difficulty in
making any price increase stick in a competitive environment.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The district economy continued to grow moderately last month, with no
major signs of easing. Retail sales maintained a strong momentum into the summer, construction
activity improved further, and manufacturing activity remained fairly strong. An exception was
energy activity, which was flat. In the farm economy, corn and soybean crops enjoyed good
conditions, while pasture conditions were poor. Operators of cattle feedlots and hog producers
continued to lose money. Labor markets in much of the district remained very tight, with more
evidence of wage pressures than in the recent past. Prices edged down at the retail level and
declined slightly for most manufacturing materials. In contrast, prices were up slightly for some
construction materials.
Retail Sales. Retailers reported a slight increase in sales last month, improving on the
robust performance of the previous period. Most respondents expect sales to improve
considerably over the next three months. Inventories expanded modestly last month, and
retailers were generally satisfied with current stocks. Inventories in the near future are likely to
expand to match seasonal growth in demand. Automobile dealers reported good performance
last month as sales of sport utility vehicles and light trucks remained strong. Total sales were
moderately higher than a year ago. Inventories edged up once again, with the exception of GM
vehicles. Most dealers were generally satisfied with current stock levels but plan to trim
inventories in the coming months after seasonally stronger summer sales subside.
Manufacturing. Manufacturing activity remained fairly strong last month with plants
operating at high levels of capacity. More difficulties with obtaining materials were reported
compared with the last survey period. Only a few respondents reported slight increases in lead
X-2
times. Inventories were generally unchanged. Although most managers remained unsatisfied
with current stock levels, they plan no major changes in the near future.
Housing. Builders reported that housing starts remained high last month and were well
above year ago levels. Although many builders expect additional gains in construction activity
in the coming months, they are less optimistic than in the last survey. Sales of new homes were
up again last month, leaving inventories of unsold new homes at low to moderate levels.
According to mortgage lenders, demand last month was generally unchanged but remained well
above year-ago levels. Home purchases accounted for almost half of mortgage activity. Lenders
expect mortgage demand to stay strong over the next three months as rates remain low.
Banking. Bankers reported that loans and deposits both rose last month, leaving loandeposit ratios unchanged. Commercial and industrial loans, home mortage loans, and home
equity loans increased, while other loan categories were little changed. Increases in demand
deposits and money market deposit accounts were partly offset by a decline in large CDs.
All respondent banks left their prime lending rates unchanged last month and expect to
hold rates steady in the near term. Most banks held their consumer lending rates constant and
anticipate no future changes.
Lending standards were generally unchanged.
Energy. Despite a fall in prices, district energy remained fairly steady last month, after a
marginal improvement in the previous period. Natural gas prices fell, though not by as much as
in May. Crude oil prices fell in June to their lowest levels since 1986. The district rig count was
practically flat in June but was 18.7 percent lower than a year ago.
Agriculture. The district's corn and soybean crops in June were in good condition and
crops were developing on schedule in most parts of the district owing to favorable weather
X-3
conditions. In the cattle industry, pasture conditions continued to be poor and some cow-calf
producers may liquidate herds if rainfall is not received within the next month. Some district
banks remained concerned that cattle feedlot operators were continuing to lose money, although
losses have slowed recently. Hog producers were also losing money, and many small hog
producers have already liquidated their herds. Larger producers have not trimmed their herds.
Area bankers reported that in spite of high farmland prices the debt-to-equity ratio on farmland
loans remained stable. Producers have been using cash reserves built up over the past two years
to finance purchases of land.
Wages and Prices. Labor markets remained very tight last month in much of the
district, with somewhat more evidence of wage pressures than in previous reports. Retailers
complained of persistent problems hiring entry-level workers, while manufacturers reported
increased labor shortages of skilled workers, especially welders and machinists. With
construction activity strong, builders faced significant labor shortages and reported a severe
scarcity of select trades such as framers. Additionally, most respondents reported difficulties in
hiring and maintaining workers in the information technology field. As a result of persistently
tight labor markets, there were more reports of wage pressures than in previous surveys. Wage
pressures were more concentrated in construction activity and areas requiring skilled workers in
general, such as information technology employees. Prices were steady to slightly down at the
retail level, and prices for most manufacturing materials continued to decline. Prices of some
construction materials, such as cement and sheetrock, were up slightly last month, and builders
expect them to remain high over the next three months. Retailers expect no major price changes
in the coming months.
XI-1
ELEVENTH DISTRICT--DALLAS
Over the past six weeks, Eleventh District economic activity expanded at about the
same modest pace reported in the last Beige Book. Oil service and machinery contacts reported
further slowing. Agricultural conditions have deteriorated due to the drought. Manufacturing
activity grew at the same pace as reported in the last Beige Book. Demand for business
services continued to increase overall, with few contacts reporting slowing sales growth.
Credit quality and consumer borrowing increased slightly. Retailers reported continued strong
sales growth. Real estate and construction activity continued to expand at a brisk pace.
Prices. Most prices were unchanged or lower. Notable exceptions were those for real
estate and some construction materials. Apartment rents and home prices continued to rise, but
increases in office rents slowed. Prices also rose for electricity, industrial motors, specialized
apparel and business services. Prices were unchanged for most apparel, crude oil, heating oil,
natural gas, retail gasoline, plastic resins, steel, cement bricks, air and surface cargo and food.
Prices declined for lumber, telecommunications equipment, liner board, semiconductors,
memory chips, electronic components, wholesale gasoline, rig rates, base petrochemicals, and
aluminum. Lower prices for Asian goods were reported as keeping retail prices down.
More contacts reported that labor shortages were leading to rising wages. Wages
increased for workers in telecommunications manufacturing, truck and air transport, and
business services, and for skilled workers in general. Business service respondents said that the
rising wages were putting pressure on profits. Wages in the apparel, paper, food and lumber
industries were unchanged, but contacts reported upward pressure in non-border areas.
Manufacturing. Manufacturing activity grew at the same pace as reported in the last
Beige Book. Sales of lumber, some metals, electronic components, semiconductors, DRAM
XI-2
chips, chemicals and heating oil were down. Contacts reported that weak Asian demand had
contributed to increased domestic supplies of lumber, aluminum, and chemicals. Electronics
manufacturers reported weak sales due to the GM strike and slower oil and gas exploration
activity. Despite the increased demand from the summer driving season, high refinery
production levels kept gasoline inventories high and put downward pressure on refiners'
margins. Contacts reported stable sales of boxes, food and concrete, but one box manufacturer
said Christmas shipping of boxes started a month later than the usual May start. Sales of
telecommunications equipment, some specialized semiconductors, apparel, brick, and gasoline
were up. Telecommunications equipment contacts were starting to see their sales pick up with
resumed investment following the MCI-Worldcom merger.
Services. Demand for business services continued to rise, fueled by initial public
offerings, mergers, takeovers, and work for manufacturing businesses near the border. Some
business service contacts reported lower sales due to the drought, the GM strike and weakness
in the semiconductor industry. Temporary staffing contacts reported the tight labor market
resulted in more unfilled orders and lower than expected sales. Transportation services contacts
reported loads increased strongly for passenger airlines, moderately for trucking companies
and slightly for air cargo shippers. For the rail industry, increased coal shipments offset
smaller grain shipments caused by the drought and weak Asian demand for grain.
Retail Sales. Retailers reported continued strong growth in sales, except for sporting
goods. Contacts expect sales to remain strong-but with downward price pressure from Asian
imports. One retailer said that wholesale prices in the spring of 1999 could be 2 percent to 3
percent lower than this year. Auto dealers reported increased sales compared to a year earlier.
Financial Services. Credit quality and consumer borrowing increased slightly, and
several contacts reported declining loan delinquency and writeoffs. Demand for home and auto
XI-3
loans continued to increase. Increased building and commercial activity offset some of the
drought-induced weakness in lending by rural institutions. Contacts reported competition
continued to hold down interest rates on commercial loans.
Construction and Real Estate. Real estate and construction activity continued to
expand at a brisk pace over the past six weeks. Home construction "exploded," nearing record
levels, in part due to delayed starts earlier in the year. One contact expected the low
inventories of new and existing homes to contribute to continued strength in home building.
Other contacts were concerned that there may be too much new construction in the office and
multifamily markets. Preleasing of office buildings under construction fell. Contacts expected
apartment construction over the next year to outpace absorption, leading to a slight decline in
the currently strong occupancy rates.
Energy. Contacts reported continued slowing in both gas and oil drilling. Over the past
several weeks, the U.S. rig count fell from 860 to 810 and was down from a recent peak of
1019 in December. Continued weakness in onshore drilling and recent reductions in
exploration in the Gulf of Mexico led to lowered rig day-rates and some layoffs. Although the
hot weather translated into strong demand for natural gas by electric utilities, natural gas
inventories remained at least 25% above year-earlier levels.
Agriculture. Agricultural conditions deteriorated as extremely hot temperatures
stressed crops and livestock. Most areas remained very dry, despite some scattered rainfall.
While irrigated crops were doing well, water use was high. Some crops have been damaged by
grasshoppers. Water rationing impaired production in South Texas. Range and pasture
conditions continued to decline.
XII-1
TWELFTH DISTRICT-SAN FRANCISCO
Summary
Reports from Beige Book contacts generally indicated a solid pace of overall economic
activity in the recent survey period, though with moderation in growth for some sectors.
Retailers reported healthy sales growth, and District service providers noted continued high
demand for their products. Manufacturing activity cooled in recent weeks, damped by declining
export demand and a general slowing in the high-tech sector. District agricultural producers
noted that rising inventories and falling prices have squeezed profit margins on many
commodities and forced some producers to operate at a loss. Strong residential and commercial
real estate demand continued to fuel construction activity in the District. Financial conditions
remained favorable throughout the District, and competition for quality borrowers intensified.
Respondents continued to be concerned about the tightness of labor markets in their regions.
Business Sentiment
District respondents expect a solid but tempered performance from the national economy
and their respective regional economies in the coming year. About two-thirds of the respondents
expect U.S. GDP growth to slow to its long-run average pace, leaving the national
unemployment rate at or near its current level. Most respondents expect inflation to remain
stable, although roughly one-third anticipate an increase in inflation in coming quarters. Nearly
all respondents expect economic growth in their region to outpace growth in the national
economy over the next year. Respondents are most optimistic about the strength of business
investment and consumer spending in their areas. East Asia continues to affect import and
XII-2
export expectations in the District-more than 75 percent of District respondents anticipate
further deterioration in their region's foreign trade balance.
Retail Trade and Services
Retailers in most District states reported solid sales growth in recent weeks. Sales were
strongest for big-ticket items such as cars, home furnishings, and major appliances, as customers
took advantage of seasonal discounting and favorable financing terms. Overall, District retailers
reported adequate inventory levels and few problems obtaining merchandise from suppliers. The
notable exceptions were for GM products. Respondents reported shortages of "hot selling" GM
cars and trucks and most GM replacement parts. One respondent noted that delivery times on
parts have doubled in recent weeks and backorders have reached ten times their normal level.
Retailers throughout the District noted that stiff competition and falling import prices have kept
retail prices down, despite healthy consumer demand and rising labor and occupancy costs.
Service industry respondents in most District states continued to report robust growth. In
California and the Pacific Northwest, demand for telecommunications and cable television
services remained high, outstripping supply in some cases and putting pressure on prices.
Tourism-related restaurant sales, car rentals, and hotel occupancy rates were healthy throughout
the District, boosted by the beginning of the summer travel season. Unbalanced trade flows to
and from East Asia continue to affect District ports and eastbound shipping prices. Empty
shipping containers are piling up at ports and warehouses throughout the District, while in Asia
new containers are being built to meet the demands of their exporters.
XII-3
Manufacturing
Reports on District manufacturing activity were mixed. Contacts noted that the East
Asian slowdown continues to affect both current production and future orders of a diverse set of
products including industrial machinery and equipment, electronic components, wood products,
processed foods, and aircraft. Manufacturers of high-tech equipment reported that, although the
industry has slowed markedly in recent months, growth remains positive and most companies
continue to prosper. In general, District manufacturers reported no difficulties obtaining
materials or supplies, few capacity constraints, and declining prices on key inputs such as energy.
Finding skilled employees remained a major concern among respondents from the manufacturing
sector, particularly those in Portland, Seattle, and the San Francisco Bay Area.
Agriculture and Resource-Related Industries
District agricultural producers have grown concerned in recent weeks. Although weather
conditions improved in most District states, farmers and ranchers reported difficulty selling
inventory and maintaining profitability. Despite lower than average yields on many fruits and
vegetables, inventories remain high, driving product prices down and storage prices up.
Respondents noted that price declines for some commodities have been so large that producers
cannot cover production costs. Reports from ranchers indicate further price declines on feeder
cattle and excess supplies of poultry and pork. Respondents throughout the District reported
significant difficulties obtaining seasonal agricultural workers.
Real Estate and Construction
Residential real estate and construction activity reportedly was strong in most District
states. Demand for single-family homes continued to grow in Arizona, California, and Nevada
XII-4
and picked up significantly in Alaska. In Washington, the Puget Sound area posted strong sales
of both new and existing homes. Housing demand and residential construction cooled further in
Oregon and Utah, although activity remains at a high level. In many areas of the District, the
residential construction sector is operating at capacity. Labor and materials shortages reportedly
have become binding constraints against more rapid construction growth in Alaska, Arizona,
Nevada, and California's Central Valley.
Commercial construction activity also was strong in most parts of the District.
Throughout California, respondents reported that commercial office and warehouse space is hard
to find and commercial and industrial construction is rising. In Utah, light-rail and freeway
construction continue to boost non-residential construction, which already was active with
commercial building. A respondent from Alaska noted that commercial construction activity is
at its highest level since the mid-1980s. High commercial and residential construction activity in
many District states has prompted a "bidding war" for labor and materials, reportedly driving up
some project costs by as much as 40 percent.
Financial Institutions
Twelfth District banking conditions remained favorable in recent weeks. Respondents
reported that bank capital and liquidity were ample, and competition for loans remained intense,
with quality borrowers receiving excellent terms and rates. Respondents also noted that low
interest rates have led to increased loan volume and encouraged refinancing on all types of real
estate. Throughout the industry, shortages of qualified workers continued to be a primary
concern.
Cite this document
Federal Reserve (1998, August 17). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19980818
@misc{wtfs_beige_book_19980818,
author = {Federal Reserve},
title = {Beige Book},
year = {1998},
month = {Aug},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19980818},
note = {Retrieved via When the Fed Speaks corpus}
}