Beige Book
For use at 2:00 p.m., E.S.T.
Wednesday
December 9, 1998
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
November 1998
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
NOVEMBER 1998
TABLE OF CONTENTS
SUMMARY
......................................................
First District - Boston
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i
I-1
Second District - New York
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Third District - Philadelphia
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III-1
Fourth District - Cleveland ................................
IV-1
Fifth District - Richmond ...................................
V-1
Sixth District - Atlanta ...................................
II-1
VI-1
Seventh District - Chicago
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VII-1
Eighth District - St. Louis
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VIII-1
Ninth District - Minneapolis
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IX-1
Tenth District - Kansas City
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X-1
Eleventh District - Dallas .................................
Twelfth District - San Francisco
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XI-1
XII-1
i
SUMMARY¹
The information collected for these district reports suggests that all twelve district
economies continued to expand in November, despite contraction in export industries. The rate
of economic expansion slowed in the Atlanta, Boston, Dallas, Kansas City and St. Louis
Districts, was unchanged in the Chicago, Minneapolis, Richmond and San Francisco Districts,
and growth strengthened in the New York District.
Consumer spending was up, but several districts said sales were weaker than expected.
Manufacturing activity was generally softer, mostly due to output declines in export-related
industries. Several districts noted that some manufacturers were expecting further reductions in
output. Overall, construction activity increased. Stronger consumer confidence and lower
interest rates spurred homebuilding, refinancing, and a rebound in commercial construction
activity in some areas. Loan demand was strong in most districts, but bankers reported
generally tightened credit standards. Low prices and weak exports continued to hammer the
natural resource and agricultural industries. Several districts noted sizable losses incurred by
many agricultural producers.
Labor markets remained tight in nearly all districts, but reports suggest that wage
pressures have subsided somewhat. Generally, prices of goods were reported to be steady or
falling in nearly all districts, although there were scattered reports of higher prices.
Consumer Spending. Retail sales increased in most districts, but the tone of these sales
reports was mixed. Strong sales were reported in the Kansas City, Minneapolis, New York and
¹ Prepared at the Federal Reserve Bank of Dallas and based on information collected before
December 1, 1998. This document summarizes comments received from business and other contacts
outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
ii
Richmond Districts, but most districts referred to sales growth as modest, good or rebounding.
Atlanta said retail sales were generally flat, while Boston said sales growth was positive but
clearly slowing. Sales of seasonal merchandise and traditional gift items, such as toys, have
been the strongest. Some districts noted that heavy homebuilding boosted sales of furniture and
home goods.
Several districts said sales were weaker than retailers expected. Although a couple of
districts noted that some contacts were concerned that consumers might be pulling back, most
retailers blamed the unseasonably warm weather, which reduced demand for winter apparel
and other products. A particular exception was the Minneapolis District, where retailers said
the warm weather was stimulating overall sales.
Auto sales were reported to be strong or increasing in the Chicago, Dallas, Kansas
City, Minneapolis, Philadelphia, and St. Louis Districts. The Cleveland District, however,
said auto sales slowed significantly from their robust summer pace, and dealers were reporting
full-to-heavy inventory levels. A few districts said dealers had increased the use of sales
incentives and rebates to stimulate sales.
Manufacturing. Manufacturing activity generally softened, with output declines
reported in export-related industries. The Chicago, Cleveland, Dallas, Philadelphia, St. Louis
and San Francisco Districts reported weaker manufacturing activity than in the last beige book.
The Kansas City and Minneapolis Districts reported unchanged activity, but Richmond
reported that manufacturing had rebounded in that District.
Industries that were mentioned as cutting back production include agricultural
equipment, apparel, chemicals, energy-related equipment, lumber, paper, some high-tech
products, and primary metals-particularly steel. There were areas of strength, however.
iii
Production of automotive and aircraft parts, construction-related products, furniture and some
high-tech products were mentioned as expanding or strong. While production of and new
orders for heavy trucks were strong in the Chicago District, there were reports of canceled
orders, some with substantial down payments. There was a small rebound for semiconductor
firms in the Cleveland District, although business has remained significantly below last year's
levels. Tobacco and textile firms in the Richmond District were trimming their workforce
levels.
Services. San Francisco noted an acceleration in the demand for numerous services,
while Dallas and Richmond reported a general deceleration. Transportation firms reported that
shipments were up in the Dallas, St. Louis and San Francisco Districts. Demand for
temporary-service employees was strong in the Cleveland and Richmond Districts and had
rebounded from a third quarter drop in the Boston and Dallas Districts. The tourist season was
one of the best in recent years in the Minneapolis District, and tourism was boosted by fair
weather in the Richmond District. Tourism is moderating in the Boston District. Atlanta
reports that tourism has been hard hit in Florida and attributes the decline to fewer visitors
from Latin America.
Construction and Real Estate. Overall, construction activity increased in November.
Most districts reported that housing markets and home building remained strong or had
strengthened since the last report. Commercial construction activity rebounded in several
districts, which contacts attributed to lower interest rates and improved consumer confidence.
There were reports that lenders had increased interest rates and credit standards for
commercial projects, which hampered commercial markets in some areas, although new
projects were still going forward.
iv
Banking and Finance. Low interest rates were stimulating loan demand in most
districts, but bankers had generally tightened standards and credit terms. The demand for loans
was strong or increasing in the Chicago, New York, Richmond, St. Louis and San Francisco
Districts. In contrast, loan growth had slowed in the Minneapolis District, and Cleveland said
that loan demand was soft. Several districts said residential mortgage and refinancing activity
was strong or increasing, but noted a slippage in the credit quality of agricultural loans.
Labor Markets. Labor markets remained tight in nearly all districts. An exception was
San Francisco which noted that, in a change from previous survey periods, manufacturers did
not report difficulty finding skilled employees. Reports suggest wage pressures have subsided
somewhat in many districts, with the exception of the Atlanta District and for some types of
workers in the Boston, Chicago and Dallas Districts.
Several regions mentioned that the retail industry was having great difficulty finding
qualified workers, and wages had increased for these workers in a few markets. A shortage of
construction workers was also mentioned by several districts. The Dallas District reported that
some contacts in the high-tech sector had turned their focus to retaining workers rather than
hiring, partly because firms are focusing more on expanding capital rather than labor. An
Atlanta contact also noted that any capital investment made by the firm was to increase
efficiency and decrease labor costs.
Prices. Generally, prices of goods were reported to be steady or falling in nearly all
districts. Reports of falling prices were prevalent in the manufacturing sector, with districts
mentioning lumber, paper, petrochemicals, plastics, textiles, steel, and automotive and aircraft
parts. Prices for some of these products are expected to decline further. Unseasonably warm
weather in the United States contributed to falling energy prices and high inventories. Oil
V
prices have fallen to their lowest nominal levels in more than a decade. Agricultural prices are
also low, with the exception of milk. There were a few reports of price increases, particularly
for construction materials and in some real estate markets.
Agriculture and Natural Resources. Financial stress in the farm sector was reported
by the Dallas, Chicago, Minneapolis, Kansas City and San Francisco Districts. Output reports
were mixed, but regions with good production were hurt by low product prices. Hog prices are
at their lowest levels in nearly 30 years, bringing large losses and some liquidations. A number
of apple orchards in the Pacific Northwest went unpicked because prices were too low to cover
production costs. High output and slow sales have resulted in a storage crunch in some areas,
with large quantities of grain in temporary storage on the ground, although the Chicago
District reports that the situation has not matched earlier concerns. St. Louis reports sharply
slower demand for farm machinery and agricultural chemicals. The winter wheat crop was
reported to be in good shape, but conditions remained dry in some areas.
The energy sector continued to decline, with falling drilling activity and a drop off in
demand for oil field machinery and services. Drilling in the Kansas City District was down 10
percent in November, after falling 7 percent in October, while Dallas reports that drilling in
Texas is down 38 percent from last year. Contacts in the Dallas District believe oil and gas
producers are pulling back hard, in preparation for a prolonged period of low oil prices.
I-1
FIRST DISTRICT-BOSTON
Economic activity in the First District is generally expanding, but at a slower pace than in the first
half of the year. Prices are reportedly stable or falling. Labor markets remain tight and firms in the region
mostly report they are not adding to their work forces, except seasonally.
Retail
Most retail contacts report positive, but clearly slowing, sales growth in the September to early
November period. Sectors said to be strong are middle to low-end department stores and building
materials; sales growth is moderating in tourism and home furnishings, while men's casual wear and
footwear continue to be weak. Retail sales the day after Thanksgiving were up modestly from year-earlier.
Permanent employment is reported to be holding steady on a same-store basis. Hiring for the
holiday season is currently in progress. Some retailers say that labor markets are very tight, especially for
information technology workers. The tourism sector reports that labor raiding is occurring and large wage
premiums are being offered. Otherwise, wage rates are said to be either flat or increasing only slightly.
With the exception of tourism, respondents report that consumer prices and vendor prices are
holding steady. The fast pace of inflation in hotel room rates is expected to end in 1999, as new hotel
construction will ease current room shortages. Lumber prices are reported to be declining. Most contacts
say profit margins are holding steady. Respondents report that recent capital expansions have been
completed and they do not plan any additional expansions over the next six months.
Looking forward, retail contacts are cautiously optimistic for the holiday period, but report a great
degree of uncertainty concerning the outlook for 1999. Most expect the current expansion to continue in
1999 but at a markedly slower pace.
Manufacturing
Half of the First District manufacturers contacted indicate that recent business is up from a year ago;
the remaining firms report declines. Segments with growing revenues include automotive and aircraft parts,
furniture, and building equipment. Weakness is reported in apparel textiles, machinery, and components for
electrical, electronic, and sports equipment. Competition from Asian suppliers or a reduction in sales
in Asian markets were the most commonly cited reasons for declining revenues.
Most manufacturers indicate that both their materials costs and their selling prices are either stable
I-2
or falling. The most notable downward price pressures are in textiles (because of competition) and
automotive and aircraft parts (because of pressures from major customers). However, about one-quarter of
the respondents plan to raise prices modestly because of rising costs for components or labor.
Contacts mostly report that their U.S. employment is flat or down (in about equal numbers)
relative to a year ago. Hiring is concentrated on engineering, information systems, purchasing
management, technical sales and service, and other professional and technical fields. Average wage and
salary increases are mostly in the range of 2 to 6 percent.
About one-quarter of the respondents have reined in capital spending because of concerns about
business trends. Others are maintaining their investment programs and typically cite factors such as a need
to improve efficiency, become Y2K-compliant, or introduce new production or information technologies.
Most manufacturers express a somewhat cautious view of their business prospects for 1999, but they cite
examples of "silver linings" as well as "clouds." Some firms that expect revenue gains predict flat
earnings because of escalating labor costs, while others express confidence that they have taken actions
that will enable earnings to continue to grow.
Temporary Employment Firms
Expansion continues at First District temporary employment firms, although growth has slowed
from earlier this year at some firms. Contacts report a sharp drop in activity early in the third quarter, but
most recovered relatively quickly. Overall revenues are 10 to 33 percent higher than year-earlier levels.
Fall is typically a busy time for contract employment and October 1998 marked one firm's best month
ever. Labor markets remain tight, with the supply of workers still scarce; one contact, however,
mentioned some softening on the demand side. The rate of increase in wages reportedly has begun to
moderate. Contacts are cautiously optimistic about the industry's future. All expect the usual slowdown
around the holidays and some anticipate additional softening of the regional economy.
Commercial Real Estate
Commercial real estate in New England is doing well. Capital market problems in August created
shortages of financing in September and October. As a result, sales prices of commercial properties in
Boston have declined by 10 to 15 percent since August. By contrast, rental rates for prime downtown
Boston office space have been rising and are about $50 to $60 per square foot. Suburban rental rates have
I-3
been flat for the past few months, having reached $40 per square foot. Contacts report very low vacancy
rates for office and retail space. Vacancy rates for apartments are second lowest in the country, with
particularly severe shortages of low- and medium-priced apartments. Some retail construction is
occurring, but contacts report no speculative construction anywhere in the Boston area.
The rest of New England is mixed. Office vacancy rates in Greater Hartford are the lowest since
1989, but still the highest in the Northeast; rental rates for retail space have risen slightly, but the industrial
sector has high vacancies and unchanged rental rates. New Haven and Stamford are doing very well, with
low office vacancy rates and office rental rates up 12 percent in 1998; apartment vacancy rates are very
low as well. Maine has seen a rise in office and retail vacancy rates during the past quarter. Rhode Island
has a very strong industrial market, but little activity in its office market.
Contacts anticipate the Boston market will remain strong; the Greater Boston economy is
sufficiently diversified to absorb any space that might be vacated by declining sectors of the economy.
Vacancy rates in Hartford, however, may rise because of consolidation in the financial sector.
Nonbank Financial Services
Respondents at insurance companies report revenues in the second quarter of 1998 ranging from
flat to up 25 percent. Mutual funds and variable annuities are responsible for much of the growth in sales.
Employment changes range from 5 percent decreases to 4 percent increases. Most respondents note
continued shortages of information systems personnel; as a result, they are relying more on outside
contractors and raising base salaries and the amounts and types of bonuses. A number of respondents also
note scarcity of accounting and investment management professionals.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting group, released its
semiannual five-year regional forecast in October. NEEP expects regional employment growth to slow to
a range of 1.0 to 1.3 percent annually in the period 1999 to 2002, after exceeding 2 percent in 1998.
Among industries, average annual job growth is projected to range from a low of zero in manufacturing to
a high of 2.4 percent in services.
II-1
SECOND DISTRICT--NEW YORK
Economic growth in the District has been mixed but, on balance, stronger than in the last report.
Most retailers report brisk sales in the last weekend of November, though retail sales for the month were
generally below plan, mainly due to warm weather; discounters continued to out-perform department
store chains. The housing market strengthened across most of the region in recent weeks, though sales
of high-end Manhattan co-ops and condos were soft. New York City's office market remains
tight-while vacancy rates have leveled off, rents continue to rise at a double-digit rate. Although the
market for commercial properties in New York City continues to be somewhat hampered by credit
tightening among lenders, most new projects (including three major hotels) are going forward.
Despite more layoff announcements on Wall Street, the local job market remains generally firm.
Regional surveys of purchasing managers indicate a general pickup in manufacturing activity in October
and November, along with continued brisk growth in non-manufacturing sectors. Finally, local banks
report a further pickup in loan demand, tightening credit standards, and steady delinquency rates.
Consumer Spending
Despite brisk post-Thanksgiving business, most retailers report that sales in the region were on
or below plan in November, as exceptionally weak sales of cold-weather merchandise more than offset
strength in most other categories. Department store chains report that same-store sales were little
changed from a year ago, while major discounters report gains of 3-6 percent. For the important postThanksgiving weekend, all major chains describe business as brisk, and a separate survey of small
retailers across New York State indicates that their weekend sales were up 4-6 percent from a year ago.
Virtually all contacts say that unseasonably mild weather in the Northeast depressed sales of
outerwear and various cold-weather accessories (antifreeze, heating devices, etc.); however, other
categories, such as home goods, toys, electronics, and intimate apparel sold well in November.
II-2
Inventories are said to be in good shape, with the overhang in winter-related merchandise expected to
dwindle with the next cold snap. Retail selling prices and merchandise costs were steady to down
slightly, with prices for apparel (largely from Asia) generally lower than a year ago. Retailers report
difficulty in staffing, with one contact describing it as "brutal"; however, most contacts say it is not
much different from last year's holiday season and none reports significant wage pressures.
Construction & Real Estate
The District's housing market has taken on a firmer tone in recent weeks. Housing permits in
New York and New Jersey surged in October-rising 58 percent from a year earlier-led by a wave of
multi-family projects in New York City and northern New Jersey. Year-to-date, multi-family permits
are up 22 percent from 1997, while single-family permits are up 14 percent. Moreover, New Jersey
homebuilders report fairly strong traffic and sales in recent weeks. Builders in New York State say that
the single-family market has improved across almost all of the state-even in the chronically sluggish
central and western tiers. Builders in both states cite a severe labor shortage in skilled trades
(carpenters, masons, roofers, etc.).
New York State realtors report that sales of existing single-family homes were brisk in October,
rising 15 percent above year-earlier levels, while prices jumped 11 percent. The biggest price rises were
downstate-especially in the lower Hudson Valley. Prices also rose in the Rochester area, and sales
activity strengthened noticeably across most of upstate New York. A leading Manhattan brokerage
reports that buyer traffic for prime Manhattan co-ops and condos rebounded from September's sharp
slump; however, in October and November, actual sales were roughly 30 percent lower than a year ago,
while new listings were up substantially, and selling prices stabilized well below this summer's peak
levels. The weakness is attributed to concern about Wall Street layoffs and related income losses.
Manhattan's office market remains exceptionally tight; although vacancy rates held steady at
II-3
low levels again in October, rents continued to rise at a double-digit pace. However, with commercial
lenders tightening credit, some buyers have reduced bids on office properties and a number of deals
have been put on hold. Still, an industry expert notes that most commercial developers are going ahead
with projects, including the construction of three large hotels, which are due to be completed in 2000.
Other Business Activity
While reports on the District's job market are generally positive, Wall Street layoff
announcements continue. A recently announced merger between Bankers' Trust and Deutsche Bank
is expected to eliminate more than 2,000 in New York City; moreover, further job cuts and bonus
reductions are expected at major banks and Wall Street firms. Still, this year, New York City's private
sector has registered its strongest pace job creation since at least World War II. Moreover, job growth
in upstate new York, though still sluggish, has accelerated in recent months.
Regional purchasing managers' surveys indicate some pickup in manufacturing activity in
October and November, along with particular strength in non-manufacturing sectors.
Buffalo
purchasing managers report sturdy growth in manufacturing activity in both October and November.
New York purchasing managers report a slowdown in the manufacturing sector in November, following
brisk growth in October; growth in non-manufacturing sectors remains strong. Prices paid in the
manufacturing sector continued to decline in November.
Financial Developments
According to a survey of senior loan officers at small- and medium-sized banks in the District,
the overall demand for loans increased over the past two months. This rise was again driven by strong
demand for residential and non-residential mortgages. There was also a continued strong increase in
refinancing activity, which bankers attribute to the recent drop in interest rates. Bankers surveyed report
a further tightening in credit standards-especially on commercial and industrial loans. Interest rates
II-4
for all loans declined over the last two months, led by the residential loan category, for which 79 percent
of banks report lower rates. Similarly, a large majority of respondents report a decline in average
deposit rates. Delinquency rates remained stable over the same period.
III-1
THIRD DISTRICT - PHILADELPHIA
Reports from most sectors of the Third District economy indicate healthy economic
conditions, although weakness persists in manufacturing. Area industrial firms continue to
report slowing shipments and orders. Retailers said sales for Thanksgiving weekend were good.
Auto dealers saw a slight improvement in sales in November compared to October. Bankers
reported generally steady loan volumes, although several noted slight increases in residential
mortgage lending for new-home purchases. Real estate markets were strong, with continuing
demand for offices and industrial buildings and a good pace of home sales.
The consensus outlook is for further modest growth in 1999. Manufacturers predict a
slight rebound in demand for their products. Retailers foresee continued growth near the current
pace. Bankers expect general business activity in the region to continue to move upward, albeit
at a somewhat slower rate. Real estate contacts see no signs of a near-term slowing in home
sales or commercial leasing and acquisition.
MANUFACTURING
Manufacturing activity in the Third District slipped in November. Industrial companies
in most of the region's major goods-producing sectors reported a slower rate of shipments and
orders in November than in October. Industrial firms continued to report weakness in Asian
markets. In addition, firms producing primarily for domestic markets indicated that demand for
agricultural equipment and primary metals was also slowing. On balance, surveyed firms
reported decreases in order backlogs and shortened delivery times. A reduction in working hours
III-2
during November was further evidence of slackening in the District's industrial sector.
Looking ahead, area manufacturers expect business to pick up in the next six months,
although they are not forecasting strong improvement. Slight gains in shipments and orders are
anticipated, but employment is expected to decline somewhat. Some companies whose business
has increased sharply in the past few quarters, notably makers of transportation equipment and
home building materials, expect growth to ease next year.
Prices in the industrial sector have been mostly steady. Three-fourths of the firms polled
in November indicated that the prices of both inputs and outputs have not changed from the prior
month, and there were more reports of price cuts than price increases. The consensus forecast
among surveyed firms is that prices will remain mostly level for at least the next six months.
RETAIL
Most Third District retailers reported that sales during the Thanksgiving weekend were in
line with their expectations. Sales increases for most of the stores contacted were in a range of 4
to 6 percent, in current dollars, from the year-ago period. As has been the case for much of the
year, discount stores had better results than most other types of stores. Sales were strong for
toys, jewelry, and traditional gift items, such as sweaters and jackets, but sales of winter coats
and other outerwear were hampered by the warm weather that prevailed over the weekend. In
general, retailers forecast a good holiday season, with a year-over-year increase for the fourth
quarter about in line with the Thanksgiving weekend's store average of 5 percent. Merchants
expect the high level of consumer confidence to bolster sales into the new year.
Auto dealers reported a slight increase in sales in November compared to October.
Compared to year ago, however, the sales rate was flat. Nonetheless, dealers were generally
III-3
satisfied with the pace of business, although a few still said they were unable to obtain as many
popular new models as they could sell.
FINANCE
Bankers contacted for this report generally indicated that loan volume outstanding at their
institutions was level during November. Business loans were said to be steady, and most bankers
continued to describe the market as very competitive. Residential mortgage demand was strong
at all of the banks surveyed, and most of the activity was for refinanced mortgages, although
some banks noted increases in mortgages for new purchases. Several banks reported that
borrowers who refinanced were consolidating some other debt into the new loans. This shift and
an increased usage of home equity lines were cited as reasons for the flatness in consumer loan
volume that most banks reported.
Looking ahead, most of the bankers interviewed said they did not expect any major
changes in current trends. Some reported that their reviews of business plans with commercial
customers factor in slower growth in 1999 than this year. Similarly, banks' consumer lending
plans are based on some slowing in spending next year.
REAL ESTATE AND CONSTRUCTION
Commercial real estate remains healthy, according to contacts in most of the important
market areas in the District. Construction of new offices has been continuing at a good rate, and
sales and leasing activity increased during the third quarter. Rents and vacancy rates have been
mostly steady in the region, except in some markets where demand for space has been increasing.
Speculative construction is under way in suburban locations that have had increases in rental
rates and declining vacancy rates. For suburban areas as a whole, recent estimates of the vacancy
III-4
rate average around 10 percent. In the Philadelphia central business district, the vacancy rate is
16 percent. Real estate contacts say demand and supply of office space in the city has begun to
move into balance as expansion by law firms and service companies has begun to offset the
impact of a recent series of corporate downsizings and relocations.
The vacancy rate for industrial buildings in the region has declined from 12 percent at
mid-year to 11 percent at the end of the third quarter. According to real estate firms, new space
has been coming on line at a rate sufficient to keep rents from rising in most areas; however, the
conversion of older industrial buildings into retail and office space in some suburban locations
has pushed up industrial rental rates in those places.
Residential real estate activity has picked up after a brief interruption that real estate
professionals attributed to financial market volatility. Sales of both existing and new homes
have risen in the past month. Builders and real estate agents report that demand has risen for
"move up" buying, but price appreciation on existing homes and price increases for new homes
were said to be slight.
IV-1
FOURTH DISTRICT - CLEVELAND
General Business Conditions
The Fourth District economy shows mixed growth patterns. While business
activity remains very strong in several industries, including construction, export-sensitive
areas, such as agriculture and basic materials manufacturing, report a significant drop-off
in sales and prices.
Temporary employment agencies report a continued strong demand for labor, and
most remain unable to fill all vacancies. Skilled office and service industry workers are in
especially high demand, resulting in added upward wage pressure.
Unions report that wages are increasing in the 3% to 4% range, up from the 2%
to 3% range seen in 1997. Some unions have indicated heightened concern over job
security due to fierce foreign competition. Still, organized labor sources in the District
continue to report shortages of skilled labor, particularly in the construction trades.
Construction activity in the District is unusually brisk for the season, although the
majority of respondents believe that speculative building has been on the decline.
Residential building-cost increases were reported for land and, marginally, for labor. One
contact estimated the growth in land prices approximately 10% for the year, compared
with an estimated 3% to 5% for materials and labor.
The labor market continues to be relatively tight, but increased availability of
commercial masonry contractors was noted. Residential builders continue to report
difficulty securing subcontractors and report upward pressure on subcontracting costs.
IV-2
Agriculture
The Kentucky tobacco harvest is expected to be good-only marginally below the
high level of 1997, although there remains concern over the crop's color and weight.
The District's corn harvest is abundant and ahead of schedule, with yields expected
to be about 10 bushels per acre higher than last year, or about 8% above their average
yield of the past five years. Projections for the soybean harvest are strong in Ohio and
Pennsylvania, but in Kentucky, where weather has been considerably drier, farmers
anticipate their lowest yield since 1988. Some farmers are plowing under their poor
soybean yields or harvesting them for silage.
Prices for most agricultural commodities are much lower compared to a year ago.
In particular, corn and soybean prices have fallen 20% to 25% from 1997.
Industrial Activity
Manufacturing activity has varied since the mid-summer. Capital goods producers
are seeing satisfactory orders and production, although few sources indicate any
significant growth since July. One notable exception is the agricultural sector, where
equipment sales have declined rather sharply. Heavy truck manufacturing continues at a
near record level of orders and production, and industry sources are revising upward their
1999 sales expectations. Automotive parts suppliers are also seeing strong order growth.
Conversely, steel and chemical producers, which saw sharp declines in orders this
summer, continue to report weakness resulting from import competition. Semiconductor
firms, which saw a sharp falloffin orders this summer, report a small rebound in October,
although business has remained significantly below last year's levels.
IV-3
Sources in the transportation and shipping industries, now entering the heavy
holiday season, report a moderation in traffic since earlier in the year. Nevertheless,
shipping activity remains high and domestic freight prices are holding steady. Container
traffic from Asia, although still very strong, has leveled off somewhat from its seasonal
peak of last a month. Export activity remains weak.
Consumer Spending
Retail sales, which softened in October, picked up a bit in early November.
Furniture sales have been particularly strong since the last District report, and many stores
report sales running above last year's strong season. Housewares are reported to be
selling well, while unseasonably warm weather is blamed for recent weak apparel sales.
Retailers are optimistic about the holiday shopping season. Most expect holiday
sales to be at least as good as last year's strong performance. Most stores report that
inventories are "on plan" and there are no plans to alter pricing. Retailers maintain that
the labor market is tight, and many expressed difficulty in finding qualified workers for the
holiday season. The result is that retailers are paying up to 25% over last year's wages for
seasonal help.
Despite continued strong showroom traffic, sales of new automobiles have slowed
significantly from their robust summer pace, even after adjusting for the industry's
seasonal pattern. As a result, dealers report full-to-heavy inventory levels for most
models, with the notable exception of light trucks and sport utility vehicles, where stocks
remain thin. These shortages are especially acute for GM dealers, where truck and sport
utility vehicle inventories are still struggling to rebuild following this summer's strike.
IV-4
Banking and Finance
District lending activity is mixed for both commercial and consumer loans.
Consumer loan demand is somewhat soft, though mortgage refinancing is quite strong.
Demand for commercial loans has strengthened at most, though not all, of the banks
contacted.
Loan delinquencies are holding steady at relatively low levels, but credit quality
is mixed. Some banks report a modest tightening in credit standards, while others
indicate that margins are still deteriorating and competition for borrowers is very tight.
One source reported an easing of competitive pressures as foreign banks have reduced
their presence in the syndicated loan market.
FIFTH DISTRICT - RICHMOND
Overview: The Fifth District economy continued to expand at a moderate pace in
the weeks since our last report. Many firms in the service sector reported a pullback in
revenues, but manufacturing output rebounded after several months of decline. Retailers
reported somewhat higher sales in November and a good start to the holiday sales season,
despite unseasonably warm weather which damped enthusiasm for winter apparel. Real
estate activity picked up; commercial developers were particularly upbeat in light of the
rebound in the stock market. Loan demand was strong and lending was brisk at District
banks. In labor markets, wages grew moderately and worker shortages persisted, despite
continued declines in District manufacturing employment. Fair weather in late October and
November boosted tourism, but brought little relief to moisture-starved crops and pastures.
Retail: Retail sales rose only modestly through the first three weeks of November,
but ended the month on a strong note. Most retailers reported that their sales reflected
normal seasonal momentum prior to Thanksgiving, even though shopper traffic was
noticeably higher. However, retailers reported busy stores and robust sales during the
weekend following the Thanksgiving holiday. Several contacts said their sales would have
been even stronger without the unseasonably warm weather which hindered sales of winter
lines. A department store manager in Charleston, S.C., noted that "it's hard to be in the
holiday spirit when it's 75 degrees outside." Retailers continued to struggle to find holiday
help; a Richmond, Va., retailer said there was a "terrible labor shortage" in his area. Retail
wages were higher in most areas.
Services: Activity in the services sector edged lower in November, as businessservice firms and airports reported revenue declines. Contacts at law and accounting firms
indicated that their November billings held up well, but paled in comparison to October's
unusual strength. A source at an airport reported that revenues decreased because a low-cost
airline "pulled out," which allowed other airlines to raise fares and led to an overall decrease
in airline traffic. Employment remained little changed while wage growth moderated across
the District. Service providers continue to expect increased demand over the next six
months; businesses that provide financial services were especially optimistic.
Manufacturing: Manufacturing activity picked up in November. Shipments
increased in most goods-producing industries, underpinned by an uptick in customers'
confidence. An industrial machinery producer said his customers had been "on the fence" in
recent months, but now were going ahead with orders. The average workweek stabilized
after tumbling in October, even though manufacturers in several sectors continued to trim
their workforce levels. A drop in tobacco employment was attributed to ongoing efforts to
"streamline" operations, while contacts said that textile firms lowered payrolls because they
continued to lose business to foreign competitors. Looking ahead, manufacturers were more
optimistic about shipments and new orders in coming months, but expected employment to
continue to trend downward.
Finance: District banks reported strong lending activity in the period since our last
report. Residential mortgage lending benefited from a solid housing market and steady
refinancing activity while lower interest rates buoyed commercial lending. Most bankers
reported little change in their loan standards in November, but several indicated that caution
prevailed as they peered "down the road" for signs of recession. While few believed that a
substantial slowing in the economy was imminent, several anticipated a normal throttling
back of mortgage lending activity in coming weeks as potential customers turn their attention
to the upcoming holidays.
Real Estate: Realtors described District housing markets as generally strong and
stable in November. Although a few realtors noted some "seasonal slowing" in the rate of
home sales in recent weeks, most were quick to point out that sales in their areas remained
very good. Only modest price increases were reported. A realtor in the District of Columbia
expressed surprise that prices in his area were not advancing faster, quipping that perhaps the
"law of supply and demand" no longer applied there. Homebuilders reported generally
strong housing starts because of low interest rates and improved consumer confidence.
Reports of higher labor and materials costs were more widespread. A builder in Rockville,
Md., told us that labor costs were "going through the roof" and that there continued to be
shortages of all types of building subcontractors. Other contacts noted that drywall and
insulation prices had risen sharply in recent weeks.
Commercial real estate activity picked up in recent weeks, driven higher by a
rebound in stock prices and consumer confidence. Realtors in both West Virginia and North
Carolina noticed that a growing proportion of doctors, engineers, and attorneys were buying
their offices rather than leasing. The exodus of these professionals combined with new
product coming on line contributed to an increased availability of Class A space in these
areas. In contrast, realtors in Maryland, Washington, D.C., and South Carolina expressed
growing concern about shortages of available space.
Tourism: Tourist activity was strong in November. Bookings at District resorts for
the Thanksgiving holiday were well above those of a year ago; a contact on North Carolina's
Outer Banks suggested that much of the increase in his area was driven by Christmas
shopping at area outlet malls. Resorts in mountain areas also enjoyed increased activity. A
source at a ski resort in Virginia reported that sales of time-shares rose considerably and that
tourists were spending more. Contacts noted that skiers were more interested in buying
state-of-the-art skiing equipment rather than second-hand merchandise. District sources
expected tourist activity to strengthen further during the next six months.
Temporary Employment: Strong demand for temporary workers persisted across
the District in recent weeks. Workers with technical and clerical skills were particularly
sought after throughout the region; a contact in Greenville, S.C., reported that industrial
skills, including packaging and assembling experience, were in short supply in her area.
Several temporary agencies noted an increase in "temp-to-perm" workers, as employers
attempted to secure quality help while it was still available. Contacts reported little change
in the wages that their placements received and did not foresee substantial changes during
the next few months.
Agriculture: District agricultural analysts continued to report that topsoil moisture
levels were short to very short in many areas. Pasture conditions were generally described as
poor and deteriorating, leading to concerns about the adequacy of hay stocks. In Virginia,
farmers increased their supplemental feeding of cattle and continued to use private wells to
assist in watering livestock. On a brighter note, corn harvesting neared completion in
Maryland and West Virginia and winter wheat planting was ahead of schedule in most areas.
VI-1
SIXTH DISTRICT - ATLANTA
Summary: The pace of current economic activity weakened again slightly, but the outlook
among business contacts remains positive. Retail sales have been generally flat across the District
since our last report and inventories remain high. The pace of new home construction has changed
little, while new home sales have improved somewhat. The manufacturing sector is currently
described as soft, and overall loan demand continues to be mixed. The tourism sector has been
especially hard hit in Florida by declines in the Latin American economies. Tight labor markets
continue to put upward pressure on wages and impact business growth, while prices have been
generally stable.
Consumer Spending: Overall comments from District retailers indicate that retail sales
during October and early November in the region have been flat. About half of the merchants
contacted said that recent sales levels had fallen below their expectations and most said that
inventories were currently high. Apparel sales have been mixed. Several retailers attributed slow
apparel sales to unseasonably warm weather. As a result, half of the contacts said that discounting
was greater than normal for this time of the year. However, most merchants continue to expect
that fourth quarter and holiday sales will be up slightly compared with last year, and are currently
optimistic about good post Thanksgiving Day weekend sales.
Construction: Most District builders contacted reported that the pace of single-family
home construction in October and early November was similar to our last report, flat-to-slightly
up on a year-over-year basis. However, new home sales improved from our last report. Realtors
and builders continue to report balanced housing inventories; however, builders in areas of
Georgia and Florida complain that there is a shortage of suitable lots. Looking forward, about half
of the Realtors contacted expect home sales during the fourth quarter to exceed last year's levels,
VI-2
while most builders expect new home construction to be flat in the fourth quarter. Commercial
construction within the District remains at strong levels.
After moderating recently, District
multifamily permits have rebounded somewhat.
Manufacturing:
Production and new orders for the region's factory sector are soft
compared with a year ago, but the outlook remains generally positive. Contacts report that the
District's paper producers continue to cut back operations, pare inventories, and scale back capital
expansion plans because of decreased Asian demand.
New orders and the factory workweek
continue to decline for apparel producers. There are more reports that regional steelmakers are
operating far below capacity and are laying off workers because of foreign imports. Low oil
prices are causing oil companies, engineering firms, and related fabrication shops to reduce
payrolls.
More positively, Louisiana's petrochemical industry continues to benefit from low
energy prices and is planning robust capital spending over the next two years. New orders have
increased for manufacturers of building products and a large producer of lumber and wood
products. Companies producing transmission products for digital communications and computer
data storage products have announced expansion plans. Some of the District's aerospace firms are
adding to factory payrolls.
Tourism and Business Travel: The outlook is less upbeat for the tourism and hospitality
sector. Negative fallout from turbulence in foreign markets is adversely affecting south Florida
and Florida's Gulf coast because of the decline in Latin American tourists. South Florida's highend resorts report strong seasonal bookings.
However, decreased forward bookings and
occupancy levels at some moderately priced south Florida hotels are prompting concern that
middle income tourists may opt to stay home this year. Although strong bookings are reported
by central Florida hoteliers, they fear that many Canadian tourists will stay away because of the
VI-3
weak Canadian dollar.
Statewide revenues from riverboat casinos in Louisiana have been
adversely affected by hurricanes and storms, but the gaming industry continues to expand in the
region.
Financial: Bankers throughout the Sixth District report that overall loan demand has been
mixed by type of loan lately.
Consumer and automobile loan volume remains healthy, and
mortgage demand continues to be strong as consumers continue to consolidate and refinance debt.
There have been some reports of slowing on the commercial loan sector side as commercial real
estate and speculative financing have become more selective.
Consumer and commercial loan
quality have held steady.
Wages and Prices: Finding and retaining workers continues to be difficult, and this is
affecting business expansion and putting upward pressure on wages. Contacts say that their most
common concerns are the cost and availability of labor.
One contact notes that any capital
investment he makes is to increase efficiency and decrease labor costs. Contacts, also, point out
that employee retention sometimes requires increased perks and benefits in addition to salary
increases.
In one case, a dearth of qualified laborers is limiting the ability of a commercial
contractor to bid on additional projects.
Most industry contacts indicate a stable price picture.
Contacts continue to report
relatively low oil, paper, and steel pricing with little chance for an upturn in the near term.
Foreign and domestic competition is expected to continue to hold back price increases for most
material and finished products in the foreseeable future. The healthcare industry was the only
sector reporting notable pricing increases for this beige book.
VII-1
SEVENTH DISTRICT--CHICAGO
Summary. The Seventh District economy remained strong in October and November,
although pockets of softness persisted. Retailers were generally satisfied with Thanksgiving
weekend sales results as traditional gift items sold well. Home sales remained strong and builders'
expectations for the new year were buoyed by Federal Reserve actions to cut interest rates.
Manufacturing activity was generally high despite further softening in some key industry segments.
Bankers remained somewhat cautious amid continued strong demand for both business and consumer
loans. Midwest labor markets were much tighter than the nation as a whole and retailers were
finding it harder to fill seasonal positions than a year ago. District farmland values dropped slightly
during the third quarter, the first quarterly decline since 1986. Hog producers again sustained losses
from sharply lower prices while dairy farmers continued to benefit from high milk prices.
Consumer spending. Retailers reported that sales were generally in line with their
expectations going into the holiday season. Contacts indicated that traffic through retail outlets was
very heavy over the Thanksgiving weekend. Sales were good, but were not in line with the heavy
traffic, suggesting to some contacts that many customers were simply browsing rather than buying.
Contacts with a national presence generally reported that sales gains in Midwest stores were slightly
better than the rest of the nation. Items cited as selling well included seasonal and traditional gift
items (such as toys, novelty apparel, shirts and neckties for men, robes for women, etc.) while winter
apparel languished on the shelves as a result of unseasonably warm weather. Overall inventory
levels were reported to be in line with sales expectations and only one contact noted a greater-thannormal increase in promotional activity. District auto dealers reported that sales remained strong,
despite a normal seasonal slowdown.
Housing/construction. Overall housing and construction activity was generally robust in
October and November. A national survey of homebuilders suggested that November sales in the
Midwest region increased substantially from October and ran well ahead of year-ago results.
Homebuilders' optimism was also buoyed by Federal Reserve actions to cut interest rates, leading to
much higher sales expectations for the coming six months. Realtors reported that sales of existing
homes remained very strong in October and November. Contacts noted that the normal seasonal
slowdown in sales failed to materialize this year and, in some cases, actually increased noticeably. A
large realtor in the Chicago metro area indicated that existing home prices continued to appreciate in
VII-2
the 5 percent to 7 percent range as a result of the very active market. Apartment space remained tight
in most areas and rents were reported to be increasing slightly, yet there was no noticeable change in
building activity in this market. Nonresidential activity also remained robust although there were a
few more reports of large projects, particularly in office and hotel developments, being scaled back.
Some contacts indicated that the less ambitious plans were not entirely unwelcome at this point in the
business cycle.
Manufacturing. Manufacturing activity generally remained strong in the District, although
some key industries softened further. Strong national sales kept manufacturers of light vehicles
producing at very high levels in October and November, and new orders remained strong,
particularly for light trucks. Pricing remained very competitive for light vehicles and incentives were
expected to remain high into the first quarter of 1999. Producers of construction and mining
equipment reported continued strong sales and new orders as well as inventories that were generally
in line with sales expectations. Production of and new orders for heavy trucks were also strong,
although reports of canceled orders (some with substantial deposits) persisted. However, producers
of agricultural equipment continued to "take it on the chin," according to one contact. Cutbacks in
production resulted from an increasingly pessimistic sales outlook and high inventory levels.
Contacts in the steel industry also remained pessimistic. Softer new orders and very high inventories
led to production cutbacks, with one contact reporting that capacity utilization in the industry had
fallen to around 80 percent and was perhaps still slipping. The pricing power of producers in both
the steel and agricultural equipment industries remained very soft as a result of dwindling demand.
Banking/finance. Overall lending activity was similar to that noted in our last Beige Book
report. Consumer lending was moderately stronger, again buoyed by strength in housing markets.
Both new originations and refinancing activity continued at a strong pace as mortgage interest rates
remained at very low levels. Terms and standards on consumer loans were reported by nearly all
contacts to be unchanged in November. Commercial lending activity was also reported to be brisk.
Contacts suggested that recent interest rate cuts by the Federal Reserve and prime rate cuts by
commercial banks had reassured some commercial borrowers who were concerned about the
availability of credit. While most bankers indicated that business loan demand increased moderately,
terms and standards were generally tightened somewhat for most types of business loans. Small
companies were less likely to see changes in the terms and standards for loans than were larger
borrowers.
VII-3
Labor markets. Labor markets remained very tight in the District and much tighter than the
nation as a whole. A national survey of hiring plans indicated that employers in the Midwest remain
the most optimistic of any region in the country about their hiring and expansion plans. The only
reported source of labor market softness was in the manufacturing sector, particularly in durable
goods. Seventh District producers of agricultural equipment cut back production and laid off some
workers recently, and contacts suggested that further cuts could be in the offing. In contrast,
employers in the construction and trade industries, both wholesale and retail, were very optimistic
about their staffing levels heading into the new year. Skilled construction workers remained in short
supply as a result of the extraordinary strength in housing markets. Retailers reported that finding
holiday help was more difficult than last year, and the hiring plans survey indicated fewer than
normal layoffs in both the wholesale and retail trade sectors. There were no new reports of
intensifying wage pressures although a few contacts suggested that moderately rising health care
insurance costs may exert additional pressure on overall employment costs.
Agriculture. The region's corn and soybean harvest was nearly complete by late November,
with only a few farmers left finishing up in their fields. Available storage space for grain was
reported to be tight in some areas, but the extent to which it was necessary to temporarily store grain
on the open ground has not matched earlier concerns. Grain prices moved higher in the first half of
November, yet remained well below year-earlier levels. Anecdotal reports indicated that tight farmer
holding of grain and additional export sales contributed to the seasonal price gains.
District hog producers continue to sustain losses. Cash hog prices in the Midwest trended
lower and in late November were 60 percent below a year earlier. The sharp price decline was
spurred by record-large hog marketings and tight packer capacity. In contrast, dairy farmers
continued to benefit from record-high milk prices.
A survey of agricultural bankers in the Seventh District indicated that farmland values
registered a decline of 1 percent during the third quarter, the first such decline since 1986. Moreover,
a majority of the respondents expect another decrease during the fourth quarter. Bankers also stated
that the pace of loan repayments was slower than a year ago and that requests for loan renewals and
extensions were up. Although bank contacts indicated that most of their farm borrowers are in good
financial shape and able to weather the current downturn, they expressed concern over the financial
performance of hog producers and the duration of low commodity prices.
VIII-1
EIGHTH DISTRICT - ST. LOUIS
Summary
District contacts, while still reporting tight labor markets in their communities, are seeing
some moderation in the rate of economic growth. Retail contacts expressed satisfaction with
November sales activity and are generally optimistic about the holiday season. The latest Manpower
survey suggests a slight pullback in hiring plans for the first quarter of 1999 compared with a year
earlier. Housing markets remain strong, although growth in new construction has been waning.
Nonresidential construction has slowed across the District. While loan demand remains strong at
large District banks, several bankers report a modest tightening of loan standards for corporate
borrowers. Farm sector contacts report that low commodity prices have significantly pared sales of
farm machinery and agricultural chemicals compared with a year earlier.
Consumer Spending
General retailers report that year-over-year sales growth averaged 4 percent in November-a
result that generally met expectations. Most of those surveyed indicated that their inventories were
at desirable levels orjust a little bit high. Contacts report that balmy weather throughout the District
kept many shoppers out of the malls the weekend after Thanksgiving, although the effect on sales
figures has not yet been tabulated. Nevertheless, retailers are optimistic about this year's holiday
season and most are positive when looking toward the new year.
Automobile dealers said sales growth was about 5 percent on average for November
when compared with a year earlier. Almost all of the dealers indicated that they are currently,
and plan to continue, using sales incentives, and most are content with their current inventory
levels. Some dealers are very optimistic about sales in the first quarter of 1999 but, in general,
dealers anticipate only modest sales growth.
VIII-2
Manufacturing and Other Business Activity
District contacts remain optimistic about economic conditions. Although they believe the
overall pace of activity has slowed somewhat, contacts also see an economic resilience that's being
bolstered by strong housing markets and stable consumer spending. Employers note that their
continuing difficulty filling vacancies is a sign that tight labor markets have not really turned around
yet. Still, reports of unusually high wage increases because of the labor market situation are scarce.
For the most part, businesses related to home construction and home improvement are
experiencing strong orders and sales. The furniture industry, for example, continues to receive a
steady stream of new orders. A contact who provides custom interior architectural design has also
seen strong sales lately. Transportation companies have seen some pickup, too.
One railroad
company is embarking on a long-term plan to boost capacity and employment. Foreign sales for
some companies, however, have almost dried up. Weak Asian economies have affected industries
like poultry and lumber.
Labor Outlook
According to the latest Manpower survey of businesses in the four major Eighth District
cities, firms are expected to tone down their hiring plans during the first three months of 1999
compared with a year earlier. On average, the percentage of firms expected to add to their payrolls
in the first quarter of 1999 exceeds by 8 percentage points the portion expected to pare their
workforces. This net increase averaged 19 percentage points three months earlier and 9 percentage
points a year earlier. Hiring prospects are the most upbeat in Little Rock and St. Louis, with
somewhat less optimism expressed in Louisville.
Real Estate and Construction
Although there has been some slowing in monthly permit issuance for residential
construction, year-to-date permits are up in almost all of the District's 12 metropolitan areas. Sales
VIII-3
of new and existing homes remain strong, and median prices (year-over-year) continue to increase.
Nonresidential construction, however, has tapered off. Short of some major projects already in the
works, most nonresidential builders are taking a "wait and see" approach.
Banking and Finance
Several senior loan officers in the District report that they have recently tightened standards
for approving commercial and industrial (C&I) loans to all sizes of corporate borrowers. The
officers cite a less favorable or more uncertain economic outlook and a worsening of industryspecific problems as reasons for the modest tightening. Demand for C&I loans is still reported to
be strong, as is demand for residential mortgage loans. Consumer loan demand is reportedly
unchanged from three months earlier.
Agriculture and Natural Resources
The fall harvest is nearly complete in all areas. Surveys and anecdotal reports indicate that
yields on the District's corn crop were well above last year's in most areas. For the most part,
soybean yields are off slightly from a year earlier. In the southern portions of the District, an
unusually dry growing season reduced cotton yields measurably; combined with fewer harvested
acres, total crop production in Arkansas, Mississippi, Missouri and Tennessee is expected to drop
25 percent from a year earlier. Reports from contacts in Arkansas and Mississippi suggest that sales
from chemical and farm implement dealers are down markedly from a year earlier because of low
commodity prices. Reduced demand from Asian markets has caused a substantial cut in wood chip
production. Moreover, pulp prices are reportedly the lowest in a decade.
NINTH DISTRICT--MINNEAPOLIS
As 1998 draws to a close, the Ninth District economy displays great strength as it has
throughout most of the year. Consumers continue to spend at record levels. Construction
activity is robust in most areas. Manufacturing output is strong overall, and many plants
continue to operate near capacity. The primary commodity sectors including agriculture, oil,
mining and logging continue under pressure from low prices. Loan growth has slowed for
banks, which continue to generate strong profits. As throughout the year, labor markets are
tight in many areas, but compensation cost increases remain limited. There is little evidence of
price pressures at consumer levels.
Consumer spending and tourism
"Our holiday push started way back in mid-September," says a representative of Minnesota's
largest mall, who described most stores' sales growth over 1997 as "in the high single digits."
"The warm weather is really helping; we have a lot of traffic," reports a South Dakota mall
official who described strong buying the day after Thanskgiving.
Other retail sources also
reported very good sales for the Thanksgiving weekend. Retailing remains very competitive,
but consumers are spending at record levels in urban areas, according to merchants and state
finance officials. Only small town merchants in agricultural areas report slow sales.
Auto sales are described by dealer representatives as generally strong, with a continuing
preference for light trucks and sport-utility vehicles. Dealers in farming areas are an exception
to this generally positive picture.
The summer and fall tourist season was one of the best in recent years, due in part to low
gasoline prices. Lack of snow has delayed winter recreation activity in some areas, but
business owners are generally optimistic.
Construction and real estate
"Shortage of rental housing a crisis," headlined a November story in a Minnesota business
newspaper. In response to such tight housing markets, multifamily construction in the state
continues well above year-earlier levels. Single-family building remains robust in most urban
IX-2
areas. Office tower building is at the highest rate in 11 years in Minneapolis-St. Paul. General
commercial building and heavy construction are also robust. Unseasonably warm weather in
late November has been very favorable to builders in many parts of the district.
Manufacturing
Manufacturing output is generally described as strong, with little change as the year ends.
Manufacturing employment is only about 1 percent above 1997 levels, but plant owners
frequently state that productivity increases allow them to expand output at a higher level and
that they are running at or near capacity. Printing capacity is highly utilized, and press
scheduling has been very tight. The district's only auto plant, which produces pickups, has had
strong orders. However, firms for which exports to Asia and Latin America are important
continue to experience slackness, as do manufacturers of agricultural implements.
Banking
Reportedly, loan growth has slowed somewhat from late summer across the Ninth District, but
competition in making loans remains fierce. "Banks are knocking each other out" to get good
commercial loans, remarked one banker. "It's a real fight these days." Slippage in the credit
quality of agricultural loans was reported in some areas of the district. Banks are reportedly
responding by increasing their reserves for loan losses. Banks in some areas are also reportedly
tightening credit due to adverse agricultural conditions. Profitability is expected to be
consistent with 1997 performance, mostly due to very strong first and second quarters in 1998.
Agriculture
Agriculture remains financially stressed. Prices are low for most Ninth District farm products
except milk. But preliminary responses to a Minneapolis Fed fourth quarter survey of ag
bankers reveal some hope that October upticks in grain prices bode well for improvements in
their customers' income and spending. With all the harvest in, the 1998 crop was record setting
for most farmers. High output and slow sales by farmers have resulted in a storage crunch, with
large quantities of corn in temporary storage on the ground. Dairy farmers continue to face
very favorable milk/feed price ratios.
IX-3
Energy and mining
Once again, natural resource industry output shows little change from earlier in the year. Oil,
gas and coal output is reportedly stable, with little new leasing or drilling. Copper and gold
mine output is stable, though passage of an environmental initiative in Montana will limit new
gold mining operations. Iron mines are finishing the year with output near earlier projections,
but expect reductions in 1999 because of import competition. One Montana logging company
will furlough 45 workers largely due to reduced demand in Asia.
Employment, wages and prices
Tight labor markets continue as a difficult problem for business. Unemployment rates are low
and largely stable in most parts of the district. Even in Michigan's Upper Peninsula, usually
the Ninth District's most sluggish labor market, unemployment has dropped below the national
average. As before, employers report increases in starting wages and nonwage compensation,
but there is little evidence of any sharp escalation in labor costs. In Minneapolis-St. Paul,
hourly earnings in manufacturing are up about 2.5 percent from a year ago. There are few price
increases at the producer or consumer levels. Gasoline is available at less than 90 cents per
gallon in some areas, and red meat is often highly discounted in supermarkets.
X-1
TENTH DISTRICT - KANSAS CITY
Overview.
The district economy grew moderately again last month, but signs of easing are
still present. Retail sales rebounded, and automobile sales enjoyed a good month. Construction
activity also remained fairly solid, although housing starts continued to grow at a slower pace than
earlier in the year. Manufacturing activity last month was flat and expectations about the future are
substantially lower than in recent past. The energy sector slipped back into decline, as oil prices
began falling again. In the farm economy, corn and soybean yields came in above average, while hog
producers experienced sizable losses. Labor markets remained very tight in most of the district, with
slightly less evidence of wage pressures than in our last survey, especially in the manufacturing sector.
Prices were subdued at the retail level and mixed for construction materials, while prices for most
manufacturing materials continued to decline.
Retail Sales. Retailers reported a rebound in sales last month and expect a strong holiday
season. Inventories expanded in preparation for the Christmas season, and most managers are
satisfied with current stock levels. However, most retailers plan to reduce stock levels after the
holidays. Automobile sales recovered nicely last month, led by strong performance of trucks and
sport utility vehicles. Sales are now moderately above year-ago levels. Dealers are cautiously
optimistic about the near future as some seasonal decline in sales is expected over the next few
months. Following the GM strike, dealers have been vigorously expanding vehicle inventories and
expect further expansion in the near future. More dealers reported a tightening in consumer credit
compared to the recent past.
Manufacturing. Tenth District manufacturing activity was largely unchanged last month,
with plants operating at lower levels of capacity than in the first half of the year. Manufacturing
materials were generally available, and lead times again declined slightly. Managers were less
satisfied with inventory levels than in the recent past, and most plan to continue cutting back. A
X-2
quarterly survey of district manufacturers indicated that, by most measures, growth in the sector
slowed from the previous survey. New orders for exports declined as a result of weak foreign
markets. Survey respondents were substantially less optimistic about the future than in the recent past.
Housing.
Construction activity remained solid as housing starts continued to grow at a
healthy pace, although more slowly than the brisk rates registered earlier in the year. Despite a slight
decline in sales of new homes, builders were somewhat more optimistic about future activity than in
our last survey. Inventories of unsold homes were practically unchanged from the previous month as
slower activity was matched by slower sales. Lenders reported that mortgage demand declined
slightly last month, as refinancing activity slowed but remained well above year-ago levels.
Reflecting lower mortgage rates, lenders were more optimistic about future demand than they have
been in the recent past.
Banking. Bankers reported that both loans and deposits were stable last month, leaving loandeposit ratios unchanged. Demand increased for both commercial real estate loans and home
mortgage loans, with refinancing accounting for most of the growth in the latter category. Other loan
categories were little changed. On the deposit side, decreases in NOW accounts were offset by
increases in money market deposit accounts.
All respondent banks decreased their prime lending rate at least once during the last month.
Most banks lowered their consumer lending rates, although a few left these rates unchanged. Most
banks do not expect to lower their prime rate or consumer lending rates in the near future. A few
banks tightened lending standards, and some banks indicated they were less willing to make
agricultural loans due to lower commodity prices.
Energy. District energy activity began falling again in October and November, after a brief
period of modest gains. The district rig count reached a new low, down 7 percent in October and
another 10 percent in November. The decline in activity was expected since oil prices started to edge
X-3
down again after a few weeks of small gains in September. The price of West Texas Intermediate
crude fell below $12 per barrel by the end of November. Natural gas prices posted a 4 percent rise in
October, but both oil and gas prices remained more than 35 percent below year-ago levels.
Agriculture. District producers report that corn and soybean yields were well above average
in most areas. Most of the wheat pasture in the district is doing well with favorable growing
conditions, although there may be somewhat less pasture available due to the late planting of the
wheat crop. With hog prices at the lowest levels in nearly 30 years, producers in the district are
experiencing losses close to $35 per head. Many small hog producers in the district are liquidating
their herds. District bankers report that their overall farm portfolios have deteriorated from a year ago
and concern is rising. Most bankers do not expect significant repayment problems or foreclosures this
year, but bankers expect many borrowers to carry over operating debt into next year. In spite of low
commodity prices, farmland values and cash rents in the district have remained stable.
Wages and Prices. Labor markets remained very tight in most of the district, with slightly
less evidence of wage pressures last month than in our previous survey. Labor markets are especially
tight in areas such as Omaha and Denver, and in some sectors such as construction. Retailers
continued to complain of a lack of entry-level and general sales workers, and manufacturers faced
difficulties finding both skilled and unskilled production workers. Builders again reported labor
shortages across the board, with the greatest need existing for framers, roofers, and carpenters. Wage
pressures continue to be greatest in the retail and construction sectors, although pressures appear to
have eased slightly for retailers and considerably more for manufacturers. Retail prices were
practically dormant last month and are expected to remain stable in the near future. Prices for most
manufacturing materials continued to decline and are likely to drop further. For example, prices are
especially low for steel due to the Asian crisis. Prices of a few construction materials, such as cement
and concrete, edged up last month.
XI-1
ELEVENTH DISTRICT--DALLAS
Economic growth in the Eleventh District continued to gradually cool in November. Overall
manufacturing activity was weaker, and drilling activity continued to plummet. Demand for business
services was somewhat softer, with the exception of temporary service firms which reported a pick up.
Retailers said sales activity has been weaker than expected. Sales were strong or increasing for some
manufactured products, and construction activity remained at very high levels. Financial service contacts
reported tighter credit standards and strong deposit growth. Harvest is winding down for most crops, but the
financial situation remains poor for many agricultural producers.
Prices. There continued to be numerous reports of price declines, particularly for manufactured and
energy products. Although there were scattered reports of rising prices from some real estate and service
contacts, these reports were less widespread than have been reported for several years. Import competition
and falling input prices led to further price declines for most metals and all types of paper. Lumber prices
fell 10 to 15 percent over the past six weeks, and contacts say their customers and distributors have reduced
inventory in anticipation of further price declines. Crude oil prices dropped below $12 per barrel, the lowest
nominal level in 12 years. Gasoline and heating oil prices are low, and inventories are high. Natural gas
prices were up sharply in early November, but have since declined. Weak natural gas prices are expected
unless a cold weather materializes, because storage is 10 percent higher than last year and nearly 100
percent of capacity. Petrochemical and plastic prices have stabilized at low levels. Inventories are down for
some petrochemical products, such as ethylene, because of numerous maintenance outages and hurricanerelated shut downs. Prices continued to fall for personal computers and telecommunications products,
although contacts said prices were not falling as fast as "usual" because costs are not dropping significantly.
Cement prices continued to increase, but contacts say there is more resistance to price increases, and prices
are expected to soften next year.
Some labor markets remain tight, and wages in those industries are rising, particularly for highly
technical positions, business services and the retail industry. Retail contacts say workers are "not what you
want when you find them." Temporary service firms are still having trouble finding enough workers to fill
XI-2
customer requests. Some high tech contacts say the industry has turned its focus to retaining workers rather
than hiring. Telecommunications firms said wages are competitive because of the lack of technical/skilled
workers, but pressures are not as intense as they were 3 months ago, partly because firms are focusing more
on expanding capital rather than labor.
Manufacturing. Manufacturing activity continued to weaken. Demand was strong for most
construction-related products and some high-tech products, but energy-related manufacturing continued to
decline. Import competition remains intense for some industries, with plant or line shutdowns expected in
lumber and paper. Lumber remains in oversupply despite strong demand from the construction industry.
Domestic demand for paper products is also strong, but global demand remains weak, and inventories are
up. Globally, plant shut downs are expected to reduce worldwide excess paper capacity by 50 percent or
more. Cement producers say the softening reported in the last beige book appears to be solely due to poor
weather, and activity has returned to high levels. Brick demand was strong, and gypsum wallboard sales
have been so strong that customers are on allocation for this product. Demand for metals was "fairly
strong" but less than expected for some products. Metals producers are receiving new orders from the
construction industry but expect these to slow. Demand for telecommunications products continued to grow,
although contacts said competition has become more intense, and additional mergers are expected. Personal
computer sales increased. Demand was up slightly for semiconductors, and contacts say inventories have
stabilized, but they are cautious that a weakening domestic economy could halt the recovery. Demand
remains weak for downstream energy manufacturers, although producers benefitted from the drop in oil
prices in November. Refiners say demand for gasoline and heating oil has been weaker than they hoped,
and producers anxiously await cold weather. Low export volume has left the chemical industry with
oversupply. Contacts believe the industry has bottomed out, albeit at a very low level.
Services. Demand for business services was softer, with the exception of temporary service firms
who said demand was up over the past month. Legal firms reported slower mergers and acquisition activity,
but stronger corporate bankruptcies and restructuring activity. Demand for consulting and accounting
services was softer, due to the slow down in commercial real estate activity and the end of year 2000
XI-3
activities for many companies. Transportation firms reported strong demand for retail shipments and air
passenger traffic, but weak shipments of chemicals and oil, especially agricultural chemicals.
Retail Sales. Retailers said sales were softer than expected in November, although most contacts
thought sales remained "good." Some expressed concern that the consumer may be pulling back, while
others are optimistic that "a good cold snap" will spur sales. Thanksgiving sales were mixed, and most
retailers agree that Christmas has started slowly. Heavy homebuilding has boosted furniture sales, however,
with stores reporting double-digit gains over last year. Sales to Mexican nationals continued to be below
expectations. Auto sales picked up, which contacts attribute to increased dealer rebates.
Financial Services. The financial service industry reported continued strong deposit growth, with a
few seasonal dips in delinquency rates and loan demand. Most banks reduced their prime and deposit rates,
and tightened credit standards. Contacts said that much of the financing for large commercial projects, that
disappeared in September, has returned to the markets.
Construction and Real Estate. Construction activity remained at very high levels, with housing
starts still growing strongly. Labor shortages continued to cause delays. New and used home sales grew at a
strong rate, although weakness was reported in Houston. A drop in the availability of funds for lending by
REITs has caused an increase in interest rates for commercial projects. Contacts continued to voice concern
about overbuilding in the industrial market in some areas.
Energy. Drilling activity continued to plummet, both within the District and around the world,
reducing demand for the region's oil field machinery and services. Drilling is declining faster in Texas than
in the rest of the United States, down 38 percent over the last year, with the area around Midland and
Odessa hurt the worst, with declines of 50 to 60 percent. Oil service and machinery firms say the
cancellation of large orders has shrunk backlogs. Day rates for some rigs are near variable cost, and some
service companies are offering to take equity stakes in exploration ventures rather than cash. Contacts
believe producers are pulling back hard, preparing for a prolonged period of low oil prices.
Agriculture. Harvest is winding down for most crops, but the financial effects of the year's drought
and low commodity prices will not be resolved for some time. Wet conditions hampered some harvesting
and damaged cotton fields in North Central Texas. Livestock conditions remained good overall, with some
supplemental feeding.
XII-1
TWELFTH DISTRICT-SAN FRANCISCO
Summary
Reports from Beige Book contacts indicate a moderate pace of economic growth in most
12th District states during this survey period. Retailers reported modest sales growth in recent
months, while service providers in the District noted an acceleration in growth above an already
rapid trend. Manufacturing activity slowed further in recent weeks, damped by declining demand
for exports and inventory imbalances in the high-tech sector. District agricultural conditions
remained weak, as below average yields, low quality harvests, and soft prices continued to
depress profits. Residential and commercial real estate activity was healthy, although higher
financing costs have tempered growth. District banks reported increased demand for loans, as
borrowers searched for alternative financing tools. Looking forward, respondents remain
concerned about future financial and economic developments, although their view has improved
since the last survey period.
Business Sentiment
Most District respondents expect the national economy and their respective regional
economies to slow during the next four quarters. About two-thirds of the respondents expect
U.S. GDP growth to fall below its long-run average pace, easing pressure in labor markets and
pushing the national unemployment rate above its current level. Most respondents expect
inflation to remain stable, although a growing proportion anticipate an increase in inflation in
coming quarters. About one-half of District respondents expect economic growth in their region
to be at or below the national pace over the next year; the remaining half expect their region to
outperform the nation, although to a lesser degree than in previous years. Most respondents
XII-2
anticipate further slowing in business investment and consumer spending in their areas, and more
than 95 percent of District respondents anticipate further deterioration in their region's foreign
trade balance. Although respondents remain concerned about future financial and economic
developments, their outlook has improved since the last survey period.
Retail Trade and Services
Overall, District respondents reported modest growth in retail sales during this survey
period. Consumers reportedly remained cautious, searching for bargains and delaying purchases
of more expensive items. Sales growth reportedly was strongest at "big box" retailers, which
used discounting, merchandise give-aways, and contests to attract customers. Department store
sales were flat or declining relative to last year in many areas of the District, but respondents
noted that the Thanksgiving weekend is no longer considered a reliable barometer of holiday sales
outcomes. Respondents indicated that apart from toys, home furnishings such as linens and
decorative items were the fastest sellers. In contrast, apparel sales, particularly of outerwear and
sweaters, were flat.
Service industry respondents in most District states reported strong growth. Demand for
telecommunications, data communications, and cable television services picked up in recent
weeks, producing material shortages and delaying deliveries in some regions. However, prices for
most telecommunications and cable products remained stable due to stiff competition among
providers. Demand for shipping and freight services also increased in many District states, as
producers and retailers prepared for the holiday season. Strong import growth during the recent
survey period kept port traffic at high levels throughout the District and pushed inbound cargo
XII-3
charges up significantly; two contacts reported that container rates for inbound cargo have risen
by as much as 50 percent in the last year.
Manufacturing
Reports on District manufacturing activity were mixed. Respondents noted that industries
dependent on export demand continued to slow in recent weeks, with employment contracting in
some regions. In contrast, conditions among manufacturers of products targeted at domestic
markets remained stable. However, a number of respondents noted that import competition has
begun to push down final goods prices, depress order growth, and narrow profit margins in
almost all sectors of manufacturing. District respondents reported few problems obtaining
materials and limited capacity constraints; overcapacity, rather than constrained production, has
become a concern of many District manufacturers. In a change from previous survey periods,
District manufacturers did not report difficulty finding skilled employees.
Agriculture and Resource-Related Industries
District respondents reported that agricultural conditions remained weak during this
survey period. Low prices and high inventories continued to squeeze profits for grain producers,
while below average yields and poor quality harvests have left many growers of fruits, nuts, and
vegetables in the red for the year, despite slight increases in prices. One contact noted that a
number of apple orchards in the Pacific Northwest went unpicked this year because prices were
too low to cover production costs. Feedlot conditions reportedly improved in recent weeks,
although contacts noted that the slight improvement will not make up for weak conditions earlier
in the year.
XII-4
Real Estate and Construction
Real estate construction and sales activity remained at high levels in most District states,
although the pace of growth reportedly slowed, particularly for commercial properties. Contacts
throughout the District noted that rents for commercial properties have stabilized in most
markets, damping new construction. Higher financing costs and the slowing economy reportedly
have delayed construction of a number of new hotels and resorts in the District. Residential
construction remained strong in many parts of the District, although respondents noted that
speculative building has slowed substantially.
Financial Institutions
Twelfth District financial conditions were strong in recent weeks, although borrowers
faced tighter terms. Commercial loan demand at banks remained high, and banking contacts
reported ample capital to meet borrowers' needs. However, concerns about credit quality
reportedly have restrained bank lending, resulting in higher terms and rates for commercial
borrowers. Agricultural lenders noted that weak conditions for farmers and ranchers have begun
to decrease the quality of their agricultural loan portfolios. On the consumer side, lower interest
rates kept demand for mortgages and auto loans at high levels.
Cite this document
Federal Reserve (1998, December 21). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_19981222
@misc{wtfs_beige_book_19981222,
author = {Federal Reserve},
title = {Beige Book},
year = {1998},
month = {Dec},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_19981222},
note = {Retrieved via When the Fed Speaks corpus}
}