Beige Book

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

Wednesday

June 16,1999

Summary of Commentary on

Current

Economic

Conditions

by Federal Reserve District

June 1999

TABLE OF CONTENTS

SUMMARY .................................................................

i

First District - Boston .................................................

I-1

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

II-1

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

III-1

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

IV-1

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

V-1

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

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

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

VI-1

VII-1

VIII-1

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

IX-1

Tenth District - Kansas City ............................................

X-1

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

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

XI-1

XII-1

SUMMARY*

District reports indicate that the U.S. economy remains strong, with gains in activity

widespread. Retail activity in most districts has shown little sign of slowing, and consumers

remain upbeat about the economy. Home furnishings and motor vehicles sold particularly well

in April and May. Manufacturing activity continues to improve in most areas from the sluggish

conditions of the past year and a half. Production of such items as electronics, machinery, heavy

trucks, and construction equipment has been especially strong, although some sectors, such as

steel and apparel, continue to face stiff competition from foreign producers. Construction

continues to grow at a brisk pace throughout the nation, spurred by strong home sales in most

parts of the country. Shortages of labor and materials, however, have resulted in higher building

costs in some districts. Lending activity remains strong in most districts despite a slowdown in

refinancings due to slightly higher mortgage rates. In the agricultural economy, growing and

planting conditions have been mixed. There is little optimism about farm incomes in 1999, as

most agricultural commodity prices remain low. Energy activity in most regions has been slow

to react to the recent increases in oil prices, although expectations of a solid recovery are high.

Labor markets remain very tight in almost all districts, with increased reports of upward

pressure on wages in many parts of the country. There have been some reports that labor supply

constraints are impeding employment growth in many sectors. Prices, however, with the

exception of several construction materials, remain well behaved.

*Prepared at the Federal Reserve Bank of Kansas City and based on information

collected before June 7, 1999. This document summarizes comments received from businesses

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

Reserve officials.

Consumer Spending

The strong retail activity in most districts earlier in the year showed almost no signs of

easing in April and May, as consumers remained upbeat about the economy. The only district

reporting weaker activity was Kansas City, where sales have edged down but are still above yearago levels. Retailers in the Cleveland district report especially strong sales numbers for May,

particularly for specialty apparel items. The hottest selling products in most districts have been

home furnishings and appliances, in part reflecting continuing strength in home sales and

housing construction. Stores in metropolitan areas of the Dallas and Minneapolis districts posted

vigorous sales, but rural merchants in these districts continue to suffer as a result of a weak

agricultural sector. Airline and cruise bookings in the Atlanta district remain strong even as

prices have edged up, and advance summer bookings for south Florida resorts are higher than a

year ago. Labor shortages are a major concern for many retailers, especially for entry-level

workers and sales associates. In the Cleveland district, virtually all companies operating

amusement parks have been severely understaffed, with some having to cut back operations as a

result. Stores in several districts increased their inventories in May in anticipation of robust sales

throughout the summer.

Automobile sales increased in most districts in April and May due largely to the

continued popularity of light trucks and sports-utility vehicles. Inventories of new trucks have

been tight in most places, particularly in the St. Louis and Kansas City districts. Auto dealers in

the Chicago district have been able to push through modest price increases.

Manufacturing

Manufacturing activity in most districts has continued to improve from the sluggish

iii

conditions experienced in the recent past. Boston, Atlanta, and Dallas, however, report mixed

results, and New York notes some slowing in factory activity. Strong new orders, production,

and shipments were reported for many manufacturing products, such as heavy trucks, electronic

equipment, machinery, and food and biotechnology products. Brisk demand for construction

equipment and building materials has continued across the nation, as construction activity

remains strong. Similarly, a strong housing market continues to fuel the demand for appliances.

San Francisco reports that increased demand from East Asia has helped paper and pulp

processors in the Pacific Northwest. Some sectors continue to report strong foreign competition,

however. For example, activity at steel mills remains weak and many apparel producers continue

to struggle with competition from cheap imports.

Manufacturers in several regions have expressed concern about labor availability and

continue to report difficulties in hiring skilled technical workers, especially in the information

technology area. As a result of a shortage of qualified workers, not all of the increase in demand

for manufactured goods in the St. Louis district has been met. Additionally, labor costs have

become a major concern for most contacts in that district. On a positive note, many districts

continue to report healthy productivity gains, with Richmond noting that several manufacturers

are experiencing record productivity, in part because of increased capital spending.

Construction and Real Estate

Construction activity and real estate markets remain robust in most parts of the country

following an exceptional first quarter. Only New York, Atlanta, and Kansas City appear to be

experiencing slightly weaker building activity, but in all three districts activity is still well above

year-ago levels. Sales of new and existing homes remain very strong in Chicago and St. Louis,

iv

with a shortage of available houses leading to rising prices and quick sales. Construction in the

Kansas City district is expected to pick up considerably over the summer months as Kansas and

Oklahoma rebuild from tornadoes that destroyed or severely damaged more than 10,000 homes

and businesses.

Commercial real estate markets have improved in most districts. Demand for office

space in downtown Boston continues to increase. Retail, office, and warehouse leasing

commitments in the Richmond district have been stronger as well, especially in Virginia and the

Carolinas. In Chicago, the retail segment has been particularly vibrant.

Builders in most districts continue to complain of substantial shortages of labor,

especially for framers. Several construction materials, particularly sheetrock, also remain in

short supply. The shortages have created rising construction costs, and project schedules in some

districts have been affected, but builders in general remain optimistic about the future.

Banking and Finance

Demand for loans has remained strong in most districts, although some weakness in

commercial loan demand has been seen in New York and Atlanta. Several districts report strong

competition among banks for high-quality commercial customers, with some indication in

Chicago that this may be affecting lending standards. In most districts, however, lending

standards remain generally unchanged.

Higher mortgage rates appear to have slowed refinancing activity across the country, but

real estate loan origination and consumer lending remain strong overall. Chicago, New York,

and Philadelphia report some signs of weakness on the consumer side, however. Loan

delinquency rates have shown some improvement across districts.

Agriculture, Energy, and Natural Resources

In the agricultural sector, growing and planting conditions have been mixed across

districts. Cleveland, Chicago, St. Louis, and Dallas report planting has been generally at or

ahead of schedule. Dry conditions have hindered planting and crop development in some areas

of the Richmond and Cleveland districts, however, while Minneapolis has seen some problems

caused by wet fields.

There is little optimism about farm incomes across districts, as commodity prices remain

low. As a result, agricultural credit markets are somewhat stressed, with Minneapolis reporting

increases in farm liquidations and bankruptcies and Chicago reporting a general slowing in

agricultural loan repayments.

Oil exploration has been slow to react to price increases in most areas, but expectations of

a solid recovery are high if the price increase is sustained. Some increases in activity have been

seen recently, such as in the Kansas City district, but rig counts remain well below year-ago

levels.

Labor Markets, Wages, and Prices

Labor markets were extremely tight last month in almost all districts, with no signs of

easing in the foreseeable future. Despite the summer influx of student workers, temporary

employment firms in many districts have been unable to fill all their job openings. Employers in

Cleveland are hiring temporary workers in hopes they will become permanent employees after a

short trial period. Richmond, Chicago, and St. Louis note that severe labor supply constraints are

hampering employment growth in many sectors.

Although labor shortages are reported in almost all sectors, some skilled workers have

been in especially short supply and many employers have broadened their searches from local to

regional and national levels. Information technology workers, in particular, are very difficult to

find. As an employment agent in Northern Virginia put it: "Anyone that can operate a personal

computer can get a job." Skilled tradesmen in the construction sector are also extremely scarce,

especially in urban areas where the building boom continues. The Minneapolis district reports

that builders in Duluth imported 200 trade workers due to the lack of available local workers.

Persistently tight labor markets have resulted in many reports of increased wage

pressures, especially for some specific industries and skilled occupations. Chicago, St. Louis,

and Richmond report upward wage pressures in almost all sectors, while other districts report

more scattered wage increases. For example, retailers in the Boston district report a recent

increase in the use of higher wages as a recruiting tool, while a large retail chain in New York

notes increased wage pressures primarily for entry-level positions. In Dallas, wages have risen

for truckers, secretaries, legal assistants, and workers with technical skills. Similarly, wage

changes in San Francisco have been generally limited, but increases were noted for some types of

workers. Cleveland and Philadelphia report that wage pressures have generally been held in

check, but rising benefits costs have become more common. The Kansas City district is an

exception, as wage pressures there appear to have eased somewhat from previous surveys.

Many districts suggest that employers have continued to be creative in finding and

recruiting additional labor. Employers in the Atlanta district, for example, appear to be using

more bonuses and incentives as part of total labor compensation, and many companies are using

more part-time workers and consultants as well as allowing employees to work at home. Some

firms in the Boston district are avoiding higher labor costs for new hires by outsourcing and

changing work assignments internally.

Prices remain generally subdued, but many districts report pockets of higher prices for

some specific sectors and goods. At the retail level, price increases have been marginal and

infrequent. Retailers indicate that stiff competition continues to restrain price increases. Dallas,

for example, reports that smaller markdowns have resulted in a slight increase in average selling

prices and Kansas City notes that retail prices continue to edge up. Chicago suggests there have

been a few signs that consumer resistance to price increases has softened somewhat. In contrast,

retailers in the New York district report that selling prices and merchandise costs have been flat

to slightly down. Prices for manufacturing goods and materials have held steady, with modest

increases for a few items, such as cardboard, packaging materials, metals, and ethylene-based

petrochemicals. The big exception has been building materials, especially sheetrock, which

continues to experience substantial price increases. Housing prices and commercial rental rates

have also increased in several districts.

I-1

FIRST DISTRICT - BOSTON

The First District economy continues to expand. Retailers report strong sales growth while

manufacturers' results are mixed, with business up compared with a year earlier at about half the contacts

and down at half. Business continues to grow at temporary employment firms and insurance companies

and in most of the region's commercial real estate markets. Retailers report that vendor prices and prices

to consumers are mostly steady; manufacturers also indicate their input costs and selling prices are mostly

flat or down, but a few say they are able to raise prices to customers slightly. According to respondents,

most workers' pay increases are in the 3 to 5 percent range.

Retail

All retail contacts report strong growth during the March through May period relative to the same

period last year, with sales expanding at a 5 to 10 percent pace. Only one sector, office and architectural

supplies, said sales growth was below expectations, with some signs of a recent slowdown.

Employment is said to be holding steady, with very tight labor markets impinging on merchants'

ability to find and hire new help. Retailers also report a recent increase in the use of higher wages as a

recruiting device. Nonetheless, overall wage growth is said to be in the same 3 to 5 percent range that has

existed for most of the last two years.

Most respondents report that retail prices are holding steady, primarily because of competitive

pressures. Supplier prices are also said to be holding steady. One exception is construction supply

retailers, who say that materials prices are rising dramatically, as supply is short relative to construction

demand. Most retail contacts say gross margins are holding steady.

Contacts report that little or no capital expansion is planned for the remainder of this year, and

some moderate capital expansions are planned for the year 2000. Looking forward, respondents express

continued optimism about the economic outlook, although they expect the rate of economic growth to

slow during the second half of 1999.

Manufacturing and Related Services

First District manufacturing contacts are about equally split as to whether recent business is up or

down from a year ago. Demand is growing most strongly for biotech instruments, publishing, office

equipment, and goods and services related to construction. Equipment suppliers say the semiconductor

industry is rebounding from its slump. Demand for industrial machinery reportedly remains weak. A

maker of apparel textiles reports negative trends, largely because of competition from imports.

Manufacturers report that input costs are mostly flat or down. The sharpest declines are for

integrated circuits and computer components. By exception, prices for corrugated cardboard and plastic

packaging are said to be starting to rise. Some contacts anticipate that paper prices may increase soon,

although none are paying higher prices yet. One-quarter of the contacts report being able to raise prices

slightly. The remainder report that selling prices are flat or down, with some equipment makers reporting

sizable decreases as a result of technological improvements or customer pressures.

The majority of companies report that they are hiring for sales, engineering, information

technology, and/or other technical positions. Almost half are cutting jobs or hours for factory and lowerlevel service workers. Most companies report average pay increases in the range of 3 to 5 percent.

Despite tight labor markets, only a few respondents indicate that hiring expenses are increasing faster

than average pay; a couple of these firms report changing work assignments internally or contracting

work out in order to avoid what they view as excessive costs for new hires.

About one-half of manufacturing contacts plan to increase capital spending this year. The most

commonly cited reasons are Y2K, computer upgrades, and modernization of facilities. Most firms do not

plan to build up inventories later this year in anticipation of Y2K, but a few indicate they will accelerate

orders from critical suppliers.

Most manufacturers are upbeat about their business over the coming year. To the extent they

have concerns, these tend to relate to their own company's sales challenges rather than to conditions in

the economy at large.

Temporary Employment Firms

First District temporary employment firms continue to expand, although the pace of growth has

slowed largely because of supply constraints. Demand is strong, with firms reporting substantial

increases in demand for information technology (IT) workers, especially for software and Internet

development. Contacts say they cannot find enough people to fill all the IT jobs. The summer influx of

student workers may temporarily alleviate some of the supply shortage for general office work, this but

this will not help firms searching for highly skilled, experienced workers or workers for longer term

projects. Wages are increasing 10 percent annually for IT workers and 5 percent outside that sector; temp

firms are passing these increases on to their customers, so profit margins remain steady.

Commercial Real Estate

The commercial real estate market in New England is doing well and most contacts are

optimistic. While some Massachusetts respondents say that the market is becoming less active, others see

no signs of slowdown. Demand for prime office space downtown is very strong, and supply will not

increase until new construction projects are completed during the next one to two years. Office rental

rates continue increasing in downtown Boston but have been steady in the suburbs.

The rest of New England is mixed. Providence is doing very well, with strong demand and rising

rental rates for industrial and suburban office space. The market in Hartford is unchanged, although

several new projects are planned. Southern Maine and southern New Hampshire are experiencing high

levels of activity, but report no change in vacancy or rental rates.

Nonbank Financial Services - Insurance

All but one respondent at insurance companies reports an increase in sales during the first quarter

of 1999. The increases were mostly traditional individual life insurance products. Despite sales growth,

most respondents indicate that they have either reduced employment since the beginning of the year or

expect to do so in the second part of the year. One respondent has a hiring freeze in effect and two are

implementing early retirement programs later this year.

II-1

SECOND DISTRICT--NEW YORK

The District's economy continues to expand, though at a somewhat slower pace than in the last

report. While there are scattered reports of upward price pressures, they appear to remain relatively

subdued. Most retailers report that sales were above plan in May, despite unseasonably cool weather

which held down sales of summer merchandise. Residential real estate markets remain strong, though

activity appears to have leveled off in the second quarter, largely due to supply constraints.

Regional purchasing managers report a slowdown in manufacturing activity in May, along with

some upturn in input prices. The breakup of Conrail and its recent merger into CSX and Norfolk

Southern appears to have caused only minor operational glitches thus far. Local banks report a dip in

demand for residential mortgages and consumer loans, and continued improvement in delinquency rates.

Consumer Spending

Retailers report that sales were on or above plan in May, and would have been stronger still,

except that unseasonably cool weather held down sales of summer merchandise. Overall, same-store

sales for May were up by roughly 4 percent on average, though individual gains ranged from 2 to 8

percent. However, these figures understate underlying growth since they are based on a 4-week month

that included Memorial Day in 1998 but not in 1999. Virtually all contacts report very strong followthrough in sales in late May and early June. Most retailers surveyed report sluggish sales of lawn and

garden, air conditioners, swimwear, and other summer merchandise, but generally brisk sales of apparel

and home goods. Most contacts also cited Star Wars merchandise as a contributor to strong sales.

Retail inventories are generally said to be at satisfactory levels, though one contact describes

them as "a bit heavier than desired." Most retailers report that selling prices and merchandise costs

were flat to slightly lower, though one major chain notes an increase in costs for autumn private-label

apparel imports. Another large chain notes increasing wage pressures for entry-level workers.

Construction & Real Estate

Housing demand in the District remains strong early in the second quarter, though the general

level of activity appears to have lost some momentum, largely due to supply constraints as well as a

mild winter (which boosted first-quarter activity). In April, single-family permits in New York and

New Jersey slipped roughly 6 percent below first-quarter levels (seasonally-adjusted), but were still up

10 percent from a year earlier. Multi-family permits retreated sharply, following spectacular gains in

the first quarter and especially March; year-to-date, they are still up more than 65 percent from 1998

levels. Homebuilders in New Jersey report that new home sales remain strong in the second quarter,

despite a drop-off in buyer traffic from torrid first-quarter levels. They also note that prices for homes

sold in early 1999 rose an average of 11-12 percent from a year earlier, based on comparable sales.

Most of this increase reflects sharply rising land prices due to a shortage of available land. There are

increasing reports of labor shortages in construction-particularly for framers.

Sales of existing single-family homes in New York State slowed somewhat in April. However,

realtors contend that demand continues to be exceptionally strong (as reflected in scattered bidding

wars), and that activity is being held down by a shortage of available homes for sale-particularly in

the counties adjacent to New York City, where the inventory is said to be at "historic lows." Compared

to a year ago, the number of homes on the market is down 35 percent in Nassau County and 25 percent

in Westchester. Even in the Buffalo area, where the economy has been sluggish, there are 10 percent

fewer homes on the market than a year ago, while home sales are approaching record levels.

New York City's office market has shown further signs of stabilizing in April. Office vacancy

rates in Manhattan were little changed: Midtown's availability rate edged down from 8.1 percent to 7.7

percent, while Downtown's edged up from 11.8 to 11.9 percent. Manhattan office rents also appear to

have leveled off thus far in 1999-after rising by more than 20 percent during 1998, rents have barely

II-3

changed since the beginning of this year, though they were up 14 percent from a year earlier in April.

Other Business Activity

The breakup of Conrail and its recent (June 2) merger into CSX and Norfolk Southern appears

to have caused only minor operational glitches thus far, according to contacts in upstate New York.

Substantial resources have been devoted to integrating computer systems in order to avoid the problems

encountered in the 1998 merger between Union Pacific and Southern Pacific. One operator of a small

railroad in western New York says the merger is already starting to bring down rail-shipping costs.

The trucking industry is unlikely to be affected much by increased competition from this merger,

according to an industry expert. However, the recent jump in fuel prices may have a sizable effect on

industry profits, as truckers will probably not be able to pass along the full cost increase to shippers.

Regional purchasing managers' surveys indicate some slowing in manufacturing activity in

May, along with a rise in commodity price pressures. Buffalo purchasers report that manufacturing

activity slowed in May-production activity grew at a slower pace than in March and April, new orders

remained flat, and employment edged down. They also note a sharp upturn in commodity prices, which

had been declining through most of 1998 and early 1999. New York City area purchasing managers

also report that manufacturing activity retreated in May, following strong growth in March and April,

but that growth in non-manufacturing sectors remained solid. Prices paid for commodities were little

changed in May, while costs of contracted services rose at a somewhat slower pace than in April.

Hotel occupancy rates in New York City have ebbed from their peaks reached in early 1998 but

remain exceptionally high-April's rate was 81 percent, down from 84 percent a year earlier. Room

rates continue to increase but at a much slower pace than last year; after rising more than 10 percent in

1998, rates have been running about 5 percent ahead of 1998 levels this year. On a seasonally-adjusted

basis, room rates have declined modestly from their peaks reached in the final quarter of 1998.

Financial Developments

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

overall loan demand has dipped in the past two months. Bankers report a downturn in demand for

residential mortgages and consumer loans and slower growth in demand for commercial and industrial

loans and nonresidential mortgages. Two-thirds of banks reported a decrease in refinancing activity.

Very few respondents indicated a change in credit standards in either direction; however, more recent

contacts suggest some tightening in standards for residential mortgage and home construction loans.

Changes in interest rates were mixed-residential mortgage rates increased, on balance, while

rates on consumer loans declined. Rates for nonresidential mortgages and commercial and industrial

loans were generally stable. Average deposit interest rates rose slightly, on balance. Delinquency rates

continued to fall for all categories of loans.

III-1

THIRD DISTRICT - PHILADELPHIA

Business activity in the Third District continued to increase in May.

Manufacturers in most of the region's major industrial sectors reported further gains in

shipments and orders. Retailers posted higher sales in May than in April, and year-overyear increases were generally strong. Auto dealers also had improved sales in May

compared to April. Bankers indicated that demand for business loans was on the increase

and real estate lending remained at a high level. Consumer lending was rising, on

balance, although some banks noted flat or falling personal lending. Real estate markets

have been active. Home sales have been increasing, and commercial real estate leasing

has been strong.

Looking ahead, most of the Third District businesses contacted for this report

have positive outlooks. Manufacturers forecast further increases in orders. Retailers

expect sales to remain on an upward trend. Bankers expect overall lending to continue

rising, led by an increase in business credit. Builders and property managers anticipate

more construction and leasing activity in the second half of the year.

MANUFACTURING

Manufacturers contacted in May reported continuing gains in business, on

balance. Around one-third said shipments and orders increased during the month, and

less than one-fifth said these measures had fallen at their firms. Increasing activity was

noted in all major industrial sectors in the region except among producers of paper

products and primary metals. Steel makers reported that intensifying foreign competition

was limiting domestic firms' sales and holding prices down. Overall, area manufacturers

continued to indicate that prices for both the goods they buy and the products they make

remain steady.

The forecast for Third District manufacturing remains positive, on balance. More

firms expect increases than decreases in orders and shipments over the next six months.

A modest increase in order backlogs is predicted among the firms contacted for this

report, but delivery times are expected to decrease a bit. Some increases in employment

III-2

and working hours are planned, but roughly two-thirds of area plants will hold workers

and hours steady.

RETAIL

Retail sales in the Third District increased in May from April, according to

merchants contacted for this report, and several store executives noted strong year-overyear gains as a result of healthy Memorial Day sales this year. Warm weather in late

May and early June was boosting sales of summer apparel and other seasonal

merchandise. The combination of strong sales of summer goods and gift items for

graduations and Fathers' Day was leading the sales rate higher in June as well. In

general, retailers are optimistic that the strength in sales will persist into the summer.

Auto dealers reported an increase in sales in May compared to April. The

continuing popularity of light trucks and manufacturers' incentives on sedans were

bolstering the sales rate. In general, dealers described inventories as appropriate for the

current pace of sales, although some said their supplies of the most popular types of

vehicles were lean.

FINANCE

Third District banks were posting gains in loans in the major credit categories in

May, although some banks reported that consumer loan volume was flat or falling. To

some extent this reflected a moderating of demand for personal credit, but some banks

said they were intentionally reducing some types of consumer lending in order to

reallocate resources to more profitable credit areas. Bankers said that loan demand was

rising from small and medium businesses in a wide variety of industries that were

expanding capacity, and they expect this trend to continue. Real estate loan demand,

both residential and commercial, remained strong. Banks indicated that property

development activity has been rising and developers have been looking for increased

leverage in order to maintain their growth.

REAL ESTATE AND CONSTRUCTION

Home builders gave generally positive reports for May, indicating continuing

high sales rates or increases compared to the prior month. Several builders mentioned

that sales of homes in higher price ranges were rising more than lower priced homes.

Some builders indicated that they had recently posted price increases of a few percent for

III-3

single homes while keeping townhouse prices steady. Although some builders reported

difficulties in locating supplies of some materials, primarily wallboard, none of those

interviewed in early June said that their construction schedules had been delayed as a

result. Sales of existing homes have also been on the increase, and real estate agents said

prices have started to appreciate more rapidly than they did last year.

Commercial real estate markets in the District continued to tighten, according to

local developers and property managers. Leasing activity has been strong so far this year

and rents have been rising. Recent estimates of vacancy rates were around 5 percent in

Wilmington, 13 percent in Philadelphia, and in a range of 5 to 12 percent in suburban

locations. In most areas, office vacancy rates have decreased about one percentage point

since the end of last year. Industrial buildings continued to be in demand in the region,

and conversion of older structures to nonindustrial uses has reduced availability and

prompted construction of new space. Most of the demand is for flex space and

warehouses, although some new manufacturing facilities have been built recently.

Contacts in the commercial property industry said sources of private financing have

become more active in the region, and they expect construction, leasing, and sales to

increase through the rest of the year.

PRICES AND WAGES

Businesses in the Third District noted price increases for some of the goods they

purchase, and some firms have recently raised prices for their own products. Overall,

however, increases have been slight and infrequent. Most manufacturers said markets

remain very competitive, especially for products that are imported as well as produced

domestically. Retailers also said that they have seen little or no increases in prices of the

goods they purchase, and they noted the damping effect of foreign supply on prices as

well.

The rate of wage increase in the region does not appear to have accelerated,

according to businesses surveyed in recent months. However, reports of rising benefits

costs have become more common. Some labor contracts that have been signed at area

firms recently included wage increases averaging around 4 percent per year over the life

of the contract.

IV-1

FOURTH DISTRICT - CLEVELAND

General Business Conditions

The Fourth District economy is still quite strong, and worker shortages remain a

concern for many companies.

District temporary employment agencies report an increase in demand for

temporary workers this quarter compared to a year ago. A typically strong demand for

seasonal help has been augmented by a large, sustained rise in the demand for long-term

temporary help. A large number of companies are hiring temporary workers with the hope

of making the workers permanent after a short trial period. Many agencies have recently

increased wages for a variety of positions. The largest wage hikes are reported for

administrative assistants.

Many District firms report having difficulty attracting the usual numbers of

seasonal workers. Virtually every amusement company is reported to be understaffed, and

some are said to be paring down their operations because of this. Although the starting

wage for unskilled seasonal workers has not increased significantly, many companies

indicate having boosted benefits, and some have instituted end-of-summer bonuses to

attract and keep workers.

Construction

Although reports vary widely by company, most contacts indicate that residential

construction has improved this quarter relative to the strong first quarter numbers.

Labor and materials shortages continue to plague homebuilders. Skilled trades

workers, for example, appear to be in short supply throughout the District, with the

IV-2

possible exception of northern Ohio. Still, cost increases, estimated between 2 and 4%,

are relatively subdued.

Commercial construction activity for the District is also mixed. One contractor

reported year-over-year growth this year of nearly 20%. Another contractor described

conditions as slow compared to last year. Overall, commercial construction activity has

picked up from the relatively modest levels seen in the first quarter.

Commercial builders report spotty materials shortages and price increases. Many

say they are also being more vigilant about recruiting and retaining employees. One

respondent cited a shortage of skilled manpower as the single biggest threat to his firm's

future prospects.

Agriculture

District farmers report very favorable growing conditions, and most crops are

developing faster than usual for the season. In Ohio, the planting of the corn crop is

nearly complete-a month earlier than usual. Soybean crops are also well ahead of

schedule and favorable reports are also heard for a variety of other crops in the state. In

Pennsylvania, where rainfall has been more variable, crops are about one week ahead of

schedule.

Similar conditions are indicated in Kentucky, with tobacco, corn, and soybeans

developing well ahead of schedule. However, some eastern Kentucky farmers are

experiencing problems with crop germination because of drier-than-usual conditions.

Some tobacco farmers have had to replant portions of their crop. Early June rains have

alleviated some of the problem.

IV-3

Industrial Activity

Manufacturing activity is good overall. Heavy truck production and sales are

running above last year's record pace. Most capital goods makers have seen continued,

strong sales and production this quarter. Commercial construction equipment

manufacturing is especially strong. Even industries which had shown weakness earlier in

the year, such as energy-related and semi conductor equipment manufacturing, appear to

have improved a bit from earlier in the year.

Modest gains are reported in the steel industry, helped in large part by the

continued strength in the automobile and residential construction industries. Steel prices

have risen marginally since the beginning of the year. Some business analysts caution that

the recent positive developments in the industry may reflect steel customers' hedging

against a potential steel workers' strike later this year.

Upward price pressures are reported for industrial commodities, including most

energy and metals prices. However, finished goods prices are flat, or mildly lower.

Consumer Spending

District retailers report very strong sales numbers for May. Specialty apparel store

receipts have been exceptionally high, with several stores reporting double-digit growth

compared with this time last year. Similarly, chain-store apparel sales are roughly 7%

above last year's numbers. Apparel sales are expected to be strong through the season.

Retailers see labor market conditions as very tight-filling positions for all jobs is

difficult, and worker demand has not been adequately satisfied by the inflow of seasonal

help. Still, wage pressure is said to be modest.

IV-4

The pace of District new-car sales was brisk in April and May. April sales were

generally characterized as better than average, and the May sales numbers were universally

very strong. Dealers report having sufficient stocks to meet the demand. Used vehicle

sales were reported to be holding steady relative to the first quarter.

Banking and Finance

Lending activity in the District was mixed for commercial loans. Some banks

report "phenomenally good" demand while others have seen a slower lending pace

recently. Demand for consumer loans is steady at a high level.

No deterioration in credit quality or changes in credit standards have been

reported. Indeed, consumer and commercial loan delinquencies may have actually

improved a bit in recent months.

The willingness among financial institutions to lend remains high, and the

competition for borrowers is still fierce. The spread between borrowing and lending

rates is still thin and may have narrowed further since the last District report.

FIFTH DISTRICT - RICHMOND

Overview: The Fifth District economy continued to advance at a rapid clip in

late April and May. Business services and financial firms reported stronger demand and

retailers noted continued strength in automobile and housing-related sales.

Manufacturers continued to increase output and, in some cases, raise productivity. The

real estate sector remained upbeat; housing sales were brisk and commercial activity was

strong in Virginia and the Carolinas. Lending at banks remained strong although higher

interest rates slowed the pace of mortgage refinancings. Labor markets tightened further

and wages rose somewhat faster in the retail and services sectors, but prices increased

only moderately. In agriculture, dry weather hampered spring planting and crop

development in many areas of the District.

Retail: Retailers reported increased sales since our last report, but growth has

slowed compared to earlier in the year. Automobile and housing-related businesses fared

especially well in recent weeks. Retail inventories expanded in May as stores anticipated

stronger sales in coming months. Retailers expressed increased concern over their

inability to attract workers. A hardware retailer in Columbia, S.C., for example,

complained that a "lack of employees was stopping growth" at his firm. Reports

indicated that strong wage growth persisted, but the size of the retail workforce was little

changed. Price gains remained modest; many contacts said that although wages were

rising, competition prevented them from raising their prices.

Services: Services revenues expanded at a brisk pace in recent weeks, driven by

stronger demand for business and financial services. Real estate firms benefited from the

District's strong housing markets while favorable weather increased travel and boosted

hotel revenues. After pausing in April, services firms added to their workforces in May.

Labor markets remained extremely taut and led to higher wages for workers in business

and professional services. Prices, however, rose only modestly since our last report.

Manufacturing: District manufacturing activity continued to grow at a moderate

rate since our last report. Shipments, new orders, and capacity utilization maintained the

pace set earlier this year. However, producers of food, chemicals, and fabricated metal

products firms reported a notable increase in their businesses. One chemical

manufacturer said that "business growth has been good and continues to hold." Several

manufacturers noted that they were experiencing record productivity, in part because of

increased capital spending. A fabricated metals producer said, "Productivity is our

salvation at this plant. If it begins to subside, price inflation will follow." In labor

markets, wages and employment fell, but the average workweek was little changed. Price

pressures remained generally dormant; only scattered increases were noted by District

manufacturers.

Finance: District loan officers reported that loan demand remained strong

although higher interest rates slowed the pace of mortgage refinancing activity in late

April and May. A Greenville, S.C., lender described mortgage refinancings as being

"choked off" by rising mortgage rates. In contrast, new loan originations were generally

steady and mortgage lenders continued upbeat, noting that housing markets remained

robust and that mortgage rates stayed relatively attractive. Commercial lending activity

was strong, driven by continued solid business expansion and construction activity in the

region. Commercial lenders characterized competition between banks for commercial

accounts as intense and told us that lending institutions continued to "steal customers"

from their competitors.

Real Estate: Realtors reported that residential home sales continued at a brisk

pace in recent weeks, especially in selected areas of Virginia. Prices were said to be

rising sharply in popular neighborhoods in Northern Virginia, Richmond, and Virginia

Beach. District realtors said that mid-priced homes were currently the strongest market

segment, except in West Virginia where homes priced below $125,000 were noticeably

stronger. One West Virginia builder said, "Anything above that, I wouldn't build

speculative for love nor money." Homebuilders throughout the District continued to

report shortages of skilled labor and building materials, particularly drywall. One upstate

South Carolina builder told us that despite low unemployment rates in the area,

construction workers could still be found; however, quality of these workers, in his

words, "leaves a lot to be desired."

Commercial real estate activity was stronger in recent weeks, particularly in

Virginia and the Carolinas. The pickup in activity was most noticeable in Charlotte,

N.C., where, according to one contact, there were "a lot of tenants making big space

commitments ... big companies [that were] bullish on the market." The acceleration

included new retail, office, and warehouse developments. In South Carolina, stronger

growth was driven by new companies relocating to that area, which pushed rental rates

higher. But some realtors were less optimistic regarding continued strength in the sector.

In Northern Virginia and North Carolina, realtors were concerned that there may be

insufficient demand to absorb the new office space coming to market.

Tourism: Tourist activity was somewhat stronger in recent weeks. A contact on

the Outer Banks of North Carolina told us that--in contrast to a year ago--local hotels

were "almost booked to capacity" during the Memorial Day weekend. Several hoteliers

in the area reported that excellent weather during the holiday weekend boosted consumer

spending on outdoor sports such as windsurfing, kayaking, golfing, and fishing. In

Myrtle Beach, S.C., record-breaking attendance at two motorcycle rallies revved up

tourism in May. Most contacts commented that hotel rates had increased recently and

would likely continue to move higher as the summer season progressed.

Temporary Employment: The demand for temporary workers rose further in

recent weeks placing additional strains on the District's already stretched labor markets.

Although labor remains plentiful in rural areas hit by textile plant closings or cutbacks in

coal operations, qualified workers were becoming extremely scarce in most urban areas

of the District. According to one contact in Charlotte, N.C., manufacturing firms, in

particular, have been scrambling for workers and paying dearly for them. In addition to

skilled manufacturing workers, "anyone that can operate a personal computer can get a

job," according to an employment agent in Northern Virginia. Our contacts indicated that

wage increases have become widespread across job types and industries in recent weeks.

Agriculture: Unseasonably dry weather across most of the District in recent

weeks continued to threaten crop development and hamper planting progress in many

areas. A shortage of rainfall led some South Carolina cattle producers to supplement

their pastures with hay, and in Maryland, reports of herbicide failure due to inadequate

moisture were widespread. Some soybean producers in Maryland have halted planting

until more moisture becomes available for proper germination of their crops. Despite dry

conditions, the peach crop in the Carolinas was reported to be the best in years.

VI-1

SIXTH DISTRICT - ATLANTA

Summary: Moderate growth continues in the Southeast. Merchants report that sales

have generally met expectations, and the outlook is positive. The tourism and hospitality sector

continues to post strong numbers. Residential building and sales have slackened from high

levels, and the longer-term outlook has weakened. Commercial construction remains healthy.

Bankers note strong loan demand, especially from consumers.

Factory production has been

mixed across industries, but announcements of new projects have boosted the outlook. Labor

markets remain tight as employers search for scarce workers, but reports of accelerating wage

pressures are mostly limited to high-tech workers. Prices remain stable with a few exceptions.

Consumer Spending:

According to reports from District retailers, sales during May

ranged from flat to up significantly on a year-over-year basis. Most contacts say that recent sales

have met expectations. Most report balanced inventories, although a notable minority notes high

inventories.

Women's apparel sales have been strong over the last month, while men's and

children's apparel sales have been mixed by store.

Looking forward, retailers anticipate

second quarter sales growth to be flat to slightly up, while third quarter sales are expected to be

slightly stronger.

Tourism and Business Travel:

mostly positive.

Reports from the tourism and hospitality sector are

One Florida contact notes that weather disasters such as hurricanes and

wildfires are the only potential stumbling blocks to record receipts this summer. Airline and

cruise bookings reportedly remain strong even as prices inch up. Cabin utilization rates on cruise

ships are high, even though capacity is up by double-digits from last year for some cruise lines.

Advance summer bookings for south Florida resorts are about the same as last year or slightly

VI-2

higher. The ongoing expansion of Florida theme parks is expected to attract more visitors to the

state, although there are new concerns of overbuilding. Lenders to hotels and to the amusement

and gaming industries in the Southeast say that occupancies and tourist traffic will remain at

historically high levels, at least for the near term. Mississippi casinos report record revenues,

and new projects have been announced.

Construction: Reports from District builders on single-family construction and new

home sales in April and May show little consensus. Many builders continue to note material and

lot shortages, which are slowing construction. Builders anticipate construction levels to be flat to

slightly up compared with last year during the second and third quarters. Realtors also report

that home sales have been mixed recently. Listing inventories and new home inventories are

described as balanced in most parts of the District. Real estate agents' second quarter outlooks

varied widely, while third quarter expectations are weaker.

The pace of commercial construction in the District remains similar to our last report.

Office, industrial, and retail markets in the region generally remain balanced. Downtown office

markets in the region continue to improve, while many suburban markets have experienced slight

increases in their vacancy rates. Industrial vacancy rates have also risen in several key markets,

but the increases remain subdued. Retail construction remains robust, although several large

retailers are exiting some local markets or scaling back on the number of stores.

Manufacturing:

Manufacturing activity is mixed across industries, but recent

announcements brighten the long-term outlook. Contacts in Louisiana are disappointed that

layoffs and cutbacks continue in the oil industry despite rising energy prices. A large military

contractor has announced layoffs at a Georgia facility. Future operations at an Alabama steel

mill are uncertain because of a continued influx of cheap imports, according to industry

VI-3

spokesmen.

However, employment and new orders are increasing for Georgia producers of

electrical and electronic equipment and machinery. In addition, two major announcements boost

the long-term outlook for the District's factory sector. The recently announced plans by Honda

Motor Company to build a $400 million 1,500-worker facility to produce minivans or SUV's in

Alabama has economic developers crowing, as does the announcement that Dell Computer will

build a new plant in mid-Tennessee, resulting in thousands of new high-technology jobs.

Financial: Despite a slight moderation of activity in some sectors, overall loan demand

remains quite strong throughout the District. Consumer loan demand remains very robust, and

commercial demand remains healthy overall despite some reports of slowing. Automobile loan

demand is holding steady, and mortgage demand and refinancing activity have continued to

slow. Although bankruptcy filings have fallen, consumer credit quality and loan standards

remain unchanged.

Wages and Prices: Contacts report a continuing struggle to locate and retain skilled

workers. Employers are reportedly using a wide variety of means to acquire workers while

wage increases.

Bonuses and incentives are becoming

increasingly important factors in compensation.

Increased dependence on part-timers and

resisting greater-than-average

consultants, as well as a greater willingness to allow employees to work at home, are holding

down costs for some District firms. However, companies are spending more on training as the

skill level of available workers falls. Employers of skilled workers are broadening employee

searches to a regional and national level.

Most contacts report a stable price picture, with some exceptions.

Health insurance

premiums are increasing at double-digit rates in some parts of the District. Prices of building

materials, especially sheetrock, are rising. Airfares are increasing.

VII-1

SEVENTH DISTRICT-CHICAGO

Summary. The Seventh District economy continued to expand at a modest pace in May

and early June as reports of intensifying price pressures became more frequent. Sales of homerelated items and light vehicles led strong consumer spending as consumers' resistance to price

increases appeared to be softening. Construction activity continued very strong even as

shortages of labor and some types of building materials slowed some projects. Manufacturing

activity was robust with motor vehicles and construction-related industries running near capacity,

while steel and agricultural equipment producers continued to struggle. Despite a sharp dropoff

in home refinancings, overall lending activity remained strong. Labor markets were again tighter

in the District than the nation as a whole, and reports of worker shortages and intensifying wage

pressures became more widespread. Farmers were still having difficulty repaying bank loans due

to low commodity prices. Corn planting in the District was nearly finished at the end of May

while soybean planting was 80 percent completed.

Consumer spending. Retailers indicated that sales results in May were in line with or

slightly above their expectations, and a few contacts suggested that price discounting was not as

big a factor in driving sales as it had been in recent months. Home-related items-furniture,

lawn and garden, draperies, etc.-continued to receive a boost from exceptional housing activity.

Apparel sales were also strong despite some weather-related softness in May. Discounters again

appeared to fare better than general merchandisers, although sales growth had slowed somewhat

from earlier in the year. A few retail chains with a national presence suggested that sales gains

in the Midwest were not quite as strong as in the rest of the nation. One contact at a large auto

dealer group in the District indicated that the market for light vehicles remained exceptionally

strong, as consumers' confidence in the economy remained high. There were a few signs that

consumers' resistance to price increases had softened slightly. Auto dealers and some casual

dining establishments were able to push through very modest price increases; and a few retailers

suggested that strong sales results were "not as price-driven" as earlier in the year, although a

few merchants did continue using promotions to move some apparel items.

Construction/real estate. Construction activity remained very strong in the District,

particularly on the commercial side. Office vacancy rates continued to tighten in most areas with

some new development taking place, mainly in suburban areas. Demand for light industrial

space, especially distribution centers, remained strong and development was reportedly keeping

VII-2

pace with that demand. The retail segment appeared to be the most vibrant of the commercial

categories according to contacts, with "big-box" tenants driving the market. Sales of both new

and existing homes continued to exceed most builders' and realtors' expectations, despite recent

increases in mortgage interest rates. Many builders again expressed concern that severe

shortages of labor were leading to project delays. Shortages of building materials, most notably

wallboard, were not as acute in the Midwest as in other regions although there were scattered

reports of rationing by suppliers. One major supplier to the construction industry noted that

orders for trim (which is installed right after the wallboard) had not been cancelled or delayed,

suggesting that shortages had not been causing significant delays yet. With exceptional strength

in new home and commercial construction, however, this contact stated that severe wallboard

shortages in the region were just a matter of time.

Manufacturing. Overall manufacturing activity remained robust in May, although

softness in some major industries persisted. Appliance shipments, benefiting from the strong

housing market, were well above last year's record levels through May. Noting that exports

were down and imports up, one contact suggested that strong appliance sales were due almost

entirely to exceptional domestic demand. This contact also noted that confident consumers were

increasingly opting for higher-quality items, improving producers' profit margins. Automakers

also pointed to consumer confidence as contributing to light vehicle sales in May that were the

highest monthly results since December 1986. Heavy truck production was running near record

levels as inventories remained very lean. One contact noted that demand for heavy trucks

remained strong, although a slight softening in new orders had reduced backlogs from 12 months

to about 9 months. According to this contact, a three- to four-month backlog is typical for the

industry. Production at steel mills was again hampered by the inventory overhang noted in our

last report, but one contact said that capacity usage at integrated mills was on the rise and prices

were coming back a bit after declines earlier in the year.

Banking/finance. Overall lending activity remained brisk in May and early June, despite

some slowing in consumer lending. With mortgage interest rates trending upward in recent

weeks, most bankers reported a noticeable and expected drop in refinancing applications. With

home sales remaining strong, however, there was no significant drop in mortgage originations.

One major bank noted that asset quality on consumer loans was improving as a result of the

strong wave of refinancings earlier in the year and in response to some slight tightening of

VII-3

lending standards. Business lending activity was generally described as strong and steady, with

little if any noticeable change in momentum. While there were some scattered problem segments

(for example, loans to firms in the steel, agriculture, and energy industries), overall asset quality

on commercial loans remained very good, according to most bankers. Competition for quality

commercial loans remained intense, keeping margins narrow, and a few bankers noted that the

industry had "taken a step back" by slightly lowering lending standards.

Labor markets. The region's labor markets remained much tighter than the nation as a

whole, intensifying pressure on wages and hampering businesses' expansion plans. Increased

wages for information technology and administrative/clerical occupations were cited most often

by contacts, but reports of broad-based wage pressures were more frequent than in our previous

reports. One provider of temporary staffing services indicated that wages for administrative help

had increased by 25 percent since the beginning of the year-costs that were passed along in

large part to their customers. This firm was anticipating another price increase in June. Reports

that severe shortages of labor were hampering economic growth also became more widespread

since our last report. Builders and contractors suggested that shortages of qualified workers are

more likely to cause project delays than the materials shortages noted earlier in this report.

Contacts in metropolitan areas throughout the District reported that significant shortages of labor

were limiting their ability to attract new businesses to their areas. A national survey showed that

employers in the Midwest remained more optimistic about their hiring plans than their national

counterparts and contacts at temporary help firms suggested that orders remain very strong with

no signs of softening.

Agriculture. A recent survey of District agricultural bankers showed that farmland

values during the three-month period ending April 1 rose in Michigan and Wisconsin, declined

in Indiana, and were unchanged in Illinois and Iowa. On average, cash rental rates paid this

spring were unchanged from a year earlier. Bankers reported that farm loan repayments slowed

relative to last year as grain prices continued at low levels and milk prices fell. Hog prices

increased to a near breakeven point for producers in early May but had retreated somewhat by

early June. Corn planting in the District was all but finished by the end of May, while soybean

planting was nearly 80 percent completed.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The District economy continues to exhibit strong growth. Retail sales were up between 4 and

5 percent from a year earlier, meeting most contacts' expectations. Auto and light truck sales were

not as brisk, but have showed renewed strength recently.

Manufacturers and other businesses

continue to report growth in demand, which, in some instances, they are unable to meet because of

persistent labor shortages. Signs of growing upward wage pressures are emerging, as the strong

demand for labor shows few signs of tapering off. Residential real estate markets continue to boom

throughout the District, while strong demand and shortages of available homes are driving up prices

in some regions. District loan demand and credit conditions have remained essentially unchanged

over the past few months. Supported by good soil moisture and ideal growing conditions, the spring

planting proceeded as planned in most areas.

Consumer Spending

District retailers reported that sales in April and May were up on average between 4 and 5

percent compared with one year earlier. Only one-fourth of those surveyed said growth was below

expectations. Home furnishings, appliances, electronics, and home and garden products were the

most popular purchases. Nearly all respondents reported that inventories are currently at desired

levels; moreover, they do not plan to boost inventories later this year in preparation for Y2K.

Contacts expect sales to increase in the second half of the year, but do not anticipate price increases.

District auto dealers reported that sales, after a somewhat sluggish start in May, picked up

by the end of the month. Some GM dealers noted that a lack of inventory of popular models,

particularly pickup trucks, hampered sales. Other dealers reported that inventories are at desired

levels. Only one contact noted holding extra inventory because of the then-pending truckers' strike.

Most dealers expect vehicle sales by the end of the year to be up moderately from last year.

VIII-2

Manufacturing and Other Business Activity

District contacts continue to report strong economic conditions. Orders for many products,

such as manufactured homes, copper tubing and electrical equipment parts, continue to grow at a

brisk pace, although not all demand can be met because of an ongoing shortage of qualified

employees. Suppliers of building materials continue to report solid growth because of the booming

construction industry. Poultry processors reported a rebound in sales and profits in the past few

weeks and expect this trend to continue through the summer. Many contacts, however, noted strains

on profit margins because of increasing operating costs that cannot be passed along to customers in

the current competitive environment. Labor costs are the biggest concern for most contacts. In one

instance, for example, a maker of home appliances has reportedly budgeted a 5.5 percent wage

increase for the upcoming fiscal year.

The FedEx and UPS hubs continue to attract distribution centers to the region. Several firms,

including Amazon.com and an apparel manufacturer, have announced plans to open new distribution

warehouses in the coming months. The weak farming sector, however, has led to reduced orders for

farm equipment. One producer has eliminated overtime and cut its work schedule back from a

seven-day to a five-day work week because of falling demand. Because Boeing did not win new

contracts for its F-15 fighter, about 7,000 jobs at its St. Louis plant will be eliminated as production

is phased out by 2001. Some analysts believe, however, that this layoff might help the region attract

businesses that had previously been reluctant to come because of a shortage of qualified workers.

Labor Market Conditions

The demand for labor remains robust in the District's four major cities, according to

Manpower's employment outlook survey for the third quarter of 1999. On average, about a third of

the firms surveyed in Little Rock, Louisville, Memphis and St. Louis expect to add employees in the

upcoming three months-slightly exceeding the rate from a year earlier-while about 8 percent plan

VIII-3

to reduce their workforces. Of the four cities, Little Rock and Memphis had the largest shares of

firms seeking to hire additional workers.

Real Estate and Construction

Sales of new and existing homes remain strong throughout the District. In some parts of the

District, sales are up more than 10 percent from a year earlier.

In fact, many markets are

experiencing a shortage of available houses, leading to price increases and quick sales. Through

April of this year, residential construction permits outpaced last year's levels by 10 percent or more

in almost all of the District's metropolitan areas. Many nonresidential real estate agents believe that

new office construction may be getting ahead of demand, despite low vacancy rates in most regions.

The market for industrial/warehouse space remains tight, with regional vacancy rates well below the

national average.

Banking and Finance

A recent survey of District senior loan officers indicated no change in standards for

approving commercial and industrial (C&I) loans to large, mid-sized and small firms. A couple of

respondents noted, however, that they had recently increased the premiums charged on riskier C&I

loans. Demand for C&I loans was reportedly unchanged. In fact, demand and credit standards

remained unchanged for commercial real estate loans, home mortgage loans, consumer installment

loans and credit cards.

Agriculture and Natural Resources

Most of the District is experiencing ideal growing conditions, although parts of Kentucky and

Mississippi could use some rain. Planting of the major crops, which was aided by favorable moisture

conditions, came off without a hitch in most areas. Accordingly, crop conditions appear to be in

good-to-excellent shape in most parts of the District. About a third of the wheat crop has been

harvested in Mississippi, with early reports suggesting above-average yields.

NINTH DISTRICT--MINNEAPOLIS

As summer approaches, the overall Ninth District economy continues to expand, although

natural resource-based industries are still struggling. The economy remains robust for

construction, consumer spending and manufacturing; consumers continue to spend and

many businesses are expanding. However, low commodity prices persist in depressing

farm income and curbing metal mining. Overall labor markets remain tight and in some

cases businesses are paying more to retain workers.

Construction and Real Estate

Construction and real estate retains its momentum. The strong housing market in

Minneapolis-St. Paul boosted home prices 10 percent in April compared to a year earlier.

Homebuilders are very optimistic; year-to-date housing units authorized were up 62

percent through April in South Dakota, up 24 in North Dakota and up 22 percent in

Minnesota.

Other construction remains strong. Plans for $80 million in new construction are

set for downtown Duluth, Minn., according to an advisory council member. Bank

directors report strong construction spending in Billings, Mont., and Fargo, N.D. The

state of Montana is expected to pay contractors a record $200 million this summer for

roadway improvements, 16 percent higher than the previous record. However, contract

awards through April were down slightly from year-ago levels for the Ninth District.

Consumer Spending and Tourism

Consumer confidence is keeping retail sales vigorous and summer tourism prospects

bright, as well as boosting merchandise and auto sales. Consumer spending is at last year's

strong levels and auto dealers report steady sales in Montana. Mall sales are running 13

percent ahead of a year ago in Eau Claire, Wis., and are up 15 percent from year-earlier

levels at a Minneapolis mall. However, small communities dependent on agriculture still

show signs of softened sales.

Not only are people rushing to the malls, they are planning to visit vacation spots

throughout the district this summer. The Montana tourism office predicts a 3 percent

increase in visitors for 1999. Tourism businesses in Minnesota are optimistic for the

summer season, especially along the north shore of Lake Superior, and Internet inquiries

are significantly increased over a year earlier in South Dakota. Inquiries on tourism

IX-2

activities in the Upper Peninsula of Michigan are at record levels, according to a tourism

official.

Manufacturing

Manufacturing in the district remains robust with several major manufacturers reporting

higher levels of sales. As a result, district manufacturing shows signs of output expansion

and productivity increases. A bus manufacturer is opening a new manufacturing plant in

central Minnesota. A tool manufacturer in southern Minnesota is operating at capacity. A

western Wisconsin plastic manufacturer is expanding capacity and an equipment

manufacturer reported increased investment and productivity. A North Dakota food

processor expanded its manufacturing capacity. An ethanol plant is under construction in

South Dakota. Several other major district manufacturers noted continued improvement in

productivity.

Mining and Energy

Metal-based mining industries remain depressed. In response to low metal prices and

environmental legislation, Montana mining employment in March declined two percent

from year-ago levels. In addition, due to continued weak demand for domestic steel, a

northern Minnesota taconite mine plans to shut down one of its pellet-making furnaces

and terminate 168 workers. Moreover, U.S. iron ore inventories in March were 21 percent

higher than year-ago levels. "Unless there is a miraculous turnaround later in the year,

we're going to see some (more) cutbacks at iron ore operations," said an American Iron

Ore Association spokesman.

Meanwhile, oil exploration activity remains below year-ago levels with only two

rigs working in North Dakota and three rigs operating in Montana compared to 12 and

four, respectively, a year ago.

Agriculture

"Farm sales, liquidations and bankruptcies are on the increase," reported a South Dakota

agriculture lender. Based on results of the Ninth District's second quarter (May 1999)

survey of agricultural credit conditions, respondents reported that 31 percent of their

agricultural customers were at their debt limit compared to 27 percent 12 months earlier.

The second quarter 1999 survey revealed that 82 percent of respondents reported below

normal levels of farm income compared to 71 percent of the second quarter 1998 survey

respondents.

IX-3

The reduced farm income is due to depressed livestock, corn, soybean and wheat

prices. Many producers are still storing crops in hopes of future price increases. In

addition, wet weather has delayed planting in many parts of the district Some fields have

standing water and may need to be replanted. The wet soil conditions also caused a small

outbreak of anthrax in Montana.

Employment, Wages and Prices

Labor markets remain tight, with scattered reports of wage and price increases. A major

staffing and employment service reports that 48 percent of companies in Minneapolis

indicate plans for increased hiring in the third quarter, while 2 percent expect decreases.

Last year at this time 40 percent planned increases and 5 percent expected decreases. Job

openings outside the Twin Cities area are also plentiful, according to a survey of

purchasing managers. Employers will have to scramble to find employees to fill these

positions as unemployment rates across the district continue to stay at low levels.

Unemployment in Minnesota dipped to 2.1 percent in April, the lowest ever recorded in

the state and the lowest in the country. In Duluth, Minn., 200 trade workers from outside

the area are working on local construction projects due to the lack of local workers.

While detecting overall increases in wages proves difficult, there are reports of

some increases. An advisory council member reports that wage inflation is a concern as

new hires command higher salaries. Faculty raises at South Dakota's public universities

averaged 7 percent for 1999. In the Upper Peninsula of Michigan, building trade union

contracts were recently negotiated at 4 percent per year over the next three years.

General price increases are also difficult to spot. E-commerce and competition are

making it hard to raise prices, reports a bank director. Although tourism prospects look

bright, a tourism official in the Upper Peninsula of Michigan isn't anticipating increases of

more than 5 percent for lodging or other tourism-related expenses. A large manufacturing

company in the Minneapolis-St. Paul area reports level input prices.

X-1

TENTH DISTRICT - KANSAS CITY

Overview.

The district economy remained solid in May but appears to have slowed from the rapid

growth of recent years. Extremely tight labor markets in much of the district may be contributing to the

slowdown. Retail activity slowed following strong performance earlier in the year, and construction also

cooled from the burst of activity in March and April. In contrast, manufacturing activity improved

considerably from the sluggish conditions experienced in the recent past, and energy activity finally picked

up in response to the recent increases in oil prices. In the farm economy, the winter wheat crop remained in

good condition, but losses continued for many livestock producers. Although labor markets in most of the

district remained very tight, wage pressures eased somewhat from previous surveys. Retail prices continued

to edge up, as did prices for construction materials, especially sheetrock. After a long period of decline,

prices for several manufacturing materials also began to rise.

Retail Sales. Retail activity in the district slowed somewhat in May after performing exceptionally

well from the beginning of the year through the Easter season. Still, sales remained well above year-ago

levels. Home furnishings enjoyed another strong month of sales following the construction boom in March

and April. The slower overall sales volume led store inventories to creep up in May. Most managers were

not especially worried, however, since expectations for activity over the next three months remained robust

in the wake of continued strong consumer confidence, low unemployment rates, and persistent income gains.

Expecting higher sales in the near future, many stores plan to continue building inventories into the summer.

Automobile sales were weaker in May than in previous months but stayed above year-ago levels. Trucks

and SUVs continued to lead in sales growth, but truck dealers in general and GM dealers in particular

complained of difficulties obtaining enough of these vehicles to meet demand. Overall, car dealers were

unhappy with current inventories, with most trying to expand in anticipation of strong sales in coming

months.

Manufacturing. Tenth District factory activity showed marked improvement in May, as

manufacturing conditions strengthened at the national level and steady progress in Asia and a fast recovery

in Brazil seemed to reduce the difficulties plants were facing in their export markets. Capacity utilization at

X-2

district factories nearly matched the high levels posted last summer and was much higher than in our

previous three surveys. Most manufacturing materials remained generally available in May, but producers

of construction materials expressed concerns about the future availability of some inputs if building demand

remains high. Input lead times were largely unchanged, but lead times for several finished products, such as

sheetrock and brick, continued to edge up. Inventories at district factories were similar to the recent past,

with the majority of managers remaining satisfied with current stock levels.

Housing. Construction activity slowed last month from unusually strong growth in March and

April, but builders remain overwhelmingly optimistic about the future. The destruction caused by the recent

tornadoes in Oklahoma and Kansas has created additional demand for construction services in those states;

and with consumers remaining upbeat about the economy, builders anticipate another burst of activity in

coming months. New home starts increased at a much slower pace in May than in the previous two months

but remain comfortably above year-ago levels. Problems with sheetrock availability continued to mount,

pushing prices for construction materials up for the third straight survey. The additional demand created by

the tornadoes has most builders expecting continued availability problems in the future. Home sales in the

district were steady in May, remaining just above year-ago levels. Inventories of unsold homes were largely

unchanged, staying at moderate levels. Mortgage bankers reported another decline in refinancing activity

last month, with overall mortgage demand falling further below year-ago levels. But most lenders cautiously

share builders' enthusiasm about the future and expect a rise in demand in coming months.

Banking. Bankers report that loans and deposits both edged up last month, leaving loan-deposit

ratios unchanged. Demand rose for residential construction loans, commercial real estate loans, and

commercial and industrial loans. Demand for home mortgage loans slowed. Small increases in demand

deposits, NOW accounts, and large time deposits were partly offset by a drop in small time deposits. All

respondent banks left their prime lending rates unchanged, and all but a few left their consumer lending rates

unchanged last month. Although most banks expect to maintain their prime rate and consumer lending rates

over the near term, a few banks expect to raise these rates in the near future. Lending standards were

unchanged.

X-3

Energy. District energy activity finally improved in May after nearly a year and a half of steady

decline. The rig count rose 7 percent in May, responding to the recent jump in oil prices. Still, the number

of rigs operating in the district remained more than 35 percent below year-ago levels. The price of West

Texas Intermediate crude oil continued to rise in early May, reaching nearly $19 per barrel, but began to

taper off by the end of the month. The price for the month as a whole was almost 20 percent higher than in

the previous year. Natural gas prices also increased in May, rising above year-ago levels for the first time

since last summer.

Agriculture. The district's winter wheat crop was in good condition, with average yields expected

in most areas. Spring plantings fell slightly behind schedule due to recent excessive rains in some areas of

the district. Losses continued to pile up for hog producers in the region. While many of the district's small

hog producers have liquidated, most medium- and large-sized producers continued to operate in spite of the

severe toll of the last six months. The weak farm economy has led to a slowdown for many mainstreet

businesses through rural parts of the district. Despite some hitches earlier this year, district bankers report a

generally smooth process in obtaining Farm Service Agency guarantees for their weakest farm loan

customers.

Wages and Prices. Labor markets remained very tight in most of the district in May, especially for

construction workers, but wage pressures eased somewhat after increasing in the two previous surveys.

Builders continued to face the biggest difficulties finding capable workers, with framers especially in short

supply. Among retailers the biggest needs remained entry-level workers and sales associates, while for

manufacturers, general production workers became the toughest to find. Wage pressures eased slightly

across the board but remained vitally present. Retail prices continued to edge up in May and are expected to

rise slowly in coming months. Prices for some manufacturing materials, especially oil, rose considerably

from our last survey, although most managers expect a leveling off in the near future. Sheetrock prices

jumped again in May and most builders expect further increases in prices for construction materials.

XI-1

ELEVENTH DISTRICT--DALLAS

In May and the first week of June, the Eleventh District economy continued to expand at

roughly the same pace reported in March and April. Most business service firms continued to report

strong activity, and retailers said sales growth was still strong. Construction activity and concerns about

overbuilding were up slightly over the past six weeks, however. Contacts at manufacturing firms and

financial institutions reported little change in activity. Energy activity has not increased with higher oil

prices, according to contacts, although optimism is picking up. Agricultural conditions have been

mostly favorable.

Prices. Over the last six weeks, there were more reports of price increases than price declines.

High levels of construction have led to very high land prices, according to contacts, and shortages of

bricklayers, framing labor and building materials, such as lumber. Drywall is being allocated to

contractors based on the amount they purchased last year, and prices surged as much as 30 percent

following the Oklahoma tornadoes. Higher building costs and strong demand have pushed new home

prices up 5 percent to 7 percent over the past year. Shortages of labor and inputs have also caused new

home construction to be delayed by one to three months, and some contacts say the quality of

construction has been allowed to decline to help builders offset the rising cost of inputs. In the service

sector, contacts say hiring remains difficult, and wages are up for truckers, secretaries, legal assistants

and workers with technical skills. Service firms reported less resistance to fee increases in May and

early June, than in the six weeks prior, particularly at legal and temporary firms. Some retailers said

smaller markdowns resulted in a slight increase in final selling prices over the last six weeks. Some of

the retailers who benefitted from falling prices for Asian products say those prices are expected to

increase slightly over the next six months. In May, prices were up for ethylene-based petrochemicals, as

already low inventories of ethylene were drawn down following planned and unplanned outages in April

and May. Prices for these chemicals are not expected to fall until inventories are rebuilt, which contacts

believe will take much of the rest of the year. Heavy inventories of ethanol, styrene and polystyrene are

XI-2

keeping other petrochemical prices from increasing even though feedstock costs, such as oil and natural

gas, have risen. Stiff competition and dealer incentives are driving down retail prices for new cars. This

is putting downward pressure on used car prices, which have fallen for the last four months.

Manufacturing. Manufacturing activity remained at roughly the same level as reported in the

last beige book. Demand remains very strong for construction-related manufactured products, such as

cement, brick, lumber and metals. Demand for aluminum surged over the last month, which one contact

suggested may be because customers were stocking up in anticipation of price increases. Sales continued

to be strong for electronic and communications equipment. Producers of corrugated boxes also reported

that sales were still strong, but demand for printing paper was weaker than three months ago. Refiners

say profit margins fell over the past couple of weeks, as refineries moved production into high gear and

inventories filled up. Refineries along the Texas and Louisiana Gulf Coast have operated at 100 to 105

percent of rated capacity over the past six weeks. Apparel manufacturing activity remained mixed, with

demand increasing only for those who do not face significant import competition.

Services. Most business service firms continued to report strong activity over the past six

weeks. Demand for telecommunications, legal and temporary services were still strong, and temporary

firms said demand for their services from the manufacturing sector was up slightly. Demand for

shipping services was weaker than reported in the last beige book, according to contacts. Trucking

companies reported slower demand growth than over the past couple of years, and rail cargo volume

was down. A large rail firm announced plans for layoffs and a reduction in orders for capital

equipment. A contact suggests this might induce similar announcements from other rail companies in

the future.

Retail Sales. Retailers said sales growth continued to be strong in May. Sales were very strong

in most of the region's major metropolitan areas, with some stores posting double-digit increases in the

Dallas-Fort Worth Metroplex. Some retailers reported flat sales growth in Houston, however, and the

region's rural markets did not do well, according to contacts. Auto dealers said demand was still strong

in May, particularly for sports-utility-vehicles and trucks.

XI-3

Financial Services. Contacts at financial institutions report little change in activity, with

continued strong lending, and "good" business conditions and profits. Contacts say consumer lending

continues to fare the best, with solid margins. According to bankers, competition for commercial

lending remains intense. Lending in rural areas continues to be slow because of weak agricultural

markets.

Construction and Real Estate. Construction activity increased slightly over the past six weeks,

fueled by strong home sales, retail construction and "booming" school construction. Shortages of labor

and materials, particularly residential and commercial drywall, are still restraining building activity.

New home sales, starts and traffic through model homes were up from last year. Existing home sales

continued to surge, with homes selling quickly; some before they are listed. Hotel construction has

slowed, however, which pleases contacts who say the hotel market is overbuilt. Heavy supplies and

slow business travel have pushed down hotel occupancy rates. Commercial real estate activity remains

slow. Demand for office space is still "good," but one contact summarized the overbuilding concerns of

many by saying "we're holding our breath," noting that anything that hasn't been started is being

reevaluated. Another contact said sales of office buildings have slowed and expressed uncertainty about

future prices. Contacts say small office and industrial buildings are in short supply, however.

Energy. Energy activity has not increased with higher oil prices, although there is increased

optimism about the second half of this year because producers expect the number of wells being drilled

to increase. Some producers believe there is the potential for a big bounce back in drilling activity,

since drilling programs are running behind the plans made early in the year, before oil prices

rebounded. Still, all contacts qualified any optimism by saying that oil prices will come down as fast as

they went up if OPEC does not hold together.

Agriculture. Favorable weather conditions aided crop development, planting and harvesting

activities in most areas in May. Still, low price forecasts for most crops continues to dampened some of

the enthusiasm for planting, particularly cotton. Range and livestock conditions were good.

XII -

1

TWELFTH DISTRICT - SAN FRANCISCO

Summary

Reports from contacts indicated robust economic conditions in the Twelfth District

during the most recent survey period. Sales were brisk for retailers and providers of services to

consumers and businesses. Manufacturing activity proceeded at a moderate pace, and contacts

reported a mild pickup in export demand. Conditions in the agricultural sector were somewhat

weak. Activity in real estate and construction markets remained at high levels in most areas, and

financial institutions reported strong demand for credit. Wages and prices exhibited limited

movement overall, although increases were noted for some types of workers and some products.

Business Sentiment

Contacts generally are optimistic about the expected performance of the national

economy and their respective regional economies during the next year, although they are

concerned that inflation will rise. Nearly all of the contacts expect growth in national GDP to

equal or exceed its long-run average pace, and two-thirds expect the national unemployment rate

to remain at its current level; both figures reflect substantially greater optimism than was evident

in preceding survey periods. However, the percentage of contacts expecting higher inflation has

risen from about one-quarter early this year to three-quarters now. Nearly two-thirds of the

contacts expect the pace of economic growth in their region to exceed the national pace, and the

percentage expecting improvement in their region's outlook for foreign trade has risen to onehalf, after dropping nearly to zero in mid-1998.

Retail Trade and Services

Retail sales were rapid overall, although contacts provided scattered reports of slight

XII -

2

slowing in a few states. Automobiles and light trucks sold at a good clip in most areas of the

District, and prices were flat or declined a bit. Throughout California, sales were rapid for all

types of consumer items, with similar reports provided by contacts in Arizona, Washington, and

Oregon. By product, the strongest sales in the District were reported for home furnishings and

home electronic items. However, several respondents in Utah and Nevada noted that retail sales

slowed relative to the previously rapid pace in those states, especially for some "big ticket"

consumer durables and luxury goods.

In regard to services, general reports indicated that sales to businesses and consumers

continued at a rapid pace. Demand was strong for communications and utility services. Export

traffic through Southern California ports picked up a bit further. The sole weak report was for

the tourist trade in Utah, where airport travel and hotel occupancies declined. Regarding labor

costs at retail and service establishments, reports indicated annual wage increases in new union

contracts and for workers in general that were in the 3 to 3½ percent range or below. Price

increases were limited in general, with the exception of rising health care costs and prices for

pharmaceuticals. Gas prices fell somewhat in California but remained at elevated levels.

Manufacturing

Reports indicated a moderate pace of activity in the manufacturing sector, with some

evidence of rising foreign demand. Demand for Pacific Northwest lumber has been "excellent,"

and paper and pulp processors there benefited from an increase in demand from East Asia.

Several contacts noted increased sales of semiconductors and semiconductor manufacturing

equipment due to rising world demand, and high-tech manufacturers in some areas reportedly

have begun to expand their work forces. Conditions in the chemical manufacturing sector also

XII -

3

improved and producers of biotechnology products faced continued strong demand. In contrast,

Boeing's outlook for international sales remained weak, and activity by manufacturers of

women's apparel slowed.

Agriculture and Resource-related Industries

Agricultural producers faced somewhat weak demand and low sales prices. Reports from

California, Washington, and Oregon indicated that farmers were hampered by weak export

demand, and sales prices have remained low as a result. Planting and growing conditions were

mixed. Poor weather adversely affected grain and vegetable crops in Oregon, but conditions

have improved in California's Central Valley, which reportedly is recovering from the impact of

the freeze that hurt growers in late 1998.

Real Estate and Construction

Demand for real estate and new construction remained high in the District, although there

were scattered reports of slight cooling in states other than California. Home construction and

sales proceeded at a vigorous pace throughout California. The markets for commercial,

industrial, and office space also were very active in the state, with continued low vacancy rates

reported in most areas and rising rents observed in a few; strong demand has even spurred

construction of new office buildings in the downtown area of San Francisco. The markets for

residential and nonresidential real estate were vibrant in most other states as well. However,

there were scattered reports of slight cooling in Washington, Oregon, and Idaho, and several

contacts noted that residential real estate markets have loosened a bit in Utah. In Hawaii,

construction activity remained torpid, although falling home prices reportedly spurred rising

sales. Reports from several states indicated rising construction costs due to shortages of building

XII -

4

materials such as drywall and skilled labor such as carpenters, but no substantive effects on

overall construction activity were noted.

Financial Institutions

Contacts at banks and other financial institutions, such as venture capital firms, reported

strong demand for credit and relatively good supply conditions. The only exceptions were in

Hawaii, where activity in all loan categories was weak, and in Utah, where higher mortgage rates

reportedly reduced mortgage refinancing activity.