Prepared at the Federal Reserve
Bank of Boston and based on information collected before June 6, 2000.
This document summarizes comments received from businesses and other
contacts outside the Federal Reserve System and is not a commentary on the
views of Federal Reserve officials.
Reports from the Federal Reserve
Districts indicate that solid economic growth continued in April and May,
but that signs of some slowing from the rapid pace earlier in the year are
also present. In Minneapolis, "economic activity remains hot,"
and in Chicago and Richmond, growth is said to be strong. Most of the
other District reports characterize growth as moderate or steady. All but
Minneapolis said scattered signs of cooling are in evidence or the pace of
growth is slowing. Indications of worsening price inflation, while not
widespread, are reported by several Districts.
Labor markets are tight across all 12
Districts, but the tightness does not appear to have intensified since the
last report. Contacts across the country report worker shortages and
difficulties in recruiting and hiring; half the Districts indicate that
labor shortages are constraining output growth. The St. Louis, Richmond,
Cleveland, New York, and Boston Districts report that shortages would be
even more severe in the absence of inflows of immigrants or students. Base
wages of permanent employees are not said to be accelerating in most
Districts, but seasonal help and temporary workers are being recruited
only with sizable raises. Similarly, some occupations experiencing severe
shortages--skilled building trades in New York, for example, and Internet
and other technical workers in the Boston and Atlanta Districts,
entry-level workers in Richmond, and truck drivers in Chicago--have seen
larger pay increases.
Retail sales are higher in all Districts than a year ago. However, half of
the Districts report a recent slowdown in the rate of growth. All four of
the Districts mentioning the tourist sector (Boston, Richmond, Atlanta,
Minneapolis) said that tourism spending continues to be strong. A majority
of Districts said that autos and durable goods exhibited weaker sales
growth and a corresponding increase in inventories for some of these big
ticket items. Despite the recent slowdown, retailers in the St. Louis,
Richmond, and Boston Districts remain optimistic concerning the strength
of consumer demand, while retailers in the Dallas District are revising
downward their earlier projections of spending growth.
Merchants in all Districts report very
tight labor markets for retail workers, with corresponding pressures to
increase wages in order to attract employees. Districts mentioning wage
increases in the retail sector said they were in the 3 to 7 percent range,
with double-digit wage growth in highly skilled occupations and among
seasonal workers. Tourist-related businesses are said to be having great
difficulty filling seasonal positions.
Retailers in the Boston, New York,
Atlanta, Chicago, Kansas City, and San Francisco Districts say that wage
inflation is not carrying over to prices. Of those, all but Chicago
indicate that prices for consumer goods are mostly stable. Retailers in
Chicago report that prices are rising modestly. However, retail contacts
in Cleveland said that increased supply costs are being passed along,
raising consumer goods prices faster than previously. By contrast,
Richmond reports that price increases have eased in the retail sector.
Most Districts report that overall manufacturing activity is rising.
Chicago, Kansas City, and San Francisco report a slight weakening but
describe conditions as "strong" or "solid." St. Louis
indicates that business is stable at a high level.
Strong and rising demands for steel,
fabricated metals, petroleum products, semiconductors, and high-tech
equipment are mentioned frequently in District reports. Shortages of
labor, materials, and capital are said to be constraining actual or
expected output for manufacturers of these or other products in the
Boston, Philadelphia, St. Louis, Minneapolis, Kansas City, and Dallas
Districts. Where mentioned, exports are said to be rising across a variety
of products, mostly durable goods.
Reports on the interest-sensitive
automotive and construction-related sectors are mixed. Chicago and
Cleveland indicate declining demand for heavy trucks. Chicago notes a
slowdown in light vehicle demand (from an exceptionally high level last
year); however, Atlanta reports a ramp-up in production among auto parts
suppliers. Boston, Philadelphia, and Richmond cite strong demand for
building components and furnishings. Dallas indicates continuing strong
demand for brick and glass but declines for lumber and wood products. San
Francisco indicates that lumber orders are sluggish. Cleveland and Chicago
mention that public sector construction is providing a boost for some
manufactured products, although Chicago also reports that orders for
construction equipment are down.
Most Districts mention some evidence of
increasing inflationary pressures. Prices paid for petroleum-based
products, natural gas, metals, paper, and some construction materials are
said to be rising. However, reports generally indicate that manufacturers
are raising their selling prices less than the increase in input costs.
Only Richmond explicitly states that the prices of manufactured goods
accelerated in the most recent survey period, describing the increase as
slight. By contrast, Chicago characterizes pricing in the manufacturing
sector as soft.
Districts reporting on business services generally describe demand as
strong within the sector although Cleveland reports a softening in the
need for temporary workers. Also, demand for legal services from dot-com
companies has slowed somewhat in Dallas because of weakness in financial
markets and fewer IPOs. Labor markets remain tight throughout the country.
For example, software and information technology service firms in Boston
report high turnover rates and difficulty competing with compensation
packages offered by dot-com companies in the area. Contract employment
firms in both Richmond and Boston relate that clients are increasingly
using their services to fill permanent positions, because of the
difficulty they are having finding workers on their own.
Banking and Finance
Most Districts report either a reduction or a slowing in the growth of
loan demand, especially for mortgages. Richmond and Atlanta report
softening demand for commercial loans. New York, Richmond, Atlanta,
Chicago, St. Louis, and Dallas note sluggish or decreased mortgage demand.
New York, Richmond, and Atlanta report decreased or soft mortgage
refinancing. New York, Cleveland, and St. Louis experienced slowing of
demand for consumer loans. San Francisco reports "slightly weaker
loan demand in some areas," and Philadelphia notes a slowing in the
rate at which loan volume was increasing. Contrary to the general tone,
Chicago, Kansas City, and Dallas report strong or increasing overall loan
demand; Cleveland reports strong commercial lending activity; and Atlanta
reports strong consumer and home-equity loan demand.
Three Districts report that deposits are
down, although New York notes an increase. There appears to be little
change in credit standards since the last survey.
Construction and Real Estate
Compared to a year ago, April and May home sales were lower in more than
half of the Districts. While the Richmond and St. Louis Districts report
moderate slowdowns, the Kansas City District experienced a significant
decline. In contrast, upstate New York had much higher sales than a year
ago, and home sales in New York City declined only because of lack of
inventory. The pace of residential construction was also slower in many
areas. The New York District reports fewer single-family home permits in
April compared to the first quarter, and sales of new homes in the
Cleveland District were 5 to 10 percent lower than a year ago. By
contrast, the Philadelphia and Minneapolis Districts report increased
construction activity. House price changes were mixed.
Commercial real estate markets are
strong, and commercial construction has escalated in many parts of the
country. The Philadelphia and Cleveland Districts report new industrial
construction, while the Atlanta District reports speculative office
construction. Construction is also expanding in the Chicago, Minneapolis,
and Kansas City Districts, but it has slowed in the Dallas District.
Office vacancy rates are very low in some metropolitan areas, mainly
Boston, New York City (where record low vacancy rates were reported in
Manhattan), and the San Francisco Bay area. Both office and industrial
space is scarce in the Richmond and Atlanta Districts. Office rental rates
are increasing in Boston, Manhattan (where rents have risen at an annual
rate of 35 percent so far this year), Philadelphia, and Washington, DC.
Contacts in most Districts expect activity in commercial markets to
continue at a high level, but predict possible further slowdowns in
residential markets due to higher interest rates.
Agriculture and Natural Resources
May rains reportedly improved crop prospects in the Cleveland, Richmond,
and Chicago Districts. By contrast, drought-like conditions continued in
most of the St. Louis, Kansas City, and Dallas Districts, where the dry
weather damaged winter wheat and created poor forage. Pastures are also
dry in Arizona and Oregon. In a few areas, scarce forage has spurred
ranchers to start culling their herds. Nevertheless, the corn, soybean,
and other major crops are generally described as on or ahead of schedule,
and in Cleveland, St. Louis, and Minneapolis, they are in
good-to-excellent condition. Surveys in several Districts indicate that
farmers' financial conditions have improved, with gains in farm values and
incomes and debt repayments. Contacts in Kansas City and San Francisco
noted that crop prices remain low, while those in Minneapolis and San
Francisco mentioned rising wages or turnover for farm labor.
Activity in the energy sector has
improved. Atlanta, Minneapolis, Kansas City, and Dallas all cite sharply
increased rig counts in response to low inventories, strong demand, and
higher energy prices. With natural gas prices up over 50 percent
year-on-year and forecast to rise, Dallas reports that gas is leading the
sector's recovery and that drilling in the Gulf of Mexico is at late 1997
peaks. In Atlanta and Dallas, contacts note that the energy sector is
having trouble hiring. The iron ore and platinum industries in the
Minneapolis District are operating near capacity.
First District - Boston
Economic activity in the First District
continues at a high level. Almost all of the New England businesses
contacted this time have seen increases in revenues or sales from a year
earlier, although some cite signs of slower growth. Price inflation
remains limited. Contacts are unanimous in saying that labor markets are
tight; while increases in base wages for most employees remain in the 2 to
5 percent range, technical personnel and others in short supply are seeing
Most retail contacts say that sales growth continues to exceed
expectations. By exception, however, respondents in the discount retail
sector report sales below last year, while a graphic supply firm indicates
sales growth slowed in the last month.
Most respondents report steady
employment levels, although a lumber yard and contacts in the tourist
industry are seeing employment levels erode because job leavers are
running ahead of new hires. All contacts say that hiring is increasingly
difficult because of very tight labor market conditions. Most merchants
continue to report wage increases in the 3 to 5 percent range. However, in
the tourist industry, wage offers to seasonal help are said to be running
20 to 30 percent above normal levels.
Most respondents say retail prices are
generally holding steady. By exception, one sector is raising prices less
than 4 percent and hotel room rates are increasing at a 5 to 7 percent
pace. Profit margins are said to be holding steady, with non-labor cost
efficiencies offsetting wage inflation.
Merchants contacted this time plan only
modest expansions of operations over the next few months. Respondents
expect relatively strong economic growth to continue through the remainder
of 2000. Construction material suppliers, for example, report that
building contractors do not expect interest rate hikes to affect their
businesses until late in the year.
Manufacturing and Related Services
First District manufacturing contacts report that recent business is up
relative to a year earlier. About one-half of this month's respondents are
experiencing low single-digit revenue growth, with the remaining half
experiencing faster growth. The strongest areas are integrated circuits,
furniture, construction-related products, small aircraft, publishing,
biotech, and medical equipment. Companies reporting sluggish sales include
makers of machinery, paper, defense hardware, and products for use by the
oil and gas industry.
Materials costs are largely flat,
although some manufacturers mention increases for fuel and other oil-based
products, pulp and paper, wood, and metals. Selling prices are mostly
flat, although there are scattered reports of modestly higher prices.
Respondents from the paper, printing, and some non-consumer goods
industries indicate that their margins are under pressure as a result of
intense competition and their customers' price-sensitivity or
About three-quarters of the contacted
manufacturers report that employment levels are flat or down slightly; the
remainder report single-digit increases. Most contacts are not increasing
their capital expenditures this year, in part reflecting heavy past
investments. Two-thirds of the firms report average pay increases in the
range of 2 to 4 percent. Those reporting greater average pay increases (of
up to 10 percent) tend to make intensive use of technical personnel or be
located in areas of extremely low unemployment. Some companies with modest
wage and salary growth report paying sharply higher rates for health
coverage. Most contacts categorize labor markets as very tight and
indicate they are having difficulties filling vacancies. Sales,
engineering and science, information technology, and entry-level
manufacturing positions are reported to be particularly challenging to
Most manufacturers are at least
cautiously optimistic about their business prospects, especially those
developing new products. About half of the respondents believe their
revenue growth may be constrained this year because of shortages of labor
or plant capacity. In addition, many mention that rising interest rates
pose downside business risks or added costs.
Software and Information Technology
This is the first report incorporating material from conversations with
firms producing software and information technology services. Most
contacts say revenue growth is strong this year to date. However, some
cite decreased demand for their products due to factors associated with
the particular markets they serve, and some cite a temporary drop in
demand earlier this year due to heavy spending on Y2K-related activities
late last year. Both groups report that they continue to spend heavily on
new product development, and often cite the need to keep up with changing
Most respondents are increasing
employment, although some report small decreases. Many contacts indicate
that high turnover is a problem, especially among younger employees.
However, turnover rates generally seem to be stable. Respondents at
established software companies report difficulties in competing with the
compensation packages offered by "dot coms." Average salary
increases at most companies are in the 6 to 10 percent range. Salary
increases tend to be higher for technical employees than for non-technical
employees, and higher at firms located close to Boston.
Expansion at First District contract employment firms continues, with
overall revenues about 20 percent higher than year-earlier values. Most
contacts are increasing their focus on the Internet for "e-cruiting."
Contacts also report increased use of their services to transition
temporary hires into permanent employees; client companies are able to
"test drive" these workers and then recruit them for long-term
positions. Recent college graduates are providing a temporary inflow of
new help into a very tight labor market, but according to one source,
"most students were hired even before they left their schools."
Wages are up 5 to 10 percent from year-earlier, and Internet workers are
receiving even greater increases. Prices are rising in line with wages,
with no resistance from clients. "They have no choice. As long as you
can provide quality, companies will pay anything." Staffing firms
retain a very upbeat outlook.
Commercial Real Estate
Commercial real estate markets in New England are doing well. The Boston
area continues to be exceptional. Vacancy rates in the downtown office
market are extremely low and suburban demand has been spurred by companies
leaving the more expensive downtown area. High demand coupled with lack of
new construction has created "tremendous" pressure on downtown
rental rates. Rental rates in the suburbs have also increased somewhat.
Contacts anticipate a slight increase in vacancy rates in the next two
years, after some new office construction is completed.
Hartford contacts report high levels of
activity and a gradual decline in office vacancy rates, which are now
around 14 percent. In Rhode Island, new construction is planned in
suburban Providence, where office vacancy rates are low. Rental rates have
increased somewhat in downtown Providence, while holding steady in the
suburbs. Maine contacts report unchanged vacancy and rental rates in the
office market and a weak retail market, with several empty stores in
Second District - New York
Most sectors of the Second District's
economy have continued to grow at a sturdy pace in recent weeks, led by
real estate and construction. Housing markets in upstate New York appear
to be strengthening; in the New York City area, home prices continue to
appreciate rapidly, and builders are struggling to keep up with demand, as
construction workers are in short supply. A shortage of office space in
New York City appears to be driving a further acceleration in commercial
rents. Regional purchasing managers report some strengthening in
manufacturing activity in May.
In contrast, retailers report that sales
were sluggish last month, with a pickup in early May followed by
substantial weakening in the second half of the month--weather was cited
as a major factor. Retail prices, merchandise costs, and wages were
characterized as stable, with anticipated hikes in transportation costs
expected to have little if any effect on final prices. Finally, bankers
report some slackening in loan demand, along with further improvement in
Most retailers report that consumer spending picked up in early May,
coinciding with a heatwave, but fell back below plan in the second half of
the month, as unseasonably cool weather returned. For the month, sales
were on or below plan, with year-over-year changes in comparable-store
sales ranging from down 2 percent to up 7 percent. Some retailers also
believe that increased competition may have detracted slightly from their
sales recently, as a national chain expanded its presence in the New York
City metropolitan area, opening 20 new stores in the past four months.
Almost all retail contacts noted weak
sales of apparel--especially women's apparel. However, sales of home goods
were mixed: some contacts indicate continued strength, but others have
seen some softening. One contact reports that sales of air conditioners
were up threefold in May, compared with a year earlier, despite the cool
weather in the final two weeks.
For the most part, contacts report that
inventories are generally at satisfactory levels; however, some report an
overhang of summer apparel, and plan to offer sizable discounts. In
general, selling prices and merchandise costs are little changed. Rising
fuel costs have yet to affect retailers' transportation costs, because of
contractual obligations. While most contacts anticipate a jump in shipping
costs in the months ahead, the impact on overall costs is described as
small, and is not expected to be passed through to consumer prices.
Construction and Real Estate
The housing shortage in and around New York City shows no signs of letting
up, while, in upstate New York, housing demand finally appears to be
gaining steam. In Buffalo, for example, realtors indicate that market
conditions have clearly strengthened--primarily at the middle to upper end
of the market--and that homes are selling quickly, often with multiple
offers and sometimes above the asking price. While the average selling
price, compiled by local realtors, has reportedly declined over the past
year, this statistic may be understating actual price trends, as a sizable
backlog of distressed properties have been sold off this year. More
generally, year-to-date unit sales in upstate areas such as Buffalo,
Rochester, and Albany are running well ahead of 1999 levels. Meanwhile,
realtors in the New York City area continue to bemoan a lack of
inventory--particularly at the upper end of the market. This is consistent
with local sales data, which indicate a decline in the number of homes
sold but a steep increase in the median selling price.
Construction statistics suggest that
supply is struggling to keep pace with demand. On a seasonally-adjusted
basis, single-family permits in New York and New Jersey retreated in
April, following an uncharacteristically strong first quarter. However,
multi-family permits soared again in April, led by another wave of
apartment projects in New York City. Year-to-date, single-family permits
are off about 6 percent from comparable 1999 levels, but multi-family
permits are up 55 percent. Anecdotally, New Jersey homebuilders say the
market is still "dominated by inventory shortage"; they cannot
put up homes fast enough, as pre-built sales are out-running current
levels of production. While builders report no problems in obtaining
materials, they are hampered by a severe shortage of skilled trade
workers, but note that this shortage would be far worse if not for a heavy
influx of immigrant workers. Wages in these occupations are said to be
running nearly 10 percent higher than a year ago.
New York City's office market tightened
further during April, with leasing activity described as
"frenetic." Midtown Manhattan's office availability rate--space
that is vacant or coming available within 12 months--tumbled to a new low
of 4.2 percent, from 4.9 percent at the end of March and 7.7 percent a
year ago. Similarly, Downtown's rate ended the month at 6.3 percent, down
from 6.9 percent in late March and 11.9 percent a year ago. This shortage
of commercial space has driven up office rents at an increasingly rapid
pace this year: they are up roughly 15 percent over the past 12 months,
and have increased at an average annual rate of nearly 35 percent so far
Other Business Activity
Regional purchasing managers indicate that manufacturing activity
strengthened in May. Buffalo purchasers report continued strong growth in
new orders, a pickup in hiring and an acceleration in production activity;
commodity price increases grew increasingly widespread. Manufacturers in
the New York City area report that activity re-accelerated in May, after
holding steady at high levels in March and April, but purchasers in other
sectors indicate a pause in growth. Prices for manufacturing inputs in the
New York City area leveled off in May, but purchasers outside
manufacturing report widespread cost increases--particularly for
engineering, architectural and computer services.
New York State and New Jersey recently
reached agreement on spending plans for the bi-state Port Authority,
clearing the way for a number of development projects to move forward.
These include a new $200 million cargo terminal at Port Elizabeth, New
Jersey, the leasing of air rights to build an office tower above
Manhattan's bus terminal, and a possible extension of the PATH commuter
According to the latest survey of local bankers, demand for consumer
loans, non-residential mortgages, and especially home mortgages fell
compared with two months ago, while demand for commercial and industrial
loans remained steady. Refinancing at Second District banks continued to
slow, as has been the trend in the past few surveys: 44 percent of bankers
indicate decreases in refinancing activity, and only 8 percent mention
Most respondents report unchanged credit
standards. Virtually all survey respondents continued to report higher
interest rates on all categories of loans. On the deposit side, 76 percent
of respondents reported a rise in their average deposit rate. Finally,
delinquency rates continued to decrease for consumer loans, residential
mortgages, and nonresidential mortgages, but remained steady in the
commercial and industrial loan category.
Third District - Philadelphia
Economic activity in the Third District
expanded in May, but there were indications that the rate of growth was
easing. Manufacturers reported increases in shipments and orders. Retail
sales leveled off in May after moderate increases in the previous two
months. Auto sales were slightly above the year-ago level, although the
sales rate slowed near the end of the month. Overall lending continued to
rise at Third District banks in May, but the growth rate slipped.
Commercial real estate markets remained firm, but residential markets
showed some softening. Although homebuilders generally had steady sales,
there were reports of a drop in demand for homes in the lower price range.
Demand for existing homes also eased, but real estate agents said land and
home prices have risen significantly.
The consensus in the Third District
business community is for continued but slower growth in most sectors.
Manufacturers forecast a slight increase in business in the second half of
the year. Retailers anticipate some improvement in sales, and auto dealers
expect sales to increase. Most of the bankers polled for this report
forecast slower growth in lending for the balance of the year. Real estate
brokers expect commercial markets to remain firm for the rest of the year,
but they anticipate further slowing in demand for both new and existing
Manufacturing activity in the Third District rose in May. One-third of the
industrial firms contacted for this report indicated that they had
increases in orders and shipments during the month, although about half
said business was steady. Relatively strong demand continued to be
reported for lumber, wood products, fabricated metal products, and
commercial and industrial equipment. Although order backlogs at plants in
the District have been steady, on balance, delivery times have lengthened
slightly. Firms in a variety of the region's major manufacturing sectors
indicated that labor shortages have either limited their ability to meet
growing demand for their products or caused them to reduce production
Third District manufacturers continued
to report rising input prices but only limited ability to pass rising
costs on to final product prices. Firms queried on prices generally
indicated that, to date, competitive pressures still preclude large
increases in the prices of their own products, although some increases
were noted for lumber, primary metals, paper products, and printing.
Reports of rising wages in the manufacturing sector are still common, and
some firms have noted recent increases in benefits costs as well.
Area manufacturers expect only slight
increases in shipments and orders in the next six months, and they
anticipate a decline in order backlogs. Although their forecast is for
slight growth in business, firms polled in May plan to hire more workers,
on balance, in the months ahead. Surveyed firms anticipate further
increases in input costs, and they intend to raise prices for the products
Reports from Third District retailers suggest that sales in May were
around the same level as in May of last year. Unseasonably cold weather
for much of the month was cited as a negative influence on sales. However,
store officials generally indicated that business picked up during the
Memorial Day weekend, and they expect some improvement in sales in June.
Auto dealers in the District reported
that sales of most makes and models continued to be strong. The selling
rate in May was somewhat above the rate set in May of last year. Some
dealers noted a slight slowing in sales toward the end of the month, which
they said was mainly the result of an inadequate supply of popular
vehicles. Dealers believe the production shortfall will be made up in the
second half of the year, and several have revised up their forecasts for
the full year's sales level.
Third District banks reported increases in loan volume outstanding in May,
but several noted that growth has been easing. Commercial and industrial
credit demand did not expand as rapidly in May as it did in earlier
months, according to several bank credit officers, who agreed that
business borrowers, in general, have scaled back their expansion plans.
Some bankers also noted that business borrowers have experienced some
slippage in gross revenue and profit margins recently. Consumer lending,
on balance, continued on an upward trend in May at banks in the District,
although several banks said growth has slowed. Residential real estate
loan volumes have moved up, but applications for mortgages have dropped.
Several bankers noted slight increases
in delinquencies in their consumer loan portfolios and a decline in the
proportion of loan applicants, both consumer and business, that meet their
credit standards. Loan pricing was still described as very competitive,
although banks in the District do not appear to be relaxing the terms of
Looking ahead, the consensus among the
bankers contacted for this report is that overall loan growth will slow
during the second half of the year. While some gains in commercial real
estate lending are anticipated, residential mortgage activity is expected
to decline. Slight gains are forecast for consumer and business lending
through the end of the year.
Real Estate and Construction
Commercial real estate markets in the region remain strong, according to
brokers and property managers. The vacancy rate for the Philadelphia
metropolitan area as a whole was estimated at 12 percent recently, about
the same as at the end of 1999. New office buildings and conversions of
industrial buildings to offices have boosted the supply of space. Leasing
activity has been brisk and rents have increased by around 5 percent from
year-end 1999, according to some estimates. Demand for industrial space
also remains strong. Rents, especially for new logistics and technical
facilities, have been on the rise and vacancy rates have fallen.
Build-to-suit construction has been expanding along major transportation
corridors in the region. Contacts in commercial real estate expect markets
to remain firm through the end of the year, and they foresee construction
continuing at around its current rate.
Homebuilders in the region generally
reported steady sales in May, although some indicated that there has been
a drop in sales of homes in lower price ranges, which they attributed to
rising mortgage interest rates. Backlogs of homes to be built remained
high, and builders said construction activity should remain near its
current rate through the rest of this year and possibly into early 2001.
Builders reported that labor costs continue to rise, although they do not
appear to be accelerating. Price increases for building materials have
moderated compared with last year. However, land prices were said to be
Residential real estate agents reported
some declines in the number of people looking to buy existing homes in
recent weeks. However, the number of homes listed for sale in most parts
of the District remains low by historical standards, and sales prices have
begun to rise more sharply than they did last year. Real estate agents
noted that there has been an increase in the number of people looking to
rent apartments. Apartment vacancy rates in the region have declined and
markets were described as tight. Real estate agents said rising demand for
apartments is the result of higher mortgage interest rates, which reduces
the number of people who can qualify for home mortgages, and growing
employment in the region, which has boosted the number of people moving
into areas where jobs are available.
Fourth District - Cleveland
Growth in economic activity in the
Fourth District has moderated from the high rates experienced during the
first quarter of the year. Labor markets are less tight than in April,
although joblessness remains low. Business contacts reported that although
skilled employees remain difficult to find, the general quality of
potential employees has improved. The prices for consumer goods are said
to be increasing more than in the previous report.
There has been a recent softening in the
demand for temporary workers, particularly for administrative positions.
Demand for unskilled workers remains strong. Although most contacts
reported persistent wage growth, one found that increased student
availability has led to a lessening of wage pressures.
Union contacts reported a rapid increase
in health care costs for their members. The rising cost of pharmaceuticals
appears to be an important component of the increase. Unions are less
concerned about rising inflation, as the current contract negotiations are
only rarely emphasizing cost-of-living adjustments.
District homebuilders reported a slowing of residential sales in the last
few months, which some attribute to higher mortgage rates. Year-over-year
sales declines for April and May varied among builders from between 5
percent and 10 percent. Builders have had to offer incentives in the form
of easier financing or lower prices than last quarter in order to sell
their houses. Homebuilders, while noting healthy profit margins, also
noted that the cost of such incentives has eroded their margins somewhat.
Conditions in the commercial building
sector appear to have improved somewhat since the last report, due to
increased construction of warehouses and industrial buildings.
Construction of office and retail structures is reported to be steady and
strong. Some contacts reported the improved demand is due to a robust
manufacturing sector. No significant changes in labor and materials costs
have occurred since the last report, though lead times (from order to
delivery) for steel and brick have lengthened.
Demand for steel is reported to be strong for all products. Back orders
are larger than this time last year. All contacts expect the third quarter
to be very busy. The major steel companies attempted to increase prices in
the first and second quarters of this year, but these attempts were
reportedly beaten back by competitive pressures.
Heavy truck manufacturers expect large
cuts in production of 10 to 15 percent year-over-year due to continued low
sales from the first quarter of 2000. The low sales are reportedly due to
high fuel prices, a large stock of used trucks, and higher interest rates.
Some manufacturers are predicting layoffs to occur with the decline in
production. Orders have increased for heavy construction equipment,
reportedly due to increased highway construction. Durable goods production
is described as good, with strong export markets. Purchases of farm
equipment have also risen from their low levels of a year ago. Purchasing
managers in the District reported moderately higher commodity prices in
May, especially for brass, petroleum products, and paper products.
Though District retailers reported that sales remain at high levels, the
pace of sales growth in April and May slowed relative to earlier in the
year. General merchandisers continue to see good sales growth across all
product lines although the rate of growth is lower than the unusually high
rates experienced in 1999. Smaller, specialty retailers have seen somewhat
more weakness in sales. Sales in the furniture and home furnishings
category, for example, appeared flat in April and May, relative to the
first three months of the year. A luggage retailer reported declining
The retail sector reported mixed signals
about the next quarter. On the one hand, inventories are said to remain at
desired levels. On the other hand, some retailers reported increases in
the prices charged by their suppliers. As a result, many have indicated
that they have had to increase their retail prices. However, in spite of a
sense among many retailers that things had slowed and may continue to
slow, many organizations continue to expand and add staff. As has been
true for some time now, however, it remains difficult to recruit and
retain employees. Wage growth in retail firms appears to have been on the
order of 3 percent to 5 percent.
Sales growth slowed in the most recent
period for most car dealerships, with most reporting no increase in sales
over the May to April period. Due to recent increases in fuel prices,
buyers are reportedly more interested in fuel-efficient automobiles, which
are not yet available in enough quantity to meet the increased demand.
Dealers are offering more attractive financing plans, as well as discounts
and rebates in the pricing of new autos. Automobile dealers indicated
revenue and sales volume for used cars have remained nearly the same this
May as in May of 1999. Dealers of both new and used cars expect sales for
2000 to be flat or lower than last year, due to the recent increases in
both interest rates and gas prices.
Greater-than-average precipitation in the month of May has brought mixed
blessings to agriculture in the District. The corn crop has benefited,
with predictions of good-to-excellent yields being reported throughout the
region. However, continued high rainfall in June may result in lower
yields. Wheat yields may also decline from disease if rainfall is high
during June. Soybean production has been adversely affected by the rain,
in part because of pests. However, most predictions about these three main
crops of the District remain favorable.
Banking and Finance
Lending activity in the District is strong for commercial loans. Contacts
attributed this to increased merger and acquisition activity and to
inventory building. On the other hand, the demand for consumer loans is
down, which was attributed to interest rate increases. The rate for loan
delinquencies remains around 1 percent. There were mixed reports on the
availability of funds for lending. Some banks reported very high
loan-to-deposits ratios, whereas other banks reported having more
Fifth District - Richmond
Economic growth in the Fifth District
generally continued at a strong pace in late April and May, although
scattered signs of slowing were more in evidence. Activity in the
residential real estate and banking sectors expanded at a more modest rate
in recent weeks, in part because of higher interest rates. In contrast,
revenue growth at services firms picked up in April and May and retail
sales rose at a solid clip in the last several weeks. Moreover,
manufacturing activity remained relatively strong; new orders rebounded
from a spring lull and shipments growth picked up. In labor markets, new
workers continued to be hard to find, and wages increased moderately.
Prices of manufactured goods rose at a slightly faster rate in May, while
price growth eased in the retail and services sectors.
District retail activity continued to advance at a brisk pace since our
last report. Shopper traffic picked up in May and retailers were more
optimistic regarding product demand over the next six months. Big-ticket
sales were somewhat flat, however. An automobile dealer in the Research
Triangle area of North Carolina noted that customer traffic in showrooms
had fallen off, and that sales in the region had dropped about 15 percent
compared to a year ago. An apparel retailer in West Virginia also reported
a sales decline, due in part to a loss of mining jobs in the region. Wages
in the retail sector advanced at a somewhat faster rate in May.
Growth in services revenues picked up in recent weeks and moderate
employment growth continued in the sector. Demand for services workers
remained strong as District employers increasingly turned to foreign
workers with short-term work visas to fill positions in landscaping,
housekeeping services, and other seasonal or temporary positions. Strong
demand for entry-level workers was said to be driving up wages at fast
food restaurants. A contact in the Tidewater area of Virginia reported
that fast food restaurants were offering as much as $8.00 per hour to
attract employees--well above minimum wage.
District manufacturing activity advanced at a moderate rate in late April
and May as growth in new orders rebounded. Manufacturing shipments grew at
a solid pace; growth was particularly strong at tobacco, lumber, paper,
and industrial machinery producers. On the employment front, job growth
remained modest, in part because of a continued shortage of qualified
workers in some areas. A manager at an industrial machinery plant in
Maryland, for example, noted that "low unemployment makes hiring
qualified individuals quite difficult--we have chosen continued use of
overtime instead." Manufacturing wages rose at a quicker pace in both
April and May, and raw materials prices trended moderately higher since
our last report, largely reflecting higher oil and stainless steel prices.
District bankers reported that growth in lending activity slowed in recent
weeks as interest rates moved higher. Most bankers we spoke with said that
while their local economies remained vibrant, commercial lending activity
was losing steam. Our contacts characterized new residential mortgage
lending as sluggish and they noted that refinancings dropped markedly.
Lenders expressed growing concern that higher interest rates would reduce
lending activity further; a Charleston, S.C., banker captured the
sentiment of several bankers, noting that he was "waiting nervously
to see what will happen next." Lenders generally indicated that their
credit standards changed little in recent weeks; nevertheless, several
lenders described increased efforts to market loans to individuals with
marginal credit ratings.
Residential realtors began to see a slight cooling of home sales and
customer traffic through model homes in May. While home sales in the
District of Columbia were said to be at normal seasonal levels, realtors
reported that home sales outside the city's beltway slowed, especially
those to first-time homebuyers. Homebuilders in Greensboro, N.C., reported
a decline in building permits, and realtors there said home sales were
softer across all price ranges. Sales of upper-end homes were
characterized as strong in some areas of Myrtle Beach, S.C., but were said
to have slowed in the Tidewater area of Virginia, and in eastern North
Carolina. New homes sales were also reported to be down in West Virginia,
where there was scattered evidence that materials shortages were easing. A
homebuilder near Charleston, W.V., for example, noted that he could now
get same-day delivery of materials from his lumberyard; a year ago such
deliveries were taking up to three days.
Commercial realtors in the Fifth
District reported generally strong markets, although some signs of slowing
in the pace of activity were emerging. Realtors in Maryland and the
District of Columbia said that office rental rates were rising as supplies
of available Class A office and industrial space tightened. One realtor
noted that it was "clearly a landlords' market" in the area.
Contacts in Northern Virginia said an inflow of telecommunications and
"dotcom" businesses continue to absorb large blocks of office
space and they indicated that the hotel market there was also very strong.
In contrast, commercial real estate activity in the suburbs of Richmond,
Va., was described as somewhat slower, although the level of activity
there continued to be high. Commercial vacancy rates and rental rates were
reported to be stable in Raleigh, N.C., but one realtor noted an "air
of caution" about prospects for new construction in the area. In
Charlotte, N.C., new industrial and manufacturing construction activity
was said to be slowing, while office development picked up.
Tourist activity remained strong in recent weeks despite a wet Memorial
Day weekend. A manager of five hotels in the Virginia Beach area told us
that tourist activity had increased overall in May despite the Memorial
Day weekend washout. A hotelier on the Outer Banks of North Carolina said
that while rainy weather caused some tourists to check out early,
attendance at the reopening of the Cape Hatteras Lighthouse and at a huge
fishing tournament offset vacationers put off by rainy weather. Clement
holiday weather prevailed in Myrtle Beach, S.C., and several contacts
there reported being completely booked for the weekend.
Demand for temporary workers remained strong in most areas of the
District. Contacts at temporary employment agencies attributed the
strength to the robust economy and to the difficulty of finding permanent
workers. Warehouse and factory production workers remained in short supply
as did workers with administrative and computer skills. A contact in
Richmond, Va., reported an urgent need for administrative assistants with
word processing and data entry skills, but noted that she would gladly
settle for people who were simply "reliable." Workers placed by
agencies on a temporary basis were being increasingly hired by companies
for permanent positions, making it more difficult for agencies to maintain
an adequate pool of employees for temporary work assignments. Contacts at
employment agencies indicated that wages continued to advance at a
With the exception of South Carolina, District states received abundant
rain in recent weeks and topsoil moisture levels improved. Cotton, peanut,
and soybean planting generally progressed on schedule in Virginia and
North Carolina. However, dry conditions persisted in South Carolina and
farmers in some areas of that state halted the planting of cotton and
soybeans until soil moisture conditions improve. The lack of rain in South
Carolina also led to deterioration in pasture conditions and some farmers
were considering culling their herds because of the shortage of forage
Sixth District - Atlanta
Southeastern economic activity expanded
moderately, and contacts are mostly optimistic about future prospects.
Retail sales during April and May exceeded year-ago levels but growth has
weakened. Evidence of a slowdown in the District's single-family
residential market is mounting; however, commercial real estate markets
remain strong. Overall, loan demand has weakened slightly in the
Southeast. Reports from both the industrial and tourism sectors are mostly
positive. Tight labor markets continue to constrain growth in the
District, and reports concerning prices are mixed.
According to District retailers, sales in April and May exceeded year-ago
levels, though growth weakened somewhat in May. A majority of merchants
said that recent sales had met expectations and inventories were generally
balanced. However, many retailers contacted noted a slowdown in recent
activity and anticipate that second-quarter growth will be modest. Women's
apparel, electronics and jewelry are selling well, while men's apparel
sales continue to be weak.
The District's single-family residential market is showing more signs of a
slowdown. More contacts than in our previous report observe that activity
has weakened. Both Realtors and builders believe that the market will
continue to decelerate through the remainder of the year. In most cases,
the rise in interest rates is credited with slowing demand, while the lack
of suitable lots, particularly in Georgia and Florida, is a major
restraining factor as well. Most District Realtors contacted report that
home sales in April and May were equal to or below year-ago levels.
Additionally, contacts indicate that home-price increases are slowing, and
there is evidence that concessions are on the rise, as are customer
In contrast to residential real estate
markets, the region's commercial real estate markets remain strong.
Occupancies are described as healthy, while absorption continues strong.
Office space is scarce in several key markets. Speculative office
development continues in several parts of the District. Industrial markets
remain tight around the District and new projects continue to be
announced. Retail growth is substantial. Overall, the picture is rosy;
however, contacts approach the future with some caution.
Reports from the industrial sector are mostly positive. Growth in the
region's auto industry is stimulating production of parts and components.
A Tennessee manufacturer of transmissions is adding jobs in an expansion
project. In Georgia, a supplier of steering wheels and dashboard
components is ramping up production and adding to employment rolls to
supply Alabama's new Honda plant.
Louisiana's oil industry is reportedly
"heating up," but smaller drilling companies are having trouble
getting rigs running because of a lack of labor crews. Most of the
increased activity is associated with increased pumping and utilization of
existing wells, rather than on new explorations. In the manufacturing
sector, the outlook continues to be positive. Orders and the factory
workweek are up for a producer of commercial and industrial machinery, and
orders are robust for a high-tech producer of television set-top boxes. A
developer of fiber-optics technology is expanding employment rolls. Less
positively, production is down for a Georgia apparel producer, and a
Mississippi glove manufacturer is shutting down operations.
Tourism and Business Travel
Prospects for the tourism and hospitality sector remain very positive.
Summer bookings for south Florida hotel/motel rooms suggest a
record-summer season. Miami posted the highest occupancy rates and the
third highest room rates in the nation for the first quarter. Higher gas
prices do not appear to have had any measurable effect on south Florida
tourism, and consumers reportedly are not expected to change their summer
travel habits as a result of the higher prices. Mississippi Gulf Coast
casinos continue to produce record-breaking revenues. This is reflected in
the growth in the number of hotel rooms and increase in flights at the
Bankers report that overall Sixth District loan demand has weakened
slightly. The softness in the refinancing sector has been mitigated
somewhat by reports of strong activity on the consumer side in home-equity
lending. Demand for commercial and industrial loans was reported to have
slowed recently. Some financial institutions have tightened terms on
commercial and consumer loans, while relaxing them in the residential
mortgage market. Consumer loan demand continues to be robust, while
deposit growth slowed and residential mortgage lending remains down.
Wages and Prices
Tight labor markets continue to burden the District. Nursing and IT
employees are in especially high demand. One fast growing Internet company
says that its average cost for new employees is up by 15-20 percent more
than budgeted a year ago. A temporary employment agency reports that
search times for candidates have increased so dramatically that they
expect a significant near-term escalation of wages. After holding wages
steady for several years, some Alabama employers are feeling pressure to
raise wages 5-8 percent. The pool for "qualified candidates" is
shrinking, according to the manager of a large Georgia mall, and a
spokesman for theme parks in central Florida foresees difficulties in
filling thousands of summer job openings. More reports than last time
indicate that companies are using productivity-based cash incentives and
are increasing benefits.
Most contacts report no significant
change in prices since the last Beige Book, while there are some reports
that are up or mixed. Copper and oil prices are reportedly down from
recent highs, but there has been a recent upward movement in paper
products, meats, grains, and vegetables. One contact indicates further
escalation in building materials prices. Prescription drug prices are
surging, according to reports, with increases as high as 35 percent.
Seventh District - Chicago
The Seventh District economy remained
strong, but the pace of expansion moderated further in April and May.
Consumer spending growth softened notably and many retailers suggested
that sales results in the Midwest were not as good as in some other
regions. Growth in construction activity slowed slightly again, but both
residential and nonresidential activity was described as strong. While
production generally remained robust, manufacturers reported more mixed
conditions. Lenders reported solid, steady loan demand from businesses,
but moderately softer demand on the consumer side. Worker shortages and
wage pressures persisted in the District, but neither showed signs of
intensifying over the last two months. District farmland values rose 2
percent during the first quarter. Corn planting was essentially complete
and topsoil moisture levels improved with timely rainfall in recent weeks.
Consumer spending in April and May softened noticeably in many key
segments. Retailers, both discounters and general merchandisers, generally
reported that sales fell short of their expectations, in part due to
unfavorable weather. However, sales of home-related items (such as
appliances, electronics, and home furnishings) remained strong as did
sales of ladies apparel and jewelry. In contrast, results for seasonal
items were mixed, with sales mostly described as soft. Retailing contacts
with a national presence generally indicated that sales in the Midwest
were softer than in the nation as a whole. Despite generally
weaker-than-expected sales results, there were few signs that inventories
were building. The casual dining business remained strong, although one
contact noted that business softened slightly in April and moderated a
little further in May. Several District auto dealers reported a
discernible sales slowdown in recent weeks, with a contact at one large
auto group citing higher gasoline prices and interest rates as
contributing factors. This contact also noted that inventories were well
above the group's desired levels, and that costs of maintaining that
inventory cut profit margins significantly. While overall price increases
at the retail level remained modest, there were more frequent reports that
higher fuel costs were pushing up prices for distribution and travel &
Construction and Real Estate
Overall construction activity slowed modestly in April and May, but most
contacts continued to describe the market as strong. Sales of both new and
existing homes were off from year-ago levels in much of the District,
although no one was "singing the blues," according to one
contact. A leading realtor in one of the District's largest metro areas
said that while May's existing home sales were off significantly from
year-ago levels, it was still the second best May ever. Some contacts
indicated that higher mortgage interest rates had taken many first-time
buyers out of the market. One contact suggested that this was beginning to
have a "trickle-up" effect; that is, when low-end homes do not
sell, the owners of those homes cannot move up to a bigger home. A
suburban architect noted that some clients were scaling back residential
remodeling plans somewhat and pressing for quick turnaround on drawings so
permits could be obtained and financing locked in before interest rates
moved higher. Nonresidential activity remained strong, although contacts
suggested that growth may have slowed somewhat in recent weeks. One retail
contact pointed to more contractor bids on their expansion projects
(compared to a few months ago) as a sign of some softening in the
commercial building segment. There were some reports that public projects,
which contributed significantly to overall growth earlier in the year, had
softened slightly in recent weeks. Generally, however, contacts suggested
that nonresidential construction activity was strong and fairly steady,
and most remained confident that the supply of commercial space was in
line with demand.
Conditions in the manufacturing sector became more mixed in recent weeks
as the region's star performer, its auto industry, showed some signs of
slowing. Nationwide, light vehicle sales fell in May, the first
year-over-year monthly decrease since August 1998. However, auto analysts
pointed out that sales were still very strong, around 17 million units at
an annualized rate, and suffered only in comparison to last May's
exceptional sales results. The region's steel industry continued to run
near capacity, despite sluggish new orders from the industrial segment, as
demand remained strong from the construction segment--particularly for
government projects (schools, highways, etc.). One analyst noted that
there was some inventory building in the first five months of the year as
buyers stocked up on steel products ahead of an announced price increase.
Reports from manufacturers of heavy equipment were mixed. Orders for
agricultural equipment picked up slightly from very low levels, while
orders for heavy trucks and construction and earth-moving equipment
decreased. Equipment producers noted that demand from European markets was
picking up while the domestic market was sagging. A producer of
communications equipment reported strong orders and rising backlogs, while
also indicating that most of the strength in demand was coming from
overseas. Most manufacturers reported that the pricing environment
remained very soft. One contact noted that gypsum wallboard prices, which
had been relatively firm, slipped recently as new capacity came on stream.
Banking and Finance
Overall lending activity was again strong, although some contacts
indicated that growth had flattened out at high levels. Home-equity
lending was robust during April and May, just as new mortgage applications
slowed noticeably. One contact noted that demand for adjustable-rate
mortgages, which had picked up earlier as rates on fixed-rate mortgages
increased, softened in recent weeks. Consumer loan quality was generally
described as good and steady. Business loan demand remained strong,
although most contacts suggested that loan growth had flattened out. There
were some indications that lenders in the District were tightening their
standards on commercial loans, with one banker suggesting that nearly all
banks were taking a closer look at deals, particularly for commercial real
estate loans. The quality of outstanding business loans remained high,
with a large money center bank reporting that the level of non-performing
loans was "extraordinarily low."
Contacts reported very little change in tight labor market conditions in
recent weeks as strong demand, worker shortages, and wage pressures
persisted. In addition, a survey of hiring plans suggested that employers
in the Midwest expected to continue adding to their payrolls, signaling
that labor markets will remain tight in coming months. While shortages of
qualified workers were widespread, they were particularly severe in the
trucking and retail industries. A large transportation company noted that
a dearth of drivers led to a double-digit increase in the mileage rate
paid to drivers in February, and may lead to further increases in June.
Contacts in the retail industry also reported that finding and retaining
workers remained difficult. While overall wage pressures were relatively
stable, a contact in casual dining indicated that employment costs were up
4 to 6 percent from a year ago. This contact also noted that wage gains
had recently begun to outstrip increases in productivity. There was
virtually no evidence, however, that higher wages were translating into
higher prices at the retail level.
Our survey of agricultural bankers showed that District farmland values
rose an average of 2 percent during the first quarter (i.e., from January
1 to April 1), with all five District states registering an increase.
Average cash rents were little changed from last year, though bankers in
Michigan and Wisconsin reported a modest increase. Farm loan repayments
continued to be a concern during the first quarter. This encouraged
farmers and bankers to increase their use of farm loan guarantees from the
Farm Service Agency. Over three-quarters of surveyed bankers indicated
they were making some use of these guarantees. Corn planting in the
District was essentially finished at the end of May, well ahead of the
average pace. Soybean planting also neared completion. Crop prospects
improved in late May as timely rains replenished topsoil moisture
throughout the District, although dry conditions were still a concern in
much of Iowa. Some areas of Wisconsin reported crop damage due to a frost
in late May.
Eighth District - St. Louis
Outside of softening in some home and
vehicle sales, business conditions in the District remain steady overall.
Motor vehicles sales are down from a year earlier, in some cases
substantially. Higher interest rates and gasoline prices are frequently
cited as causes. Retail sales, on the other hand, are up from a year
earlier, although many contacts report that sales fell below expectations,
primarily because of sales to online vendors. Tight labor markets continue
to affect many firms' ability to meet output demand. High fuel prices are
pinching profits at trucking firms. Home sales and construction have
slowed as interest rates have risen. Credit standards for loans have not
changed recently, but demand for some real estate and consumer loans has
weakened. Drought-like conditions are still the norm in most parts of the
District, even after some rainfall in late May provided temporary relief.
Retailers report that sales during April and May are up about 4 percent on
average from a year earlier. Department stores showed the strongest
growth, up almost 8 percent in some cases, while gift and specialty stores
recorded sales declines. More than half of the contacts note that sales
growth fell below expectations, with about a quarter citing online sales,
especially of electronics, as a reason. Shoes, women's accessories, lawn
and garden supplies, and electronics all have been posting weak sales.
Appliances, jewelry and women's apparel, on the other hand, have been
strong sellers. For the most part, retailers' inventories are at desired
levels. Contacts are optimistic about the summer, expecting sales to
increase between 4 and 5 percent over a year earlier.
Car dealers report that sales in April
and May are down about 6 percent on average from a year earlier. In some
instances, declines of up to 20 percent have been reported. Many contacts
cite rising interest rates and gasoline prices as causes of the slowdown.
With more than half of the contacts reporting that vehicle
inventories--especially of SUVs--are above desired levels, many dealers
are raising rebate amounts to move vehicles. Most dealers, however, remain
optimistic that sales this summer will pick up.
Manufacturing and Other Business
Contacts report stable business activity in the District, although tight
labor markets are still a major problem for nearly all industries. Some
firms continue to note that labor shortages are restricting their output
capabilities. Hit especially hard have been retail establishments,
manufacturing firms and hospitals, which are raising starting hourly wages
by $1 or $2 to attract workers for positions ranging from nurses to
cashiers. Many other firms are coping by recruiting overseas workers to
fill positions. Hotels and retail stores report offering career
counseling, job training and child care to attract employees.
High fuel prices are taking a toll on
District transportation and trucking firms, which continue to surcharge
customers 3 to 6 percent to maintain profits. Most trucking companies
posted first-quarter losses, but hope to break even in the second quarter.
Labor shortages and fuel prices
notwithstanding, contacts report steady business activity. Numerous firms
are expanding or moving into the District, among them, many high-tech
companies. An online customer support firm, which recently opened in St.
Louis, will create 600 jobs by year-end; two Internet companies are
opening in Louisville, together creating about 150 jobs. Six other
expansions and openings in Louisville and Memphis will bring about 650
jobs to the District in the next few months.
A handful of closings have also
occurred. An abrupt closing by a Memphis paper products producer, due to
the loss of its largest customer, eliminated 300 jobs. Competition in the
food industry will result in a major grocery store chain closing 20 stores
within the District by July.
Real Estate and Construction
Residential home sales throughout the District continued to slow
moderately in May. Some real estate agents have noted longer turnaround
times, especially for new single-family homes, and a growing inventory of
houses. Agents expect sales to continue slowing--but not to fall off
substantially--during the year because of higher interest rates. Median
prices for homes in April are down from a year earlier.
District-wide residential construction,
mirroring the sales reports, declined slightly in April, although it
remained at a high level. Year-to-date and monthly building permits are
down from their year- and month-earlier levels in most areas of the
District. Commercial real estate markets, particularly sales and leasing
of office space, are holding steady. Some new construction projects,
however, have reportedly been put on hold because of higher interest
Banking and Finance
According to respondents of a recent Senior Loan Officers survey, credit
standards for all loan categories are unchanged. Respondents also report
that demand for commercial and industrial loans and for commercial real
estate loans remains unchanged. Demand for residential real estate loans,
on the other hand, is weaker. Half of the respondents note that demand for
consumer loans is weaker, while the other half have experienced no change.
Banks continue to have trouble attracting deposits.
Agriculture and Natural Resources
Drought-like conditions continue to affect much of the District. Although
temporary relief arrived in late May--when widespread rainfall across the
District helped replenish topsoil moisture in all states except
Mississippi--more is needed to bring subsoil moisture to adequate levels.
Despite the dry conditions, unseasonably
warm spring weather allowed for an earlier-than-normal planting of the
major crops in most parts of the District. The corn, soybean, winter
wheat, rice and cotton crops are in good-to-excellent condition in most
areas, with only isolated insect problems being reported.
Ninth District - Minneapolis
As summer begins, economic activity in
the Ninth District remains hot. Construction, manufacturing, energy and
platinum mining are still strong. The outlook for summer tourism is bright
and consumer spending continues to heat up the economy. Agriculture is
starting to improve from the dismal past financial conditions. Labor
markets are still strong as businesses continue to report wage pressures,
and some price increases are noted, primarily in petroleum, construction
Construction and Real Estate
Commercial construction is still expanding at a brisk pace. In the western
suburbs of Minneapolis, the amount of available office space leased or
purchased during 2000 is expected to finish twice as high as the previous
record, according to a commercial real estate firm. This summer, South
Dakota will spend twice the average amount of recent years on road
construction projects. Contracts awarded for new construction projects in
the Dakotas and Minnesota increased 22 percent for the three-month period
ending in April, compared with a year earlier.
Meanwhile, homebuilding continues to
grow. A building association representative in La Crosse, Wis., projects
strong demand for high-priced homes for the rest of this year. District
housing units authorized increased 5 percent for the three-month period
ending in April compared with a year ago. However, bank directors report
that homebuilding is slower in North Dakota and rural parts of Montana.
Consumer Spending and Tourism
Consumers haven't slowed their spending at retail stores. A major
Minnesota-based electronics retailer reports that year-to-date April
same-store sales in district states were up 7 percent to 12 percent
compared with a year ago. A chamber of commerce official in northwest
Wisconsin reports that retail sales are above year-ago levels. New car and
truck registrations in South Dakota are up over 20 percent for April
compared with a year ago, while registrations in North Dakota remain flat.
Prospects for summer tourism are bright.
A tourism official in the Upper Peninsula of Michigan has received
higher-than-normal inquiries about summer travel. Tourism in the Duluth,
Minn., area is currently 8 percent to 10 percent above year-earlier levels
and is expected to remain strong throughout the summer. A chamber of
commerce representative in central Montana projects tourism to increase 3
percent to 4 percent in the area compared with a year ago; however,
reservations are down from last year at Glacier National Park.
Manufacturing in the Ninth District remains robust. A recent survey by
Northern Michigan University of manufacturers in that area indicates
strong growth in sales, employment and capital spending. A May purchasing
manager survey by Creighton University indicates strong growth in South
Dakota, slower growth in North Dakota and a slowdown in Minnesota. As
evidence, sales are strong at a South Dakota plastic product firm. In
addition, sales are up 10 percent to 15 percent compared with a year ago
at a Minnesota electronic equipment producer, and a fabricated metal
products company reports full production and strong sales. However, a
Wisconsin food and kindred product manufacturer reports lower sales due to
a shortage of labor.
Mining and Energy
The iron ore and platinum industries continue to operate at near capacity.
An iron ore industry spokesperson reports full production at nearly all
iron ore mines. However, a steel company announced the closing of one of
the oldest iron ore mines in the United States. The northern Minnesota
mine, which currently produces about 7 million tons a year and has 1,400
workers, will close next year. Other district mines are expected to meet
the steel company's need for iron ore. March year-to-date iron ore
consumption was 13 percent above year-ago levels, while March inventory
levels were down 17 percent. Meanwhile, a Montana mining industry
spokesperson reports platinum mining is at full production, with a new
mine under development and scheduled to be in production within two years.
Meanwhile, Ninth District oil exploration continues at a strong pace in
response to high petroleum prices. In May, eight rigs were operating in
North Dakota compared with two a year ago, and Montana rig operations
increased to six compared with three a year ago.
"Increased cattle prices have reduced ranchers' debt and improved the
local economy," reports a South Dakota agricultural lender. Farmers'
financial condition continues to improve, based on preliminary results of
the Ninth District's second quarter (May 2000) survey of agricultural
credit conditions. Loan repayments have improved as 77 percent of
respondents report average or above-average levels of loan repayments
compared with 43 percent a year ago. In addition, farm income improved as
53 percent of respondents reported average or above-average farm income
compared with 18 percent a year ago.
Moreover, farmers had a productive
spring. The U.S. Department of Agriculture reports that district spring
planting and crop progress is significantly ahead of the five-year
average. In addition, due to rain in May and early planting, most district
crops are in good condition. The U.S. Department of Agriculture reports
that 86 percent of the South Dakota corn crop and 64 percent of the
Minnesota soybean crop are in good-to-excellent condition.
Employment, Wages, and Prices
Labor markets remain tight, yet many employers continue to plan
expansions. A Minneapolis area health care facility reports difficulty
finding skilled workers, as they look for 40 to 60 new employees. This
summer, businesses expect to hire large numbers of seasonal workers.
"I can't imagine a 16- or 17-year-old trying to get a summer job, not
being able to get one," said a Wisconsin labor analyst. A Minnesota
real estate management company reports that some stores are delaying
opening due to a lack of qualified workers. According to a survey of
employers conducted by a temporary-services agency, 36 percent of
Minneapolis-St. Paul firms expect to increase workers this summer, and 12
percent will reduce staff. These results are down from a year ago when 47
percent of firms expected to increase staff and 2 percent predicted
Employers are still paying higher wages
to attract workers. Electrical workers in St. Paul negotiated for wage
increases over $2 per hour, in part to cover rising health care costs.
Wages for hired field and livestock workers on district farms were up
around 3 percent in April compared with a year earlier. A member of the
advisory council on small business, agriculture and labor reports higher
compensation costs, bigger investments in labor-saving technology and
greater use of temporary services.
Some price increases were noted,
especially for petroleum, construction materials and housing. According to
an informal survey of manufacturers in the Dakotas, Minnesota, and
Wisconsin, about 60 percent of respondents noticed increases in input
prices, while 50 percent expect to increase product prices about 2 percent
to 5 percent. Paper and construction material prices are up, including a
15 percent hike in asphalt, according to a bank director. A
Minneapolis-St. Paul apartment owner plans to raise rents 8 percent to 10
percent in June, the second increase of the year.
Tenth District - Kansas City
The Tenth District economy showed some
signs of cooling in May but remained generally solid. Retail sales were
flat, factory activity edged down from high levels earlier in the year,
and residential construction slowed following recent interest rate
increases. In contrast, commercial building remained strong and district
energy activity increased after holding steady earlier in the year. In the
farm economy, low crop prices continued to be a concern. Labor markets
remained tight, with wage pressures similar to previous surveys. Prices
for manufacturing materials continued to rise, and some firms passed these
cost increases through to output prices. Construction material prices
increased seasonally, while retail prices were largely unchanged.
Retail sales remained flat in May and showed little change from a year
ago. Home furnishings continued to experience strong sales, while sales
slowed for high-end women's clothing. Store inventories were basically
unchanged in May. Despite sluggish sales in recent months, managers were
quite optimistic about summer retail activity. Motor vehicle sales were
also flat in May, as dealers indicated that interest rate increases were
restraining automobile sales in some markets. Trucks, however, continued
to sell particularly well throughout the district. Dealers were generally
optimistic about sales in coming months, although some expressed concerns
about the availability of domestic vehicles.
District factory activity edged lower in May, with somewhat fewer firms
reporting high levels of capacity utilization. There were more reports of
material availability problems than in previous surveys, particularly for
steel products and semi-conductors. Lead times increased slightly. Many
plants trimmed inventory levels in May, due in part to strong product
sales. Most managers expect to continue trimming stocks in the next few
Real Estate and Construction
Housing activity has slowed since the previous survey, while commercial
construction remains strong. Most home builders reported in May that
housing starts were down 10 to 20 percent from last year's record pace,
and expectations of future residential building have cooled considerably.
Home sales have fallen in much of the district, and inventories of unsold
homes have edged up from previously low levels. Mortgage demand was flat
in May, and lenders' expectations of future demand have fallen
considerably following recent interest rate increases. In contrast to
housing, reports suggest continued strength in the nonresidential market,
particularly for office buildings. This strong office market is expected
to continue through the summer. Builders reported few concerns about
material availability in May and do not anticipate problems developing in
Bankers report that loans edged up and deposits edged down over the past
month, slightly boosting loan-deposit ratios. Demand increased modestly
for consumer loans, residential construction loans, and commercial real
estate loans. On the deposit side, demand deposits, small time deposits,
and large CDs all declined slightly. Almost all respondent banks increased
their prime rate in the past month, and most raised their consumer lending
rates as well. A few banks tightened lending standards, but most left
their lending standards unchanged.
After holding steady earlier in the year, district energy activity began
to move higher in April and May. The count of active oil and gas rigs in
the district has risen more than 10 percent in the past two months.
Natural gas prices continued to move upward and now sit 56 percent above
year-ago levels, with strong forecasts for summer demand and supply
shortages driving expectations for further increases. The price of West
Texas intermediate crude oil has returned to $30/bl levels, helping to
sustain the resurgence in overall economic activity in several
energy-dependent areas of the district.
Unusually warm, dry weather has hurt yield prospects for the district's
winter wheat crop, which is nearing harvest. Timely rainfall throughout
the growing season will be needed for normal development of the corn and
soybean crops. Despite continued weather risks to growing crops, low crop
prices remain a concern for the farm economy. District bankers indicate
farm loan portfolios remain healthy, however, and relatively few have
significantly increased their use of government guarantees of farm loans.
Small business activity remains sluggish but steady in many of the
district's rural communities.
Wages and Prices
Labor markets in most of the Tenth District remained tight in May.
Retailers and manufacturers, however, reported slightly fewer problems
finding workers than in previous surveys. Shortages persisted in
occupations such as engineering, nursing, information technology, and
skilled construction trades. Moreover, summer recreation businesses in the
district reported strong competition for seasonal workers, as entry-level
service positions remained hard to fill throughout the district. Wage
pressures were largely unchanged from previous surveys. Several firms
indicated that labor problems were less of a concern recently than price
increases for materials. Prices continued to rise for most manufacturing
materials, including metals, resins, chemicals, and other petroleum-based
products. Further increases in input prices are anticipated. Purchasing
managers also reported higher costs due to transportation surcharges. Some
manufacturing firms have begun to pass these cost increases through to
output prices. Prices for some construction materials rose seasonally, but
builders do not anticipate further increases this summer. Retail prices
were largely unchanged in May after edging up in recent months, and no
significant increases are expected in the near future.
Eleventh District - Dallas
Overall Eleventh District economic
activity increased in May, despite some evidence that financial conditions
have affected the economy. Demand for business services was still very
strong, and energy activity continued to accelerate. Manufacturers
generally reported increased or continued strong demand, and financial
service contacts said loan demand was mostly strong. Retail sales growth
decelerated throughout the month however, and residential construction
activity declined. Agricultural conditions remained difficult, although
government payments have helped the financial condition of producers. Many
contacts indicated increased uncertainty about the future, but their
outlooks remained positive.
Overall price pressures were up, led by energy and manufactured products,
the latter partly a result of higher energy prices. Low inventories
contributed to sharp increases in energy prices. Crude oil prices rose
from $25 per barrel in late April to $30 per barrel in mid-May and spot
natural gas prices rose to over $4 per thousand cubic feet. Natural gas
storage was 23 percent below year-ago levels on May 1, and hot weather
nationally stimulated demand, which prevented storage from filling.
Inventories of gasoline also are low, which has pushed gasoline prices up
35 percent over the last six weeks. Currently, there are no shortages of
gasoline, but there are concerns that there will be strong demand in the
United States for summer driving and that imports will be limited by
strong demand in Europe as well. Diesel prices also rose by about 10 cents
per gallon because stocks were depleted by strong demand from truckers and
farmers. Petrochemical producers expect to boost their prices
significantly if prices for natural gas feedstock remain high, and they
expect strong demand for petrochemicals will allow them sustain the
increases. Prices for brick and glass products were also up and are
expected to rise further, which contacts attributed to higher natural gas
prices. Rising wages and a shortage of some chips was putting upward
pressure on some electronics prices. Computer manufacturers said the
movement away from desktops to notebooks is resulting in higher selling
prices because notebooks cost more. Higher prices were also reported in
the service sector. Some service firms said greater client demand was
making it easier to pass along salary increases to fees, but others said
competition remains significant and is limiting fee increases. Cement,
concrete and lumber prices declined slightly.
Labor market tightness continued to be reported in nearly all sectors. The
energy industry is having problems hiring large numbers of workers, and
contacts said the industry's reputation as an unstable employer is not
helping. Auto dealers reported upward pressure on wages for mechanics.
Service firms said wages and salaries have risen in almost every area, and
an employment agency added that anyone who has not been convicted of a
violent crime, is drug-free, and can show up and work 8 hours a day has a
job if they want one. Some manufacturers reported that the scarce supply
of skilled workers is translating to general wage pressure throughout the
industry. Many firms now offer training, which they say is a big change
from just five years ago. The recent stock market drubbing and shakeout of
"dot.com" companies has led to a slowing of the skyrocketing
salaries in the legal industry and a halt to the exodus of labor, such as
lawyers and MBAs, to Internet companies. One contact said that some
employees have recently asked to return.
Manufacturing activity was up, with strong demand for energy and high-tech
products. Producers of computers and other high-tech machinery reported a
significant increase in orders from the first quarter. A shortage of some
processors was limiting production of computers. A large computer
manufacturer said domestic consumer sales weakened over the last two
weeks, but noted that demand is strong from almost all areas of the world
and is optimistic sales will remain strong. Petrochemical producers
reported extremely strong domestic demand and improving demand from Asia
and Europe. Refiners also reported extremely strong demand. Supplies are
so tight that every refinery shutdown was immediately reflected in spot
and futures prices. The seasonal maintenance period is now coming to an
end, but Gulf Coast refiners generally operated at high levels throughout
the period. Demand for apparel products was up over the last few weeks,
and contacts reported little change in the demand for brick, glass,
primary metals and food products, with most reporting strong demand.
Fabricated metals producers also reported continued strong demand, with
particularly brisk sales to the energy and high-tech industries. Demand
for concrete and cement was unchanged since slowing in the first quarter.
Demand for lumber and wood products declined over the past three months
and the decline accelerated over the last two to four weeks. Weak demand
and mild winter weather, which allowed for more logging, has resulted in
an oversupply of lumber.
Demand for business services continued to be strong, and nearly all firms
reported more activity than at this time last year. Temporary service
firms said demand has been good from most sectors of the economy, and one
firm said demand is at its highest level in recent memory. Accounting and
legal firms also reported strong demand, but demand for legal services
from dot-com companies has slowed as a result of weakness in financial
markets and fewer IPOs. Most transportation firms reported generally
strong demand. Trucking activity picked up recently, particularly for oil
and construction. Airlines said that demand remains strong, but railroads
reported weaker demand growth.
Retailers said sales growth was strong in early May but decelerated during
the month, ending with a poor couple of weeks. While some contacts said
unseasonable weather probably affected sales, most believe it is possible
that consumers are slowing purchases as a result of weakness in the stock
market and higher interest rates. Some retailers lowered their sales
outlook slightly. Auto sales remained strong.
Loan demand remained mostly strong, according to contacts, who are
generally optimistic about business activity in the near term. Banks
reported a slight slowing in real estate loans, but all other loan
categories have experienced stable to strong demand. In some cases, loan
demand is still outstripping supply.
Construction and Real Estate
Homebuilders reported slower traffic and sales over the past few weeks.
Order backlogs fell, with some people removing themselves from the backlog
because they no longer qualify for a loan or chose not to pay higher
interest costs. Still, contacts said building remained at a good pace.
Overall commercial development continued to slow. Contacts said some small
speculative shopping mall and office projects were put on hold because of
interest rate concerns. A few large commercial developments and shopping
malls are helping boost activity, however. Demand for office space picked
up in recent weeks as new corporations are moving to the area and soaking
up space. Concerns about overbuilding are dissipating and plans for
speculative building have revived for larger projects, and contacts say
these larger projects will not be affected by interest rate increases.
Energy activity continued to accelerate. Oil service and machinery
companies said the last pieces of the healing process from the 1998-99
downturn are falling into place. Contacts reported growing backlogs, and
some companies are working around the clock to meet demand. The Texas rig
count rose sharply over the past six weeks, from near 300 to 323. Gas
drilling is leading the recovery. Drilling in the Gulf of Mexico returned
to late 1997 peak levels, as the search for gas pushed producers offshore
to deeper, more complicated, and expensive projects. International
activity remained slow but continued to improve. Contacts say the
"super-majors" are still digesting the last round of mergers and
are moving slowly--trying to impress Wall Street with efficiencies rather
than drilling activity.
High winds and hot temperatures slowed land preparation and stressed crops
and forage across most of the District. Soil moisture remained low in many
areas. The condition of the Texas wheat crop was rated 39 percent of
normal in May. Range conditions have been poor and wheat grazing was
difficult. As a result, livestock were being heavily culled at light
weights. There continue to be some producers going out of business and
large ranches converting into recreational properties.
Twelfth District - San Francisco
Reports from contacts indicate solid
expansion of the Twelfth District economy in recent weeks, although signs
of moderation were apparent in some sectors. Sales of services and retail
merchandise were strong. District manufacturers reported generally solid
conditions, although weaker demand was evident in a few sectors.
Conditions among District agricultural producers were mixed, as demand
conditions were stronger for ranchers than for growers. Real estate market
and construction activity slowed a bit in the Pacific Northwest and
Intermountain states but remained very strong in California and Arizona.
District financial institutions reported somewhat tighter credit
conditions. Labor markets remained tight in most areas, and elevated
energy costs were passed on to the prices of transportation services and
Wages and Prices
Respondents from all District states except Hawaii reported tight labor
markets across the board. Difficulties in recruitment and retention have
been most acute for workers with computer, technical, and financial
skills, but contacts also noted shortages of retail workers and increased
turnover in agricultural labor markets. Wage increases reportedly picked
up a bit in some areas of the District, and employers' benefits costs have
been rising rapidly.
In regard to price developments,
sustained high prices for oil and other energy sources have raised
producers' costs in recent weeks and have been passed on to the final
prices of some goods and services. The prices of petroleum-based materials
such as containers, plastic bags, and fertilizers have increased, raising
costs for manufacturers, retailers, and agricultural producers. Airlines
and trucking companies have raised passenger airline fares and shipping
rates in response to high fuel costs. Apart from these items, however,
materials costs and final prices of goods and services remained fairly
stable, due to competitive pressures and productivity gains.
Retail Trade and Services
Demand for retail merchandise expanded further in recent weeks. Sales of
food, beverages, and pharmaceuticals were rapid throughout the District.
Department store and apparel sales picked up somewhat, and price
discounting was less evident in California; inventories generally were at
or near targeted levels, with respondents noting that new computer
technologies have improved inventory management. Reports regarding
District vehicle sales were mixed; for example, an Idaho respondent
reported weakened demand for new vehicles, but a Utah contact noted
continued rapid sales growth for popular sport utility vehicles and light
Demand for services to businesses and
households grew substantially in most areas. Sales growth has been
especially rapid for telecommunications and Internet-related services,
although contacts in California and Washington reported difficulty
obtaining electronic telecommunication equipment, such as switches and
fiber optic cable, to support further expansion. Demand for transportation
services--both for passengers and for shipping--remained robust. Visitor
arrivals to Hawaii picked up further, but in Utah hotel occupancy rates
and revenues declined somewhat, as growth in the supply of hotel rooms has
outpaced demand there.
Manufacturing contacts reported solid conditions overall, although
weakened demand was evident in some sectors. Semiconductor manufacturers
experienced strong demand and very high rates of capacity utilization;
continued rapid growth in productivity enabled them to expand output while
prices remained flat or declined. Demand strengthened somewhat for
District machine tool manufacturers, reportedly due in part to declining
import competition associated with an increase in East Asian domestic
demand. However, sales of farming machinery weakened. In the Pacific
Northwest, lumber orders were sluggish and prices fell significantly, but
orders for wood pulp increased further, causing prices to rise and keeping
inventories low. New orders and shipments of Boeing aircraft reportedly
Agriculture and Resource-Related
Conditions for District agricultural producers were mixed during the most
recent survey period. District beef producers reported further increases
in demand and prices, although ranchers in Arizona and Oregon were
hampered by dry pasture conditions and rising hay prices. In California
and the Pacific Northwest, agricultural output was high due to favorable
weather conditions and productivity enhancements associated in part with
new information technologies. Despite increased demand from East Asia,
prices on many agricultural commodities remained low as supply growth
matched demand growth.
Real Estate and Construction
Construction activity and demand for residential and commercial real
estate remained strong overall, especially in California, although slowing
was evident in some states. Contacts in Oregon, Utah, Idaho, and Alaska
reported slower home sales and price appreciation, and respondents in
several areas noted that increased mortgage rates have restrained activity
in residential markets more than commercial markets. While home sales and
home construction have slowed from their previously rapid pace in the
Portland and Seattle areas, demand for commercial real estate has remained
strong, especially in Seattle. Residential and commercial markets were
vibrant throughout Arizona and California, with extremely rapid increases
in commercial lease rates evident in the San Francisco Bay Area. Demand
for residential real estate strengthened further in Hawaii, reportedly due
in part to demand for vacation homes by residents from states such as
Contacts from District financial institutions reported some tightening of
credit availability and slightly weaker loan demand in some areas, mainly
for real estate loans. Respondents from Washington, Oregon, and Idaho
reported declining demand for residential and commercial mortgages.
Contacts also noted slower deposit growth at California community banks,
and credit availability reportedly has tightened for agricultural
producers there. A Hawaii contact reported no significant changes in
overall loan demand there, despite a slight pickup in consumer lending.