Prepared at the
Federal Reserve Bank of Minneapolis and based on information
collected before October 25, 1999. 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.
Most districts continue to
report strong economic growth but some slowing is noted.
Manufacturing activity continues to advance in almost all
districts and for most industries. Although four districts
report some slowing in consumer outlays, spending generally
remains strong and most retailers are expecting increases in
holiday sales from last year. Real estate and construction are
still robust in most districts, though there are signs of some
moderation in activity. The mining and energy industries are
showing signs of recharging. Overall loan demand remains brisk,
although a softening is noted by some districts in consumer loan
demand. Labor markets remain tight across the country, with
numerous districts reporting continued difficulty in finding and
retaining qualified workers. Many districts report a pickup in
wage increases, but overall prices remain stable with some
notable exceptions: Increases in prices were noted for some
manufacturing inputs, health care, memory chips and construction
materials. By contrast, low prices continue to weigh heavily on
some important segments of the agricultural sector.
Many districts report continued steady to strong retail
spending, while the Chicago, Dallas, Kansas City and New York
districts mention weakening sales. The Minneapolis and San
Francisco districts report sizable increases in sales; in the
Philadelphia district, several stores experienced double-digit
increases over last year. Sales growth in the Boston district is
generally exceeding retailers' expectations. But retailers in
the Kansas City district report a decline in sales, following
flat activity in the three previous surveys. Most districts note
that retailers expect strong consumer demand as the holiday
season approaches. Auto dealers report solid sales in the
Dallas, Kansas City and Philadelphia districts, with weakening
demand indicated in the Chicago district. In the Cleveland
district, auto sales slowed in October after a record summer.
Some dealers continue to have short inventories of some popular
models. Fall tourism is steady compared to a year earlier in the
Minneapolis district. Hurricane Floyd depressed tourism at
coastal destinations in the Richmond district, but inland
mountain resorts report gains.
Nearly all districts report that manufacturing activity is
growing. The Boston district reports most suppliers to the
semiconductor, telecommunications, biotech and construction
industries are experiencing double-digit increases in business.
Several manufacturers of industrial products and chemicals in
the Philadelphia district note increases in orders from
customers in Asia. The Richmond district reports that shipments
and capacity utilization levels are increasing; production was
particularly strong in printing and publishing. Shipyards in
Louisiana are operating at full capacity, according to the
Atlanta district. The Chicago district reports that automobile
production was steady at very high levels in recent months.
Strong growth in sales of plastics and building materials is
reported by the St. Louis district. The Dallas district reports
a slight increase in manufacturing activity. The San Francisco
district reports expansions in petrochemical production, paper
processing, steel manufacturing and high-technology equipment
Kansas City is the only
district reporting a slowing in overall manufacturing activity.
In addition, the Boston district notes that production of
industrial machinery and machine tools remains below
Labor markets remain tight across most of the country. The
Cleveland, Dallas, New York and Richmond districts report strong
demand for temporary workers. In New York, "effectively,
there are no more temps." The New York district attributes
a slowing in payroll employment to labor shortages, and the
Chicago district says its labor markets remain tighter than the
nation as a whole. In the Atlanta district, excessive overtime
to offset labor shortages is causing morale and productivity
problems. In the Dallas district, retailers' entry-level
turnover is 200 percent to 300 percent a year. Throughout the
San Francisco district, finding and keeping qualified
entry-level and skilled workers is a challenge.
Some districts, however,
detect an easing in selected labor markets. The Dallas and New
York districts indicate some letup in requests for computer
specialists and IT-related jobs as Y2K-preparation work is
completed. The Philadelphia district states hospitals and health
services firms have laid off workers recently, and the Chicago
and Kansas City districts disclose some softening in requests
for manufacturing workers.
Wages and Prices
In most districts, the persistent tightness in labor markets
continues to put upward pressure on wage increases. Boston
reports that labor costs may be accelerating somewhat, with
manufacturers offering attractive recruitment packages and
slightly higher wage increases while retailers engage in more
raiding. The Chicago, Minneapolis, Richmond and St. Louis
districts report accelerating wages as well.
There are few signs of a
general pickup in prices of final goods and services. Several
districts report few price changes, and in the Boston, Kansas
City and New York districts retail prices are either steady or
declining, despite increases in the cost of manufacturing
inputs. Moreover, several districts report selected price
increases: health care costs (Atlanta, Chicago and Minneapolis),
memory chips (Dallas), paper (Minneapolis) and construction
materials (Atlanta and Minneapolis). In contrast, the Dallas
district reports the prices of lumber and wood products and
cement have declined recently.
Real Estate and
Real estate and construction remain robust in most districts,
though indications of some slowing have surfaced recently.
Residential real estate activity is at high levels in the
Richmond and San Francisco districts, although the pace of
growth is slowing. In the Boston, Chicago and Kansas City
districts recent interest rate increases have curbed home sales.
Existing home sales rose just 1 percent in September in New York
State, but prices increased 6 percent from a year earlier. In
the Kansas City district building activity improved following
several months of decline, but was flat compared with a year
ago. Housing units authorized are above year-earlier levels in
the Minneapolis and St. Louis districts.
The commercial real estate
markets are considered tight in several districts and commercial
construction is increasing. The Chicago, New York and Richmond
districts report low office vacancy rates. The pace of
construction is slightly ahead of a year ago in the Atlanta
district, but the level of activity was uneven across the
Most districts report that
residential and nonresidential construction is constrained by
labor shortages and higher prices on some construction supplies.
The St. Louis district notes that shortages of workers and
certain materials will continue to delay some projects.
Banking and Finance
Most districts report increases in overall loan demand, although
four districts indicate some easing in the demand for consumer
loans. The Cleveland, New York, Richmond and Chicago districts
report a softening in consumer loan demand. Only the New York
district experienced weakness in overall loan demand. Commercial
lending activity increased in the Philadelphia, Richmond,
Chicago and Kansas City districts. The Richmond district reports
that commercial bank lending is driven by continued business
expansion and, in some cases, the anticipation of higher
interest rates. Consumer lending has strengthened in the
Philadelphia, Atlanta, St. Louis and Kansas City districts.
Credit quality is good in the Atlanta district, and bankruptcies
continue to gradually decline. The San Francisco district
reports continued solid credit quality, while in the St. Louis
district many bankers are becoming increasingly concerned about
delinquency rates and have upped their loan loss reserves
accordingly. The New York district reports tighter credit
standards for all categories of loans.
Agriculture and Natural
Most of the country is having a good harvest. The Chicago,
Cleveland, Kansas City and Minneapolis districts all report good
harvest conditions for their crops. Record soybean and sugar
beet crops are projected for some states. Drought has reduced
yields in the Dallas, Richmond and St. Louis districts, but
hurricanes brought much-needed rain to most areas of the East
Coast and too much rain in some areas. The San Francisco
district reports mixed agricultural conditions, with good
conditions for fruits and rice, and poor conditions for
vegetable and grain producers. Farm income, however, remains
depressed as dismal agricultural prices are offsetting the
Conditions for dairy producers
remain strong, report the Cleveland and San Francisco districts.
Meanwhile, cattle and swine herds have benefited from low feed
prices. The Kansas City and San Francisco districts report
favorable conditions for cattle ranchers; however, the Chicago
district reports a sharp decline in the size of the swine
breeding herd. The Dallas district reports most pastures had
limited forage for livestock, and supplemental feeding and herd
reduction continued in most areas.
Oil exploration is on the
rise, with oil rig counts in the Dallas, Kansas City and
Minneapolis districts higher than early summer levels. In
addition, the Minneapolis district reports several iron ore
mines restarting taconite production.
First District -
Business activity continues to
expand at a vigorous pace in the First District. Retail sales
are expanding solidly and most manufacturing contacts' revenues
are up. Retailers, with one exception, say their vendor and
selling prices are steady or even declining, while half the
manufacturing respondents report rising materials costs. Labor
costs may be accelerating somewhat, with manufacturers offering
attractive recruitment packages and slightly higher wage
increases while retailers engage in more raiding. In addition,
manufacturers express concern about sizable projected increases
in the cost of medical benefits.
Most retail contacts report solid sales growth during the months
of July through September. These growth figures, in the middle
single-digit range, are generally better than sales projections
for the period. Inventories are considered to be at desired
levels. Looking forward, retailers are optimistic that consumer
demand will remain strong through the important Christmas
Employment is said to be
holding steady. Most retail contacts continue to say that wages
are growing at a 3 to 5 percent pace. All respondents indicate
that the labor market is very tight and some are having
difficulty finding temporary help for the Christmas season. In
contrast, contacts are having no difficulty hiring or replacing
permanent help, although raiding is reported to be more common.
Most retail respondents say that consumer goods price inflation
is non-existent and that vendor prices are either holding steady
or declining. By exception, hardware prices are increasing
because of manufacturers' price increases. Gross margins are
said to be holding steady.
Retailers are planning modest
capital expansions for next year. Most contacts say that
economic fundamentals are strong and hence they expect steady
economic growth to continue for the next six months. Respondents
in the interest-rate-sensitive construction supply business
report that building contractors indicate they have orders
booked for the next six to nine months.
Manufacturing and Related
Three-quarters of First District manufacturing contacts report
that recent business is up relative to a year ago. Most
suppliers to the semiconductor, telecommunications, biotech, and
construction industries are experiencing double-digit increases
in revenue; otherwise, gains tend to be more modest.
Manufacturers of aircraft components report moderate to weak
demand. Production of industrial machinery and machine tools
remains below year-ago levels. Competition from imports has
forced the closure of some plants in the apparel, textile and
One-half of the manufacturers
contacted indicate that materials costs are rising. The most
commonly mentioned increases are for fuels, plastics, and
petrochemicals; copper and aluminum; and paper and cardboard.
Selling prices are said to be mostly flat. However, some
companies are raising their prices in response to higher costs
for materials and labor, while manufacturers of automotive and
aircraft equipment report that their customers are continuing to
press for price reductions.
Most manufacturing contacts
report steady or rising headcounts, although some large firms
have instituted layoffs. Average pay increases are said to be in
the range of 3 to 6 percent. One-quarter of the respondents
report that production worker turnover is their most serious
problem; they are offering a variety of bonuses, compensation
adjustments, and flexible work schedules to attract and retain
labor. Many companies expect double-digit increases in health
care premiums for next year; some express concern about the need
to restructure benefits.
Most manufacturers expect
their revenues to increase in 2000. Many cite evidence of
turnaround in Asia as a contributing factor. By contrast,
sentiments regarding the U.S. economy have become more mixed and
some contacts have become more proactive with respect to
managing their outlays. The century date change appears to be
having only a minimal effect on most manufacturers' projections.
Residential Real Estate
Real estate contacts say that higher interest rates somewhat
diminished demand for real estate in New England during the past
quarter. The effect of higher interest rates is especially
visible in lower demand for newly built high-end homes in some
greater Boston communities. Most respondents report that markets
are still strong, however, and low inventory continues to be the
major problem in many areas. Third-quarter sales were comparable
to the same period last year and most contacts report modest
price appreciation. Massachusetts contacts indicate that price
growth has slowed in 1999 compared with its 1998 pace. The
market is viewed as "more normal" now than it was
during the previous couple of years. Connecticut continues to be
identified as the weakest residential market in New England,
although contacts there report steadily improving conditions,
with modest price appreciation and lower inventory than a year
ago. Contacts expect modest price appreciation to continue but
anticipate a seasonal slowdown in sales until February or March.
Investment management contacts in the First District report that
total assets under management decreased in the third quarter
because of the reduction in the market values of equity.
Nevertheless, respondents continue to expand employment in the
areas of customer service and technology, areas in which labor
market tightness persists.
Second District - New
Economic growth in the
District has shown signs of slowing since the last report, with
some softening in consumer demand accompanied by ongoing labor
shortages. Consumer price inflation remains subdued, despite
indications of increased cost pressures--prices of manufacturing
inputs continue to rise, and a large employment agency reports
an acceleration in wages. Retailers indicate that sales were on
the weak side in September and the first three weeks of October.
Homebuilders and realtors in the New York City area report that
markets are still strong but have cooled a bit since the summer.
New York City area office markets remain tight, while rents have
Regional purchasing managers
report that manufacturing activity was mixed to weaker in
September while cost pressures intensified further. Banks report
a decline in loan demand and a noticeable tightening in credit
standards, accompanied by continued improvement in delinquency
Retail sales have been mixed but, on balance, slightly below
plan in recent weeks. A majority of retail contacts report that
sales growth slowed in September and picked up only modestly
over the first three weeks of October; on the other hand, two
large chains report that business has been fairly brisk. Some
retailers with sluggish sales blamed part of September's
weakness on mid-month flooding from Hurricane Floyd, though that
was not viewed as the major factor. In general, sales of
consumer durables--home improvement, electronics, appliances,
etc.--were said to be on the strong side, while apparel sales
tended to lag. Despite the modest slowing in sales, inventories
are generally said to be at satisfactory levels. One large chain
reports that its greatest concern is having adequate inventories
on hand by Thanksgiving weekend; while shipping delays appear to
be much less of a problem than last year, there are reports of
minor bottlenecks at West Coast ports.
Selling prices and merchandise
costs are reported to be little changed, on balance, in recent
weeks. However, a number of retailers say that the pricing
environment for the upcoming holiday season is shaping up to be
more competitive than last year; one retailer indicates that
some competitors have already begun discounting merchandise.
Wage pressures remain steady thus far, though a number of
contacts are concerned that they may intensify as seasonal
hiring picks up in November.
Construction and Real
There are signs that the region's housing market has cooled
somewhat from this summer's torrid pace. In New York State,
sales of existing single-family homes slipped in September, and
were up just 1 percent from a year earlier; however, prices were
up by a brisk 6 percent from a year earlier, led by double-digit
gains across most of the New York City area. Based on anecdotal
reports, part of the weakness in unit sales may reflect a dearth
of homes on the market. In Manhattan's co-op and condominium
market, a major realtor reports that demand remains
exceptionally strong, and that there has been a recent increase
in new listings--more people putting their homes on the market.
New Jersey homebuilders report
continued strong demand for both new and existing homes. There
continues to be an unusually long delivery time for new homes,
reflecting shortages of both materials and workers. An industry
expert indicates that homebuyer traffic was affected by severe
weather in September, but otherwise has remained brisk; however,
he notes that there now seems to be less of a sense of urgency
to buy than a few months ago.
Office markets across most of
the New York City area remain tight as a drum. Office vacancy
rates across Manhattan continue to hover at cyclical lows.
Office rents in Midtown and Downtown have risen only modestly
this year, but rents in the Midtown South area (including
Silicon Alley) continue to rise at a double-digit rate. Office
vacancy rates in Westchester and Northern New Jersey edged down
in the third quarter, while Long Island's vacancy rate fell
sharply, to a cyclical low of 7.1 percent.
Other Business Activity
Regional purchasing managers' surveys for September indicate a
mixed but generally weaker picture of the manufacturing sector,
along with heightened cost pressures. Buffalo purchasers
indicate steady growth in new orders and a further acceleration
in production activity in September, along with persistent but
steady increases in commodity prices. Purchasing managers in
both the New York City and Rochester areas report a downturn in
manufacturing activity, along with increasingly broad-based
inflation in input prices.
There is some anecdotal
evidence that the slowing in regional payroll employment growth
in the third quarter may reflect labor shortages. A large
employment agency reports that demand for temporary workers
remains strong but that "effectively, there are no more
temps." The contact describes the labor market as very
tight and notes that the current lack of contingent workers is
now "driving up salaries and fees in full-time job
placement." There has been a pause in demand for computer
specialists, as Y2K needs are slackening, but strong demand is
expected to resume next year. Separately, a recent survey of the
securities industry indicates that technology spending is
expected to increase by 7 percent annually over the next three
years--largely to support on-line investing.
Demand for loans weakened since the last report, according to
bankers at small and medium-sized banks in the District.
Approximately two in five bankers report lower demand while only
one in five indicate higher demand. The weakness in demand was
most pronounced in the consumer and residential mortgage
segments. Refinancing activity continued to slow, with half of
the bankers surveyed reporting declines.
On the supply side, bankers
report tighter credit standards for all categories of
loans--particularly on nonresidential mortgages and commercial
and industrial loans. A large majority of bankers raised rates
on both loans and deposits since the last report. Finally,
delinquency rates continued to drop in all loan sectors, led by
residential and nonresidential mortgages.
Third District -
Third District business
activity continued on an upward path in October. Manufacturers
had increases in shipments and orders, and they reported
stepped-up demand from Asian customers. Retail sales continued
to grow at a solid rate. Auto sales have been steady. Bankers
reported modest gains in consumer and business lending, but a
slowing in residential mortgage activity. Both manufacturers and
retailers indicated that they are having difficulty finding
workers, both skilled and unskilled, and that wages are rising.
Service firms, with the exception of health services, also said
they are having difficulty finding new employees. Some business
contacts said that it is taking longer to fill open positions
now than it did a year ago.
Looking ahead, businesses in
the Third District generally have optimistic views, although
they caution that their expectations could change if financial
conditions become less positive. Manufacturers expect shipments
and orders to continue growing at their current rate, but they
are concerned that costs will rise as well. Retailers expect a
good pace of sales in the fourth quarter, but they predict a
consumer pullback if interest rates rise further. Bankers expect
lending to continue moving up through the end of the year, but
at a slower pace.
Manufacturers in the Third District reported moderate growth in
October, on balance. While half of the firms contacted said
shipments and new orders were steady during the month, one-third
said they had increases. Gains were common among all the major
industrial sectors in the region. Several manufacturers of
industrial products and chemicals noted increases in orders from
customers in Asia. Despite the increase in orders in October,
most of the firms polled during the month reported that order
backlogs were steady.
Employment at plants in the
region has been virtually level. Several companies indicated
that shortages of both skilled and unskilled workers have
restricted their ability to respond to increased demand for
their products. One firm reported that it recently established a
plant overseas because of its inability to find more workers in
Reports of rising costs for
raw materials and supplies have become more common from Third
District manufacturers. In particular, producers of chemical,
food, and paper products indicated that prices for the raw
materials they use have begun to increase. However, according to
the firms contacted for this report, competition among firms is
still keeping output prices in check, putting pressure on profit
The outlook among
manufacturers in the region is positive, although there is some
concern regarding rising input prices. On balance, managers at
area plants expect the current rate of growth in shipments and
orders to continue over the next six months. They are seeking
more workers, and they are planning to increase capital
spending. Nearly half of the firms contacted anticipate
increases in input costs, and half expect costs to remain near
current levels. One-fourth plan to raise prices for the products
they make, but over half will keep prices steady.
Retail sales in the Third District continued to move up at a
good pace in October, according to merchants interviewed for
this report. Several stores indicated that their recent
year-over-year sales comparisons have been in excess of 10
percent, in current dollars. Fall apparel has been selling well,
as have other seasonal items. Some stores noted a pickup in
sales of camping and outdoor goods to customers who fear
interruptions in utility services due to Y2K problems.
Inventories were generally described as in line with plans,
although a few merchants indicated their inventories were
somewhat below desired levels. Reports of labor shortages have
become common among the region's retailers, who anticipate some
difficulty in fully staffing their stores for the holiday
Auto dealers generally said
sales have been running at a high, steady rate in recent weeks,
although some noted slight easing. Inventories were in line with
sales at most dealers, but several noted that the supply of
popular models has not kept up with demand.
Looking ahead, most store
executives expect a strong fourth quarter. Some expressed
concern that recent increases in interest rates and volatility
in financial markets could trim consumer confidence, but most
area retailers said they have seen no sign of a slowdown in
spending yet. Similarly, auto dealers believe sales will remain
at or near the current pace as long as consumer confidence does
Business continued to be good for the region's law firms and
other business service firms. Service companies are adding
workers in a variety of specialty occupations and basic clerical
positions. Information technology professionals remain in high
demand. However, hospitals and health services firms have laid
off workers recently.
Lending officers at Third District banks generally reported
modest growth in lending in October. Lending to individuals for
consumer purchases has picked up recently, but home mortgage
lending appeared to be slowing. Bankers said lending to
businesses was moving up slowly. Lending officers noted that
some of their business borrowers were not achieving the growth
they had been expecting. Partly in response to this development,
some banks said they were reviewing credit standards for
commercial and industrial loans and planned to make them more
stringent. Nonetheless, several bankers said lending for
commercial real estate from a variety of financial firms was
still aggressive in the region.
Looking ahead, most of the
bankers contacted for this report expect consumer borrowing to
pick up seasonally, but they expect some slowing in growth in
other credit categories. Concern about liquidity at the turn of
the year appears to be growing. Several bankers said they were
receiving inquiries about expanded credit lines for December and
January from current business and local government borrowers who
are concerned about payment interruptions due to possible Y2K
problems. Bankers also said they are concerned that depositors'
demand for currency will rise significantly as the year comes to
Fourth District -
General Business Conditions
and Labor Markets
Business activity in the Fourth District remains strong, and
some upward pressure in wages continues to be seen. Larger price
increases are noted for certain commodities in the industrial
sector, but retail prices remain steady.
District temporary employment
agencies reported continued high demand. All contacts face
ongoing difficulty finding and retaining qualified workers.
Agencies noted that, increasingly, firms are retaining temporary
employees on a permanent basis, and in an effort to attract new
workers, the agencies have had to raise wages. Rising wages have
helped entice some workers back into the job market; a technical
training center in Columbus reported that retirees make up a
large share of its computer education classes.
Due to the upcoming holidays,
there has been a large increase in demand for workers in
customer service, warehousing, and distribution. Sources
anticipate that the demand for temporary retail workers during
the holiday season will be even greater than last year's
Wage growth is inching up in
almost all industries covered by collective bargaining
agreements, averaging around 3 �%. Job security and benefits
remain top priorities, and several contacts reported
"dramatic" increases in pension benefits; minimum
pension contributions have more than doubled in the past year
for some employers.
Persistent labor and materials shortages continue to plague
commercial builders, with contacts noting backlogs of 30 to 45
days for some materials--a significant increase from earlier in
the year. Nevertheless, labor and materials costs remain
Most commercial builders noted
improved sales activity within the past six weeks, compared with
earlier in the year. Particular strength was noted in the
Cleveland and Columbus metropolitan areas; some weakness was
reported in Cincinnati.
For the first time in recent
memory, residential builders are beginning to report a softening
in sales volume, with sales in the third quarter of 1999
reportedly down about 10% from the previous quarter. The recent
slowdown in the pace of residential construction is generally
being blamed on higher mortgage interest rates.
Unlike commercial builders,
residential contractors reported that materials and labor costs
are still increasing--each is estimated to have risen 3% to 5%
year-to-date. Materials and labor shortages have also resulted
in longer orders backlogs.
Crop yields were extremely varied across the District in 1999.
In the northern reaches of the District, corn and soybean
harvests were average, or slightly less than average. However,
reports from southern Ohio and Kentucky indicate crop harvests
were 50% to 85% below average.
Recent rainfall in the
District has helped the winter wheat and tobacco crops. Most
tobacco is reportedly in good or fair condition, although yields
are below average. The dairy industry is generally doing well
throughout the District. Milk prices remain high, and feed
prices have come down from earlier in the year. In some areas,
recent rainfall has renewed pasturelands that had been
diminished by earlier drought conditions.
Industrial activity is holding steady or growing moderately in
the District. Production and orders data are generally
favorable, and inventories have come down somewhat from the
summer. Basic commodity prices are rising, a trend that appears
to have begun this summer. Prices were noticeably higher for
steel and paper goods and some chemicals. Shortages are seen for
a variety of skilled trades, but wage growth is said to be
Capital goods producers
continue to see high production levels and a strong orders pace.
Auto-related manufacturing remains exceptionally strong. Some
slowing in the heavy truck market has been seen, and the orders
backlog-which had extended to about a year this summer-has been
reduced by about one-third. Still, orders and production in this
industry remain somewhat high by historical standards.
Agricultural equipment production remains flat.
Most steel companies in the
District report poor third quarter earnings, primarily
attributable to low prices. Mergers and acquisitions are
believed to have deflated the earnings reports a bit. Strong
demand and firming prices are expected to improve conditions in
the industry slightly this quarter.
Retail sales are still showing strong gains overall, although a
few retailers have seen some softening in the first few weeks of
October. Sales in August and September ranged from good to
better, with exceptional sales reported for apparel stores.
inventories are low, but most retailers reported plans to
steadily increase stocks in preparation for the holiday season.
Some also indicate a desire to stockpile larger-than-usual
inventories as a precaution against possible Y2K-related tie-ups
in the supply chain.
Despite the continued strong
sales pace, retailers report steady prices and a very
competitive sales environment. Retailers also indicate having
difficulty finding workers and are anticipating labor shortages
as the holiday shopping season approaches.
Sales of new vehicles slowed
in October, after record sales over the summer. All dealer
contacts reported missing their October sales projections,
although year-over-year sales are still up sharply--between 5%
to 15% from last October. The 2000 model year is selling well,
and most of the 1999-model-year stocks have been liquidated. A
few shortages of some 2000 year models were noted.
Banking and Finance
Lending activity in the District is generally down from the last
District report. Most banks are reporting difficulty attracting
deposits as people move available funds into equity markets. The
loan-to-deposit ratio has risen, reducing banks' ability to
lend, and some sources indicate having tightened credit
standards. Higher interest rates have dampened credit
Loan delinquencies are holding
at a low level and credit quality is high. The spread between
borrowing and lending rates is narrowing in accordance with the
observed long-term trend.
Fifth District -
Fifth District economic activity advanced at a solid pace in
late September and October, despite some easing of growth in
interest-sensitive sectors. Retailers reported stronger sales
and a pick-up in employment while manufacturers recorded
moderate gains in shipments and an increase in capacity
utilization. The services sector reported modest growth in
revenue and employment outside of finance and real estate. At
financial institutions, commercial lending remained strong, but
residential mortgage lending flagged. Real estate activity was
mixed; both residential and commercial markets remained buoyant,
although growth slowed in some areas. Wage growth strengthened
further in many sectors of the economy, while price increases
remained generally subdued. In agriculture, a series of
hurricanes in September and October brought heavy rain and
flooding in eastern regions of the District, and slowed the
planting of small grain crops in Virginia and North Carolina.
Retail sales growth exceeded expectations in late September and
October. Furniture sales were particularly robust, driven in
part by homebuyers moving up to larger homes in recent months. A
retail stock analyst in Richmond, Va., stated that
back-to-school sales were strong in September, and predicted
that solid sales growth would continue into the upcoming holiday
season. District retailers anticipate good holiday sales and a
number have stepped up hiring much earlier than usual in an
attempt to "beat the rush" for holiday sales help.
Wage growth picked up noticeably as retailers sought to expand
payrolls, but retail price increases remained moderate.
Revenue growth in the services sector has been spotty since our
last report. Business services revenues were generally higher,
especially in Richmond, Va., and Charlotte, N.C. However, growth
in finance and real estate activity was trimmed by anticipations
of higher interest rates, and many restaurant and entertainment
businesses in coastal areas of North Carolina and Virginia
experienced sales declines in the aftermath of Hurricane Floyd.
In addition, brisk sales of new cars slowed revenue growth at
automobile repair shops; one South Carolina contact remarked,
"No one needs to fix a car when they're all brand
new." Employment at services producing firms was flat since
our last report, while substantial wage growth persisted.
District manufacturing activity generally grew at a moderate
pace in September and October, even though softness remained in
some industry segments. Shipments and capacity utilization
levels increased; production was particularly strong in the
printing and publishing, fabricated metals, industrial
machinery, and rubber and plastic industries. A North Carolina
producer of industrial machinery said that his company had
recently scheduled an additional shift because of a surge in its
custom fabrication business. In contrast, textiles and apparel
producers continued to report weak demand and production
overcapacity--particularly in denim lines. According to a North
Carolina producer, excess denim manufacturing capacity has
caused a "price war" for those product lines. He
expected six months or more of difficult market conditions
ahead. In labor markets, manufacturing employment and wage
growth held steady, while the average workweek fell. Prices paid
for raw materials rose, in part because of substantial increases
in petroleum prices.
District bankers reported that commercial loan demand remained
strong in September and October, while the demand for home
mortgages eased. Commercial bank lending was driven by continued
business expansion in the District and, in some cases, the
anticipation of higher interest rates. A Charlottesville, Va.,
banker noted that his commercial business borrowers were
securing loans now, "before rates go up further."
Although mortgage rates have not advanced substantially since
our last report, mortgage lenders indicated that earlier rate
increases had cooled loan demand. Mortgage refinancings, in
particular, were down considerably. Competition for residential
mortgage customers intensified; a banker in Greenville, S.C.,
noted that he was seeing more competition from lending
affiliates of large national home building firms.
Residential real estate activity in the District remained at a
high level, although the pace of sales activity eased in recent
weeks. Realtors said that people are taking a little more time
to purchase a house now, and, in the words of a central North
Carolina realtor, "
are looking for less house."
Some of the slowdown in that state can be attributed to
Hurricane Floyd, which slowed real estate activity in eastern
North Carolina but had little effect on markets in other areas.
Shortages of labor and building materials persisted in some
areas, but wallboard was said to be somewhat more available.
Construction labor costs rose slightly, especially in the
Tidewater Virginia area.
Commercial real estate
activity was mixed since our last report. A contact in southern
Maryland reported a slowdown in office and retail leasing; in
contrast, a realtor in the Maryland suburbs of the District of
Columbia said any Class A office space coming on the market was
pre-leased. A realtor in Charlotte, N.C., told us that office
construction continued in suburban areas, and that the supply of
Class A office space was tight downtown. Vacancy rates generally
changed little, except in Richmond, Va., where realtors reported
that Class A space was being "eaten up," by a large
financial services company.
Tourist activity strengthened in mountain areas of the District
but weakened along the coast after three hurricanes brought
extensive flooding to coastal areas. A contact on the Outer
Banks of North Carolina reported a decline in bookings in both
September and October and noted that tourist activity had simply
lost momentum in the aftermath of Hurricanes Dennis and Floyd. A
Virginia Beach hotelier reported a 16 percent decline in
occupancy due to inclement weather. Resorts in mountain areas,
however, benefited from the storms; a contact at a mountain
resort in Virginia reported that tourism in that area
strengthened as vacationers escaped the battered coast and
headed for the mountains.
The demand for temporary workers remained high since our last
report, while the supply of qualified workers shrank further.
Contacts in Virginia and the Carolinas reported increasing
turnover among temporary employees as these workers pursued
higher paying job opportunities. Wages for temporary workers
rose at a faster pace since our last report, but wage growth was
not expected to accelerate substantially in coming months.
The hurricanes brought heavy rains to farmland in most of the
District. With the exception of West Virginia, soil moisture
levels are now generally either adequate or surplus. In
addition, the recent weather conditions were favorable to the
fall planting of the Maryland, West Virginia, and South Carolina
small grain crops. In contrast, wet fields continued to hamper
planting of small grains in Virginia and North Carolina. Peanut
harvesting activity is behind schedule in Virginia and the
Carolinas, as is the harvesting of cotton. Wet weather also led
to a poor pumpkin crop, as the gourds rotted in many fields.
Pasture and livestock conditions continued to improve in South
Carolina and Virginia, but remained poor in West Virginia.
Sixth District -
The southeastern economy posted mixed growth into fall, and the
outlook remains mostly upbeat. Merchants' sales have, on
balance, met expectations, and contacts anticipate that fourth
quarter sales will outpace those of a year ago. Residential
construction and sales were nearly unchanged from the previous
month, while commercial building was ahead of last year in most
markets. Advance bookings for the tourism and hospitality sector
are disappointing in parts of the District. Overall
manufacturing activity increased recently, but weakness persists
in certain sectors. Bankers report mostly strong loan demand.
Tight labor markets continue to plague District employers, but
there are few reports of accelerating wage pressures. Prices
remain stable, with a few exceptions.
Sales results during September and early October have been
decidedly mixed as about half the retailers contacted said sales
were down from a year ago, while the remainder experienced
increases. However, most merchants said that recent sales have
met their expectations and inventories are balanced. The
strongest sellers recently have been women's and children's
apparel, while home-related product sales have varied across the
region, and men's apparel sales have made a poor showing.
Looking to the fourth quarter, a majority of retailers
anticipate sales will be up slightly compared with last year.
The pace of single-family construction in October was similar to
September, while new home sales weakened. Reports indicate that
construction levels are especially weak in Louisiana and
Mississippi. Realtors indicate that new and existing home sales
in September and October have been mixed across the region with
a slight improvement noted in October. The majority of contacts
said that home inventories are currently balanced. Looking
forward, most builders expect construction levels to be similar
to, or slightly below, last year's levels through the end of the
year. The pace of District multifamily construction remains
similar to our last report, up modestly from a year ago.
The pace of District
nonresidential construction is slightly ahead of a year ago but
varied across the different states in the District. Contacts in
Florida, Georgia, and Tennessee report that construction
continues to slow but remains above year-ago levels. In
Louisiana, construction activity is similar to last year's
level, while in Alabama and Mississippi construction continues
at below year-ago levels. Vacancy rates are on the rise in the
Atlanta office and industrial markets as well as the Orlando
Manufacturing activity increased moderately since the last
Beigebook. Most contacts noted increases in production and new
orders; reports pertaining to the near-term factory outlook were
also positive. New military weapons contracts are expected to
boost employment rolls in Mississippi and Alabama. Shipyards in
Louisiana are reportedly operating at 100 percent capacity
because of large long-term contracts. Stabilizing paper costs
are helping District printers, but there is concern about
business loss to electronic media. Less positively, the factory
workweek and shipments are declining for an appliance producer,
perhaps indicating some slowing from national residential
housing markets. Several contacts said that hurricanes caused
lost factory production days in the District. However, demand
increased for lumber and wood products because of storm damage
Tourism and Business Travel
The outlook for the tourism and hospitality industry, while
good, is a little less positive than before. Some south Florida
resort and hotel owners are disappointed with advance bookings
for the upcoming tourist season and are pessimistic about
exceeding last year's results, speculating that some tourists
are reluctant to make plans until after Y2K. Bookings for the
"Turn-of-the-Year" are said to be disappointing. In
Atlanta, 1999 is reportedly shaping up to be the best year the
city has ever had for conventions, but bookings are down for the
year 2000 partly because of competition from other cities with
new or expanded facilities. Gaming revenues along the
Mississippi Gulf Coast are at record levels and are expected to
outpace those of a year ago by double-digits.
Bankers report that overall loan demand and lending remains
strong throughout the Southeast. Consumer and automobile lending
remain very strong, commercial lending has moderated, and
mortgage and refinancing loan demand are subdued. Banking
contacts around the District report that credit quality is good,
and bankruptcies continue to gradually decline; however, there
were reports that some bankers are showing an increasing
willingness to accept higher risks in making loans and are
making some concessions on loans and borrower qualifications.
Wages and Prices
Contacts continue to note problems with tight labor markets, but
there are few reports of accelerating wage pressures. One
contact reports that the use of excessive overtime to make up
for labor shortages is causing morale and productivity problems.
Competition for new and replacement employees is reportedly
intense in Miami, Jacksonville, New Orleans, Atlanta, and
Nashville. Skilled construction workers, nurses, and information
technology professionals remain in especially high demand.
Contacts expect no significant
changes in the prices of inputs or outputs for the near term
with only a few exceptions. Health insurance premiums and
pharmaceuticals prices are expected to continue on an upward
trend. Some contacts say that the cost of higher oil prices is
cutting into profits more than impacting the pricing of goods
and services because of the competitive marketplace. An
"abundance of work" is keeping construction materials
prices high in parts of the District.
Seventh District -
The Seventh District's expansion appeared to slow modestly in
September and early October as consumer demand moderated. Retail
sales were below what most retailers had expected and reports
from District auto dealers became mixed. Construction and real
estate activity slowed on the residential side, but most
contacts indicated that the market was still
"healthy." Manufacturing activity was steady at very
high levels of production. Overall loan demand remained strong,
despite some softening on the consumer side related to slowing
in mortgage lending. Labor markets appeared to tighten further
and reports of intensifying wage pressures became more frequent.
The fall harvest was proceeding rapidly thanks to dry weather,
and yields were turning out better than many had anticipated.
District hog farmers reduced the size of their breeding herds
relatively more than farmers in other states.
Overall consumer spending slowed in September and early October,
with sales results falling below most merchants' expectations.
Many contacts suggested that warmer-than-usual temperatures
negatively impacted sales of seasonal items and apparel. Some
retailers, however, noted an exceptional pickup in sales of
men's apparel. Home-related items (electronics, appliances,
furniture, etc.) remained some of retailers' strongest selling
items. Despite slower-than-expected sales, inventories were
described as being at or slightly below last year's levels, and
there were no reports of increased promotional activities. Most
retailers, citing unwavering consumer confidence, were very
optimistic about the upcoming holiday shopping season. Reports
on District light vehicle sales were mixed with some dealers
indicating that sales remained strong, while one large District
auto group reported that "October (sales) slowed up,
hard." This contact also noted that for the first time in a
long time they will not be taking manufacturers' full allotment
of new vehicles.
Construction and Real
Overall construction activity slowed modestly as both the
residential and business segments showed some signs of
softening. Realtors reported that existing home sales had peaked
and were decreasing slightly, as buyers became concerned about
interest rate increases. A realtor in one of the District's
largest metro areas reported that year-to-date sales through
September moved roughly even with 1998's results, after running
ahead of last year's sales pace through August. One contact
reported that in recent months there had been a discernible
increase in condominium purchases by investors who planned on
either renting the units out or turning them around quickly for
a profit. This contact suggested that this was holding down
rents on two-bedroom apartments in the market. Growth in
commercial construction slowed modestly, but remained robust.
One contact noted a slowing in retail development even as
vacancies in this segment continued to decrease. Office
vacancies also remained very low in most metropolitan areas, but
rental rates were not rising as fast as some analysts had
The auto industry continued to lead the way as overall
manufacturing activity remained very strong in September and
early October. Automakers expected sales nationwide to remain
strong in the fourth quarter, which kept production steady at
very high levels in recent months. Inventories were generally
lean, notably for some passenger car models. Despite continued
strong sales, pricing power remained soft for the auto industry
with very little increase in sticker prices and continued heavy
use of incentives. The steel industry continued to rebound from
1998's difficulties. The inventory overhang resulting from
record imports late last year has been worked down as prices
continued to firm and new orders remained strong. Demand for
consumer durables, such as small appliances and lawn equipment,
was strong although one contact noted a "gentle,
gentle" softening in demand for appliances. Production of
heavy trucks remained robust, but industry contacts noted that
inventories were building and could lead to slower production in
the coming months. Demand for construction equipment was
reported to be strong, but softening somewhat, and new orders
for farm machinery remained very weak. Producers of construction
materials reported that new orders remained very strong as these
industries continued to run near capacity.
Banking and Finance
Overall lending activity remained strong in recent months,
although some slowing was noted on the consumer side. Home
refinancing activity has dropped off precipitously as mortgage
interest rates increased. Refinancing applications at one large
money center bank, which earlier in the year accounted for
nearly 80 percent of total mortgage applications, fell to 11
percent in recent weeks. At the same time, lenders reported that
home equity lines of credit were increasing. One bank noted
improved consumer loan quality resulting from the bank's efforts
to tighten standards in recent months. On the business side,
most contacts indicated that loan volume continued to rise
steadily and demand remained strong. One bank noted a pickup in
sizable lines of credit to firms with international exposure,
who are hedging against Y2K-related problems that may develop
abroad. Standards and terms for business loans remained
unchanged for the most part, although one bank did report some
tightening of standards.
Labor markets remained tighter than the nation as a whole in
September and early October amid more frequent reports of
intensifying wage pressures and increases in non-wage labor
costs. Contacts in industries ranging from casual dining,
automobile dealerships, and temporary help agencies reported
that wage pressures were intensifying. One staffing service firm
indicated that wages were up 10 to 20 percent "across the
board since July." This contact reported that the company
had to absorb this increased cost for existing orders, but was
passing it along to new customers. In addition, a few contacts
reported that non-wage labor costs, particularly for health
insurance, were rising noticeably. Demand for workers remained
strong across industry sectors with the exception of
manufacturing, where some pockets of softness continued. A large
shipping firm suggested that the dearth of truck drivers, and
potential drivers, was leading to softer demand for heavy
trucks. Increasing layoffs and upward-trending unemployment
rates were reported in a few of the less-diversified, highly
industrialized metropolitan areas, especially those highly
reliant on farm machinery production.
The fall harvest was moving rapidly throughout the District in
mid-October and was well ahead of the average pace thanks to dry
weather. The favorable weather also helped lower fall expenses
by reducing the amount of natural gas required to dry grain for
storage. However, the dry weather also hurt pasture conditions
in Indiana and Illinois. Several agricultural bankers reported
that yields were better than expected, contributing to tight
storage availability in some areas. One grain elevator near
Sioux City, Iowa had already placed several thousand bushels of
corn on the ground as of mid-October. The Hogs and Pigs
report released near the end of September confirmed the industry
is in a liquidation phase that began three months earlier.
District states registered an especially sharp decline in the
size of the breeding herd. The number of breeding animals
dropped 20 percent in Illinois and Wisconsin, was down 11
percent in both Indiana and Iowa, and declined 8 percent in
Michigan. In comparison, states outside the District reported an
aggregate decline of 6 percent in the size of the breeding herd.
The value of U.S. agricultural exports is projected by the USDA
to increase 2 percent during fiscal year (Oct.-Sept.) 2000.
However, gains are expected to be marginal for District farmers
because an increase in the export value of soybeans, meal, red
meats, and dairy products will likely be offset by a decline in
the export value of corn and soybean oil.
Eighth District - St.
The District economy continues to operate at what appears to be
full capacity. Contacts have noted some moderation in growth
lately that they attribute partly to ongoing shortages of
workers. Examples of upward wage pressures have recently become
more frequent. Home sales continue to be strong in most parts of
the District, although pockets of weakness are popping up.
Commercial real estate markets remain robust. Consumer loan
demand is boosting loan growth moderately at banks, although
bankers are becoming increasingly concerned about delinquency
rates. The fall harvest is ahead of schedule for most crops,
although yields are generally below average.
Manufacturing and Other
District contacts report that growth has moderated slightly in
the past two months, partly because tight labor markets continue
to limit production at many firms, especially small ones.
Ongoing record low unemployment rates have forced many firms to
search for workers outside their local areas. FedEx, for
example, reports recruiting hourly workers from outside the
Memphis region. Firms also continue to use cash bonuses to
attract and retain workers. Concerns about finding a sufficient
number of qualified workers have delayed some firms' expansion
Contacts report that upward
wage pressures have picked up recently-in some cases, wage
increases are approaching 6 percent. Contacts also note that
health care costs are rising dramatically, and hikes of 10 to 15
percent are common. Rising pharmaceutical costs are a primary
Strong sales growth has been
reported in the plastics and building-materials industries.
Computer hardware- and software-support companies are also
flourishing, with many high-tech firms moving into, and
expanding within, the District. Truck producers continue to
enjoy a boom, with year-to-date sales through September topping
Despite the overall robust
economy, several plant closings and downsizings have also been
reported. Declining demand for major household appliances has
led to ongoing workforce reductions at General Electric. Even
though the poultry market has recently rebounded somewhat,
poultry prices are still off about 20 percent from a year
earlier. Cutbacks in the industry are expected. Because of poor
conditions in the agricultural sector, farm equipment dealers
have seen demand fall off sharply and inventories rise to
unusually high levels.
Real Estate and
Although most residential real estate agents report that home
sales around the District remain strong, with many areas
continuing to experience growth, some agents have noted a slight
weakening. Inventories of available homes have grown recently in
several areas, especially Memphis, relieving some of the
shortages that had existed for much of this year.
After a moderate decline in
July, monthly residential building permits rebounded sharply in
August, spurred by strength in the multi-family housing market.
Year-to-date residential permits are above their year-earlier
levels in almost all District metropolitan areas. Many
contractors are still concerned, though, that ongoing shortages
of skilled workers and certain materials will continue to delay
Commercial real estate markets
remain strong. However, some commercial real estate agents
report that the demand for industrial space is not being met
because rental rates in some areas have not yet risen enough to
justify new construction.
Banking and Finance
Total loans outstanding at a sample of large District banks grew
less than 2 percent between mid-August and mid-October. This
growth came entirely from consumer loans. Real estate loans were
unchanged, and commercial and industrial loans were down mildly.
Recent conversations with contacts at small and mid-sized banks
revealed that deposits have picked up recently and that loan
demand remains strong, particularly for consumer loans. Many
bankers are becoming increasingly concerned about delinquency
rates, especially for agricultural loans, and have upped their
loan loss reserves accordingly.
Agriculture and Natural
Despite recent rains, fall harvest conditions have generally
remained quite favorable throughout the District. For example,
the District-wide corn harvest, and the cotton harvest in
Arkansas, Mississippi, Missouri and Tennessee are ahead of both
last year's paces and their five-year averages. The soybean
harvest is also ahead of schedule in all District states except
Persistently dry conditions in
August and September, however, have reportedly reduced soybean
yields below last year's levels in most District states. Cotton
growers are experiencing lower-than-average cotton yields. In
addition, they are worried that below-average crop quality will
exert downward pressure on revenue. Corn yields in Arkansas,
Illinois, Mississippi and Tennessee, on the other hand, are up
from a year earlier. Early reports suggest that rice yields will
be either average or slightly below average this season. A
shortage of subsoil moisture in Illinois may hinder the
emergence of the winter wheat crop.
Ninth District -
The overall Ninth District
economy remains highly charged, although agriculture's batteries
are running low. Construction, consumer spending and
manufacturing are energizing the economy. Moreover, the mining
and energy industries are recently showing signs of recharging.
However, low prices are reducing the power of this fall's
bountiful harvest. Meanwhile the tight labor markets are
generating wage pressure as several businesses report boosting
worker pay. Overall prices remain level but the cost of some
items is accelerating.
Construction and Real
"Construction is still going strong," said a North
Dakota builder, which describes the current state of
construction throughout the district. A Wisconsin bridge-girder
manufacturer will expand operations by over 10 percent due to
increases in federal funding for bridges over the next five
years. A $20 million amphitheater project is planned for a
Minneapolis suburb. In Minnesota and the Dakotas, construction
contracts awarded rose 3 percent in the three months ending in
August from a year earlier. District housing units authorized
grew by 3 percent in the three months ending in August from a
Consumer Spending and
Consumer spending is robust. Sales are up 7 to 10 percent
compared to a year-earlier at a large Minneapolis area mall, and
up 10 percent at a regional mall in Fargo, N.D. Several large
retailers are expecting holiday sales to increase 10 to 15
percent over 1998 levels. Auto sales are level with last year in
North Dakota. The consumer market for educational games is
"very, very strong," reported an advisory council
member. However, retail sales are weak in agricultural areas of
northeast Montana, according to a bank director.
Fall tourism is steady across
most of the region. Northern Wisconsin is on par with a year
earlier following a strong close to the summer season. A chamber
of commerce representative in northwest Minnesota reports
increases in tourism traffic compared to a year earlier. Hotel
occupancy and visits to attractions are flat to down slightly in
South Dakota compared to year-earlier levels, but tourists are
spending more than last year, according to a tourism official.
Montana tourism is steady overall, but summer tourism finished
down in Glacier National Park and other northern destinations
compared to a year earlier.
Manufacturing in the Ninth District remains robust, with many
manufacturers reporting strong sales and expansion plans. A
Minnesota home improvement product manufacturer plans to add new
equipment and staff to meet rising demand for its products. A
Wisconsin plastic products manufacturer reports an increase in
both sales and development and is considering building another
plant. A North Dakota equipment manufacturer reports
year-to-date sales up 5 percent as compared to last year. A
Wisconsin industrial products manufacturer is expanding
production capacity due to increases in product sales. In
addition, an October St. Cloud State University (Minnesota)
survey reveals an increase from the previous survey of hours
worked at area manufacturing establishments.
Mining and Energy
The metal-based mining industries are starting to rebound as
evidenced by increases in iron ore production. Increases in
steel plant utilization and reductions in iron ore inventories
have spurred some iron ore mines to reopen. A Minnesota iron ore
mine production line reopened in September and two Michigan iron
ore mines reopened in October. Most mine workers have agreed to
a five-year contract, which should reduce the risk of work
Meanwhile, oil exploration
activity has picked up. In October, 10 rigs were operating in
North Dakota, three rigs in South Dakota and four rigs in
Montana as compared to four, zero and four, respectively, in
July. In addition, August oil production in the district was up
2 percent from June production levels.
Current crop production forecasts for the district suggest a
bountiful harvest. Expected soybean, hay and sugarbeet
production for Minnesota, the Dakotas and Montana in 1999 is
above the hefty 1998 harvest levels. However, expected 1999 corn
production in Minnesota and the Dakotas is 10 percent below the
record 1998 harvest amounts, and 1999 small grain production in
North Dakota is significantly below 1998 levels. Farm income,
however, remains depressed as dismal agricultural prices are
offsetting the bumper crop.
Employment, Wages and
"There is more stress on finding help than customers,"
reported a mall manager in North Dakota, a theme heard across
the district. A South Dakota state labor official said that
employers are "looking for good prospects, and they're hard
to find. I don't see anything changing that." Economic
development officials in Fargo, N.D., reported that businesses
may soon pool resources to offer scholarships or pay off school
loans to attract employees. Even though significant layoffs are
reported in La Crosse, Wis., employers in the region still cite
difficulty in finding labor. A St. Cloud State University survey
reveals that 55 percent of survey respondents indicate that it
was more difficult to attract qualified workers in September
than it was three months earlier.
Wages and salaries are
increasing in response to tight labor markets. Some employers in
the district are offering starting bonuses for entry-level
retail positions. A medical center in La Crosse, Wis., reports a
4 percent hike in wages. Union workers at food plants in
southern Minnesota negotiated over a 2 percent raise each year
for four years, and a 12 percent increase in starting pay.
Montana directors reported wage pressure for middle-management
and retail positions, and local unions are bargaining for higher
wages. Several Montana industries, however, report steady wages.
Some product prices are
increasing; however, the upward pressure on wages isn't spilling
over to most prices. An informal survey of manufacturers in
Minnesota and Wisconsin indicates that input and product prices
are largely holding steady. High productivity and low prices on
products coming from abroad are restraining overall price
increases. Exceptions include climbing construction-input costs,
health insurance costs, milk prices and gas. Health insurance
costs are expected to increase 12 percent next year reported an
advisory council member. Corrugated paper prices are expected to
increase 10 percent next year, reported another advisory council
member. Costs for residential heating oil and natural gas are
expected to increase this winter.
Tenth District -
The district economy slowed further in late September and early
October. However, the overall level of activity remained solid,
at a level similar to a year ago. Retail sales declined but are
expected to pick up heading into the holiday season.
Manufacturing activity slowed from a strong August, and the
construction sector showed signs of improvement following flat
growth during the summer. In the farm economy, the fall harvest
is on schedule, but big grain crops could continue to hold down
crop prices. Labor markets in most of the district remained very
tight, and reports of wage pressures were slightly higher than
in recent surveys. Retail prices edged down, while prices for
some construction and manufacturing materials continued to rise.
Retailers in the district reported a decline in sales, following
flat activity in the three previous surveys. Sales of men's
business wear were particularly weak, while appliances sold
well. Inventory levels continued to expand and are expected to
rise further, as stores gear up for the holiday season. Motor
vehicle sales remained strong in most parts of the district,
particularly for trucks and SUVs. Expectations for future
vehicle sales weakened from earlier in the year. Vehicle
availability was only a concern for some models of light trucks.
District factory activity slowed after making some progress in
August. While most plants were still operating at medium to high
capacity, fewer contacts than in the previous survey reported
high levels of capacity utilization. Manufacturing materials
remained generally available, but lead times increased for steel
and some other metals. Concerns about future material
availability remained low. Managers were much more satisfied
with inventories, and most plan to continue trimming stock
levels in coming months.
Building activity improved following several months of decline,
but was flat compared with a year ago. Builders expect a typical
seasonal downturn in activity heading into the winter months.
Material availability problems eased somewhat from previous
surveys, but gypsum board and insulation remained scarce in some
areas. Home sales declined, and inventories of unsold homes
built up in some rural areas. Mortgage demand continued to fall
as refinancing activity has slowed substantially with rises in
Bankers report that loans increased and deposits held steady
last month, raising loan-deposit ratios. Demand increased for
commercial and industrial loans, commercial real estate loans,
and consumer loans. Demand for home mortgage loans fell. On the
deposit side, increases in demand deposits and MMDAs were offset
by a decline in large time deposits. A few respondent banks
raised their prime lending rates and consumer lending rates last
month, but most banks held rates steady. Almost half the banks
expect to increase their prime rate and consumer lending rates
in the near future. Lending standards were unchanged.
District energy activity continued to improve, as energy prices
remained high. The rig count in mid-October was nearly as high
as a year ago and 60 percent above the March low, as both oil
and gas prices remained well above year-ago levels.
The district's fall harvest is on schedule. Corn and soybean
yields in much of the district are better than normal, but
cotton yields are well below normal due to dry weather. The big
grain crops promise to hold crop prices down in the months
ahead. The lower prices, however, have trimmed feed costs and
boosted profits for cattle feeders. Despite the bigger profits,
cattle ranchers have not begun to enlarge their herds as
expected. Low hog prices have forced many of the district's
small-scale hog producers out of business, and many remaining
producers operate under contractual arrangements with food
companies. District bankers report farm loan portfolios are
generally stable, but repayment of farm loans may slow unless
farm incomes improve. The bankers also report slower business
activity in many farm dependent rural communities.
Wages and Prices
The district's weaker economic activity in recent months has not
eased labor markets much, since labor force growth in the region
has also slowed substantially. Most contacts continued to report
difficulties filling positions. Some manufacturers noted an
increase in the availability of production workers, but
retailers and builders reported continued difficulties in
finding sales associates and skilled tradesmen. The number of
contacts reporting increased wage pressures was up slightly from
the three previous surveys. Retail prices edged down but are
expected to inch up as the holidays approach. Prices for some
manufacturing materials continued to increase and are expected
to rise further in coming months. Prices for construction
materials also continued to rise, although not as quickly as in
the last six months.
Eleventh District -
In September and early
October, Eleventh District economic activity expanded at about
the same pace as reported in the last beige book. Manufacturing
activity accelerated slightly, and demand for oil services
continued to increase at a slower pace than drilling activity.
Demand for services was steady and strong, while credit
conditions, deposit growth and demand for loans were stable.
Retailers reported that sales growth was slightly slower but
still strong. Construction activity was slightly slower, and
drought caused increasing problems for agricultural producers.
Prices of labor, services and a few goods rose, but most other
prices were steady or down. Contacts across many industries
reported difficulty finding and keeping workers. Retailers
reported that entry-level turnover was 200 to 300 percent a
year. A trucking firm reported that some trucks are standing
idle because labor is so scarce. As a result, wages rose in many
service industries, such as retail and auto sales, business
services and trucking and air transportation. However, only a
couple of goods-producers increased wages (by 5 to 20 percent.)
Prices of memory chips rose 25 percent from a few months ago.
Petrochemical prices increased, but contacts expected a decline
in coming months with increases in production capacity. Aluminum
prices rose 2 to 3 percent, and business service contacts
encountered less resistance to fee increases. Prices of clay,
fabricated metal, apparel, paper and food products, office space
and transportation services were steady. Prices of oil, gasoline
and natural gas fluctuated over the past six weeks, but returned
to about the same levels as reported in the last beige book.
Retail prices were slightly lower, and telecommunications
equipment and services prices continued to fall. Prices of
lumber and wood products fell 4 to 5 percent over the past three
months, and timber prices also fell seasonally. Cement prices
fell by as much as 12 percent in some locations.
Manufacturing activity accelerated slightly in the past six
weeks. Semiconductor sales growth picked up slightly, in part
due to increased sales of wireless phones and the usage of more
chips in each phone. Contacts reported that memory chip
production from Taiwan was back on line following the September
earthquake, but users of memory chips have increased their
inventories in case of further supply disruptions. Sales of food
products, finishing woods and apparel rose. Sales of some
petrochemicals rose with improved demand in Asia. Demand for
timber and lumber was steady, but stronger than last year, in
which firms saw declines associated with the Asia crisis. Sales
of primary and fabricated metals, boxes and packaging materials
were unchanged. Sales of concrete declined in a couple of areas
but were stable elsewhere, and contacts reported that cement
inventories were too big. Sales of clay products were steady,
with the exception of brick sales, which weakened due to softer
home sales and backlogs in brick production.
Demand for services was steady and strong since the last beige
book. Temporary services contacts reported continued increases
in demand for temporary workers for the energy sector, continued
strong demand for workers with high-tech skills and steady
demand for manufacturing workers following an increase in the
summer months. However, growth in customer service and
IT-related jobs slowed as Y2K-preparation work was completed.
Legal and accounting contacts reported strong and steady
activity, boosted by transactions, utility deregulation and
construction of government and school buildings. However, trial
work has been depressed recently. Railroad cargo volumes were up
over the past month, and trucking activity was steady and strong
but weaker compared to early this year. Passenger airlines
reported that while earnings were hurt by the hurricanes, demand
Retailers reported weaker sales growth in the first half of
October than in September. Several retailers said that, despite
this softening, sales were still strong. While no inventory
problems were reported, a few said that October sales were below
projections and one contact worried that inventories might swell
if sales growth continued to decelerate. Contacts said they
expect good sales growth through Christmas. Auto sales remained
at very high levels.
Credit conditions, deposit growth and demand for loans were
stable over the past six weeks. While higher interest rates
dampened lending growth, contacts reported that auto, real
estate and home equity lending remained at high levels. A
contact in the securitization industry said some major financing
companies will cut office financing from November through
January because of their expectations that Y2K-related
uncertainty could cause interest-rate gyrations which they want
Construction and Real
Construction activity was slightly slower in recent months, with
fewer commercial projects being started. In some areas, builders
reported that shortages of labor and materials, and backlogs of
unbuilt homes had subsided somewhat. New home sales slowed but
remained strong over the past few months, as higher mortgage
rates dampened demand. Contacts reported that this softening in
home sales may have boosted absorption of multifamily units.
However, completions of new apartments are expected to outpace
demand over the next year, leading to a slight decline in
occupancy rates. New office construction has outpaced absorption
in Houston and Dallas, lowering occupancy rates a bit.
The domestic rig count rose 7.5 percent over the past six weeks,
but the increase in demand for oil services was not as great, as
the new drilling remained onshore, shallow and gas-directed.
Offshore and international oil services work continued to
decline slightly. This lack of response to higher oil prices was
attributed to several factors: expectations that price gains
were temporary, mergers that drew resources away from other
investment, and the inability of some independents to obtain
financing after they violated their loan covenants during the
most recent period of low oil prices.
Drought is a growing problem for agricultural producers.
Harvesting continued, but land preparation slowed due to a lack
of moisture. Most pastures had limited forage for livestock, and
supplemental feeding and herd reduction continued in most areas.
Twelfth District - San
Reports from contacts indicate continued strong performance from
the Twelfth District economy in recent weeks. Sales of retail
merchandise and services reportedly were rapid in most District
states during the recent survey period and respondents noted a
pickup in District manufacturing activity. Conditions among
District agricultural producers were mixed, as prices improved
for ranchers but remained poor for farmers. Conditions in
District real estate markets were strong overall, although
slower home sales tempered growth in construction in some
states. District financial conditions remained healthy, and
competition for quality borrowers continued to be intense.
Throughout the District, respondents reported difficulty finding
and keeping qualified entry-level and skilled workers.
District respondents expect continued strong performance in the
national economy and their respective regional economies during
the next four quarters. Most respondents expect national GDP
growth to return to its long-run average pace, leaving the
national rate of unemployment at or near its current level.
Still, an increasing number of respondents expect inflation to
edge up in coming quarters. Although one-half of District
respondents still expect economic growth in their region to
outpace growth in the national economy over the next year, a
growing number of respondents expect growth in their region to
slow to the national pace. Most respondents anticipate little
change in the strength of business investment and consumer
spending in their areas. In contrast, nearly two-thirds of
District respondents expect housing starts to slow in coming
months, a larger share than in the previous survey.
Retail Trade and Services
Sales of retail merchandise reportedly were rapid in most
District states during the recent survey period. Respondents
noted robust sales of food, pharmaceuticals, home furnishings,
home electronics, and appliances. In contrast, sales of apparel
slowed in recent weeks, as unseasonably warm weather damped
shoppers' appetites for fall and winter fashions. Retailers
commented that inventory levels were generally sufficient, with
few problems obtaining merchandise from suppliers. However,
respondents noted that wholesale prices are rising on several
types of products, most notably food and pharmaceuticals.
Conditions among District service providers remained strong in
recent weeks. Respondents reported robust demand for
telecommunications, Internet-related services, and cable
television services. Demand for shipping and freight services
increased in many District states, as exports to East Asia
continued to improve. In contrast, growth in tourism slowed in
Utah and Southern California, boosting hotel vacancy rates in
Throughout the District,
respondents mentioned difficulty finding both entry-level and
skilled retail trade and service employees. Moreover, training
times and employee turnover are increasing. Respondents noted
that many firms are paying existing employees commissions for
finding new hires and that signing bonuses, stock options, and
year-end bonuses are now a must in hiring skilled information
Manufacturing contacts throughout the District experienced solid
gains, as expansions in petrochemical production, paper
processing, and steel manufacturing augmented ongoing growth in
high-technology equipment manufacturing. Rapid growth in demand
for year-end publications and business and government forms
apparently has increased orders for paper products in recent
weeks, raising prices and producing occasional shortages of
materials, such as titanium dioxide, the primary whitening
pigment for paper. Respondents reported that orders for domestic
steel products rose in recent weeks. Demand for
telecommunications and computer equipment remained strong and
respondents noted that order backlogs are growing. Respondents
pointed out that supplies of several key inputs to high-tech
manufacturing, most notably memory chips, were interrupted by
the recent earthquakes in Taiwan. Decreased supply has boosted
chip prices, but according to respondents, higher input prices
have not been passed on to final sales prices.
District agricultural producers reported mixed conditions during
the most recent survey period. Conditions for cattle ranchers
continued to improve in recent weeks. Beef producers have
benefitted from strong sales, increased prices, and stable
costs. Conditions also have been favorable for District dairy,
stone fruit, citrus, avocado, and rice producers. In contrast,
low commodity prices and poor growing conditions continue to
affect wheat, cotton, sugar beat, and vegetable growers.
Respondents throughout the District reported significant
difficulties obtaining seasonal agricultural workers.
Real Estate and
Real estate construction and sales activity remained at high
levels in most District states, although the pace of growth
reportedly slowed, particularly for residential properties.
Contacts in many District states noted that home sales have
slowed and sales price appreciation has decelerated from earlier
in the year, tempering growth in new residential construction.
The notable exceptions to the slowdown in residential markets
are the San Francisco Bay Area and Phoenix, Arizona. A number of
contacts noted that a slowing rise in residential rental rates,
both of apartments and homes, has begun to affect speculative
building in that market. Commercial real estate markets remained
solid in most District states, although building permit activity
reportedly is down from last year. Building materials and
skilled construction workers remain in short supply throughout
the District. However, respondents noted that in most cases
material and worker shortages are being translated into longer
completion times rather than higher prices and wage rates.
District financial institutions continued to report healthy loan
demand and generally good credit conditions. Financing remains
readily available for qualified businesses and stiff competition
is encouraging lenders to offer more favorable financing terms.
Comments from respondents point to continued solid credit
quality, although there were scattered concerns about the health
of highly leveraged businesses. Throughout the financial
industry, shortages of qualified workers continued to be a
primary concern, and wage and salary pressures remained high.