Summary
Prepared at the Federal
Reserve Bank of San Francisco and based on information collected
before February 29, 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 twelve Federal
Reserve Districts indicated appreciable expansion of economic
activity during late January and February. The majority of
districts reported strong growth during the survey period, with
the remaining reports pointing to moderate growth or continued
high levels of activity. Retail sales expanded significantly over
their year-earlier levels. Gains in manufacturing output were
widespread. Providers of services to businesses and consumers
continued to expand output and employment substantially. Real
estate market activity and construction were at high levels,
although slight cooling was evident in some areas. Conditions in
the agricultural and resource extraction sectors were mixed.
Demand for bank loans generally was strong, but several districts
reported slower activity in some loan categories, especially
consumer loans and residential mortgages.
Constraints on the availability
of labor and other production inputs were apparent in many areas.
Most districts reported tight supplies and upward wage pressure
for various types of labor, both skilled and entry level. Despite
faster wage growth for some workers, increases in the prices of
final goods and services were limited overall, although the prices
of transportation services and some industrial commodities rose
noticeably.
Consumer Spending
Retail sales were strong in most areas and generally met or
exceeded retailers' expectations for the period. Compared to a
year earlier, growth in retail sales was in the upper single-digit
range in Boston, the mid-single digit range in Chicago, and 3 to 7
percent in New York. By product line, consumer electronics,
appliances, and home furnishings posted the strongest sales
increases. Further advances in e-commerce sales were reported in a
few districts, although Kansas City noted that online sellers
gained business at the expense of retailers in rural areas. Demand
for automobiles and light trucks was solid on net; sales mostly
were at or above high levels from a year earlier, with reports of
double-digit gains in the Minneapolis District. In contrast,
several districts noted sluggish sales of apparel. Inventories
generally were deemed appropriate for the prevailing pace of
sales, although slow sales contributed to a buildup of apparel
inventories in San Francisco and winter merchandise inventories in
New York.
Manufacturing
Most districts reported a pickup in manufacturing activity in
January and February. The gains were moderate in general, although
Richmond's report indicated considerable strengthening. Cleveland
noted strong growth in demand for industrial machinery. Sales of
semiconductors and related high-tech equipment were strong in
Dallas and San Francisco, and earlier tight supplies of
semiconductors and flat-panel display monitors have eased. Demand
for a variety of other manufactured products grew substantially,
including metal products, electronics, furniture, chemicals,
paper, and food. Demand for steel was especially strong, largely
for use in the manufacture of motor vehicles and other consumer
durable goods. Among less upbeat indicators, Boston, Atlanta, and
San Francisco noted cutbacks or ongoing weakness in aerospace
manufacturing, and Chicago reported that the market for
construction and agricultural equipment remained soft. In
addition, Dallas reported that refineries in that district are
being squeezed by high prices of crude oil and have reduced
output; reports from that district also indicate that gasoline
inventories are low heading into the spring and summer driving
seasons.
Nonfinancial Services
Reports from the Boston, New York, Richmond, Dallas, and San
Francisco Districts indicated that activity of firms providing
nonfinancial services to businesses and consumers grew briskly
during the survey period. Temporary employment agencies were very
busy, with Boston reporting revenue growth of 25 percent from a
year earlier for these firms. Computer services firms expanded
rapidly in several districts, with newly created internet firms
reportedly spending large sums on advertising campaigns in the San
Francisco District. Demand for transportation services was strong,
but availability of trucking services was constrained in some
areas by labor shortages.
Real Estate and Construction
Construction activity and demand for residential and
nonresidential real estate remained at high levels, although
cooling was evident in some markets. Demand for commercial space
was strong in most areas, with low vacancy rates and rising rents
even in areas where substantial new space has come on line.
Reports from the Minneapolis District indicated that commercial
construction values were up more than 20 percent in recent months
compared with a year earlier. In contrast, Dallas reported a sharp
increase in office subleasing and an ongoing decline in lease
rates in that city; Atlanta noted slower nonresidential
construction activity; and San Francisco reported that
nonresidential markets have softened somewhat in two inland states
in that district.
Residential construction
activity and sales of new homes remained strong in many areas,
although several reports cited evidence of slowing compared with
1999. Recent levels of construction and sales activity were near
historical highs in the St. Louis and Minneapolis Districts, and
they also have remained high in California, where home prices have
been rising rapidly. However, signs of cooling in residential real
estate markets have emerged in the Atlanta and Kansas City
Districts and in several states in the San Francisco District.
Agriculture and Natural
Resources
Agricultural producers faced mixed conditions overall, with solid
demand for meat products offset by drought conditions and poor
crop yields in some areas. San Francisco noted rising demand for
beef, and Chicago reported that hog farmers benefited from a
substantial increase in hog prices during the past year. By
contrast, drought conditions have hit Texas farmers hard,
producing poor conditions for wheat and oat crops and
necessitating costly supplemental feeding and herd reduction among
livestock suppliers. Dry weather also has harmed the winter wheat
crop in the Kansas City District and is a concern for cattle
ranchers in Arizona.
Despite the recent sharp
increase in the price of crude oil, conditions in the resource
extraction industry were mixed. Oil drilling and extraction
activity increased in several districts, but they were
"lackluster" in Dallas, where companies have been
choosing to pay down debt rather than risk expansion. In
Minneapolis, mining of iron ore picked up further in response to
strong demand, but gold mining remained weak.
Financial Services and Credit
Demand for bank loans was solid overall, although several
districts reported softening in some categories. Lending activity
was strong and expanded in most or all loan categories in
Richmond, Chicago, and San Francisco. However, Cleveland reported
declining demand for consumer and commercial loans, Kansas City
noted that slower real estate loan activity had held total loans
down, and New York, Philadelphia, St. Louis, and Dallas indicated
that consumer and residential mortgage lending has slowed. Several
districts noted that a relative scarcity of deposits has kept
margins thin and has spurred search for alternative sources of
funds; however, no district reported liquidity problems. Credit
quality and lending standards were stable in general, although New
York and Kansas City reported tighter standards for some banks.
Employment, Wages, and Prices
Labor markets were very tight in most areas, and wage pressures
increased for some worker groups, although most reports suggested
moderate wage gains on net. Reports of recruitment obstacles were
widespread, and some employers responded by recruiting among
nontraditional worker groups (for example, senior citizens and
teens), relying on increased overtime, and emphasizing employment
perquisites and bonuses rather than increasing base wages. Very
tight market conditions were reported for nurses in St. Louis and
Minneapolis, restaurant and retail workers in Kansas City, and
computer-savvy workers in many districts. Chicago reported a sharp
increase in truckers' wages, and San Francisco and New York noted
shortages and high turnover among truck drivers. In terms of
general year-over-year changes, wage gains were reported to be 3
to 5 percent in St. Louis and 2 to 4 percent in Minneapolis.
Kansas City reported that wage pressures have eased compared to
the latter half of 1999. However, New York reported wage increases
of 10 to 15 percent in jobs being filled by year 2000 college
graduates recruited through employment agencies there, and
Philadelphia reported faster wage gains overall.
Prices of some industrial
commodities rose noticeably, especially for energy and
petroleum-related products. Rising wages and fuel costs have
raised prices and reduced profit margins for providers of
transportation services, especially trucking. Other commodity
inputs and raw materials with noticeable price increases included
steel, primary metals, building materials, and computer memory
chips in the industrial sector and chemicals and fertilizers in
the agricultural sector. However, increases in the prices of final
goods and services reportedly were limited overall.
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First District - Boston
Economic activity continues to
expand in the First District. Retailers report strong sales growth
and little price inflation. Most manufacturers are also seeing
their business grow and indicate they are not raising prices.
Labor markets remain tight. Most companies say base wages are
rising at a 3 to 5 percent pace, although increasing numbers say
they are raising wages more than this. In addition, temp firms
report wages are up 5 to 10 percent from a year earlier. Firms
continue to implement technologies or strategies that economize on
labor and other inputs.
Retail
Most retail contacts report sales growth from year-earlier in the
upper single-digit range for the December through mid-February
period, at or slightly above expectations. Respondents in all
sectors characterize their results as strong.
Permanent employment is said to
be holding steady. Most retailers indicate that base wages are
increasing at a 3 to 5 percent rate, although overall compensation
is increasing faster because of performance-based incentives.
However, contacts in faster-growing sectors are raising wages at a
5 to 10 percent pace in order to attract scarce labor. Retailers
continue to report little evidence of inflation except in the
fast-growing tourist sector. Contacts say that profit margins are
increasing slightly as technological improvements yield cost
efficiencies.
Retailers plan some modest
capital expansions over the next six months; these expansion plans
have changed little over the past year. Most contacts say that the
economy is currently very strong and they are optimistic
concerning sales growth prospects for the first half of 2000.
However, looking toward the second half of the year, they expect
to see a moderation in the rate of growth in consumer spending,
reflecting the braking action of interest rate hikes and oil price
increases.
Manufacturing and Related
Services
Most First District manufacturing contacts report that recent
business is up relative to a year earlier, although typically the
gains are modest. Makers of building equipment and furnishings
report solid activity. Aerospace manufacturers continue to
experience weakness but are beginning to see some positive signs
for future business. Consumer goods manufacturers are experiencing
good post-Christmas orders, although in some cases they say that
ongoing inventory reduction efforts on the part of retailers are
holding down new business.
Manufacturers cite rising costs
for oil and gasoline, paper, copper, and furniture-grade lumber
but reductions for electronic components. Most selling prices
remain flat, and many contacts cite increased operating
efficiencies or improved cost management techniques as being
helpful in avoiding the need to raise prices. However, prices
reportedly are rising somewhat for paper goods, consumer products,
and industrial machinery. Prices of aircraft equipment are
falling.
One-third of the respondents are
reducing their head counts substantially as part of restructuring
efforts. Employment changes at most other companies are fairly
small. The majority of respondents indicate that average pay
raises remain in the range of 3 to 5 percent, but a growing
fraction report higher increases. Contacts indicate that tight
labor markets have raised workloads for existing employees and
increased the need to reward key personnel. Finance, accounting,
information technology, research and development, and sales and
service openings reportedly are the hardest to fill.
All contacts expect business
either to be good or to show improvement this year. However, many
point to at least some degree of uncertainty arising from their
own restructuring efforts or those of competitors or customers.
Temporary Employment
Temporary employment firms in the First District continue to
expand, with overall revenues growing an average of 25 percent
from a year earlier. As before, contacts report strong demand for
information technology workers, especially those associated with
the Internet. Wages are generally 5 to 10 percent higher than a
year earlier, and these increases are in line with billing rates.
E-business professionals and web developers are witnessing even
greater wage growth because of high demand for their skill sets.
In response to tight labor markets, many clients are increasingly
using staffing firms to fill their permanent hire needs. Outlooks
are positive, although contacts say most of their clients are
slightly concerned about future stock market performance.
Commercial Real Estate
The commercial real estate market in New England has not changed
much during the past quarter. The Boston office market continues
its strong course, and contacts describe it as the
"hottest" market in the country. Rents continue to rise.
Vacancy rates for prime downtown office space are extremely low.
Lack of space downtown has induced some firms to move to the
suburbs, raising demand for office space in the 128/495 corridor.
Rental rates in the suburban office market have increased as a
result. Retail and multifamily markets are also very robust, with
vacancy rates below 4 percent in both. Contacts do not expect any
major changes in the Boston market.
The rest of New England is
mixed. Hartford has seen some recovery, but its office vacancy
rate is still one of the highest in the country, at around 20
percent. The retail and industrial sectors in Hartford have
vacancy rates of 7.5 and 14 percent, respectively, also worse than
the national averages. Rhode Island has experienced some
restructuring in manufacturing and contacts anticipate an increase
in industrial vacancy rates there. The office market in Rhode
Island is doing well, however.
Insurance
Continued restructuring in the insurance industry is resulting in
employment reductions at some companies as redundant positions are
eliminated following mergers or acquisitions. Sales trends are
mixed, with underlying trends somewhat hard to discern because of
restructuring of the industry.
Most insurance companies do not
seem to be experiencing general labor market pressures. The market
for some specialties, particularly information technology (IT)
workers, remains tight. However, contacts suggest that the degree
of tightness in the IT labor market varies considerably by
geographic area within New England.
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Second District - New
York
The Second District's economy
continued to run flat out in early 2000. Labor shortages
intensified further and there are some signs of increased wage
pressures. Retail sales continued to run on or above plan in late
January and the first three weeks of February. Most retailers
report that inventory levels are satisfactory and that selling
prices and merchandise costs are essentially flat. Housing permits
picked up noticeably in January, led by a surge in the
multi-family sector. Housing markets remain exceptionally tight in
the New York City area, where prices continue to advance at a
double-digit rate. In contrast, home prices are flat or declining
in upstate New York, though sales volume has been quite brisk in
most areas.
Regional purchasing managers'
surveys indicate a slight pickup in manufacturing activity in
January, along with ongoing input price pressures. Trucking firms
are passing along some of their rising costs of diesel fuel to
shippers in the form of fuel "surcharges". Finally,
bankers report softening demand for consumer and home mortgage
loans but a pickup on the commercial side; they also note that
credit standards have tightened further and that delinquency rates
have stopped declining.
Consumer Spending
Retailers generally indicate that sales were on or ahead of plan
in early- to mid-February. Major chains report that same-store
gains ranged from 3 to 7 percent compared to a year earlier; sales
were also mostly above plan in January. Home goods, ranging from
electronics and appliances to bedding, continued to be the
strongest category, while apparel sales tended to be sluggish.
Some contacts indicated that overall sales would have been a bit
stronger still, if not for the storms that battered the Northeast
in late January and early February. New York State is eliminating
its sales tax on apparel and footwear (priced under $110) as of
March 1, but the overall impact on sales is expected to be modest.
Most contacts report that inventories are at satisfactory levels,
though one retailer indicates a sizable overhang of winter
merchandise. Selling prices and merchandise costs are reported to
be little changed from a year ago. Two retail contacts note that
they have raised wages to hold down employee turnover, but most
have held the line on wages and resorted to other means (i.e.,
flexible hours) to attract and retain workers.
Construction and Real Estate
Housing markets remain exceptionally strong across most of the
District, as builders in downstate New York and northern New
Jersey are struggling to keep pace with surging demand. For the
two states combined, multi-family housing permits-a harbinger of
future construction-surged more than 30 percent in January, after
seasonal adjustment, to the second strongest January level on
record. Single-family permits posted a more moderate gain in
January. On an annual basis, multi-family permits jumped 13
percent in 1999, while single-family permits rose 6 percent; both
were at ten-year highs. Anecdotally, homebuilders in northern New
Jersey continue to report "exceptionally strong" market
conditions, with prices said to be running roughly 10 percent
ahead of a year ago. Due to labor shortages, building constraints,
and a dearth of available land, builders say they are unable to
bring enough supply to market to meet growing demand. An industry
contact notes that many builders, concerned about finding workers
in the peak spring season, have already started assembling crews.
The market for existing homes in
the New York City area continues to be exceptionally tight.
Double-digit price appreciation is reported across most of the
lower Hudson Valley, Long Island and northern New Jersey. However,
unit sales in these areas remain lower than a year ago, suggesting
a persistent shortage of homes on the market. Market conditions
are mixed but generally more subdued in upstate New York. While
home prices in metropolitan Rochester and Buffalo have declined
over the past 12 months, unit sales are up sharply in these areas,
as well as Albany and Syracuse.
In the multi-family segment, one
leading New York City realtor indicates that the average price of
a prime Manhattan apartment rose nearly 20 percent in 1999, while
another reports an average rise of nearly 15 percent. More
currently, prices in late 1999 and early 2000 continue to run more
than 10 percent ahead of a year earlier. Finally, based on data
from a leading Manhattan rental agency, average rents for
newly-leased apartments rose roughly 10 percent in 1999, after
jumping 13 percent in 1998.
New York City's office markets
have tightened further, as availability rates fell sharply in the
final months of 1999, led by strong demand from high-tech,
"new media," and financial services firms, as well as
publishing and law firms. Midtown's rate fell to a 14-year low of
5.7 percent, down from 7.1 percent at the end of the third
quarter, while Downtown's rate tumbled from 10.6 to 9.1 percent.
Manhattan office rents rose an estimated 8 percent last year,
after soaring more than 20 percent in 1998; still, an incipient
acceleration in the final quarter of 1999 may be signaling a
return to sharper upward pressure. There are reports that Lower
Manhattan's tightening office market has prompted some
commercial-to-residential conversions to be reversed.
Other Business Activity
Labor shortages continue to intensify in the New York City area. A
major employment agency reports that salaries for
"second-tier" 2000 college graduates-those who are
recruited through employment agencies rather than directly-are
estimated to be up 10-15 percent from last year, and that computer
programmers coming off Y2K projects are being "swallowed
up."
Regional purchasing managers
report steady to stronger conditions in the manufacturing sector,
along with persistent input price pressures. Rochester purchasers
indicate that business activity continued to soften in January,
while upward commodity price pressures were somewhat less
widespread than during the fourth quarter. Buffalo purchasing
managers report a modest pickup in manufacturing activity in
January-both production activity and hiring activity remained
generally flat, but new orders continued to advance at a brisk
pace; commodity price pressures, which had abated slightly in
December, picked up again in January. New York purchasing managers
indicate a surge in manufacturing activity in January, but a pause
in growth in other sectors; input price increases were somewhat
more pervasive than in December, as a slight moderation in the
manufacturing sector was more than offset by increasingly
widespread increases in other sectors.
A company that monitors the
financial health of U.S. trucking firms reports that a number of
firms recently instituted fuel "surcharges" to offset
the rising cost of diesel fuel, which is up roughly 50 percent in
the past 12 months. However, competition from rail carriers, which
are less sensitive to fuel costs, appears to be limiting their
ability to fully pass along these costs. In addition, trucking
firms continue to endure severe labor shortages and growing wage
pressures, with some firms reporting nearly 100 percent turnover
over the past 12 months.
Financial Developments
Overall demand for loans remained steady compared with two months
ago, according to small and medium sized banks in the District.
However, softer demand was reported for both consumer loans and
residential mortgages, and most of this weakness cannot be
attributed to seasonal patterns. In contrast, demand for
commercial and industrial loans picked up noticeably. Refinancing
demand continued to slow, with almost 70 percent of bankers
reporting further declines in activity.
On the supply side, credit
standards continue to tighten: approximately 15 percent of
respondents reported tightening overall credit standards while
none reported an easing of standards in any loan category. Bankers
reported higher interest rates across the board, on both loans and
deposits. Delinquency rates, which had been declining steadily for
most of 1999, leveled off in all loan sectors.
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Third District -
Philadelphia
The Third District economy was
expanding moderately in February, with gains in most sectors.
Manufacturers reported increases in shipments and orders.
Retailers indicated that sales for the month were well above the
level of last February. Auto sales were steady and above the
year-ago level. Bankers noted increases in lending to businesses
but a slight decline in consumer and mortgage lending. Commercial
real estate markets were firm, and homebuilders said sales were
steady or rising. Sales of existing homes have eased. Firms in
several industries have reported rising costs, primarily for basic
commodities, and a recent step-up in wage increases.
Looking ahead, Third District
business contacts in most industries expect continued growth.
Manufacturers forecast rising business activity and they are
boosting capital spending. Retailers expect the spring season to
yield year-over-year gains in line with recent increases. Auto
dealers forecast steady sales at a high rate. Bankers anticipate
growth in most loan categories, although at a slower pace than
last year. Commercial real estate markets are expected to remain
firm, but homebuilders and real estate agents expect rising
mortgage interest rates to reduce sales of new and existing homes.
Manufacturing
Manufacturing activity in the Third District advanced moderately
in February. Around one-half of the industrial firms surveyed
during the month reported steady business, but more firms reported
increases in shipments and orders than decreases. Gains were
relatively more prevalent among producers of metal products,
machinery, and industrial equipment. Some chemical companies
reported increased sales as well. Manufacturers in the region
continue to report difficulty recruiting and retaining workers,
both skilled and unskilled. Some firms said they have had to limit
production schedules as a result of labor shortages.
The outlook among manufacturers
is for continued growth. Around half of the firms polled in
February forecast increases in shipments and orders during the
next six months, and around one-third expect business to be
steady. On balance, the region's manufacturers are planning to
increase capital spending. Firms indicated that expansion is
required to produce for current orders and for expected increases
in orders for their products.
Retail
Third District retailers reported sales in February well above the
level in February last year, despite snowstorms that impeded
shopping on several days. Substantial gains were posted among all
types of stores--discount, specialty, and department stores. Cold
weather for most of the month boosted sales of winter outerwear,
helping clothing and department stores to reduce stocks of these
items without price markdowns. Overall, inventories were described
as appropriate for the current rate of sales. Merchants generally
expect sales to continue moving up. They say early indications are
that spring merchandise, especially clothing, will be popular with
consumers.
Auto dealers generally reported
a steady rate of sales in recent weeks. There has been a slowing
in sales of the larger sport utility vehicles, according to some
dealers, who attribute the relative softness to rising gasoline
prices and less-than-expected consumer acceptance of the new
larger vehicles. Inventories appear to have risen a bit above
dealers' planned levels, but dealers expect broader manufacturers'
incentives to underpin a high sales rate in the months ahead.
Finance
Bankers in the Third District generally described loan growth as
slow in February. Lending to businesses was rising as commercial
borrowers continued to seek loans for working capital and
expansion. Commercial real estate lending was also moving up.
Nonbank financial institutions such as pension funds and private
investors were said to be active in commercial real estate
markets. Consumer lending was off slightly, on balance, at banks
in the District. Mortgage activity appeared to be easing overall,
although some bankers said residential mortgage applications had
picked up as borrowers sought to lock in rates.
Looking ahead, most of the
bankers contacted for this report expect loan growth to continue,
but at a moderating rate. Several bankers said they were
implementing more cautious credit terms for commercial lending,
which could restrain growth in their loan portfolios. Also,
bankers forecast a more modest pace of economic expansion in the
region this year compared with last that will lead to a slower
rate of growth in demand for commercial credit. Consumer lending
is expected to pick up, but residential real estate lending is
expected to decline.
Real Estate and Construction
Contacts in commercial real estate markets described conditions as
firm at year-end 1999. Vacancy rates in important office markets
in the region averaged around 11 percent, up 1 percentage point
from the third quarter of 1999, mainly because new buildings have
become available for lease. Average rental rates rose slightly
from the third quarter, according to commercial property managers,
while rates for large blocks of space in new buildings increased
by a more substantial amount. The pace of nonresidential
construction has slowed since the first half of 1999, but
contractors and real estate developers expect little further
slippage this year. They expect continued work on highways,
airports, and public buildings throughout the region in addition
to build-to-suit construction of offices, high-tech industrial
buildings, and stores in some parts of the District. Vacancy rates
are expected to inch up in some areas as new buildings are added
to the available inventory, but rental rates are forecast to
remain stable or rise in major markets.
Homebuilders in the region
reported steady or increasing sales in late January and early
February. Builders said sales were somewhat stronger for homes in
the lower and middle price ranges than in the higher price range.
New home prices have been moving up as labor costs have increased.
Sales of existing homes have slowed, according to residential real
estate agents. They believe a decline in the number of homes being
listed for sale is slowing the sales pace while demand for homes
seems to be holding up. Real estate contacts reported that sales
of second homes in prime vacation areas have been strong, although
price appreciation has been moderate. Both homebuilders and real
estate agents said the pace of sales will be slowed by recent
increases in mortgage interest rates, although there has been an
increase in home buying recently, prompted by purchasers' locking
in rates before anticipated further increases.
Wages and Prices
Reports of accelerating wage and salary increases have been
received from a range of industries, notably manufacturing,
services, and trade. On average, firms have implemented recent
across-the-board increases around 1 percentage point higher than
in prior labor contracts. Several companies indicated that wage
acceleration for unskilled and entry-level workers has become more
prevalent recently than it was last year. Also, this year more
firms report raising wages and salaries to retain current
employees than reported taking such steps last year.
Prices of industrial commodities
have been rising. Petroleum products, basic metals, and building
products were becoming more costly, according to manufacturers in
the region. Companies in the manufacturing and trade sectors
reported that rising prices for motor fuels and other petroleum
products were beginning to have an impact on their profit margins.
The cost of manufactured inputs appeared to be relatively steady.
Some business managers said level prices for imported manufactured
goods were helping to restrain increases in overall supply costs.
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Fourth District -
Cleveland
Growth in the District economy
remains strong, with continued low rates of joblessness and steady
wage growth. Materials prices for manufacturers are rising.
However, the prices for consumer goods and the materials prices
for construction are stable.
Labor Markets
District temporary employment agencies reported a broad based
increase in the demand for workers, following a seasonal holiday
decline. Strong demand for administrative assistants, clerical
workers, and legal secretaries continues unabated. Demand for
workers with computer skills seems to have shifted away from
hardware and systems workers to software and Web-based workers.
Although most contacts mentioned difficulty in finding qualified
personnel, none reported an inability to fill customer orders or
significant wage increases. All contacts expect a steady growth in
demand to continue for the next few months.
Union sources reported continued
wage growth, averaging 3 per cent. They affirmed that gains are
"across-the-board" instead of being skewed by a few
large settlements. Pension funds have done well recently due to
high stock market returns. This has been balanced by a concern
over the possibility that higher health care costs will be borne
increasingly by workers and less by the firms. Job security
remains a high-priority issue in union negotiations.
Reports on the demand for
information technology were mixed, depending on the type of
services provided. Contacts who experienced an upsurge last
quarter due to Y2K-related consulting expect a slowdown. Others
anticipate a rise, as clients turn to development projects that
were postponed until Y2K.
Construction
Although January sales are off from the high pace of a year ago,
the level of home sales remains high. Some builders reported that
existing homeowners have begun to account for a smaller share of
their sales. These builders say that this could indicate a
weakness in demand, because potential buyers may not be able to
sell their existing homes. Cost pressures for both materials and
labor continue to be subdued.
Commercial builders reported a
large increase in publicly funded construction. They also reported
an increase in the construction of industrial facilities and
office buildings. This is driven, in part, by increased demand
from the manufacturing sector. Warehouse space for Web-based
businesses is in high demand,. but retail space is characterized
by some as being overbuilt. One contact suggested that the labor
market was so tight that it could cause a wage increase on the
order of 5 to 10 percent. Finding subcontractors has also become
very difficult due to the high demand for construction.
In general, materials prices for
construction are flat.
Industrial Activity
Industrial equipment demand is very strong, and there are
indications that much of the growth that has been concentrated in
the high-tech sectors is also being seen in machinery, steel, and
autos. One contact reported growth rates of 6 percent for
industrial machinery in orders. Weak farm prices have decreased
the demand for agricultural equipment, but this trend has
flattened out in recent months. Industry analysts agree that
rising gasoline prices have hurt this industry, although
predictions for the decline in demand for heavy trucks range from
5% to 25% for the year 2000. The demand for light trucks continues
to be very strong.
In recent months the combination
of strong demand and declining imports has caused steel prices to
rise. Some companies announced spot market steel price increases
of $20-$25 per ton for hot rolled, cold rolled, and coated
products, effective for January shipments, and an additional $30
per ton effective for April shipments. Demand continues to be
strong. However, last year's steel-price decreases and
raw-material-price increases have caused most companies to report
losses for 1999. Some companies expect to see improvements this
quarter, but others do not expect major improvements until the end
of the second quarter of 2000. Several companies have announced
small job cuts recently.
Purchasing managers in the
District reported an increase in the growth rate of commodity
prices in January. Higher prices were reported in primary metals,
engineered polymers, memory chips, PVC resin, and steel. After
several months of reductions, inventories of raw materials are
starting to be rebuilt. Inventories of finished goods continue to
drop. Both production levels and new order levels were mixed, but
more companies reported higher levels in January than lower.
Consumer Spending
Several contacts reported slower sales, which they attributed to
the severe weather conditions during most of the month rather than
to a more fundamental decrease in demand. Overall, however, most
of our contacts reported that their inventories are consistent
with their plans. None of the retailers reported price increases.
Expectations for spring are quite positive, with most retailers
expecting moderate-to-strong sales increases overall. Internet
sales by regular retailers continue to grow but remain a small
portion of their overall sales.
Sales of new vehicles have
generally slowed for the month of February. However, sales in
January were good, despite the bad weather. The February slowdown
was anticipated, and inventories, which had been reduced by the
brisk holiday sales, are now at more normal levels. Dealers did
not believe that high gasoline prices would significantly affect
sales, and they foresaw continued strong sales for the next few
months.
Banking and Finance
Sources in banking report that lending activity in the District is
down for both commercial and consumer loans due to recent rate
increases. The rate for loan delinquencies is slightly up. This is
said to be a seasonal variation caused by heavy Christmas
spending.
Credit quality is thought to be
high, as banks report being very selective in accepting loan
applications. Most banks already have a very high loan-to-deposit
ratio both because of strong credit demand and because depositors
are finding alternative instruments to bank liabilities.
Willingness-to-lend levels remain high, but all banks reported
that it is very difficult to attract deposits at rates that will
provide a healthy margin for them.
The spread between borrowing and
lending rates is shrinking due to competition. Small banks
reported that bigger banks toughen the competition by offering
lower rates.
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Fifth District -
Richmond
The Fifth District economy
advanced at a quicker pace in January and most of February, driven
by strong retail sales and robust manufacturing activity.
Retailers reported markedly higher sales including sales of
big-ticket items. Manufacturing activity accelerated in recent
weeks; capacity utilization and new orders advanced at the
strongest rates seen in several years. Contacts at services firms
noted moderately increased revenues and employment during the
period. Real estate activity expanded at a moderate rate despite
higher mortgage interest rates. Lending activity, in general,
remained strong. In labor markets, wage pressures picked up
somewhat in manufacturing and in retail, but eased in the services
sector. Prices rose only modestly in most sectors of the
District's economy.
Retail
District retailers reported much stronger sales growth in the
weeks since our last report. Although winter storms slowed
customer traffic at some stores in late January, shoppers opened
their wallets in February. Customers suffering from cabin fever
after several days at home bought ravenously, according to a New
Bern, N.C., contact. Big-ticket sales growth was strong throughout
February, especially for automobiles and home furnishings. While
inventories increased slightly since the last report, a number of
retailers reported that deep price discounts on Presidents' Day
helped move out winter merchandise and clear space for new spring
lines. Retailers trimmed workforces in February, but modest upward
wage pressures persisted. Retail prices rose only modestly in
recent weeks.
Services
Revenues at District services firms grew at a moderate rate in the
last two months. Contacts at electric and gas utilities reported
their revenues were boosted by soaring demand during the late
January cold snap. Revenues at business services and computer
consulting firms rose moderately as their customers reinitiated
projects that had been put on hold while Y2K problems were
addressed. A computer networking contact in Charlotte, N.C., noted
a pickup of new business within the last month. Services providers
added employees at a faster rate, while wage and price pressures
remained subdued.
Manufacturing
District manufacturing activity strengthened considerably in
recent weeks. Manufacturers recorded solid growth in new orders
and a sharp increase in capacity utilization in January, and they
noted a pickup in growth in February. Contacts in the chemicals,
food, electronics, paper products, and fabricated metals
industries reported exceptional strength in shipments in the last
several weeks. On the employment front, the level of manufacturing
employment was little changed since our last report, but
manufacturing wages and the average workweek rose. Raw materials
prices also moved higher as the effects of higher crude oil prices
were more broadly felt by District producers. Tire and rubber
manufacturers, in particular, noted that they now expect hikes in
raw materials prices to outstrip gains in prices received during
the next six months.
Finance
District loan officers reported that the level of lending activity
changed little in January and February. Commercial lenders told us
that generally strong loan demand persisted despite higher
interest rates. A commercial banker in Norfolk, Va., said that
higher interest rates had actually increased loan demand in the
short run because borrowers wanted to lock in rates now rather
than risk future rate increases. In addition, a commercial lender
in Greenville, S.C., said that he was negotiating more fixed-rate
loans because of borrowers' concerns that interest rates will rise
further. Residential mortgage lenders reported little change in
loan demand.
Real Estate
Residential real estate activity advanced at a moderate pace in
January and February. Realtors described the District of Columbia
market as strong, and they said that Northern Virginia was the
hottest submarket in that region. In contrast, home sales were
reported to be weaker in southern Maryland, and mixed in the
Baltimore area. A Frederick, Md., contact indicated that home
prices rose substantially there in recent months, and he expressed
concern that lower income buyers were being shut out of the
market. Contacts in Richmond, Va., reported a dip in home sales,
but realtors in Virginia Beach said sales there remained strong.
Construction and home sales advanced at a normal pace for this
time of year in North Carolina, aided in part by continued
rebuilding in areas affected by last year's flooding. In upstate
South Carolina, however, contractors were reportedly turning away
work because of a lack of skilled labor. Across the District there
continued to be scattered reports of rising labor and materials
costs
In commercial real estate,
construction advanced at a seasonal pace and lease rates showed
some signs of upward pressure in recent weeks. Realtors in the
District of Columbia said that the market for Class A office space
was tightening and that lease rates were rising. In that market,
about a half-million square feet of speculative office space was
under construction in Montgomery County, Md. In addition, a
substantial amount of construction was underway in Northern
Virginia, primarily for information technology companies. Retail
and office vacancy rates in Richmond, Va., were described as
starting to decline, while lease rates remained firm. In
Charlotte, N.C., commercial construction was reported to be about
average for this time of year, and buildings under construction
were about 50 percent pre-leased. South Carolina realtors noted a
slight tightening in the office market in Columbia, and said that
lease rates inched up a little recently.
Tourism
District tourist activity continued to be mixed. Snow and ice
storms in late January caused a large number of cancellations and
early departures at coastal resorts. February snowfall, however,
increased the snow base and business at area ski resorts. A
manager at a ski resort in Virginia reported that his business
doubled whenever there was as much as four inches of snow in the
area. A West Virginia counterpart also reported good business,
noting that bookings at his resort were up 35 percent compared to
a year ago. Looking ahead, tourism industry contacts expressed
concern that rising gasoline prices could reduce their business
through the spring and summer.
Temporary Employment
Demand for temporary workers rose in the weeks since our last
report. Although some District retailers trimmed their payrolls in
January, many increased their workforces to help with the
transition to new spring lines. Administrative workers with
computer skills still topped the most-wanted list at many firms;
technical programmers ranked a close second. Despite widespread
skilled worker shortages, wage increases were said to have
moderated over the past six weeks.
Agriculture
Mild weather in early January allowed District farmers to make
good progress working fields. Winter storms later in the month,
however, brought heavy snow, sleet, and freezing rain to the
region. The precipitation from the storms helped replenish soil
moisture and groundwater, and the snow helped to insulate small
grains from freeze damage. But District pastures were covered with
snow for extended periods of time, making supplemental feeding of
livestock necessary in some areas. These supplemental feedings
resulted in a shortage of hay in West Virginia and Maryland and
forced some producers to substitute more costly alternative feeds.
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Sixth District - Atlanta
Contacts in the Southeast
indicate that the District economy continues to expand at a robust
pace and the outlook remains positive. Retail sales have been
strong, although growth has eased slightly recently. District
builders said that the pace of single-family construction in
January was below a year ago, while nonresidential District
construction has tailed off in some areas. Factory production and
new orders have slowed, but contacts expect manufacturing activity
to improve in the near term. Despite continued weakness in some
business sectors, overall loan demand remains high, and the
outlook for the tourism and hospitality sector is mostly upbeat.
Tight labor markets continue to negatively affect the District,
and there were scattered reports of accelerating wages.
Consumer Spending
Reports from retailers around the District concerning January
sales were positive, with sales above year-ago levels. However,
sales growth in early February was slightly weaker than during the
previous month. Most merchants said that recent sales had met or
exceeded their expectations. Several retailers noted they made
fewer markdowns after the start of the year, boosting profit
margins. Inventories were reported to be balanced by the majority
of retailers. Sales of children's apparel, jewelry, and
home-related products have been strong recently, while sales of
men and women's apparel have varied across stores. Most merchants
anticipate that first quarter sales will be up slightly compared
with last year.
Construction
The majority of District builders contacted said that the pace of
single-family construction in January declined compared with a
year ago. Some noted that harsh winter weather had slowed down
construction in their market. During the early part of February,
builders noted a slight increase in construction levels, with
fewer contacts reporting declining construction on a
year-over-year basis. However, new home sales seem to have
weakened slightly in early February, with more builders saying
that home sales declined from year-ago levels. Over one-half of
the builders expect first-quarter construction to decline compared
with last year's strong levels and construction growth in the
second quarter to be flat. Realtors expect growth in home sales to
slow slightly from the first quarter to the second quarter.
Nonresidential construction
continued to decline overall. However, activity has not been
uniform across the District. Construction accelerated in Florida,
Georgia, and Tennessee, whereas activity slowed somewhat in
Alabama, Louisiana and Mississippi. Speculative construction
continues in several markets, but experts are cautioning that
demand for office and retail space in particular will probably
wane somewhat this year.
Manufacturing
Reports from the factory sector varied across industries.
Announcements of large job cuts since our last report include a
2,500-employee reduction at Coca-Cola's Atlanta headquarters; a
2,100-job cut at BellSouth, mostly in Atlanta; and an 800-employee
job cut at the Lockheed Martin plant in Marietta, Georgia. Rising
interest rates have adversely affected the manufactured housing
industry; one contact's sales volume has fallen by 25 percent
recently. More positively, a rise in steel prices and improved
production performance resulted in the first profitable month in
years for an Alabama steel mill. A recovery in the paper market
has led regional pulp mills to boost production. Activity is up in
the lumber business, but the effects of rising interest rates on
construction are expected to moderate the increases. Contacts
report that the outlook for the District's energy extraction
industry is very strong in light of current oil prices.
Tourism and Business Travel
The outlook for the tourism and hospitality sector is mostly
upbeat. Advance bookings for hotels and motels in south Florida
for February through April were reported as strong. However,
reservations at Panama City hotels and motels for Spring Break are
down by 40 percent compared with a year ago. Year-to-date
convention bookings are up by double-digits from a year ago in New
Orleans. Casino gross gaming revenues were up by 13 percent from a
year ago in Mississippi.
Financial
Despite continued weakness in some sectors, loan demand remains
high overall and the availability of investment capital is
unchanged for most businesses. Commercial loan demand continues to
be particularly strong, while consumer and automobile loan demand
remain robust. Mortgage loan volume and applications and
refinancing activity continue to be depressed. Credit quality is
reported as healthy overall.
Wages and Prices
Tight labor markets continue to adversely impact the District, and
there were scattered reports of accelerating wages. Technological
improvements are easing the labor shortage for some District
firms, and other companies are increasing in-house training to
deal with the lack of qualified workers. Many contacts indicated
that overtime is being used to cover staffing gaps but expressed
concern that employees can only work so much. High-tech firms in
the region are reportedly spending a lot of time and resources
just to maintain staffing levels and fulfill contract obligations.
Some businesses are being forced to offer reduced levels of
service because of a shortage of workers. One Atlanta area
restaurant reportedly posted a help-wanted sign that said,
"Now hiring-must have a pulse." There were a few reports
of easing shortages of construction workers in the District.
More contacts than previously
noted increasing prices. District farmers are particularly
concerned about rising oil prices, which have boosted prices for
fertilizer and some other petroleum-based raw materials.
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Seventh District -
Chicago
The Seventh District economy
continued to expand moderately in January and February, while
reports of intensifying pressure on wages and prices were
isolated. Confident consumers buoyed retail spending, with
contacts reporting strong sales of electronics, home-related
items, and light vehicles. Business construction remained robust,
and sales of both new and existing homes were stronger than
expected. Overall manufacturing activity was paced by strength in
light vehicle and steel production, but pockets of weakness
persisted. Despite higher interest rates, lending activity
remained brisk and credit quality was said to be improving. In a
familiar refrain, labor markets were very tight, shortages of
workers persisted, and there were a few new reports of
intensifying wage pressures. District farmland values strengthened
in late 1999 and were up 1 percent for the year.
Consumer Spending
Retail sales in the District remained robust in January and
February, with most contacts citing very high consumer confidence
as the primary contributing factor. Virtually all of our retail
contacts reported year-over-year sales gains in the mid-single
digits, right in line with their expectations. Valentine's Day
promotions were reported to be very successful. More generally,
sales of appliances and home-related items remained strong
according to most merchants, with one contact describing
consumers' appetite for VCRs, DVD players, TVs, and game products
as "insatiable." Inventories generally were in line with
sales expectations, and promotional activity was similar to that
in the same period last year. Light vehicle sales generally
remained strong, although results varied by make and model. One
contact noted that higher gasoline prices had not yet had much
impact on demand for sport utility vehicles, which remains strong.
A large auto dealer group reported that sales so far this year
were down from a year ago, but had picked up in recent weeks and
expects 2000 sales to be comparable to the very strong 1999
results. Another contact reported that sales of RVs and boats were
very brisk. Despite continued strong demand for goods and
services, reports of intensifying pressure on prices at the retail
level remained isolated.
Construction and Real Estate
Construction and real estate activity in early 2000 was stronger
than most builders and realtors had expected, given recent
increases in mortgage interest rates. Sales results on the
residential side were mixed. New and existing home sales in some
areas remained softer than they had been last year, while other
areas recorded exceptional growth. In the areas where sales were
soft, contacts cited concerns about increasing interest rates; in
the stronger areas, they suggested that confidence in the economy
outweighed any effects from higher interest rates. However,
traffic through homes for sale was reportedly strong, and none of
our contacts expressed concerns about a significant falloff in
sales. Commercial construction remained strong in most of the
District, but growth reportedly had slowed. One exception was the
Chicago area market, where development of office, retail, and
multifamily residential space continued to rise steadily. Three
new buildings in downtown Chicago will add 3.5 million square feet
to the office inventory in the next two years, even as absorption
rates have slowed. The additional space is expected to keep rents
from increasing substantially.
Manufacturing
Overall, strength in the manufacturing sector persisted early in
2000, although there was some softness in important industry
segments. Resiliency in nationwide light vehicle sales kept both
automakers and their suppliers operating at very high levels.
Incentive spending remained high and inventories generally were
still in line with sales. Strong demand for light vehicles and
other consumer durable goods boosted steel production. An industry
analyst indicated that steel consumption was at an all-time high
with demand "dominated" by consumer-goods-producing
industries. This contact also noted that inventory overhangs had
been worked down and "no one even talk(ed) about them"
recently. A District cabinet manufacturer reported that demand
from homebuilders remained strong, and an office furniture maker
said that demand was up substantially from the same period last
year. Production of construction and agricultural equipment
remained soft, while demand for heavy trucks was said to be
slowing. Overall, the pricing environment was again soft for most
manufacturers. The steel industry was one exception as previously
announced price increases held, with another round of increases
announced for April. Steel prices, however, were still below
levels prior to the "Asian contagion" in 1997.
Banking and Finance
Overall loan demand remained robust as business lending continued
to lead the way. Lending to households, however, was stronger than
many bankers had anticipated. While home refinancing activity was
again weak, home-equity lending picked up, and strength in new
mortgage originations exceeded most lenders' expectations. Many
contacts argued that increases in mortgage interest rates were
being outweighed by overall confidence in the economy. Reports
from bankers suggest a moderate improvement in consumer credit
conditions. Business lending remained strong, with most evidence
suggesting relatively steady volume growth. Overall asset quality
remained good, with some contacts noting that they had seen more
credit risk rating upgrades than downgrades. Most lenders
continued to report that competition for business loans was
keeping downward pressure on both spreads and fees. Bankers'
expectations for overall lending activity in the next three months
were mixed, with some expecting a moderate pickup and others
anticipating a modest slowing.
Labor Markets
The pattern of very tight labor markets and slow payroll
employment growth over the last few years appeared to continue
into early 2000. Labor markets remained much tighter than for the
nation as a whole, and employers were struggling to find and
retain workers. In efforts to keep turnover down, some retailers
were paying bonuses to employees after the holiday season, and a
fast-food chain was offering to pay for employees' textbooks. A
few contacts in both goods- and service-producing industries
indicated that product quality control was becoming more difficult
as a result of the scarcity of adequately skilled workers. Overall
wage pressures remained generally subdued, although there were a
few exceptions. Wage increases for clerical workers were again
cited by contacts, and one large freight hauler cited a survey
that indicated nearly a third of truckload carrier drivers had
received a wage increase of 4 cents a mile (or 15 percent) over
the last three months.
Agriculture
District farmers benefited from an increase in hog prices, which
were 30 percent higher in mid-February than a year earlier.
However, large supplies continued to put downward pressure on
corn, soybean, and milk prices. The Chicago Fed's quarterly survey
of agricultural banks indicated that farmland values rose 2
percent, on average, in the District during the fourth quarter of
1999, with Illinois and Iowa posting their first
quarter-to-quarter gains in nearly two years. Bankers indicated
that farm loan repayments continued to come in slowly relative to
a year earlier, but the average credit quality of farm loan
portfolios was unchanged from a year earlier. Several bankers
indicated the performance of their farm loans was enhanced by
strong crop yields and federal assistance. Many stated they had
tightened their credit standards for agricultural loans, and
planned to increase their use of federal loan guarantees in the
first quarter. Bankers also stated they believe the number of corn
and soybean acres planted with seed containing genetically
modified organisms (GMO) will be stable to declining this spring,
relative to last year. Nearly 96 percent of the bankers expressed
willingness to finance purchases of GMO seed.
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Eighth District - St.
Louis
The District economy continues
to operate at a high level. Reports of worker shortages at a
variety of firms are still the norm. Firms and communities
continue to respond to shortages with innovative training/bonus
programs. Some firms have upped their starting wages as well.
Residential real estate markets remain robust overall despite some
slowdown in the growth rates of sales and construction near the
end of last year. Banks continue to search for additional sources
of funds as loan demand remains relatively strong while deposit
growth is flat. Drier-than-normal weather, which has resulted in
low river levels, has restricted barge traffic on the Upper
Mississippi River.
Manufacturing and Other
Business Activity
Contacts continue to report healthy economic conditions overall in
the District, with several expansions leading to job growth.
Wal-Mart, for example, will not only open its largest supercenter
in Arkansas this fall, but will also add 250 employees at a
western Kentucky store. Two new e-commerce companies in St. Louis
and Memphis are creating a total of 850 jobs, and a Memphis paper
products firm is adding 625 jobs. The poultry processing industry
is running almost at capacity and expects costs to fall somewhat
because of an abundance of feed grain.
A scattering of downsizings have
also been reported, most notably the layoff, in response to
falling prices, of 425 workers in western Kentucky at one of the
nation's two uranium plants. Makers of commercial kitchen
equipment expect a moderate slowdown this year due to higher
interest rates. A dip in the demand for athletic gear led to the
downsizing of an athletic store chain, eliminating 450 jobs. The
sharp rise in oil prices over the past few weeks has been
affecting not only customers, but also the District's trucking and
transportation industry, which has been attempting to pass on the
higher cost to customers because profit margins are being
squeezed. On the other hand, higher oil prices have spurred a
moderate resurgence of drilling and exploration activity at some
firms in the District.
District employers still report
having difficulty hiring and retaining qualified workers, which,
in some cases, continues to hinder plans for expansion. Labor
shortages are affecting both skilled and unskilled labor at a wide
range of firms, including manufacturers, banks, hotels and
retailers. In addition, the health care industry is experiencing a
severe shortage of nurses. Some communities, however, are using
job-training programs and expanded vocational training programs in
high schools to successfully attract new workers, such as
teenagers, and older and disabled people, into the labor force to
help alleviate the problem.
Contacts note that some firms
are raising wages to attract workers. Several fast food
restaurants in some regions, for instance, are paying $8 an hour
for what a contact calls "warm bodies." In all, though,
most contacts report that wage increases are in the 3 to 5 percent
range. On top of higher starting wages, firms continue to offer
incentives to workers who stay at a job or refer other new
employees. One health care company, for example, is offering
$1,000 bonuses to new hires and $50 awards for successful
referrals.
Real Estate and Construction
Despite a slowdown in home sales at the end of 1999, sales
remained at high levels, making 1999 one of the best years on
record, according to most real estate agents. Some regions, such
as parts of northern Mississippi, even experienced record figures
for residential sales in both December and January. Several agents
have noted a mild uptick in the number of out-of-state buyers,
which has helped support sales levels. Home prices continue to
increase moderately.
New construction has mirrored
sales. Monthly residential building permits in almost all District
metropolitan areas were down in December, although year-to-date
they were above their year-earlier levels. Despite this late-year
slowing, new permit levels were still at historically high levels,
especially in parts of Mississippi and Kentucky. Homebuilders
continue to report construction backlogs, although they have been
declining somewhat since November. Overall, most real estate
agents and builders remain optimistic about sales in early 2000.
Banking and Finance
Although the demand for loans at many District banks remains
relatively strong, deposit growth continues to be flat, forcing
banks to seek new sources of funds. Commercial and industrial
(C&I) loans and commercial real estate loans have been the
growth categories, while residential real estate and consumer
loans have shown some weakness. Delinquency rates of some C&I
loans have recently increased moderately; however, contacts
believe that this is simply a return to trend. Some bankers report
that tighter interest-rate spreads have led to some higher fees.
Nevertheless, a recent survey of District senior loan officers has
revealed that credit standards for C&I, real estate and
consumer loans have remained unchanged over the past three months.
Agriculture and Natural
Resources
The drier-than-normal weather that has persisted throughout the
District since last fall has caused the Upper Mississippi River to
drop to its lowest level since 1991. These low levels have caused
some barges to run aground, which in turn has led to increased
dredging activity and size restrictions on barge tows headed
downstream.
In February, the USDA announced
that this year's tobacco quota will be 45 percent lower than last
year's. Since this is the third consecutive year of quota cuts,
and since burley tobacco is Kentucky's largest cash crop, contacts
are concerned that many farmers may be pushed deeper into
financial trouble. In fact, agricultural lenders in general remain
concerned about agricultural loans, as crop prices are expected to
remain low in the foreseeable future.
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Ninth District -
Minneapolis
As spring approaches, the Ninth
District economy continues to look very strong. Construction,
manufacturing and consumer spending remain robust, energy and iron
mining are making a rebound, and even agriculture shows some signs
of improvement. Of the major industries, only tourism exhibits
little growth. The economic strength continues to be reflected in
labor markets, which remain tight, and with businesses reporting
some wage pressures. However, while input prices have been rising,
there are still few signs of accelerating inflation.
Construction and Real Estate
Commercial construction remains bustling. Contract awards for
construction projects in Minnesota and the Dakotas increased over
20 percent for the three-month period ending in January compared
to a year earlier. A materials supplier in Great Falls, Mont., is
unusually busy this winter, partially due to favorable weather for
building. A commercial real estate firm reports that the downtown
Minneapolis retail and entertainment sector is expected to expand
with the addition of new hotels and increased residential
development.
Residential construction is also
strong. Due to low vacancy rates, the outlook for Minneapolis/St.
Paul apartment building is promising, according to a commercial
real estate firm. Rental rates are up about 10 percent in the
Minneapolis/St. Paul area compared to a year earlier. Home prices
finished 1999 up 5 percent to 9 percent compared to a year earlier
for several district cities, including a 9.3 percent climb in
Minneapolis/St. Paul. District housing units authorized in 1999
finished with the second highest fourth quarter of the decade.
Consumer Spending
Retailers remain optimistic about current and prospective sales. A
major Minneapolis/St. Paul-based discount and department store
retailer reports same-store earnings for January up 5.7 percent
compared to a year earlier. Electronics retailers in Billings,
Mont., expect 12 percent gains in 2000 compared to last year,
according to a Helena branch director. South Dakota new car and
truck registrations are up 10 percent for January from a year
earlier. A Montana dealership reports sales up 20 percent for
January compared to a year ago.
Tourism is expected to finish
flat overall, with gains in areas with normal or above normal
snowfall, and losses where snowfall came late in the season. A ski
area in northern Montana reports excellent snow conditions and a
35 percent increase in business compared to last year. In
contrast, tourism businesses in parts of Minnesota with light snow
cover are concerned. Below normal snowfall in South Dakota has
stifled winter sports. "We would have a lot more business if
we had more snow," says a tourism official.
Manufacturing
Manufacturing in the Ninth District remains strong, although some
weakness is reported in North Dakota. A January purchasing manager
survey by Creighton University indicates languishing manufacturing
conditions in North Dakota; however, the same survey reports a
strong manufacturing sector in Minnesota and South Dakota.
Examples include a 50 percent increase in sales from a year ago
for a Minnesota construction materials producer, a 5 percent
increase in sales from year-earlier levels for an industrial
equipment company and strong sales at a Wisconsin industrial glass
maker. In addition, a diecasting component manufacturer plans to
build a new plant in the Upper Peninsula of Michigan. "The
outlook for investment in plants is substantially stronger than
earlier in the year," notes a bank director. In contrast, a
North Dakota pasta cooperative reports it is shutting down its
plant, and a Minnesota printing plant and a metal processing
facility plan to close this year due to industry consolidation.
Mining and Energy
The iron ore industry has rebounded from its slump, while Montana
gold mining continues to struggle. An iron ore industry
spokesperson reports full production and strong demand. November
iron ore production was 1.5 percent above year ago levels, while
inventory levels are down 16 percent from a year ago. In Montana,
a gold mine plans to reduce production and lay off 70 workers.
Meanwhile, Ninth District oil
exploration has increased as oil prices have risen. In February,
nine rigs were operating in North Dakota compared to one a year
ago. In addition, estimated February oil production in North
Dakota was up 5 percent from year-ago levels. However, in Montana
only three rigs were operating compared to five a year ago and
Montana oil production is down 9 percent from a year ago.
Agriculture
"Government payments have again helped our local producers
get through another year," reports a North Dakota
agricultural lender. Farmers' financial condition continues to
improve based on preliminary results of the Ninth District's first
quarter (February 2000) survey of agricultural credit conditions.
Farm income improved as 46 percent of respondents reported that
farm income is below normal levels compared to 64 percent of
fourth quarter 1999 survey respondents and 86 percent of the third
quarter 1999 respondents.
Looking ahead, a continued warm
winter has farmers worried about lack of snow coverage for winter
grains and a possible drought next summer as a result of dry soil
conditions. Moreover, some ranchers tell of problems getting water
to their animals, but the mild winter continues to reduce stress
on livestock.
Employment, Wages, and Prices
Labor markets remain taut. Shippers in Duluth, Minn., complain
about "sailing short," with a smaller crew than called
for by union contract during the past year. Minneapolis/St. Paul
temporary employment agencies are offering free training and
starting to offer an array of benefits.
Companies are still looking for
workers. A telecommunications company based in Superior, Wis.,
will add more than 300 jobs by early March. A major electronics
retailer based in Minneapolis/St. Paul recently announced plans to
add 2,000 workers at its headquarters over the next five years.
Wages continue to creep higher.
An informal survey of Upper Midwest businesses conducted in
January reports that wages are generally about 2 percent to 4
percent higher than last year. A major Minneapolis/St. Paul-based
airline increased the bonus pay to mechanics with specialized
licenses by $1.50 an hour; custodians and cleaners received $500
bonuses. A Fargo, N.D., hospital is offering $4,000 signing
bonuses for registered nurses.
While overall prices are not
accelerating, input prices and transportation costs are
increasing. Surveys of manufacturers show that input prices are
higher compared to a year earlier. The Creighton University survey
reports that an index of input prices for January in Minnesota and
South Dakota is almost twice as high as a year ago. Through
January, the Upper Midwest business survey reports that an average
of 41 percent of respondents over the past five months have
reported higher input prices compared to 22 percent for the first
eight months of 1999. Rising oil prices have affected
transportation costs, but businesses aren't showing noticeable
concern.
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Tenth District - Kansas
City
Tenth District economic activity
remained solid in January and early February. Retail sales stayed
strong after the holidays, manufacturing activity held steady, and
construction activity was largely unchanged despite some further
slowing in home sales. Activity in the energy sector was also
stable following recent growth. In the farm economy, dry weather
hurt the winter wheat crop but recent rains should help soil
moisture levels. Labor markets remained very tight, although wage
pressures were not quite as high as in the recent past. Some
retail prices edged up, and prices for several construction and
manufacturing materials continued to rise.
Retail Sales
Retail activity remained strong following a very robust Christmas
season, with most stores reporting higher sales than a year ago.
Most managers expect the strong activity to continue through the
spring. Sales of home furnishings, men's sportswear, and cosmetics
were especially robust in January and early February. Winter
clothing and men's formal wear experienced weak sales. E-commerce
activity continued to expand, helping sales for several large
retailers that have their own web sites. Merchants in some rural
areas of the district, however, reported being negatively affected
by online retailing. Changes in store inventories were similar to
recent surveys, with nearly all managers satisfied with current
stock levels. Motor vehicle sales declined somewhat in January and
early February, dropping roughly to year-ago levels. Car dealers
remained generally satisfied with vehicle inventories, although
shortages of some models of trucks and SUVs were reported. Most
dealers were optimistic about vehicle sales in coming months,
despite recent increases in gasoline prices and interest rates.
Manufacturing
District factory activity remained solid, with most plants
reporting high levels of capacity utilization. An exception was
the food industry, which may have experienced some payback for
consumer stockpiling heading into Y2K. Most manufacturing
materials experienced few availability problems. Lead times for
some materials, however, such as steel and electronic components,
continued to edge up. Managers were generally satisfied with
inventories in January and early February, although several plants
reported plans to trim stock levels in coming months.
Housing
Housing starts were flat in January but still higher than a year
ago. Most builders expect a normal seasonal increase in activity
over the next few months. Concerns about availability continued to
ease for several construction materials, including gypsum
wallboard and concrete. Home sales slowed more than normal in
January and were well below year-ago levels in most major cities
in the district. Despite the recent slowdown in sales, inventories
of unsold homes were quite low in most areas, placing some upward
pressure on home prices. Mortgage demand remains much lower than a
year ago, as refinancing activity has dropped off considerably.
Banking
Bankers reported that loans edged down and deposits were flat last
month, slightly boosting loan-deposit ratios. Demand declined
slightly for home mortgage loans, construction loans, and
commercial real estate loans. Demand for agricultural loans edged
up. On the deposit side, all major categories held steady. Almost
all respondents increased their prime lending rates in the past
month, and most raised their consumer lending rates as well. Most
banks expect to leave their lending rates unchanged in the near
future, but some expect to raise rates further. A few banks
tightened credit standards.
Energy
District energy activity leveled off last month despite further
increases in energy prices. The count of active oil and gas rigs
in the district was stable in January and early February,
remaining well above year-ago levels but below the previous peak
in late 1997. Despite the almost year-long increase in drilling
activity, oil and gas production has been restrained by
uncertainty about future prices.
Agriculture
Dry weather this winter hurt the district's winter wheat crop, but
recent rain in parts of the district should help soil moisture
levels. Preliminary credit reviews indicate agricultural loan
portfolios were in good condition. Most farm borrowers have been
able to meet their debt obligations with the help of government
payments, but some credit problems have emerged in areas where
crop yields were down in 1999. Despite these problems, district
bankers reported that only a few of their farm borrowers will be
denied credit this year. Farmland values remained steady due to
strong demand for farm real estate investment. Likewise, rental
rates for farmland stayed healthy, despite low commodity prices.
Wages and Prices
Labor markets remained very tight, with reports of labor shortages
similar to the recent past. Entry-level workers in most industries
continued to be particularly difficult to find. Other positions
experiencing shortages included clerical workers, engineers,
computer specialists, and hourly sales workers. Wage pressures did
not appear to be quite as high as in the latter half of 1999. Many
employers expressed disappointment with the current pool of
potential workers, and some said this has kept them from
attempting to attract new workers with higher wages. Sizable wage
pressures persisted, however, in sectors with a large potential
for job-hopping, such as the retail and restaurant industries. An
increasing number of small businesses appeared to be caught in a
cost-price squeeze. Costs at these firms have been driven up due
to recent wage increases, while selling prices have remained
fairly steady. Some retail prices edged up in late January and
early February but are expected to stabilize in coming months.
Prices for several manufacturing materials, including synthetic
rubber, chemicals, and solvents, moved higher and are expected to
rise further due to recent increases in oil prices. Builders
reported rising prices for some materials and expect continued
price increases with the seasonal expansion in building activity.
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Eleventh District -
Dallas
The Eleventh District economy
continued to expand at a brisk pace in January and February.
Demand for business services was robust, and retailers said sales
continued to be strong. Overall manufacturing activity was still
quite strong. Construction and real estate activity was mixed,
with a rebound in home building but a softening in office leasing
rates. Energy activity has been lackluster after showing signs of
rebounding at the beginning of the year. Financial service
contacts reported slower lending activity. Drought continues to be
a serious problem for agricultural producers.
Prices
Price pressures were mixed with rising prices for energy products
and some metals but continued price declines for some high-tech
products and some construction inputs. The lowest crude oil
inventories in over 20 years and OPEC's stated commitment to
production cuts have pushed up oil prices since early January,
despite generally lackluster demand. Heating oil prices rose above
$1 per gallon with low inventories and cold weather in late
January and February, but fell back to the mid-70 cents level.
Natural gas prices have remained over $2.00 per thousand cubic
feet since the new year, with spot prices hitting a high of $2.91
on February 1. Despite higher heating oil and gasoline prices,
rising crude prices are keeping refiners' margins under pressure,
and refineries have sharply reduced output. Concerns that refiners
are not building inventory for the spring and summer driving
seasons pushed gasoline futures up to post-Persian Gulf war highs.
Chemical producers say they would like to raise prices for basic
petrochemicals, such as ethylene and polyethylene, to protect
their margins from rising feedstock prices, and strong demand has
pushed down inventories for ethylene, but excess capacity suggests
producers will have difficulty raising prices. Contacts say prices
for plastic products have not yet risen because prices never fully
adjusted downward when crude oil fell to $10 per barrel. One
respondent warns of price increases very soon, however, for the
myriad of products made from plastic, such as shower curtains,
garbage bags, and squeeze bottles. Transportation firms say higher
fuel prices are taking a bite out of earnings. Many have added
fuel surcharges and are trying to raise prices. Brick
manufacturers are considering a price hike to pass along higher
natural gas prices and shipping fuel surcharges.
High-tech firms reported an
easing of the tight supply of semiconductor chips. The supply of
flat-panel monitors has also increased, after being in tight
supply for a couple of years, and their prices are softening.
Homebuilders say that cost pressures are significantly reduced
from the end of 1999, with lower prices for sheet rock and cement.
Manufacturers also reported lower selling prices for concrete and
cement, which they attributed to increased competition.
Labor markets remain tight. Wage
pressures are extreme for some types of workers, particularly
those who are being demanded by Internet firms. Some service firms
reported that higher wages are translating into higher fees. Some
high-tech companies say wages have accelerated slightly in recent
weeks, and noted that workers are demanding more pay in direct
wages instead of stock options. Legal contacts say heavy
competition with "dot-com" firms has caused many law
practices to increase wages. One retailer said that competition is
"wild" for workers with Internet experience and
"compensation is dramatic." Still, some firms reported
no change in wage pressures. One retailer said that workers appear
to be more sensitive to workplace conditions than moderate
increases in wages. This has led the retailer to 1) conduct
regular surveys of worker morale, 2) offer more training
opportunities and 3) encourage workers to enlist their friends as
fellow employees. The retailer is also offering contests and pizza
parties to improve worker retention.
Manufacturing
Overall manufacturing activity continued to be quite strong in
January and February. Several producers noted a rebound in sales,
after a slowdown at the end of 1999. Demand for lumber picked up
in February, particularly for wood used in finishing work at the
end of construction. Demand for concrete rebounded in February,
but remained slightly below a year ago, while cement sales
continue to be strong, at roughly the same level as a year ago.
Brick producers say sales are setting records every month. Sales
for paper products have moderated, but without a Y2K-related drop,
as some feared. Metals manufacturers reported brisk sales to the
oil industry but slowing demand for construction-related metals.
Computer and semiconductor manufacturers said demand growth was
stabilizing at a strong pace, after rebounding from a Y2K slow
down at the end of last year. Demand from Asia was reported as
very strong but some cooling was reported from Eastern Europe, and
demand remained sluggish from France and Germany. In response to
terrible profit margins, refiners reduced production sharply,
reducing capacity utilization from 91 percent in November to 84
percent in early February.
Services
Demand for business services remained generally robust. Temporary
firms reported that business has been as strong or stronger than
it was in December, with good demand from all areas, particularly
high-tech companies. Legal firms also reported strong demand for
their services. Transportation firms said demand was slower than
in December, which they attributed partly to seasonal factors,
particularly for passenger traffic. Trucking, rail and airline
cargo contacts wondered if they are still feeling the effect of
Y2K and depressed commodity prices.
Retail Sales
Retailers and auto dealers reported continued strong sales.
Houston area sales are picking up, after posting slower sales
growth than in the rest of Texas.
Financial Services
Lending activity was slower according to contacts, who noted
slowing in auto and mortgage financing. While some banks attribute
the slowing to the typical after-Christmas slow down, others
believe that higher interest rates are beginning to affect
lending. Some respondents have increased reserve accounts. Most
financial service contacts are optimistic but expect lending this
year to be slower than in 1999.
Construction and Real Estate
Home building picked up in January and February after showing
serious signs of slowing toward the end of 1999. Some builders say
growth was significantly stronger than expected and believe
interest rates are not affecting sales or traffic. One builder
noted that buyers have shifted to using adjustable rather than
30-year fixed rate mortgages. In contrast, a builder focused on
the "more affordable buyer" reported a pick up in sales
but said sales were below last year's level. This builder said
buyers are having a harder time qualifying for loans and, although
the builder has been "pushing ARMs," the cost-conscious
buyers tend to have an aversion to adjustable rate mortgages. A
commercial real estate broker reports "a lot more
anxiety" in the office market over the past 6 weeks. Tenant
companies have increased the velocity of change--shifting
strategies and changing leasing plans. There has been a sharp
increase in subleasing, and one contact estimated that 16 percent
of the Dallas market is currently available for subleasing, which
will lead to an overall drop in absorption and leasing rates.
Office leasing rates have fallen 5 to 8 percent in recent weeks
and will likely fall further, according to this contact.
Energy
Drilling activity has been lackluster, with the domestic rig count
stuck at 750 to 775 rigs and international work outside of Canada
still in decline. Oil remains out of favor, with an apparent turn
to oil-directed drilling in late 1999 seeming to evaporate. After
rising at the end of 1999, the "workover" rig count
dropped back sharply in January. Workovers are the quickest,
cheapest route to increasing oil production, as well as a leading
indicator for oil-directed drilling, according to contacts.
Improvement in the Gulf of Mexico has been marginal, with day
rates for rigs and supply vessels flat or showing small
improvement from depressed levels. Contacts say the industry
"remains unimpressed" by high oil prices and are
unwilling to take significant risks, choosing instead to pay down
debt with the increased cash flow. One respondent stressed the
financial and psychological damage that oil prices at $10 per
barrel had caused, and said firms needed to clean up the financial
problems before moving forward.
Agriculture
The USDA has declared almost half of Texas counties eligible for
drought disaster assistance. Wheat and oat crops are in generally
poor condition. Livestock conditions are poor, with heavy
supplemental feeding and herd reduction. Agricultural bankers
reported a decline in demand for loans, renewals or extensions.
Many link the reduced demand to drought conditions that have
discouraged farmers from planting and to government assistance
that has helped farmers pay off existing loans.
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Twelfth District - San
Francisco
Contacts reported strong
performance by the Twelfth District economy in recent weeks,
characterized by generally robust demand for final products and
labor inputs. Although some wage pressures were evident, prices
for final goods and most services have remained fairly stable, in
part due to vigorous competition in the retail trade sector.
District manufacturers reported strong demand, including some
increases in export demand, although aircraft deliveries continued
to decline. In addition, contacts saw few signs of capacity
constraints in manufacturing. Agricultural conditions were mixed.
Activity in the construction and real estate markets remained
strong in many parts of the District, although slowing was
reported in a few states. Financial institutions reported strong
demand for credit and adequate liquidity.
Wages and Prices
District respondents reported continued tight labor markets and
some upward compensation pressure. Prices for final goods and most
services, however, remained fairly stable during recent weeks.
Both skilled and entry level workers remained scarce in most
District states. Respondents from the retail, agriculture, and
manufacturing sectors indicated increases in wage pressures,
especially for those with computer and other technical skills. In
addition, contacts cited increases in benefits costs and the use
of incentives such as retention bonuses and salary increases in
connection with job reclassifications. Competitive pressures
reportedly held down price increases in the retail trade sector.
Sales of discounted products have been especially brisk, and
manufacturer incentives contributed to flat auto prices. However,
the price of ready-mix concrete increased due to capacity problems
and a lack of raw materials. In addition, prices for
transportation and courier services increased due to rises in fuel
costs and a shortage of licensed truck drivers.
Retail Trade and Services
Respondents reported generally strong retail sales and manageable
inventories in the survey period. One contact cited a buildup in
apparel inventories as an exception. Some constraints along the
retail supply chain have been apparent. Contacts in California
reported slower deliveries from manufacturers, while respondents
in other District states mentioned shortages of truck drivers and
shipping containers. Reports from service providers indicated that
advertising volume for "dot com" businesses has been
heavy.
Manufacturing
District manufacturers reported generally favorable conditions.
For example, contacts in the pharmaceutical, biotechnology, wood
products, and semiconductor industries reported strong sales.
Respondents from several industries reported increased exports due
to strengthening global demand. For example, a contact in the
machine tool industry mentioned an improvement in Japanese demand.
Respondents saw few signs of general capacity constraints or a
scarcity of input goods. One contact noted that wood product
inventories in the Pacific Northwest have increased in recent
weeks but remain acceptable. In Washington, Boeing's deliveries
have continued to decline.
Agriculture and
Resource-Related Industries
Conditions for District agricultural producers were mixed during
the most recent survey period. District beef producers benefited
from rising demand and high sales prices, combined with low feed
costs. However, in Arizona, ranchers have been concerned by a lack
of spring grass for grazing due to continued drought conditions.
District pecan crops were larger than expected and sold at good
prices. An Intermountain producer reported that alfalfa prices
have firmed in recent weeks. However, producers in the Pacific
Northwest reported a decline in apple and pear crop yields
compared to last year and increases in fresh pack and canned
inventories. Low cotton and grain prices continued to affect
District growers of these commodities. Increases in the prices of
oil, chemicals, and fertilizers boosted farmers' costs.
Real Estate and Construction
Construction and real estate market activity in the District
generally was strong during the survey period, although signs of
slight cooling were evident in some states. In California,
residential sales prices continued to rise substantially. In
Washington and Arizona, residential construction and sales
activity has been strong in recent weeks, but there was a report
of decelerating price increases in Washington. Housing starts
increased in Northern Nevada, and house prices in Hawaii were
either stable or rising. In contrast, slower residential
construction activity, sales activity, and price appreciation were
evident in Oregon, Utah, and Idaho. Activity in nonresidential
markets was strong in most District states. Structural steel
delivery time increased in California in recent weeks. However,
slower business construction activity was reported in Utah and
some increases in commercial vacancies were reported in Arizona.
Financial Institutions
Reports of strong financial conditions were widespread in the
District during the most recent survey period. Strong loan demand
was met by ample liquidity.
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