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Federal Reserve Districts reported that as 1997 came to a close the pace of economic growth continued to be moderate. After a slow start in early December, retail sales gathered momentum in the days before Christmas and during the post-holiday weeks. Overall, retail sales for the holiday season were mainly at or slightly above expectations. Motor vehicle sales picked up at yearend due mainly to strong sales of sport utility vehicles, minivans, and light trucks. Manufacturing activity remained fairly strong, although some Districts reported signs of easing. Construction and real estate markets were strong at yearend, with tight markets for office and industrial space in several regions. Some Districts reported evidence of more speculative construction in response to increasing rental rates. Lending activity was brisk throughout the nation despite softer demand for consumer loans. Agriculture reports were generally favorable, although adverse weather has hurt livestock production in some Districts. The impact of Asian financial turmoil was felt in most Districts. Manufacturers and agricultural firms report weaker exports to Asia, and there was some evidence of increased competition from Asian products in U.S. markets. Despite lower prices, oil and natural gas drilling activity was strong last month.

Labor markets remained tight or very tight in all Districts. Reports of firms scaling back production or expansion plans due to labor shortages were more common. Some Districts reported increased wage pressures, particularly for retail workers and some skilled occupations. According to business respondents, prices were generally flat due to intense competition and lower import prices.

Consumer Spending
Most Districts reported that retail sales were slow in early December but picked up strongly during the days before Christmas and during post-holiday sale events. With few exceptions, holiday sales met or slightly exceeded expectations. Retailers noted that sales of electronics, computers, appliances, and jewelry were particularly strong. Some merchants reported disappointing sales of winter- related items, such as snow-blowers and winter clothing, due to unseasonably warm weather in many parts of the country. Post-holiday inventories were at desired levels. The tourism industry posted strong holiday results, with hotels operating at record high occupancy rates in areas such as New York, Boston, Florida, and California. Ski resorts, however, reported problems due to lack of snow.

Automobile dealers enjoyed good overall results last month, although sales were mixed across vehicle categories. Sales of sport utility vehicles, minivans, and light trucks remained stronger than sales of passenger cars.

Manufacturing
Manufacturing activity remained fairly strong, although some Districts showed signs of easing. Boston and Philadelphia reported manufacturing activity improved last month, while New York and Dallas noted weaker performance for the sector. Richmond reported a sharp slowdown in activity. Strong demand, production, shipments, and new orders were reported for aircraft parts, telecommunication and computer-related products, capital goods, and automobiles. In most Districts, the Asian financial turmoil started to have some impact on manufacturing activity. Some Districts reported weaker export demand for industrial equipment, building materials, aircraft parts, semiconductors, processed food, and some metals. There was also some evidence of increased Asian competition in the domestic market. Manufacturers in several regions expressed concern that the Asian turmoil and the overall strength of the dollar might hurt sales and profits in 1998.

Labor availability remained a major concern in most Districts. Manufacturers continued to report difficulties in hiring skilled technical workers, such as engineers. Some contacts in the St. Louis District could not meet demand because of a shortage of workers, and a major producer of high-tech equipment in the Chicago District had to cancel some projects because of the shortage of engineers.

Construction and Real Estate
Construction activity and real estate markets remained strong in most parts of the nation. The only two exceptions were Atlanta and Kansas City. New home sales in the Atlanta District were flat-to- down compared to last December, while construction activity was spotty. In the Kansas City District housing starts were down slightly last month.

Low and declining vacancy rates for retail, office, and other commercial space in urban areas began to put upward pressure on rental rates. Evidence of some speculative construction was cited by Boston, Atlanta, St. Louis, and Dallas as a response to persistently strong demand for commercial and industrial space.

The housing market remained strong in most regions. Unseasonably warm weather in many areas of the country boosted traffic and sales of new homes above their average December levels. Housing markets showed further signs of strength in New York and Dallas and a slight rebound in Chicago. In the Minneapolis District a fast construction pace became the norm.

Banking and Finance
Lending activity was brisk in most Districts, led by strong demand for commercial loans and mortgages. New York reported small to medium-sized banks faced softer demand for loans, especially for consumer loans and residential mortgages. Minneapolis reported that demand for bank loans was softening after a very strong 1997.

Most Districts reported that demand for mortgage refinancing was strong due to falling mortgage rates but that demand for consumer loans remained sluggish. New York, Cleveland, and Dallas noted that loan delinquency rates declined or stabilized at moderate levels.

Lenders in most Districts reported that strong competition was reducing the spread between borrowing and lending rates, particularly for quality borrowers. In contrast, contacts in Richmond indicated that pricing spreads had been maintained. In general, lending standards were unchanged in most of the Districts.

Agriculture, Energy, and Natural Resources
The agriculture reports were generally favorable, although performance was mixed across crops and livestock. Favorable crop conditions were reported by Richmond, Kansas City, Dallas, and Minneapolis. Winter wheat and small grain crops appeared to be in good shape. Crop harvesting was near completion in the Richmond District, and contacts there suggested that yields of most crops might fall short of 1996 levels. Chicago noted that farm prices for many key Midwest commodities have declined recently, which may hurt farm earnings in 1998. Chicago, St. Louis, and San Francisco reported that some agricultural producers were concerned that Asian turmoil will lead to weaker farm exports in 1998.

In the livestock sector, Kansas City and Minneapolis reported favorable conditions, while Dallas reported that snow and cold temperatures hurt some livestock operations. San Francisco also reported herd losses due to unfavorable weather and grazing conditions, particularly in the mountain states. Chicago noted that a seasonal rise in domestic hog marketings and a bulge in hog imports from Canada contributed to a decline in U.S. hog prices.

Minneapolis, Kansas City, and Dallas reported strong drilling activity for oil and natural gas last month despite weak energy prices. Minneapolis noted that output for iron ore and most forest products may stabilize in 1998 after strong or moderate growth in the last two years. San Francisco reported that a number of western mines had shut down operations due to falling gold prices.

Labor Markets, Wages and Prices
All Districts reported that labor markets were tight or very tight last month. Although labor shortages appeared to be broad-based, some skilled workers were in especially short supply. Most areas noted problems in finding computer-related workers, construction skilled tradesmen, and technicians. Shipbuilders in New Orleans were looking to hire foreign welders, shipfitters, electricians, and others. A company in Nashville was forced to idle more than 10 percent of its equipment due to labor shortages. In the Chicago District some projects were canceled due to a lack of labor, while in the St. Louis District some contacts were unable to meet production schedules due to labor problems. Some businesses in the Cleveland District increased their recruiting efforts, resulting in higher demand for human resources personnel.

Some Districts reported increased wage pressures, especially for some specific industries and skilled occupations. Boston and Richmond reported upward wage pressures in the retail sector. Boston also noted that some manufacturers began offering double-digit pay increases in categories such as engineering. San Francisco reported that wage and salary pressures remained high in financial institutions. Some employers in the Dallas District began offering higher compensation for skilled and semiskilled workers in the service sector and for skilled workers in construction, fabricated metals, bricks and lumber. Atlanta, Chicago, and Minneapolis reported that wage pressures were generally being held in check, with more significant wage pressures confined to specific skilled workers.

Most Districts suggested that employers continued to be creative in finding and recruiting additional labor. Some companies were subsidizing transportation for employees located far away from their work sites. Employers in several Districts adopted flexible work schedules and more generous benefit packages.

While reports of price changes for goods and services were mixed, prices overall remained generally flat. At the retail level, many Districts reported that most of the holiday sales occurred late in the season at large discount levels. Richmond reported that prices in the retail, service, and manufacturing sectors grew at a somewhat slower pace than in the last report, except for soaring prices for starter homes in a specific area of North Carolina. Manufacturers in most areas reported stable prices for their inputs and final goods, due to intense competition and lower import prices. Minneapolis noted that manufacturers of intermediate goods continued to receive pressure from customers to lower prices. Tourism appeared to be an exception from the overall price picture, with Boston, New York, and Atlanta reporting higher rates for hotel rooms. Higher rental rates were also reported for commercial and industrial space in many urban areas.