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Beige Book: National Summary

March 18, 1998

All district economies continue to show overall strength, but a few have noted some recent moderation in their rates of growth. Retail sales are generally up in most districts, exceeding retailers' expectations in many of them. Auto sales, however, are generally down, although demand for pickup trucks and sport utility vehicles remains high. Industrial activity is on the rise in most parts of the country, with orders and production up. Most districts, though, are experiencing a decline in exports to Asia. Continuing the theme of recent reports, the demand for labor remains strong, with nearly all districts reporting shortages of workers at the entry level and in certain skilled categories. Widespread labor market tightness appears to have increased the degree of wage pressures compared with recent reports. Pressures on product prices remain eerily calm, as domestic competition, productivity gains and the Asian situation help to constrain production costs. Residential housing markets, buoyed by low interest rates and mild weather in many districts, are unseasonably hardy. Commercial real estate markets are healthy across districts. Loan demand, especially for residential mortgages, remains strong in most districts. Agricultural conditions are mixed, with some districts reporting that an abundance of precipitation has harmed crop prospects and delayed field preparation activities.

Consumer Spending
Most districts report that January and February sales are up from one year ago. The Boston, Chicago, Cleveland, Dallas, New York and Richmond districts report that sales have generally exceeded retailers' expectations; in the Atlanta and St. Louis districts, sales have generally met expectations. Almost all districts report that unseasonably mild winter weather has helped boost sales of items in many categories, especially home improvement products, furniture and building materials. Sales of winter clothes, however, have suffered in most parts of the country. The New York district notes that contacts experiencing weak retail sales have usually cited mild weather as a cause. The Atlanta, Chicago, Cleveland, New York and Richmond districts report strong sales of spring clothes, particularly for women; the Boston and San Francisco districts note that apparel sales are down. The San Francisco district adds that department store sales in Southern California are also down. Most districts report that retailers' inventories are at desired levels, although some contacts in the Kansas City and St. Louis districts report that inventories are too high.

Auto sales in most districts are down from one year ago. While sales of pickup trucks, sport utility vehicles and minivans remain strong, sales of passenger cars are either flat or down. The Richmond district reports, though, that sales of new and used vehicles have exceeded expectations. The Dallas district notes that vehicle sales surged in January, before slowing somewhat in February. Almost all districts report that vehicle inventories are too high, although contacts in the Kansas City district are satisfied with their stocks. Contacts in most districts expect some strengthening in sales this spring.

Manufacturing
Almost all districts report steady or increasing growth in industrial activity, although the Dallas district notes a slight weakening in growth. The Chicago district reports that activity is robust, with nearly every sector operating near capacity, while Kansas City district contacts report that current operations are at moderately high levels of capacity utilization and expanding. The Cleveland district notes that, although production is up at most surveyed firms, the number reporting a slowing in production has risen. The Richmond district describes a resurgence of activity, with sharp rebounds in orders and shipments. The Chicago, Cleveland, Minneapolis, New York, Philadelphia, St. Louis and San Francisco districts also report hikes in new orders, while the Kansas City district has seen a mild decline.

Makers of building materials and related products generally report continued brisk or rebounding sales due to strength in construction markets. The Dallas district, however, notes that sales of construction materials are down because of a wetter than usual February. Aircraft and heavy truck parts, primary and fabricated metals, and steel production are reportedly strong in the Boston, Chicago, Cleveland, Minneapolis, St. Louis and San Francisco districts. Demand for business services, particularly real estate services, and telecommunications services is up in the Richmond and San Francisco districts. Contacts in the Dallas district, though, report that sales of telecommunications equipment are essentially flat.

The apparel industry is in decline in almost all districts. Plant closings, falling sales and declining orders are common, reflecting both increased import penetration and a weakening of export demand. Just about every district reports that exports of many goods to Asia are dropping. The Richmond district, however, notes that activity in the district, except in the textiles industry, has not been affected by the Asian situation. The Boston district adds that the strong dollar has been hurting exports to all parts of the world, not just to Asia.

Labor Markets
The tone of this report is largely unchanged from that of recent reports: Taut labor markets continue to hamper business activity in a variety of ways. In general, the apparent imbalance between the demand and available supply of workers remains the dominant theme, with the majority of district reports suggesting that the supply of entry-level and skilled workers-most often in technology-related fields, but also in construction and certain skilled craft positions-appears to be insufficient to meet existing production schedules. In the St Louis district, for instance, contacts note that UPS is concerned it will not be able to find enough workers to staff a major expansion.

Firms have used a variety of methods to ameliorate these shortages. For example, in the Boston and Cleveland districts, firms are hiring temporary workers and outsourcing production more often, while in the Atlanta, Chicago and Kansas City districts, firms are resorting to worker training programs and various incentive or award programs.

Wages and Prices
With labor markets stretched to the limit in many areas, there have been reports of rather large wage increases-although this is by no means consistent across all districts. In the Boston district, vigorous demand at temporary employment agencies has produced wage increases of up to 15 percent; wage increases in the retail sector are running 4 to 6 percent higher than the previous year, while wage increases in manufacturing are running at 3 to 5 percent. Wage gains appear to be more measured elsewhere in the country. The Cleveland district reports wage gains of 3 percent, while the Minneapolis and San Francisco districts report wage increases of anywhere from 0 to 4 percent. The Atlanta and Richmond districts report somewhat faster wage growth in the retail sector, but note that overall wage gains are modest to subdued, which is similar to the Chicago and Kansas City district reports.

Price pressures appear to be less pressing than wage pressures, according to most district reports. Manufacturing raw materials costs have reportedly increased little, if at all, in the Boston, Chicago, Cleveland, New York and Philadelphia districts. At the same time, nonmanufacturing firms in the New York district, as well as manufacturing firms in the Kansas City and St. Louis districts, note higher input prices. In addition, a few districts continue to report that competitive pressures and productivity gains have worked to offset higher materials prices and to limit product price increases. Although a few firms in the Chicago district have attempted to raise their selling prices, these efforts have not been entirely successful.

The evolving Asian situation has had some depressing effect on prices, according to most district reports. The Dallas district reports that Asian currency movements against the U.S. dollar have caused widespread declines in the prices of commodities, computer components and petrochemical products. In the Atlanta district, some import prices have fallen, although not among importers with fixed contracts. Meanwhile, retailers in the New York district report that no significant price declines in consumer goods have occurred.

Construction and Real Estate
Every district reports strong residential housing market conditions. New home construction is described as unseasonably brisk in several districts, including Boston, Chicago, Cleveland, New York and St. Louis. Mild winter weather, high consumer confidence and low interest rates are credited with much of this strength. However, in several districts, such as Atlanta, Dallas, and Richmond, otherwise robust activity is being hampered by wet weather. Sales of new and existing homes are reportedly strong in most districts, and modest price appreciation is noted by many districts.

Commercial real estate markets are uniformly described as strong by reporting districts. Contacts in a number of districts are reporting declining vacancy rates, rising rental rates and increasing speculative construction. The commercial real estate market has "picked up dramatically" in the Richmond district, with "floods of tenants looking for space." Nonresidential construction and prices are up in California, while the Dallas district reports a sharp increase in land prices. Contacts in several other districts, however, see signs of an impending slowdown and are worried about the pace of speculative building.

Banking and Finance
Most districts report moderate to vigorous demand for bank loans. Contacts in the Chicago, Cleveland, Dallas, Minneapolis, Philadelphia and San Francisco districts indicate that loan competition, especially on the commercial side, is stiff, although there are concerns in some districts that this competition could compromise credit standards. Mortgage lending, especially refinancings, is reportedly strong in the Atlanta, Chicago, Cleveland, Dallas, Kansas City, New York, Philadelphia, Richmond and St. Louis districts. Contacts in the Atlanta and Chicago districts report robust consumer loan demand, while contacts in the Cleveland, Dallas, Philadelphia and St. Louis districts note some softening. A reduction in consumer loan delinquencies is reported in the Chicago and New York districts. The Chicago district notes that credit card repayments are up and personal bankruptcies are declining.

Agriculture and Natural Resources
Agricultural conditions vary widely across districts. The deluge of rain that hit California has damaged crops. Near-record precipitation has reportedly worsened the condition of the winter wheat crop in the Richmond district rather significantly. In the Kansas City district, however, the winter wheat crop appears to be in good shape. Although rains have delayed field activities in the Dallas and Minneapolis districts, overall conditions are reportedly good in those areas. Contacts in the Richmond district are worried that a late frost may harm the apple and peach crops. The Chicago district reports that corn exports have weakened markedly-not solely because of Asia-although the soybean export picture is somewhat brighter. In the St. Louis district, cotton exports to Asia, while still expected to wane, are not declining as much as many had expected since sales to other markets, such as Mexico, have picked up. The San Francisco district reports a similar situation for beef and pork exports. Lower cattle and hog prices are hurting the profit margins of producers in the Chicago, Minneapolis and Kansas City districts.

The unseasonably warm winter weather has affected the energy extraction industries to varying degrees. The Dallas and Minneapolis districts report increased activity, while energy output increases have begun to decline in the Kansas City district. Solid demand for steel continues to bolster iron ore output in the Minneapolis district.