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Beige Book: National Summary

June 17, 1998

Overall, the U. S. economy continues its excellent performance. Output and employment are high while inflation is low. The economy continues to grow in all Federal Reserve districts and across most sectors. The pace of growth has varied across Federal Reserve districts, ranging from quite strong in the Northeast, much of the Midwest and the West Coast, to somewhat more modest growth in the Southeast and in the Dallas district. Growth is fueled by liberal
consumer spending and by business investment in plants and
equipment. The construction sector is very strong. Manufacturing is robust in several districts, notably Chicago, St. Louis and Kansas City, but somewhat weaker in an arc from Dallas through Atlanta and Richmond.

In agriculture, crop conditions are generally favorable, but crop and livestock prices are low. Oil and gas drilling continues slack, while output in other natural resource industries is generally stable. Seven districts report some adverse effects from economic problems in Asia.

Household Spending
The strength of the nation's economy is reflected in household spending. Boston reports 5 percent to 8 percent growth over year-earlier retail sales, while New York and Chicago describe them as above-plan or above expectations. Philadelphia and Richmond describe sales as healthy, Minneapolis as brisk, Kansas City and San Francisco as robust and Dallas as strong. Atlanta sees somewhat softer consumer spending, with most retailers saying "recent sales had gone as planned, but a significant minority noted their disappointment." In the Chicago district spending increased modestly, with sales exceeding retailers' expectations, while for St. Louis average sales are up 2 percent to 2.5 percent.

The composition of consumer spending varies somewhat by region. Home furnishings and related goods are strong in several districts. Summer clothing and other apparel are strong in the Midwest, but mixed in New York. Motor vehicles are selling well in San Francisco, Philadelphia, Richmond, Kansas City and Chicago, but more slowly for Dallas and in rural parts of the Minneapolis district. St. Louis was one of several districts to note the effects of strong incentive
programs on auto sales. Sport utility and luxury vehicles continue to sell more strongly than other models in many areas.

Tourism is strong in Boston, New York City and the Carolinas. Atlanta expects a very good season in Florida and notes record business at Mississippi casinos. Minneapolis district tourist businesses also anticipate a good summer season. San Francisco reports good tourist trade at present but anticipates some falling off in October.

Construction and Real Estate
Construction is an engine of growth in many districts. Boston, New York, Minneapolis, St. Louis, Kansas City and Dallas all report vigorous home building. Cleveland notes a continued overall strong sector, with residential building up across its district but mixed activity in nonresidential categories. Home building is very strong in California, but softer in Oregon and Utah. Chicago's construction sector is bolstered by strong commercial building activity.

Several districts report strong market activity for existing real estate, both residential and commercial. Richmond relates that residential and commercial business was strong, but the pace of growth was moderating. Minneapolis notes that long waits for newly constructed homes are fueling interest in existing housing. Chicago and New York report tighter markets for office space in contrast to some softening in Philadelphia.

Manufacturing
Manufacturing generally is growing strongly, particularly in the Northeast and Midwest but at a somewhat slower pace elsewhere. Chicago describes particularly robust manufacturing, especially in heavy equipment, appliances and steel. St. Louis reports vigorous activity, while Boston lists double-digit sales gains for aircraft components, power equipment, and medical and pharmaceutical equipment. Philadelphia notes continued gains, and Kansas City
says plants are operating at a high level of capacity. Minneapolis describes manufacturing growth as strong but not spectacular. Cleveland says that production is expanding at a slower pace than earlier in the year.

In contrast, manufacturing growth appears somewhat slower across the Southeast and South. Richmond says that shipments have declined recently and new orders are more modest. For Atlanta, production has increased but expectations reportedly are for some softening. Dallas
similarly reports a slightly slower manufacturing sector, driven in part by sluggishness in the energy industry. But demand for construction-related goods in the Dallas district is so strong that items such as drywall and concrete are being rationed by suppliers. San Francisco notes expanded output overall, but deceleration for some products, particularly those affected by slack demand in Asia.

Agriculture
Conditions for farmers vary widely depending on region and crop or livestock enterprise. Crop conditions are good in most areas, especially the corn and soybean areas of the Chicago, St. Louis and Minneapolis districts. Kansas City anticipates excellent winter wheat yields on a somewhat reduced acreage from a year earlier. Richmond also anticipates good yields for its grain producers. Exceptions to this general pattern are wheat growing areas of Montana and the Dakotas, where drought is a concern as it is for some Dallas district farmers. Cleveland notes mold problems for Kentucky tobacco growers as well as a short wheat crop there. Moreover cold, wet weather has hampered some fruit production in California and the Carolinas. Crop prices remain depressed in response to anticipated strong yields and weak export demand.

Low cattle and hog prices are putting pressure on producers' bottom lines, although Chicago notes some recent improvement in hog prices from lows experienced earlier in the year. San Francisco and Kansas City report that cattle feeders are losing money.

Other Natural Resource Industries
All districts reporting on oil and gas drilling describe it as
slack. Dallas notes further slowing of drilling due to large stocks of gas and oil. The energy sector is also weak in the Minneapolis district, with gas somewhat better than oil. Kansas City reports a slight uptick, though activity remains well below year-earlier levels.

Iron mining sources in the Minneapolis district indicate that 1998 output should match the strong pace set in 1997. Forest product output apparently is stable. Paper manufacturing reports are mixed, with Minneapolis describing profitability varying among grades of paper and Dallas noting increased pulp imports. For Atlanta, mills are still operating below capacity, but with some improvement.

Banking and Insurance
Banks and other financial firms are generally in good shape. San Francisco reports stronger demand for loans by businesses than by consumers. Dallas sees increased consumer borrowing, except for auto loans. Kansas City describes higher lending to consumers and agriculture. Minneapolis says that while loan volumes continue to grow, the growth rate has slowed somewhat, and lenders are becoming somewhat more cautious. Bankers in the St. Louis district reportedly describe loan demand and competition as strong. Lending to consumers and businesses in the Chicago district is apparently very brisk, and loan quality may be improving. Banks' loan business is also strong in Richmond, Philadelphia and New York. Boston describes slack demand for traditional life insurance, but increasing interest in lines such as group disability policies as employers increase employee benefits.

Employment, Wages and Prices
Employment levels are high and labor markets tight in most areas. While no district reports widespread increases in general wage levels, reports of increases in occupation-specific, targeted or nonwage compensation are frequent. Boston, Atlanta, Cleveland and Chicago cite acute shortages of information technology workers and say that some jobs are going unfilled. Boston notes that tight labor markets are not yet leading to sizable wage hikes but says that temporary employment firms are expanding sharply. Cleveland reports some acceleration in compensation costs amid indications of tight labor markets. Richmond says that demand for workers remains intense but overall wage pressures are still mild. Similarly, Atlanta describes labor shortages as plaguing parts of its district, but with little upward wage pressures. Chicago sees signs of broad-based labor shortages, with wages rising in specific occupations and at the lower end of the pay scale, but reports that general wage pressures are still subdued. Demand for labor remains strong in the St. Louis district, with some upward pressure on wages noted. Minneapolis continues to have very tight labor markets with widespread nonwage compensation increases despite overall restraint of base wage increases. Kansas City reports continued, but not increasing, moderate wage pressures in very tight labor markets. Dallas made note of firms' widespread difficulty in hiring skilled workers and their use of targeted wage increases. Construction workers are in short supply in the San Francisco Bay area, though there is some easing of employment among high-tech manufacturers.

Despite indications of tight labor markets in all districts and
higher compensation costs in several, prices of goods are largely stable. Boston and New York report manufacturing input costs as flat or down. New York purchasing managers see upward pressure on contracted services, with most firms reporting unchanged input and output prices. Cleveland and Atlanta note largely stable commodity, input and finished goods prices. Minneapolis says that commodity and energy prices are holding down increases in the general price level.
Price changes are mixed in the Dallas district, with the
preponderance lower. San Francisco cites some cost increases for services.

Inventories
Reports that mention inventories generally describe them as at normal levels relative to sales. Philadelphia reports stable
manufacturing order backlogs and inventories and retailers'
inventories at appropriate levels. Cleveland describes some upward movement in inventory levels but categorizes them as in line with production levels. Atlanta views inventories as generally on target, while Chicago says retail inventories are "in good shape." St. Louis and Kansas City say that most retailers are managing inventories at lower levels, although some auto dealers have too many cars on hand.
Minneapolis notes some evidence of shorter delivery times and higher supplier inventories.

Asia
Seven districts made specific note of effects from economic problems in Asia. Boston says such troubles have held down some input prices and reduced demand for some manufactures. New York describes incipient price reductions for imported electronics and apparel. Philadelphia lists declining orders from Asia for primary metals and construction materials. Richmond sees more effects from import competition in apparel and textiles than on exports. Chicago steel producers are facing increased competition from Asia and high-tech and electronics is also suffering. Dallas lists weak Asian demand for petrochemicals and telecommunications gear. San Francisco district producers of computer components and lumber also have seen a drop in sales to Asia.