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September 17, 1997
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Prepared at the Federal Reserve Bank of Boston and based on information collected before September 8, 1997. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. Economic activity expanded in July and August in all twelve Federal Reserve Districts. Although some Districts note signs of slowing in selected sectors, about half the Districts say their region's overall pace picked up in July and August while the others report continued moderate growth. Retail results range from "mixed" to growing at a "solid clip." Manufacturers report generally rising orders and revenues, with durables manufacturing especially strong. Residential and commercial real estate markets are mostly improving, although the level of new construction activity varies widely. While most energy suppliers are seeing improvements, other natural resource industries and agriculture show considerable variability as a result of weather and other factors. Most regions are experiencing tight labor markets, recruiting difficulties, or growing labor shortages. Two-thirds of the Districts, however, report that these supply-demand imbalances are not translating into generally higher wages, although wages may be rising faster in selected industries, occupations, firms, or localities. Several Districts note that firms are using creative recruiting or compensation techniques to reduce the pressure on wages. With a few exceptions, prices for goods are said to be moving very little, if at all, at the manufacturing level for inputs or finished goods, and at the retail level.
Consumer Spending Districts reporting unanticipated increases in sales activity are Chicago and Dallas. In most Districts, inventories are at desired levels. However, Chicago reports lower inventories due to a weather-related increase in sales, while Richmond reports inventory accumulation as a result of moderating sales growth. Sales of apparel, other back-to-school items, and tourism are said to be very strong in most Districts. In addition, the St. Louis and San Francisco Districts say that sportswear and sporting goods sales are strong, while Boston, New York, and Cleveland cite strength in home furnishing sales. Sales of appliances and other consumer durables are mixed, with almost half the Districts (Boston, Richmond, St. Louis, Minneapolis, and San Francisco) reporting weak sales results, but New York and Cleveland experiencing strong sales. Although San Francisco reports generally solid retail sales growth in the District, softness is noted in Utah's retail and tourism businesses. All Districts report tight labor markets and difficulty attracting and keeping retail employees. Nonetheless, most Districts say that wages are either holding steady or rising only moderately. Only the Richmond District notes sharp wage increases in the retail sector. There is little evidence of price pressures at the retail level; in most Districts, both consumer and vendor prices are stable. Only Dallas and New York say that consumer prices are rising, albeit slowly.
Manufacturing Durables manufacturers appear to be doing particularly well; Districts typically cite strong or accelerating demand for computers and other business equipment, metals, machine tools, aircraft, and heavy equipment. Steel mills, in particular, are said to be struggling to build inventories to meet strong demand from such sectors as construction, oil and gas, and machinery. According to Chicago, light vehicle production will be higher this quarter than last (in part to rebuild stocks depleted during labor stoppages) and order backlogs are increasing for heavy trucks. Several Districts indicate growing sales of furniture and lumber, although San Francisco notes that declining foreign demand and rising imports had a depressing effect on sales and prices of wood and lumber products in that District. Nondurables manufacturing results are mixed. Oil refineries were operating at record high levels of capacity utilization this summer, according to Dallas. However, Atlanta and St. Louis note layoffs in the apparel industry, and Minneapolis and Dallas mention sluggish conditions in food processing. Several Districts report that the United Parcel Service strike created temporary disruptions, and rail shipments have been a problem in the Dallas District. Otherwise, there are no indications of unusual delivery lags. In general, materials cost pressures are described as modest, although several Districts indicate that manufacturers are paying higher prices for metals and packaging. Output prices largely remain in check, with Chicago and San Francisco noting a heightening of competitive pressures as a result of the appreciation in the value of the dollar. Reports of tight labor markets are widespread, but manufacturers appear to be facing only selective hiring bottlenecks or pay pressures. Boston, Atlanta, Minneapolis, Kansas City, and San Francisco report stiff competition or accelerating compensation for workers in technical and other specialized occupations. Kansas City manufacturers were also experiencing difficulties hiring production workers. Only Richmond indicates generalized wage acceleration and hiring concerns among manufacturers, while Cleveland exemplifies the other extreme, citing "no significant labor shortages or wage increases."
Real Estate and Construction Commercial real estate markets have been strong in most Districts that reported on this activity. Vacancy rates declined in New York, Philadelphia, Atlanta, Dallas, and San Francisco, with particularly strong office markets. Despite the declines in vacancy rates, almost no Districts note rising rents. Philadelphia reports a slight increase in rental rates but indicates that new construction could cause them to decrease. Rising commercial construction is reported by Philadelphia, Richmond, Atlanta, Minneapolis, and Dallas.
Banking and Finance Delinquency rates for both commercial and consumer loans continued stable to improved across the country. Several Districts report improved asset quality and some tightening in credit standards, although New York and Chicago note some apparent easing of standards for consumer credit and commercial mortgages, respectively. A number of Districts mention continued strong competition among banks and other institutions, especially for commercial and industrial loans. Philadelphia bankers note ongoing competition from commercial finance and specialized small business lenders, while Dallas says that stiff competition is exerting pressure on loan rates. San Francisco and Kansas City report a drop in bank deposits, citing strength in equity markets.
Nonfinancial Services
Agriculture and Natural Resources Reports on the oil sector indicate that continued strong demand for energy products has led to price increases, good profits, and a resurgence in oil and gas exploration activities. In the Minneapolis, Kansas City, and Dallas Districts, rig counts are at their highest levels in years. While prices remain below their late 1996 levels, supplies are currently tight; however, seasonal declines in gasoline prices are expected soon, and mild weather damped down energy prices in the San Francisco District. Contacts in Atlanta note that the resurgence of the energy sector along the Gulf Coast has produced strong demand for geoscientists and petroleum engineers, while some Dallas contacts believe that a shortage of experienced crews may limit future drilling activity.
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