June 16, 1999 Summary

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Prepared at the Federal Reserve Bank of Kansas City and based on information collected before June 7, 1999. 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. District reports indicate that the U.S. economy remains strong, with gains in activity widespread. Retail activity in most districts has shown little sign of slowing, and consumers remain upbeat about the economy. Home furnishings and motor vehicles sold particularly well in April and May. Manufacturing activity continues to improve in most areas from the sluggish conditions of the past year and a half. Production of such items as electronics, machinery, heavy trucks, and construction equipment has been especially strong, although some sectors, such as steel and apparel, continue to face stiff competition from foreign producers. Construction continues to grow at a brisk pace throughout the nation, spurred by strong home sales in most parts of the country. Shortages of labor and materials, however, have resulted in higher building costs in some districts. Lending activity remains strong in most districts despite a slowdown in refinancings due to slightly higher mortgage rates. In the agricultural economy, growing and planting conditions have been mixed. There is little optimism about farm incomes in 1999, as most agricultural commodity prices remain low. Energy activity in most regions has been slow to react to the recent increases in oil prices, although expectations of a solid recovery are high. Labor markets remain very tight in almost all districts, with increased reports of upward pressure on wages in many parts of the country. There have been some reports that labor supply constraints are impeding employment growth in many sectors. Prices, however, with the exception of several construction materials, remain well behaved. Consumer Spending The strong retail activity in most districts earlier in the year showed almost no signs of easing in April and May, as consumers remained upbeat about the economy. The only district reporting weaker activity was Kansas City, where sales have edged down but are still above year-ago levels. Retailers in the Cleveland district report especially strong sales numbers for May, particularly for specialty apparel items. The hottest selling products in most districts have been home furnishings and appliances, in part reflecting continuing strength in home sales and housing construction. Stores in metropolitan areas of the Dallas and Minneapolis districts posted vigorous sales, but rural merchants in these districts continue to suffer as a result of a weak agricultural sector. Airline and cruise bookings in the Atlanta district remain strong even as prices have edged up, and advance summer bookings for south Florida resorts are higher than a year ago. Labor shortages are a major concern for many retailers, especially for entry-level workers and sales associates. In the Cleveland district, virtually all companies operating amusement parks have been severely understaffed, with some having to cut back operations as a result. Stores in several districts increased their inventories in May in anticipation of robust sales throughout the summer. Automobile sales increased in most districts in April and May due largely to the continued popularity of light trucks and sports-utility vehicles. Inventories of new trucks have been tight in most places, particularly in the St. Louis and Kansas City districts. Auto dealers in the Chicago district have been able to push through modest price increases. Manufacturing Manufacturing activity in most districts has continued to improve from the sluggish conditions experienced in the recent past. Boston, Atlanta, and Dallas, however, report mixed results, and New York notes some slowing in factory activity. Strong new orders, production, and shipments were reported for many manufacturing products, such as heavy trucks, electronic equipment, machinery, and food and biotechnology products. Brisk demand for construction equipment and building materials has continued across the nation, as construction activity remains strong. Similarly, a strong housing market continues to fuel the demand for appliances. San Francisco reports that increased demand from East Asia has helped paper and pulp processors in the Pacific Northwest. Some sectors continue to report strong foreign competition, however. For example, activity at steel mills remains weak and many apparel producers continue to struggle with competition from cheap imports. Manufacturers in several regions have expressed concern about labor availability and continue to report difficulties in hiring skilled technical workers, especially in the information technology area. As a result of a shortage of qualified workers, not all of the increase in demand for manufactured goods in the St. Louis district has been met. Additionally, labor costs have become a major concern for most contacts in that district. On a positive note, many districts continue to report healthy productivity gains, with Richmond noting that several manufacturers are experiencing record productivity, in part because of increased capital spending. Construction and Real Estate Construction activity and real estate markets remain robust in most parts of the country following an exceptional first quarter. Only New York, Atlanta, and Kansas City appear to be experiencing slightly weaker building activity, but in all three districts activity is still well above year-ago levels. Sales of new and existing homes remain very strong in Chicago and St. Louis, with a shortage of available houses leading to rising prices and quick sales. Construction in the Kansas City district is expected to pick up considerably over the summer months as Kansas and Oklahoma rebuild from tornadoes that destroyed or severely damaged more than 10,000 homes and businesses. Commercial real estate markets have improved in most districts. Demand for office space in downtown Boston continues to increase. Retail, office, and warehouse leasing commitments in the Richmond district have been stronger as well, especially in Virginia and the Carolinas. In Chicago, the retail segment has been particularly vibrant. Builders in most districts continue to complain of substantial shortages of labor, especially for framers. Several construction materials, particularly sheetrock, also remain in short supply. The shortages have created rising construction costs, and project schedules in some districts have been affected, but builders in general remain optimistic about the future. Banking and Finance Demand for loans has remained strong in most districts, although some weakness in commercial loan demand has been seen in New York and Atlanta. Several districts report strong competition among banks for high-quality commercial customers, with some indication in Chicago that this may be affecting lending standards. In most districts, however, lending standards remain generally unchanged. Higher mortgage rates appear to have slowed refinancing activity across the country, but real estate loan origination and consumer lending remain strong overall. Chicago, New York, and Philadelphia report some signs of weakness on the consumer side, however. Loan delinquency rates have shown some improvement across districts. Agriculture, Energy, and Natural Resources In the agricultural sector, growing and planting conditions have been mixed across districts. Cleveland, Chicago, St. Louis, and Dallas report planting has been generally at or ahead of schedule. Dry conditions have hindered planting and crop development in some areas of the Richmond and Cleveland districts, however, while Minneapolis has seen some problems caused by wet fields. There is little optimism about farm incomes across districts, as commodity prices remain low. As a result, agricultural credit markets are somewhat stressed, with Minneapolis reporting increases in farm liquidations and bankruptcies and Chicago reporting a general slowing in agricultural loan repayments. Oil exploration has been slow to react to price increases in most areas, but expectations of a solid recovery are high if the price increase is sustained. Some increases in activity have been seen recently, such as in the Kansas City district, but rig counts remain well below year-ago levels. Labor Markets, Wages, and Prices Labor markets were extremely tight last month in almost all districts, with no signs of easing in the foreseeable future. Despite the summer influx of student workers, temporary employment firms in many districts have been unable to fill all their job openings. Employers in Cleveland are hiring temporary workers in hopes they will become permanent employees after a short trial period. Richmond, Chicago, and St. Louis note that severe labor supply constraints are hampering employment growth in many sectors. Although labor shortages are reported in almost all sectors, some skilled workers have been in especially short supply and many employers have broadened their searches from local to regional and national levels. Information technology workers, in particular, are very difficult to find. As an employment agent in Northern Virginia put it: "Anyone that can operate a personal computer can get a job." Skilled tradesmen in the construction sector are also extremely scarce, especially in urban areas where the building boom continues. The Minneapolis district reports that builders in Duluth imported 200 trade workers due to the lack of available local workers. Persistently tight labor markets have resulted in many reports of increased wage pressures, especially for some specific industries and skilled occupations. Chicago, St. Louis, and Richmond report upward wage pressures in almost all sectors, while other districts report more scattered wage increases. For example, retailers in the Boston district report a recent increase in the use of higher wages as a recruiting tool, while a large retail chain in New York notes increased wage pressures primarily for entry-level positions. In Dallas, wages have risen for truckers, secretaries, legal assistants, and workers with technical skills. Similarly, wage changes in San Francisco have been generally limited, but increases were noted for some types of workers. Cleveland and Philadelphia report that wage pressures have generally been held in check, but rising benefits costs have become more common. The Kansas City district is an exception, as wage pressures there appear to have eased somewhat from previous surveys. Many districts suggest that employers have continued to be creative in finding and recruiting additional labor. Employers in the Atlanta district, for example, appear to be using more bonuses and incentives as part of total labor compensation, and many companies are using more part-time workers and consultants as well as allowing employees to work at home. Some firms in the Boston district are avoiding higher labor costs for new hires by outsourcing and changing work assignments internally. Prices remain generally subdued, but many districts report pockets of higher prices for some specific sectors and goods. At the retail level, price increases have been marginal and infrequent. Retailers indicate that stiff competition continues to restrain price increases. Dallas, for example, reports that smaller markdowns have resulted in a slight increase in average selling prices and Kansas City notes that retail prices continue to edge up. Chicago suggests there have been a few signs that consumer resistance to price increases has softened somewhat. In contrast, retailers in the New York district report that selling prices and merchandise costs have been flat to slightly down. Prices for manufacturing goods and materials have held steady, with modest increases for a few items, such as cardboard, packaging materials, metals, and ethylene-based petrochemicals. The big exception has been building materials, especially sheetrock, which continues to experience substantial price increases. Housing prices and commercial rental rates have also increased in several districts. Return to top         Boston