August 11, 1999 Summary

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Prepared at the Federal Reserve Bank of New York and based on information collected before August 3, 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 continued strength in economic activity, though there are widespread reports of supply constraints. Retail sales, which had been robust in the second quarter, decelerated somewhat in July, in some cases due to low inventories of clearance merchandise. Manufacturing activity continues to expand in most parts of the country, though a few districts indicate some softening. Performance has varied substantially by industry: electronics, heavy trucks and construction materials continue to exhibit strength, while textiles and metals remain weak. Residential construction and housing markets remain strong in most districts, though in some areas shortages of materials, labor, and available land have constrained home construction, delayed projects and boosted costs. Commercial real estate markets remain tight in most districts; building is mixed but generally strong. Tourism has generally been strong, especially in the Middle and South Atlantic seaboard regions. Loan demand is steady or rising in most districts. Although there has been some decline in residential mortgage lending, and especially refinancing activity, demand for commercial and industrial loans, as well as consumer (largely auto) loans, continues to grow briskly. Expectations of large Midwest harvests have depressed grain prices, but drought conditions are hurting crops in the eastern part of the country. The energy sector has shown some signs of improvement in recent weeks, as oil prices have continued to climb, but the level of drilling activity remains sluggish and lower than a year ago. Widespread labor shortages persist in virtually every district, but there have been only scattered reports of an actual acceleration in wages. Final prices of goods and services remain relatively stable for the most part. There are some reports of accelerating prices--largely related to home construction--but there is no evidence of any broad-based pickup in consumer price inflation. Consumer Spending July retail sales were characterized as strong in most districts, but the pace of growth appears to have eased since the last report. While sales continue to run higher than a year ago in all districts, activity has slowed somewhat in New York and Dallas--partly due to low clearance inventories--and has held steady in Kansas City. Overall, retail inventories are generally at desired levels. However, lean stocks of summer merchandise, most notably air conditioners, are reported in New York and Philadelphia. Contacts in Philadelphia, Cleveland, Richmond, Kansas City, and San Francisco express optimism that consumer spending will continue to be strong in the months ahead. Automobile sales continue at high levels in most parts of the country. In July, robust vehicle sales are reported in Cleveland, Richmond, Minneapolis, Dallas, and San Francisco. Dealers in Cleveland report low inventories, with certain models sold out. However, auto dealers in Philadelphia and Chicago say that sales slowed, following very brisk activity in June. Manufacturing Overall, manufacturing activity has been expanding in most districts, though Atlanta, Chicago, and Kansas City report some slowing. Manufacturing-sector performance varied considerably by industry. Output of industrial equipment and home-construction materials has been expanding briskly across most of the country, though there are scattered indications that growth is being limited by shortages of raw materials and labor. Boston, Cleveland, Dallas, and San Francisco report strong demand for electronic (computer/telecommunications) equipment; Cleveland and Chicago indicate strong orders for heavy trucks. There are also reports of strength in medical equipment (Boston), furniture (Richmond), and chemicals (Dallas). Weak or declining activity is reported in metals industries in Philadelphia, Chicago, and San Francisco, and in the textile industry in Philadelphia, Richmond, and Atlanta. Other reports of weakness come from makers of machine tools in Boston and San Francisco, farm equipment in Cleveland and Chicago, and commercial aircraft in St. Louis and San Francisco. Manufacturers in the west--Dallas and San Francisco--report some pickup in exports to Asia; producers in the Boston district see only scattered signs of improvement in Asian markets. Real Estate and Construction Housing activity continues at a vigorous pace in most districts, though supply constraints are limiting growth in many areas. Boston, New York, Philadelphia, Cleveland, St. Louis, and Minneapolis indicate persistent strength in residential real estate. Chicago, Kansas City, Dallas, and San Francisco report that housing activity slowed somewhat in July. New York and Richmond indicate that the recent rise in mortgage rates has not adversely affected the housing market and may have prompted some buyers to act. Shortages of materials, labor and land are hindering construction and delaying projects in some areas. Land shortages are cited in New York and Atlanta. Labor shortages are indicated in New York, St. Louis, Chicago, Dallas, and San Francisco--mainly for skilled tradespeople, such as carpenters, framers, and masons. Many districts also report problems in obtaining key construction materials, most notably drywall, insulation and bricks. Home sales in Boston, New York and Atlanta are being limited by construction bottlenecks, combined with low inventories of existing homes. Commercial real estate markets remain tight in most areas. St. Louis indicates a pickup in activity, while New York, Richmond, Chicago, Atlanta, Dallas, and San Francisco report that conditions are steady and strong. However, some contacts in the Cleveland and Dallas districts, though pleased with current conditions, express concern that vacancy rates have begun to rise. Tourism and Services Tourism has generally been very strong. Philadelphia, Richmond, and Atlanta note that summer resort areas are having an exceptionally good year; New York reports that hotel business has held steady at a high level through the first half of 1999. Boston and San Francisco cite a decline in international visitors from Asia and (in Boston's case) from Canada. Districts reporting on other non-retail service industries--Richmond, Dallas, and San Francisco--indicate that they are in good shape. Financial Services Banks in most districts report that overall loan demand is steady or growing, despite a dip in demand for residential mortgages. Atlanta, Chicago, and Kansas City indicate increasing loan demand, while New York, Philadelphia, Cleveland and Dallas report that demand is flat, on balance. By contrast, St. Louis district banks report declining loan demand, though this is largely attributed to a loss of share by banks in the mortgage market. Strong growth in commercial and industrial loans is reported from Philadelphia, Richmond, Atlanta, Chicago, St. Louis, and Kansas City. Consumer lending is reported to be strengthening in the Atlanta, St. Louis, Kansas City and Dallas districts but flat in New York and Cleveland. However, residential mortgage lending is generally weaker in Richmond and Dallas, as well as St. Louis. Declines in refinancing activity are reported in New York, Richmond, Chicago, and Kansas City. Credit quality appears to have improved, on balance, since the last report. New York, Cleveland and Chicago note an improvement in overall credit quality, while Atlanta and San Francisco indicate little or no change. Lending standards are mostly unchanged, though New York and Cleveland report some tightening in standards. Agriculture, Mining, Natural Resources Hot and dry weather in the eastern part of the country has caused some crop damage, but crops are generally reported to be in good shape in the interior regions. Philadelphia and Richmond report that drought conditions are severely hurting this year's corn and soybean crops. Cleveland, Chicago, and St. Louis report that the corn and soybean crops are generally in good condition, but pasture conditions are poor. Expectations of a large harvest have depressed prices, hurting farmers' incomes. In Minneapolis, Kansas City and San Francisco, wet weather has hindered output of some crops. The recent rise in oil prices has boosted activity in the Kansas City, Dallas, Minneapolis and San Francisco districts, though rig counts are still said to be well below last year's levels. Dallas reports that most of the increase in activity is in small, low-risk projects, while major projects (off-shore and foreign drilling) continue to trend down. Labor Markets, Wages, Inflation Virtually all districts report widespread labor shortages, but most indicate that overall wage growth remains subdued. There are severe shortages of skilled construction workers--particularly carpenters and brick masons--in most districts. Excess demand for computer and information technology workers is reported in Cleveland, Richmond, Atlanta, Kansas City and Dallas; however, Chicago notes some slackening in demand for Y2K staff. Retailers, including restaurants, report labor shortages in New York, Philadelphia, Richmond and Kansas City. San Francisco notes a shortage of seasonal agricultural workers. Despite the labor shortages, none of the districts reports evidence of any broad-based acceleration in wages. Still, there were scattered reports of accelerating or rapidly-rising wages--in biotechnology (Boston), construction (New York, Kansas City, San Francisco), retail (Philadelphia, Richmond), health-care (Atlanta), and transportation (Minneapolis). In addition, strong wage increases for office workers with technical skills are reported in Chicago and Kansas City. Aside from boosting wages, businesses are dealing with labor shortages in various ways: retailers in Boston are expanding performance-based compensation; businesses in Cleveland are providing job security commitments; truckers in St. Louis and builders in Kansas City are increasingly recruiting internationally and (in the latter case) using signing bonuses more than in the past. Consumer prices remain relatively stable, despite some apparent intensification in input price pressures. Manufacturers in New York, Philadelphia, and Chicago indicate a general increase in input costs, although those in Boston report flat to declining input prices. A number of districts indicate an acceleration in prices for certain materials--particularly construction materials such as drywall, lumber, bricks and insulation materials, as well as energy and transportation costs. Also, steel and paper prices, though low, have turned up recently. Agriculture and livestock prices, however, remain weak and are mostly down from a year ago. There is no evidence of any broad-based acceleration in prices of finished goods and services. Retailers in Boston, New York, Atlanta, Chicago, Minneapolis, and San Francisco report stable prices, while those in Philadelphia, Richmond, Kansas City, and Dallas indicate modest increases. Hotel room rates have risen noticeably in Boston but have leveled off in New York following sharp rises last year. Return to top         Boston