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Prepared at the Federal Reserve Bank of San Francisco and based on information collected before February 29, 2000. This document summarizes comments received from businesses and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicated appreciable expansion of economic activity during late January and February. The majority of districts reported strong growth during the survey period, with the remaining reports pointing to moderate growth or continued high levels of activity. Retail sales expanded significantly over their year-earlier levels. Gains in manufacturing output were widespread. Providers of services to businesses and consumers continued to expand output and employment substantially. Real estate market activity and construction were at high levels, although slight cooling was evident in some areas. Conditions in the agricultural and resource extraction sectors were mixed. Demand for bank loans generally was strong, but several districts reported slower activity in some loan categories, especially consumer loans and residential mortgages.
Constraints on the availability of labor and other production inputs were apparent in many areas. Most districts reported tight supplies and upward wage pressure for various types of labor, both skilled and entry level. Despite faster wage growth for some workers, increases in the prices of final goods and services were limited overall, although the prices of transportation services and some industrial commodities rose noticeably.
Consumer Spending
Retail sales were strong in most areas and generally met or exceeded retailers' expectations for the period. Compared to a year earlier, growth in retail sales was in the upper single-digit range in Boston, the mid-single digit range in Chicago, and 3 to 7 percent in New York. By product line, consumer electronics, appliances, and home furnishings posted the strongest sales increases. Further advances in e-commerce sales were reported in a few districts, although Kansas City noted that online sellers gained business at the expense of retailers in rural areas. Demand for automobiles and light trucks was solid on net; sales mostly were at or above high levels from a year earlier, with reports of double-digit gains in the Minneapolis District. In contrast, several districts noted sluggish sales of apparel. Inventories generally were deemed appropriate for the prevailing pace of sales, although slow sales contributed to a buildup of apparel inventories in San Francisco and winter merchandise inventories in New York.
Manufacturing
Most districts reported a pickup in manufacturing activity in January and February. The gains were moderate in general, although Richmond's report indicated considerable strengthening. Cleveland noted strong growth in demand for industrial machinery. Sales of semiconductors and related high-tech equipment were strong in Dallas and San Francisco, and earlier tight supplies of semiconductors and flat-panel display monitors have eased. Demand for a variety of other manufactured products grew substantially, including metal products, electronics, furniture, chemicals, paper, and food. Demand for steel was especially strong, largely for use in the manufacture of motor vehicles and other consumer durable goods. Among less upbeat indicators, Boston, Atlanta, and San Francisco noted cutbacks or ongoing weakness in aerospace manufacturing, and Chicago reported that the market for construction and agricultural equipment remained soft. In addition, Dallas reported that refineries in that district are being squeezed by high prices of crude oil and have reduced output; reports from that district also indicate that gasoline inventories are low heading into the spring and summer driving seasons.
Nonfinancial Services
Reports from the Boston, New York, Richmond, Dallas, and San Francisco Districts indicated that activity of firms providing nonfinancial services to businesses and consumers grew briskly during the survey period. Temporary employment agencies were very busy, with Boston reporting revenue growth of 25 percent from a year earlier for these firms. Computer services firms expanded rapidly in several districts, with newly created internet firms reportedly spending large sums on advertising campaigns in the San Francisco District. Demand for transportation services was strong, but availability of trucking services was constrained in some areas by labor shortages.
Real Estate and Construction
Construction activity and demand for residential and nonresidential real estate remained at high levels, although cooling was evident in some markets. Demand for commercial space was strong in most areas, with low vacancy rates and rising rents even in areas where substantial new space has come on line. Reports from the Minneapolis District indicated that commercial construction values were up more than 20 percent in recent months compared with a year earlier. In contrast, Dallas reported a sharp increase in office subleasing and an ongoing decline in lease rates in that city; Atlanta noted slower nonresidential construction activity; and San Francisco reported that nonresidential markets have softened somewhat in two inland states in that district.
Residential construction activity and sales of new homes remained strong in many areas, although several reports cited evidence of slowing compared with 1999. Recent levels of construction and sales activity were near historical highs in the St. Louis and Minneapolis Districts, and they also have remained high in California, where home prices have been rising rapidly. However, signs of cooling in residential real estate markets have emerged in the Atlanta and Kansas City Districts and in several states in the San Francisco District.
Agriculture and Natural Resources
Agricultural producers faced mixed conditions overall, with solid demand for meat products offset by drought conditions and poor crop yields in some areas. San Francisco noted rising demand for beef, and Chicago reported that hog farmers benefited from a substantial increase in hog prices during the past year. By contrast, drought conditions have hit Texas farmers hard, producing poor conditions for wheat and oat crops and necessitating costly supplemental feeding and herd reduction among livestock suppliers. Dry weather also has harmed the winter wheat crop in the Kansas City District and is a concern for cattle ranchers in Arizona.
Despite the recent sharp increase in the price of crude oil, conditions in the resource extraction industry were mixed. Oil drilling and extraction activity increased in several districts, but they were "lackluster" in Dallas, where companies have been choosing to pay down debt rather than risk expansion. In Minneapolis, mining of iron ore picked up further in response to strong demand, but gold mining remained weak.
Financial Services and Credit
Demand for bank loans was solid overall, although several districts reported softening in some categories. Lending activity was strong and expanded in most or all loan categories in Richmond, Chicago, and San Francisco. However, Cleveland reported declining demand for consumer and commercial loans, Kansas City noted that slower real estate loan activity had held total loans down, and New York, Philadelphia, St. Louis, and Dallas indicated that consumer and residential mortgage lending has slowed. Several districts noted that a relative scarcity of deposits has kept margins thin and has spurred search for alternative sources of funds; however, no district reported liquidity problems. Credit quality and lending standards were stable in general, although New York and Kansas City reported tighter standards for some banks.
Employment, Wages, and Prices
Labor markets were very tight in most areas, and wage pressures increased for some worker groups, although most reports suggested moderate wage gains on net. Reports of recruitment obstacles were widespread, and some employers responded by recruiting among nontraditional worker groups (for example, senior citizens and teens), relying on increased overtime, and emphasizing employment perquisites and bonuses rather than increasing base wages. Very tight market conditions were reported for nurses in St. Louis and Minneapolis, restaurant and retail workers in Kansas City, and computer-savvy workers in many districts. Chicago reported a sharp increase in truckers' wages, and San Francisco and New York noted shortages and high turnover among truck drivers. In terms of general year-over-year changes, wage gains were reported to be 3 to 5 percent in St. Louis and 2 to 4 percent in Minneapolis. Kansas City reported that wage pressures have eased compared to the latter half of 1999. However, New York reported wage increases of 10 to 15 percent in jobs being filled by year 2000 college graduates recruited through employment agencies there, and Philadelphia reported faster wage gains overall.
Prices of some industrial commodities rose noticeably, especially for energy and petroleum-related products. Rising wages and fuel costs have raised prices and reduced profit margins for providers of transportation services, especially trucking. Other commodity inputs and raw materials with noticeable price increases included steel, primary metals, building materials, and computer memory chips in the industrial sector and chemicals and fertilizers in the agricultural sector. However, increases in the prices of final goods and services reportedly were limited overall.
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