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Prepared at the Federal Reserve Bank of Atlanta and based on information collected before October 23, 2000. 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.
Reports from Federal Reserve Banks generally described the regional economies as growing at a moderate pace during September and early October, but with additional signs of slowing growth in some areas. Activity in Chicago, Minneapolis, St. Louis, Kansas City, and Boston was reported as growing at a moderate rate. The pace of activity had eased in Philadelphia, Atlanta, Cleveland, Richmond, and Dallas, while San Francisco and New York reported solid expansion in most industries.
Retail spending softened slightly in some Districts and the outlook was a little less positive for the tourism sector. Manufacturing activity was generally steady, but some reports noted continuing problems because of labor shortages, higher fuel prices, and competition from imports. Residential housing sales and construction activity continued to slow in most of the country. Commercial real estate markets remained generally healthy, but some reports indicated that activity might be slowing. Reports on agriculture were mixed, while the energy sector strengthened considerably. Labor markets remained stretched, and some Districts indicated increasing wage pressures. Reports also noted higher petroleum-based manufacturing input costs, although strong competition amongst producers continued to prevent the majority of firms from passing on much of the cost increases to their customers.
Consumer Spending
Retail sales have generally slowed from earlier in the year and growth is described as modest. Retailers in New York and Richmond noted some pickup in the volume of sales recently. In the Atlanta, Boston, Chicago, and Philadelphia Districts, recent sales figures had met merchants' expectations. Inventory levels were described as balanced in Atlanta, Dallas, New York, and Philadelphia, while inventories were somewhat higher than desired in Chicago and Kansas City. Reports on apparel sales were mixed, but early cool weather contributed to some pickup in sales volume. More broadly, the retail outlook has become increasingly conservative since the last report. Merchants in the Atlanta District expect fourth-quarter sales growth will be modest. Dallas District retailers lowered their outlook for the next six months, while retailers in the Chicago region anticipate consumers will have less money to spend because of higher home heating costs this winter. However, merchants in Boston remained generally optimistic about sales growth through the end of the first quarter of next year, and retailers in Cleveland and Kansas City anticipated strong year-end sales.
Reports on recent vehicle sales were mixed but still at generally high levels. Sales in Kansas City were up slightly in September and early October, and dealers were largely successful at managing inventories during the model year changeover period. Auto sales were better than a year ago in Chicago, and inventories were under control. Sales were reported to have slowed in Philadelphia and Dallas, and to have been slightly below last year's record levels in Cleveland.
Services and Tourism
The service sector continued to post solid growth, but attracting and retaining employees remained difficult. Boston noted that the pace of restructuring in the insurance industry has slowed, and little additional retrenchment is planned. Some contacts reported difficulty in finding and retaining employees in information technology and systems areas. There was some softening of revenue growth for service firms in the Richmond District. Dallas reported that the demand for transportation services remained strong even with fuel surcharges, and in San Francisco, there was strong demand for most services.
The outlook for the tourism and hospitality industry was a little less upbeat for the Atlanta and Richmond Districts; both reports expressed concern that rising fuel prices could discourage winter tourists. Minneapolis reported that fall season tourism in its District was on par with a year ago. San Francisco noted that healthy growth in tourism to Hawaii was boosting hotel occupancy rates and room prices.
Construction and Real Estate
Most reports stated that the level of activity in single-family housing markets continued at a healthy level despite slowing sales and construction activity. There have been scattered reports of rising home inventories in the Atlanta, Boston, and St. Louis regions, and some price concessions were reported in the Atlanta District. The Kansas City, New York, and San Francisco Districts reported some pickup in housing activity. Generally, contacts anticipated the market would remain strong, although the pace of construction and home sales was expected to decline further through year-end.
Overall, commercial real estate markets continued to perform well, although there is increasing evidence that construction levels are waning a bit. Contractors in the Atlanta region noted that construction backlogs had declined, and construction has slowed in the St. Louis District. Vacancy rates retreated slightly in parts of the Atlanta, Kansas City, New York, and San Francisco Districts. Site and utility inquiries have declined significantly in central Indiana. Contract work shrank in the Dakotas and Minnesota. In Manhattan, New York, despite rapidly escalating office rents, only a moderate volume of new construction is planned over the next few years.
Manufacturing
Manufacturing activity was generally steady, with only a few areas of continuing weakness. Atlanta, Dallas, Boston, and San Francisco reported expanding activity in the high-tech sector. Manufacturers' capital spending plans were strong in Philadelphia and Boston, while St. Louis and Atlanta reported expansions in light vehicle production facilities. Although overall manufacturing conditions remain favorable in the New York and San Francisco Districts, weakness in the euro had reduced orders for some manufactured goods. The pace of manufacturing activity was increasing in Kansas City and Minneapolis. Strong demand for household appliances led to a factory expansion in the St. Louis District, while large shipyard contracts were boosting activity in the Atlanta District. San Francisco reported strong sales in the aerospace, semiconductor, and pharmaceutical industries. Refineries were operating at near capacity in New York and Dallas. Less favorably, paper and lumber mill production was slowing and inventories were accumulating according to Atlanta, Minneapolis, and Dallas. Chicago reported that an increase in imports led to slower steel production and softer pricing. Heavy-duty truck producers continued to cut back output in Cleveland and Chicago because of a weaker volume of new orders. In Philadelphia, working hours have been reduced at many manufacturing plants, and inventories have risen. Atlanta noted that the downsizing of the apparel industry continued.
Banking and Finance
Growth of loan demand remained strong in most Districts, but with some softening noted. Overall lending activity was reported as solid in Chicago and Atlanta, and stable in the New York District. Total loans outstanding were up slightly according to St. Louis. Richmond, Kansas City, and Philadelphia reported that growth of lending activity slackened in September and early October. In Dallas, contacts reported that the pace of financial sector activity was slower than a year ago.
In New York, there was a slight pickup in commercial and industrial sector loans, and in Philadelphia and Cleveland, banks reported slight increases in business lending activity. Refinancing activity continued to decrease in New York, Kansas City, and Philadelphia, but increased in Chicago in recent weeks. Atlanta and New York reported further weakening in demand for both residential and nonresidential mortgages. Real estate and consumer loan demand remained unchanged in St. Louis.
Many contacts continued to express concerns about credit quality, although most reported that overall credit quality was still at healthy levels. In New York, credit standards were tightened further on commercial and industrial borrowers. Commercial lenders in Richmond were monitoring hotel and other commercial real estate loans closely. Chicago reported that business-lending standards remained tighter than earlier in the year. In Atlanta, there were expectations that third- and fourth-quarter credit losses would rise. San Francisco reported that credit quality was generally good, but there was some tightening of credit conditions for commercial real estate lending. Lending standards were generally unchanged in Kansas City. In Philadelphia, credit quality for both business and personal loan portfolios has been steady.
Labor Markets
Labor markets remained taut, and some reports cited notable upward pressure on wages. In Philadelphia, firms were having considerable trouble finding qualified workers, and many companies raised wages in greater amounts this year than in the past few years. The skilled labor shortage also remained a problem in Boston and Richmond, and employment agencies reported trouble filling job openings in New York. Dallas indicated that while labor markets remained tight, the recent shake-up of Internet companies had freed up some high-tech workers in the District. In Kansas City, employers were increasingly using flexible work schedules to attract and retain workers. Minneapolis reported widespread concern over worker availability and retention. In Cleveland, contacts noted strong wage increases in fast growing companies. Employees at all skill levels remained in short supply in San Francisco and St. Louis, with notable upward pressure on wages.
Petroleum-based input prices rose recently, but strong competition has reportedly prevented many firms from passing on much of the cost increases to customers, except in transportation and certain other areas. Rising costs resulted in increased pressure on profitability for firms in the Atlanta, Philadelphia, Minneapolis, Cleveland, and San Francisco Districts. Price pressures had reportedly diminished somewhat in New York, and with the exception of energy, most prices were stable in Dallas. Cleveland, Kansas City, and Atlanta reported declining building materials prices, such as lumber and drywall. Strong import competition has been keeping prices flat in San Francisco. In contrast, Boston noted that some manufacturers were passing on more of their increasing costs to customers than in previous reports. The increasing cost of health and other insurance programs continued to be reported as a concern in Atlanta, Philadelphia, and Chicago.
Agriculture and Natural Resources
Oil and natural gas exploration and production were reported at high levels in the Dallas, Kansas City, and Minneapolis Districts. Agricultural production results varied greatly across the Districts. St. Louis reported that cotton estimates for District states were below normal for October, reflecting a smaller-than-expected increase in harvested acres and a sizeable drop in yield this year. In the Dallas District, much of the cotton and sorghum crop has been declared a total loss. Recent rains also came too late for many crop farmers throughout the Atlanta District. On the other hand, record corn and soybean harvests are expected in Kansas City, and Chicago reported that October's corn and soybean production in the District is expected to be up 6 percent and 5 percent, respectively, from a year ago. Farmers in North Carolina and Virginia made good progress harvesting the peanut and cotton crops. Pasture and livestock conditions ranged from fair to excellent in West Virginia.
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