FED BEIGE BOOK August 11, 1999 - Nothing has changed except perception
Summary
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.
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