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The districts reported some further gains in economic activity in January and February, despite weakness in agriculture and a few manufacturing industries. Consumer spending continued to display strength, aided by post-holiday price discounting and mild weather in some regions. Motor vehicle sales increased, led by light trucks, and furniture sales benefited from robust home sales. Manufacturing activity expanded in most districts, although foreign competition and low energy prices depressed textile, apparel, and energy-related industries.

Commercial real estate and construction activity, already at a high level, grew at a brisk pace in most districts. Residential construction was strong in most regions. Several districts reported a pickup in business lending, and a few noted that lenders' standards were stable to slightly tighter. Agriculture continued to be plagued by low farm commodity prices, and an increasing number of farmers were under financial stress. Labor markets remained tight. Finding qualified workers has become more difficult in several districts, and reports of faster wage increases were more widespread than in recent months. Prices of most goods remained little changed, and several districts said that businesses remain reluctant to press for price increases.

Consumer Spending
Retail sales remained strong in the first two months of the year, and most districts reported that activity was substantially higher than a year ago. Inventories were balanced and in line with future sales expectations. Boston, New York, Cleveland, Chicago, and Dallas experienced faster-than-expected sales growth, while in Atlanta, sales were flat or up only slightly from the prior year. In the Philadelphia, Richmond, Chicago, Kansas City, and San Francisco districts, substantial post-holiday price discounting helped move winter merchandise and boost sales, while Cleveland reported strong sales despite unusually small discounts. Healthy housing markets supported strong demand for furniture and home products in Boston, Cleveland, Richmond, Atlanta, Chicago, and Dallas. Apparel sales were lackluster in New York and Richmond but remained strong in Boston, Atlanta, and Chicago.

Automobile sales increased in many districts in January and February. Philadelphia, Cleveland, Chicago, Dallas, and San Francisco noted that motor vehicle sales--especially of sport-utility vehicles and light trucks--strengthened compared to December. Auto sales were lagging in Kansas City and flat in Minneapolis.

Two districts had upbeat reports on tourism. Resort activity was up from a year ago in the Atlanta District, while in Minneapolis skiing revenues were strong. In the Richmond District, mild weather damped revenues at ski areas but helped tourism in coastal regions. New York noted that their tourism boom had leveled off and that hotel occupancy rates had fallen.

Manufacturing
The tone of manufacturing improved in most districts, although some industries continued to be hampered by foreign competition. Growth in overall manufacturing activity strengthened in the New York, Philadelphia, Richmond, St. Louis, Minneapolis, and San Francisco districts. In the Boston, Cleveland, Atlanta, Chicago, and Dallas districts, manufacturing was described as mixed, while Kansas City said that its manufacturing sector remained weak.

Motor vehicle production moved higher in the Boston, Cleveland, Chicago, and San Francisco districts. In Cleveland and Chicago, heavy truck orders exceeded analysts' expectations in February and led some to raise their sales forecasts for 1999. The Boston and Richmond districts noted strength in the furniture industry, while St. Louis characterized its furniture industry as mixed. Several districts noted that shipments of semiconductors and high- tech equipment increased. Expectations for business conditions in coming months were mostly positive. Boston, for example, reported that most manufacturers' expectations were positive but cautious for 1999. Producers in the Philadelphia and Richmond districts expected orders and output to increase over the next six months.

Construction and Real Estate  Residential real estate activity remained vigorous in nearly all districts. Increases in housing starts were reported in the New York, Cleveland, Chicago, St. Louis, Minneapolis, and San Francisco districts. Residential construction was particularly active in Ohio, where some of the activity was described as speculative. Also, residential construction was said to be running at a record pace in St. Louis, and in the Minneapolis District, reports of increased residential construction were widespread. In contrast, new home construction eased a bit in the Atlanta, Dallas, and parts of the San Francisco District.

Contacts in the Chicago District indicated that existing home sales have slowed since December. Housing sales were described as brisk in the New York, Philadelphia, and Dallas districts. New home purchases were above the previous year's level in Kansas City and builders there were optimistic about the next few months. Home prices moved higher in the New York, Philadelphia, Cleveland, Richmond, and St. Louis districts.

In the Cleveland, Richmond, Minneapolis, and Kansas City districts, construction costs increased in recent weeks. Drywall and insulation shortages, as well as tight markets for skilled labor, placed upward pressure on prices. In contrast, San Francisco reported that lower labor costs in Utah and sluggish activity in Oregon had slowed construction cost increases in those areas.

Commercial real estate activity remained strong in most districts, although there were a few reports of slowing activity. Competition for commercial space intensified in the Carolinas. Rental rates rose in the New York and Philadelphia districts, and reached record high levels in the San Francisco Bay area. Chicago and Minneapolis noted faster growth in construction activity, particularly of public works projects. Boston reported an uptick in activity around Hartford, Connecticut, with several new construction projects planned. In contrast, Atlanta, Dallas, and San Francisco reported slowdowns in new construction, while activity in the Cleveland District was described as flat. Office leasing was said to be leveling off in Boston, and in the St. Louis District vacancy rates rose in central business districts.

Banking and Finance
Lenders were upbeat in most districts. Atlanta and San Francisco reported strong overall demand for loans, and New York and Kansas City said that loans or loan demand increased. Several districts noted strength in specific categories of lending: Chicago cited strong demand for consumer and business loans, while Dallas said that auto lending and home equity refinancing showed "signs of strength." Overall loan volumes were steady in Philadelphia and Richmond. Higher mortgage rates slowed the pace of lending in Richmond and caused a drop in loan originations and refinancing applications for some banks in the Chicago District. The only district reporting a decline in overall lending was St. Louis, where total loans at a group of large banks was said to be down 2.5 percent since the beginning of the year.

Reports on credit quality and delinquency rates were mixed. Chicago said that credit quality improved and New York reported lower delinquency rates for all types of loans. Cleveland, however, noted that many banks reported higher delinquency rates. In addition, automobile dealers in the Cleveland District expressed concerns about the credit worthiness of some new car buyers. San Francisco said that the only report of deteriorating credit quality was from the Oregon coast, where loan delinquencies rose.

Labor Markets, Wages, and Prices
Labor markets remained taut with higher employment levels reported in nearly all districts. Employers in the Chicago, Minneapolis, Kansas City, and Dallas districts continued to experience difficulty finding qualified workers. Markets for retail labor remained tight across much of the nation, especially in the New York and Kansas City districts, where finding even entry-level workers was said to be difficult. Cleveland also said that retail labor conditions remained tight, but somewhat less so than in December. Retailers in the Richmond District trimmed workers in an effort to control costs.

Temporary employment firms faced strong demand for their services in January and February. Boston and Chicago indicated that more businesses had recently turned to temporary employment firms to find workers. Cleveland and Richmond reported that temporary help firms were unable to meet their clients' demand for workers, raising the probability of future wage increases. The demand for contingent workers was mixed in the Dallas District, where requests from telecommunications firms, call centers, and banks remained at high levels, although demand from manufacturing and oil companies slackened.

Manufacturing employment was mixed across districts in January and February. St. Louis manufacturers increased their workforces, and plants in the Philadelphia District planned to add workers and lengthen the workweek in coming months. Boston and Richmond reported steady manufacturing employment, while declines were cited by New York, Cleveland, Kansas City, Dallas, and San Francisco.

The Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, and Dallas districts reported greater upward wage pressures in January and February. Generally stable wages were reported by New York, Atlanta, and San Francisco. Most districts indicated that higher wage costs were absorbed by businesses.

Low commodity prices and a perceived lack of pricing power by firms helped keep prices stable during January and February. Boston, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco reported generally steady prices, while Dallas indicated that price declines outnumbered price increases in that district. Rising lumber and drywall prices were reported by Cleveland and Minneapolis, while insulation and sheetrock prices inched up in the Kansas City District. Escalating health care costs continued to plague employers in the Atlanta, Minneapolis, and San Francisco districts.

Agriculture and Natural Resources
The weather had mixed impacts on agricultural production across the districts, and low commodity prices affected both agricultural and energy producers. Respondents from Richmond and Minneapolis said that above-normal temperatures generally improved crop and pasture conditions and reduced the need for supplemental feeding of livestock in some areas. Richmond and Kansas City noted, however, that warm weather had accelerated crop development, which increased the potential for frost damage. San Francisco reported "severe damage" to its citrus crop from a late December freeze. Agricultural banks in several districts stated that weak commodity prices had caused financial hardship for some farmers. Lenders in the Chicago District experienced a drop off in agricultural loan repayment rates compared to a year ago, and some hog farmers in the Kansas City District liquidated herds earlier than normal. Both districts noted that credit standards for agricultural loans had recently been raised. Contacts in the Dallas District said that a greater number of producers had left the farming business recently. In the energy sector, Minneapolis, Kansas City, and San Francisco reported that falling oil prices were causing some oil and gas wells to be withdrawn from production.