The booming U.S. economy's unprecedented roll now shows signs of moderating, but the commercial real estate industry hardly appears to be experiencing a letup. Far from it in many cities.

The U.S. economy continued to expand in June and July, but there are signs that the expansion was leveling off in some sectors, according to an August report released by the Federal Reserve Board. Seven of the 12 Federal Reserve Bank districts reported slowing economic growth, including Atlanta, Boston, Chicago, Dallas, New York, San Francisco and Richmond, Va.

The Cleveland, Kansas City, Minneapolis and Philadelphia districts reported no change in growth rates, while the St. Louis District reported accelerating economic growth.

Federal Reserve Chairman Alan Greenspan has been working to slow economic growth with a series of interest rate hikes over the past 18 months. "What we are trying to achieve is a soft landing, not a boom or a bust," says Dr. Sung Won Sohn, an executive vice president and chief economist in the Minneapolis office of San Francisco-based Wells Fargo Co. "There is a very good possibility that a soft landing is around the corner," says Sohn.

The goal is to achieve the following: more moderate growth, which would result in interest rates cresting at near current levels; a relatively strong stock market; low inflation; and economic growth at a modest rate of 3% to 4%, notes Sohn. But there are risks in the economy that could upset that soft landing. Past recessions have been influenced by a combination of policy mistakes, such as interest rates being pushed too high, too fast. "I hope Chairman Greenspan will not make that mistake," notes Sohn.

External shocks such as wars, or unexpected crises like the Arab oil embargo of 1973, also can nudge an economy into a recession. "The most likely candidate right now for an external shock is the spike in the price of oil. That is what worries me at the moment," says Sohn.

Despite speculation on the impact of rising fuel costs, many economists remain optimistic regarding the economic outlook in the United States. "I see us in a favorable economic environment for the remainder of 2000 and well into 2001," says Hessam Nadji, senior vice president of research at Palo Alto, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Co. "Beyond the short-term horizon, we expect to see a stable economy going forward."

The strong economy bodes well for commercial real estate. Continued business expansion fuels demand for real estate sectors such as office and industrial, while high employment and job growth are a boon to housing, lodging, retail and entertainment markets. "Obviously, the economy drives real estate markets, and this is almost too good to be true," says Nadji.

Northeast Income as a measure of economic growth reflects that the Northeast is quite healthy. As of July 2000, total compensation in the region had increased 4.3% compared with the same period in 1999. Wages are going up - a very positive development for workers.

"As a region, the Northeast has the highest per capita income in the nation," says Ray Torto, a principal at Boston-based Torto Wheaton Research. Torto Wheaton provides commercial real estate research, customized analysis and econometric forecasting. Massachusetts reported the highest growth in per capita income growth in 1999 among all 50 states at a rate of 6.5%, according to the U.S. Department of Commerce.

The Northeast has long been considered a major financial capital, and the region is home to a variety of large money management firms, ranging from Chase Manhattan Corp. to The Goldman Sachs Group Inc. The Northeast also has exposure to growth industries such as software engineering, medical research and the Internet, notes Torto.

Although the Northeast economy appears to be cruising along at a healthy clip, there are some potential trouble spots on the horizon. "Some of the risks in our area are migration trends and population trends that are not terribly good, because people are moving out of the area as a whole," says Torto.

The region experienced the smallest increase in its civilian labor force during a 12-month period ending in July. The Northeast's labor force grew by 140,500 people, while the civilian labor force increased by 941,400 in the South; 618,700 in the West; and 490,700 in the Midwest, according to the Bureau of Labor Statistics.

In addition, the high income in the Northeast is countered by a high cost of living. The Consumer Price Index in the Northeast rose to 179.6 in July compared with 175.2 in the West; 168.7 in the Midwest; and 167.9 in the South, according to the U.S. Bureau of Labor Statistics.

A potential problem for the Northeast is that manufacturing jobs are tied heavily to defense, and defense is a sector that is moderating, says Torto. Another concern is rising oil and natural gas prices as the Northeast prepares for a relatively colder New England winter now that the effects of La Nina and El Nino have subsided. Some analysts have projected that heating bills could double this winter, notes Torto. "How that would affect consumer spending, and whether or not that will cause a further slowdown is a concern," he says.

Midwest "One of the benefits of the Midwest economy is that we are diversified," says Sohn. Another advantage in the Midwest is the availability of land outside of its metro areas. "Economic growth in the San Francisco Bay area or L.A. is hampered due to lack of land, and that is less of a problem here in the Midwest," explains Sohn.

However, availability of workers is a concern. The Midwest continues to have the lowest regional jobless rate, 3.5% as of July, compared with 4.6% in the West and 3.7% in both the South and Northeast. Some Midwestern states are facing even tougher conditions. Iowa posted the lowest unemployment rate in the country at 2.1%, while South Dakota reported 2.3% and Missouri posted 2.4%, according to the Bureau of Labor Statistics.

"Labor shortages are the biggest constraints on economic growth right now," says Sohn. "Businesses are having a difficult time finding skilled labor, and it's not likely that labor shortages will be going away anytime soon."

Another trouble spot in the Midwest economy is agriculture. Commodity prices in agriculture have been low for a variety of reasons. In addition, farmers have had to deal with crop damage due to floods, insects and even droughts in some parts of the region. "Today, about 40% of farm income is coming from support from Uncle Sam, and this is not a stable situation in the long run," says Sohn.

West Coast The West is enjoying the region's best economy in 14 years, says Nadji of Marcus & Millichap. Job growth has slowed to a modest 1%, while employment and wages are both on the rise. "It's a strong economy," he adds.

"The West Coast is obviously booming, in part because of a population influx from the rest of the nation and from Asia and Latin America," agrees Sohn. That population growth is sparking economic growth in the shape of more construction activity, higher retail sales and job growth, he adds. As of July, the civilian labor force over a 12-month period had increased by 618,700 to total 32.2 million, according to the Bureau of Labor Statistics.

Technology is important to the West Coast, especially in the Silicon Valley and the San Francisco Bay area, and most of the venture capital in the United States is concentrated on the West Coast, says Sohn. In addition, California has a growing base of low-tech firms due to the availability of cheap labor - largely immigrants from Latin America. "As a result, they have everything from auto parts to bicycle manufacturing," says Sohn.

Portland, San Diego and California's Inland Empire are three regions that have rebounded from the Asian crisis that hit hard in 1997 and 1998. Those regions were negatively affected by Asia's economic woes due to their strong trade relationships with Asia. But those areas began to recover in 1999 and into 2000, says Nadji. In fact, the Inland Empire has emerged as a rapidly growing area with a job growth rate of 3% to 3.5%. Businesses are attracted to the area due to available labor and availability of affordable housing, he adds.

The West also is home to some of the highest growth in per capita income. In 1999, the West accounted for four of the five states with the fastest growth in per capita income. Massachusetts reported the highest growth rate at 6.5% followed by Washington at 6.1%; Wyoming at 5.9%; California at 5.8%; and Colorado at 5.6%, according to the U.S. Department of Commerce.

"The biggest problem the West Coast faces is the skyrocketing costs of doing business, the price of real estate and labor costs," says Sohn. Total private industry compensation, for example, increased 4.7% in July compared with the same period in 1999, according to the Bureau of Labor Statistics.

Another crisis on the West Coast is the housing crunch. The San Francisco Bay Area, Orange County, Calif., and even Seattle are some of the regions battling the high cost of housing. Escalating housing costs are becoming a hindrance to growth because businesses can't afford to locate in areas where the employment base is negatively affected by high housing costs, says Nadji.

The South The pace of economic growth in the South and Southeast eased slightly in recent weeks, but activity remains at healthy levels. Florida and Georgia, for example, rank among the top states in the United States in terms of population and job growth in the past year. Florida's civilian labor force increased 219,000 over a 12-month period to reach a total of 7.6 million as of August 2000. During the same period, Georgia's civilian labor force increased 90,400 to 4.2 million, according to the Bureau of Labor Statistics.

"There are a lot of industries in the district that do well when the economy does well," says John Robertson, an assistant vice president in the research department at the Federal Reserve Bank of Atlanta. The Sixth District represents Alabama, Florida, Georgia, and half of Louisiana, Mississippi and Tennessee.

A number of businesses based in the Southeast are tied to housing construction. "So, when housing starts to slow, some of those industries start to slow as well," says Robertson. Although the current housing market is slowing a bit, it is coming off such unprecedented high levels that a slowdown hasn't put much of a damper on the housing market. Tourism is another important component for Florida and the Gulf Coast. Reports suggest that tourism did well this past summer, and the outlook for the fall season seems pretty upbeat, says Robertson.

"The oil production and exploration industries in Louisiana are expanding rapidly in response to high oil prices," says Robertson. Of course, that was coming off a big slowdown last year in response to low prices, so the region is very sensitive to oil prices, he adds.

A severe drought in the Southeast continued to hurt agricultural production. All of Georgia and parts of Florida have been declared federal agricultural disaster areas, making farmers eligible for low-interest federal government loans. Drought-related losses in Florida are currently estimated at $315 million. "The drought is just continuing to take a huge toll on many parts of the district," says Robertson.

Despite some signs of slowing, the U.S. economic outlook remains favorable, concludes Robertson. "The signs that overall growth still looks pretty healthy, but it's slowing relative to the incredibly fast pace we saw at the end of last year and the beginning of this year."