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Prepared at the Federal Reserve Bank of Chicago based on information collected before September 10, 2001, thus reflecting activity prior to the attacks on the World Trade Center and the Pentagon. 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 Federal Reserve Districts generally indicated that overall economic activity remained sluggish in August and early September, with several suggesting that activity slowed further. Back-to-school buying gave retailers in some regions a boost in sales, but overall consumer spending generally was said to be flat to down. Residential real estate markets were described as "brisk," "strong," or "steady" in most reports, buoyed in large part by low mortgage rates. By contrast, demand for commercial space reportedly softened further in most Districts. Manufacturing activity remained weak in nearly all regions, and the softness appeared to be broad based. Lending activity was mixed. Demand remained strong for residential mortgages, while demand for business loans was flat to down in most Districts as many lenders continued to tighten standards on some commercial loans. Relatively soft labor markets persisted in most Districts, with a few reports indicating further easing. Upward pressure on wages remained subdued, but contacts in some Districts continued to express concern about rising health insurance premiums. Upward price pressures were again restrained in nearly all Districts. Input cost pressures were said to be easing as well.
Consumer Spending and Tourism
Overall consumer spending remained soft in most of the country during August and early September, while upward pressures on retail prices were subdued. Over half of the District reports indicated that retail sales were flat to down in the reporting period. Atlanta and Minneapolis reported retail sales increases, as did Dallas but from very weak levels. In the important back-to-school segment, merchants in the Boston, Chicago, and St. Louis Districts noted strong sales, while those in the New York, Philadelphia, and Kansas City regions had mixed, less-than-expected, and flat results, respectively. Federal income tax rebates had only a limited effect on spending in August, with New York and Chicago indicating no significant impact, while the Atlanta report suggested that tax rebates (along with heavy discounting) boosted overall sales. Minneapolis noted that state sales tax rebates helped retail sales. Consumers in many areas remained value-conscious, and large discount stores continued to outperform general merchandisers in some regions. Merchants in over half the Districts expected either flat sales or only moderate growth for the remainder of the year, with one contact in the Boston region describing the retail outlook as "grim." Most Districts reported that retail inventories were in good shape. Total sales of new light vehicles were relatively soft in most regions, and the Cleveland and Dallas reports noted a shift toward used vehicles. Reports of tourism spending were mixed, while business travel generally remained soft. Upward pressure on retail prices appeared to ease further in some regions, and Chicago and Dallas indicated that there were more reports of price decreases than increases.
Construction and Real Estate
Real estate and construction activity were mixed, as the residential side remained strong, while the commercial segment softened further. Residential sales were relatively steady at high levels in most of the country, even in the Districts that reported slightly softer sales activity--New York, Philadelphia, and Atlanta. Softness was noted, however, in the demand for high-end homes in some reports, while Kansas City and Dallas indicated that overall home sales were soft in a few high-tech intensive areas. Contacts in many regions attributed much of the strength to continued low mortgage rates. District reports indicated that commercial activity remained weak in nearly all regions, and softened further in most. Downward pressure mounted on office rental rates as available space continued to increase. The amount of sublease space becoming available picked up in the St. Louis and Minneapolis Districts, while it reportedly slowed in the Chicago and Dallas regions. Industrial real estate markets softened in one-third of the Districts, while retail development declined from high levels in the Atlanta and Chicago Districts. Hotel occupancy fell in a few regions, leading to decreased room rental rates.
Overall manufacturing activity was weak again in August, but there were positive signs contained in a few District reports. Virtually all regions reported that new orders and production were weak, and nearly one-half suggested that conditions had deteriorated further. However, Boston, New York, Chicago, and Kansas City reported that the declines in manufacturing activity appeared to be stabilizing, while Richmond's manufacturing sector expanded for the first time in a year. Capital equipment spending remained weak, as contacts in some Districts reported that businesses had a "wait and see" attitude. Nearly one-half of the Districts indicated that high-tech manufacturing industries generally softened further in August. Some contacts in the Dallas and San Francisco Districts, however, suggested that the sector may have bottomed. Most Districts reported that manufacturers continued to trim inventories and many suggested that further inventory reductions were in the offing. Soft demand and stiff competition, in many cases from foreign producers, kept downward pressure on selling prices, and most input prices were reportedly flat to down. Increases in new orders and production in machine tool and shipping/packaging materials were noted by Chicago and Minneapolis.
Banking and Finance
Overall lending activity was reported to be mixed, as household demand for loans remained strong in most areas while softness in business lending persisted. Over half of the District reports indicated that household lending activity remained relatively robust, with only Boston, New York, St. Louis, and San Francisco reporting a general softening. Low mortgage interest rates continued to buoy home buying and spur mortgage refinancing in many areas. Contacts in the Boston, Philadelphia, and Cleveland Districts suggested that consumer delinquencies increased in the latest period, and New York noted rising delinquencies on residential mortgages. Reports on business lending activity were mixed, but generally indicated soft demand. Only the Philadelphia and Kansas City reports alluded to a general pickup in business lending activity, but the increases were very modest. One-third of the Districts noted a further deterioration in business loan quality, although contacts indicated that banks were well positioned to weather the increases in nonperforming or problem loans. Banks in one-third of the regions continued to tighten standards on business loans. Deposit increases were noted by Boston, Kansas City, and Dallas, while St. Louis reported a slight decline.
Labor markets continued to ease in most parts of the country in August with over half the District reports suggesting soft and/or softening demand for labor. Boston and St. Louis indicated that demand for high-tech workers continued to erode, while Atlanta suggested that potential employers had become much more selective and high-tech job searches had become longer. Staffing agency reports were mixed, but generally pointed to continued weaker demand. By contrast, New York reported that overall labor demand was stable, while St. Louis indicated that worker shortages persisted despite recent loosening of labor markets. Richmond, Kansas City, and Minneapolis noted a shortage of nurses. There were also signs of stabilization in manufacturing employment in a few regions. Boston noted an increase in weekly hours, and Chicago reported that a few manufacturers were calling back a small percentage of furloughed workers. There were scattered reports of moderately increasing wages but, for the most part, upward wage pressures continued to ease along with labor demand. In fact, the Cleveland report suggested that unions were trading off negotiated wage increases in exchange for job security provisions. Contacts in four Districts expressed concern over rising health insurance costs, while those in the Atlanta and Chicago regions also noted rising liability insurance costs.
Agriculture and Natural Resources
Agricultural conditions were reportedly mixed across the country. Districts that span the Plains or northern portions of the Corn Belt (Cleveland, Chicago, Minneapolis, Kansas City, and Dallas) reported inadequate moisture conditions in many areas that were expected to negatively affect corn, cotton, and soybean yields. Recent rains were expected to help the winter wheat crop in some areas and provide a boost to late soybean yields, but were too late to help corn yields. Districts covering the southern Corn Belt and the southeastern states (Richmond, Atlanta, and St. Louis) reported generally favorable conditions for the corn, cotton, soybean, and peanut crops. San Francisco recorded mostly favorable crop conditions but noted that continued low market prices were stressing some producers. Chicago and Minneapolis also indicated that some bankers expressed concern about low levels of farm-derived income and the financial health of their customers.
Extractive natural resource industries were reported to be operating at high levels in most cases. The active oil and gas rig count in August was reported level to slightly lower than July in the Dallas, Kansas City, and Minneapolis Districts. Kansas City noted that drilling activity remained constrained by a shortage of rig workers. Minneapolis observed that mining activity varied across the District. Most iron mines were back in full production, following a slowdown earlier in the summer, while several nonferrous metal facilities in Montana remained closed.