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New York
St. Louis
Kansas City
San Francisco

Full report

Prepared at the Federal Reserve Bank of Richmond and based on information collected before November 19, 2001. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the Federal Reserve districts indicate that economic activity generally remained soft in October and the first half of November, with evidence of additional slowing in most regions outweighing signs of recovery in a few districts. Manufacturing activity weakened further, with declines in production, new orders and employment widely reported. Consumer spending was mixed--aggressive financing incentives drove automobile and light truck sales to exceptional levels, but tourism remained weak and nonauto sales were spotty, with stronger sales growth in some areas offset by weaker sales elsewhere. Retailers' outlook for spending during the upcoming holiday season was also mixed. Store managers had already begun discounting prices in some areas to counteract weak customer traffic, while in other areas retailers' expectations for the season had brightened recently. Residential real estate generally held its own, with sales of moderately-priced homes steady and permits for new construction increasing modestly in all but a few regions. In contrast, the demand for commercial space eased further, pushing vacancy rates higher and rents lower in many areas. In the finance sector, the pace of residential mortgage refinancing activity accelerated as mortgage interest rates fell further. Business lending weakened though, reflecting softer loan demand and some tightening of lending standards. Labor markets continued to ease. Layoffs and downsizings contributed to a greater supply of available workers and wages were steady to lower. Prices were generally stable, although lower prices were in evidence for automobiles, gasoline, and computers. In contrast, prices for insurance and health care rose sharply.

Consumer Spending
Consumer spending, while strengthening slightly in October and the first half of November, remained at or below pre-September 11 levels in most districts. Most Reserve Banks reported that sales of luxury goods weakened, as did sales at specialty and department stores. In contrast, discount retailers generally experienced stronger sales as consumers sought value. Store managers had mixed expectations about sales prospects for the upcoming holiday season. Retailers in Philadelphia and San Francisco expected lower holiday sales, as did managers at upscale stores in the Atlanta district. In contrast, retailers anticipated higher sales in Cleveland, Richmond, St. Louis and Kansas City. Inventories at retail establishments were described as too high in Boston, New York and Atlanta, but St. Louis said their contacts were evenly split between those with inventories at desired levels and those with excess inventories. Automobile sales surged, spurred by attractive dealer financing incentives. Dealers in most districts reported strong sales in October but in November sales slowed in Atlanta, Chicago, Minneapolis and Dallas. Looking ahead, automobile dealers expressed concern that sales in coming months would fall as incentives ended.

Two districts had upbeat reports on tourism while others continued to feel the effects of September 11 and the slowing economy. New York reported that occupancy rates in Manhattan, which plunged below 50 percent in late September, rebounded to about 75 percent in October--12 percentage points below a year earlier. In addition, some Manhattan hotel rooms were being used as interim office space by firms displaced by the September 11 terrorist attacks. In the Richmond district, a contact attributed solid holiday bookings to tourists staying closer to home because of concerns with airline safety. Atlanta, St. Louis and Minneapolis reported that the hospitality and tourism sectors continued to suffer from the slowing economy and the impact on air travel of the terrorist attacks. Atlanta noted that a major car rental firm in Florida filed for Chapter 11 bankruptcy because of a sharp decline in activity and that the opening of a large hotel in Orlando had been postponed as attendance at local tourist attractions waned.

Manufacturing activity weakened further in nearly all regions in late October and the first half of November. More than two-thirds of the districts reported that new orders and production decreased or grew more slowly. On balance, capital expenditure plans remained weak, but contacts in several districts reported that the general attitude of firms was to hold the line rather than to cut capital spending further. Businesses continued to draw down their inventories with most districts suggesting that the bulk of reductions was behind them.

Five of the districts indicated that conditions in telecommunications and other high-tech equipment manufacturing industries softened further during the survey period. Other sectors experiencing declining shipments and orders included: construction-related manufacturers in Dallas; heavy equipment producers, including trucks, in Chicago; building products industries in Atlanta, Dallas and San Francisco; and furniture and apparel manufacturers in Richmond. In contrast, firms producing food products in Philadelphia, Kansas City and Dallas noted stronger-than-expected demand for their products. However, Boston and Philadelphia reported that their contacts did not expect business activity to improve until the second half of 2002.

Construction and Real Estate
Residential real estate activity displayed little change in most districts. Cleveland reported an improvement in home sales activity, while Richmond, Chicago and Dallas indicated slower sales. In the Boston, New York and Kansas City districts, sales activity was weaker for higher-priced homes. Philadelphia and St. Louis reported that sales activity was mixed. In the Chicago district, builders' expectations of future construction activity was mixed--some builders were concerned that inventory was too low while other builders sought to withdraw from signed purchase contracts for home sites. Residential building permits increased in the New York, Philadelphia, St. Louis, Minneapolis, Kansas City and Dallas districts, while the San Francisco Reserve Bank reported that permits declined in the San Francisco area but remained strong in southern California. Declining mortgage rates made lower priced homes more affordable for first-time homebuyers but did little to boost sales of homes in upper price ranges, resulting in a surplus of higher-priced homes for sale in the Richmond and St. Louis districts. Residential construction remained stable in St. Louis, Minneapolis and Kansas City and declined in Chicago and San Francisco.

Leasing activity in the commercial real estate sector weakened further across all reporting districts. Increasing vacancy rates and softening rental rates were widely reported, except in the Philadelphia district, where rental rates remained relatively stable but were expected to decline. Commercial construction was flat in most districts, although Cleveland and Richmond reported a modest number of projects underway or planned for the near future.

Banking and Finance
Lending activity was mixed in most districts, as stronger demand for residential mortgage refinancing was offset by weaker demand for commercial loans. New York, Cleveland, Richmond, and San Francisco reported higher demand for residential mortgage loans. Atlanta and Chicago said that mortgage refinancing was "brisk" and at "record levels," respectively. Demand for commercial or business loans was said to be stable in New York, but "soft" in Cleveland, Atlanta, and Chicago, "slipping" in Richmond, and "declining markedly" in San Francisco. Philadelphia said that consumer, commercial, and real estate lending all declined, while Kansas City reported that demand fell for all loan categories except home mortgages.

Several districts reported tighter credit standards for bank lending and increases in loan delinquencies. New York said that with the exception of residential mortgages, credit standards for all types of loans tightened further while Atlanta reported some tightening of credit standards for loans secured by commercial real estate. Cleveland and Chicago reported declines in credit quality and increases in loan delinquencies. Philadelphia indicated that banks were becoming more concerned about credit quality because a growing number of business borrowers had fallen short of revenue goals.

Labor Markets, Wages, and Prices
Labor markets continued to ease in most districts. Extremely weak labor market conditions were reported by a major employment agency in the New York district. Employment in New York City was reported to have fallen by more than 70,000 in October. Boston reported widespread weakness in the temporary employment industry; industry revenues were 30 to 40 percent lower than a year ago. Cleveland and Richmond also reported weak or slowing demand for temporary workers. In Cleveland, some industries were trimming employment as a result of the after effects of September's terrorist attacks while layoffs continued in Minneapolis and Dallas.

In Boston, temporary employment agencies reported that clients were increasingly seeking reductions in billing rates for temporary workers, but profit margins were being maintained and wages were holding steady. Wages were slightly lower at small firms and generally flat at larger firms in the New York district. In Cleveland wage pressures eased, reportedly because workers were more uncertain about job security.

Upward price pressures were subdued across all reporting districts. The majority of the districts reported manufacturing input prices as flat to lower. Most districts noted that prices for retail goods were steady to slightly down, but Atlanta experienced some occurrences of "deep discounting." Most districts noted a dramatic increase in costs for property insurance and/or healthcare related products and services.

Agriculture and Natural Resources
A dry autumn reduced agricultural production in some regions, and low commodity prices affected both agricultural and energy producers. Arid conditions in Richmond, Kansas City and Dallas depleted topsoil moisture, causing poor germination of small grain crops in those areas. Respondents in these districts also reported that range and pasture conditions deteriorated as dry weather persisted, increasing the need for supplemental feeding of livestock. Kansas City noted that dry conditions limited forage supplies in some areas of the district, encouraging ranchers to liquidate herds despite weak prices this fall. In contrast, the St. Louis district received heavy rain at times, which delayed the planting of the wheat crop, but replenished soil moisture.

Credit quality deteriorated as low prices for agricultural products and cattle prevailed in a number of districts. Lenders in the Minneapolis district reported a 10 percent drop in cattle prices over the past month, adversely affecting many of their customers' ability to repay loans. Atlanta and San Francisco indicated that a decline in world demand for textile products and high levels of domestic production has led to some of the lowest cotton prices in the past 25 years.

Activity in the energy and mining sectors was down. In the Minneapolis district, oil and natural gas exploration and production were below the levels of early October. Contacts in the Dallas district said that energy activity has gone from overheated to very cool in a short period of time. Prices for oil services and rigs have softened as a result of weaker demand, although strong pockets of domestic activity and high levels of activity in international markets are propping up revenues and profitability. A large northern iron ore mine in Minnesota reduced production starting in mid-October because of weak orders from steel producers and a platinum mine in Montana decreased output.

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Last update: November 28, 2001