Prepared at the Federal Reserve Bank of Kansas City and
based on information collected on or before July 18, 2005. 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.
Reports from all twelve Federal Reserve Districts indicate that economic activity
continued to expand in June and early July. Richmond and Dallas reported that
the rate of economic growth increased, and Cleveland said economic growth was
stronger and more balanced than in the spring. New York was the only District
to report a slowing in the rate of economic growth. Among the other Districts,
Atlanta, Minneapolis, Kansas City, and San Francisco characterized the pace
of expansion as solid, while Chicago described the rate of economic growth as
moderate. Boston, Philadelphia, and St. Louis did not characterize the overall
pace of expansion, although Boston noted that locally-based retailers were not
sharing in the expansion.
Most Districts reported increases in retail sales, and vehicle sales in nearly
all Districts were boosted by a new round of price discounting. Demand for most
services, including tourism, continued to increase across the country, and most
Districts noted moderate to solid expansions in manufacturing activity. Commercial
real estate activity improved in most Districts. Residential real estate activity
remained strong overall but showed a few signs of cooling in some Districts.
Bankers reported solid or increasing loan demand.
Labor markets generally continued to improve, although hiring in several Districts
was mixed. Skilled worker shortages were reported in several Districts, but
nearly all Districts said wage pressures remained moderate. Overall price pressures
eased slightly or remained unchanged in most Districts, despite substantial
increases in energy costs.
Most Districts reported increases in retail sales, and reports on retailers'
expectations were generally positive. Dallas said sales growth had been stronger
than expected given high gasoline prices, and Atlanta noted that higher gasoline
prices did not appear to have cut into spending on other items; Cleveland and
Chicago said warmer weather may have boosted sales in their Districts. Minneapolis
and Kansas City reported solid year-over-year retail sales gains, and sales
also increased in the Philadelphia, Richmond, and San Francisco Districts. The
weakest report on retail sales came from the Boston District, where sales were
flat or down from a year ago and retailers were less optimistic than in previous
surveys. New York also reported a softening in sales in early July following
solid growth in June, while St. Louis said reports on retail sales were mixed
Nearly all Districts that reported on vehicle sales noted improvements, which
were generally attributed to a new round of price discounting by some automakers.
Cleveland reported dramatic gains, saying all types of dealerships benefited
from increased buyer traffic. San Francisco also said vehicle sales rose substantially
in response to the price cuts. Only St. Louis cited mixed reports on auto sales.
Sales of most types of vehicles were characterized as strong, although Philadelphia
and Kansas City reported some weakness in sales of large SUVs. Auto dealers
in the Philadelphia and Dallas Districts were somewhat concerned about future
auto sales, but Kansas City said dealers expect strong sales to continue.
Services and Tourism
Demand for services continued to increase in June and early July. Boston reported
healthy growth in demand for advertising and management consulting, and Philadelphia
contacts noted increased activity in information services and business support
services. Richmond also reported increased demand for business-to-business services.
Demand for health care was reported to be flat in the Richmond District but
robust in the San Francisco District. Dallas and San Francisco noted an increase
in demand at transportation firms, while Cleveland and Chicago said that demand
for trucking was steady and that overall conditions for the industry remained
favorable. On the other hand, Atlanta reported some transportation firms have
seen activity fall slightly from the high levels experienced earlier in the
Tourism continued to show strength throughout much of the country. New York
reported that hotel occupancy rates in Manhattan were near record levels and
that room rates were up substantially from a year earlier. In addition, Atlanta
said hotel occupancy rates in the Miami area were at record levels, and theme
park attendance was ahead of last year's pace. Chicago and Kansas City also
noted an increase in demand for hotel rooms since the previous survey. Tourism
activity over the Fourth of July was characterized as being particularly strong
in parts of the Richmond and Minneapolis Districts. San Francisco reported continued
strong growth in visits to key tourist destination states.
Most Districts reported moderate to solid expansions in manufacturing activity,
and expectations for future factory activity were generally upbeat. New York
saw a rebound in manufacturing production in July, adding that manufacturers'
expectations had also risen. Chicago reported continued solid growth, and Atlanta
said that reports from District manufacturers were positive. Boston said sales
and orders remain on an upward trend. Philadelphia, Minneapolis, and Dallas
noted increases in activity as well. St. Louis and Kansas City reported moderate
expansions in factory activity, and San Francisco said demand for manufactured
goods rose slightly after slowing in the previous survey period. Cleveland said
durable goods production had been flat since the previous survey but nondurable
goods production was steady or rising. Richmond reported a softening in factory
activity in June but a solid increase in shipments and new orders in July. Despite
the overall expansion in manufacturing activity, as well as generally positive
reports on capital spending, factory hiring remained sluggish in most Districts
that reported on employment.
Activity in a wide variety of manufacturing industries was characterized as
strong. Boston and San Francisco reported strength in aircraft and high-tech
manufacturing, and Atlanta and Dallas said refineries were doing quite well.
Several Districts also noted strong activity for producers of construction materials--especially
cement--as well as for producers of industrial equipment and materials. While
most factory sectors were strong, some weakness was noted among producers of
metals and textiles.
Construction and Real Estate
Residential real estate activity remained robust overall but showed a few signs
of cooling in some Districts. Boston reported that residential real estate markets
were still strong. However, housing activity and home price appreciation in
Massachusetts moved from "hot" to "normal," and housing inventories in the District
as a whole became somewhat less tight. Housing activity was described as robust
in the New York District, but housing inflation slowed in New Jersey and the
condo market in Manhattan was less frenzied than in the spring. In the Richmond,
Atlanta, and San Francisco Districts, housing activity remained strong but eased
in a few markets that had been especially hot--Washington, D.C., several Florida
markets, and parts of southern California. Dallas also described housing demand
as strong but noted that the supply of new homes was sufficient to keep housing
inflation from exceeding overall inflation. Housing activity was brisk in the
Chicago District and solid in the Kansas City and Minneapolis Districts, although
homebuilding edged down in the Kansas City District. The weakest report came
from the Cleveland District, where homebuilders have faced slightly softer conditions
since early spring and new home prices have been flat.
Commercial real estate activity improved in most Districts. Cleveland said
commercial builders were experiencing steady improvement and higher backlogs
of orders. In the Atlanta District, new construction projects moved forward,
and office vacancy rates trended downward but were still high. Contacts in the
Chicago District described commercial activity as busier than normal, although
activity was slower in Michigan. Commercial real estate activity was described
as strong in the Richmond District and as improving in the Minneapolis, Kansas
City, and San Francisco Districts. Dallas reported that speculative office construction
increased, apartment construction remained high, and hotel markets were hot.
Some of the increased real estate demand in the Dallas District was attributed
to outside investors attracted by the area's lower real estate prices.
Banking and Finance
In Districts reporting on banking conditions, loan demand increased or remained
solid. Overall lending increased in most Districts, with growth ranging from
slight in the Cleveland and Kansas City Districts to solid in the Dallas District.
Atlanta and San Francisco both characterized loan demand as strong. In most
Districts, loan growth was attributed to increases in home mortgages, home equity
loans, or business loans. Credit quality was generally strong, although there
were some concerns about loans to auto suppliers and farmers in the Chicago
District and loans for Florida condominium developments in the Atlanta District.
Dallas indicated that competition for large commercial loans had intensified,
and Chicago said that competitive pressures had led to some easing of commercial
credit standards. Outside of the banking sector, cash inflows to investment
companies increased in the Philadelphia District, and venture capital rose for
the first time in five years in the Chicago District. New York and Richmond
also reported increased activity in the financial services sector as a whole.
Agriculture and Natural Resources
Although conditions remained favorable in most agricultural Districts, dry weather
was a problem in some areas. Richmond reported that substantial rainfall brought
on by two tropical storms generally improved soil conditions in the District.
Atlanta reported only limited damage to crops from the storms and favorable
crop conditions overall, although citrus canker continues to be of some concern
in Florida. Kansas City and Minneapolis also said that crop conditions were
mostly favorable, and winter wheat yields were above year-ago levels in both
Districts. Some Kansas City contacts reported concern about higher energy prices
boosting irrigation costs. Drought conditions were reported in the Chicago,
St. Louis, and Dallas Districts, and Chicago noted these conditions had led
to an increase in corn and soybean prices. The lack of rain caused pasture conditions
to deteriorate substantially in the St. Louis and Dallas Districts. San Francisco
reported little or no impact on cattle prices from renewed fears about mad cow
disease, while Kansas City reported that the resumption of live cattle imports
from Canada was contributing to downward pressure on cattle prices.
Activity in the energy industry remained strong. Oil and gas activity increased
in the Dallas and San Francisco Districts and remained steady in the Minneapolis
and Kansas City Districts. Kansas City reported that drilling was constrained
due to a shortage of available rigs and regulatory factors, and some oil service
firms in the Dallas District were turning down available work due to limited
capacity. Dallas contacts also noted difficulty finding qualified engineers
and training crews. Atlanta reported a temporary shut-in of some oil and natural
gas supplies in the Gulf of Mexico due to Hurricane Dennis. Minneapolis respondents
said that mines are operating at full capacity, with exploration activity in
full swing across the District.
Labor Markets, Wages, and Prices
The demand for labor continued to increase in most Districts, although hiring
in several Districts was mixed. Atlanta, Chicago, Minneapolis, Kansas City,
Dallas, and San Francisco all noted an overall firming in labor markets. Boston
reported moderate increases in services employment and mostly steady employment
in retail and manufacturing. In the Richmond District, jobs increased moderately
at services firms but declined slightly at manufacturing firms. New York said
labor markets were a bit softer overall despite a pickup in hiring in financial
services. Several Districts reported increased demand for temporary workers,
while no Districts reported weaker demand for temps. Skilled workers were said
to be in shorter supply in several Districts, and truck drivers were reported
as scarce in the Cleveland, Richmond, and Atlanta Districts.
Despite generally tighter labor markets, nearly all Districts said overall
wage pressures remained moderate. The only wage pressures cited by the Dallas
District were in the accounting and energy industries, and Chicago said the
only sizable wage gains were in some skilled professions experiencing labor
shortages. San Francisco also reported only modest overall wage growth but noted
an increasing use of incentive compensation by some employers to attract workers.
Rising health-care costs continued to be a concern for contacts in the Atlanta
and San Francisco Districts, but Chicago reported that one large health insurance
firm plans to implement the smallest premium increase in a decade.
Overall price pressures either eased slightly or remained unchanged in most
Districts, despite substantial increases in the costs of energy and some building
materials. Manufacturers in the New York District reported a marked deceleration
in input prices and expect substantially less upward price pressure in coming
months. Some moderation in input price increases was also noted in the Richmond,
Kansas City, and Cleveland Districts. Overall cost and price pressures were
described as mild in the Richmond District, moderate in the Chicago District,
and largely unchanged from the second quarter in the Philadelphia District.
Kansas City and Minneapolis noted some softening in the costs of steel. However,
many Districts reported substantial increases in the costs of energy, petroleum-based
products, and building materials such as concrete and plywood. Chicago, Cleveland,
and Dallas said that transportation firms were able to pass on much of their
increased fuel costs to customers. However, in a number of Districts, firms
outside the transportation sector were reported as having only limited success
passing on cost increases. Retail prices were reported as either flat or up
moderately from the previous survey.
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The First District economy continues to expand, with the exception of New England-based
retailers. Contacted retailers say sales are flat or down compared with a year
ago. By contrast, most responding manufacturers are enjoying year-over-year
revenue growth, as are advertising and consulting firms in the region. Both
retailers and manufacturers report cost increases that they are unable to pass
along fully to their customers. New England's residential real estate markets
are still going strong, although the pace of activity and rate of increase in
home prices in Massachusetts are moving toward normal from "hot," and region-wide
inventories of homes for sale are rising somewhat toward more normal levels.
First District retailers cite flat or poor sales results in the second quarter.
According to one contact, furniture sales are sluggish compared to this period
last year, and slowed in June and early July compared to May, possibly because
of good vacation weather and soaring gas prices. Another respondent reports
a slowdown in casual dining compared to previous months and year-ago levels
but remains unsure of the cause. A contact selling discount apparel and home
fashions relayed that business has been "okay," but still slightly below year-earlier
levels and below plan. Another contact selling apparel notes that year-over-year
sales are down, but believes that the decrease is due to poor merchandising
decisions and not a lack of consumer demand.
Inventory levels remain flat or have decreased according to most respondents.
One exception is the apparel retailer who has increased inventories in order
to shift to more-salable merchandise. Several retail contacts note cost increases
for utilities, steel-based items, and paper; they remain hesitant to pass these
increases on to customers. Employment levels are mostly steady, with increases
occurring only in connection with the opening of new stores. Respondents also
report increased capital spending associated with these new store openings,
as well as for improvements in distribution and technology.
Most contacted retailers are less optimistic than in previous months, and
remain cautious in their outlook. Many hope that sales will at least remain
flat compared with a year ago. Respondents also express uncertainty and caution
about consumer demand, rising healthcare costs, and geopolitical instability.
Manufacturing and Related Services
First District contacts in manufacturing and related services mostly report
that sales and orders remain on an upward trajectory, with levels in the second
quarter of 2005 higher than a year earlier. Makers of aircraft, medical equipment,
pharmaceuticals, chemicals, and IT and information-related products used by
the financial services industry are doing particularly well. However, a fabric
manufacturer indicates that business is falling off, while a fabricated metals
firm reports a temporary downturn in sales to the automotive industry.
Prices for some materials and services continue to increase. Respondents cite
cost pressures from freight and transport, energy, and petrochemicals and other
synthetic products in particular. In general, manufacturers cannot fully pass
along these higher costs to their customers. Some have managed to offset margin
pressures by introducing greater efficiencies in purchasing and production.
Companies are mostly keeping their domestic headcounts steady. A few are laying-off
employees or shortening the factory workweek. Hiring generally is restricted
to sales and marketing and high-end technical positions. Labor markets typically
are tight for these types of positions, but contacts do not complain of hiring
delays except for positions requiring government security clearance. Wage and
salary increases are mostly in the range of 3 to 3.5 percent. Most companies
are increasing their capital spending, but they describe their added investments
as modest or careful.
Respondents tend to characterize the revenue outlook in terms such as "satisfactory,"
"decent," or "on plan." Companies in information-related businesses stress that
they expect to grow more slowly than in the 1990s. Manufacturers say they intend
to remain focused on cost containment, especially given their limited ability
to pass on high oil prices and competition from producers in low-cost locations
such as China.
Selected Business Services
New England advertising and management consulting companies experienced healthy
demand growth in the second quarter of 2005. Most companies believe clients
are now more liberal with their discretionary spending than they were in 2004.
Although still generally cautious, these clients seem to be shifting toward
strategies of growth and expansion, rather than focusing on efficiency. Responding
companies have earned moderate price increases over year-ago levels, but costs
are also increasing, most notably for labor. Headcounts are growing in response
to demand, but at a slightly slower rate than revenues. Looking forward, most
respondents call themselves optimistic and expect revenue growth in the second
half of 2005 to continue at the first-half pace or to go higher. Nonetheless,
contacts see the possibility of a general economic slowdown, higher oil prices,
or terrorism as sources of risk to their positive outlook.
Residential Real Estate
Residential real estate markets in New England remain strong and active. Contacts
report that brokers are busy throughout the region, even though markets typically
slow down this time of year. In Massachusetts, the number of sales of single-family
homes declined in April and May compared with year-earlier levels, but the number
of condominiums sold reached new record highs for both months. However, inventory
of both types increased and sale prices rose by only single digits compared
to last year--a more moderate rate of appreciation than in the last few reports.
Contacts in other states have not observed much slowdown in price appreciation.
Average sale prices have increased in Connecticut, Maine, New Hampshire and
Vermont. Nevertheless, some contacts report that there is "finally" a little
more inventory for buyers to choose from. Most contacts expect prices to continue
rising for the rest of the year.
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Second District--New York
The Second District's economy has expanded at a somewhat more moderate
pace since the last report than in earlier periods. Reports on the labor market
have been mixed but, on balance, a bit softer. Retailers generally report that
sales were strong in June, though a number indicate some softening in early
July. Tourism activity was robust in June. While housing markets continue to
be characterized as sturdy, there has been some deceleration in selling prices
and a modest dip in activity since the last report. Office markets strengthened
moderately in the second quarter, but the market for industrial space was mixed.
New York City's financial industry has shown signs of improvement in early
July, after a sluggish second quarter; moreover, hiring activity is said to
have picked up and compensation has accelerated. Manufacturers and purchasing
managers report a considerable diminution of input price pressures in June and
early July. Finally, bankers report a pickup in demand for commercial mortgages
but little change in other loan categories; they also report some tightening
in credit standards and further declines in delinquency rates.
Retailers report that sales were generally on or above plan in June, but have
softened and appear to be a bit below plan in early July. After a relatively
cool spring, unseasonably hot weather in June boosted sales of summer merchandise--particularly
apparel. More generally, sales of premium lines of clothing were characterized
as strong, as were sales of jewelry and accessories. However, sales of home-related
goods were weak across the board. In general, retail inventories were said to
be at desired levels at the end of June, though a number of wholesale trade
contacts indicate that inventories were on the high side. Selling prices were
Tourism continued to show strength in June. Manhattan's hotel occupancy
rate climbed above 90 percent in June--close to a record high and up more
than 3 percentage points from a year earlier; moreover, with average room rates
up nearly 18 percent from a year earlier, total revenues are up more than 20
percent over the past 12 months. Similarly, Broadway theaters indicate that
attendance remained robust in June, with revenues running roughly 10 percent
ahead of a year earlier, though attendance has tapered off moderately in the
first half of July.
Consumer confidence improved in June, based on two separate surveys. The Conference
Board's survey of Middle Atlantic residents shows consumer confidence
rebounding strongly in June, after slipping to a 6-month low in May. Siena College's
survey of New York State residents shows confidence climbing for the second
month in a row--whereas May's gain was concentrated in the New York
City metropolitan area, all of the June gain was in upstate New York.
Construction and Real Estate
The housing market generally continued to be robust in June and early July,
though there were some signs of slowing in activity and deceleration in prices.
New Jersey homebuilders report that conditions remain strong, though the rate
of price increase has slowed; residential construction activity has been stronger
in 2005 than it has been since the late 1980s, but there is still a fairly long
queue of homebuyers. Two contacts maintain that Manhattan's co-op and
condo market remains robust across the board, though not as frenzied as during
the spring. Apartment prices were estimated to be running 10 percent to 15 percent
higher than a year earlier in June--a bit less than in April and May--while
unit sales were down moderately.
Office markets in and around New York City have continued to show signs of
strengthening. At the end of June, office vacancy rates declined to 4-year lows
in both Midtown and Lower Manhattan, and this improving trend has continued
during the first half of July. Similarly, Westchester County's vacancy
rate fell to a 5-year low at mid-year, while Fairfield County's rate was
down slightly for the quarter. In Long Island, however, vacancy rates rose by
nearly a full point in the second quarter, though they are still 1/2 point
lower than a year earlier. Industrial markets in and around New York City were
mixed in the second quarter. Industrial vacancy rates edged down to near a 3-1/2
year low in Fairfield County and were steady at record lows in Westchester County;
rents in both areas were up slightly from a year earlier. In New York City,
Long Island, and northern New Jersey, industrial vacancy rates were little changed,
though asking rents were up roughly 10 percent from a year earlier.
Other Business Activity
A contact at a major New York City employment agency describes the job market
as lukewarm, noting that hiring activity has been a bit slower in June and early
July than anticipated. In contrast, a contact in the financial industry notes
that employment and compensation have accelerated in recent months; more generally,
business activity is said to have picked up in early July, after a sluggish
According to our latest survey, New York State manufacturers report a further
rebound in activity in early July and have become increasingly optimistic about
the near-term outlook. Still, hiring activity is reported to have slowed, and
a number of contacts indicate that inventories are higher than desired. They
also note a marked deceleration in input prices, and anticipate substantially
less upward pressure on prices in the months ahead. Regional surveys of purchasing
managers also point to considerable moderation in input price pressures.
Small and medium sized banks in the district report little change in demand
for consumer loans, residential mortgages, and commercial and industrial loans
since the last report, but an increase in demand for commercial mortgages. Refinancing
activity continued to weaken. Bankers reported tightened standards on residential
mortgages, consumer loans and commercial mortgages. Higher rates were reported
across all loan categories, particularly in the consumer loan category. Increased
average deposit rates were reported by 67 percent of bankers versus only 6 percent
reporting lower rates. Finally, banks report lower delinquency rates on consumer
loans, commercial mortgages, and commercial and industrial loans.
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Economic activity in the Third District was expanding in early July. Manufacturers
reported increases in orders and shipments compared with June. Retail sales
of general merchandise increased compared to the prior month and year. Auto
sales remained on the rise following a strong upturn from May to June. Banks
reported that lending continued on an upward trend, with gains in business lending
and home equity credit. Firms in the District's major service industries
reported growth in activity in the past few months about in line with the growth
rates they posted earlier in the year.
Third District business contacts generally expect business activity in the
region to continue to expand at around the current pace. Manufacturers expect
increases in shipments and orders during the next six months, although the balance
of positive forecasts is not as great as it was during the first half of the
year. Retailers anticipate steady sales growth, with moderate year-over-year
gains. However, auto dealers are uncertain about the outlook, and some expect
the sales rate to decline in the months ahead. Bankers expect continued loan
growth near the recent pace. Service sector firms expect moderate, steady increases
Manufacturing activity in the Third District was on the rise in early July according
to manufacturing firms contacted during the month. Nearly one-third of the companies
contacted posted increases in new orders and shipments compared with June, and
around one-fifth had decreases. However, order backlogs were on the decline,
and delivery times were unchanged from the prior month, on balance. For early
July compared with June, the improvement in business was relatively stronger
among firms producing wood products, packaging, and industrial materials. Manufacturers
of metals and metal products generally had declines. Makers of other products
gave mixed reports.
On balance, the region's manufacturers expect continued growth in business
activity, although positive expectations are not as widespread as they were
in the first half of the year. About half of the firms contacted in July expect
their shipments and orders to increase during the next six months, and about
one-fourth expect decreases. On balance, capital spending plans remain positive
among District manufacturers, but the number of firms scheduling increased outlays
is somewhat lower than it was during the first half of the year.
Reports of price increases from Third District manufacturers outnumbered reports
of decreases in early July, although a majority of manufacturing firms reported
steady prices for the month. One-third of the manufacturing firms contacted
for this report noted increases in input prices from June to early July, and
one-fifth raised output prices. Less than one-tenth reported declines in either
input or output prices. The number of firms noting increases for the month was
about the same as during the second quarter, and lower than in the first quarter.
During the next six months about half of the manufacturers contacted for this
report expect increases in input prices, and almost one-third plan to increase
the prices of their own goods; only a very small percentage expect declines
in either input or output prices.
Retailers generally reported higher sales in early July compared with June and
with July of last year. There were gains among most lines of goods, with somewhat
better performance for seasonal items, apparel, and home furnishings relative
to other merchandise categories. Some merchants noted that shoppers were visiting
stores less frequently, consolidating shopping trips in order to economize on
gasoline expense. Some store officials also noted an apparent decline in impulse
buying by shoppers. Retailers expect sales growth to continue at about the current
pace, but they are being cautious in their expansion plans. Several retail executives
indicated that rising operating costs were leading them to focus on measures
to increase sales at existing stores rather than on opening new stores.
Auto dealers in the region generally reported a pickup in sales in June and
early July stemming from new price discounts by manufacturers. As a result,
inventories have been reduced to more desirable levels. However, dealers indicated
that sales of large sport utility vehicles have been declining, and they attribute
the sales falloff to high gasoline prices. Dealers expressed some concern that
the pace of sales will ease later this year as the impact of recent price cuts
The volume of loans outstanding at Third District banks rose in the first weeks
of July compared with June, according to banks surveyed for this report. Commercial
and industrial loans have been increasing. Some bankers indicated that there
has been strong growth in lending to construction firms and to manufacturers
and other companies with housing-related business. Lending for residential mortgages,
home equity loans, and home equity credit lines has been growing, as has credit
card lending. Bankers in the District expect continued expansion in business
activity in the region, and they expect overall lending to remain on the rise.
Investment companies reported gains in cash inflows in recent weeks, with
about equal growth in purchases of money market, bond, and equity funds. Investment
company officials said investor confidence appears to be improving, although
both individual and institutional investors continue to believe there remains
some risk that financial conditions could deteriorate and economic growth could
Most of the Third District service firms contacted in early July reported growth
in activity. Information services firms have had some increases in demand, and
they have been upgrading their own systems. Among other business services, there
has been an increase in activity among basic business support services firms
and at temporary employment agencies. Demand for temporary workers has picked
up for health care, administrative, and some skilled manufacturing occupations.
Some temporary employment agencies also noted more demand for workers this year
compared with last year from firms with summer peak activity. Most of the service
sector firms contacted for this report expect business to continue to advance
at around its current growth rate during the balance of the year.
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District business conditions generally improved across a broad base of industries
in the six-week period through the middle of July, after a period of uneven
growth throughout the spring. Outside of a few categories, most manufacturers
reported that production remained steady or rose in recent weeks. And reports
from retailers suggested notable improvements in the sector, paced by strong
gains at automobile dealerships. As in recent reports, commercial builders continued
to see steady improvements in business conditions, while residential builders
reported a more mixed economic environment. At the District's banks, loan
demand was steady to slightly increasing. And demand for trucking and shipping
services continued to be strong, after slowing slightly through the early spring.
Growth in most materials prices moderated through the middle of July, though
prices of petroleum-based products and concrete increased more sharply since
May. Despite steady improvements in the economic environment in recent months,
hiring continued to be modest in most industries. Nevertheless, staffing-services
companies reported an increase in the number of job openings, especially for
workers with specific skills, such as accountancy and information technology.
Contacts at staffing-services firms also noted that these workers were in shorter
supply than in the recent past.
Through the six-week period ending in mid-July, production at most District
durable goods facilities remained steady, and above the levels of this time
a year ago. While inventories were generally reported to be at acceptable levels,
more firms cited excessive inventories than was true at this time last year.
Nevertheless, most contacts reported that their new orders had risen in recent
weeks, and accordingly, they expected production levels to rise throughout the
remainder of 2005.
Activity at the District's steel facilities, however, has not been as
strong. Contacts cited weaker demand from firms in commercial construction and
in automobile and appliance production as part of the explanation for recent
declines. These developments have led to larger-than-desired inventories and,
along with an increase in imported steel, have pushed prices down for some steel
products on the order of 40% from fourth-quarter 2004 levels. Regarding another
important District industry, production at automobile assembly plants continued
to be above year-ago levels in June, despite some domestic auto producers'
recent production cuts.
Among nondurable good producers, production was generally characterized as
steady or rising, both relative to earlier in the year and to this time last
year. According to most contacts, the current pace of new orders suggests steady
gains in production through the rest of 2005. While most manufacturers reported that their input costs were flat or falling
for the six weeks through the middle of July, costs generally continued to be
above year-ago levels, and firms with petroleum-based products as important
inputs reported that their input costs rose in recent weeks. Several contacts
from durable goods firms reported that their companies were able to successfully
increase prices in June and early July. Hiring continued to be limited among
most manufacturers, and while durable goods producers generally did not anticipate
any significant changes to their capital spending through the end of 2005, several
nondurable goods contacts noted that they planned to upgrade equipment, in some
cases to improve the energy efficiency of their capital stock.
After a lull in the spring, which coincided with an increase in gasoline prices,
sales for District retailers improved in June and through the first half of
July. Typically, retailers reported that their sales were consistent with expectations,
though warmer weather may have helped to improve traffic. By segment, several
specialty apparel stores, particularly those catering to teens, saw strong year-over-year
sales gains. Department stores also saw solid year-over-year increases in sales,
despite reporting declines throughout much of 2005. In general, attitudes among
retailers were characterized as cautiously optimistic, especially regarding
the upcoming back-to-school selling season. Few firms reported using an abnormal
amount of discounts or other incentives to attract shoppers.
Automobile sales were strong across the District in June and through the early
part of July. Contacts reported that the recent employee-discount pricing policy
introduced by General Motors (GM) led to dramatic year-over-year sales gains.
Interestingly, respondents reported that the promotion not only benefited GM,
but also other automakers by drawing would-be buyers to dealerships. Other automakers
have since moved to mimic GM's employee-discount pricing policy, which
has been extended through the end of July.
The slightly weaker business conditions that homebuilders have reported since
early spring continued to prevail throughout the District. In the six-week period
through the middle of July, most homebuilders reported that their sales were
slightly weaker than anticipated, although activity levels varied from market
to market. Most homebuilders do not expect conditions to change markedly through
the remainder of 2005. Regarding costs, outside of isolated increases in specific
materials, such as cement and concrete, materials costs remained relatively
flat. Labor costs have also stayed steady, though some subcontractors in specific
trades have been less available because of increases in nonresidential construction.
New home prices have tended to be flat for the most part across the District.
Nonresidential builders continued to report more growth than their counterparts
in residential construction, with contractors typically seeing increases in
year-over-year sales. As with residential builders, materials costs were generally
seen as stable, though isolated increases were reported for concrete and petroleum
products. Builders noted that these cost increases were difficult to pass through
to prices, which have remained relatively stable. With respect to specific sectors,
contacts reported an increase in demand from firms in the manufacturing sector.
Finally, builders generally noted that their orders backlogs had increased,
which was typically taken as a positive sign for the future.
Trucking and Shipping
Demand for trucking and shipping services in the District
remained steady at a high level in June and July, after a period of weaker demand
that ended in early spring. While rising fuel costs continued to be offset through
surcharges, contacts noted that these increases were still affecting their margins
as a result of truck operations that cannot be billed to clients. Prices, nevertheless,
remained relatively stable in recent weeks, as did wages, despite continuing
complaints of a driver shortage.
Conditions at commercial banks in the District were little changed for the six-week
period ending in mid-July. Loan demand was steady to slightly increasing at
institutions in the District among both commercial and consumer clients. In
addition, demand from commercial clients was broad-based, with no specific industry
identified as driving demand. For consumer clients, though mortgage demand was
down slightly, the demand for home-equity loans remained robust. Most contacts
reported an increase in core deposits, and credit quality continued to be strong,
with some contacts indicating that their charge-offs and delinquency rates were
at unusually low levels.
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The Fifth District economy expanded at a quicker pace in the weeks since our
last report as growth in the services sector edged up. District services businesses
reported moderately higher revenue growth in June and early July. Retail sales
gained momentum throughout the period, boosted by brisk automobile and light
truck sales in recent weeks. District manufacturing activity edged lower in
June but strengthened substantially in the first half of July. District real
estate agents continued to report robustness in housing markets and relatively
strong demand for office and retail space in the commercial sector. In the financial
sector, bank lending moved moderately higher as demand for residential mortgages
strengthened. When asked about prices, most of our business contacts responded
that price pressures remained generally mild. In agriculture, remnants of two
tropical storms brought substantial rainfall to the District in July, helping
to alleviate dry soil conditions and boost crop and pasture conditions.
Retail sales rose at a moderate pace in the weeks since our last report. Automobile
and light truck sales, which languished in the spring, picked up in June and
the first half of July. Furniture sales also strengthened in recent weeks--a
manager at a department store in North Carolina noted that customer response
to an expansion of the store's furniture product line had been "very
positive." In addition, other retailers generally reported higher shopper
traffic and big-ticket sales in early July. District bookstores noted particularly
brisk customer traffic in mid July in advance of the latest release in the Harry
Potter series of children's books. Retailers reported that their hiring
picked up in June but eased in the first two weeks of July. Retail price growth
was moderate in both months.
District services firms reported stronger revenue growth since our last report.
Contacts at business-to-business firms in central West Virginia and at financial
services firms in Richmond, Va., and eastern North Carolina told us that customer
demand rose at a quicker pace in recent weeks. In contrast, most contacts at
healthcare facilities in the District said demand, while strong, had shown little
additional growth. Services sector firms reported moderate increases in hiring
and noted that information technology workers, truck drivers, and registered
nurses were more widely sought. Prices in the services sector rose at a moderate
pace in June and July.
District manufacturing activity softened in June but picked up the pace in early
July. Manufacturers told us that shipments, new orders, and capacity utilization
expanded at a solid clip in July. Manufacturers in the electronics, food, and
plastic products industries reported particularly strong growth in output during
the month. A plastics manufacturer in North Carolina, for example, reported
being "very busy right now...We have some good new orders in-house
and pending, so I'm optimistic about the next few months." Despite
higher output, manufacturing employment continued to drift lower. Textiles firms,
in particular, said they continued to trim payrolls. District manufacturers
told us that raw material price increases eased in June and July and that prices
for final goods manufactured rose only modestly.
District bankers said lending activity rose at a moderate pace in June and early
July as demand for residential mortgages picked up. A mortgage lender in Greenville,
S.C., told us that residential mortgage applications and closings in his office
in June were the best this year, and that while the year started off slowly,
they were now "turning the corner." Several lenders said that the
pickup in mortgage lending was due in part to uncertainty regarding future mortgage
interest rates--borrowers were committing to mortgages now in anticipation
of higher interest rates ahead. Commercial lending activity was little changed.
A commercial banker in Richmond, Va., reported "a lot of renegotiation
of existing loans, but little new business" in recent weeks. A lender
in Charlottesville, Va., told us there were new loans in the pipeline, but noted
that many of his commercial clients appeared reluctant to draw down their lines
of credit until business strengthened further.
While a few residential real estate agents reported somewhat slower growth in
home sales, most told us that both home sales and prices strengthened since
our last report. Housing markets in Virginia were particularly robust; a Richmond
agent reported "great" home sales in July, while a contact in Virginia
Beach said he had never seen a stronger market. Residential real estate markets
in the Washington, D.C., metropolitan area showed continued strength as well,
although the pace of activity was not as frenzied as in the spring. An agent
in Washington, D.C., said that multiple offers on homes for sale were still
common, and that condominiums selling for prices in excess of $500,000 were
moving particularly well. A contact in Fredericksburg, Va., however, noted that
while the market there remained busy, it was taking "maybe a bit longer
to sell properties." Real estate agents in several towns in the Carolinas
said that housing markets were generally stable; a Greenville, S.C., agent said
there were lots of homes on the market and they were being sold relatively quickly.
House prices continued to move higher in most areas of the District.
Commercial real estate agents reported little change in Fifth District leasing
activity in June and early July. Demand for office and retail space remained
strong in most areas but the onset of summer vacations made closing deals a
little more difficult. "There is still a lot of business going on out
here; it just takes a little longer to get stuff done when summer rolls around,"
noted a contact in Columbia, S.C. Despite robust demand for lease space and
investment properties, agents said that price increases for both had begun to
moderate during the last six weeks, and most contacts said they expected only
modest increases in rents in the near future.
Tourist activity was somewhat stronger in recent weeks. Hoteliers along the
coast reported solid bookings for July. A contact at Myrtle Beach, S.C., noted
that hotel bookings were particularly strong around the July 4th holiday. In
addition, July 4th holiday celebrations attracted lots of visitors to the nation's
capital--the city's Metro subway ridership on the holiday was about
25 percent higher than a year ago. Tourism officials noted that the return of
professional baseball to Washington, D.C., had also boosted tourism in the city.
Temporary employment agencies in the District reported continued strong demand
for workers since our last report. Warehouse, production, sales, administrative,
and software skills in particular were widely sought. A Raleigh, N.C., contact
told us that renewed confidence in business growth strengthened demand for his
agency's services. An agent in Baltimore, Md., said that he expected demand
for services to rise further in coming weeks, and noted that he was seeing better
qualified applicants for temporary positions.
Remnants of tropical storms Cindy and Dennis brought much-needed rainfall to
crops and pastures in the Fifth District in early July. While some eastern parts
of the District remained generally dry, substantial rainfall greatly improved
soil conditions and yield prospects for corn and soybeans, and "greened-up"
pastureland in most of the District. Heavy rains in South Carolina, however,
caused some flooding and damaged crops in low-lying areas. On a brighter note,
small grain harvesting neared completion in the Carolinas, and peach crops in
Maryland and South Carolina remained in good-to-excellent condition.
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Most Sixth District business contacts reported that the pace of economic activity
remained solid during June and early July. Disruptions from recent tropical
storms along the Gulf Coast are expected to have only a limited impact on overall
economic activity. Retail sales were up modestly from last year, and vehicle
sales benefited from new price discounts. Housing markets remained at robust
levels, although some slowing in activity was noted in several Florida markets.
Improvements continued in commercial real estate markets. Reports from manufacturers
were generally upbeat and most reports on tourism and business travel were quite
positive. Loan demand remained strong, especially in the housing segment, although
some lenders noted concern about the pace of condominium development in South
Florida. Contacts reported that labor markets improved, and shortages continued
in construction-related trades in several parts of the District. Price increases
were reported for industrial commodities, building products, energy-related
goods, and healthcare.
Reports on retail sales during June and early July were generally positive.
Most contacts indicated that sales were up modestly from a year ago and were
in line with expectations. Inventories were described as balanced. Higher gasoline
prices did not appear to be having a significant impact on non-gasoline retail
sales overall, although some discount retailers noted reduced spending per customer.
Building supply and home improvement stores in Florida benefited from a two-week
tax holiday in early June on hurricane-related supplies. Most contacts said
they expect sales to rise slightly in the third quarter compared with last year.
District vehicle sales improved in June. Several contacts cited a new round
of price discounts by domestic suppliers as boosting traffic and sales. Demand
for foreign brands remained strong.
Home construction and sales in the District remained at high levels during June
and early July, although some deceleration was noted in a few Florida markets.
Realtors reported that sales in June rose slightly compared with last year,
while reports from builders were more mixed. Shortages of homes for sale continued
to be a problem in Florida, and some builders noted a shortage of available
land for development. Several Florida builders indicated that labor shortages
were an additional restraining factor. Overall, builders expect new home construction
to increase in Florida and remain steady throughout the rest of the District
in the second half of the year. Early reports on Hurricane Dennis suggest that
structural damage was not as widespread as last year, but repairs may add to
backlogs for many contractors.
Solid improvements continued to be noted in commercial real estate markets
across the District as expansion plans and new projects moved forward. Contacts
noted that office vacancy rates remain elevated on several markets but are generally
Manufacturing and Transportation
Reports from the factory sector were positive. Production of building products,
lumber and gypsum board, and cement remained at high levels because of strong
residential construction. Manufacturing activity in defense-related industries
continued to be strong. A large refinery in Mississippi announced plans for
an expansion to increase production by about 25 percent. Contacts in manufactured
housing, machine tool, heavy truck, and electrical equipment sectors also cited
healthy levels of activity. Paper and packaging production was mixed; "away
from home" paper products were selling well, while shipments of packaging
material were off from levels seen earlier in the year. Hurricane Dennis reportedly
resulted in the temporary shut-in of some oil and natural gas supplies in the
Most District transportation contacts reported good freight demand through
mid-year, although some noted a slower pace than earlier in the year. A shortage
of qualified drivers continues to be a concern for many trucking companies.
Tourism and Business Travel
Despite the early start to the tropical storm season, most reports on tourism
and business travel were positive. In addition, most contacts indicated that
high fuel prices were not having a significant impact on travel overall. Tourist
activity in South Florida was very strong, and the prospects for the remainder
of the summer season were positive. Miami hotels reported high demand with record
occupancy and increased room rates. Theme park contacts stated that they were
enjoying a strong summer, with attendance ahead of last year’s pace, and
Orlando area hotels noted high occupancy levels. Reports from Tennessee destinations
and the Mississippi Gulf Coast were also upbeat. Convention business in Atlanta,
New Orleans, and Orlando improved.
Banking and Finance
Financial conditions in the Sixth District remained stable. Loan demand remained
strong in most areas, but concerns about the possibility of excessive condominium
construction in parts of Florida were noted by several contacts. Asset quality
Employment and Prices
Reports suggest that labor markets tightened in some sectors and temp hiring
increased in June and early July. For instance, a contact at a large temporary
staffing company said that their business was extremely strong and that the
company was starting to see shortages of both skilled and unskilled labor in
Prices for lumber and other building products as well as several industrial
commodities continued to drift higher, and most businesses have reportedly been
able to pass on some of these increases to their customers. Rising energy prices
and healthcare costs continued to be noted by most contacts.
Tropical storm Cindy and Hurricane Dennis caused only limited damage to regional
crops. Crop conditions for cotton and peanuts were favorable, according to recent
USDA reports. Florida contacts noted that citrus canker continued to be found
throughout the Indian River Citrus District.
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Economic activity in the Seventh District continued to expand at a moderate
pace during June and early July, though activity in Michigan lagged. Consumer
spending increased modestly during June, as did business spending and hiring.
Construction and real estate activity was quite brisk in much of the District.
The manufacturing sector continued to expand at a solid pace. Mortgage lending
kept pace with home sales, while commercial loan demand increased modestly.
Overall cost and price pressures remained moderate. The drought expanded and
has now affected all of the District' states, contributing to a rise in corn
and soybean prices.
Consumer spending increased gradually during June. One area retailer attributed
most of the pick-up to better weather during the month, adding that consumers
seemed more focused on buying "needs-based" goods rather than discretionary
items. Apparel sales were said to be strong. Retail inventories were slightly
higher. Auto sales in the District increased in line with national trends, though
one contact thought the new employee discount marketing programs did not benefit
sales in the Detroit area as much as in other areas. One auto dealer in northern
Indiana said sales in early July slowed to a more average pace. Tourism spending
continued to increase steadily, with reports of increased demand for hotel rooms
in Chicago and Michigan.
Business spending continued to expand at a modest pace. Several contacts noted
that they had increased capital spending as planned, and others reported that
the investment climate remained positive. Trucking volumes held steady through
the end of the second quarter. One trucking contact said that an inventory correction
among their retail customers had restrained activity, but overall conditions
in the shipping industry remained good. A Wisconsin utility reported a rise
in power demand during the first six months of the year. Labor market conditions
improved slightly overall, but conditions varied by location and industry. Job
markets in Wisconsin and Indiana were better than those in Michigan. Hiring
in the banking, trucking, and distribution industries reportedly increased.
By contrast, layoffs were reported by pharmaceutical and auto-supply firms.
Construction and real estate activity was quite brisk in many of the District'
markets during June and early July. Residential real estate markets remained
active, with reports of more homes going on the market in Milwaukee and a solid
pace of condo conversions in Chicago. Homebuilders in Wisconsin added incentives
to help boost interest in some new properties. One homebuilder noted a decline
in sales in metro Detroit but stronger activity in Indiana and Illinois. The
news on commercial real estate was more positive than that of the previous reporting
period. Contacts described commercial activity as "busier than normal" and "fast
paced." However, activity in Michigan was slower than elsewhere in the District,
and there were reports of weakness in office markets in a number of locations.
Commercial occupancy rates and rents were stable on balance, though one contact
was adding incentives to attract new clients to some properties.
Manufacturing activity continued to expand at a solid pace in the District during
June and early July. Automakers reported a slight pick-up in sales in the first
two weeks of July and expected sales for the month to be higher than June. Light
truck sales were stronger than car sales, and one contact felt that the new
incentives were offsetting consumers' concerns about higher gas prices. Industry
contacts revised up their sales forecasts for the year, but left production
plans unchanged. Toolmakers reported a solid sales pace in June, and one added
that early indications suggest that sales in July will be strong as well. Office
furniture producers reported solid growth in domestic sales. Activity in the
heavy equipment market continued to be brisk, with production increasing and
backlogs remaining high. One contact in the industry noted that sales of construction
equipment remained very healthy, though retail sales of small tractors had declined
slightly in the U.S. and Europe, perhaps because of drought conditions. Tire
shortages were still limiting production of heavy equipment and heavy-duty trucks,
though one contact said that a major tire maker was increasing capacity for
large tires, potentially easing that constraint.
Lending activity generally continued to increase during June and early July.
Demand for home-purchase mortgages was solid. Refinancing was mixed by location,
with a Chicago bank reporting a modest pick-up and a Michigan bank reporting
little change. The mix between adjustable-rate and fixed-rate mortgages was
stable. Business loan demand continued to increase modestly, led by strength
in commercial real estate loans. Nonetheless, several bankers said that competitive
pressures were lowering margins on commercial lending and resulting in easing
standards and terms for such loans. Business credit quality remained in good
shape with many firms flush with cash. One exception was the auto-supply industry,
where many banks expressed concern about the financial health of their customers.
One analyst reported that venture capital in the Chicago area increased for
the first time since 2000, adding that there was "renewed excitement and enthusiasm"
for investing in local technology start-ups.
Overall cost and price pressures remained moderate. Higher material costs were
noted for energy, resins, and some construction materials. Firms most directly
affected by higher energy costs, such as those in trucking and air travel, said
that they were able to offset most of the higher costs through surcharges and
fare increases. However, one trucker noted that shippers who tried to raise
rates too aggressively had lost customers. Manufacturers of heavy equipment,
wallboard, and tools reported a new round of price hikes, though a heavy equipment
maker reported some resistance to its increases. Reports of retail price increases
outnumbered the reports of decreases. New car prices fell, not only for retail
customers but also for corporate fleets. Wage gains remained modest overall,
except in some skilled professions with shortages. With regard to costs for
benefits, a large health insurance firm in Michigan announced plans to implement
the smallest premium increase in a decade.
Crop conditions deteriorated in most of the District, contributing to a rise
in corn and soybean prices. The drought expanded and deepened, despite some
rainfall in early July. Illinois continued to be hit hardest, though at least
part of each state in the District experienced drought conditions. In Iowa,
crop development has been quite good, but some areas are at risk if they do
not receive timely rains. District bankers were apprehensive about some farmers'
poor risk management, especially with respect to inadequate crop insurance.
Dairy farms generally did well in the reporting period, as milk prices increased.
Livestock producers remained profitable overall, though cattle feeders were
pressured by lower prices for cattle.
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Eighth District--St. Louis
Business activity in the Eighth District has continued to expand since our
previous survey. Manufacturing activity increased in many industries, although
several District manufacturers announced plant closings and workforce reductions.
Contacts in the services sector continued to report increased economic activity.
District retailers and auto dealers had mixed reports for May and June compared
with the same months in 2004. Home sales continued to increase in most of the
District. Although commercial real estate markets remained soft, some areas
showed signs of improvement. Lending activity at a sample of small and mid-sized
District banks increased from mid-March to early June.
Manufacturing and Other Business Activity
Manufacturing activity in the Eighth District continued to expand moderately
since our previous survey. Several manufacturers reported plant openings and
expansions. Firms in the electrical equipment, machinery, furniture, and chemical
industries announced plans to expand production capacity or open new facilities
in the District. In spite of these reports, contacts in the fabricated metal
product, leather product, food, and electronics industries announced plans to
close plants or lay off workers. Several of these firms cited plans to move
operations abroad because of increased foreign competition.
Activity in the District's services sector has continued to increase
in most areas since our previous report. Firms in the freight transportation,
utilities, leisure, and insurance industries reported plans to open new facilities
and hire new workers. Contacts in the air transportation, tourism, administrative
support, wireless, and Internet service industries experienced solid customer
growth and high sales volume. Despite overall positive reports, contacts in
the business software, real estate, and water transportation industries announced
plans to lay off workers. District retailers generally reported increased sales
in May and mixed sales in June compared with the same months last year. Discount
and large retailer sales remained steady over the same period. Reports from
District auto dealers were generally mixed. In some cases, price discounts led
to increased sales growth. Inventories generally remained high. Used car sales
were strong in May but slowed in June relative to May.
Real Estate and Construction
Home sales in the Eighth District have continued to increase. May year-to-date
home sales were up 7.2 percent in Louisville, 5.8 percent in Memphis, 2.8 percent
in Little Rock, and 1.0 percent in St. Louis compared with the same period in
2004. Residential construction conditions were mixed throughout the District.
May year-to-date single-family residential permits were down 2.6 percent in
St. Louis; down 8 percent in Owensboro, Kentucky; and down about 16 percent
in Evansville, Indiana, and Jonesboro, Arkansas. In contrast, permits were up
7 percent in Louisville, 11 percent in Little Rock, and 1 percent in Memphis.
Pine Bluff, Arkansas, continued its residential construction climb with May
year-to-date permits increasing over 114 percent compared with the same period
Commercial real estate markets have remained soft throughout much the District.
The first-quarter industrial vacancy rate in Little Rock held steady at nearly
14 percent. Contacts indicated that the industrial and office sectors in Memphis
have recently shown signs of improvement. In contrast, the first-quarter office
vacancy rate in Louisville increased to 20.4 percent from 18.7 percent at the
end of 2004. Contacts in northeast Arkansas reported little new activity in
commercial construction, while contacts in northeast Mississippi reported that
commercial growth has remained strong. Contacts have indicated that Louisville
has several large construction projects on the horizon, and industrial development
in DeSoto County, Mississippi, is on the rise.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks increased
2.2 percent from mid-March to early June. Real estate lending and commercial
and industrial loans (with increases of 1.3 percent and 5.7 percent, respectively)
contributed roughly 1 percentage point each to the rise in total loans. Loans
to individuals fell 4.1 percent. All other loans, accounting for roughly 5.4
percent of total loans, increased 9.5 percent. Over this period, total deposits
at these banks increased 0.6 percent.
Agriculture and Natural Resources
Since early June, most parts of the District have endured unusually dry conditions.
As of mid-July, about 62 percent of the District's corn crop and about
72 percent of the soybean crop are rated in fair or better condition, while
over 90 percent of the District's rice and cotton crops have reached that
category. Nevertheless, corn and soybean crop development remain ahead of their
five-year averages, while cotton and sorghum are on par with their five-year
averages. Since June, pasture conditions have deteriorated throughout the District,
and at least half of the pastures in Arkansas, Illinois, Kentucky, and Missouri
are rated as poor or very poor. Every District state except Indiana has completed
more than 95 percent of its winter wheat harvest.
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The Ninth District economy displayed solid growth since the last report. Growth
was evident in consumer spending, manufacturing, real estate, construction,
tourism, agriculture, energy, and mining. Employment growth was evident since
the last report, and contacts report difficulty finding skilled workers. Meanwhile,
wages grew moderately. Significant price increases were noted in fuel and certain
Consumer Spending and Tourism
Consumer spending showed solid growth. A major Minneapolis-based retailer reported
same-store sales up 9 percent in June compared with a year ago. Sales were up
between 5 percent and 10 percent from a year ago at a mall in North Dakota,
and the first week in July was "huge," according to the mall manager.
Recent apparel sales were described as outstanding at a mall in Montana. A Minneapolis-St.
Paul area mall manager reported sales and traffic were up in the single digits
for June compared with a year ago.
During the past couple of months, import car sales were about even with a
year ago in Minnesota, while domestic brand sales were down. However, during
the past few weeks, price discounts have helped boost domestic brand sales,
according to a Minnesota auto dealer. New incentives also aided sales in North
Dakota, according to a representative of an auto dealers association.
Summer tourism picked up by early July. In South Dakota, tourism activity
started slowly in early June, but showed strength by early July, including strong
attendance at Mt. Rushmore on the Fourth of July, according to a tourism official.
Some resort owners and retailers in northwestern Wisconsin said they had the
best Fourth of July weekend yet. A Montana tourism official said the summer
tourism season so far has been good and is expected to continue. In Minnesota,
tourism in June was steady or showing slow growth compared with last year, according
to an official. Business travel is growing after several years of decreases,
a particular boost to Minneapolis-St. Paul area hospitality businesses.
Construction and Real Estate
Overall, construction grew since the last report. In June, housing units authorized
were up 5 percent for the Minneapolis-St. Paul area from a year earlier, which
indicated a recent spike after a slow start to the year's building season.
The value of newly permitted residential and commercial construction projects
in Rochester, Minn., was up significantly in June from last year; however, the
number of permits issued was down 12 percent from last year. Bank directors
from North Dakota and Montana described residential and commercial construction
Real estate showed signs of increased activity. Commercial markets were picking
up. Office and industrial sales for 2005 in the Minneapolis-St. Paul area are
forecast to reach $1.4 billion, compared to $1.2 billion for last year. Office
vacancy declined throughout Minneapolis-St. Paul, with industrial absorption
at its highest levels since 2000. Developers in Marquette, Mich., reported that
commercial and retail vacancy rates were down dramatically. Residential real
estate markets were solid. There is practically no inventory in the parts of
Montana and North Dakota experiencing an oil boom. Bank directors from North
Dakota and Montana reported home prices up by 8 percent to 10 percent, with
increases as high as 20 percent in oil-rich areas. June home sales in Minneapolis-St.
Paul were down 4.4 percent from last year, but remained at a high level with
prices up 5 percent and pending home sales up 3.2 percent.
Manufacturing activity expanded. A June survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated increased manufacturing activity in Minnesota
and the Dakotas. In northern Minnesota, a paper mill and a metal processing
plant are planning to expand. In western Wisconsin, a furnace company plans
to build a new production facility. However, a foundry in North Dakota recently
shut down and a maker of semiconductor testing machines in Minnesota plans to
Energy and Mining
Activity in the energy sector was up slightly, and increased in the mining sector.
A refinery in Montana plans to invest $325 million to upgrade its facilities.
Several wind energy farms and three ethanol plants are under construction in
district states. Oil and gas exploration and production were about level from
early June through early July. Mines across the district are producing at near
full capacity, and maintenance activity is occurring without the usual complete
shutdowns. Expansions at several mines are in the permitting stage, and exploration
activity is in full swing across the district.
Economic activity in the agricultural sector increased. Warm, dry weather aided
crop development in the district. Yields and production for the South Dakota
winter wheat crop are up from a year ago. In Montana, 84 percent of the winter
wheat crop is rated good to excellent, significantly above the five-year average
of 36 percent. Row crop progress increased rapidly during the first half of
July. The U.S. Department of Agriculture projects corn prices in 2005/06 to
average $1.70 to $2.10, up 15 cents on each end from last month's projection.
The USDA also increased its price projections for soybeans and expects cattle
and dairy prices to remain at strong levels. However, the Montana sweet cherry
crop is forecast to decrease 45 percent from last year.
Employment, Wages, and Prices
Employment growth was evident since the last report, and contacts noted difficulty
finding workers for some jobs. In Montana, a recently reopened copper-and-silver
mine has hired 150 employees, while another mine has hired 50 more workers.
In South Dakota, construction recently began on a cooling system and heat exchanger
plant that will eventually create 150 jobs, and a new filter production line
recently created 26 jobs. A health insurance group recently reported it will
hire 100 more workers in Minnesota. A temporary employment agency in the Minneapolis-St.
Paul area noted that demand was up from three months ago, particularly for specialized
jobs such as accounting and human resources. A bank director in northeastern
Montana reported that available contractors and carpenters are hard to find.
Some bankers in the Minneapolis-St. Paul area recently noted a short supply
of quality commercial banking professionals. A temporary staffing agency survey
of Minneapolis-St. Paul businesses found that 24 percent of respondents expect
to increase employment during the third quarter of 2005, while 9 percent expect
to make reductions.
Employment reductions included a boat producer in Minnesota that laid off
about 145 workers due to slow demand. Restructuring at a Minnesota-based travel
company will affect about 200 jobs in the state.
Wage increases were moderate. A county board in northern Wisconsin recently
passed pay raises of 3 percent per year over three years for highway, forestry,
and sheriff's department employees. According to a recent survey of businesses
by the St. Cloud Area Quarterly Business Report, 44 percent of respondents expect
to increase employee compensation by November 2005; 53 percent expect no change
in compensation levels.
While overall price increases were moderate, significant price increases were
noted in fuel and certain construction materials. Mid-July gasoline prices in
Minnesota were 42 cents higher than a year ago, while recent jet fuel prices
were 56 percent higher and diesel fuel was 64 percent higher than last year.
Recent price increases were noted for some construction materials, including
asphalt, concrete, and roofing materials. However, steel prices have softened
since the last report.
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Tenth District--Kansas City
The Tenth District economy expanded solidly in June and early July. Non-automotive
retail sales posted further gains, auto sales improved sharply, and labor markets
continued to firm. Manufacturing activity also grew moderately, and commercial
real estate activity improved. In addition, energy activity remained strong,
and agricultural conditions were positive. Residential construction edged down,
but housing activity remained solid overall. Price pressures eased slightly
at both the wholesale and retail levels, while wage pressures remained moderate.
Consumer spending in the district continued to increase in June and early July.
Most retailers, mall managers, and restaurants reported solid year-over-year
increases in activity, with sales generally at or above plan. Sales of electronics,
appliances, and outdoor furniture were characterized as strong, while sales
of home improvement items, hardware, and indoor furnishings were said to be
weak at some stores. Many stores reduced inventories since the last survey,
and most managers were satisfied with current stock levels. Nearly all store
managers were optimistic about future sales. Auto dealers reported strong vehicle
sales since the last survey, driven largely by new price discounts from manufacturers.
The increased activity pushed sales above year-ago levels at many dealerships.
The strongest sales were reported for new trucks and fuel efficient cars, while
sales of used vehicles and large SUVs were characterized as weak by some dealers.
Most dealers expect sales to remain strong in the months ahead. Travel and tourism
activity in the district increased strongly in June and early July. Most hotels
reported occupancy rates were up from both the previous survey and a year ago,
and nearly all tourism contacts expect further increases in activity in coming
District manufacturing activity expanded moderately in June and early July.
Many plant managers reported increases in production, shipments, and orders
since the previous survey, and some firms added workers and hours. Growth in
capital spending remained strong at most plants. Plant managers said materials
were generally available, although petroleum-based materials were reported to
be scarce in some areas. Expectations for future factory activity remained solid,
and many plants plan further additions to their workforces.
Real Estate and Construction
Housing activity remained solid in June and early July despite some easing in
construction, and commercial real estate activity improved further. Most builders
reported that housing starts edged down and were slightly below year-ago levels.
However, new home construction was still generally characterized as strong.
Builders reported few difficulties obtaining materials and most do not expect
problems heading forward. Home starts are expected to remain steady in the months
ahead. Real estate agents reported home sales increased slightly from both the
previous survey and a year ago. Home prices were up moderately from a year ago
in most cities. Real estate agents expect home sales to continue to rise in
coming months, while home prices are expected to level off in some cities. In
a few cities, purchases of homes for investment purposes were reported to be
putting downward pressure on home rental rates. Mortgage lenders reported an
increase in demand for both new home purchase loans and refinancings since the
previous survey, and they expect demand for new home mortgages to rise further.
Commercial real estate activity in the district improved further in June and
early July. Vacancy rates edged down in several markets, and prices for office
space were up moderately in some cities. Some commercial real estate agents
expect activity to continue to increase in the months ahead.
Bankers report that loans and deposits both increased slightly since the last
survey, leaving loan-deposit ratios unchanged. Demand rose moderately for commercial
and industrial loans and edged up for home mortgages, residential construction
loans, and commercial real estate loans. Demand for consumer loans was unchanged.
On the deposit side, all types of accounts increased slightly. All respondents
increased their prime lending rates since the last survey, and almost all respondents
raised their consumer lending rates. Lending standards were generally unchanged.
District energy activity remained strong in June and early July. The count of
active oil and gas drilling rigs in the region was basically unchanged from
both the previous survey and a year ago. Several contacts continued to cite
constraints on drilling due to rig shortages and regulatory factors. In order
to increase drilling heading forward, some rig operators in the district placed
orders for new rigs to be delivered later this year, including some that are
being shipped from China. One large rig operator also plans to begin producing
some of its own rigs. In addition, a few energy firms are proposing to test
new drilling techniques in Wyoming next winter designed to reduce impacts on
Agricultural conditions remained generally positive in June and early July.
With the winter wheat harvest nearly complete, overall yields were slightly
better than a year ago. Corn and soybean crops were also reported to be in good
to excellent condition across the district. On the negative side, some contacts
said higher energy prices were boosting irrigation costs. In the livestock market,
a seasonal rise in U.S. cattle supplies and the announced resumption of live
cattle imports from Canada have placed some downward pressure on cattle prices.
Labor Markets and Wages
Labor markets in the district firmed further in June and early July, but wage
increases remained moderate. Hiring announcements exceeded layoff announcements
by a considerable margin, and several military bases in the district learned
they will be adding considerably more personnel than originally announced in
May. The percentage of contacts experiencing labor shortages increased somewhat
from the previous survey, with most of the shortages reported for either low-skilled
or high-skilled workers. In addition, several contacts noted an increase in
help-wanted advertisements in their areas. However, the share of firms reporting
wage pressures remained moderate, lower than before the last recession but higher
than a year ago. Some contacts expect wage pressures to increase slightly in
the months ahead.
Price pressures eased somewhat at both the wholesale and retail levels in June
and early July. The share of manufacturers reporting materials price increases
continued to fall, and most users of steel reported price declines. On the other
hand, prices for many petroleum-based products rose. The share of manufacturers
raising output prices also fell slightly, and fewer plant managers than in previous
surveys expect materials prices and output prices to rise in the months ahead.
However, the share of firms planning to raise prices remains relatively high
by historical standards. Most builders reported increased costs for materials,
especially for plywood, and expect further increases heading forward. Retailers
generally reported flat selling prices in June and early July after reporting
slight price increases in the previous two surveys. However, a number of stores
plan to raise prices on some products in the months ahead.
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Eleventh District economic activity strengthened from late May to early July,
driven by strong construction- and energy-related activity. Many contacts expressed
increased optimism about the economic outlook, noting surprise that activity
had strengthened more than they had expected. Manufacturing and service sector
activity was up. Retail sales increased. Contacts say real estate investment
is very strong. There has been a pickup in all types of construction and real
estate activity, leading to a very hot housing market and construction of speculative
office space in the Dallas area. The financial sector continued to report solid
loan growth and good credit quality. Hot, dry weather hurt agricultural conditions.
Energy prices were higher than during the last survey period. Strong demand
pushed up crude oil prices. Pump prices for gasoline and diesel fuel were also
higher. Exceptionally strong demand for diesel raised concern about the refinery
system's ability to build inventories for next winter. Natural gas prices have
risen along with crude prices, helped by warmer-than-normal temperatures in
the South. Despite high temperatures, natural gas inventories remained 12 percent
above normal for this time of year. Refinery margins on the Gulf Coast remained
very strong throughout June, about the same as May and better than $3.50 per
barrel higher than last June. Prices for energy services were sharply higher.
Most contacts expressed concerns about rising freight, fuel and utility costs.
Transportation firms said they are passing these costs on to customers as much
as possible, and even airlines have been able to raise fares. The ability of
manufacturers and retailers to push through price increases remained mixed,
Strong demand pushed up prices for cement and most other construction-related
materials. Selling prices were lower for scrap steel, nickel, and aluminum.
Excess inventory led to price declines for a variety of basic chemical and plastics
products, but increased orders and unplanned outages were helping inventories
adjust and prices stabilize.
The labor market continued to strengthen, with more reports of hiring, employees
being bid away and scattered problems hiring skilled workers. Only a few industries
noted any significant wage pressures, notably accounting firms and the energy
Manufacturing activity increased, with very strong demand for most construction-related
and energy-related manufactured products. Very strong demand for cement has
led to shortages in Texas, and inventories are rapidly depleting--despite manufacturing
plants working at capacity. Some producers said they imported cement from abroad
to keep up with demand. Producers of clay, brick and glass continued to report
robust demand. Demand for fabricated metals has been good and steadily improving,
spurred by particularly strong sales for highway and commercial construction.
Demand for lumber was above last year's pace.
Respondents in high-tech manufacturing said sales and orders continued to
grow at healthy rates since the last survey. Industrial demand for semiconductors
has picked up in the past six weeks. Apparel producers say demand has been decreasing
due to import competition, which has resulted in another plant closure. Sales
of primary metals have cooled from very strong growth earlier this year, and
producers continued to report increased import competition. Inventories are
higher than desired for some metals but are being pared down.
Chemical producers continued to struggle through a patch of weak demand. Sales
to Asia have slowed. There was some improvement in orders in late June, which
contacts said was an early indication that demand was stabilizing. Refinery
capacity utilization averaged rates near 98 percent in the District, higher
than the U.S. average.
Activity in the service sector picked up slightly. Temporary staffing firms
said demand edged up over the past six weeks. Transportation firms also reported
an increase in demand. Legal firms reported no change in demand. Demand continues
to be strong in the accounting sector, keeping pace with last year's strong
Retailers report that sales growth has been stronger than expected, and early
signals suggest a healthy back-to-school season. Contacts thought high oil and
gasoline prices would restrain growth, but reported that consumers have kept
spending, and there has been no deterioration in bad debt portfolios. Auto dealers
also reported a pick up in sales growth. Contacts noted some uncertainty because
they said sales were being stimulated by manufacturer price reductions, and
the underlying market is not strong.
Construction and Real Estate
Contacts say real estate investment is extremely high in part because the District's
competitively-priced markets are attracting investment capital from more expensive
coastal markets. Construction of new homes picked up over the past six weeks.
Demand is strong, and sales are ahead of this time last year. With few regulatory
or land development constraints, the supply of new homes has been sufficient
to meet demand, and prices are not increasing faster than inflation. Existing
home sales in major metropolitan areas remained above last year's record levels,
but sales growth was less robust than earlier this year and some contacts expressed
concerns about rising inventories.
Demand for apartments rose over the past six weeks. Contacts noted an upturn
in market conditions with occupancies tightening in Dallas and Austin, and rents
rising modestly. Apartment construction continued to be at high levels in Dallas, Houston and
San Antonio, and developers remained optimistic that conditions will continue
to improve. Several high-end condo and town-home projects are slated to break
ground in Dallas, and contacts noted that most are at least 60 to 70 percent
Office markets also continued to improve. Occupancy rates increased, although
they are still low in comparison with other parts of the country. Contacts say
rents are "firm" to "rising." There is limited office construction activity
in Houston and Austin, but speculative space is being developed in the Dallas
area. Industrial activity is also picking up, especially near the Port of Houston.
Hotel markets are "hot."
Loan growth remained solid, according to contacts, who said
that there has been a pickup in consumer auto loans as a result of an increase
in purchase incentives. Credit quality was still good. The banking environment
is very competitive, they said, particularly for large, commercial loans.
Drilling activity continued to expand. The rig count increased, and contacts
say the outlook for future drilling activity has picked up. Oil service companies
reported extremely strong demand, limited capacity, and strong pricing power.
Service firms say they are turning down work and have expressed more willingness
to expand capacity, given current pricing and the potential durability of this
drilling cycle. Expanding manufacturing capacity for oil field equipment poses
few barriers, but finding qualified engineers and training crews is difficult
and time consuming. Technical skills will increasingly have to be found abroad,
Dry weather has reduced yields and increased the cost of production. Irrigated
land crops remained in fair condition but the outlook for dry land crop yields
worsened. Range and pasture conditions also deteriorated substantially since
the last report, and hay production has been very limited. Corn producers expressed
concern about aflatoxin.
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Twelfth District--San Francisco
The Twelfth District's solid economic expansion remained on track during the
survey period of early June through mid-July. Price inflation for final goods
and services moderated somewhat. Labor markets tightened further and an increasing
number of employers relied on incentive compensation to meet recruiting challenges.
District retailers and service providers reported sales gains, and growth in
manufacturing activity picked up following a slight lull during the previous
survey period. Demand rose further for District agricultural and resource-related
products. The pace of home sales and price appreciation remained rapid but slowed
slightly in some markets, while demand for commercial real estate continued
to improve. District banks reported strong loan demand and good credit quality.
Wages and Prices
Contacts reported modest inflationary pressure on net in recent weeks. Energy
costs rose significantly, increasing prices of production inputs for which energy
costs are a significant component, such as transportation services, fertilizers,
and some construction materials. However, contacts in most sectors noted that
pricing power for final goods and services remained muted more generally, citing
vigorous competition from domestic and foreign producers and continued gains
in production efficiency as restraining factors.
Demand for labor increased, and District labor markets tightened further.
The most significant recruiting and retention challenges were reported for skilled
occupations in the financial, construction, information technology, and health-care
services sectors. Contacts in the agricultural, retail, services, and financial
sectors reported substantial reliance on temporary workers to meet demand. Although
wage growth generally remained in the modest range of 2 to 4 percent, contacts
in several areas reported rising use of incentive compensation, including signing
bonuses to attract qualified workers. Employer costs for health insurance benefits
remained on a relatively steep upward trajectory, causing total compensation
to rise more rapidly than wages and salaries. Looking ahead, about one-third
of respondents plan to increase their pace of hiring for permanent staff during
the second half of 2005 compared with the first half, and virtually none plan
to reduce their pace of hiring.
Retail Trade and Services
District retail sales expanded during the survey period. Automobile sales climbed
substantially, as demand remained strong for imported makes and purchases of
domestic makes surged in response to price discounts by manufacturers. Sales
of apparel and other small retail items also rose, and prices for these items
generally were flat or fell because of extensive discounting.
District service providers reported a substantial increase in demand on net.
Sales were robust for providers of food, transportation, and health-care services.
Contacts reported continued strong growth in tourist visits to key destination
states such as Hawaii, California, and Arizona, with further increases in hotel
occupancy rates and average daily room rates noted.
Demand for District manufactured products picked up a bit, following a mild
slowdown during the previous survey period. Orders and sales of semiconductors
and other technology products generally remained at high levels. Makers of machine
tools and industrial equipment reported that demand expanded and was particularly
strong for small and medium-sized capital equipment items. Demand for commercial
aircraft and defense products grew further, and makers of these items reported
ample capacity to accommodate a rising number of new orders. Manufacturers of
certain construction materials, notably wallboard and roofing products, have
expanded capacity to meet booming demand, and sales of these products have increased
Agriculture and Resource-related Industries
Orders and sales of District agricultural and resource-related products grew
further during the survey period of early June through mid-July. Demand was
strong and prices generally were stable for dairy products and most fruits and
vegetables, particularly for items filling market niches, such as organic foods.
Cattle sales and prices remained high, with little or no adverse impact from
recently renewed fears about the BSE ("mad cow") virus. In the energy sector,
producers of oil and natural gas continued to operate at or near full capacity,
and extensive new drilling is underway to help meet steadily growing demand.
Real Estate and Construction
Demand and sales of residential real estate remained vigorous in most parts
of the District, and demand for commercial real estate continued to improve.
The pace of home sales, price appreciation, and construction was rapid in most
areas, fueled in part by rising purchases of second homes and investment properties.
The market reportedly heated up further in some areas, such as Seattle, but
a few respondents reported evidence of slight cooling in parts of Southern California,
where houses remained on the market longer and price appreciation slowed. Demand
for commercial real estate strengthened further; office vacancy rates fell and
rental rates increased in many District markets, with especially strong demand
reported in Southern California. Growth in demand for residential and commercial
properties kept overall construction activity at high levels throughout the
Contacts reported that loan demand was strong overall and credit quality remained
good across all loan categories. The number of commercial and industrial loans
rose, and demand for construction, commercial real estate, and home loans remained
at high levels in most areas and grew further in some.
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