October 21, 2009
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Prepared at the Federal Reserve Bank of Richmond and based on information collected before October 13, 2009. 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 the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors, although reports of weakness or moderate decline were frequently noted in other sectors.
Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered. For example, Dallas cited slight improvements residential real estate and staffing firms, while New York noted gains only in a few sectors (predominantly manufacturing and retail). Retail and manufacturing conditions were mixed in Boston, but some signs of improvement were reported. New York, Philadelphia, Cleveland, and San Francisco cited small pickups in manufacturing activity. In the Kansas City District, an uptick was noted in technology firms, while services firms posted revenue gains in Richmond. However, conditions were referred to as stable or flat for business services and tourism firms in Minneapolis and agriculture in St. Louis and Kansas City.
The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all Districts. Banking also faltered in several Districts, with Kansas City and San Francisco noting continued erosion in credit quality (often with more expected in the future). One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit. Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.
Districts generally reported little or no increase to either price or wage pressures, but references to downward pressures were occasionally noted. While upward price pressures were generally subdued in most Districts, materials prices increased in Cleveland (mainly for steel) and Kansas City. Manufactured goods prices were flat to up slightly in Boston. Boston reported that in some market segments "product competition and customer clout are leading to downward pressure on prices." Minimal wage pressures were noted in Cleveland and Minneapolis.
Consumer Spending and Tourism
The "cash-for-clunkers" program ended in August, leaving depleted inventories and slower sales in its wake. New vehicle sales declined in New York, Philadelphia, Cleveland, Richmond, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco. However, Chicago reported a pick-up in vehicle sales in early October. Low new-car inventories helped to move used cars in several Districts, although San Francisco commented that the demand for used cars also weakened. New York also reported that automobile dealers saw some improvement in credit conditions for consumers looking to purchase cars.
Looking to expectations for holiday sales, Chicago anticipated improved sales, while Philadelphia retailers expected consumers to limit spending. However, Third District merchants also noted that store traffic increased recently. Atlanta reported that two-thirds of contacts expected flat or declining sales over the next three months.
Tourist activity varied across Districts. Boston, New York, and Atlanta described business travel as extremely soft, whereas Richmond observed solid growth in group bookings. Occupancy rates held steady in New York, spurred by increased leisure visitors, while aggressive discounting boosted cruise-line occupancy rates in Atlanta. San Francisco reported a deep slide in hotel and resort visits in Southern California and Las Vegas, but noted a continued firming of occupancy rates in Hawaii. Richmond indicated overall bookings were much improved over last year, while Kansas City reported occupancy rates remained below year-ago-levels. Room rates continued to decline in several Districts, including New York and Atlanta. In contrast, Boston said that hotels were offering dramatic promotional deals and discounts on local attractions, which preserved posted room rates.
Transportation services activity generally declined, although Cleveland and Chicago reported some strengthening. Atlanta observed weak transportation demand overall, and firms in the San Francisco District indicated that trucking had declined. Import demand in the Dallas District fell, leading to a reduction in cargo volumes at intermodal firms. Activity in the transportation sector was flat, according to Kansas City. In contrast, the cash-for-clunkers program helped to clear dealership lots, which prompted dealers to restock their depleted inventories and drove up car shipments. Chicago reported that trucking shipments increased, although the level of activity remained low, and Cleveland's contacts cited an uptick in freight transport volume in recent weeks. Cleveland also noted that trucking companies planned substantial equipment purchases through the first quarter of 2010. Business travel by air declined since the last report, according to San Francisco, while airlines in the Dallas District reported stabilized demand--albeit at low levels.
Comments on the near-term outlook varied across Districts. Boston, Philadelphia, Cleveland, and Kansas City reported that their contacts expected only slight gains and modest economic growth during the next six months. Therefore, capital spending plans remained subdued, and centered mostly on new product development or cost reduction. Dallas indicated that planned projects and routine maintenance were being deferred to conserve capital. New York, however, reported that respondents were increasingly optimistic about the near-term outlook and expected to hire more workers and spend more on capital.
Real Estate and Construction
Residential construction activity remained weak in most Districts. Atlanta reported that construction remained very low, and Cleveland expected new home construction to proceed at a slow pace. Chicago indicated that construction on existing developments edged up, but St. Louis reported that construction activity declined. Kansas City reported that housing starts stabilized, although levels remained well below a year ago and were not expected to improve over the next three months. Philadelphia noted that builders continued to offer increased incentives to boost sales.
Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots. Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. And, while industrial real estate in the Richmond District was generally weak, renewed interest by retailers to revisit postponed expansion plans was also noted. Finally, public nonresidential construction activity funded by federal stimulus projects was a source of strength in the Cleveland, Chicago, Minneapolis, and Dallas Districts, but gains were often offset by state and local government cutbacks.
Banking and Financial Services
Credit quality continued to be a problem, and rising delinquencies were often noted. For example, credit quality was described as stable or declining in the Philadelphia, Cleveland, and Kansas City Districts. Half of the contacts for Kansas City expected loan quality to continue to erode over the next six months. Cleveland stated that the quality of loan applicants had deteriorated somewhat, mostly on the business side. Delinquencies were also widely reported to be up; New York particularly noted rising delinquency rates among both consumer and commercial mortgage loans.
Employment, Wages, and Prices
Wage and price pressures were generally described as subdued across most Districts. Wages were flat in the San Francisco District, but increased moderately in the Minneapolis District. In the Boston District, business services firms (mainly advertising and consulting) reported modest salary increases, but a decline in bonuses left total compensation slightly reduced. Wage pressures were characterized as "not significant" in the Chicago District and "contained" in the Cleveland District.
Prices followed a similar pattern to wages, with reports of little significant pressure on either input or output prices, although moderate increases were observed for materials prices. For example, prices movements were characterized as generally subdued or little changed in the Philadelphia, Atlanta, and Minneapolis Districts. Cleveland noted stable construction materials prices, but added that the cost of steel had experienced an uptick. Materials prices in general were reported to be up in the Kansas City District. Boston said that selling prices of manufacturing goods were flat to slightly up, but noted that product competition and consumer clout was leading to downward pressures in some market segments. Retail price inflation slowed slightly in the Richmond District, while retail prices were stable in the Philadelphia District and edged down in the Chicago, Kansas City, and San Francisco Districts.
Agriculture and Natural Resources
Activity in the energy industry remained weak. Atlanta, Kansas City, Dallas, and San Francisco reported increases in oil and gas inventories as demand continued to weaken. Atlanta indicated that refining margins continued to deteriorate, which led to delays in new projects. Cleveland noted that sharply lower contract prices for coal prompted coal miners to continue their deep cutbacks in production and to keep their capital spending on hold. Kansas City mentioned that overall drilling activity improved slightly, but that rig counts were still at historically low levels. Dallas remarked that rig counts rose in September and early October, spurred by oil drilling. However, Dallas also indicated that, despite the increase, excess capacity in the industry had resulted in job losses and weak domestic pricing. Minneapolis reported that activity in the energy and mining sectors increased slightly and noted that oil and gas exploration inched up in late September.