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New York
St. Louis
Kansas City
San Francisco

Full report

Prepared at the Federal Reserve Bank of Dallas and based on information collected before January 9, 2002. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the Federal Reserve Districts suggest that economic activity generally remained weak from late November through early January. But while there are still indications of caution, there are also scattered reports of improvement. The Dallas and San Francisco Districts report a continued decline in activity, while the Cleveland District indicates that the regional economy appears to be in the process of bottoming out. Economic activity remained slow or weak in the Boston, Chicago, Philadelphia, Kansas City and St. Louis Districts. Activity was mixed according to the Atlanta, Minneapolis and Richmond Districts and showed further signs of rebounding in the New York District.

Many Districts indicate that their contacts believe a recovery will begin by mid-year or earlier, but the timing and strength are uncertain. Several Districts say that uncertainty has led some businesses to budget conservatively for the first quarter.

Manufacturing activity was weak or down in most reports, but showed signs of stabilizing or rebounding in several Districts. Retail sales picked up in late December and early January but for the period overall posted generally weak results in most Districts. Auto sales slowed in December--after very strong sales in October and November--but sales remained relatively strong. Construction and real estate activity continued to soften in most Districts. Commercial real estate markets continued to weaken, and while housing markets held up overall, there was further weakness concentrated in the markets for higher-priced homes. Reports on the service sector were mixed but in general suggest sluggish economic activity. Financial institutions reported a slight softening of conditions in late November and December. Drilling activity continued to contract rapidly in response to lower energy prices, and the airline industry continued to suffer from weak demand and soaring security costs.

Labor markets remained soft. There are numerous reports of shrinking wage and benefit packages. The Cleveland District notes that employers are invoking "economic duress" clauses to renegotiate union contracts. Most Districts report declining prices for goods and services with the notable exception of sharply rising prices for security, health care, and all types of insurance.

Consumer Spending
Retail sales showed signs of improvement in late December and early January but results were generally weak overall in most Districts. Sales were flat or down compared to last year in the Boston, Richmond and St. Louis Districts. Sales were "mediocre" in Atlanta, "weak" in Dallas, "soft" in Chicago, "slow" in St. Louis and "lackluster" in San Francisco. Sales were up, however, and better than expected in the Cleveland, Kansas City, New York and Philadelphia Districts.

According to most Districts, there were aggressive promotions and unusually large discounting that reduced profit margins for retailers. The flurry of sales activity in late December and early January left inventories in good shape. Sales were strongest for home furnishings and electronics according to District reports. Sales of menswear were weak, and warm weather discouraged purchases of winter apparel and seasonal sporting goods. Discount stores continued to report stronger sales than apparel or high-end retailers. The Dallas, Boston and Philadelphia Districts note that retailers have reduced purchases for the first half of 2002 in anticipation of weak sales.

Auto sales were slower in December after very strong sales in October and November. Several districts report that sales had remained relatively strong, however, and a few Districts note that December sales were above year-ago levels. The Cleveland, Dallas and Kansas City Districts say their contacts expect first-quarter sales to weaken. The Atlanta, Kansas City and Minneapolis Districts note that inventories of used cars are high due to the large number of trade-ins that occurred in October and November. As a result, used car prices have fallen.

Manufacturing activity was weak or down in nearly all Districts. Demand is lower for machine tools, metals, textiles, telecommunications and most aircraft equipment. But there are some signs of stabilization or recovery in many reports. For example, the Cleveland District says that the number of manufacturers reporting increases in new orders rose from November to December. In the Atlanta District, several firms noted a modest pickup in new orders and were rehiring some of their recently laid-off staff.

Auto production was mixed but showed indications of picking up. In the Atlanta and Cleveland Districts, some plants worked overtime hours to meet booming demand for their models, while others were forced to close for two weeks because of slumping sales of the models produced at those plants. The Chicago District reports that manufacturers said nationwide light vehicle sales exceeded their expectations again in December despite softening from November. Inventories remained very lean, according to the Chicago District, where one manufacturer indicated that its light vehicle production in the first quarter of 2002 would be 6 percent to 7 percent higher than a year earlier. Demand for some high-tech products has improved since the last survey, according to the Dallas and San Francisco Districts. The Boston and Atlanta Districts report an increase in demand for medical and security-related products, while the Chicago District reports a late-December pickup in steel production.

The reports also suggest more optimism among the country's manufacturers, with many predicting a pickup towards the end of the first half of 2002. A higher percentage of plant managers in the Kansas City District expect increases in production than in earlier surveys. Manufacturers in the Philadelphia District indicate that they have slightly raised capital spending plans for the first half of the year in anticipation of an upturn by the middle of the year. Most contacts in the Cleveland District also expect conditions to improve late in the second quarter or early in the third quarter. Richmond manufacturers anticipate that shipments, new orders and capital expenditures will increase substantially by mid-year. In contrast, most manufacturers of heavy equipment in the Chicago District cut their forecasts for 2002. And, the Boston District reports that capital spending will be tight or reduced significantly according to a majority of their respondents.

Reports on the service sector were mixed but in general suggest weak economic activity. The Cleveland and Dallas Districts report slow demand for temporary workers. Temporary employment agencies in the Richmond District, however, report somewhat stronger demand for most categories of workers.

Transportation and tourism activity was reported to be rebounding in December, but demand remains well below year-ago levels according to the Atlanta, Dallas, Minneapolis, New York, St. Louis and San Francisco Districts. Hotel occupancy rates picked up but are still below a year ago. Business travel remains down, according to the Dallas and San Francisco Districts. But, price cuts stimulated a pickup in leisure travel over the holidays and flights were fuller, according to the Chicago District. The Dallas District notes that the airline industry has significantly reduced capacity over the past two months. With 15 percent fewer aircraft in service compared to a year ago, industry capacity is now at roughly 1997-98 levels. Weak demand has pushed revenues down 15 to 20 percent below last year's levels. Depressed revenues along with soaring security costs have significantly hurt earnings.

Construction and Real Estate
Housing markets continued to hold up in most Districts, although there were pockets of weakness, particularly for higher-priced homes. Commercial markets were softer, with the Atlanta, Chicago, Kansas City, New York and Richmond Districts reporting higher office vacancy rates. The Atlanta and New York Districts report an abundance of sublease space, while office rents were lower in the Richmond District. The Chicago and Kansas City Districts say that landlords are offering more generous tenant improvement packages that may be masking the full extent of rent declines in the commercial market. In contrast with other reports, the Cleveland District reported "uncharacteristically strong" building activity.

Banking and Finance
Financial institutions indicated a slight weakening of conditions in late November and December. Soft or declining loan demand is reported in the Chicago, Cleveland, Kansas City, New York, Richmond, St. Louis and San Francisco Districts. Competition for quality borrowers remained intense, according to the Cleveland and San Francisco Districts. Demand for commercial loans remained weak. Consumer lending has held up in this recession, but it began to soften at the end of December as higher mortgage rates choked off the surge in refinancing activity. Only the Philadelphia District reports rising loan volumes. The Cleveland and San Francisco Districts indicate some deterioration in asset quality, and the Atlanta and Cleveland Districts note some increase in delinquency rates. Tightening credit standards are reported in the Chicago, New York, Philadelphia and St. Louis Districts.

Agriculture and Natural Resources
The Kansas City, Minneapolis and St Louis Districts note concern about the absence of a protective snow cover for the winter wheat crop. The crop may already have been damaged, according to the Kansas City and St. Louis Districts. Dry weather in the Kansas City District has limited pasture growth, causing most ranchers to be reluctant to expand their cattle herds. Rain and snow helped replenish depleted soil moisture levels and improved the condition of small grain crops in the Richmond District.

Bankers in the Richmond District said low crop prices continue to leave some farmers financially vulnerable. Livestock producers have benefited from lower feed costs and lower prices for nitrogen fertilizer, however. The St. Louis District notes that the price of natural gas--a major cost component in the production of nitrogen-based fertilizer--fell by approximately 75 percent compared with last year. Government payments to crop producers and strong livestock profits in the first half of 2001 will provide some offset for weakness in farm loan portfolios, according to bankers in the Kansas City District.

Drilling activity continued to decline rapidly in response to lower energy prices, according to the Atlanta, Dallas, Kansas City and San Francisco Districts. The U.S. rig count fell from over 1000 working rigs in early November to 887 at year-end. Capital spending in 2002 is expected to be down by more than 20 percent according to the Dallas District.

The San Francisco District reports that interest in siting and building electrical power plants has slowed, with some developers backing off their "fast track" approach and taking a more wait-and-see attitude. An iron-ore mine in the Upper Peninsula of Michigan and a mine in Northern Minnesota both extended a shutdown, according to the Minneapolis District, while another mine in Northern Minnesota ended an eight-week shutdown but is operating at reduced production levels. Several Kansas City District firms report expansion of coal-bed methane exploration activity.

Labor Markets
Labor markets remain soft, according to most District reports. Further layoffs are expected in the Boston District, but the Chicago and New York Districts say labor markets are stabilizing.

While there were reports of shrinking pay increases in the Chicago District, some firms are freezing pay scales in the Boston District, and downward wage pressures are reported in the Cleveland, Kansas City and San Francisco Districts. These Districts report the elimination of hiring bonuses, decreases in moving allowances and reduced merit increases. Employees are also being asked to pay a larger share of health care and other benefit costs than in past years and to accept more limited health plan options. The Cleveland District says union contracts were being renegotiated due to adverse economic conditions. Employers in the steel and aerospace industries have invoked "economic duress" clauses that exempt them from certain job-security provisions. Some of these renegotiations have involved wage concessions or agreements to postpone (with "give-back" provisions) scheduled wage increases.

Districts report declining prices for most goods and services with the notable exception of security, health care and medical, property and liability insurance. The Atlanta, Boston, Dallas, Minneapolis and New York Districts report steep increases in insurance costs.

Energy costs are lower and, as the Cleveland District notes, firms have reduced or eliminated energy surcharges. According to the Dallas District, warm weather and flagging demand led to declines in natural gas, crude oil and refined product prices. Forecasts of colder weather and collaboration between OPEC and non-OPEC producers to restrict crude oil production led prices to bounce back to just below mid-November levels. Inventories of most energy products, however, are significantly higher than a year ago.

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Last update: January 16, 2002