October 24, 2001
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Prepared at the Federal Reserve Bank of Cleveland and based on information collected before October 15, 2001. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a representation of the views of Federal Reserve officials.
Reports from all Federal Reserve Districts indicate weak economic activity in September and the first weeks of October. In all Districts, the tragedy of September 11 was followed by a short period of sharply reduced activity. Business activity recovered quickly from some aspects of the shock, such as reduced air cargo capacity, but longer-run effects are more difficult to assess. Retail sales, other than autos, were slightly lower than before September 11, but this weakness might have already been in train. The same is true for manufacturing. Insurance premiums have increased, and security precautions are disrupting productivity.
Retail sales softened in September and early October in almost all Districts. Auto sales fell at the beginning of the period but have now rebounded following new zero-financing incentive plans. Both shipments and orders for a broad spectrum of manufactured goods, ranging from steel to semiconductors, are weak in most of the country. Construction generally slowed during the period. The softness in consumer spending, manufacturing, and construction is affecting the labor market, where layoffs and plant closings have been reported in many industries, from financial services on the East Coast to media and advertising on the West Coast to auto parts in the central states. There has been little upward pressure on either wages or prices, and, in some cases, they have actually fallen.
The Effect of September 11
The grounding of aircraft caused some very short-run effects. For example, the transport of fresh vegetables from the West Coast to the East Coast was disrupted somewhat. The supply chain of parts to manufacturers also was interrupted but appeared to recover quickly from dislocations in air transportation, as air cargo was promptly rerouted through ground networks.
All Districts except Boston and Kansas City report sharp declines in the hotel, airline, and tourism industries. In many Districts, demand dropped sharply immediately following the attack but later rebounded partially. Some cancelled conventions have been rescheduled. In Manhattan, Broadway theaters have noted some pickup in attendance after a sharp dropoff in mid-September. However, large layoffs in the airline industry may be the result of previously observed weakness in the industry, which was then amplified by the attack. Manhattan lost roughly 7 percent of its office space in the September 11 attack, but an estimated four percent will be repaired in upcoming months. Despite the damage, however, office availability increased slightly on balance in September.
The attack is likely to have a longer-term effect on manufacturing. Aircraft orders are down sharply, causing layoffs in the aircraft and aircraft parts industries in the Boston, Kansas City, and San Francisco regions. There has been an increase in demand for security products and data storage devices produced in the Cleveland and San Francisco Districts. Boston reports a large rise in insurance demand, while Atlanta, Dallas, and San Francisco report an increase in insurance premiums. The Atlanta and Chicago Districts report a fall in business productivity due to increased security precautions.
Automobile sales were much weaker during the first weeks of September, but all Districts, except Boston and New York, report a rebound in sales because of zero-percent financing options that are being offered. In most cases, sales were back to normal, except in the San Francisco and Atlanta Districts, where they were weaker than normal. Atlanta and Chicago also mention that sales of trucks were down.
The weakness is broadly based. The industries affected by lower shipments and orders include high-tech industries, such as semiconductors in the Boston, Dallas, and San Francisco regions, as well as the more traditional heavy industries such as steel in the Chicago and Cleveland regions. In spite of robust auto sales, the auto parts industries in the Boston, Cleveland, Dallas, and St. Louis Districts all reported difficult times. The resource-based industries such as lumber reported mill closures in the regions of Atlanta, Dallas, and San Francisco. A few industries are doing well. Cement in the Dallas region, some textiles in the Richmond region, and luxury goods in Cleveland report some gains.
Real Estate and Construction
Residential construction rose only in Philadelphia and some areas of the St. Louis region. It held steady in the Cleveland and Minneapolis Districts and fell in the Atlanta, Boston, Chicago, Dallas, Kansas City, New York, Richmond and San Francisco Districts and some portions of the St. Louis region. In Boston, the decline followed a strong summer, so that on a year-over-year basis, construction activity was still up. In the Richmond and New York regions, the decline was seen in the construction of luxury homes. New York also reports a decline in rents in Manhattan.
Agriculture and Natural Resources
Decreases in oil and natural gas prices have led to a decline of drilling activity in the Dallas and Kansas City Districts. Decreases in steel production have caused several iron ore mines to close in the Minneapolis District.
Financial Services and Credit
The Chicago, Cleveland, New York, and San Francisco Districts report that loan delinquencies were up, and credit standards were reportedly higher in the Atlanta, Kansas City, and New York Districts. Nonperforming loans were higher in the Philadelphia and St. Louis Districts.
Wages and Prices
Most Districts report steady or declining consumer prices. Districts reporting steady retail prices included Kansas City and Richmond. San Francisco reports steady prices except for declining prices in apparel. Districts reporting lower retail prices included Atlanta, Boston, Chicago, and Dallas. The prices for manufactured goods also fell in the Chicago, Dallas, and New York regions, while they were steady in the Atlanta, Kansas City, Richmond, and San Francisco regions.
Input prices are reported as decreasing or holding steady, except in Cleveland, where they were mixed. Districts reporting price declines included Boston, Chicago, Dallas, Minneapolis, and New York. Those reporting steady prices were Atlanta, Kansas City, and San Francisco.