July 30, 2003
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Prepared at the Federal Reserve Bank of Richmond and based on information collected before July 21, 2003. 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 twelve Federal Reserve districts provided additional signs that the pace of economic activity increased a notch during June and the first half of July. Only the Chicago, St. Louis, and San Francisco districts characterized economic activity as sluggish while Atlanta described conditions as mixed. Reports from the remaining districts suggested somewhat stronger growth in the weeks since the last Beige Book. Consistent with the generally more positive assessments of current economic activity, several districts noted increased optimism about economic prospects in coming months.
In particular, manufacturing activity edged higher in most districts, and Philadelphia and Richmond cited an end to the recent declines in production. The districts' reports also suggested that activity in the services and energy sectors grew somewhat faster in recent weeks. In contrast, consumer spending remained lackluster-only New York reported a noticeable improvement in retail sales. Housing sales and starts remained strong across districts, spurred by low mortgage interest rates, but commercial real estate conditions remained sluggish. Prices were generally little changed, though higher health insurance costs continued to be passed on to employees according to some districts. In agriculture, excessive rainfall delayed harvesting and damaged crops in several districts but was credited with alleviating drought conditions in other districts.
Consumer Spending and Tourism
Reports on automobile sales across the districts were mixed. Sales were flat to lower in the Chicago, Cleveland, Dallas, St. Louis, and San Francisco districts. Sales were steady in Philadelphia and Richmond, but were mixed in Atlanta. In the Kansas City District, motor vehicle sales improved in areas outside of Colorado, and Minneapolis reported that automobile sales were above year-ago levels. Contacts in several districts said new vehicle inventories were above desired levels. Dealers in the Kansas City District reported record-high inventories, but they expected the inventories would be drawn down in coming weeks.
Tourism and travel reports were also mixed in June and the first half of July. In the Chicago District, hotel occupancy rates were boosted by discounts and economy packages. Boston said that international travel more than doubled compared to last year, but the report indicated that travel industry expectations were not met because activity still trailed pre-9/11 levels. Likewise, early summer travel in the Atlanta District fell short of industry expectations even though a large cruise line in South Florida reported a recent spike in bookings and projected a robust second half. Kansas City indicated that passenger traffic rose at most airports in its District and that convention business in Denver was strong.
Chicago's report noted that nationwide light vehicle production was "pretty good" through mid-July and that heavy equipment orders edged up, in part because of a weaker dollar. San Francisco reported that new orders in the information technology sector strengthened, reducing inventory levels. Suppliers to the defense and military industry in the Cleveland and Atlanta districts continued to report strong orders, while Boston and Dallas noted a pickup in demand for personal computers and computer hardware. Philadelphia added that demand increased for residential construction materials and orders rose for printing and industrial machinery components.
But weakness persisted in some segments of the manufacturing sector. Richmond and Atlanta reported that textile shipments continued to fall, Atlanta reported layoffs at an aircraft engine plant, and Boston noted weakness in the aerospace industry. Cleveland indicated that auto production fell further though the decline was smaller than in previous months. Chicago said that demand for steel remained soft and Dallas reported that energy-related manufacturing activity was softer.
On balance, capital expenditures in the manufacturing sector remained weak, although several districts reported an increase in investment planned for the future. Atlanta reported that firms remained reluctant to buy new equipment. Kansas City indicated that recent capital spending fell but that planned future investment edged up, as optimism about manufacturing prospects remained high. Boston and Dallas noted increases in capital spending for upgrades in hardware and software, while Philadelphia said that manufacturers planned to increase investment, though some firms indicated they would likely delay expansion until next year. St. Louis reported that several plants in that district have recently announced plans to expand.
Construction and Real Estate
Commercial real estate conditions remained weak in most districts during June and early July. Very little new construction activity was noted-an exception was in the St. Louis District where construction activity had begun to pick up before being delayed by inclement weather. Commercial leasing activity also remained generally stagnant, although renewals and renegotiations drove some activity in the Chicago District. In contrast to the overall sluggishness, Atlanta reported small increases in leasing and net absorption. Compared with the last Beige Book reports, vacancy rates edged higher in the Kansas City, New York, and San Francisco districts and were higher compared with a year ago in the St. Louis District. Chicago and New York reported that rents moved lower, and Richmond indicated that landlord concessions had reemerged in the office and retail sectors. However, several district reports noted pockets of improvement-leasing activity was up in the Atlanta and Minneapolis districts along with a substantial decline in vacancy rates in Lower Manhattan. Looking ahead, Cleveland, Dallas, Kansas City, Richmond, and St. Louis reported that their contacts expected the excess commercial space currently on the market to be absorbed slowly.
Banking and Finance
Several districts reported little change in credit quality. Philadelphia said that credit quality was not currently a problem, but added that some banks believed a further deterioration in business conditions could lower the credit quality of commercial loan portfolios. Kansas City noted that some bankers had expressed concern that declining used car prices had lowered the credit quality of their automobile loan portfolios.
Prices and Wages
Prices charged by manufacturers were generally unchanged in Boston, Cleveland, and Kansas City, but Chicago reported some firming resulting from the weaker dollar. On the flipside, prices paid for materials by manufacturers were mixed. The Boston, Cleveland, and New York districts noted stable input prices, but moderate price hikes were reported in Dallas, Kansas City, and Richmond.
Agriculture and Natural Resources
Activity in the energy industry remained strong according to reports from the Minneapolis, Kansas City, Dallas, and San Francisco districts. Minneapolis indicated that oil and natural gas exploration levels increased, while Kansas City reported that energy activity was steady in June and early July after increasing markedly during the first five months of the year. Dallas added that the level of drilling activity moved to new highs but noted that the rate of increase had slowed substantially in recent weeks, as producers tried to assess the storage situation for natural gas this summer. Kansas City reported that the end of a moratorium on new coal-bed methane drilling permits in Wyoming led to predictions of increased production of natural gas in coming months.