January 19, 2005
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Prepared at the Federal Reserve Bank of Richmond and based on information collected before January 10, 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 the twelve Federal Reserve districts indicated that economic activity continued to expand from late November through early January. Eleven districts characterized activity as expanding with Atlanta, New York, and Richmond noting that the pace of activity had quickened since their last reports. The Cleveland District was less upbeat, characterizing economic activity in that district as mixed.
Consumer spending was generally higher since the last Beige Book and a number of districts reported that retail sales during the holidays were above year-ago levels. While the pace of spending was sluggish in a number of districts at the beginning of the period, it picked up appreciably by late December. Adding to the strength in household spending was an increase in tourism in several districts. Most districts reported that manufacturing activity firmed and many districts said that businesses planned to increase capital spending in 2005. Although several reports noted some slowing in residential real estate and construction activity, real estate markets remained generally strong. In the financial sector, lending activity was mixed, as modestly higher commercial and industrial lending was tempered by slower residential mortgage lending. Several districts noted that agricultural conditions were favorable and that activity in the energy sector remained strong. Labor markets firmed in a number of districts, but wage pressures generally remained modest. Several districts reported higher prices for building materials and manufacturing inputs, but most reported steady or only slightly higher overall price levels.
Consumer Spending and Tourism
Automobile sales were mixed. Atlanta, Chicago, Cleveland, and Kansas City noted higher sales, but St. Louis and Dallas said new car sales slowed. Atlanta, Philadelphia, and San Francisco noted that sales of foreign cars outperformed domestic makes. Dealers in the Chicago, Dallas, and Philadelphia districts reported that automobile dealers' inventories remained above desired levels.
Tourist activity strengthened in several districts. Boston said that increased business travel, corporate spending, citywide conventions and increased international travel boosted hotel occupancy rates. Occupancy rates were also up in the San Francisco district, and the number of Japanese visitors to Hawaii has returned to pre-September 11 levels. New York noted that tourist activity was higher both upstate and in New York City where Broadway theaters set a box-office record during the last week of the year. In addition, the Atlanta report indicated that tourism was strong and that central Florida theme parks were filled to capacity. Kansas City indicated that some ski resorts in the district reported near-record levels of visitors. Richmond reported that because of unseasonably mild weather, hotels were booked to capacity in coastal areas and that some were turning tourists away during the week after Christmas.
But some manufacturing sectors weakened. Richmond reported that textiles and apparel shipments continued to decline. Atlanta reported layoffs at a computer circuit board plant, and Dallas noted slowing demand in consumer communications equipment. Philadelphia indicated that demand softened for lumber and wood products, paper products, and plastics, and Cleveland reported that sales at automobile industry suppliers slowed at year-end. St. Louis said that firms in the fabricated metal product, wood product, chemical, and apparel industries announced plant closings and layoffs.
Looking ahead, manufacturers expected conditions to remain positive in coming months. Most districts reported that manufacturers intend to increase their capital spending in 2005. Firms in the Chicago district upped their planned capital expenditures for next year; most have already begun to place orders to accomplish those spending goals. Minneapolis indicated that expectations of higher sales by businesses led to plans to increase capital spending in 2005. Kansas City noted greater capital spending in 2005 to replace outdated equipment. Richmond reported that manufacturers planned to increase capital spending despite their skepticism about the sustainability of the U.S. economic recovery.
Construction and Real Estate
Commercial real estate conditions strengthened in most districts in December and early January. Real estate agents in the Dallas, New York, Richmond, San Francisco, and St. Louis districts reported that leasing activity increased--particularly for office space. Office leasing was especially brisk in Washington, D.C., and New York City, two of the nation's strongest commercial markets. Contacts in New York said the recent uptick in activity sent the Class A office vacancy rate to a two-and-a-half-year low and may be a signal of increased hiring in that area. In other districts, vacancies were mixed--rates dipped in San Francisco, St. Louis, and most of the Kansas City District, but were generally unchanged in other areas. Adding to the positive tone, commercial construction activity was higher since the last Beige Book report--contacts in Atlanta, Chicago, Minnesota, Richmond, and St. Louis reported new industrial or office construction activity, while retail construction maintained a generally steady pace.
Banking and Finance
Several districts reported that credit conditions were steady, though Dallas added that competition between banks in that district could threaten credit quality in the months ahead. In addition, Chicago and San Francisco reported that banks' profit margins on loans were thin.
Agriculture and Natural Resources
Agricultural prices were generally higher. The Chicago district reported that net farm income jumped last year as a result of profitable livestock operations and record corn and soybean harvests, much of which was forward-contracted at unusually high prices. In addition, Minneapolis reported milk prices were higher.
Activity in the energy industry remained strong according to reports from the Dallas, Kansas City, Minneapolis, and San Francisco districts. Minneapolis indicated increased mining activity, noting that the delivery of some mining machinery required two-year waits. Kansas City reported that oil and gas drilling rig counts remained well above year-ago levels, and noted constraints on drilling due to labor and equipment shortages. Dallas added that the level of land drilling was mostly unchanged but that offshore activity had picked up.
Manufacturing employment rose in Kansas City, New York, Richmond and St. Louis, while factory owners in Philadelphia anticipated adding workers in coming months. Planned factory hiring in Cleveland was mixed by product type--producers of nondurable goods predicted little change in future hiring, but makers of durable goods anticipated adding to their payrolls in the months ahead. Services sector respondents in Dallas, Richmond, and St. Louis reported broad-based strengthening in services sector employment, and contacts in New York and Philadelphia noted a particularly strong pickup in securities industry hiring.
Information on employment staffing services firms was mostly positive, but varied by district. Contacts in Cleveland, New York, Philadelphia, and St. Louis reported a moderate to brisk rise in demand, but Richmond noted generally flat activity and Dallas reported a softening in demand for temporary workers. Chicago also experienced a modest decline, but attributed it to a normal seasonal lull.
The reports from Kansas City, Minneapolis, and San Francisco indicated that wage increases generally continued to be modest. However, Cleveland noted that in response to the strong pickup in shipping demand, trucking firms have been attempting to expand their workforce by raising their wage rates and offering nonpecuniary incentives. Kansas City also noted higher wages for skilled factory workers in short supply, while Richmond noted that wage increases picked up in the services sector.
In manufacturing, input prices rose modestly in most districts, but Boston and Minneapolis reported that some input prices rose sharply. Manufacturers of nondurable goods in the Cleveland district noted that prices for raw materials continued to rise, while prices for durable goods inputs were steady. Prices charged by manufacturers increased modestly in Kansas City, New York, and Richmond, and remained in check in Atlanta and Chicago. Increases in the costs of building materials were mixed by district. Modest to sharp price hikes were widely reported in Atlanta, Kansas City, and Minneapolis, but material prices were flat in Cleveland and New York, and eased somewhat in San Francisco.
Overall, price inflation remained relatively steady in recent weeks. Reports from Atlanta, Boston, Chicago, Kansas City, New York, Richmond, and San Francisco reported that price increases remained largely in check. Contacts in Dallas noted that many firms were unable to pass rising costs along to the customer due to stiff competition, and Chicago noted that competition in the retail sector is expected to limit price increases.