March 5, 2008
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Prepared at the Federal Reserve Bank of Boston and based on information collected on or before February 25, 2008. 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 suggest that economic growth has slowed since the beginning of the year. Two-thirds of the Districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow, or modest growth. Retail activity in most Districts was reported to be weak or softening, although tourism generally continued to expand. Services industries in many Districts, including staffing services in Boston, port activity in New York, and truck freight volume in Cleveland, appeared to be slowing, but activity in services provided some positive news in Richmond and Dallas. Manufacturing was said to be sluggish or to have slowed in about half the Districts, while several others indicated manufacturing results were mixed or trends were steady.
Residential real estate markets generally remained weak; reports on commercial real estate markets were somewhat mixed, but also suggest slowing, on balance, in many Districts. Most Districts reporting on banking cite tight or tightening credit standards and stable or weaker loan demand. Districts reporting on the agriculture and energy sectors said activity is generally strong.
Upward pressure on prices from rising materials and energy prices was noted in almost all the District reports, but Philadelphia said increases in input costs and output prices had recently become less prevalent, and San Francisco indicated pressures were limited for products other than food and energy. By contrast, wage and salary pressures were generally said to be modest, as the hiring pace slowed in various sectors and labor markets loosened somewhat in many Districts.
Consumer Spending and Tourism
Districts commenting on vehicle sales described them as slow or sluggish, with little exception. Contacts in Dallas attributed an uptick in auto sales to increased advertising and incentives. Chicago dealerships reported some increases in used car sales in February. Dealers in the Philadelphia District expected sales to increase later in the year, but Cleveland did not expect significant change in the upcoming months.
The majority of reports on tourism were positive, on balance, although most Districts mentioned some areas of softening. The San Francisco District commented that while tourism in Hawaii had fallen from previous levels, activity in California remained stable, partly because of growing foreign travel resulting from the lower exchange value of the U.S. dollar. Minneapolis reported an increase in tourism activity generally relating to winter sports. Tourism and travel in Kansas City, Atlanta, New York, and Chicago were also mostly positive.
Available reports from staffing firms pointed to mixed demand for temporary labor. The Boston, New York, Richmond, and Atlanta Districts reported weaker staffing requests relative to a year ago; Cleveland, Chicago, and Dallas reported stable to increased demand. Boston noted increased demand from the biopharmaceutical and aerospace industries, while Dallas contacts saw an increased demand for temporary workers in IT, engineering, and oil-related services. A large New York employment agency found that despite widely announced layoff plans at financial firms, they saw no noticeable increase in the number of job candidates. Boston and Atlanta noted improved labor supply.
All Districts reporting on transportation services noted weaker activity in the first quarter of 2008 compared with the previous quarter. Trucking and shipping respondents from the Richmond and Dallas Districts reported declining import volumes, which more than offset growth in exports, stimulated by the depreciation of the dollar. However, airlines in those Districts reported higher passenger volumes since the start of the year.
Various Districts cited strong demand for steel, aircraft and parts, energy-related equipment, and exports, but mostly continued weak markets for products and equipment used for building and furnishing homes. Atlanta, Chicago, and Dallas indicated that automotive production and sales have been light or declining. On the other hand, the Cleveland District saw an uptick in the production of foreign nameplates during January, and St. Louis was anticipating additional capacity and employment in automotive parts manufacturing. Dallas reported that refining production fell in the face of weak margins. Reports on food processing were mixed, with some Districts indicating that high prices were constraining demand, while others cited rising demand. Boston and New York mentioned that some manufacturers are experiencing slower payments from their customers.
All Districts commenting on the near-term outlook mentioned caution or concern on the part of at least some segments of manufacturing. Boston, Philadelphia, Kansas City, and San Francisco indicated that some firms are adjusting their hiring or capital spending plans downward. A couple of Districts mentioned risks associated with financing constraints. For example, Chicago cited concerns on the part of the auto industry that tight credit would cause its customers to become more price-sensitive and less able to obtain car loans.
Real Estate and Construction
Districts that reported home prices all saw overall declines; one exception was the Manhattan co-op and condo market, where prices increased 5 percent compared with a year ago. Inventories remained high as demand was still fairly low. A few contacts in the Chicago, Cleveland, and Richmond Districts reported an increase in inquiries, although this increase in traffic had not yet translated into increased sales. Residential construction declined or remained at low levels in most Districts.
The markets for office and retail space showed signs of a slowdown in several Districts. Office vacancies were reported up, and leasing volumes down, in Manhattan, Baltimore, Washington, D.C., Memphis, portions of Maine and Rhode Island, and Las Vegas. Districts indicated that office vacancies held steady in Boston and the Carolinas, and were down in Philadelphia and in the Minneapolis and St. Louis Districts; however, contacts in the Boston and Philadelphia Districts and see some emerging slack. Office rents were mixed, however, coming in about flat in greater Boston and Manhattan, either flat or down in the Richmond District, and up in Philadelphia. Retail vacancy was reported up in the Minneapolis District and retail space demand was described as slow in the Chicago District. Demand for industrial space was described as either "firm" or "flat" in the Districts commenting on that sector.
Sales activity in nonresidential markets was down in the Boston, Dallas, Kansas City, and Chicago Districts, with contacts citing tight credit conditions as a major factor. Office sales activity remained strong, however, in the major cities of the New York District and in the San Francisco District. Eight of the twelve Districts reported that nonresidential construction activity was slow; countering these reports, the Cleveland, Dallas, and San Francisco Districts indicated that construction remained strong.
Banking and Finance
Agriculture and Natural Resources
All Districts reporting on energy cited robust levels of activity and steady or higher prices; in addition, Kansas City and Cleveland mentioned increases in hiring. However, Dallas noted that drilling had flattened domestically and declined in the Gulf of Mexico, leaving activity outside of North America to drive future growth, while Kansas City, Cleveland, and Minneapolis expected exploration and capital spending to increase going forward. Rates for durable equipment, and drilling and evaluation services were reported to be flat to declining. However, price pressures, regulatory costs, and tightening credit were mentioned as providing possible future impediments to increased production.
Prices and Wages
Most Districts indicated that contacted businesses reported limited wage pressures, moderate wage increases, and some loosening of labor markets. While Atlanta, Boston, Chicago, and San Francisco noted short supplies of selected types of skilled labor relative to demand, they and the New York, Richmond, Kansas City, and Dallas Districts cited pullbacks in the pace of hiring by some firms. Furthermore, several Districts, including New York, Philadelphia, St. Louis, and Atlanta, reported increased prevalence of layoffs, reductions in work hours, or hiring freezes.