September 8, 2010
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Prepared at the Federal Reserve Bank of San Francisco based on information collected on or before August 30, 2010. 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 suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Economic growth at a modest pace was the most common characterization of overall conditions, as provided by the five western Districts of St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The reports from Boston and Cleveland also pointed to positive developments or net improvements compared with the previous reporting period. However, the remaining Districts of New York, Philadelphia, Richmond, Atlanta, and Chicago all highlighted mixed conditions or deceleration in overall economic activity.Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms. Activity was largely stable or up slightly for professional and other nonfinancial services. Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts. Agricultural producers and extractors of natural resources reported continued gains in demand and sales. Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Reports from financial institutions pointed to generally stable or slightly lower loan demand and noted some modest improvements in credit quality.
Upward price pressures remained quite limited for most categories of final goods and services, despite higher prices for selected commodities such as grains and some industrial materials. Wage pressures also were limited, although a few Districts noted increased upward pressures in a narrow set of sectors experiencing a mismatch between job requirements and applicant skills.
Consumer Spending and Tourism
Reports from most Districts pointed to consistent gains in travel and tourist activity, with pickups evident in the business and leisure segments alike. New York reported strong tourist activity that kept hotel occupancy rates high in Manhattan despite an increase in hotel capacity this year, while Boston noted that travel and tourism activity was "stronger than expected." Several other Districts also reported rising visitor counts and hotel occupancies, notably for popular tourist destinations in the Richmond, Minneapolis, and San Francisco Districts, although several pointed to continued softness in per-visitor spending. Atlanta noted reduced tourist activity in areas of the Gulf Coast affected by the oil spill but improvements over last year in unaffected areas. Airline traffic was stable to up, with Boston pointing to an expanded number of low-fare carriers.
Reports on capacity utilization were mixed. Manufacturers of high-tech products have been operating near maximum capacity of late, although this partly reflects a substantial decline in industry-wide capacity over the past three years, as noted by Dallas. More generally, the majority of Cleveland's manufacturing contacts reported that capacity utilization remained below pre-recession levels. Capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months, based on reports from the Boston, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts.
Real Estate and Construction
Demand for commercial, industrial, and retail space generally remained depressed. Vacancy rates stayed at elevated levels in general and rose further in a few Districts, placing substantial downward pressure on rents. Asking rents continued to decline in parts of the New York and Kansas City Districts. High vacancies and negative absorption held nonresidential construction activity to the bare minimum in most Districts. A few Districts reported exceptions to weak conditions. Cleveland noted improved construction activity for industrial use and educational infrastructure; this raised overall activity above year-earlier levels and prompted modest hiring by builders. Chicago reported an increase in inquiries for commercial redevelopment and rising construction activity for public projects, but Richmond reported that state and local governments cut back on construction projects.
Banking and Finance
Lending standards were largely unchanged. However, New York reported tighter standards in all lending categories, particularly for commercial mortgages, and Kansas City reported that a few banks tightened standards for commercial real estate loans. By contrast, reports from Chicago indicated that credit availability and terms loosened for business and consumer loans. Credit quality also changed little on balance. Philadelphia, Chicago, and San Francisco noted modest improvements in overall credit quality, while New York reported rising delinquencies for all categories except consumer loans and Atlanta reported an increase in business and household bankruptcies.
Agriculture and Natural Resources
Demand and extraction activity increased for producers of natural resource products, including oil and other items used for energy output. Rising global demand spurred expanded extraction activity for oil, natural gas, and assorted minerals, as reported by Cleveland, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco. In the Atlanta District, oil production was barely affected by the Gulf oil spill, although contacts noted lingering concerns about the longer-term business impacts of the deepwater drilling moratorium and higher liability insurance costs for oil extraction companies.Prices and Wages
Upward price pressures were very limited during the reporting period, with the exception of selected food commodities and industrial materials. Philadelphia reported increases in the prices of primary metals and wood products, Minneapolis pointed to higher prices for copper and lead, and Dallas and San Francisco reported higher prices for grain and selected other agricultural commodities. Atlanta reported that commodity and transportation-related prices rose, but their contacts indicated plans to absorb the increases into their margins rather than passing them on to consumers. Chicago, Kansas City, and San Francisco also noted limited pass-through of cost pressures to downstream prices.
Wage pressures remained modest overall. Of Districts commenting on wages, most identified little or no upward pressures or increases. Dallas reported that wage pressures were "generally nonexistent," with the exceptions of some airline and temporary workers. Hiring of permanent employees was held down in part by employers' reliance on temporary and contract workers, as reported by Philadelphia and Atlanta, although Boston noted that conversions from temporary to permanent staff picked up. Contacts in the Boston, Chicago, and Kansas City Districts noted skill mismatches between available jobs and the workers applying for them, which caused a slight uptick in wage pressures for selected jobs in a narrow set of industries. More generally, however, the reports suggested ample supply of qualified applicants for open positions.