April 13, 2011
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Prepared at the Federal Reserve Bank of Richmond and based on information collected before April 4, 2011. 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 generally continued to improve since the last report. While many Districts described the improvements as only moderate, most Districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid. Manufacturing continued to lead, with virtually every District citing examples of steady improvement, often with reports of increased hiring. Retailers in the Boston District reported mixed sales results and retail sales remained weak in the Richmond District, but all other Districts experienced at least slight gains in consumer spending and the New York District cited robust sales. Business services, including freight-related activities, improved in most Districts. Loan demand was either unchanged or up slightly in most Districts, with New York, St. Louis, and Kansas City citing weaker lending. Residential and commercial real estate performance varied across Districts. Seven of the Districts described commercial real estate as slightly improved, while five noted that their markets were flat. While most Districts noted little change in their residential real estate markets, half of the Districts cited at least pockets of weakening.
Reports focusing on the near-term outlook were most often upbeat. Some Districts, however, also noted that uncertainties remained high. Boston, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, and Dallas all noted actual or expected disruptions to sales and production as a result of the tragedy in Japan. Most Districts reported signs of improvement in at least some of their labor markets and Boston, Richmond, Chicago, and Kansas City cited examples of concern among their contacts about being able to obtain certain types of skilled workers. Some businesses in the Philadelphia and Cleveland Districts still preferred to hire temporary over permanent workers.
Wage pressures were described by most Districts as weak or subdued, but higher commodity costs were widely reported to be putting increasing pressures on prices. Energy prices were cited most often, but raw materials in general were an increasing concern of businesses. The ability to pass through cost increases varied across Districts, with manufacturers generally finding less resistance to price increases than either retail or construction (where weak demand was a limiting factor).
Consumer Spending and Tourism
Automobile sales rose in most Districts. Dallas noted higher foot traffic at auto dealers and Cleveland, Atlanta, and San Francisco indicated that improved availability of credit helped to boost car sales. In the Richmond District, however, vehicle sales were generally unchanged or sluggish, while dealers in the Chicago District reported a slight decline. Contacts in several Districts expressed concern about potential supply chain disruptions due to production problems in Japan.
Tourism strengthened in the New York, Richmond, Atlanta, Minneapolis, Kansas City, and San Francisco Districts, although Japanese tourism in Hawaii dropped. Tourist activity picked up in the Minneapolis and Kansas City Districts, as visitors enjoyed late-winter sports, and early attendance at the Cherry Blossom Festival in Washington, D.C. was above average. New York noted that hotel occupancy and attendance at Broadway theaters rose above year-ago levels.
Reports from transportation services firms were mostly positive. Contacts in the Cleveland, Richmond, and Atlanta Districts reported an increase in freight transportation volume, notably for vehicles and construction materials. Dallas received mixed reports, however, citing weaker international demand for intermodal transportation; container volume flattened, while railroads reported moderate increases. Carriers in the Atlanta District reported increased air travel for business and leisure, while airlines in the Dallas District indicated traffic was steady. New York and Richmond cited a strengthening in freight trucking, and port activity rose in the Richmond and San Francisco Districts. Shippers in the Atlanta District anticipated temporary disruptions resulting from the disaster in Japan.
Comments on the outlook were generally positive. Boston mentioned that manufacturers generally remained cautiously optimistic but voiced greater uncertainty about the outlook for the rest of the year, based on the disruption at Japanese facilities, the geopolitical climate worldwide, and ambiguity about U.S. government spending plans. Likewise, Chicago commented that contacts' optimism was tempered by elevated uncertainties surrounding recent global events. New York and Kansas City stated that contacts remained optimistic about the near-term outlook, and Philadelphia indicated that more than two-thirds of their manufacturers expected business conditions to improve in the next six months.
Real Estate and Construction
Commercial real estate activity remained weak across all Districts, although seven reported slight improvements since their last report. Market activity was still slow in the St. Louis and Philadelphia Districts and remained at low levels in the Boston, Atlanta, and San Francisco Districts. Markets in the San Francisco District were characterized as subdued, but leasing activity increased among technology firms. Most other Districts noted improvements, albeit slight, in activity. For example, Chicago and Kansas City cited moderate gains in construction, with Chicago highlighting gains in healthcare and automotive industries. Improvements in the Cleveland District were also driven by healthcare projects and, to a lesser extent, by manufacturing and energy. Office and industrial leasing improved in the Richmond District, although retail was little changed.
Banking and Financial Services
Several Districts reported that credit standards were unchanged or slightly tighter and that competition for quality loans was intense. For example, Cleveland described credit standards as unchanged, while New York noted no change for consumer loans but tightening for other categories in its District. San Francisco noted that credit standards remained somewhat restrictive. Cleveland characterized loan quality as stable or slightly improved and delinquency rates as stable or trending down. However, New York mentioned an uptick in delinquency rates for commercial and industrial loans. Competition for quality loans was described as intense in the Chicago, Dallas, and San Francisco Districts, putting downward pressures on rates and fees.
Employment, Wages, and Prices
Input prices rose in most Districts, particularly for cotton and other agricultural commodities, petroleum-based products, and industrial metals. In addition, shippers added fuel surcharges in several Districts. Boston, Cleveland and Atlanta cited increasing cost pressures, and some manufacturers in Boston were raising their selling price to pass costs along to customers. The ability to pass through increases, however, varied in both the Chicago and Atlanta Districts, with manufacturers generally being more successful than retail or construction firms. Contacts in the San Francisco District reported a limited ability to pass through higher input prices on anything other than food and gasoline. Kansas Cited stated that more manufacturers and retailers expected to raise prices in coming months.
Wage pressures were reported to be mostly contained, especially in the Philadelphia, Cleveland, Minneapolis, Dallas, and San Francisco Districts. Kansas City noted wages generally held steady, even with expanded hiring, and wage pressures were expected to be contained except for highly competitive or specialized positions. Wage pressures were described as modest in the Chicago District. However, Richmond reported slightly faster wage increases. Boston reported that nearly all of the manufacturing firms that they contacted planned to implement merit increases, and one contact planned a greater merit pool next year to compensate for previous low raises. Philadelphia noted some concern about rising nonwage employment costs, but wages for business firms in the District were mostly steady.
Agriculture and Natural Resources
Activity in the energy industry generally strengthened since the last report. Minneapolis, Kansas City, and Dallas reported increased drilling activity as demand firmed. In the Atlanta District, deep-water drilling permits were issued in late February for the first time since the Gulf oil spill last April, although the number of rigs operating in the Gulf of Mexico was still only about half the number prior to the spill. In the St. Louis and Kansas City Districts, coal production remained above year-ago levels, but was stable to moderately lower in the Cleveland District. Kansas City reported increased drilling activity, with exploration shifting away from natural gas toward crude oil, while Cleveland indicated that oil and gas output held steady. In the San Francisco District, extraction activity for natural gas expanded, while Minneapolis reported that late-March oil exploration activity increased since mid-February. Minneapolis also noted that iron ore mines in northern Minnesota were operating at full capacity, with expectations that 2011 production will be the highest in more than 10 years.