April 24, 2002
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Prepared at the Federal Reserve Bank of Kansas City and based on information collected before April 16, 2002. 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
Almost all Federal Reserve Districts reported signs of improvement or actual increases in economic activity since the last survey. The sole exception was Boston, which described economic activity as mixed. While the overall tone was positive, a few districts expressed qualifications about the pace of the recovery or the strength of their regional economies. Cleveland said its economy continued to improve but cited concerns that the rate of improvement had slowed considerably from earlier in the year. Also, Kansas City and Dallas noted that their economies were still weak despite recent signs of improvement.
Retail sales increased or held steady in most districts, and all districts reported stable or improved manufacturing conditions. Manufacturers' capital spending plans, however, remained limited. Residential real estate activity was strong in most districts, as both home sales and construction increased. Tourism activity also improved in most areas, while other services activity held steady. Demand for bank loans was little changed in most districts, although increases were reported in some regions. Commercial real estate markets remained generally weak, especially in the San Francisco, Dallas, and Atlanta districts, but showed signs of steadying in the New York, Richmond, Chicago, and Kansas City districts. Energy activity continued to ease, and agricultural crops in several districts were damaged by adverse spring weather.
Despite the increases in economic activity reported in many districts, labor markets remained slack and wage and price pressures generally stayed in check. Demand for labor showed signs of firming in several districts but was still reported as weak in others. Except for skilled health care workers, there were very few reports of labor shortages. Also, those districts that mentioned wage pressures described them as minimal. Retail prices were generally flat. Steel producers sharply boosted prices, but most other manufacturers held prices steady despite reports in some districts of higher costs for fuel, steel, and petroleum-based inputs.Consumer Spending
Most districts reported that retail sales held steady or rose moderately in March and early April. Philadelphia and Richmond reported increased sales from previous months, and Cleveland, Atlanta, Minneapolis, and Kansas City reported sales above year-ago levels. Sales appeared to be weakest in the Dallas district, although retailers there reported some signs of improvement as well. In the New York, Chicago, and St. Louis districts, sales at discount retailers were reported to be better than at general merchandise stores. Home furnishing items continued to sell particularly well in most districts. Apparel sales were reported as weak in some districts, but as rebounding somewhat in the New York, Philadelphia, and Cleveland districts. Store managers across the country appeared to be largely satisfied with inventory levels, and were generally positive about the outlook. Retailers in the Kansas City district, however, said they were ready to begin discounting if sales did not meet expectations.
Automobile sales were characterized as mixed or flat in most districts reporting on such activity. Dealers were cautiously optimistic about future sales in the Philadelphia and Kansas City districts. On the other hand, Cleveland district auto dealers did not expect to meet last year's sales levels, and dealers in the Dallas district were concerned that rising interest rates would dampen sales. Dealers in the St. Louis district were also keeping inventories a little lower than usual in case sales did not pick up.Manufacturing
Manufacturing activity in March and early April was reported to be either stabilizing or showing signs of improvement in all districts. Plants in the Philadelphia and Richmond districts reported continued growth in orders and shipments, and many plants in the St. Louis district were hiring new and previously laid-off workers. Boston and Kansas City also reported signs of a looming turnaround, but noted that activity was still weak compared with a year ago. Industries reporting the strongest activity included producers of auto parts, steel, residential building materials, and furniture. Activity also remained solid at automobile plants in the Cleveland and Chicago districts and among semiconductor producers in the Boston, Dallas, and San Francisco districts. Textile and apparel manufacturers in the Richmond, St. Louis, and Dallas districts experienced increases in demand as well, but the rebound follows numerous plant closures. Plants in most districts reported a stabilization of inventories following a lengthy period of decline, and some firms in the Chicago and San Francisco districts were cautiously increasing stock levels.
Manufacturers were generally optimistic about the outlook for factory activity later in the year. Purchasing managers in the New York district, in fact, reported their highest expectations for increases since mid-2000. In contrast, some producers of capital goods in the Boston district expected weakness to continue until 2003. Despite the generally positive outlook, capital spending plans remained rather limited across the country. Kansas City reported a similar number of firms expected to increase as to decrease capital expenditures over the next six months. Philadelphia reported that manufacturers have raised capital spending plans, on balance, but that the planned increases have been spotty and concentrated mainly in the chemicals and plastics industries.Real Estate and Construction
Residential real estate activity remained robust. Housing markets were reported to be strong in most districts, with both home sales and new construction showing continued gains. The housing market in the Boston district was described as very strong, with listings in short supply throughout the region. In New York, further strengthening in home sales has caused the number of unsold homes to dwindle and has led to some acceleration in housing prices. Richmond also reported especially strong housing activity, with one metro area described as the best sellers' market ever and another metro area said to be experiencing rapidly escalating home prices. There were, however, a few exceptions to the overall strength in housing activity. Home sales softened somewhat in the Chicago district, and residential construction activity remained weak in the Dallas district. Moreover, demand in several districts was weaker for high-end homes than for low- and mid-priced homes, and demand for rental units in the New York district was not as strong as that for houses.
Commercial real estate activity remained generally weak but appeared to be stabilizing in a few districts. Markets remained especially weak in the San Francisco, Dallas, and Atlanta districts. In the San Francisco district, vacancy rates continued to increase, lease rates continued to decline, and new construction was at a minimum. In the Dallas district, office markets were still being held back by overcapacity and weak demand, causing steep declines in rental rates in many areas. Commercial markets in Atlanta also continued to suffer from weak demand, limiting new construction. Commercial builders in the Cleveland district expected to be busy in the coming months but were somewhat less optimistic than in the previous survey, with more projects still in the planning stage than they had hoped. On the positive side, commercial markets in a few districts showed some signs of stabilization or improvement. Leasing activity strengthened in the Richmond district, and office vacancy rates appeared to level off in the New York, Chicago, and Kansas City districts following months of steady increases. There were also scattered reports in the Chicago district of sublease space being pulled off the market by tenants who had overestimated the extent of the business slowdown.Tourism and Services
Travel and tourism continued to improve, yet remained below year-ago levels in most reporting areas. Richmond and Minnesota reported strong ski seasons in their districts, and Atlanta reported that theme parks in Florida were busy and cruise lines were operating near capacity. New York and Richmond both reported that hotel business had improved. Expectations for the summer travel season were high in most districts. However, Atlanta reported that some contacts fear high fuel costs may limit automobile travel this summer and Kansas City reported that advance bookings at mountain resorts were still trailing year-ago levels.
Activity in other service industries was generally steady. Trucking service firms in the Cleveland district noted a moderate increase in the volume of manufacturing shipments, while Dallas indicated that demand for transportation services was still low relative to past levels. In the Cleveland district, trucking firms' operating margins remained very thin due to high fuel and insurance costs. A media company in the Richmond district reported that ad revenues rose for the first time in over a year, and insurance firms in Boston reported continued high demand for life insurance. Demand for legal services, particularly in the areas of litigation and bankruptcy, increased somewhat in the Dallas district.Financial Services
Demand for bank loans held steady or rose modestly in most districts. Banks in the Cleveland, San Francisco and Atlanta districts reported some increase in demand for consumer loans and home-purchase mortgages, while banks in the New York district experienced increased demand for nonresidential mortgages. Demand for business loans was up modestly in the Philadelphia district but flat in other districts. In the Chicago district, banks noted that recent improvements in business sentiment were not translating into increased loan demand. Similarly, banks in the Philadelphia district said their business customers were seeing increased demand but were showing little inclination to take out loans to finance the expansion of facilities. In contrast to home-purchase mortgage lending, mortgage refinancing activity in most districts was down from the high levels reached last year.
Changes in credit quality showed no clear pattern. At banks in the New York district, delinquencies fell for consumer loans and residential mortgages. At banks in the Atlanta district, consumer delinquencies increased but remained manageable. Banks in the Chicago district reported that business loan quality had stabilized following previous deterioration but was still fragile. Banks in the Philadelphia and Kansas City districts were still limiting their commercial real estate lending, and banks in the New York district continued to tighten standards for all types of loans except residential mortgages. Otherwise, lending standards were unchanged in those districts reporting on them.Natural Resources and Agriculture
Activity in the energy sector continued to ease. Despite recent increases in oil and natural gas prices, contacts in the Dallas and Kansas City districts reported that exploration and production activity in the oil and gas sector was contracting while Minneapolis reported flat activity. Kansas City indicated that the higher prices have produced some optimism about future activity. Some producers in the Dallas district also expressed interest in increased future activity, but others were merely taking advantage of increased prices to improve their balance sheets. Outside of the oil and gas industry, Minneapolis reported that activity in the iron ore sector was expanding with the reopening of some shuttered extraction and processing facilities.
In the farm economy, spring weather conditions have adversely affected some areas. Continued low levels of soil moisture in most of the Minneapolis, Kansas City, and Dallas districts have damaged crops, while portions of the Cleveland, Chicago, and St. Louis districts reported excessively wet conditions. Recent cold weather may have also damaged the apple, peach, and strawberry crops in the Richmond district. The winter wheat crop was reported to be doing well in areas with sufficient moisture, including the Cleveland and St. Louis districts, but has been severely damaged in the drought areas of the Minneapolis and Kansas City districts. Spring planting is either under way or is expected to begin soon in most districts, with St. Louis and Chicago reporting that more acres are being devoted to corn and fewer to soybeans this year.Labor Markets, Wages, and Prices
Labor markets remained generally slack. Modest increases in demand for workers in some industries were reported in the New York, Cleveland, Richmond, Atlanta, and St. Louis districts, but otherwise demand was weak across the nation. San Francisco and Dallas reported that employers still have the advantage in most hiring situations, and firms in the Kansas City district enjoyed a rising number of job applicants and declining turnover rates. The only workers reported as being in short supply in more than one district were those in skilled health care occupations.
Wage pressures, when mentioned, were characterized as minimal. Half of the manufacturers contacted in the Boston district expected to hold wages steady at least until the second half of the year. San Francisco reported that wages were being held back due to significant increases in health care and other insurance premiums. New York, Cleveland, Atlanta, and Dallas also reported substantial increases in insurance costs.
Price pressures for consumer goods were generally subdued, and prices for most manufactured goods held steady despite higher costs for steel, fuel, and insurance. Retail prices were essentially flat in the New York, Kansas City, and San Francisco districts and were flat to down slightly in the Boston district. Retail price pressures in the Chicago district also remained subdued, with price-conscious consumers discouraging retailers from going ahead with planned increases. Steel producers in the Cleveland and Chicago districts raised prices significantly. Despite reports of increasing input costs in some districts, other manufacturers generally held their selling prices constant. Concerns about rising input costs were especially pronounced in the Dallas district, where rising costs for fuel, petroleum-based products, and insurance were said to be adversely affecting many industries.