Prepared at the Federal Reserve Bank of Chicago based on information collected before February 24, 2003. This document summarizes comments received from businesses and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts generally suggested that
growth in economic activity remained subdued in January and February. Only a
few Districts reported any notable changes from the last Beige Book. In particular,
Richmond indicated that economic activity "grew modestly" and Kansas City noted
"some signs of strengthening;" by contrast, New York said that the regional
economy had "generally weakened." Many reports indicated that geopolitical and
economic uncertainties were constraining consumer and business spending and
tempering near-term expectations.
Consumer spending remained weak, on balance, with a few Districts noting a
little improvement and others indicating a slight deterioration. Business spending
was very soft, with little change in capital spending or hiring plans. Nearly
all Districts indicated that real estate and construction activities were mixed,
with strength on the residential side and weakness on the nonresidential side.
Most Districts still described manufacturing activity as weak or lackluster,
although half of the reports noted at least some degree of improvement. Refinancing
activity continued to drive growth in household loans, while business loan demand
remained weak. Contacts in most Districts expressed concern over rising energy
and insurance costs, but noted that businesses had difficulty passing along
much, if any, of the cost increases to their customers. The agricultural sector
continued to be affected by poor weather in many Districts. Mining and energy
extraction activity picked up, but energy production was limited by supply problems
and some shortages of skilled labor.
Consumer Spending and Tourism
Overall consumer spending remained weak during January and February. Retail
sales were generally flat throughout much of the country in January. Boston,
Chicago, and Kansas City reported some signs of improvement during February,
but severe winter weather over the Presidents Day weekend hampered shopping
in the New York, Philadelphia, and Richmond Districts. Apparel sales were mostly
weak, although discounting helped move merchandise in some areas. Reports on
home furnishings were mixed. Valentine's Day merchandise sold well in a few
Districts, and terrorism fears boosted the sales of duct tape, plastic, and
other hardware goods in some regions. Retail inventories were generally low
and in line with both current sales and merchants' conservative near-term expectations.
New light-vehicle sales were down from year-end 2002 levels; new vehicle inventories
were high for some product lines, and incentives remained elevated. Tourism
and travel reports were mostly favorable. Richmond said that tourist activity
strengthened. Atlanta reported a gradual improvement in overall tourism and
continued strength in cruise activity through Florida ports. Kansas City noted
that traffic to Rocky Mountain ski resorts remained solid. San Francisco reported
that domestic and international travel to Hawaii improved, but was below expectations.
Business spending remained very soft, as geopolitical concerns and uncertainty
over the strength of demand continued to constrain spending and hiring plans.
Capital expenditures remained sluggish, with most Districts noting little change
in recent months. Cleveland and Atlanta noted particular weakness in manufacturers'
current capital outlays. Boston and Chicago reported that information technology
spending was weak, with Boston noting further softening, particularly for telecom-related
software and services. By contrast, Dallas indicated a slight improvement in
information technology sales, with one contact noting an increase in orders
for replacement hardware such as routers, computers, and monitors. While businesses
in much of the country remained cautious about their plans for capital spending
in coming months, a survey of Philadelphia District manufacturers indicated
that about 25 percent of respondents planned to increase outlays while only
10 percent planned decreases. Reports of demand for legal and accounting services
were mixed, while three Districts indicated some softening in advertising.
Most Districts reported that businesses were still very cautious about hiring
permanent workers, though Cleveland and Atlanta noted a pickup in the use of
overtime and part-time employees. Nearly half of the District reports suggested
that manufacturing industries were reducing their payrolls, and two said that
retailers were downsizing as well. State fiscal woes were cited as contributing
to layoffs in the Minneapolis and Kansas City regions. Staffing services firms
generally continued to report soft demand. A large employment agency in New
York noted that hiring for midlevel office jobs had been on the rise late in
2002, but had since dropped off. However, Dallas reported improved demand for
temporary workers in administrative, light industrial, and professional and
technical positions, and Richmond saw scattered increases in manufacturing.
Construction and Real Estate
Nearly all Districts indicated that real estate and construction activities
remained mixed, with strength on the residential side and weakness on the nonresidential
side. New and existing home sales remained strong in nearly all Districts, with
only Dallas reporting that activity was soft. Housing demand generally appeared
to be strongest for low- and moderate-priced units. Demand for higher-priced
homes remained softer, although Richmond and Chicago noted slight improvement
in some areas. None of the Districts reported a general improvement in commercial
real estate markets, and three suggested slight deterioration. Most regions
said that net new demand for office space remained very weak. Vacancy rates
continued to rise somewhat and downward pressure on rents persisted. Philadelphia
and Richmond indicated that office-leasing activity picked up as existing tenants
renegotiated with landlords for lower rents and/or concessions. Boston also
reported an increase in leasing activity, largely due to consolidations. Cleveland
noted that state and local fiscal difficulties were having an impact on public
construction projects, and St. Louis reported that several announced hospital,
church, and college projects have been delayed due to economic uncertainty.
Most reports suggested that there were few, if any, expectations of a near-term
improvement in commercial real estate and building activities. Cleveland, however,
noted an increase in demand for architects' services, which contacts suggested
could be a precursor to increased commercial building activity.
Manufacturing activity generally remained weak nationwide, but half of the reports
noted at least some degree of improvement. Richmond indicated that "activity
strengthened" as "shipments and new orders rose sharply," and Kansas City said
that "activity improved slightly." Only St. Louis suggested a slight deterioration,
with increasing reports of weak sales. Light-vehicle production nationwide was
flat-to-down from a year earlier, and adverse weather in mid-February led to
some plant shutdowns in the Cleveland District. Reports from vehicle parts suppliers
were mixed. Firms in the St. Louis District reported diminishing orders for
automobile parts, but Atlanta suggested that businesses supplying parts to the
new vehicle assembly plants in the region were outperforming other manufacturers.
Demand for some high-tech goods was said to be improving. Conditions in the
semiconductor industry appeared to improve in the Boston and San Francisco Districts.
Dallas added that there was an increase in the demand for some high-tech consumer
goods. Apparel makers in two Districts reported better conditions. Manufacturers'
inventories of finished goods and raw materials were generally lean, as contacts
across the country expressed high uncertainty about the near-term outlook.
Banking and Finance
Lending activity was mixed by market segment. Most Districts indicated that
growth in household lending continued to be driven by very strong residential
mortgage demand. Refinancing was again spurred by lower fixed-rate mortgage
interest rates; one contact in the Richmond region indicated that every 1/8
percentage point to 1/4 percentage point drop in mortgage rates brings in new
people. Demand for other types of consumer loans was generally flat-to-down.
A few Districts noted slight increases in delinquencies and defaults on some
household loans, while one reported slight improvements in loan quality. Standards
for household loans were largely unchanged. However, bankers in the Dallas region
said that the quality of loan applicants was lower, and Philadelphia suggested
that marginal borrowers were finding it more difficult to service their debts.
Business lending activity remained weak in most of the nation, as many bankers
suggested that decisionmakers were reluctant to borrow in the face of continued
uncertainty surrounding geopolitical and economic conditions. Atlanta reported
that the bulk of commercial lending activity was driven by businesses refinancing
existing loans. However, bankers in the Philadelphia, Richmond, and Chicago
Districts saw slight increases in some commercial lending segments. Bankers
in one-third of the Districts reportedly tightened standards on some business
loans. There were few indications that overall quality on commercial loans had
changed in recent weeks, although bankers in the Philadelphia District noted
"some slippage in credit quality," while Chicago bankers suggested modest improvement.
Prices and Employment Costs
A combination of geopolitical uncertainties, very harsh winter weather in the
eastern half of the country, and lean inventories led to significantly higher
energy costs in January and February. These cost increases were having wide-ranging
economic impacts throughout the country--higher raw materials costs for manufacturers,
increases in transportation and shipping costs, fuel surcharges, and even job
cuts in manufacturing in the Atlanta region. Dallas reported that "gasoline
prices at the pump reached the highest February level on record," while one
Chicago contact suggested that small freight haulers may be driven into bankruptcy
by very high diesel fuel prices.
Upward wage pressures remained generally subdued in nearly all Districts, but
some nonwage costs continued to rise, particularly for health and other insurance.
Minneapolis reported that two large unions had agreed to pay a portion of their
health insurance premiums in order to get 3.75 percent pay raises in each of
the next two years.
Few firms said they were able to pass along much, if any, of these cost increases
to their customers. Competition from both domestic and foreign producers helped
keep final goods prices in check. Most Districts suggested that price pressures
at the retail level remained largely subdued, with many merchants still resorting
to heavy discounts to move merchandise.
Agriculture and Natural Resources
Agricultural activity remained mixed across Districts. San Francisco reported
that the decline in the value of the dollar gave a boost to agricultural exports.
Farmland values in the Chicago District posted the largest year-over-year gain
since 1997. Higher prices for many agricultural commodities boosted planting,
notably for winter wheat in part of the Minneapolis District. Cotton yields
hit a record in Texas, and cotton plantings in the mid-South are expected to
be higher this year. Increased livestock prices have eased profitability concerns,
though reduced herds due to drought could lead to a smaller calf crop this year.
The drought reportedly affected agriculture in nearly half the Districts, increasing
the need for timely precipitation in the spring. On the other hand, Atlanta
and Dallas reported favorable moisture levels. Cold weather had a negative impact
on agricultural activity, stressing livestock in several regions, slowing field
work in the Richmond District, and causing moderate frost damage in portions
of the Atlanta District. Low prices continued to affect the dairy industry,
even the most efficient producers. Financial stress has increased in the Chicago
District, but few significant farm loan portfolio problems were reported by
Due to higher prices, activity in the energy sector increased, though not evenly.
Kansas City and San Francisco reported strong oil and natural gas activity.
However, Dallas noted only a mild increase and Minneapolis said energy activity
was mixed. Current and potential disruptions to crude oil supplies continued
to hamper refining, especially in the Dallas District. Dallas also reported
that activity was held down by industry perceptions that the oil price increase
was temporary and by a shortage of trained workers. Higher metal prices helped
spur mining activity in the Minneapolis District.
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The First District economy shows few signs of improvement. Retailers cite disappointing
December results, although some gained in January and February. Most manufacturing
contacts report weak demand. Commercial real estate markets in New England remain
very slow. Most software and information technology providers say demand is
declining. The outlook is highly uncertain and virtually no contacts are making
plans based on expectations of an upturn.
Most retail contacts in New England report lackluster sales in December, although
some contacts report a slight uptick in January and February. Art and graphics
supplies reportedly sold well, while electronics sales slowed and inventories
rose. Conditions in the travel and tourism sector remain weak; contacts report
hotel occupancy rates in the Boston area continue to be low because of soft
corporate and international travel. Furniture sales did not meet expectations
in December, but reportedly picked up in January and February. A surplus merchandise
contact experienced record-high sales in December, having obtained unusually
good inventory from big retailers. Hardware stores report double-digit increases
in sales compared with a year ago; the harsh weather and fear of terrorism--consumers
purchasing items such as duct tape and plastic--have helped boost sales.
Most retailers are holding employment levels steady; two contacts, however,
are implementing slight decreases in head count. Wages are mostly constant,
although Maine's minimum wage increase has led to some raises even in above-minimum
pay rates. Most capital spending plans continue to be minimal. Overall, vendor
prices and selling prices are level or falling.
Some retail contacts expect sales to increase slightly over the next six months,
while others foresee little improvement. Most contacts are hopeful for a turnaround
if the geopolitical uncertainties are resolved in the next six months.
Manufacturing and Related Services
First District manufacturing contacts continue to report few, if any, signs
of a pickup in demand for their products in early 2003. Most makers of capital
goods and other business products indicate that business is weak, especially
for aircraft and power equipment. Makers of consumer products say business is
soft or, at best, just meeting plan. Some consumer goods companies indicate
new signs of deterioration. For example, one furniture company observes that
consumers became more cautious in early February and a label maker says that
sales to retailers have been running below expectations in the new year. However,
others say that conditions are basically similar to what they observed in late
2002 or even a little better. In contrast to the general trend, sales of supplies
and equipment to health-related sectors continue to rise. Contacts in the semiconductor
industry anticipate that first-quarter revenues will be up at a double-digit
rate from a year ago; however, one firm is continuing to see good momentum quarter
to quarter, while another calls the quarterly pattern "flattish."
Selling prices remain under competitive pressure. Although materials costs
are generally in check, contacts express concern that rising oil prices will
raise costs for items such as plastics and chemicals.
About one-half of the manufacturing contacts expect to shrink their workforce
in coming months. Most of the remaining firms are either holding staffing steady
following layoffs in recent months or hiring selectively. In 2003 merit pay
increases are or will be modest, ranging from zero percent to 4 percent at most
firms. Capital spending budgets for 2003 generally are similar to last year's.
The few companies planning significant increases cite the need for efficiency
improvements or new product development.
Most manufacturers are either anticipating or hoping for a modest improvement
in conditions during 2003. However, they remain cautious in the face of economic
and geopolitical uncertainties. Contacts variously describe their companies
as "focusing inward" … "not spending with confidence, not taking a lot of chances"
… "just muddling along" … "[having] absolutely no visibility right now."
Conditions in the staffing industry are mixed, with most companies experiencing
flat or modest year-over-year growth in revenues and profits during the fourth
quarter of 2002 and early 2003. Labor supply remains abundant. Wages and billing
rates are largely unchanged, although many respondents express alarm at steady
increases in employee insurance costs. Temp hiring in manufacturing and light
industry is particularly weak, with Vermont reportedly lagging behind the other
New England states. Staffing firms are keeping their own payroll and capital
spending low, with few instances of further restructuring or reorganization.
Most respondents anticipate modest growth in 2003, particularly during the second
Commercial Real Estate
Commercial real estate markets in New England remain sluggish. Respondents report
little change in activity since our last contact in November, with any new leasing
activity being spurred predominantly by consolidation rather than by expansion
or growth. While demand for building purchases continues to be strong, lack
of demand for rental space has led to lower rental rates and higher vacancy
rates in office markets throughout the region. In the Boston area, the published
vacancy rates are around 15 percent in the city and 30 percent in the suburbs,
but substantially more space is actually available for rent, as some companies
make deals for space that is not even listed for sublease. Rental rates for
Class A space have dropped to what Class B or Class C buildings commanded two
years ago. With little expectation that the economy will improve in the near
future, contacts predict a third consecutive year of negative absorption.
Software and Information Technology Services
The demand for software and information technology services has continued to
weaken in early 2003. With some exceptions, contacts in the software industry
report flat or negative first-quarter revenue growth ranging from zero percent
to minus 12 percent compared with last quarter. January is said to have been
atypically slow for several custom applications and network software firms.
Providers of telecom-related software and services report soft sales along a
continuing downward trend, while firms selling software development tools say
demand has been level since November. By contrast, several contacts producing
human resources and health-care software report annual revenue growth of more
than 10 percent.
Software producers seeing revenue gains continue to add labor. The rest are
still adding no jobs, with some firms having reached optimal size and others
beginning to struggle to avoid layoffs. Capital spending is level across the
sector with few plans for change in the coming months. Companies continue to
spend only out of necessity or to complete previously postponed investment projects.
Software and information technology contacts indicate that the outlook has
deteriorated since the last quarter of 2002 and is marked by considerable uncertainty.
The majority of respondents expect flat to deteriorating demand for the next
quarter, partly reflecting increased geopolitical risk.
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Second District--New York
The Second District's economy has generally softened since the last report,
with the notable exception of housing, which appears to have regained some momentum.
Signs of weakness are particularly evident in the labor market. While business
contacts report increased cost pressures, mainly for insurance and energy, these
pressures show no signs of feeding into finished-goods prices. The Presidents
Day snowstorm had a large effect on the retail sector but little disruptive
effect on manufacturing or shipping.
Retailers note that sales were below plan in recent weeks, particularly during
and after the blizzard. Selling prices and merchandise costs were described
as steady to lower than a year ago, while retail inventories were said to be
in fairly good shape. Manufacturers indicate mixed but generally softer conditions
in recent weeks; they also note increased upward cost pressures but flat to
declining selling prices.
Home construction and the housing market generally have picked up since the
last report, though the upper end of the market remains weak. Manhattan's office
market has been stable to slightly weaker in early 2003, with rents continuing
to fall. Conditions in New York City's financial industry have reportedly deteriorated
since the last report. Finally, bankers report some weakening in consumer loan
demand, a modest upturn in consumer delinquency rates, and tighter lending standards
on commercial borrowers.
Retailers report that sales were generally below plan in January and the first
three weeks of February. Most contacts were not too concerned with January,
which is considered a clearance month. However, the Presidents Day snowstorm
had a substantial effect on February sales, and contacts generally do not expect
to recoup those sales for quite some time. The storm shut down a number of stores
on what is typically a busy sales day and continued to depress business for
two to three days. February same-store sales are expected to range from 3 percent
to 15 percent lower than last year, mainly due to the snowstorm.
Apparel sales were generally described as weak, though outerwear again performed
better than other categories; a number of contacts noted particularly strong
sales of jewelry. Demand for home furnishings and appliances was described as
mixed. Despite the recent weakness in sales, most retail contacts say that inventories
are in good shape. Retailers report that selling prices are flat to down moderately
and describe the pricing environment as highly competitive. Merchandise and
labor costs are said to be little changed, but retailers report steep increases
in utility and insurance costs.
Regional surveys of consumer confidence have given mixed but generally weak
signals. Siena College's monthly survey of New York State residents showed confidence
rebounding from a cyclical trough in January, led by the New York City area.
However, the Conference Board reports that confidence in the Middle Atlantic
states--New York, New Jersey, and Pennsylvania--fell to a new cyclical low in
Construction and Real Estate
Residential real estate markets have shown signs of regaining steam since the
last report, while commercial markets remain soft but stable. New York State
realtors report that sales of single-family homes rebounded in December, while
selling prices continued to run more than 10 percent ahead of a year earlier,
with the steepest gains in the New York City area. Contacts report that sales
of Manhattan co-ops and condos picked up in January and early February and that
selling prices have been stable in recent months. The high end of the market,
however, continues to lag.
Both single-family and multifamily housing permits in the District rebounded
in December, after drifting down in the prior two months. More recently, homebuilders
in northern New Jersey report that demand remains strong for homes selling for
under $1 million, but note that demand has weakened further at the top end of
the market, particularly in areas near New York City. An industry contact notes
that labor and material costs are not a problem but that liability insurance
coverage is increasingly difficult--builders are more concerned about availability
than the rising cost.
Manhattan's commercial real estate market was steady to slightly weaker in
January. Lower Manhattan's availability rate inched up, after improving slowly
but steadily in the second half of 2002. However, rates held steady in Midtown
and edged down in Midtown South. Still, asking rents throughout the city continued
to decline; they have fallen by roughly 20 percent from their early-2001 peaks,
and industry experts note that the decline in actual rents has been much steeper.
On the supply side, there is a moderate amount of new office space currently
under construction in Manhattan: roughly 3 million square feet is scheduled
for completion this year and another nearly 4 million in 2004. Together, this
represents slightly over 1 percent of the total stock, and all of this new space
will be in Midtown.
Other Business Activity
A major New York City employment agency, specializing in midlevel office jobs,
reports that that hiring activity, which appeared to be on the rise in late
2002, dropped off in January and February. The market for temps is also described
as slack. Legal firms are still hiring, and there has been some pickup at magazine
publishers; however, there has been very little activity from the usually dominant
financial sector. Moreover, a large and growing number of unemployed financial
industry workers are looking for jobs.
A contact in New York City's securities industry reports that conditions have
deteriorated noticeably since the last report. In addition to increased weakness
in the financial markets, stock issuance, and mergers and acquisitions, recent
litigation settlements and increased liability have further affected securities
firms' bottom lines. Bonus payments are estimated to be down 20 percent to 30
percent from last year's levels, and there is no indication of a pickup in hiring
on the horizon.
The manufacturing sector has given mixed signals since the last report. Purchasing
managers in both the Buffalo and Rochester areas report some pickup in manufacturing
activity in January but further declines in employment levels; they also note
widespread increases in input prices. New York City-area purchasers report that
manufacturing sector conditions were flat in January, after broad improvement
in December, and indicate little change in input prices; while they express
increased optimism about the near-term business outlook, a majority anticipates
staff cutbacks in the industry in 2003. More recently, our February survey of
New York State manufacturers indicates some leveling off in business conditions,
following three months of improvement. Manufacturers note increased upward pressure
on input costs but downward pressure on selling prices. Respondents also expressed
less optimism about the near-term outlook than in recent months. While the survey
was taken prior to the Presidents Day blizzard, there has been no indication
that the storm had any substantial effect on production.
Separately, a major freight shipping firm reports that the snowstorm had little
disruptive effect at the seaports during the subsequent workweek, causing only
scattered minor delays. More generally, this contact characterizes shipping
activity as very strong.
Small to medium-sized Second District banks report a further decline in demand
for consumer loans, which appears to be partly seasonal, but steady demand in
other segments. In particular, 31 percent of bankers indicated lower demand
for consumer loans, compared with only 3 percent indicating higher demand. Bankers
reported no change in overall refinancing activity.
On the supply side, bankers continue to report tightening credit standards
for commercial borrowers--roughly one in six bankers reports tighter standards
for commercial and industrial loans, while none reports an easing of standards.
Credit standards for residential mortgages and consumer loans remained little
changed. Both loan rates and deposit rates continued to decline across the board.
Lenders report an upturn in delinquency rates on consumer loans, which cannot
be attributed entirely to seasonal fluctuations--twice as many respondents indicate
that they are rising as rates are declining. Delinquency rates are reported
to be stable in the other categories.
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The pace of business activity in the Third District was virtually steady in
February, as some sectors improved slightly and others slowed. Manufacturers
reported a small increase in new orders for the month compared with January,
but shipments were flat and order backlogs declined. Retail sales of general
merchandise and auto sales eased in February from January and from February
of last year. Bank lending has been rising slowly, with most of the growth coming
from consumer loans, although some banks reported recent increases in business
lending. Commercial real estate market conditions have shown little change.
Vacancy rates have been nearly steady, but effective rents have edged down.
Residential real estate sales have been steady at a fairly brisk pace, and builders'
backlogs remain high.
Looking ahead, contacts in the Third District business community expect some
improvement, although they do not foresee a strengthening in growth. Manufacturers
forecast some increases in shipments and orders during the next six months,
but their level of optimism has waned somewhat since the start of the year.
Retailers anticipate a slow improvement in sales, but they are being very conservative
in their sales plans for the spring. Auto dealers expect a pickup in sales as
winter comes to an end, but they do not expect to match last year's sales rate.
Bankers expect slight gains in lending, but they have become increasingly concerned
that loan growth could stall if the pace of business activity in the region
does not improve.
Third District manufacturers reported steady shipments and slight gains in new
orders, on balance, in February. However, despite the rise in new orders, order
backlogs declined at area plants. Manufacturers continued to report declining
inventories, and some firms characterized them as historically low. Also, some
manufacturing companies indicated that their customers were maintaining very
low inventories and placing orders only on an as-needed basis. By major industry
sector, conditions appeared to be relatively better for makers of apparel and
furniture and for some producers of industrial equipment and materials. Conditions
were relatively slower among makers of paper products and fabricated metal products.
On balance, the region's manufacturers forecast improvement during the next
six months, although they have not been quite as optimistic recently as they
were at the start of the year. About half of the firms surveyed in February
expect increases in shipments and orders by midyear, but one-fifth anticipate
decreases. Area manufacturers' capital spending plans call for increases, on
balance, with about one in four scheduling increased outlays and one in ten
planning cuts. Most of the firms that are limiting or reducing capital spending
for 2003 indicated that they are doing so because demand for their products
remains weak, but a significant number mentioned geopolitical uncertainties
as a negative influence on their capital spending decisions.
Third District retailers generally reported that sales in February were somewhat
off compared with a year ago, and most of the stores contacted for this report
indicated that sales slowed in February compared with January. Store traffic
has also declined. Store executives said cold weather and winter storms have
hampered shopping, but they also said that fundamental consumer demand has eased.
Retailers said sales of home furnishings and electronics have been holding up,
but sales of many other types of merchandise, particularly apparel and jewelry,
have weakened. Some merchants also noted that there has been a sharp decline
in purchases by younger consumers. Discounting continued to be extensive, with
many special sales and coupon promotions being offered.
Most of the retailers contacted for this report expect sales to move up sluggishly
as the year proceeds. They are being very cautious in inventory planning, and
many store executives said they will be trimming promotional spending, particularly
for advertising. It appears that retail companies operating in the region will
also reduce capital spending this year, but most of the store executives surveyed
said the cuts will not be as large as they were last year.
Auto sales in the District slipped in February from the January pace, with
declines for nearly all makes. Dealers reported that sales fell as some manufacturers
scaled back incentives and dropped further when snowstorms disrupted travel
in the region. Dealers said the outlook is uncertain. They expect sales to rise
by the spring, although they anticipate results for this year as a whole will
be below last year.
Outstanding loan volume at Third District banks was rising slowly in late January
and early February. Much of the growth was in consumer lending, including credit
cards and other installment loans. Residential real estate lending continued
to move up as well. Some banks noted recent increases in commercial and industrial
lending, primarily to small and medium-sized businesses. The gains in business
lending were slight, however.
Bankers generally said there has been some slippage in credit quality recently
among both business and consumer borrowers. Most of the banks contacted for
this report said loan delinquencies have increased, but some noted that the
increase in their charge-offs has been proportionately lower than the increase
in their loan portfolio's delinquency rate.
Looking ahead, bankers in the Third District expect slow growth in total lending,
at best. Some expressed concern that, unless the economic recovery picks up
speed, growth in business and consumer lending will stall. Furthermore, several
bankers said marginal borrowers are beginning to have difficulty servicing their
current debt, and they anticipate more firms and households will experience
financial pressure if business activity and employment do not improve soon.
Real Estate and Construction
There has been little change in conditions in Third District commercial real
estate markets in recent months. Surveys by area real estate firms indicated
that overall vacancy rates have been nearly steady, with slight increases in
some locations and slight decreases in others. The office vacancy rate in the
Philadelphia central business district was recently estimated at around 13 percent.
The vacancy rate in suburban areas varied. In markets where new buildings have
been completed the rate was around 20 percent, but in other markets it was lower.
Quoted rents remained fairly stable, but effective rental rates have fallen
as landlords have raised tenant improvement allowances and offered rent-free
periods. Leasing activity has picked up as many tenants have negotiated new
or renewed leases to take advantage of landlord concessions. Although a number
of new buildings have been proposed, contacts say construction activity has
been easing and is likely to fall further until firms in the region add substantial
numbers of new employees.
Residential real estate agents and homebuilders generally reported steady rates
of sales in January and February at a fairly strong pace. Price appreciation
continued to be strong in many parts of the region, although instances of multiple
offers have diminished. Real estate agents expect sales of new and existing
homes for the year as a whole to be a few percentage points below last year's
level. Builders reported little or no decreases in backlogs, which have been
kept up by strong sales while construction has been delayed by adverse weather.
Residential construction contractors generally indicated that land prices continue
to rise, but materials and labor costs have been mainly steady.
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Economic conditions in the Fourth District remained mixed in January and through
the first three weeks of February. On balance, conditions in this report were
very similar to the last: Conditions in residential construction were positive.
Although trucking and shipping contacts reported a slight seasonal decline,
conditions remained generally stable. Manufacturing, banking, and retail reports
were mixed. Commercial construction conditions remained poor. Winter weather
did have an adverse impact on several businesses in the region. Businesses in
retail and construction saw less customer traffic than usual, and many firms
across several industries temporarily closed operations because of severe winter
weather during the survey period.
While hints of future improvement can be found in this report (for example,
new orders in manufacturing increased slightly), little suggested conditions
would change in the near future. In the current environment, contacts remained
reluctant to forecast future economic conditions--most are basing future decisions
on the expectation that conditions will remain flat over the next few months.
A few firms reported reducing their capital expenditure plans since the first
of the year, but most appear to have adopted a wait-and-see attitude before
changing their budgets.
Labor market conditions have deteriorated since the last report--several manufacturers
reported having reduced their labor forces or planning to do so. The few firms
that were looking for employees reported no trouble in hiring--one contact reported
8,600 applications for 200 jobs at a new facility that would be opening in the
In manufacturing, most nondurable goods producers reported flat or slightly
increasing conditions compared with the end of 2002 and reported year-over-year
increases in production and sales for January 2003. Durable goods manufacturers
were not so uniform--some reported year-over-year declines in production and
sales while others reported flat or improving conditions compared with a year
ago. While reports on production and sales varied, reports on other business
indicators were more similar. Most contacts reported idle capacity (some as
much as 40 percent or 50 percent), curtailed capital expenditures, and labor
force reductions. Those that increased production did so using overtime rather
than by expanding their labor force. Reports regarding input prices were mixed,
with roughly half our contacts noting significant increases, while the other
half reported flat or declining prices.
Looking forward, most contacts reported flat or slightly increasing new orders,
suggesting a slight pickup in production in the coming months, but most firms
were making no plans to increase their labor force or capital expenditures in
the near future. Most contacts reported that they would be able to respond to
a sudden pickup in demand by bringing their idle capacity on line.
Severe weather curtailed District auto production during the third week of
February, closing several plants in the area for at least one day. Despite these
closings, roughly half the District auto plants reported year-to-date production
above 2002 levels, and others reported year-to-date figures very near 2002 levels.
Demand for steel continued to soften in January and during the first three
weeks of February. Production and sales were slightly down from December 2002
levels but significantly below January 2002 levels. Steel prices remained under
downward pressure even as the cost of production increased significantly throughout
the winter. Many contacts expect significant reductions in the steel industry's
labor force as companies renegotiate labor contracts. Labor reports were mixed
among companies that did not have negotiated labor contracts: Some reported
that they were planning to hire back some of the many workers they laid off
in 2002, while others reported that they would lay off more workers if conditions
in the industry did not improve in the next month.
District retail reports remained mixed in January, ranging from slight declines
(-1.2 percent) to strong gains (4.0 percent) in year-over-year comparable store
sales. Although sales for Valentine's Day were characterized as robust, retailers
reported that sales for the month of February were trending downward. Apparel
retailers noted that seasonal promotions and clearance events had allowed them
to move merchandise and reduce inventories. Most retailers are very carefully
managing their inventories, as they expect sales to be flat in the coming months.
Automobile dealers in the District characterized sales in January as "lethargic"
(one contact noted that year-over-year sales were down 10 percent), but February
reports were mixed. Most contacts noted a rebound in sales, but a few continued
to report declines. Although dealers reported significant cuts in their advertising
budgets (some as high as 20 percent), they were optimistic about sales in the
coming months as manufacturers continue to offer incentives. As was the case
in the last report, inventories remain high (seventy-five- to one hundred-day
supplies--a sixty-day supply is preferable), but contacts were not as concerned
about climbing inventories as they were in the last report.
District homebuilders reported that sales were steady, at levels slightly higher
than at the start of 2002. Despite some slowing in consumer traffic (partially
attributed to poor weather), demand remained reasonably strong in a favorable
interest rate environment.
Commercial builders, on the other hand, continued to report weak conditions.
Worsening state and local budget crises have had an impact on the availability
of public construction projects (a major source of business for some firms in
2002). Competition for available projects in all areas of commercial construction
has increased. Some contacts noted, however, that architects have been seeing
an increase in business, suggesting a pickup will occur in commercial construction
in about a year.
Trucking and Shipping
Trucking and shipping activity slowed again in January, although most of this
slowing was seasonal. Compared with one year ago, shipping volume in January
was nearly flat--most contacts saw a year-over-year increase of about 0.5 percent.
Contacts are expecting February shipping volume to remain flat, but note that
the industry will see a seasonal pickup in March with an increase in volumes
from auto manufacturers and their affiliated companies.
For the first time in many reports, the industry experienced downward price
pressure as companies respond to slowing demand (in the last report, contacts
reported price increases). Profit margins have been shrinking as input prices,
especially labor and energy, continue to rise. Companies are attempting to contain
capital spending to replace worn-out equipment--several contacts noted recycling
trucks or buying them off the secondary market.
In the banking sector, both commercial and consumer loan demand remained weak.
Compared with one year ago, most contacts reported demand was flat or slightly
down, but, for the first time in many months, some contacts reported that demand
growth for mortgages was "robust" (attributed to both new and refinancing activity).
For most banks, however, home equity loans continue to be the only source of
growth in lending. The number of loan applications remained flat, and the credit
quality of consumer loan applicants remained very poor. Competition for creditworthy
borrowers remains intense. Contacts offered conflicting reports regarding loan
Reports regarding core deposit growth were also mixed, with a few contacts
reporting declines, but most reporting no change or growth. Those that reported
growth attributed it to heavy promotions, including free checking. Most contacts
reported a continued squeeze on spreads as loan rates adjust downward and funding
rates remain relatively constant.
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Economic activity in the Fifth District grew modestly in January and the first
three weeks of February, with a slight improvement in services and manufacturing
conditions offsetting a listless retail sector. Services businesses reported
generally steady to slightly higher demand, and some contacts cited higher orders
for coming months. District manufacturing activity expanded somewhat faster,
as shipments and new orders rose sharply in January and early February. In contrast,
retail sales were little changed from our previous report, and retailers continued
to trim payrolls. Price inflation remained modest according to contacts. In
the real estate sector, District home sales rose at a solid rate, but commercial
leasing activity slowed as war prospects unsettled potential lessees. In agriculture,
unusually cold and snowy weather hampered field preparation and led to the abandonment
of still-unharvested crops in some areas of the District.
District retailers reported generally flat sales over the past six weeks. A
major winter storm over the Presidents Day weekend led many District businesses
to close for a day, and lingering snow curtailed sales. According to a department
store manager in Annapolis, Md., sales growth and customer traffic there had
been unchanged in recent weeks. And in Richmond, Va., where the winter storm
closed several malls, a contact said that store sales were off but that some
of the slack might have been made up through increased Internet sales. A manager
at a builders supply store told us even though customer traffic was lower because
of the recent storm, his store experienced a run on duct tape and other items
recommended for use in the event of domestic terrorism. In Virginia Beach, Va.,
retailers reported a slight decrease in customer traffic as military deployments
continued in that area. Car dealers in Washington, D.C., and Charleston, W.Va.,
said business was very slow, with manufacturers incentives shoring up sales.
Most services businesses said customer demand was steady to slightly higher
in January through late February, but firms that do business with the federal
government reported decreased revenues. A contact at a financial services firm
in Baltimore, Md., said business was stable and that there was less of a "negative
feel" in the local economy. In West Virginia, a caterer said her bookings had
been slow the past few weeks but noted that her calendar for late spring and
summer was filling. Most firms indicated that their employment levels have been
steady. An executive search firm in the District of Columbia said they have
had to "market a little harder," and a health club also in District of Columbia,
said they were seeing more clients. An engineering firm in Charlotte, N.C.,
reported a shortage of qualified, licensed engineers in the area but a glut
of business managers.
District manufacturing activity strengthened in January and early February.
Shipments and new orders rose sharply at District factories, led by a pickup
in the chemicals, paper, and textiles industries. A textiles manufacturer in
North Carolina told us that aggressive price reductions were enabling his company
to gain market share. Furniture manufacturers noted that sales were strong in
early January, although inclement weather later in the month tempered growth.
Despite the recent uptick in demand, a number of manufacturers expressed concerns
about rising oil prices and the possibility of war. A producer of plastic products
in North Carolina told us, "Things are very uncertain now; business isn't getting
any worse, but there will likely be no sign of a real pickup in activity until
the Iraq situation is cleared up." A tire manufacturer in Virginia noted that
70 percent of his firm's raw materials were derived from oil. He said that the
rising costs of oil and natural gas were pushing up the prices of raw materials
but that he could not pass the higher costs through to his customers.
Contacts at District financial institutions said that loan demand changed little
in January and February. Commercial lending remained weak, in part because of
the uncertainty over Iraq, but there were some encouraging signs that demand
for commercial loans may be ticking up. A banker in Charlottesville, Va., said
that he had made a few more business loans in recent weeks and noted that some
of his clients were beginning to expand business. In contrast, a lender in Richmond,
Va., reported that commercial lending was "no better, no worse" than it was
late last year and that her clients were "doing well to just keep from losing
business." Residential mortgage lending remained strong as mortgage rates drifted
lower, and most contacts said that the growth in mortgage lending matched December's
pace. Residential refinancing continued strong, accounting for 60 percent to
75 percent of home mortgage lending in many cases. A mortgage lender in Richmond,
Va., said that interest in refinancing was still strong, observing that "every
1/8 percent to 1/4 percent drop in mortgage rates brings in new people."
Residential realtors generally reported that home sales were solid in January
and February. An agent in Greenville, S.C., said local sales were the best he
had seen in forty years. He commented that sales were so good he was afraid
to say too much "for fear of jinxing them." A realtor in Odenton, Md., also
reported strong sales in January, adding that properties put on the market in
her area did not last long. In Richmond, Va., an agent said that the remarkable
string of monthly sales advances in that area remained intact. In a less rosy
assessment, real estate agents in the District of Columbia said sales had been
somewhat slower in recent weeks--in part because of inclement weather in the
region. Across the District, homes in the low-to-middle price range were selling
best, but a few realtors said that interest in higher price homes was picking
up. Home prices were reported to be rising modestly in most locations.
Commercial realtors reported slower growth in leasing activity in recent weeks
as potential lessees in the office sector adopted a "wait and see" attitude
in light of political developments internationally. A realtor in Raleigh, N.C.,
captured the mood of many with the observation that "people are just waiting
on the sidelines." The leasing of retail space picked up--a realtor in Richmond,
Va., for example, experienced "very high" growth over the past six weeks in
retail leasing. But office and industrial space leasing was sluggish. Vacancy
rates for retail space remained low, while office vacancy rates edged higher.
Rents for retail space held firm, but edged lower for office space. Realtors
in Washington, D.C. and Charlotte, N.C., noted that some tenants had recently
renegotiated their leases, obtaining lower rents and other concessions. New
commercial construction was generally flat across sectors--several realtors
in the Carolinas reported a shift to refurbishing older buildings in lieu of
building new ones.
Tourist activity strengthened since our last report. Contacts at several District
ski resorts told us that abundant snow in February rejuvenated interest in skiing.
They noted that bookings over the Presidents Day weekend were much higher than
last year and predicted that the ski season would be extended through late March.
Coastal tourism was also reported to be stronger. A contact from Myrtle Beach,
S.C., said that Presidents Day weekend had been extremely busy, adding that
it was difficult to get into a local restaurant without a reservation. Looking
ahead, contacts expressed concern that rising gas prices and continued talk
of war could hamper the spring tourist season.
Contacts at District temporary employment agencies reported lukewarm demand
for workers in recent weeks. An agent in Washington, D.C., reported that he
had expected a better start to the new year but said, " Business is still very
soft, and demand for extra workers is slower than expected." While overall demand
for temporary workers was flat, continued strong residential mortgage lending
resulted in higher demand for temporary workers in that sector. In addition,
there were scattered reports of a pickup in hiring in manufacturing.
Frigid weather in January and heavy snowfall in early February impeded field
preparation and limited late small-grain plantings in much of the District.
Farmers in Maryland, North Carolina, and Virginia abandoned some remaining corn
and soybean fields in January because of the cold weather and anticipated poor
yields. The cold weather also curtailed development of pastures and winter grazing
crops--farmers were feeding livestock full time and trying to stretch hay supplies.
Although some areas in South Carolina continued to experience moderate drought
conditions, contacts in most areas of the state reported that small-grain crops
were in good condition.
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Contacts reported that economic activity in the Sixth District remained lackluster
in January and February. Retail sales were sluggish, while manufacturers noted
continued weakness outside of defense and auto-related production. The District's
tourist sector continued its gradual improvement. Labor markets displayed a
modest improvement in January and February; employers reportedly remained reluctant
to add permanent staff but increased their use of overtime and part-time workers.
The District's single-family housing market remained strong, but commercial
real estate markets continued to suffer from low demand for space. Most contacts
indicated that geopolitical concerns and higher fuel prices were weighing on
near-term expectations for the District's economy.
The majority of District retail contacts reported that January and February
sales were about the same as they were a year earlier. Aggressive discounting
remained prevalent, especially among apparel merchants that were clearing out
winter clothing. Most retailers contacted indicated that inventories were balanced,
and some noted that stocks were lower than this time last year. Several national
retail chains announced planned store consolidations in the District. Automobile
industry contacts reported mixed light-vehicle sales in January and February,
while the demand for used-car sales remained soft.
Real Estate and Construction
Low mortgage rates continued to propel District housing markets in January and
February. The strongest reports in the District were from Florida, while contacts
reported that home sales and construction elsewhere were mostly stable. High-end
homes remained difficult to sell in most parts of the region. Reports noted
that commercial real estate markets remained weak in January and February. Vacancy
rates increased in some metropolitan markets, and new construction was largely
limited to public works projects. Several contacts noted that generous lease
incentives were prevalent, but absorption remained at low levels.
Overall, factory activity remained lackluster in January and February. Most
manufacturing firms reported no significant increases in demand. Inventories
remained lean, and capital spending plans were subdued. Petrochemical and ammonia
plants in Louisiana have announced job reductions because of high natural gas
prices. Production has been scaled back at a steel plate plant in Alabama because
of slack industrial demand. The District's timber and forest products industry
continued to experience low prices and stiff competition from imports from Canada,
Europe, and South America. Contractors for NASA in Florida and Louisiana expressed
concern that activity may slow following the Columbia tragedy. The most positive
reports came from firms supplying the new vehicle assembly plants in the District
and from defense contractors.
Tourism and Business Travel
Tourism contacts reported a gradual improvement in business conditions in January
and February. In Florida, reports suggested that the level of activity still
lagged behind that of early 2001 but exceeded year-ago levels. The number of
visitors to Miami over the past few months was boosted by the success of several
special events in the city and particularly inclement weather in the North.
Cruise activity remained strong through Florida ports. Gaming revenue was characterized
as exceptional for Louisiana casinos over the holidays, but the pace dropped
off in January.
Banking and Finance
Responses from the banking sector were mostly positive in January and February.
Residential loan demand and refinancing activity continued to be strong overall,
although there were reports of increasing mortgage default rates in some areas.
The vast majority of commercial loan activity was among businesses refinancing
existing loans. Banking contacts reported ongoing moderate deposit growth. Venture
capital investment activity remained low in most of the District.
Labor and Prices
Most business contacts continued to report that they were reluctant to increase
permanent staffing levels. However, a number of firms noted that they had increased
the use of overtime and part-time workers during January and February. Local
and state governments were cutting back on hiring plans because of budget constraints.
The main areas of employment growth were in the health-care sector and at newly
expanded vehicle production facilities in the District. Insurance costs continued
to escalate throughout the District, and while most reports indicated little
change in output prices, input costs related to oil and gas increased significantly.
Some crops in southern Florida and south Louisiana received moderate frost damage
in February, but most areas emerged largely unscathed from recent cold snaps.
Winter rains have helped reduce drought conditions in several District locations.
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Reports from Seventh District contacts generally suggested that economic activity
remained soft in January and February. Consumer spending was again relatively
weak, and caution persisted in businesses' capital spending and hiring plans.
Strength continued in sales of both new and existing homes, while nonresidential
building and real estate activities were again soft. Manufacturing activity
remained generally weak but appeared to have improved further from our last
report. Bankers continued to report strong mortgage demand from households and
weak loan demand from businesses. There were a few new reports of input cost
increases, particularly for energy, but prices at the retail level remained
largely in check. District farmland values in 2002 posted the largest year-over-year
gain since 1997, even as concerns increased about the impact of drought and
continued low dairy prices.
Overall consumer spending remained weak in January and February. Most retail
contacts indicated that sales results in January fell short of their conservative
expectations, although one national chain noted some slight improvement in February.
Merchants said that sales of food and consumables were stronger than other items,
particularly apparel. Inventories generally remained lean as retailers sought
to tightly control stocks, although one merchant reported that inventories were
rising faster than sales. A contact in casual dining noted that sales had been
softening since mid-January, in part because of bad weather and increased fears
of terrorism. Auto dealers indicated that light-vehicle sales in the District
had slowed from the torrid pace of year-end 2002, particularly in February.
Contacts said that light-vehicle inventories were higher than desired, with
one noting that "some dealers are getting nervous," given the great deal of
uncertainty about sales in coming months. A manufacturer of recreational vehicles
said that demand for lower priced units remained strong but that the high end
was "suffering." Tourism activities were reported to be flat to down in most
areas, and one contact noted fewer attendees at boat and RV shows in the region.
Business spending generally remained weak in January and February. Most contacts
suggested that there had been little, if any, change in their actual capital
spending or investment plans early in the year. Many expressed uncertainty about
the strength of the economy and continued to take a "wait and see" attitude.
One computer industry contact indicated that businesses continued to defer both
upgrades to mainframe equipment and additions to capacity, which were also adversely
affecting software vendors. There were a few reports of stronger advertising
activity in January, but it had softened somewhat in February. Business travel
remained weak, and there were some reports of firms encouraging workers to postpone
or cancel business trips as a result of the increased threat of terrorism. Hiring
plans remained very cautious. Reports from temporary staffing firms were mixed
but generally indicated that demand remained lackluster. Contacts from many
industries suggested that uncertainty about overall economic conditions and
the need to contain costs were constraining hiring.
Construction and Real Estate
Construction and real estate activity was again strong on the residential side
and soft on the nonresidential side. Sales of both new and existing homes remained
strong, according to homebuilders and realtors. Demand for lower priced homes
was strongest in most markets, although there were a few reports of improving
demand for higher priced new homes in some. One builders association in Wisconsin
noted record attendance at their annual home show in January, with builders
and remodelers optimistic about the "quality of leads" from the show. Apartment
occupancy rates continued to trend down, despite little new development of multifamily
rental units. Nonresidential activity remained weak. Office vacancy rates crept
up in some markets, in part because of lease termination agreements. While these
deals increased official vacancy rates, they also reduced the amount of sublease
and "shadow" space on the market. One contact said of office leasing activity,
"As for net new demand, we're just not seeing it." Some reports suggested that
vacancies rose in some older retail developments and that the number of new
retail projects in the pipeline was slowing.
Overall, manufacturing activity remained generally soft but continued to show
signs of improvement. Nationwide, light-vehicle sales slowed in January and
February but were still tracking at historically strong levels. A contact with
one automaker said that the industry expected volatile sales in coming months,
and manufacturers were prepared to raise incentives to smooth out sales volumes.
This contact also noted that production was down slightly from a year ago, and
inventories were a little high. A producer of heavy trucks said that sales had
been gradually improving after bottoming in August of last year, and it appeared
that "people are buying the new engines" that meet more stringent EPA emissions
standards. Production was also holding up, with no plans for additional plant
shutdowns. Strong shipments to China were said to be helping buoy steel production,
according to one industry contact, but inventories had increased somewhat in
recent months. A few producers of machine tools reported that quoting activity
(especially for larger projects) was up, and this was translating into some
Banking and Finance
Overall lending activity continued to reflect the bifurcation in economic activity,
with strength on the household side and softness on the business side. Applications
for mortgage refinancing may have slowed somewhat, but remained much stronger
than most bankers had anticipated. Contacts noted some improvement in household
loan quality, as delinquencies and charge-offs decreased modestly. Business
lending activity remained very weak. A contact with one large bank said soft
business demand was reflected in relatively flat loan volumes, a trend that
has persisted over the past six months. Banks that did experience volume increases
suggested that the gains were due to market share shifts rather than a general
increase in demand. On balance, banks did not appear to be tightening standards
on business loans, and there were a few reports that overall business loan quality
had improved slightly.
Prices and Employment Costs
There were a few new reports of increasing input costs, but retail price increases
remained largely subdued. Of particular concern to many contacts were rising
prices of energy and inputs derived from petroleum. One contact said that prices
for diesel fuel had risen to "frighteningly high" levels, which could potentially
send some small freight carriers into bankruptcy. By contrast, steel prices
were said to be stabilizing after some significant increases in 2002. There
were no new reports of intensifying pressure on wages, and some companies were
said to have delayed merit increases until later in the year. Businesses continued
to express concern over rising health and other insurance costs. Despite some
increases in input costs, fierce price competition kept most output prices in
check. Small-business owners appeared particularly concerned with this trend,
as they were finding it increasingly difficult to compete with larger producers
On average, District farmland values at the end of 2002 were up more than 7
percent from a year earlier, the largest year-over-year gain since 1997, according
to our survey of rural bankers. Nearly 40 percent of eligible farms in the District
had signed up for aid under the Farm Security and Rural Investment Act of 2002,
with a crush of applications likely this spring. With drought covering about
half the District and another third of the region abnormally dry, there was
increasing concern about the growing season. Corn and soybean prices remained
higher than a year ago, and contacts suggested prices could rise further, given
low stocks and the potential for drought conditions to reduce yields. Higher
crop prices had already led food producers to raise some prices. Very low dairy
prices and low crop yields last year in parts of Illinois and Indiana contributed
to increased financial stress in the District's farm sector.
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Eighth District--St. Louis
Contacts in the Eighth District reported lackluster business conditions in
recent months, with little change from the last survey. In manufacturing, reports
of weak sales, consolidations, closings and cutbacks have continued. Retail
sales during December and January were mostly flat from a year ago but met expectations.
Auto sales over the same period declined. Residential real estate markets are
still strong, while commercial real estate markets remain weak. Over the past
three months, there was essentially no change in lending activity.
Contacts reported that retail sales in December and January were flat to slightly
up, on average, from year-earlier levels. More than 70 percent of the retailers
surveyed noted that sales levels met their expectations, while about 25 percent
of the contacts reported that sales were below expectations. Apparel, shoes,
home items, cosmetics, and winter items were strong sellers, while jewelry,
specialty, and luxury items moved more slowly. Despite a slow holiday season,
over half the retailers surveyed noted that inventories are at desired levels,
while only 20 percent reported excess inventories. Most contacts indicated no
current plans for discounting merchandise. Retailers remained cautiously optimistic
about the next few months, with about 65 percent of contacts expecting a small
increase in sales from last year and while the rest expecting sales to remain
flat or below 2002 levels.
Car dealers in the District reported that sales in December and January were
down over year-earlier levels, on average. Almost all contacts attributed this
trend to an uncertain economy and the threat of war. Several car dealers reported
that used and low-end cars are selling better than new cars, causing inventories
of used cars to be okay-to-low and inventories of new cars to be okay-to-high.
About 35 percent of the contacts surveyed noted higher rejection rates of finance
applications, while the rest saw no change. A third of the dealers surveyed
expect sales to be flat-to-slightly-down over last year in the next few months,
the rest expect a moderate increase.
Manufacturing and Other Business Activity
The District's manufacturing sector remains soft. Reports of weak sales, consolidations,
closings, and cutbacks continue to rise. Most contacts also noted diminishing
orders and low selling prices. Industries affected include packaging, appliances,
automobile parts, fluorescent lights, tools, electrical products, paper, and
steel cable. Contacts see an uncertain economy and increased foreign competition
as the causes for weakness. Several manufacturers are somewhat pessimistic about
the first half of the year. Despite the overall slowdown, a few firms in the
dye, clothing, stationery, and ventilator industries have announced plans to
expand in or move to the Eighth District.
The increasing price of diesel fuel has many contacts from small and midsize
trucking firms concerned about their already narrow profit margins. A major
packing and shipping firm in the District has announced a plan to lay off pilots
in the next year, citing a decrease in shipping volume as the reason for the
cut. In the health-care sector, contacts noted that the nursing shortage has
persisted, especially in the non-urban areas of the District. Contacts in all
industries continued to experience the burden of increasing health-care insurance
Real Estate and Construction
Residential real estate sales are still up in most of the District. Last year
was a record year for home sales in Memphis, with an increase in total home
sales of 20 percent in December 2002 compared with December 2001. In Arkansas,
home sales were very strong the last two to three months of 2002 but slowed
as the weather turned colder. Residential construction is also up in most District
areas. In Louisville, contacts noted that housing starts are booming for homebuyers
in the $100,000 to $150,000 range. Contacts in Fayetteville reported that housing
starts continue to flourish. In the Greater St. Louis area, year-to-date single-family
housing permits as of December 2002 were up 4 percent from 2001.
Commercial real estate markets are still slow in most of the District. St.
Louis continues to experience an increase in office vacancy rates. Contacts
in both Louisville and Fayetteville reported increased office vacancy rates
at the end of 2002. Commercial construction is weak in most District areas.
In northeast Arkansas, activity has continued to be slow and is not expected
to pick up in the spring. In Memphis, contacts reported that there is virtually
no building. In central Kentucky, construction of hospitals, churches, and college
facilities are under way or have just been completed, but several that have
been announced are being delayed because of uncertainty about the economy.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates
little change in overall lending activity over the past three months. Banks'
credit standards for commercial and industrial (C&I) loans remained generally
unchanged by large firms but were slightly tightened for small firms. Most contacts
reported a moderate decrease in the demand for C&I loans for large and small
firms, citing a decrease in merger and acquisition financing needs and reduced
plant investment as reasons. The survey introduced questions about credit default
swaps (CDS), but it appears that banks make very little use of them in either
buying or selling credit risk, because, according to the respondents, CDS are
more expensive, riskier, and more complicated instruments than loans. Credit
standards for commercial real estate loans were tightened somewhat even though
demand remained about the same. Both the credit standards and the demand for
residential mortgage loans were reported to be generally unchanged. Credit standards
for credit card and consumer loans remained largely unchanged, but the demand
for consumer loans decreased moderately.
Agriculture and Natural Resources
Unusually cold weather in the Midwest stressed livestock and threatened winter
crops. Despite a good amount of snow covering the southern part of the state,
Illinois winter wheat ratings have continued to decline. Low levels of topsoil
moisture add to concerns about the survival of the crop. Rains will be particularly
important in late February and March as the crop breaks dormancy. According
to a major survey, cotton producers in the mid-South intend to plant 3.3 percent
more cotton this year than in 2002. The number of catfish operations in District
states decreased, on average, 8.1 percent between 2002 and 2003. Water surface
acres used for production decreased 8.5 percent, on average.
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Ninth District economic activity was mixed from early January through late
February. Agriculture, home building, and mining grew. Manufacturing, tourism,
and energy were mixed. Consumer spending was flat and commercial construction
was down. Over this period, labor markets loosened slightly. Overall wage and
price increases were modest. Significant price increases were noted in heating
costs, gasoline, and tuition.
Construction and Real Estate
Commercial building was generally down. In 2003, only about 200,000 square feet
of new space is planned in the Minneapolis-St. Paul area, down from 1.2 million
square feet in 2002, according to a commercial real estate firm. A Minneapolis
firm that reconfigures office space and moves furniture reported less work in
January and February than in the last months of 2002. However, in Sioux Falls,
S. Dakota, building permits were up in January compared with a year ago; commercial
realtors, developers, and architects are expecting a good year in 2003, according
to a city official.
Home building and residential real estate activity were solid. The number of
housing units authorized in the Minneapolis-St. Paul area increased 14 percent
in January compared with a year earlier. "Every indication is that 2003 should
be another very busy year for builders," said a representative of a Minneapolis-St.
Paul area builders association. However, the vacancy rate for apartments in
Minneapolis-St. Paul increased to 6.6 percent in the fourth quarter of 2002,
up from 4 percent a year earlier. A representative of a realtors association
in La Crosse, Wis., expects 2003 to be another good year for single-family home
sales, but says 2003 will likely fall short of the 2002 sales record.
Consumer Spending and Tourism
Overall retail sales were flat. A major Minneapolis-based department store and
discount retailer reported that same-store sales were essentially flat in January
compared with a year ago. According to a representative of a chamber of commerce
association, retailers in Minnesota were not complaining about post-holiday
sales, but they carried low levels of inventory. A Minneapolis area mall manager
noted flat sales in January compared with a year ago, while a mall in Montana
reported sales down slightly in January from last year. In contrast, another
Minneapolis area mall manager reported good traffic levels in January and February,
while a mall manager in North Dakota noted that the mall's annual post-holiday
sale had higher traffic levels than a year earlier.
Auto sales dipped in January from December levels. According to a representative
of an auto dealers association in Minnesota, after a good December, auto sales
have "fallen off a cliff." An auto dealer in Minnesota noted a significant slowdown
in sales at several stores in January.
Winter tourism was mixed, primarily due to weather. The first seven weeks of
the winter tourism season were a "washout" due to a lack of snow in the Black
Hills area of South Dakota, according to a tourism official; however, since
the end of January, business has been up about 10 percent over last year. Businesses
in northern Wisconsin that depend on snowmobiling and cross-country skiing are
hurting, reported a university extension agent. In contrast, plenty of snow
in the Upper Peninsula of Michigan led to a recent 10 percent increase in lodging
expenditures in January compared with last year.
Manufacturing activity was mixed. A January survey of purchasing managers by
Creighton University (Omaha, Neb.) indicated increased manufacturing activity
in Minnesota and the Dakotas. As evidence, a Minnesota prescription drugs manufacturer
plans to significantly increase capital purchases and employment, and an industrial
equipment maker will expand production in western Wisconsin. However, preliminary
results from a January survey of District manufacturers by the Federal Reserve
Bank of Minneapolis and the Minnesota Department of Trade and Economic Development
revealed that businesses expect employment and capital investment to decrease
slightly in the first half of 2003 from the second half of 2002. Several District
manufacturing facilities recently announced plans to close, including a western
Wisconsin tool factory and an electronic component plant in southern Minnesota.
Energy and Mining
Activity in the energy sector was mixed, while the mining sector was up slightly.
Mid-February District oil and natural gas exploration levels were down slightly,
while oil production was up slightly from early January. Meanwhile, two District
iron ore mines were operating at near capacity and expect to increase employment.
District metal mines enjoyed significant increases in gold prices and moderate
price increases for other metals.
The agricultural economy was generally up due to higher commodity prices. The
U. S. Department of Agriculture reported that farmers and ranchers received
slightly higher prices for their products in January compared with December.
January hog and beef prices were up 5 percent and 3 percent, respectively, from
December. January poultry and egg prices were up 13 percent from a month earlier.
However, January dairy prices were down 1 percent. In response to higher wheat
prices, Montana farmers planted 21 percent more acres of winter wheat than last
year, despite continued drought conditions. Ranchers in the western part of
the District have reduced herds due to the drought and, therefore, a smaller
calf crop is expected this year.
Employment, Wages, and Prices
Several upcoming layoffs were announced since the last report. In Rochester,
Minn., a high-tech manufacturing company will lay off most of its 550 workers
by June. A financial services organization with headquarters in Minneapolis
just announced plans to lay off 500 employees companywide due to merger issues.
In North Dakota, a bus manufacturing plant will lay off up to 230 employees.
A credit card issuer recently announced plans to cut 100 jobs in Minnesota.
In several areas of the District, state and local government budget problems
may be addressed in part through job reductions. For example, more than 1,000
Minnesota state workers could be laid off by June 30. School Districts in the
Upper Peninsula of Michigan noted that reductions in state aid will likely result
In contrast, a health benefits company in Duluth, Minn., plans to hire another
60 to 70 employees over the next six months. A call center in South Dakota has
hired 160 people since the beginning of the year and plans to hire 175 more.
A telemarketing company that opened in South Dakota in February plans to hire
as many as 50 employees, and a call center in Billings, Mont., will add 50 jobs.
Wage increases were modest. About 75 percent of respondents to a recent survey
by the St. Cloud (Minn.) Area Quarterly Business Report indicated no change
in employee compensation during the last three months of 2002. In Eau Claire,
Wis., two large unions agreed to pay a portion of their health insurance premiums
in exchange for pay increases of 3.75 percent during each of the next two years.
Overall price increases were modest, except for significant increases in heating
costs, gasoline, and tuition. Only 10 percent of respondents to the St. Cloud
(Minn.) Area Quarterly Business Report poll raised product prices during the
last three months of 2002, while 16 percent decreased prices. Heating costs
may rise as much as 10 percent to 35 percent over a year ago in several areas
of the District due to colder weather and higher natural gas prices, according
to energy companies. Gasoline prices at pumps in Minnesota were about 50 percent
higher than a year ago. Tuition and fees at four-year public universities in
North Dakota were up 14 percent for this academic year.
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Tenth District--Kansas City
The Tenth District economy showed some signs of strengthening in late January
and February, despite widespread uncertainty among businesses and consumers.
Retail sales posted slight gains, manufacturing activity improved, and energy
activity picked up. In addition, residential real estate activity continued
at a strong pace. On the negative side, auto sales were weak and commercial
real estate remained in a slump. In the farm economy, many ranchers and farmers
continued to suffer from the effects of drought. Wage and price pressures remained
largely subdued across the District.
Retail sales in the District improved slightly in late January and February
after a sluggish holiday season. Sales were above year-ago levels at most stores
and flat or only slightly lower elsewhere. Many retailers attributed the recent
gains to heavy discounting. Among product categories, apparel and electronics
sold particularly well, while sales of some types of home furnishings were weak.
Most managers were optimistic about future activity after solid Valentine's
Day sales and expect some inventory building leading up to the Easter season.
Motor vehicle sales were flat after declining at the end of last year but were
only slightly below year-ago levels in most areas. Compared with contacts in
other industries, auto dealers appeared to be more adversely affected by uncertainty
over a possible war with Iraq. Still, most dealers expect solid sales by summer.
In the tourism industry, activity at Rocky Mountain ski resorts remained solid
after record numbers of visits during the holidays.
District manufacturing activity improved slightly in late January and February
after slipping in December. Production, shipments, and new orders at District
firms rose back above year-ago levels, and many firms reported small increases
in capacity utilization rates. However, new hiring and capital spending remained
weak, and inventories of raw materials fell. Firms appeared somewhat apprehensive
about activity in the immediate future, but their optimism about production
activity later in the year was quite high. Although manufacturing employment
is also expected to pick up by the summer, capital spending is not expected
to change much from current modest levels.
Real Estate and Construction
Residential real estate activity in the District remained strong in late January
and February, although commercial real estate activity weakened further. Single-family
housing starts throughout much of the District rose from already high levels.
Most of this strengthening continued to be for lower priced homes, but there
were also reports of increased construction of midrange homes in some areas.
High-end home building, on the other hand, largely remained in a slump. Most
builders expect home construction to remain solid in coming months, although
builders in some drought-stricken areas were concerned about the effects of
new water restrictions on permit applications. Home sales across the District
were also solid, though reports were not as uniformly strong for housing starts.
In the months ahead, most realtors expect sales to continue at the recent pace.
Mortgage demand remained strong throughout much of the District, as refinancing
activity continued at high levels. Nearly all recent refinancings have been
used to reduce monthly payments-a contrast from previous surveys, when a sizable
portion of refinancing activity was for the purpose of taking out cash. Lenders
generally expect mortgage demand to stay solid and to possibly increase further
in the spring. Commercial real estate activity remained weak across the District,
with some markets experiencing even further deterioration. Office vacancy rates
rose again in Denver, and commercial construction activity fell in nearly all
markets. Absorption and prices of office space were down slightly in most areas,
and many landlords were offering rent concessions to keep or attract tenants.
Commercial realtors generally do not expect a turnaround in activity any time
Bankers report that loans and deposits both held steady since the last survey,
leaving loan-deposit ratios unchanged. Demand increased for home mortgage loans
but edged down for consumer loans. Demand for other loan categories was largely
unchanged. On the deposit side, small increases in NOW accounts and money market
deposit accounts were offset by a slight decline in large CDs. All respondent
banks left their prime lending rates unchanged since the last survey, and most
banks also held their consumer lending rates steady. Lending standards were
District energy activity expanded in late January and February in response to
the rise in energy prices that began in mid-December. The count of active oil
and gas drilling rigs in the region has risen more than 30 percent since the
beginning of the year and is now well above the previous peak reached last summer.
Some District contacts expect further increases in natural gas drilling in the
Rocky Mountains in coming months, as new pipelines to areas east and to California
open in the spring and summer.
Much of the District's farm economy continues to face drought conditions. The
region's winter wheat crop has deteriorated since the previous survey, and timely
rains will be needed to help develop the crop and renew pastures. Despite the
drought, supplies of forage and feedstuffs have been adequate, but ranchers
in some areas have been forced to pay a premium. Livestock prices have moved
higher in recent months, improving profitability in the industry. Overall, District
bankers report few significant problems with their farm loan portfolios. However,
some highly leveraged borrowers will need to carry over or restructure their
Wages and Prices
Wage and price pressures remained generally subdued across the District. Labor
markets were still very slack, with little evidence of rising wages. Managers
reported few problems finding workers, although some retailers and manufacturers
expressed difficulties retaining quality hourly employees. The pace of layoff
announcements continued to decline from recent peaks last fall. Some retail
prices eased due to post-holiday discounting, although jewelry prices edged
up due to recent increases in the price of gold. Retailers generally expect
little change in prices in the near future. Prices for construction materials
were basically flat, but some builders expect lumber and gypsum wallboard prices
to increase in coming months. Manufacturers continued to report rising prices
of petroleum-based products, and several firms also reported surcharges from
suppliers due to increased transportation and insurance costs. At the same time,
many manufacturers continued to have difficulties passing cost increases through
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From early January through mid-February, overall Eleventh District economic
activity exhibited signs of inertia. Manufacturing activity remained lackluster.
Service sector activity was mixed, with signs of a pickup in some industries
and severe financial problems in others. Retail sales remain weak, and there
is still little change in the financial services industry. Construction and
real estate markets continued to decline. Energy activity picked up only mildly,
despite a sharp increase in prices. Overall agricultural conditions were good.
Geopolitical uncertainties still dampen consumer and business confidence. High
energy prices also weigh heavily on the outlook for some industries. Hiring
is minimal, according to contacts who say investments are on hold until questions
surrounding the war are resolved. Contacts report that concerns about terrorism
seem to be distracting attention from normal business.
Oil prices climbed sharply in recent weeks, pushed up by continued global uncertainties
in Iraq and Venezuela, along with freezing cold weather in the midwestern and
northeastern United States. The prices of heating oil and gasoline have followed
crude oil upward. Gasoline prices at the pump reached the highest February level
on record. High gasoline prices are expected to persist into the summer; refiners
would normally be building inventories of gasoline now but currently do not
have the crude available to do so.
Cold weather and rising crude oil prices also pushed natural gas prices upward.
Several waves of bitter weather have pulled natural gas inventories down 20
percent below year-earlier levels, and raised concerns about their adequacy
to deal with a late winter blast of cold weather. Propane prices have risen
along with natural gas--reaching the highest level in 13 years. Higher energy
prices have pushed up chemical and plastic prices. Healthy demand for housing
is driving price increases for chlorine and polyvinyl chloride (PVC).
Rising cost pressures--particularly from energy, shipping, and insurance--were
noted by most industries. A few firms were able to pass along price increases,
but international competition and overcapacity is making that difficult for
most manufacturers and retailers. Some contacts suggest that energy price increases
will be passed onto consumers if they persist. A few firms expressed concern
about how long they could operate if energy costs remain elevated.
Manufacturing activity remained lackluster overall. While there were some signs
of pickup in the high-tech industry, demand for construction-related materials
is waning. Import competition is reducing sales for some manufacturers.
Demand for fabricated metals was flat in January and February, and producers
were guarded about the outlook for activity over the next year. Sales of primary
metals picked up in January but then fell in February. Producers say that sales
are slower than a year ago. Metals producers reported some increases in selling
prices, partially passing along rising costs for scrap metal and reinforcing
steel. Producers of stone, clay, and glass were surprised by better-than-expected
demand over the past two months, but expressed increased uncertainty about the
outlook. Paper and lumber producers report soft sales during the same period,
partly because of import competition. Paper producers expect little change in
sales growth because international competitors are absorbing market share, especially
Demand for apparel products is up. Production of private label apparel is increasing,
according to contacts who say that selling prices continue to decline, even
as energy prices are pushing up production costs of petroleum based fabrics.
The high-tech industry reported a slight pickup in sales since the last survey.
One source of moderate improvement has been increasing orders from businesses
for replacement hardware such as routers, computers, and monitors. One respondent
noted that this might be the beginning of a replacement cycle; businesses remain
conservative, but after so little spending in the past couple of years, feel
the need to replace old equipment. Consumers continue to buy video and computer
gaming systems and products, and there has been a pickup in demand for high-definition
TVs and flash memory. Inventories remain very low. There is still too much capacity
in the telecommunications industry, although there has been some pickup in demand
for mobile phones and other consumer products. Contacts say the recent FCC decision
has delayed a potential stimulus for capital investment in the industry, dampening
the outlook for telecommunication equipment firms.
Refinery utilization on the Gulf Coast, which was running at about 95 percent
in early December, fell to the mid-80 percent level as Venezuelan crude oil
shipments were disrupted. Utilization improved slowly in early February. There
have been sharp reductions in both crude and product inventories, with crude
inventories 25 percent below last year and near critical levels needed to maintain
normal operation of the refinery system.
Demand for petrochemicals has been generally weak over the past two months,
but is still up 5 percent to 6 percent above last year. One exception is PVC,
where demand has been very strong to supply the housing market and Asia.
Some service firms report a pickup in activity while others fight for survival.
Temporary staffing firms reported a pickup in demand over the last two months.
Activity is strongest to supply administrative support, light industrial, and
some professional and technical areas. Salaries are down from the levels of
a year ago. Rail shipments are up over last year, with substantial increases
in the shipments of metallic ores and metals.
Demand for legal services remains steady, particularly for litigation, bankruptcy,
labor, and regulatory work. Real estate and lending activity are still quiet,
but there are some signs of a pickup for transactional and venture capital activity.
Legal contacts say activity will remain flat to moderate until corporate confidence
improves. Demand for accounting and consulting activity remains solid, partly
because firms continue to benefit from the Anderson fallout. The Sarbanes-Oxley
bill is boosting demand for risk management and audit work.
Many small businesses are struggling, particularly those that supply the high-tech
industry, and contacts say there is a huge shake out going on. One company is
requiring cash up front for new business because they have depleted all reserves.
This firm said they are reinventing their company regularly to find new ways
to support their customers.
The airline industry remains in a tailspin. Demand for air travel continues
to be extremely price sensitive, and already strapped carriers are having difficulty
passing higher fuel costs on to passengers. The snowstorm on the East Coast
added another financial blow. A significant drop in aircraft values has tightened
the availability of credit for airlines.
Retail sales continued to be weak. Although the District did not have the weather-related
disruptions that occurred in other parts of the country, retailers were still
generally disappointed with sales. Consumer confidence remains low, they say,
and retailers are being cautious about the outlook. Contacts said that retailers
are not increasing inventories and are looking for other cost-cutting measures
to keep as much cash--and as much flexibility--as possible moving forward. Auto
sales are down from a year ago. Dealers say that many potential buyers do not
have good credit and others are waiting to buy due to geopolitical and economic
uncertainty. Large rebates and low interest rate offers seem to be having less
of an impact than they once did.
Overall lending activity continues to be stable. Real estate lending remains
the strongest category, mostly for refinancing. Auto lending has dropped off
since January. A few contacts reported that the quality of new loan applications
has declined a bit, and there were some indications of tighter credit standards
in the C&I area. Deposit growth remains strong.
Construction and Real Estate
Construction and real estate conditions continued to decline. Commercial markets
are weak. Building acquisitions continue, but leasing activity is very soft,
and rents are falling. Office landlords are offering numerous incentives to
keep tenants and to get them to take more space. Vacancies are rising, and one
contact noted that owners are obtaining reappraisals when vacancies occur, reducing
their tax liability. Single family activity remains soft, with numerous foreclosures,
particularly in the Dallas-Fort Worth area. Although activity is still moderately
strong in the market's low end, several contacts mentioned a lack of "urgency"
among buyers. Builders report an increase in incentives and downward pressure
on home prices.
The domestic rig count moved over 900 for the first time since late 2001, which
contacts say is a nice increase but not a discernable trend. The energy industry
is not responding to much stronger prices because they view the increases as
temporary and lack the trained workers to respond right away. The additional
domestic projects are not very complex--oil-directed, vertical wells and on-shore.
Oil service and equipment companies report that these simple drilling projects
have not yet resulted in a perceptible increase in orders. The pickup in domestic
activity is not offsetting a decline in international drilling.
Regular precipitation across the District has helped conditions overall. The
livestock market conditions remain favorable. Grain prices are still low, and
cattle prices are up 37 percent from last fall. Texas reported record cotton
yields for 2002, up 10 percent over 2001. Rice production continues to decline,
however, and contacts say "even the most efficient" dairies are doing poorly.
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Twelfth District--San Francisco
Reports from Twelfth District contacts indicate continued sluggish economic
growth in much of the region during January and early February. While prices
remained stable for most consumer goods and services, prices for energy and
health care increased substantially. In labor markets, firms faced limited upward
pressure on wages and salaries but noted continued rapid increases in costs
for employee benefits. Many respondents pointed to uncertainties, due in part
to geopolitical risks, as having negatively affected both consumer and business
spending. Consumers appeared more cautious concerning expenditures on vehicles
and travel. Conditions in District manufacturing generally remained weak with
limited signs of improvement. The agricultural sector benefited from improved
exports and oil and natural gas producers operated at high levels of capacity.
Contacts reported continued strength in residential real estate, while commercial
real estate remained weak. Bank lending continued recent patterns of rapid growth
in residential mortgage loans and weak demand for business credit.
Prices and Wages
Respondents in the District reported that consumer prices generally remained
stable in recent weeks. Notable exceptions were energy prices, reflecting jumps
in fuel costs, and rapid increases in health-care prices. Contacts noted that
retailers had very little pricing power in the face of the slow economy, extensive
discounting was common among retailers and automakers.
Persistent weak demand and ample supply in labor markets continued to damp
wage and salary pressures in the District in recent weeks. Contacts characterized
wages as flat or up modestly. However, health care and other benefits expenses
continued to increase rapidly.
Retail Trade and Services
District respondents reported that the generally sluggish economy and uncertainties
related to possible military action in Iraq contributed to lackluster performance
in the retail sector during the most recent survey period. Sales of new and
used vehicles slowed in January and early February, both relative to December
and to a year earlier. Automobile dealers noted that, with the rise in gasoline
prices, inventories of SUVs and light trucks rose in several markets. Indicative
of more general weakness in retail, sales of apparel reportedly were flat.
District respondents reported continued weak demand for many services in January
and early February. Demand for accounting and legal services remained soft in
parts of the District; in California, a large law firm catering to the technology
sector closed. Transportation providers faced higher costs from rising fuel
prices and uncertain future demand associated with a potential war in Iraq.
Conditions in District travel and tourism were mixed. In Hawaii, for example,
both domestic and international tourism continued to improve; however, the improvement
was below expectations and the level of international tourism still has not
recovered fully after slumping in 2001. Looking forward, District travel and
hospitality industry contacts indicated that adverse effects on tourism from
a potential war would more than offset any positive effects associated with
the weakening value of the dollar in the foreign exchange market.
Conditions in manufacturing generally remain weak in the District, with respondents
noting limited improvement in January and early February. Demand conditions
remained relatively stable in biotech industries, while weakness persisted in
telecommunications. Respondents noted that semiconductor sales were flat to
up modestly and inventories rose slightly. Capacity utilization in parts of
the high-tech sector improved; utilization rates reportedly were high and, in
some cases, capacity is being expanded for cutting edge technologies. Overall,
however, District firms remain cautious about spending. District contacts reported
that manufacturers, especially those facing rising energy costs and uncertainties
related to a potential war, have postponed spending and investment decisions.
Contacts also cited disruptions to businesses from the call-up of military reservists.
However, several contacts noted that defense contractors in Southern California
and other areas of the District would benefit from the federal government's
increased spending on defense and homeland security. Several respondents reported
that the fall in the value of the dollar over the past year has positioned District
manufacturers to compete more effectively against foreign firms in the months
Agriculture and Resource-related Industries
The agricultural sector, on balance, benefited from increased exports, while
the oil and natural gas extraction sector was marked by high capacity utilization
and rising prices. Prices for specialty farm products have been mixed in recent
weeks. Prices for raisin grapes fell considerably, while prices for certain
nut crops were higher than they were a year ago. Respondents noted that the
depreciation of the dollar contributed to higher export volumes for a variety
of agricultural products, notably nut crops and beef. High levels of capacity
utilization and reduced inventories in oil and natural gas production continued
to put upward pressure on energy prices. Ongoing and potential disruptions of
foreign energy supplies also affected energy prices.
Real Estate and Construction
Overall conditions in District real estate remained mixed, with commercial real
estate markets still in a serious slump and residential markets still showing
strength in recent weeks. Commercial office vacancy rates remained high and
continued to edge up as leases expired. Rental rates fell, most notably in the
San Francisco Bay Area, and new office construction is not expected to pick
up for some time.
In contrast, contacts indicated that residential housing markets across much
of the District remained robust in January and early February. Sales of low-to-median
priced homes remained high in most of the District, especially in Southern California
and Hawaii, although the pace of sales and of price appreciation has moderated
in some areas. Throughout the District, contacts noted that markets for high-end
homes had cooled off. Respondents attributed continued strength in overall home
sales primarily to low mortgage interest rates.
District banking industry respondents noted strong performance among community
banks in January and early February, with most depicting asset quality as remaining
good. Residential mortgage loan growth rates continued to climb. Home mortgage
refinancing activity was very brisk, though some lenders reported the pace of
applications fell short of the pace of loan closings. Business lending remained
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