September 3, 2008
Summary of Commentary on
Prepared at the Federal Reserve Bank of Philadelphia and based on information collected on or before August 25, 2008. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicate that the pace of economic activity has been slow in most Districts. Many described business conditions as "weak," "soft," or "subdued." Cleveland and St. Louis reported some weakening since their last reports while Boston and New York noted signs of stabilization. Kansas City reported a slight improvement.
Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending. Districts reporting on auto sales described them as falling or steady at low levels. Tourism activity was mixed but received support from international visitors in several Districts, and the demand for services eased in most Districts. The transportation industry was also adversely affected by rising fuel costs. Manufacturing activity declined in most Districts but improved somewhat in Minneapolis and Kansas City. Most Districts reported that residential real estate markets remained soft. Commercial real estate activity was slow in most Districts, and some reported further slackening in demand for office and retail space. Most Districts reported easing loan demand, especially for residential mortgages and consumer loans; lending to businesses was mixed. Districts reporting on the agricultural sector noted some relief from drought conditions. Districts reporting on energy and mining activity recorded increased activity.
Almost all Districts continued to report price pressures from elevated costs of energy, food, and other commodities, although some noted that there have been declines or slower increases in prices for several industrial commodities and energy products. Business contacts in a number of Districts indicated that they had increased selling prices in response to the high costs for their inputs. Wage pressures were characterized as moderate by most Districts amid a general pullback in hiring, although several Districts noted continued strong demand for workers in the energy sector.
Consumer Spending and Tourism
Tourism activity varied across Districts. Atlanta, Minneapolis, and Kansas City reported mixed or steady conditions since the last report. Boston, New York, and Richmond reported improvement since the last report. San Francisco reported that tourism was flat to down in most major destinations in that District, significantly so in Hawaii. International visitors boosted tourism in Boston, New York, and Minneapolis. In contrast, several Districts noted that domestic vacationers appeared to be reducing miles traveled and amounts spent on trips. Boston reported that business travel has been better than expected.
Real Estate and Construction
Commercial real estate activity moved down or remained weak in all Districts except Dallas. Boston, New York, Philadelphia, Atlanta, and Chicago reported signs of softening demand for commercial real estate, including declining leasing activity, rising vacancies, and decreasing construction. Cleveland, Richmond, St. Louis, Minneapolis, Kansas City, and San Francisco reported that commercial real estate market conditions varied across those Districts but in general were not strong. Dallas reported an increase in office leasing but at a slower pace than in the last report. Chicago and Minneapolis noted drops in demand for retail space. Dallas and San Francisco reported that public projects were buoying construction activity.
Banking and Finance
Agriculture and Natural Resources
Energy and mining activity were strong and expanding in all of the Districts that reported on these sectors. Cleveland noted increases in oil, gas, and coal extraction since the last report. Minneapolis also reported an increase in energy activity and indicated that almost all mines in the District were operating at full capacity. Drilling activity has increased in the Kansas City District since the last report and was well above the year-ago level. Dallas reported a continued rise in the rig count, to levels above last year, with much of the increase due to drilling for natural gas. San Francisco noted an increase in petroleum production.
Prices and Wages
Labor market conditions were unchanged or somewhat softer in most Districts compared with the last report. Wage increases were typically characterized as moderate. Boston reported mostly modest wage increases except for greater hikes in salaries at information technology companies. Philadelphia reported moderate wage gains and limited hiring. Cleveland noted wage pressures in the energy sector but not in manufacturing or construction. Atlanta received scattered reports of wage increases, mainly in the professional services and the energy sectors, and more generally in coastal areas undergoing rebuilding after storm damage. Chicago indicated that labor markets have weakened and there was little wage pressure other than for a few skilled trades. Kansas City reported steady wage pressure but noted that there were shortages of qualified workers in the energy sector. Dallas also noted shortages of workers in the energy sector but indicated that wage pressure was mild overall. San Francisco reported some easing in upward wage pressure as firms in that District have been reducing staff counts, although demand remained strong for skilled workers in the resource extraction and information technology industries.
Business contacts in the First District report little further deterioration in the pace of activity in the second quarter or recent months compared with the last report, although actual results are quite mixed. Retailers--partly because many respondents this time are discounters--say their sales are increasing, and so do software and information technology firms, but real estate markets in the region remain very slow and most responding manufacturers indicate unit sales or orders are down compared with last year. Manufacturers report ongoing hikes in their selling prices. According to most respondents, the near-term outlook is for "more of the same" or further slowing, with some signs of improvement expected in 2009.
Retail and Tourism
Inventory levels and headcounts continue to be tightly managed across the First District. Capital spending reports are mixed, with some retail contacts modestly pulling back spending and others continuing their capital spending as planned. Most respondents are still coping with the effects of high oil prices, but one notes that these cost pressures have abated somewhat.
Tourism in the Boston area has been "surprisingly good." While room rates are softening, tourism is up year-over-year; museums and area attractions report significant growth in visitors. Business and international travel both remain strong.
Overall, most contacted First District retailers are cautiously optimistic in their outlook, even though they expect the next few months to be a continued challenge.
Manufacturing and Related Services
Three-quarters of contacted manufacturers reportedly face rising input costs and point to fuel and energy, petrochemical, and rolled steel prices in particular. A few firms note with relief that oil prices have subsided and that natural gas prices are little changed from year-ago levels. In response to input cost pressures, two-thirds of the contacted firms say that they have raised their selling prices from 2007 levels by from 3 percent to 8 percent; a minority have posted two prices increases in 2008 and are planning a third. Most firms find that "everyone" understands the need for these price hikes; thus, contacts are usually able to pass at least half of their increased material costs on to their customers. By exception, contacts in the IT industry report that selling prices are generally stable.
Two-thirds of manufacturing contacts have reduced their workforce--generally modestly--from year-ago levels. No firm expects to increase its head count; a minority plan further cuts or a hiring freeze, while a few await third and fourth quarter numbers to determine the need for further layoffs. Still, scientists, engineers, and other skilled labor reportedly remain hard to find. Wage increases for 2008 or planned for 2009 are generally 3 percent to 4 percent, but two firms have delayed or asked some workers to forego raises. Others are tightening their grip on merit increases or finding ways to cut benefits costs. While a few contacts note increased complaints from workers facing high gas and food prices, none has responded to these wage pressures; most of this group believes their staff understands that the firm cannot "make them whole."
Manufacturers generally expect their capital spending to remain on budget at or above 2007 levels, but a few are taking a harder look at discretionary spending. None of these firms suggests that financial market distress is affecting its investment spending. Only one is seeking more credit than it has been able to negotiate to date.
Looking to 2009, half the manufacturers are "cautiously optimistic" or believe that the next 18 months could turn out "OK." The other half are "anxious and concerned" and view the economic environment as "challenging" and "volatile." They expect it will take several quarters to resolve problems emanating from the housing, energy, and financial markets.
Software and Information Technology Services
Commercial Real Estate
Building sales continue to be down sharply relative to last year, due to ongoing credit tightness and significant gaps between asking prices and bids. Capitalization rates are expected to continue to rise in response to increases in long-term interest rates, so downward price pressure will continue and default risks will continue to rise. Against these trends, a small banking contact in Boston states that his bank continues to enjoy a higher-than-usual deal volume, typically involving the refinancing of well-stabilized properties. To meet the above-normal demand for its loans, the bank has sought out new deposits by offering higher rates on CDs, with considerable success.
The outlook remains downbeat and some contacts say it has worsened. One commercial broker, for example, pushed back his forecast of when the market will begin to improve to the second half of 2009. Contacts expect overall leasing and sales activity to remain slow for a while, and express uncertainty as to whether fundamentals will deteriorate further, or simply stagnate, before recovering.
Residential Real Estate
Median home prices in Massachusetts, New Hampshire, and Connecticut declined 8 percent year-over-year in the most recent period, while median condo prices in Massachusetts stayed flat. Median home prices decreased year-over-year in June by 6 percent in Maine and by 14 percent in Rhode Island. Home price declines are said to partly reflect increases in foreclosure-related "distress" sales.
The number of months of supply is generally higher in New England markets than it was last summer, but it has decreased from its peak earlier this year. One exception is Massachusetts, where contacts report a decrease in listings of houses and condos in response to falling prices that has made the market more balanced, even though sales have declined since last year. Several contacts are optimistic that the housing bill recently passed in Congress will have positive effects on New England markets.
Second District--New York
The Second District's economy has shown signs of stabilizing since the last report, though not in all sectors. Manufacturers report that business activity has steadied in recent weeks, after weakening for a number of months, and factories continue to report fairly widespread increases in both input costs and selling prices. Contacts at non-manufacturing firms generally also report some stabilization in business conditions but continue to indicate modest declines in employment. Consumer confidence was reported to be at record lows in July. Still, retail sales remained on or close to plan in July and early August, and were up slightly from a year earlier; moreover, tourism activity in New York City has firmed. Housing markets have been mixed but generally softer, and office markets have slackened. Finally, bankers report weakening demand for both residential and commercial mortgages, widespread declines in refinancing activity, continued tightening in credit standards, and increasing delinquency rates on home mortgages.
Tourism activity in New York City has strengthened in recent weeks. Manhattan's hotel occupancy rate remained near 90 percent in July, which is typically a relatively slow month; room rates were up roughly 10 percent from a year ago, compared with 8 percent in June and 6 percent in May; preliminary indications for August suggest continued strength. An industry contact attributes the strength primarily to large numbers of overseas visitors. Broadway theaters report that business has improved moderately since the last report. Both attendance and revenues are reported to have risen by 1 to 2 percent from a year ago in July and by 3 percent in the first half of August. Average ticket prices have remained essentially flat.
Construction and Real Estate
On a more positive note, a contact monitoring New Jersey's housing industry reports that the resale market has shown signs of stabilizing, though at a weak level, especially for single-family homes. Inventories of unsold existing homes have declined in northern New Jersey, as many discretionary sellers have taken their homes off the market and other sellers have become more negotiable. Both prices and sales volume have leveled off, though they remain lower than a year ago. Concerns over foreclosures are noted, though their absolute number is described as relatively low.
While single-family construction remains at low levels, multi-family activity has remained fairly brisk. In New York City, multi-family building permits ballooned in June, in advance of a change in building codes that took effect July 1. The number of multi-family units authorized increased more than four-fold in June from a year earlier--surging from just under 4,000 to slightly over 17,000. Overall, multi-family permits were 63 percent higher for the first half of 2008 than in the first half of 2007. In urban areas of northern New Jersey proximate to New York City, multi-family re-development is reported to be persistently robust and above comparable 2007 levels.
Commercial real estate markets in the New York City area have shown signs of weakening. In Manhattan, office vacancy rates were little changed from June to July, but were up nearly 2 percentage points from a year earlier; moreover, leasing activity is reported to be running well below comparable 2007 levels. An industry contact maintains that firms with upcoming lease expirations are increasingly inclined to hold off on leasing, reflecting some anticipation that rents could move down from current levels. Asking rents in Manhattan have leveled off, though they are still up by roughly 6 to 8 percent from a year ago; however, a major brokerage firm estimates that actual (effective) rents are lower than a year ago, by roughly 5 percent. Suburban office markets are mixed: Northern New Jersey's market is reported to be increasingly slack, while markets are described as stable in Westchester and Fairfield Counties, and slightly softer in Long Island. Finally, a contact in Manhattan's hospitality industry notes some pickup in interest, among developers, in new hotel projects.
Other Business Activity
In general, non-manufacturing firms in the District generally report that business activity has stabilized, after deteriorating for a number of months. Respondents continue to report flat to declining employment levels at their firms, but expect them to remain steady over the next three to six months. Among these contacts, finding qualified workers remains a major concern. Non-manufacturing firms report continued price pressures, but a somewhat smaller proportion than last month expect to raise their selling prices in the months ahead. A trucking-industry contact reports little change in conditions since the last report--truckers continue to be hampered by high diesel fuel costs and weaker demand.
Business conditions in the Third District remained soft in August. Manufacturers, on balance, reported nearly steady shipments but a drop in new orders. Retailers posted mixed sales results, with year-over-year increases at some discount stores but decreases at most other types of stores. Motor vehicle sales were about flat during the month but well below the level of a year ago. Bank lending continued to grow slowly. Residential real estate sales and construction activity continued to be sluggish. Commercial real estate leasing and construction activity remained slow. Reports of increases in input costs and output prices were about as prevalent in August as they were in July.
The outlook among Third District businesses is mixed. Manufacturers forecast increases in shipments and orders during the next six months. Retailers generally expect consumer demand to be restrained for the balance of the year, and auto dealers expect slow sales to persist into next year. Bankers anticipate slow growth in overall lending. Residential real estate agents and home builders have varying opinions on how much further home sales will fall, although most agree that a rebound is not likely until next year. Contacts in commercial real estate expect leasing and construction activity to remain soft until financial conditions improve.
Auto dealers in the region reported a near steady pace of sales in August but at a level far below sales in August of last year. Many dealerships were being closed or consolidated. Supplies of small cars continued to fall short of demand, according to dealers, but they said overall demand for vehicles was weak and total sales were unlikely to rise much even if the more popular small cars were available. Dealers expect sales to remain slow into next year, and they anticipate more dealerships will close as well.
Real Estate and Construction
Commercial real estate firms indicated that construction and leasing activity continued to be very slow in August. Office markets have softened as tenants have reduced their space needs by vacating buildings as leases have expired or by offering currently leased space for subleasing. Commercial agents noted that demand for industrial and retail space has declined recently; however, they indicated that the pace of new development has slowed, helping to limit the increase in vacancies. Although several new construction projects have been announced in the region, no start dates have been set, and as one contact noted, "with tight financing conditions it is likely these projects will not commence construction in the immediate future."
Prices and Wages
Economic activity in the Fourth District has weakened somewhat since mid-July. Factory output was largely stable, though auto production declined. Residential construction remains weak, with no improvement expected going into 2009. Most commercial builders told us that business is steady; however, a growing number of them reported a decline in inquiries. Sales by District retailers showed a small improvement during July. Demand for business loans was relatively stable, while lending to households was flat to declining. Energy production was steady to increasing. And the market for freight transport services has softened.
Employment levels were largely unchanged and wage pressures were limited to energy producers. Staffing firms saw a small increase in the number of job openings and job seekers. Job vacancies were greatest in health care and high-skilled manufacturing. Accounts of rising input prices, especially for metals and petroleum-based products, were widespread. However, we heard a few reports that the rate of increase in commodity prices is moderating.
Capital spending remains on plan, with almost half of our respondents saying that they plan to raise spending in the upcoming months. Although credit remains available, we heard several accounts of borrowers seeing more stringent terms and higher interest payments. Most manufacturers reported continuing price increases for raw materials, especially steel, petroleum-based products, and processed food ingredients. In response, half of them raised their product prices recently. Looking forward, expectations call for inflationary pressures to continue. However, only a third of our respondents said that they would consider additional price increases in the near future. On net, employment levels and wages at District factories have been stable, with little hiring anticipated in the near future.
Most commercial contractors told us that business conditions have been holding steady during the past six weeks. Although backlogs remain relatively strong, inquiries have declined. Nearly all of our contacts expect a small downturn in business in 2009. Several contractors commented that banks continue to tighten credit standards, nonetheless, financing is available. Contract pricing remains fairly stable, and the rapid rise in steel and fuel prices is beginning to abate. Workforce levels were largely unchanged, and little wage pressure was reported.
Economic activity in the Fifth District remained weak in late July and August. Retail sales were soft despite recent tax holidays and rebates; a few auto dealers reported low but nearly steady sales. Similarly, service sector firms reported mostly sluggish demand with little or no revenue growth, while temporary employment agencies noted mixed conditions. Residential real estate sales remained weak across most markets, resulting in low home mortgage demand. Commercial real estate activity was generally softer. Manufacturing activity declined further amid feeble domestic sales that were not fully offset by increased exports. Tourism was a bright spot, with contacts in both coastal and mountain resort areas noting increased bookings since our last report.
Exports at Fifth District ports remained substantially above year-ago levels in recent weeks. Port officials noted particularly strong outbound activity for grains and paper products, although one contact reported a slowdown in automobile exports. Import levels generally remained steady, although several respondents noted a "big drop" in inbound furniture shipments. Fuel surcharges stabilized somewhat in late July and August, and one port contact anticipated that "they'll hold for awhile."
Commercial loan activity softened a bit in recent weeks as somewhat weaker demand combined with tighter loan standards. A lender in Charlotte, N.C., described activity as generally "healthy, although moderating in growth," while a Washington, D.C., contact said that activity in his market was "continuing to slow." Lenders tightened credit standards further and several noted more "laborious" underwriting and stricter adherence to policies and guidelines. Respondents also reported some deterioration in borrowers' credit quality. In addition, several contacts said that long-standing customers of some banks were being turned down and were shopping around at other institutions.
Commercial real estate conditions varied across the District. Leasing activity slowed in Richmond, Va., Columbia, S.C., and the outlying areas of Washington, D.C., picked up slightly in Charleston, W.Va., and Greensboro, N.C., and remained flat in Raleigh, N.C., and Baltimore, Md. Office vacancy rates were "creeping up" in northern Virginia and Richmond, Va., but were generally unchanged elsewhere. Agents in Baltimore, Md., Washington, D.C., Richmond, Va., and Raleigh, N.C., reported steady rental rates, but an increase in concessions. Only a handful of new construction projects were announced in recent weeks, and all were small and/or entirely pre-leased. While respondents continued to report that obtaining financing from larger banks was challenging, several noted that community banks remained more active in lending.
Reports from contacts for July and August continued to describe weak levels of economic activity throughout the Sixth District. Retailers reported that sales were below expectations while inventories were higher than a year earlier. Both commercial and residential construction activity was weak. Most manufacturers reported lower production levels along with higher input prices. District banks continued to note tighter lending standards. Food, energy, and raw materials prices were elevated, but wage costs were not rising in most parts of the District.
Consumer Spending and Tourism
Real Estate and Construction
The majority of reports from commercial contractors noted declines in construction activity on a year-over-year basis. Weakness remained most pronounced in Florida. Vacancy rates among all commercial property types continued to rise in most parts of the District. Overall, commercial contractors anticipate development activity will remain restrained at least through the first quarter of 2009.
Manufacturing and Transportation
Freight demand was weaker than a year earlier, according to contacts. Regional rail activity was down from year-earlier levels as shipments of automotive and construction materials continued to drop, offsetting some gains in coal, minerals, and farm product shipments. Inter-modal shipments were also lower than year-earlier levels.
Banking and Finance
Employment and Prices
District businesses continued to note higher input prices mostly tied to higher energy costs, although increases in the prices of metals, food and fertilizers were also noted. Higher fuel prices continued to have a negative effect on the profitability of regional freight and passenger transportation firms. There were increased instances of businesses passing on higher costs to consumers. However, there was skepticism about the ability to sustain the rate of pass through in the future because of weakening demand conditions.
Economic activity in the Seventh District remained sluggish in July and August. Consumer spending was flat and labor market conditions weakened. Residential construction declined and nonresidential construction showed further signs of slowing. Manufacturing activity was steady. Consumer lending was little changed, while there was some growth in business lending. Cost pressures from material and energy prices remained elevated, while wage pressures continued to be low. The condition of corn and soybean crops improved.
Construction and Real Estate
Banking and Finance
Prices and Costs
Eighth District--St. Louis
Overall economic conditions in the Eighth District have softened since our previous report. Contacts noted declining activity in services and manufacturing. Compared with a year ago, retail sales were flat in July and the first half of August, while auto sales declined. Home sales and construction continued to decline throughout the District, while commercial real estate reports were mixed. Overall lending activity at a sample of District banks declined during the three-month period ending in July.
On average, car dealers in the District reported that sales in July and the first half of August were down compared with last year. About 80 percent of the car dealers surveyed reported a decrease in sales, while 8 percent reported an increase. About 64 percent of contacts reported more rejections of finance applications. About 39 percent of the car dealers surveyed reported that inventories were too high (mostly trucks, sports cars, and less-fuel-efficient cars), while 17 percent reported that inventories were too low (mostly used cars and fuel-efficient cars). About 71 percent of the car dealers expect sales to decrease over 2007 levels in September and October, 17 percent expect sales to increase, and 12 percent expect sales to be the same.
Manufacturing and Other Business Activity
Activity in the District's service sector has softened in most areas since our previous report. Contacts in the transportation and warehousing industries reported plans to expand operations, build new distribution centers, and hire additional workers in the District. Firms in the business support services also announced plans to hire additional workers. In contrast, and to a greater extent, firms in the information, health care and social assistance, warehousing and storage, education, architectural, and business support services industries announced plans to lay off workers. Firms in the information and health care services sectors announced plans to consolidate operations within the District.
Real Estate and Construction
Commercial real estate market conditions varied across the District. The 2008 second-quarter industrial vacancy rate decreased compared with the first quarter rate in St. Louis, Louisville, Little Rock, and Memphis. During the same period, the suburban office vacancy rate decreased in St. Louis and Little Rock but increased in Louisville and Memphis. The downtown office vacancy rate decreased in Louisville and Memphis and increased in St. Louis and Little Rock. A contact in northeast Arkansas reported that commercial building was slow. Commercial contracting contacts in Louisville reported that a satisfactory number of projects are in the pipeline.
Banking and Finance
Agriculture and Natural Resources
Ninth District economic activity was stagnant since the last report. Decreased activity was noted in consumer spending and services, while residential construction and real estate remained slow. Tourism and commercial real estate and construction were mixed. Increases in activity were noted in manufacturing, energy, mining and agriculture. Labor markets loosened somewhat since the last report. Wages increased moderately, while prices for many commodities and energy have decreased since mid July, but remain at relatively high levels.
Consumer Spending and Tourism
Tourism activity was mixed. Tourism activity in the Upper Peninsula of Michigan was soft in July, but August was fairly strong, according to an official. A tourism official in Montana noted that summer activity is on a par with last year; however, tourists are spending less on souvenirs and retail. The number of visitors stopping at tourism information centers was down during July in South Dakota compared with a year ago, but there was a substantial increase in the number of Canadians and other international travelers. A number of contacts observed that people were vacationing, but staying closer to home to save on fuel costs.
Construction and Real Estate
Commercial real estate activity was mixed. A Minneapolis-St. Paul commercial real estate firm reported that so far this year, the industrial market has been strong, while the office market has been mainly flat and retail has worsened. Contacts in other District cities also reported slow demand for retail space. Residential real estate remained slow. Second-quarter home sales in central Minnesota were down 14 percent from a year earlier. The western Montana home market has cooled slightly from last year, but is performing well relative to most other areas. July pending sales in Minneapolis-St. Paul increased 6 percent from a year ago.
Energy and Mining
Employment, Wages and Prices
Wage increases were moderate. Miners and support staff at a Montana mine approved a four-year contract that includes pay raises of 4 percent annually, similar to the previous contract. However, a Montana bank director noted that in the northwestern part of the state, wage increases for management positions were accelerating.
Prices for many commodities and energy have decreased since mid July, but remain at relatively high levels. Several metal and grain prices, including aluminum, copper, lead, corn and soybeans, decreased significantly. Minnesota gasoline prices were 38 cents per gallon lower in mid-August than in mid-July; however, they were 68 cents higher than a year ago. Some school districts have moved to a four-day week in order to reduce fuel and energy costs. A bank director noted that medical insurance prices increased 7 percent this year, while health care costs to businesses increased only 5 percent due to benefit reductions and product shifts.
Tenth District--Kansas City
Economic growth in the Tenth District improved slightly in late July and early August. Retail and restaurant sales rose, although auto sales remained weak. Manufacturing activity rebounded after weakening in early summer, and expectations for the next six months were positive. Residential real estate sales experienced a modest improvement, but sales volume and home prices remained well below year-ago levels. Commercial real estate activity held steady despite many contacts reporting an additional tightening of credit, but bankers reported a slight reduction in overall loan demand. Energy activity remained robust, and agricultural conditions were favorable. Labor markets softened, but some firms continued to report labor shortages. Wage pressures were largely unchanged, and most firms did not expect future wage increases. Additional gains in raw materials prices resulted in higher prices for finished products.
Consumer Spending Consumer spending was mixed in late July and early August, with retail and restaurant sales up while auto sales remained down. Although traffic and spending at malls weakened, other store managers reported that retail sales strengthened compared with the previous survey period and were in line with year-ago levels. Restaurant sales climbed while menu prices stabilized. Auto dealers continued to report sluggish sales, with large truck and SUV sales particularly lethargic. Auto industry respondents indicated that tightened credit conditions persisted. Tourism activity was flat since the last survey. Several contacts reported that consumers were traveling less and staying closer to home for vacations. Air travel remained slightly higher than year-ago levels, and hotel occupancy rates were stable but below expectations. Room prices continued to increase.
Manufacturing Manufacturing activity rebounded after weakening in June. Production levels and new orders increased considerably, especially for non-durable goods. Expectations for the next six months were also much stronger than in previous surveys. Export demand continued to be strong. Capital spending remained well above year-ago levels, and manufacturers anticipated high capital spending levels to persist. Manufacturers expressed concern over soaring raw material prices driven by elevated fuel and energy prices. Respondents reported that higher input prices were increasingly being passed through to final product prices.
Real Estate and Construction The Tenth District residential real estate market was mixed in late July and early August with sales strengthening slightly and prices continuing to fall. Residential sales improved modestly since the last survey period, but still remained well below year-ago levels. While sales of lower-priced homes and foreclosures increased, respondents commented that demand for higher-priced homes was weak. Home prices decreased in the current survey period and were anticipated to decline further in the next three months. Inventories of residential homes stabilized during the current survey period. Commercial real estate activity was unchanged since the last survey, and remained slow. Vacancy and absorption rates held steady, but sales were down slightly. Contacts reported modest increases in rental rates and prices. Survey respondents indicated that credit had tightened further and was a major constraint to current and future activity.
BankingBankers reported tighter credit standards and weaker loan demand than in the previous survey. Demand for commercial and industrial loans and commercial real estate loans fell appreciably, and demand for consumer installment loans and residential real estate loans declined modestly. As in the previous survey, half of respondents reported tighter credit standards for commercial real estate loans, while a quarter reported tighter standards for commercial and industrial loans. A few banks reported tighter standards for residential real estate and consumer installment loans. Assessments of current loan quality were little changed from the previous survey, but banks were somewhat more pessimistic about future loan quality. Bank deposits increased, and a couple of respondents noted that depositors were paying more attention to the financial soundness of banks in deciding where to place their funds.
EnergyDistrict energy activity remained robust in the current survey period. Drilling activity accelerated compared to the previous survey and was well above year-ago levels. Expectations for drilling activity remained strong, even as oil and gas prices fell from record levels to lower but still profitable levels. The number of active drilling rigs in the District was flat. Respondents continued to report easy access to credit, but the availability of qualified workers and equipment constrained drilling activity for some firms. Profit margins at bio-fuel firms improved with lower crop prices.
AgricultureAgricultural conditions remained favorable in late July and August. Wheat yields were reported larger than normal in Kansas, Nebraska, and Oklahoma, though dry weather limited production and yields in Colorado. Despite lagging crop development due to delayed planting, rising expectations for bumper corn and soybean harvests contributed to lower prices in recent weeks. Dry pasture conditions in parts of Colorado, Kansas, and Oklahoma prompted supplemental feeding for cattle with a few reports of herd liquidations. Farm credit conditions showed some sign of deterioration as the number of loan renewals and extensions increased and the rate of loan repayments slowed. High input costs trimmed farm income expectations, boosted loan demand, curbed capital spending plans, and limited farmland value gains.
Wages and Prices Price pressures continued to increase in late July and early August, but wage pressures remained steady. Prices of final manufactured products rose further as District factories faced surging raw material prices and fuel surcharges. Some retailers reported higher prices in the current survey period, but most expected prices to stabilize over the next three months. Restaurant contacts indicated that menu prices were flat despite increased food costs. Some contacts continued to report labor shortages, but wage pressures remained largely unchanged. Most respondents did not expect to raise wages in the next three months. However, a number of firms were instituting more flexible work schedules or shorter work weeks to alleviate employee concerns with high gasoline prices. District layoff announcements exceeded hiring announcements in July, but hiring announcements rebounded in August with net hiring gains erasing July's losses.
The Eleventh District economy expanded modestly in late July and August. Economic conditions were slightly softer than reported in the last survey. Despite weakness in some sectors, businesses with national sales say demand remains better in Texas than elsewhere in the country. Most contacts said higher costs continue to impact profitability. Many expressed concern about the health of the national economy and current financial conditions.
After peaking at an all-time high in mid-July, oil prices retreated in recent weeks but remain elevated compared to a year ago. Oil product prices, such as gasoline, diesel and heating oil, fell in tandem with crude oil. The price of natural gas also declined to its lowest level since February. Natural gas inventories are near their 5-year average but are below the high levels seen last year. Prices for some petrochemicals, including ethylene and propylene fell along with energy prices, but plastics prices held steady and industry contacts noted they remain behind the curve in passing through previous energy increases.
Labor Market The labor market remained relatively tight and most contacts reported flat to moderate hiring. Shortages remain prevalent for skilled workers in oil and gas related professions. Wage pressures were mild overall, but there were reports that companies were fielding more requests for higher wages. Some firms were eliminating overtime or reducing hours to help manage payroll costs.
ManufacturingDemand for materials to supply residential construction remained weak, and bookings were lackluster. Inventory levels have fallen in response to a ramp down in production. Fabricated metal producers that supply commercial construction said demand was down considerably, driven by continued trouble in credit markets. One contact noted the falloff was "like the faucet shut off". Primary metals producers noted slower to flat demand, and some contacts said their customers were reducing inventory. Outlooks were somewhat more cautious. Costs of construction continue to rise, and lending conditions have become much stricter. Despite the more difficult environment, contacts said the Texas construction market remains in better shape than most other areas of the country.
Respondents in high-tech manufacturing report flat to slightly lower sales since the last survey, with most describing the pace of growth as weak to moderate. One contact noted a recent softening of demand in Asia which had previously maintained a strong pace. Inventory levels were mixed. Expectations have diminished. Contacts said they had expected demand to improve in the third quarter but now expect weakness through year-end.
Food product sales remain near year-ago levels and the outlook is positive, despite higher costs for input prices such as corn and milk. Contacts are optimistic about the back-to-school season and expect new snack products to generate demand through the rest of the year. Activity remained steady for specialized transportation equipment, such as ambulances and aircraft parts. Automotive manufacturers said demand continued to fall--particularly for vehicles with low fuel economy--and there are reports of temporary plant shutdowns. Sales of corrugated packaging remained sluggish.
Demand for gasoline, diesel, and other oil products weakened and refiners cut production. Contacts said refining margins fell sharply as the decline in product prices was faster than the decline in crude prices. Contacts reported softer demand for petrochemical products as domestic sales remained weak and exports slowed, partly due to Olympics-related production cutbacks in China and the August vacation period in Europe.
Retail Sales Retail demand was largely unchanged from the last survey, with mixed reports from contacts. Discount retailers noted strength in sales, although the pace of growth was less robust than a year earlier. Traditional department store sales remained tepid at below year-ago levels. Sales of discretionary items, such as electronics, jewelry and housewares weakened. Retailer outlooks remained pessimistic overall, even though Texas sales appear to be holding up better than in many other areas of the country. Respondents that extend credit expect conditions to worsen in the near-term.
Automobile sales remained weak, and most contacts expect no improvement until early next year. Inventory levels improved as manufacturers reduced production and dealers cut prices.
Services Growth in orders for temporary staffing services leveled off following a slight uptick in the previous survey. Contacts noted clients were cautious to hire because of a slower national economy, rising costs and upcoming elections. Still, demand for skilled professional and technical workers remained strong, especially in the oil and gas industry. Outlooks were generally positive, but many noted concern about the health of the overall economy.
Legal firms said bankruptcy and litigation work continued to shore up activity. Transactional work was down overall, although demand from the oil and gas industry remained strong. Real estate-related demand was weak. Contacts in accounting services reported steady, moderate demand.
Elevated fuel costs continue to hamper the transportation services industry. Intermodal cargo volume remained steady, but was well below year-ago levels. Respondents noted international demand has shifted the client composition to favor exporting. Railroad industry contacts said volumes were up slightly for metals, coal and chemicals, although the transportation cost of such materials was of great concern. Airlines continue to be negatively impacted by high jet fuel costs. Despite the recent reprieve in energy prices, airline contacts are maintaining their business models and will go ahead with announced capacity cuts.
Construction and Real Estate Sales of new and existing homes remain slow and buyers are extremely cautious, according to contacts. Homebuilders continue to cut back on starts, and new home inventories are edging down. Sales incentives are prevalent on completed homes, but overall, prices are holding up relatively well in both the new and existing markets. The lending environment is a major concern. Several respondents said lending standards had over-corrected, making it difficult for some credit-worthy buyers to obtain mortgages. Contacts in the multifamily sector noted increased concern about apartment overbuilding across the District.
Office leasing activity remained positive but the pace was slower. Contacts noted that even as vacancies tick up, an expected decline in office construction should keep market fundamentals balanced. Overall, commercial construction activity remains relatively strong due to projects currently in the pipeline and elevated public sector construction, although many contacts expect a slowdown next year. Commercial real estate sales activity was subdued as investment capital remained scarce.
Financial Services Eleventh District financial services contacts report relatively satisfactory conditions despite the uncertain national financial environment. Credit quality continues to hold up, although contacts still expect to see some deterioration in the near term. Lending standards remain tight and lenders are reportedly evaluating each borrower and deal with heightened scrutiny. Several contacts noted stiffer guidelines from regulators.
Competition for deposits remains high, and contacts continue to pursue other sources of liquidity. Elevated capital costs continue to pressure lenders to increase interest rate spreads. Loan demand remained soft for automobiles and single-family mortgages but commercial lending was fairly solid. Lending was reportedly strong for new multifamily development.Automotive industry contacts reported that several lenders had exited the auto lending business and the ones that remained had become more stringent.
Energy Despite a recent fallback, oil and natural gas prices remain at elevated levels compared to a year ago. The decline in prices over the past several weeks is attributed, in part, to weaker U.S. and global economies. The domestic rig count continued to rise, adding 79 rigs over the past six weeks. Much of the additional drilling activity is land-based natural gas activity in the Barnett and Haynesville shale. According to contacts, current prices remain profitable, and there are no indications of cuts in production.
AgricultureRain improved soil moisture conditions in a few areas, but drought continues to stress crops across much of the District. Hurricane Dolly wiped out cotton and sorghum acreage in the Rio Grande Valley adding to crop losses. Livestock operators culled their herds at a higher-than-normal rate due to elevated feed costs and poor pasture conditions. Dairy farmers said high demand for products and a recent reprieve in grain prices had led to better conditions.
Twelfth District--San Francisco
Economic activity in the Twelfth District remained subdued during the survey period of late July through late August. Upward price pressures eased for food and energy-intensive items, but price inflation remained significant overall, while wage pressures fell further. Most retailers saw sluggish sales, and demand for services weakened. Manufacturing activity was mixed across sectors but appeared to expand on net, while demand remained strong for agricultural products and natural resources. The prolonged slump in District housing markets continued, and demand for commercial real estate remained somewhat weak. Contacts from financial institutions indicated that loan demand and credit quality slipped a bit further.
Wages and Prices Upward price pressures remained significant. Despite slower price increases or lower levels for some foods and especially energy products, their prices remained elevated and continued to exert upward pressure on prices for related final products. Upward price pressures have eased for various raw materials but price levels remained high for some, notably steel and copper. Prices for many retail items were held down by extensive discounting, although a few contacts reported that they raised prices in response to earlier increases in input prices.
Upward wage pressures eased further. Firms in most sectors have been reducing staff counts through layoffs or attrition, with particularly pronounced drops continuing in the construction, finance, and real estate sectors. The resulting labor market slack has reduced upward wage pressures in general, with the exception of workers with specialized skills in a few sectors such as resource extraction and information technology. Several contacts reported upward pressure on overall labor costs due to substantial increases in the costs of health benefits.
Retail Trade and Services Retail sales remained sluggish. Respondents pointed to high prices for food and fuel as a primary factor underlying the generally weak sales performance of discretionary items such as clothing and jewelry. For department stores and many smaller retail outlets, sales were weak and inventories rose. Demand remained stronger for discount chains than traditional department stores, as consumers offset price increases on food and fuel by switching to lower-priced items in other retail categories. Consumer electronic products continued to sell well in general. Retailers of furniture and household appliances reported exceptionally poor sales, and unit sales of gasoline remained weak. Demand dropped further for new automobiles, especially domestic models with low fuel efficiency.
Demand for services appeared to decline slightly compared with the previous survey period. Health-care providers reported a drop in demand, with some medical centers reducing staff counts in part by leaving vacant positions unfilled. Demand remained soft for providers of professional and legal services and fell further for providers of advertising services. Conditions remained "dismal" for providers of real estate services such as title insurance, with cumulative employment reductions reportedly in the range of 40 to 50 percent over the course of the ongoing real estate slump. Tourist activity was flat to down in major tourist destinations such as Southern California and Las Vegas and down significantly in Hawaii, and airlines continued to struggle with reduced travel demand and elevated fuel costs.
Manufacturing District manufacturing activity was mixed across sectors but appeared to expand overall during the survey period. Production activity was at high levels for makers of commercial aircraft and parts as they continued to work through extensive order backlogs. Makers of semiconductors and other information technology products saw moderate sales gains and high rates of capacity utilization; semiconductor inventories reportedly rose slightly. Manufacturers of wood products made further cuts in production activity and employment. Capacity utilization at petroleum refineries remained well below its five-year average, and inventories have been above average. Sales reportedly grew at a moderate pace for food manufacturers, although some faced challenges to their bottom lines due to high input prices.
Agriculture and Resource-related Industries Strong demand and sales continued for agricultural items and natural resources. Sales continued at a brisk pace for most crops, especially those with extensive overseas markets such as grains and cotton, and sales of livestock products were reported to be at record levels. However, the high prices of fuel, feed, and fertilizer continued to crimp profit margins and reportedly caused some farmers and ranchers to scale back or shut down. Overall demand remained high for petroleum products, with further expansion in extraction activity noted.
Real Estate and Construction The slump in District home demand and construction activity continued, while demand for commercial real estate remained somewhat weak. Demand for new and existing homes continued to languish, resulting in further price declines. These effects have been especially pronounced in areas that have experienced high levels of home foreclosures, such as parts of Arizona, California, and Nevada, although lower prices reportedly stimulated sales increases in some areas. Demand for nonresidential real estate was reported to be little changed from the previous survey period but was down relative to twelve months earlier. A few contacts noted that construction activity for public projects such as highways has been maintained or increased of late.
Financial Institutions District banking contacts reported that loan demand fell on net relative to the previous survey period. Scattered reports indicated that some businesses have sidelined expansion projects, resulting in a pullback in the demand for commercial and industrial loans. Demand for new residential mortgages continued to be very weak, and lending standards remained quite restrictive for residential mortgages and construction loans. Asset quality deteriorated a bit further on net, with scattered reports of more severe deterioration and concerns about additional bank failures, especially among community banks that have been stressed by poorly performing construction loans.