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New York
St. Louis
Kansas City
San Francisco

Full report

Prepared at the Federal Reserve Bank of Boston and based on information collected before August 25, 2003. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve districts indicate that the economy continued to improve in July and August. Eleven districts say that activity levels increased during the summer. In some districts, improvement occurred in selected sectors, and in others, it was broad-based. Even in the Dallas district, where activity remains generally weak, contacts are said to be more optimistic.

Consumer activity showed improvement in most districts. But Kansas City, Philadelphia, and Boston noted that the increases in retail sales were slight or modest, and New York indicated retail results were better in July than August (partly on account of the August blackout). And retail sales were weak or softening according to respondents in the Cleveland and St. Louis districts.

Ten districts report increases in manufacturing activity. The exceptions were Dallas, where there was little change, and Richmond, which reports that manufacturing weakened. District reports on nonfinancial services firms--temp agencies, software and IT companies, or trucking and shipping--mostly indicate activity increased during the summer months. Among districts reporting on bank lending, a majority cite increases. Most districts report strong housing markets and weak commercial real estate markets, with the latter showing scattered signs of improvement.

Business reports from the New York, Cleveland, Atlanta, Chicago, and Dallas districts mention the mid-August blackout. While respondents note a comprehensive assessment is premature in this round of information-gathering, the effects were generally small. Even where firms were closed for several days, affected contacts suggest they are not anticipating difficulties in making up for lost production or shipments.

Labor Costs and Prices
Labor markets remain slack across the nation, with few reports of occupational shortages. Employers in a number of districts indicate that wage increases, when they occur, are modest, but the rising cost of benefits--notably health insurance--has raised compensation costs.

Although districts note price increases for natural gas, gasoline, insurance, tuition, semiconductors, and pharmaceuticals, most product prices are reported to be stable or lower, as businesses say they cannot pass along these or other cost increases to their customers. The dominant price pressures are downward according to reports from Boston, New York, and Chicago, notwithstanding a few manufacturing respondents in Boston and Chicago who indicate they have raised selected prices by small amounts; Dallas reports that manufacturing prices are falling. San Francisco cites "very little upward movement" in the prices of final goods and services, while Minneapolis reports that price increases are generally modest and manufacturers expect prices to remain level for the remainder of the year. Similarly, retailers in the Kansas City district expect little change in prices in coming months.

Retail and Tourism
In most districts, retail sales improved at least modestly in July and August. Contacts in New York report that sales were generally above plan in July, while August reports were mixed, with the blackout having adverse effects on some stores. Respondents in Philadelphia note that sales improved in August from July, while retail revenues are said to be down slightly in St. Louis. Reports were mixed in the Cleveland district, though sales were down compared to the same period last year.

Among categories, the Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, and Minneapolis districts report reasonably strong demand for back-to-school merchandise, with Philadelphia, Minneapolis, and Kansas City noting a sales up-tick particularly in back-to-school apparel. Home furnishing sales are reportedly up in the Boston, New York, Philadelphia, Cleveland, and St. Louis districts. Appliance sales improved in New York, St. Louis, and San Francisco.

District reports on automobile sales are mixed. Contacts in Boston, Philadelphia, St. Louis, Kansas City, and San Francisco note rising auto sales over the summer, while sales in Dallas are said to be generally flat. Overall car sales are down compared to a year earlier in the Cleveland district, though used car sales continue to increase. Reports from contacts in Atlanta and Chicago were mixed, although both districts report a pickup in sales of light vehicles. Auto dealers in some districts have increased incentives to reduce 2003 inventory as they head into the new model year.

Travel and tourism reports are mixed for July and the first half of August. Overall tourism levels are below a year ago in the Atlanta district, but drive-to tourist destinations continue to perform better than those relying on air traffic. Manhattan hotels note fairly strong business in July and early August. Tourism was generally flat in the Chicago district, and reports are mixed in the districts of Minneapolis and Kansas City, as business in some areas was hindered by forest fires. Contacts in San Francisco report slight improvements in late July and August, with hotel occupancy rates rising in some areas.

Manufacturing and Related Services
Manufacturing activity is reported to be improving slightly to moderately in 10 of the 12 districts. New York, Cleveland, Kansas City, and San Francisco cite continuations of the upward trends in production or orders observed in the spring and early summer. Chicago notes widespread up-ticks in key manufacturing sectors, and Philadelphia finds that increases in shipments and orders are spreading. Most of the remaining districts characterize the improvements as selective. By contrast with the prevailing tone, Dallas says that manufacturers continue to report tough conditions, and Richmond indicates that manufacturing activity has weakened somewhat.

Various districts report solid or strengthening demand for autos and auto parts, high tech equipment, semiconductors, pharmaceuticals, and building materials. According to reports from Philadelphia, Chicago, and San Francisco, the improvement in manufacturing extended to a pickup in demand for machine tools and industrial equipment. Boston notes rising demand for military goods and stabilizing demand for commercial aircraft, while St. Louis indicates that firms in the helicopter and aerospace industries are expanding. On the other hand, markets for paper, chemicals, textiles, and furniture were reportedly soft or softer than in the recent past, and overall steel demand remains muted.

Manufacturers are reportedly facing rising costs for energy and insurance, but materials costs mostly remain contained. Several districts cite new opportunities for manufacturers to raise prices or trim discounts slightly for selected products. However, competitive pressures or weak demand continue to cause other selling prices to hold steady or fall.

Manufacturing labor demand appears to be firming. A majority of districts indicate scattered reports or projections of longer work hours and selective hiring, and several report that layoffs are becoming less frequent. Most districts commenting on capital spending indicate that manufacturers' plans remain cautious, although the majority of contacts in the Philadelphia and San Francisco districts plan increases.

Manufacturers generally expect that their production volumes will increase somewhat during the remainder of 2003. However, forecasts vary by industry, and some districts indicate that their contacts are planning conservatively in light of uncertainties about the economic recovery.

Non-Financial Services
Non-financial services firms in the Boston, New York, Cleveland, Richmond, Atlanta, Dallas, and San Francisco districts report higher demand during the summer than a year ago. For software and information technology firms in both the Boston and San Francisco districts, revenue and employment levels were flat or slightly higher than a year earlier. In Boston, a few companies that had considered layoffs in the first quarter have, in fact, begun to hire. San Francisco technology respondents report slight demand growth, although sales of telecommunications services were soft.

Temporary employment firms in the Boston, New York, Richmond, Chicago, and Dallas districts report modest demand growth in the second and early third quarters. Respondents said they are optimistic, believing recent improvements in demand reflect more than just seasonal trends. A large New York firm reports a lull in temp hiring in early August, but expects a rebound after Labor Day, noting that the pace of layoffs in the district has abated noticeably in recent months. The Dallas and Boston districts cite signs of increased demand for temp workers in technical areas like software, electronic assembly, and technical support.

Trucking and shipping contacts from the New York, Richmond, and Dallas districts report total volume is higher than a year ago, with a pickup in activity in July and August. Demand for transportation services improved this summer, according to reports from San Francisco and Dallas districts.

Banking and Financial Services
The majority of districts reporting on bank activity registered a modest pickup in lending in late July and August. Overall lending was up in the Cleveland, Dallas, Kansas City, New York and Philadelphia districts, but deteriorated in the Atlanta, Chicago and Richmond districts due to weak mortgage refinancing activity. As thirty-year mortgage interest rates hit 6 percent in August, some districts tallied mortgage lending declines, while others scored gains as borrowers reportedly hurried to secure mortgage financing in expectation of higher interest rates.

Business lending increased in the Chicago, Cleveland, Dallas, and San Francisco districts, but Atlanta, Richmond and St. Louis saw some decline. Richmond respondents remained pessimistic about the possibility of an upturn, while Chicago and San Francisco report growing demand by small and medium-sized firms. While business loan quality generally held steady, Cleveland and New York saw slightly higher delinquency rates for commercial and industrial loans; by contrast, the quality of consumer credit remained largely unchanged across districts.

Construction and Real Estate
Residential real estate activity remained strong in most districts in July through mid-August, with some contacts reporting all-time sales highs. Respondents in the Chicago, Cleveland, Kansas City, Minneapolis, Philadelphia, Richmond, St. Louis, and San Francisco districts report that overall sales were strong in recent weeks. Dallas indicates that real estate markets "improved" in July and early August, but that the industry "remains very competitive, restraining price increases." In contrast to most districts, real estate contacts in Atlanta report a "slight weakening in overall sales growth, especially at the higher end;" some of this weakness they attribute to unusually wet weather over the summer months. Contacts in the Chicago, Dallas, Kansas City, New York, Philadelphia, Richmond, and San Francisco districts say that the recent upturn in mortgage interest rates prompted a rush to complete sales of both new and existing homes in August. Contacts in Atlanta anticipate some continued slowing through the end of the year as a consequence of rate increases.

Although commercial real estate markets remained lackluster in most districts in July and early August, scattered signs of improvement were reported. Overall conditions are "soft" in Chicago, "weakened" in Kansas City, "sluggish" in Minneapolis, and "lagging" in St. Louis. Boston reports that commercial real estate markets are "holding steady" and Richmond cites "flat" conditions. By contrast, New York respondents note continued improvement, particularly in areas of Manhattan. Atlanta cites "small improvements," and Dallas reports signs of optimism. Most districts report high vacancy rates and some edged higher, but New York cites moderate declines in vacancies, led by strong leasing activity in the Class B segment. Looking forward, contacts in several districts indicate they expect continued weakness until employment growth improves.

Agriculture and Other Natural Resources
Unfavorable weather--too much rain in the East and too little in the Midwest and Southwest--is delaying harvests and damaging crops and pastures in parts of many districts. Contacts across wide areas expect reduced yields for corn, soybeans, and small grains as well as for some more localized products. However, in the Atlanta and St. Louis districts, the corn and soybeans are reportedly in generally good condition. As a result, Atlanta growers are said to be in a position to increase exports to drought-stricken Europe. San Francisco contacts also note strong export demand. In the hot, dry weather, pastures are reportedly deteriorating and livestock is coming under stress, especially in parts of the Minneapolis and Kansas City districts and, to a lesser extent, in the Dallas district. While contacts in Dallas, Kansas City, and San Francisco describe cattle prices as steady or strong, potentially boosting profits, the need for supplemental feed is rising in some areas, and bankers in the Kansas City district do not expect borrowers to fully recover recent years' losses. Similarly, while some lenders in the Minneapolis district expect above-average farm incomes in the third quarter, Chicago contacts point to lowered yield prospects and higher input costs and anticipate no improvement in farm balance sheets.

In the energy sector, contacts in the Minneapolis, Kansas City, Dallas, and San Francisco districts report that oil and gas exploration or rig counts are constant, solid, or increasing slightly. San Francisco notes that widespread hot weather and the reduced availability of hydropower have reportedly driven natural gas prices higher in recent weeks, while Dallas indicates that blackout-related and other unplanned outages at refineries have caused spikes in gasoline prices. Kansas City bankers say that demand for loans for gas field equipment and development is strong, while Dallas drilling companies reportedly view prices as high enough to cover capital costs. Still, Dallas energy contacts remain intent on controlling costs and cautious about hiring. Most major iron mines in the Minneapolis district are said to be operating near capacity, but they too have announced efforts to cut costs.

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Last update: September 3, 2003