Prepared at the Federal Reserve Bank of Richmond and based on information collected
before October 2, 2006. This document summarizes comments received from businesses
and other contacts outside the Federal Reserve and is not a commentary of the
views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicate that economic activity
continued to expand since the last report. Four Districts reported that economic
growth firmed while a couple of Districts noted that growth cooled. Other reports
generally characterized growth as moderate or mixed.
Consumer spending increased more quickly in a number of Districts, although
several reports continued to note that automobile and home-related sales were
sluggish. Tourism was generally strong and added some momentum in the New York
and Kansas City Districts. Activity in the service sector expanded in most Districts,
but Boston described activity as flat and Cleveland and Dallas identified pockets
of softness in some industries. Manufacturing conditions generally held up well,
with several Districts indicating that growth increased, though Philadelphia
reported that activity edged down. Commercial construction gained strength in
most of the country. Reports on residential real estate, however, indicated
widespread cooling with the majority of Districts citing lower asking prices,
rising inventories of homes on the market and softening sales. A number of reports,
however, indicated that residential activity increased in some markets. Financial
institutions continued to report that residential mortgage lending had tapered
off, but commercial lending activity picked up in several Districts. Agricultural
conditions generally improved as rainfall brought relief to drought-stricken
A number of Districts reported that labor markets were tight with some noting
shortages of skilled workers. Wage pressures were associated with tightening
conditions in a few Districts, though other reports noted that wage pressures
were in check. While the majority of Districts characterized price pressures
as contained, input prices increased in several Districts and a few reports
mentioned increased pass throughs by businesses.
Consumer Spending and Tourism
Most Districts reported stronger growth in consumer spending, although automobile
and housing-related sales generally weakened. Solid back-to-school sales helped
boost retail revenues in the Philadelphia, Atlanta and Minneapolis Districts.
Chicago said back-to-school sales were within expectations, though "nothing
stellar." Sales of upscale merchandise picked up in the New York District,
while apparel sales grew more quickly in the Boston, Cleveland and San Francisco
Districts. Chain department store sales were stronger in the Richmond District
and same-store sales increased in the New York District. Softer residential
real estate conditions damped home improvement and furniture sales in the New
York, Richmond, Kansas City and San Francisco Districts.
Vehicle sales weakened in several Districts--particularly sales of domestic
automobiles, SUVs and light trucks. However, a few Districts reported increased
sales of foreign cars and fuel-efficient automobiles. Philadelphia noted that
a growing number of smaller automobile dealerships had closed and dealers in
the Atlanta District added incentives to move inventory. In the Dallas District,
sales of luxury vehicles increased.
Tourist activity strengthened since our last report. New York said that tourism
remained robust in New York City. Kansas City reported solid gains in hotel
occupancy rates, while tourist activity in the San Francisco District remained
at a high level despite some moderation. Tourism in the Richmond District was
temporarily dented by Hurricane Ernesto in early September, but rebounded later
in the month.
Activity in the service sector generally strengthened across Districts since
the last report. The Philadelphia, Richmond, St. Louis and San Francisco Districts
reported increased demand for professional and technical services. Boston reported
increased demand for consulting and financial services, and along with San Francisco,
for healthcare services. Richmond indicated that demand for computer and web-based
services firmed and San Francisco noted that demand for media services was stronger.
Assessments of transportation services were mixed. Trucking firms reported declining
volume in the Philadelphia, Cleveland, Atlanta and Dallas Districts, and in
Cleveland, shipping services continued to soften. Chicago said trucking volume
was up slightly and cargo shipping increased in the Dallas District. St. Louis
reported that freight transportation companies planned expansions. Atlanta indicated
that rail companies experienced steady growth in inter-modal shipment volume,
and Dallas said that rail demand was strong.
Manufacturing activity remained generally strong in most Districts. Eight of
the twelve Districts indicated that factory output increased, while Chicago
and Kansas City noted that the pace of expansion slowed. Minneapolis described
factory activity as mixed and Philadelphia reported that factory production
edged down. The output of energy-related equipment increased in the Boston,
Atlanta and Dallas Districts, while Chicago and San Francisco indicated that
orders for machine tools increased. San Francisco reported that semiconductor
sales were solid. The demand for steel was especially strong according to Atlanta
and Chicago, while Cleveland and Chicago noted that heavy equipment sales continued
to be robust. Chicago also reported strength in heavy-duty truck production.
In contrast, St. Louis said that producers of motor vehicle parts announced
plans to lay off workers and Cleveland reported weakness in the auto industry.
Reports of softer demand for housing-related products continued to be widespread,
but Dallas noted that strong demand from the commercial construction industry
helped offset softer residential demand. Cleveland, Minneapolis, Dallas and
San Francisco said that sales of food products had accelerated since our last
Construction and Real Estate
Nearly all Districts reported that housing market conditions continued to soften,
though several noted that activity increased in some markets. Most Districts
reported higher home inventories, and several said that homebuilders and sellers
continued to offer incentives to attract buyers. Softer home demand in San Francisco
led to layoffs for mortgage brokers and real estate agents. Residential construction
remained weak in the St. Louis and Minneapolis Districts except in western North
Dakota where residential construction was described as "robust." New home inventories
inched up in the Dallas District despite strong demand in some of its markets
and inventories of single family homes and condominiums rose sharply in the
New York and St. Louis reported mixed housing activity. On the upside, Manhattan
condominium sales showed signs of resilience, and housing sales rose in Memphis,
but both Districts noted weakness in most markets. Richmond reported generally
weaker housing activity, but also noted increases in some markets. Atlanta said
that housing activity rose in its Mississippi Gulf market, and Minneapolis'
Sioux Falls market remained on pace with last year's record-breaking level.
Dallas reported particularly robust home sales in its Houston, Austin and El
Commercial real estate markets were strong in most Districts, and activity
increased at a faster pace in a number. Leasing activity increased in New York,
Minneapolis, Kansas City, Dallas and San Francisco, and held steady in Richmond.
Chicago and St. Louis, however, said leasing activity was mixed. Rent increases
were reported by New York, Minneapolis and San Francisco, with Dallas indicating
that pricing power was shifting to landlords.
Nonresidential construction was generally strong. Construction activity was
steady in the Cleveland, Richmond, Atlanta, Minneapolis and Kansas City Districts
and increased in the Chicago and Dallas Districts. Material costs and budget
concerns scaled back some projects in the Atlanta and Chicago Districts. The
Chicago and Minneapolis reports noted concerns among some contacts that commercial
construction may slow in the coming months.
Banking and Finance
Lending activity was mixed as increases in commercial lending were offset by
further weakness in residential mortgage lending. The New York, Richmond and
Chicago Districts reported declines in overall loan demand, while Philadelphia,
St. Louis and Kansas City reported modest increases. Demand for residential
mortgages slowed in the New York, Philadelphia, Cleveland, Richmond, Atlanta,
Chicago, Dallas and San Francisco Districts. Demand for commercial and industrial
loans rose in the Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis
and San Francisco Districts; held steady in the Richmond and Dallas Districts;
and declined in the New York District. The commercial lending market was characterized
as very competitive by Richmond, Chicago and Dallas. Overall credit quality
remained generally good, although increases in mortgage delinquency rates were
noted by Philadelphia, Cleveland and Atlanta. Tighter standards for commercial
loans were reported by New York and Chicago.
Agriculture and Natural Resources
Agriculture conditions generally improved as late summer rainfall brought relief
to drought-stricken Districts, although some rains hindered field work in some
areas and damaged crops in others. Richmond indicated that tropical storm Ernesto
severely damaged crops along some coastal areas. Chicago and St. Louis reported
that recent precipitation and unseasonably cool weather delayed corn and soybean
harvests. Crop yields in the Minneapolis District improved with the rainfall,
though Chicago reported that yield prospects were mixed. In the Kansas City
District, cooler weather and scattered rainfall restored soil moisture and pastures
conditions, though cattle producers continued to draw down herds. Dallas, however,
said that while September rains assisted wheat producers and eased pressure
on livestock producers to liquidate herds, many parts of the District still
needed rain. San Francisco reported strong sales for livestock and most crops
but indicated that spinach producers put planting on hold.
Activity in the energy industry remained strong according to reports from the
Minneapolis, Kansas City and San Francisco Districts. Minneapolis indicated
that alternative energy industries continued to expand at a rapid pace and that
mining production was at near-capacity across the District. Kansas City noted
that oil and gas drilling rig counts remained above year-ago levels, while San
Francisco said that oil and natural gas extraction continued at a rapid pace.
In contrast, Dallas reported that activity in the oil and energy producing sector
was virtually unchanged although demand for oil-field equipment and energy services
Employment, Wages, Prices
Labor market conditions remained taut since our last report. The Boston, Philadelphia,
Richmond, Minneapolis and Dallas reports characterized labor markets as generally
tight, particularly for skilled workers, while the remaining Districts noted
that job growth was steady to stronger. Six Districts mentioned labor shortages,
particularly for professional, scientific, and other technical workers. In addition,
Kansas City said retailers faced shortages of experienced sales workers and
Atlanta indicated that residential construction firms were having difficulty
obtaining qualified construction workers, despite the slowdown in building activity.
In contrast, Cleveland reported that roughly half of the homebuilders they contacted
had reduced their labor force.
Wage growth around the nation was generally modest, although faster wage growth
for skilled services workers was cited by a number of Districts. The San Francisco
District noted that a short supply of healthcare, finance and construction workers
pushed wages higher. In addition, Richmond noted a sharp uptick in retail wages
and Atlanta reported that some manufacturers had raised entry-level wages in
an effort to attract workers.
Most Districts reported few signs of increased price pressures in recent weeks.
A number of Districts said that energy prices moderated, but increases in raw
materials prices were noted by Philadelphia, Richmond and Atlanta, and a rise
in building materials prices was reported by Minneapolis. Instances of businesses
passing on higher costs were scattered across Districts; Cleveland and Atlanta
said some manufacturers attempted to raise output prices while Boston reported
increases in retail prices. Boston also reported that costs for some businesses
had increased--especially for airfare and hotel accommodations. Likewise, the
New York District noted that accommodation and theatre ticket prices had risen
sharply compared to a year ago.
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Business results in the First District are somewhat mixed in the late summer-early
fall. Manufacturers generally report revenue gains compared with a year earlier,
while retailers and selected business services firms are mostly flat to up,
but some cite losses. Manufacturers indicate that costs have stabilized or eased
in recent months, but remain higher than a year ago; as a result, they have
not raised their prices recently. Retailers say input prices are level except
for energy, while advertisers and consulting firms report continuing cost pressures;
both sectors continue to raise their selling prices. Headcounts are mostly stable
in manufacturing and retailing, but consulting firms plan increases; most sectors
cite recruiting difficulties for professional and technical positions. Residential
real estate markets across New England are softening further, with inventories
and time to sale increasing while prices and sales decline.
Retail respondents in the First District report mixed results in August and
September, as year-over-year sales range from double-digit declines to double-digit
gains. One auto dealership association reported that their members’ sales
are down as much as 50 percent. A consumer electronics and appliance retailer
observed that same-store sales have been flat, but expects to end the year on
a positive note. Respondents in the discount apparel and art and office supply
businesses report sales increases, and are confident that growth will continue.
Inventory levels are generally in line with plans. Input prices appear to
be stabilizing, although several contacts still observe energy-related price
increases. Most respondents report being able to pass price increases on to
the consumer. With the exception of automobile dealers, most retailers note
that headcount is fairly steady with most hiring occurring as replacements or
for new stores. Excluding already planned new store openings, many contacts
report tightening up capital spending plans.
Overall, retail respondents are cautious, but optimistic for the fall. However,
many retailers are wary about the effect of the real estate market downturn
and high energy prices on consumers as winter approaches.
Manufacturing and Related Services
First District manufacturers and related services providers generally report
that revenues in third quarter 2006 have been running ahead of year-ago levels.
Sales trends are particularly strong for aerospace and energy-related equipment
and biopharmaceuticals. On the other hand, demand for certain consumer products
is trailing off, which contacts attribute to weak consumer confidence, deteriorating
housing markets, and competition from imports and other producers.
Most manufacturers note that materials, energy, and transportation costs have
stabilized or eased in recent months but remain higher than they were a year
ago. Some firms have managed to reduce costs by consolidating suppliers or shifting
to foreign vendors. Most contacts indicate that they have not raised their product
prices since mid-year, and they anticipate making little or no adjustments in
pricing in coming months. Some note that they are charging more or reducing
discounts for services.
Except for some consumer goods manufacturers that are curtailing production,
most contacts report that their U.S. headcounts are fairly stable. Firms are
continuing to increase their technical, scientific, and sales staffing while
cutting factory jobs. A couple of contacts report that high housing costs are
hindering recruitment for their New England locations. Base pay increases continue
to be mostly in the range of 2-3/4 percent to 4 percent. Despite tight white-collar
labor markets, only a couple of firms are budgeting for higher average pay raises
in 2007 than in 2006.
The majority of companies are increasing their domestic capital spending modestly
in order to produce new products or modernize production processes. Several
are in the midst of large projects to expand or relocate capacity or integrate
newly acquired businesses. These respondents expect capital spending to return
to normal levels once these projects are completed.
Manufacturers tend to have a positive sales outlook for late 2006 and early
2007. Many indicate a growing sense of confidence as a result of moderation
in energy prices and stabilized interest rates. Others express ongoing concerns
related to cost containment and foreign competition.
Selected Business Services
The majority of First District contacts in advertising and management consulting
report that business is steady, with flat to modest year-over-year revenue gains
in the third quarter. A minority recorded revenue losses from a year earlier,
the result of losing large clients. Demand for productivity- and efficiency-enhancing
consulting services has increased, as has the demand from the healthcare and
Business costs have increased, especially for airfare and hotel accommodations.
Two contacts note that their project mix is changing, leading them to purchase
more subscription and data resources; they are able to pass along only a fraction
of the added costs. Most responding firms either have implemented moderate price
increases over year-ago levels, or plan to in the fourth quarter.
Nearly all New England consulting contacts plan to increase their headcounts
in the fourth quarter. They report that the labor market for experienced consultants
continues to tighten, and several respondents say that turnover rates have increased.
A few contacted companies note that they are experiencing difficulties recruiting
personnel with integrated marketing and interactive services backgrounds. Advertising
and marketing firms report no plans to change headcount. Wage increases range
from 3.5 percent to 10 percent, with consulting firms at the higher end of the
Most advertising and consulting contacts expect revenue growth to be flat
or accelerate slightly in the final quarter of 2006.
Residential Real Estate
Across New England, the pace of residential sales continues to be slow compared
to 2005. In Massachusetts, the average number of days on the market has increased
by a full month since last year, to around 110 days. Contacts attribute slower
sales to less urgent buyers focused on getting the highest value for their money.
Slow sales combined with increased listings have led to inventory build-up in
most New England markets. In Massachusetts, single family inventory has increased
16 percent and condominium inventory has increased 28 percent year-on-year,
leading to around 10 months of supply currently in the market.
Contacts indicate that as sellers have become more attuned to supply conditions
in recent months, they have become more willing to reduce prices. Correspondingly,
many New England markets feature declining prices. The median price of single-family
homes sold in Massachusetts in August was about 6 percent below its August 2005
level; the corresponding decline for condominiums was 3 percent.
Contacts expect that the pace of sales will remain slow in the near term and
that markets will continue to show prices below year-earlier levels. Inventory
may decline in the near term as properties are de-listed for the holiday season.
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Second District--New York
The Second District has shown signs of strengthening since the last report,
with few signs of increased price pressures. Labor markets have been steady
to stronger, according to firms in manufacturing and most service industries.
Manufacturers report steady growth in activity since the last report, along
with less widespread increases in input prices. Retailers indicate that sales
picked up in September, while prices remained flat. Tourism activity remained
robust in New York City, with both hotels and Broadway theaters reporting double-digit
increases in prices over the past year. Consumer confidence in the region rose
to a five-month high in September.
Housing markets have been mixed since the last report: New York City's
co-op and condo market has remained fairly strong, and the rental market has
tightened further; however, housing markets in New Jersey and upstate New York
show continued weakness. Commercial real estate markets across the New York
City metro area generally strengthened in the third quarter, for both office
and industrial space. Finally, bankers again report weakening in loan demand--particularly
for home mortgages--somewhat tighter credit standards in the commercial
sector, and little change in delinquency rates.
Retailers report that sales were on or above plan in September, and noticeably
stronger than in August. Same-store sales gains ranged from 2 percent to more
than 10 percent compared with a year ago. Retail contacts note that premium
merchandise lines have continued to sell relatively well. Furniture and other
home goods continued to lag, while sales of apparel, accessories and jewelry
have been robust. Retailers report that selling prices remain steady and that
inventories are at favorable levels. Looking ahead to the upcoming holiday season,
retailers generally expect same-store sales to be up in the range of 2 to 5
percent from comparable 2005 levels. Contacts report that they plan to hire
about the same number of holiday-season workers as in 2005, though most of the
increased staffing capacity is again expected to come from extending hours of
current part-time workers.
Tourism activity has been fairly steady at a high level since the last report.
The occupancy rate at Manhattan hotels edged up to 87 percent in August, slightly
higher than a year earlier, while room rates climbed more than 10 percent from
comparable 2005 levels. Broadway theaters report mixed results for September:
attendance was down roughly 3 percent from a year earlier, but total revenue
jumped 11 percent, reflecting sharply higher admission prices. Based on the
Conference Board's survey of Middle Atlantic (New York, New Jersey and
Pennsylvania) residents, consumer confidence, which had drifted down in July
and August, jumped to a 5-month high in September.
Construction and Real Estate
The region's housing market has shown mixed results since the last report,
with further weakening noted in northern New Jersey and upstate New York, but
signs of underlying strength reported in New York City. New Jersey homebuilders
report that the housing market has continued to slacken since the last report:
both buyer traffic and sales activity have declined substantially, the inventory
of homes on the market has risen substantially, and prices have continued to
slip. One New Jersey contact also notes pronounced weakening in the sub-contracting
business, attributing much of the recent weakening in home remodeling to reduced
home equity. Similarly, real estate firms in western New York State report that
both sales and prices were down moderately in August, compared with a year earlier.
In contrast, Manhattan's co-op and condo market showed signs of resilience
in the third quarter. Based on quarterly data from a leading appraisal firm,
both the number of apartments sold and the price per square foot were up roughly
6 percent from a year earlier, despite a sharply higher inventory of available
units. Manhattan's rental market has tightened further since the last
report, particularly at the high end, reflecting a dearth of large rental units
on the market at the end of the third quarter; a major real estate firm estimates
that rents on studio and one bedroom apartments are up 5 to 10 percent from
a year earlier, while rents on larger units are up 10 to 15 percent.
Commercial real estate markets across the New York City area showed further
signs of tightening in the third quarter. In Manhattan, office vacancy rates
continued to edge down, reaching their lowest levels since early 2001, while
asking rents accelerated, rising more than 10 percent from a year earlier. One
industry contact notes that large blocks of space have become nearly impossible
to find in Midtown Manhattan. In the nearby suburban markets, vacancy rates
were also down from a year earlier and at or near cyclical lows, though rents
increased more moderately. The industrial market has been mixed but, on balance,
stronger in the third quarter: vacancy rates declined to cyclical lows in Long
Island, Westchester and Fairfield Counties, but continued to rise in northern
Other Business Activity
Manufacturing contacts report steady improvement in business conditions since
the last report, along with further abatement in price pressures. Manufacturers
also indicate increased employment, along with higher levels of capital spending
in the months ahead. Surveys of purchasing managers in the Buffalo, Rochester
and New York City areas also indicate some lessening in price pressures in September,
but signal some slowing in manufacturing activity. Outside of manufacturing,
contacts in most industries report little change in overall business conditions,
along with steady or rising employment levels; however, contacts in the publishing
industry note some weakening in employment.
Contacts at small to medium-sized banks in the 2nd District report decreased
demand for all types of loans since the last report--particularly residential
mortgages, for which more than two-thirds of bankers reported decreases. Respondents
also continue to report widespread declines in refinancing activity. Bankers
report tightened credit standards for commercial loans and mortgages, while
standards remained unchanged for the consumer and residential mortgage categories.
Bankers report little change in loan rates overall, with somewhat higher rates
on consumer credit and commercial and industrial loans but somewhat lower rates
on home mortgages. Delinquency rates are again reported to be little changed
across all categories.
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Economic activity in the Third District increased in September, but conditions
varied by sector, and overall growth appears to have slowed. Manufacturing in
the District edged down from August to September. Retail sales of general merchandise
rose, but auto sales remained sluggish. Bank lending increased overall, although
mortgage lending declined. Service-sector activity continued to increase, but
the pace of growth has eased since midsummer.
Third District business contacts generally expect business activity in the
region to continue to expand but at a slow pace. Manufacturers expect improvement
but do not anticipate strong gains. Retailers forecast a modest growth in sales;
however, auto dealers do not expect sales to pick up. Bankers expect a further
decline in mortgage lending and slight gains in business and consumer lending.
Service-sector firms expect business to continue to move up slowly.
Third District manufacturers reported a lower level of activity in September
than in August. Around one-third of the companies surveyed noted declines in
shipments and one-fourth noted increases. New orders were level, on balance,
with an equal number of respondents reporting increases, decreases, and steady
orders. Demand increased in September for wood, paper, plastic, and metal products,
but fell for textiles, chemicals, and industrial materials and equipment. Area
manufacturers reported a slight decline in order backlogs and no change in delivery
Overall, manufacturers expect demand for their products to improve, but their
outlook is not as optimistic as it was earlier this year. Among the manufacturers
contacted in September, slightly more than one-third expect their shipments
and orders to increase during the next six months, and about one-fourth expect
decreases. Capital spending plans reported by Third District manufacturers in
September rose somewhat from August. On balance, however, it appears that fewer
firms are scheduling increased outlays for 2007 than planned increases for 2006.
Most of the retailers contacted for this report indicated that sales have increased
in recent weeks. Although the seasonal upturn due to back-to-school sales started
slowly, sales improved through the period, and many of the retailers surveyed
in September noted that they achieved year-over-year increases in excess of
their expectations. The gains were fairly widespread among lines of merchandise
and types of stores. Merchants did note, however, that promotional efforts were
extensive. Looking ahead, area retailers are uncertain whether the recent pace
of growth will be sustained. They say consumer confidence is fragile, and that
shoppers’ willingness to spend will depend crucially on the course of
gasoline prices and the stability of housing values.
Auto sales in the region remained sluggish in September. Dealers said domestic
manufacturers’ incentives have done little to boost sales. Production
cutbacks have helped area dealers keep inventories manageable, although the
number of light trucks on dealers’ lots is still high. Auto dealers in
the region do not anticipate an improvement in sales in the near future. There
has been an increase in the number of dealerships closing in the past few months,
especially smaller ones.
The volume of loans outstanding at Third District banks rose moderately in September,
according to commercial bank lending officers contacted for this report. Commercial
and industrial lending increased for most banks. Credit card lending expanded
at a steady rate, but growth in other types of personal lending slowed. Demand
for residential mortgages eased. And while overall credit quality was good,
according to bankers contacted for this report, some noted increased delinquencies
on residential mortgages, and some said the average creditworthiness of applicants
for mortgages and consumer loans has declined recently.
Bankers in the District expect business and consumer lending to increase in
the months ahead, but not strongly. They also expect gains in credit card lending.
However, they anticipate a further decline in the demand for residential mortgages.
Some bankers also said they expect an increase in mortgage delinquencies as
payments of principal start to become due on non-amortizing mortgages and as
rates rise on adjustable-rate mortgages.
Most of the Third District service firms contacted in September reported that
activity was increasing, but for many firms growth has slowed recently. Business
services firms generally indicated that they have experienced slower growth
in work done for existing client firms and a slower pace of new client acquisition.
Trucking firms reported significant slowdowns in the rate at which their business
has been growing. Information technology firms have generally reported steady
growth in the past few months. Employment agencies and temporary help firms reported that demand for workers has been rising at a nearly steady pace. Service-sector firms expect business to continue to advance, but they expect growth to remain slow, at best, in the months ahead.
Prices and Wages
Business firms in the Third District noted increases in the costs of raw materials
and intermediate goods, although reports of price increases were not as widespread
in September as they were earlier in the year. Manufacturers noted continued
increases in prices for metals and energy. However, retailers generally indicated
that selling prices have not been rising significantly, and they noted that
discounting was widespread during the back-to-school shopping period.
Employers in many industries reported that labor markets remain tight for
skilled workers, but the availability of unskilled workers has increased somewhat.
In service industries, firms report rising hiring rates and turnover among some
occupational specialties, especially in information technology. Area employers
indicated that wages have been rising slightly faster than at this time last
year, but the rate of increase has not accelerated in recent months.
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The District's economy showed modest growth since mid-August; however,
growth was mixed and there is concern about the sustainability of lower energy
prices and a continuing slowdown in the auto sector and residential construction.
Most district manufacturers reported steady production with production forecasted
to remain at current levels for the next six months. However, reduced activity
in the auto sector is tempering the outlook for some manufacturers. Retailers
experienced mixed sales activity with lower gas prices and cooler weather helping
boost sales at some District outlets. Commercial builders reported strong activity
but were concerned that inquiries were beginning to taper off. New home sales
continued to be soft with several builders saying they have no backlog. Banking
contacts reported a gain in core deposits and an increase in corporate borrowing.
And the demand for trucking and shipping services continues to soften.
On net, hiring across the District was steady. Staffing firms reported job
openings were moderately increasing in August and September with demand coming
from professional business services and healthcare. Wage pressures were not
seen as an issue at this time. Almost all contacts said that the rise in input
costs has moderated and cite a drop in energy prices as the reason. Manufacturers
attempting to raise their prices met with a mixed degree of success. Retailers
generally reported holding their prices steady.
Since mid-August, production by the District's durable goods manufacturers
was stable or up slightly with higher production levels reported on a year-over-year
basis. Overall demand for steel products is softening with almost all contacts
noting weakness in the auto industry; however, electric utilities and heavy
machinery are still growth areas for steel producers. District auto production
showed an overall decline on a year-over-year basis. The outlook by durable
manufacturers is for production to remain at current levels over the next six
months. Almost all contacts said they were operating at normal capacity and
that capital expenditures remain on target. A majority of the producers expect
little change in the level of capital spending for the next few months. Input
costs are reported to have moderated due primarily to decreases in energy prices.
Hiring has been relatively flat over the last six weeks with half the contacts
saying they anticipate limited hiring in the near future. Wage pressures in
durable manufacturing remained contained.
Production at the District's nondurable goods facilities has been stable
since mid-August with higher levels reported on a year-over-year basis. Expectations
for the next six months are flat to up with some manufacturers saying that the
auto industry could affect their production levels. Most contacts reported idle
capacity--food producers being the exception. A majority of manufacturers
said capital expenditures were on target with no increases anticipated during
the next few months. Input costs were mixed following oil price fluctuations.
None of the contacts reported increasing employment in the past six weeks and
few said they plan to hire in the near future. Wage pressures are contained.
Sales by District retail contacts continued to be mixed with some retailers
saying that cooler weather and lower gas prices helped boost sales. Contacts
have reported lowering prices in some stores and increasing promotions as means
of improving sales. Apparel retailers and big box stores experienced sales increases;
however, sales trends were tied to the store brand. Drug stores reported strong
sales driven primarily by prescriptions. Some restaurant owners continued to
see a decline in customers but were optimistic due to the drop in gas prices.
Overall, vendor prices have remained stable since mid-August which is reflected
in stable prices for customers. Contacts reported limited wage pressures and
are planning normal Christmas hiring.
Most contacts said that new car sales improved in August, but fell in September.
August is normally closeout time as dealers make a push to sell the remaining
prior year's inventory. SUVs continued to sell poorly and used car sales
were consistent with sales in past months.
Residential contractors reported new home sales are down or flat when compared
to earlier this year. Year-over-year sales declines of 10 percent or more are
common with a few contacts saying the market is down by as much as 60 percent.
Several contractors reported that they no longer have any backlog. Most home
builders expect sales to remain soft for the remainder of the year with 2006
totals to be below those in 2005. Many contacts said that material costs have
stabilized over the past couple months with a few noting a drop in the price
of lumber. About half the homebuilders contacted reported reducing their labor
force through direct layoffs or by not replacing workers that leave.
The District's commercial contractors reported strong activity since
mid-August with an increase in business on a year-over-year basis. Most contacts
anticipate activity will remain strong through the first half of 2007 due to
project backlogs which remain at high levels--for one contractor, the highest
in five years. However, inquiries seem to be tapering off slightly which could
result in slowness about a year out. Segments reporting stronger activity were
health care, education, and public works. Material cost increases that were
prevalent over the past few months are slowing or have stabilized. Margins for
a few contacts have increased slightly due to a slower acceleration in costs.
Contractors reported little change in the size of their labor force.
Since mid-August, District banks experienced an increase in corporate borrowing
primarily in commercial real estate while consumer loan activity was mixed.
Activity in the mortgage market continues to show an overall decline; however,
two contacts reported a slight increase in demand after a three-month slowdown.
Although most bankers said credit quality remains stable and characterized it
as high, almost half experienced a slight increase in delinquencies related
to commercial loans and residential real estate. Finally, nearly all contacts
reported a gain in core deposits primarily in CDs and money market accounts.
Demand for trucking and shipping services has softened since mid-August with
a slight decrease in volume on a year-over-year basis. Trucking companies continue
to pass on high fuel costs using surcharges. One contact reported his revenues
have held up due to the increase in the fuel surcharge. Most trucking companies
were hiring, but activity was limited to finding replacements due to normal
industry turnover. None of our contacts reported wage increases over the past
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Economic activity in the Fifth District expanded at a moderate pace in late
August and September, as firmer factory output and somewhat stronger store sales
were balanced against a continued weakening in housing markets. Manufacturing
shipments and new orders rebounded in September following a soft patch in August.
Retail sales increased more quickly outside of housing-related categories and
domestic automobiles. Revenues at services firms continued to expand on pace
with a notable pickup at computer-related businesses. Both construction and
sales of houses softened further in most markets, though activity edged higher
in a few areas. In banking, mortgage lending weakened, while commercial lending
was steady. Tourist activity was temporarily dented in early September by Hurricane
Ernesto, but held up in areas away from the coast. Labor markets remained generally
tight, with hiring increasing modestly at factories and services firms. Skilled
workers remained difficult to find, and some upward wage pressures were noted.
Price pressures were more pronounced in manufacturing, but the pace of increase
moderated in the services sector. In agriculture, substantial crop damage was
inflicted by Hurricane Ernesto in early September, but subsequent weather conditions
have been favorable for harvesting activity.
District contacts reported that home-related sales slowed, though retailers
in other categories said their sales grew more quickly in late August and September.
Executives at two building supply chains told us sales growth at District stores
eased as new residential construction softened. The pace of sales also cooled
at furniture and home accessories stores in central Virginia, according to an
industry contact in Richmond, Va. In contrast, a contact at a chain department
store reported increased sales growth at District locations. Additionally, the
manager of a chain department store near Charlotte, N.C., said sales at his
store have been "going strong," as area manufacturing jobs expanded.
In the eastern panhandle of West Virginia, the manager of a discount department
store told us that the pace of sales has picked up since our last report. District
automobile dealers said the overall pace of sales steadied during the last four
weeks despite softer domestic automobile sales in some areas. In labor markets,
retailers continued to trim employee levels, although retail wages rose sharply
in the last four weeks. Contacts indicated that price growth in retail was moderate.
Revenues at service-producing firms grew more quickly since our last report.
Contacts at professional, scientific, and technical firms indicated that demand
strengthened over the period, particularly at computer and web-related businesses.
An executive at a financial services firm in Baltimore, Md., attributed his
clients' bullishness in part to the recent drops in energy prices. In addition,
District airports recorded an increase in air travel, although one airport manager
said more people are driving instead of flying for short trips because of the
"hassle factor" of security related to air travel. Hiring at services
firms picked up slightly in recent weeks; wage and price growth moderated.
Manufacturing activity picked up in September. Manufacturers told us that shipments
grew briskly following a contraction in August, while new orders gained momentum
and employment growth remained on pace. Contacts in the electronic, plastics,
and printing and publishing industries reported particularly strong growth in
demand since our last report. A printing and publishing manufacturer in South
Carolina, for example, said that some firming of local economic and employment
conditions helped boost their revenues. A plastics producer reported that they
were "still busy with good projects," and an electronic equipment
manufacturer in Maryland indicated that their sales were notably stronger than
a year ago. In contrast, a producer of residential doors in North Carolina reported
a substantial decrease in orders. Factory hiring expanded on pace with recent
months and wages increased somewhat more quickly. Manufacturers told us that
raw material prices jumped higher in September and that prices for finished
goods rose moderately.
District bankers reported some softening in lending activity in September. Mortgage
lending was particularly weak. A banker from Charleston, S.C., noted that "September
loan volume looks like it is going to be about the same as August. Typically,
we see a pickup in September, but not this year." Commercial lending,
however, held up since our last report. A banker from Charleston, W.Va., for
example, said that his bank was able to maintain its lending volume by competing
harder. "There is a lot of hunger out there for the good deals, and we
have to be more aggressive to get the new deals and keep the old deals,"
Residential real estate agents across the District noted generally slower home
sales in September. A Washington, D.C., agent described that area's housing
market as "horrible," adding that sales volume was down 25 percent
from a year earlier. Additionally, he reported that home inventories had risen
sharply and that some sellers were trimming asking prices. In Virginia Beach,
Va., an agent also noted weaker home sales, saying that buyers were being more
selective. Many District agents told us that inventories in their housing markets
continued to rise and that buyer traffic had slowed. In contrast, contacts described
the Charlotte, N.C., market as strong, and an agent in Greenville, S.C., reported
good local housing market conditions. Also, a Fairfax, Va., agent reported renewed
sales activity in September, though he was not optimistic that it would hold
through year's end. He noted more interest by investors in purchasing
properties to hold, "for a while." Modest decreases in home prices
were noted by contacts in many areas, and an agent in Richmond, Va., told us
that sellers were offering more incentives to prospective buyers.
Commercial real estate agents across the Fifth District reported that leasing
activity remained steady in recent weeks. An agent in Richmond, Va., said that
client interest and inquiries increased, though actual activity had yet to improve.
A contact in Washington, D.C., however, noted a slowdown in retail leasing.
He speculated that a reduction of consumers' wealth had forced area retailers
to curb their expansion plans. On balance, there was little change in new construction
reported across the District. In addition, little change in vacancy and rental
rates was noted.
Tourist activity changed little on balance since our last report. Contacts in
coastal areas said that bookings declined in early September in the wake of
Hurricane Ernesto, but that activity rebounded later in the month. A contact
on North Carolina's Outer Banks said that the construction of rental homes
had leveled off but noted continued brisk remodeling activity. She also indicated
that consumer spending had increased as gas prices declined. Contacts at mountain
resorts in Virginia told us business had picked up and that timeshare sales
were particularly strong.
Temporary employment agencies in the District generally reported firmer demand
for workers. An agent in the metropolitan Washington, D.C., area indicated continued
strong demand for temporary workers in all skill areas--especially in the warehouse,
distribution, and manufacturing industries. In Richmond, Va., an agent reported
that some additional strengthening in the area's economy helped boost
demand for employees fluent in Spanish, especially in the transportation and
healthcare industries. Most agents continued to have difficulty finding skilled
workers. Temporary workers' wages remained steady across much of the District.
Tropical storm Ernesto brought much-needed rainfall to the Fifth District in
early September, but hindered field work and damaged crops in low-lying fields
in coastal regions. Analysts in North Carolina told us that tobacco farmers
in the state lost 25 percent of their crops because of flooding from Ernesto,
and incurred $76 million of crop damage across 19 counties. In South Carolina,
crop and other farm damage from Ernesto was estimated at $11.5 million. In contrast,
drier weather returned to the District during the latter part of September,
allowing farmers to keep harvesting activity on schedule. In Maryland, farmers
were beginning to harvest their soybean crops; the harvesting of corn and sowing
of barley were progressing well in Virginia, and the apple harvest was ahead
of schedule in West Virginia.
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Reports from Sixth District contacts indicated that business activity was mixed
in September. District merchants reported that sales exceeded expectations,
although auto sales were mixed. Home sales and housing construction continued
to trend lower in Florida, and there were reports of declining housing market
activity in other areas as well. In contrast, nonresidential construction continued
to expand modestly. Real estate loan demand moderated further, and an increase
in foreclosures was noted in parts of the District. Reports on manufacturing
and tourism were generally positive. Labor shortages were a source of wage pressure
in some industries, and cost increases related to energy and raw material prices
continued to be reported. Several businesses noted they had successfully raised
their output prices to offset a portion of the higher input costs.
District retailers reported that sales improved in September. Most merchants
noted that sales exceeded expectations and were above year-ago levels. Back-to-school
activity was particularly strong across the District, and the outlook among
most retailers remained positive. Reports of auto sales were mixed. Most domestic
brand dealers reported that sales of trucks and SUVs were disappointing in September,
and that inventories were too high. Some dealers noted that reduced prices and
new financing incentives helped to boost sales modestly later in the month.
Regional foreign brand distributors noted that sales were better in the Southeast
than the national average in September, but were off from year-ago levels.
Further declines were noted in District housing markets in September. The majority
of builders and Realtors reported that activity was down from a year ago and
inventories continued to rise. Weakness was most pronounced among Florida contacts,
while there were scattered reports that conditions deteriorated in parts of
Alabama, Georgia, and Tennessee. According to contacts, new home construction
was below year-ago levels in most parts of the District. Reports from the Mississippi
Gulf Coast were more robust, whereas reports from New Orleans indicated that
the pace of construction continued at low levels. Contacts suggested that the
high cost of insurance remained a major problem for property owners in the Gulf
Reports from commercial builders indicated that nonresidential construction
in the District was slightly stronger in September compared with a year earlier.
However, contacts also reported that rising material costs caused highway and
road projects in Alabama, Florida, and Georgia to be scaled back. Most reports
anticipated continued modest growth in nonresidential activity over the next
Manufacturing and Transportation
Reports on manufacturing production in September were generally positive. Activity
related to the energy sector was especially strong. A refiner was adding personnel
and a major shipbuilder received a contract to provide support vessels for the
offshore oil and gas industries. Steel industry contacts also reported good
results. Reports on capital outlays and future spending plans were mixed. For
instance, many contacts reported that capital investments were directed toward
increasing energy efficiency rather than adding to capacity. Reports from the
transportation sector varied. Some trucking companies noted slower activity,
especially those dealing with homebuilders. Meanwhile, regional rail companies
were encouraged by the steady growth in the volume of inter-modal container
Tourism and Business Travel
Reports from the tourism sector were generally positive in September. Passenger
traffic at Orlando International Airport was up over two percent from a year
ago, and central Florida theme park attendance was described as solid. Three
casinos recently reopened on the Mississippi coast, boosting the near term economic
outlook for that area. In New Orleans, however, the reduced number of tourists
and conventions continued to hamper the industry's recovery there. Industry
contacts expect tourist activity in New Orleans to pickup after the hurricane
Banking and Finance
Slowing loan demand, aggressive competition for deposits, and strong credit
quality, characterized reports from the District's banking sector in September.
Weaker real estate loan demand was noted in most parts of the District, while
reports on commercial and industrial lending were softer than in the last report.
Higher foreclosure rates were reported in parts of the region as increased interest
rates affected borrowers with adjustable rate mortgages. However, bank credit
quality indicators remained strong.
Employment and Prices
Labor shortages persisted in parts of the District. Some manufacturers reported
that they had raised their entry-level wages in an effort to attract workers.
Several residential construction firms continued to note difficulty in obtaining
qualified construction workers, despite the slowdown in building activity. A
spokesman for one staffing firm said that demand for skilled engineering and
finance specialists was strong. However, another staffing firm reported that
the overall demand for temporary workers had leveled off in September.
Many of the companies contacted stated that they have been able to pass on
at least some of their cost increases to their customers. However, a concrete
products manufacturing company had to absorb recent energy, freight, and raw
material cost increases because of the slowdown in homebuilding. Property insurance
premium increases continued to be a major concern for businesses in coastal
areas of the District.
Agriculture and Natural Resources
Drought conditions moderated slightly across the District, but growers in Alabama
and Georgia remained concerned about the impact of the summer drought on cotton
and peanut yields. Meanwhile, Florida citrus producers have benefited from higher
prices for oranges this year. Despite weaker export demand attributed to international
concerns about Avian influenza, lower poultry prices have reportedly encouraged
some large export orders from China, Russia, and Mexico.
High energy prices and a calm hurricane season resulted in a significant expansion
of exploration in the Gulf of Mexico in recent months. According to initial
estimates, a new, large find in the deep waters of the Gulf has the potential
to double U.S. crude oil reserves.
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Economic activity in the Seventh District expanded at a moderate pace during
late August and September. Consumer spending continued to increase modestly,
and business spending expanded again. Labor market conditions were little changed,
with small gains in employment on net. Residential construction and real estate
activity declined again in most areas, while nonresidential construction advanced
at a steady pace. Manufacturing activity expanded again, though at a modestly
slower pace than in the previous reporting period. Mortgage lending declined,
while commercial lending increased at a slightly slower rate than in the previous
reporting period. Nonenergy price pressures and overall wage increases held
steady. Corn and soybean harvests in the District were delayed by cool and rainy
weather in September, and early results indicated mixed yields relative to a
Consumer spending continued to increase modestly in August and September. Retailers
said back-to-school sales were within their expectations but "nothing
stellar." Cool weather reportedly helped apparel sales in some areas.
Retailers thought that lower gasoline prices had only a modest impact on their
sales. Retail inventories were at desired levels for general merchandisers,
but a furniture retailer said it was running down its inventories because its
suppliers were well stocked and able to fill orders quickly. Auto dealers reported
that sales trends have changed little in recent weeks; Big Three vehicles lagged
behind foreign nameplates and high-gas-mileage vehicles continued to sell well.
Tourism in Michigan was running similar to a year ago after a small pick-up
in recent weeks.
Business spending and hiring expanded again in the District. For the most part,
capital spending continued to increase at similar rates as in the previous reporting
period. Trucking volumes were up slightly over a year earlier, though one contact
said customers have been tentative and saw a chance of stronger activity in
the fourth quarter. Overall labor market conditions were little changed, with
small gains in employment on net. Manufacturing employment was mixed by industry.
Auto manufacturers and suppliers laid off workers, while toolmakers increased
employment. A contact in Rockford reported that a number of warehouses serving
retailers were significantly increasing employment. A local internet job posting
business said that job advertising continues to be robust. Shortages of skilled
manufacturing workers persisted. A temporary help services provider said that
demand growth in the District during the third quarter was a bit stronger than
the second quarter, led by a pickup in Illinois and Wisconsin.
Residential construction and real estate activity declined again in most areas.
Homebuilders observed sluggish demand in all market segments, and a Chicago-area
builder said high-end properties have been taking noticeably longer to sell.
However, a contact in the Milwaukee area said traffic through model homes was
holding up well. Builders in southeast Michigan reported a number of project
cancellations. New home prices were steady to down, and several builders were
adding free upgrades to help sell homes. A contact in Michigan noted that list
prices of existing homes were being reduced as well. Nonresidential construction
expanded at a steady pace. However, net absorption of office space slowed and
neared zero in many parts of the District, which a Chicago-area contact attributed
to the return of sublease space into the market. Looking forward, a few contacts
said that the development pipeline looked slower than average and that some
projects were delayed for budget reasons.
Manufacturing activity expanded again in late August and September, though the
pace of expansion was a bit slower than in the previous reporting period. Sales
of large- and medium-sized heavy equipment continued to be strong, but overall
order backlogs dipped below recent highs and deliveries of machines used in
home construction have fallen below year-ago levels. Sales of high-tech equipment
were growing well, with demand spread across cell phones, cellular infrastructure,
and defense communication equipment. A specialty steel producer reported robust
order growth and said that it was picking up new customers that had been having
trouble filling orders with their existing supply base. Toolmakers reported
continued strong order growth. One toolmaker added that it had not seen any
weakening in its oil-related business since crude prices have declined, and
another noted that demand from foreign firms has been strong. Heavy-duty truck
production and sales were at record levels. Net orders continued to fall, but
the decline was within expectations since production capacity was booked through
the end of the year, when new emission standards go into effect. Demand for
medium-duty trucks was driven by orders from truck dealers, as analysts report
that end-users were "clueless" about the new emission standards.
Light vehicle manufacturers forecast steady or slightly slower sales for the
rest of the year, though one expected lower gasoline prices and higher equity
prices to support demand. A steelmaker noted that vehicle production cuts were
starting to show through in weakening orders for flat-rolled steel and growing
inventories at steel service centers.
Lending activity moderated further. Bankers noted continued stagnation in mortgage
applications for home purchases but said that refinancing activity firmed between
August and September. One bank indicated that slower home price appreciation
was restraining demand for new home equity loans. Home equity credit line balances
declined further, though demand for closed-end loans ticked up. Household credit
quality remained in good shape in most places with stable delinquency rates
on mortgages and home equity loans; the exception was in Michigan, where delinquency
rates moved higher. Commercial lending continued to expand but at a slightly
slower pace than in recent reporting periods. Bankers in the Chicago area noted
that customers remained upbeat about business conditions and were increasing
their demand for financing, while bankers in Michigan reported little loan growth.
Commercial lending conditions continued to be competitive and interest rate
margins were narrow. One banker noted that competitive pressures were spreading
into second-tier lending, such as small business loans collateralized with personal
assets. Commercial credit quality remained in good shape, which one Detroit-area
banker attributed to the reluctance of lending officers to loan funds to problem
Nonenergy price pressures and overall wage increases were similar as in the
previous reporting period. Several contacts reported recent declines in energy
costs, but a manufacturer said their suppliers were waiting to make sure energy
prices stabilized before passing along the cost reductions. An appliance manufacturer
said the cost environment remained "unfavorable," due to high materials
prices. Construction materials costs were stabilizing at high levels. There
were no reports of significant changes in price movements at the retail level.
Wage increases continued at similar rates as in the previous reporting period.
Corn and soybean harvests in most of the District were delayed by continued
precipitation and unseasonably cool weather. The weather also inhibited crops
from drying in the fields, forcing farmers to use energy-intensive, mechanical
drying. Early reports on corn and soybean yields indicated mixed results around
the District, as extensive cloud cover late in the growing season hampered crop
development. Net crop receipts decreased across the District. Contacts expressed
concern about cash flows for grain farmers given higher operating costs for
the crop year overall, though the recent decline in energy prices has been a
positive factor, especially by reducing the cost of drying grain. Hog prices
declined in September, while cattle and dairy prices increased.
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Eighth District--St. Louis
Economic activity in the Eighth District expanded modestly since our previous
survey. Reports from manufacturing continued to be positive and contacts indicated
that the services sector continued to grow. Reports from contacts in residential
real estate markets were mixed; similarly, commercial real estate market conditions
varied across the District. Total loans at a sample of small and mid-sized District
banks increased slightly from mid-June to the end of August.
Manufacturing and Other Business Activity
Manufacturing activity in the District continued to expand since our previous
survey. Several manufacturers reported plans to open plants and expand operations
in the near future, while a smaller number of contacts reported plans to close
plants and reduce operations. Firms in the biofuel and fabricated metal product
industries reported plans to open new facilities in the District. Contacts in
the machinery, food, furniture, and miscellaneous industries reported plans
to expand existing facilities and operations. Firms in the nonmetallic mineral
and paper product industries reported plans to hire additional workers. In contrast,
contacts in the motor vehicle parts industry reported plans to lay off workers
and decrease operations, and a firm in the computer equipment industry announced
that it will close a plant in the District.
The District's services sector continued to expand. Firms in the freight
transportation, recreation, and professional business services industries reported
plans to build new facilities and expand operations. In contrast, a firm in
the business support services industry reported plans to close a facility in
the District. Car dealers in the District reported that sales from late August
through early September were down, on average, over year-earlier levels. Sales
of domestic cars and sport utility vehicles were particularly slow.
Real Estate and Construction
August year-to-date home sales were mixed throughout the Eighth District. Home
sales increased 11 percent in Memphis and were relatively unchanged in Louisville
compared with the same period in 2005. August year-to-date home sales declined
about 2 percent in both St. Louis and Little Rock. Residential construction
remained weak throughout the District. August year-to-date single-family housing
permits were down in nearly every metro area. Compared with the same period
last year, permits fell 34 percent in Louisville, 21 percent in greater St.
Louis, 11 percent in Memphis, and 8 percent in Little Rock. Permits, however,
increased 12 percent in Jackson, Tennessee, and 2 percent in Fayetteville, Arkansas.
Commercial real estate market conditions continued to be mixed throughout
the District. In Little Rock, the second-quarter 2006 industrial vacancy rate
increased slightly, the downtown office vacancy rate decreased, and the suburban
office vacancy rate increased. Contacts in east Memphis reported high demand
for Class A office space. Contacts in Little Rock reported that several large
construction projects are expected or underway. Contacts in northeast Arkansas
reported that commercial building remains slow, while contacts in Madison County,
Tennessee, reported that commercial construction is booming. In St. Louis, contacts
reported that new industrial construction is vibrant.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks showed
a modest increase of 0.6 percent from mid-June to the end of August. Real estate
lending, which accounts for 71.9 percent of total loans, increased 0.4 percent.
Commercial and industrial loans, accounting for 18.0 percent of total loans,
increased 1.1 percent. Loans to individuals, accounting for 4.3 percent of total
loans, fell 0.7 percent. All other loans, roughly 5.8 percent of total loans,
increased 1.8 percent. Over this period, total deposits at these banks increased
Agriculture and Natural Resources
Ample rainfall in much of the District since August slowed harvesting progress
in some areas. The District's overall corn harvest is behind its average
pace by 14 percent because of slower-than-normal paces in Illinois, Indiana,
and Kentucky; the soybean harvest is behind by 20 percent because of slower-than-normal
paces in Illinois, Indiana, Kentucky, and Missouri; and the sorghum harvest
is behind by 4 percent because of the slower-than-normal pace in Illinois. In
contrast, the cotton harvest in Arkansas and Mississippi is ahead of its normal
pace by 88 percent, while the rice harvest is ahead by 12 percent. The rain
improved pasture conditions in all District states, but at least one-third of
the pastures in Arkansas, Mississippi, Missouri, and Tennessee still remain
in poor condition.
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The Ninth District economy grew moderately since the last report. Increases
in activity were noted in consumer spending, commercial real estate, tourism,
agriculture, mining, and energy. Meanwhile, manufacturing activity was mixed,
commercial construction was steady, and residential real estate and construction
activity decreased. Labor markets tightened since the last report, and wage
increases were moderate. Significant price increases were noted for some building
materials, and significant decreases were noted in fuel and lumber.
Consumer Spending and Tourism
Overall consumer spending increased modestly from a year ago. A major Minneapolis-based
retailer reported same-store sales up about 3 percent in August compared with
a year ago. A Minneapolis area mall manager noted that recent traffic was higher
than a year ago, but sales were relatively flat. A solid back-to-school shopping
season was reported at another Minneapolis area mall; recent traffic was up
2 percent. Cool weather helped boost sales for sweaters and light jackets. A
mall manager in Montana noted that sales were very strong in August compared
with a year ago.
An auto dealer in eastern Montana reported that sales were up slightly from
a year ago. A representative of an auto dealers association in North Dakota
noted that sales over the past two months were sluggish compared with last year.
Late summer and fall tourism activity was up slightly from last year. A Chamber
of Commerce representative in northwestern Wisconsin noted strong traffic during
a recent autumn event. The fall tourism season is starting to pick up in South
Dakota, according to an official; the pheasant hunting season looks promising.
A tourism official in the Upper Peninsula of Michigan noted positive reports
by tourism-related businesses during August and September. Some lodging operators
in northeastern Minnesota noted a slower August compared with last year.
Construction and Real Estate
Commercial construction activity was steady. A bank director noted that commercial
construction was active, although the pace of activity might be slowing. August
residential and commercial permits in Rochester, Minn., were down 22 percent
in value from a year ago. Developers announced plans for a $14.4 million industrial
park in suburban Minneapolis, and other developers announced plans for a $5.2
million, 55,000- square-foot fitness center in suburban St. Paul. However, residential
construction continued to weaken around the District. A Minneapolis director
heard contractors describe activity there as slow. A proposed condominium development
plan in St. Paul was delayed, and there is doubt about whether some downtown
Minneapolis condo developments will go forward. However, a western North Dakota
director described residential construction in his area as robust.
Residential real estate continued to slide. August home sales in Minneapolis-St.
Paul were down 27 percent from 2005, with pending sales down 23 percent. Sales
were down 10 percent from last year in the Upper Peninsula of Michigan; the
market for recreational land is the only strong segment there. However, a representative
of a Realtors' association in Sioux Falls, S. D. described the market there
as on pace with last year's record-breaking levels, with lower priced homes
driving the market. The commercial sector stayed strong, however, particularly
the Minneapolis industrial market, which saw rising prices, according to an
official from a commercial real estate firm. The markets for retail space in
North Dakota and Montana are strong. Office vacancies crept up in the Minneapolis
and St. Paul central business districts.
Growth in the manufacturing sector was mixed. An October survey of purchasing
managers by Creighton University (Omaha, Neb.) indicated slight growth of manufacturing
activity in the Dakotas and Minnesota. A contact from a specialty food products
company in North Dakota reported strong demand and was expanding workers' overtime
hours. In Minnesota, a contact from a manufacturer of parts for the medical
and transportation industries reported strong demand, added production, and
increased hiring. An industrial machine producer in northwestern Wisconsin noted
a slowing down in demand from domestic customers and increased demand from foreign
customers. However, due to weak residential construction, two oriented-strand
board plants suspended operations in Minnesota. A contact at a lumber mill in
northwestern Wisconsin reported sales are "real slow."
Energy and Mining
Activity in the energy and mining sectors increased since the last report. Although
oil and gas exploration and production in the District were stable, the alternative
energy industry, including wind, biodiesel, and ethanol, continued to expand
at a rapid pace. Mining production is at near-capacity across the District.
A Montana platinum mine reopened after shutting down due to nearby wildfires.
A Minnesota iron-mining official noted that "all systems are go," as production
is strong and new mines are in the permitting process.
Agricultural activity increased since the last report. Late summer rains and
improved harvest estimates aided farmers. District sugar beet producers are
expecting a bumper crop. The U.S. Department of Agriculture reported that corn
and soybean progress in District states is ahead of last year and the five-year
average. The corn harvest in Minnesota is expected to come in at a robust 1.1
billion bushels. However, District corn and soybean production is projected
to decrease from last year.
Employment, Wages and Prices
Labor markets tightened slightly since the last report. A temporary staffing
agency survey of Minneapolis-St. Paul companies showed that 36 percent of respondents
expect to increase staffing levels during the fourth quarter, while 11 percent
expect declines. A year ago, 26 percent expected increases, while 13 percent
anticipated decreases. More than half of the 149 employers in Minnesota surveyed
by St. Cloud State University's Career Service Center plan to hire new college
graduates this year. Construction of an anti-cancer-agent research facility
is under way in Minnesota, making room for 100 new research positions. In contrast,
a telecommunications company based in Minnesota plans to lay off 225 employees
Wage increases were moderate. Wages for manufacturing workers in District
states increased 1.8 percent for the three-month period ended in August compared
with a year ago. Workers at five hospitals in the Minneapolis-St. Paul area
recently agreed to a new contract that provides wage increases of 4 percent
in each of the first two years and 3 percent in the third, and employer contributions
to health insurance premiums will increase.
Significant price increases were noted in some building materials, and decreases
were noted in fuel and lumber. Prices for copper and brass mill shapes, steel
mill products, asphalt, and wire and cable were notably higher than a year earlier.
Meanwhile, gasoline prices decreased since the last report. In Minnesota, gasoline
prices toward the end of September were 49 cents per gallon lower than a year
ago and 75 cents lower than a month earlier. Regional prices for diesel fuel
were 23 cents per gallon lower than a year ago. Recent plywood and softwood
lumber prices were also down from last year.
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Tenth District--Kansas City
The Tenth District economy expanded moderately in September with the pace of
growth firming since the last survey period. Consumer spending strengthened
with stronger retail sales and tourism activity. The expansion in labor markets,
energy activity, and commercial real estate activity advanced further. District
manufacturing activity was solid despite expanding at a slower pace and residential
real estate activity continued to soften. Agricultural conditions improved slightly
with recent precipitation. Wage and wholesale price pressures remained contained
and retail price pressures were subdued.
Consumer spending strengthened in September after growing more slowly in August.
District retail contacts reported a rebound in sales and heavier traffic in
retail malls. Sales gains were generally broad-based, but contacts suggested
some weakness in home furnishings and home improvement items. Retail sales were
up from a year ago and retailers expected higher sales in the next three months.
Auto dealers reported slower sales growth as fewer incentives were offered.
High gas mileage vehicles sold well while truck and SUV sales remained slow.
Auto inventories rose in September, but stood at acceptable levels. Auto dealers
expected slower auto sales and rising inventories in the months ahead. Travel
and tourism activity strengthened in September. District hotels reported solid
gains in hotel occupancy rates. Hotel and tourist attraction operators expected
activity to improve going forward.
The expansion in district manufacturing activity slowed in September. Plant
managers indicated that growth in production, shipments, and new orders slowed
since the last survey period, but remained well above year-ago levels. Inventories
edged up from August and suppliers to auto manufacturing plants reported slower
sales. Still, manufacturers remained optimistic about future sales. Supplier
delivery times improved in September. Capital expenditures remained solid as
did expectations for future investment.
Real Estate and Construction
The residential real estate market continued to soften while commercial real
estate activity expanded. Contacts indicated that home starts, traffic of potential
buyers, and home prices were down relative to a year ago. Inventories of existing
homes rose and contacts reported that the time-on-market for homes lengthened,
despite the increased use of concessions to attract buyers. Home sales were
soft in most segments of the housing market, with particular weakness in low
to moderately priced housing markets. Builders expected home starts to decline
further, due in part to normal seasonal slowing. In contrast, commercial real
estate activity expanded. Although commercial building starts fell, vacancies
were down and absorption was up. Commercial real estate contacts expected activity
to remain firm.
Bankers reported that loans increased somewhat since the last survey, while
deposits held steady. Demand for commercial and industrial loans rose slightly,
while demand for other loan categories was generally unchanged. Money market
deposits and CDs were higher than in the prior period. Lending rates and standards
remained basically unchanged. Overall loan quality improved somewhat compared
to the same period a year ago, and respondents expected loan quality to improve
moderately in coming months.
Energy activity continued to expand in the district in September. Oil and gas
drilling rig counts remained above year-ago levels. District contacts expected
the expansion in energy activity to continue, but at a slower pace. The availability
of qualified labor and equipment remained a concern. Demand for gasoline and
oil slowed with the end of the summer driving season. Industry contacts, however,
expected natural gas prices to rise this winter.
Agricultural conditions generally improved across the district since the last
survey in August. Cooler weather and scattered rain helped to improve soil moisture
and pastures conditions, but slowed crop maturation and fall harvest. Elsewhere,
windy conditions forced some producers to delay winter wheat plantings or risk
erosion. Still, producers remained generally optimistic about field conditions
going forward. Despite improved pastures, cattle producers may continue to draw
down herds to help pastures recover from drought.
Labor Markets and Wages
Labor markets continued to expand while wage pressures remained contained. District
hiring announcements continued to outpace layoff announcements. Most contacts
continued to report some type of labor shortage, especially for skilled and
specialized workers, including engineers, experienced sales workers, oil and
gas workers, and manufacturing workers. Some district contacts indicated shortages
of entry level positions. The share of businesses experiencing wage pressures
eased somewhat since the last survey. Most businesses expected wage gains to
be in line with recent wage increases, but some expected that larger wage increases
would be needed to attract and retain specialized workers.
Wholesale price pressures continued to ease and retail price pressures remained
subdued. Fewer manufacturers reported rising raw materials prices and fewer
also expected price increases in the coming months. Nevertheless, prices for
raw materials remained high, especially for materials derived from oil and natural
gas. The share of manufacturers reporting higher finished goods prices held
steady. Looking forward, the share of firms planning output price increases
also held steady. District builders indicated that metals prices continued to
rise in September. Most retail contacts indicated that prices were stable relative
to recent months. Going forward, most retailers expected selling prices to remain
flat or rise only marginally.
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The Eleventh District economy continued to cool from high levels in September.
Falling fuel prices increased profits and optimism for some firms, but increased
caution has crept into the residential construction and energy industries. Energy
activity is still robust, but drilling has paused amid growing concern about
a glut of natural gas in storage. Nonresidential construction is vigorous, and
residential building is strong but continuing to cool. Manufacturing activity
is also quite strong, despite slowing demand from residential builders. Retail
sales were up, and demand in the service sector is still very good, but there
continue to be pockets of softness. Financial service firms reported slower
consumer lending, but commercial lending remained strong. Rain has slightly
improved agricultural conditions.
Energy costs have fallen, relieving upward pressure on prices. Selling prices
have fallen for some products where demand has fallen precipitously, such as
for lumber. But in most instances, lower energy costs have halted the rise in
selling prices and not yet resulted in price declines. Some firms say lower
energy and commodity prices have boosted profits to offset recent sales declines.
After peaking near $78 in July, crude oil prices fell to near $60 in September.
Demand for crude oil has been strong, but inventories are well above last year's
level and the 5-year average. Wholesale gasoline prices fell about 50 cents
per gallon in September, and the pump price fell further. Distillate prices
fell less rapidly than gasoline because the winter heating season is approaching.
Spot natural gas prices dipped from about $6 to just over $4 per million Btu
at Henry Hub. Natural gas in storage is roughly 12 percent higher than the 5-year
average. Some producers say they are holding natural gas off of the market in
anticipation of the higher prices the futures market shows for winter. Other
producers are preparing but not perforating their natural gas wells, so they
can sell forward the initial surge of production at a higher price.
Home prices continued to rise in Houston, but in other cities softer demand
has led builders to add incentives. Apartment rental rates are edging up, but
at a slower pace than was expected earlier this year. Commercial builders reported
higher construction costs.
While there were scattered reports of hiring freezes or layoffs, the labor market
remains tight. Contacts across many sectors are still reporting problems finding
skilled labor. Skills in short supply include high-tech engineers, automobile
mechanics, truckers, accountants and workers for the energy and commercial construction
industries. Wages have increased for most of these types of employees.
Manufacturing activity continued to expand at a strong pace, boosted by commercial
construction and a backlog of orders from the energy industry. Sales of food
products were very strong and accelerated this month, which contacts attribute
to lower gasoline prices boosting restaurant activity. Demand has slowed for
corrugated boxes, and contacts in this industry have become less positive about
the outlook. High-tech manufacturers said shipments were still strong, but there
is continued uncertainty about the outlook.
Demand continued to slow for products used in residential construction, but
some firms said recent slowing may have been partially weather-related. Producers
of stone, clay and glass reported sales declines of as much as 20 percent from
a year ago, and inventories are up for some products. Lumber producers reported
a significant drop in demand and increase in inventory over the past month,
mostly because of reduced demand from national markets, although sales in Texas
were also weaker. Producers of wood products, such as cabinets, say demand is
unchanged. A few producers of construction-related products report that some
large publicly-traded builders have sent letters asking for price reductions
to help them achieve quarterly income projections. This has led producers to
become wary about doing business with these builders.
Fabricated metals producers report no change in sales volume but had become
more optimistic. Demand for residential construction products has been soft,
but sales to the energy industry remain strong. Primary metals producers reported
little change in demand overall, with strong demand for commercial building
helping compensate for slowing activity from the residential sector.
Gulf Coast refineries continued to operate at very high levels, near 97 percent
in recent weeks. Gasoline demand fell seasonally but is still 4 percent stronger
than last year. Demand softened for synthetic rubber and ethylene. Plant outages
temporarily boosted ethylene prices, and contacts suggested recent weakness
in sales is a result of customers using inventory in anticipation of lower prices
in the weeks ahead.
Activity continued to increase for some temporary service firms, particularly
in Houston and East Texas, but demand dropped unexpectedly at some companies,
leading these contacts to be less optimistic. Accounting firms say demand growth
has slowed from last year, mostly due to a slow down in Sarbanes-Oxley related
work. Most law firms reported continued strong demand and are optimistic about
Overall cargo shipping continued to increase, with some contacts noting particularly
strong international activity. Railroads reported strong demand, but there has
been a modest decline in trucking volume. Airlines reported a rebound in passenger
traffic, with good loads and bookings for long-haul and international flights.
Demand was reported as slower for short hops that are more affected by the increased
hassle of increased security restrictions.
Retail sales improved in September after weakness over the summer. Sales growth
was better than expected but lower than earlier this year. Contacts mostly attribute
the pickup to lower gasoline prices, but other factors were mentioned. Auto
sales continued to be soft according to dealers, who say imported fuel-efficient
vehicles are selling well but sales of domestic vehicles remain poor. Sales
are strong for luxury vehicles, both domestic and imported.
Construction and Real Estate
The housing market continues to soften but remains quite strong. Sales are particularly
strong in Houston, Austin and El Paso. Dallas real estate agents say the "buying
fervor" is a little slower, but relocations and healthy job growth are
still boosting activity. New home inventories have inched up, despite strong
demand in some markets. Building is expected to slow from the rapid pace of
growth seen earlier this year. While the market remains strong, contacts have
become "more nervous and anxious" in their outlook, especially given
recent reports of a decline in housing sales and prices at the national level.
Apartment construction remains strong, and occupancies are still near or above
90 percent in most areas. In Dallas, demand for apartments picked up robustly
over the past couple of months, boosting occupancies and rents. Houston contacts
attribute some recent softness to the "Katrina effect" as evacuees
leave apartments for permanent residences. With many Houston projects in the
works, some contacts were concerned with the possibility of overbuilding.
Construction and demand for office space is still increasing. Contacts characterize
the Houston market as "the healthiest we've seen in a long time."
Dallas contacts say the large blocks of space have become more limited, shifting
pricing power to landlords.
Commercial loan demand remained strong. The market remains very competitive,
but firms say there is no apparent credit quality deterioration. Deposit growth
is steady, but deposits are increasingly difficult to get. Consumer lending
slowed further, which was attributed to borrowers paying down existing debt.
Automobile lending has softened.
After increasing strongly for months, the Texas and U.S. rig counts were virtually
unchanged in September. Low natural gas prices have raised caution in the industry.
Demand for oil-field equipment and energy services is still strong, stimulated
in part by international activity, where the rig count continues to rise.
Heavy supplies of natural gas have increased pipeline pressure in parts of
the country. Concern is rapidly growing about the possibility that a warm winter
would sustain lower prices. Drilling has not yet been cut, which contacts say
is partly because of the backlog of equipment and workers in the industry. Firms
are hesitant to give up a rig or their place in line for oilfield equipment
or services. While oil prices have fallen, this drilling is expected to be more
immune from a price downturn because oil projects are larger and based on conservative
outlooks for oil prices, have long-term horizons and deeper pockets behind them.
Most of the District continues to suffer from severe or extreme drought, but
September rain brought some relief. The moisture helped the wheat crop get off
to a good start, improved range and pasture conditions and eased pressure on
livestock producers to liquidate herds. Cotton harvesting is under way in some
parts of the District, and contacts say production will be 35 percent less than
last year. Contacts remain concerned that low crop production and rising costs
will make it difficult for producers to repay farm loans. Federal grants recently
made available under the livestock assistance program are expected to ease the
cash flow situation for some producers.
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Twelfth District--San Francisco
Economic activity in the Twelfth District expanded at a moderate pace on net
during the month of September. Falling energy prices reduced upward pressures
on the final prices of some goods and services, while the pace of wage increases
generally remained contained but exerted upward price pressure in some industries.
Reports on retail sales suggested modest growth on net, while demand for most
services remained strong. Orders and output grew further for manufacturers and
agricultural producers. Residential real estate markets continued to cool, while
activity in commercial real estate markets generally expanded further but moderated
in some areas. District banks reported solid loan demand and good credit quality
but further declines in demand for residential mortgages.
Wages and Prices
District reports indicated that overall price inflation remained modest. Energy
prices fell noticeably in most areas, reducing the retail price of gasoline
and relieving upward price pressures for assorted energy-intensive products.
Contacts also noted a decline in the prices of selected building materials used
primarily for residential construction, although the prices of some other building
materials rose. More generally, respondents noted limited price pressures.
Overall wage growth remained moderate, in the range of 2-4 percent on an annual
basis. Wage growth was more rapid for selected groups of workers in short supply,
notably in the health-care, finance, and construction sectors, and in fast-growth
areas with very tight overall labor markets, such as Idaho and Utah; however,
a few respondents in those areas indicated reduced wage pressures of late. Rising
labor costs were offset by enhanced production efficiency in most cases, but
a few reports indicated significant pass-through to final prices.
Retail Trade and Services
District retail sales grew modestly from the previous survey period. Sales rose
somewhat for small retail items such as apparel, but they fell for items used
for home improvement. Auto demand changed little from the previous survey period;
sales of fuel-efficient import vehicles continued to rise at a solid clip, while
sales fell further for large, fuel-inefficient domestic models.
Service providers generally reported strong demand. Activity continued to
expand at a robust pace for providers of health services, and sales grew further
for providers of media and high-tech services. Tourist activity remained at
high levels in most major markets, but some moderation was noted. In Hawaii,
tourist visits and spending were down compared with a year earlier. In parts
of California, hotel occupancy rates reportedly have stabilized following a
prolonged climb, but room rates continued to rise.
Demand for District manufactured products grew further during the September
survey period. Sales of semiconductors expanded at a solid pace that was in
line with industry forecasts, although inventories reportedly rose slightly;
capacity utilization generally remained in the range of 90 percent. Rapid production
activity continued for producers of commercial aircraft and for their parts
suppliers, while makers of machine tools reported substantial growth in new
orders of late. Food processors reported further sales gains, and demand for
apparel was "steady." By contrast, demand for selected building materials used
primarily for residential construction fell further. Except for tight supplies
of skilled workers in some areas, manufacturing contacts generally reported
little or no constraints on their ability to expand output further.
Agriculture and Resource-related Industries
Sales of agricultural and resource-related products grew further and production
conditions were stable in general. Sales were strong for livestock and most
crops, and weather conditions generally were favorable, keeping production on
track. However, some spinach producers have put planting on hold due to the
recent bacterial outbreak associated with that crop. Respondents noted further
easing of labor shortages in the agricultural sector and a reduction in upward
price pressures due to falling fuel prices. Extraction of oil and natural gas
continued at a rapid pace, with very high capacity utilization noted. However,
inventories of natural gas were reported at near-record levels, maintaining
downward pressure on the price of this commodity.
Real Estate and Construction
Demand for residential real estate fell further in most areas, while activity
in commercial real estate markets continued to expand but at a slower pace than
previously in some areas. The pace of home sales, construction, and price appreciation
slowed further in most parts of the District, and contacts in some areas noted
that developers have been offering price concessions and other incentives to
entice buyers. Demand for commercial and industrial space rose further in most
areas, reducing vacancy rates and leading to further increases in rental rates;
however, contacts in a few areas reported a recent reduction in the pace of
demand growth. In areas where home demand has been resilient or commercial and
public projects have grown rapidly, builders continued to face project backlogs
and high costs. In other areas, however, overall building activity has fallen,
and contacts noted that reduced home demand has led to layoffs for mortgage
brokers and real estate agents.
District banking contacts reported solid loan demand and good credit quality.
Overall loan demand was reported to be "healthy," as further growth in commercial
and industrial loans generally offset declines in demand for home loans. However,
a few contacts noted slight weakening in overall loan demand relative to the
previous survey period. Credit quality was high in general; for example, loan
delinquencies were reported to be "practically nonexistent" in Utah and Idaho.
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