January 17, 2007
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Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before January 8, 2007. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
Most reports from the Federal Reserve District Banks indicated that economic activity expanded at a modest pace since the last report. The New York and San Francisco Districts reported moderate growth, while the Dallas District reported further deceleration from a high level of activity. The Minneapolis District reported slight growth. The Boston District characterized activity as mixed, and the Cleveland District saw softening activity.
Districts generally reported modest increases in retail sales, and vehicle sales were sluggish in several Districts. Tourism spending was up in a number of Districts. Reports on the service sector were generally positive; many Districts reported growth in technical, legal and information services. Manufacturing activity continued to expand in most Districts, with weakness reported mainly for products supporting the residential construction industry. Nearly all Districts reported a continued softening in housing markets, and high inventories of new homes have generally led to a slowing in residential building. In contrast to the housing sector, commercial real estate markets continued to see strong activity in most Districts. Lending activity was mixed, with commercial and industrial lending generally up while residential mortgage origination and refinancing continued to weaken. Overall weather conditions and high prices aided the agriculture sector. Energy production and exploration remained at high levels, and the alternative energy sector increased. Mining output grew.
District reports generally described labor market conditions as tightening and cited examples of some businesses having difficulty finding qualified workers. Despite expanded hiring, Districts reported relatively moderate gains in wages; however, some Districts noted certain business lines that experienced wage increases and have concerns about increases in the benefit portion of compensation. District reports indicated moderate price increases overall as prices for energy and a number of materials eased and competition kept prices for final goods in check.
Consumer Spending and Tourism
Vehicle sales were sluggish in several Districts. Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis and Kansas City reported slow vehicle sales. Auto sales were mixed in the Cleveland District, while Dallas reported a pickup in sales and San Francisco described sales as moderate on net. Several reports noted that foreign car sales were stronger than domestic truck sales; however, a few reports indicated strength in SUV demand due to lower gas prices.
Tourism spending was up in a number of Districts. Boston, New York, Atlanta, Chicago, Kansas City and San Francisco provided positive assessments of tourism activity, while Richmond described activity as mixed and Minneapolis noted that tourism was in the doldrums in several areas due to a lack of snow. Tourism activity remained at high levels in most major markets in the San Francisco District, while tourism and travel exceeded expectations in the Boston metropolitan area.
Strong demand for products used in the energy sector was noted by the Boston, Atlanta, Chicago, Minneapolis and Dallas Districts. Philadelphia, Dallas and San Francisco noted increases in food products. Boston, Cleveland, Atlanta, Chicago, Dallas and San Francisco reported continued weakness among manufacturers that support the residential construction industry.
Real Estate and Construction
All Districts reported slow home sales, except for Richmond, which saw a modest increase. Decreases in home prices were reported by Boston, New York, Atlanta and Chicago, while Kansas City said prices were subdued. In contrast, Dallas reported modest price increases and San Francisco said homes were appreciating but at a slower pace. New York reported that Manhattan's co-op and condo market improved in the fourth quarter of 2006, with flat prices but higher sales volume. Dallas noted that the low-priced home market was slower than higher-priced segments. Realtors in San Francisco were offering significant incentives to sell properties. New York reported rent increases, while Dallas noted that apartment vacancies edged up in the cities of Dallas and Houston, largely due to an exodus of Hurricane Katrina evacuees.
In contrast to the housing sector, commercial real estate markets continued to see strong activity in most Districts. Cleveland, Atlanta, Chicago, St. Louis, Minneapolis and San Francisco saw increases in commercial building. New York reported that relatively little new office space was under construction in New York City, even though rents have increased and vacancy rates have fallen. Atlanta, St. Louis and Minneapolis reported growth in commercial real estate market activity, with Kansas City, Dallas and San Francisco also reporting increased office rents. Chicago saw an increase in office absorption across most of the District, with the exception of the Detroit area.
Banking and Finance
Agriculture and Natural Resources
Activity in the energy and mining sectors remained at strong levels. Cleveland, Minneapolis, Kansas City, Dallas and San Francisco reported robust oil and gas activity. Cleveland and Kansas City noted some capacity constraints. Atlanta and Minneapolis reported growth in the alternative energy industry. Meanwhile, mining activity increased in the St. Louis and Minneapolis Districts.
Despite expanded hiring, Districts reported relatively moderate gains in wages; however, some Districts noted certain business lines that experienced wage increases and had concerns about increases in the benefit portion of compensation. Boston, Philadelphia, Cleveland, Chicago, Minneapolis, Kansas City and San Francisco described wage increases as moderate or continuing at rates similar to those in the preceding reporting period. However, Boston, Philadelphia, Cleveland, Dallas and San Francisco mentioned higher increases for benefit costs, particularly health care. Dallas reported that many contacts said high and rising labor costs, including the cost of health insurance, top their list of concerns for the coming year. A contact in the Chicago District said that salaries for executives were "vigorously competitive."