March 4, 2009
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Prepared at the Federal Reserve Bank of San Francisco based on information collected on or before February 23, 2009. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.
Consumer spending remained sluggish on net, although many Districts noted some improvement in January and February compared with a dismal holiday spending season. Travel and tourist activity fell noticeably in key destinations, as did activity for a wide range of nonfinancial services, with substantial job cuts noted in many instances. Reports on manufacturing activity suggested steep declines in activity in some sectors and pronounced declines overall. Conditions weakened somewhat for agricultural producers and substantially for extractors of natural resources, with reduced global demand cited as an underlying determinant in both cases. Markets for residential real estate remained largely stagnant, with only minimal and scattered signs of stabilization emerging in some areas, while demand for commercial real estate weakened significantly. Reports from banks and other financial institutions indicated further drops in business loan demand, a slight deterioration in credit quality for businesses and households, and continued tight credit availability.
Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food. With rising layoffs and hiring freezes, unemployment has risen in all areas, reducing or eliminating upward wage pressures. A number of reports pointed to outright reductions in hourly compensation costs, through wage reductions and reduction or elimination of some employment benefits.
Consumer Spending and Tourism
The weakness in discretionary spending was also reflected in relative sales by product type. Sales of luxury goods such as jewelry, electronic equipment, and other big ticket items were reported to be especially slow in the Philadelphia, Richmond, and Chicago Districts. Demand for furniture, appliances, and other durable household items remained quite depressed, according to Kansas City and San Francisco. Sales of new automobiles and light trucks remained exceptionally sluggish, with Philadelphia, Richmond, and Kansas City reporting further declines from an already slow pace of sales. Used vehicles fared better in general, with Kansas City and San Francisco noting that they were selling well and Cleveland and Chicago reporting improvement over the previous period. Reports of gains in retail spending were largely limited to grocery stores and pharmacies, although reports from Philadelphia, St. Louis, and Richmond indicated some pickup in sales of apparel, which the latter District attributed in part to severe winter weather.
Travel and tourist activity continued to fall in most areas, as households reduced their vacation travel and corporate travel spending was scaled back. Tourist visits and spending were reported to be slower than in the previous reporting period or down from twelve months earlier for major tourist destinations in the Richmond, Atlanta, Minneapolis, New York, and San Francisco Districts, with the declines in the latter two characterized as "substantial" and "sharp," respectively. Airline traffic fell in the Kansas City, Dallas, and San Francisco Districts. Business at restaurants dropped substantially in some areas, notably in the Kansas City and San Francisco Districts, with extensive layoffs and restaurant closures reported in the latter.
Demand for shipping and transportation services fell further. New York, Cleveland, Richmond, and Atlanta reported reduced activity and layoffs among trucking and rail companies, with the decline in activity described as considerable in some cases. Richmond also reported that shipping activity through ports in that District slowed further, as imports and exports both continued on a downward trend.
Manufacturing of biotechnology products and pharmaceuticals was one bright spot, with Boston reporting sales gains at a double-digit pace for biopharmaceutical firms, Richmond noting continued hiring of temporary staff among life sciences and pharmaceutical companies, and Chicago reporting continued strong demand for pharmaceuticals. Aircraft manufacturers in the St. Louis District are planning to expand existing production facilities; activity in this sector was largely stable in the Cleveland and San Francisco Districts, but contacts expect some slowing in the future as airlines reduce capacity due to a slowdown in air travel. Food processers and manufacturers of selected chemicals also saw further increases in demand during the reporting period, according to Philadelphia and San Francisco.
As a result of declining production, capacity utilization fell in most manufacturing sectors, with rates as low as 25 to 50 percent reported for some metal fabricators. Several Districts reported that capital spending plans were curtailed further during the reporting period, notably for companies in the retail sector and within manufacturing, which suggests the possibility of further reductions in orders for capital goods going forward.
Real Estate and Construction
Demand for commercial, industrial, and retail space fell further during the reporting period, with some evidence of more rapid deterioration than in preceding periods. Vacancy rates rose and lease rates declined on a widespread basis; New York noted that commercial real estate markets "weakened noticeably," while Atlanta described reports on commercial real estate that were "decidedly more negative" than in previous periods. Construction activity has declined commensurately, and assorted reports suggest that market participants expect this weakness to continue at least through the end of 2009. Cleveland noted that public works projects have shown stability of late, although they declined in the San Francisco District as a result of the budgetary struggles of some state and local governments there. Credit constraints and uncertainty were reported to be a drag on commercial construction and leasing activity in the Philadelphia, Chicago, Dallas, and San Francisco Districts.
Banking and Finance
The availability of credit generally remained tight. Lenders continued to impose strict standards for all types of loans, with scattered reports of further tightening and particular scrutiny focused on construction projects and commercial real estate transactions. Despite stringent standards, Atlanta and Chicago noted that funds were available for well-qualified applicants, and Dallas cited contacts who reported that capital has become more readily available. Credit quality fell for all loan categories, with declines cited by most Districts with the notable exception of Kansas City, where current loan quality was unchanged and expectations for future quality improved modestly. New York reported that the deterioration in quality was most pronounced for consumer loans, while Chicago emphasized deterioration in the quality of business loans as a result of rising bankruptcies. Scattered reports suggested improved liquidity in some credit markets and reductions in interest spreads, with Chicago noting that conditions for the commercial paper and corporate bond markets "improved significantly."
Agriculture and Natural Resources
Activity slowed significantly for producers of natural resource products. Reduced global demand and lower prices for oil have prompted a sharp cutback in oil extraction activity since last fall, with Dallas noting an "unprecedented" decline in the domestic rig count that was largely concentrated in their District. Respondents from the Kansas City District expect oil extraction activity to fall further as the year proceeds, and Minneapolis noted that natural gas and mining activities also faltered during the reporting period.
Prices and Wages
Upward wage pressures eased in all Districts, as a rising incidence of hiring freezes and continued job cuts increased the degree of labor market slack. Contacts from various Districts pointed to a higher incidence of wage freezes resulting from the added slack, with a few noting outright wage reductions. Some employers also reduced compensation by lowering benefit costs, including reduced contributions to employee retirement programs, according to the Philadelphia, Chicago, Minneapolis, and San Francisco Districts.