Beige Book
For use at 2:00 p.m., E.S.T.
Wednesday
March 6, 2002
Summary of Commentary on
Current
Economic
Conditions
by Federal Reserve District
February 2002
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
FEBRUARY 2002
TABLE OF CONTENTS
SUMMARY ...............................................
...............................
First District - Boston ................................................
...............
i
-1
Second District - New York ......................................................... IIThird District - Philadelphia ......................................................... III-1
Fourth District - Cleveland .......................................................... IV-1
Fifth District - Richmond ............................................................ V-1
Sixth District - Atlanta ................................................................. VISeventh District - Chicago ........................................................... VII-1
Eighth District - St. Louis ........................................................... VIII-1
Ninth District - Minneapolis .........................................................
IX-1
Tenth District - Kansas City ............................................................
X-1
Eleventh District - Dallas ............................................................ XI-1
Twelfth District - San Francisco ................................................... XII-1
SUMMARY¹
A majority of Federal Reserve districts report some signs of improvement in economic
conditions in January and early February. The Boston, Philadelphia, Richmond, Atlanta,
Minneapolis, and San Francisco districts note some pickup in activity, Chicago cites a more
positive tone, and Kansas City and St. Louis say that economic activity is weak, but there are
some bright spots. Cleveland indicates that although some positive signs continue to emerge,
overall business conditions in the district have neither improved nor deteriorated compared with
the end of last year. New York reports mixed signals, and Dallas notes continued weak activity.
Most districts say that manufacturing activity is generally weak, but selected industries in
some areas are showing more positive results. Boston, New York, Philadelphia, Atlanta, Dallas,
Richmond, Kansas City, and San Francisco report modest improvements in retail sales recently
compared with the end of last year. Retail results were more mixed in the other districts.
Districts indicate that residential real estate markets are generally stronger than commercial
markets. Reports on demand for bank loans are mixed across the districts. Warm, dry weather
figures prominently in agricultural reports. Warm weather and the slow global economy have
contributed to weaker energy demand.
Labor markets continue to be slack in most districts, with many citing business contacts
who have suspended bonuses, frozen wages, or skipped annual salary increases. However,
contacts at temporary employment firms in several districts suggest employment is bottoming
out, and new hires in selected occupations are said to be in short supply. While wage and price
pressures are described as "subdued" to "largely nonexistent," business contacts in many districts
mentioned rising health insurance costs. Firms in most districts indicate that their purchase and
¹ Prepared at the Federal Reserve Bank of Boston and based on information collected before February 26,
2002. This document summarizes comments received from business and other contacts outside the Federal
Reserve and is not a commentary on the views of the Federal Reserve officials.
selling prices are generally stable, but Dallas reports upward pressure on services prices and
declining prices for chemicals and paper, while Cleveland notes an increase in spot market prices
for steel.
Retail
Most districts report that retail sales during January and February were unchanged from a
year earlier, but several noted improvement in early 2002 compared with late 2001. In addition,
the Philadelphia, Atlanta, and Kansas City districts say that sales were higher in early 2002 than a
year earlier. New York, Richmond, Atlanta, Kansas City, and San Francisco indicate that while
tourism continues to be weak, it has improved since the second half of 2001. Home furnishings
and appliances were reported to be growing strongly in the Cleveland, Richmond, Atlanta, St.
Louis, and Kansas City districts. Philadelphia, St. Louis, Dallas, and San Francisco note that
motor vehicle sales remain solid, but are down from the rapid pace set in the fourth quarter of
2001 because price promotions have ended; Dallas also reports that automobile dealer profit
margins are lower.
Wage and price pressures in the retail sector are virtually nonexistent. Retail
employment is said to be stable in Boston, but down in the Richmond and San Francisco districts.
Most districts indicate that retail contacts expect flat to slightly increasing sales during the first
half of 2002; only retailers in the St. Louis and Philadelphia districts expect somewhat stronger
sales growth during this period. The Boston, Cleveland, and Kansas City districts say that
retailers expect sales growth to resume at a modest pace during the second half of 2002.
Manufacturing
Manufacturing activity is reported to be generally weak but showing signs of
improvement in at least some industries. The most positive reports come from Philadelphia and
Richmond, indicating "moderate" or "solid" growth in manufacturing shipments and orders
iv
and accounting firms note strengthening demand for work on litigation, bankruptcy, auditing, and
taxes. Demand for communication services improved in the San Francisco district.
Conditions in the temporary labor market continue to be slack in most reporting districts,
but the worst seems to be over. District reports suggest that widespread layoffs have subsided
and demand for workers appears to be stabilizing. The Richmond district is the most upbeat, with
reports of strengthening demand for temporary workers in recent weeks. Atlanta notes
improvement in outplacement activity, even though labor market conditions remain weak. Other
districts indicate that ample supplies of labor are still readily available, although certain areas of
employment in some districts bucked the sluggish trend. The legal industry in New York
exhibited strong demand for temps; employers in the Richmond district are seeking light industry
workers and customer service representatives; and, in Dallas, demand was strong for
administrative and clerical positions, and in the banking and retail industries and some
professional services.
Banking and Finance
Loan demand is generally mixed in the reporting districts. Dallas, Kansas City, New
York, and San Francisco report falling overall demand while Atlanta, Cleveland, Philadelphia,
and Richmond report mixed results. Overall lending activity is picking up in St. Louis and
Chicago. Demand for consumer loans is down or continues to be soft in the Cleveland, New
York, and Philadelphia districts, but Atlanta is experiencing growth in demand. Commercial and
industrial loan demand is similarly mixed, with Philadelphia and St. Louis reporting increasing
demand, Cleveland and Kansas City showing lower demand, and the Chicago, Dallas, New York,
and Richmond districts all indicating stable or mixed demand. Mortgage and refinancing loan
volumes are steady to strong in the Atlanta, Chicago, Kansas City, and Richmond districts, with
only New York and Philadelphia reporting slowing demand. New York, Philadelphia, and San
Francisco all report stricter loan requirements, while the requirements in Chicago, Dallas, Kansas
City, and Richmond are reportedly unchanged. Delinquency rates are stable in Chicago,
Cleveland, Dallas, and New York. Cleveland and Philadelphia report some decline in loan
applicant quality. Richmond reports that stock market investors are "in a holding pattern," and
Atlanta's contacts note that there is little new money entering the venture capital industry.
Real Estate and Construction
Real estate markets are mixed, with commercial markets almost universally said to be
weak while the residential segment remains strong. Increased office vacancy rates are reported in
the Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, St. Louis, Minneapolis,
Dallas, and San Francisco districts. The rise in available commercial space has been exacerbated
by active sublease markets and additional construction in some areas. Office rents have declined
moderately compared with a year earlier. Consequently, commercial construction activity has
slowed in most reporting districts.
Residential markets remained steady or strengthened during the last two months. Home
sales and demand for houses are reported to be strong in the New York, Philadelphia, Richmond,
Atlanta, Chicago, St. Louis, Kansas City, and San Francisco districts. Lower-priced home sales
are especially strong, while demand for the high-end segment of the market has weakened in a
few districts. New York, Philadelphia, Chicago, and Minneapolis note increased home sale
prices compared with a year earlier. New home construction was unchanged or increased in
Cleveland, St. Louis, and Minneapolis, but was lower than a year ago in Kansas City.
Agriculture and Other Natural Resources
The unusually warm, dry weather in much of the country dominates news from the
agricultural sector. The dry spell has resulted in poor conditions for the winter wheat crop or has
reduced winter pasturage in the Richmond, Minneapolis, Kansas City, and Dallas districts. As a
result, Dallas district ranchers are reducing their herds. But in San Francisco, where farmers have
already cut their inventories of cattle and field crops, they now report improved prices. Despite
producer concerns about the farm economy, Kansas City district bankers indicate that farmers'
balance sheets remain strong, thanks to steady land values and government support. St. Louis
contacts also report a slight rise in land values. Looking ahead, Dallas notes that preparation for
the corn and cotton crop is on schedule, and that, despite a cotton surplus and low prices, farmers
are planning to plant as normal. In the St. Louis district, farmers expect to plant less wheat and
cotton than last year; however, they are waiting for passage of the federal farm bill before
finalizing their plans.
According to the Atlanta and Dallas districts, the second warmest U.S. weather on record
for November through January plus global economic weakness have damped demand for heating
oil and natural gas and have kept prices low. Minneapolis reports that drilling activity has fallen
slightly in recent weeks, while Kansas City notes that the district's count of active oil and gas
drilling rigs remains near the two-year low hit in late 2001. In the Dallas district, energy activity
shows signs of bottoming out and stocks of crude oil, heating oil, and natural gas are all well
above last year's levels. Because firms storing natural gas will not want to hold it over the
summer, many Dallas contacts expect significant downward pressure on natural gas prices this
spring. In the case of mining, Minneapolis iron ore production is up slightly from late 2001
levels and is nearing more normal levels. In Kansas City, higher coal prices have encouraged
increased activity.
I-1
FIRST DISTRICT - BOSTON
Business conditions are improving in the First District. Manufacturers and retailers report more
positive results in mid-February than they did at the beginning of the year, and software contacts say
business is picking up. The commercial real estate market is said to be on the bottom, no longer moving
down, and staffing firms are seeing some improvement, but business is still very slow. Most contacts
expect activity levels to improve very modestly later this year.
Retail
Retailers report generally improving sales results in early 2002. Sellers of furniture, lumber and
home improvement products, shoes, and surplus merchandise indicate that sales through mid-February
were above year-earlier levels, though mostly by small amounts. Even a computer retailer with sales
down 20 percent from a year earlier says business in recent weeks has been "less bad than it was."
Employment is reported to be stable at most retail firms; head counts are generally level with
year-earlier. One company with "major, major" layoffs in the last year is not currently planning further
cuts. Wage trends are mixed, with one firm planning "the usual" 3 percent pay hike this summer, another
seeing costs jump because of a rise in the minimum wage, and a third instituting a wage freeze.
Retailers say vendor prices are fairly stable. In most cases, their selling prices are also steady,
although one firm is raising prices on selected products. The computer retailer reports that the pace of
price declines increased in the last half of last year but has attenuated in the last three months.
Contacted retailers are expecting the economy and their businesses to improve in 2002. One
respondent says he foresees "something between dead flat and the beginning of a very modest recovery."
Most see the improvement concentrated in the second half and none expects a strong upturn.
Manufacturing and Related Services
Most First District manufacturing contacts report that revenues in the fourth quarter of 2001 and
early 2002 were fairly flat relative to a year ago. By exception, demand for biopharmaceutical equipment
and supplies remains on a solid growth path. Manufacturers indicate that discretionary spending by
I-2
business customers remains depressed. This weakness affects sales of a variety of products, from
corporate gift and promotional items to major office equipment. To the extent that their business has
improved of late, manufacturers describe the changes as limited. For example, a firm in the
semiconductor industry attributes the pickup in orders since mid-January to a replenishment of stocks by
distributors - not (yet) to a rise in final demand. A manufacturer of paper products reports that some of
its customers seem to be enjoying resumed sales growth, but others are simply restocking.
Contacts report that selling prices and materials costs are generally flat. In a variety of industries,
respondents indicate that they are not even considering higher price quotes because they would not stick.
Contacts continue to express concern about steep increases in insurance rates.
Manufacturers remain intent on controlling costs. They are avoiding higher input costs by
pressuring their vendors or shifting to lower-cost sources. Most contacts reduced employment in 2001,
and most anticipate that their headcounts will be steady or drifting downward in the remainder of 2002.
Pay raises will be nonexistent at some firms and limited to 2 to 3 percent at others. Most contacts reduced
inventories last year and are contemplating no buildup from current levels. In describing capital spending
plans, manufacturers expressed a "do with what we have" mentality, especially with respect to technology
investments. Many say they will focus on maintaining their existing capital and investing to develop new
products.
Revenue expectations for 2002 generally are muted. Although the consensus continues to be that
business will improve, manufacturers remain doubtful that they will see any substantial pickup until
sometime in the second half of the year.
Temporary Employment
Respondents in the staffing industry report mixed results in the first quarter of 2002 (to date), but
most are performing better now than in the fourth quarter of 2001. Some contacts say that the current
market is the worst they have seen; others are more upbeat because orders are starting to come in.
Almost all report lower revenues than a year ago. Even with some signs of a pickup for temporary work,
permanent placement is still lackluster. Responding firms in northern New England are doing better than
I-3
those located in Massachusetts and Connecticut. On the supply side, temp firms continue to be inundated
with job seekers. Most contacts predict a modest turnaround later this year.
Commercial Real Estate
Commercial real estate markets in New England have maintained their slow pace over the past
quarter. Vacancy rates remain high and rents have declined somewhat, although contacts report that "the
worst is behind us," and the pace of deterioration has slowed markedly. The Greater Boston market is
still in "bad shape," but vacancy rates have stopped increasing and contacts predict that "we have reached
the bottom." The level of activity is much slower than a year ago, but has not changed much over the past
quarter. Other parts of New England have been stable, with no noticeable changes in vacancy or rental
rates. Contacts in Connecticut, Rhode Island, and Maine report increased activity levels relative to the
last quarter of 2001. Most contacts do not anticipate any significant improvement before the end of 2002.
Software and Information Technology Services
A majority of technology respondents are beginning to see signs of improving demand for
software products and services. Respondents who provide infrastructure software report particularly
strong fourth quarters, while those who provide products more closely related to consumer services are
not faring as well. Large customers are said to have activated plans and finalized agreements that they
had put on hold for almost a year, while small companies are still holding back on some technology
investments. Contacts servicing the healthcare and insurance industries have particularly strong sales.
The improving technology environment has made most of the respondents more optimistic than in the
recent past, but they are still very cautious regarding the future. One of the best performing respondents
still believes that the technology industry is "scary as hell." Most contacts plan to keep employment level
until their prospects are more certain; only one company expects to increase its workforce significantly.
A couple of respondents report plans to upgrade their job mix while keeping their headcounts constant by
increasing the number of research and development workers while reducing customer service positions
and installers. Capital and technology spending also appears to be level for most respondents.
II-1
SECOND DISTRICT--NEW YORK
Economic conditions in the Second District have been mixed since the last report, with hiring
remaining weak but housing quite strong. Retail sales, which had been a bit lean in January, were
generally reported to be back above plan in February. Retailers indicate that selling prices have been
steady in early 2002. Purchasing managers report mixed business conditions in January, though a
survey of manufacturers across New York State suggests ongoing improvement in general business
conditions in early February.
Housing markets appear to have gained further momentum since the last report, in both
metropolitan New York City and parts of upstate New York. New York City's office market has shown
signs of bottoming out, though suburban markets have slackened further. Manhattan hotels experienced
less of a seasonal slowdown than normal in January. Finally, bankers report some weakening in
demand for consumer loans and home mortgages, ongoing tightening in credit standards, and a slight
up-tick in consumer delinquency rates.
Consumer Spending
Major retail chains report that January sales were constrained by lean post-holiday inventories,
but most indicate that business was back on or above plan in February. Comparable-store sales in
recent weeks have been little changed from a year earlier, with brisk sales of home goods offsetting
sluggish apparel sales-particularly men's apparel. In general, discounters continue to fare better than
department stores. Similarly, small retailers across New York State indicate that business has been little
changed from a year ago, but, in most cases, this was better than had been expected. Selling prices are
reported to be flat, though the lack of clearance merchandise in January translated into less discounting.
According to Siena College's latest monthly survey of New York State residents, confidence
was little changed around the District in January. More recently though, the Conference Board reports
II-2
that consumer confidence in the Middle Atlantic region tapered off in February.
Construction and Real Estate
Commercial real estate markets remained generally weak in early 2002, though conditions in
Manhattan appear to have stabilized. While availability rates in Lower Manhattan continued to climb
in January, rates in Midtown retreated noticeably. Asking rents in both areas were down substantially
from a year earlier, and the drop in contract rents is said to have been even more pronounced. Office
markets in New York City's suburbs, though, slackened considerably in recent months-particularly
in southwestern Connecticut and northern New Jersey. Markets in New Jersey are being dampened by
a substantial amount of sublease space, mainly from telecommunications firms, and by a large volume
of space recently completed and under construction. Across the metro area in general, asking rents were
slightly higher at the beginning of this year than in early 2001, but landlords are reported to be offering
more concessions. Despite the sluggish leasing market, sales transactions are described as fairly strong
across the metropolitan area.
In contrast, the residential market has continued to gain momentum. A leading New York City
housing appraisal firm and a major brokerage both report a substantial pickup in the co-op and condo
market in January and early February. Apartment sales activity has been brisk in recent weeks, with
selling prices up modestly from a year earlier and transactions volume up substantially. In addition,
the inventory of available homes is back down, and bidding wars are, once again, increasingly common.
The single-family housing market has also been quite strong. Homebuilders in northern New
Jersey report a brisk rebound in demand and indicate that a supply shortage is again buoying home
prices. Similarly, existing home sales prices in late 2001 were up on the order of 10 percent across most
of the District, while sales volume was up slightly.
Other Business Activity
A major New York City employment agency reports a slight improvement in hiring activity in
January and February, compared to the fourth quarter of last year, but no significant momentum. This
contact indicates a deluge of resumes from technical people but very few such openings. The strongest
labor demand is still reported to be coming from the legal industry, but there has been some pickup
from a smattering of small firms in creative fields, such as public relations, advertising, and film.
Manhattan hotels report that occupancy rates posted a normal seasonal decline in January. After
adjusting for seasonal movements, January's occupancy rate was 78 percent, virtually the same as in
December, and down only 4 points from a year earlier. The average room rate was down about 15
percent from a year earlier in January, compared with declines of 20-25 percent in the fourth quarter
of 2001. Industry contacts note that business remained relatively favorable in February, buoyed by the
World Economic Forum meetings.
There are indications of improvement in New York State's manufacturing sector. A rising
proportion of manufacturers across New York State report improvement in general business conditions
and a sizable majority express optimism about the near-term outlook, based on a survey conducted in
early February. However, surveys of purchasing managers offer more mixed results. New York City
area purchasing managers report some weakening in business conditions in January-particularly in
non-manufacturing sectors. Buffalo-area purchasers indicate that both production and new orders
continued to decline in January, though declines were less widespread than in December. However,
Rochester-area purchasers report modest improvement in business conditions in January, following a
sharp pickup in December. Purchasers in the New York City area report fairly widespread declines in
input prices, while those in the Buffalo area indicate moderate increases.
Financial Developments
According to the latest survey of small to medium-sized Second District banks, overall loan
demand receded somewhat since the last report, driven largely by the consumer side. Nearly half of
those surveyed report slower demand for both consumer and residential mortgage loans, but demand
remained stable for commercial and industrial loans. Fairly widespread declines were reported in
refinancing activity. Bankers reported continued tightening in credit standards for all types of loans.
In particular, while none reported an easing of standards, roughly one in four bankers reported tighter
standards on both nonresidential mortgages and commercial and industrial loans. Loan rates were
steady to lower, while deposit rates decreased. Delinquency rates were reported unchanged for all types
of lending except for consumer lending, where there was a moderate increase.
III-1
THIRD DISTRICT - PHILADELPHIA
Business conditions in the Third District showed some signs of improvement in
February. Manufacturers reported increases in shipments and orders. Retail sales of
general merchandise have been rising modestly, and auto sales have been steady. Sales of
new and existing homes have been running at a fairly high rate. However, there were
clear indications that commercial real estate markets have weakened. Bank loan volumes
have been flat, and slight growth in business lending has been offset by a decline in
consumer loan balances.
The consensus among Third District businesses surveyed in February is that there
will be slow growth in the region during the rest of the year. Manufacturers expect gains
in shipments and orders. Retailers anticipate modest improvement in sales. Auto dealers
expect the current sales rate to carry through most of the year. Bank credit officers
generally forecast slow growth in overall lending, with gains in commercial and
industrial loans as well as consumer credit but a falloff in real estate lending. Contacts in
the commercial real estate industry forecast steady market conditions for the first half of
the year and some increase in demand for space in the second half of the year.
Residential real estate contacts expect sales of both new and existing homes to be steady
through most of the year at around the current rate.
MANUFACTURING
Third District manufacturers reported moderate gains in activity in February,
continuing the improvement that began in January. Orders and shipments increased in
February at about the same pace as they had in January. Business conditions improved
somewhat more for makers of durable goods, such as metal products and industrial
equipment, than for makers of nondurable goods, such as apparel and food products.
Area manufacturers kept working hours steady in February but reduced employment. On
balance, industrial firms continued to reduce inventories, although half of those contacted
for this report said they were maintaining steady inventories. Three out of four
manufacturers in the region indicated that prices for both inputs and for the goods they
III-2
manufacture were steady in February. The number of firms reporting falling prices has
been declining for the last few months.
Local manufacturers have positive forecasts. Over half of the firms surveyed in
February forecast increases in orders and shipments during the next six months, while
around one in 10 anticipate decreases. On balance, area firms have raised capital
spending plans, but increases are modest and spotty across the major industrial sectors in
the region. Several chemical and plastics companies have scheduled increases in outlays
for the first half of the year. Capital spending in other manufacturing sectors is likely to
be flat or up just slightly.
RETAIL
Third District retailers reported modestly rising sales during February. Sales
growth was noted across nearly all lines of goods, with the relatively strongest growth for
jewelry and electronics. However, warmer than normal weather has held down sales of
winter coats and some other seasonal merchandise.
Most area retailers said their inventories were at appropriate levels. Stores in the
region have increased discounting to spur sales of winter merchandise during a prolonged
spell of warm weather, but they have been conservative in their buying of spring
merchandise and do not expect to make significant markdowns on spring goods. Store
executives believe consumer confidence may be firming, and some have raised their sales
forecasts for the year. On average, they expect sales for the year to be around 5 percent
above last year, on a comparable stores basis.
Auto sales in the region were steady in February. Although below last year's high
rate, the current pace of sales was described as good by most of the dealers contacted for
this report, as manufacturers' incentives continued to attract car buyers. Inventories were
generally described as in line with sales. Dealers expect sales to continue around the
current rate through most of the year.
FINANCE
Outstanding loan volume at Third District banks has been virtually flat in recent
weeks. Some banks have seen modest growth in business loans, but consumer credit has
III-3
declined somewhat. Mortgage refinancing activity has started to ease at most banks in the
region, and bank lending officers expect a substantial decline in the next few months.
Most of the bankers contacted for this report indicated they were limiting their
commercial real estate lending activity even though local developers were continuing to
seek financing for new commercial and industrial projects. Bank lending to residential
developers appeared to be steady, for both single-family home building and multifamily
housing construction. In general, although bankers noted some deterioration in loan
quality, both commercial and consumer, they indicated that the decline has been within
the parameters they had anticipated.
Bankers in the Third District expect overall loan demand to increase slowly
through the year. They expect a modest economic recovery with commensurate growth in
business and consumer lending, but they anticipate that residential real estate lending,
both refinancing and purchase mortgage activity, will be slower this year compared with
last year.
REAL ESTATE AND CONSTRUCTION
Third District commercial real estate markets have eased since last fall.
According to surveys by commercial real estate firms in the region, the office vacancy
rate in the Philadelphia central business district has increased by about 2 percentage
points, to around 12 percent. Vacancy rates have increased more in suburban office
markets, to an average of around 15 percent. Vacancy rates are higher in the suburbs
because more new space has become available in suburban areas and more space has
been made available for sublease by firms that have scaled back operations or gone out of
business. Many of these firms were high-tech or e-commerce companies. Rental rates
have decreased, and in some markets, landlords have begun offering tenant improvement
allowances. There has been some renegotiation of soon-to-expire leases to extend them
for longer terms at reduced rates. Demand for industrial space has been fairly steady in
most parts of the Third District, although vacancies have increased in a few areas where
new buildings have become available. Commercial real estate agents expect demand for
office space to be steady through the first half of the year and pick up during the second
half. They expect demand for industrial space to be steady through most of the year.
III-4
Residential real estate agents generally reported steady sales of both new and
existing homes. Sales have been running at a fairly high rate in most price categories
except for the very high end, where sales have slipped. Price appreciation has been
steady, except for very expensive homes. Price appreciation for these homes has slowed
in recent months. Home builders also reported steady sales, although below last year's
rate. Builders' backlogs remain high. Real estate agents and builders indicated that
relatively low mortgage interest rates continue to support home sales, and some real
estate agents believe there has also been a shift in consumer attitudes favoring home
purchases over financial investments. Real estate agents and home builders anticipate
relatively steady sales at around the current pace during the rest of the year.
IV-1
FOURTH DISTRICT - CLEVELAND
According to reports gathered the third week of February, business conditions during the
first six weeks of 2002 remained much the same as in the last six weeks of 2001. Very few signs of
further deterioration in conditions were evident in reports from our contacts, and signs of modest
improvement continued to emerge throughout the District. The manufacturing sector continued to
report slight improvement, retail noted strong sales of home-related items, construction activity
remained strong, and, for the first time in more than a year, some improvement was reported in the
trucking and shipping industry.
Labor markets, however, continue to struggle. Demand for temporary workers softened
again in January, with some contacts reporting that demand for temporary workers was down at
least 50 percent from a year earlier. Modest improvement was seen in requests for the first two
weeks of February, and most contacts believe conditions will improve during the second quarter,
because they are beginning to receive inquiries and initial business proposals requesting temporary
help for later in the spring.
Job security is still the number-one concern among organized labor. Hiring freezes remain
in effect across most industries, but contacts noted that widespread layoffs in industries such as steel
and aerospace during the last three months of 2001 appear to have subsided. Some bargaining units
in the public sector reported substantial wage increases (from 5 percent to 8 percent annually).
Health care continued to be a point of contention in labor negotiations because employers attempted
to pass through some of the increasing costs of health care to their workers. In some cases, disputes
over health care benefits have led to strikes.
Manufacturing
Modest improvements were seen in manufacturing over the last six weeks, as slightly more
manufacturers reported an increase in new orders, and there were slight increases in production
throughout the District. Most manufacturers reported lower employment levels than in previous
months, but indicated that they did not anticipate more layoffs.
None of the District's automakers reported plant closings during the first six weeks of the
year, and a few plants reported three consecutive weeks of scheduled overtime to meet booming
demand for their models, the first time this has occurred in the District in more than six months. In
the steel industry, conditions remained mixed.
Several companies reported that they had
IV-2
implemented 3 percent to 5 percent price increases for hot-rolled steel. On the other hand, contacts
noted that the length of time it takes to collect accounts receivable has been increasing. Plans for
capital improvements remain on hold until steelmakers see substantial improvement in industry
conditions.
Most contacts believe that this will not occur until fourth quarter 2002: although
improvement already has been seen in spot market prices, changes will not be complete until
contract prices (which comprise over 60 percent of industry sales) are renegotiated at the end of this
year.
Retail Sales
As in the last six weeks of 2001, the first six weeks of 2002 showed mixed conditions in the
retail sector. Discount retailers continued to report significant improvement in conditions (one
contact reported year-over-year sales were up almost 17 percent). Apparel retailers, however,
reported continuing declines in year-over-year sales figures, with reports of declines as high as 14
percent for the first six weeks of the year. In general, items related to the home, such as furniture
and decorations, electronics, and appliances, have shown strong sales over the last six weeks.
Nearly all retailers noted that their conservative sales plans have led to solid inventory
positions. One contact noted that inventories are currently running 25 percent below the same
period last year. Most retailers continue to run promotions at a normal pace and have not resorted to
heavy discounting.
Most retailers' plans for capital expansion remain in effect, but some have scaled back the
number of store openings planned for this year. In general, contacts continue to expect retail sales
for the first half of 2002 to be flat or slightly better than the first half 2001 and to improve in the
second half of the year.
While some auto retailers reported slight increases in January sales compared with
December, most reported that sales were flat compared with January 2001. Although dealers do not
expect year-over-year increases for 2002 (sales for 2001 were the second-highest on record), they
are optimistic that pace of sales will improve substantially in late March or early April, and that the
higher level of sales will persist throughout the year.
Construction
Both commercial and residential builders throughout the District continued to characterize
business conditions as "favorable." Most homebuilders reported that customer traffic continues to
be strong, with year-to-date sales for 2002 comparable to those the first six weeks of 2001.
IV-3
Commercial builders are optimistic about business in the months ahead. Like residential
homebuilders, they have seen the number of customer inquiries remain unusually strong since the
year started. Many expect demand to accelerate in the latter part of 2002; several contacts noted that
architects appear to be very busy, a sign that companies are going ahead with plans for expansions.
Trucking and Shipping
Nearly equal shares of contacts reported a decline, constant activity, and an improvement in
industry conditions over the first six weeks of 2002. This report is the first time in more than a year
that a significant number of contacts noted improvement in the industry. Overall, shipping activity
for the first six weeks was slightly off from the same period last year, but the year-over-year
decrease has narrowed compared with the year-over-year decline seen during the last six weeks of
2001, suggesting some improvement in conditions. Many carriers also reported that the first two
weeks of February showed an increase from January. While most contacts noted that no single
product area has been doing relatively well or poorly, some noted that shipping of manufacturingrelated goods did not decline and may have been up slightly compared with the last six weeks of
2001.
Some companies have been able to phase in minor rate increases, but competition has kept
companies from raising rates significantly, with some contacts even reporting rate decreases. Diesel
prices and associated surcharges remain low and are still less of a concern to carriers than insurance
costs, which have increased substantially.
Rather than replacing existing trucks and trailers, companies are spending to maintain
existing equipment as much as possible to manage costs. Capital expenditures are not likely to
show an increase over the low levels reported for 2001.
Banking
Competition for borrowers continued to be very aggressive across all lines of lending as the
demand for commercial and consumer loans remained soft. Most contacts reported a decrease in
demand for commercial loans, while trends in consumer loan demand were mixed among contacts.
Roughly half of contacts reported that the credit quality of loan applicants had diminished; the other
half reported an unchanged credit quality. Although one contact reported an improvement in the
loan delinquency rate, all others reported no change. Most banks reported either no change or a
tightening of the net interest margin.
FIFTH DISTRICT-RICHMOND
Overview: Fifth District economic activity advanced at a moderate pace in January and
February, led by somewhat stronger growth in the retail and manufacturing sectors. Services firms
reported modest increases in revenues, and sales growth at retail establishments rebounded in
February after sagging in January. Manufacturers reported that shipments grew more rapidly and
new orders increased substantially. In contrast, activity at residential and commercial real estate
firms was little changed. Bankers reported steady demand for residential mortgages but somewhat
sluggish growth in commercial lending. Employment fell in the manufacturing and retail sectors, but
temporary employment agencies reported that the demand for workers picked up. In agriculture,
warm and dry weather aided field preparation but stressed pastures and triggered supplemental
feeding of livestock.
Retail: District retailers said that seasonally-adjusted revenues fell in January but rebounded
in the first three weeks of February. Big-ticket sales were generally higher, although automobile
dealers gave mixed reports on customer traffic and vehicle sales in February. A number of retailers
told us that they had trimmed inventories; a big-box retailer and a manager at a home improvement
center said they were carrying lower inventories because of the sluggish economy. Retail
employment edged downward in recent weeks while average wages increased at a moderate pace.
Prices in the retail sector were reported to be rising at less than a two percent rate.
Services: Services businesses reported modestly higher revenues in the weeks since our last
report. A manager at a fitness center in Charlotte, N.C., said customer demand had picked up in
recent weeks, while a travel agent in Greenville, S.C., reported an increase in both business and
pleasure travel. Also in Charlotte, an engineering firm reported a jump in orders for both government
and private sector projects. But a financial services firm in Baltimore, Md., said stock market
investors were concerned that there may be more bad news regarding corporate accounting methods
and remained "in a holding pattern." Employment in this sector declined in January but rose
modestly in February.
Manufacturing: District manufacturing activity strengthened in January and February, led
by solid growth in shipments and new orders. Contacts in the electronics, furniture, paper, tobacco,
and transportation industries generally reported moderate growth in shipments in recent weeks. A
paper company in Richmond, Va., introduced a new product and accordingly, February appeared to
be "a very good month" for orders and shipments. In addition, a producer of plastic products in
North Carolina noted that January was "a good, active month" and that shipments were higher.
While uncertain whether this was "truly the beginning of the recovery," he nevertheless anticipated
that shipments in coming months would be higher. The level of manufacturing employment declined
since our last report, but manufacturing wages and the average workweek rose. Looking forward,
most manufacturers remained very optimistic about business prospects six months from now,
expecting higher shipments, new orders, and capacity utilization.
Finance: District loan officers reported that lending activity was little changed since our last
report. Growth in commercial lending activity continued to be constrained by sluggish demand for
business loans. Several commercial lenders noted that some of their borrowers continued to have
weak profits and were not looking to expand their business operations at this time. While
commercial lenders reported little change in credit standards, several said they were taking a closer
look at financial statements before extending loans, particularly for companies restating earnings.
Residential mortgage lenders said that refinancing activity had declined in recent weeks, but that
overall demand for mortgages was holding steady. A Greenville, S.C., banker described demand for
residential mortgages as "steady, but not great," despite a dip in mortgage interest rates in recent
weeks.
Real Estate: Residential real estate activity was mixed since our last report. Several realtors
reported that home sales were exceptionally strong in their areas. A contact in Chevy Chase, Md.,
said that sales in his area were "hot"-he had an "enormous number of buyers" but not enough
inventory. A realtor in Richmond, Va., reported that houses were selling quickly there and that the
"spring market" had begun earlier than usual this year. In addition, a homebuilder in the Tidewater,
Va., area said the market was the most robust he had seen in his 25 years in the business. But other
contacts described slowing home sales. A realtor in Baltimore, Md., noted a "slight softening" in the
market there, while a realtor in Columbia, S.C., characterized home sales as "quiet." While most
realtors continued to report that sales were strongest in the lower price ranges, a builder of homes in
the Carolinas said that the upper-end market was "making a comeback."
Commercial realtors across the District reported little change in leasing and construction
activity since our last report. Leasing activity rose slightly in the industrial sector, but was flat in the
office and retail sectors. Vacancy rates continued to edge up across all sectors and a number of
District contacts noted the persistence of a "wait and see" attitude among clients. Rents stabilized in
the retail and industrial sectors, but declined further in the office sector. The rate of new sublease
space coming onto the market declined across the office and retail markets. A Northern Virginia
realtor reported that the office-sublet market was finally starting to "firm up" and that vacant space
was being absorbed by "a variety of users." Although a smattering of new projects were reported,
new construction activity remained generally flat across the District.
Tourism: District tourist activity continued to be mixed in recent weeks. A manager at a ski
resort in West Virginia told us that the pace of business had picked up considerably in February and
that record attendance was expected in March. A counterpart at a resort in Virginia, however,
reported that business was off 30 percent from a year ago-unseasonably warm and dry weather had
caused a shortage of water reserves essential for making snow. But mild weather boosted tourist
activity at coastal resorts. A contact on the Outer Banks of North Carolina said that bookings during
Valentine's Day and the Presidents' Day holiday weekend were much better than a year ago, which
she attributed in part to patrons taking holidays closer to home because of ongoing concerns with air
safety. Looking ahead, tourism industry contacts were encouraged by the strong pace of spring
bookings, with some areas being booked to capacity through June.
Temporary Employment: Temporary employment agencies in the District reported
continued strengthening in the demand for workers in recent weeks. Employment agents in Northern
Virginia, Richmond, Va., and Rockville, Md., told us that demand for workers had risen in recent
weeks and that they expected demand to continue to rise over the next six months as the economy
rebounds. A contact in Hagerstown, Md., said that demand was "somewhat weak" at her firm, but
noted that she was beginning to see "hopeful signs of increased customer activity." Light industrial
workers and customer service representatives were among the most highly sought employees in the
District.
Agriculture: Mild weather in January and much of February allowed District farmers to
make good progress in field preparation. Dry conditions, however, persisted in many areas of the
District. Some areas of North Carolina and Virginia will require several months of above-normal
rainfall to fully replenish soil moisture. In North Carolina and West Virginia, sparse rainfall
prompted earlier feeding of livestock and hauling of water in some areas, while in South Carolina
supplemental feeding of livestock continued because of poor pasture conditions. Small grains in
most areas of the District were reported to be progressing well despite the arid soil conditions.
Agricultural analysts noted, however, that additional precipitation was needed to keep small grain
crops in good condition.
VI-1
SIXTH DISTRICT - ATLANTA
Summary: Sixth District contacts reported improved conditions in many sectors during
January and early February, and most noted cautious optimism regarding the near-term outlook.
The majority of retail contacts described sales as exceeding their expectations. Automobile sales
did fall from the robust pace of past months, but inventory levels were mostly described as
acceptable.
Reports indicated positive signs from the manufacturing sector as orders and
inventories were stabilizing. The defense industry, in particular, received a significant boost in
new orders. Residential real estate markets maintained their strength, but contacts noted that
weakness persisted in the District's office and industrial markets. The improving trend in the
tourism and hospitality industry also continued, although hotel occupancies remained below
those of a year ago. Bank lending activity was still sluggish, and remained supported primarily
by robust mortgage refinancing. Price pressures were subdued overall. Several contacts noted
rising health care, insurance, and security costs.
Consumer Spending: Reports from District retailers were upbeat in January.
indicated that sales were above year-ago levels.
Most
There was some softening noted in early
February, but most contacts indicated that recent sales had met or exceeded expectations.
Apparel and home-related products were reported to have sold well. The majority of contacts
anticipated that sales would rise moderately in the first half of the year compared with the same
period last year. In contrast, District automobile sales were weak during January and the first
part of February, as remaining incentive programs failed to significantly boost sales. Despite the
softer conditions, no major imbalances were reported in automobile inventory levels.
Real Estate and Construction: Low mortgage rates continued to support strength in the
District's single-family housing market, with contacts noting that the Florida market remained
VI-2
particularly robust. Most reports indicated that District home sales during January and early
February were near the previous year's level.
Home construction was described as near or
slightly ahead of last year. Home inventories and new home construction was seen as balanced,
although several contacts noted that Florida's housing inventory was low. Looking to the spring
selling season, most contacts were cautiously optimistic.
District commercial real estate markets remained weak in January and early February.
Office and industrial vacancy rates continued to run at high levels and prices were under
downward pressure. The majority of new construction work is government-related or small
build-to-suit projects.
Manufacturing: Reports on the District's manufacturing sector during January and early
February were mixed, but generally suggested improved conditions. Alabama steel processors
noted that conditions did not worsen in January and several District paper mills and lumber
manufacturers reported maintaining employment levels.
Orders for building products were
described as picking up in some areas. The region's aerospace industry received a boost with
new orders from defense contractors, and hiring for Nissan's new plant in Mississippi continues.
On a less positive note, contacts reported a further contraction in the textile and apparel industry
with a large plant closing in Mississippi and problems for some producers in Tennessee related
to the Kmart situation.
Tourism and Business Travel:
The hospitality and tourism industry in the District
continued to recover through mid-February. Convention and conference bookings in Florida and
Georgia were improving, although contacts noted that attendance at many events was subdued.
Cruise lines out of Miami were sailing at near capacity levels and the use of deep discount
pricing was less prevalent.
South Florida hotel occupancy rates continued to be adversely
VI-3
affected by a dearth of international tourists. However, attendance at central Florida theme parks
continued to improve, and report's on the President's Day weekend were upbeat.
Financial: Overall bank lending remained sluggish in January, but contacts noted that
mortgage refinancing continued to be strong. Consumer loan volume at credit unions was also
strong in some areas. The pace of investment bank activity was reported to have improved
slightly, although direct commercial lending remained subdued. Contacts also noted that there
was little new money entering the venture capital industry.
Wages and Prices:
Labor market conditions remained weak in January and early
February. Many businesses reported that they were willing to incur overtime costs in the short
term rather than hire additional workers.
Nonetheless, outplacement firms reported some
improvement in activity, although it was noted that it was taking much longer for people to find
employment than a year ago.
Prices were described as stable by most accounts.
However, continuing increases in
health care costs, security costs, and insurance was noted, and price discounting for rental cars
and cruises were ending. Reports from the Gulf coast noted that high natural gas inventories and
continued warm weather were keeping natural gas prices in check.
Agriculture:
Citrus growers in Florida benefited from recent rains and colder
temperatures, but the outbreak of citrus canker disease in prime Indian River tree areas could
have a significant impact on Florida's citrus crop and on citrus prices.
VII-1
SEVENTH DISTRICT-CHICAGO
Summary. Reports of Seventh District economic activity through mid-to-late February were
mixed, but the overall tone was more positive than earlier in the year. Consumer spending remained
mostly soft in the region, though there were some signs of strength in a few sectors. Real estate and
construction activities were again mixed, with continuing vigor on the residential side and softness
on the business side. Manufacturing activity was generally weak, but there were more frequent
reports of increasing production and new orders. Lending activity appeared to increase modestly,
with firming loan demand from businesses. Labor markets slackened modestly, with most contacts
saying that the worst of the region's job losses had passed. There were no new indications of
intensifying pressure on wages or prices at the retail level.
Consumer spending. Reports on consumer spending through mid-February were mixed, but
generally indicated relatively weak spending. Several contacts reported that sales results in the
Midwest were softer than in other regions. One discount retailer noted that sales of staples and
discounted items remained strong, but sales of discretionary merchandise were softer. Entertainment
spending was mixed. With favorable weather said to be helping consumers get out and about, theater
revenues were reported to be up between 5 percent and 10 percent so far in 2002. But sales results at
casual dining restaurants remained generally soft, with one industry contact saying that conditions
were "hard to read." Regional auto sales also were said to be mixed, but generally weaker than late
last year. Reports on tourism and travel varied. A contact with one airline reported strong load
factors, and said the company was planning to add 7 percent or 8 percent to its flight capacity, mainly
through increased domestic flights. At the same time, United Airlines announced publicly that on
April 1 it would be calling back 1,200 of its recently furloughed flight attendants, over one-third of
whom are based in Chicago. Other contacts, however, suggested that tourism and travel in the region
was softer than they had expected. Signs of intensifying pressure on retail prices were virtually
nonexistent, as most contacts said that customers remained very value conscious.
Construction/real estate. Reports from real estate and construction contacts were also
mixed; residential activities generally remained brisk, while nonresidential activities were slower.
VII-2
Low mortgage interest rates continued to buoy existing home sales in the region. A contact with one
of the largest independent real estate companies in the District said that January home sales were a
record for the month and remained strong in February. Home price appreciation was said to be
slowing somewhat from the very strong rates realized over the last few years. New home sales and
starts were down modestly from a year earlier, but builders remained busy according to most
contacts. Both realtors and builders indicated that first-time buyer and trade-up homes sold well,
while high-end sales remained weak. Apart from some over-building in the downtown Chicago
condo market, contacts reported that inventories of new residential units were normal to slightly low
for this time of year. Nonresidential building and leasing activities were again soft. Office vacancies
continued to increase in most metro areas, though there were some isolated reports of decreases.
Landlords were more proactive in securing leases by offering more generous incentives and lowering
rental rates. Light industrial vacancy rates were also increasing in most areas, albeit at very modest
rates. Development of new retail space remained fairly strong in some areas, but contacts noted that
the number of projects in pipelines was falling, as a generally softer economy led some retailers to
postpone or cancel expansion plans.
Manufacturing. Manufacturing activity remained generally weak, but reports of increased
production and new orders became more frequent. Many contacts said that with inventories very
lean, the worst for the manufacturing sector was over. Light vehicle sales nationwide were robust
again in January and through mid-February, exceeding most analysts' expectations. With continued
strong sales and lean inventories, General Motors recently announced increases in both its production
estimates for the first quarter and its sales forecast for the year. Domestic production of steel
increased in January from very low levels. Steel inventories continued to fall, according to one
industry analyst, and prices strengthened from very weak levels. New orders for construction and
consumer equipment decreased considerably in the first quarter of 2002, but industry contacts noted
that dealer sales were stronger than expected in January and February. Pending changes in
environmental standards likely prompted the surge in new orders for heavy trucks in January.
Several contacts indicated that more restrictive emission standards and heavy fines for
noncompliance, scheduled to take effect October 1, would pull new orders ahead into the first three
VII-3
quarters of this year. One contact with a large producer of telecommunications equipment suggested
that there were more signs that the industry was "in the initial stages of a recovery," and noted that
inventories were so low that restocking will take place even before a pickup in demand.
Banking/finance. Overall lending activity appeared to pick up modestly in January and
February, with a few reports of firming demand for business loans. Buoyed by favorable mortgage
interest rates, residential refinancing activity remained brisk, and contacts in some markets indicated
that demand for new originations was picking up. Applications for home-equity loans and lines of
credit were said to be increasing in some areas as well. Most contacts indicated that consumer
delinquency rates were stable, and there was no discernible change in standards and terms for
household loans. Reports of business loan demand were mixed, in contrast to the negative anecdotes
of the past several months. Some bankers noted a "real pickup" in overall demand in January, while
others said it remained soft. Even within the same major metro area, one contact reported a pickup in
commercial real estate borrowing, as another said it was weaker. Industrial lending generally
remained weak, but a contact with one large bank in central Indiana reported an increase in lending
to manufacturers, who were investing in both inventories and capital equipment. Most lenders
indicated that business loan quality stabilized somewhat in January and February, and banks that had
been building their loan loss reserves were doing so at a slower rate.
Labor markets. Labor markets continued to slacken in the Seventh District, but most
contacts indicated that the demand for labor was stabilizing. One industry analyst said that the
number of mass layoffs had slowed, but idled workers were finding it more difficult to secure work.
A contact with a large staffing agency said that total billable hours and revenues rose early in 2002,
after sinking throughout 2001. This contact also noted that most of the company's regional
managers, who at this time last year "saw no end in sight" to the industry's doldrums, expressed
confidence in a rebound in the second half of this year. Contacts in some industries have said that
the general economic slowdown has helped improve worker productivity as turnover rates have
decreased and managers were learning to "manage better" during lean economic times. There were
no new reports of intensifying pressure on wages, but contacts continued to express concern over
rising health insurance costs.
VIII-1
Eighth District - St. Louis
Summary
Despite some bright spots, economic activity in the District continues to be weak. Retail sales in
December and January were generally at or just below their level from a year earlier, although retailers
are mildly optimistic about the upcoming months. The manufacturing sector has been mixed, with some
industries continuing to face reduced orders while others have begun to recover. The residential real
estate sector has picked up and remains relatively strong throughout most of the District. New housing
permits continue to be issued at a higher level than a year earlier. Commercial real estate markets have
continued to be stagnant throughout the District, with rising delinquencies in at least one area. Driven by
rising real estate loans and loans to banks outside of the District, total loans outstanding at small- and
medium-sized banks have risen significantly. Agricultural producers in the District anticipate reduced
planted acreage for wheat and cotton in the upcoming year, although there is a great deal of uncertainty as
farmers await the passage of the new farm bill.
Consumer Spending
Contacts report that retail sales in December and January were, on average, at or just below their
year-earlier levels, and just under one-half noted that sales had been lower than expected while nearly as
many noted that sales were higher than expected. Apparel, shoes, home entertainment and decor, health
and beauty products, and seasonal items were strong sellers while jewelry, gift items, and collectibles
moved more slowly. Despite a slow season, most contacts noted that inventories were at desired levels,
while only 20 percent reported excess inventory. Contacts remain mildly optimistic about the next few
months, with about one-half expecting slightly higher sales compared with the same period last year,
while most of the rest expect the same level of sales.
Car dealers in the District report that sales in December were higher, on average, but have tapered
off since the end of the year. Almost all contacts attribute this pattern to financing incentives and rebates
offered by manufacturers on new cars, the most aggressive of which have ended recently. Several dealers
reported that, because of ongoing rebate offers, new cars continue to sell better than used cars, causing
VIII-2
new-car inventories to be okay-to-low and used-car inventories to be okay-to-high. About one-half of the
contacts noted higher rejection rates for finance applications, while the other half have seen no change.
Although individual responses about car sales in the next few months varied from very optimistic to very
pessimistic, the average dealer was neither optimistic nor pessimistic.
Manufacturing and Other Business Activity
The District's manufacturing sector continues to be weak. Steel, fabric, apparel, paper, auto, oil
and gas, and building supplies are among the industries facing reduced orders. Most manufacturers do
not expect a turnaround until the second half of 2002. Despite the overall slowdown, a few District firms
in the food, coal, energy, and ink industries have been expanding. Districtwide, contacts in the service
sector continue to report business as being flat-to-slow compared with the same period last year. In order
to cut costs, many firms have decreased advertising expenditures, although a few contacts in the
advertising industry noted recovery in television advertising revenues. Contacts in the
telecommunications industry are taking a "wait and see" attitude, expecting earnings to rise in the second
half of 2002. The tourism industry continues to slow, as contacts in the hotel industry have been
reporting a drop in occupancy rates, resulting in reduced profits and layoffs.
Real Estate and Construction
Residential real estate sales have picked up across most of the District, with the exception of
northern Mississippi, where the number of homes for sale has risen to a historically high level. December
2001 year-to-date sales in northern Arkansas and Memphis improved over year-earlier levels. Residential
sales in central Kentucky continue to do well given the time of the year. A contact in St. Louis reports
that a rising quantity of bulk warehouse and general office space, falling rents, and falling absorption rates
indicate a buyer's market for commercial real estate. Similarly, Memphis and Louisville finished the year
with an excess of office and sublease space due to the failure of Internet businesses. Office-rent
delinquencies for Class B and Class C properties in northern Arkansas are slightly higher than normal.
Residential construction opportunities continue to grow, as December year-to-date permit levels
were higher than year-earlier levels in most of the District's metropolitan areas. Government-sponsored
VIII-3
construction opportunities remain strong in the Kentucky and Indiana portions of the District with the
approval of projects for highway and bridge construction as well as projects for public facilities such as
libraries and jails. Commercial contractors in Arkansas and western Tennessee report commercial
building has been slow over the past few months, but they remain optimistic for 2002.
Banking and Finance
Total loans outstanding at a sample of small- and medium-sized District banks rose by 15.7
percent between late November last year and late January this year. This significant increase stems from
an increase in real estate loans, which rose by 22.5 percent over the same period, and loans to other
commercial banks in the rest of the country, which rose by 26.2 percent. Commercial and industrial loans
and loans to individuals have also increased over the period, growing by 3.5 percent and 9 percent,
respectively. Total deposits at these banks were 15 percent higher over the same period.
Contacts in central and northeastern Arkansas, and western Tennessee have reported strong loan
demand, particularly for residential lending. Bankers in northeast Mississippi and western Tennessee
reported high past-due loan ratios and high bankruptcy filings. Nonetheless, they consider themselves in
a good position with high liquidity and loan loss reserves.
Agriculture and Natural Resources
Although crop prices generally remain below last year's levels, one contact reported that District
agricultural land values rose by about 5.5 percent last year, with faster appreciation in the District's
northern states. Despite more favorable planting weather last fall, District winter wheat producers
reduced planted acreage by 7 percent, down 20 percent since 2000. A major survey of U.S. cotton
farmers' 2002 planting intentions shows a modest decrease (-6.7%) in acreage from a year earlier. Based
on survey results, farmers in the Mid-South region plan to decrease planted acreage by almost 20 percent.
Cotton industry contacts report that large domestic and international supplies of cotton in the United
States are expected to keep cotton prices relatively low in the foreseeable future. As the 2002 planting
season fast approaches, contacts reported that they were uncertain about their crop plans for the year as
farmers anxiously await the passage of the new farm bill in Washington.
NINTH DISTRICT--MINNEAPOLIS
Overall economic activity in the Ninth District appears to have edged up in recent
months. Residential construction and mining activities are up slightly. The commercial
construction, tourism and energy sectors have slowed. Meanwhile, the consumer
spending, manufacturing and agriculture sectors are mixed. From early January to midFebruary, labor markets loosened slightly, while overall wages and prices were stable.
However, decreases in some construction materials prices and increases in home prices
and insurance premiums were noted.
Construction and Real Estate
Commercial construction activity is soft. Contracts awarded for heavy construction
projects decreased 22 percent in the three-month period ending in January compared with
the same period last year. A representative of a commercial construction company said
that the market has bottomed out in the Minneapolis-St. Paul area. Vacancy rates in the
industrial markets of some Minneapolis suburbs are as high as 17 percent.
District home building is solid. Home permits in the Minneapolis-St. Paul area
were up 7 percent in January compared with a year earlier, with strength particularly
noted in multi-family construction. According to residential construction officials in
Sioux Falls, S.D., home builders are expected to be busy in 2002, but the year is likely to
finish somewhat slower than the previous two record-breaking years. A contractor in
Bismarck, N.D., expects to build 25 percent more housing in 2002 compared with a year
earlier. Bank directors reported that the outlook for residential construction is optimistic
for the upcoming year, with softness noted in the high-end housing market in Montana.
Consumer Spending and Tourism
Consumer spending is mixed. A major Minneapolis-based department store retailer
reported that overall same-store sales in January were up 6 percent compared with a year
earlier. A Minneapolis area mall manager estimated that sales increased about 4 percent
in February compared with a year ago. In North Dakota a mall manager expects February
sales to finish up 3 percent to 5 percent compared with last year.
In contrast, a St. Paul area mall manager noted slightly less traffic in January and
February compared with last year. A Helena branch bank director reported slow February
traffic at a Montana mall compared with a year ago. A Minnesota-based leather products
retailer said that same-store sales in January were down 17 percent compared with last
IX-2
year. Auto sales in Minnesota slowed in January and February, according to a
representative of an auto dealers association.
Little snowfall and warm weather has halted winter tourism activities in many
areas. Some businesses in the Upper Peninsula of Michigan expect the season to be off as
much as 40 percent to 50 percent due to poor snowmobiling conditions. A tourism
official in South Dakota estimated ski activity down 45 percent and snowmobiling down
70 percent this year compared with a year ago. However, traffic at Mount Rushmore,
considered a "fair weather" attraction, set monthly attendance records from October
through January. A ski resort in Montana reported good snow conditions this year and an
increase in visits over last year.
Manufacturing
Manufacturing activity is mixed. Preliminary results of a February survey of Minnesota
manufacturers reveal that production in the first half of 2002 will be higher than the
levels of the last half of 2001. However, a January survey of purchasing managers by
Creighton University indicated slight decreases in manufacturing activity in Minnesota
and South Dakota and slight increases in North Dakota. In Minnesota, a factory that
produces industrial abrasives plans to severely curtail output. However, a data storage
producer in North Dakota plans to expand output and employees this spring, and a new
pasta plant is expected to begin production in April. In addition, a new dairy plant is
scheduled in the Upper Peninsula of Michigan. A Montana steel producer plans to expand
output to meet demand for a new short-distance rail line, according to a Helena bank
director.
Mining and Energy
Activity in the energy sector is down somewhat, while mining is up slightly. MidFebruary district oil and natural gas exploration and production levels were slightly
behind the levels of early January. Meanwhile, the iron ore industry is up slightly in the
first two months of this year compared with November and December of last year.
Production at a large mine in northern Minnesota returned to more normal levels and
another mine expects to resume production in March. Mining production is stable to up
slightly in Montana, according to a state mining official.
IX-3
Agriculture
Dry and warm weather conditions have favored livestock and dairy producers but have
hampered crop producers. Livestock producers report little stress on their herds, due to the
unseasonable warm weather across the district. Meanwhile, the Montana Agricultural
Statistics Service reported that winter wheat producers are increasingly concerned about
the lack of snow cover to protect from cold temperatures and gusty winds. Winter wheat
snow cover was rated at 69 percent very poor, while wind damage was rated at 28 percent
heavy. Freeze and drought damage was rated at 41 percent heavy.
Employment, Wages and Prices
Some layoff announcements were cited since the last report. A large computer maker will
cut more than 500 positions at two South Dakota plants. A high-tech manufacturer
announced job cuts that may include closing a St. Paul plant, affecting 86 workers. A
Minnesota-based airline will cut 64 mechanics positions.
As a marker of looser labor markets, a Minnesota company recently reported a 70
percent acceptance rate of offers made to applicants for open positions, an increase from
a historical average of 50 percent. Initial claims for unemployment insurance in
Minnesota were up 28 percent in January compared with a year earlier, including a large
increase in claims from the construction sector.
In contrast, a computer company is planning to hire 100 employees in North
Dakota. Furthermore, U.S. Customs will add 39 jobs at North Dakota's border with
Canada. A call center in northern Minnesota will add 65 more workers.
Wage increases are modest. St. Paul public school teachers recently agreed to a 2
percent increase in pay; the overall wage and benefit package was considered average
compared with recent contracts, according to a union official. In contrast, according to
the results of a December St. Cloud Area Quarterly Business Report survey, 55 percent of
respondents in central Minnesota expect increases in employee compensation by June.
Price increases are moderate, with price decreases noted in some construction
materials and increases in home prices and insurance rates. Recent steel and cement
prices have decreased slightly from a year earlier. Meanwhile, the median price of homes
recently sold in Minneapolis-St. Paul is up 12 percent compared with a year earlier. Some
home insurance premiums during the past two months are 10 percent to 30 percent higher
than last year in North Dakota, according to an official.
X-1
TENTH DISTRICT - KANSAS CITY
Overview. The Tenth District economy remained very sluggish in late January and February,
but some small signs of improvement were reported. Manufacturing activity fell further, automobile
sales and residential construction activity declined, and commercial real estate activity remained weak.
On the positive side, however, retail sales excluding autos edged higher, home sales strengthened, and
energy activity stabilized. In the farm economy, dry weather continued to hinder the development of
the winter wheat crop. District labor markets remained considerably less tight than a year ago, and
wage pressures were largely nonexistent. Retail prices and prices for construction materials were flat,
while prices for several manufacturing materials edged lower.
Consumer Spending. Retail sales edged up in late January and February following a better
than expected holiday season, and were above year-ago levels in most stores. High-end retailers,
however, continued to report sluggish sales. Many retailers in Kansas, Oklahoma, and western
Missouri lost sales when they were forced to close due to power outages caused by a late January ice
storm. Home furnishing items continued to sell particularly well across the district. Nearly all retailers
expect sales to increase in coming months. Inventory levels held steady, and most managers reported
they were satisfied with their stocks. Most stores, however, expect to expand stock levels heading into
the Easter season. Colorado ski resort operators reported that while activity has been below year-ago
levels, it has not been as weak as they feared in the fall. Motor vehicle sales in the district continued to
fall from the record sales seen late in 2001 and lot inventories were growing more quickly than some
dealers preferred. Still, dealers were cautiously optimistic that sales would rebound by summer.
Manufacturing. District factory activity declined again, but optimism about future production
continued to build. Production and orders fell farther below year-ago levels, and employment and
capital expenditures showed little sign of improvement. Auto plants in the region experienced brief
losses of production as a result of the late January ice storm. One plant expects to make up the lost
X-2
production sometime in March. On the positive side, an increasing percentage of district manufacturers
expect a turnaround by mid-year. Inventory levels held steady after falling sharply over the past year,
but are expected to resume declining in coming months. Some firms reported difficulties receiving
steel shipments, but no other significant shortages of materials were reported or expected for the
foreseeable future.
Real Estate and Construction. Home sales strengthened in most of the district, but residential
construction activity declined in most district states, and commercial real estate markets remained very
weak. Residential sales improved in most areas, with the exception of higher-end homes. However,
inventories of unsold homes still remain high, and housing starts fell outside of Oklahoma and New
Mexico. Most builders expect the sluggish activity to continue for several months. Commercial
realtors continued to report weakness in most district office markets, especially in Denver. With
absorption remaining slow, vacancies have continued to edge up, and were significantly higher than a
year ago in February. Lease concessions such as rent abatement and moving allowances continued to
be reported in some markets. However, realtors reported prices for office space were down only
slightly, as most sellers are still in good financial position and expect the market to turn around once the
economy recovers.
Banking. Bankers report that loans fell and deposits increased since the last survey, reducing
loan-deposit ratios. Demand fell for commercial and industrial loans, residential construction loans,
and commercial real estate loans. Demand held steady for home mortgages and edged up for home
equity loans. Refinancing activity slowed but was described by some bankers as still strong. On the
deposit side, demand deposits, NOW accounts, and money market deposit accounts all increased, while
large CDs and small time deposits remained unchanged. Bankers attributed the increase in liquid
deposit accounts to low market interest rates and a wait-and-see attitude by investors. All respondent
banks reduced their prime lending rates, but most banks left their consumer lending rates unchanged.
Lending standards were unchanged.
X-3
Energy. Energy activity in the district remained steady in late January and February. The
region's count of active oil and gas drilling rigs stayed near the two-year low reached in late 2001. In
Wyoming, higher coal prices have reportedly led to some expansion of mining activity and have
intensified efforts to increase rail service from the Powder River Basin to coal markets.
Agriculture. Much of the district's winter wheat crop was in below-average condition due to
dry weather. The dry weather has also limited grazing on district wheat fields, but other forages have
been in ample supply for feeding cattle this winter. District farmers remained concerned about the
weak farm economy and were hesitant to take on additional debt. District bankers, however, reported
strong farm balance sheets with farmland values holding steady. To date, major problems in district
farm loan portfolios have been avoided through government payments to farmers. Small business
activity in rural areas remained sluggish and expectations point toward a slow recovery at best.
Wages and Prices. District labor markets remained considerably less tight than a year ago, but
a slightly higher percentage of firms reported shortages of some kinds of workers than in the previous
survey. Occupations experiencing shortages included welders, skilled construction trades, and nurses.
There were also some tentative signs of increased demand for entry-level retail and service workers.
Some hospitals reported expanding the use of nontraditional hiring incentives, including grocery
allowances and housecleaning services, in an effort to attract nurses. Evidence of wage pressures
outside the occupations experiencing shortages remained virtually nonexistent. Some firms reported
they were delaying annual wage increases for six months or more. Many employers also continued to
increase employees' share of health care costs. Retail prices largely held steady and are expected to
remain flat in coming months. Prices for most manufacturing materials, including many plastics and
paper products, have declined. Meanwhile, steel prices have risen somewhat and are expected to
increase further. Prices for construction materials were basically flat, but many builders were
concerned that prices for gypsum wallboard would increase in the near future.
XI-1
ELEVENTH DISTRICT-DALLAS
Eleventh District economic activity remained weak in January and the first half of
February. Retail sales improved some, but other service-sector activity continued to be
sluggish, and manufacturing activity was weak. Construction and real estate activity continued
to soften. Energy activity showed signs of bottoming out, but many contacts fear a collapse in
natural gas prices could lead to future declines. Respondents in the financial services industry
have lowered their expectations for loan demand, but note that consumer lending has held up
better than expected. Agricultural conditions remained dry.
Prices and Labor Markets. There were some signs of increasing price pressures in the
service sector, but prices were mostly unchanged or lower in the manufacturing and energy
industries. Continued weak global demand and very warm weather in the United States have
pushed down most energy prices despite stability in the price of crude. November 2001
through January 2002 was the second warmest ever recorded in the United States. Crude oil
prices were pushed up to near $20 per barrel in January after OPEC and non-OPEC countries
reduced production. Some contacts expressed concern that if global demand does not pick up
soon, OPEC unity will be tested severely and a price collapse could follow. U.S. crude
inventories are 33 percent higher than last year, and heating oil inventories are 23 percent
higher than a year ago. There is still too much petrochemical capacity, and downward pressure
on prices continues. Chemical inventories are very low because customers expect prices to fall
further. Warm weather has limited demand for natural gas and left storage facilities very full.
Companies that hold natural gas in storage will not want to hold the gas over the summer, and
many contacts expect serious downward pressure on natural gas prices in the Spring. Paper
producers say that selling prices continue to fall because of excess capacity in the industry.
Many industries continue to report rising costs for all types of insurance. Security costs
are also rising, particularly for the airline industry. Contacts in several industries note that stiff
competition has prevented these cost increases from being passed along to consumers. While
labor markets have loosened, many firms say competition remains stiff for quality workers and
wages are increasing for those employees.
Manufacturing. Manufacturing activity remained weak. Producers of fabricated metals
said demand continued to be very slow, while producers of primary metals, brick and tile
XI-2
reported a drop in demand over the past 8 weeks. Paper producers say sales are still sluggish.
One contact noted that a lot of manufacturing has moved offshore, reducing demand for
packaging materials produced domestically. Demand for glass, cement and concrete and food
products was unchanged. Apparel producers reported an increase in sales over the past 8
weeks, because retailers are restocking after clearing out inventories during Christmas. Still
more layoffs were announced in the apparel industry as the industry continues to move to
lower cost off shore locations.
The high tech industry reported that sales continued to bounce around the bottom of the
cycle. While most respondents believe a recovery has begun, it is expected to be very slow.
Demand for telecommunications products was still very weak, particularly in Europe, and sales
of personal computers continued to be "anemic." Inventories are lean across high-tech
industries, according to contacts.
Demand for petrochemicals and refined products remained weak. Some refineries have
announced cuts in production while others have begun early turnarounds to produce gasoline
for the spring and summer.
Services. Activity in the service sector continued to be sluggish, although there were
some areas of improvement. Temporary service firms said that demand for workers remained
down, particularly to supply manufacturing and light industrial positions. Demand was strong,
however, for workers to staff administrative and clerical positions, the banking and retail
industries, as well as some professional services. Legal contacts say transactional activity,
particularly venture capital, is slower than a year ago, but other types of business activity is
starting to improve. Litigation and bankruptcy work remained strong. Accounting firms say
activity remained strong for auditing and taxes but consulting work had declined. Demand for
transportation services was still weak, but is showing signs of slowly improving from the very
depressed level a couple of months ago.
Retail Sales. Retail sales improved some in February from a very weak January.
Contacts say this is a difficult time of year to infer trends from sales data and remain
conservative with their purchases despite recent signs of a pick up. Retailers are happy that
inventories have been drawn down. One contact explained that stronger than expected sales
could result in a brief price spike which they would prefer to having too much inventory. Auto
XI-3
sales have been solid and better than expected following the low interest rate deals from last
year. Inventories are a little high and the average gross profit on auto sales is down.
Financial Services. Loan demand declined seasonally as expected at levels slightly
lower than a year ago. While contacts have generally lowered their expectations for activity,
they note that consumer lending has been stronger than expected. Commercial and industrial
lending has been flat to moderately positive. Credit conditions are mostly unchanged, with only
a couple of contacts reporting an increase in delinquencies. Credit standards remained stable
since the last survey, according to contacts, and are not expected to change in the near future.
Construction and Real Estate. Activity remained weak over the past 8 weeks. There
was a slight uptick in leasing activity in the Dallas area, stimulated by free rent and other
incentives. Contacts say long-term leases are only being signed with deep financial
concessions. Rents have declined 20 percent and are not expected to increase this year. The
Houston market has been jolted by the sudden addition of substantial office space, leading to
uncertainty about how low the occupancy rate could fall.
Residential activity is still weak, and potential homebuyers continue to back out of
deals, according to contacts. Existing home inventories have risen as people continue to leave
houses they can not afford. Demand for multifamily housing is also weak and concessions are
prevalent. Demand remains solid, however, for lower priced homes.
Energy. U.S. drilling activity showed signs of bottoming out in recent weeks, but there
are concerns about future declines. Some projects are being delayed and contacts say the
possibility of a collapse in natural gas prices could lead to a decline of as many as 150 rigs.
International drilling is also seeing some delays, although day-rates for rigs in the deep Gulf
and key international markets continue to hold up well.
Agriculture. Overall conditions remained dry despite heavy precipitation in midFebruary. Land preparation for corn and cotton is proceeding on schedule except in a few
areas where producers had to wait for the ground to dry out. Despite low prices and a large
surplus of cotton, farmers are continuing to plant as if it was a normal year. Ranchers are
reducing livestock herds because dry conditions have prevented pastures from reaching their
usual winter production levels.
XII-1
TWELFTH DISTRICT-SAN FRANCISCO
Reports from Twelfth District contacts indicated a pickup in economic activity in January
and early February. Respondents reported steady prices for most consumer goods and services
and little pressure on wages. Consumer spending reportedly exceeded expectations in recent
weeks and travel spending improved slightly, but sales remained below year-earlier values for
both retailers and travel-related businesses. Demand for high-tech manufactured goods
reportedly strengthened further in January and February, with contacts noting improvements in
both sales and orders. District agricultural producers reported little change in conditions in
recent weeks. Demand for low-to-medium priced residential real estate remained fairly strong,
although slightly weaker than in previous months. In contrast, commercial real estate markets
continued to weaken. Bank contacts reported a drop-off in borrowing in response to greater
economic uncertainty and stricter loan terms.
Prices and wages
District contacts reported little change in consumer prices in the recent survey period but
noted some downward pressure on input costs, especially energy. Falling input prices reportedly
helped boost profit margins in a number of sectors. Ongoing weakness in labor markets further
eased wage and salary pressures in the District during the most recent survey period. Wage
increases were scant across sectors, and some contacts noted that some firms have suspended
bonus programs until the economy improves.
Retail trade and services
District respondents reported better than expected retail sales in January and early
February. Still, nominal sales growth reportedly remains flat to negative relative to a year
XII-2
earlier. Contacts reported that retail inventories generally were in balance but that many retail
outlets were cutting jobs to bring staffing in line with current requirements. Automobile sales
slowed considerably relative to the fourth quarter of 2001 as many zero percent financing
programs came to an end.
Respondents in the services sector noted that the demand for professional services such as
financial counseling, advertising, and public relations fell in recent weeks. In contrast, demand
for communications services reportedly improved in January and February. Travel and tourism
also picked up slightly, although demand remained well below year-earlier levels, creating
excess capacity at hotels, rental car agencies, airlines, and cruise ships.
Manufacturing
District contacts noted further signs of stabilization in the high-tech manufacturing sector,
with improvements in new orders and sales and continued success in drawing down inventories.
Despite these positives, high-tech manufacturing contacts reported that firms continued to reduce
employment.
Outside the high-tech sector, respondents reported little improvement, with falling orders
and excess capacity continuing to depress output and earnings. Weakness was especially
apparent in the District's aerospace sector, where the impact of reduced demand for air travel is
beginning to show through to employment at aircraft and parts manufacturers. Numerous
manufacturing contacts reported that the strong dollar and weak foreign economies continued to
damp export demand for manufactured goods.
Agriculture and Resource-related Industries
District agricultural conditions reportedly changed little from the previous survey period,
XII-3
with excess supply and low prices characterizing markets for most products. On a positive note,
cattle farmers and growers of field crops worked down inventories, and saw improvements in
prices. The long period of low prices reportedly has prompted producers of some products to
engage in supply control programs. For example, prune growers reportedly have taken measures
to reduce supply and stabilize prices. Several respondents noted that in the context of the strong
dollar, there was increased competition from new global market players in South America,
Northern Europe, and China. Lastly, respondents in the energy sector noted that warmer than
normal weather has depressed demand for heating oil and natural gas and slowed growth in the
fuel transportation business.
Real Estate and Construction
Conditions in real estate have remained mixed so far this year, with commercial markets
weakening further and residential markets remaining stable. Respondents throughout the District
noted further increases in vacancy rates and declines in lease rates for commercial property in
recent weeks. Accordingly, construction on ongoing and new commercial projects slowed
substantially, with many builders pausing until the economy improves.
In contrast, residential real estate markets in the District remained solid. Respondents
noted that sales of low-to-median priced homes were strong, with many listed properties
receiving multiple offers. In California, markets in the San Francisco Bay Area improved in
January and February adding to ongoing strength in Southern California and the Central Valley.
Across the District, the market for high-end homes remained weak, with sales and prices
declining relative to the previous survey period.
XII-4
Financial Institutions
District contacts reported that loan demand continued to fall on net in January and early
February. Contacts noted that some of the drop-off in borrowing likely was due to the uncertain
economic environment, while stricter borrowing requirements have priced some businesses out
of the market. Respondents noted that consumer loans were more readily available with respect
to price and loan terms than were business loans.
Cite this document
Federal Reserve (2002, March 18). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20020319
@misc{wtfs_beige_book_20020319,
author = {Federal Reserve},
title = {Beige Book},
year = {2002},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20020319},
note = {Retrieved via When the Fed Speaks corpus}
}