Beige Book
March 5, 2003
Summary
Prepared at the Federal Reserve Bank of Chicago based on information collected before February 24,
2003. This document summarizes comments received from businesses and other contacts outside the
Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts generally suggested that growth in
economic activity remained subdued in January and February. Only a few Districts reported
any notable changes from the last Beige Book. In particular, Richmond indicated that
economic activity "grew modestly" and Kansas City noted "some signs of strengthening;"
by contrast, New York said that the regional economy had "generally weakened." Many
reports indicated that geopolitical and economic uncertainties were constraining consumer
and business spending and tempering near-term expectations.
Consumer spending remained weak, on balance, with a few Districts noting a little
improvement and others indicating a slight deterioration. Business spending was very soft,
with little change in capital spending or hiring plans. Nearly all Districts indicated that real
estate and construction activities were mixed, with strength on the residential side and
weakness on the nonresidential side. Most Districts still described manufacturing activity as
weak or lackluster, although half of the reports noted at least some degree of improvement.
Refinancing activity continued to drive growth in household loans, while business loan
demand remained weak. Contacts in most Districts expressed concern over rising energy
and insurance costs, but noted that businesses had difficulty passing along much, if any, of
the cost increases to their customers. The agricultural sector continued to be affected by
poor weather in many Districts. Mining and energy extraction activity picked up, but energy
production was limited by supply problems and some shortages of skilled labor.
Consumer Spending and Tourism
Overall consumer spending remained weak during January and February. Retail sales were
generally flat throughout much of the country in January. Boston, Chicago, and Kansas City
reported some signs of improvement during February, but severe winter weather over the
Presidents Day weekend hampered shopping in the New York, Philadelphia, and Richmond
Districts. Apparel sales were mostly weak, although discounting helped move merchandise
in some areas. Reports on home furnishings were mixed. Valentine's Day merchandise sold
well in a few Districts, and terrorism fears boosted the sales of duct tape, plastic, and other
hardware goods in some regions. Retail inventories were generally low and in line with both
current sales and merchants' conservative near-term expectations. New light-vehicle sales
were down from year-end 2002 levels; new vehicle inventories were high for some product
lines, and incentives remained elevated. Tourism and travel reports were mostly favorable.
Richmond said that tourist activity strengthened. Atlanta reported a gradual improvement in
overall tourism and continued strength in cruise activity through Florida ports. Kansas City
noted that traffic to Rocky Mountain ski resorts remained solid. San Francisco reported that
domestic and international travel to Hawaii improved, but was below expectations.
Business Spending
Business spending remained very soft, as geopolitical concerns and uncertainty over the
strength of demand continued to constrain spending and hiring plans. Capital expenditures
remained sluggish, with most Districts noting little change in recent months. Cleveland and
Atlanta noted particular weakness in manufacturers' current capital outlays. Boston and
Chicago reported that information technology spending was weak, with Boston noting
further softening, particularly for telecom-related software and services. By contrast, Dallas
indicated a slight improvement in information technology sales, with one contact noting an
increase in orders for replacement hardware such as routers, computers, and monitors.
While businesses in much of the country remained cautious about their plans for capital
spending in coming months, a survey of Philadelphia District manufacturers indicated that
about 25 percent of respondents planned to increase outlays while only 10 percent planned
decreases. Reports of demand for legal and accounting services were mixed, while three
Districts indicated some softening in advertising.
Most Districts reported that businesses were still very cautious about hiring permanent
workers, though Cleveland and Atlanta noted a pickup in the use of overtime and part-time
employees. Nearly half of the District reports suggested that manufacturing industries were
reducing their payrolls, and two said that retailers were downsizing as well. State fiscal
woes were cited as contributing to layoffs in the Minneapolis and Kansas City regions.
Staffing services firms generally continued to report soft demand. A large employment
agency in New York noted that hiring for midlevel office jobs had been on the rise late in
2002, but had since dropped off. However, Dallas reported improved demand for temporary
workers in administrative, light industrial, and professional and technical positions, and
Richmond saw scattered increases in manufacturing.
Construction and Real Estate
Nearly all Districts indicated that real estate and construction activities remained mixed,
with strength on the residential side and weakness on the nonresidential side. New and
existing home sales remained strong in nearly all Districts, with only Dallas reporting that
activity was soft. Housing demand generally appeared to be strongest for low- and
moderate-priced units. Demand for higher-priced homes remained softer, although
Richmond and Chicago noted slight improvement in some areas. None of the Districts
reported a general improvement in commercial real estate markets, and three suggested
slight deterioration. Most regions said that net new demand for office space remained very
weak. Vacancy rates continued to rise somewhat and downward pressure on rents persisted.
Philadelphia and Richmond indicated that office-leasing activity picked up as existing
tenants renegotiated with landlords for lower rents and/or concessions. Boston also reported
an increase in leasing activity, largely due to consolidations. Cleveland noted that state and
local fiscal difficulties were having an impact on public construction projects, and St. Louis
reported that several announced hospital, church, and college projects have been delayed
due to economic uncertainty. Most reports suggested that there were few, if any,
expectations of a near-term improvement in commercial real estate and building activities.
Cleveland, however, noted an increase in demand for architects' services, which contacts
suggested could be a precursor to increased commercial building activity.
Manufacturing
Manufacturing activity generally remained weak nationwide, but half of the reports noted at
least some degree of improvement. Richmond indicated that "activity strengthened" as
"shipments and new orders rose sharply," and Kansas City said that "activity improved
slightly." Only St. Louis suggested a slight deterioration, with increasing reports of weak
sales. Light-vehicle production nationwide was flat-to-down from a year earlier, and adverse
weather in mid-February led to some plant shutdowns in the Cleveland District. Reports
from vehicle parts suppliers were mixed. Firms in the St. Louis District reported
diminishing orders for automobile parts, but Atlanta suggested that businesses supplying
parts to the new vehicle assembly plants in the region were outperforming other
manufacturers. Demand for some high-tech goods was said to be improving. Conditions in
the semiconductor industry appeared to improve in the Boston and San Francisco Districts.
Dallas added that there was an increase in the demand for some high-tech consumer goods.
Apparel makers in two Districts reported better conditions. Manufacturers' inventories of
finished goods and raw materials were generally lean, as contacts across the country
expressed high uncertainty about the near-term outlook.
Banking and Finance
Lending activity was mixed by market segment. Most Districts indicated that growth in
household lending continued to be driven by very strong residential mortgage demand.
Refinancing was again spurred by lower fixed-rate mortgage interest rates; one contact in
the Richmond region indicated that every 1/8 percentage point to 1/4 percentage point drop
in mortgage rates brings in new people. Demand for other types of consumer loans was
generally flat-to-down. A few Districts noted slight increases in delinquencies and defaults
on some household loans, while one reported slight improvements in loan quality. Standards
for household loans were largely unchanged. However, bankers in the Dallas region said
that the quality of loan applicants was lower, and Philadelphia suggested that marginal
borrowers were finding it more difficult to service their debts.
Business lending activity remained weak in most of the nation, as many bankers suggested
that decisionmakers were reluctant to borrow in the face of continued uncertainty
surrounding geopolitical and economic conditions. Atlanta reported that the bulk of
commercial lending activity was driven by businesses refinancing existing loans. However,
bankers in the Philadelphia, Richmond, and Chicago Districts saw slight increases in some
commercial lending segments. Bankers in one-third of the Districts reportedly tightened
standards on some business loans. There were few indications that overall quality on
commercial loans had changed in recent weeks, although bankers in the Philadelphia
District noted "some slippage in credit quality," while Chicago bankers suggested modest
improvement.
Prices and Employment Costs
A combination of geopolitical uncertainties, very harsh winter weather in the eastern half of
the country, and lean inventories led to significantly higher energy costs in January and
February. These cost increases were having wide-ranging economic impacts throughout the
country--higher raw materials costs for manufacturers, increases in transportation and
shipping costs, fuel surcharges, and even job cuts in manufacturing in the Atlanta region.
Dallas reported that "gasoline prices at the pump reached the highest February level on
record," while one Chicago contact suggested that small freight haulers may be driven into
bankruptcy by very high diesel fuel prices.
Upward wage pressures remained generally subdued in nearly all Districts, but some
nonwage costs continued to rise, particularly for health and other insurance. Minneapolis
reported that two large unions had agreed to pay a portion of their health insurance
premiums in order to get 3.75 percent pay raises in each of the next two years.
Few firms said they were able to pass along much, if any, of these cost increases to their
customers. Competition from both domestic and foreign producers helped keep final goods
prices in check. Most Districts suggested that price pressures at the retail level remained
largely subdued, with many merchants still resorting to heavy discounts to move
merchandise.
Agriculture and Natural Resources
Agricultural activity remained mixed across Districts. San Francisco reported that the
decline in the value of the dollar gave a boost to agricultural exports. Farmland values in the
Chicago District posted the largest year-over-year gain since 1997. Higher prices for many
agricultural commodities boosted planting, notably for winter wheat in part of the
Minneapolis District. Cotton yields hit a record in Texas, and cotton plantings in the
mid-South are expected to be higher this year. Increased livestock prices have eased
profitability concerns, though reduced herds due to drought could lead to a smaller calf crop
this year. The drought reportedly affected agriculture in nearly half the Districts, increasing
the need for timely precipitation in the spring. On the other hand, Atlanta and Dallas
reported favorable moisture levels. Cold weather had a negative impact on agricultural
activity, stressing livestock in several regions, slowing field work in the Richmond District,
and causing moderate frost damage in portions of the Atlanta District. Low prices continued
to affect the dairy industry, even the most efficient producers. Financial stress has increased
in the Chicago District, but few significant farm loan portfolio problems were reported by
bankers elsewhere.
Due to higher prices, activity in the energy sector increased, though not evenly. Kansas City
and San Francisco reported strong oil and natural gas activity. However, Dallas noted only a
mild increase and Minneapolis said energy activity was mixed. Current and potential
disruptions to crude oil supplies continued to hamper refining, especially in the Dallas
District. Dallas also reported that activity was held down by industry perceptions that the oil
price increase was temporary and by a shortage of trained workers. Higher metal prices
helped spur mining activity in the Minneapolis District.
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First District--Boston
The First District economy shows few signs of improvement. Retailers cite disappointing
December results, although some gained in January and February. Most manufacturing
contacts report weak demand. Commercial real estate markets in New England remain very
slow. Most software and information technology providers say demand is declining. The
outlook is highly uncertain and virtually no contacts are making plans based on expectations
of an upturn.
Retail
Most retail contacts in New England report lackluster sales in December, although some
contacts report a slight uptick in January and February. Art and graphics supplies reportedly
sold well, while electronics sales slowed and inventories rose. Conditions in the travel and
tourism sector remain weak; contacts report hotel occupancy rates in the Boston area
continue to be low because of soft corporate and international travel. Furniture sales did not
meet expectations in December, but reportedly picked up in January and February. A surplus
merchandise contact experienced record-high sales in December, having obtained unusually
good inventory from big retailers. Hardware stores report double-digit increases in sales
compared with a year ago; the harsh weather and fear of terrorism--consumers purchasing
items such as duct tape and plastic--have helped boost sales.
Most retailers are holding employment levels steady; two contacts, however, are
implementing slight decreases in head count. Wages are mostly constant, although Maine's
minimum wage increase has led to some raises even in above-minimum pay rates. Most
capital spending plans continue to be minimal. Overall, vendor prices and selling prices are
level or falling.
Some retail contacts expect sales to increase slightly over the next six months, while others
foresee little improvement. Most contacts are hopeful for a turnaround if the geopolitical
uncertainties are resolved in the next six months.
Manufacturing and Related Services
First District manufacturing contacts continue to report few, if any, signs of a pickup in
demand for their products in early 2003. Most makers of capital goods and other business
products indicate that business is weak, especially for aircraft and power equipment. Makers
of consumer products say business is soft or, at best, just meeting plan. Some consumer
goods companies indicate new signs of deterioration. For example, one furniture company
observes that consumers became more cautious in early February and a label maker says
that sales to retailers have been running below expectations in the new year. However,
others say that conditions are basically similar to what they observed in late 2002 or even a
little better. In contrast to the general trend, sales of supplies and equipment to health-related
sectors continue to rise. Contacts in the semiconductor industry anticipate that first-quarter
revenues will be up at a double-digit rate from a year ago; however, one firm is continuing
to see good momentum quarter to quarter, while another calls the quarterly pattern "flattish."
Selling prices remain under competitive pressure. Although materials costs are generally in
check, contacts express concern that rising oil prices will raise costs for items such as
plastics and chemicals.
About one-half of the manufacturing contacts expect to shrink their workforce in coming
months. Most of the remaining firms are either holding staffing steady following layoffs in
recent months or hiring selectively. In 2003 merit pay increases are or will be modest,
ranging from zero percent to 4 percent at most firms. Capital spending budgets for 2003
generally are similar to last year's. The few companies planning significant increases cite the
need for efficiency improvements or new product development.
Most manufacturers are either anticipating or hoping for a modest improvement in
conditions during 2003. However, they remain cautious in the face of economic and
geopolitical uncertainties. Contacts variously describe their companies as "focusing inward"
… "not spending with confidence, not taking a lot of chances" … "just muddling along" …
"[having] absolutely no visibility right now."
Temporary Employment
Conditions in the staffing industry are mixed, with most companies experiencing flat or
modest year-over-year growth in revenues and profits during the fourth quarter of 2002 and
early 2003. Labor supply remains abundant. Wages and billing rates are largely unchanged,
although many respondents express alarm at steady increases in employee insurance costs.
Temp hiring in manufacturing and light industry is particularly weak, with Vermont
reportedly lagging behind the other New England states. Staffing firms are keeping their
own payroll and capital spending low, with few instances of further restructuring or
reorganization. Most respondents anticipate modest growth in 2003, particularly during the
second half.
Commercial Real Estate
Commercial real estate markets in New England remain sluggish. Respondents report little
change in activity since our last contact in November, with any new leasing activity being
spurred predominantly by consolidation rather than by expansion or growth. While demand
for building purchases continues to be strong, lack of demand for rental space has led to
lower rental rates and higher vacancy rates in office markets throughout the region. In the
Boston area, the published vacancy rates are around 15 percent in the city and 30 percent in
the suburbs, but substantially more space is actually available for rent, as some companies
make deals for space that is not even listed for sublease. Rental rates for Class A space have
dropped to what Class B or Class C buildings commanded two years ago. With little
expectation that the economy will improve in the near future, contacts predict a third
consecutive year of negative absorption.
Software and Information Technology Services
The demand for software and information technology services has continued to weaken in
early 2003. With some exceptions, contacts in the software industry report flat or negative
first-quarter revenue growth ranging from zero percent to minus 12 percent compared with
last quarter. January is said to have been atypically slow for several custom applications and
network software firms. Providers of telecom-related software and services report soft sales
along a continuing downward trend, while firms selling software development tools say
demand has been level since November. By contrast, several contacts producing human
resources and health-care software report annual revenue growth of more than 10 percent.
Software producers seeing revenue gains continue to add labor. The rest are still adding no
jobs, with some firms having reached optimal size and others beginning to struggle to avoid
layoffs. Capital spending is level across the sector with few plans for change in the coming
months. Companies continue to spend only out of necessity or to complete previously
postponed investment projects.
Software and information technology contacts indicate that the outlook has deteriorated
since the last quarter of 2002 and is marked by considerable uncertainty. The majority of
respondents expect flat to deteriorating demand for the next quarter, partly reflecting
increased geopolitical risk.
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Second District--New York
The Second District's economy has generally softened since the last report, with the notable
exception of housing, which appears to have regained some momentum. Signs of weakness
are particularly evident in the labor market. While business contacts report increased cost
pressures, mainly for insurance and energy, these pressures show no signs of feeding into
finished-goods prices. The Presidents Day snowstorm had a large effect on the retail sector
but little disruptive effect on manufacturing or shipping.
Retailers note that sales were below plan in recent weeks, particularly during and after the
blizzard. Selling prices and merchandise costs were described as steady to lower than a year
ago, while retail inventories were said to be in fairly good shape. Manufacturers indicate
mixed but generally softer conditions in recent weeks; they also note increased upward cost
pressures but flat to declining selling prices.
Home construction and the housing market generally have picked up since the last report,
though the upper end of the market remains weak. Manhattan's office market has been stable
to slightly weaker in early 2003, with rents continuing to fall. Conditions in New York City's
financial industry have reportedly deteriorated since the last report. Finally, bankers report
some weakening in consumer loan demand, a modest upturn in consumer delinquency rates,
and tighter lending standards on commercial borrowers.
Consumer Spending
Retailers report that sales were generally below plan in January and the first three weeks of
February. Most contacts were not too concerned with January, which is considered a
clearance month. However, the Presidents Day snowstorm had a substantial effect on
February sales, and contacts generally do not expect to recoup those sales for quite some
time. The storm shut down a number of stores on what is typically a busy sales day and
continued to depress business for two to three days. February same-store sales are expected
to range from 3 percent to 15 percent lower than last year, mainly due to the snowstorm.
Apparel sales were generally described as weak, though outerwear again performed better
than other categories; a number of contacts noted particularly strong sales of jewelry.
Demand for home furnishings and appliances was described as mixed. Despite the recent
weakness in sales, most retail contacts say that inventories are in good shape. Retailers
report that selling prices are flat to down moderately and describe the pricing environment
as highly competitive. Merchandise and labor costs are said to be little changed, but retailers
report steep increases in utility and insurance costs.
Regional surveys of consumer confidence have given mixed but generally weak signals.
Siena College's monthly survey of New York State residents showed confidence rebounding
from a cyclical trough in January, led by the New York City area. However, the Conference
Board reports that confidence in the Middle Atlantic states--New York, New Jersey, and
Pennsylvania--fell to a new cyclical low in January.
Construction and Real Estate
Residential real estate markets have shown signs of regaining steam since the last report,
while commercial markets remain soft but stable. New York State realtors report that sales
of single-family homes rebounded in December, while selling prices continued to run more
than 10 percent ahead of a year earlier, with the steepest gains in the New York City area.
Contacts report that sales of Manhattan co-ops and condos picked up in January and early
February and that selling prices have been stable in recent months. The high end of the
market, however, continues to lag.
Both single-family and multifamily housing permits in the District rebounded in December,
after drifting down in the prior two months. More recently, homebuilders in northern New
Jersey report that demand remains strong for homes selling for under $1 million, but note
that demand has weakened further at the top end of the market, particularly in areas near
New York City. An industry contact notes that labor and material costs are not a problem but
that liability insurance coverage is increasingly difficult--builders are more concerned about
availability than the rising cost.
Manhattan's commercial real estate market was steady to slightly weaker in January. Lower
Manhattan's availability rate inched up, after improving slowly but steadily in the second
half of 2002. However, rates held steady in Midtown and edged down in Midtown South.
Still, asking rents throughout the city continued to decline; they have fallen by roughly 20
percent from their early-2001 peaks, and industry experts note that the decline in actual
rents has been much steeper. On the supply side, there is a moderate amount of new office
space currently under construction in Manhattan: roughly 3 million square feet is scheduled
for completion this year and another nearly 4 million in 2004. Together, this represents
slightly over 1 percent of the total stock, and all of this new space will be in Midtown.
Other Business Activity
A major New York City employment agency, specializing in midlevel office jobs, reports
that that hiring activity, which appeared to be on the rise in late 2002, dropped off in January
and February. The market for temps is also described as slack. Legal firms are still hiring,
and there has been some pickup at magazine publishers; however, there has been very little
activity from the usually dominant financial sector. Moreover, a large and growing number
of unemployed financial industry workers are looking for jobs.
A contact in New York City's securities industry reports that conditions have deteriorated
noticeably since the last report. In addition to increased weakness in the financial markets,
stock issuance, and mergers and acquisitions, recent litigation settlements and increased
liability have further affected securities firms' bottom lines. Bonus payments are estimated
to be down 20 percent to 30 percent from last year's levels, and there is no indication of a
pickup in hiring on the horizon.
The manufacturing sector has given mixed signals since the last report. Purchasing
managers in both the Buffalo and Rochester areas report some pickup in manufacturing
activity in January but further declines in employment levels; they also note widespread
increases in input prices. New York City-area purchasers report that manufacturing sector
conditions were flat in January, after broad improvement in December, and indicate little
change in input prices; while they express increased optimism about the near-term business
outlook, a majority anticipates staff cutbacks in the industry in 2003. More recently, our
February survey of New York State manufacturers indicates some leveling off in business
conditions, following three months of improvement. Manufacturers note increased upward
pressure on input costs but downward pressure on selling prices. Respondents also
expressed less optimism about the near-term outlook than in recent months. While the
survey was taken prior to the Presidents Day blizzard, there has been no indication that the
storm had any substantial effect on production.
Separately, a major freight shipping firm reports that the snowstorm had little disruptive
effect at the seaports during the subsequent workweek, causing only scattered minor delays.
More generally, this contact characterizes shipping activity as very strong.
Financial Developments
Small to medium-sized Second District banks report a further decline in demand for
consumer loans, which appears to be partly seasonal, but steady demand in other segments.
In particular, 31 percent of bankers indicated lower demand for consumer loans, compared
with only 3 percent indicating higher demand. Bankers reported no change in overall
refinancing activity.
On the supply side, bankers continue to report tightening credit standards for commercial
borrowers--roughly one in six bankers reports tighter standards for commercial and
industrial loans, while none reports an easing of standards. Credit standards for residential
mortgages and consumer loans remained little changed. Both loan rates and deposit rates
continued to decline across the board. Lenders report an upturn in delinquency rates on
consumer loans, which cannot be attributed entirely to seasonal fluctuations--twice as many
respondents indicate that they are rising as rates are declining. Delinquency rates are
reported to be stable in the other categories.
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Third District--Philadelphia
The pace of business activity in the Third District was virtually steady in February, as some
sectors improved slightly and others slowed. Manufacturers reported a small increase in new
orders for the month compared with January, but shipments were flat and order backlogs
declined. Retail sales of general merchandise and auto sales eased in February from January
and from February of last year. Bank lending has been rising slowly, with most of the
growth coming from consumer loans, although some banks reported recent increases in
business lending. Commercial real estate market conditions have shown little change.
Vacancy rates have been nearly steady, but effective rents have edged down. Residential real
estate sales have been steady at a fairly brisk pace, and builders' backlogs remain high.
Looking ahead, contacts in the Third District business community expect some
improvement, although they do not foresee a strengthening in growth. Manufacturers
forecast some increases in shipments and orders during the next six months, but their level
of optimism has waned somewhat since the start of the year. Retailers anticipate a slow
improvement in sales, but they are being very conservative in their sales plans for the
spring. Auto dealers expect a pickup in sales as winter comes to an end, but they do not
expect to match last year's sales rate. Bankers expect slight gains in lending, but they have
become increasingly concerned that loan growth could stall if the pace of business activity
in the region does not improve.
Manufacturing
Third District manufacturers reported steady shipments and slight gains in new orders, on
balance, in February. However, despite the rise in new orders, order backlogs declined at
area plants. Manufacturers continued to report declining inventories, and some firms
characterized them as historically low. Also, some manufacturing companies indicated that
their customers were maintaining very low inventories and placing orders only on an
as-needed basis. By major industry sector, conditions appeared to be relatively better for
makers of apparel and furniture and for some producers of industrial equipment and
materials. Conditions were relatively slower among makers of paper products and fabricated
metal products.
On balance, the region's manufacturers forecast improvement during the next six months,
although they have not been quite as optimistic recently as they were at the start of the year.
About half of the firms surveyed in February expect increases in shipments and orders by
midyear, but one-fifth anticipate decreases. Area manufacturers' capital spending plans call
for increases, on balance, with about one in four scheduling increased outlays and one in ten
planning cuts. Most of the firms that are limiting or reducing capital spending for 2003
indicated that they are doing so because demand for their products remains weak, but a
significant number mentioned geopolitical uncertainties as a negative influence on their
capital spending decisions.
Retail
Third District retailers generally reported that sales in February were somewhat off
compared with a year ago, and most of the stores contacted for this report indicated that
sales slowed in February compared with January. Store traffic has also declined. Store
executives said cold weather and winter storms have hampered shopping, but they also said
that fundamental consumer demand has eased. Retailers said sales of home furnishings and
electronics have been holding up, but sales of many other types of merchandise, particularly
apparel and jewelry, have weakened. Some merchants also noted that there has been a sharp
decline in purchases by younger consumers. Discounting continued to be extensive, with
many special sales and coupon promotions being offered.
Most of the retailers contacted for this report expect sales to move up sluggishly as the year
proceeds. They are being very cautious in inventory planning, and many store executives
said they will be trimming promotional spending, particularly for advertising. It appears that
retail companies operating in the region will also reduce capital spending this year, but most
of the store executives surveyed said the cuts will not be as large as they were last year.
Auto sales in the District slipped in February from the January pace, with declines for nearly
all makes. Dealers reported that sales fell as some manufacturers scaled back incentives and
dropped further when snowstorms disrupted travel in the region. Dealers said the outlook is
uncertain. They expect sales to rise by the spring, although they anticipate results for this
year as a whole will be below last year.
Finance
Outstanding loan volume at Third District banks was rising slowly in late January and early
February. Much of the growth was in consumer lending, including credit cards and other
installment loans. Residential real estate lending continued to move up as well. Some banks
noted recent increases in commercial and industrial lending, primarily to small and
medium-sized businesses. The gains in business lending were slight, however.
Bankers generally said there has been some slippage in credit quality recently among both
business and consumer borrowers. Most of the banks contacted for this report said loan
delinquencies have increased, but some noted that the increase in their charge-offs has been
proportionately lower than the increase in their loan portfolio's delinquency rate.
Looking ahead, bankers in the Third District expect slow growth in total lending, at best.
Some expressed concern that, unless the economic recovery picks up speed, growth in
business and consumer lending will stall. Furthermore, several bankers said marginal
borrowers are beginning to have difficulty servicing their current debt, and they anticipate
more firms and households will experience financial pressure if business activity and
employment do not improve soon.
Real Estate and Construction
There has been little change in conditions in Third District commercial real estate markets in
recent months. Surveys by area real estate firms indicated that overall vacancy rates have
been nearly steady, with slight increases in some locations and slight decreases in others.
The office vacancy rate in the Philadelphia central business district was recently estimated at
around 13 percent. The vacancy rate in suburban areas varied. In markets where new
buildings have been completed the rate was around 20 percent, but in other markets it was
lower. Quoted rents remained fairly stable, but effective rental rates have fallen as landlords
have raised tenant improvement allowances and offered rent-free periods. Leasing activity
has picked up as many tenants have negotiated new or renewed leases to take advantage of
landlord concessions. Although a number of new buildings have been proposed, contacts
say construction activity has been easing and is likely to fall further until firms in the region
add substantial numbers of new employees.
Residential real estate agents and homebuilders generally reported steady rates of sales in
January and February at a fairly strong pace. Price appreciation continued to be strong in
many parts of the region, although instances of multiple offers have diminished. Real estate
agents expect sales of new and existing homes for the year as a whole to be a few
percentage points below last year's level. Builders reported little or no decreases in
backlogs, which have been kept up by strong sales while construction has been delayed by
adverse weather. Residential construction contractors generally indicated that land prices
continue to rise, but materials and labor costs have been mainly steady.
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Fourth District--Cleveland
Economic conditions in the Fourth District remained mixed in January and through the first
three weeks of February. On balance, conditions in this report were very similar to the last:
Conditions in residential construction were positive. Although trucking and shipping
contacts reported a slight seasonal decline, conditions remained generally stable.
Manufacturing, banking, and retail reports were mixed. Commercial construction conditions
remained poor. Winter weather did have an adverse impact on several businesses in the
region. Businesses in retail and construction saw less customer traffic than usual, and many
firms across several industries temporarily closed operations because of severe winter
weather during the survey period.
While hints of future improvement can be found in this report (for example, new orders in
manufacturing increased slightly), little suggested conditions would change in the near
future. In the current environment, contacts remained reluctant to forecast future economic
conditions--most are basing future decisions on the expectation that conditions will remain
flat over the next few months. A few firms reported reducing their capital expenditure plans
since the first of the year, but most appear to have adopted a wait-and-see attitude before
changing their budgets.
Labor market conditions have deteriorated since the last report--several manufacturers
reported having reduced their labor forces or planning to do so. The few firms that were
looking for employees reported no trouble in hiring--one contact reported 8,600 applications
for 200 jobs at a new facility that would be opening in the near future.
Manufacturing
In manufacturing, most nondurable goods producers reported flat or slightly increasing
conditions compared with the end of 2002 and reported year-over-year increases in
production and sales for January 2003. Durable goods manufacturers were not so
uniform--some reported year-over-year declines in production and sales while others
reported flat or improving conditions compared with a year ago. While reports on
production and sales varied, reports on other business indicators were more similar. Most
contacts reported idle capacity (some as much as 40 percent or 50 percent), curtailed capital
expenditures, and labor force reductions. Those that increased production did so using
overtime rather than by expanding their labor force. Reports regarding input prices were
mixed, with roughly half our contacts noting significant increases, while the other half
reported flat or declining prices.
Looking forward, most contacts reported flat or slightly increasing new orders, suggesting a
slight pickup in production in the coming months, but most firms were making no plans to
increase their labor force or capital expenditures in the near future. Most contacts reported
that they would be able to respond to a sudden pickup in demand by bringing their idle
capacity on line.
Severe weather curtailed District auto production during the third week of February, closing
several plants in the area for at least one day. Despite these closings, roughly half the
District auto plants reported year-to-date production above 2002 levels, and others reported
year-to-date figures very near 2002 levels.
Demand for steel continued to soften in January and during the first three weeks of
February. Production and sales were slightly down from December 2002 levels but
significantly below January 2002 levels. Steel prices remained under downward pressure
even as the cost of production increased significantly throughout the winter. Many contacts
expect significant reductions in the steel industry's labor force as companies renegotiate
labor contracts. Labor reports were mixed among companies that did not have negotiated
labor contracts: Some reported that they were planning to hire back some of the many
workers they laid off in 2002, while others reported that they would lay off more workers if
conditions in the industry did not improve in the next month.
Retail Sales
District retail reports remained mixed in January, ranging from slight declines (-1.2 percent)
to strong gains (4.0 percent) in year-over-year comparable store sales. Although sales for
Valentine's Day were characterized as robust, retailers reported that sales for the month of
February were trending downward. Apparel retailers noted that seasonal promotions and
clearance events had allowed them to move merchandise and reduce inventories. Most
retailers are very carefully managing their inventories, as they expect sales to be flat in the
coming months.
Automobile dealers in the District characterized sales in January as "lethargic" (one contact
noted that year-over-year sales were down 10 percent), but February reports were mixed.
Most contacts noted a rebound in sales, but a few continued to report declines. Although
dealers reported significant cuts in their advertising budgets (some as high as 20 percent),
they were optimistic about sales in the coming months as manufacturers continue to offer
incentives. As was the case in the last report, inventories remain high (seventy-five- to one
hundred-day supplies--a sixty-day supply is preferable), but contacts were not as concerned
about climbing inventories as they were in the last report.
Construction
District homebuilders reported that sales were steady, at levels slightly higher than at the
start of 2002. Despite some slowing in consumer traffic (partially attributed to poor
weather), demand remained reasonably strong in a favorable interest rate environment.
Commercial builders, on the other hand, continued to report weak conditions. Worsening
state and local budget crises have had an impact on the availability of public construction
projects (a major source of business for some firms in 2002). Competition for available
projects in all areas of commercial construction has increased. Some contacts noted,
however, that architects have been seeing an increase in business, suggesting a pickup will
occur in commercial construction in about a year.
Trucking and Shipping
Trucking and shipping activity slowed again in January, although most of this slowing was
seasonal. Compared with one year ago, shipping volume in January was nearly flat--most
contacts saw a year-over-year increase of about 0.5 percent. Contacts are expecting February
shipping volume to remain flat, but note that the industry will see a seasonal pickup in
March with an increase in volumes from auto manufacturers and their affiliated companies.
For the first time in many reports, the industry experienced downward price pressure as
companies respond to slowing demand (in the last report, contacts reported price increases).
Profit margins have been shrinking as input prices, especially labor and energy, continue to
rise. Companies are attempting to contain capital spending to replace worn-out equipment-several contacts noted recycling trucks or buying them off the secondary market.
Banking
In the banking sector, both commercial and consumer loan demand remained weak.
Compared with one year ago, most contacts reported demand was flat or slightly down, but,
for the first time in many months, some contacts reported that demand growth for mortgages
was "robust" (attributed to both new and refinancing activity). For most banks, however,
home equity loans continue to be the only source of growth in lending. The number of loan
applications remained flat, and the credit quality of consumer loan applicants remained very
poor. Competition for creditworthy borrowers remains intense. Contacts offered conflicting
reports regarding loan delinquency behavior.
Reports regarding core deposit growth were also mixed, with a few contacts reporting
declines, but most reporting no change or growth. Those that reported growth attributed it to
heavy promotions, including free checking. Most contacts reported a continued squeeze on
spreads as loan rates adjust downward and funding rates remain relatively constant.
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Fifth District--Richmond
Economic activity in the Fifth District grew modestly in January and the first three weeks of
February, with a slight improvement in services and manufacturing conditions offsetting a
listless retail sector. Services businesses reported generally steady to slightly higher demand,
and some contacts cited higher orders for coming months. District manufacturing activity
expanded somewhat faster, as shipments and new orders rose sharply in January and early
February. In contrast, retail sales were little changed from our previous report, and retailers
continued to trim payrolls. Price inflation remained modest according to contacts. In the real
estate sector, District home sales rose at a solid rate, but commercial leasing activity slowed
as war prospects unsettled potential lessees. In agriculture, unusually cold and snowy
weather hampered field preparation and led to the abandonment of still-unharvested crops in
some areas of the District.
Retail
District retailers reported generally flat sales over the past six weeks. A major winter storm
over the Presidents Day weekend led many District businesses to close for a day, and
lingering snow curtailed sales. According to a department store manager in Annapolis, Md.,
sales growth and customer traffic there had been unchanged in recent weeks. And in
Richmond, Va., where the winter storm closed several malls, a contact said that store sales
were off but that some of the slack might have been made up through increased Internet
sales. A manager at a builders supply store told us even though customer traffic was lower
because of the recent storm, his store experienced a run on duct tape and other items
recommended for use in the event of domestic terrorism. In Virginia Beach, Va., retailers
reported a slight decrease in customer traffic as military deployments continued in that area.
Car dealers in Washington, D.C., and Charleston, W.Va., said business was very slow, with
manufacturers incentives shoring up sales.
Services
Most services businesses said customer demand was steady to slightly higher in January
through late February, but firms that do business with the federal government reported
decreased revenues. A contact at a financial services firm in Baltimore, Md., said business
was stable and that there was less of a "negative feel" in the local economy. In West
Virginia, a caterer said her bookings had been slow the past few weeks but noted that her
calendar for late spring and summer was filling. Most firms indicated that their employment
levels have been steady. An executive search firm in the District of Columbia said they have
had to "market a little harder," and a health club also in District of Columbia, said they were
seeing more clients. An engineering firm in Charlotte, N.C., reported a shortage of qualified,
licensed engineers in the area but a glut of business managers.
Manufacturing
District manufacturing activity strengthened in January and early February. Shipments and
new orders rose sharply at District factories, led by a pickup in the chemicals, paper, and
textiles industries. A textiles manufacturer in North Carolina told us that aggressive price
reductions were enabling his company to gain market share. Furniture manufacturers noted
that sales were strong in early January, although inclement weather later in the month
tempered growth. Despite the recent uptick in demand, a number of manufacturers
expressed concerns about rising oil prices and the possibility of war. A producer of plastic
products in North Carolina told us, "Things are very uncertain now; business isn't getting
any worse, but there will likely be no sign of a real pickup in activity until the Iraq situation
is cleared up." A tire manufacturer in Virginia noted that 70 percent of his firm's raw
materials were derived from oil. He said that the rising costs of oil and natural gas were
pushing up the prices of raw materials but that he could not pass the higher costs through to
his customers.
Finance
Contacts at District financial institutions said that loan demand changed little in January and
February. Commercial lending remained weak, in part because of the uncertainty over Iraq,
but there were some encouraging signs that demand for commercial loans may be ticking
up. A banker in Charlottesville, Va., said that he had made a few more business loans in
recent weeks and noted that some of his clients were beginning to expand business. In
contrast, a lender in Richmond, Va., reported that commercial lending was "no better, no
worse" than it was late last year and that her clients were "doing well to just keep from
losing business." Residential mortgage lending remained strong as mortgage rates drifted
lower, and most contacts said that the growth in mortgage lending matched December's
pace. Residential refinancing continued strong, accounting for 60 percent to 75 percent of
home mortgage lending in many cases. A mortgage lender in Richmond, Va., said that
interest in refinancing was still strong, observing that "every 1/8 percent to 1/4 percent drop
in mortgage rates brings in new people."
Real Estate
Residential realtors generally reported that home sales were solid in January and February.
An agent in Greenville, S.C., said local sales were the best he had seen in forty years. He
commented that sales were so good he was afraid to say too much "for fear of jinxing them."
A realtor in Odenton, Md., also reported strong sales in January, adding that properties put
on the market in her area did not last long. In Richmond, Va., an agent said that the
remarkable string of monthly sales advances in that area remained intact. In a less rosy
assessment, real estate agents in the District of Columbia said sales had been somewhat
slower in recent weeks--in part because of inclement weather in the region. Across the
District, homes in the low-to-middle price range were selling best, but a few realtors said
that interest in higher price homes was picking up. Home prices were reported to be rising
modestly in most locations.
Commercial realtors reported slower growth in leasing activity in recent weeks as potential
lessees in the office sector adopted a "wait and see" attitude in light of political
developments internationally. A realtor in Raleigh, N.C., captured the mood of many with
the observation that "people are just waiting on the sidelines." The leasing of retail space
picked up--a realtor in Richmond, Va., for example, experienced "very high" growth over
the past six weeks in retail leasing. But office and industrial space leasing was sluggish.
Vacancy rates for retail space remained low, while office vacancy rates edged higher. Rents
for retail space held firm, but edged lower for office space. Realtors in Washington, D.C.
and Charlotte, N.C., noted that some tenants had recently renegotiated their leases, obtaining
lower rents and other concessions. New commercial construction was generally flat across
sectors--several realtors in the Carolinas reported a shift to refurbishing older buildings in
lieu of building new ones.
Tourism
Tourist activity strengthened since our last report. Contacts at several District ski resorts told
us that abundant snow in February rejuvenated interest in skiing. They noted that bookings
over the Presidents Day weekend were much higher than last year and predicted that the ski
season would be extended through late March. Coastal tourism was also reported to be
stronger. A contact from Myrtle Beach, S.C., said that Presidents Day weekend had been
extremely busy, adding that it was difficult to get into a local restaurant without a
reservation. Looking ahead, contacts expressed concern that rising gas prices and continued
talk of war could hamper the spring tourist season.
Temporary Employment
Contacts at District temporary employment agencies reported lukewarm demand for
workers in recent weeks. An agent in Washington, D.C., reported that he had expected a
better start to the new year but said, " Business is still very soft, and demand for extra
workers is slower than expected." While overall demand for temporary workers was flat,
continued strong residential mortgage lending resulted in higher demand for temporary
workers in that sector. In addition, there were scattered reports of a pickup in hiring in
manufacturing.
Agriculture
Frigid weather in January and heavy snowfall in early February impeded field preparation
and limited late small-grain plantings in much of the District. Farmers in Maryland, North
Carolina, and Virginia abandoned some remaining corn and soybean fields in January
because of the cold weather and anticipated poor yields. The cold weather also curtailed
development of pastures and winter grazing crops--farmers were feeding livestock full time
and trying to stretch hay supplies. Although some areas in South Carolina continued to
experience moderate drought conditions, contacts in most areas of the state reported that
small-grain crops were in good condition.
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Sixth District--Atlanta
Contacts reported that economic activity in the Sixth District remained lackluster in January
and February. Retail sales were sluggish, while manufacturers noted continued weakness
outside of defense and auto-related production. The District's tourist sector continued its
gradual improvement. Labor markets displayed a modest improvement in January and
February; employers reportedly remained reluctant to add permanent staff but increased
their use of overtime and part-time workers. The District's single-family housing market
remained strong, but commercial real estate markets continued to suffer from low demand
for space. Most contacts indicated that geopolitical concerns and higher fuel prices were
weighing on near-term expectations for the District's economy.
Consumer Spending
The majority of District retail contacts reported that January and February sales were about
the same as they were a year earlier. Aggressive discounting remained prevalent, especially
among apparel merchants that were clearing out winter clothing. Most retailers contacted
indicated that inventories were balanced, and some noted that stocks were lower than this
time last year. Several national retail chains announced planned store consolidations in the
District. Automobile industry contacts reported mixed light-vehicle sales in January and
February, while the demand for used-car sales remained soft.
Real Estate and Construction
Low mortgage rates continued to propel District housing markets in January and February.
The strongest reports in the District were from Florida, while contacts reported that home
sales and construction elsewhere were mostly stable. High-end homes remained difficult to
sell in most parts of the region. Reports noted that commercial real estate markets remained
weak in January and February. Vacancy rates increased in some metropolitan markets, and
new construction was largely limited to public works projects. Several contacts noted that
generous lease incentives were prevalent, but absorption remained at low levels.
Manufacturing
Overall, factory activity remained lackluster in January and February. Most manufacturing
firms reported no significant increases in demand. Inventories remained lean, and capital
spending plans were subdued. Petrochemical and ammonia plants in Louisiana have
announced job reductions because of high natural gas prices. Production has been scaled
back at a steel plate plant in Alabama because of slack industrial demand. The District's
timber and forest products industry continued to experience low prices and stiff competition
from imports from Canada, Europe, and South America. Contractors for NASA in Florida
and Louisiana expressed concern that activity may slow following the Columbia tragedy.
The most positive reports came from firms supplying the new vehicle assembly plants in the
District and from defense contractors.
Tourism and Business Travel
Tourism contacts reported a gradual improvement in business conditions in January and
February. In Florida, reports suggested that the level of activity still lagged behind that of
early 2001 but exceeded year-ago levels. The number of visitors to Miami over the past few
months was boosted by the success of several special events in the city and particularly
inclement weather in the North. Cruise activity remained strong through Florida ports.
Gaming revenue was characterized as exceptional for Louisiana casinos over the holidays,
but the pace dropped off in January.
Banking and Finance
Responses from the banking sector were mostly positive in January and February.
Residential loan demand and refinancing activity continued to be strong overall, although
there were reports of increasing mortgage default rates in some areas. The vast majority of
commercial loan activity was among businesses refinancing existing loans. Banking
contacts reported ongoing moderate deposit growth. Venture capital investment activity
remained low in most of the District.
Labor and Prices
Most business contacts continued to report that they were reluctant to increase permanent
staffing levels. However, a number of firms noted that they had increased the use of
overtime and part-time workers during January and February. Local and state governments
were cutting back on hiring plans because of budget constraints. The main areas of
employment growth were in the health-care sector and at newly expanded vehicle
production facilities in the District. Insurance costs continued to escalate throughout the
District, and while most reports indicated little change in output prices, input costs related to
oil and gas increased significantly.
Agriculture
Some crops in southern Florida and south Louisiana received moderate frost damage in
February, but most areas emerged largely unscathed from recent cold snaps. Winter rains
have helped reduce drought conditions in several District locations.
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Seventh District--Chicago
Reports from Seventh District contacts generally suggested that economic activity remained
soft in January and February. Consumer spending was again relatively weak, and caution
persisted in businesses' capital spending and hiring plans. Strength continued in sales of
both new and existing homes, while nonresidential building and real estate activities were
again soft. Manufacturing activity remained generally weak but appeared to have improved
further from our last report. Bankers continued to report strong mortgage demand from
households and weak loan demand from businesses. There were a few new reports of input
cost increases, particularly for energy, but prices at the retail level remained largely in
check. District farmland values in 2002 posted the largest year-over-year gain since 1997,
even as concerns increased about the impact of drought and continued low dairy prices.
Consumer Spending
Overall consumer spending remained weak in January and February. Most retail contacts
indicated that sales results in January fell short of their conservative expectations, although
one national chain noted some slight improvement in February. Merchants said that sales of
food and consumables were stronger than other items, particularly apparel. Inventories
generally remained lean as retailers sought to tightly control stocks, although one merchant
reported that inventories were rising faster than sales. A contact in casual dining noted that
sales had been softening since mid-January, in part because of bad weather and increased
fears of terrorism. Auto dealers indicated that light-vehicle sales in the District had slowed
from the torrid pace of year-end 2002, particularly in February. Contacts said that lightvehicle inventories were higher than desired, with one noting that "some dealers are getting
nervous," given the great deal of uncertainty about sales in coming months. A manufacturer
of recreational vehicles said that demand for lower priced units remained strong but that the
high end was "suffering." Tourism activities were reported to be flat to down in most areas,
and one contact noted fewer attendees at boat and RV shows in the region.
Business Spending
Business spending generally remained weak in January and February. Most contacts
suggested that there had been little, if any, change in their actual capital spending or
investment plans early in the year. Many expressed uncertainty about the strength of the
economy and continued to take a "wait and see" attitude. One computer industry contact
indicated that businesses continued to defer both upgrades to mainframe equipment and
additions to capacity, which were also adversely affecting software vendors. There were a
few reports of stronger advertising activity in January, but it had softened somewhat in
February. Business travel remained weak, and there were some reports of firms encouraging
workers to postpone or cancel business trips as a result of the increased threat of terrorism.
Hiring plans remained very cautious. Reports from temporary staffing firms were mixed but
generally indicated that demand remained lackluster. Contacts from many industries
suggested that uncertainty about overall economic conditions and the need to contain costs
were constraining hiring.
Construction and Real Estate
Construction and real estate activity was again strong on the residential side and soft on the
nonresidential side. Sales of both new and existing homes remained strong, according to
homebuilders and realtors. Demand for lower priced homes was strongest in most markets,
although there were a few reports of improving demand for higher priced new homes in
some. One builders association in Wisconsin noted record attendance at their annual home
show in January, with builders and remodelers optimistic about the "quality of leads" from
the show. Apartment occupancy rates continued to trend down, despite little new
development of multifamily rental units. Nonresidential activity remained weak. Office
vacancy rates crept up in some markets, in part because of lease termination agreements.
While these deals increased official vacancy rates, they also reduced the amount of sublease
and "shadow" space on the market. One contact said of office leasing activity, "As for net
new demand, we're just not seeing it." Some reports suggested that vacancies rose in some
older retail developments and that the number of new retail projects in the pipeline was
slowing.
Manufacturing
Overall, manufacturing activity remained generally soft but continued to show signs of
improvement. Nationwide, light-vehicle sales slowed in January and February but were still
tracking at historically strong levels. A contact with one automaker said that the industry
expected volatile sales in coming months, and manufacturers were prepared to raise
incentives to smooth out sales volumes. This contact also noted that production was down
slightly from a year ago, and inventories were a little high. A producer of heavy trucks said
that sales had been gradually improving after bottoming in August of last year, and it
appeared that "people are buying the new engines" that meet more stringent EPA emissions
standards. Production was also holding up, with no plans for additional plant shutdowns.
Strong shipments to China were said to be helping buoy steel production, according to one
industry contact, but inventories had increased somewhat in recent months. A few producers
of machine tools reported that quoting activity (especially for larger projects) was up, and
this was translating into some new orders.
Banking and Finance
Overall lending activity continued to reflect the bifurcation in economic activity, with
strength on the household side and softness on the business side. Applications for mortgage
refinancing may have slowed somewhat, but remained much stronger than most bankers had
anticipated. Contacts noted some improvement in household loan quality, as delinquencies
and charge-offs decreased modestly. Business lending activity remained very weak. A
contact with one large bank said soft business demand was reflected in relatively flat loan
volumes, a trend that has persisted over the past six months. Banks that did experience
volume increases suggested that the gains were due to market share shifts rather than a
general increase in demand. On balance, banks did not appear to be tightening standards on
business loans, and there were a few reports that overall business loan quality had improved
slightly.
Prices and Employment Costs
There were a few new reports of increasing input costs, but retail price increases remained
largely subdued. Of particular concern to many contacts were rising prices of energy and
inputs derived from petroleum. One contact said that prices for diesel fuel had risen to
"frighteningly high" levels, which could potentially send some small freight carriers into
bankruptcy. By contrast, steel prices were said to be stabilizing after some significant
increases in 2002. There were no new reports of intensifying pressure on wages, and some
companies were said to have delayed merit increases until later in the year. Businesses
continued to express concern over rising health and other insurance costs. Despite some
increases in input costs, fierce price competition kept most output prices in check. Smallbusiness owners appeared particularly concerned with this trend, as they were finding it
increasingly difficult to compete with larger producers on price.
Agriculture
On average, District farmland values at the end of 2002 were up more than 7 percent from a
year earlier, the largest year-over-year gain since 1997, according to our survey of rural
bankers. Nearly 40 percent of eligible farms in the District had signed up for aid under the
Farm Security and Rural Investment Act of 2002, with a crush of applications likely this
spring. With drought covering about half the District and another third of the region
abnormally dry, there was increasing concern about the growing season. Corn and soybean
prices remained higher than a year ago, and contacts suggested prices could rise further,
given low stocks and the potential for drought conditions to reduce yields. Higher crop
prices had already led food producers to raise some prices. Very low dairy prices and low
crop yields last year in parts of Illinois and Indiana contributed to increased financial stress
in the District's farm sector.
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Eighth District--St. Louis
Contacts in the Eighth District reported lackluster business conditions in recent months,
with little change from the last survey. In manufacturing, reports of weak sales,
consolidations, closings and cutbacks have continued. Retail sales during December and
January were mostly flat from a year ago but met expectations. Auto sales over the same
period declined. Residential real estate markets are still strong, while commercial real estate
markets remain weak. Over the past three months, there was essentially no change in
lending activity.
Consumer Spending
Contacts reported that retail sales in December and January were flat to slightly up, on
average, from year-earlier levels. More than 70 percent of the retailers surveyed noted that
sales levels met their expectations, while about 25 percent of the contacts reported that sales
were below expectations. Apparel, shoes, home items, cosmetics, and winter items were
strong sellers, while jewelry, specialty, and luxury items moved more slowly. Despite a slow
holiday season, over half the retailers surveyed noted that inventories are at desired levels,
while only 20 percent reported excess inventories. Most contacts indicated no current plans
for discounting merchandise. Retailers remained cautiously optimistic about the next few
months, with about 65 percent of contacts expecting a small increase in sales from last year
and while the rest expecting sales to remain flat or below 2002 levels.
Car dealers in the District reported that sales in December and January were down over
year-earlier levels, on average. Almost all contacts attributed this trend to an uncertain
economy and the threat of war. Several car dealers reported that used and low-end cars are
selling better than new cars, causing inventories of used cars to be okay-to-low and
inventories of new cars to be okay-to-high. About 35 percent of the contacts surveyed noted
higher rejection rates of finance applications, while the rest saw no change. A third of the
dealers surveyed expect sales to be flat-to-slightly-down over last year in the next few
months, the rest expect a moderate increase.
Manufacturing and Other Business Activity
The District's manufacturing sector remains soft. Reports of weak sales, consolidations,
closings, and cutbacks continue to rise. Most contacts also noted diminishing orders and low
selling prices. Industries affected include packaging, appliances, automobile parts,
fluorescent lights, tools, electrical products, paper, and steel cable. Contacts see an uncertain
economy and increased foreign competition as the causes for weakness. Several
manufacturers are somewhat pessimistic about the first half of the year. Despite the overall
slowdown, a few firms in the dye, clothing, stationery, and ventilator industries have
announced plans to expand in or move to the Eighth District.
The increasing price of diesel fuel has many contacts from small and midsize trucking firms
concerned about their already narrow profit margins. A major packing and shipping firm in
the District has announced a plan to lay off pilots in the next year, citing a decrease in
shipping volume as the reason for the cut. In the health-care sector, contacts noted that the
nursing shortage has persisted, especially in the non-urban areas of the District. Contacts in
all industries continued to experience the burden of increasing health-care insurance costs.
Real Estate and Construction
Residential real estate sales are still up in most of the District. Last year was a record year
for home sales in Memphis, with an increase in total home sales of 20 percent in December
2002 compared with December 2001. In Arkansas, home sales were very strong the last two
to three months of 2002 but slowed as the weather turned colder. Residential construction is
also up in most District areas. In Louisville, contacts noted that housing starts are booming
for homebuyers in the $100,000 to $150,000 range. Contacts in Fayetteville reported that
housing starts continue to flourish. In the Greater St. Louis area, year-to-date single-family
housing permits as of December 2002 were up 4 percent from 2001.
Commercial real estate markets are still slow in most of the District. St. Louis continues to
experience an increase in office vacancy rates. Contacts in both Louisville and Fayetteville
reported increased office vacancy rates at the end of 2002. Commercial construction is weak
in most District areas. In northeast Arkansas, activity has continued to be slow and is not
expected to pick up in the spring. In Memphis, contacts reported that there is virtually no
building. In central Kentucky, construction of hospitals, churches, and college facilities are
under way or have just been completed, but several that have been announced are being
delayed because of uncertainty about the economy.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates little change in
overall lending activity over the past three months. Banks' credit standards for commercial
and industrial (C&I) loans remained generally unchanged by large firms but were slightly
tightened for small firms. Most contacts reported a moderate decrease in the demand for
C&I loans for large and small firms, citing a decrease in merger and acquisition financing
needs and reduced plant investment as reasons. The survey introduced questions about
credit default swaps (CDS), but it appears that banks make very little use of them in either
buying or selling credit risk, because, according to the respondents, CDS are more
expensive, riskier, and more complicated instruments than loans. Credit standards for
commercial real estate loans were tightened somewhat even though demand remained about
the same. Both the credit standards and the demand for residential mortgage loans were
reported to be generally unchanged. Credit standards for credit card and consumer loans
remained largely unchanged, but the demand for consumer loans decreased moderately.
Agriculture and Natural Resources
Unusually cold weather in the Midwest stressed livestock and threatened winter crops.
Despite a good amount of snow covering the southern part of the state, Illinois winter wheat
ratings have continued to decline. Low levels of topsoil moisture add to concerns about the
survival of the crop. Rains will be particularly important in late February and March as the
crop breaks dormancy. According to a major survey, cotton producers in the mid-South
intend to plant 3.3 percent more cotton this year than in 2002. The number of catfish
operations in District states decreased, on average, 8.1 percent between 2002 and 2003.
Water surface acres used for production decreased 8.5 percent, on average.
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Ninth District--Minneapolis
Ninth District economic activity was mixed from early January through late February.
Agriculture, home building, and mining grew. Manufacturing, tourism, and energy were
mixed. Consumer spending was flat and commercial construction was down. Over this
period, labor markets loosened slightly. Overall wage and price increases were modest.
Significant price increases were noted in heating costs, gasoline, and tuition.
Construction and Real Estate
Commercial building was generally down. In 2003, only about 200,000 square feet of new
space is planned in the Minneapolis-St. Paul area, down from 1.2 million square feet in
2002, according to a commercial real estate firm. A Minneapolis firm that reconfigures
office space and moves furniture reported less work in January and February than in the last
months of 2002. However, in Sioux Falls, S. Dakota, building permits were up in January
compared with a year ago; commercial realtors, developers, and architects are expecting a
good year in 2003, according to a city official.
Home building and residential real estate activity were solid. The number of housing units
authorized in the Minneapolis-St. Paul area increased 14 percent in January compared with a
year earlier. "Every indication is that 2003 should be another very busy year for builders,"
said a representative of a Minneapolis-St. Paul area builders association. However, the
vacancy rate for apartments in Minneapolis-St. Paul increased to 6.6 percent in the fourth
quarter of 2002, up from 4 percent a year earlier. A representative of a realtors association in
La Crosse, Wis., expects 2003 to be another good year for single-family home sales, but
says 2003 will likely fall short of the 2002 sales record.
Consumer Spending and Tourism
Overall retail sales were flat. A major Minneapolis-based department store and discount
retailer reported that same-store sales were essentially flat in January compared with a year
ago. According to a representative of a chamber of commerce association, retailers in
Minnesota were not complaining about post-holiday sales, but they carried low levels of
inventory. A Minneapolis area mall manager noted flat sales in January compared with a
year ago, while a mall in Montana reported sales down slightly in January from last year. In
contrast, another Minneapolis area mall manager reported good traffic levels in January and
February, while a mall manager in North Dakota noted that the mall's annual post-holiday
sale had higher traffic levels than a year earlier.
Auto sales dipped in January from December levels. According to a representative of an
auto dealers association in Minnesota, after a good December, auto sales have "fallen off a
cliff." An auto dealer in Minnesota noted a significant slowdown in sales at several stores in
January.
Winter tourism was mixed, primarily due to weather. The first seven weeks of the winter
tourism season were a "washout" due to a lack of snow in the Black Hills area of South
Dakota, according to a tourism official; however, since the end of January, business has been
up about 10 percent over last year. Businesses in northern Wisconsin that depend on
snowmobiling and cross-country skiing are hurting, reported a university extension agent. In
contrast, plenty of snow in the Upper Peninsula of Michigan led to a recent 10 percent
increase in lodging expenditures in January compared with last year.
Manufacturing
Manufacturing activity was mixed. A January survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated increased manufacturing activity in Minnesota and the
Dakotas. As evidence, a Minnesota prescription drugs manufacturer plans to significantly
increase capital purchases and employment, and an industrial equipment maker will expand
production in western Wisconsin. However, preliminary results from a January survey of
District manufacturers by the Federal Reserve Bank of Minneapolis and the Minnesota
Department of Trade and Economic Development revealed that businesses expect
employment and capital investment to decrease slightly in the first half of 2003 from the
second half of 2002. Several District manufacturing facilities recently announced plans to
close, including a western Wisconsin tool factory and an electronic component plant in
southern Minnesota.
Energy and Mining
Activity in the energy sector was mixed, while the mining sector was up slightly.
Mid-February District oil and natural gas exploration levels were down slightly, while oil
production was up slightly from early January. Meanwhile, two District iron ore mines were
operating at near capacity and expect to increase employment. District metal mines enjoyed
significant increases in gold prices and moderate price increases for other metals.
Agriculture
The agricultural economy was generally up due to higher commodity prices. The U. S.
Department of Agriculture reported that farmers and ranchers received slightly higher prices
for their products in January compared with December. January hog and beef prices were up
5 percent and 3 percent, respectively, from December. January poultry and egg prices were
up 13 percent from a month earlier. However, January dairy prices were down 1 percent. In
response to higher wheat prices, Montana farmers planted 21 percent more acres of winter
wheat than last year, despite continued drought conditions. Ranchers in the western part of
the District have reduced herds due to the drought and, therefore, a smaller calf crop is
expected this year.
Employment, Wages, and Prices
Several upcoming layoffs were announced since the last report. In Rochester, Minn., a
high-tech manufacturing company will lay off most of its 550 workers by June. A financial
services organization with headquarters in Minneapolis just announced plans to lay off 500
employees companywide due to merger issues. In North Dakota, a bus manufacturing plant
will lay off up to 230 employees. A credit card issuer recently announced plans to cut 100
jobs in Minnesota. In several areas of the District, state and local government budget
problems may be addressed in part through job reductions. For example, more than 1,000
Minnesota state workers could be laid off by June 30. School Districts in the Upper
Peninsula of Michigan noted that reductions in state aid will likely result in layoffs.
In contrast, a health benefits company in Duluth, Minn., plans to hire another 60 to 70
employees over the next six months. A call center in South Dakota has hired 160 people
since the beginning of the year and plans to hire 175 more. A telemarketing company that
opened in South Dakota in February plans to hire as many as 50 employees, and a call
center in Billings, Mont., will add 50 jobs.
Wage increases were modest. About 75 percent of respondents to a recent survey by the St.
Cloud (Minn.) Area Quarterly Business Report indicated no change in employee
compensation during the last three months of 2002. In Eau Claire, Wis., two large unions
agreed to pay a portion of their health insurance premiums in exchange for pay increases of
3.75 percent during each of the next two years.
Overall price increases were modest, except for significant increases in heating costs,
gasoline, and tuition. Only 10 percent of respondents to the St. Cloud (Minn.) Area
Quarterly Business Report poll raised product prices during the last three months of 2002,
while 16 percent decreased prices. Heating costs may rise as much as 10 percent to 35
percent over a year ago in several areas of the District due to colder weather and higher
natural gas prices, according to energy companies. Gasoline prices at pumps in Minnesota
were about 50 percent higher than a year ago. Tuition and fees at four-year public
universities in North Dakota were up 14 percent for this academic year.
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Tenth District--Kansas City
The Tenth District economy showed some signs of strengthening in late January and
February, despite widespread uncertainty among businesses and consumers. Retail sales
posted slight gains, manufacturing activity improved, and energy activity picked up. In
addition, residential real estate activity continued at a strong pace. On the negative side, auto
sales were weak and commercial real estate remained in a slump. In the farm economy,
many ranchers and farmers continued to suffer from the effects of drought. Wage and price
pressures remained largely subdued across the District.
Consumer Spending
Retail sales in the District improved slightly in late January and February after a sluggish
holiday season. Sales were above year-ago levels at most stores and flat or only slightly
lower elsewhere. Many retailers attributed the recent gains to heavy discounting. Among
product categories, apparel and electronics sold particularly well, while sales of some types
of home furnishings were weak. Most managers were optimistic about future activity after
solid Valentine's Day sales and expect some inventory building leading up to the Easter
season. Motor vehicle sales were flat after declining at the end of last year but were only
slightly below year-ago levels in most areas. Compared with contacts in other industries,
auto dealers appeared to be more adversely affected by uncertainty over a possible war with
Iraq. Still, most dealers expect solid sales by summer. In the tourism industry, activity at
Rocky Mountain ski resorts remained solid after record numbers of visits during the
holidays.
Manufacturing
District manufacturing activity improved slightly in late January and February after slipping
in December. Production, shipments, and new orders at District firms rose back above
year-ago levels, and many firms reported small increases in capacity utilization rates.
However, new hiring and capital spending remained weak, and inventories of raw materials
fell. Firms appeared somewhat apprehensive about activity in the immediate future, but their
optimism about production activity later in the year was quite high. Although manufacturing
employment is also expected to pick up by the summer, capital spending is not expected to
change much from current modest levels.
Real Estate and Construction
Residential real estate activity in the District remained strong in late January and February,
although commercial real estate activity weakened further. Single-family housing starts
throughout much of the District rose from already high levels. Most of this strengthening
continued to be for lower priced homes, but there were also reports of increased
construction of midrange homes in some areas. High-end home building, on the other hand,
largely remained in a slump. Most builders expect home construction to remain solid in
coming months, although builders in some drought-stricken areas were concerned about the
effects of new water restrictions on permit applications. Home sales across the District were
also solid, though reports were not as uniformly strong for housing starts. In the months
ahead, most realtors expect sales to continue at the recent pace. Mortgage demand remained
strong throughout much of the District, as refinancing activity continued at high levels.
Nearly all recent refinancings have been used to reduce monthly payments-a contrast from
previous surveys, when a sizable portion of refinancing activity was for the purpose of
taking out cash. Lenders generally expect mortgage demand to stay solid and to possibly
increase further in the spring. Commercial real estate activity remained weak across the
District, with some markets experiencing even further deterioration. Office vacancy rates
rose again in Denver, and commercial construction activity fell in nearly all markets.
Absorption and prices of office space were down slightly in most areas, and many landlords
were offering rent concessions to keep or attract tenants. Commercial realtors generally do
not expect a turnaround in activity any time soon.
Banking
Bankers report that loans and deposits both held steady since the last survey, leaving
loan-deposit ratios unchanged. Demand increased for home mortgage loans but edged down
for consumer loans. Demand for other loan categories was largely unchanged. On the
deposit side, small increases in NOW accounts and money market deposit accounts were
offset by a slight decline in large CDs. All respondent banks left their prime lending rates
unchanged since the last survey, and most banks also held their consumer lending rates
steady. Lending standards were unchanged.
Energy
District energy activity expanded in late January and February in response to the rise in
energy prices that began in mid-December. The count of active oil and gas drilling rigs in
the region has risen more than 30 percent since the beginning of the year and is now well
above the previous peak reached last summer. Some District contacts expect further
increases in natural gas drilling in the Rocky Mountains in coming months, as new pipelines
to areas east and to California open in the spring and summer.
Agriculture
Much of the District's farm economy continues to face drought conditions. The region's
winter wheat crop has deteriorated since the previous survey, and timely rains will be
needed to help develop the crop and renew pastures. Despite the drought, supplies of forage
and feedstuffs have been adequate, but ranchers in some areas have been forced to pay a
premium. Livestock prices have moved higher in recent months, improving profitability in
the industry. Overall, District bankers report few significant problems with their farm loan
portfolios. However, some highly leveraged borrowers will need to carry over or restructure
their debt.
Wages and Prices
Wage and price pressures remained generally subdued across the District. Labor markets
were still very slack, with little evidence of rising wages. Managers reported few problems
finding workers, although some retailers and manufacturers expressed difficulties retaining
quality hourly employees. The pace of layoff announcements continued to decline from
recent peaks last fall. Some retail prices eased due to post-holiday discounting, although
jewelry prices edged up due to recent increases in the price of gold. Retailers generally
expect little change in prices in the near future. Prices for construction materials were
basically flat, but some builders expect lumber and gypsum wallboard prices to increase in
coming months. Manufacturers continued to report rising prices of petroleum-based
products, and several firms also reported surcharges from suppliers due to increased
transportation and insurance costs. At the same time, many manufacturers continued to have
difficulties passing cost increases through to customers.
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Eleventh District--Dallas
From early January through mid-February, overall Eleventh District economic activity
exhibited signs of inertia. Manufacturing activity remained lackluster. Service sector activity
was mixed, with signs of a pickup in some industries and severe financial problems in
others. Retail sales remain weak, and there is still little change in the financial services
industry. Construction and real estate markets continued to decline. Energy activity picked
up only mildly, despite a sharp increase in prices. Overall agricultural conditions were good.
Geopolitical uncertainties still dampen consumer and business confidence. High energy
prices also weigh heavily on the outlook for some industries. Hiring is minimal, according
to contacts who say investments are on hold until questions surrounding the war are
resolved. Contacts report that concerns about terrorism seem to be distracting attention from
normal business.
Prices
Oil prices climbed sharply in recent weeks, pushed up by continued global uncertainties in
Iraq and Venezuela, along with freezing cold weather in the midwestern and northeastern
United States. The prices of heating oil and gasoline have followed crude oil upward.
Gasoline prices at the pump reached the highest February level on record. High gasoline
prices are expected to persist into the summer; refiners would normally be building
inventories of gasoline now but currently do not have the crude available to do so.
Cold weather and rising crude oil prices also pushed natural gas prices upward. Several
waves of bitter weather have pulled natural gas inventories down 20 percent below
year-earlier levels, and raised concerns about their adequacy to deal with a late winter blast
of cold weather. Propane prices have risen along with natural gas--reaching the highest level
in 13 years. Higher energy prices have pushed up chemical and plastic prices. Healthy
demand for housing is driving price increases for chlorine and polyvinyl chloride (PVC).
Rising cost pressures--particularly from energy, shipping, and insurance--were noted by
most industries. A few firms were able to pass along price increases, but international
competition and overcapacity is making that difficult for most manufacturers and retailers.
Some contacts suggest that energy price increases will be passed onto consumers if they
persist. A few firms expressed concern about how long they could operate if energy costs
remain elevated.
Manufacturing
Manufacturing activity remained lackluster overall. While there were some signs of pickup
in the high-tech industry, demand for construction-related materials is waning. Import
competition is reducing sales for some manufacturers.
Demand for fabricated metals was flat in January and February, and producers were guarded
about the outlook for activity over the next year. Sales of primary metals picked up in
January but then fell in February. Producers say that sales are slower than a year ago. Metals
producers reported some increases in selling prices, partially passing along rising costs for
scrap metal and reinforcing steel. Producers of stone, clay, and glass were surprised by
better-than-expected demand over the past two months, but expressed increased uncertainty
about the outlook. Paper and lumber producers report soft sales during the same period,
partly because of import competition. Paper producers expect little change in sales growth
because international competitors are absorbing market share, especially China.
Demand for apparel products is up. Production of private label apparel is increasing,
according to contacts who say that selling prices continue to decline, even as energy prices
are pushing up production costs of petroleum based fabrics.
The high-tech industry reported a slight pickup in sales since the last survey. One source of
moderate improvement has been increasing orders from businesses for replacement
hardware such as routers, computers, and monitors. One respondent noted that this might be
the beginning of a replacement cycle; businesses remain conservative, but after so little
spending in the past couple of years, feel the need to replace old equipment. Consumers
continue to buy video and computer gaming systems and products, and there has been a
pickup in demand for high-definition TVs and flash memory. Inventories remain very low.
There is still too much capacity in the telecommunications industry, although there has been
some pickup in demand for mobile phones and other consumer products. Contacts say the
recent FCC decision has delayed a potential stimulus for capital investment in the industry,
dampening the outlook for telecommunication equipment firms.
Refinery utilization on the Gulf Coast, which was running at about 95 percent in early
December, fell to the mid-80 percent level as Venezuelan crude oil shipments were
disrupted. Utilization improved slowly in early February. There have been sharp reductions
in both crude and product inventories, with crude inventories 25 percent below last year and
near critical levels needed to maintain normal operation of the refinery system.
Demand for petrochemicals has been generally weak over the past two months, but is still
up 5 percent to 6 percent above last year. One exception is PVC, where demand has been
very strong to supply the housing market and Asia.
Services
Some service firms report a pickup in activity while others fight for survival. Temporary
staffing firms reported a pickup in demand over the last two months. Activity is strongest to
supply administrative support, light industrial, and some professional and technical areas.
Salaries are down from the levels of a year ago. Rail shipments are up over last year, with
substantial increases in the shipments of metallic ores and metals.
Demand for legal services remains steady, particularly for litigation, bankruptcy, labor, and
regulatory work. Real estate and lending activity are still quiet, but there are some signs of a
pickup for transactional and venture capital activity. Legal contacts say activity will remain
flat to moderate until corporate confidence improves. Demand for accounting and consulting
activity remains solid, partly because firms continue to benefit from the Anderson fallout.
The Sarbanes-Oxley bill is boosting demand for risk management and audit work.
Many small businesses are struggling, particularly those that supply the high-tech industry,
and contacts say there is a huge shake out going on. One company is requiring cash up front
for new business because they have depleted all reserves. This firm said they are reinventing
their company regularly to find new ways to support their customers.
The airline industry remains in a tailspin. Demand for air travel continues to be extremely
price sensitive, and already strapped carriers are having difficulty passing higher fuel costs
on to passengers. The snowstorm on the East Coast added another financial blow. A
significant drop in aircraft values has tightened the availability of credit for airlines.
Retail Sales
Retail sales continued to be weak. Although the District did not have the weather-related
disruptions that occurred in other parts of the country, retailers were still generally
disappointed with sales. Consumer confidence remains low, they say, and retailers are being
cautious about the outlook. Contacts said that retailers are not increasing inventories and are
looking for other cost-cutting measures to keep as much cash--and as much flexibility--as
possible moving forward. Auto sales are down from a year ago. Dealers say that many
potential buyers do not have good credit and others are waiting to buy due to geopolitical
and economic uncertainty. Large rebates and low interest rate offers seem to be having less
of an impact than they once did.
Financial Services
Overall lending activity continues to be stable. Real estate lending remains the strongest
category, mostly for refinancing. Auto lending has dropped off since January. A few
contacts reported that the quality of new loan applications has declined a bit, and there were
some indications of tighter credit standards in the C&I area. Deposit growth remains strong.
Construction and Real Estate
Construction and real estate conditions continued to decline. Commercial markets are weak.
Building acquisitions continue, but leasing activity is very soft, and rents are falling. Office
landlords are offering numerous incentives to keep tenants and to get them to take more
space. Vacancies are rising, and one contact noted that owners are obtaining reappraisals
when vacancies occur, reducing their tax liability. Single family activity remains soft, with
numerous foreclosures, particularly in the Dallas-Fort Worth area. Although activity is still
moderately strong in the market's low end, several contacts mentioned a lack of "urgency"
among buyers. Builders report an increase in incentives and downward pressure on home
prices.
Energy
The domestic rig count moved over 900 for the first time since late 2001, which contacts say
is a nice increase but not a discernable trend. The energy industry is not responding to much
stronger prices because they view the increases as temporary and lack the trained workers to
respond right away. The additional domestic projects are not very complex--oil-directed,
vertical wells and on-shore. Oil service and equipment companies report that these simple
drilling projects have not yet resulted in a perceptible increase in orders. The pickup in
domestic activity is not offsetting a decline in international drilling.
Agriculture
Regular precipitation across the District has helped conditions overall. The livestock market
conditions remain favorable. Grain prices are still low, and cattle prices are up 37 percent
from last fall. Texas reported record cotton yields for 2002, up 10 percent over 2001. Rice
production continues to decline, however, and contacts say "even the most efficient" dairies
are doing poorly.
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Twelfth District--San Francisco
Reports from Twelfth District contacts indicate continued sluggish economic growth in
much of the region during January and early February. While prices remained stable for
most consumer goods and services, prices for energy and health care increased substantially.
In labor markets, firms faced limited upward pressure on wages and salaries but noted
continued rapid increases in costs for employee benefits. Many respondents pointed to
uncertainties, due in part to geopolitical risks, as having negatively affected both consumer
and business spending. Consumers appeared more cautious concerning expenditures on
vehicles and travel. Conditions in District manufacturing generally remained weak with
limited signs of improvement. The agricultural sector benefited from improved exports and
oil and natural gas producers operated at high levels of capacity. Contacts reported
continued strength in residential real estate, while commercial real estate remained weak.
Bank lending continued recent patterns of rapid growth in residential mortgage loans and
weak demand for business credit.
Prices and Wages
Respondents in the District reported that consumer prices generally remained stable in
recent weeks. Notable exceptions were energy prices, reflecting jumps in fuel costs, and
rapid increases in health-care prices. Contacts noted that retailers had very little pricing
power in the face of the slow economy, extensive discounting was common among retailers
and automakers.
Persistent weak demand and ample supply in labor markets continued to damp wage and
salary pressures in the District in recent weeks. Contacts characterized wages as flat or up
modestly. However, health care and other benefits expenses continued to increase rapidly.
Retail Trade and Services
District respondents reported that the generally sluggish economy and uncertainties related
to possible military action in Iraq contributed to lackluster performance in the retail sector
during the most recent survey period. Sales of new and used vehicles slowed in January and
early February, both relative to December and to a year earlier. Automobile dealers noted
that, with the rise in gasoline prices, inventories of SUVs and light trucks rose in several
markets. Indicative of more general weakness in retail, sales of apparel reportedly were flat.
District respondents reported continued weak demand for many services in January and
early February. Demand for accounting and legal services remained soft in parts of the
District; in California, a large law firm catering to the technology sector closed.
Transportation providers faced higher costs from rising fuel prices and uncertain future
demand associated with a potential war in Iraq. Conditions in District travel and tourism
were mixed. In Hawaii, for example, both domestic and international tourism continued to
improve; however, the improvement was below expectations and the level of international
tourism still has not recovered fully after slumping in 2001. Looking forward, District travel
and hospitality industry contacts indicated that adverse effects on tourism from a potential
war would more than offset any positive effects associated with the weakening value of the
dollar in the foreign exchange market.
Manufacturing
Conditions in manufacturing generally remain weak in the District, with respondents noting
limited improvement in January and early February. Demand conditions remained relatively
stable in biotech industries, while weakness persisted in telecommunications. Respondents
noted that semiconductor sales were flat to up modestly and inventories rose slightly.
Capacity utilization in parts of the high-tech sector improved; utilization rates reportedly
were high and, in some cases, capacity is being expanded for cutting edge technologies.
Overall, however, District firms remain cautious about spending. District contacts reported
that manufacturers, especially those facing rising energy costs and uncertainties related to a
potential war, have postponed spending and investment decisions. Contacts also cited
disruptions to businesses from the call-up of military reservists. However, several contacts
noted that defense contractors in Southern California and other areas of the District would
benefit from the federal government's increased spending on defense and homeland security.
Several respondents reported that the fall in the value of the dollar over the past year has
positioned District manufacturers to compete more effectively against foreign firms in the
months ahead.
Agriculture and Resource-related Industries
The agricultural sector, on balance, benefited from increased exports, while the oil and
natural gas extraction sector was marked by high capacity utilization and rising prices.
Prices for specialty farm products have been mixed in recent weeks. Prices for raisin grapes
fell considerably, while prices for certain nut crops were higher than they were a year ago.
Respondents noted that the depreciation of the dollar contributed to higher export volumes
for a variety of agricultural products, notably nut crops and beef. High levels of capacity
utilization and reduced inventories in oil and natural gas production continued to put upward
pressure on energy prices. Ongoing and potential disruptions of foreign energy supplies also
affected energy prices.
Real Estate and Construction
Overall conditions in District real estate remained mixed, with commercial real estate
markets still in a serious slump and residential markets still showing strength in recent
weeks. Commercial office vacancy rates remained high and continued to edge up as leases
expired. Rental rates fell, most notably in the San Francisco Bay Area, and new office
construction is not expected to pick up for some time.
In contrast, contacts indicated that residential housing markets across much of the District
remained robust in January and early February. Sales of low-to-median priced homes
remained high in most of the District, especially in Southern California and Hawaii,
although the pace of sales and of price appreciation has moderated in some areas.
Throughout the District, contacts noted that markets for high-end homes had cooled off.
Respondents attributed continued strength in overall home sales primarily to low mortgage
interest rates.
Financial Institutions
District banking industry respondents noted strong performance among community banks in
January and early February, with most depicting asset quality as remaining good.
Residential mortgage loan growth rates continued to climb. Home mortgage refinancing
activity was very brisk, though some lenders reported the pace of applications fell short of
the pace of loan closings. Business lending remained weak.
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Last update: March 5, 2003
Cite this document
Federal Reserve (2003, March 17). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20030318
@misc{wtfs_beige_book_20030318,
author = {Federal Reserve},
title = {Beige Book},
year = {2003},
month = {Mar},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20030318},
note = {Retrieved via When the Fed Speaks corpus}
}