Beige Book
January 19, 2005
Summary
Prepared at the Federal Reserve Bank of Richmond and based on information collected before January 10,
2005. This document summarizes comments received from businesses and other contacts outside the Federal
Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve districts indicated that economic activity continued
to expand from late November through early January. Eleven districts characterized activity
as expanding with Atlanta, New York, and Richmond noting that the pace of activity had
quickened since their last reports. The Cleveland District was less upbeat, characterizing
economic activity in that district as mixed.
Consumer spending was generally higher since the last Beige Book and a number of districts
reported that retail sales during the holidays were above year-ago levels. While the pace of
spending was sluggish in a number of districts at the beginning of the period, it picked up
appreciably by late December. Adding to the strength in household spending was an increase
in tourism in several districts. Most districts reported that manufacturing activity firmed and
many districts said that businesses planned to increase capital spending in 2005. Although
several reports noted some slowing in residential real estate and construction activity, real
estate markets remained generally strong. In the financial sector, lending activity was mixed,
as modestly higher commercial and industrial lending was tempered by slower residential
mortgage lending. Several districts noted that agricultural conditions were favorable and that
activity in the energy sector remained strong. Labor markets firmed in a number of districts,
but wage pressures generally remained modest. Several districts reported higher prices for
building materials and manufacturing inputs, but most reported steady or only slightly higher
overall price levels.
Consumer Spending and Tourism
Consumer spending increased in most districts since the last Beige Book report, with only
Cleveland, Dallas, and New York reporting that sales were mixed. Boston, Chicago, Dallas,
New York, Richmond, and San Francisco said that retail sales were slow in early December
but picked up the pace from Christmas through the end of the year. Sales of luxury goods
were strong in the Kansas City, Philadelphia, and San Francisco districts, while retailers in
the Atlanta, Chicago, and Kansas City districts reported that electronics and jewelry sold well
during the holiday season. Boston, Richmond, and San Francisco reported higher sales of
building supplies, and Boston, Chicago, and St. Louis noted stronger sales of apparel. Gift
cards sold briskly according to the Chicago, Kansas City, Minneapolis, and New York
reports. Post-holiday retail inventories were at satisfactory levels in the Kansas City, New
York, Philadelphia, and San Francisco districts.
Automobile sales were mixed. Atlanta, Chicago, Cleveland, and Kansas City noted higher
sales, but St. Louis and Dallas said new car sales slowed. Atlanta, Philadelphia, and San
Francisco noted that sales of foreign cars outperformed domestic makes. Dealers in the
Chicago, Dallas, and Philadelphia districts reported that automobile dealers' inventories
remained above desired levels.
Tourist activity strengthened in several districts. Boston said that increased business travel,
corporate spending, citywide conventions and increased international travel boosted hotel
occupancy rates. Occupancy rates were also up in the San Francisco district, and the number
of Japanese visitors to Hawaii has returned to pre-September 11 levels. New York noted that
tourist activity was higher both upstate and in New York City where Broadway theaters set a
box-office record during the last week of the year. In addition, the Atlanta report indicated
that tourism was strong and that central Florida theme parks were filled to capacity. Kansas
City indicated that some ski resorts in the district reported near-record levels of visitors.
Richmond reported that because of unseasonably mild weather, hotels were booked to
capacity in coastal areas and that some were turning tourists away during the week after
Christmas.
Services
The Dallas, New York, Philadelphia, San Francisco, and St. Louis districts reported steady to
stronger demand at services firms since the last Beige Book. Atlanta, Dallas, San Francisco,
and St. Louis noted stronger demand for transportation services, with some seaports in the
Atlanta district posting double-digit gains in both inbound and outbound shipping. Air
passenger traffic was higher at airports in the Chicago, Dallas, Kansas City, and New York
districts while air freight volume increased in the Atlanta district. New York's report also
noted that the securities industry ended 2004 on a strong note.
Manufacturing
Manufacturing activity strengthened since the last Beige Book report. Nine of the 12 districts
indicated that factory output rose, while Chicago, Cleveland, and Richmond noted that
production was steady. Boston, Philadelphia, and San Francisco indicated that demand for
transportation equipment strengthened measurably. Production of electrical machinery
increased in the Philadelphia district, and Chicago reported strong output of heavy
equipment. Atlanta, Dallas, and San Francisco reported that production of building materials
picked up, while Chicago and San Francisco indicated that orders for machine tools increased
in their districts. San Francisco also reported that semiconductor orders and sales were
generally solid.
But some manufacturing sectors weakened. Richmond reported that textiles and apparel
shipments continued to decline. Atlanta reported layoffs at a computer circuit board plant,
and Dallas noted slowing demand in consumer communications equipment. Philadelphia
indicated that demand softened for lumber and wood products, paper products, and plastics,
and Cleveland reported that sales at automobile industry suppliers slowed at year-end. St.
Louis said that firms in the fabricated metal product, wood product, chemical, and apparel
industries announced plant closings and layoffs.
Looking ahead, manufacturers expected conditions to remain positive in coming months.
Most districts reported that manufacturers intend to increase their capital spending in 2005.
Firms in the Chicago district upped their planned capital expenditures for next year; most
have already begun to place orders to accomplish those spending goals. Minneapolis
indicated that expectations of higher sales by businesses led to plans to increase capital
spending in 2005. Kansas City noted greater capital spending in 2005 to replace outdated
equipment. Richmond reported that manufacturers planned to increase capital spending
despite their skepticism about the sustainability of the U.S. economic recovery.
Construction and Real Estate
Residential real estate activity generally remained strong. Atlanta, Boston, New York,
Richmond, and San Francisco said that housing markets in their districts continued to show
strength in the fourth quarter of 2004, and Dallas and St. Louis reported some improvement
since the last Beige Book. Chicago reported mixed housing activity, possibly because of a
seasonal slowdown in December, but noted a slight pickup in sales during the first week of
January; real estate activity was also mixed in the Minneapolis district. The Kansas City
District reported flat to slightly higher home sales compared with a year earlier. New York
reported that prices for upper-end New Jersey properties leveled off, or pulled back, but that
prices for Manhattan co-ops and condos continued to rise. Richmond said home prices
continued to rise in most areas of that district.
Commercial real estate conditions strengthened in most districts in December and early
January. Real estate agents in the Dallas, New York, Richmond, San Francisco, and St. Louis
districts reported that leasing activity increased--particularly for office space. Office leasing
was especially brisk in Washington, D.C., and New York City, two of the nation's strongest
commercial markets. Contacts in New York said the recent uptick in activity sent the Class A
office vacancy rate to a two-and-a-half-year low and may be a signal of increased hiring in
that area. In other districts, vacancies were mixed--rates dipped in San Francisco, St. Louis,
and most of the Kansas City District, but were generally unchanged in other areas. Adding to
the positive tone, commercial construction activity was higher since the last Beige Book
report--contacts in Atlanta, Chicago, Minnesota, Richmond, and St. Louis reported new
industrial or office construction activity, while retail construction maintained a generally
steady pace.
Banking and Finance
Lending activity remained generally mixed as slower residential mortgage lending offset
somewhat higher commercial and industrial lending in many districts. Commercial lending
was modestly higher in the Atlanta, Chicago, and San Francisco districts while commercial
and industrial lending was stronger in the Kansas City, Philadelphia, and St. Louis districts.
Residential mortgage lending, however, declined in the Chicago, Dallas, and New York
districts.
Several districts reported that credit conditions were steady, though Dallas added that
competition between banks in that district could threaten credit quality in the months ahead.
In addition, Chicago and San Francisco reported that banks' profit margins on loans were
thin.
Agriculture and Natural Resources
Several districts noted that crop and livestock conditions were generally favorable, despite
widely varying weather conditions. Richmond indicated that unseasonably warm weather in
early December accelerated the development of winter grains and extended the grazing
period for livestock. But very cold temperatures and snowfall in late December led to
supplemental feeding of livestock. A major snow storm affected part of the St. Louis District
in late December, leaving fields and pastures muddy. Despite the excess soil moisture, St.
Louis said the winter wheat crop was in mostly fair to good condition. Minneapolis noted
that Montana's 2005 winter wheat crop was good to excellent despite little snow cover to
protect against freeze or wind damage. Kansas City added that some producers in the western
part of its district remained concerned that dry pastures could deteriorate further.
Agricultural prices were generally higher. The Chicago district reported that net farm income
jumped last year as a result of profitable livestock operations and record corn and soybean
harvests, much of which was forward-contracted at unusually high prices. In addition,
Minneapolis reported milk prices were higher.
Activity in the energy industry remained strong according to reports from the Dallas, Kansas
City, Minneapolis, and San Francisco districts. Minneapolis indicated increased mining
activity, noting that the delivery of some mining machinery required two-year waits. Kansas
City reported that oil and gas drilling rig counts remained well above year-ago levels, and
noted constraints on drilling due to labor and equipment shortages. Dallas added that the
level of land drilling was mostly unchanged but that offshore activity had picked up.
Labor Markets
Districts generally reported firmer labor markets in late 2004. Contacts in Dallas, Kansas
City, Minneapolis, New York, and Richmond reported improvement on the job front, while
respondents in Boston, Chicago, and San Francisco saw little change in hiring activity.
Manufacturing employment rose in Kansas City, New York, Richmond and St. Louis, while
factory owners in Philadelphia anticipated adding workers in coming months. Planned
factory hiring in Cleveland was mixed by product type--producers of nondurable goods
predicted little change in future hiring, but makers of durable goods anticipated adding to
their payrolls in the months ahead. Services sector respondents in Dallas, Richmond, and St.
Louis reported broad-based strengthening in services sector employment, and contacts in
New York and Philadelphia noted a particularly strong pickup in securities industry hiring.
Information on employment staffing services firms was mostly positive, but varied by
district. Contacts in Cleveland, New York, Philadelphia, and St. Louis reported a moderate to
brisk rise in demand, but Richmond noted generally flat activity and Dallas reported a
softening in demand for temporary workers. Chicago also experienced a modest decline, but
attributed it to a normal seasonal lull.
The reports from Kansas City, Minneapolis, and San Francisco indicated that wage increases
generally continued to be modest. However, Cleveland noted that in response to the strong
pickup in shipping demand, trucking firms have been attempting to expand their workforce
by raising their wage rates and offering nonpecuniary incentives. Kansas City also noted
higher wages for skilled factory workers in short supply, while Richmond noted that wage
increases picked up in the services sector.
Prices
Inflationary pressures remained largely in check in December and early January. While many
manufacturers and builders continued to report small increases in input costs, price increases
for final goods and services were generally modest.
In manufacturing, input prices rose modestly in most districts, but Boston and Minneapolis
reported that some input prices rose sharply. Manufacturers of nondurable goods in the
Cleveland district noted that prices for raw materials continued to rise, while prices for
durable goods inputs were steady. Prices charged by manufacturers increased modestly in
Kansas City, New York, and Richmond, and remained in check in Atlanta and Chicago.
Increases in the costs of building materials were mixed by district. Modest to sharp price
hikes were widely reported in Atlanta, Kansas City, and Minneapolis, but material prices
were flat in Cleveland and New York, and eased somewhat in San Francisco.
Overall, price inflation remained relatively steady in recent weeks. Reports from Atlanta,
Boston, Chicago, Kansas City, New York, Richmond, and San Francisco reported that price
increases remained largely in check. Contacts in Dallas noted that many firms were unable to
pass rising costs along to the customer due to stiff competition, and Chicago noted that
competition in the retail sector is expected to limit price increases.
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First District--Boston
Business contacts in the First District continue to be fairly upbeat. Retailers enjoyed higher
sales in the year-end quarter than a year earlier, for the most part, and tourism strengthened
measurably. Manufacturers in many sectors report growing fourth quarter revenues
year-over-year. Residential real estate markets remain strong. Insurers say demand is
increasing at a slow to moderate pace. Across all sectors, contacts are positive about
prospects for continued expansion in 2005.
Retail and Tourism
Overall, retail respondents in the First District report sales are ahead of last year in the
quarter ending in December; same-store year-over-year sales ranged from flat to up 13
percent. Holiday shopping was generally slow until two weeks before Christmas. Clothing,
shoes, flat panel televisions, and MP3 players were said to be strong sellers, while renovation
and lumber materials sales were also up.
Contacts report mostly steady vendor and selling prices, with the exception of decreases in
flat-panel television prices and increases for home appliances and lumber-based products.
Inventory levels are mixed, and employment levels are said to be mostly steady, as seasonal
hiring was minimal in November and December. About half of the respondents note
increased capital spending plans in 2005, while the remainder report no changes or decreases.
According to contacts, travel and tourism in the Boston area continued to improve in the
fourth quarter, ending above year-ago levels. Increased business travel, corporate spending,
and city-wide conventions all contributed to the pick-up. In addition, international travel
reportedly increased 11 percent. As a result of this growth in activity, hotel occupancy and
rates are up, and the revenue per available room increased by double digits. In December,
client and corporate holiday parties boosted revenues for restaurants and special event
businesses, exceeding last year's levels.
Most of the contacted retailers anticipate further improvements in 2005. Though contacts
expect only moderate gains, unlike earlier reports, they expressed little concern about
external factors, such as fuel prices, consumer confidence, and the war in Iraq.
Manufacturing and Related Services
Most First District contacts in manufacturing and related services report that sales and orders
in the fourth quarter of 2004 were above year-earlier levels. The number of firms indicating
that their revenue growth is accelerating is about the same as the number reporting
deceleration. Contacts generally express the view that the economy will provide moderate
positive support for their business in 2005.
Demand for ground transportation equipment is surging, and one large company notes that its
trucking firm customers are having a hard time finding drivers. Biopharmaceutical businesses
say that industry revenues continue to grow at a double-digit rate, but their own sales tend to
be bumpy because they are driven by patterns for individual drugs. On the other hand,
manufacturers of some consumer products report that demand has been muted.
A number of manufacturers mention that they are paying substantially more for metals,
petroleum-based chemicals, and energy than they did one year earlier. In addition, some
express heightened concern about the possibility of further cost hikes for transportation and
distribution, as well as foreign inputs. Respondents tend to agree that cost increases from
2004 are likely to result in further attempts to raise prices in 2005, but they have differing
views on customer receptivity and they are giving considerable thought to appropriate
strategies. For example, one manufacturer met unexpected resistance to its attempt to raise
selling prices on one category of products in late 2004 but is nonetheless considering raising
prices for another category in 2005. Another is intent on trying to pass through cost increases
"before the window closes." However, a couple of other firms have decided to hold off on
increasing prices until their newer technology products gain a foothold in the marketplace.
Prices for innovative drugs are on the rise, reflecting producer market power.
Most manufacturers are making only minor adjustments in their U.S. headcounts. Their
continued drive for cost containment is putting downward pressure on employment, but some
need new employees to generate added sales. Pay increases for 2005 are expected to be in the
range of 2.5 percent to 4 percent, but firms are more likely to express concern about
escalation in non-wage costs such as medical insurance and workers' compensation
insurance. Most respondents intend to keep capital spending roughly unchanged from the
amounts spent in 2004.
Residential Real Estate
Despite the usual seasonal slowdown, residential real estate markets throughout New
England remain strong. Contacts report high levels of activity in most parts of the region,
diminished somewhat by lack of inventory. Shortages of lower-end homes are especially
noticeable. Indeed, houses in lower price ranges continue to sell quickly, while those with
higher prices stay on the market longer than in the past. However, the longer time on the
market is not substantial enough to cause price declines and the overall level of inventory has
not changed markedly, according to most contacts.
In most areas, the number of sales in the last quarter of 2004 was similar to the last quarter of
2003, while sale prices increased. In Massachusetts, the number of sales in November was
record-high, especially for condominiums, with November sales 27 percent higher than a
year earlier. At the same time, the median sale price increased by double digits compared to
November 2003. Vermont recorded similar price gains, while contacts in other states cite
more modest price increases. Most contacts anticipate that the markets will remain stable in
the next few months as long as interest rates stay low.
Insurance
Responding insurance companies in New England report slow-to-moderate demand growth
in the fourth quarter of 2004. Sales of property and casualty insurance were healthy,
especially in foreign markets, although the rate of growth may be slowing. Disability sales
were flat in the fourth quarter, but claims continue their downward trend. Demand for
individual life insurance continues to grow at a fair pace. Most contacts report intense price
competition, resulting in slower rates of price growth or decreases in some cases.
Employment and capital spending strategies remain conservative, reflecting modest rates of
demand growth and limited needs to increase capacity. Respondents are generally optimistic,
expecting Q1 2005 to be similar to 2004; at the same time, they remain somewhat concerned
about a handful of issues related to price competition, terrorism, and interest rates.
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Second District--New York
The Second District's economy has clearly gained further momentum since the last report,
and the labor market has taken on a firmer tone. While cost pressures persist, prices of final
goods and services generally remain stable. Manufacturers continue to report fairly
widespread improvement in business conditions, as well as a pickup in hours worked.
Reports from the retail sector, though mixed, are generally more favorable than in the last
report, with holiday-season sales roughly in line with expectations.
Residential real-estate markets showed continued strength in the fourth quarter, while office
markets were steady to stronger. Tourism is characterized as increasingly robust in both New
York City and upstate New York. The securities industry reports an upsurge in business
activity, as well as a pickup in hiring, in the fourth quarter. Finally, bankers report a normal
seasonal pullback in household loan demand, unchanged credit standards, and lower
delinquency rates on commercial loans.
Consumer Spending
Holiday-season sales were mixed but, on balance, close to plan. Chain stores showed mixed
results for the region in December: some indicate that sales were up 3 percent to 4 percent,
which was moderately ahead of plan, but a number report that sales fell short of plan,
declining by 1 percent to 3 percent. Similarly, a survey of smaller retailers across New York
State indicates wide variation in sales results but decent sales overall. Both groups of retailers
report that sales were weaker in the first half of the month but strengthened in the week
before Christmas and continued strong through early January. Retailers generally attribute the
late surge to discounting, as well as increased popularity of gift cards. Inventories were
generally said to be at satisfactory levels. Virtually all retail chains indicate that prices were
little changed from a year earlier, though a few contacts anticipate some declines in both
costs and selling prices for apparel products in 2005 due to the recent expiration of import
quotas.
Consumer confidence improved sharply in December, based on two separate surveys. Siena
College's survey of New York State residents shows confidence jumping to a five-month
high, led by a sharp gain in the New York City area. Similarly, The Conference Board's
survey of Middle Atlantic state (NY, NJ, PA) residents shows confidence rebounding to a
three-month high in December, led by a surge in the public's assessment of current
conditions, which reached its highest level since September 2001.
Construction and Real Estate
Housing markets continued to show strength in the fourth quarter. New Jersey homebuilders
report that the housing market remains steady and strong, though there are scattered reports
that prices at the high end of the market leveled off or pulled back in late 2004. Prices of
construction materials were generally steady in recent months, after significant escalation in
2003 and the first half of 2004. Similarly, New York State Realtors report persistent strength
in the market for existing homes in late 2004, with transactions volume up about 5 percent
from a year earlier and average prices up 15-20 percent. In Manhattan, a major residential
broker indicates that selling prices for co-ops and condos, on average, were up 5-10 percent
from a year ago, while a leading appraisal firm reports gains of more than 10 percent; both
contacts note a dwindling supply of apartments on the market in recent months.
Commercial real estate markets were steady to stronger at year-end. Manhattan's Class A
office vacancy rate fell to a 2½-year low of 9.8 percent, down from 10.3 percent in
November. Midtown's market showed particular strength, with available space (both direct
and sublease) continuing to shrink, and asking rents 10 percent higher than a year earlier.
Downtown's vacancy rate fell by more than a point in December, but asking rents have been
little changed over the last year. An industry contact notes that the recent pickup in both the
Midtown and Downtown markets mainly reflects brisk leasing activity from the financial
sector and may signal a pickup in hiring in the securities industry. Suburban markets around
New York City showed little change: vacancy rates edged down in northern and central New
Jersey and Fairfield County but edged up in Westchester County.
Other Business Activity
Manufacturers continue to report improving business conditions and ongoing price pressures.
Preliminary results from our January survey of New York State manufacturers indicate
continued widespread improvement in business conditions, along with a pickup in hiring and
hours worked, and some acceleration in selling prices. Similarly, Buffalo-area purchasing
managers indicate improved business conditions in December; however, purchasing
managers in the New York City area indicate some moderation in manufacturing-sector
activity in December, but continued strength in non-manufacturing sectors.
The securities industry ended 2004 on a strong note, according to an industry contact.
Investor sentiment improved and activity picked up in virtually all business segments starting
in late-October and this trend gained momentum through December. The industry anticipates
increased hiring in 2005 and stronger compensation growth than previously projected. More
broadly, a major New York City employment agency, specializing in mid-level office jobs,
reports that business was unusually brisk in both December and the first week of January, and
that financial firms, in particular, have picked up their pace of hiring. Moreover, on the
supply side, a growing share of job-seekers is reported to be looking to change jobs.
Tourism also ended 2004 on a strong note. Broadway theaters report a pickup in activity in
December; though attendance and revenues for the month were slightly below the lofty levels
of a year earlier, the last week of the year set a box-office record. Manhattan hotels report
strong business in December: occupancy rates were up 2 percentage points from a year
earlier, while room rates were up roughly 15 percent; also, bookings for January are said to
be relatively strong. Hotel occupancy rates in the Buffalo and Rochester areas were also up
noticeably from comparable 2003 levels, and Buffalo's airport notes robust growth in
passenger traffic in November and December.
Financial Developments
Small to medium-sized banks in the Second District report a typical seasonal pullback in
demand for consumer and home mortgage loans, while demand for commercial credit held
steady. Demand for residential mortgages continued to slip, though declines were less
widespread than they have been in six months. Bankers again report little or no change in
their credit standards. Interest rates rose across all loan categories, particularly in commercial
and industrial loans and commercial real estate. Deposit rates increased according to a
majority of respondents, with only 6 percent of bankers reporting lower rates. Bankers report
lower delinquency rates for both commercial real estate loans and commercial and industrial
loans, while delinquency rates on both consumer and home mortgage loans were little
changed.
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Third District--Philadelphia
Business activity in the Third District expanded in December. Manufacturers reported
increases in orders and shipments during the month. Retail sales of general merchandise
during the holiday shopping period rose from the previous year, with modest gains for most
stores and greater increases among luxury goods retailers. Auto sales were roughly steady
during December. Banks reported that overall lending continued on an upward trend in
December. Service companies generally reported a steady to slightly stronger pace of growth
at year-end compared with the fall.
Contacts in the Third District business community expect economic activity in the region to
continue on an upward trend through the winter, and some contacts anticipate a slight
quickening in the growth rate as the year progresses. Manufacturers expect increases in
shipments and orders during the next six months. Retailers expect modest growth in sales
during the year, but auto dealers expect sales to weaken. Bankers believe overall lending will
continue to rise, although they do not anticipate much growth in residential mortgage loan
volume. Service companies expect some pickup in the pace of growth for their businesses.
Manufacturing
Manufacturing activity in the Third District increased in December. Around four out of ten of
the manufacturing firms surveyed during the month posted higher shipments and orders
compared with the previous month, and less than two in ten reported decreases. Order
backlogs at area plants edged up slightly from November to December although delivery
times were unchanged. Business conditions varied among the major manufacturing sectors in
the region. Growing demand was generally reported by makers of food products, apparel,
electrical machinery, and transportation equipment. Some slowing in demand was reported
by makers of lumber and wood products, paper products, and plastics.
The region's manufacturers generally expect further gains in business activity. Just over half
of the firms surveyed in December expect their shipments and orders to increase during the
next six months, and around one in ten expect decreases. On balance, area manufacturing
firms are scheduling increases in capital spending and planning to add employees. Although
current conditions vary among the region's major manufacturing sectors, the outlook for the
first half of the year is positive in almost all of them.
Third District manufacturers continued to report rising prices, with about the same
percentage of firms noting increases during December as in November. During the next six
months almost two-thirds of manufacturers expect increases in input prices, and about
one-half expect increases in the prices of their own goods.
Retail
Retail sales of general merchandise during the holiday shopping period were generally in line
with merchants' expectations. Most stores reported year-over-year gains of around 3 percent,
in current dollars. Stores specializing in luxury goods did better than other types of stores
during the period, as they did through most of 2004; some posted year-over-year gains in
excess of 10 percent. Merchants indicated that the extent of price markdowns in December
and early January was roughly comparable to discounting in the previous year. In general,
merchants reported that their inventories after the holidays were not excessive. Store
executives forecast modest growth in sales during 2005. Those who commented on
expansion plans generally indicated that they will open as many new stores this year as they
did last year.
Auto dealers in the region reported roughly steady sales in December, on balance, although
results varied by dealership. In general, dealers selling domestic makes saw some slowing in
sales, and dealers selling imports saw increases. Although manufacturers have maintained
promotions on 2004 models and extended them to 2005 models, many dealers' inventories
remained above desired levels. Dealers expect sales this year to be off at least a few percent
from last year.
Finance
Outstanding loan volume at Third District banks rose in December, according to banks
contacted for this report. Commercial and industrial loans have been growing, with new
borrowing being done by firms in a wide range of industries. Bankers also reported increases
in consumer lending, including credit cards and home equity lines. Banks generally indicated
that growth in home mortgage lending has slowed. Bankers in the District expect overall
lending to rise in 2005. They anticipate further gains in business and consumer lending, but
little growth in residential mortgage loan volume.
Investment companies and stockbrokers in the region have been receiving strong cash
inflows, and most of the money has been directed toward equities. In response to the greater
volume of business, some securities firms are adding employees and increasing their
information technology capacity. Investment company executives expect business to continue
to expand this year, but they do not expect stronger growth in 2005 than in 2004.
Services
Most of the Third District service firms contacted for this report indicated modest
improvement in business conditions in the past few months, and some reported recent
pickups in the pace of growth. Information technology companies indicated that demand for
their services has strengthened as the result of improvement in their clients' business, an
increase in information systems requirements to support regulatory compliance, and a
growing need to upgrade computer systems generally. Other business services activity has
been on the rise, and the pace of growth has increased somewhat. Most of the service sector
firms surveyed expressed cautious optimism that growth in business this year will be stronger
than last year.
Employment agencies in the region reported moderate increases in demand for workers in the
past few months, and they expect the pace of hiring to be steady through the winter.
Companies in manufacturing, trade, and the financial sectors have relatively stronger hiring
plans than do employers in other sectors.
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Fourth District--Cleveland
For the final six weeks of 2004, economic conditions were mixed across major sectors of the
Fourth District. Retailers' reports varied by retail segment, while activity among the District's
durable and nondurable goods facilities was steady. Though residential and nonresidential
construction continued to slow somewhat, the slowdown was probably partially due to
seasonal variation. And while borrowing from banks in the District remained steady, demand
for shipping services was "surprisingly strong." In general, input cost increases were modest
and retail price pressures remained limited. Finally, staffing services companies reported an
increase in demand for workers from manufacturing firms.
Manufacturing
Production at the District's durable goods manufacturers was generally steady at a high level
toward the end of 2004. Some small declines were reported, but seemed to be the product of
a seasonal slowing in demand. Automobile industry suppliers reported slowing sales at
year-end, and domestic steel producers acknowledged that, aside from seasonal fluctuations,
inventories have risen somewhat. Nevertheless, most manufacturers reported higher levels of
production than at this time last year. And though growth in new orders was weak, firms'
expectations for the future improved in December. In addition, unlike in recent reports,
several firms reported that they plan to hire in the coming months.
Nondurable goods makers generally reported that production levels were flat for the last six
weeks of 2004. Some firms also reported a rebound in production in January, but noted that
this may be from seasonal fluctuations in demand. Production levels were reported to be the
same as or less than at this time last year. Regarding expectations, several chemicals
producers expect the economic environment to improve in the near term; however, paper
producers were less sanguine in their assessment of the outlook. Most firms indicated that
they had little intention to hire in the coming months, or to add to their capital stock.
Input costs continued to increase in recent weeks for nearly all nondurable goods makers, and
they are also higher on a year-over-year basis. By contrast, durable goods producers
generally reported that their input costs were flat throughout the recent period, though their
costs also remained above year-ago levels. Finally, many durable goods producers reported
rising wages and indicated continued concerns about increasing health care costs.
Retail Sales
The economic environment for retailers in the District was mixed, with some retail segments
seeing strong gains and other reporting disappointing December sales. For some firms, this
year's holiday selling season was worse than last year's, which itself was weak. Some
contacts suggested that poor weather in the Midwest may have been a factor.
Sales at District department stores were generally weak, while sales at specialty apparel
shops were more mixed. A few firms noted strong sales in early January, though these firms
indicated that they were sharply discounting some of their merchandise. In particular, apparel
retailers reported aggressive promotional activity in the wake of sluggish sales. Discounters
reported sales growth that was consistent with their expectations. And grocers reported
strong sales during the holiday season, while restaurateurs reported weaker conditions. While
personal care products generally sold well, furniture and other home products sold poorly.
Sales at auto dealerships improved in December after a weak November. New automobile
sales strengthened throughout the month of December, as dealerships employed discounts
and incentives in an attempt to move merchandise. Nevertheless, dealerships generally
reported that their inventories of new cars remained above acceptable levels. Used car sales
were generally flat for the last six weeks of 2004.
Construction
Residential builders reported continuing declines in activity, often exceeding the expected
seasonal slowing in sales. Building activity also appeared to be down from the levels of this
time a year ago. Big builders discounted prices and provided incentives in an attempt to spur
buying, but sales stayed weak throughout the District, especially in the Columbus and
Cincinnati areas. Overall, builders' costs remained flat for the most part in December.
Regarding hiring, several builders said that they have reduced or will reduce workforce sizes,
as the expectations for future sales have diminished: Most builders expect 2005 sales to be
below those in 2004.
Accounting for the usual seasonal slowing in activity, nonresidential construction was largely
flat throughout the last six weeks of 2004, though customer inquiries improved modestly
during December. On a year-over-year basis, building activity saw a slight increase.
Regarding specific sectors, education-related construction remained robust at year-end, and
several contractors also indicated increasing demand from firms in the manufacturing sector.
Input prices for nonresidential builders have been flat for several months. Few firms expected
to add to their workforces in the coming months, and most contacts think that activity in
2005 will be at least as strong as in 2004.
Banking
District banks described loan demand as steady, in general, throughout the six weeks ending
2004. While many smaller banks experienced a slight slowdown in commercial borrowing,
they attributed this primarily to seasonal factors. Larger banks reported moderate
improvement in their commercial clients' borrowing. Banking contacts generally
characterized consumer borrowing as flat. Across all borrowers, most contacts reported that
their delinquency rates remained low. Deposit growth differed across District institutions,
with banks describing the deposit market as "very competitive."
Trucking and Shipping
Demand for trucking and shipping services remained strong through the six weeks ending
2004. In fact, a number of contacts characterized conditions as "surprisingly strong." Though
demand continued to come from an array of sectors, manufacturers were noted as having
especially high demand. And while fuel prices fell in recent weeks, shipping firms' fuel
surcharges continued to protect them against any adverse fluctuations in fuel expenses.
Companies continued their attempts to add to capacity through new truck purchases. The
increase in demand for new trucks has created long lead times for their delivery. Companies
also continued attempts to add to their payrolls by raising wage rates, as well as offering
prospective personnel nonpecuniary enticements.
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Fifth District--Richmond
The Fifth District economy expanded at a quicker pace than in our last report, led by firmer
conditions in manufacturing and an increase in retail activity in late December. District
retailers generally reported that sales growth picked up the pace after mid December and was
particularly strong in the final week of the month. Services providers reported moderate
growth in both revenues and employment, and major services sectors such as real estate and
tourism remained strong. Despite continued contraction in textiles, overall District
manufacturing output was little changed in December after having dipped in November.
Bank lending was also generally steady in the period since our last report. There were fewer
reports of spiraling raw materials prices in the manufacturing sector and prices of
manufactured goods rose only modestly. In agriculture, small grains and livestock were in
good condition in most areas of the District.
Retail
District retailers reported that a surge in sales in the final week of the month offset sluggish
activity early in the month, boosting their December revenues. A manager at a department
store in central North Carolina said holiday revenues were strong. Sales at building supply
stores were notably higher--a contact in Richmond, Va., said customer traffic picked up in
December while a retailer in Columbia, S.C., reported record sales for the month. Most
automobile dealers in the District indicated revenues were about the same as a month earlier.
Stronger sales led retailers to increase hiring, and wage growth accelerated. Respondents said
that prices rose only modestly at stores in December.
Services
Demand at services firms was somewhat stronger since our last report. A financial services
contact in Baltimore, Md., said the general outlook of "the man on the street" had brightened.
A commercial and residential landscaper in coastal North Carolina said his business had
"done a 180" in the last four weeks, and that sharply higher customer demand was helping to
rein in excess inventory accumulated earlier in the season. Despite the pickup in demand,
services employment rose at a slower pace in December, though wage growth gained
strength. Prices in the services sector grew at a slightly slower pace in December.
Manufacturing
District manufacturing activity stabilized in December after slipping somewhat in November.
Factory shipments and new orders were flat while manufacturing employment edged higher.
Several sectors reported generally higher levels of manufacturing activity but these gains
were tempered by continued weakness in the textile and apparel sectors. A rubber products
manufacturer in South Carolina, for example, told us that December sales were "better than
forecast" and added that sales "looked good for the next 30 to 60 days." A plastics
manufacturer in North Carolina reported "activity is good" and that "backlog, sales and work
activity" were all up at his company. But textile and apparel producers reported softer new
orders and lower employment in December. Textile and apparel firms expressed concern that
the removal of textile and apparel quotas on China could constrain orders in 2005. Prices of
raw materials and finished goods rose at a slower pace in December. Looking ahead, though
some manufacturers expressed skepticism about the sustainability of the U.S. economic
recovery, many said they planned to increase capital spending over the next six to 12 months.
Finance
District bankers reported that loan demand changed little since our last report. Lenders said
that demand for commercial loans slowed in December, but the slowdown was about normal
for the holiday season. Several commercial bankers noted modestly higher capital spending
by their clients, particularly for new equipment, and expressed optimism that increased
capital spending would drive commercial lending activity higher in 2005. In addition, there
were scattered reports of stronger commercial real estate lending in Virginia. Residential
mortgage lending was only modestly higher, however; new mortgage originations rose, but
refinancing activity dwindled. Bankers reported little change in loan standards for
creditworthiness since our last report.
Real Estate
Fifth District real estate agents continued to report generally strong housing markets. In
Fairfax, Va., an agent said properties were being "snapped up" as soon as they hit the market,
adding that she expected an even stronger market in the spring. A Fredericksburg, Va., agent
reported a "still crazy" market there, noting that business at her agency was double year-ago
levels. In Greensboro, N.C., an agent reported an "active market" and said that the future was
expected to be even brighter as a new computer manufacturing facility brought additional
jobs to the area. There were a few softer markets, however; agents in Odenton, Md., and
Greenville, S.C., for example, reported some slowing in the pace of home sales. Home prices
continue to rise in most areas of the District.
Commercial real estate agents reported that commercial leasing activity strengthened over
the final six weeks of 2004. "We ended the year on a very strong note and are quite optimistic
we can maintain that momentum well into 2005," noted a contact in Charlotte, N.C. Office
leasing was the driving force behind the recent surge in activity as retail and industrial
leasing were generally flat. An agent in the Washington, D.C., metropolitan area reported that
the uptick in office leasing was due primarily to the expansion of "large companies into large
spaces." There were scattered reports of increased office construction across the District,
while the pace of retail construction was reported to be moderating. Rents and vacancy rates
in the commercial sector were little changed.
Tourism
Tourist activity picked up in the weeks since our last report. A contact on the Outer Banks of
North Carolina noted that unseasonably warm weather in late December and early January
had boosted their business. A contact in Myrtle Beach, S.C., reported that some hotels were
booked to capacity and were turning tourists away during the week after Christmas. Reports
from mountain areas were generally upbeat as well. Contacts at mountain resorts in Virginia
said that declining gasoline prices in December had helped their business and also noted that
they were seeing more visitors from outside the United States.
Temporary Employment
Employment agents in the District generally reported flat demand for temporary workers
since our last report. An agent in Raleigh, N.C., said that demand for workers had been
slowed by the holidays in December; however, he looked for a pickup in hiring in 2005. An
agent in Hagerstown, Md., also expected demand for workers at his agency to strengthen as
the economy continued to grow. Workers with administrative and sales skills and those with
production or distribution center experience were most highly sought.
Agriculture
Warm weather in early December accelerated the growth of late-planted winter grains and
extended the grazing period for livestock in Virginia and West Virginia. Small grain crops
were reported to be in mostly good condition in most areas of the District. But the last week
of December brought very cold temperatures across the District and a snow storm along the
Atlantic Coast, leading to unusually large amounts of supplemental feeding of livestock in
Virginia and West Virginia.
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Sixth District--Atlanta
Sixth District business contacts reported that the pace of economic activity increased during
late November and December. Most retailers conveyed that holiday sales were up modestly
from year-ago levels, while auto sales rebounded somewhat. Travel and tourism contacts
noted healthy seasonal activity, with the strongest results coming from Florida. Reports from
manufacturers were mostly positive and capacity utilization continued to increase. According
to contacts, housing markets in many parts of the District continued at high levels, while
commercial markets noted small improvements. The demand for labor continued to increase,
and reports noted a shortage of skilled workers in some industries. Contacts reported that
prices were largely in check, although increases for building supplies and health insurance
were exceptions.
Consumer Spending
Retail contacts indicated that holiday sales were up modestly compared with last year.
Retailers in several Florida locations reported that they benefited from strong tourism over
the holidays. Intense competition among merchants led to widespread discounting, but most
contacts noted that fourth-quarter profit margins equaled or exceeded last year's results.
Electronics, jewelry and women's apparel sold well across much of the region, while
home-related products sales were mixed. Most retail contacts anticipated modest sales
growth in the first quarter of 2005.
District car dealers were encouraged by improved sales at year-end. This improvement was
largely attributed to extensive promotional programs. Sales of District-assembled models
were mixed, with transplanted foreign brands outperforming domestic brands.
Real Estate
Contacts reported that District housing markets displayed strong levels of activity during
November and December. In many markets, construction and sales of new homes posted
gains, bringing them close to year-ago levels. New housing construction continued to pick up
in Florida following delays caused by the hurricanes. Both builders and Realtors in Florida
noted shortages of homes for sale. Nonresidential construction remained at low levels, but
there were scattered reports of increasing industrial development. District office markets
continued to recover very slowly.
Manufacturing and Transportation
Reports from the factory sector were generally positive and most contacts noted increased
utilization of operating capacity in late November and December. Manufacturers of
construction materials and steel were operating at especially high levels of capacity because
of strong demand. Contacts noted increased output for pulp and paper producers, and reports
from carpet producers and the defense sector were positive as well. Less positively, a
computer circuit board manufacturer plans to cut 525 jobs in response to strong competition
from Asian producers and a machine tool firm reported a decline in new orders. District
trucking contacts continued to report increasing demand for freight services at year-end. In
addition, the ports of Savannah, Brunswick and Jacksonville posted double-digit gains in
both inbound and outbound shipping and Miami and Atlanta airport cargo tonnage was
higher than year-ago levels.
Tourism and Business Travel
Industry reports suggest that the District's tourism industry performed well in late November
and December, and the outlook remained positive for the rest of the winter season. Increased
attendance at Florida attractions was reportedly boosted by a rise in foreign visits. Central
Florida theme parks were filled to capacity and restaurants and hotels have increased hiring.
Repairs to tourist facilities in hurricane-damaged areas continued. In Nashville, hotel room
tax collections were running more than 8 percent ahead of 2003 and bookings suggested the
strongest December in four years. Some District signs have also recently emerged of
improvement in the business meeting and convention sector. Bookings of the exhibit space at
downtown Atlanta's Georgia World Congress Center are up notably from a year ago.
Financial
Financial sector reports were mostly positive in late November and December. Consumer
loan demand remained steady at strong levels and delinquency rates remained low.
Commercial loan demand improved marginally but remained at low levels overall. Asset
quality remained strong across most of the District, and insurance proceeds and federal loans
boosted deposit levels in parts of Florida. Reports indicated that venture capital spending was
increasing in some areas.
Employment and Prices
According to contacts, labor markets improved in late November and December. Several
manufacturers reported that they were adding workers and some reported difficulty finding
qualified staff. Commercial and residential building contractors reported that subcontractors,
such as carpenters and roofers, were especially hard to find. Contacts in some parts of the
District also reported that demand for workers in technology service industries has improved.
Rising building supply and healthcare costs continued to be widely reported. According to
most reports, price increases for building materials were being passed along to homebuyers.
Several business contacts noted that a larger share of the increase in health insurance costs
was being passed along to employees than a year ago. Fuel surcharges continued to be used
by transportation firms.
Agriculture
Weather patterns fluctuated markedly in late November and December, but no major impact
on District crops was reported.
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Seventh District--Chicago
The Seventh District economy continued to expand at a moderate pace around the turn of the
year. Consumer spending remained relatively soft, but business spending continued to pick
up. Construction and real estate activity experienced a typical seasonal lull. Manufacturing
output was steady at robust levels, and new orders were still strong. Bankers said that
demand was down somewhat for household loans, but up slightly for business loans. High
input costs persisted, but retail price pressures were largely subdued. The farm sector
continued to profit from sales of bumper crops and relatively stable livestock prices.
Consumer spending
On balance, consumer spending was again fairly soft in December and early January. Most
retailers said that holiday sales were at the low to mid range of their expectations, as a strong
finish to the shopping season largely offset a relatively weak start. Sales of electronics,
jewelry, and entertainment goods (movies, books, music, etc.) were strong, while sales of
appliances were weaker. Apparel sales picked up as the weather cooled in the region.
Merchants also suggested that solid increases in gift card purchases will likely boost
January's sales results. District auto dealers reported better-than-average light vehicle sales in
December, although results varied greatly by make and model. Light vehicle inventories
remained somewhat bloated. Some dealers noted a slight pickup in service and body shop
sales from weak levels. Tourism and travel was mixed, as contacts in Wisconsin and Illinois
reported increases from the previous year, but those in Michigan noted declines.
Business spending
Business spending continued to increase modestly. Most firms surveyed indicated that they
planned to increase capital outlays in 2005 from 2004 levels. Of those that planned to
increase spending, most had already begun to place orders for those outlays. The remaining
firms said they would begin placing orders in the first half of the year. Airlines suggested that
business travel held up in December, especially on international routes. With regard to hiring,
temporary help firms reported a normal seasonal slowdown in December's orders. Still,
year-over-year growth remained solid. Demand for professional and technical workers was
said to be stronger than other categories, while it was weaker for office and clerical workers.
Fees for temp-to-perm conversions and permanent placements continued to rise. Outside of
the temporary help industry, fewer contacts reported new permanent hiring, but fewer also
indicated that they were laying off workers.
Construction/real estate
Reports on construction and real estate activity were mixed. Realtors and builders in many
areas noted a typical seasonal slowdown in December, while some reported a slight pickup in
activity during the first week of January. Nonresidential activity also experienced a seasonal
lull during December. Despite a slowdown in leasing activity last month, some office
markets saw significant net absorption for the fourth quarter as a whole. However, contacts in
the Chicago area said that the office market remained soft, with little net absorption. In
general, office rents remained under downward pressure, though one contact reported that
landlords in a "smattering of markets" were able to increase rents modestly in the fourth
quarter after several years of decreases. Leasing and construction of light industrial space
picked up somewhat and retail activity remained strong.
Manufacturing
Manufacturing output was relatively steady in December, at high levels. Steel production was
solid, although producers reported a slight slowdown in December. However, worldwide
demand for steel products remained strong and contacts expected production to increase in
coming months. Machine tool makers indicated that new orders and shipments were strong,
with one firm adding that business was "the best it has been in years." Production of heavy
equipment remained strong in December. One producer of heavy capital equipment indicated
that production and shipments in December were buoyed by expiring tax incentives; looking
ahead, this company's order backlogs had eased and its inventories were slightly higher. One
contact in the heavy truck industry noted that "the window to replace the fleet before the
2007 change in environmental regulations is closing," with order books already filled for the
first half of 2005. Trailer orders were reportedly strong as well. Nationwide light vehicle
sales exceeded expectations in December, which helped bring inventories down to more
desirable levels. However, inventories were still high and some automakers cut their
production plans for the first quarter.
Banking/finance
Overall lending activity was slightly softer in December than during the previous reporting
period. On the consumer side, one large bank reported slower growth in revolving credit, and
many other banks said that mortgage lending had decreased. Margins continued to be
squeezed, especially for mortgages. Standards and terms on the household side were largely
unchanged, and quality was stable in most areas at good levels. On the business side, lending
was still sluggish, although some bankers reported very slight increases in loan volumes. A
contact with one large bank, however, noted a pickup in loan applications in the pipeline,
which may boost volumes in coming months. Margins were still thin on business loans,
standards and terms were largely unchanged, and loan quality continued to improve.
Prices/costs
Overall cost and price pressures remained in check at the end of 2004. Broad-based wage
gains remained very modest, though increases were greater for workers in professional and
technical occupations. Manufacturers reported that materials cost pressures eased somewhat
toward the end of the year, but were still intense. Moreover, input costs were not expected to
decline much further in the first quarter, and some were even expected to rise again. Some
retailers plan to increase prices on selected merchandise (notably appliances and toys) to
offset cost increases. However, many contacts said that the retail environment remains too
competitive to increase prices substantially.
Agriculture
Agricultural contacts reported that farmers were upbeat. Net farm income jumped last year as
a result of profitable livestock operations and record corn and soybean harvests, much of
which was forward-contracted at unusually high prices. Farm income was also supported by
federal loan deficiency payments, which are tied to spot market prices. The biggest problem
reported was the slow movement of crops stored in the open air, which can be damaged by
precipitation. Yet few storage facilities were under construction, which one contact thought
was due to the large increases in steel costs. Farmland prices again moved higher amidst
continued strong demand from non-farm investors and recreational buyers.
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Eighth District--St. Louis
Economic activity in the Eighth District continued to expand since our previous survey. A
majority of manufacturing contacts reported plant openings, expansions, and new hires. The
services sector continued to expand. Retail sales increased in November and early December
compared with last year's levels. Reports of auto sales were mixed. Residential real estate
activity continued to increase, and commercial activity showed additional signs of
improvement, especially in construction. Total loans at a sample of small and mid-sized
District banks increased from late September to early December.
Manufacturing and Other Business Activity
Manufacturing activity in the Eighth District has improved in many areas since our previous
report, with a majority of firms reporting plant openings, facility expansions, and new hires.
Several firms in the packaging materials, printing, primary metal, nonmetallic minerals,
machinery, software, transportation equipment, and automotive parts industries reported
plans to open new plants and expand production facilities in the District, which will likely
result in more than 660 new jobs. Other firms in the machinery, transportation, primary
metal, chemical, motor vehicle, automotive parts, fabricated metal product, and food
industries reported plans to increase capital investment and hire as many as 880 new workers.
Counteracting these improvements somewhat, several District manufacturers reported plant
closings and workforce reductions. Firms in the fabricated metal product, wood product,
chemical, and apparel industries will close plants and lay off employees, displacing as many
as 1,290 workers.
The District's service sector continues to improve in most areas. Firms in the business
support, freight transportation, insurance, airport operations, traveler accommodation,
recreation, and employment services industries reported new facility openings and
expansions, likely resulting in more than 500 new jobs. In contrast, a firm in the credit
intermediation industry reported plans to eliminate 200 jobs due to a nationwide industry
slowdown. District retailers generally reported increased sales in November and early
December compared with the same months last year. Electronics and clothing were among
strong-selling items. Auto dealer reports have been mixed, with new vehicle sales slowing as
used vehicle sales continue to increase.
Real Estate and Construction
Home sales in the Eighth District continued to do well in November. November year-to-date
sales increased by 14.8 percent in Memphis, compared with the same period in 2003. The
increase was 6.6 percent in Louisville, 12.8 percent in southern Indiana, and 3.3 percent in
the greater St. Louis area. November year-to-date housing starts grew by 6.7 percent in
Memphis and fell by 11.7 percent in the Tupelo region compared with the same period in
2003. November year-to-date single-family housing permits were up in most of the District's
metropolitan areas compared with the same period last year; in the St. Louis metropolitan
area, permits increased by 12.5 percent. Contacts in northeast Arkansas reported that
residential construction in November was very strong.
Commercial real estate markets at the end of the year seemed to be strengthening throughout
the District. The St. Louis metropolitan area's year-end office vacancy rate fell to 16.0
percent, compared with 17.5 percent at the end of 2003, while the industrial vacancy rate fell
to 5.6 percent from 7.4 percent in 2003. Contacts in Memphis expect commercial real estate
activity to pick up in 2005. Commercial construction continued to show some improvement
in most of the District. Contacts in west Tennessee report that commercial construction has
improved and government construction has increased considerably. Contacts in northeast
Arkansas indicate that commercial construction was active, but not as strong as residential
activity. Commercial development remained at a record high through November in the
Tupelo region, with a year-to-date increase of 20.3 percent in new commercial space built,
compared with November 2003.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks increased 3.2
percent from late September to early December. This increase stems from a 3.4 percent rise
in real estate loans along with a 4.4 percent rise in commercial and industrial loans. Loans to
commercial banks also contributed to the overall increase, with a growth of 118.8 percent.
Loans to individuals continued to decline, dropping by 2.3 percent. Over the same period,
total deposits at these banks increased 4.8 percent.
Agriculture and Natural Resources
A major snowstorm hit parts of the District in late December. Moderate temperature and
rainfall have since melted the snow but left behind muddy fields and pastures. Since
November, there have been confirmed cases of Asian soybean rust--a fungus that reduces
yield--in a few counties along the Mississippi River in Missouri, Tennessee, and Arkansas.
Its effect on next year's crop remains uncertain. Farmers report that the winter wheat crop is
mostly in fair or good condition. December coal production in the District states was about 4
percent higher than a year ago. Coal production during 2004 increased by about 10 percent
compared with 2003.
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Ninth District--Minneapolis
The Ninth District economy showed continuing signs of growth from late November through
mid-January, especially in consumer spending, manufacturing, energy, and mining.
Agriculture was mixed, construction was steady, and tourism was down. Employment grew
slightly and wage increases were moderate. Price increases appeared for a number of
products including pork, fertilizer, and some manufacturing and construction materials.
Consumer Spending and Tourism
Overall consumer spending grew. A major Minneapolis-based retailer reported same-store
sales up 5 percent in December compared with a year ago, while a Minnesota-based
electronics retailer reported same-store sales up 2.5 percent. Bank directors noted that
jewelry sales were up significantly, while sales at discount stores were soft. A women's
apparel chain based in Minnesota reported December same-store sales fell 7 percent
compared with a year ago. Sales for snow removal and winter recreation products were down
from a year ago in several areas of the district due to low snowfall levels.
District mall managers noted a solid holiday sales season and between a 10 percent and 45
percent increase in gift card sales over a year ago. December sales at a North Dakota mall
were up about 7 percent in December from last year. In Montana a mall manager reported a 6
percent gain in traffic for December compared with a year ago. A manager at a Minneapolis
area mall reported traffic was strong, while merchandise returns were relatively soft between
Christmas and New Year's; total December sales were up slightly from a year ago.
Winter tourism activity was slow due to a lack of snowfall in several parts of the district. A
tourism official in the Black Hills area of South Dakota reported that snowmobiling and
cross-country skiing were down significantly due to a lack of snow. Two downhill ski resorts
in central Minnesota reported November and December activity down slightly from a year
ago. However, snowmobiling activity during the holidays was up in the Upper Peninsula of
Michigan and far northern Wisconsin thanks to "lake effect" snow from Lake Superior. In
addition, over 125,000 fans attended games at the Junior World Hockey Championship held
in Grand Forks, N.D., and Thief River Falls, Minn., during late December and early January.
Manufacturing
Manufacturing activity increased. A December survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated strong manufacturing activity in the Dakotas and
Minnesota. An ad hoc survey of manufacturers revealed that capital spending is expected to
increase in 2005, primarily due to higher sales expectations. In Minnesota, several firms
announced plans to expand production facilities, including a plastics part producer, a tooling
company, a furnace company, and an agricultural machinery maker. In South Dakota, a
cooling system manufacturer is opening a $7 million plant, and an emergency vehicle
producer received a large order for fire trucks. In western Wisconsin, two shipbuilders
proposed expanding production facilities, and a wood products company plans a major
expansion.
Construction and Real Estate
Commercial construction was steady. Contracts awarded for large construction projects in
Minnesota and the Dakotas during the three-month period ended in November were about
even with a year ago. A building official in Duluth, Minn., reported strong nonresidential
construction through 2004 and expects slight growth in 2005. Residential construction was
down slightly from year-ago levels. Permits issued in November for new home construction
in Minneapolis-St. Paul were down 20 percent from the same month a year earlier. Housing
units authorized in district states during the three-month period ended in November were
down 2 percent compared with a year ago. However, Sioux Falls, S.D., issued a record
number of housing permits by year-end 2004. Home builders are expected to remain busy
during the winter months in Duluth, Minn., according to a builders association representative.
Real estate sales were mixed. The market for industrial space improved dramatically in 2004,
according to a commercial real estate firm. A large user absorbed 212,000 square feet of
office space in downtown Minneapolis, although downtown St. Paul had a 25 percent
vacancy rate, compared with 19.4 percent a year earlier. The number of homes sold in
Minneapolis-St. Paul in November was about 16 percent higher than a year earlier, with
particularly strong demand for condominiums.
Energy and Mining
Activity in the energy and mining sectors remained strong. The Bureau of Land Management
reported a record high price for oil and gas lease rights for a parcel of land in Montana.
Meanwhile, mining companies are expanding production. Iron ore production was up, and
additional investment was under way. A Montana mining official noted increased activity at
most mines and said some mines have to wait for additional machinery, as new equipment
orders may take up to two years to fill. There is increased interest in starting mining
operations across the district.
Agriculture
The agriculture sector had mixed economic activity. The expected opening of the Canadian
border to live cattle imports in March 2005 has some district cow/calf operators nervous
about the effect on calf prices. Dairy producers are still enjoying strong prices for their
products. The USDA expected Wisconsin December 2004 milk prices to average $17.40 per
hundred pounds. Even though there is very little snow cover to protect against freeze or wind
damage, the USDA rated 65 percent of the Montana 2005 winter wheat crop as good to
excellent.
Employment, wages and prices
Employment grew slightly since the last report. Nonfarm employment in district states during
November was 1.6 percent above year-earlier levels, the highest year-over-year increase
since September 2000. A railroad hired more than 200 new workers in Montana during 2004.
In North Dakota, a heavy equipment manufacturer will hire 100 workers; in northwestern
Wisconsin, a transport company recently announced plans to add 162 new jobs over the next
three years. A manufacturer of lubrication equipment recently said it will hire 40 workers in
Sioux Falls. A representative of a placement firm for technology professionals in Minnesota
expects the job market for information technology workers to steadily improve during 2005.
Almost 20 percent of companies surveyed in Minneapolis-St. Paul by a temporary staffing
agency plan to hire more employees during the first quarter of 2005, while 10 percent expect
to reduce staffing levels.
In contrast, a Minnesota freezer manufacturer cut about 230 jobs in December, and a
software company recently announced plans to lay off 75 employees. A paper mill in
northern Minnesota intends to eliminate about 60 positions, and a mail-sorting operation will
shut down in central Minnesota, laying off 24 employees.
Wage increases were moderate. A Minnesota state economist predicted that increases in real
wages per job in the state will grow 2 percent in 2005.
Significant price increases were noted in pork, fertilizer, and several manufacturing and
construction materials. Pork prices in November were up 20 percent from last year, while
recent fertilizer prices were up 30 percent. Prices for steel, plastics, and copper were
significantly higher than a year ago. While recent natural gas prices were above year-ago
levels, prices decreased from the beginning of November to late December.
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Tenth District--Kansas City
The Tenth District economy expanded solidly in the period from late November to early
January. Holiday retail sales were favorable, factory activity strengthened, and labor markets
improved further. The energy and agriculture sectors also remained strong. Housing activity
slowed slightly but was still high by historical standards, while commercial real estate
markets generally remained weak. Wage and retail price pressures were still modest, but
some price pressures persisted in manufacturing.
Consumer Spending
Consumer spending during the holiday season was generally characterized as solid. Most
store and mall managers reported favorable year-over-year increases in holiday sales, with
sales above plan at many stores. Overall, store managers reported that price discounting was
similar to a year ago, although a few contacts said they resorted to heavy promotions to boost
sales around Christmas. Sales of jewelry, other high-end items, and electronics were reported
as especially strong this year. Many gift and specialty stores also reported robust sales.
Apparel sales were somewhat mixed, with some stores reporting sluggish sales of winter
clothing items due to unseasonably warm temperatures in early December. Inventory levels
following the holidays were generally reported as satisfactory. Virtually all managers expect
solid year-over-year sales gains in the near future, due in part to greater holiday sales of gift
cards than a year ago. Motor vehicle sales in the district were reported as up slightly from the
fall but basically unchanged from a year earlier. Most dealers were satisfied with current
inventory levels and expect solid sales growth in coming months. Travel and tourism activity
during the holidays rose solidly from a year ago. Airport traffic increased in most district
cities, and activity at the Rocky Mountain ski resorts was strong, with some resorts reporting
near-record levels of visitors.
Manufacturing
District manufacturing activity strengthened further. Most manufacturers reported increased
production and orders since the previous survey, and employment continued to expand at
many firms. A number of manufacturers continued to report difficulties obtaining materials,
especially petroleum-based inputs, and expect some modest material availability problems to
persist. Plant managers' expectations for future production remained strong, and many firms
plan to continue to expand employment heading forward. In addition, many manufacturers
expect to increase their capital spending in 2005, both to replace outdated equipment and to
expand capacity. Among those firms not planning increases in capital spending, a commonly
cited reason was the recent completion of a major capital project.
Real Estate and Construction
Housing activity slowed slightly but remained solid, while commercial real estate activity
was still weak in most areas. Single-family housing starts edged down in many district cities
but were still above last year's high levels. Builders generally characterized starts of both
low-end and high-end homes as solid. Most builders expect some continued easing in
homebuilding in the months ahead, though construction activity is expected to remain high
by historical standards. Based on reports from real estate agents, home sales compared with
recent months were basically flat for the district as a whole, with some cities reporting
increases and others reporting decreases. Compared to last year's high levels, home sales
were reported as being flat to slightly higher in most areas. Most mortgage lenders reported a
decline in mortgage demand since the previous survey. Some lenders also noted a shift away
from variable rate loans. Lenders generally expect some decrease in mortgage demand in the
months ahead due to an anticipated further easing in demand for refinancings. Commercial
real estate activity in the district generally remained weak, though some small improvements
were reported in several mid-sized markets. Office vacancy rates edged down except in
Denver and Kansas City, and prices for office space rose slightly in most areas as well. Most
commercial real estate agents expect little significant change in office conditions in the next
few months.
Banking
Bankers report that loans and deposits both edged up since the last survey, leaving
loan-deposit ratios unchanged. Demand rose for commercial and industrial loans but was
generally unchanged for other loan categories. On the deposit side, large CDs rose, while
other types of accounts held steady. All respondent banks raised their prime lending rates
since the last survey, and most banks also raised their consumer lending rates. Lending
standards were generally unchanged.
Energy
District energy activity remained strong. The count of active oil and gas drilling rigs in the
region was basically unchanged from the previous survey and still well above year-ago
levels. Some contacts reported continued constraints on drilling due to labor and equipment
shortages. With oil and gas prices still high, most drilling companies expect a slight
expansion in drilling in the months ahead and are planning for solid increases in capital
spending in 2005. Coal-mining firms also reported strong output growth in 2004 and
anticipate another solid year in 2005.
Agriculture
Agricultural conditions generally remained strong. The winter wheat crop was reported to be
in good condition across the district. In addition, preliminary assessments of farm incomes
for 2004 indicate they will be up slightly from the record highs of 2003. Despite the higher
incomes, few contacts expect large increases in capital investment this year because many
producers made such investments last year. In addition, some producers in western parts of
the district are worried that a possible lack of spring moisture could worsen already dry
pasture conditions.
Labor Markets, Wages, and Prices
Wage and retail price pressures remained modest, while price pressures persisted in
manufacturing. Labor markets continued to show improvement, as hiring announcements
again outpaced layoffs. Even so, the percentage of firms reporting difficulties finding
qualified workers remained similar to recent surveys--up considerably from a year ago but
still much lower than five years ago. Worker shortages continued to be most acute in the
energy sector, with one driller hiring rig workers from overseas in order to expand. Skilled
factory workers, such as welders and metal fabricators, were also reported to be in short
supply at some plants. Aside from these positions, wage pressures were still generally modest
across the district. Most retailers reported flat selling prices compared with the previous
survey and said that holiday discounting was similar to a year ago. Heading forward, a few
retailers expect to raise prices modestly in order to pass on vendor price increases, but most
managers anticipate little change in selling prices. Builders again reported moderate input
price increases, though the increases were less widespread than in previous surveys. They
generally anticipate further slight price increases heading forward. Many manufacturers
continued to report rising materials costs, though fewer firms than in recent surveys did so.
At the same time, a slightly higher percentage of factories raised their output prices or expect
to do so in the near future.
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Eleventh District--Dallas
Eleventh District economic activity continued to expand at a moderate pace from
mid-November to early January. While still mixed, manufacturing activity strengthened
some, particularly for chemicals and energy-related products. Service sector activity was still
strong, but there was some softening in demand for temporary workers. Retail sales were
mixed, while construction and real estate activity picked up slightly. Energy activity
continued to strengthen. Overall lending and deposit activity continued to grow, and credit
quality remains stable. Agricultural conditions have been favorable.
Prices
Energy prices fell during the period but still remained relatively high in comparison to 2002
and 2003. Crude oil prices are down since November, and crude inventories moved above the
five-year average in December, after being below the five-year average all year. Heating oil
and retail gasoline prices have also fallen. Inventories of heating oil remained near the
bottom of their five-year range, but inventories of gasoline returned to normal. Natural gas
inventories are more than 10 percent above normal, and prices have fallen but remain very
high compared to average prices in 2002 and 2003.
Manufacturers continued to be concerned about input cost pressures. Several industries said
high energy prices have pushed selling prices up more than is typical for this time of year.
Declines in the value of the dollar have increased the cost of some inputs, such as fabricated
metals. Stiff competition is limiting the ability to pass along cost increases. Rising prices for
coke, coal, steel and aluminum have led to slight increases in selling prices for some primary
metals. Higher input costs for paper products have pushed up selling prices for toilet paper,
tissues and paper towels, but stiff competition is putting downward pressure on prices of
corrugated boxes. China's demand for aluminum has raised selling prices here, according to
contacts. Rising cost pressures are also a concern for contacts in the service sector. Some
firms are able to pass these cost increases onto their customers, but in other industries,
contacts say stiff competition limits their ability to raise selling prices.
Labor Market
Labor markets remain quite soft overall, but appear to be slowly improving. Hiring continues
to gradually strengthen in the service sector, with scattered reports of difficulty finding
qualified workers in some occupations. Some manufacturing firms continued to report
limited hiring or additional layoffs. Contacts in the lumber industry, however, report plans to
increase employment.
Manufacturing
There were more signs of strengthening in the manufacturing sector from mid-November to
early January. Demand for construction-related manufactured products has been stronger
than usual for this time of year, partly because late fall rains pushed construction work into
December. Lumber sales remained at high levels and producers of stone, clay and glass said
demand was higher. Holiday demand for food products was stronger than usual, according to
contacts, who said this was a very strong year for the food industry. District apparel
manufacturers report no change in demand. Producers of paper and paper products also
reported no change in demand over the past few weeks.
Sales growth increased slightly for semiconductor manufacturers. Producers noted continued
gains in productivity and little overall job growth. Inventories were reported to be in good
shape. Demand for consumer communications equipment slowed slightly at the end of the
year after very strong growth in the first three quarters of 2004. Producers noted that demand
for products, such as cell phones and personal communication devices, was strongest from
markets outside the United States, such as from Asia and Europe. Demand picked up slightly
for industrial communications equipment, such as switches and power sources, and growth is
now about the same as a year ago. These firms say demand from businesses has improved
recently but consumer activity has been unchanged over the past year. Further layoffs are
anticipated as a result of investments in productivity-enhancing capital equipment.
Demand for primary and fabricated metals was unchanged from mid-November to early
January. Sales of primary metals continued to be slower than in the third quarter--for some
metals substantially slower. Contacts continued to cite lower levels of consumer confidence
and foreign trade competition as possible reasons for slower activity, expressing concerns
that China may become a net exporter of steel. While overall employment has been
unchanged, employees are working shorter hours.
Chemical producers continued to report strong increases in activity. Domestic and
international demand has been strong for chlorine, caustic soda, ethylene and olefin products.
Contacts say that record exports were stimulated by gains in the price of oil relative to natural
gas, as well as a drop in the value of the dollar. Demand for polyvinyl chloride (PVC) also
remained strong, although rising ethylene prices have squeezed margins. A major new PVC
and chlor-alkali complex was announced on the Gulf Coast, the first major expansion
announcement since the late 1990s. Gulf Coast refiners have finally returned to high levels of
operation following hurricane-related downtime.
Services
Temporary staffing activity softened slightly in the six weeks since our last report. Demand
from light industrial manufacturing remained strong while demand for clerical workers
slowed. Contacts said they are concerned about being unable to raise fees to completely
offset an increase in their state unemployment tax rates. Demand for accounting services
remained very strong. Activity was still mostly to support requirements of the
Sarbanes-Oxley legislation. Contacts say firms are hoping to be more efficient complying
with regulations this year because they have experience with the new rules. Accounting
companies are still hiring "a lot of new people," and one contact said his firm had to turn
away work for a lack of professionals to staff the project. Demand for legal services has been
strong, driven by both transaction and litigation work. Hiring is up, and fees for legal services
are rising, but not dramatically. Costs are largely unchanged, they say.
Railroads reported strong demand and rising prices. The trucking industry reported steady
demand. Contacts say profits are being squeezed by high fuel prices and medical insurance
costs because intense competition limits their ability to pass on cost increases to selling
prices. Demand for air travel was up over a year ago, and airline industry contacts said planes
have been flying fuller. Still, excess capacity is putting downward pressure on prices, keeping
airlines focused on cutting costs to improve their balance sheet positions. Further layoffs are
expected at some carriers.
Retail Sales
Retail sales reports were mixed. The Christmas season started slowly, but sales growth
picked up as the holiday approached and were strong in the days after. Stiff competition and
weak sales early on led to significant discounting at some stores, but other contacts reported
good margins. Only a few retailers were left with excess inventory. Auto dealers reported
sluggish sales and inventories are higher than desired. Selling prices and profits are down.
Construction and Real Estate
Demand for housing picked up from mid-November to early January, following a cooling
that was reported in the last Beige Book. Realtors and home builders expect a slightly slower
year in 2005, and remain focused on the need for job growth to stimulate activity.
Multifamily contacts said Austin's market continues on the road to recovery, but Houston and
Dallas' apartment markets have been overbuilt and may not see improvement until mid-2005.
There is still a lot of vacant commercial space, but contacts said office leasing continued to
pick up at a slow, steady pace.
Financial Services
Lending activity continues to increase, with the strongest loan growth in commercial and
industrial categories. Mortgage lending is showing serious signs of slowing, according to
contacts. Deposit growth was reported to be stable to good, and credit quality was
unchanged. There are concerns, however, that credit quality could begin to suffer in a few
quarters due to competitive rate pressures between the large number of banks in the larger
Texas cities.
Energy
Land drilling has been mostly unchanged, but there was a pick up in offshore activity, with
the number of rigs working in the Gulf of Mexico rising above 100 for the first time since a
year ago. The increase is in oil-directed, deep-water drilling, with little change in shallow
waters. Rates have been rising for deepwater rigs for several months, but long-term contracts
have been limiting availability. Some contacts expressed the view that the recent leveling of
drilling in the U.S. reflects a shortage of land rigs. Demand for oil services has increased
with drilling. Contacts expect capital expenditures by oil producers to increase as much as 10
percent next year. Some contacts said such expansion plans might be constrained by
shortages of equipment and/or workers with needed skills and that would lead to increases in
the costs of these inputs rather than increased activity.
Agriculture
Soil moisture is adequate, but late fall rains delayed cotton harvest in the Plains, and cotton
gins are expected to run through March, which is unusually late. Ranchers have expressed
concerns about plans to re-open live cattle trade with Canada.
Return to top
Twelfth District--San Francisco
The Twelfth District economy continued to expand at a solid pace in late November and
December. Contacts reported little or no pickup in the pace of overall price increases. The
pace of cost increases for selected inputs eased, albeit from high levels. Several contacts
noted that some of the higher input costs were passed on to consumers, though efficiency
gains helped hold down overall production costs. Wages and salary pressures remained
modest but up slightly overall. Strong export growth contributed to improving demand
conditions in most sectors. Holiday retail sales, on balance, were up compared with last year,
with retailers stepping up discounting in late December. Manufacturers, agricultural
producers, and transportation and other service providers generally reported strong demand.
Activity in District residential real estate markets remained robust, though it moderated in
some areas. District banks reported overall solid loan demand and good credit quality.
Wages and Prices
The overall pace of price increases remained modest in recent weeks. District producers
reported that, although the level of certain input costs remained high, increases in the cost of
energy and building materials have eased from previous rapid rates. Several businesses
indicated they were passing along at least some of the higher input costs to consumers. At the
same time, several District businesses reportedly have experienced efficiency gains in their
production processes, which served to hold down overall cost increases.
Contacts noted little change in labor market conditions. Reports indicated little or no
difficulty filling positions, with the exception of certain high-skilled jobs in selected
industries. Wages and salary pressures remained modest but up slightly overall; most District
businesses reported that increases in benefits costs continued to push up total compensation
bills.
Retail Trade and Services
Reports from District retailers indicated generally solid retail sales for the holiday season as a
whole, with both dollar sales and unit sales up relative to last year. The strength of demand
during the holiday season was broad-based across establishment types, with sales at discount
stores, department stores, and establishments specializing in luxury products reportedly all
performing well. Contacts noted that holiday season discounting was generally more
restrained than last year, though many retailers increased discounting as the end of the season
drew near. Perhaps as a result, sales performance was reported to have been considerably
better toward the end of the holiday season than at the beginning. Overall, most contacts
reported that holiday sales met expectations, leaving retail inventories in balance heading
into 2005.
Sales of autos generally were solid during the survey period; foreign makes reportedly sold
considerably better than domestic brands, despite the dollar's recent declines relative to other
currencies. Final sale prices and profit margins remained restrained as a result of intense
competition, particularly among domestic automakers.
District service providers reported a further strengthening in demand in recent weeks. For
example, demand for health-care and transportation services was solid, and service providers
operated at high utilization rates. District travel and tourism activity was healthy in most
areas, with increases in both domestic and international traffic. In particular, the number of
Japanese visitors to Hawaii have returned to pre-September 11 levels, boosting activity there.
Hotel occupancy and average daily room rates continued to improve in many markets.
Manufacturing
Most District manufacturers reported strong demand for their products in late November and
December. Increased foreign demand for various products contributed to overall
improvements in business conditions. Makers of machine tools reported strong demand for
most of their products; the market for certain inputs such as steel plates is characterized by
tight inventories, strong demand, and rising prices. Robust construction activity continued to
drive demand for wall board, insulation, and other building products in recent weeks. Robust
demand conditions also characterized the food processing industry. Transportation equipment
makers reported that demand conditions improved; new orders edged up slightly in recent
weeks. In IT manufacturing, semiconductor orders and sales generally were solid; however,
capacity utilization of chip makers dropped slightly from its already high level.
Agriculture and Resource-related Industries
District providers of agricultural and resource-related products indicated a strengthening in
demand during the most recent survey period. Agricultural exports rose in recent weeks.
District orders and sales of tree nuts especially were high, attributable in part to favorable
public announcements regarding nutritional value and in part to constrained supply in other
nut-growing regions. Contacts reported that prices for most agricultural products increased
moderately in recent weeks. Overall, respondents indicated strong underlying demand for
natural resources. Contacts reported a slight decline in wholesale prices for natural gas, while
retail prices generally remained stable. On the other hand, consumers in the Pacific
Northwest faced higher electricity prices as the effect of drought conditions on hydroelectric
generation more than offset the effect of mild weather on demand.
Real Estate and Construction
Demand for residential real estate generally remained robust in recent weeks. Sales of new
and existing homes increased throughout the District and home-price appreciation remained
solid, particularly in certain areas such as Hawaii. However, in some areas the pace of home
sales growth and price increases slowed from previous rapid rates. The overall robust
demand for new homes and home improvements has kept overall construction activity at
high levels. District commercial real estate markets generally improved in recent weeks;
contacts reported that office vacancy rates continued to fall, and rents increased moderately
in most markets.
Financial Institutions
District banking contacts indicated overall solid loan demand and good credit quality in late
November and December. A very competitive environment generally has kept profit margins
low in the banking sector recently, although several contacts reported that profit margins
have improved. Commercial and industrial lending edged up slightly in recent weeks.
Demand for construction, commercial real estate, and residential loans slowed a bit in some
areas but remained at high levels overall. Several contacts noted increases in merger and
acquisition activities among District firms.
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Last update: January 19, 2005
Cite this document
Federal Reserve (2005, February 1). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20050202
@misc{wtfs_beige_book_20050202,
author = {Federal Reserve},
title = {Beige Book},
year = {2005},
month = {Feb},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20050202},
note = {Retrieved via When the Fed Speaks corpus}
}