Beige Book
April 20, 2005
Summary
Prepared at the Federal Reserve Bank of Boston and based on information collected on or before April 11,
2005. This document summarizes comments received from business and other contacts outside the Federal
Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from all twelve Federal Reserve Districts indicate that business activity continued to
expand from late February through early April. Kansas City and San Francisco noted solid
growth, Chicago and Dallas characterized growth as moderate, and Atlanta reported a robust
pace. By contrast, while citing positive growth, New York and Cleveland mentioned uneven
progress across sectors, and Richmond stated that signs of improvement in April followed a
restrained March.
More than one-half of the Districts reported that retail activity was up, from modestly to
strongly. Among the remaining Districts, Chicago said consumer spending was subdued,
Dallas noted that retailers were disappointed with recent growth, and Cleveland reported
some deterioration after improvement earlier in the year. Tourism was generally doing well in
those Districts that mentioned it.
Districts described manufacturing activity as ahead of year-earlier or previously-reported
levels, with reports ranging from "rising briskly" in the Kansas City District to "continuing at
solid levels" for contacts around Chicago. Information on service industries was generally
positive. Residential real estate markets remained strong across most of the country, while
commercial real estate conditions varied. Price pressures have intensified in a number of
Districts, and most report that high or rising energy prices are a concern across sectors.
Consumer Spending and Tourism
The majority of Districts experienced improving retail sales overall, but several showed flat
or disappointing results. In Minneapolis, contacts indicated that retail sales increased
between 5 percent and 12 percent over the previous year. St. Louis also reported strong
growth, with Boston, Philadelphia, Atlanta, Kansas City, and San Francisco recording modest
to solid gains. Among the remaining five Districts, New York, Chicago, and Dallas
characterized consumer spending growth as either subdued or disappointing, while Cleveland
and Richmond cited mixed trends during the reporting period. Contacts in these five Districts
attributed sluggish spending in part to unfavorable weather conditions, and in part to high or
rising energy and gasoline prices. Retail selling prices were described as reasonably stable to
date, although some contacts cited evidence of increased prices and pricing power.
New vehicle sales were flat or slightly up in most of the Districts reporting on this category.
The exceptions were San Francisco, which reported strong sales, and Dallas, where car sales
were weaker than a year ago. Contacts in several Districts also mentioned softening demand
for domestic vehicles, especially trucks and SUVs, although most dealers in the Richmond
District said they had not seen a shift to smaller cars despite higher gasoline prices. In other
product categories, apparel and jewelry sales were strong in many regions.
Spending on travel and tourism improved throughout much of the country. New York and
San Francisco reported brisk activity compared with a year ago, citing rising occupancy rates
and higher revenues per room. Bolstered by foreign visitors, Florida recorded high passenger
counts on cruise lines and robust bookings at theme parks. Boston, Philadelphia, and Kansas
City also reported stronger tourist-related growth. Weather was an important factor in the
Richmond, Chicago, and Minneapolis Districts, as areas with favorable winter weather
enjoyed increased business while those with bad weather saw flat or sluggish growth.
Service Industries
In general, firms in the service sector enjoyed a moderate increase in activity. St. Louis
reported expansion in most areas, and San Francisco noted solid demand growth, especially
in health-care, transportation, and food services. According to Atlanta, temporary employee
hiring maintained a brisk pace, while Philadelphia, Cleveland, and Richmond observed some
pickup in demand at employment agencies. By contrast, Chicago and Dallas indicated more
modest growth at temporary staffing firms. Demand for trucking and shipping services in
several Districts reportedly eased somewhat as firms began passing on higher fuel costs to
customers. However, Philadelphia reported increased trucking activity despite higher freight
rates. Dallas cited strong conditions in the accounting industry, while business at law firms
remained unchanged. Boston identified robust demand at both advertising and management
consulting firms.
Manufacturing
The updates on manufacturing were largely positive. Eleven of the twelve Districts indicated
that production or orders were rising, while Chicago characterized activity as continuing at
solid levels with the exception of continued weakness in light vehicle production. Several
Districts with largely upbeat reports nevertheless indicated that increases in manufacturing
output may be moderating a little. For example, New York cited a "loss of momentum" in the
manufacturing sector, and Cleveland stated that "many firms noted flattening new orders
growth" for durable goods.
Districts reported strong or rising demand for various durable goods, including building
materials, machinery and machine tools, fabricated metals, energy-related equipment, and
defense equipment. Shortages of tires and metal parts were said to be constraining heavy
truck and other production in Chicago, Minneapolis, St. Louis, and Kansas City.
Manufacturers in all Districts were reportedly facing rising costs for a variety of inputs, most
notably energy, transportation, petrochemicals, and other petroleum-based products.
Moreover, according to Dallas, expansions of petrochemical capacity are not expected to
provide price relief for at least another year. On the other hand, several Districts mentioned
that steel prices were stabilizing, albeit at high levels, and Philadelphia's survey revealed that
the number of companies saying prices had risen in March was lower than it had been during
the fall and early winter.
Overall, manufacturers' output prices appear to be rising modestly. Most Districts found that
firms were having partial success passing on higher energy and materials costs to their
customers. However, several cited instances of firms having to rescind price increases and
accept lower margins. Reduced margins remained the norm in the Cleveland District, and
rising energy costs were specified as a source of "concern" or "caution" among
manufacturers in New York, St. Louis, and Dallas.
Labor demand in the manufacturing sector appears to be mixed, with some Districts placing
more emphasis on additions to employment and others on cutbacks. District reports on
capital spending tended to be moderately positive. Kansas City referred to "solid growth" in
capital investment, and Philadelphia took note of the fact that very few companies expect to
reduce their capital spending in the coming six months. Nevertheless, Boston described
manufacturers as "closely managing" their capital expenditures.
Real Estate and Construction
Residential real estate markets were very active during March and early April, with Districts
noting increased activity levels compared with the previous report. Demand for houses was
strong and residential sales were high in three-quarters of the Districts. New York,
Richmond, and Atlanta cited low housing inventories, while Boston mentioned increased
time on the market for high-priced homes. Several Districts indicated that home prices rose.
Reports on new housing construction were more mixed. Atlanta, Minneapolis, Kansas City,
and San Francisco said the pace of home construction was strong or picking up, but St. Louis
and Dallas noted slower residential construction.
Commercial real estate markets varied. Office vacancy rates declined in New York,
Richmond, St. Louis, Minneapolis, and San Francisco. New commercial construction was
robust in Cleveland, Atlanta, St. Louis, Dallas and San Francisco, but slow in Richmond.
Chicago reported steady vacancy and rental rates.
Banking and Finance
For most Districts reporting on financial services, demand for loans increased across a range
of categories. Almost all Districts mentioned increases in commercial lending activity, and
Philadelphia, St. Louis, Kansas City, and San Francisco noted industrial lending as an area of
strength. The Cleveland District cited increased demand for loans to the manufacturing
industry, specifically. Reports on demand for mortgages were mixed, and the New York,
Chicago, and Kansas City Districts noted weakness in refinancing activity. Demand for
non-bank financial services was disappointing, with New York reporting a recent slowing in
the securities industry, and investment companies from the Philadelphia District noting
general caution on the part of investors.
Other banking indicators were holding steady or improving in some cases. Philadelphia and
Kansas City reported growth in deposits, while Cleveland cited rising core deposits at larger
banks. Credit conditions and delinquency rates have improved according to the New York,
Chicago, and San Francisco Districts, and held roughly the same in the Dallas and Chicago
Districts.
Agriculture and Natural Resources
Planting activities are under way in the agricultural Districts, which generally reported good
spring conditions. By exception, wet weather has caused delays in parts of the Richmond and
Atlanta Districts, while drought conditions continued or worsened in parts of the Minneapolis
and Kansas City Districts. Still, contacts indicated that the winter wheat and other crops are
generally in good shape, as are range land, pasturage, and livestock. However, canker disease
required destruction of part of the Florida citrus crop. In addition, growers in the Chicago, St.
Louis, and Minneapolis Districts are cutting planned soybean acreage, reflecting some
concern about soybean rust. Chicago, Kansas City, and San Francisco contacts noted that
fuel, fertilizer, and other input costs are rising. Chicago bankers voiced concern that higher
rents and interest rates could adversely affect cash flow at large farming operations. Atlanta
contacts reported strong export demand for cotton and poultry, while Dallas noted improved
selling prices for wheat, corn, and soybeans and favorable prices for livestock.
Minneapolis, Kansas City and Dallas reported that activity in the energy sector is revving up.
According to contacts in Dallas, the U.S. rig count is at the highest level since 1986, and
drilling plans are increasing faster than predicted earlier this year. Kansas City respondents
noted that shortages of labor and equipment are keeping drilling activity slightly below
desired levels at some firms, while some Dallas contacts say they are thinking of adding
capacity. In San Francisco, drilling costs are rising. Dallas contacts report that producers are
turning their attention to coal-bed methane, tight gas, tar sands, and gas shale, while service
companies seek to create new products to support the development of unconventional
resources. In the Minneapolis District, a large-scale wind energy project is planned for
Montana. Mining activity is also on the rise, with output stable or growing at Montana's iron,
palladium/platinum, and copper mines.
Prices and Wages
Reports from many Districts suggested that upward price pressures have strengthened,
although actual increases to date in vendor prices and selling prices have generally remained
moderate. Much of the pressure derives from energy costs, although contacts cited the lower
dollar and rising costs of building materials as well. Most Districts said manufacturers,
retailers, or services firms were able to pass at least a portion of cost increases along to their
customers. However, only Chicago and Dallas suggested that some contacts have raised
prices enough to increase margins or profits.
In two-thirds of the Districts, retail or tourism contacts expressed concern that high energy
prices were already, or could soon be, damping consumer demand. Distribution (shipping,
trucking, freight, delivery) firms and utilities shared similar apprehensions, having imposed
fuel surcharges in many cases, according to Cleveland, Richmond, Chicago, and
Minneapolis. As noted above, manufacturers also mentioned rising energy costs. San
Francisco stated that increasing costs have prompted manufacturers to "keep production as
close as possible to demand," and Dallas indicated that uncertainty about energy prices has
added caution to the outlook for business activity.
Boston, Richmond, Chicago, Minneapolis, and Kansas City reported modest or moderate
wage increases in various sectors, as labor markets in a few areas or occupations became
somewhat tighter. By contrast, Cleveland cited stable wages in trucking, and Dallas said its
contacts saw little or no wage pressure. Atlanta, Chicago, Dallas, and San Francisco
indicated that benefits costs, especially health care, continue to rise.
Return to top
First District--Boston
First District businesses contacted in early April report that activity continues to expand.
Most retailers say first quarter sales were up from a year ago; responding manufacturers'
revenues and orders are generally ahead of year-earlier levels. Some retailers and
manufacturers, however, suggest they are keeping a tighter rein on capital spending recently
than in previous quarters. Advertising and business consulting firms report strong demand.
Residential real estate markets in some parts of the region remain robust; other areas are
leveling off.
Retail and Tourism
Most First District retailers report positive sales growth in the first quarter compared to a
year earlier, and a strong recovery in February and March from the poor weather in January.
Year-over-year first quarter sales ranged from down 6 percent to up 9 percent, and
respondents with lower sales attributed them to strong results in 2004. Flat panel televisions,
MP3 players, lumber, and furniture remained particularly strong sellers and apparel sales
were still strong.
Vendor prices are mixed; for example, dairy prices are said to be up, television prices are
falling, and lumber remains volatile. Most retailers are passing price increases along to
consumers, but in the restaurant business, competitive pressures are keeping prices stable.
Inventories are steady or higher than expected among contacts. Employment levels vary as
some respondents increase headcount for new stores or to emphasize service, while others
keep head count low reflecting increased productivity. Employment is flat or falling at the
corporate level, and wages are steady. Respondents report holding back on capital spending
more now than in recent quarters.
Travel and tourism revenue is said to be strong in comparison to a weak base from 2004.
Boston area first quarter hotel revenue per room was up double-digits from a year ago; while
business travel increased and international travel was up 8 percent, most of the change came
from an increase in room rates. Pent-up demand from waning geopolitical turbulence as well
as a lower dollar are expected to boost international travel, although increases in fuel prices
may temper the growth.
Most retailers are optimistic about the economy and expect modest or strong growth in the
coming year. However, they remain concerned about the effects of energy prices on
consumers' discretionary income. Those in the furniture and lumber industries are also wary
about the effects of rising interest rates on housing starts.
Manufacturing and Related Services
Most First District contacts in manufacturing and related services report that sales and orders
in the first quarter were moderately above year-earlier levels. Demand for aircraft, energyrelated, and defense-related equipment rose more than average. By contrast, respondents in
the furniture industry say their sales have slumped below year-earlier levels, perhaps the
result of import competition.
Contacts continue to indicate that they are paying more for energy, transportation,
petrochemicals, and some metals. There is also new mention of firming prices for
telecommunications services. On the other hand, some companies have seen their input costs
fall as a result of increased sourcing in Asia, and one company says that the upward pressure
on steel costs has abated. Respondents generally say that their selling prices are steady or
increasing a little. They note that customers are more understanding of the causes for price
increases or that competition has become somewhat less intense than it had been during the
last several years.
Manufacturers are hiring for sales, marketing, and R&D positions. They are continuing to
shed other positions as a result of efficiencies introduced through new technology or
acquisitions. The net changes are usually small. Some respondents mention that tighter labor
markets are resulting in slower hiring or higher attrition in certain professional and technical
fields. Merit pay increases generally are expected to average 2.5 percent to 4 percent in 2005.
Contacts are managing their capital expenditures closely, and a capital goods producer
indicates that its customers are adding more "checks and balances" into the capital spending
process. Several respondents need to add capacity, although not necessarily in the United
States.
Most of the contacted manufacturers indicate that they expect to stay "on track" throughout
2005. However, they tend to be planning carefully, on the assumption that the general
economy or their markets are unlikely to experience rapid growth this year.
Selected Business Services
Advertising and management consulting companies enjoyed healthy demand growth in Q1
2005, building on gains made in 2004. Respondents believe client companies' budgets are
less constrained than in the recent past, and that the strategic focuses of these companies have
shifted somewhat from cost-cutting and productivity to augmenting sales and revenue.
Within advertising and marketing, demand for data and market analysis services is growing
notably well. Demand from clients in technology-related industries appears healthiest, while
reports on healthcare demand are mixed, and government-related demand is said to be weak.
About half of responding business services companies have been able to raise prices in the
past year, while the remaining companies are managing with steady prices and improving
market conditions. Business costs are under control, although competition for employees
seems to be pushing up labor costs in some cases. Most responding companies are adding to
their headcounts and raising wages, although not aggressively. All respondents express
positive views, expecting revenue growth to remain the same or accelerate slightly over the
course of 2005.
Residential Real Estate
Residential real estate markets in New England remain active. However, contacts report
softening markets in some parts of the region, even though the slowdown is not yet
noticeable in the number of sales or in average sale prices. Lower- and mid-priced homes
continue to sell quickly in most areas, and the inventory in those price ranges remains low.
Markets in Massachusetts, New Hampshire, and Vermont continue to prosper. In
Massachusetts, the number of sales and median sale prices exceeded last year's values in
January and February, and the number of condominiums sold in the state beat all previous
records for those two months. Contacts attribute some of the strength to anticipated increases
in mortgage interest rates. By contrast, one market in Rhode Island, for example, saw the
number of listings priced below $300,000 rise to 60 from 14 a year ago. Time on the market
has also increased in many areas, especially for high-priced houses. Some of the slowdown is
said to be due to sellers' reluctance to lower their asking prices. Contacts anticipate further
moderation of activity levels, especially if interest rates rise in the next few months.
Return to top
Second District--New York
The Second District's economy has continued to grow, on balance, since the last report, with
considerable variation across sectors. There have been increasing signs of price pressures in
some industries. Manufacturers report a slowing in growth of activity and note fairly
widespread increases in input costs but only a moderate escalation in selling prices. Retailers
indicate that March sales were on or below plan, largely reflecting unfavorable weather;
however, hotels and other tourist-related businesses continue to report pronounced strength.
Residential real estate markets were extraordinarily robust in the first quarter and that
strength appears to be carrying over into the current quarter. Office and industrial markets
were moderately stronger in the first quarter. Although the securities industry showed strong
growth in activity, revenues and profits in the first quarter, business has slowed noticeably in
recent weeks; escalating input costs are reported in the industry. Finally, bankers report
continued modest declines in delinquency rates; they also indicate steady to slower loan
demand from the household sector but increased demand for commercial loans.
Consumer Spending
Retailers report that sales were mostly below plan in March, held down by unseasonably cold
and wet weather; most contacts also surmise that their customers have been pinched by high
energy costs. Compared with a year earlier, same-store sales ranged from a 4 percent gain to
a 13 percent decline, despite the early date for Easter, which was expected to boost apparel
sales. Sales of lawn and garden merchandise, casual apparel and other seasonal goods were
described as especially weak, while goods for the home were generally characterized as
sluggish. Though one contact indicates some overhang, inventories were generally said to be
at desired levels. Retail chains indicate that selling prices have risen slightly, though this is
partly attributed to a gradual shift in the sales mix towards more upscale goods. Consumer
confidence retreated in March, based on the Conference Board's survey of Middle Atlantic
state (NY, NJ, PA) residents.
Indicators of tourism, primarily in New York City, signaled exceptional strength in the first
quarter. Manhattan's hotel occupancy rate was nearly 7 percentage points higher in February
than a year ago, and total revenues were up more than 20 percent; there are indications that
March was almost as strong. Hotels in the Buffalo-Niagara Falls area also report that
occupancy rates were up noticeably in early 2005 compared with a year earlier. Broadway
theaters report a sharp pickup in activity since the last report: in March, attendance was up 7
percent from a year earlier, while revenues were up 9 percent, with the strongest gains
coming at the end of the month. Two major Manhattan department stores report that brisk
tourism has buoyed their sales. Passenger traffic at district airports is reported to be
increasingly robust--volume at New York City area airports recently rose above pre-9/11
levels, with one airport currently said to be at full capacity; Buffalo's airport also reports
brisk passenger traffic. Very strong growth is also reported in bridge and tunnel traffic.
Construction and Real Estate
Housing markets appear to have gained further momentum in March. Contacts in
Manhattan's real estate industry report 15 to 20 percent price appreciation for apartments
over the past year and 6 to 10 percent increases in unit sales. The inventory of homes on the
market is said to be lean and little changed from a year ago, and units are staying on the
market for an unusually short time. One large real estate firm reports that March was their
strongest month ever, in terms of revenue, and that bidding wars remain fairly common.
Another contact notes that several large mortgage lenders will soon be entering the New York
City market. Demand for single family homes across New York State has shown persistent
strength in early 2005--though sales volume has tapered off somewhat recently, prices have
continued to appreciate at a double-digit rate.
Commercial real estate markets across the New York City metro area strengthened
moderately in the first quarter. Office markets in Manhattan and northern New Jersey
tightened in the first quarter, with vacancy rates declining and rents rising; some softening in
Lower Manhattan's market was more than offset by further strength in the Midtown and
Midtown South areas. Sales of office space weakened slightly in Northern New Jersey, but
continued to strengthen in both Lower and Midtown Manhattan. Office vacancy rates edged
up in Long Island and Westchester and Fairfield Counties but were still down from a year
earlier, while rents were up modestly. Sales of office buildings were reported to be
exceptionally strong in both Lower and Midtown Manhattan, though some weakening was
reported in northern New Jersey. Industrial markets also strengthened: compared with a year
earlier, vacancy rates were down and industrial rents were up nearly 7 percent across the
New York City metropolitan region.
Other Business Activity
Manufacturing contacts report a loss of momentum in March and early April. The April
Empire State Manufacturing Survey indicates a leveling off in activity. Many manufacturing
contacts cite soaring energy prices as a major concern. More broadly, though, while
respondents continue to note widespread increases in input costs, selling prices are reported
to be stable to up moderately. Purchasing managers report mixed results for March: those in
the New York City and Rochester areas indicate some leveling off in activity and steady costs
for manufacturing inputs; however, purchasers in the Buffalo area note an acceleration in
business activity and persistent widespread cost pressures. There are reports of expansion in
Long Island's defense industry.
The securities industry, which had shown brisk growth in activity, revenues and profits in the
first quarter, is reported to have weakened noticeably starting in mid-March and continuing
into April, portending a second quarter slowdown. An industry contact reports fairly rapid
escalation in wages and costs of most business inputs--consultants, auditing, printing,
software engineering and other business and professional services, as well as catering and
various business supplies.
Financial Developments
Small to medium-sized banks in the Second District report increased overall demand for
commercial loans and non-residential mortgages, but little change in demand from the
household sector. Bankers again indicate declines in refinancing activity. Little or no change
is reported in credit standards, except for commercial and industrial loans, where there was
some tightening, on balance. Respondents report widespread increases in interest rates, both
on deposits and loans--particularly on commercial mortgages and commercial and industrial
loans. Finally, bankers report declining overall delinquency rates, with 17 percent reporting
overall decreases and no bankers reporting increased delinquencies in any loan category.
Return to top
Third District--Philadelphia
Business activity in the Third District increased in March. Manufacturers reported rises in
orders and shipments during the month. Retail sales of general merchandise were up
modestly compared with the previous month and with March of 2004. Auto sales rose from
February to March and were slightly above last year's level. Banks reported that lending
continued on an upward trend. Firms in the service sector indicated that their business
activity was rising at a moderate pace.
Third District business contacts generally expect further improvement in the region's
economy in the months ahead. Manufacturers expect increases in shipments and orders
during the next six months. Retailers anticipate an improved rate of sales during the spring,
with modest year-over-year gains. Auto dealers also expect sales to pick up in the months
ahead, although they do not anticipate an increase for the year as whole. Bankers forecast a
roughly steady rise in overall lending. Service companies expect business to expand further
at the current rate of growth.
Manufacturing
Manufacturing activity in the Third District rose in March. Around one-third of the
manufacturing firms surveyed during the month reported increases in new orders and
shipments compared with February, and around one-fifth reported decreases. Order backlogs
at area plants were virtually unchanged from February to March, and delivery times were
practically steady. Growth in business was reported among firms in most of the District's
major manufacturing industries, the most widespread gains being among producers of metals
and other industrial materials.
The region's manufacturers generally expect further growth in business activity. Nearly half
of the firms surveyed in March expect their shipments and orders to increase during the next
six months, and around one in ten expect decreases. A substantial portion of the region's
manufacturing firms surveyed in March (about one-third) plan to increase capital spending
during the next six months, and very few expect to reduce it.
Third District manufacturers reported rising prices in March, on balance, although the
number of firms noting increases during the month was somewhat lower than in the fall and
early winter. Firms in all but a few of the major manufacturing industries in the region
indicated that they had experienced increased input costs and raised prices for their own
products in March compared with February. During the next six months 50 percent of the
manufacturers polled in March expect increases in input prices, and about 10 percent expect
decreases. About 30 percent plan to increase the prices of their own goods, and about 10
percent expect to reduce prices. This represents somewhat less widespread expectations of
higher prices than prevailed during the fall and early winter.
Retail
Retailers reported slight increases in sales in March compared with February and with March
of last year. Most indicated that unseasonably cold and rainy weather held down sales of
spring apparel and other seasonal merchandise. As a result, sales for the month were below
most stores' plans. Stores that specialize in luxury goods continued to post better
year-over-year sales gains than stores selling less expensive merchandise. Retailers expect
sales growth to improve as spring progresses, and most anticipate sales for the rest of the
year will be modestly above last year. Store executives generally indicated that the wholesale
cost of most of the goods they buy has not risen much so far this year. They also reported that
they have not raised selling prices significantly.
Auto dealers in the region reported a healthy increase in sales in March compared with
February, although compared with March of last year the increase was slight. Inventories
continued to be above desired levels, except for some imported models. Most of the dealers
contacted for this report said they expect sales to move up further during the spring, although
they anticipate sales for this year as a whole will be down from last year. Dealers said
manufacturers are continuing to offer high levels of rebates.
Finance
The volume of loans outstanding at Third District banks rose in March compared with
February, according to banks surveyed for this report. Commercial and industrial loans have
been increasing fairly strongly, with new borrowing being done by firms in a wide range of
industries. Commercial bank lending officers reported that prospective business borrowers
are increasingly requesting fixed-rate loans and that competition among lenders was limiting
rate increases. Bankers also reported increases in personal loans, especially home equity
loans and credit lines. Looking ahead, bankers in the District expect overall lending to remain
on a steady upward trend.
In general, banks in the District are meeting their deposit growth goals, although some
indicated that deposits have not increased as strongly as they had expected. These banks also
noted that depositors are becoming increasingly reluctant to place funds in long-term deposits
because they anticipate further increases in deposit rates this year. Investment companies
reported gains in cash inflows in recent weeks but indicated that inflows were down
compared with the same period last year. Although investors continued to favor equity funds
over bond funds, executives at investment companies said investors appear to have become
more cautious about committing funds to investments of any kind.
Services
Most of the Third District service firms contacted for this report indicated that business had
increased at a modest rate. General business services activity has been on the rise, and the
pace of growth has increased somewhat. Business travel and personal travel and tourism have
been growing. Trucking activity has continued to increase despite higher freight rates
implemented in response to rising costs for fuel, equipment, and labor in that industry. Most
of the service sector firms surveyed expect business to expand further this year, at about the
current growth rate.
Employment agencies in the region reported growing demand for workers, and they expect
the pace of hiring this spring to be better than last year. Companies in manufacturing, trade,
services, and the financial sectors have relatively stronger hiring plans than do employers in
other sectors. Manufacturing and service companies indicated that they have increasing needs
for workers in technical occupations. Health care workers are also in growing demand.
Return to top
Fourth District--Cleveland
From late February through the first full week in April, District business conditions
continued to show signs of improvement, although somewhat less evenly than earlier this
year. Among manufacturers, activity at the District's durable goods facilities continued to
trend up, and contacts characterized production as steady among nondurable goods
manufacturers. Reports from retailers, which had indicated an improving environment earlier
in the year, suggested some deterioration in recent weeks. Residential builders saw seasonal
improvements in sales, but sales were slower than at this time last year; commercial builders
continued to report modest improvements in conditions. At the District's banks, commercial
borrowing continued to strengthen. But demand for shipping services, while still strong,
showed some signs of slowing.
Input cost increases seemed slightly less pronounced in recent weeks, with isolated increases
reported for fuel and other petroleum-based products. Steel-related product prices also
remain high; however, steel spot prices are expected to fall. Interestingly, effective steel
prices for many firms may actually rise as contracts--many of which were negotiated when
steel spot prices were much lower--are adjusted to reflect more recent spot prices. Several
steel industry contracts are currently being renegotiated.
Hiring still seemed limited throughout the District, though staffing-services companies
reported an increase in openings and a shrinking supply of prospective candidates. Recruiters
reported that it took longer than at this time a year ago to find matches for available
openings.
Manufacturing
Through the six-week period ending in early April, production levels continued to trend up at
the District's durable goods producers and were also above year-ago levels. Despite the
steady increases in production through the last several months, however, many firms noted
flattening new orders growth. Among specific sectors, steel shipments continued to soften,
but remained roughly even with the levels of this time a year ago. Contacts attributed slowing
shipments to an accumulation of inventories, sluggish demand from automakers, and
attempts by some customers to delay purchases until prices fall further. At District
automobile plants, production has risen throughout the early part of 2005 but remains below
the levels of this time last year.
Nondurable goods manufacturers reported that production was steady through the last six
weeks and up slightly for several producers on a year-over-year basis. The level of new
orders remained roughly flat. Though production levels have been steady for some time,
many producers expect an acceleration in sales in the months ahead.
Among all manufacturers, hiring remained somewhat sluggish. Durable goods producers
added to their staffs more frequently than their counterparts in nondurable goods
manufacturing, though the former plan fewer increases in the months ahead. And while most
nondurable goods producers plan few additions to their capital stock, many durable goods
manufacturers intend to increase their investment spending through the course of the next six
to twelve months, with several noting a need to increase capacity.
Input costs increased only slightly in recent weeks, though they are still up substantially from
a year ago. Many manufacturers noted increases in fuel costs, though steel product prices
were expected to fall. Several contacts noted that they had begun to raise prices in an attempt
to restore their margins and undo the impact of a steady string of increases in input costs.
However, firms have generally been unable to completely offset these cost changes, and they
continued to report reduced margins.
Retail
Retailers' reports suggested a more mixed economic environment from late February through
the early part of April. Recent increases in gasoline prices were thought to be the cause of
slightly weaker sales at discounters; discount retailers previously reported an improvement in
the pace of sales, which some thought was tied to declining gasoline prices. Sales at District
department stores were also worse than expected and below the levels of this time last year;
contacts had anticipated better sales because of the Easter holiday. Unseasonably cold
weather was also cited as a cause of more sluggish sales activity.
Specialty stores and grocers, however, generally reported gains in their businesses. And
automobile dealers saw March sales rebound slightly. Nevertheless, apart from auto
dealerships, most contacts were somewhat less sanguine about their sales prospects in the
foreseeable future. While incentives reportedly remained generous at District dealerships,
prices at other retail outlets were characterized as stable.
Construction
Residential builders reported an increase in sales through the six weeks ending in early April;
however, most contacts attributed these gains to the typical seasonal pattern. Despite the
improvement in sales, most builders reported that their sales levels were less than at this time
last year, and several noted that their backlogs were weaker than desired. Several builders
also indicated that the lower-price segment of the market had fared more poorly than other
price points. Input costs continued to increase for builders for an array of items including
concrete, steel, and petroleum; however, lumber prices stabilized, albeit at a high level.
Regarding hiring, most homebuilders did not add to their payrolls in recent weeks.
Nonresidential builders continued to report rising activity, with sales for many firms
exceeding those of this time last year. Firms also reported increases in inquiries from
prospective clients, leaving many contacts optimistic in their assessment of the outlook.
While business conditions improved across a range of nonresidential construction categories,
growth in public building projects seemed particularly pronounced. Interestingly, input costs
increases seemed less severe recently for many firms, though many contacts anticipate an
increase in concrete and steel prices. Builders reported that their prices were stable, and most
had merely maintained their current staff sizes.
Banking
At banking institutions in the District, contacts characterized commercial loan demand as
steady, though it slowed somewhat in March. Nevertheless, lending connected to commercial
real estate, especially for manufacturing firms, was described as faring well within recent
weeks. Contacts also characterized consumer borrowing as steady, despite weak demand for
automobile loans. Banks reported extending home equity loans at an increasing pace in
March. Larger banks in the District generally reported rising core deposits, while changes in
core deposit levels were more mixed among smaller banks. Hiring remains modest at most
institutions.
Trucking and Shipping
Business conditions continued to be strong for shipping firms in the District. However, for
the first time in at least a year, some contacts suggested that activity may be starting to
soften. Contacts reported that rising fuel costs continue to be a concern for shipping firms.
While surcharges allow shippers to almost entirely eliminate the impact of increases in fuel
costs, companies are worried that these increases in shipping costs will eventually dampen
demand. Outside of surcharges, regular shipping rates have remained steady. Contacts
reported that their firms continue to attempt to attract drivers, though wage rates remain
stable. Firms also continue to add trucks to their fleets.
Return to top
Fifth District--Richmond
Overview
Fifth District economic growth was restrained in March but showed signs of gaining
momentum in early April. District services businesses generally reported modest increases in
revenues, though utilities and trucking firms experienced some softening in demand for their
services as they pushed through higher fuel costs. Retailers indicated that sales dipped in
March--big-ticket sales were particularly weak--but partly rebounded in early April.
Manufacturing shipments and orders moved higher in the weeks since our last report though
factory employment contracted somewhat. Real estate agents continued to report robust
housing markets in many areas of the District, and bankers said that lending activity
increased in most categories. Despite higher oil prices, business contacts generally reported
that prices for their products and services continued to rise only modestly. In agriculture,
excessive rain hampered planting and field work, but crops and pastures were generally in
good condition.
Retail
District retailers said that sales slipped a bit in March but gained ground in early April. For
March, shopper traffic was generally light and big-ticket sales were sluggish, but both
measures improved in early April. Automobile dealers reported that their sales were
generally mixed in recent weeks. Despite higher gasoline prices, most dealers contacted said
they had not yet seen a significant shift to smaller cars. A big-box retailer reported that their
sales were flat, as consumer budgets tightened due to higher healthcare costs. In contrast, a
contact at a department store in central North Carolina said their sales were strong, and a
sporting goods dealer in the Charleston, W.V., area said sales had been on an upswing in the
last few weeks. Retail establishments in the District reported moderately higher employment
and wages in recent weeks. A contact at a hardware store in central Virginia said he had
boosted hiring to staff a new store, while a large bookstore in central North Carolina reported
a substantially higher budget for hiring.
Services
Contacts at District services firms generally reported moderate revenue growth in the weeks
since our last report. A few companies, however, noted that they had raised prices to recover
higher fuel costs and had experienced somewhat slower growth in demand as a result. A
national trucking firm with a presence in central North Carolina, for example, said that higher
diesel fuel prices had trimmed their business in recent weeks. Contacts at electric and gas
utility firms in South Carolina and Virginia said rising fuel costs would be passed through to
customers in the months ahead. Employment and wages rose moderately at serviceproducing businesses, and prices in the sector generally continued to increase at an annual
rate of less than 2 percent.
Manufacturing
District manufacturing activity strengthened since our last report, with shipments and new
orders increasing moderately in March and early April. Capacity utilization contracted in
March but increased in April. A plastics manufacturer in North Carolina told us he was
optimistic, noting that "March was down" but adding that "the outlook is good." A
Maryland-based producer of electrical equipment held a similar view, characterizing the
current slight slowdown as only temporary. Furniture makers in Hagerstown, Md., and
Sumter, S.C., were upbeat and reported higher shipments and new orders in both March and
April. Although oil prices were sharply higher, scrap steel prices were reported to be falling
from 2004 highs, and overall raw materials prices continued to rise at an annual rate of less
than 2 percent.
Finance
District loan officers reported moderately higher demand for loans in March and early April.
Commercial lending edged up, boosted by stronger economic activity in most areas. A
commercial lender in Charleston, W.V., said that an upturn in coal mining activity boosted
borrowing to finance capital spending in that industry. Residential mortgage lenders also
reported higher demand. A banker in Greenville, S.C., said that residential mortgage lending
had picked up in recent weeks, as more "fence-sitters" committed to home mortgage loans. In
contrast, a residential mortgage lender in Richmond, Va., said that recent increases in interest
rates had damped demand for residential mortgages but that he expected a "decent" level of
loan demand to continue for the next few months.
Real Estate
Residential real estate agents reported a pickup in activity in March and early April. A
Washington, D.C., agent said his office had been "extremely busy," and that houses placed on
the market continued to receive multiple offers. An agent in Virginia Beach, Va., said that
homes in that area were moving fast and that buyers continued to pay more than list price
there. Several contacts indicated that it was becoming exceedingly difficult to find land to
build on and to secure approval from municipalities to construct new homes. A Washington,
D.C., agent said that some builders were buying several small lots and combining them into
one large lot in order to build larger, mansion-like homes--a process he labeled
"mansionization." Agents in a number of areas reported low inventories of homes and rapidly
rising prices.
Commercial real estate agents reported a notable increase in leasing activity in the weeks
since our last report. Activity was strongest in the office and retail segments of the market; in
contrast, industrial leasing remained stagnant. Contacts in Raleigh, N.C., and Columbia, S.C.,
said that their phones were ringing again as clients finally seemed to be emerging from the
"winter doldrums." Washington, D.C., remained, by far, the busiest market in the District.
"There continues to be an unbelievable appetite for product in this market," noted a
Washington, D.C., contact. The increase in leasing activity led to a firming of rents in most
areas. While commercial construction activity was generally slow, there were numerous
reports of older office and retail space being converted into upscale condominiums.
Tourism
Tourism was generally mixed since our last report. Mountain resorts in Virginia and West
Virginia wrapped up a strong ski season and contacts noted that an early Easter lengthened
the season and increased holiday bookings. In contrast, contacts along the coast said that
unseasonably cool temperatures and higher gasoline prices had hurt tourism activity there. In
Washington, D.C., over 1 million tourists attended the 93rd annual National Cherry Blossom
Festival, a record attendance for the event.
Temporary Employment
Contacts at temporary employment agencies reported that stronger economic activity drove
up the demand for temporary workers since our last report. An agent in the Washington,
D.C., area told us that distribution center workers were particularly sought, in part because "a
lot more goods were being shipped now." Citing the low unemployment rate in the
Washington, D.C., area, a temporary employment agent looked for a shortage of workers in
coming months and predicted that employers would have to increase wages to attract and
retain workers.
Agriculture
Above-normal precipitation in March and early April hampered planting and limited field
work in many areas of the District. Excessive rains delayed corn planting in Maryland and
North Carolina and muddy fields slowed field work in Virginia and West Virginia. Corn
planting in South Carolina was 33 percent complete by early April, somewhat below the
five-year average of 40 percent by this time of year. In addition, Maryland and South
Carolina farmers reported that the development of small grain crops was on track and the
crops were in generally good condition. Pastures and livestock were also in good condition.
Return to top
Sixth District--Atlanta
Summary
Sixth District business contacts reported that the pace of economic activity was robust in
March and early April. Retail sales were generally strong, although auto sales were mixed.
Reports on tourism remained upbeat, particularly in Florida where foreign visitors boosted
overall activity. Housing construction and sales continued strong in most areas, while
commercial markets displayed further improvement, albeit from low levels. Strong demand
conditions boosted most manufacturing industries. Hiring expanded at a modest pace with
numerous firms indicating they were relying on temporary staffing firms to fill job openings.
Higher fuel prices raised operating costs for many producers and service providers. Overall,
firms noted that they were able to pass along a portion of these increases to their customers.
Consumer Spending
District retailers reported that March sales exceeded expectations, in part because of strong
Easter-related activity. Once again, very strong results were reported from tourist destinations
in Florida. Apparel sales were solid in most areas of the District. Merchants commented that
they anticipate positive second-quarter sales relative to a year earlier, although several
contacts noted concern that rising fuel prices may have dented discretionary consumer
spending. District auto dealers had mixed results in March. Foreign-brand vehicles continued
to perform well throughout the region, and some Florida contacts also noted positive sales of
some domestic brands. However, overall purchases of domestic full-size trucks and SUVs
were below year-ago levels. Most dealers stated that used car sales had improved from weak
2004 levels, and auction prices were higher.
Real Estate
Overall, March single-family home construction and sales remained near high year-ago
levels. Moreover, both Realtors and builders in Florida continued to report record levels of
activity. The demand for residential housing remained extremely strong in Florida, and
shortages of homes for sale were noted by several contacts. In addition to single-family
homes, condominium construction and sales were vigorous in Florida. Most contacts agreed
that District residential construction will likely remain strong in the short-term, but some
slowing is anticipated in the second half of the year.
Improvements continued to be noted in commercial real estate markets. Retail development
remained solid across the District, and industrial projects have been gaining pace as firms
move forward with expansion plans. Office development was also improving, with plans for
several new office towers.
Manufacturing
Reports from the factory sector continued to be positive. Some manufacturers increased
production and lengthened workweeks in response to rising demand. Solid activity was noted
by contacts in most industries, including carpet, building materials, machinery, and
manufactured housing. In addition, contacts in the forest products and pulp and newsprint
industries were optimistic about current and future activity.
Tourism and Business Travel
The tourism and hospitality sector remained strong in March and early April. In Florida,
activity continued to be bolstered by foreign visitors. Bookings were characterized as
"robust" at major central Florida theme parks, and passenger counts at cruise lines were high.
The hospitality industry along Florida's panhandle continued to improve as hurricane-related
repairs brought more rooms on line. Hotel occupancy remained strong along the Mississippi
coast. Some convention hotels in Atlanta noted a recent upturn in business.
Financial
Financial activity in the District was brisk. Loan demand remained at high levels and some
areas that experienced a slowdown in early 2005 noted an increase in activity in March.
Contacts reported that consumer loan activity was expected to remain robust in the second
quarter. Bankers also noted steady deposit growth, with several institutions expanding
facilities and increasing hiring to meet demand. A modest improvement was also noted in
commercial loan demand.
Employment and Prices
Labor markets improved modestly in March. Temporary employee hiring remained brisk,
especially in the business services sector. Several contacts reported that they expected the
pace of hiring to slow because of the rising cost of employee healthcare benefits and a lack of
qualified applicants in some industries. For the trucking industry, in particular, the
availability of qualified drivers remained limited.
Contacts again reported price increases in several sectors. For instance, building materials
prices edged higher again, and petroleum-based goods such as plastics experienced notable
price increases. Several contacts noted that they have been able to pass on higher energy and
materials prices to their customers.
Agriculture
Rains severely slowed fieldwork for most District growers in March and early April. Also,
Florida's citrus industry continued to monitor the impact of canker disease. So far, about
4,500 acres have been destroyed because of canker but up to 10,000 acres may be cleared
before the disease is brought under control. The outlook for the District's poultry and cotton
industry was reported to be positive because of strong export demand.
Return to top
Seventh District--Chicago
Summary
The Seventh District economy continued to expand at a moderate pace in late February and
March, though activity was lagging in Michigan. Consumer spending was again generally
subdued, while business spending continued to increase. Reports on construction and real
estate activity were mixed by location and market segment. Manufacturing activity continued
at solid levels in many industries, though weakness persisted in light vehicle production.
Lending activity picked up slightly from the previous reporting period. There were more
frequent reports of price increases throughout the supply chain, but overall cost and price
pressures were modest. District farmers' crop plans for 2005 included an increase in corn
acreage and a decrease in soybean acreage from last year.
Consumer Spending
Consumer spending was again generally subdued in late February and March. Retailers
reported that sales in the Midwest were weaker than in other parts of the country, in part
because cold weather reduced the demand for spring merchandise. Some reports suggested
that sales of jewelry and apparel were stronger than other categories. New vehicle sales rose
slightly in March. One dealer in the Chicago area credited the pick-up to their aggressive
promotional efforts in response to manufacturer-to-dealer incentives. Inventories remained
high, and dealers were selective in their ordering. Used vehicle sales were said to be gaining
momentum. A large restaurant chain reported that sales in the Midwest were stronger than
expected, with all market segments showing decent growth. Tourism was mixed by location,
with contacts in Michigan reporting a sluggish pace of spending and others in Illinois
reporting more positive conditions.
Business Spending
Business spending continued to increase. Reports on capital spending were generally
favorable: one pharmaceutical company said they were sticking to their "healthy" investment
plans, and a toolmaker was looking to add equipment. Reports on freight hauling were
generally strong, though one analyst noted some slowdown in trucking during the first
quarter. Labor market conditions continued to improve. A number of manufacturers said that
they were hiring additional workers; the few reports of cutbacks were concentrated in the
auto industry. Staffing firms reported modest growth in demand for temporary workers; one
noted that the growth in their fees from permanent placements was stronger than their growth
in billings for temporary workers.
Construction and Real Estate
Reports on construction and real estate activity were mixed by location and market segment.
The residential market continued to be solid in most of the District, though reports suggested
weakness in Michigan and Indiana. A builder in Indiana noted that permits and home
construction were down from a year ago and expressed concern that some spec units were
not selling; nonetheless, the contact remained optimistic for the rest of the year. Commercial
real estate markets continued to be active in the Chicago area but were very slow in
Michigan. Commercial vacancy rates were generally stable, with some improvement in
suburban Chicago. Rents for commercial space were relatively steady.
Manufacturing
Manufacturing activity continued at solid levels in many industries, though weakness
persisted in the light vehicle sector. Light vehicle production continued to slow and one
analyst said that the industry was pondering deeper production cuts later in the year. The cuts
already in place have strained the financial conditions of many suppliers. By contrast, strong
demand has strained capacity in the heavy truck industry, with shortages of axles, tires, and
roller bearings holding back production. One industry analyst thought that customers may be
delaying ordering because backlogs were so high. Production and shipments of other heavy
equipment rose further; orders eased slightly but remained at very strong levels, and many
producers revised their forecasts for 2005 upward. A telecommunications equipment maker
reported solid demand, as did contacts in the tooling industry. In the steel industry, one
contact noted stable conditions: "The market is not robust, but it is not bad." Steel inventories
had been worked down some but remained a little high.
Banking and Finance
On balance, lending activity picked up slightly from the previous reporting period. Business
loan demand improved further, and one contact added that there was "good momentum" for
commercial banking going forward. District bankers reported strong demand for financing
equipment purchases and inventory building, and one in Chicago noted a pick-up in mergers
among small- and medium-sized firms. Business credit quality was generally stable at good
levels. Household loan demand was relatively steady during March. Demand for
home-purchase mortgages was better than earlier in the year. A contact at a large bank
attributed part of the increase to "fence sitters" jumping into the market before rates moved
higher. By contrast, demand for mortgage refinancings was quite weak. Consumer credit
quality was generally good. One banker noted an up-tick in delinquencies but did not view
the increase as a significant concern. Contacts reported that spreads for most loan types had
narrowed, and margins had shrunk due to competitive pressures.
Prices and Costs
There were more frequent reports of price increases throughout the supply chain, but overall
cost and price pressures were moderate. A number of manufacturers noted higher prices for
inputs such as resins and plastics, but steel prices appeared to stabilize somewhat.
Manufacturers reported some success raising the prices for their products to cover higher
costs. Furthermore, some heavy equipment makers and one construction materials producer
thought they could raise prices enough to boost profits. At the retail level, reports of price
increases were still sporadic, but they outnumbered the reports of price declines. Virtually all
contacts noted higher energy costs. Fuel surcharges were imposed and accepted for many
freight hauling activities. Wage gains remained modest, though health insurance costs
continued to be a concern for many contacts.
Agriculture
Corn planting has begun and will shortly kick into high gear across the District. Moisture
levels remained at least adequate for almost the entire District. According to the USDA's
initial forecasts, corn acreage in District states was expected to increase a little over 1 percent
from a year ago, and soybean acreage was expected to decline about 1 percent. Both of these
forecasts were a little above the expectations for the nation. Corn and soybean prices rose
during late February and early March before dropping again, but the price increases triggered
sales from the large stocks in storage. The soybean price increases were large enough to
cause some farmers to increase planting and forward-contract soybeans. A contact reported
that most farmers are "crossing their fingers" about soybean rust, although some were
increasing insurance coverage. Concerns about higher fuel and fertilizer costs continued.
Farmers were also disappointed that higher gasoline prices had not lead to higher ethanol
prices. With higher rents and interest rates, bankers expressed concern about cash flows,
especially for large operations.
Return to top
Eighth District--St. Louis
Summary
Business activity in the Eighth District continued to expand since our previous survey.
Reports in manufacturing were generally positive. Contacts in the services sector continued
to report increased economic activity. Retail sales increased in February and March
compared with the same months in 2004. Car sales over the same period were flat or slightly
up. Home sales in the District continued to increase while commercial real estate activity
showed additional signs of improvement. Total loans at a sample of small and mid-sized
District banks increased from early December to mid-March.
Manufacturing and Other Business Activity
Manufacturing in the Eighth District has shown signs of improvement since our previous
report, although several manufacturers expressed concern about rising energy prices. Several
firms in the primary metal, motor vehicle, plastics, and electrical equipment industries
reported plans to open new plants in the District, which will likely result in more than 1,900
new jobs. In addition, other firms in the machinery and automotive parts industries reported
plans to expand operations and hire several hundred workers. Despite generally positive
reports, several District manufacturers announced plant closings and workforce reductions.
Firms in the food manufacturing, automotive parts, plastics, chemical, and apparel industries
will close plants and lay off employees, displacing as many as 1,350 workers. Many of these
contacts reported that they plan to relocate operations abroad because of increased foreign
competition.
The District's service sector continues to expand in most areas. Firms in the freight
transportation, airport operations, traveler accommodation, warehousing, gambling,
marketing, telecommunications, water supply, waste management, recreation, and
educational services industries reported new facility openings, renovations, and expansions.
District retailers generally reported strong sales in February and March compared with the
same months in 2004, although several contacts expressed concern about rising fuel prices.
Strong-selling products included discount and grocery items, clothing, furniture, and
hardware. District auto dealers reported that sales were flat or slightly up compared with last
year. Import, tractor, and used car dealers reported positive sales growth, while most contacts
reported a continued decline in the demand for sport utility vehicles.
Real Estate and Construction
February year-to-date home sales rose in most of the Eighth District. January and February
home sales increased by 2.8 percent in St. Louis compared with the same months in 2004.
Home sales were up 5.2 percent in Memphis and 5.6 percent in Louisville over the same
period. Residential construction is, however, weakening in most of the District. January and
February single-family housing permits declined in most areas. Compared with the same
months last year, permits fell over 5 percent in St. Louis and Memphis and fell 10 percent in
Louisville and 14 percent in southern Indiana. In contrast, February year-to-date permits
increased in nearly every area of Arkansas and were up 88 percent in Tupelo, Mississippi.
Commercial real estate markets in the District are still strengthening. There is a limited
amount of new office construction throughout the District and office vacancy rates seem to
be slowly declining. In Louisville, the 2004 year-end office vacancy rate was 18.7 percent,
down from 19.4 percent in 2003. The overall commercial vacancy rate for the JeffersonBullitt County market in Kentucky was 19.2 percent in the fourth quarter of 2004, down from
19.5 percent in the third quarter. The St. Louis and Memphis industrial markets are showing
signs of improvement. Contacts in Memphis, Little Rock, and Louisville reported that
commercial construction is very active. In northeast Mississippi, January and February
square footage in commercial development increased 252 percent compared with the same
months in 2004. Contacts in Little Rock reported that January and February were quiet in
terms of industrial development.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks increased 1.5
percent from early December to mid-March. Real estate lending rose 2.1 percent. Consumer
and industrial loans rose 3.1 percent. Meanwhile, loans to individuals declined 3.4 percent.
Over this period, total deposits at these banks increased 1.6 percent.
Agriculture and Natural Resources
Most District farmers are still preparing for planting their spring crops. Farmers in the
District states anticipate planting 2 percent more acres of corn, 28 percent more acres of
sorghum, 10 percent more acres of cotton, and 2 percent more acres of rice this year than
they planted in 2004. In contrast, District farmers anticipate planting 2 percent fewer acres of
soybeans and 26 percent fewer acres of tobacco than last year. A few soybean farmers in
Illinois and Indiana (the two largest soybean-producing states in the District) plan to decrease
their acreage because of concerns about the incidence of Asian soybean rust.
Return to top
Ninth District--Minneapolis
The Ninth District economy displayed firm growth since the last report. Growth was evident
in consumer spending, manufacturing, construction, real estate, energy, and mining.
However, agriculture was down slightly and tourism was level. Employment grew
moderately, and wage increases were generally modest. Significant price increases were
noted in gasoline, home heating oil, and college tuition.
Consumer Spending and Tourism
Overall retail activity increased. A major Minneapolis-based retailer reported same-store
sales up 8 percent in March from last year. Sales at a North Dakota mall during the Easter
weekend were up 12 percent compared with last year's Easter sales, according to the mall
manager. March sales at a Montana mall were about 5 percent ahead of last year, according
to the mall manager, who expressed concern about recent higher gas prices. However, gas
prices haven't had a noticeable effect on traffic so far. Recent sales and traffic were up
slightly at a Minneapolis-St. Paul area mall compared with a year ago.
A representative of a North Dakota auto dealers association described recent sales activity as
good overall, but "spotty." For example, a dealer in the northeastern part of the state
described last month's sales as the best March ever, while dealers in the western part of the
state noted volatile sales. A publication by the Minnesota Automobile Dealers Association
reported that new retail light vehicle registrations will likely decline 4 percent in 2005
compared with 2004, but nevertheless finish at historically strong levels.
Late winter tourism activity improved in areas that received more snow. March winter
tourism activity in the Duluth, Minn., area was up from last year due to good snow
conditions, and convention bookings for the rest of the year look solid, according to an
official. In the Upper Peninsula of Michigan, winter tourism was up about 8 percent from a
year ago, while winter tourism activity was about level with a year ago in northwestern
Wisconsin, according to officials. However, snowmobiling activity was generally down in
South Dakota from last year due to a lack of snow.
Manufacturing
Manufacturing activity expanded. A March survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated increased manufacturing activity in the Dakotas and
Minnesota. A steel fabricator in Minnesota noted that business is very strong. In northern
Wisconsin, a lumber mill recently completed a $1.5 million equipment upgrade, and business
is "moving pretty well." However, the plant manager is concerned about the lack of
long-term orders. A plastic parts manufacturer in the Upper Peninsula reported "very brisk"
business and tremendous gains in productivity through recent investments in new equipment
and automation. However, input costs have been rising fast. Some equipment contacts
reported shortages of large tires and certain steel inputs.
Construction and Real Estate
Construction in the Ninth District increased slightly. A 150-unit development was announced
in Minneapolis, continuing the condominium construction boom there. Housing units
authorized in district states were up 0.3 percent for the three-month period ended February.
However, for the same period, contract awards for large construction projects in Minnesota
and the Dakotas were down 9 percent compared with a year earlier. In North Dakota, a
company announced plans to build a $65 million ethanol plant, with construction to begin
this fall. Construction is also set to begin on a $30 million power plant in Butte, Mont.
Real estate activity was brisk. A Fargo, N.D., area Realtor called the market there "hot as a
pistol" and said activity was up over last year's strong sales. A study of the Marquette, Mich.,
area real estate market showed increasing sales and prices and a decrease in selling times,
owing to improving regional employment. The office vacancy rate in downtown St. Paul
showed signs of improvement, dropping to 24.2 percent from recent highs over 25 percent,
with especially strong gains for Class A space.
Energy and Mining
Activity in the energy and mining sectors increased. A large-scale wind energy project is
planned for central Montana. Oil and gas exploration and production were about level from
late February through late March. Iron ore production continues at capacity. A Montana
palladium/platinum mine expects stable production in 2005, and a recently reopened copper
mine is ramping up production. The operating mines are performing "exceptionally well" due
to strong metal prices, commented a Montana mining official.
Agriculture
Economic activity in the agricultural sector was down slightly. District farmers expect to
slightly decrease the acres planted with soybeans and corn from last year and slightly
increase wheat plantings. The drought worsened in the western part of the district, as
Montana suffered the sixth driest winter on record. Although dry conditions exist, the U.S.
Department of Agriculture reports that 66 percent and 42 percent of the winter wheat crop in
South Dakota and Montana, respectively, were rated in good to excellent condition, while
only 6 percent and 13 percent are in poor or very poor condition.
Employment, Wages, and Prices
Employment increased slightly. Nonfarm employment in district states was up 1.3 percent in
February compared with a year ago; employment in Montana increased almost 2 percent.
New retail, hotel, and business prospects in the Bismarck, N.D., area will require about 1,500
or more new employees over the next year and a half. In Montana, a cable television and
high-speed Internet company recently opened an operations center with 200 employees,
which could increase to 300 employees within a few years. In Minnesota, a printing company
recently announced expansion plans, and a fastener distributor is planning to establish a new
call center. Each project will add about 30 jobs. According to a recent St. Cloud (Minn.) Area
Quarterly Business Report survey, 47 percent of respondents expect to increase employment
during the next six months, and 10 percent expect to decrease staff. A survey of
Minneapolis-St. Paul businesses by a temporary staffing agency found 37 percent of
respondents expect to increase employment during the second quarter of 2005, while 7
percent plan to decrease staff. In last year's survey, 32 percent expected to increase
employment, while 1 percent planned to make cuts.
However, some layoffs were announced. A major Minnesota-based airline recently
announced plans to reduce its fleet and eventually cut up to 900 mechanic jobs. A Minnesota
hair care products manufacturer plans to close, affecting 400 to 500 jobs. A plant that
produced graphics for automobiles will close in Minnesota by the end of the year, affecting
200 jobs.
Increases in wages were generally modest. State employees in South Dakota will receive a
2.25 percent raise next year, according to recent legislative action. However, a Montana bank
director noted significant wage increases for skilled workers in the high tech sector.
Some significant price increases were noted. Minnesota gasoline prices in the beginning of
April were up 41 cents compared with last year. A Minnesota servicing company recently
reported fuel surcharge increases on deliveries. Home heating oil prices were up by almost
50 percent from a year ago. Tuition for next fall will increase 8 percent in the Montana
university system and 5 percent at South Dakota public universities. Steel mill product prices
have recently leveled, but were still almost 40 percent above year-ago levels. While the
American Farm Bureau reported that overall increases in food prices during the first quarter
from fourth quarter 2004 were modest, flour, bacon, apple, and egg prices posted notable
increases.
Return to top
Tenth District--Kansas City
The Tenth District economy expanded solidly in March and early April. Retail sales and
tourism increased, factory activity rose briskly, and the energy sector continued to strengthen.
In addition, labor markets firmed slightly, and residential real estate activity increased. Wage
increases remained moderate at most firms, but price pressures persisted at the wholesale
level and showed scattered signs of emerging at the retail level.
Consumer Spending
Consumer spending in the district rose solidly in March and early April. Most retailers and
mall managers reported sizable increases in sales from a year ago. Product categories
characterized as especially strong included apparel, appliances, and jewelry. On the other
hand, sales of garden and patio items and shoes were said to be weaker than normal. Some
stores increased inventories due to the solid increase in sales, but most stores held inventories
steady and plan few changes in the months ahead. Virtually all store managers anticipated
strong sales through early summer, although some were worried that higher gasoline prices
could cut into sales. Motor vehicle sales improved somewhat from the previous survey but
generally remained slightly weaker than a year ago. A number of dealers continued to note
some weakening in truck and SUV sales, which they attributed to higher gasoline prices.
Nevertheless, most dealers were optimistic that overall vehicle sales will continue to post
modest improvements. Travel and tourism activity continued to increase in March and early
April. Airport traffic was up from year-ago levels across the district, and Rocky Mountain
resorts reported strong increases in activity from last year.
Manufacturing
District manufacturing activity expanded strongly in March and early April. Overall, plant
managers reported sizable increases in production, shipments, and orders compared with the
previous survey, and many firms continued to add employees. In addition, manufacturers
generally reported solid growth in capital investment. On the negative side, a few large firms
in the region announced sizable layoffs since the previous survey. Heading forward, plant
managers remain optimistic about future activity, though slightly less so than in the recent
past. Most plant managers noted few difficulties obtaining materials, though some reported
delays in shipments of steel and aluminum.
Real Estate and Construction
Residential real estate activity increased in March and early April, while commercial real
estate activity remained flat. Most builders reported solid growth in single-family housing
starts since the previous survey. The increase was in contrast to the softening in
homebuilding reported in recent surveys. Builders generally expect steady construction
activity in the months ahead. Real estate agents reported slight improvements in home sales
from both the previous survey and a year ago. Activity in some cities was reported to have
been boosted by sales to out-of-state investors. Most real estate agents anticipate slight
increases in home sales in coming months. Mortgage lenders reported another small rise in
mortgage demand, despite further decreases in refinancing activity. Virtually all mortgage
lenders remain optimistic about future demand for home purchase loans. Commercial real
estate activity in the district was generally unchanged from the previous survey and still
relatively weak overall. As in the previous survey, however, many commercial real estate
agents anticipate some improvement in vacancy and absorption rates in the months ahead.
Banking
Bankers reported that loans increased more than deposits since the last meeting, boosting
loan-deposit ratios somewhat. Demand increased for commercial and industrial loans and
commercial real estate loans and was unchanged for other categories. On the deposit side, all
types of accounts edged up. Almost all respondents increased their prime lending rates and
consumer lending rates since the last survey. A few banks eased their lending standards,
citing competition from other banks.
Energy
District energy activity continued to rise in March and early April. The count of active oil
and gas drilling rigs in the region increased moderately from the previous survey and was
well above year-ago levels. A number of energy firms said drilling activity was slightly less
than desired, due to persistent shortages of labor and equipment. One company reported that
waiting time for drilling rigs had increased to a minimum of nine months. Most contacts
expect continued modest expansion of drilling in the months ahead, reflecting increased
confidence that oil and gas prices will remain high.
Agriculture
Agricultural conditions in the district were generally favorable in March and early April.
Most crop producers were upbeat about the status of the winter wheat crop and reported good
to excellent field conditions for spring-planted crops. In the northern and western areas of the
district, however, drought remained a pressing issue for ranchers, who reported that pasture
conditions were somewhat unfavorable heading into spring. Many farmers also noted some
concern about rising fuel costs. Farmland values in the district continued to appreciate
rapidly.
Labor Markets, Wages, and Prices
Wage pressures remained moderate despite firmer labor markets, but many manufacturers
continued to raise output prices and more stores than in recent surveys raised retail prices.
The number of firms reporting worker shortages continued to increase. Workers reported to
be in especially short supply included truck drivers, computer technicians, and both
entry-level and experienced workers in the retail, manufacturing, and energy sectors. Despite
the tightening in labor markets, the number of firms reporting wage increases remained
similar to recent surveys. Also, due to sizable job cuts at a few large companies, layoff
announcements in the district exceeded hiring announcements for the first time in over a
year. Most retailers continued to report flat selling prices. However, a larger number of stores
and restaurants than in recent surveys said they had raised prices due to increased costs.
Retailers generally expect little change in prices in the months ahead, though several home
improvement and furniture stores anticipate raising prices further. Some builders noted
increased prices for materials, and nearly all manufacturers said input prices were rising. As
in previous surveys, a sizable share of manufacturers raised output prices and plan to
continue doing so in the months ahead. A few firms, however, have been less successful in
passing on cost increases than they anticipated and have had to withdraw previous price
increases.
Return to top
Eleventh District--Dallas
Eleventh District economic activity expanded moderately in March and early April. The
manufacturing sector continued to rebound, while activity in financial and business services
continued to expand at the same pace reported in the last Beige Book. Retailers said they
were disappointed with recent sales growth. Residential construction continued to cool from
last year's strong pace, amid signs that commercial real estate markets were slowly
improving. The energy industry strengthened further, and contacts said exploration activity
was expanding on the belief that energy prices would remain high. Agricultural conditions
remained generally positive. While activity was strong in some industries, in many sectors
contacts reported slightly less optimism about the strength of activity for the rest of the year,
largely because demand has not been picking up as quickly as they had hoped.
Prices
Energy prices were up despite rising U.S. inventories of crude oil and refined product. Crude
oil prices rose from $47 per barrel to a high of $57 per barrel since the last Beige Book, while
domestic crude inventories built rapidly toward five-year high levels. Prices for both
distillates and gasoline rose with the price of crude oil. Sales of gasoline continued to be very
strong despite prices that increased from $1.95 to $2.19 per gallon at the pump between early
February and late March. Gasoline inventories are far above five-year highs, which contacts
say is unusually large. Distillate inventories, including heating oil, were below normal for
most of the period, but built back toward the five-year average in early April. Natural gas
prices were up from near $6 per million Btu in early February to near $7.25 in early April.
Natural gas inventories are now 22 percent higher than the five-year average with the heating
season rapidly coming to an end.
Most manufacturing and service sector contacts expressed concern about rising cost pressure
for utilities, transportation and petroleum-based products, such as Styrofoam and plastic
bags. A weaker dollar contributed to increases in the cost of some imported raw materials.
The ability of firms to push through these cost increases remains mixed. Some companies
have reduced energy consumption to mitigate cost increases, and others have increased
selling prices and/or reduced profits. Uncertainty about energy prices has added caution to
the outlook for activity.
Labor Market
The labor market continued to slowly improve, and there continued to be reports of shortages
for a few types of workers. Still, most industries said there was little or no wage pressure.
The costs of benefits--particularly for health care--remain a concern for most firms, but
contacts reported that the rate of increase had slowed.
There were still reports that the accounting and energy industries were having difficulty
finding qualified workers, and competition between banks for quality workers is bidding up
salaries and benefits. A few firms say they are considering capacity expansion that would
require adding workers, but are waiting for demand to strengthen before making these
investments.
Manufacturing
Manufacturing activity continued to pick up--with strong demand for food products, some
construction-related products and activity to support the energy industry. Sales of fabricated
metals increased over the past month, partly because of an increase in the availability of
steel. Producers of cement, clay, brick, tile and glass continued to report robust demand for
their products.
Demand for paper products softened slightly in recent weeks. Contacts reported reduced
demand for corrugated boxes for durable goods. Demand for primary metals and lumber was
unchanged. Lumber contacts reported that inventories are high. Apparel manufacturers said
demand was unchanged over the past few weeks, which is lower than a year ago. Stiff global
competition continues to force producers out of the apparel business. One contact expects
demand to drop by about 15 percent during the summer and plans to lay off some workers at
that time.
There was little change in the growth of orders for most high-tech products. A rise in orders
for communications equipment, industrial switches and medical instruments stimulated a
slight pickup in demand for semiconductors. Sales of consumer electronics and personal
computers were reported as unchanged.
Demand for basic petrochemicals continued to be very strong. Petrochemical prices are up,
and producers say that margins are very strong. New capacity is not expected to provide price
relief until mid-2006 at the earliest. Refiners reported that strong product demand and limited
capacity allowed increased profits on both light, sweet and heavy, sour crude, despite sizable
increases in crude oil prices.
Services
Demand for accounting services was strong, driven mostly by firms complying with tax and
regulatory laws; but there was some pickup in transactions services. Law firms reported no
change in the demand for their services. Temporary staffing firms said demand was mixed
over the past six weeks. Activity was still sluggish in the major metropolitan areas but picked
up outside the metropolitan areas.
Demand for trucking has leveled off but remained above last year's levels. Railroads and
airlines reported strong demand. Airfares were up in some markets, but contacts said fare
increases were too low to cover growing fuel and other costs, such as escalating landing fees.
Respondents say continued financing for bankrupt carriers is hindering a return to
profitability.
Retail Sales
Most retailers reported disappointing sales growth, which they attributed to a combination of
wet weather, an early Easter and higher gasoline prices. Sales of home goods were
particularly slow. Still, retailers said selling prices were higher than a year ago. Contacts say
this was largely the result of higher input costs but some also reported higher profit margins.
Auto sales were weaker than a year ago, and dealers said inventories are slightly too high.
Sales have been softest for domestic brands, SUVs and trucks. Most manufacturers say they
have taken incentives off of the market because they can not afford to continue them.
Construction and Real Estate
Demand for new homes remained at or just below last year's record levels, while sales of
existing homes were still robust. Builders say competition is limiting pricing power, except in
Austin where demand is strong. Rising building costs continued to squeeze builders' margins.
Overbuilding in apartment markets remains a concern, according to contacts, particularly in
Dallas and San Antonio, but development in Austin is in line with demand. Leasing activity
in office markets continued to gain steam, mostly due to expansion by smaller tenants. In
Dallas, pockets of strength are spurring plans for new office construction.
Financial Services
Overall lending activity was unchanged. There continues to be a lot of money available for
investing in commercial real estate, according to lenders. Competition for good investments
remained stiff, leading lenders to be creative with contract terms to attract borrowers.
Otherwise, contacts say that there have not been significant changes in lending standards and
delinquencies remained unchanged.
Energy
Energy activity continued to strengthen. Drilling plans have moved up faster than predicted
earlier in the year. The U.S. rig count is at the highest point since 1986. Pricing power
continues to strengthen for oil services, and many firms have begun to consider expanding
capacity. Many say that they won't expand, however, until they are actively turning down
work.
Contacts say there are more signs that the industry believes higher oil prices will last because
price movements are being driven by the market bumping up against capacity constraints
rather than by an OPEC production cut. As a result, producers are considering oil and natural
gas from coal-bed methane, tight gas, tar sands and gas shales. Service companies are
interested in creating new products that support this unconventional resource development.
Agriculture
Producers reported good demand for livestock and favorable prices. Range and pasture
conditions improved. Prices remained weak for most District agricultural commodities, but
there were reports of some improvement in the price of wheat, corn and soybeans. Land
preparation and planting was active in most parts of the District.
Return to top
Twelfth District--San Francisco
Summary
The Twelfth District economy expanded at a solid pace in March and early April. Although
contacts noted a slight increase in inflation for final goods and services, due in part to higher
energy prices, the pace of inflation reportedly remained modest. Compensation pressures
were up slightly, with rising health-care costs and some pickup in demand for skilled
workers. District retailers and service providers noted solid demand in recent weeks, and
manufacturing activity continued to expand throughout the District. Demand for District
agricultural and resource-related products reportedly was strong. Activity in residential real
estate markets remained vibrant, and commercial real estate markets improved further.
District banks reported strong loan demand and high overall credit quality.
Prices, Wages, and Labor Markets
Contacts reported that price inflation remained modest, although it was up slightly compared
to the previous survey period. The overall pickup in inflation was attributed, in part, to high
and rising oil prices, which pushed up costs for a wide range of products including
transportation services and energy-intensive goods, such as fertilizers, plastics, and many
construction materials. Many producers have passed these cost increases on to final goods
prices. For example, a contact in the roofing business stated that rapidly rising prices for
oil-based roofing materials have led him to raise his prices for roofing services. Those
District businesses that have not increased final prices cited vigorous competition among
sellers and continued gains in production efficiency as the restraining factors.
Respondents reported some tightening in District labor markets in recent weeks, especially
for high-skilled workers, though most indicated they were able to fill job openings. The
increased demand for skilled workers, along with continued increases in health benefit costs
for all workers, led to a slight pickup in labor compensation.
Retail Trade and Services
District retailers indicated generally solid sales in recent weeks. Auto sales continued to be
strong overall, although demand reportedly softened somewhat for domestic makes. Contacts
reported a notable shift in demand toward more fuel-efficient brands. Demand for SUVs and
trucks softened in recent weeks, negatively affecting many domestic manufacturers.
District service providers continued to report strong growth in March and early April.
Demand was especially robust for health-care, transportation, and food services. Activity in
the District's travel and tourism sector remained vigorous, pushing up hotel occupancy and
average daily room rates in most areas. For instance, continued strong year-over-year growth
in the number of domestic and international visitors to Hawaii fueled robust conditions in the
tourism sector there.
Manufacturing
Demand for manufactured goods picked up further throughout the District during the survey
period. Makers of machine tools reported strong growth in new orders and solid workloads.
For high-tech producers, semiconductor orders and sales reportedly were solid and capacity
utilization was stable at relatively high levels. Robust construction activity fueled rising
demand for wallboard, insulation, and other building materials. As in the previous survey
period, the main exception to solid conditions in the manufacturing sector was in
telecommunications, as communications equipment makers continued to struggle with weak
orders and substantial excess capacity. Contacts throughout the manufacturing sector stated
that increasing costs of materials and energy inputs have prompted them to keep production
as close as possible to demand.
Agriculture and Resource-related Industries
District agricultural contacts reported strong growth in orders and sales of agricultural goods.
Contacts noted rising input costs, particularly for fuel. In general, businesses passed these
increases on to final goods prices. In the energy sector, producers of oil and natural gas
reported strong demand and rising drilling costs.
Real Estate and Construction
District residential real estate markets remained robust in March and early April, and
conditions improved slightly in commercial real estate markets. The pace of home sales,
price appreciation, and home construction remained rapid in most areas in the District.
Demand for District commercial real estate strengthened moderately in recent weeks, with
office vacancy rates improving in many markets. Builders indicated that strong consumer
demand for both residential and commercial real estate allowed them to pass on the cost
increases of building materials such as concrete, wallboard, lumber, and steel products.
Continued solid demand for new homes plus increased demand for commercial real estate
kept overall construction activity at high levels; contacts noted construction backlogs in
several areas.
Financial Institutions
District banking contacts indicated a general continuation of trends from the previous survey
period. Commercial and industrial lending continued to improve. Demand for construction,
commercial real estate, and residential loans remained at high levels overall, although home
mortgage demand continued to slow somewhat. District banks and financial institutions
reported that loan quality remained high.
Return to top
Home | Monetary Policy | 2005 calendar
Accessibility | Contact Us
Last update: April 20, 2005
Cite this document
Federal Reserve (2005, May 2). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20050503
@misc{wtfs_beige_book_20050503,
author = {Federal Reserve},
title = {Beige Book},
year = {2005},
month = {May},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20050503},
note = {Retrieved via When the Fed Speaks corpus}
}