Beige Book

June 15, 2005

Summary

Prepared at the Federal Reserve Bank of Atlanta and based on information collected before June 6, 2005.

This document summarizes comments received from businesses and other contacts outside the Federal

Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from all twelve Federal Reserve Districts indicate that business activity continued to

expand from mid-April through May. Most Districts--including New York, Richmond,

Atlanta, Chicago, Minnesota, Kansas City, and San Francisco--characterized the pace of

expansion as moderate, solid, or well-sustained. However, Philadelphia noted that the pace of

growth had eased in May while Boston and Cleveland observed some unevenness across

sectors.

Retail activity was mixed. Several Districts reported disappointing May retail sales results

and cited unseasonable weather as the principal reason. A few reports mentioned that high

gasoline prices were having a negative impact on sales. Almost all reports on other service

industries were quite positive. Residential real estate markets remained strong in most

Districts, and several Districts reported improving commercial real estate conditions. Most

Districts reported that manufacturing activity continued to expand overall, although some

reports described varying conditions across industries.

Labor markets improved in most Districts. Overall price pressures were moderate, but several

reports noted concern over high fuel, transportation, and building materials costs.

Consumer Spending

Reports on retail sales in April and May were mixed. Richmond reported that May sales and

store traffic picked up markedly, and Kansas City noted that consumer spending expanded

solidly in April and May. St. Louis, Minneapolis, Dallas, and San Francisco also reported

gains in consumer spending. Sales were characterized as mixed by merchants in Atlanta and

Cleveland and as having edged down in the Philadelphia District. Chicago retailers described

sales as subdued, and those in New York reported sales as soft. Boston, New York,

Cleveland, Philadelphia, Atlanta, Chicago, and Minneapolis noted that unseasonable weather

had dampened sales in May. In addition, Cleveland, Philadelphia, Kansas City, and Dallas

said that high gasoline prices had a negative impact on retail sales.

Automobile sales were reported as mixed by Atlanta, Kansas City, Chicago, and Dallas,

sluggish in Cleveland, and down in the Philadelphia, Minneapolis, and St. Louis Districts.

Meanwhile vehicle inventories were above desired levels according to Chicago, Philadelphia,

and Dallas. Dealers in the Philadelphia area boosted leasing promotions to lower some excess

inventories. Atlanta and San Francisco noted that high gasoline prices were having a negative

impact on sales of SUVs and light trucks.

Services and Tourism

According to most reports, industries in the service sector continued to display solid growth

in April and May. Dallas reported that the transportation industry continued to experience

strong demand conditions, but also noted concerns about high fuel costs. San Francisco

reported that demand for media and high-tech services strengthened and that activity among

transportation, food, and healthcare service providers remained vigorous.

Reports from the tourism and hospitality industry remained positive. Tourism remained

exceptionally strong in New York City. Manhattan's hotel occupancy rate was more than 2

percentage points higher in April than a year ago and average room rates were up 17 percent.

Richmond said that hotel bookings at coastal hotels for the Memorial Day weekend were

somewhat stronger than a year earlier and that rapidly rising demand for hotel rooms in the

nation's capital drove room rates sharply higher in recent months. Atlanta also noted that

hotel and resort occupancies were at high levels. St. Louis reported strong sales and

employment gains in the hospitality services industry, and San Francisco reported that the

travel and tourism sector continued to surge. Spring tourism was flat because of cool weather

according to Minneapolis, but tourism officials remained optimistic about the summer

season.

Construction and Real Estate

Reports on residential real estate markets remained quite positive overall, although some

slowing in activity was noted in a few markets. Philadelphia and Atlanta reported that home

sales were brisk and strong, respectively. St. Louis reported that home sales continued to rise,

while Kansas City and Chicago stated that activity remained solid. San Francisco reported

that home sales continued to be rapid, although growth slowed somewhat relative to previous

periods. Richmond and New York said that housing markets remained strong, but both noted

some easing in demand in high-end markets. Minneapolis described real estate markets as

mixed. New home sales weakened slightly, according to Cleveland, and Dallas noted that in

some parts of the District the supply of new homes had outstripped demand. St. Louis and

Minneapolis cited permit data that indicated some moderation in construction is likely.

Several Districts reported improvements in commercial real estate markets. New York and

Dallas saw signs of strengthening activity, with office vacancy rates retreating in several

local markets. Leasing activity has been fairly strong, according to Philadelphia, and

Richmond noted that rents firmed and new construction has increased. Atlanta saw solid

improvements as firms moved forward with expansion plans; development also increased at a

steady pace in Cleveland and Chicago and continued to improve in San Francisco. Modest

improvements were noted by Kansas City and Minneapolis. However, St. Louis reported that

commercial markets were mixed, and Boston noted that local markets continued to struggle.

Manufacturing

Most Districts reported that manufacturing activity continued to expand, although several

Districts noted that production had slowed or leveled off. Atlanta and San Francisco reported

that defense contracts had generated new orders for local manufacturers, while Boston and

San Francisco cited strong demand for aircraft-related and computing equipment. Durable

goods production was improving, according to Minneapolis and Cleveland, although

Cleveland noted that steel production was softer. Boston and Dallas described manufacturing

activity as mixed overall, and the pace of expansion, although positive, had reportedly

slowed in some industries, according to San Francisco, Chicago, and Philadelphia. St. Louis,

Boston, Minneapolis, and Chicago cited varying degrees of weakness in vehicle production,

although Cleveland reported year-over-year gains in auto production in the two-month period

ending in May. Several reports noted that manufacturing firms are planning to increase

capital spending, open or expand plants, and increase operations to meet expected demand.

The majority of Districts reported manufacturer concerns regarding higher input prices,

especially in energy-related goods.

Banking and Finance

For most Districts reporting on financial services, the demand for loans either increased or

remained solid. Most Districts cited increases in commercial lending activity, although

Richmond noted a slower pace in some areas. Philadelphia linked new commercial

borrowing to rising capital expenditures by firms in a wide range of industries. Atlanta and

Chicago reported stronger consumer loan demand, but St. Louis and New York reported

some slowdown, and Cleveland described activity as mixed. Residential real estate lending

was described as rising or remaining solid in most Districts. Dallas reported some concern

about a potential glut in multi-family residential properties. Other banking indicators were

holding steady or improving, and credit quality was described as good.

Labor Markets and Prices

Labor market conditions continued to improve in most Districts, and several reports cited

difficulty finding specific types of workers. For instance, Dallas reported a shortage of

skilled workers in the energy industry, while Atlanta and San Francisco noted similar

shortages in construction. Cleveland reported that manufacturing firms had difficulty

obtaining qualified applicants for job openings. San Francisco described tighter supply

conditions in nursing and financial service professions. The demand for temporary workers

strengthened in the Richmond, New York, and Atlanta Districts, while Chicago noted a small

decline from a year earlier. San Francisco and Dallas reported rising wages, mainly in

professional services, while Minneapolis noted only modest increases in wages.

Reports from most Districts indicated that price increases at the retail level remained modest

overall. San Francisco noted that price inflation for final goods and services edged up, largely

because of the pass-through of earlier increases in energy costs. Several Districts noted

increases in transportation and healthcare costs. Prices were up for construction-related

materials, such as lumber, cement, brick, tile, and glass in many Districts. Some Districts

noted that manufacturers were unable to pass along rising costs of raw materials because of

the presence of long-term contracts and competitive pressures from foreign producers.

However, Cleveland reported that firms have had some success in passing input cost

increases along to their customers.

Agriculture and Natural Resources

Despite less-than-ideal weather, crop conditions were described as between fair and good for

most reporting Districts. Cold weather slowed plantings and crop development, according to

Richmond and Kansas City. Also, heavy rains in California's central Valley region damaged

some fruit crops. Dallas and San Francisco noted concerns over higher costs of fuel and

fertilizers.

Activity in the energy industry has remained strong especially for oil field services. Dallas

reported strong drilling activity, long backlogs, and a dearth of skilled workers. San

Francisco and Minneapolis reported that producers were operating at or near full capacity.

Kansas City noted that drilling firms expected moderate expansion of drilling activity in the

months ahead.

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First District--Boston

Business contacts report continued growth in the New England economy, although some

sectors are lagging the overall pace. Retailers cite healthy increases in sales, while

manufacturers and software and information technology (IT) services firms indicate that

results range from "okay" to robust. Staffing firms also report increasing demand, but some

say the pace is slower than last quarter. While comments about rising prices are less at the

forefront than in the last report, high input costs remain a concern. Commercial real estate

markets in the region remain sluggish.

Retail

All First District retail contacts report strong increases in April same-store sales from a year

earlier, ranging from 4 to 9 percent. However, most indicate dismal New England weather

damped May's results. Sales of lumber and hardware remain particularly strong as the

housing boom continues. Flat-screen televisions, digital cameras, wireless networking and

other higher-end goods are said to be selling well. By contrast, top-of-the-line clothes are not.

Inventory levels are up slightly according to most contacts, but are in line with sales.

Multiple respondents report rising vendor prices for petroleum and steel-related products;

lumber and television prices are falling and appliance prices are increasing. Most vendor

price changes are being passed on to consumers, although selling prices for clothing have

continued to fall due to competitive pressures. Gross margins are slightly up for most

contacts. Wage growth and employment are mostly stable, although some retail contacts

report increased headcount due to acquisitions, new stores, or increased sales. Most contacts

are increasing capital spending in order to upgrade distribution methods or outdated

information technology equipment, and they have the cash on hand to do so. Those who

aren't currently upgrading their equipment did so recently.

Retail respondents are now more optimistic about their business than they were last quarter,

and they all expect sales in coming months to be as strong as their April numbers, if the

weather is decent. The one serious source of concern for several contacts is rising health

insurance costs.

Manufacturing and Related Services

First District contacts in manufacturing and related services report mixed sales and orders

through the second quarter of 2005. Demand for aircraft-related and computing equipment is

said to be strong and rising. Sales of some other capital goods and semiconductor sales are

reportedly improving as well. However, many manufacturers describe business as merely

"okay," if not "disappointing." A couple of firms cite transitory factors such as poor spring

weather or the early Easter. Others note weakening demand for cargo containers or

transportation services, or softening demand from the Big Three automakers. A common

refrain from contacts is that their firm "has the volume, but not the margins"--which they

tend to attribute to either low-cost competition from Asia or high input prices.

On the whole, manufacturers remain quite concerned about the high costs of raw materials,

energy, and transport. Various respondents indicate that although they no longer face

escalating costs for metals or petroleum products, they need to increase their selling prices

further to restore margins to acceptable levels. Manufacturing contacts express doubts that

large retail chains and other business customers would accept price increases, or that their

competitors would follow suit. Only those firms producing unique or technologically

advanced products seem largely unconcerned about margin pressures.

Companies continue to explore outsourcing and other methods to reduce production-worker

and back-office employment. Pay for these types of jobs is said to be rising at a rate of 2.5

percent to 3 percent. Markets for professional, technical, and managerial employees are said

to have tightened, resulting in salary increases of 3.5 percent to 4 percent and some delays in

filling positions.

Manufacturers tend to be holding their capital spending constant or increasing it slightly.

They are investing in new capacity overseas while concentrating mostly on improving

efficiency and automation or developing new products at domestic facilities.

Respondents are mostly guardedly optimistic about their business through the end of 2005,

although several note the adverse effects of high input costs on their profitability. Compared

to past conversations, manufacturers express greater concern or uncertainty about

longer-term strategies.

Temporary Employment Firms

Demand for temporaries continues to grow, but some companies report that the rate of

growth seems to be slowing. This pause seems most pronounced for manufacturing and light

industrial positions. By contrast, demand is said to be strong for technical and IT-related

workers, as well as for engineering, financial, healthcare, administrative, and governmentrelated employment. Permanent hiring continues to grow at a strong pace, and the available

supply of labor continues to decrease, albeit gradually.

Prices are steady or rising slightly. Unemployment insurance costs are increasingly

worrisome, and health insurance continues to be a concern. Worker's compensation insurance

costs are flat or slightly down in the past few months. While more hesitant to give concrete

predictions of future performance than they were three months ago, staffing respondents are

fairly confident about the recovery, and believe 2005 will be a better year than 2004.

Commercial Real Estate

Commercial real estate markets in New England continue to struggle. Despite some increase

in employment, most office markets in the region have not experienced any substantial

improvement during the past quarter. Large firms have not hired enough people to make a

difference in overall demand for space. In addition, consolidations and acquisitions by

out-of-state companies have increased vacancy rates in some areas. In the Boston market,

office vacancy rates remain in the mid-teens in the city and exceed 20 percent in the suburbs.

Contacts do not expect office rental market conditions to improve noticeably until the

region's job growth picks up its pace.

At the same time, office buildings in Boston continue to sell at what contacts call

"exorbitant" prices. One respondent expressed concern that high building prices raise the

probability of new construction of office buildings, which would further raise vacancy rates.

Software and Information Technology Services

Contacts in the software and IT services industries report year-over-year quarterly revenue

increases ranging from near zero to 13 percent in their most recent quarters, with half the

contacts close to the high end of the range. A couple of respondents mentioned particularly

strong demand growth from customers in the financial services industry.

Over half of contacted firms are increasing their headcounts, generally modestly, via

selective hiring of technology workers and marketing/sales personnel. One software firm is

focusing its additional hiring in India; another is recruiting aggressively in Massachusetts.

Most respondents report that wage increases are moderate, notwithstanding some perceived

tightening in technology labor markets.

Software and IT services contacts indicate they are holding capital spending fairly level. One

respondent explained that they are increasing the number of computers and servers in

proportion to increases in personnel, but declining computer prices allow them to do so

without raising spending.

The outlook among software and IT services contacts is cautiously positive, with most

expecting a continuation of their current pace of growth. The economy is viewed as

somewhat uncertain; it is said to be currently steady--not robust, not deteriorating--but with

more downside than upside risks.

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Second District--New York

The Second District's economy has continued to expand at a well-sustained pace since the

last report, despite some weather-related softness in consumer spending. While there are

some signs of increased cost pressures, retail prices have remained stable. Manufacturers

generally report that business has picked up again in recent weeks, after a lull in April and

early May; they also indicate some acceleration in input prices. Retailers indicate that sales

were generally below plan in May, but hotels and other tourist-related businesses again report

brisk business and sturdy revenue growth.

Residential real estate markets showed continued strength in May, though there were

scattered signs of softening at the high end of the market. Office markets have gained

momentum in April and May, particularly in Midtown Manhattan and northern New Jersey,

while industrial markets have strengthened modestly. New York City's financial industry

reports some slowing in business activity in April and May. Finally, bankers report a pickup

in demand for home mortgage loans but some softening in consumer loan demand, as well as

some tightening in credit standards and lower delinquency rates in that segment.

Consumer Spending

Retailers report that sales were below plan in May, as cool weather hampered sales of

seasonal merchandise, such as summer clothing, swimwear, and lawn and garden supplies.

Sales of home goods were also weak. However, sales of cosmetics, jewelry and accessories

were characterized as strong. Overall, on a year-over-year basis, same-store sales were little

changed, with reports ranging from a 6 percent decline to a 3 percent increase. Inventories

were said to be in good shape, with excess warm-weather merchandise expected to sell well

in June. Retailers indicate that both selling prices and merchandise costs are stable to up

slightly.

Tourism remained exceptionally strong in April and May, especially in New York City.

Manhattan's hotel occupancy rate was more than 2 percentage points higher in April than a

year ago, and average room rates soared 17 percent. Indications are that a similar pattern

continued into May. Broadway theaters report increasingly robust attendance and revenues

since the last report; from mid-April through the end of May, attendance was up 10 percent

from a year ago, while total revenues rose 15 percent--the strongest year-over-year gain since

March 2004. Buffalo-area hotels also indicate that business was stronger in April than a year

earlier, buoyed by strong convention business.

Consumer confidence was mixed in May. Siena College's monthly survey of New York State

residents shows confidence edging up in May--confidence jumped in the New York City area

but slipped to a 2-year low upstate. Based on the Conference Board's survey of Middle

Atlantic region residents, consumer confidence slipped to a 6-month low in May, and the

expectations component fell to a 15-year low.

Construction and Real Estate

Housing markets showed continued strength in April and May, though residential

construction activity has tapered off a bit. New Jersey homebuilders report that demand

generally remains strong, though there are signs of softening at the high end of the market

where queues of buyers are said to have shortened. Prices of new homes are estimated to be

up about 8 percent over the past year, while construction activity has slowed somewhat from

2004 levels. A contact at a major builders' association expresses concern about the growing

preponderance of adjustable-rate mortgages and no-equity financing.

Manhattan's co-op and condo market continued to show strength in April and May. Prices

retreated following a first-quarter spike but remain well ahead of a year ago, while sales

volume held steady at a high level. Moreover, the inventory of available apartments declined

in May, except at the high end of the market where there has been a good deal of new

development. New York City's rental market is reported to have picked up a bit: the available

inventory has decreased, and rents are up roughly 5 percent over the past year.

Commercial real estate markets across the New York City metro area showed signs of

strengthening in April and May. In particular, office markets in Midtown Manhattan and

northern New Jersey have gained momentum, with vacancy rates falling noticeably and rents

escalating. Office vacancy rates also declined modestly in Lower Manhattan and Westchester,

though rents remain lower than a year ago, while markets in Long Island and southwestern

Connecticut were steady. Industrial markets strengthened in Long Island, New York City,

Westchester and southwestern Connecticut, and were steady in northern New Jersey.

Other Business Activity

A major NYC employment agency, specializing in office jobs, reports that hiring activity

quickened again, after a lull in April. This contact notes that firms are offering somewhat

higher starting salaries than earlier in the year. However, a financial industry contact

indicates that there has been a sharper slowdown in the industry than expected, following a

robust first quarter: trading volume and profits, as well as debt issuance, have declined

noticeably; also, the performance of hedge funds is reported to have been weak in April and

May. More generally, this contact indicates that securities industry hiring and overall

spending is likely to slow in the second half of this year.

Manufacturing activity, however, has shown signs of rebounding since the last report.

Factory contacts report that business activity has picked up noticeably in recent weeks, after

slowing in April and early May; they also continue to be quite optimistic about the outlook

for orders and shipments in the second half of 2005. Purchasing managers report mixed

results for May: those in the New York City area report some deceleration in manufacturing

activity, but Buffalo-area purchasers report ongoing improvement in business conditions.

Both groups of purchasers, as well as manufacturing contacts, note some increase in price

pressures.

Financial Developments

Small to medium-sized banks in the Second District reported some weakening in demand for

consumer loans, but a pickup in demand for residential mortgages--despite continued

declines in refinancing activity. Bankers indicate some tightening in standards on consumer

loans: 17 percent say they have tightened standards while just 6 percent indicate easing.

Bankers note increased interest rates on all types of loans except residential mortgages.

Bankers also report increased rates on deposits; nearly four in five bankers indicate an

increase in rates, while none reports a decrease. Finally, on balance, loan delinquency rates

were unchanged in all categories except consumer loans, where delinquencies declined.

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Third District--Philadelphia

Economic activity in the Third District expanded in May, but the pace of growth appeared to

ease. Manufacturers reported increases in orders and shipments during the month, although

the gains were not as widespread as in April. Retail sales of general merchandise edged down

during the month, and auto sales fell. Banks reported that lending continued on an upward

trend in May, although at a slower rate compared with April. Commercial real estate market

conditions showed little change, although leasing activity has been on the rise. Sales of new

and existing homes continued at a brisk pace.

Third District business contacts generally expect improvement in the region's economy in the

months ahead, but not a strengthening in growth. 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. However, auto dealers expect

slower sales for the rest of the year. Commercial real estate contacts forecast gradual

tightening in office markets. Residential builders and real estate agents expect sales to

continue at high rate, but some expect sales for the year as whole to be lower than last year.

Manufacturing

Manufacturing activity in the Third District continued to expand in May, although fewer

firms reported growth during the month than in April. Around one-third of the manufacturing

firms surveyed had increases in new orders and shipments in May compared with April, and

around one-fifth reported decreases. Order backlogs were unchanged from April to May, and

delivery times were steady. Growth in business was reported among firms in most of the

District's major manufacturing industries, with the most widespread gains being among

producers of metal and wood products.

The region's manufacturers generally expect further growth in business activity, although

their expectations are not as robust as they were earlier in the year. Around one-third of the

firms surveyed in May expect their shipments and orders to increase during the next six

months, and about one-fifth expect decreases. Capital spending plans remain positive, on

balance; about one-fourth of the surveyed manufacturers plan to increase capital expenditures

in the next six months, half plan steady spending, and about one-tenth plan to reduce capital

outlays.

Third District manufacturers reported rising prices in May, on balance, although the number

of firms noting increases during the month was lower than in earlier months this year. 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 May compared

with April. During the next six months almost one out of two of the manufacturers polled in

May expect increases in input prices, and about one out of ten expect decreases. About one

out of four plan to increase the prices of their own goods, and around one out of six expect to

reduce prices. This represents less widespread expectations of higher prices than in earlier

months of the year.

Retail

Retailers generally reported declines in sales in May compared with April. Most said cold

and rainy weather deterred sales of spring apparel and other seasonal merchandise. Retailers

gave mixed reports on their year-to-year comparisons. Although some posted flat sales or

slight gains, several had lower sales than in May of last year. Retailers expect sales growth to

resume in the months ahead, but most look for only modest gains. Merchants continue to be

concerned that consumers are limiting their buying of general merchandise as they cope with

high gasoline prices. Most of the retailers contacted in May indicated that wholesale prices of

the goods they are purchasing have been roughly steady, but several store executives noted

that fuel surcharges are now common for goods shipped to them.

Auto dealers in the region generally reported declines in sales in May compared with April

and with May of last year. Inventories have risen, and a large number of dealers have boosted

leasing promotions to move cars off their lots. Dealers do not expect the sales rate to

improve, and they believe sales for the year as a whole will be below last year.

Finance

The volume of loans outstanding at Third District banks rose in May compared with April,

according to banks surveyed for this report, although some noted slower growth during the

month. Commercial and industrial loans have been increasing, and bankers said the new

borrowing has been for capital expenditures by firms in a wide range of industries. Lending

for residential mortgages, home equity loans, and home equity credit lines was also on the

rise. Banks and other mortgage lenders reported strong demand for purchase mortgages, but

they indicated that refinancing activity was slower than they had expected. Credit card

lending has also been growing, but bankers generally indicated that other types of personal

loans have been about flat. Looking ahead, bankers in the District expect continued growth in

the regional economy, and they expect overall lending to rise in step with the expansion in

business.

Real Estate and Construction

Commercial real estate firms reported that vacancy rates in the region's office markets have

been steady in the past few months, and that rental rates have eased slightly. Leasing activity

has been fairly strong, but commercial real estate firms noted that tenants were signing for

shorter terms on new or renewed leases. However, some tenants have signed for more space

than they currently need, in anticipation of growing business. Commercial real estate agents

expect tightening in the region's office markets during the rest of the year. Industrial building

vacancy rates have risen slightly in recent months, as speculative buildings have come on the

market, but commercial real estate contacts believe demand for space will grow during the

rest of the year.

Residential real estate agents indicated that sales have picked up, and that the pace of sales in

May was brisk. Although many real estate agents anticipate sales for this year will not match

those of last year, they generally believe a high sales rate is likely this summer as long as

mortgage interest rates remain around current levels. Homebuilders reported continuing high

demand for new homes and large backlogs. House prices continue to appreciate for both new

and existing homes. Builders indicated that costs of materials and labor have been rising

slightly, and they reported continuing steep increases in land prices.

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Fourth District--Cleveland

Through the eight weeks in April and May, District business conditions continued to show

some unevenness across sectors, but were still supportive of growth on net. In the

manufacturer sector, activity at the District's durable goods facilities generally continued its

recent increases, and for the first time in recent reports, notably more nondurable goods

producers indicated improvements in production. Reports from retailers continued to be

varied, though discounters saw slightly better sales than earlier this year. Commercial

builders continued to report improvements in conditions, though residential builders saw

sales continue to decline slightly through April and May. At the District's banks, commercial

loan demand remained robust. And demand for shipping services rebounded in recent weeks,

after slowing slightly in March and April.

Input cost increases continued to moderate in April and May, though interestingly, some

firms appeared more able to pass input cost increases on to their end consumers. Hiring

throughout the District remained modest in most industries, though staffing-services

companies reported some increases in available openings.

Manufacturing

Production at the District's durable goods facilities continued to increase in April and May,

and was typically above year-ago levels. Moreover, most contacts expected conditions to

continue to improve throughout the year. Nevertheless, activity at the District's steel facilities

fell throughout the eight weeks ending May, and for many firms steel shipments are similar

to or less than at this time last year. As indicated in the previous report, contacts again

attributed the recent slowing to an accumulation of inventories, customers putting off

purchases in the hope of buying cheaper steel, and weakening demand in some sectors,

notably automobiles. Weakness in automobile production, however, was less evident

throughout the District, where there were gains in year-over-year production for the

two-month period ending in May.

In general, nondurable goods manufacturers also reported slight increases in activity in recent

weeks, with production levels slightly above those of this time last year. Many firms

anticipate steady improvements in production throughout the rest of 2005, though the current

pace of new orders growth does not indicate an improving production trajectory. Firms that

supply the auto industry are anticipating weaker production.

As in recent reports, hiring among manufacturers remained modest, with durable goods

producers increasing staff sizes more often than their counterparts in nondurable good

production. Still, the use of overtime appears to have increased in April and May for durable

and nondurable goods producers alike. Firms that attempted to hire noted more difficulty

attracting adequately trained candidates. Regarding increases in capital outlays, most contacts

indicated that their firms were likely to spend according to their previously budgeted plans.

Firms typically indicated that there was a limited need to expand or replace existing

equipment, as many had made significant capital outlays over the last few years; few cited

the partial-expensing tax provision that expired in 2004 as a significant factor in their

decisions.

In general, input cost increases continued to abate, but costs are still up substantially from a

year ago. Steel prices, in particular, appear to have fallen noticeably, with prices for some

steel products falling below last year's levels. Energy costs, however, continued to increase in

recent weeks. Firms continue to have some success passing previous rounds of input cost

increases along to their customers.

Retail

The economic environment for retailers continued to be mixed in April and May. The

District's discount retailers saw some improvement in sales in recent weeks, though still-high

gasoline prices and unseasonably cool weather were thought to have dampened sales

somewhat. Most contacts indicated that their sales were unchanged or slightly above

year-ago levels. While sales at specialty stores and grocers were above year-ago levels, sales

at the District's department stores continued to be below expectations, and were less than at

this time last year. Accordingly, department-store contacts cited increases in promotional and

markdown activity; this was true for apparel retailers as well.

After improving sales in March and April, District automobile dealerships reported sluggish

sales in May. Sales seemed to be much weaker in the District than was true nationally. And

for the first time in recent reports, sales trends for trucks and SUVs were poor. Inventories

were characterized as high at dealers selling domestic makes. In general, incentives also

remained generous at District dealerships.

Construction

Many homebuilders saw a slight weakening in sales in April and May. Relative to this time a

year ago, homebuilders typically reported that sales were flat or falling. Contacts that also

operate outside of the District indicated that market conditions were weaker in the Midwest

than elsewhere. And some builders reported that the market for lower price-point homes was

softer than that for other segments. Several contacts reported that their customer cancellation

rates had risen higher than their historical average. While increases in materials costs

moderated, costs remained above the levels of last year. Most builders do not expect business

conditions to change markedly throughout the remainder of 2005.

Nonresidential builders, by contrast, experienced somewhat stronger growth than

homebuilders. Most commercial contractors reported an increase in activity in the second

quarter, as well as on year-over-year basis. Several builders cited public projects and

manufacturing as areas where demand was especially strong. Backlogs are also up for most

builders. Regarding materials prices, steel price pressures have eased, though costs for

petroleum-based products have continued to increase in recent weeks. Nevertheless,

contractors report that it is easier to pass input cost increases on to their end consumers.

Though most firms expect conditions to continue to improve throughout the year, hiring and

additional capital investments remain limited.

Banking

At banking institutions in the District, commercial loan demand appeared to strengthen

slightly in April and May. One contact noted that the number of its prospective borrowers

had grown significantly since the start of the year, and another institution in the District

reported its largest ever pool of prospective commercial borrowers. Demand was described

as broad-based, with some seasonal increases in demand connected with commercial real

estate. By contrast, consumer borrowing was more mixed across District institutions. Some

strengthening in the demand for home-equity products and mortgages was mentioned. Banks'

core deposits were generally flat or falling, and credit quality continues to be characterized as

high.

Trucking and Shipping

The slight softening in this sector's business conditions that was reported for the late winter

months continued through the end of April. However, demand reportedly rebounded for

trucking and shipping services firms in May. Demand was generally broad-based, though

some contacts noted weaker-than-expected demand from firms in the automotive sector.

Contacts expect conditions in the industry to remain strong throughout the year--one contact

called this period the best in the industry in 20 years--but think that growth will be

constrained by an inability to attract and retain workers. Wage rates, nevertheless, remained

stable. Fuel costs continue to be high, but have been offset through surcharges. Contacts'

capital spending levels were largely driven by the need to comply with coming changes in

emissions regulations.

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Fifth District--Richmond

The Fifth District economy continued to expand at a moderate pace in the weeks since our

last report. District services businesses reported somewhat faster growth in revenues and

employment in both April and May. In retail, sales picked up markedly and store traffic

increased sharply in May. Manufacturing also gained some traction; shipments and new

orders rose at a more solid pace since our last report, though employment in the sector

continued to drift lower. District real estate agents said that residential markets remained

vibrant and that commercial leasing firmed in recent weeks. In the financial sector, lending

picked up; residential mortgage lending was particularly strong as home sales remained hot

in most areas. On the price front, business contacts said that the prices of most goods and

services continued to rise only modestly. In agriculture, cooler-than-normal spring

temperatures hampered planting activity in some areas, but crop conditions were generally

good throughout the District.

Retail

Retail sales growth picked up in April and May. District retailers told us their stores were

busier in recent weeks and they were expanding sales staff as a result. Sales at building

supply stores were particularly strong and contacts reported that rising sales had prompted

increased hiring. Although sales rose at a number of District big-ticket retailers, the gains

were concentrated in men's apparel, sporting goods, and building supplies, rather than in

automobiles and furniture. District retailers told us that prices continued to rise at an annual

rate of less than 2 percent.

Services

District services firms reported moderately higher revenues in recent weeks. Public utilities

in South Carolina and West Virginia said unseasonably cool weather had prolonged the

demand for heat through May. Several District healthcare services firms reported an increase

in business. Contacts at hospitals and home healthcare businesses in eastern North Carolina

and southwestern West Virginia said that stronger sales had led them to increase staffing.

Employment in the services sector continued to rise only moderately although wage gains

were larger than earlier in the year. Price increases at service-producing firms remained

modest.

Manufacturing

District manufacturing activity expanded at a slightly faster pace since our last report.

Manufacturers said shipments grew more quickly, while new orders increased modestly and

capacity utilization moved higher in April and May. Industrial machinery, paper, and

transportation equipment manufacturers registered the strongest gains in output. Despite

increased shipments, factory employment continued to decline, especially in the chemicals

and furniture industries. A Carolina furniture manufacturer said that his shipments, new

orders, and payroll fell in May and that retail furniture sales had declined nationwide. Raw

materials prices rose at a quicker pace in recent weeks and a number of District

manufacturers expressed concern about razor-thin profit margins. "Raw materials costs are

escalating faster than we can pass them along to customers," lamented a North Carolina

plastics manufacturer.

Finance

District bankers said demand for loans strengthened somewhat in April and May. Increased

residential mortgage lending was spurred by continued robust home sales in many areas of

the District; mortgage refinancings remained subdued. Real estate agents said that a growing

number of clients expressed interest in purchasing a house for investment purposes or as a

second home rather than as a primary residence. Mortgage interest rates drifted lower in

April and May, dropping well below 6 percent for conventional 30 year mortgages.

"Mortgage interest rates have fooled people, staying as low as they have. They've helped to

sustain the market," noted a Richmond, Va., lender. Commercial lending was generally

higher as well, bolstered by a pickup in merger and acquisition activity in some instances.

But the pace of commercial lending slowed in a few areas. A Charlottesville, Va., banker said

that his cold calls to solicit commercial loans had "gotten a lot colder" in recent weeks.

Real Estate

Residential real estate agents in the District generally reported stronger housing markets and

rising home prices in recent weeks. In Richmond, Va., an agent reported "extremely" strong

house sales, noting that listings at his agency were the highest they had ever been and that

multiple offers for homes remained common. In Virginia Beach, Va., an agent said

"everything is popping!" He said that sales across the board were great, noting that he had

sold over $12 million in properties in ten days. Likewise, contacts in Fredericksburg, Va., and

Washington, D.C., characterized markets as very strong. Both said, however, that sales of

upper-price-range homes had slowed a bit. An agent in Greensboro, N.C., also experienced

some slowing in sales of upper-end homes. Despite softer upper-end activity, sales prices

continued to rise at a brisk pace in many areas of the District.

Commercial real estate agents reported a strong increase in Fifth District leasing activity in

April and May. Contacts said that office and retail leasing accounted for the bulk of recent

activity. In the Washington, D.C., market, demand for investment properties and lease space

remained strong--one local agent summed up the environment by stating, "There are too

many developers chasing too few sites and too much money chasing too few deals." Contacts

in Raleigh, N.C., and Richmond, Va., said that commercial markets were "in a good

place"--leasing strengthened in both areas. Commercial leasing also moved higher in

Columbia, S.C., and contacts there noted with relief that military bases in the area had been

spared in the most recent round of base closings. "If we had lost those bases then we could

have just locked the doors and gone home," commented one agent. Commercial rents firmed

throughout the District and new construction rose in many urban areas in April and May.

Tourism

Tourism picked up a bit since our last report. Contacts at hotels along the District's coast

noted that bookings for the Memorial Day weekend were somewhat stronger than a year ago.

But not all contacts characterized tourism as strong. Several contacts along the coast said that

they had to discount rooms substantially to attract vacationers, many of whom, they noted,

were quite savvy at shopping for price discounts on the Internet. Tourism in Washington,

D.C., continued to rise and hotel occupancy rates there have returned to pre-September 11

levels; surging demand for hotel rooms in the nation's capital has driven room rates sharply

higher in recent months.

Temporary Employment

Contacts at employment agencies reported stronger demand for temporary workers in April

and May. A Washington, D.C., agent told us that the local economy continued to improve,

boosting demand for temporary workers and wages. The president of a staffing agency in

Raleigh, N.C., said that many local companies were searching for permanent employees, and

he expected wider use of his firm's "temp-to-hire" option, which allows companies to hire an

employee on a permanent basis after a 13-week trial period.

Agriculture

Cooler-than-normal temperatures slowed the planting and development of selected District

crops in recent weeks. Cantaloupe, tomato, and watermelon plantings were well behind

schedule in Maryland, while plantings of peanuts and cotton were slightly behind in Virginia.

Agricultural analysts characterized crop conditions as "fair to good" throughout the District,

despite dry conditions in some areas of Virginia and the Carolinas. Small grain harvesting

began in the Carolinas and, based on early estimates, yields were average.

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Sixth District--Atlanta

Most Sixth District business contacts reported that the pace of economic activity was solid in

April and May. Residential housing sales and construction remained strong, while conditions

in commercial real estate markets continued to improve. Reports from the tourism and

hospitality industry remained upbeat, with hotel/resort occupancies at high levels. However,

retail and auto sales were more mixed than a year earlier. Several manufacturing sector

contacts reported strong demand, but many also noted that high energy prices were affecting

profit margins. Banking contacts reported that loan demand remained strong throughout the

District and credit quality was good. Labor markets tightened in some areas for construction

workers, while temporary hiring remained robust. Contacts continued to note price increases

in building materials and energy, and several reports noted service-related price increases in

transportation and healthcare.

Consumer Spending

According to reports from District contacts, retail sales during April and May were mixed

compared with strong reports from a year ago. Florida merchants remained the most positive,

while retailers in other parts of the District reported that sales ranged from slightly down to

up modestly compared with a year ago. Several noted that sales results in May fell below

expectations, and many blamed cool or wet weather conditions for the lackluster results.

District auto sales were also mixed in April and May. Most contacts noted that demand for

foreign brands remained strong, while domestic models lagged. A domestic industry contact

blamed the disappointing performance of U.S. brands on sluggish sales of large trucks and

some SUV models, which may be linked to reports that fuel efficiency was becoming a more

important factor for most buyers.

Real Estate

District real estate markets were little changed in April and May. Residential construction

and home sales continued to be strong, especially in Florida where shortages of homes for

sale continued to be noted. The pace of condominium development remained very strong

along the coasts, most notably in South Florida. Solid improvements continued to be reported

in District commercial real estate markets as firms moved ahead with expansion plans and

absorption of existing space remained positive.

Manufacturing and Transportation

Reports from the factory sector were mostly positive, although high energy prices were

adversely affecting some firms. Several firms reported that they were running at capacity and

were adding to payrolls. Some also noted that they were going ahead with capital investment

plans, including expansion. New military contract awards continued to boost District factory

activity. Some contacts noted that many manufacturers are unable to pass along rising costs

of raw materials because of long-term contracts that are in place, but those that could pass

through price increases were doing so.

District transportation contacts generally continued to report good freight demand, although

one contact noted a deceleration in activity after a strong first quarter. Airborne shipments in

March and April were weaker than last year in Miami and Atlanta airports.

Tourism and Business Travel

Reports from the tourism and hospitality sector were upbeat in April and May. Tourismrelated businesses in South Florida reported very strong sales with hotel occupancies holding

strong. Contacts expected that the surge of foreign visitors will continue to boost the South

Florida economy well into the summer. Central Florida resort attendance was said to be very

strong and tax collections from those areas continued to rise. In Southwest Florida, hotel

occupancy levels remained high with European travel to the area up by double digits from a

year ago. Many major gaming industry properties along the Mississippi Gulf Coast continued

significant upgrades and additions.

Banking and Finance

Overall loan demand in the District remained strong. In parts of the District, anticipation of

higher interest rates appears to have accelerated some loan activity. There were no reports of

a slowdown in consumer finance. Real estate loan volume remained on track in most parts of

the District. Credit quality remained good with delinquency rates in check, and banks are

reportedly expecting higher profits in the second quarter of the year.

Employment and Prices

Contacts in parts of the District reported that construction employment remained tight, with

continued labor shortages in electricians, plumbers and flooring laborers. Hiring remained

strong for temporary workers. Many manufacturing firms reportedly now have temporary

workers that do a variety of jobs that were once done by permanent employees.

Contacts reported that prices of construction materials continued to rise with a new round of

increases for some building products expected in July. Reports from across all business lines

reported that profits were being squeezed by high energy costs, especially in the

manufacturing and transportation sectors. Healthcare and hotel prices were also reported to

have risen recently.

Agriculture

Dry weather improved fieldwork activity through the end of May with conditions of most

regional crops averaging between fair and good. The District cotton crop progressed well, but

the outlook weakened as world-market prices recently dropped. Poultry exports were strong

in volume and price as global demand for chicken continued to increase.

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Seventh District--Chicago

Seventh District business conditions in April and May were similar to conditions during the

previous reporting period; the economy continued to expand at a moderate pace, though

activity lagged in Michigan. Consumer spending was again generally subdued, while

business spending continued to increase. Residential construction remained solid, and

commercial real estate development increased at a steady pace in many parts of the District.

Manufacturing activity continued to expand, though the rate of increase slowed in many

industries. Lending activity to both businesses and households picked up from the previous

survey period. There were reports of price increases throughout the supply chain, but overall

cost and price pressures were moderate. Spring planting proceeded quickly, but farmers

expressed some concerns about slow crop development due to cool weather and, in many

parts of the District, inadequate rainfall.

Consumer Spending

Consumer spending was again generally subdued. Retailers reported that sales in the

Midwest during May were weaker than in other parts of the country and below expectations,

in part because of unseasonable weather. One contact said that sales of home and garden

merchandise were especially slow. As a result, inventories of these goods were heavy, but the

contact believed sales would pick up as the weather improved in June. Auto dealers'

characterizations of new vehicle sales in May ranged from "OK" and "decent" to "tough."

Vehicle inventories remained high. A large restaurant chain noted that sales in the Midwest

were still strong, but not as robust as at the end of last year. Tourism contacts in Chicago

reported positive conditions, while those in Michigan reported a sluggish pace of spending,

in part due to the colder weather in May. Hotels in Michigan said that summer reservations

were running below year-ago levels, but they remained optimistic and speculated that

travelers had grown more willing to make plans on short notice.

Business Spending

Business spending continued to increase. A majority of contacts planned to expand capital

spending during the next twelve months, and reports of decreases in investment were

sporadic. Trucking volumes moderated some, particularly for consumer goods; nonetheless,

one industry analyst forecasted a pickup later in the year. Labor market conditions continued

to improve, with several contacts indicating that job openings had increased. Demand

reportedly firmed for workers in professional services, health care, and, to a limited extent,

some manufacturing industries. In contrast, layoffs occurred at a large retailer, a food

manufacturer, and an auto supplier; and a large staffing services firm reported a small decline

in demand for temporary workers relative to a year earlier. Truck drivers were easier to find.

However, other skilled workers--notably in manufacturing--were in short supply, and one

staffing firm said that businesses were more willing to pay direct-hire fees to fill openings.

Construction and Real Estate

Reports on construction and real estate activity were mixed by location and market segment.

Residential construction continued to be solid overall, though it showed signs of moderating

in some parts of the District. The supply of unsold single-family homes fell slightly in

Milwaukee, but ticked up in the Detroit area. Commercial real estate development continued

to expand at a steady pace in many parts of the District. However, one contact in Michigan

noted a further slowdown in commercial development there and attributed the decline to the

weak performance of the auto industry. On balance, commercial vacancy rates and rents were

stable. Some further declines in vacancies were reported in suburban Chicago, but contacts

expressed some concern about excess space in parts of Iowa.

Manufacturing

Manufacturing activity continued to expand in the District during April and May, though the

rate of increase slowed in many industries. Heavy machinery producers reported slower

growth in shipments for equipment. Activity in the steel market was reportedly "sluggish and

slowing down," which one contact attributed to heavy inventories at service centers. A

toolmaker reported some slowdown in orders, but added that bookings remained healthy and

demand from abroad was increasing. Shipments of wallboard and cement continued to

increase, and contacts in both industries reported high capacity utilization rates. Cement

inventories were said to be extremely tight nationwide, though an increase in imports had

reduced the number of shortages in the southeast. Manufacturers also reported continued

shortages of large tires, some specialized steel products, foundry castings, bearings, and

titanium. The light vehicle sector remained weak. Automakers revised down overall thirdquarter production schedules from their earlier plans and shifted around product mix.

Nonetheless, contacts remained optimistic and maintained their forecasts for light vehicle

sales to firm later in the year. An analyst in the heavy truck industry noted a softening in

orders, though order backlogs remained high and build rates continued to increase.

Banking and Finance

Lending activity picked up from the previous reporting period. Business loan demand

continued to improve, with broad-based gains across market segments and loan types.

Business credit quality was generally stable or slightly better: one contact noted

improvements in non-accruing loans and the number of assets on its watch list. Several

contacts noted that standards and terms for commercial loans remained fairly generous due to

competitive pressures, but they added that there had been no further easing. Household loan

demand ticked up during April and May. Demand for home-purchase mortgages remained

strong and applications for mortgage refinancings increased slightly. Consumer credit quality

was generally good and little changed from earlier in the year. Contacts reported that spreads

for business and household loans remained narrow due to competitive pressures.

Prices and Costs

There were 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

energy, resins, and plastics, but prices for finished steel declined somewhat. Manufacturers

reported some success in raising the prices of their products to cover higher costs. However,

one heavy machinery producer said customers recently showed more resistance to price hikes

than they had earlier in the year. One appliance maker was focusing on covering their cost

increases through productivity improvements. At the retail level, reports of price increases

were still sporadic, but they outnumbered the reports of price declines. Wage gains remained

modest. The state of Wisconsin raised the minimum wage at the beginning of June, affecting

2 percent of the state's workforce.

Agriculture

Spring planting proceeded at a quick pace, inducing some shift in acreage from soybeans to

corn. Corn development was slightly behind a year ago in all District states, though ahead of

the 5-year average. Soybean emergence lagged last year's pace in Indiana and Iowa, but was

close to the 5-year average in most of the District. Moderate drought conditions stretched

from central Illinois into Michigan, with much of Wisconsin and northern Indiana behind on

precipitation as well. Conditions to date have likely ruled out a repeat of last year's extremely

high yields, but timely rainfall this summer could still produce a good harvest. As poor

weather pushed up futures prices, more farmers locked in prices on at least part of their fall

harvest. Some farmers, worried about "hot spots" and other problems with corn currently in

storage, sold it rather than wait for higher prices. Hog prices moved up during the reporting

period, but milk and cattle prices declined. Farmland values in the District increased 4

percent from the fourth quarter of 2004 to the first quarter of 2005.

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Eighth District--St. Louis

The economy of the Eighth District has continued to expand since our previous survey. A

majority of manufacturing contacts reported plans to open plants and increase operations.

The services sector continued to expand. Retail sales in April and May increased over

year-earlier levels, but auto sales declined over the same period. Home sales continued to

increase, and commercial real estate market conditions were mixed. Lending conditions at a

sample of District banks have varied slightly in the past three months.

Consumer Spending

Contacts reported that retail sales in April and May increased over year-earlier levels. While

45 percent of the retailers surveyed noted that sales levels met their expectations, 35 percent

reported that sales were below what they had anticipated, and 20 percent reported sales above

expectations. Gardening items, shoes, clothing (especially children's), food, and jewelry were

all strong sellers, while home decor, seasonal items, and hardware were moving more slowly.

About half of the contacts noted that inventories were at desired levels, while 38 percent

reported that inventories were too high. Retailers are generally optimistic about summer

sales.

Car dealers in the District reported that sales in April and May decreased compared with last

year. About 46 percent of the car dealers surveyed reported decreases in sales, while another

46 percent reported increases. About 35 percent of the car dealers noted that used car sales

had increased relative to new car sales, and about 37 percent reported increases in low-end

vehicle sales relative to high-end vehicle sales. About 80 percent of the contacts reported no

change in the use of rebates. Over half of the respondents reported unchanged acceptance

rates of finance applications, but 29 percent noted more rejections. About 57 percent of the

car dealers surveyed reported that their inventories were at desired levels, and one third of

contacts reported that their inventories were too high. Half of the contacts anticipate

increased summer sales over 2004.

Manufacturing and Other Business Activity

Manufacturing in the Eighth District continued to show signs of moderate improvement, with

a majority of firms reporting plans to open plants and expand operations. Several contacts

expressed concern over higher fuel and steel input prices. Firms in the primary metal,

furniture, motor vehicle, household appliance, coal product, aerospace, chemical,

pharmaceutical, plastics, and medical supplies industries reported plans to open new plants or

expand operations. Contacts in the steel, electrical equipment, and chemical manufacturing

industries reported increased orders and higher earnings in April and May from a year ago.

Despite these improvements, several District manufacturers reported plant closings and

workforce reductions. Firms in the motor vehicle industry reported plans to temporarily shut

down operations because of excessive inventories and decreased demand for sport utility

vehicles.

The District's services sector continued to expand. Firms in the freight transportation,

business support, management consulting, recreation, warehousing, and health services

industries reported new facility openings and expansions. Several regional business contacts

noted strong sales and employment gains in the hospitality services industry. In contrast,

several firms in the financial and educational services industries reported plans to close

facilities or lay off workers.

Real Estate and Construction

Home sales are still on the rise in the Eighth District. Compared with 2004, April

year-to-date sales rose 5 percent in Louisville, 4.2 percent in Memphis, and almost 1 percent

in St. Louis. Residential construction is lagging in most of the District's metro areas. April

year-to-date single-family residential permits were down from 2004. Permits declined 8.3

percent in St. Louis, 4 percent in Memphis, and about 14 percent in Evansville, Indiana, and

Jackson, Tennessee. In contrast, permits in Louisville and Little Rock increased over 9

percent.

Commercial real estate market conditions throughout the District were mixed. The firstquarter industrial vacancy rate in Memphis fell to 18.2 percent from 18.7 percent in the

fourth quarter of 2004; in St. Louis, the industrial vacancy rate fell to 6.4 percent from 6.6

percent; in Louisville, however, the industrial vacancy rate rose to 8.5 percent from 7.4

percent. Office vacancy rates in the District declined slightly. The first-quarter office vacancy

rate in Memphis declined to 18.6 from 18.7 percent in the fourth quarter of 2004, while the

St. Louis office vacancy rate remained at roughly 16 percent. Contacts reported no new

commercial construction permits issued in April for Texarkana, Arkansas. Contacts in

northeast Mississippi reported that new commercial space increased in the first quarter of

2005 compared with a year ago. In west Tennessee, contacts reported numerous

manufacturing plant expansions.

Banking and Finance

A recent survey of senior loan officers at a sample of District banks indicates little variation

in overall lending activity in the past three months. During this period, credit standards for

commercial and industrial loans were somewhat tighter, while demand remained unchanged.

Credit standards for residential mortgage loans, commercial real estate loans, and consumer

loans were generally unchanged. Respondents indicated that the demand for commercial real

estate loans was somewhat stronger, while the demand for consumer loans was somewhat

weaker.

Agriculture and Natural Resources

Because of good conditions in April and May, planting of all major District crops is ahead of

their five-year average pace, with soybean and sorghum significantly ahead of normal.

Recent cool and dry weather, however, has slowed growth of crops and pastures. In addition,

over half of the soil moisture ratings in Arkansas, Illinois, Missouri, and Tennessee were

reported to be less than adequate at the end of May.

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Ninth District--Minneapolis

The Ninth District economy displayed moderate growth since the last report. Growth was

evident in consumer spending, manufacturing, construction, energy, and mining. However,

agriculture and real estate were mixed, and tourism was flat. Employment grew modestly,

and wages grew slightly. Significant price increases were noted in health insurance, natural

gas, and cement.

Consumer Spending and Tourism

Overall consumer spending increased moderately. A North Dakota mall manager reported

April sales up more than 7 percent from a year ago; May started slower but was picking up

toward the later part of the month. A major Minneapolis-based retailer reported same-store

sales up 5.1 percent in May compared with a year ago. A Minneapolis area mall manager

characterized recent traffic as quiet, while a St. Paul area mall manager noted that there were

"no big swings one way or the other." The number of foreign travelers visiting a major mall

in the Minneapolis-St. Paul area increased to 6 percent of all visitors this year, up from 3

percent two years ago. Apparel sales were generally slow throughout the district due to

unseasonably cool weather.

A St. Paul area auto dealer noted sales of domestic cars and trucks were down over 30

percent in May compared with a year ago. A representative of an auto dealers association in

Minnesota reported that sales in late April and May were down from a year earlier.

Spring tourism was flat due to cool weather, but tourism officials are optimistic for the

summer season. Recent hotel occupancy in St. Paul was down slightly from a year ago.

According to an official, South Dakota tourism activity was slower in April and May

compared with last year, but picked up during Memorial Day weekend; inquiries and

advance bookings for the summer season were higher than a year ago. Bookings,

reservations, and Web site visitor totals were at encouraging levels for Montana's summer

tourism season, which is expected to increase 2 percent over last year.

Construction and Real Estate

Activity early in this year's construction season was solid. Construction for industrial space

has shown signs of picking up in the Minneapolis-St. Paul area during 2005, according to a

report from a commercial real estate firm. The U.S. Congress approved $80 million for

military-related construction projects in Montana. Contract awards for large construction

projects in Minnesota and the Dakotas were up 16 percent during the first quarter compared

with the same period a year ago. However, during the three-month period ended in April,

housing units authorized in district states were down 7 percent compared with the same

period a year ago.

Real estate markets were mixed. Home foreclosures through April were up 17.7 percent in

the Minneapolis-St. Paul area from the same period a year earlier. A St. Paul Realtor reported

market time for selling houses increased slightly, and sellers must often make concessions on

their asking prices. However, residential real estate markets in some other district cities, such

as Fargo, N.D., and Duluth, Minn., remained strong. The Minneapolis-St. Paul commercial

office market continued to recover, and growth in the industrial real estate market remained

at a strong pace.

Manufacturing

Manufacturing activity expanded. A May survey of purchasing managers by Creighton

University (Omaha, Neb.) indicated significantly increased manufacturing activity in the

Dakotas and level activity in Minnesota. The survey indicated that durable goods

manufacturing was gaining momentum. An informal survey of contacts revealed that most

manufacturers plan to increase capital investment due to high sales expectations and little

excess capacity. In South Dakota, a backhoe manufacturer recently announced a major

expansion plan. In North Dakota, a soybean crushing plant is in the design phase. A defense

manufacturer is building a new facility in Minnesota. However, a major automobile assembly

plant in Minnesota furloughed workers for several weeks since the last report.

Energy and Mining

Activity in the energy and mining sectors increased. Oil and gas exploration and production

increased significantly from early April through mid-May. In southern Minnesota,

construction of a biodiesel plant is currently under way and another is planned. Mines across

the district are producing at near full capacity. Expansions of existing mines and several new

mines are planned in the district.

Agriculture

Economic activity in the agricultural sector was mixed. District farmers had problems getting

in the fields to plant, and row crop development is below a year ago. The honey bee

population is down significantly due to mite infestations, which may inhibit the pollination of

district fruits, vegetables, and nuts. However, a bountiful winter wheat crop is expected in

Montana and South Dakota, and the progress of the spring wheat and other small grain crops

is significantly ahead of the five-year averages. Prices for many district agricultural

commodities decreased in May compared with a year ago. The U.S. Department of

Agriculture projects that prices will continue to drop into 2006 for corn, soybeans, wheat,

milk, cattle, and hogs. Meanwhile, precipitation increased across the district, which reduced

the severity of the drought. Agricultural land prices continue to increase. For example, the

USDA reports that the average price of Minnesota farmland is up 12 percent from a year ago.

Employment, Wages, and Prices

Overall employment grew slightly. In Minnesota, a disk drive manufacturer expects to add

100 jobs this year due to strong demand, and a bottled soft drink sales and distribution center

has recently added 95 jobs. A computer component plant in Eau Claire, Wis., has recently

added about 300 workers. Members of the Minneapolis Fed's Advisory Council on Small

Business and Labor noted that certain businesses were having difficulty finding qualified

workers. A truck driver shortage was reported in several parts of the district.

In contrast, a brokerage and investment bank based in Minneapolis plans to lay off 90 people

this summer. Also in Minnesota, a freezer plant laid off 130 workers, an electronics

manufacturer recently reported plans to cut about 80 workers, and a circuit board plant

closed, ending 60 jobs in the northern part of the state.

Wage increases remained modest. A Montana bank director noted that manufacturing

businesses expect to increase wages slightly, tempering increases to compensate for higher

health insurance premiums. Farm operators in an area including Minnesota and Wisconsin

paid hired workers slightly less in April compared with a year earlier.

While price increases for consumer goods were generally moderate, significant increases

were noted in health insurance, natural gas, and cement. Members of the Minneapolis Fed's

Advisory Council reported that costs for several raw materials were well above year-ago

levels; however, many businesses were not able to pass increases along to customers. A bank

director noted that year-over-year health insurance cost increases were above 10 percent.

Natural gas prices recently increased 15 percent to 30 percent above year-ago levels. Prices

for cement recently increased and are about 10 percent higher than a year ago. Steel mill

product prices decreased during the past few months, but were still nearly 20 percent higher

than a year ago. Gasoline prices in Minnesota at the end of May were slightly lower than a

year ago.

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Tenth District--Kansas City

The Tenth District economy expanded moderately in late April and May. Consumer spending

rose solidly, labor markets continued to firm, and commercial real estate activity improved

slightly. In addition, energy activity and residential real estate activity remained at high

levels. Manufacturing activity showed little growth following two years of expansion.

Agricultural conditions weakened somewhat. Wages and retail prices rose modestly, while

wholesale price pressures eased slightly.

Consumer Spending

Consumer spending in the district expanded solidly in late April and May. Most retailers,

mall managers, and restaurants reported increased sales since the previous survey despite a

modest negative impact from high gasoline prices. Sales were generally higher than a year

ago and at or above plan for the period. Sales of many types of apparel were characterized as

particularly strong, while sales of home items were weak at several stores. A number of

stores increased inventories since the previous survey, and most managers are now satisfied

with current stock levels. Nearly all store managers were optimistic about sales this summer.

Motor vehicle sales were flat compared with the previous survey and were below plan at

many dealerships. Sales generally remained slightly weaker than a year ago. Sales of large

SUVs and trucks were reported as weak in most areas, while smaller and more fuel efficient

models sold well. A number of dealers also reported solid sales of used vehicles. Virtually all

dealers expect some improvement in vehicle sales in the months ahead. Travel and tourism

activity in the district improved further in late April and May. Nearly all hotels reported

increased occupancy rates since the previous survey, and occupancy rates in some locations

were at the highest level in several years. Most hotel and resort operators were optimistic

about summer travel activity, expecting little if any impact from high gasoline prices.

Manufacturing

District manufacturing activity was largely stable in late April and May following two years

of expansion. Plant managers reported little growth in production and employment since the

previous survey. However, factory activity generally remained well above year-ago levels.

Several firms noted increased supplier delivery times, as truckers were avoiding less-thantruckload shipments in an effort to control costs. Some factories were also delaying their own

shipments to ensure full truckloads. Most plant managers remained optimistic about the

future, and a sizable share of factories plan to expand their workforces in the months ahead.

Many firms also plan to increase capital spending in the second half of the year, due to

expectations of increased sales and the need to expand and replace plant and equipment.

Real Estate and Construction

Residential real estate activity remained solid in late April and May, and commercial real

estate activity improved slightly. Builders reported that home starts were generally

unchanged since the previous survey and down slightly from year-ago levels, although still

high by historical standards. Most builders expect new home construction to remain flat in

the months ahead. Real estate agents reported increased home sales from both the previous

survey and a year ago. As in the previous survey, agents in several cities noted that sales

were being boosted in part by out-of-state investors. Home prices were reported as increasing

at moderate rates throughout the district. Most agents expect slight increases in home sales

and home prices in coming months. Mortgage lenders generally reported increased mortgage

demand since the previous survey. The increase was driven by higher demand for home

purchase loans, as refinancing activity was flat. Overall, mortgage lenders remain optimistic

about future demand for home purchase loans. Commercial real estate activity in the district

improved slightly in late April and May. Vacancy rates edged down in several cities, and

prices and rents for office space were up modestly. Commercial real estate agents expect

activity to be stable or to improve slightly in the months ahead.

Banking

Bankers report that loans edged up and deposits decreased slightly since the last survey,

raising loan-deposit ratios somewhat. Demand rose slightly for commercial and industrial

loans and commercial real estate loans but edged down for consumer loans. On the deposit

side, demand deposits, other checkable deposits, and large CDs edged down, while other

types of accounts held steady. Almost all respondents increased their prime lending rates

since the last survey, and most respondents raised their consumer lending rates. Lending

standards were unchanged. Banks do not plan to increase capital spending in the second half

of the year, in some cases because they invested heavily in information technology in 2004.

Energy

District energy activity remained strong in late April and May. The count of active oil and

gas drilling rigs in the region was basically unchanged from the previous survey but still

much higher than in recent years. Most drilling firms expect moderate expansion of drilling

activity in the months ahead, as energy prices are expected to remain high. In addition,

several contacts noted improved conditions in the coal industry in Wyoming since the

beginning of the year, as both spot and futures prices for coal have risen considerably.

Agriculture

Agricultural conditions in the district weakened somewhat in late April and May. A late

freeze and heavy spring rains complicated spring planting in certain areas and forced some

producers to replant crops. In addition, producers reported that the condition of the winter

wheat crop had deteriorated somewhat since the previous survey due to drought and freeze

damage. Pastures, on the other hand, were in good condition, providing adequate spring

forage. Farmers' capital spending for the rest of the year is expected to decline somewhat

from a year ago due to the higher cost of fuel and fertilizer and lower farm incomes this year.

Labor Markets and Wages

Labor markets in the district continued to firm in late April and May, but wage increases

remained modest. Private sector hiring announcements since the previous survey exceeded

layoff announcements by a sizable margin. In addition, the military base realignments

announced in May were expected to boost both military and civilian employment in the

district. The percentage of firms reporting worker shortages was slightly less than in recent

surveys. However, several types of workers were still reported to be in short supply,

including truck drivers, rig workers, welders, machinists, and both entry-level and

experienced retail workers. In addition, college placement offices in the region reported a

solid increase in job offers compared with recent years. Firms generally reported that wage

increases remained modest, but some contacts said benefit costs rose more than normal.

Prices

Modest price pressures persisted at the retail level in late April and May, while price

pressures eased somewhat at the wholesale level. As in the previous survey, most retailers

reported flat selling prices, but a sizable number raised their selling prices or delivery charges

to offset increased costs. A sizable number of stores also plan to raise prices in the months

ahead. Several builders reported increased costs for framing materials, and some expect these

increases to persist. Fewer manufacturers than in recent surveys reported rising materials

costs, and one firm said chemical prices had fallen due to weaker demand in Asia. Plant

managers generally expect moderate increases in materials prices heading forward. The share

of manufacturers raising output prices was also lower than in the previous survey, but many

plant managers still expect to raise output prices in the months ahead.

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Eleventh District--Dallas

Eleventh District economic activity continued to expand. Manufacturing continued to be

mostly strong but with some patches of softness. The service sector showed signs of picking

up, while retail sales were up modestly. Construction and real estate activity remained

unchanged at a high level. Financial service contacts said loan growth and credit quality

remained good. Activity in the energy industry remained very strong, and contacts are very

optimistic, but there is a lot of discussion about how long high prices can last. Agricultural

conditions are favorable.

Prices

Contacts in most industries expressed concerns about high energy, fuel and freight costs

biting into consumer demand and profits. Competitive pressures are limiting firms' ability to

pass rising costs to their customers. Some companies are finding ways to reduce

consumption. For example, a retailer said that they have "reengineered standards" to reduce

use of petroleum-based products, such as using plastic shopping bags that are smaller and

thinner. Other firms say they are continuing to find ways to increase labor productivity to

counter rising input costs.

Crude oil prices have varied from less than $50 to more than $55 per barrel. Demand for

gasoline was down compared to earlier this year and is now more similar to a year ago.

Gasoline inventories are high; 4 percent above the 5-year average and at the highest level

since May 1999. Natural gas prices fell from over $7.50 per million Btu to near $6.50.

Natural gas inventories continued to grow and are now more than 20 percent above the

5-year average.

There were reports of rising fees for business services, such as accounting and legal. Prices

for manufactured goods were mixed. Prices were up for construction-related materials, such

as lumber, cement, brick, tile and glass. Primary metal manufacturers said that high energy

and raw material costs have lead to some price increases, but persistently idle international

capacity and a recent softening in steel and aluminum prices have reduced the threat of a

price-rise in the near future. Paper producers say that heavy inventories have pushed down

prices. Prices have fallen for all of the basic chemicals and most plastic intermediates.

Labor Market

The labor market continued to strengthen, with more reports of hiring at all levels. Wages

were rising in the service sector, but there were few reports of rising wages for

nonprofessional workers. Nearly all contacts expressed concerns about the high cost of

benefits, particularly health care, and some said that these costs are restraining hiring. Skilled

workers were in short supply in the energy industry, and a few industries reported that

management level workers were being bid away.

Manufacturing

Manufacturing activity was mixed. Demand was up for construction-related products,

including lumber, cement, brick, tile and glass. Contacts attributed the increase to continued

robust construction activity, specifically strong housing starts and some commercial and

infrastructure work. Cement is in short supply and is on allocation in some areas. Producers

of fabricated metals reported solid sales, stimulated in part by increased demand to support

construction activity and to supply the construction of wind turbines to generate electricity.

Demand for food products continued to be strong. Apparel manufacturers said demand has

been growing over the past month. In the last six weeks, one firm has hired 100 new workers

overseas and about 30 domestically. Respondents in high-tech manufacturing said that

growth in orders has increased slightly since the last survey. Much of the pickup occurred in

the consumer sector. Sales to industrial customers continued to grow at a moderate pace.

Telecommunications manufacturers reported a slight increase in demand.

Demand for corrugated boxes softened slightly. Contacts say there is still overcapacity in the

industry and competitive pressures may cause some businesses to close. Demand had also

softened for primary metals, although demand remained higher than a year ago.

Chemical producers reported an unexpected slow down in demand from Asia, particularly

China, and inventory has shifted from shortage to oversupply. Contacts say the slowdown is

not severe but was not expected. Production was reduced slightly but remained at high levels.

Refining utilization rates on the Gulf Coast were hurt by a series of outages. Refined product

imports were at the highest levels of the last five years and 9 percent higher than last year.

Services

Temporary staffing firms reported increased activity, up significantly from year-earlier levels,

with almost all areas performing well. Demand for telecommunications services was up

slightly, with continued strong demand for wireless services. Demand for legal services has

been steady, driven mostly by corporate transactions, real estate deals and litigation work.

Accounting firms reported mixed results.

The transportation industry continued to report strong demand and serious concerns about

high fuel costs. Railroads say the strongest demand is for shipping metallic ores, crushed

stone, construction products and trailers. Contacts said rail shipping rates continued to rise,

but the pace of increase seemed to be slowing. Trucking activity also remained strong and

above year-ago levels. The airline industry continued to report strong demand in domestic

markets but limited ability to raise prices, although carriers reported slightly higher fares in

some markets. Carriers are moving capacity to international routes because fares are higher.

Retail Sales

Retail sales increased modestly. Contacts said sales growth continued to be dampened by

high gasoline prices biting into consumers' pocketbooks. Retailers that issue their own credit

cards say credit quality trends are positive, with low delinquencies. Auto sales were mixed,

and some dealers reported that inventories are higher than desired.

Construction and Real Estate

Housing markets were strong overall, but there continued to be reports of slowing from last

year's pace in some metropolitan areas. Home sales are about even with last year's levels, but

builders in Dallas and Houston said new home construction has outpaced demand. Rising

input costs continued to put pressure on builders' margins because heavy competition has left

no room for price increases. Austin remained an exception, where sales have picked up from

last year's rate and builders are able to raise prices. Existing home sales were strong across

the District, except in Dallas, where sales have slowed and dipped below last year's levels.

Contacts are optimistic that recent job gains will spur a pick up in sales.

Demand for apartment space increased in Dallas and Houston but continued to be

overshadowed by what many perceive as excess development. Rent concessions have picked

up, especially in Houston. Contacts said Austin's multifamily housing market is not overbuilt,

but they also expressed concerns about the possibility that new development under

consideration could generate an oversupply.

Office markets continued to improve and the pace has picked up slightly, according to

contacts. Dallas, Houston and Austin have witnessed positive absorption so far this year.

Contacts say investment activity is at a record high.

Financial Services

Loan growth remained solid, and credit quality is good, according to contacts. The market is

extremely competitive, however, and pricing remained a challenge. Respondents are

optimistic about the economy and future loan growth. Still, contacts expressed concern about

a potential glut in multi-family residential properties, and the possibility of some land price

bubbles, particularly in rural areas located near big cities.

Energy

Drilling activity remained strong, with little change in the number of working rigs. In the

United States, more rigs have turned to natural gas as the market for rigs has tightened, and

only about 11 percent are now directed to oil. International drilling continued to pick up.

Demand for oil field services has been very strong. According to contacts, oil field service

companies are raising prices rapidly, and margins are improving. Backlogs are long, and

companies are turning down work. Capacity is being expanded in critical areas. Day rates are

skyrocketing for land and offshore rigs. Skilled workers are the critical constraint in any

effort to expand, according to contacts, who say engineers, truck drivers and drilling crews

are particularly in short supply.

Agriculture

The planting season continued to progress well, and most planted crops are thriving,

according to contacts. High fuel, irrigation and fertilizer costs remain a serious concern for

farmers. The cattle industry is profitable, according to ranchers, who say they are expanding

their cow-calf herds. Pasture conditions and prices are favorable, but contacts expect cattle

prices to decline in coming months.

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Twelfth District--San Francisco

The Twelfth District economy expanded at a solid pace from mid-April through the

beginning of June. Price inflation for final goods and services edged up, largely due to the

pass-through of earlier increases in energy costs, and tighter labor markets led to a slight

increase in upward wage pressure. District retailers and service providers reported strong

demand and sales, and manufacturing activity expanded further. Demand for District

agricultural and resource-related products was solid, but late-season rains damaged some

crops in California. Home sales and price appreciation continued at high rates, and demand

for commercial real estate improved further. District banks reported strong loan demand and

good credit quality.

Wages and Prices

Contacts reported an increase in inflationary pressure on net, although the pickup largely was

limited to products and services for which energy costs are a significant component.

Increases in oil prices from earlier this year were passed on to the final prices of various

items, including transportation services and energy-intensive goods such as fertilizers and

some construction materials. This in turn led to price increases in related industries; for

example, prices of packaged food rose as a result of rising delivery costs. Pricing power

remained modest more generally, however, with contacts citing vigorous competition from

domestic and foreign producers and continued gains in production efficiency as restraining

factors.

District labor markets tightened somewhat during the survey period, especially for skilled

occupations such as nursing, construction trades, and various jobs in financial services.

Contacts from the financial sector reported a recent reemergence of incentive compensation,

including signing bonuses to attract qualified workers. Employer costs for health insurance

benefits continued to rise, exerting a restraining influence on wage increases for some

businesses but reportedly being passed on to final prices in others. General labor market

tightening and shortages for some skilled occupations led to increased upward pressure on

wages and salaries. However, wage pressures reportedly have subsided somewhat in the

manufacturing sector, and reports from various industries suggested that the pace of wage

growth more generally remained in the moderate range of 2 to 4 percent.

Retail Trade and Services

District retail sales grew on balance during the survey period. Sales of new and used

automobiles remained at high levels overall. However, high gas prices held down relative

demand for sport-utility vehicles and light trucks, and substantially more demand strength

was evident for foreign than for domestic brands. Sales of smaller retail items grew

significantly and inventories reportedly stabilized further.

Service providers continued to see robust demand growth. Demand for media and high-tech

services strengthened, while demand growth remained vigorous for providers of food,

transportation, and health-care services. The District's travel and tourism sector continued to

surge; the number of domestic and international visitors rose further at key destinations such

as Hawaii, increasing hotel occupancy rates and average daily room rates from already high

levels.

Manufacturing

Demand was solid in the manufacturing sector, although the pace of growth has slowed.

Semiconductor orders and sales were strong and inventories in balance, but capacity

utilization has fallen and sales prices were held down by substantial supply; ample

production capacity and limited pricing power were reported for technology products in

general. Makers of machine tools and industrial equipment reported that demand remained

strong, though new orders slowed. Reports from a variety of industries suggest that business

investment spending grew at a steady pace during the survey period. Respondents expect

further increases in investment spending during the balance of this year, which will help

maintain demand growth for technology products and other capital goods going forward.

Conditions in the aerospace sector have improved due to a recent upturn in new orders for

commercial aircraft, and defense contractors have been busy filling orders for a variety of

items related to national defense. Apparel manufacturers reported little or no change in orders

and good availability of raw materials.

Agriculture and Resource-related Industries

Demand for District agricultural and resource-related products remained solid in mid-April

through early June. Orders and sales reportedly were strong and prices were stable for cattle,

commodity crops such as cotton and hay, citrus fruits, and vegetables. However, contacts

reported rising input costs, particularly for fertilizers, and recent heavy rains in California's

Central Valley severely damaged the crops of cherries and other tree fruits. In the energy

sector, producers operated at or near full capacity in recent weeks, and drilling and

distribution of natural gas continued to grow rapidly.

Real Estate and Construction

Demand remained vigorous in residential real estate markets, and conditions improved

further on the nonresidential side. The pace of home sales, price appreciation, and home

construction was rapid in most parts of the District, although growth reportedly slowed a bit

relative to previous periods. Demand for commercial real estate strengthened further in

recent weeks, with office vacancy rates and rental rates increasing slightly in some markets.

Continued solid demand for new homes plus increased demand for commercial real estate

kept overall construction activity at high levels, especially in Southern California, the Las

Vegas area, and Hawaii.

Financial Institutions

District banking contacts reported little change from the strong conditions reported in the

previous survey period, with strong loan demand and good credit quality. Commercial and

industrial lending activity grew further, while demand for construction, commercial real

estate, and home loans remained at high levels in most areas. Credit quality in general was

good across all loan categories. A very competitive environment and narrow spreads between

short-term and long-term interest rates reportedly held down profit margins in the banking

sector.

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Last update: June 15, 2005