Beige Book
April 26, 2006
Summary
Prepared at the Federal Reserve Bank of Boston and based on information collected on or before April 17,
2006. This document summarizes comments received from business and other contacts outside the Federal
Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from all twelve Federal Reserve Districts indicate that economic activity continued
to expand in March and the first half of April. Three Districts--Minneapolis, Kansas City, and
San Francisco--characterize growth as "solid," while a number of others describe the rate of
economic activity as "modest," "moderate," or "steady." Richmond notes a quicker pace of
growth, and Dallas indicates that activity continued to strengthen. By contrast, New York
says the rate of growth may have slipped a bit since the last report.
Most Districts report that orders or revenues in the manufacturing sector continue to come in
ahead of year-earlier levels, although New York notes some deceleration in manufacturing
activity, and Atlanta says that manufacturers' results were mixed. Non-auto retail sales are up
from a year ago, as well, according to most Districts, although the shift of Easter from March
last year to April this year makes comparisons difficult. Activity levels in service industries-including temporary help, health services, professional and technical services, and
transportation and shipping--are also expanding according to District reports. The pace of
housing market activity is said to be moderating in many Districts, while commercial activity
is firming. A majority of Districts note that labor markets, at least for skilled workers, are
tight or are tightening. While energy costs are high and costs for selected other inputs are
rising, businesses continue to have limited ability to raise their selling prices.
Consumer Spending and Tourism
The majority of Districts cite improving retail sales overall, but Richmond and Cleveland
experienced sluggish or disappointing results. Boston, New York, Philadelphia, Atlanta,
Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco all report modest to
solid gains, although year-over-year comparisons have been complicated by Easter's shift
from March in 2005 to April in 2006. Several Districts report strong sales in home and
garden products and building goods. Reports on apparel and grocers are mixed. Retail
inventories were generally at desired levels across the country.
Auto sales were mixed across the Districts. Many Districts report that sales were short of
year-ago levels, but Philadelphia, Cleveland, Richmond, Kansas City, and Minneapolis all
indicate that sales improved from the prior survey period. While demand in San Francisco
was stronger than expected, Boston, Atlanta, and Dallas all cite flat sales. Many Districts
continue to say that sales of imports and used cars are stronger than new domestic vehicles.
Most of the reports on travel and tourism are positive. Atlanta, Chicago, Minneapolis, Kansas
City, and San Francisco all cite modest to strong improvements, and while New York saw
tourism softening slightly, it was still at high levels. In contrast, tourism was mixed in
Richmond. Ski resorts in the Boston District continued to suffer from lack of snowfall, but
tourism was thriving in the Boston metro area. A record-setting ski season was reported in
Virginia, and Minneapolis saw a positive ski season in parts of the District.
Services Industries
All Districts reporting on nonfinancial services note increased activity during the first quarter
relative to a year ago. Health-care services expanded in the Richmond, St. Louis, and San
Francisco Districts. Professional and technical services activity increased according to
Boston, Philadelphia, Richmond, St. Louis, and Dallas, while San Francisco notes mixed
conditions in information technology services.
Temporary employment firms in the New York, Philadelphia, Richmond, Atlanta,
Minneapolis, and Dallas Districts report modest demand growth in the first and early second
quarters. A large New York employment agency found increased demand for legal and
financial services employees, while Dallas contacts noted increased demand for temporary
workers in high-tech and light industrial manufacturing.
Transportation services activity improved this quarter, according to reports from the Atlanta,
Dallas, and San Francisco Districts. Trucking and shipping respondents from the
Philadelphia, Cleveland, and St. Louis Districts report increased growth relative to a year
ago. While Cleveland's contacts continue to express concern about fuel costs, many now
believe that they can increase their base rates, given the strength of demand.
Manufacturing
Reports on manufacturing activity remain positive. Districts describe shipments and orders as
continuing to strengthen--significantly in some cases and gradually or steadily in others.
Only Atlanta characterizes overall manufacturing activity as mixed, although New York
indicates a retrenchment in orders and shipments in early April followed a strong March. All
Districts mentioning near-term forecasts say that, on balance, manufacturers expect business
to remain on an upward trajectory.
Multiple Districts note strong or expanding production of steel, construction inputs, machine
tools, aircraft equipment, and food. Production capacity for mining equipment in the Chicago
District is reportedly booked through 2007. Chicago described heavy- and medium-duty
truck orders as remaining solid, but light vehicle sales as flat, with some signs of excess auto
inventories. Other District updates on auto assembly and parts production were mixed--some
up and others down. Trends in apparel-making also varied, with Richmond and Dallas citing
increases but Atlanta, St. Louis, and San Francisco indicating shutdowns or disappointments.
Although several Districts describe labor demand in the manufacturing sector as mixed, most
report some form of pickup. For example, Richmond says that "factory employment grew
modestly," Cleveland notes more hiring on the part of durable goods producers, and Boston
indicates that most manufacturers were hiring in order to obtain a "higher skill mix." District
reports on capital spending tend to be either modestly positive or mixed.
Real Estate and Construction
Most Districts report cooling and moderation in their residential real estate markets. In
general, year-on-year price appreciation seems to be lower than in quarters past, with San
Francisco, Cleveland, Kansas City, Richmond, New York, and Boston all reporting more
modest price growth in residential sales. Several Districts' contacts noted that slower price
increases were a healthy market outcome. Residential inventories are increasing; Kansas
City, Minneapolis, Chicago, Atlanta, New York and Boston all saw increases in residential
inventories compared with the first quarter of last year. The Dallas District, by contrast,
registered particularly strong residential sales.
Residential construction is more regionally differentiated than overall residential sales and
prices. In the West, Dallas and San Francisco both cite high levels of residential construction
activity, with Dallas homebuilders reaching record sales for the first quarter of 2006. In the
Midwest, Kansas City, Minneapolis, and St. Louis report declining residential construction.
As well, the Chicago District mentions slower residential building in most areas. In the
South, Atlanta indicates that single family construction remained strong but that some
condominium projects have been postponed or cancelled.
The commercial real estate outlook appears to be predominantly positive across the reporting
Districts--none report weakening commercial demand. San Francisco, Dallas, Minneapolis,
St. Louis, Atlanta, and New York all register strong commercial activity. Kansas City,
Chicago, and Richmond report steady to improving levels of activity. With vacancies
declining in many locations, rents appear to be edging upwards.
In the West and the Midwest, commercial construction appears to be responding to increased
commercial demand. Dallas, Cleveland, Minneapolis, Chicago, and St. Louis all report
increasing or soon-to-be increasing commercial construction. San Francisco cites continued
high levels of construction activity. In the South, Richmond reports little change in new
construction, while overall development in Atlanta remained at low levels. The New York
District featured relatively stable commercial construction.
Banking and Finance
Reports of lending activity are mixed, as most Districts reporting on financial services
continue to see decreases in demand for consumer loans and residential mortgages, coupled
with moderate expansion of commercial and industrial lending. St. Louis and Kansas City, in
particular, saw a decrease in consumer lending, while both Chicago and Kansas City
witnessed decreased demand for home equity loans. Almost all Districts report declining
demand for residential mortgages. Meanwhile, commercial and industrial lending increased
in nearly all Districts, with only St. Louis reporting a decline. Bankers in Richmond noted
that commercial lending for mergers and acquisitions and construction remained high.
Respondents in San Francisco mentioned an increase in venture capital financing.
While reports of credit quality are positive across the board, delinquency reports are more
varied, with low delinquency rates in Atlanta, commercial and industrial delinquency rates
increasing slightly in New York, home mortgage delinquency rates increasing somewhat in
Dallas, and respondents in Philadelphia predicting a possible future increase in delinquencies
due to rising interest rates on adjustable-rate mortgages. Deposit growth was steady in
Cleveland and Kansas City, sluggish in Chicago, and flat in Dallas. Philadelphia, Dallas, and
San Francisco all report fierce competition for loans and narrow net interest margins.
However, credit standards remained virtually unchanged in all Districts except for New York,
where standards tightened slightly for consumer loans.
Agriculture and Natural Resources
Adverse weather conditions and high energy costs are affecting agricultural prospects in
much of the country. Although recent rains have brought some relief, dry weather has
reportedly stressed pastureland and crops in the Richmond, Atlanta, Chicago, Kansas City,
and Dallas Districts. By contrast, unusually wet weather has delayed fieldwork in the San
Francisco District. Ranchers facing poor pasturage in Kansas City and Dallas are culling their
herds and giving supplemental feed unusually early; as a result, Kansas City reports
downward pressure on prices for feedlot cattle. In San Francisco, prices received by ranchers
have softened but remain at a high level. St. Louis and Minneapolis report that one-half to
two-thirds of the winter wheat crop is in good to excellent condition, but the Kansas City
crop is described as poor, and Dallas reports that half the District wheat crop will be lost.
Reflecting relative crop prices and the high cost of fertilizer, Chicago and St. Louis farmers
are said to be shifting acreage from corn to soybeans. Contacts in Dallas and San Francisco
also note the high cost of fertilizer and fuel, while Chicago and Dallas indicate that these
costs are combining with dry conditions to cause cash flow problems for farmers.
In the energy sector, demand for oil and natural gas or oil services remains robust and energy
activity continues to expand, according to contacts in the Dallas, Kansas City, and San
Francisco Districts. Minneapolis reports that energy activity is stable at a high level. Dallas
and Kansas City indicate that the count of active oil and gas rigs continues to rise. In the Gulf
of Mexico, Dallas notes that the rig count is close to pre-Katrina levels, while Atlanta reports
that the share of oil and gas still "shut in" amounted to just 23 percent for oil and 14 percent
for natural gas in early April. Dallas, Kansas City, and San Francisco contacts see little or no
excess capacity in the energy sector. In particular, Kansas City contacts say that shortages of
equipment and workers are constraining drilling activity; pipeline capacity is also limited in
some areas. In the Minneapolis District, almost all open mines are producing near capacity.
Prices and Wages
High energy prices were at the forefront of most Districts' mentions of cost pressures.
Manufacturers in most Districts cite rising costs for other inputs, with metals mentioned most
frequently along with petroleum-related products. While no District reports that cost
increases have intensified in the latest survey period, Kansas City says that firms were having
greater difficulty obtaining steel and aluminum. Services firms are also reported to be facing
higher costs, notably for utilities, shipping, and transportation. Many Districts describe firms
as attempting to raise selling prices but having mixed success, with price increases generally
either smaller than the cost increases or less widespread. Richmond, Cleveland, and Chicago,
for example, mention manufacturing firms' limited ability to recoup higher costs; Boston and
Dallas say competitive pressures are constraining some price increases, and Atlanta notes
that the ability to pass on cost increases varies across firms, depending in part on the strength
of demand and contract arrangements. Construction materials costs have also risen, or
supplies are tight, according to reports from Philadelphia, Cleveland, Atlanta, Chicago,
Minneapolis, and Dallas.
A number of Districts, including Cleveland, Richmond, and Dallas, cite high energy prices as
an explanation for weaker than expected tourism results, auto sales, or retail sales, especially
to lower-income consumers, with the impact occurring both directly by constraining
consumers' driving and indirectly by reducing the income available for purchases after
paying for home fuel and transportation fuel. Atlanta and Chicago note the possibility of such
energy cost impacts as a risk to the summer outlook.
District reports from Boston, New York, Richmond, Kansas City, and Dallas say that labor
markets are tightening, especially for skilled positions. Philadelphia, Minneapolis, San
Francisco, and Atlanta indicate that labor markets remain tight in at least some parts of their
Districts. Contacts in Atlanta, Richmond, Cleveland, Kansas City, and Dallas state that truck
drivers are in short supply. Wages continue to move up, but only a few Districts--New York,
Dallas, and Kansas City--mention a pickup in the pace of raises, while Philadelphia cites
firms more often paying in the high end of salary ranges. Richmond reports no pickup, but a
continuation of "brisk" wage increases in services. Boston says manufacturing wage
increases are in the same range as last year, Chicago cites a steady pace of labor cost
increases, and Cleveland notes no reports of accumulating wage pressure, while Minneapolis
and San Francisco mention moderate overall wage increases.
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First District--Boston
Business activity continues to increase in the First District. Most manufacturers and selected
business services firms report revenues well above year-earlier levels in the first quarter of
2006; retailers also indicate sales were ahead of a year ago in February and March. A
majority of firms are passing cost increases on to customers. Manufacturers and consulting
firms indicate the labor market for professional positions is tightening. Residential real estate
markets continue to slow compared with a year ago; observers characterize current activity
levels as more sustainable than those during the past few years.
Retail and Tourism
Retail contacts in the First District report positive results in February and March, as
year-over-year sales range from flat to single-digit gains. Products that sold particularly well
this period include footwear, accessories, home goods, and kitchen and bath-related products,
although one retailer mentioned that year-over-year comparisons are complicated by Easter's
shift from March to April. A restaurant contact notes that warmer weather seems to have
helped sales. However, both women's and men's apparel sales were softer than expected, and
an automobile dealers' group indicates that sales continue to be weak.
Inventory levels are mixed, but reportedly in line with expectations. Vendor prices are varied,
with some contacts noting ongoing price decreases, on imported apparel, for example.
Selling prices also continue to be mixed; some retailers are passing increases along to
consumers, while others are holding prices steady or decreasing them slightly. Same-store
employment is generally steady, although one contact has had layoffs. A couple of contacts
report reduced capital spending, while several others are planning new store and showroom
openings, the acquisition of new vehicles, store remodeling, or minor technology updates.
A travel and tourism contact reports "feeling good" about tourism in New England. While the
ski season was weaker than expected and last minute bookings are still prevalent across New
England, tourism in the Boston area is booming. The contact says business and convention
travel is recovering and leading to increased advanced bookings; she expects tourism in
Boston and nearby coastal areas to thrive in the summer months.
With the exception of the auto dealers association, most retail and tourism respondents are
cautiously optimistic in their outlook, with expected growth in the remainder of the year
ranging from flat to high single-digit increases.
Manufacturing and Related Services
Most First District manufacturers and related services providers report that first quarter sales
were higher than a year ago. Many had double-digit or high single-digit percentage revenue
gains, and several comment that overseas demand rose faster than domestic demand. Order
backlogs are signaling continued revenue growth in the second quarter. Biopharmaceutical
sales are doing particularly well.
Many respondents express concern about high or rising costs for energy, transportation, and
metals (chiefly steel and copper). Some also face increased costs for food and other
agricultural-based inputs. About two-thirds of the contacted manufacturers--makers of both
intermediate and final goods--have raised their selling prices in recent months. Some of these
firms are satisfied with their ability to increase prices, while others feel that competitive
pressures are constraining their increases. Companies not raising prices describe the situation
as "horrible" or "a big problem."
Manufacturers are fairly evenly balanced in their intentions to reduce, hold constant, or
increase their U.S. headcounts, but almost all firms (even some with layoffs) are hiring as
they seek a higher skill mix. The market for skilled workers is said to be tight or somewhat
tighter than in late 2005. Contacted companies are experiencing difficulties filling vacancies
in fields such as finance, accounting, supply-chain management, engineering, and scientific
R&D. However, overall average pay increases for 2006 mostly are targeted to remain in the
same range as last year, that is, 2.5 to 4 percent.
Domestic capital spending plans are quite varied. Some manufacturers are planning to add
capacity or new production capabilities. Others intend to reduce capital expenditures as they
complete big projects, engage in outsourcing or off-shoring, or feel a need to conserve cash.
Most manufacturers expect the demand for their products to increase in 2006. Their concerns
center around high energy, materials, or regulatory costs; rising interest rates; and problems
in the domestic auto industry. Depending on the company, these forces are viewed as risks
that could possibly reduce profitability or--toward the end of 2006 or in 2007--cause a
cutback in spending that would hurt revenues either directly or through a weakening of the
general economy.
Selected Business Services
All responding First District advertising and management consulting firms enjoyed
improving business conditions and revenue growth in the first quarter of 2006, with most
firms reporting double digit gains from a year ago. Contacts attribute their improved growth
rates to increased merger and acquisition activity and a general improvement in the economic
climate, noting that all of the industries they serve have seen increased sales.
The majority of responding consulting companies have earned moderate price increases over
year-ago levels with no discernible effect on demand; however, one contact commented that
his firm was not getting price increases per se, but rather reducing the amount of discounting.
Three contacts note that costs have increased substantially for travel, with hotel and airfare
costs both up more than 10 percent relative to a year ago. While most of these expenses are
passed on to the client, one firm noted that non-billable travel and training costs hurt their
bottom line by a couple of margin points in the first quarter; as a result, they are buying space
for a training room to avoid renting increasingly costly hotel space.
A majority of New England business services contacts plan to increase their headcounts in
2006. Several firms note that the labor market is tightening, with one contact describing it as
a "war for talent;" while qualified people are out there, they all have multiple offers. Most
contacts raised wages by 3 percent to 6 percent over the last year. All respondents have a
positive outlook, with one commenting that, "unless there is a catastrophic shift in the
business cycle, we anticipate more of the same for the rest of 2006," which another stated,
"means we'll be pretty darn busy."
Residential Real Estate
Residential real estate contacts in the First District uniformly cite a continued slowing in the
pace of sales. The Massachusetts real estate market has seen five consecutive months of
year-on-year sales declines in detached single family homes. Condominiums in
Massachusetts, however, are performing well, setting monthly volume records in both
January and February.
The slowing residential sales pace has led to an overall increase in inventory. Compared to
about 10 months of inventory at this time in 2005, the Massachusetts market currently
features 16 months of inventory. Contacts across New England suggest that the inventory
awaiting sale is not evenly distributed across price ranges, but rather that there are many
high-end properties on the market, while entry level and midrange properties are tight in
many communities.
Residential real estate prices appear to be leveling off. Price appreciation, although still
positive overall, is below 5 percent year-on-year in most markets. Contacts feel that the
deceleration in price increases is a positive sign; they characterize the New England market
as being slower but healthier than in the last few years. Though much of the current year's
performance will be determined by spring sales, the general expectation is for prices to
remain steady and for the sales pace to be slower than in recent years past. One
Massachusetts contact said that even with slower sales, he expects 2006 to be among the top
five years all time for residential real estate.
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Second District--New York
The Second District's economy has continued to expand since the last report, but the overall
rate of growth may have slipped a bit. The labor market has grown increasingly tight, and
there are signs that wages have accelerated in some sectors. More broadly, though, input
price pressures remain widespread but do not appear to have intensified. Manufacturers
report some deceleration in activity in recent weeks but continue to report increased
employment. Despite unseasonably cool weather, retailers report that sales were generally
close to plan in March and early April, though tourism has softened slightly since the last
report. Consumer confidence improved in March.
Housing markets showed ongoing signs of softening in the first quarter, though sales of
Manhattan apartments reportedly picked up in March. Commercial real estate markets across
the New York City metro area were mixed in the first quarter: office rents were up from the
prior quarter, but rents on industrial space slipped. New commercial construction remains
relatively sluggish, but residential development continues to be robust. Finally, bankers again
report some weakening in loan demand, some tightening in credit standards on consumer and
home mortgage loans, and an up-tick in delinquency rates.
Consumer Spending
Retailers report that sales were generally close to plan in March and early April, despite
unseasonably cool weather over much of the period. Retail contacts continue to note that
higher-end (premium) merchandise was selling a good deal better than lower-end lines. Sales
of home furnishings have continued to lag most other categories. Overall, inventories are
reported to be at favorable levels, and selling prices are little changed, on average.
Tourism has softened slightly since the last report but remains at a high level. Manhattan
hotels report that occupancy rates tapered off in February, but rebounded in March; still,
occupancy rates have been running about 3 percentage points below comparable 2005 levels.
However, room rates were reported to be up 10 percent from a year earlier in February and
up 13 percent in March. Broadway theaters report that attendance slipped below comparable
2005 levels in March, while revenues were little changed, but both rebounded noticeably in
early April.
Consumer confidence in the region strengthened in March. Based on the Conference Board's
survey of residents of the Middle Atlantic states (NY, NJ, PA), consumer confidence rose
sharply in March, reaching its highest level in nearly four years. Based on Siena College's
survey of New York State residents, confidence posted a more moderate gain, climbing to a
14-month high.
Construction and Real Estate
The region's housing market was mixed but generally softer in early 2006. New Jersey
homebuilders report continued sluggish demand for new homes, reflecting some spillover of
weakness from the existing market. Prices of new homes have leveled off, but builders have
yet to make any significant downward price adjustments. The inventory of unsold existing
homes is reported to have risen sharply over the past year--from a 3-month to a 7-month
supply, based on concurrent sales activity. Manhattan's co-op and condo market was mixed in
the first quarter. A major appraisal firm reports that prices were little changed from the prior
quarter but still up 6 percent from a year earlier, while sales were down slightly from a year
earlier; at the end of March, the inventory of apartments on the market was up 60 percent
from a year earlier. A major Manhattan real estate firm similarly reports a sizable increase in
the number of homes on the market and a leveling off in prices but notes that sales volume
rebounded above comparable 2005 levels in March, with new developments accounting for a
growing share of sales volume. In general, residential development in Manhattan remains
strong.
Commercial real estate markets were mixed in the first quarter. Office vacancy rates across
the New York City metro area were mixed but down slightly overall; northern New Jersey's
rate, though still relatively high, edged down to a nearly four-year low. Asking rents for
office space were up sharply in Manhattan but were generally flat in the outlying markets.
The industrial market showed signs of weakening: although vacancy rates were little
changed, rents declined throughout the New York metropolitan area.
Overall, commercial construction activity appears relatively stable--compared with 2005,
there is reported to be somewhat less industrial construction underway but more office and
hotel construction. Still, contacts note that the level of commercial development remains
relatively low and note that a good deal of office and hotel space, predominantly in New
York City, has been converted to residential use.
Other Business Activity
A major New York City employment agency, specializing in office jobs, reports that labor
market conditions are increasingly tight, with a sizable number of job openings--particularly
in financial and legal services--and fewer job seekers. This contact also estimates that salaries
are up at least 15 percent from a year ago for experienced office workers, after several years
of little change. A contact in the financial services sector reports continued brisk growth in
both employment and compensation. New York State manufacturers also report continued
expansion in employment levels in early April. More generally, though, while manufacturers
are increasingly optimistic about the near-term outlook, they report a deceleration in general
business activity and a particularly sharp slowing in new orders and shipments in April,
following a strong March. Manufacturers also continue to report fairly widespread increases
in input prices but more moderate increases in selling prices. Non-manufacturing firms in the
district also report continued widespread increases in input prices and some acceleration in
wages.
Financial Developments
Bankers at small to medium-sized banks in the 2nd District report decreased demand for all
types of loans since the last report; decreased demand continues to be most evident in
residential mortgages. Refinancing activity has also continued to weaken. Credit standards
tightened slightly for consumer loans and residential mortgages but remained little changed
for commercial mortgages and loans. Bankers again report widespread increases in both loan
rates and deposit rates. Finally, bankers report somewhat higher delinquency rates on
commercial and industrial loans, and marginally higher delinquencies on non-residential
mortgage and consumer loans.
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Third District--Philadelphia
Economic activity in the Third District increased in April. Manufacturers reported that
shipments and new orders were up during the month. Retail sales of general merchandise
rose, and the year-to-year gain improved compared with March. Auto sales increased slightly
in April. Bank lending has been increasing, although demand for residential mortgages has
slowed. Firms in the District's major service industries reported steady, moderate growth in
business.
Third District business contacts generally expect business activity in the region to continue to
expand at a moderate rate. Manufacturers expect business to continue moving up at its
current growth rate. Retailers anticipate steady gains through the spring. Auto dealers expect
the sales rate to be level in the months ahead and below last year's pace. Banks expect
business and personal lending to increase moderately, but they forecast a decrease in
residential mortgage lending. Area companies in the service industries generally expect
steady growth at about the current rate.
Manufacturing
Manufacturers in the Third District reported increased demand for their products in April.
Overall, activity in this sector appeared to be growing at about the same pace as it did in the
March. Around one-third of the companies contacted in April said that shipments and new
orders rose from the previous month, twice as many as reported declines. On balance, area
manufacturers reported an upturn in order backlogs, but no change in delivery times.
Business improved in April in most of the District's major manufacturing sectors.
Overall, manufacturers expect growth in business activity to stay on an upward trend in the
months ahead. Half of the firms contacted in April expect their shipments and orders to
increase during the next six months; about one-tenth expect decreases. On balance, capital
spending plans among District manufacturers call for modest increases in expenditures.
Retail
Most of the retailers contacted for this report indicated that sales picked up somewhat from
the March pace. Sales of general merchandise increased a bit more quickly in April on both a
month-to-month and year-to-year basis. Area merchants said a return to warm weather,
school vacations, and Easter stimulated sales. Sales increased for most categories of
merchandise, with the strongest gains in sporting goods, home and garden supplies, and
spring apparel. In general, Third District retailers expect the recent rate of sales growth to
persist for the next few months until the usual summer slack period.
Auto sales in the region rose slightly in April. Dealers said the sales rate in recent weeks has
been somewhat better than it was earlier in the year. Foreign models continued to have better
year-to-year sales comparisons than domestic models. Sales have slowed for vehicles that are
not eligible for manufacturers' incentives. Inventories were said to be fairly low as dealers
have kept orders to manufacturers under control and some smaller dealerships have closed.
The consensus among auto dealers in the region is that sales will be close to steady for the
rest of the year but slower than last year's pace.
Finance
The volume of loans outstanding at Third District banks rose from March into April,
according to commercial bank lending officers contacted for this report. Commercial and
industrial lending increased for most banks. Consumer lending also rose, and some banks
reported increases in home equity lending. Demand for residential mortgages at banks and
other financial institutions slowed. Some banks indicated that they had increased the amount
of mortgage loans they were retaining in their portfolios. Banks and other lenders in the
region reported that competition for loans continues to be strong and net interest margins
remain thin.
Bankers in the District expect moderate growth in business and consumer lending in the
months ahead but foresee further weakening in residential mortgage lending. Commercial
bank loan officers contacted for this report generally indicated that credit quality remained
good, but several expressed concern that rising interest rates on adjustable-rate mortgages
might lead to an increase in delinquencies later in the year.
Services
Most of the Third District service firms contacted in April reported that activity continued to
expand at a steady, moderate pace. Business services firms and information technology
service firms posted steady growth during the first quarter. Employment agencies and
temporary help firms reported that demand for workers has been rising. Most indicated that
the advance has been fairly steady, but some said hiring has picked up somewhat after a slow
start to the year. Trucking firms reported increases in activity during the first quarter. Most of
the service-sector firms polled expect business to continue to advance at about its current
growth rate in the months ahead, although some firms that do business for government
entities expect a gradual slowdown in revenues from those sources.
Prices and Wages
Business firms in the Third District reported continuing increases in costs of materials and
intermediate goods, although the rate of increase does not appear to be accelerating.
Manufacturers continued to face price increases for metals, petroleum-based products, and
chemicals. Construction firms reported continued tight supplies for some materials. Some
commercial real estate companies noted that building operating and maintenance costs have
been rising. They expect tenants, especially retail stores, to raise the prices of the goods or
services they market in order to cover the increases.
Employers in a range of industries reported that labor markets remain tight. Several area
firms that are expanding noted that they are paying at the high end of salary ranges more
often than last year for positions they need to fill. Employment agencies expect the pace of
recruiting to be steady or to accelerate in the second quarter.
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Fourth District--Cleveland
Economic activity continued to show steady gains throughout the District in March and early
April. Manufacturers saw steady increases in production in the six weeks through the middle
of April, relative to earlier this year. Construction activity also appeared to strengthen, though
rates of home building were below those of this time last year. Commercial lending remained
relatively robust. And the demand for trucking and shipping services was strong and broadbased. While retailers reported that sales were weaker-than-expected in March and early
April, this was thought to be partly attributable to Easter's arrival in April.
In general, hiring remained relatively limited across the District. For firms that were hiring,
outside of a few specialties, employers appeared able to find the workers they needed; there
were no reports of any accumulating wage pressure. Staffing services companies, however,
did report that those seeking jobs were able to find them more quickly than in the recent past.
Regarding cost pressures, contacts reported increases in the prices for cement, various
metals, and petroleum products, and some ability to pass price increases through to end users.
Nevertheless, retail prices remained relatively flat.
Manufacturing
Contacts continued to report steady increases in production at the District's durable goods
facilities in March and early April, with production levels generally above those of this time
last year. Orders for future shipments were also strong. Steel producers saw strong demand
from an array of industries, though shipments to the auto sector were mixed, as some
American automakers attempt to reduce capacity. At District auto assembly plants,
production rose roughly 5% on a year-over-year basis. Durable good producers generally
planned to spend as much or more on investment outlays through the next six months as they
are currently spending. More hiring also appears to be occurring, with additional increases in
staff planned. Finally, firms reported increases in input costs, especially for various metals
and petroleum products, with only some firms able to offset these increases through price
changes.
Production showed slight increases for many manufacturers of nondurable goods in March
and early April, relative to earlier this year. And new orders showed increasing strength as
well, suggesting that production may continue to improve in the months ahead. Nevertheless,
current production levels remain less than those of a year ago. In general, nondurable goods
manufacturers are not investing in additional capacity. Most firms are also not adding to their
staffs. Like durable goods producers, many nondurable goods manufacturers mentioned
increases in metals and petroleum prices, though some petroleum-derived products were
actually less expensive than earlier this year.
Retail
Year-over-year sales gains were generally weaker-than-anticipated at District retail outlets in
March and early April. However, contacts cautioned that these comparisons were
problematic since Easter fell in late March last year, but mid-April this year. Some weakness
was also attributed to increases in gasoline prices, particularly at discounters and others
offering lower-price point merchandise. While sales at specialty-apparel shops were weakerthan-expected, drug stores and grocers generally reported sales above the levels of this time
last year. Most contacts reported that markdowns and promotional activity were within the
normal ranges. Hiring in the industry continued to be limited.
Sales of new and used automobiles improved slightly in March, relative to the beginning of
this year. However, sales of new domestic nameplates remained at relatively lower levels.
Contacts reported attempting to more effectively manage their inventories, and trim the
number of vehicles on their lots, given that holding costs have increased.
Construction
Residential builders reported a slight increase in sales in March and early April, relative to
earlier this year. Nevertheless, some of this increase relates to regular seasonal fluctuations.
Compared to this period a year ago, most builders reported a reduction in sales. Most
contacts expect sales in 2006 to be below the totals of recent years. Accordingly, prices are
rising less rapidly, with many builders more willing to discount than during the previous two
years. Regarding input costs, most contacts reported that their materials costs remained
relatively stable in March and April. Some builders said concrete costs continued to increase,
though several said that lumber costs fell. Few firms reported hiring in recent weeks, while
subcontractors were thought to be more available than typical for this time of year.
For firms involved in commercial construction, sales increased slightly relative to earlier this
year, and were also up relative to a year ago. In addition, most commercial contractors
reported that their backlogs were strong. Demand was driven in part by health care providers
and educational establishments; construction of new office space was relatively less robust.
Increases in materials costs were more widely reported among commercial contractors. Many
builders reported increases in steel, cement, and petroleum-product prices. Still, most
builders have been able to pass through these costs increases. Hiring remained relatively
limited in the industry, and while subcontractors seem to be readily available at present, some
contacts were concerned that there will be shortages soon.
Banking
In March and early April, commercial loan demand increased slightly among smaller lenders
in the District, and remained steady at bigger banks. The latter also reported that lending for
commercial real estate remained strong. Consumer loan demand was more mixed across
institutions, though the issuance of mortgages and autos loans appeared in general to fall
from previous levels. Contacts expressed concerns about narrow net-interest margins, though
credit quality continued to be described as strong. Finally, contacts reported that their core
deposits rose in recent weeks.
Transportation
Demand for trucking and shipping services remained strong through early April, though
some contacts reported a slight softening in activity in March. As fuel prices trended up in
March and April, contacts expressed concern over the level of fuel costs. However, these
costs continue largely to be passed through to end-users using surcharges. Moreover, many
contacts believe that they can raise their base rates if needed, given the strength of demand.
Drivers remain in short supply, according to contacts, though wage rates were generally
unchanged. As previously reported, capital spending in the industry is strong, as firms
attempt to purchase trucks that don't need to meet impending EPA guidelines.
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Fifth District--Richmond
Fifth District economic activity expanded at a somewhat quicker pace since our last report, as
a pickup in manufacturing activity outweighed softening in housing and retail activity.
District manufacturers said that shipments and new orders rose briskly in March and early
April, and that factory employment grew moderately. District services businesses also
reported solid revenue gains and higher employment. Retail sales remained soft, however,
and employment in the sector continued to slip. District real estate contacts reported
continued strength in commercial leasing activity in recent weeks but said that home sales
slowed and that home price appreciation moderated in some areas. In the financial sector,
growth in both residential and commercial real estate lending slowed. Business contacts
generally reported that price increases for goods and services remained moderate since our
last report. In agriculture, unusually dry weather depleted soil moisture and slowed crop
development, though recent rainfall offered some relief.
Services
Service-producing firms reported solid growth in revenues since our last report. The
increases were widespread across industries: architectural and engineering firms, hospitals
and health care centers, and hotels and restaurants were among the types of organizations
reporting solid growth. After pausing in March, services hiring picked up the pace in April,
and wages continued to rise briskly. Shortages of nurses and truck drivers were reported in
some communities--contacts reported offering substantially higher wages to attract
applicants. Price growth in the services sector edged up since our last report, though
increases remained modest. Looking ahead, respondents expected somewhat higher price
increases in the months ahead.
Retail
District retailers continued to report sluggish sales in March and the first half of April.
Contacts at apparel stores in Maryland and West Virginia said their sales pace softened.
Among categories, sales were flat at grocery stores and grew less rapidly at big-box retailers,
reportedly because higher gasoline prices caused some customers to trim their purchases.
Automobile and light truck sales rose at dealerships in some areas in recent weeks, but sales
of other big-ticket items remained generally lackluster. Retail employment softened in March
and early April, with the latest readings suggesting that the softness is lessening. Retail prices
rose more slowly in March and early April, and expectations of future increases waned.
Manufacturing
District manufacturing activity strengthened considerably since our last report. Shipments,
new orders, and capacity utilization rose briskly in March and the first half of April.
Producers of electrical equipment, textiles and apparel, and tobacco products recorded the
strongest gains in output. An electrical equipment manufacturer in South Carolina told us that
increased demand from the Middle East lifted his sales in recent months. Consistent with
stronger activity, manufacturers reported a pickup in hiring again after several months of
modest payroll declines. Contacts said that the pace of growth in raw materials prices was
little changed since our last report, while growth in final goods prices moderated. Some
manufacturers noted difficulty in passing higher costs along to their customers--a North
Carolina furniture manufacturer, for example, said that higher fuel surcharges on his raw
materials were "eating into profits."
Finance
District bankers reported that lending activity grew more slowly in March and the first half of
April. Some lenders said higher interest rates on home mortgages damped growth in home
sales, while others told us that home price escalation trimmed demand and that "a large part
of the population is now priced out of the market." District bankers said rising interest rates
also slowed growth in commercial lending, though they noted that commercial lending for
mergers and acquisitions activity and for construction of office buildings remained at high
levels. A Richmond, Va., banker reported that private equity groups had "lots of money to
invest" and were expected to boost merger and acquisition activity throughout 2006.
Real Estate
Residential real estate agents reported generally slower home sales and more moderate price
growth in March and early April. A contact in Vienna, Va., said that housing markets
remained healthy, but that sales were "softer." "Buyers are out there, but they won't make
quick decisions," he noted. An agent in Virginia Beach, Va., similarly remarked: "People are
thinking more before buying. They take more time to shop around now." In Washington,
D.C., an agent said that the real estate market had slowed over the past several months,
including less traffic at open houses. Contacts in some areas in the Fifth District noted that
homes--particularly those in upper price ranges--were staying on the market longer. Real
estate agents generally reported that home prices were no longer escalating at the rapid pace
of 2005. A contact in Washington, D.C., said that many area home sellers were reducing
asking prices: "It's clearly a buyers' market now and buyers can negotiate better prices," he
noted.
Commercial real estate agents reported continued strength in leasing activity in most areas.
An agent in Raleigh, N.C., said "it [leasing activity] has not been gangbusters, but it's been
pretty steady." Agents reported that vacancy rates for office and retail space remained low
and that demand continued to be strong. A contact in Prince William, Va., described a large
office building that was just recently put on the market and was already half leased. District
real estate agents said that commercial rents rose modestly since our last report. A Charlotte,
N.C., agent mentioned that with vacancy rates so low, the increase in rents was "simply a
matter of good old supply and demand." Little change in new construction was reported.
Tourism
Tourism was mixed since our last report. A manager at a mountain resort in Virginia reported
that his company had just completed a record-setting ski season and said that bookings for
the Easter weekend were double those of a year ago. In contrast, contacts along coastal areas
said that higher gasoline prices had hampered business there--a hotelier in Virginia Beach,
Va., told us "bookings get slower as the price of gasoline gets higher." Higher gasoline prices,
however, did not diminish attendance at the 94th annual National Cherry Blossom Festival in
Washington, D.C. Approximately 1 million people showed up for the festival this year.
Temporary Employment
Temporary employment agencies generally reported stronger demand for workers in March
and early April. An agent in Richmond, Va., said that the area's low unemployment rate had
made it more difficult for companies to find qualified workers, boosting demand for
temporary workers. Contacts in Washington, D.C., and Cary, N.C., reported that demand for
temporary workers had been boosted by stronger economic growth in those areas.
Employment agents noted that it had become harder to find workers and said that they would
be raising wages over the next six months to attract more applicants.
Agriculture
Dry weather during much of March and early April depleted soil moisture and stressed
pastures and crops in many areas of the District. Agricultural analysts said that pastureland in
Virginia and the Carolinas was in generally poor condition due to the lack of rain. Hay and
small grain development in Virginia was also slowed by the dry conditions. As for brighter
notes, widespread rainfall was received in mid April, lessening concerns about dry
conditions. In addition, spring planting of corn was ahead of schedule in most of the District
and livestock were reported to be in good condition in Virginia and West Virginia.
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Sixth District--Atlanta
Reports from Sixth District business contacts were mostly positive in March and early April.
Merchants experienced modestly increasing sales, while vehicle sales were little changed
over the month. Real estate contacts noted softening sales in some parts of the District, and
declining sales in Florida. Residential construction remained strong throughout the region as
builders worked off backlogs. Nonresidential sales and construction improved overall, but
there were some reports of commercial projects being delayed because of rising costs.
Manufacturing reports were mixed. Strong demand boosted production and hiring in some
manufacturing sectors, while layoffs were announced in others. The demand for
transportation services remained robust. Reports from the tourism industry were positive,
although rising gasoline prices and concerns about the upcoming hurricane season clouded
the outlook. Commercial and industrial lending activity strengthened while residential loans
slowed in parts of the District. Labor market conditions remained firm with numerous reports
of labor shortages, especially in skilled positions. Contacts again cited high prices for
building materials, energy, and industrial inputs, while firms' ability to pass on higher costs to
consumers varied.
Consumer Spending
Most retail contacts reported that activity during March and early April rose modestly
compared with a year ago, and the majority said that sales were above plan. Most merchants
contacted said that they were satisfied with their current inventory position. The outlook was
upbeat with most anticipating rising sales over the next several months.
The overall pace of vehicle sales was little changed. Contacts noted that imports continued to
gain market share while domestic dealers reported lower sales. The demand for fuel efficient
vehicles increased. Commercial fleet sales by domestic automakers declined from earlier in
the year.
Real Estate
According to reports from homebuilders and residential real estate contacts, single-family
home sales softened in some parts of the District during March and early April, and declined
in Florida from record levels. Despite this, single-family construction remained strong as
builders worked to fill the backlog of orders made last year. As a consequence, home
inventories rose in most Florida markets, while there were scattered reports of higher
inventories in other parts of the District. Condominium sales in Florida continued to weaken,
with more projects cancelled or postponed. Contacts anticipate that recent trends in District
housing markets will continue during the second quarter.
District commercial real estate markets continued to experience stronger levels of demand,
but overall development remained at low levels. There were scattered reports of projects put
on hold or delayed because of rising construction costs. Some contacts noted that projects
have been scaled back or redesigned in an effort to rein in costs. The pace of redevelopment
along the Gulf Coast remains slow and debris removal continues to dominate activity.
Manufacturing and Transportation
Production and hiring increased in some manufacturing sectors, while new layoffs were
reported in others. Recent announcements of an expansion of an aerospace firm and a new
vehicle production facility will add thousands of jobs to Georgia's transportation equipment
sector over the next several years. Building materials manufacturers throughout the District
continued to report robust activity. Tool and die companies reported that business was good,
while some steel producers noted improving orders. The textile and apparel segment
continued to struggle, however, with plant closures announced in Alabama and Georgia.
Demand for transportation services remained strong.
Tourism and Business Travel
Tourism activity remained positive in March and early April, according to most reports.
South Florida tourism was characterized as vibrant, and strong attendance was noted for
central Florida theme parks over Spring break. A special study for the Florida Commission
on Tourism related that although the industry is currently reporting positive advance
bookings, there is concern about the potential negative impact of the approaching hurricane
season. The new Georgia Aquarium recorded more than 1 million visitors in its first 98 days,
greatly exceeding expectations. Six more casinos are expected to be opened along the
Mississippi Gulf Coast by the end of summer, in addition to the three that are already up and
running. A large New Orleans amusement park announced that it would not re-open in 2006,
a setback to the local tourism industry there.
Banking and Finance
Credit quality in the District continued at strong levels and delinquency rates remained low.
Loan growth was healthy, but there was some slowing in real estate lending. An increase in
commercial and industrial lending activity was noted in March.
Employment and Prices
Labor markets remained tight in March and early April, according to most reports. The
shortage of skilled workers continued in many parts of the District, and lower skilled
personnel remained scarce in Katrina-affected areas. A staffing firm said that business over
the next six months is expected to trend upward because of continuing high demand for labor.
Developers throughout the District again relayed concern over a labor shortage in the
construction industry. A significant number of merchants surveyed noted difficulty filling
positions. A shortage of qualified truck drivers was also noted by several business contacts.
Energy costs were noted as a constraining factor in most industries, and higher input prices
continued to affect manufacturers and builders. The ability to pass on higher costs to
customers varied across firms. Contacts noted that more building contractors were adding a
margin to their quotes to try and protect themselves against further input price increases.
However, those with fixed contracts have been unable to pass along cost increases, and some
firms have reportedly delayed projects as a consequence. Oil service companies have been
able to increase prices for equipment and services because of strong demand.
Agriculture and Natural Resources
Recent dry weather had a mixed impact on regional crops. Vegetable harvesting was in full
swing in south Florida. In Georgia, the lack of rains reportedly slowed some livestock pasture
growth. Meanwhile, poultry prices remained depressed because of uncertainties related to the
impact of the Avian Flu on export markets. Government reports show moderate declines in
the amount of shut-in oil and gas in the Gulf of Mexico. By early April, approximately 23
percent of oil and 14 percent of natural gas remained shut-in. A little over 40 percent of the
remaining shut-in oil production is attributable to a single platform that is expected to return
to production in the second half of this year.
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Seventh District--Chicago
Economic activity in the Seventh District continued to expand at a moderate pace during
March and early April. Spending by both consumers and businesses increased at rates similar
to those in the last report. Labor market conditions were little changed, with small
employment gains in some industries and only sporadic reports of layoffs. Manufacturing
activity remained strong. Residential construction and real estate activity softened, while
commercial real estate activity increased at a slow pace. Mortgage demand was down, but the
expansion in commercial lending continued. Cost and price pressures remained firm. Rains
boosted moisture conditions but slowed preparations for planting in parts of the District.
Consumer spending
Consumer spending continued to increase modestly in March and early April. Retailers in
most areas said that sales gains from last year were running at low single-digit growth rates.
Electronics and gardening items recorded strong increases. High gasoline prices have
reportedly slowed sales at discounters but have had little effect on the demand for expensive
durable goods, such as pleasure boats and recreation vehicles. Several contacts expressed
concern that higher gas prices during the summer driving season would lead to softer retail
sales in coming months. Retail inventories were at desired levels. Auto dealers said that sales
of new vehicles remained soft, but used car sales were holding up well. Several dealers said
that high gas prices were eroding demand for light trucks, but a few also said that vehicle
prices and finance rates were becoming bigger factors in consumers' decision making.
Tourism increased modestly in the District, with hotel bookings running ahead of a year ago.
Business spending
Business spending and hiring expanded again. For the most part, District firms were holding
to their existing capital spending plans; these generally call for higher outlays this year than
last. The largest gains were budgeted for equipment purchases, but a significant number of
contacts planned to increase construction spending. A local information technology firm
noted an increase in the number of projects started during the first quarter and forwardlooking indicators suggested that activity would remain solid this year. Overall labor market
conditions were little changed, with small employment gains in some industries and only
sporadic reports of layoffs. Demand for information technology workers was increasing. One
pharmaceutical firm said its head count was up nationwide, but down at their Midwest
locations. Retail hiring was limited to staffing new stores. In contrast, several auto suppliers
and mortgage brokers reported reductions in workers. Temporary help firms reported that
growth in billable hours had firmed in the District as a whole, as the long-running declines in
bookings in Michigan had showed signs of "settling out." Shortages of skilled manufacturing
workers persisted in the District. One contact noted that enrollments in an apprenticeship
program had increased recently.
Construction/real estate
Construction and real estate activity was mixed by both location and market segment.
Residential activity continued to slow from high levels in most areas. Contacts in Illinois,
Indiana, and Michigan said that sales had softened, while real estate agents in Wisconsin said
that sales in March had recovered some. Most contacts indicated that the supply of new and
existing homes for sale was growing, buyer traffic was down, and homes were staying on the
market longer. In addition, new home construction slowed in most areas. Apartment vacancy
rates were steady. On balance, commercial construction and real estate continued to expand
at a slow pace. In southeast Michigan, demand for all types of commercial space was weak.
In contrast, contacts in Chicago reported a sharp pickup in net absorption of office space,
with a number of large block tenants entering the market. The amount of space under
construction ticked up in the first quarter. Commercial vacancy rates were either little
changed or down slightly.
Manufacturing
Manufacturing activity remained strong during March and early April. Demand for heavy
equipment continued to be solid and order backlogs increased. Orders for mining equipment
remained especially strong; current production capacity has been booked through 2007 and
some producers have begun taking orders for 2008. One industry analyst noted that
equipment makers have been trying to increase capacity by outsourcing more intermediate
work and just focusing on assemblies. Orders of agricultural equipment were flat. Activity in
the tooling industry remained brisk, led by demand from the energy sector. Steel producers
reported strong demand from all markets and growing backlogs. Steel imports were
increasing as well. Wallboard production continued to run near full capacity. Heavy- and
medium-duty truck orders remained solid, reflecting in part the continued pre-purchase of
trucks before new EPA standards go into effect at the beginning of next year. Nationwide,
light vehicle sales were flat between March and early April. One automaker said that vehicle
inventories were "excessive," and that this would lead to either production cuts or higher
incentives.
Banking/finance
Lending activity moderated further. Bankers noted additional declines in mortgage
applications for both purchases and refinancing. Still, one contact said that a number of
customers were refinancing from adjustable to fixed-rate loans in order to lock in rates before
they moved any higher. Demand for home-equity loans declined, which most contacts
attributed to slower increases in home values. Mortgage spreads were slim due to competitive
pressures. As a result, one banker in Chicago expected to see a number of originators exit the
market in the second quarter. Reports on household credit quality were favorable, though
exceptions were noted from Michigan. Deposit growth was sluggish, and contacts said that
deposit rates were priced aggressively. Commercial lending expanded, continuing the trends
seen earlier in the year. Loan volume and use of existing credit lines picked up, and demand
was solid across product markets. One contact noted that their optimism about loan demand
had improved markedly since the last reporting period. Commercial credit quality remained
in good shape.
Prices/costs
Price and cost pressures remained firm in March and early April. Many contacts noted that
higher energy prices were boosting costs, and only heavy truck manufacturers and
toolmakers indicated that they had been successful in passing these costs through to their
customers. Steel prices increased noticeably since the last reporting period. A construction
industry analyst noted that roadbuilding material costs have moved significantly higher,
leading some state governments to reevaluate their projects. Price reports at the retail level
were mixed. One retail chain said it was increasing prices of its private label goods, but an
industry analyst said that competitive pressures were keeping most retailers reluctant to
increase prices. Hotel room rates were flat to slightly higher, while new vehicle prices were
flat to slightly lower. Labor costs increased at a steady rate in most industries.
Agriculture
Agricultural conditions improved in March and early April. Recent rains reduced the area of
the District affected by drought, although the rains also slowed planting preparations in parts
of the region. Still, contacts said that more and timely rains will be critical for the growing
season. Contacts continued to believe that soybean acres would increase relative to corn this
year. However, the gains likely will be not as big as previously reported due to recent
changes in the relative crop prices and fertilizer costs. Also, increases in ethanol production
were expected to boost the demand for corn further. Cash flows were tight during the
reporting period for crop farmers, dairy operators and cattle feeders. In contrast, hog
producers managed better than expected, and some expansions are under consideration in
Indiana. There were mixed reports on farmland values.
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Eighth District--St. Louis
Eighth District economic activity expanded modestly since the previous survey. During
March, the service sector continued to grow, and manufacturing showed signs of continued
improvement. Many contacts in retail trade reported gains relative to last year, although
reports from auto dealers indicated decreases in sales relative to this time in 2005.
Commercial construction activity continued to increase, while home sales and single-family
residential permits in January and February varied across the District. Total lending activity
among small and mid-sized banks remained steady.
Manufacturing and Other Business Activity
Manufacturing in the District continued to show signs of moderate expansion. Based on
reports received during March, several manufacturers are expanding or opening plants,
whereas fewer reported plant closings and workforce reductions. Firms in the plastics, auto
parts, and wood products industries announced plans to open new facilities in the District.
Contacts in the auto parts, food, transportation equipment, machinery, electronic products,
fabricated metal products, and motor vehicles industries reported plans to expand existing
facilities and hire additional workers within the next 12 months. Several contacts in the
apparel industry, however, reported plans to close plants and lay off workers. In general, most
contacts characterized economic activity and the outlook for the future as either "growing" or
"stable."
The District's service sector continued to expand in most areas. Contacts in the business
support, warehousing, and health services industries reported plans to expand their
workforces. Contacts in the freight transportation industry reported strong demand for their
services. Most District retailers reported increases in sales of 5 to 10 percent over March
2005 levels. Clothing, building materials, and "big box" retailers reported especially strong
growth. Auto sales during March, in contrast, remained below 2005 levels in most areas of
the District. Domestic and sport utility vehicles, as well as trucks, experienced the largest
decreases in sales. Several auto dealers also reported that sales of luxury models were "soft."
Imports and used vehicles fared better, with sales of these described as "relatively brisk" in
some areas of the District.
Real Estate and Construction
Home sales were mixed throughout the District. February year-to-date sales were up 21
percent in Memphis and over 6 percent in St. Louis compared with the same period in 2005.
In Little Rock, February year-to-date home sales were down 6 percent, and in Louisville
home sales remained virtually unchanged from the same period last year. Residential
construction continued to be slow in much of the District. February year-to-date singlefamily residential permits declined 44 percent in Louisville, 6 percent in St. Louis, and over 4
percent in Memphis. In contrast, permits were up 16 percent in Little Rock.
Commercial real estate markets in the District continued to grow. Contacts in southern
Indiana reported that commercial construction was active, and contacts in northeast Arkansas
reported that a number of projects were being planned. Reports indicated strong commercial
construction activity in Little Rock, and contacts in St. Louis reported that, in terms of square
footage, commercial construction for 2006 would surpass commercial construction projects
completed in 2005. Contacts in west Tennessee reported positive expectations for
commercial and industrial construction for 2006, and contacts in northeast Mississippi
reported that a large industrial project was recently announced for that area.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks showed essentially
no change from early January to late March. Real estate lending, which makes up 72.4
percent of total loans, increased 1.3 percent. Commercial and industrial loans, accounting for
17.2 percent of total loans, decreased 1.2 percent. Loans to individuals, roughly 4.7 percent
of total loans, fell 2.3 percent. All other loans, approximately 5.7 percent of total loans,
decreased 9.5 percent. Over this period, total deposits at these banks decreased 0.7 percent.
Agriculture and Natural Resources
Farmers in the District reported that they expected to plant 8 percent fewer acres of corn, 4
percent fewer acres of sorghum, 14 percent fewer acres of rice, and 15 percent fewer acres of
tobacco this year than in 2005. They also anticipated planting 7 percent more acres of
soybeans and 4 percent more acres of cotton than last year. Some farmers reported switching
from corn to soybeans because the latter were cheaper to grow in terms of nitrogen fertilizer
and fuel, which have increased in cost. This year's total winter wheat acreage increased by
more than 40 percent from last year, and at least 68 percent of each District state's crop was
reported to be in good or excellent condition. At least two-thirds of the pastures in each state
were reported to be in fair or good condition.
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Ninth District--Minneapolis
The Ninth District economy grew at a solid pace since the last report. Increases in activity
were noted in consumer spending, manufacturing, tourism, mining, agriculture, construction,
and commercial real estate. Meanwhile, residential real estate softened. Overall employment
levels and wages increased modestly. Significant price increases were noted in gasoline and
some construction materials.
Consumer Spending and Tourism
Overall consumer spending increased moderately since the last report. Retail sales were up
slightly in March compared with last year's earlier Easter season. A major Minneapolis-based
retailer reported same-store sales up 2 percent in March compared with a year ago. A
Minneapolis mall manager noted that March traffic was about even with a year ago, with
sales up about 2 percent; sales and traffic were brisk on the Friday and Saturday of Easter
weekend. Recent sales and traffic at another Minneapolis area mall increased about 2 percent
from a year earlier. A mall manager in Montana noted that March apparel and food sales
increased from a year ago; overall sales in February increased 10 percent.
Recent vehicle sales were generally lower than a year ago in Montana, according to a
representative of an auto dealers association. After slow vehicle sales in South Dakota during
January and February, sales in March and early April showed some signs of improvement,
according to a representative of an auto dealers association.
The winter tourism season finished solid in several parts of the district. Downhill ski resorts
in Montana reported deep snow pack and late season lift ticket sales above a year ago.
Tourism destinations in eastern Montana also reported that visits were up compared with last
year. A chamber of commerce representative in northwestern Wisconsin noted that the winter
tourism season finished stronger than last year. Recent hotel room occupancy rates in
Minneapolis have trended upward as corporate convention business has shown signs of
strengthening.
Construction and Real Estate
Overall construction activity grew modestly. Commercial construction contacts surveyed in
the district reported year-to-date activity to be higher or about the same compared to last
year. Commercial real estate developers in the Upper Peninsula of Michigan expect a
stronger construction season this year than in recent years. Commercial building permits
were up significantly in number and value over last year in Fargo, N.D., and Rochester,
Minn. "We had a good year in 2005; 2006 looks even stronger," said a Minnesota concrete
contractor. Year-to-date commercial building activity is up over last year in Minneapolis-St.
Paul; however, March home-building permits were down 10 percent in value from a year
earlier. March new home permits in Rochester, Minn. were down significantly in value from
a year earlier. While year-to-date residential permits were down slightly in Sioux Falls, S.D.,
developers there announced plans for a 300-acre residential and retail project on the city's
east side.
Commercial real estate was strong. The Minneapolis-St. Paul office market continued to
grow, with a market research firm predicting growth in absorption through 2007 with little
increase in supply. Meanwhile, the industrial market there is heating up, with increased
absorption. In contrast, residential real estate softened. Realtors in Fargo, N.D., reported
March closed sales down 2 percent last year and an increase in listings. New listings in the
Minneapolis area were up 47 percent over last year, but buying activity was level and time on
the market trended upward.
Manufacturing
Manufacturing activity expanded. A March survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated fast growth of manufacturing activity in the Dakotas and
Minnesota. In Minnesota, a company plans to double the size of a construction equipment
component plant, a radiator company plans to build another factory, and a printing company
is building a new facility. A control panel manufacturer in the Upper Peninsula is adding
manufacturing and warehouse space.
Energy and Mining
Activity increased in the mining sector and was stable at a high level in the energy sector.
Nearly all open mines in the district were producing at near full capacity. A mine in Montana
is planning to expand capacity. In addition, several companies are exploring or developing
mineral properties in Montana and Minnesota. Oil and gas exploration and production were
about level from late February through late March.
Agriculture
Activity in the agricultural sector increased. Spring rains across the district bode well for the
upcoming growing season. Half the winter wheat crop in Montana is rated good or excellent,
and the calving season is progressing ahead of last year and the five-year average.
Meanwhile, prices remained relatively solid throughout March for the main agricultural
products produced in the district.
Employment, wages and prices
Overall employment levels increased modestly since the last report. According to a survey of
Minneapolis-St. Paul companies by a temporary staffing agency, 29 percent of respondents
expect to increase staffing levels during the second quarter, while 9 percent expect decreases.
Montana bank directors reported tight labor market conditions in many areas. March initial
claims for unemployment insurance were flat from a year ago in Minnesota.
Some companies announced upcoming staff reductions. A slowdown at a motor vehicle plant
in St. Paul could result in at least 150 layoffs during the summer. Also in Minnesota, a
consumer electronics retailer recently announced the elimination of 300 positions at its
corporate headquarters and an investment bank recently announced plans to reduce staff by
350 positions following a purchase of the company.
Overall wage increases were moderate. Aside from notable increases in certain trades, overall
wage increases were modest, said a Montana bank director. According to results of a recent
St. Cloud (Minn.) Area Business Outlook Survey, 50 percent of respondents expect to
increase employee compensation over the next six months. In the same survey a year ago, 54
percent of respondents anticipated increases.
Significant price increases were noted in gasoline and some construction materials.
Minnesota gasoline prices in the middle of April were up about 45 cents per gallon from
February and almost 50 cents per gallon from a year ago. Price increases for construction
materials include lumber, concrete, aluminum, and some steel products. Copper prices in
April were more than 50 percent higher than levels in 2005.
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Tenth District--Kansas City
The Tenth District economy grew solidly in late March and early April. Growth in
manufacturing activity increased, consumer spending expanded, and labor markets firmed.
Energy activity continued to rise, while drought conditions eased but remained a concern in
the agricultural sector. Commercial real estate activity held steady, and residential
construction declined somewhat. Wage pressures and wholesale price pressures rose slightly,
while retail price pressures edged down.
Consumer Spending
Consumer spending expanded solidly in the period from late March to early April. Most
retail contacts reported that sales were higher than in the prior survey period and above
year-ago levels. However, several mall managers noted a decline in traffic in recent weeks.
For the most part, store managers were satisfied with inventory levels and continue to be
optimistic about future sales. Auto dealers reported that sales in late March and early April
were up slightly from the previous survey period but generally lower than a year ago.
Fuel-efficient cars were reported to be selling well, while sales of large SUVs and pickup
trucks were characterized as weak. Inventory levels were said to be satisfactory at most
dealerships, and dealers generally expect sales to hold steady in the coming months. Travel
and tourism contacts reported solid growth in activity since the previous survey. Passenger
counts were higher than a year ago at most airports across the district, and several airports
reported record traffic. Hotel occupancy rates also remained higher than a year ago in most
areas. Contacts generally expect that tourism activity will stay strong in the months ahead.
Manufacturing
Manufacturing activity in the district continued to expand in late March and early April.
Many plant managers reported increases in production and new orders, and growth in capital
spending increased after slowing somewhat in the previous survey period. A substantial
fraction of respondents expect further increases in production going forward. Contacts
reported that some materials, including steel and aluminum, had become more difficult to
obtain than in previous survey periods. Most contacts expect these difficulties will not be
resolved in the near future.
Real Estate and Construction
Residential construction declined slightly in late March and early April, and commercial real
estate activity held steady. Most home builders reported that starts decreased somewhat since
the previous survey. Many builders expect further declines in the months ahead, although
new home construction is expected to remain strong in a few areas. Construction materials
were generally reported to be readily available, and no significant problems obtaining
materials are anticipated in the coming months. Residential real estate agents said that home
sales were up slightly since the previous survey, and they expect sales to generally remain
unchanged in the coming months. Inventories of unsold homes continued to rise in many
markets and, for the most part, were well above year-ago levels. Home price appreciation
remained modest in most areas, and real estate agents expect moderate growth in home prices
going forward. Mortgage lenders reported a slight increase in home purchase loans since the
previous survey and said demand was similar to a year ago. Demand for refinancings was
unchanged from the previous survey and remained below year-ago levels. Commercial real
estate activity in the district held steady in late March and early April. In most markets,
vacancy rates and rents for commercial space were little changed from the previous survey
period, although conditions remained stronger than a year ago. Commercial real estate
markets are expected to improve slightly in the months ahead, and most contacts expect
commercial construction to be at least as strong in 2006 as 2005.
Banking
Bankers reported that deposits increased and loans held steady since the last survey, causing
a decline in loan-deposit ratios. Demand rose slightly for commercial and industrial loans,
while demand for consumer loans, home equity loans, and commercial real estate loans fell
somewhat. On the deposit side, all types of accounts increased. All respondents raised their
prime lending rates and consumer lending rates since the last survey. Lending standards were
unchanged.
Energy
Energy activity continued to expand in the district during late March and early April. The
count of active oil and gas drilling rigs in the region increased modestly since the prior
survey period and remained well above year-ago levels. Many contacts continued to report
that shortages of equipment and workers were constraining drilling activity. Pipeline capacity
was also reported to be limited in certain areas of the district. Nevertheless, firms throughout
the district expect further increases in drilling in the months ahead.
Agriculture
Dry weather remained a concern in parts of the district despite scattered precipitation. In
southern portions of the district, moisture received over the last month was lost to unusually
warm and windy weather. District winter wheat conditions were poor, especially in
Oklahoma. Planting of spring crops was reported to be running somewhat behind a year ago
but in line with five-year averages. Pasture conditions remained poor in many areas despite
the recent precipitation. As a result, some ranchers were forced to place calves in feedlots
earlier than normal, putting downward pressure on fed cattle prices.
Labor Markets and Wages
Labor markets firmed in late March and early April, while wage pressures edged up. Hiring
announcements outpaced layoff announcements by a sizeable margin. Several aerospace
firms announced that they were expanding in the district, and a number of high-tech
manufacturers also said they plan to add workers. A slightly larger percentage of contacts
reported labor shortages than in the previous survey. Among the workers reported to be in
short supply were auditors, auto technicians, skilled and unskilled manufacturing workers, oil
and gas workers, and truck drivers. The fraction of firms reporting above-normal wage
increases rose from the previous survey, although the share remained well below the levels
seen throughout the late 1990s.
Prices
Wholesale price pressures increased slightly in late March and early April, but retail price
pressures edged down. The percentage of manufacturers reporting increases in materials
prices and the percentage reporting increases in finished goods prices were both little
changed from the previous survey period. However, the share of plant managers expecting
materials prices to rise in coming months and the share expecting finished goods prices to
rise both edged up. Builders indicated that raw materials costs were mostly stable, and they
did not expect any large increase in materials prices in the months ahead. The share of
retailers reporting higher prices than a year ago was lower than in the previous survey, and
the percentage of retail stores that plan price increases in the future also declined.
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Eleventh District--Dallas
Eleventh District economic activity continued to strengthen in March and the first half of
April. The energy industry remains very strong, while activity continued to pick up in the
manufacturing and service sectors. Construction and real estate activity accelerated, boosted
by vigorous homebuilding and mounting commercial construction. Contacts in the financial
services sector report little change overall. Agricultural conditions are poor.
Prices
Price pressures are expanding, fueled by rising costs. Prices are up for utilities, gasoline and
transportation. More contacts appear to be resigned that oil prices will be high for several
months. While some industries still report that stiff competition is holding down selling price
increases, there are increasingly reports of price increases from firms that had previously
considered them impossible, both in the manufacturing and service sectors.
Crude oil prices increased from near $60 per barrel in early March to over $70 in mid-April.
Heavy maintenance at refineries reduced demand for crude putting downward pressure on
prices, but this was offset by international tensions in oil-exporting countries like Nigeria and
Iran. Oil inventories have built to very high levels, well above any recent history, presumably
as a precaution.
Gasoline prices increased 25 cents per gallon at the pump during the period, pushed up by
strong demand, rising crude prices and shortages of ethanol, an additive that is being used in
the transition to low-sulfur, non-MTBE gasoline. Diesel prices increased 10 cents at the
pump. Natural gas prices remained near $7 per thousand cubic feet, held down by heavy
inventories, which are now more than 60 percent above normal and well above the 5-year
maximum.
Labor Market
The labor market continues to tighten. Reports of hiring have increased from both
manufacturing and service firms. Contacts still note shortages of skilled workers, and there
are more reports of a tightening of the market for unskilled workers. In some areas of the
District, there are reports of difficultly finding workers who meet basic qualifications of
employment, such as background checks and drug tests. The labor market is particularly tight
in the portions of the District that had received an influx of residents who relocated following
the hurricanes.
Wage pressures are building for some industries, stiff competition is limiting profitability and
the ability of firms to raise salaries. However, an increasing number of industries report that
they must and are increasing salaries to obtain and retain workers.
Manufacturing
Overall manufacturing activity was strong and picked up slightly. Activity is strongest among
producers supplying the energy and construction sectors. A number of manufacturers
reported raising selling prices, including those in the apparel industry.
Demand remained strong for construction-related products, such as lumber, fabricated
metals, stone, clay and glass; and capacity constraints were limiting some production.
Apparel producers report an increase in demand, and sales of food products is up slightly.
High-tech manufacturers reported good, steady growth in sales and orders. Respondents say
most of the output gains are coming from continued strong productivity growth rather than
hiring. Inventories are at desired levels. Prices are not declining as fast as normal, they say,
and profits are increasing.
Petrochemical production is weaker than a year ago. Prices fell for most petrochemical
products, but some prices still remain above where they were prior to the hurricanes.
Stronger prices in the United States than in other parts of the world are attracting
petrochemical imports. With increased imports and relatively low prices abroad, domestic
producers of petrochemicals are finding smaller markets for their products. The industry
continues to recover from the hurricanes, with some plants just now coming back on line.
Some producers are going through an extensive maintenance that was postponed by the
hurricanes, and this is affecting the ethylene market, in particular.
Refiners also had a long maintenance season, and refinery utilization rates have been low.
Inventories of raw gasoline are at 5-year highs, but refiners lack sufficient quantities of the
additive ethanol that is now required in most gasoline sold in the United States from late
spring to early fall. Refined product imports have settled back to historical ranges, after
soaring to as high as 5 million barrels per day after the hurricanes.
Services
Demand for business services remains strong, and several firms report increased activity
compared with last year. Temporary service firms report good demand, particularly for high
tech and light industrial manufacturing workers. Legal firms report steady demand overall.
Real estate, transactional and corporate work remains robust, but litigation activity is down.
Accounting firms say activity is still strong especially for audit services; however, demand
for Sarbanes-Oxley related work has slowed.
Demand for transportation services remains strong and up significantly compared with last
year. Railroads are planning to build additional rail lines to increase capacity. Trucking firms
continue to report difficulty finding qualified drivers. Demand for air travel is strong, and
contacts say forward bookings look good. Airlines report that reduced domestic capacity has
increased load factors and that, along with rising fares, is helping them keep up with soaring
fuel costs.
Retail Sales
Retailers report good sales growth, but year over year comparisons have been complicated by
Easter's shift from March in 2005 to April in 2006. Sales are weakest to low-income
consumers for who, contacts suggest, are paying a larger share of disposable spending to high
utilities and gasoline costs. One large retailer noted a recent deterioration in credit portfolios
and spike in delinquencies, suggesting that some customers are unable to pay all of their
bills. Contacts say that competition in the industry remains stiff, but there is "some pricing
authority," which has permitted price increases or fewer discounts. Product costs are also
rising.
Auto dealers report flat demand and very slow sales for cars and trucks made by
American-owned companies. Inventories are very heavy for some vehicles, pressuring
dealers to lower prices and bring back rebates for those models.
Construction and Real Estate
Residential markets remained strong. Homebuilders reported record setting sales for the first
three months of 2006. Demand for existing homes was also strong. Single-family home
markets are extremely competitive, however, and builders say they are reluctant to increase
prices, even as construction costs have risen. Contacts remain concerned about news reports
of slowing home markets nationwide but seem more confident than at the time of the last
Beige Book that local markets will be unaffected. Builders in Dallas/Fort Worth are keeping
their eyes on higher inventories. Contacts are seeing some increased investor activity, but say
the price gains appear driven by economic fundamentals.
Apartment leasing continues to increase, and contacts say demand is stronger than usual for
this time of year. Inventories remain at good levels with only moderate construction planned
for this year. An exception is San Antonio, where contacts are concerned that there may be
too much building. Apartment rents are up in Houston, but rents are not firming as much as
expected in Dallas/Fort Worth and Austin.
Commercial construction activity is strengthening. Demand for retail space is strong in all the
major metropolitan areas. Office and industrial occupancy continues to rise, which is
spurring construction activity. Houston will see a good bit of construction this year, with
several new industrial development projects underway near the Port of Houston and strong
demand for professional and medical office space. Dallas office demand has picked up, say
contacts, with some suburban sectors nearing full occupancy, according to contacts.
However, downtown Dallas continues to have ample vacant space. Contacts expect
commercial construction to be especially strong in Austin.
Financial Services
Financial services respondents continue to report fierce competition for loans. While there
have been some increase in home mortgage delinquencies, contacts say overall loan quality is
very good. Short-term interest rate increases have not adversely affected clients nor slowed
loan demand. Respondents would prefer stronger growth in deposits, which has been flat.
Energy
The oil services industry reported that demand is still very strong, and capacity is tight, with
growing backlogs, and an increasing rejection of work that cannot be scheduled. The rig
count continues to rise over the past six weeks, with the number of working oil and natural
gas rigs up by over 50 in Texas and by over 80 in the United States. The growing rig count
owes to new rigs entering the market and some refurbished and rebuilt rigs. Also, the Gulf of
Mexico returned to over 90 working rigs--near the levels before the hurricanes. Rigs continue
to leave the Gulf, however, and the day-rates in the Gulf have picked up very sharply since
the hurricanes.
Agriculture
Wildfires and continued dry weather have led to a deterioration in agricultural conditions.
About 10,000 head of cattle and over 800,000 acres of land were lost to wildfires in March.
Ranchers are heavily culling their herds in the driest regions of the District, and supplemental
feeding remained necessary. Contacts say wheat and oat crops are in poor condition, and
more than half of the planted wheat crop is expected to be lost.
Recent rains have improved planting conditions and spurred land preparation for spring
planting in East and Central Texas, but overall moisture levels were still below average. Crop
insurance may be the only way that some producers can cover their costs, according to
contacts, who say that dry conditions and high energy costs are making the production
outlook uncertain. Even with insurance program payments, agricultural lenders expressed
concerns that statewide credit quality conditions may deteriorate in the second half of the
year.
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Twelfth District--San Francisco
The Twelfth District economy expanded at a solid pace during the survey period of March
through mid-April. Contacts reported modest wage and price inflation on net, although wage
growth remained rapid for selected worker groups with specialized skills in some industries.
Retail sales rose, owing in part to a rebound in auto sales, and demand for services was
strong. Output and sales grew significantly in most manufacturing sectors and for producers
of agricultural and resource-related products. Residential construction, sales activity, and
price appreciation slowed slightly in most areas, while the demand for commercial real estate
grew further. District banks reported strong loan demand on net and very good credit quality.
Wages and Prices
Contacts reported that upward price pressures were modest overall. Prices for energyintensive products and selected building materials were at high levels but generally held
steady or fell somewhat relative to recent survey periods. Final prices for most goods and
services reportedly rose at a modest pace, or in the case of information technology products
and services continued to decline, owing to domestic and international competition and
ongoing productivity gains.
Overall wage increases remained moderate on net, with numerical reports for broad worker
groups in the range of 3 to 4 percent on an annual basis. However, availability remained tight
and wage increases remained relatively rapid for some groups of workers with specialized
skills, notably in the financial, construction, health-care services, information technology,
and professional services sectors. Contacts also noted that employers' costs for employee
benefits, particularly for health insurance, continued to rise more rapidly than wages.
Retail Trade and Services
District retail sales grew at a solid pace in most areas during the survey period. "Big-box"
retailers of home improvement products and services reported robust orders and sales, while
sales of toys and other small retail items grew at a more modest pace. Demand for new and
used automobiles bounced back and was stronger than expected during the survey period,
with improved sales of domestic makes and continued strength in sales of imported vehicles.
Activity in the services sector generally was vibrant, with some exceptions. Demand
remained strong in the health-care services, professional services, and transportation sectors,
while conditions were mixed for providers of information technology and media services.
District travel and tourist activity expanded further from very high levels, although contacts
in Hawaii and California noted that hotel occupancies have been leveling off. Contacts also
noted general growth in demand for air travel and improved financial performance by major
carriers.
Manufacturing
District manufacturers reported significant growth in output and sales during the survey
period of March through mid-April. Orders and sales of semiconductors were strong and
industry-wide capacity utilization remained very high; inventories increased slightly but
remained near target levels. Production of commercial aircraft continued at a rapid pace in
the Pacific Northwest, and orders for new aircraft remained strong. Machine tool makers saw
further increases in demand and reportedly have been operating at close to full capacity. Food
processors also saw demand growth. In contrast, sales were slightly disappointing for District
apparel manufacturers, and excess capacity remains in that sector. More generally, contacts
noted that capacity utilization has been rising in most manufacturing sectors, but worldwide
competitive pressures have been restraining pricing power.
Agriculture and Resource-related Industries
Demand grew significantly for District agricultural and resource-related products. Sales were
robust for most crops and livestock; demand for beef cattle softened slightly but prices
received by ranchers remained at very high levels. Contacts noted some supply constraints,
including continued high prices for fuel and fertilizer, tight markets for agricultural labor, and
unusually wet weather that delayed planting and field work in parts of California. In the
resource sector, producers of oil and natural gas continued to see robust demand and little or
no excess capacity.
Real Estate and Construction
Activity in residential real estate markets was at high levels but showed signs of further
moderation in most areas, while demand for commercial real estate continued to expand.
Home sales and construction activity were at high levels overall. However, these and other
measures of market conditions, such as the pace of price appreciation and time on the market,
suggested significant cooling in most areas. The main exceptions were Utah and parts of the
Pacific Northwest, where activity remained robust. On the commercial side, office and retail
vacancy rates fell and rental rates rose further in most major markets. Overall construction
activity remained at high levels, reflecting an extensive array of residential, commercial, and
large public projects in most areas. Several contacts reported that builders continued to face
cost increases and minor project delays as a result of tight availability of skilled workers and
selected materials such as steel, cement, and lumber.
Financial Institutions
District banking contacts reported strong loan demand on net. The volume of commercial and
industrial lending rose, while mortgage lending, particularly in subprime categories, fell
somewhat from very high levels. One contact noted that compression of profit margins
resulting from intense competition and narrow interest spreads has been offset in part by
"excellent" asset quality. Venture capital financing has risen in some areas, and one Silicon
Valley institution with venture capital interests noted plans to expand employment
significantly this year.
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Last update: April 26, 2006
Cite this document
Federal Reserve (2006, May 9). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20060510
@misc{wtfs_beige_book_20060510,
author = {Federal Reserve},
title = {Beige Book},
year = {2006},
month = {May},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20060510},
note = {Retrieved via When the Fed Speaks corpus}
}