Beige Book
October 12, 2006
Summary
Prepared at the Federal Reserve Bank of Richmond and based on information collected before October 2,
2006. This document summarizes comments received from businesses and other contacts outside the Federal
Reserve and is not a commentary of the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicate that economic activity continued
to expand since the last report. Four Districts reported that economic growth firmed while a
couple of Districts noted that growth cooled. Other reports generally characterized growth as
moderate or mixed.
Consumer spending increased more quickly in a number of Districts, although several reports
continued to note that automobile and home-related sales were sluggish. Tourism was
generally strong and added some momentum in the New York and Kansas City Districts.
Activity in the service sector expanded in most Districts, but Boston described activity as flat
and Cleveland and Dallas identified pockets of softness in some industries. Manufacturing
conditions generally held up well, with several Districts indicating that growth increased,
though Philadelphia reported that activity edged down. Commercial construction gained
strength in most of the country. Reports on residential real estate, however, indicated
widespread cooling with the majority of Districts citing lower asking prices, rising
inventories of homes on the market and softening sales. A number of reports, however,
indicated that residential activity increased in some markets. Financial institutions continued
to report that residential mortgage lending had tapered off, but commercial lending activity
picked up in several Districts. Agricultural conditions generally improved as rainfall brought
relief to drought-stricken areas.
A number of Districts reported that labor markets were tight with some noting shortages of
skilled workers. Wage pressures were associated with tightening conditions in a few
Districts, though other reports noted that wage pressures were in check. While the majority of
Districts characterized price pressures as contained, input prices increased in several Districts
and a few reports mentioned increased pass throughs by businesses.
Consumer Spending and Tourism
Most Districts reported stronger growth in consumer spending, although automobile and
housing-related sales generally weakened. Solid back-to-school sales helped boost retail
revenues in the Philadelphia, Atlanta and Minneapolis Districts. Chicago said back-to-school
sales were within expectations, though "nothing stellar." Sales of upscale merchandise picked
up in the New York District, while apparel sales grew more quickly in the Boston, Cleveland
and San Francisco Districts. Chain department store sales were stronger in the Richmond
District and same-store sales increased in the New York District. Softer residential real estate
conditions damped home improvement and furniture sales in the New York, Richmond,
Kansas City and San Francisco Districts.
Vehicle sales weakened in several Districts--particularly sales of domestic automobiles,
SUVs and light trucks. However, a few Districts reported increased sales of foreign cars and
fuel-efficient automobiles. Philadelphia noted that a growing number of smaller automobile
dealerships had closed and dealers in the Atlanta District added incentives to move inventory.
In the Dallas District, sales of luxury vehicles increased.
Tourist activity strengthened since our last report. New York said that tourism remained
robust in New York City. Kansas City reported solid gains in hotel occupancy rates, while
tourist activity in the San Francisco District remained at a high level despite some
moderation. Tourism in the Richmond District was temporarily dented by Hurricane Ernesto
in early September, but rebounded later in the month.
Services
Activity in the service sector generally strengthened across Districts since the last report. The
Philadelphia, Richmond, St. Louis and San Francisco Districts reported increased demand for
professional and technical services. Boston reported increased demand for consulting and
financial services, and along with San Francisco, for healthcare services. Richmond indicated
that demand for computer and web-based services firmed and San Francisco noted that
demand for media services was stronger. Assessments of transportation services were mixed.
Trucking firms reported declining volume in the Philadelphia, Cleveland, Atlanta and Dallas
Districts, and in Cleveland, shipping services continued to soften. Chicago said trucking
volume was up slightly and cargo shipping increased in the Dallas District. St. Louis reported
that freight transportation companies planned expansions. Atlanta indicated that rail
companies experienced steady growth in inter-modal shipment volume, and Dallas said that
rail demand was strong.
Manufacturing
Manufacturing activity remained generally strong in most Districts. Eight of the twelve
Districts indicated that factory output increased, while Chicago and Kansas City noted that
the pace of expansion slowed. Minneapolis described factory activity as mixed and
Philadelphia reported that factory production edged down. The output of energy-related
equipment increased in the Boston, Atlanta and Dallas Districts, while Chicago and San
Francisco indicated that orders for machine tools increased. San Francisco reported that
semiconductor sales were solid. The demand for steel was especially strong according to
Atlanta and Chicago, while Cleveland and Chicago noted that heavy equipment sales
continued to be robust. Chicago also reported strength in heavy-duty truck production. In
contrast, St. Louis said that producers of motor vehicle parts announced plans to lay off
workers and Cleveland reported weakness in the auto industry. Reports of softer demand for
housing-related products continued to be widespread, but Dallas noted that strong demand
from the commercial construction industry helped offset softer residential demand.
Cleveland, Minneapolis, Dallas and San Francisco said that sales of food products had
accelerated since our last report.
Construction and Real Estate
Nearly all Districts reported that housing market conditions continued to soften, though
several noted that activity increased in some markets. Most Districts reported higher home
inventories, and several said that homebuilders and sellers continued to offer incentives to
attract buyers. Softer home demand in San Francisco led to layoffs for mortgage brokers and
real estate agents. Residential construction remained weak in the St. Louis and Minneapolis
Districts except in western North Dakota where residential construction was described as
"robust." New home inventories inched up in the Dallas District despite strong demand in
some of its markets and inventories of single family homes and condominiums rose sharply
in the Boston District.
New York and St. Louis reported mixed housing activity. On the upside, Manhattan
condominium sales showed signs of resilience, and housing sales rose in Memphis, but both
Districts noted weakness in most markets. Richmond reported generally weaker housing
activity, but also noted increases in some markets. Atlanta said that housing activity rose in
its Mississippi Gulf market, and Minneapolis' Sioux Falls market remained on pace with last
year's record-breaking level. Dallas reported particularly robust home sales in its Houston,
Austin and El Paso markets.
Commercial real estate markets were strong in most Districts, and activity increased at a
faster pace in a number. Leasing activity increased in New York, Minneapolis, Kansas City,
Dallas and San Francisco, and held steady in Richmond. Chicago and St. Louis, however,
said leasing activity was mixed. Rent increases were reported by New York, Minneapolis and
San Francisco, with Dallas indicating that pricing power was shifting to landlords.
Nonresidential construction was generally strong. Construction activity was steady in the
Cleveland, Richmond, Atlanta, Minneapolis and Kansas City Districts and increased in the
Chicago and Dallas Districts. Material costs and budget concerns scaled back some projects
in the Atlanta and Chicago Districts. The Chicago and Minneapolis reports noted concerns
among some contacts that commercial construction may slow in the coming months.
Banking and Finance
Lending activity was mixed as increases in commercial lending were offset by further
weakness in residential mortgage lending. The New York, Richmond and Chicago Districts
reported declines in overall loan demand, while Philadelphia, St. Louis and Kansas City
reported modest increases. Demand for residential mortgages slowed in the New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas and San Francisco Districts.
Demand for commercial and industrial loans rose in the Philadelphia, Cleveland, Atlanta,
Chicago, St. Louis, Minneapolis and San Francisco Districts; held steady in the Richmond
and Dallas Districts; and declined in the New York District. The commercial lending market
was characterized as very competitive by Richmond, Chicago and Dallas. Overall credit
quality remained generally good, although increases in mortgage delinquency rates were
noted by Philadelphia, Cleveland and Atlanta. Tighter standards for commercial loans were
reported by New York and Chicago.
Agriculture and Natural Resources
Agriculture conditions generally improved as late summer rainfall brought relief to droughtstricken Districts, although some rains hindered field work in some areas and damaged crops
in others. Richmond indicated that tropical storm Ernesto severely damaged crops along
some coastal areas. Chicago and St. Louis reported that recent precipitation and unseasonably
cool weather delayed corn and soybean harvests. Crop yields in the Minneapolis District
improved with the rainfall, though Chicago reported that yield prospects were mixed. In the
Kansas City District, cooler weather and scattered rainfall restored soil moisture and pastures
conditions, though cattle producers continued to draw down herds. Dallas, however, said that
while September rains assisted wheat producers and eased pressure on livestock producers to
liquidate herds, many parts of the District still needed rain. San Francisco reported strong
sales for livestock and most crops but indicated that spinach producers put planting on hold.
Activity in the energy industry remained strong according to reports from the Minneapolis,
Kansas City and San Francisco Districts. Minneapolis indicated that alternative energy
industries continued to expand at a rapid pace and that mining production was at
near-capacity across the District. Kansas City noted that oil and gas drilling rig counts
remained above year-ago levels, while San Francisco said that oil and natural gas extraction
continued at a rapid pace. In contrast, Dallas reported that activity in the oil and energy
producing sector was virtually unchanged although demand for oil-field equipment and
energy services remained strong.
Employment, Wages, Prices
Labor market conditions remained taut since our last report. The Boston, Philadelphia,
Richmond, Minneapolis and Dallas reports characterized labor markets as generally tight,
particularly for skilled workers, while the remaining Districts noted that job growth was
steady to stronger. Six Districts mentioned labor shortages, particularly for professional,
scientific, and other technical workers. In addition, Kansas City said retailers faced shortages
of experienced sales workers and Atlanta indicated that residential construction firms were
having difficulty obtaining qualified construction workers, despite the slowdown in building
activity. In contrast, Cleveland reported that roughly half of the homebuilders they contacted
had reduced their labor force.
Wage growth around the nation was generally modest, although faster wage growth for
skilled services workers was cited by a number of Districts. The San Francisco District noted
that a short supply of healthcare, finance and construction workers pushed wages higher. In
addition, Richmond noted a sharp uptick in retail wages and Atlanta reported that some
manufacturers had raised entry-level wages in an effort to attract workers.
Most Districts reported few signs of increased price pressures in recent weeks. A number of
Districts said that energy prices moderated, but increases in raw materials prices were noted
by Philadelphia, Richmond and Atlanta, and a rise in building materials prices was reported
by Minneapolis. Instances of businesses passing on higher costs were scattered across
Districts; Cleveland and Atlanta said some manufacturers attempted to raise output prices
while Boston reported increases in retail prices. Boston also reported that costs for some
businesses had increased--especially for airfare and hotel accommodations. Likewise, the
New York District noted that accommodation and theatre ticket prices had risen sharply
compared to a year ago.
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First District--Boston
Business results in the First District are somewhat mixed in the late summer-early fall.
Manufacturers generally report revenue gains compared with a year earlier, while retailers
and selected business services firms are mostly flat to up, but some cite losses.
Manufacturers indicate that costs have stabilized or eased in recent months, but remain
higher than a year ago; as a result, they have not raised their prices recently. Retailers say
input prices are level except for energy, while advertisers and consulting firms report
continuing cost pressures; both sectors continue to raise their selling prices. Headcounts are
mostly stable in manufacturing and retailing, but consulting firms plan increases; most
sectors cite recruiting difficulties for professional and technical positions. Residential real
estate markets across New England are softening further, with inventories and time to sale
increasing while prices and sales decline.
Retail
Retail respondents in the First District report mixed results in August and September, as
year-over-year sales range from double-digit declines to double-digit gains. One auto
dealership association reported that their members’ sales are down as much as 50 percent. A
consumer electronics and appliance retailer observed that same-store sales have been flat, but
expects to end the year on a positive note. Respondents in the discount apparel and art and
office supply businesses report sales increases, and are confident that growth will continue.
Inventory levels are generally in line with plans. Input prices appear to be stabilizing,
although several contacts still observe energy-related price increases. Most respondents
report being able to pass price increases on to the consumer. With the exception of
automobile dealers, most retailers note that headcount is fairly steady with most hiring
occurring as replacements or for new stores. Excluding already planned new store openings,
many contacts report tightening up capital spending plans.
Overall, retail respondents are cautious, but optimistic for the fall. However, many retailers
are wary about the effect of the real estate market downturn and high energy prices on
consumers as winter approaches.
Manufacturing and Related Services
First District manufacturers and related services providers generally report that revenues in
third quarter 2006 have been running ahead of year-ago levels. Sales trends are particularly
strong for aerospace and energy-related equipment and biopharmaceuticals. On the other
hand, demand for certain consumer products is trailing off, which contacts attribute to weak
consumer confidence, deteriorating housing markets, and competition from imports and other
producers.
Most manufacturers note that materials, energy, and transportation costs have stabilized or
eased in recent months but remain higher than they were a year ago. Some firms have
managed to reduce costs by consolidating suppliers or shifting to foreign vendors. Most
contacts indicate that they have not raised their product prices since mid-year, and they
anticipate making little or no adjustments in pricing in coming months. Some note that they
are charging more or reducing discounts for services.
Except for some consumer goods manufacturers that are curtailing production, most contacts
report that their U.S. headcounts are fairly stable. Firms are continuing to increase their
technical, scientific, and sales staffing while cutting factory jobs. A couple of contacts report
that high housing costs are hindering recruitment for their New England locations. Base pay
increases continue to be mostly in the range of 2-3/4 percent to 4 percent. Despite tight
white-collar labor markets, only a couple of firms are budgeting for higher average pay raises
in 2007 than in 2006.
The majority of companies are increasing their domestic capital spending modestly in order
to produce new products or modernize production processes. Several are in the midst of large
projects to expand or relocate capacity or integrate newly acquired businesses. These
respondents expect capital spending to return to normal levels once these projects are
completed.
Manufacturers tend to have a positive sales outlook for late 2006 and early 2007. Many
indicate a growing sense of confidence as a result of moderation in energy prices and
stabilized interest rates. Others express ongoing concerns related to cost containment and
foreign competition.
Selected Business Services
The majority of First District contacts in advertising and management consulting report that
business is steady, with flat to modest year-over-year revenue gains in the third quarter. A
minority recorded revenue losses from a year earlier, the result of losing large clients.
Demand for productivity- and efficiency-enhancing consulting services has increased, as has
the demand from the healthcare and finance industries.
Business costs have increased, especially for airfare and hotel accommodations. Two
contacts note that their project mix is changing, leading them to purchase more subscription
and data resources; they are able to pass along only a fraction of the added costs. Most
responding firms either have implemented moderate price increases over year-ago levels, or
plan to in the fourth quarter.
Nearly all New England consulting contacts plan to increase their headcounts in the fourth
quarter. They report that the labor market for experienced consultants continues to tighten,
and several respondents say that turnover rates have increased. A few contacted companies
note that they are experiencing difficulties recruiting personnel with integrated marketing and
interactive services backgrounds. Advertising and marketing firms report no plans to change
headcount. Wage increases range from 3.5 percent to 10 percent, with consulting firms at the
higher end of the range.
Most advertising and consulting contacts expect revenue growth to be flat or accelerate
slightly in the final quarter of 2006.
Residential Real Estate
Across New England, the pace of residential sales continues to be slow compared to 2005. In
Massachusetts, the average number of days on the market has increased by a full month since
last year, to around 110 days. Contacts attribute slower sales to less urgent buyers focused on
getting the highest value for their money. Slow sales combined with increased listings have
led to inventory build-up in most New England markets. In Massachusetts, single family
inventory has increased 16 percent and condominium inventory has increased 28 percent
year-on-year, leading to around 10 months of supply currently in the market.
Contacts indicate that as sellers have become more attuned to supply conditions in recent
months, they have become more willing to reduce prices. Correspondingly, many New
England markets feature declining prices. The median price of single-family homes sold in
Massachusetts in August was about 6 percent below its August 2005 level; the corresponding
decline for condominiums was 3 percent.
Contacts expect that the pace of sales will remain slow in the near term and that markets will
continue to show prices below year-earlier levels. Inventory may decline in the near term as
properties are de-listed for the holiday season.
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Second District--New York
The Second District has shown signs of strengthening since the last report, with few signs of
increased price pressures. Labor markets have been steady to stronger, according to firms in
manufacturing and most service industries. Manufacturers report steady growth in activity
since the last report, along with less widespread increases in input prices. Retailers indicate
that sales picked up in September, while prices remained flat. Tourism activity remained
robust in New York City, with both hotels and Broadway theaters reporting double-digit
increases in prices over the past year. Consumer confidence in the region rose to a five-month
high in September.
Housing markets have been mixed since the last report: New York City's co-op and condo
market has remained fairly strong, and the rental market has tightened further; however,
housing markets in New Jersey and upstate New York show continued weakness.
Commercial real estate markets across the New York City metro area generally strengthened
in the third quarter, for both office and industrial space. Finally, bankers again report
weakening in loan demand--particularly for home mortgages--somewhat tighter credit
standards in the commercial sector, and little change in delinquency rates.
Consumer Spending
Retailers report that sales were on or above plan in September, and noticeably stronger than
in August. Same-store sales gains ranged from 2 percent to more than 10 percent compared
with a year ago. Retail contacts note that premium merchandise lines have continued to sell
relatively well. Furniture and other home goods continued to lag, while sales of apparel,
accessories and jewelry have been robust. Retailers report that selling prices remain steady
and that inventories are at favorable levels. Looking ahead to the upcoming holiday season,
retailers generally expect same-store sales to be up in the range of 2 to 5 percent from
comparable 2005 levels. Contacts report that they plan to hire about the same number of
holiday-season workers as in 2005, though most of the increased staffing capacity is again
expected to come from extending hours of current part-time workers.
Tourism activity has been fairly steady at a high level since the last report. The occupancy
rate at Manhattan hotels edged up to 87 percent in August, slightly higher than a year earlier,
while room rates climbed more than 10 percent from comparable 2005 levels. Broadway
theaters report mixed results for September: attendance was down roughly 3 percent from a
year earlier, but total revenue jumped 11 percent, reflecting sharply higher admission prices.
Based on the Conference Board's survey of Middle Atlantic (New York, New Jersey and
Pennsylvania) residents, consumer confidence, which had drifted down in July and August,
jumped to a 5-month high in September.
Construction and Real Estate
The region's housing market has shown mixed results since the last report, with further
weakening noted in northern New Jersey and upstate New York, but signs of underlying
strength reported in New York City. New Jersey homebuilders report that the housing market
has continued to slacken since the last report: both buyer traffic and sales activity have
declined substantially, the inventory of homes on the market has risen substantially, and
prices have continued to slip. One New Jersey contact also notes pronounced weakening in
the sub-contracting business, attributing much of the recent weakening in home remodeling
to reduced home equity. Similarly, real estate firms in western New York State report that
both sales and prices were down moderately in August, compared with a year earlier.
In contrast, Manhattan's co-op and condo market showed signs of resilience in the third
quarter. Based on quarterly data from a leading appraisal firm, both the number of apartments
sold and the price per square foot were up roughly 6 percent from a year earlier, despite a
sharply higher inventory of available units. Manhattan's rental market has tightened further
since the last report, particularly at the high end, reflecting a dearth of large rental units on
the market at the end of the third quarter; a major real estate firm estimates that rents on
studio and one bedroom apartments are up 5 to 10 percent from a year earlier, while rents on
larger units are up 10 to 15 percent.
Commercial real estate markets across the New York City area showed further signs of
tightening in the third quarter. In Manhattan, office vacancy rates continued to edge down,
reaching their lowest levels since early 2001, while asking rents accelerated, rising more than
10 percent from a year earlier. One industry contact notes that large blocks of space have
become nearly impossible to find in Midtown Manhattan. In the nearby suburban markets,
vacancy rates were also down from a year earlier and at or near cyclical lows, though rents
increased more moderately. The industrial market has been mixed but, on balance, stronger in
the third quarter: vacancy rates declined to cyclical lows in Long Island, Westchester and
Fairfield Counties, but continued to rise in northern New Jersey.
Other Business Activity
Manufacturing contacts report steady improvement in business conditions since the last
report, along with further abatement in price pressures. Manufacturers also indicate increased
employment, along with higher levels of capital spending in the months ahead. Surveys of
purchasing managers in the Buffalo, Rochester and New York City areas also indicate some
lessening in price pressures in September, but signal some slowing in manufacturing activity.
Outside of manufacturing, contacts in most industries report little change in overall business
conditions, along with steady or rising employment levels; however, contacts in the
publishing industry note some weakening in employment.
Financial Developments
Contacts at small to medium-sized banks in the 2nd District report decreased demand for all
types of loans since the last report--particularly residential mortgages, for which more than
two-thirds of bankers reported decreases. Respondents also continue to report widespread
declines in refinancing activity. Bankers report tightened credit standards for commercial
loans and mortgages, while standards remained unchanged for the consumer and residential
mortgage categories. Bankers report little change in loan rates overall, with somewhat higher
rates on consumer credit and commercial and industrial loans but somewhat lower rates on
home mortgages. Delinquency rates are again reported to be little changed across all
categories.
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Third District--Philadelphia
Economic activity in the Third District increased in September, but conditions varied by
sector, and overall growth appears to have slowed. Manufacturing in the District edged down
from August to September. Retail sales of general merchandise rose, but auto sales remained
sluggish. Bank lending increased overall, although mortgage lending declined. Service-sector
activity continued to increase, but the pace of growth has eased since midsummer.
Third District business contacts generally expect business activity in the region to continue to
expand but at a slow pace. Manufacturers expect improvement but do not anticipate strong
gains. Retailers forecast a modest growth in sales; however, auto dealers do not expect sales
to pick up. Bankers expect a further decline in mortgage lending and slight gains in business
and consumer lending. Service-sector firms expect business to continue to move up slowly.
Manufacturing
Third District manufacturers reported a lower level of activity in September than in August.
Around one-third of the companies surveyed noted declines in shipments and one-fourth
noted increases. New orders were level, on balance, with an equal number of respondents
reporting increases, decreases, and steady orders. Demand increased in September for wood,
paper, plastic, and metal products, but fell for textiles, chemicals, and industrial materials and
equipment. Area manufacturers reported a slight decline in order backlogs and no change in
delivery times.
Overall, manufacturers expect demand for their products to improve, but their outlook is not
as optimistic as it was earlier this year. Among the manufacturers contacted in September,
slightly more than one-third expect their shipments and orders to increase during the next six
months, and about one-fourth expect decreases. Capital spending plans reported by Third
District manufacturers in September rose somewhat from August. On balance, however, it
appears that fewer firms are scheduling increased outlays for 2007 than planned increases for
2006.
Retail
Most of the retailers contacted for this report indicated that sales have increased in recent
weeks. Although the seasonal upturn due to back-to-school sales started slowly, sales
improved through the period, and many of the retailers surveyed in September noted that
they achieved year-over-year increases in excess of their expectations. The gains were fairly
widespread among lines of merchandise and types of stores. Merchants did note, however,
that promotional efforts were extensive. Looking ahead, area retailers are uncertain whether
the recent pace of growth will be sustained. They say consumer confidence is fragile, and
that shoppers’ willingness to spend will depend crucially on the course of gasoline prices and
the stability of housing values.
Auto sales in the region remained sluggish in September. Dealers said domestic
manufacturers’ incentives have done little to boost sales. Production cutbacks have helped
area dealers keep inventories manageable, although the number of light trucks on dealers’
lots is still high. Auto dealers in the region do not anticipate an improvement in sales in the
near future. There has been an increase in the number of dealerships closing in the past few
months, especially smaller ones.
Finance
The volume of loans outstanding at Third District banks rose moderately in September,
according to commercial bank lending officers contacted for this report. Commercial and
industrial lending increased for most banks. Credit card lending expanded at a steady rate,
but growth in other types of personal lending slowed. Demand for residential mortgages
eased. And while overall credit quality was good, according to bankers contacted for this
report, some noted increased delinquencies on residential mortgages, and some said the
average creditworthiness of applicants for mortgages and consumer loans has declined
recently.
Bankers in the District expect business and consumer lending to increase in the months
ahead, but not strongly. They also expect gains in credit card lending. However, they
anticipate a further decline in the demand for residential mortgages. Some bankers also said
they expect an increase in mortgage delinquencies as payments of principal start to become
due on non-amortizing mortgages and as rates rise on adjustable-rate mortgages.
Services
Most of the Third District service firms contacted in September reported that activity was
increasing, but for many firms growth has slowed recently. Business services firms generally
indicated that they have experienced slower growth in work done for existing client firms and
a slower pace of new client acquisition. Trucking firms reported significant slowdowns in the
rate at which their business has been growing. Information technology firms have generally
reported steady growth in the past few months. Employment agencies and temporary help
firms reported that demand for workers has been rising at a nearly steady pace. Servicesector firms expect business to continue to advance, but they expect growth to remain slow,
at best, in the months ahead.
Prices and Wages
Business firms in the Third District noted increases in the costs of raw materials and
intermediate goods, although reports of price increases were not as widespread in September
as they were earlier in the year. Manufacturers noted continued increases in prices for metals
and energy. However, retailers generally indicated that selling prices have not been rising
significantly, and they noted that discounting was widespread during the back-to-school
shopping period.
Employers in many industries reported that labor markets remain tight for skilled workers,
but the availability of unskilled workers has increased somewhat. In service industries, firms
report rising hiring rates and turnover among some occupational specialties, especially in
information technology. Area employers indicated that wages have been rising slightly faster
than at this time last year, but the rate of increase has not accelerated in recent months.
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Fourth District--Cleveland
The District's economy showed modest growth since mid-August; however, growth was
mixed and there is concern about the sustainability of lower energy prices and a continuing
slowdown in the auto sector and residential construction. Most district manufacturers
reported steady production with production forecasted to remain at current levels for the next
six months. However, reduced activity in the auto sector is tempering the outlook for some
manufacturers. Retailers experienced mixed sales activity with lower gas prices and cooler
weather helping boost sales at some District outlets. Commercial builders reported strong
activity but were concerned that inquiries were beginning to taper off. New home sales
continued to be soft with several builders saying they have no backlog. Banking contacts
reported a gain in core deposits and an increase in corporate borrowing. And the demand for
trucking and shipping services continues to soften.
On net, hiring across the District was steady. Staffing firms reported job openings were
moderately increasing in August and September with demand coming from professional
business services and healthcare. Wage pressures were not seen as an issue at this time.
Almost all contacts said that the rise in input costs has moderated and cite a drop in energy
prices as the reason. Manufacturers attempting to raise their prices met with a mixed degree
of success. Retailers generally reported holding their prices steady.
Manufacturing
Since mid-August, production by the District's durable goods manufacturers was stable or up
slightly with higher production levels reported on a year-over-year basis. Overall demand for
steel products is softening with almost all contacts noting weakness in the auto industry;
however, electric utilities and heavy machinery are still growth areas for steel producers.
District auto production showed an overall decline on a year-over-year basis. The outlook by
durable manufacturers is for production to remain at current levels over the next six months.
Almost all contacts said they were operating at normal capacity and that capital expenditures
remain on target. A majority of the producers expect little change in the level of capital
spending for the next few months. Input costs are reported to have moderated due primarily
to decreases in energy prices. Hiring has been relatively flat over the last six weeks with half
the contacts saying they anticipate limited hiring in the near future. Wage pressures in
durable manufacturing remained contained.
Production at the District's nondurable goods facilities has been stable since mid-August with
higher levels reported on a year-over-year basis. Expectations for the next six months are flat
to up with some manufacturers saying that the auto industry could affect their production
levels. Most contacts reported idle capacity--food producers being the exception. A majority
of manufacturers said capital expenditures were on target with no increases anticipated
during the next few months. Input costs were mixed following oil price fluctuations. None of
the contacts reported increasing employment in the past six weeks and few said they plan to
hire in the near future. Wage pressures are contained.
Retail
Sales by District retail contacts continued to be mixed with some retailers saying that cooler
weather and lower gas prices helped boost sales. Contacts have reported lowering prices in
some stores and increasing promotions as means of improving sales. Apparel retailers and
big box stores experienced sales increases; however, sales trends were tied to the store brand.
Drug stores reported strong sales driven primarily by prescriptions. Some restaurant owners
continued to see a decline in customers but were optimistic due to the drop in gas prices.
Overall, vendor prices have remained stable since mid-August which is reflected in stable
prices for customers. Contacts reported limited wage pressures and are planning normal
Christmas hiring.
Most contacts said that new car sales improved in August, but fell in September. August is
normally closeout time as dealers make a push to sell the remaining prior year's inventory.
SUVs continued to sell poorly and used car sales were consistent with sales in past months.
Construction
Residential contractors reported new home sales are down or flat when compared to earlier
this year. Year-over-year sales declines of 10 percent or more are common with a few
contacts saying the market is down by as much as 60 percent. Several contractors reported
that they no longer have any backlog. Most home builders expect sales to remain soft for the
remainder of the year with 2006 totals to be below those in 2005. Many contacts said that
material costs have stabilized over the past couple months with a few noting a drop in the
price of lumber. About half the homebuilders contacted reported reducing their labor force
through direct layoffs or by not replacing workers that leave.
The District's commercial contractors reported strong activity since mid-August with an
increase in business on a year-over-year basis. Most contacts anticipate activity will remain
strong through the first half of 2007 due to project backlogs which remain at high levels--for
one contractor, the highest in five years. However, inquiries seem to be tapering off slightly
which could result in slowness about a year out. Segments reporting stronger activity were
health care, education, and public works. Material cost increases that were prevalent over the
past few months are slowing or have stabilized. Margins for a few contacts have increased
slightly due to a slower acceleration in costs. Contractors reported little change in the size of
their labor force.
Banking
Since mid-August, District banks experienced an increase in corporate borrowing primarily
in commercial real estate while consumer loan activity was mixed. Activity in the mortgage
market continues to show an overall decline; however, two contacts reported a slight increase
in demand after a three-month slowdown. Although most bankers said credit quality remains
stable and characterized it as high, almost half experienced a slight increase in delinquencies
related to commercial loans and residential real estate. Finally, nearly all contacts reported a
gain in core deposits primarily in CDs and money market accounts.
Transportation
Demand for trucking and shipping services has softened since mid-August with a slight
decrease in volume on a year-over-year basis. Trucking companies continue to pass on high
fuel costs using surcharges. One contact reported his revenues have held up due to the
increase in the fuel surcharge. Most trucking companies were hiring, but activity was limited
to finding replacements due to normal industry turnover. None of our contacts reported wage
increases over the past six weeks.
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Fifth District--Richmond
Economic activity in the Fifth District expanded at a moderate pace in late August and
September, as firmer factory output and somewhat stronger store sales were balanced against
a continued weakening in housing markets. Manufacturing shipments and new orders
rebounded in September following a soft patch in August. Retail sales increased more
quickly outside of housing-related categories and domestic automobiles. Revenues at
services firms continued to expand on pace with a notable pickup at computer-related
businesses. Both construction and sales of houses softened further in most markets, though
activity edged higher in a few areas. In banking, mortgage lending weakened, while
commercial lending was steady. Tourist activity was temporarily dented in early September
by Hurricane Ernesto, but held up in areas away from the coast. Labor markets remained
generally tight, with hiring increasing modestly at factories and services firms. Skilled
workers remained difficult to find, and some upward wage pressures were noted. Price
pressures were more pronounced in manufacturing, but the pace of increase moderated in the
services sector. In agriculture, substantial crop damage was inflicted by Hurricane Ernesto in
early September, but subsequent weather conditions have been favorable for harvesting
activity.
Retail
District contacts reported that home-related sales slowed, though retailers in other categories
said their sales grew more quickly in late August and September. Executives at two building
supply chains told us sales growth at District stores eased as new residential construction
softened. The pace of sales also cooled at furniture and home accessories stores in central
Virginia, according to an industry contact in Richmond, Va. In contrast, a contact at a chain
department store reported increased sales growth at District locations. Additionally, the
manager of a chain department store near Charlotte, N.C., said sales at his store have been
"going strong," as area manufacturing jobs expanded. In the eastern panhandle of West
Virginia, the manager of a discount department store told us that the pace of sales has picked
up since our last report. District automobile dealers said the overall pace of sales steadied
during the last four weeks despite softer domestic automobile sales in some areas. In labor
markets, retailers continued to trim employee levels, although retail wages rose sharply in the
last four weeks. Contacts indicated that price growth in retail was moderate.
Services
Revenues at service-producing firms grew more quickly since our last report. Contacts at
professional, scientific, and technical firms indicated that demand strengthened over the
period, particularly at computer and web-related businesses. An executive at a financial
services firm in Baltimore, Md., attributed his clients' bullishness in part to the recent drops
in energy prices. In addition, District airports recorded an increase in air travel, although one
airport manager said more people are driving instead of flying for short trips because of the
"hassle factor" of security related to air travel. Hiring at services firms picked up slightly in
recent weeks; wage and price growth moderated.
Manufacturing
Manufacturing activity picked up in September. Manufacturers told us that shipments grew
briskly following a contraction in August, while new orders gained momentum and
employment growth remained on pace. Contacts in the electronic, plastics, and printing and
publishing industries reported particularly strong growth in demand since our last report. A
printing and publishing manufacturer in South Carolina, for example, said that some firming
of local economic and employment conditions helped boost their revenues. A plastics
producer reported that they were "still busy with good projects," and an electronic equipment
manufacturer in Maryland indicated that their sales were notably stronger than a year ago. In
contrast, a producer of residential doors in North Carolina reported a substantial decrease in
orders. Factory hiring expanded on pace with recent months and wages increased somewhat
more quickly. Manufacturers told us that raw material prices jumped higher in September and
that prices for finished goods rose moderately.
Finance
District bankers reported some softening in lending activity in September. Mortgage lending
was particularly weak. A banker from Charleston, S.C., noted that "September loan volume
looks like it is going to be about the same as August. Typically, we see a pickup in
September, but not this year." Commercial lending, however, held up since our last report. A
banker from Charleston, W.Va., for example, said that his bank was able to maintain its
lending volume by competing harder. "There is a lot of hunger out there for the good deals,
and we have to be more aggressive to get the new deals and keep the old deals," he said.
Real Estate
Residential real estate agents across the District noted generally slower home sales in
September. A Washington, D.C., agent described that area's housing market as "horrible,"
adding that sales volume was down 25 percent from a year earlier. Additionally, he reported
that home inventories had risen sharply and that some sellers were trimming asking prices. In
Virginia Beach, Va., an agent also noted weaker home sales, saying that buyers were being
more selective. Many District agents told us that inventories in their housing markets
continued to rise and that buyer traffic had slowed. In contrast, contacts described the
Charlotte, N.C., market as strong, and an agent in Greenville, S.C., reported good local
housing market conditions. Also, a Fairfax, Va., agent reported renewed sales activity in
September, though he was not optimistic that it would hold through year's end. He noted
more interest by investors in purchasing properties to hold, "for a while." Modest decreases
in home prices were noted by contacts in many areas, and an agent in Richmond, Va., told us
that sellers were offering more incentives to prospective buyers.
Commercial real estate agents across the Fifth District reported that leasing activity remained
steady in recent weeks. An agent in Richmond, Va., said that client interest and inquiries
increased, though actual activity had yet to improve. A contact in Washington, D.C.,
however, noted a slowdown in retail leasing. He speculated that a reduction of consumers'
wealth had forced area retailers to curb their expansion plans. On balance, there was little
change in new construction reported across the District. In addition, little change in vacancy
and rental rates was noted.
Tourism
Tourist activity changed little on balance since our last report. Contacts in coastal areas said
that bookings declined in early September in the wake of Hurricane Ernesto, but that activity
rebounded later in the month. A contact on North Carolina's Outer Banks said that the
construction of rental homes had leveled off but noted continued brisk remodeling activity.
She also indicated that consumer spending had increased as gas prices declined. Contacts at
mountain resorts in Virginia told us business had picked up and that timeshare sales were
particularly strong.
Temporary Employment
Temporary employment agencies in the District generally reported firmer demand for
workers. An agent in the metropolitan Washington, D.C., area indicated continued strong
demand for temporary workers in all skill areas--especially in the warehouse, distribution,
and manufacturing industries. In Richmond, Va., an agent reported that some additional
strengthening in the area's economy helped boost demand for employees fluent in Spanish,
especially in the transportation and healthcare industries. Most agents continued to have
difficulty finding skilled workers. Temporary workers' wages remained steady across much
of the District.
Agriculture
Tropical storm Ernesto brought much-needed rainfall to the Fifth District in early September,
but hindered field work and damaged crops in low-lying fields in coastal regions. Analysts in
North Carolina told us that tobacco farmers in the state lost 25 percent of their crops because
of flooding from Ernesto, and incurred $76 million of crop damage across 19 counties. In
South Carolina, crop and other farm damage from Ernesto was estimated at $11.5 million. In
contrast, drier weather returned to the District during the latter part of September, allowing
farmers to keep harvesting activity on schedule. In Maryland, farmers were beginning to
harvest their soybean crops; the harvesting of corn and sowing of barley were progressing
well in Virginia, and the apple harvest was ahead of schedule in West Virginia.
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Sixth District--Atlanta
Reports from Sixth District contacts indicated that business activity was mixed in September.
District merchants reported that sales exceeded expectations, although auto sales were mixed.
Home sales and housing construction continued to trend lower in Florida, and there were
reports of declining housing market activity in other areas as well. In contrast, nonresidential
construction continued to expand modestly. Real estate loan demand moderated further, and
an increase in foreclosures was noted in parts of the District. Reports on manufacturing and
tourism were generally positive. Labor shortages were a source of wage pressure in some
industries, and cost increases related to energy and raw material prices continued to be
reported. Several businesses noted they had successfully raised their output prices to offset a
portion of the higher input costs.
Consumer Spending
District retailers reported that sales improved in September. Most merchants noted that sales
exceeded expectations and were above year-ago levels. Back-to-school activity was
particularly strong across the District, and the outlook among most retailers remained
positive. Reports of auto sales were mixed. Most domestic brand dealers reported that sales
of trucks and SUVs were disappointing in September, and that inventories were too high.
Some dealers noted that reduced prices and new financing incentives helped to boost sales
modestly later in the month. Regional foreign brand distributors noted that sales were better
in the Southeast than the national average in September, but were off from year-ago levels.
Real Estate
Further declines were noted in District housing markets in September. The majority of
builders and Realtors reported that activity was down from a year ago and inventories
continued to rise. Weakness was most pronounced among Florida contacts, while there were
scattered reports that conditions deteriorated in parts of Alabama, Georgia, and Tennessee.
According to contacts, new home construction was below year-ago levels in most parts of the
District. Reports from the Mississippi Gulf Coast were more robust, whereas reports from
New Orleans indicated that the pace of construction continued at low levels. Contacts
suggested that the high cost of insurance remained a major problem for property owners in
the Gulf coast area.
Reports from commercial builders indicated that nonresidential construction in the District
was slightly stronger in September compared with a year earlier. However, contacts also
reported that rising material costs caused highway and road projects in Alabama, Florida, and
Georgia to be scaled back. Most reports anticipated continued modest growth in
nonresidential activity over the next several months.
Manufacturing and Transportation
Reports on manufacturing production in September were generally positive. Activity related
to the energy sector was especially strong. A refiner was adding personnel and a major
shipbuilder received a contract to provide support vessels for the offshore oil and gas
industries. Steel industry contacts also reported good results. Reports on capital outlays and
future spending plans were mixed. For instance, many contacts reported that capital
investments were directed toward increasing energy efficiency rather than adding to capacity.
Reports from the transportation sector varied. Some trucking companies noted slower
activity, especially those dealing with homebuilders. Meanwhile, regional rail companies
were encouraged by the steady growth in the volume of inter-modal container shipments.
Tourism and Business Travel
Reports from the tourism sector were generally positive in September. Passenger traffic at
Orlando International Airport was up over two percent from a year ago, and central Florida
theme park attendance was described as solid. Three casinos recently reopened on the
Mississippi coast, boosting the near term economic outlook for that area. In New Orleans,
however, the reduced number of tourists and conventions continued to hamper the industry's
recovery there. Industry contacts expect tourist activity in New Orleans to pickup after the
hurricane season.
Banking and Finance
Slowing loan demand, aggressive competition for deposits, and strong credit quality,
characterized reports from the District's banking sector in September. Weaker real estate loan
demand was noted in most parts of the District, while reports on commercial and industrial
lending were softer than in the last report. Higher foreclosure rates were reported in parts of
the region as increased interest rates affected borrowers with adjustable rate mortgages.
However, bank credit quality indicators remained strong.
Employment and Prices
Labor shortages persisted in parts of the District. Some manufacturers reported that they had
raised their entry-level wages in an effort to attract workers. Several residential construction
firms continued to note difficulty in obtaining qualified construction workers, despite the
slowdown in building activity. A spokesman for one staffing firm said that demand for
skilled engineering and finance specialists was strong. However, another staffing firm
reported that the overall demand for temporary workers had leveled off in September.
Many of the companies contacted stated that they have been able to pass on at least some of
their cost increases to their customers. However, a concrete products manufacturing company
had to absorb recent energy, freight, and raw material cost increases because of the slowdown
in homebuilding. Property insurance premium increases continued to be a major concern for
businesses in coastal areas of the District.
Agriculture and Natural Resources
Drought conditions moderated slightly across the District, but growers in Alabama and
Georgia remained concerned about the impact of the summer drought on cotton and peanut
yields. Meanwhile, Florida citrus producers have benefited from higher prices for oranges
this year. Despite weaker export demand attributed to international concerns about Avian
influenza, lower poultry prices have reportedly encouraged some large export orders from
China, Russia, and Mexico.
High energy prices and a calm hurricane season resulted in a significant expansion of
exploration in the Gulf of Mexico in recent months. According to initial estimates, a new,
large find in the deep waters of the Gulf has the potential to double U.S. crude oil reserves.
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Seventh District--Chicago
Economic activity in the Seventh District expanded at a moderate pace during late August
and September. Consumer spending continued to increase modestly, and business spending
expanded again. Labor market conditions were little changed, with small gains in
employment on net. Residential construction and real estate activity declined again in most
areas, while nonresidential construction advanced at a steady pace. Manufacturing activity
expanded again, though at a modestly slower pace than in the previous reporting period.
Mortgage lending declined, while commercial lending increased at a slightly slower rate than
in the previous reporting period. Nonenergy price pressures and overall wage increases held
steady. Corn and soybean harvests in the District were delayed by cool and rainy weather in
September, and early results indicated mixed yields relative to a year ago.
Consumer spending
Consumer spending continued to increase modestly in August and September. Retailers said
back-to-school sales were within their expectations but "nothing stellar." Cool weather
reportedly helped apparel sales in some areas. Retailers thought that lower gasoline prices
had only a modest impact on their sales. Retail inventories were at desired levels for general
merchandisers, but a furniture retailer said it was running down its inventories because its
suppliers were well stocked and able to fill orders quickly. Auto dealers reported that sales
trends have changed little in recent weeks; Big Three vehicles lagged behind foreign
nameplates and high-gas-mileage vehicles continued to sell well. Tourism in Michigan was
running similar to a year ago after a small pick-up in recent weeks.
Business spending
Business spending and hiring expanded again in the District. For the most part, capital
spending continued to increase at similar rates as in the previous reporting period. Trucking
volumes were up slightly over a year earlier, though one contact said customers have been
tentative and saw a chance of stronger activity in the fourth quarter. Overall labor market
conditions were little changed, with small gains in employment on net. Manufacturing
employment was mixed by industry. Auto manufacturers and suppliers laid off workers,
while toolmakers increased employment. A contact in Rockford reported that a number of
warehouses serving retailers were significantly increasing employment. A local internet job
posting business said that job advertising continues to be robust. Shortages of skilled
manufacturing workers persisted. A temporary help services provider said that demand
growth in the District during the third quarter was a bit stronger than the second quarter, led
by a pickup in Illinois and Wisconsin.
Construction/real estate
Residential construction and real estate activity declined again in most areas. Homebuilders
observed sluggish demand in all market segments, and a Chicago-area builder said high-end
properties have been taking noticeably longer to sell. However, a contact in the Milwaukee
area said traffic through model homes was holding up well. Builders in southeast Michigan
reported a number of project cancellations. New home prices were steady to down, and
several builders were adding free upgrades to help sell homes. A contact in Michigan noted
that list prices of existing homes were being reduced as well. Nonresidential construction
expanded at a steady pace. However, net absorption of office space slowed and neared zero
in many parts of the District, which a Chicago-area contact attributed to the return of
sublease space into the market. Looking forward, a few contacts said that the development
pipeline looked slower than average and that some projects were delayed for budget reasons.
Manufacturing
Manufacturing activity expanded again in late August and September, though the pace of
expansion was a bit slower than in the previous reporting period. Sales of large- and
medium-sized heavy equipment continued to be strong, but overall order backlogs dipped
below recent highs and deliveries of machines used in home construction have fallen below
year-ago levels. Sales of high-tech equipment were growing well, with demand spread across
cell phones, cellular infrastructure, and defense communication equipment. A specialty steel
producer reported robust order growth and said that it was picking up new customers that had
been having trouble filling orders with their existing supply base. Toolmakers reported
continued strong order growth. One toolmaker added that it had not seen any weakening in
its oil-related business since crude prices have declined, and another noted that demand from
foreign firms has been strong. Heavy-duty truck production and sales were at record levels.
Net orders continued to fall, but the decline was within expectations since production
capacity was booked through the end of the year, when new emission standards go into
effect. Demand for medium-duty trucks was driven by orders from truck dealers, as analysts
report that end-users were "clueless" about the new emission standards. Light vehicle
manufacturers forecast steady or slightly slower sales for the rest of the year, though one
expected lower gasoline prices and higher equity prices to support demand. A steelmaker
noted that vehicle production cuts were starting to show through in weakening orders for
flat-rolled steel and growing inventories at steel service centers.
Banking/finance
Lending activity moderated further. Bankers noted continued stagnation in mortgage
applications for home purchases but said that refinancing activity firmed between August and
September. One bank indicated that slower home price appreciation was restraining demand
for new home equity loans. Home equity credit line balances declined further, though
demand for closed-end loans ticked up. Household credit quality remained in good shape in
most places with stable delinquency rates on mortgages and home equity loans; the exception
was in Michigan, where delinquency rates moved higher. Commercial lending continued to
expand but at a slightly slower pace than in recent reporting periods. Bankers in the Chicago
area noted that customers remained upbeat about business conditions and were increasing
their demand for financing, while bankers in Michigan reported little loan growth.
Commercial lending conditions continued to be competitive and interest rate margins were
narrow. One banker noted that competitive pressures were spreading into second-tier lending,
such as small business loans collateralized with personal assets. Commercial credit quality
remained in good shape, which one Detroit-area banker attributed to the reluctance of lending
officers to loan funds to problem industries.
Prices/costs
Nonenergy price pressures and overall wage increases were similar as in the previous
reporting period. Several contacts reported recent declines in energy costs, but a
manufacturer said their suppliers were waiting to make sure energy prices stabilized before
passing along the cost reductions. An appliance manufacturer said the cost environment
remained "unfavorable," due to high materials prices. Construction materials costs were
stabilizing at high levels. There were no reports of significant changes in price movements at
the retail level. Wage increases continued at similar rates as in the previous reporting period.
Agriculture
Corn and soybean harvests in most of the District were delayed by continued precipitation
and unseasonably cool weather. The weather also inhibited crops from drying in the fields,
forcing farmers to use energy-intensive, mechanical drying. Early reports on corn and
soybean yields indicated mixed results around the District, as extensive cloud cover late in
the growing season hampered crop development. Net crop receipts decreased across the
District. Contacts expressed concern about cash flows for grain farmers given higher
operating costs for the crop year overall, though the recent decline in energy prices has been
a positive factor, especially by reducing the cost of drying grain. Hog prices declined in
September, while cattle and dairy prices increased.
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Eighth District--St. Louis
Economic activity in the Eighth District expanded modestly since our previous survey.
Reports from manufacturing continued to be positive and contacts indicated that the services
sector continued to grow. Reports from contacts in residential real estate markets were
mixed; similarly, commercial real estate market conditions varied across the District. Total
loans at a sample of small and mid-sized District banks increased slightly from mid-June to
the end of August.
Manufacturing and Other Business Activity
Manufacturing activity in the District continued to expand since our previous survey. Several
manufacturers reported plans to open plants and expand operations in the near future, while a
smaller number of contacts reported plans to close plants and reduce operations. Firms in the
biofuel and fabricated metal product industries reported plans to open new facilities in the
District. Contacts in the machinery, food, furniture, and miscellaneous industries reported
plans to expand existing facilities and operations. Firms in the nonmetallic mineral and paper
product industries reported plans to hire additional workers. In contrast, contacts in the motor
vehicle parts industry reported plans to lay off workers and decrease operations, and a firm in
the computer equipment industry announced that it will close a plant in the District.
The District's services sector continued to expand. Firms in the freight transportation,
recreation, and professional business services industries reported plans to build new facilities
and expand operations. In contrast, a firm in the business support services industry reported
plans to close a facility in the District. Car dealers in the District reported that sales from late
August through early September were down, on average, over year-earlier levels. Sales of
domestic cars and sport utility vehicles were particularly slow.
Real Estate and Construction
August year-to-date home sales were mixed throughout the Eighth District. Home sales
increased 11 percent in Memphis and were relatively unchanged in Louisville compared with
the same period in 2005. August year-to-date home sales declined about 2 percent in both St.
Louis and Little Rock. Residential construction remained weak throughout the District.
August year-to-date single-family housing permits were down in nearly every metro area.
Compared with the same period last year, permits fell 34 percent in Louisville, 21 percent in
greater St. Louis, 11 percent in Memphis, and 8 percent in Little Rock. Permits, however,
increased 12 percent in Jackson, Tennessee, and 2 percent in Fayetteville, Arkansas.
Commercial real estate market conditions continued to be mixed throughout the District. In
Little Rock, the second-quarter 2006 industrial vacancy rate increased slightly, the downtown
office vacancy rate decreased, and the suburban office vacancy rate increased. Contacts in
east Memphis reported high demand for Class A office space. Contacts in Little Rock
reported that several large construction projects are expected or underway. Contacts in
northeast Arkansas reported that commercial building remains slow, while contacts in
Madison County, Tennessee, reported that commercial construction is booming. In St. Louis,
contacts reported that new industrial construction is vibrant.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks showed a modest
increase of 0.6 percent from mid-June to the end of August. Real estate lending, which
accounts for 71.9 percent of total loans, increased 0.4 percent. Commercial and industrial
loans, accounting for 18.0 percent of total loans, increased 1.1 percent. Loans to individuals,
accounting for 4.3 percent of total loans, fell 0.7 percent. All other loans, roughly 5.8 percent
of total loans, increased 1.8 percent. Over this period, total deposits at these banks increased
1.4 percent.
Agriculture and Natural Resources
Ample rainfall in much of the District since August slowed harvesting progress in some
areas. The District's overall corn harvest is behind its average pace by 14 percent because of
slower-than-normal paces in Illinois, Indiana, and Kentucky; the soybean harvest is behind
by 20 percent because of slower-than-normal paces in Illinois, Indiana, Kentucky, and
Missouri; and the sorghum harvest is behind by 4 percent because of the slower-than-normal
pace in Illinois. In contrast, the cotton harvest in Arkansas and Mississippi is ahead of its
normal pace by 88 percent, while the rice harvest is ahead by 12 percent. The rain improved
pasture conditions in all District states, but at least one-third of the pastures in Arkansas,
Mississippi, Missouri, and Tennessee still remain in poor condition.
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Ninth District--Minneapolis
The Ninth District economy grew moderately since the last report. Increases in activity were
noted in consumer spending, commercial real estate, tourism, agriculture, mining, and
energy. Meanwhile, manufacturing activity was mixed, commercial construction was steady,
and residential real estate and construction activity decreased. Labor markets tightened since
the last report, and wage increases were moderate. Significant price increases were noted for
some building materials, and significant decreases were noted in fuel and lumber.
Consumer Spending and Tourism
Overall consumer spending increased modestly from a year ago. A major Minneapolis-based
retailer reported same-store sales up about 3 percent in August compared with a year ago. A
Minneapolis area mall manager noted that recent traffic was higher than a year ago, but sales
were relatively flat. A solid back-to-school shopping season was reported at another
Minneapolis area mall; recent traffic was up 2 percent. Cool weather helped boost sales for
sweaters and light jackets. A mall manager in Montana noted that sales were very strong in
August compared with a year ago.
An auto dealer in eastern Montana reported that sales were up slightly from a year ago. A
representative of an auto dealers association in North Dakota noted that sales over the past
two months were sluggish compared with last year.
Late summer and fall tourism activity was up slightly from last year. A Chamber of
Commerce representative in northwestern Wisconsin noted strong traffic during a recent
autumn event. The fall tourism season is starting to pick up in South Dakota, according to an
official; the pheasant hunting season looks promising. A tourism official in the Upper
Peninsula of Michigan noted positive reports by tourism-related businesses during August
and September. Some lodging operators in northeastern Minnesota noted a slower August
compared with last year.
Construction and Real Estate
Commercial construction activity was steady. A bank director noted that commercial
construction was active, although the pace of activity might be slowing. August residential
and commercial permits in Rochester, Minn., were down 22 percent in value from a year ago.
Developers announced plans for a $14.4 million industrial park in suburban Minneapolis, and
other developers announced plans for a $5.2 million, 55,000- square-foot fitness center in
suburban St. Paul. However, residential construction continued to weaken around the
District. A Minneapolis director heard contractors describe activity there as slow. A proposed
condominium development plan in St. Paul was delayed, and there is doubt about whether
some downtown Minneapolis condo developments will go forward. However, a western
North Dakota director described residential construction in his area as robust.
Residential real estate continued to slide. August home sales in Minneapolis-St. Paul were
down 27 percent from 2005, with pending sales down 23 percent. Sales were down 10
percent from last year in the Upper Peninsula of Michigan; the market for recreational land is
the only strong segment there. However, a representative of a Realtors' association in Sioux
Falls, S. D. described the market there as on pace with last year's record-breaking levels, with
lower priced homes driving the market. The commercial sector stayed strong, however,
particularly the Minneapolis industrial market, which saw rising prices, according to an
official from a commercial real estate firm. The markets for retail space in North Dakota and
Montana are strong. Office vacancies crept up in the Minneapolis and St. Paul central
business districts.
Manufacturing
Growth in the manufacturing sector was mixed. An October survey of purchasing managers
by Creighton University (Omaha, Neb.) indicated slight growth of manufacturing activity in
the Dakotas and Minnesota. A contact from a specialty food products company in North
Dakota reported strong demand and was expanding workers' overtime hours. In Minnesota, a
contact from a manufacturer of parts for the medical and transportation industries reported
strong demand, added production, and increased hiring. An industrial machine producer in
northwestern Wisconsin noted a slowing down in demand from domestic customers and
increased demand from foreign customers. However, due to weak residential construction,
two oriented-strand board plants suspended operations in Minnesota. A contact at a lumber
mill in northwestern Wisconsin reported sales are "real slow."
Energy and Mining
Activity in the energy and mining sectors increased since the last report. Although oil and gas
exploration and production in the District were stable, the alternative energy industry,
including wind, biodiesel, and ethanol, continued to expand at a rapid pace. Mining
production is at near-capacity across the District. A Montana platinum mine reopened after
shutting down due to nearby wildfires. A Minnesota iron-mining official noted that "all
systems are go," as production is strong and new mines are in the permitting process.
Agriculture
Agricultural activity increased since the last report. Late summer rains and improved harvest
estimates aided farmers. District sugar beet producers are expecting a bumper crop. The U.S.
Department of Agriculture reported that corn and soybean progress in District states is ahead
of last year and the five-year average. The corn harvest in Minnesota is expected to come in
at a robust 1.1 billion bushels. However, District corn and soybean production is projected to
decrease from last year.
Employment, Wages and Prices
Labor markets tightened slightly since the last report. A temporary staffing agency survey of
Minneapolis-St. Paul companies showed that 36 percent of respondents expect to increase
staffing levels during the fourth quarter, while 11 percent expect declines. A year ago, 26
percent expected increases, while 13 percent anticipated decreases. More than half of the 149
employers in Minnesota surveyed by St. Cloud State University's Career Service Center plan
to hire new college graduates this year. Construction of an anti-cancer-agent research facility
is under way in Minnesota, making room for 100 new research positions. In contrast, a
telecommunications company based in Minnesota plans to lay off 225 employees
companywide.
Wage increases were moderate. Wages for manufacturing workers in District states increased
1.8 percent for the three-month period ended in August compared with a year ago. Workers at
five hospitals in the Minneapolis-St. Paul area recently agreed to a new contract that provides
wage increases of 4 percent in each of the first two years and 3 percent in the third, and
employer contributions to health insurance premiums will increase.
Significant price increases were noted in some building materials, and decreases were noted
in fuel and lumber. Prices for copper and brass mill shapes, steel mill products, asphalt, and
wire and cable were notably higher than a year earlier. Meanwhile, gasoline prices decreased
since the last report. In Minnesota, gasoline prices toward the end of September were 49
cents per gallon lower than a year ago and 75 cents lower than a month earlier. Regional
prices for diesel fuel were 23 cents per gallon lower than a year ago. Recent plywood and
softwood lumber prices were also down from last year.
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Tenth District--Kansas City
The Tenth District economy expanded moderately in September with the pace of growth
firming since the last survey period. Consumer spending strengthened with stronger retail
sales and tourism activity. The expansion in labor markets, energy activity, and commercial
real estate activity advanced further. District manufacturing activity was solid despite
expanding at a slower pace and residential real estate activity continued to soften.
Agricultural conditions improved slightly with recent precipitation. Wage and wholesale
price pressures remained contained and retail price pressures were subdued.
Consumer Spending
Consumer spending strengthened in September after growing more slowly in August. District
retail contacts reported a rebound in sales and heavier traffic in retail malls. Sales gains were
generally broad-based, but contacts suggested some weakness in home furnishings and home
improvement items. Retail sales were up from a year ago and retailers expected higher sales
in the next three months. Auto dealers reported slower sales growth as fewer incentives were
offered. High gas mileage vehicles sold well while truck and SUV sales remained slow. Auto
inventories rose in September, but stood at acceptable levels. Auto dealers expected slower
auto sales and rising inventories in the months ahead. Travel and tourism activity
strengthened in September. District hotels reported solid gains in hotel occupancy rates.
Hotel and tourist attraction operators expected activity to improve going forward.
Manufacturing
The expansion in district manufacturing activity slowed in September. Plant managers
indicated that growth in production, shipments, and new orders slowed since the last survey
period, but remained well above year-ago levels. Inventories edged up from August and
suppliers to auto manufacturing plants reported slower sales. Still, manufacturers remained
optimistic about future sales. Supplier delivery times improved in September. Capital
expenditures remained solid as did expectations for future investment.
Real Estate and Construction
The residential real estate market continued to soften while commercial real estate activity
expanded. Contacts indicated that home starts, traffic of potential buyers, and home prices
were down relative to a year ago. Inventories of existing homes rose and contacts reported
that the time-on-market for homes lengthened, despite the increased use of concessions to
attract buyers. Home sales were soft in most segments of the housing market, with particular
weakness in low to moderately priced housing markets. Builders expected home starts to
decline further, due in part to normal seasonal slowing. In contrast, commercial real estate
activity expanded. Although commercial building starts fell, vacancies were down and
absorption was up. Commercial real estate contacts expected activity to remain firm.
Banking
Bankers reported that loans increased somewhat since the last survey, while deposits held
steady. Demand for commercial and industrial loans rose slightly, while demand for other
loan categories was generally unchanged. Money market deposits and CDs were higher than
in the prior period. Lending rates and standards remained basically unchanged. Overall loan
quality improved somewhat compared to the same period a year ago, and respondents
expected loan quality to improve moderately in coming months.
Energy
Energy activity continued to expand in the district in September. Oil and gas drilling rig
counts remained above year-ago levels. District contacts expected the expansion in energy
activity to continue, but at a slower pace. The availability of qualified labor and equipment
remained a concern. Demand for gasoline and oil slowed with the end of the summer driving
season. Industry contacts, however, expected natural gas prices to rise this winter.
Agriculture
Agricultural conditions generally improved across the district since the last survey in August.
Cooler weather and scattered rain helped to improve soil moisture and pastures conditions,
but slowed crop maturation and fall harvest. Elsewhere, windy conditions forced some
producers to delay winter wheat plantings or risk erosion. Still, producers remained generally
optimistic about field conditions going forward. Despite improved pastures, cattle producers
may continue to draw down herds to help pastures recover from drought.
Labor Markets and Wages
Labor markets continued to expand while wage pressures remained contained. District hiring
announcements continued to outpace layoff announcements. Most contacts continued to
report some type of labor shortage, especially for skilled and specialized workers, including
engineers, experienced sales workers, oil and gas workers, and manufacturing workers. Some
district contacts indicated shortages of entry level positions. The share of businesses
experiencing wage pressures eased somewhat since the last survey. Most businesses expected
wage gains to be in line with recent wage increases, but some expected that larger wage
increases would be needed to attract and retain specialized workers.
Prices
Wholesale price pressures continued to ease and retail price pressures remained subdued.
Fewer manufacturers reported rising raw materials prices and fewer also expected price
increases in the coming months. Nevertheless, prices for raw materials remained high,
especially for materials derived from oil and natural gas. The share of manufacturers
reporting higher finished goods prices held steady. Looking forward, the share of firms
planning output price increases also held steady. District builders indicated that metals prices
continued to rise in September. Most retail contacts indicated that prices were stable relative
to recent months. Going forward, most retailers expected selling prices to remain flat or rise
only marginally.
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Eleventh District--Dallas
The Eleventh District economy continued to cool from high levels in September. Falling fuel
prices increased profits and optimism for some firms, but increased caution has crept into the
residential construction and energy industries. Energy activity is still robust, but drilling has
paused amid growing concern about a glut of natural gas in storage. Nonresidential
construction is vigorous, and residential building is strong but continuing to cool.
Manufacturing activity is also quite strong, despite slowing demand from residential builders.
Retail sales were up, and demand in the service sector is still very good, but there continue to
be pockets of softness. Financial service firms reported slower consumer lending, but
commercial lending remained strong. Rain has slightly improved agricultural conditions.
Prices
Energy costs have fallen, relieving upward pressure on prices. Selling prices have fallen for
some products where demand has fallen precipitously, such as for lumber. But in most
instances, lower energy costs have halted the rise in selling prices and not yet resulted in
price declines. Some firms say lower energy and commodity prices have boosted profits to
offset recent sales declines.
After peaking near $78 in July, crude oil prices fell to near $60 in September. Demand for
crude oil has been strong, but inventories are well above last year's level and the 5-year
average. Wholesale gasoline prices fell about 50 cents per gallon in September, and the pump
price fell further. Distillate prices fell less rapidly than gasoline because the winter heating
season is approaching. Spot natural gas prices dipped from about $6 to just over $4 per
million Btu at Henry Hub. Natural gas in storage is roughly 12 percent higher than the 5-year
average. Some producers say they are holding natural gas off of the market in anticipation of
the higher prices the futures market shows for winter. Other producers are preparing but not
perforating their natural gas wells, so they can sell forward the initial surge of production at a
higher price.
Home prices continued to rise in Houston, but in other cities softer demand has led builders
to add incentives. Apartment rental rates are edging up, but at a slower pace than was
expected earlier this year. Commercial builders reported higher construction costs.
Labor Market
While there were scattered reports of hiring freezes or layoffs, the labor market remains tight.
Contacts across many sectors are still reporting problems finding skilled labor. Skills in short
supply include high-tech engineers, automobile mechanics, truckers, accountants and
workers for the energy and commercial construction industries. Wages have increased for
most of these types of employees.
Manufacturing
Manufacturing activity continued to expand at a strong pace, boosted by commercial
construction and a backlog of orders from the energy industry. Sales of food products were
very strong and accelerated this month, which contacts attribute to lower gasoline prices
boosting restaurant activity. Demand has slowed for corrugated boxes, and contacts in this
industry have become less positive about the outlook. High-tech manufacturers said
shipments were still strong, but there is continued uncertainty about the outlook.
Demand continued to slow for products used in residential construction, but some firms said
recent slowing may have been partially weather-related. Producers of stone, clay and glass
reported sales declines of as much as 20 percent from a year ago, and inventories are up for
some products. Lumber producers reported a significant drop in demand and increase in
inventory over the past month, mostly because of reduced demand from national markets,
although sales in Texas were also weaker. Producers of wood products, such as cabinets, say
demand is unchanged. A few producers of construction-related products report that some
large publicly-traded builders have sent letters asking for price reductions to help them
achieve quarterly income projections. This has led producers to become wary about doing
business with these builders.
Fabricated metals producers report no change in sales volume but had become more
optimistic. Demand for residential construction products has been soft, but sales to the
energy industry remain strong. Primary metals producers reported little change in demand
overall, with strong demand for commercial building helping compensate for slowing activity
from the residential sector.
Gulf Coast refineries continued to operate at very high levels, near 97 percent in recent
weeks. Gasoline demand fell seasonally but is still 4 percent stronger than last year. Demand
softened for synthetic rubber and ethylene. Plant outages temporarily boosted ethylene
prices, and contacts suggested recent weakness in sales is a result of customers using
inventory in anticipation of lower prices in the weeks ahead.
Services
Activity continued to increase for some temporary service firms, particularly in Houston and
East Texas, but demand dropped unexpectedly at some companies, leading these contacts to
be less optimistic. Accounting firms say demand growth has slowed from last year, mostly
due to a slow down in Sarbanes-Oxley related work. Most law firms reported continued
strong demand and are optimistic about the outlook.
Overall cargo shipping continued to increase, with some contacts noting particularly strong
international activity. Railroads reported strong demand, but there has been a modest decline
in trucking volume. Airlines reported a rebound in passenger traffic, with good loads and
bookings for long-haul and international flights. Demand was reported as slower for short
hops that are more affected by the increased hassle of increased security restrictions.
Retail Sales
Retail sales improved in September after weakness over the summer. Sales growth was better
than expected but lower than earlier this year. Contacts mostly attribute the pickup to lower
gasoline prices, but other factors were mentioned. Auto sales continued to be soft according
to dealers, who say imported fuel-efficient vehicles are selling well but sales of domestic
vehicles remain poor. Sales are strong for luxury vehicles, both domestic and imported.
Construction and Real Estate
The housing market continues to soften but remains quite strong. Sales are particularly strong
in Houston, Austin and El Paso. Dallas real estate agents say the "buying fervor" is a little
slower, but relocations and healthy job growth are still boosting activity. New home
inventories have inched up, despite strong demand in some markets. Building is expected to
slow from the rapid pace of growth seen earlier this year. While the market remains strong,
contacts have become "more nervous and anxious" in their outlook, especially given recent
reports of a decline in housing sales and prices at the national level.
Apartment construction remains strong, and occupancies are still near or above 90 percent in
most areas. In Dallas, demand for apartments picked up robustly over the past couple of
months, boosting occupancies and rents. Houston contacts attribute some recent softness to
the "Katrina effect" as evacuees leave apartments for permanent residences. With many
Houston projects in the works, some contacts were concerned with the possibility of
overbuilding.
Construction and demand for office space is still increasing. Contacts characterize the
Houston market as "the healthiest we've seen in a long time." Dallas contacts say the large
blocks of space have become more limited, shifting pricing power to landlords.
Financial Services
Commercial loan demand remained strong. The market remains very competitive, but firms
say there is no apparent credit quality deterioration. Deposit growth is steady, but deposits are
increasingly difficult to get. Consumer lending slowed further, which was attributed to
borrowers paying down existing debt. Automobile lending has softened.
Energy
After increasing strongly for months, the Texas and U.S. rig counts were virtually unchanged
in September. Low natural gas prices have raised caution in the industry. Demand for
oil-field equipment and energy services is still strong, stimulated in part by international
activity, where the rig count continues to rise.
Heavy supplies of natural gas have increased pipeline pressure in parts of the country.
Concern is rapidly growing about the possibility that a warm winter would sustain lower
prices. Drilling has not yet been cut, which contacts say is partly because of the backlog of
equipment and workers in the industry. Firms are hesitant to give up a rig or their place in
line for oilfield equipment or services. While oil prices have fallen, this drilling is expected
to be more immune from a price downturn because oil projects are larger and based on
conservative outlooks for oil prices, have long-term horizons and deeper pockets behind
them.
Agriculture
Most of the District continues to suffer from severe or extreme drought, but September rain
brought some relief. The moisture helped the wheat crop get off to a good start, improved
range and pasture conditions and eased pressure on livestock producers to liquidate herds.
Cotton harvesting is under way in some parts of the District, and contacts say production will
be 35 percent less than last year. Contacts remain concerned that low crop production and
rising costs will make it difficult for producers to repay farm loans. Federal grants recently
made available under the livestock assistance program are expected to ease the cash flow
situation for some producers.
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Twelfth District--San Francisco
Economic activity in the Twelfth District expanded at a moderate pace on net during the
month of September. Falling energy prices reduced upward pressures on the final prices of
some goods and services, while the pace of wage increases generally remained contained but
exerted upward price pressure in some industries. Reports on retail sales suggested modest
growth on net, while demand for most services remained strong. Orders and output grew
further for manufacturers and agricultural producers. Residential real estate markets
continued to cool, while activity in commercial real estate markets generally expanded
further but moderated in some areas. District banks reported solid loan demand and good
credit quality but further declines in demand for residential mortgages.
Wages and Prices
District reports indicated that overall price inflation remained modest. Energy prices fell
noticeably in most areas, reducing the retail price of gasoline and relieving upward price
pressures for assorted energy-intensive products. Contacts also noted a decline in the prices
of selected building materials used primarily for residential construction, although the prices
of some other building materials rose. More generally, respondents noted limited price
pressures.
Overall wage growth remained moderate, in the range of 2-4 percent on an annual basis.
Wage growth was more rapid for selected groups of workers in short supply, notably in the
health-care, finance, and construction sectors, and in fast-growth areas with very tight overall
labor markets, such as Idaho and Utah; however, a few respondents in those areas indicated
reduced wage pressures of late. Rising labor costs were offset by enhanced production
efficiency in most cases, but a few reports indicated significant pass-through to final prices.
Retail Trade and Services
District retail sales grew modestly from the previous survey period. Sales rose somewhat for
small retail items such as apparel, but they fell for items used for home improvement. Auto
demand changed little from the previous survey period; sales of fuel-efficient import vehicles
continued to rise at a solid clip, while sales fell further for large, fuel-inefficient domestic
models.
Service providers generally reported strong demand. Activity continued to expand at a robust
pace for providers of health services, and sales grew further for providers of media and
high-tech services. Tourist activity remained at high levels in most major markets, but some
moderation was noted. In Hawaii, tourist visits and spending were down compared with a
year earlier. In parts of California, hotel occupancy rates reportedly have stabilized following
a prolonged climb, but room rates continued to rise.
Manufacturing
Demand for District manufactured products grew further during the September survey
period. Sales of semiconductors expanded at a solid pace that was in line with industry
forecasts, although inventories reportedly rose slightly; capacity utilization generally
remained in the range of 90 percent. Rapid production activity continued for producers of
commercial aircraft and for their parts suppliers, while makers of machine tools reported
substantial growth in new orders of late. Food processors reported further sales gains, and
demand for apparel was "steady." By contrast, demand for selected building materials used
primarily for residential construction fell further. Except for tight supplies of skilled workers
in some areas, manufacturing contacts generally reported little or no constraints on their
ability to expand output further.
Agriculture and Resource-related Industries
Sales of agricultural and resource-related products grew further and production conditions
were stable in general. Sales were strong for livestock and most crops, and weather
conditions generally were favorable, keeping production on track. However, some spinach
producers have put planting on hold due to the recent bacterial outbreak associated with that
crop. Respondents noted further easing of labor shortages in the agricultural sector and a
reduction in upward price pressures due to falling fuel prices. Extraction of oil and natural
gas continued at a rapid pace, with very high capacity utilization noted. However, inventories
of natural gas were reported at near-record levels, maintaining downward pressure on the
price of this commodity.
Real Estate and Construction
Demand for residential real estate fell further in most areas, while activity in commercial real
estate markets continued to expand but at a slower pace than previously in some areas. The
pace of home sales, construction, and price appreciation slowed further in most parts of the
District, and contacts in some areas noted that developers have been offering price
concessions and other incentives to entice buyers. Demand for commercial and industrial
space rose further in most areas, reducing vacancy rates and leading to further increases in
rental rates; however, contacts in a few areas reported a recent reduction in the pace of
demand growth. In areas where home demand has been resilient or commercial and public
projects have grown rapidly, builders continued to face project backlogs and high costs. In
other areas, however, overall building activity has fallen, and contacts noted that reduced
home demand has led to layoffs for mortgage brokers and real estate agents.
Financial Institutions
District banking contacts reported solid loan demand and good credit quality. Overall loan
demand was reported to be "healthy," as further growth in commercial and industrial loans
generally offset declines in demand for home loans. However, a few contacts noted slight
weakening in overall loan demand relative to the previous survey period. Credit quality was
high in general; for example, loan delinquencies were reported to be "practically nonexistent"
in Utah and Idaho.
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Last update: October 12, 2006
Cite this document
Federal Reserve (2006, October 24). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20061025
@misc{wtfs_beige_book_20061025,
author = {Federal Reserve},
title = {Beige Book},
year = {2006},
month = {Oct},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20061025},
note = {Retrieved via When the Fed Speaks corpus}
}