Beige Book
January 17, 2007
Summary
Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before January 8,
2007. This document summarizes comments received from business and other contacts outside the Federal
Reserve System and is not a commentary on the views of Federal Reserve officials.
Most reports from the Federal Reserve District Banks indicated that economic activity
expanded at a modest pace since the last report. The New York and San Francisco Districts
reported moderate growth, while the Dallas District reported further deceleration from a high
level of activity. The Minneapolis District reported slight growth. The Boston District
characterized activity as mixed, and the Cleveland District saw softening activity.
Districts generally reported modest increases in retail sales, and vehicle sales were sluggish
in several Districts. Tourism spending was up in a number of Districts. Reports on the service
sector were generally positive; many Districts reported growth in technical, legal and
information services. Manufacturing activity continued to expand in most Districts, with
weakness reported mainly for products supporting the residential construction industry.
Nearly all Districts reported a continued softening in housing markets, and high inventories
of new homes have generally led to a slowing in residential building. In contrast to the
housing sector, commercial real estate markets continued to see strong activity in most
Districts. Lending activity was mixed, with commercial and industrial lending generally up
while residential mortgage origination and refinancing continued to weaken. Overall weather
conditions and high prices aided the agriculture sector. Energy production and exploration
remained at high levels, and the alternative energy sector increased. Mining output grew.
District reports generally described labor market conditions as tightening and cited examples
of some businesses having difficulty finding qualified workers. Despite expanded hiring,
Districts reported relatively moderate gains in wages; however, some Districts noted certain
business lines that experienced wage increases and have concerns about increases in the
benefit portion of compensation. District reports indicated moderate price increases overall as
prices for energy and a number of materials eased and competition kept prices for final goods
in check.
Consumer Spending and Tourism
Districts generally reported modest increases in retail sales. Several Districts described retail
sales increases as slight or moderate. New York reported that sales were on or slightly above
plan in December. Dallas characterized retail sales growth as good, but not great. Retailers in
the San Francisco District reported a generally solid performance for the holiday season.
However, Boston, Cleveland and Kansas City described retail sales as mixed. New York,
Philadelphia, Richmond and Chicago noted strong sales in electronics. New York,
Philadelphia and Richmond reported soft apparel sales, particularly in outerwear due to warm
weather. In contrast, retailers in the Chicago and St. Louis Districts reported strength in
apparel sales. Districts that commented on inventory levels described them as generally
favorable or balanced, except for Boston, where several contacts reported higherthan-expected levels.
Vehicle sales were sluggish in several Districts. Philadelphia, Richmond, Atlanta, St. Louis,
Minneapolis and Kansas City reported slow vehicle sales. Auto sales were mixed in the
Cleveland District, while Dallas reported a pickup in sales and San Francisco described sales
as moderate on net. Several reports noted that foreign car sales were stronger than domestic
truck sales; however, a few reports indicated strength in SUV demand due to lower gas
prices.
Tourism spending was up in a number of Districts. Boston, New York, Atlanta, Chicago,
Kansas City and San Francisco provided positive assessments of tourism activity, while
Richmond described activity as mixed and Minneapolis noted that tourism was in the
doldrums in several areas due to a lack of snow. Tourism activity remained at high levels in
most major markets in the San Francisco District, while tourism and travel exceeded
expectations in the Boston metropolitan area.
Services
Activity in the services sector generally expanded in most Districts since the last report.
Boston, New York, Philadelphia, Richmond, St. Louis and San Francisco reported growing
demand for technical services, while Dallas reported that activity was slowing but strong
overall. New York, Richmond and Dallas reported growing demand for legal services.
Demand for information technology services increased in the Philadelphia, St. Louis, Dallas
and San Francisco Districts, but was flat in the Richmond District. Growth in financial
services was noted by the New York, Richmond and Dallas Districts. Trucking firms reported
slower demand in the Philadelphia and Cleveland Districts, while Dallas saw greater demand
for trucking and strong demand for rail transportation.
Manufacturing
Manufacturing continued to expand in most Districts. Boston, Philadelphia, Cleveland and
San Francisco reported increased manufacturing activity, while slowing growth was reported
by the Chicago, Minneapolis and Kansas City Districts. However, Atlanta reported mixed
activity, while Richmond, St. Louis and Dallas reported some declines.
Strong demand for products used in the energy sector was noted by the Boston, Atlanta,
Chicago, Minneapolis and Dallas Districts. Philadelphia, Dallas and San Francisco noted
increases in food products. Boston, Cleveland, Atlanta, Chicago, Dallas and San Francisco
reported continued weakness among manufacturers that support the residential construction
industry.
Real Estate and Construction
Nearly all Districts reported a continued softening in housing markets. High inventories of
new homes have generally led to a slowing in residential building, with some exceptions.
While single-family construction weakened, New York saw multifamily permits on pace with
a year earlier. In Cleveland, some builders reported a stabilizing market. Although Atlanta
reported steep declines in Florida home building, activity was mixed in the rest of the
District. Chicago saw smaller declines in construction than in the preceding period, with
signs of recovery in the Chicago metro area. Minneapolis reported increased remodeling
activity in several markets.
All Districts reported slow home sales, except for Richmond, which saw a modest increase.
Decreases in home prices were reported by Boston, New York, Atlanta and Chicago, while
Kansas City said prices were subdued. In contrast, Dallas reported modest price increases
and San Francisco said homes were appreciating but at a slower pace. New York reported
that Manhattan's co-op and condo market improved in the fourth quarter of 2006, with flat
prices but higher sales volume. Dallas noted that the low-priced home market was slower
than higher-priced segments. Realtors in San Francisco were offering significant incentives
to sell properties. New York reported rent increases, while Dallas noted that apartment
vacancies edged up in the cities of Dallas and Houston, largely due to an exodus of Hurricane
Katrina evacuees.
In contrast to the housing sector, commercial real estate markets continued to see strong
activity in most Districts. Cleveland, Atlanta, Chicago, St. Louis, Minneapolis and San
Francisco saw increases in commercial building. New York reported that relatively little new
office space was under construction in New York City, even though rents have increased and
vacancy rates have fallen. Atlanta, St. Louis and Minneapolis reported growth in commercial
real estate market activity, with Kansas City, Dallas and San Francisco also reporting
increased office rents. Chicago saw an increase in office absorption across most of the
District, with the exception of the Detroit area.
Banking and Finance
Lending activity was mixed, with commercial and industrial lending generally up while
residential mortgage origination and refinancing continued to weaken. New York, Cleveland
and Dallas reported decreases in overall loan demand, while Philadelphia, Richmond, St.
Louis, Kansas City and San Francisco saw some increases. Demand for residential lending
declined in the New York, Philadelphia, Atlanta, Chicago, Kansas City, Dallas and San
Francisco Districts, while Richmond and St. Louis saw slight increases. Demand for
commercial and industrial loans rose in the Philadelphia, Cleveland, Richmond, St. Louis,
Kansas City and San Francisco Districts, was mixed in the Atlanta District and steady in the
Chicago and Dallas Districts. Philadelphia saw an increase in credit card usage with a decline
in other consumer loans, while Cleveland and Dallas saw consumer lending decrease. Overall
credit quality remained good, but New York and Atlanta reported increases in consumer
delinquencies and Chicago noted a small increase in mortgage delinquency. New York
reported tightening standards for commercial and consumer loans.
Agriculture and Natural Resources
Most Districts reported upbeat agricultural conditions because of weather and high prices.
Good weather conditions, which aided the sector, were reported by Richmond, Atlanta, St.
Louis, Kansas City and Dallas. However, Minneapolis reported dry conditions, and Kansas
City reported storms that adversely affected parts of the industry. High prices for many
agricultural commodities were reported by Chicago, Dallas and San Francisco.
Activity in the energy and mining sectors remained at strong levels. Cleveland, Minneapolis,
Kansas City, Dallas and San Francisco reported robust oil and gas activity. Cleveland and
Kansas City noted some capacity constraints. Atlanta and Minneapolis reported growth in the
alternative energy industry. Meanwhile, mining activity increased in the St. Louis and
Minneapolis Districts.
Labor Markets
District reports generally described labor market conditions as tightening and cited examples
of some businesses having difficulty finding qualified workers. Atlanta, Minneapolis and
Kansas City noted expanded hiring or signs of tightening. Boston reported that engineering
and machinist positions were especially hard to fill and that finance and accounting workers
were in great demand. In the New York District, hiring of office workers was strong, led by
financial and legal services, but slower hiring was noted in manufacturing and distribution.
Temporary employment agencies reported generally stronger demand for workers in the
Philadelphia and Richmond Districts. In the Dallas District, labor markets remained very
tight, with numerous firms continuing to report difficulty finding skilled and unskilled
workers. Meanwhile, Cleveland noted that retail hiring was about the same as a year ago.
Despite expanded hiring, Districts reported relatively moderate gains in wages; however,
some Districts noted certain business lines that experienced wage increases and had concerns
about increases in the benefit portion of compensation. Boston, Philadelphia, Cleveland,
Chicago, Minneapolis, Kansas City and San Francisco described wage increases as moderate
or continuing at rates similar to those in the preceding reporting period. However, Boston,
Philadelphia, Cleveland, Dallas and San Francisco mentioned higher increases for benefit
costs, particularly health care. Dallas reported that many contacts said high and rising labor
costs, including the cost of health insurance, top their list of concerns for the coming year. A
contact in the Chicago District said that salaries for executives were "vigorously
competitive."
Prices
Overall prices increased moderately. Prices for energy and a number of materials have eased,
and competition has kept prices for final goods in check. Atlanta, Chicago, Minneapolis and
Kansas City described price pressures as easing or moderating. Manufacturers in the Boston
and Cleveland Districts reported that input prices were stable, although contacts noted some
increases in metal prices. Meanwhile, manufacturers in the New York District indicated some
increases in input price pressures. Retail prices were steady in the New York, Atlanta and
Dallas Districts, but were edging up slightly in the Richmond District. Philadelphia noted
that reports of price increases at business firms were not as widespread as they were earlier in
the fall. Dallas described price pressures as mixed, while San Francisco said final prices rose
at a modest pace.
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First District--Boston
New England business contacts cite mixed results in the closing months of 2006.
Manufacturers and advertising and consulting firms mostly report satisfactory revenue
increases from a year earlier. A number of retail contacts say they are disappointed by their
holiday sales results or have been hurt by the housing slowdown. Residential real estate
markets are very soft. Price pressures have reportedly moderated, except for selected items,
including some metals. While it remains difficult to hire highly skilled workers, firms are
typically adding to headcount only selectively if at all.
Retail and Tourism
Retail respondents in the First District report mixed results for the months of November and
December. Same-store sales range from low double-digit decreases to high single-digit
increases year-over-year. Several respondents report sales increases, but indicate that they do
not meet expectations.
A lumber company reports sales down 11 percent year-over-year primarily because of the
housing slowdown. A retailer of clothing and outdoor gear says sales were strong until
Thanksgiving, but inexplicably soft "across the board" during the period from Thanksgiving
to Christmas. An office supply retailer notes a "lukewarm" holiday, with core business
products (ink, paper) and novelty items doing very well, but sales of electronics softer than
expected. A discount clothing retailer successfully adopted a new strategy for the holiday
season by offering more gift items such as accessories, toys, and jewelry, while a pharmacy
chain announced a year-over-year increase of more than 8 percent in same-store sales.
Inventory levels are mixed, with several contacts reporting higher-than-expected levels due
to slow sales. Some retail contacts cite cost increases for energy-related products, and several
report passing along small price increases to their consumers. Employment has been mostly
steady, with some hiring occurring for new store openings. One respondent, however, has cut
staff by 18 percent on account of a decline in sales. Capital spending plans are mixed.
A tourism contact reports that tourism and travel have exceeded expectations in the Boston
metropolitan area. Business travel was strong in the fall. Revenue per available room in
Boston is at an all-time high and is expected to continue to grow; occupancy is also projected
to continue to be strong. This contact says advanced bookings are still low, and international
travel is weaker than expected.
Overall, most retail contacts are hopeful but cautious in their outlook. Tourism is expected to
remain strong, but 2007 tourism and travel may fall short of record-breaking 2006 results.
Manufacturing and Related Services
First District manufacturers and related services providers generally report that fourth quarter
2006 revenues remained "on track" and were above year-ago levels. Sales trends for aircraft
and energy sector equipment and biopharmaceuticals are said to be particularly robust.
However, contacts note that business segments connected to consumer spending or housing
construction deteriorated in late 2006, and for the most part they expect continued softening
through the first part of 2007. For example, a semiconductor company said that its consumer
electronics customers over-ordered for the holiday season, and a product-labeling firm
reported that business "fell off considerably" in November and December.
Some manufacturers report increases in metals costs in late 2006, including unexpected hikes
for steel and zinc, and they are raising their selling prices in response. One firm indicates that
costs of silicon wafers are rising as a result of strong demand from the solar energy industry,
while another notes that costs of polymers have fallen. Otherwise, respondents mostly report
that input costs and selling prices are flat or following their normal trends.
Most manufacturing respondents expect their U.S. capital spending and employment levels to
hold steady or decrease in 2007. Average merit pay increases mostly are expected to remain
in the range of 3 percent to 4 percent, with much higher increases in benefits costs. Contacts
say that engineering and machinist positions are especially hard to fill, and that finance and
accounting professionals are in great demand as a result of the Sarbanes-Oxley legislation.
On the whole, manufacturers describe their prospects for 2007 in terms such as "good,"
"solid," and "decent," while acknowledging the risks of an economic slowdown that could
affect their business. However, companies directly dependent on residential construction
expect that these markets will continue to soften, and some makers of consumer products
express concern about their sales outlook in the new year.
Selected Business Services
All responding First District advertising and management consulting firms enjoyed
improving business conditions and revenue growth in the final quarter of 2006, with most
firms reporting double-digit gains over a year ago. Most respondents are seeing larger
projects or orders from their clients, which they view as a sign of their clients' confidence in
their own businesses. Demand for efficiency- and productivity-enhancing consulting services
remains strong, and one consulting contact notes an increased demand for outsource
consulting.
Most responding companies have earned modest price increases over year-ago levels, and
several anticipate making moderate upward price adjustments in the coming months. Input
costs are relatively stable, although a few contacts continue to note increased travel costs.
Headcounts are growing in response to demand, but at a slightly slower rate than revenues.
Contacts note that the labor market for highly skilled individuals remains tight and is feeding
through into wages. Respondents plan to increase wages between 3 percent and 8 percent in
2007.
The majority of contacted New England advertising and management consulting firms expect
revenue growth in the first half of 2007 to continue at, or slightly above, the pace in the
second half of 2006.
Residential Real Estate
Across New England, the pace of residential sales continues to be slow compared to recent
years. Sales volume has declined across New England, with Massachusetts, Connecticut, and
New Hampshire all seeing year-over-year reductions in total sales in excess of 10 percent. In
Massachusetts, the average number of days on the market has increased by more than 35
days since November 2005, and was around 130 days for single family homes and 120 days
for condominiums.
The slower sales pace has translated into significant year-on-year inventory growth across the
region. One Rhode Island contact reports having nearly six times as many listings as last
year. In Massachusetts, single family inventory increased 25 percent year-on-year in
November while condominium inventory was up nearly 37 percent. There is currently more
than 11 months of supply in the Massachusetts market; contacts indicate that conditions favor
buyers if supply exceeds 7.5 - 8.5 months.
Buyers continue to exercise patience across New England. Contacts now attribute slow sales
to this patience and not to unrealistic pricing. Median selling prices continue to decline
across the region. The median single family price declined 4 percent from November 2005 to
November 2006 in Massachusetts, marking the 10th straight month of price declines.
Condominium prices increased nearly 2 percent for this same period, but this was the first
year-over-year price increase in five months. Published repeat-sales home price indexes are
also weak, with four of the six New England states registering at least one quarter-to-quarter
decline in Q2 and Q3 of 2006.
Contacts note that the declines in sales and prices have slowed in recent months and suggest
that New England markets may be approaching a bottom. This indication is by no means
clear and contacts report that spring sales will give a more direct image of any possible
recovery.
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Second District--New York
The Second District's economy has continued to expand at a moderate pace since the last
report, though recent performance has been mixed across sectors. There are some indications
of a pickup in cost pressures but no discernible acceleration in consumer prices. Retailers
generally indicate that holiday season sales were on or slightly above plan, with much of the
strength coming in the second half of the month; retail prices were again reported to be little
changed, with promotional discounts roughly the same as a year ago. Tourism activity has
strengthened further since the last report. Two regional consumer surveys showed confidence
retreating slightly in December, but remaining at fairly high levels.
Manufacturers have grown less positive in their assessment of current business conditions in
early January, though they remain optimistic about the near-term outlook, and contacts note
some intensifying in price pressures. Housing markets remain mixed: New York City's rental
market has shown continued strength, and Manhattan's co-op and condo market picked up in
the fourth quarter, with sales rising and inventory retreating from very high levels. However,
the market for single-family homes in both northern New Jersey and upstate New York
remains sluggish. New York City's office market grew increasingly tight at year end with
vacancies falling and rents climbing rapidly. Finally, bankers report further weakening in
loan demand in the household sector, especially for home mortgages; they also indicate a
moderate increase in consumer delinquency rates.
Consumer Spending
Retailers report that sales were on or slightly above plan in December, while merchandise
prices were steady. A trade survey of New York State retailers indicates that holiday-season
business slightly exceeded expectations, on average. In addition, one major retail chain
contact reports that their sales in the District were on plan, while another indicates that sales
were slightly above plan. Overall, sales are reported to have been particularly strong in New
York City--both Manhattan and the outer boroughs--but more sluggish in northern New
Jersey and upstate New York. In terms of merchandise lines, somewhat soft sales of winter
clothing and home furnishings and equipment were reportedly offset by fairly strong
spending in most other categories, particularly consumer electronics and clothing accessories.
Strong gift-card sales throughout the season are reported to have helped buoy post-Christmas
sales. Retailers report that both selling prices and the degree of promotional discounting were
little changed from a year ago and that inventories are at favorable levels. Retail contacts
report that they hired about the same number of holiday workers as in 2005.
Based on the Conference Board survey of Middle Atlantic residents, consumer confidence
edged down in November and December, after reaching a 6-year high in October; similarly,
Siena College's survey of New York State households shows confidence levels retreating
modestly in December from a 5 1/2-year high in November.
Tourism activity in New York City continued to strengthen since the last report. Broadway
theaters report a stronger than usual pickup in business during the holiday season: attendance
was up more than 10 percent from a year earlier, while total revenue was up nearly 20
percent. Similarly, Manhattan hotels report continued strong revenue growth in November
and December, with many hotels at or near full occupancy and average room rates up well
over 10 percent from a year earlier.
Construction and Real Estate
New York City's office market tightened further in the final months of 2006, while housing
markets and residential construction activity were mixed. Lower Manhattan's office vacancy
rate fell by more than a full point to 7.1 percent from November to December, while
Midtown's rate edged down to 5.6 percent; both are at their lowest levels in more than five
years. Moreover, rents have continued to climb rapidly since the last report, reaching new
record levels; the average asking rent for Class A office space across Manhattan is reported
to have risen 2.5 percent in December alone, and ended 2006 up 35 percent from a year
earlier. A contact at a leading Manhattan commercial real estate firm notes that there is
relatively little new office space currently under construction.
Single family construction activity in New York and New Jersey, as measured by housing
permits, continued to weaken in November, slipping by roughly 30 percent from a year
earlier, but multi-family permits were roughly on par with a year earlier. More recently, New
Jersey homebuilders report that the market stabilized somewhat in December but remains
weak. Discretionary sellers in the resale market are reported to be withdrawing from the
market, which has reduced the inventory of existing homes on the market, but has also
reduced the pool of new home buyers. Builders indicate that they have substantially cut back
plans for new development in New Jersey (especially in active-adult communities) and this is
seen as slowing construction activity in 2007. New York State Realtors report that both sales
and prices for single-family homes were running lower than a year earlier in the fourth
quarter. However, Manhattan's co-op and condo market showed resilience in the fourth
quarter; though prices were little changed, sales activity picked up noticeably, after a sluggish
third quarter, and the number of listings (inventory), though still quite high, declined.
Manhattan's apartment rental market has continued to strengthen since the last report; a
contact at a major real estate firm characterizes conditions as extremely tight at year end.
Compared with a year ago, rents are up an estimated 5 percent, with larger increases on
smaller, entry-level units in recent months. While the rental supply is constrained by a
limited number of new rental buildings under development, a significant proportion of new
condos are being bought by investors, who have then leased them.
Other Business Activity
A major New York City employment agency specializing in office jobs reports strong hiring
activity at the start of 2007, again led by the financial and legal service industries. This
contact also notes a recent pickup in demand for supervisory and clerical workers in the
construction industry. In many occupations, qualified workers are reported to be in short
supply. On the other hand, regional business surveys suggest some slowing in hiring in the
manufacturing and distribution sectors. Purchasing managers in the Rochester, Buffalo, and
New York City areas report some softening in business conditions more generally in
December, and manufacturing sector contacts across New York State also report slowing in
early January. Manufacturers generally indicate some increase in input price pressures.
Financial Developments
Small to medium-sized banks in the District report decreased demand for all types of loans,
on balance--most notably in the residential mortgage category, for which 63 percent of
bankers report a decrease in demand and no bankers report an increase. Respondents also
indicate continued declines in refinancing activity. Bankers report some tightening in credit
standards on commercial and consumer loans but no change in standards for residential
mortgages. Bankers indicate a decrease in loan rates for residential and commercial
mortgages, but rates remained unchanged in all other loan categories. Average deposit rates
were up slightly, on balance. Finally, bankers report a noticeable increase in delinquency
rates on consumer loans but little or no change in other categories.
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Third District--Philadelphia
Economic activity in the Third District advanced modestly in December. Manufacturers
posted small increases in shipments, but there was virtually no change in the rate of new
orders. Retail sales of general merchandise rose slightly. However, auto sales remained weak.
Bank lending increased moderately overall, but mortgage lending declined. Service sector
activity increased at a nearly steady rate in December compared with previous months.
Third District business contacts generally expect business activity to continue to expand at a
steady rate, although several of those polled for this report said the outlook has become more
uncertain. Manufacturers expect modest improvement during the first half of the year.
Retailers generally expect a steady, albeit slight, gain in sales, although some believe the
growth rate might slow further. Auto dealers do not expect sales to pick up in the near future.
Bankers generally anticipate increases in business and consumer lending, but their views of
mortgage lending are mixed; some expect an increase, but others do not. Service-sector firms
expect steady growth in the months ahead.
Manufacturing
Third District manufacturers reported an increase in shipments from November to December,
although the rate of new orders was about steady. The increase in shipments was more
prevalent among makers of food products, furniture, and machinery than among other
manufacturing sectors in the District. Increases in orders were noted among only a few
sectors, mainly producers of food products and textiles; in most other sectors orders were
either steady or down. On balance, District manufacturers reported an easing in order
backlogs and a decrease in delivery times.
Overall, manufacturers expect demand for their products to increase during the first half of
the year, but they forecast only modest gains. Among the manufacturers contacted in
December, one-third expect their shipments and orders to increase during the first six months
of 2007; one-fifth expect decreases. Capital spending plans among Third District
manufacturers appear to be moderating. Among the firms surveyed in December, the number
planning to increase capital outlays during the first half of 2007 barely exceeded the number
planning to reduce capital expenditures.
Retail
Most of the retailers contacted for this report indicated that sales during the holiday shopping
period were only slightly above sales during the same period in the previous year. Sales of
jewelry and consumer electronics were relatively strong, but sales of most other lines of
merchandise were below retailers' expectations. Sales of outerwear and other clothing were
particularly soft. Merchants said unseasonably warm weather discouraged sales of winter
apparel. Discounting was widespread during December, although most store executives said
the price reductions made before the holidays had been planned in advance. Further price
reductions, primarily for apparel, have been taken since the holidays. Looking ahead,
retailers generally expect modest, steady growth in sales during the first quarter, although
some believe sales growth might weaken through the winter.
Auto sales in the region continued to be sluggish in December. Year-to-year sales
comparisons were again better for foreign makes than for domestic makes, although some
import dealers noted an easing in growth. Inventories remained above desired levels for
many dealers but were gradually being worked down. Auto dealers in the region expect sales
to remain slow through the winter.
Finance
The volume of loans outstanding at Third District banks rose moderately in December,
according to commercial bank lending officers contacted for this report. Commercial and
industrial lending increased for most banks. Credit card lending expanded, with a seasonal
acceleration in growth. Growth in other types of personal lending slowed. Demand for
residential mortgages and home equity loans continued to soften.
Bankers in the District expect business and consumer lending to increase modestly in the
months ahead, but they say the outlook for residential mortgage lending is uncertain. Some
bankers indicated that mortgage demand appeared to be firming in their market areas, but
other bankers said it remained weak.
Investment companies in the Third District reported strong cash inflows as 2006 came to a
close. Executives at these companies said the recent performance of equity markets had
stimulated interest in stock funds among individual investors. They also noted that there has
been rising demand for a variety of investment vehicles appropriate for retired individuals
and those nearing retirement.
Services
Most of the Third District service firms contacted in December reported that activity was
rising steadily. Business services firms generally indicated that work done for existing client
firms was growing and that they were gaining new clients. Information technology firms
generally reported continuing gains. Trucking firms, however, reported that growth had
slowed in the final quarter of the year. Employment agencies and temporary help firms
reported that, on the whole, demand for workers has been rising, although hiring plans have
moderated in some sectors--notably, construction and government--and in some parts of the
District. On balance, service-sector firms expect business to continue to advance at a steady
rate in the months ahead.
Prices and Wages
Business firms in the Third District noted increases in the costs of raw materials and other
inputs in December, although reports of price increases were not as widespread as they were
earlier in the fall. Manufacturers noted increases in prices for chemicals, metals, and energy.
Looking ahead, manufacturers expect cost increases for energy, raw materials, and
intermediate goods, but they anticipate somewhat smaller increases in 2007 than in 2006.
Firms in other industries expect input costs to remain on the rise at about the current pace.
Firms reporting on employment costs in December noted a continuing trend of moderate
wage increases but also large increases in benefit costs, especially health care. Many firms
have recently taken steps to restrain the rate of increase in benefit costs. Among the measures
implemented have been eliminating defined-benefit pension plans and requiring greater
contributions toward health-care costs from employees.
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Fourth District--Cleveland
Economic activity in the Fourth District has softened since mid November as many
businesses and consumers are now more cautious in their outlook. Production levels at
District manufacturers were stable to increasing with little change expected for the next six
months. Activity in commercial construction was mixed with half the builders experiencing
an increase in business. In contrast, most residential contractors reported a continuing decline
in sales. Holiday sales by District retailers showed mixed results. Loan demand at District
banks was flat to down while core deposits showed modest growth. Energy activity was
strong overall. And the demand for trucking and shipping services continues to soften.
On net, employment across the District was largely stable. However, staffing firms were
upbeat in the number of job openings. Half our contacts said that openings have increased
over the past six weeks and all contacts reported an increase on a year-over-year basis. The
greatest demand was in health care and financial services with some weakness seen in
manufacturing. With the exception of some energy-related businesses, wages continue to be
steady to modestly increasing. Almost all contacts said that, with the exception of metals,
input costs have stabilized. Several District manufacturers reported increasing prices since
mid November with more than half saying they were successful. And almost all retailers
reported that they were holding their prices steady.
Manufacturing
Reports by the District's manufacturers show production levels were stable to increasing
since mid November and on a year-over-year basis. However, about half of our contacts
reported some idle capacity. Focusing on steel products, demand continues to be soft for most
producers due to weakness in the auto, appliance, and residential construction markets.
However, steel producers anticipate an up-tick in Q1 of 2007. Although District auto
production decreased in November, an increase was reported on a year-over-year basis. The
outlook by most manufacturers is best characterized as stable to improving. Those that
foresee downturns are primarily in the auto supply market. Almost all manufacturers said that
capital expenditures remain on target with slightly more than half expecting little change in
the New Year. However, three contacts said they have aggressive capital projects in the
works for 2007. Most producers believe that input prices, for the most part, were stable;
however, several commented that metal prices remain high or are increasing. Hiring has been
limited over the past six weeks and manufacturers anticipate little hiring in the near future.
Reasons given include cost containment and monies being allocated for capital
improvements. Wage pressures are largely contained; however, several contacts reported
benefits, especially health care, continue to rise.
Construction
Reports on new home construction were mixed with most builders saying the decline in sales
continued into November. Looking forward, almost all residential contractors expect activity
in 2007 will be similar to the second half of 2006. In general, material costs have leveled off
with most contacts reporting a decrease in lumber prices. Builders have significantly
curtailed, or eliminated, "spec" building. District home prices have been steady during the
past six weeks and contractors are hesitant of offering any additional discounting. Many
builders reported adjusting the size of their labor force during 2006 to match market
conditions and do not foresee laying-off additional workers. Further, contractors said wage
increases will not be given in 2007.
The District's commercial contractors were split in their assessment of business activity since
mid November. Slightly more than half experienced a pick-up in business while several
reported that business is slowing. On a year-over-year basis, most contacts said that their
level of business has increased. Although inquiries have generally slowed down, most
contractors remain optimistic about 2007 due to healthy backlogs. Segments continuing to
show strong activity are health care, education, and public works. A majority of our contacts
report that material costs are stable with the exception of steel and concrete which showed
small increases. Almost all contractors said that prices remained stable and over half reported
small increases in their profit margins. Finally, hiring by contractors was kept to a minimum.
Retail
District retailers showed mixed results for the holiday shopping season; reports ranged from
very good to below expectations. Further, most retailers noted that no unusual markdowns or
promotions were used to increase sales. Expectations for Q1 of 2007 are also mixed with
more than half our contacts anticipating weak sales. Retailers reported that overall supplier
prices and other input costs have remained steady over the past six weeks. Wage pressures
are contained, and aside from normal seasonal hiring, retailers are limiting employment
opportunities to new store openings. Domestic new car sales for the months of November
and December were characterized as poor while foreign makes sold reasonably well.
Increased SUV sales were attributed to winter weather and lower gas prices.
Banking
Since mid November commercial and consumer loan demand continues to be flat to down for
most District banks. On the consumer side, declines were seen primarily in home equity lines
of credit and auto loans. Two contacts reported commercial real estate loans are growing, but
at a very modest rate. Activity in the mortgage market was mixed with refinancing driving
much of the activity. Two bankers saw increases in mortgage applications; however, they
were uncertain if this is the beginning of an upward trend. Core deposits showed modest
growth and most bankers report no change in credit quality.
Energy
Overall, energy activity remains strong across the District. Rig count is flat to slight increase
with almost all contacts reporting difficulty in obtaining drilling equipment. Over half the
producers plan to increase exploration activity in 2007. The ability to attract and keep skilled
workers is a continuing issue for most drilling companies; resulting competition is putting
significant pressure on wages. Mining production is near capacity with three coal producers
expressing interest in expanding operations. However, there are no plans to hire additional
workers. Minimal wage pressure was reported. Alternative energy representatives see an
acceleration toward more advanced energy technologies and polices. However, the recent
drop in oil prices and mild winter weather lessens the sense of urgency for alternative energy
projects in the public eye.
Transportation
Demand for trucking and shipping services continues to soften with two contacts reporting a
slowdown in the shipment of auto-related products and coal. Trucking companies continue to
pass on fuel costs using surcharges and anticipate doing so into the foreseeable future. One
contact expressed concerned about the price of the new ultra low sulfur fuel. Hiring was
attributed to the usual high driver turnover; however, two contacts said their hiring was
related to increasing capacity. Wages have remained stable since mid-November.
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Fifth District--Richmond
Overview
Economic activity in the Fifth District expanded modestly since our last report, with slowing
activity in some sectors offset by firming growth in others. Retail sales were generally solid
through the holiday season, and activity held up in early January. Manufacturing measures
moved a bit lower as demand for some lines softened. Housing activity edged higher, as sales
firmed and home inventories eased lower in some areas. Commercial real estate agents noted
that conditions in the sector remained strong, and construction and leasing activity was
steady in recent weeks. District labor markets continued to be taut, with strong demand for
workers, especially in urban areas. Price pressures were mixed, with some upward drift
apparent in raw material costs. In agriculture, unseasonably mild weather boosted crop
conditions and extended the grazing season for livestock.
Retail
District retail sales rose moderately in recent weeks with gift card redemptions boosting
activity in early January. Electronics, especially high-definition LCD and plasma televisions,
sold particularly well during the holiday season--a central North Carolina retailer said he ran
out of televisions before Christmas. In contrast, warm weather slowed apparel sales. A
contact at a Virginia hardware store chain told us his stores have not felt the homebuilding
slowdown yet, perhaps because hardware purchases come at the end of the homebuilding
process. The pace of automobile and light truck sales was unchanged in Virginia, but slowed
in the Baltimore area of Maryland and the South Carolina Midlands. An automobile dealer in
Charleston, W.Va., said customer traffic was down and "buyers are not motivated." Retail
price growth edged up slightly since our last report; average wages rose somewhat faster, as
well. A West Virginia retailer told us he had raised wages for his lower-end workers because
competition for those employees is tight.
Services
Revenues at service-producing firms generally edged higher since our last report, although
some firms said growth was flat. Contacts at legal and environmental services firms reported
faster revenue growth, and financial services providers in Baltimore and Richmond also said
business had picked up. In contrast, architects and interior designers reported flat activity, as
demand continued to be held in check by the soft housing market. Executives at healthcare
services organizations and computer services firms also said the pace of consumer demand
for services was generally unchanged in recent weeks. Services firms continued to hire at a
brisk pace, while price growth eased in the last few weeks.
Manufacturing
District manufacturing activity contracted modestly in December following a pickup in
November. Manufacturers told us that factory shipments, new orders and employment pulled
back since our last report. Product demand weakened noticeably in the fabricated metals,
rubber and plastics, and transportation equipment industries. A manufacturer of plastic
packaging supplies in South Carolina said that business had definitely taken a downturn
during the last quarter of 2006. In addition, a fabricated metals producer in North Carolina
indicated that demand was soft--trimming both volumes and margins. In contrast, an
electronic components producer reported business was strong in 2006 but noted that the
outlook for 2007 was less optimistic because [business] seemed to be slowing in recent
weeks. Raw material prices continued to rise after picking up considerably in November,
while finished good prices grew at a more measured pace.
Finance
District bankers reported an uptick in lending activity since our last report. The demand for
residential mortgage loans moved up in some pockets within the District. A Charleston, S.C.,
agent attributed unusually strong December activity to continued low interest rates. In
Greenville, S.C., a contact noted that a new program to help poorer households finance home
purchases led to an increase in loan volume. According to a Charleston, W.Va., agent, a few
particularly nice new housing developments helped increase activity in that area. Commercial
lending remained strong. Little change was reported in interest rates or the rates of delinquent
loans.
Real Estate
Residential real estate agents reported a modest pickup in home sales since our last report.
Contacts in Richmond, Va., reported very strong sales in December, resulting in a nine
percent increase in sales volume over 2005 levels, and a two percent increase in units sold
over the same period. A contact in Fairfax told us that his area had experienced "a good
rebound" in the number of houses sold, and that had caused a nice drop in his inventory level.
Likewise, contacts at housing markets in Charlotte and Asheville, N.C., reported strong
activity, with December sales in Asheville exceeding those of a year earlier. And in
Greenville, S.C., an agent reported having an "extremely strong" housing market where his
sales increased 15 percent over 2005 sales. However, in Fredericksburg, Va., an agent told us
that inventory remained very high. A homebuilder in the Tidewater area reported no real
change in the number of housing starts or building permits, adding that demand is "just not
there." House prices held steady across most areas of the District.
Commercial agents across the District reported that leasing and construction activity
remained at generally strong levels though recent activity was sluggish. In Washington, D.C.,
market conditions were characterized as tight, leading to more construction and rising rents.
In contrast, agents in some mid-sized cities noted steady activity with varying flat vacancy
rates and little pressures on rents. Across the District, contacts noted that former commercial
space in downtown areas continued to be converted to residential uses. Several agents said
that conditions will likely strengthen in coming months. They cited increased interest in their
areas by national firms looking to expand.
Tourism
Tourist activity was generally mixed since our last report. Contacts in coastal areas said that
unseasonably warm weather in December and early January had boosted their business. A
hotelier at Virginia Beach, Va., told us that holiday bookings were up 40 percent when
compared to a year ago. In contrast, a manager at a mountain resort in Virginia reported that
skiing and tubing were down 50 percent from last year because of unseasonably warm
weather in that region. On a brighter note, he said that timeshare sales were up nearly 15
percent compared to a year earlier.
Temporary Employment
Temporary employment agencies in the District reported generally stronger demand for
workers since our last report. An agent in Richmond, Va., told us that she anticipated a
stronger need for temporary workers over the next few months because of the area's low
unemployment rate. A contact in Raleigh, N.C., expected demand for workers to rise in early
2007 as businesses' budgets are anticipated to expand. Likewise, a Baltimore, Md., agent
reported very strong demand and said feedback from her clients suggest this trend will
continue. On a less optimistic note, agents in the Washington, D.C./Maryland area told us
that "January through March is usually our slowest period." Workers with computer
proficiency, administration, data entry, industrial warehouse, sales and engineering and life
sciences were among the skills sought by employers.
Agriculture
Warmer-than-normal temperatures in December coupled with mild, rainy weather in
November accelerated the growth of winter grains and extended the grazing period for
livestock in most of the Fifth District. Small grains were reported to be in mostly good
condition in much of the District. In addition, contacts told us that adequate moisture levels
had improved pasture conditions and that the mild winter had benefited livestock.
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Sixth District--Atlanta
Summary
Reports from District contacts indicated, on balance, that business activity expanded
modestly in late November and December. Retailers reported that holiday spending rose
moderately compared with a year ago, and tourism contacts noted solid late-year activity.
Continued weakness in housing markets, especially in Florida, was reported by Realtors and
homebuilders, and low levels of mortgage loan demand continued to be noted by regional
bankers. Several contacts in housing-related manufacturing and transportation operations
noted declining orders for building materials. However, post-hurricane rebuilding along the
Gulf Coast continued to boost the construction industry in that area. Labor markets remained
tight in several industries, while price pressures, particularly in the construction industry,
have eased in most parts of the District. Agricultural growing conditions were described as
being favorable.
Consumer Spending
Most District retailers reported that sales in December rose modestly compared with a year
ago and were generally in line with expectations. The majority said that they were pleased
with inventory levels. Merchants noted that gift card sales were strong. Sales reports from
New Orleans, Baton Rouge, and South Mississippi were positive, even when compared with
elevated post-hurricane levels in December of 2005. Contacts indicated that retail sales
growth in most parts of the District is expected to be modest in coming months.
Vehicle sales were reportedly below year-ago levels in most areas. South Florida dealers'
noted disappointing traffic and sales during late November and December. Sales of Florida's
two best-selling domestic trucks were said to be down sharply from year-ago levels, while
sales of foreign brands continued to advance. One regional industry contact reported that
sales of trucks and SUVs were boosted by incentives and lower gasoline prices. Meanwhile,
two regional import distributors reported slight gains across vehicle segments.
Tourism and Business Travel
Reports concerning the tourism and hospitality sector were generally positive. Some Florida
travel industry contacts noted the holiday season was stronger than last year, and travel
agencies reported that cruise bookings were up significantly between Christmas and New
Year's Day. In Atlanta, visitor numbers to the Georgia Aquarium have eased in recent
months, but the estimated 3.6 million people that visited the Georgia Aquarium during its
first year of operations far exceeded expectations. Since the aquarium opened, hotels in
Atlanta have reportedly had a much more steady flow of traffic than the usual swings
associated with conventions. In New Orleans, officials reported that about 70 percent of the
events booked before Hurricane Katrina remained committed to the city for 2007.
Real Estate
Weakness continued to be noted in District housing markets, with Florida reporting the
largest declines in sales and new construction. Home sales and construction levels were more
mixed elsewhere in the District, although inventories of homes for sale remained high across
much of the region. Most Florida real estate agents reported price reductions on existing
homes for sale, while there were scattered reports of price declines in other parts of the
District as well. In southern Louisiana and Mississippi, the outlook for residential
construction appears to be strong. Weak market conditions are expected to persist over the
next several months in most other areas.
Nonresidential development in the District remained at healthy levels, with infrastructure
repairs and improvements continuing to dominate activity in late November and December.
Reports from contacts indicated that District commercial real estate markets improved late in
the year as office occupancy and rental rates increased.
Manufacturing and Transportation
Factory activity remained mixed, and the slowdown in residential construction affected
producers of building materials. For example, a District roofing company cut back a shift in
its plant because of decreased demand, and a door and window manufacturer reported that
business was down 27 percent from last year. In contrast, a specialty machining operation
that provides fittings for the oil and gas pipeline industry noted that business was better than
last year, and an aerospace producer reported increased orders and additional hiring.
Trucking contacts reported that business conditions remained weak in late November and
December, mainly because of fewer shipping orders from building materials producers.
However, rail shipments continued to grow with shipments of inter-modal containers and
coal offset lower shipments of autos and building materials.
Banking and Finance
Banking conditions in the District were stable. Residential loan demand remained weak in
most parts of the District, especially in Florida. Reports on commercial and industrial lending
were mixed. Overall credit quality continued to be described as good, although there were
some reports of increases in consumer loan delinquency in parts of the District. Lending
requirements were expected to become more stringent in the coming months.
Employment and Prices
According to most reports, hiring trends remained positive during late November and
December. A few retailers experienced labor shortages during peak shopping times over the
holidays. Hiring in the construction industry slowed in the residential component, but this has
been partly offset by rising payrolls in the commercial construction segment. Some contacts
indicated that the demand for business IT professionals is expected to be strong over the
coming year. In the New Orleans area, hiring is described as brisk, with many workers
relocating from other areas to take advantage of the employment opportunities. Strong
demand for skilled workers continued in the energy sector, pushed by strong exploration and
production in the Gulf of Mexico.
Prices for some construction supplies continued to decline in December. For instance,
contacts noted that the cost of concrete, steel, copper, and framing lumber are all down from
recent highs. However, it was also noted that prices were well above the levels experienced
two years ago. Gulf Coast contacts reported that construction costs had not declined as much
as other areas because of strong local demand. Also, contacts in coastal areas continued to
express concern about rising residential and commercial property insurance costs. Retailers
reported that strong competition continued to limit price increases on most goods. On the
other hand, several contacts in service-providing industries noted that they had successfully
passed on cost increases to their customers.
Agriculture and Natural Resources
Weather conditions were mostly favorable for District crops in late November and December.
Cotton growers were particularly pleased with high yields and timely weather patterns that
benefited late plantings and harvesting. For citrus growers, the prospect of winter freezes and
diseases like canker and greening remained a significant industry challenge. Investment in
biofuels and other alternative fuel industries remained strong in the District.
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Seventh District--Chicago
Summary
Economic activity in the Seventh District continued to expand during November and
December, though at a more modest pace than in the previous reporting period. Consumer
spending continued to increase at a gradual rate. Business spending and hiring rose again.
Residential construction and real estate activity continued to decline in most areas, though
the declines were smaller. Nonresidential construction expanded slowly. Manufacturing
activity increased at a more gradual pace than in the previous period. Household lending
activity moderated further, while commercial lending was little changed. Overall, nonwage
price pressures continued to ease a bit, while overall wage increases were similar as in the
previous reporting period. Farmers planned to plant more corn acres and fewer soybean acres
this spring, reflecting changes in relative prices.
Consumer spending
Consumer spending continued to increase at a gradual rate in November and December.
Retailers said holiday sales "met expectations" and were "good, but not as strong as previous
years." The most notable strength came from electronics and apparel; contacts were surprised
by the apparel sales given the mild weather. Most contacts said sales in the Midwest were
softer than in the rest of the country. Inventories were in line with desired levels. Vehicle
dealers reported a slight pickup in sales during December. Dealers said consumers continued
to favor smaller, more fuel efficient vehicles, and one added that the lack of snow was
holding back demand for light trucks. Tourism in Michigan was up slightly from year ago
levels.
Business spending
Business spending and hiring rose again in the District. Capital spending continued to
increase at similar rates as in the previous reporting period, though one mid-sized firm
reported plans to decrease capital outlays this year and a manufacturer said the bulk of their
expansion plans were slated for 2008. Employment continued to increase gradually on net.
Manufacturing employment was mixed by industry. Toolmakers and a heavy equipment
manufacturer increased employment, while construction materials manufacturers reported
they were holding steady or cutting back on shifts. One retailer said it was hiring for new
stores only, while another said it was having trouble finding qualified workers. A temporary
help services provider said that billable hours in the District were steady, but temp-to-perm
conversions and permanent placements were strong.
Construction and real estate
Residential construction continued to fall in the District, though the declines were smaller
than in the previous reporting period. Homebuilding slowed in Michigan, while one contact
saw signs of a recovery in the Chicago area. Builders reported that the supply of unsold,
speculative homes remained high and that showroom traffic edged down. Contacts reported
steady or declining home values in many areas of the District, and one in Illinois noted that
many builders were adding non-price incentives to sell new homes. Nonresidential
construction expanded slowly, led by office construction in the Chicago area. Demand for
office space was strong in most cities in the District; the lone exception was the Detroit area.
Commercial vacancy rates were little changed, and there were no reported cancellations of
projects. One contact revised up their outlook for net absorption of commercial space,
reflecting lower energy prices and steady interest rates.
Manufacturing
Manufacturing activity expanded at a slower pace in late November and December than in
the previous reporting period. Contacts reported particular strength in the energy, aviation,
and aeronautical industries; manufacturers in many other industries were planning to scale
back production in 2007 after sluggish sales at year-end led to rising inventories. Sales of
large and medium sized heavy equipment for use in the energy sector were doing very well.
Demand for tractors was increasing in response to high corn prices. Manufacturers of
machine tools and equipment parts reported steady orders in December, even from customers
in the auto sector. Inventories of finished steel at service centers have been high since the
summer, but producers thought that declining imports and domestic production would bring
these stocks down to desired levels by the second quarter. In contrast, a producer of specialty
steel products indicated that their order books for 2007 were already filled. Production of
diesel engines for over-the-road applications continued at a torrid pace through the end of the
year, with an expectation of sharp reductions in output after stricter EPA emissions
requirements take effect on January 1. Several manufacturers reported increasing exports,
which they attributed to improving economic conditions outside the US and a lower dollar.
The weakness in residential construction continued to damp sales of smaller construction
equipment and wallboard.
Banking and finance
Household lending activity moderated further, while commercial lending was little changed
from the previous reporting period. The number of mortgage applications for both home
purchases and refinancing continued to be low, despite modest declines in mortgage rates.
Demand for new home equity loans and outstanding balances declined, but the usage rate of
existing credit lines ticked up. Household credit quality generally remained in good shape:
though edging up a bit, delinquency rates on mortgages and home equity loans remained at
healthy levels. Retail deposit growth was steady. Business lending was mixed by loan type.
Asset-based lending remained steady; equipment leasing activity continued to show solid
increases; and commercial real estate lending declined in the most recent month but remained
up significantly from a year ago. A commercial real estate developer said there was still "lots
of capital" available to buyers, and buyers were increasing the amount of leveraged financing
used in purchases. Commercial lending conditions continued to be competitive and interest
rate margins remained narrow.
Prices and costs
On balance, nonwage price pressures continued to ease a bit, while overall wage increases
were similar to the previous reporting period. On net, raw materials prices were down
slightly or little changed at high levels. However, one contractor said that volatility in
materials prices has made it difficult to predict the costs of projects moving forward.
Toolmakers reported further price hikes. Equipment makers announced price increases for
construction machinery but were uncertain how much would stick. One contact reported
declines in freight rates. Wholesale furniture prices were falling, and one retailer said they
were holding back on current purchases in anticipation of further discounting. A general
merchandise retailer said their promotional activities for the holidays were within normal
levels. Hotel room rates were steady to up, but not enough to cover the high level of energy
costs, according to one contact. Wage increases continued at similar rates as in the previous
reporting period. A retailer in southeast Michigan said a statewide minimum wage hike had
no impact on their wages. One contact said that salaries for executives were "vigorously
competitive."
Agriculture
During the reporting period, corn prices hit the highest level in over a decade, and soybeans
were higher than at anytime since August 2005; however, both prices have retreated in recent
weeks. In response to relative price movements as well as a reduction in fertilizer costs for
corn, farmers planned to plant more corn acres and fewer soybean acres this spring. Moisture
levels were up in much of the District, and some areas were abnormally wet. Hog and cattle
prices were lower. Milk prices increased, but were still below the prices of last year. Plans for
expanding acreage contributed to higher rents for farmland.
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Eighth District--St. Louis
Summary
Despite contrary changes in some sectors, the economy of the Eighth District expanded
modestly since our previous report. Contacts in manufacturing reported a softening in
activity, while the services sector continued to grow. Home sales declined in most District
areas, while commercial real estate market conditions firmed throughout the District. Total
loans at a sample of small and mid-sized District banks increased slightly between early
October and late December.
Manufacturing and Other Business Activity
Manufacturing activity slowed since our previous survey. While some contacts reported plans
to open plants and expand operations in the near future, a larger number of contacts reported
plans to close plants or lay off workers. Firms in the chemical and plastic products industries
reported plans to open new plants in the District and a contact in the coal mining industry
reported plans to expand existing operations. In contrast, contacts in the audio and video
equipment, motor vehicle parts, wood products, primary metal, and nonmetallic mineral
products industries announced plans to close plants in the District. An additional firm in the
audio and video equipment industry reported plans to only lay off workers.
The District's services sector continued to expand in most areas. Firms in the newspaper
publishing, data processing, educational services, and administrative and support services
industries reported plans to build new facilities and expand operations. In contrast, contacts
in the telecommunications and spectator sports industries announced plans to lay off a small
number of workers. Reports from retailers have been positive since our previous report.
December 2006 sales of clothing and sporting goods were cited as particularly strong when
compared with year-earlier sales. One discount department store announced plans to open a
new facility in the District. Another department store, however, announced plans to close a
facility in the District. Car dealers reported that fourth quarter sales in 2006 were down, on
average, compared with year-ago levels. While sales of used cars improved slightly, sales of
new cars were particularly slow.
Real Estate and Construction
Home sales declined throughout most of the Eighth District. Compared with the same period
in 2005, November 2006 year-to-date home sales were up 7 percent in Memphis but fell 4
percent in St. Louis, 2 percent in Little Rock, and 1 percent in Louisville. Residential
construction also declined throughout the District. November 2006 year-to-date single-family
housing permits fell in every metro area compared with the same period in 2005. Permits
declined 30 percent in Louisville, 24 percent in St. Louis, 11 percent in Memphis, and 10
percent in Little Rock.
Commercial real estate markets seem to be firming throughout the District. The 2006 third
quarter industrial vacancy rate in Little Rock declined from the second quarter of 2006.
Contacts in Memphis report that the office market is tight, and vacancies are at a three-year
low. Contacts in Louisville report that overall demand for office space is steady. In Little
Rock, contacts report that commercial construction is running strong. Contacts in Louisville
report that both the industrial leasing and construction markets are steady.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks increased 0.6
percent between early October and late December. Real estate lending, which accounts for
approximately 72.2 percent of total loans, increased 0.4 percent. Commercial and industrial
loans, accounting for 17.3 percent of total loans, increased 1.5 percent. Loans to individuals,
accounting for 4.3 percent of total loans, increased 0.2 percent. All other loans, roughly 6.2
percent of total loans, increased 1.0 percent. Over this period, total deposits at theses banks
decreased 1.6 percent.
Agriculture and Natural Resources
Higher-than-normal temperatures and precipitation in December helped improve soil
moisture and pasture conditions in many District areas. By year-end 2006, winter wheat was
mostly in good condition, although some farmers in Arkansas, Indiana, and Missouri
reported some damage to the crop because of standing water in the fields. As of
mid-December 2006, year-to-date bales of cotton ginned (separated from the seed) were up 6
percent over the same period in 2005. Total commercial red meat production increased by 16
percent in November 2006 over year-earlier levels, and the total weight of young chickens
slaughtered was 1 percent lower for the same period. Total District coal production for
December 2006 was 2 percent higher than a year ago, and coal production for all of 2006
increased by 1 percent over 2005 levels.
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Ninth District--Minneapolis
Economic activity in the Ninth District increased slightly since the last report. Increases were
noted in consumer spending, manufacturing, energy, and mining. Meanwhile, tourism,
agriculture, and residential real estate and construction activity decreased. Labor markets
continued to show signs of gradual tightening. Overall price increases were modest as a
number of energy and materials prices moderated.
Consumer Spending and Tourism
Overall holiday sales increased slightly. A major Minneapolis-based retailer reported
same-store sales up more than 4 percent in December compared with a year ago. December
sales at a Minneapolis area mall were up about 3 percent to 5 percent from last year, while a
manager at another Minneapolis area mall noted that most stores achieved their sales plans
and that less merchandise was left over for clearance than in years past. A mall manager in
Montana reported that sales at department stores were up, but sales at other stores in the mall
were flat on balance compared with last year. December sales at another Montana mall were
likely even to up slightly from last year; spending on gift card sales and gift wrap services
was up substantially from a year ago. Two major Minnesota-based retailers reported that
holiday online sales were up 50 percent compared with a year ago.
Overall vehicle sales were down slightly during November and December in Montana, with
SUVs showing the weakest sales and import cars the strongest, according to a representative
of an auto dealers association. Vehicle sales were down in South Dakota during the past two
months.
In many parts of the District, winter tourism activity was in the doldrums. While making
snow has allowed ski hills to open in the Black Hills of South Dakota, overall tourism
activity in the area is down substantially from a year ago due to a lack of snow for
snowmobiling. Unseasonably warm weather and a lack of snow in northern Minnesota and
Wisconsin and the Upper Peninsula of Michigan substantially slowed tourism activity during
December.
Construction and Real Estate
Commercial construction continued at a brisk pace. Directors in Bozeman, Mont., and Sioux
Falls, S.D., said they expect commercial construction to be solid in 2007. December
commercial permits were up in value from year-earlier levels in Rochester, Minn., largely
from retail building. A large electric power cooperative plans to build a $51-million,
160,000-square-foot headquarters in suburban Minneapolis, with a possible larger second
phase, and a medical devices company is adding 110,000 square feet of space. New
residential construction was weak, while higher home remodeling activity was reported in
several markets, including Rochester and Sioux Falls. A representative of a homebuilders'
association in Minneapolis-St. Paul said that although new construction was down
significantly for the year, many contractors have focused on remodeling because of strong
activity.
Commercial real estate was solid. A number of large transactions took place in Minnesota at
the end of 2006, including the $100-million sale of an office building in downtown St. Paul.
According to a commercial Realtor in Fargo, N.D., downtown office vacancy decreased
nearly 50 percent from the beginning of 2006, with healthy absorption in the suburban office
market; however, newly developed strip-mall retail space is about 20 percent vacant.
Meanwhile, residential real estate continued to slide. Bankers and builders in Bozeman
characterized the residential real estate market there as oversupplied. While there is still a
very high inventory of unsold homes in Minneapolis-St. Paul, in late December it stood at its
lowest level since February.
Manufacturing
Activity in the manufacturing sector grew slightly since the last report. A December survey
of purchasing managers by Creighton University (Omaha, Neb.) indicated flat manufacturing
activity in South Dakota and Minnesota and increased activity in North Dakota. In Montana,
a home-production company is building a new facility and a polyethylene pipe manufacturer
is expanding a production facility. In Minnesota, a truck parts producer and a boat factory are
expanding capacity. In South Dakota, a plastic injection moldings maker is building a new
plant, a new bridge component manufacturing plant is planned, and two farm equipment
producers are expanding manufacturing facilities. A wind turbine blade company plans to
expand production capacity in North Dakota.
Energy and Mining
Activity in the energy and mining sectors grew since the last report. Oil and gas exploration
in the District increased from previously reported amounts. In addition, newly announced
wind and ethanol projects are planned. Mining production remained at near capacity across
the District. Even though the price of copper decreased, a Montana mining official noted that
mining activity was "up a little" since the last report.
Agriculture
Agricultural activity decreased since the last report. Dry conditions worsened as the United
States Drought Monitor revealed that almost the whole District is either in drought or
abnormally dry. In the Dakotas, dry edible bean production in 2006 was down significantly
from 2005.
Employment, Wages and Prices
Labor markets continued to show signs of gradual tightening. A call center recently
announced plans to hire up to 400 employees, and a home-improvement retailer plans to hire
175 workers in South Dakota. A Minnesota company that supports management software
recently announced intentions to hire 225 employees over the next two years. Some
Minnesota companies noted difficulty finding nurses, accountants, long-haul truckers,
engineers, and workers skilled in precision manufacturing. A recent poll conducted by the
Minnesota Chamber of Commerce showed that 52 percent of respondents expect to hire in
2007, down from 55 percent in last year's poll.
In contrast, a temporary staffing agency survey of Minneapolis-St. Paul businesses revealed
that 18 percent of respondents expect to hire workers during the first quarter, while 28
percent expect declines. These results indicated softer hiring relative to a year ago when 29
percent expected increased hiring and 9 percent anticipated decreases. A manufacturer
recently announced plans to eliminate over 400 jobs in Minnesota as part of a restructuring
plan. A residential window manufacturer laid off 440 Minnesota and Wisconsin workers in
December.
While overall growth in wages was moderate, wage pressure was noted in some areas. A
bank director in southwestern Montana reported that some salaries were rising in order to
attract employees. City park and recreation programs in Aberdeen, S.D., have raised wages in
order to ameliorate difficulty finding workers. A union for Minneapolis-St. Paul office
building janitors was recently considering a strike due to differences with employers on
health care benefits.
Overall price increases were modest as a number of energy and materials prices moderated.
Minnesota gasoline prices in the beginning of January were about the same as they were in
mid-November and a year ago. Natural gas prices are lower than a year ago. While recent
copper prices were much higher than a year ago, they decreased during the past few months.
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Tenth District--Kansas City
Growth in the Tenth District economy slowed to a modest pace in December and early
January, but expectations suggested higher levels of activity in the coming months.
Consumer spending was mixed. Manufacturing expanded at a slower pace while commercial
real estate activity remained solid. Lending activity continued to expand while deposits held
steady. Energy activity fell slightly but was still high by historical standards. Agricultural
conditions were generally favorable, although severe winter weather posed a risk to affected
areas. Residential real estate activity continued to decline. Retailers were optimistic about
sales in the months ahead while manufacturers expected future activity to increase. Wage
pressures moderated even while labor markets continued to expand. Overall price pressures
eased slightly since the last survey. Fewer respondents expected price increases in
manufacturing. However, some retailers expected to increase prices in the coming months.
Consumer Spending
Consumer spending was mixed in December and early January while expectations for future
activity were positive among many retailers. Overall sales continued to edge down at auto
dealers while inventories increased modestly. However, several respondents reported strength
in the SUV category. A majority of retail stores reported that sales were flat or declined from
the previous survey and sales were below expectation. However, retailers reported that
overall sales were unchanged compared to a year ago and restaurants and shopping malls
reported sales gains. Mall respondents reported strength in jewelry but weakness in shoe
sales. Growth in overall holiday sales in the Rocky Mountain region appeared to be
depressed by recent blizzards. Heavy snow also interrupted mountain transportation in late
December, although holiday travel and tourism activity remained solid overall. District hotels
continued to report high occupancy rates, particularly in resort areas. A significant number of
automobile and retail establishments expected sales to increase through the first quarter.
Many furniture and appliance retailers expected inventories to decline while a significant
number of automobile dealers expected inventories to rise modestly. Most hotel and mall
operators expected high levels of activity to continue over the coming months.
Manufacturing
Growth at district manufacturers edged down in December and early January, though plant
managers expected activity to rise in the future. Plant managers reported slower growth in
production, employment, and shipments. However, some manufacturers reported that new
orders rose in December, and capital expenditures were above year-ago levels. In the wake of
ice storms in western Nebraska some manufacturers limited production to conserve power.
Plant managers were optimistic about future activity. An increasing share of respondents
expected increases in production, employment, capital expenditures, shipments, and export
orders and declines in finished goods inventories.
Real Estate and Construction
Residential real estate activity continued to decrease in December and early January, while
commercial real estate activity remained solid. Home sales declined and inventories
remained above year-ago levels. Respondents reported weakness concentrated in the higherpriced segment with some strength in lower-priced homes. Builders indicated that home
starts remained weak. Overall home prices were unchanged from a month ago and remained
below year-ago levels. Expectations for sales were mixed, with some respondents
anticipating declining prices in the coming months and others basing optimism on lower
interest rates and a positive economic outlook. Commercial real estate sales were largely
unchanged from a month ago. However, absorption of office space increased in most cities,
and vacancy rates throughout the District were lower than a year ago. As a result, office
prices and rents increased from a month ago and several respondents expected these
increases to continue. Commercial real estate contacts anticipated adjustments to absorption
and vacancies reflecting a firm market, even while sales were expected to be flat in the
coming months.
Banking
Bankers reported that loans increased somewhat since the last survey, while deposits held
steady. Demand for commercial and industrial loans and commercial real estate loans rose,
while demand for residential mortgage loans edged down. On the deposit side, interest
bearing deposits such as CDs and money market deposits were slightly higher than in the
prior period, while demand deposits were lower. Lending rates and lending standards were
reportedly unchanged.
Energy
Energy activity declined in December and early January but remained strong by historical
standards. The count of active oil and gas drilling rigs in the region fell slightly compared
with the previous survey but was still above year-ago levels. The recent decline was
concentrated in the Rocky Mountain states. Energy contacts reported availability of labor as
their top concern, with availability of equipment and services being the next most important
factor limiting activity. Most contacts anticipated drilling activity to decline in the next three
months.
Agriculture
Agricultural conditions improved in December, although drought continued to affect some
areas. In parts of eastern Colorado, western Oklahoma and Nebraska, winter snowstorms
disrupted power and transportation for rural residents. Inclement weather limited cattle
weight gains and led to animal deaths in some areas. The winter wheat crop appeared to be in
better condition in areas receiving recent precipitation. December snows provided cover for
winter wheat and improved prospects for soil moisture and stream flows next spring. Corn
and soybean yields were down from last year's outstanding levels. Higher crop prices boosted
current and future incomes with more prevalent use of forward contracting. Higher crop
prices, however, also boosted feed costs and limited profits for livestock producers.
Labor Markets and Wages
Labor markets continued to expand in the District, while wage pressures remained moderate.
Hiring announcements continued to outpace layoffs. The majority of businesses reported
some type of labor shortage, especially for skilled and specialized workers, including
engineers, oil field workers, accountants, welders, sales people, and truck drivers. Lodging
establishments reported shortages of housekeepers. Benefits costs were largely unchanged
from the previous survey but remained above year-ago levels. The percentage of firms
expecting to increase employment remained high but edged down from the previous month,
while a lower percentage of firms expected wage pressures to increase.
Prices
Price pressures continued to moderate in December and early January. Most retail contacts
reported flat selling prices. A significant number reported declines from the previous month,
although retail prices were up from year ago levels. The share of manufacturers reporting
increased materials costs edged up, while the share of factories raising finished goods prices
dropped slightly. District contacts noted that price increases for some construction materials
have moderated and were expected to edge down. Manufacturers expected declines in raw
materials and finished goods prices. Many retail contacts reported flat selling prices while a
number of respondents expected some increase in prices in the months ahead.
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Eleventh District--Dallas
The Eleventh District economy continued to decelerate from mid-November to early January.
Activity in the energy sector remained at high levels, but growth was slowing. Manufacturing
activity softened. While still strong, service sector activity slowed some. Retail sales growth
was weaker than expected, but contacts said growth improved in late December and early
January. Overall construction and real estate activity was quite strong but continued slowing.
Consumer lending moderated. Commercial lending was strong but expected to slow. Rain
improved agricultural conditions, but high costs and low yields have reduced profitability.
Contacts in a number of industries were more optimistic about the outlook than at the time of
the last Beige Book--partly because sales growth has not deteriorated as much as they feared.
Prices
Price pressures were mixed. Prices were lower for some raw materials, including
petrochemicals, primary metals, copper and aluminum. Competition put downward pressure
on selling prices for a number of products, including high tech and retail. Transportation
costs are up. Some contacts reported price increases for imported goods because of high
shipping costs and declines in the value of the dollar. Others reported declines in the dollar
reduced competitive pressures by raising the cost of imports. Real estate prices and rents
were mostly higher.
After strengthening in December, energy prices declined in early January but remained
relatively high and a concern for many firms. Henry Hub prices for natural gas fell from $8
to about $6 per million Btu.
A major inventory adjustment led many chemicals derived from natural gas to see rapid price
declines, including record drops for ethylene and propylene. There were large price declines
for polyethylene and polypropylene. Inventories had been built up last summer to protect
against any shortages that might be caused by hurricanes and ensuing major plant outages.
The inventories were cost effective while natural gas prices were rising, but the recent
decline in natural gas prices prompted a rapid reduction of inventory that pushed
petrochemical prices down sharply. Weak demand also contributed to price declines for
polycarbonate, polystyrene, PET bottle resin, and PVC. In contrast, some oil-based
petrochemicals, such as synthetic rubber saw excellent demand, low inventories, good
pricing, and solid margins.
Labor Market
The labor market remains very tight, with numerous firms continuing to report difficulty
finding skilled and unskilled workers. Many contacts say high and rising labor costs,
including the cost of health insurance, top their list of concerns for the coming year.
Shortages of skilled labor continued to restrain nonresidential construction. Energy service
contacts said workers must be kept "inside the fence" to keep other firms from hiring them
off the job. While hiring continued to increase for some manufacturing firms, weak demand
led others to slow hiring, eliminate shifts and/or lay off some workers.
Manufacturing
Overall manufacturing activity was weaker. Demand remains weak for products used in
residential construction, such as stone, brick, clay, glass, lumber and metals. Inventories have
increased for many of these products, leading to reductions in production and scattered
layoffs. There was little change in demand for fabricated metals--with most orders supplying
commercial and industrial customers.
The paper industry continues to struggle with weakening demand, high inventories and input
costs that are rising faster than selling prices. Sales have been weaker than expected for
producers of automobiles and high-tech products, causing some of these manufacturers to
temporarily shut down factories during the holidays and/or slow hiring.
High-tech firms say that there is uncertainty about the outlook for sales growth. Most
contacts believe sales will pick up after a slow first half of 2007, but some fear there may be
a more serious downturn. Inventories are mostly in good shape, according to firms, who
report some build up and uncertainty about how much stock is being held by distributors and
retailers. There was optimism that the finalizing of telecommunications mergers will free up
capital spending in the coming year.
Sales of food products unexpectedly rose more than the typical December gain. Producers
supplying equipment to the energy industry continue to report strong demand and backlogs.
Petrochemical exports increased strongly, with shipments of some products jumping 30
percent. Strong Asian demand was stimulated by declines in product prices and the value of
the dollar. The rush to export resulted in a logjam of railcars at the Port of Houston, and
railroads imposed embargoes and rationed capacity.
Refinery production on the Gulf Coast sagged in late November and early December, but
utilization rates returned to high levels by year-end. A prolonged fall turnaround season was
responsible for the slack in December production, and a heavier than normal schedule of
maintenance is expected this spring. Refiners have run plants hard in response to high
margins and are using the turnaround period to improve plant performance, but delays are
expected because engineering and construction firms are stretched thin, and craft skills are
scarce.
Services
Activity slowed a little in the service sector, but there remains a good deal of strength.
Temporary staffing firms reported weak demand to supply workers to manufacturing,
warehousing and distribution, but continued high demand for professionals with experience
and technical skills, especially in the accounting, financial services and IT services
industries.
Law firms said demand had improved over the past six weeks, driven by mergers and
acquisitions and real estate transactional work. Accounting firms reported little change in
demand. Accounting companies are still hiring, and say that it is increasingly difficult to find
both experienced accountants and new college graduates.
Demand for rail transportation was strong and increased slightly, with particularly high
shipments of grain, chemicals and petroleum products. Trucking activity picked up robustly
in December after an unusually weak November. Shipping firms reported good volume
growth in both their freight cargo and domestic small parcel business, and indicated that
shipping rates were likely to increase in coming months. Airlines reported a weak start to
December but a good sales pickup over the holiday season and good bookings into January.
Retail Sales
Retail sales growth was good but not great, according to contacts. Sales were weaker than
expected in early December, but picked up strongly as Christmas approached, which
increased the optimism about sales growth in 2007. National retailers reported stronger sales
growth in Texas than in other parts of the country. Auto sales picked up near the end of 2006.
Contacts said inventory remains too high for some types of vehicles, and prices have been
falling.
Construction and Real Estate
Residential real estate markets continued to adjust to cooler demand. Home sales have
moderated from the vigorous growth experienced throughout most of 2006, and inventories
inched up. Builders report an increase in cancellations, leading some to pull back on starts.
The market was much weaker for lower-priced homes than for homes at higher price points,
and the Dallas/Fort Worth market was weaker than the other major metropolitan areas, some
of which were still quite hot. Home prices continued to rise at a modest pace.
Apartment occupancies declined in Dallas and Houston over the past six weeks, but contacts
said the decline was expected as Hurricane Katrina evacuees continued to move out. Despite
the decline, overall occupancy rates remain above 90 percent. Austin's apartment market was
performing better than most--with an occupancy rate of 96 percent and rising rental rate.
Office demand remained strong. Landlords saw multiple tenants compete for unoccupied
blocks of space in Dallas. The Houston office absorption rate in 2006 was three times that of
2005. Rent continued increasing at a strong pace. Contacts are optimistic that demand will
remain positive in 2007.
Financial Services
Consumer lending moderated--with some softness showing in all types of consumer
products: credit cards, personal loans, auto loans, and mortgages. Bankers say the moderation
appears to be the result of more careful consumer spending and payback of existing debt.
Demand for commercial loans remains steady, but contacts expect commercial activity to
slow somewhat in 2007.
Deposit growth has slowed, and contacts say deposits are increasingly difficult to obtain from
both consumer and commercial customers. Pricing of all types of loans is still aggressive, but
credit quality remains solid.
Energy
The U.S. and Texas rig counts fell slightly over the past few weeks. Demand for energy
services remained strong, however, and contacts said their order books have very long and
increasing backlogs. Producers will reduce exploration if low natural gas prices hurt their
cash flow, but many producers have sold their production forward, which will allow them to
keep drilling through any short-lived weakness in prices. Drilling activity is expected to
increase in 2007, but growth is projected well below the increases of the last two years. Some
contacts say exploration expenditures will shift away from domestic natural gas to finding oil
in international markets.
Agriculture
Rainfall improved conditions by replenishing livestock ponds, boosting subsoil moisture and
stimulating pasture growth. Still, supplemental feeding of livestock continued, and hay was
difficult to locate in many areas. Producers continue to harvest cotton, vegetables and some
remaining summer crops. Cotton yields are below last year levels. Contacts say high prices of
corn and grain sorghum have reduced prices for stock and feeder cattle.
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Twelfth District--San Francisco
Summary
The Twelfth District economy expanded at a moderate pace during the latest survey period.
Overall price inflation remained modest, though growth in labor compensation ticked up
slightly. Retail sales were solid overall and most service providers saw strong demand.
Manufacturers and agricultural producers also reported robust demand for their products.
Activity in District housing markets slowed further, while demand for commercial real estate
grew at a modest pace. Loan demand and credit quality in the banking sector remained
healthy.
Wages and Prices
On net, District contacts indicated that final prices grew at a modest pace. Input prices
reportedly were stable overall, though price declines were noted for some building materials
used primarily in residential construction, such as lumber and wallboard. Growth in labor
compensation ticked up relative to the previous survey period but remained moderate overall.
So far, the pickup in compensation growth has not translated into higher final goods prices. A
number of respondents attributed limited price pressures to highly competitive environments,
notably for apparel and electronic goods.
Much of the growth in labor compensation during this survey period was reported to be in
non-base-wage components such as bonuses and commissions and employer-provided
health-care benefits. Contacts indicated that compensation growth was considerably higher
for select groups of skilled workers, notably in the health-care, finance, and technology
sectors, and in areas with very tight labor markets, such as Idaho and Utah, than it was
overall.
Retail Trade and Services
District retailers reported generally solid performance for the holiday season as a whole, with
sales up in dollar terms and in unit terms compared to last year. Sales growth was evident for
most retail market segments, and the extent of holiday season discounting was about the
same as last year. Sales growth was especially strong at department stores and establishments
specializing in luxury products, with full-price items reportedly selling substantially better
than last holiday season. Overall, most contacts reported that holiday sales met or slightly
exceeded expectations, leaving retail inventories in balance. Turning to the auto sector, sales
of new automobiles were moderate on net, with strong sales of imports offsetting muted sales
of domestic models. Inventories of domestic light trucks and SUVs remained at high levels.
Most service providers saw strong demand. Sales were brisk in the food and beverage,
health-care, and technology services sectors. Tourist activity remained at high levels in most
major markets. In Hawaii, total tourist visits and spending were up compared to a year ago,
despite declines in the number of Japanese visitors during the survey period. In most parts of
the District, hotel occupancy rates remained stable, while room rates rose further.
Manufacturing
District manufacturers reported an uptick in demand for their products in late November
through the beginning of January. Semiconductor sales expanded at a solid pace, and
capacity utilization in the sector generally remained in the range of 90 percent. Vigorous
competition among manufacturers held down prices for various semiconductor products.
Strong demand for commercial aircraft and defense products kept District producers
operating at full capacity to meet ongoing order backlogs. Makers of machine tools saw
continued increases in new orders but at a slightly reduced pace, and food manufacturers
reported strong sales. In contrast, demand for wood products and selected building materials
used primarily in residential construction contracted further.
Agriculture and Resource-related Industries
Demand for agricultural and resource-related products grew at a solid pace and production
conditions were stable overall. Robust demand for livestock and most crops, such as pecans
and corn, resulted in strong sales and higher prices for these items compared to a year ago.
Price declines for fertilizers and freight services continued to ease pressures on production
costs. In the resources sector, producers of oil and natural gas saw fairly robust demand and
tight inventories overall.
Real Estate and Construction
District residential real estate markets cooled further, while demand for commercial real
estate grew modestly. The pace of home sales and price appreciation deteriorated for existing
and new homes in most areas during the survey period. In several previously hot areas, such
as parts of Southern California and the San Francisco Bay Area, home price appreciation
slowed to low single digits. District homebuilders continued to work down unsold inventory
by offering significant incentives to entice buyers. Slower home sales continued to damp
residential construction activity, particularly for condominiums. Continued growth in demand
for commercial and industrial space was evident in further reductions in vacancy rates and
increases in rental rates in most areas. Construction activity for commercial and public
projects continued to expand, largely offsetting the decline in residential construction,
although the pace of growth was slower than earlier in 2006.
Financial Institutions
Contacts in the banking sector continued to indicate that, on net, overall loan demand and
credit quality were solid. Demand for commercial and industrial loans continued to outpace
demand for residential loans, owing in large part to the drop-off in mortgage originations and
refinancing. Contacts reported that indicators of credit quality, such as loan delinquencies,
were at favorable levels in general. Tight labor markets for skilled workers in banking and
other financial services remained a major concern; employers offered significant signing
bonuses and other incentives to attract capable workers.
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Last update: January 17, 2007
Cite this document
Federal Reserve (2007, January 30). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20070131
@misc{wtfs_beige_book_20070131,
author = {Federal Reserve},
title = {Beige Book},
year = {2007},
month = {Jan},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20070131},
note = {Retrieved via When the Fed Speaks corpus}
}