Beige Book
For use at 2:00 p.m., E.D.T.
Wednesday
April 11, 2012
Summary of Commentary on ____________________
Current
Economic
Conditions
By Federal Reserve District
April 2012
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS
BY FEDERAL RESERVE DISTRICTS
APRIL 2012
TABLE OF CONTENTS
Summary ......................................................................................................................... i
First District—Boston .................................................................................................. I-1
Second District—New York ....................................................................................... II-1
Third District—Philadelphia ..................................................................................... III-1
Fourth District—Cleveland ....................................................................................... IV-1
Fifth District—Richmond .......................................................................................... V-1
Sixth District—Atlanta ............................................................................................. VI-1
Seventh District—Chicago ...................................................................................... VII-1
Eighth District—St. Louis ......................................................................................VIII-1
Ninth District—Minneapolis .................................................................................... IX-1
Tenth District—Kansas City ...................................................................................... X-1
Eleventh District—Dallas ......................................................................................... XI-1
Twelfth District—San Francisco ............................................................................. XII-1
i
Summary*
Reports from the twelve Federal Reserve Districts indicated that the economy continued to
expand at a modest to moderate pace from mid-February through late March. Activity in the Boston,
Atlanta, Chicago, Dallas, and San Francisco Districts grew at a moderate pace, while Cleveland and St.
Louis cited modest growth. New York reported that economic growth picked up somewhat. Philadelphia
and Richmond cited improving business conditions. The economy in Minneapolis grew at a solid pace
and Kansas City’s economy expanded at a faster pace.
Manufacturing continued to expand in most Districts, with gains noted in automotive and hightechnology industries. Manufacturers in many Districts expressed optimism about near-term growth
prospects, but they are somewhat concerned about rising petroleum prices. Demand for professional
business services showed modest to strong growth and freight volume was mainly higher. Reports on
retail spending were positive, with the unusually warm weather being credited for boosting sales in
several Districts. While the near-term outlook for household spending was encouraging, contacts in
several Districts expressed concerns that rising gas prices could limit discretionary spending in the
months to come. New-vehicle sales were reported as strong or strengthening across much of the United
States. Tourism increased in most reporting Districts. Residential real estate showed some improvement,
with many contacts citing expansion in the construction of multi-family housing. Activity in
nonresidential real estate increased or held steady in most Districts. Agricultural conditions were
generally favorable. Mining activity expanded and oil extraction rose, while natural gas drilling slowed.
Banking conditions were largely stable, with some improvement seen in loan demand. Several Districts
reported increased credit quality.
Hiring was steady or showed a modest increase across many Districts. Difficulty finding
qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on
*
Prepared by the Federal Reserve Bank of Cleveland based on information collected on or before April 2, 2012.
This document summarizes comments received from business and other contacts outside the Federal Reserve and is
not a commentary on the views of Federal Reserve officials.
ii
wages was constrained. Overall price inflation was modest. However, contacts in many Districts
commented on rising transportation costs due to higher fuel prices.
Manufacturing
Manufacturing continued to expand in most Districts, although respondents in the Boston and St.
Louis Districts reported that manufacturing was mixed and Chicago reported that growth in
manufacturing production leveled off after a strong start to the year. Contacts in automotive industries
reported gains in Cleveland, Atlanta, and Chicago. The Kansas City, Dallas and San Francisco Districts
reported increased sales for high-technology manufacturers, with Dallas noting key demand drivers
continue to be mobile applications, cloud computing, and automobiles. The Philadelphia and Dallas
Districts indicated improvement in demand for manufacturing with ties to residential housing and
construction. Cleveland steel producers and service centers reported that volume was trending slightly
higher, while Chicago steel producers said that capacity utilization was steady. For refiners in San
Francisco, capacity utilization rates continued to hold largely stable, as weak domestic gasoline demand
was offset by strong foreign demand for distillate products. In Dallas, Gulf Coast refiners noted steady
margins overall.
Manufacturers in Boston, Cleveland, and Chicago are expanding payrolls but finding it difficult
to find highly-skilled workers. Comments from the Cleveland, Atlanta, Chicago, and Kansas City
Districts indicated a rise in capital spending. Manufacturers in over half the Districts commented on
increasing input costs, focusing, in particular, on rising petroleum prices. Contacts in Boston,
Philadelphia, Chicago, Kansas City, and San Francisco remained optimistic that activity will increase in
the near term. However, several respondents in Cleveland and Dallas noted that their outlooks have
become more cautious. Manufacturers in Boston and Cleveland expressed concern about the European
economy. Expectations were mixed in St. Louis.
Nonfinancial Services
iii
Demand for professional business services was characterized as modest to strong in the Boston,
Philadelphia, Richmond, Kansas City, and Dallas Districts. St. Louis, Minneapolis, and San Francisco
reported that demand was mixed. Boston and Richmond cited rising demand for advertising, marketing,
and consulting services, while accounting services saw a modest pickup in Minneapolis and Dallas.
Growth in technology-related services to the energy sector was noted in the Minneapolis and Kansas City
Districts. St. Louis and San Francisco reported that activity in the healthcare sector was flat to down.
Both Richmond and San Francisco noted increased sales for restaurants and food-related service
providers. Freight transportation services were higher in the Cleveland, Richmond, and Kansas City
Districts. Reports from Atlanta and Dallas were mixed due to declining air cargo volumes and railroad
shipments. St. Louis reported that plans have been announced to close certain freight transport and
distribution facilities. Contacts in Cleveland, Richmond, and Kansas City noted a shortage of qualified
truck drivers.
Consumer Spending and Tourism
Retail spending continued to improve in almost all Districts. Contacts in the Boston, New York,
and St. Louis Districts characterized retail activity as strong. Reports from Chicago and Richmond
indicated a significant strengthening in retail spending. Sales expanded at a modest or moderate pace in
Philadelphia, Minneapolis, Kansas City, and Dallas. Unseasonably warm weather boosted sales in the
Boston, Philadelphia, Cleveland, Richmond, and Chicago Districts. Grocers in Cleveland and San
Francisco reported sales as unchanged. Apparel sales were strong in Boston and New York. Purchases at
home improvement stores were up in Richmond and Chicago. Reports from Boston, Atlanta, St. Louis,
and Kansas City indicate a positive near-term outlook for retail spending; however, contacts in
Philadelphia, Cleveland, Atlanta, Chicago, and Kansas City expressed concerns that rising gas prices
could limit discretionary spending in the months to come.
Automobile sales were reported as stronger or strengthening during late February and early
March in most Districts. Mild winter weather boosted sales in Cleveland but depressed motor vehicle
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service spending in New York and Minneapolis. Rising gas prices lead to increased purchases of fuelefficient vehicles in Kansas City, Dallas, and San Francisco. Contacts in Philadelphia and Kansas City
expect continued sales strength. Reports from Cleveland showed a mixed outlook, with some
respondents expecting solid sales and others seeing the current pace of sales as unsustainable. Usedvehicle sales were reported as strong or robust in Cleveland and San Francisco.
Tourism was characterized as strong by respondents in the Boston, New York, Richmond, and
Atlanta Districts. Minneapolis indicated a slowdown in activity due to a general lack of snow this winter.
Conversely, warm weather boosted tourism in Richmond. Bookings were strong in New York, and
occupancy rates improved in the Boston, New York, Atlanta, and San Francisco Districts. In Boston and
Kansas City, business travel continues to be the main driver of tourism activity. Contacts in Boston and
Atlanta expressed concern over high fuel prices as a possible drag on leisure spending.
Real Estate and Construction
Residential real estate activity improved in most Districts, though Cleveland and San Francisco
noted that activity remained lackluster or at low levels. The St. Louis and Minneapolis Districts reported
increases in building permits. The construction of multi-family housing units, including apartments and
senior housing, expanded in many Districts. Home prices continued to decline in Boston, New York, and
Minneapolis, but were largely flat in San Francisco. Contacts in Boston, Philadelphia, and Kansas City
indicated that mild weather had boosted real estate activity.
Non-residential construction activity improved in the Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, and St. Louis Districts, though many of these contacts characterized the improvement
as slow. Boston, New York, and San Francisco characterized non-residential real estate activity as
unchanged or steady. The energy and high-tech sectors were driving much of the demand in the Dallas
District. San Francisco noted a rise in the demand for office space from the technology sector. Cleveland
and Chicago saw a boost in healthcare-related construction. Projects related to the education sector are
showing growth in Boston, Cleveland, Philadelphia, and Richmond. The outlook of builders is described
v
as positive or slowly improving in the Philadelphia, Cleveland, Atlanta, and Kansas City Districts, and as
cautiously optimistic in Boston.
Banking and Finance
For most Districts reporting on financial services, banking conditions remained stable, with
modest improvements in demand for lending. Loan demand was reported as improved in New York,
Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco, while lending
activity was unchanged in St Louis. The Dallas District reported improved sentiment by national and
regional banks due to improved middle-market and large corporate lending. Contacts in Cleveland,
Richmond, and San Francisco reported that increased competition among lenders has been driving more
aggressive loan pricing. In general, the demand for commercial and industrial loans remained steady,
while several Districts reported an increase in commercial real estate lending activity. The Philadelphia
and Cleveland Districts reported increased lending for multifamily housing and health care, and contacts
in Richmond cited increased lending to small business to finance inventory and capital expenditures.
Consumer lending has remained stable or risen modestly across a few Districts. The Cleveland and
Richmond Districts reported increased home equity and auto lending, while bankers in Chicago noted
improved credit availability for auto loans and credit cards. Several Districts reported that credit
standards remain stable, but Richmond bankers reported that they were offering easier terms to attract
new commercial borrowers. Several Districts reported increased credit quality, as delinquencies have
continued to decline and few problem loans have been reported.
Agriculture and Natural Resources
Recent rain and snowfall has helped alleviate dry agricultural conditions from earlier in the year.
Nonetheless, the Atlanta, Minneapolis, Kansas City, and Dallas Districts have all reported certain areas
where drought conditions continue to persist. Due to unseasonably warm weather, contacts in several
Districts reported that the planting of some crops is beginning earlier than normal, including corn in
Chicago and wheat in Minneapolis. San Francisco commented that there has been an increase in certain
vi
input costs, such as fertilizer, while Chicago reported tight supplies of some agricultural chemicals and
corn seed. Atlanta and Chicago reported an increase in the prices paid to farmers for soybeans; Chicago
noted that the increase was due to lower-than-expected harvests in South America. Livestock prices rose
in the Chicago, Minneapolis, and Kansas City Districts, while orders for livestock were robust in San
Francisco. Farmland values in Kansas City continue to rise and are at record highs.
Activity in natural resources remained strong. The Kansas City, Dallas, and San Francisco
Districts reported a shift from natural gas to oil exploration and production due to low natural gas prices
and growing demand for oil. In the Cleveland District, leasing activity in the Utica shale is expanding.
Cleveland and St. Louis noted that the production of coal has slowed over the past few months. The
mining sector is expanding in San Francisco due to high prices for a variety of precious metals, and iron
ore mines in the Minneapolis District continued to operate near capacity. Contacts in Kansas City
reported a shortage of engineers and experienced technical support for oil and gas drilling.
Employment, Wages, and Prices
Hiring was steady or showed a modest increase in the Boston, New York, Cleveland, Richmond,
Atlanta, Chicago, Minneapolis, Dallas, and San Francisco Districts. Industries reporting some
employment growth included manufacturing, freight transport, professional business services, and
information technology. A preference for part-time and temporary workers was seen in the Richmond
and Atlanta Districts. Atlanta noted that temporary workers were being utilized in order to contain costs
and retain flexibility, while some employers in Richmond prefer temporary workers due to uncertainty
about future demand. Some employers in the Boston, Cleveland, Atlanta, Chicago, Kansas City, and
Dallas Districts reported having difficulty finding qualified workers, especially for certain high-skilled
positions. Contacts in Philadelphia and Cleveland noted that new federal regulations are exacerbating a
truck-driver shortage. New York commented that employers are planning to step up hiring activity in the
months ahead. Boston, Richmond, and Atlanta said that employers in their Districts are cautious and
need to see more robust growth before they expand their permanent payrolls further.
vii
Wage pressures were characterized as contained or modest among reporting Districts. Contacts
in Chicago, Dallas, and San Francisco noted some upward pressure on wages for skilled jobs, especially
in manufacturing and information technology. In the Minneapolis District, strong oil-drilling and
production activity continued to bid up pay. Transportation contacts in Cleveland noted some wage
pressure due to a tightening of the driver pool. And medical benefits continue to put pressure on labor
costs in Philadelphia.
Overall price inflation was modest in most Districts. However, contacts in the Cleveland,
Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts cited rising transportation costs due to
higher fuel prices. Minneapolis and Dallas noted that airlines have raised their fares to offset higher fuel
costs. Richmond reported that rising fuel costs were a serious problem for both land and ocean shippers,
while intermodal transportation firms in Dallas said that they had increased prices in response to higher
fuel costs. In Atlanta, higher transportation costs were passed through to consumers without much
difficulty. In contrast, contacts in Cleveland, Chicago, and San Francisco said it was difficult to pass
through higher costs to consumers. Input costs for manufacturers in Boston, Cleveland, and Kansas City
rose somewhat, but with little pass-through. Price pressures have eased somewhat for manufacturing
firms in Philadelphia. Higher prices for construction materials narrowed profit margins for contractors in
Kansas City.
I-1
FIRST DISTRICT – BOSTON
Economic activity continues to expand at a moderate pace in the First District. Most contacted
retailers, manufacturers, and consulting and advertising firms report higher revenues in recent months
than a year earlier. Commercial real estate markets are mostly unchanged, while residential contacts
across the region cite rising sales and declining prices. Except for a consulting firm unable to meet very
strong demand growth without aggressive hiring, responding firms are hiring modestly or not at all; a few
mentioned small layoffs. Retailers express concern about what rising energy costs may do to consumers’
willingness to spend, while manufacturing contacts acknowledge the increasing costs, but say they are not
a problem.
Retail and Tourism
Most First District retail contacts characterize year-to-date 2012 performance as strong,
attributing this strength to mild winter weather and improving consumer sentiment. For February, yearover-year comparable-store sales increases ranged from low to high single digits, with the exception of
one retailer citing a 23 percent rise. Furniture continues to sell well in the First District, as does apparel
and other household items. Paper-based products are expected to see 3 percent to 4 percent price
increases. While respondents are optimistic that performance will continue to be good, they remain
cautious, noting that gasoline price increases might damp consumer sentiment.
The travel and tourism sector in the First District continues to expect a strong 2012, based on 5.6
percent annual growth in 2011, a strong start to 2012, and analyst forecasts predicting high single-digit to
low double-digit increases over 2011. In January and February, hotel revenues were up nearly 10 percent,
reflecting improved occupancy rates. Higher hotel occupancy has positive spillover effects for restaurants,
retail, and entertainment venues. Business travel is driving this increase, as leisure travel is still subject to
some consumer caution. Echoing the retail contacts, tourism contacts say higher gas prices could retard
growth in leisure travel, but aggressive price discounting might provide a counterweight.
I-2
Manufacturing and Related Services
None of the 10 First District manufacturing firms contacted this round saw year-over-year sales
declines in recent months, but performance varied. A semiconductor machinery manufacturer which
generates most of its sales in Asia reports flat sales in the first two months of 2012, an improvement over
declining sales in the fourth quarter of 2011. By contrast, an information technology equipment provider
cites 18 percent sales growth in 2011 and continued strong growth in the first quarter of 2012. Geography
matters, as firms with large operations in Europe saw slower growth and some outright overseas declines
whereas firms more focused on the U.S. and Asia experienced better results. A contact in the information
technology sector argues that the end of 2011 was strong because customers held back on spending during
the weak spring and summer period but then made sure to spend that money before the year ended.
All of our contacts report that input costs and, in particular, energy costs are up. However, none
says rising costs are a problem and all in this round say energy has little noticeable effect on their costs or
revenues. In general, respondents indicate they are hiring to keep up with demand. Two firms undertook
relatively small layoffs; one did so because of weaker sales in the fourth quarter of 2012 and the other is
offsetting layoffs at one New England plant with increases elsewhere in the region. Firms continue to
report difficulty finding qualified workers, especially in skilled manufacturing trades and engineering.
One contact, an electrical equipment manufacturer, is trying to re-orient recruiting to hire young
engineers, for example, and train them in-house, rather than continuing to search for workers who already
have experience with the relevant technology.
None of the contacted firms has revised its outlook since our last conversations earlier this year or
in the closing months of 2011. Most appear to expect U.S. economic growth around 2 percent in 2012 and
company sales growth in the low single digits. Contacts remain concerned about the European economy
and about political ―gridlock‖ here. A few contacts also expressed slight concern about prospects for
growth in China.
I-3
Selected Business Services
Consulting and advertising contacts in the First District report increasing revenues in the first
quarter of 2012 and most say that the pace of growth, while not rapid, is sustainable. Despite the fact that
recent growth is generally slower than at the end of 2011, contacts are relatively upbeat, partly because
the faster growth of late 2011 represented a recovery from a very weak third quarter, in which several
contacts experienced declining revenues and laid off workers. Revenue results, while good for marketing
and advertising firms, are stronger for consulting firms, especially economic consulting. A firm that
focuses on marketing and promotional materials saw year-over-year growth of about 10 percent while
another that focuses on advertising cites stable revenues recently after rapid growth in the latter half of
2011. Strategy and business consulting contacts report growth around 5 percent, as clients who had
previously been sitting on large stockpiles of cash are beginning to spend them to address pent-up need
for consulting services cut during the recession. Clients have reportedly begun to focus on increasing
sales and positioning themselves within markets rather than solely on cutting costs. Economic consulting
contacts note that demand is extremely strong for high-end consulting and revenue growth is limited
mostly by their own capacity to respond. Demand for health care consulting is generally strong, with the
exception of pharmaceuticals, but some business lines have slowed as firms wait until the uncertainty
over health care reform clears up. One consulting firm has seen rapid growth due to two new large
government contracts, but notes that individual consulting firms’ prospects are contingent upon the
funding status of and uncertainty surrounding the specific agencies with which they do business.
Contacts report wage increases in the low single digits and expect this pace to continue. Input
costs consist primarily of salaries in this sector, but other cost growth is generally low. Firms say they are
able to pass on cost increases to clients and thus see either steady or slightly increasing profit margins.
Responding firms say they changed employment levels very little in the first quarter of 2012, except for
economic consultants who are hiring to meet demand growth, and a strategic and management consultant
I-4
with small layoffs. Aside from economic consulting, contacts do not plan to expand headcounts in the
near future, requiring more rapid increases in demand to reinitiate hiring.
Most contacts expect moderate growth for the rest of 2012, with some anticipating an
acceleration either late in the year or in 2013. They note very few downside risks, saying their biggest
concerns are the macro economy in general and uncertainty surrounding partisanship in Washington and
the upcoming election.
Commercial Real Estate
Reports from commercial real estate contacts in the First District indicate that conditions are
largely unchanged since the last report. Boston’s commercial property market remains more active than
other New England markets, which are ―quiet,‖ a term one contact used to describe Portland. Contacts
note that investment demand for prime office and apartment properties continues to be robust in Boston
and expect it to remain so for the foreseeable future. Office and retail demand elsewhere in New England
is moderate. Contacts in these areas do not foresee increases in vacancy rates, but note that a dearth of
interest from potential entrants to these markets means they are unlikely to fall in the near future. Retail
sector rents remain flat across the region and all contacts reported retail sector vacancy rates somewhere
between flat and modestly decreasing.
Construction activity continues at moderate levels in Boston and low levels elsewhere in the
District. One contact perceives an increased interest in new retail and medical office projects in Boston
for the first time in recent history. Another contact expects education sector construction activity in the
Boston area to increase later in the year, but notes that large health care projects continue to be delayed.
Market appetites for multifamily apartment development remain strong in Boston. According to contacts,
favorable terms but strict standards characterize financing markets for construction projects in Boston and
financing conditions in Boston remain markedly better than in the region’s smaller markets. Respondents
throughout the region remain cautiously optimistic about the coming months, but many acknowledge that
commercial markets will not begin to pick up until macroeconomic conditions improve substantially.
I-5
Residential Real Estate
Residential real estate in New England shows signs of strengthening as sales continued to
increase in February, except in Connecticut where February sales were close to year-earlier levels.
According to most contacts, activity is improving across all price segments. Contacts cite low interest
rates, falling prices, improving economic conditions, and milder weather as factors contributing to the
observed sales increases. Nonetheless, contacts remain cautious about the prospect of housing-market
recovery because home prices continued to decline across the six states. Most contacts attribute falling
prices to distressed properties; however, they also say the role of distressed properties in the market is
diminishing. In the Greater Boston area, by contrast, the median sale price of homes and condos rose in
February compared to a year ago. Respondents say buyer activity in Boston has intensified and they are
concerned that inventory levels will not provide adequate selection for homebuyers.
Contacts in states with significant levels of inventory remain cautiously optimistic about the near
future; they say sales growth observed in recent months appears promising, but declining prices remain a
source of concern. Other contacts maintain a more optimistic outlook for coming months due to inventory
levels coming into balance with buyer activity. Based on pending sales figures and current market
activity, contacts expect growth in year-over-year sales to continue into spring.
II-1
SECOND DISTRICT--NEW YORK
Growth in the Second District’s economy has picked up somewhat since the last report. Labor
market conditions have been stable to slightly stronger in recent weeks, and a sizable number of contacts
say they plan to add workers in the months ahead. While consumer prices generally remain steady,
business contacts in a number of industries indicate rising cost pressures. Manufacturers report steady
improvement in business conditions. Most retailers and auto dealers describe sales as steady but strong in
February and the first few weeks of March. Tourism activity has been mixed but generally strong since
the last report, with bookings for the months ahead described as robust. Home sales activity has
continued to strengthen since the last report, though prices have been steady to somewhat lower; rental
markets have continued to improve, and there has been a pickup in rental multi-family construction.
Commercial real estate markets remained steady in the first quarter of 2012. Finally, bankers report
increased loan demand, no change in credit standards, and the most widespread declines in delinquency
rates in a number of years.
Consumer Spending
Retailers report that sales were mixed but mostly steady and strong in February and the first few
weeks of March. One major retail chain reports that sales were above plan and running more than 5
percent ahead of year earlier in both February and March, led by strength in spring apparel and
accessories. Retail contacts in upstate New York report that sales in recent weeks have been strong and
running roughly on par with a year earlier, which was also characterized as a very strong period, with
continued strong demand from Canadian shoppers. However, another major retailer indicates that samestore sales were below plan and down considerably from 2011 levels. Retail prices continue to be mostly
stable, but one major chain notes declining costs for apparel merchandise. Inventories are generally
reported to be at desired levels.
Auto dealers in upstate New York report that sales activity picked up in February and has
remained strong in the first few weeks of March. Sales of new vehicles were up 4-7 percent from a year
II-2
earlier in February and remained fairly strong in March. Inventory stock-outs are no longer a factor
holding down sales. Business generally remains brisk at dealer service departments, although dealers in
the Buffalo area report that unseasonably mild weather has reduced demand for winter-oriented service.
Wholesale and retail credit conditions remain favorable.
The Conference Board’s latest survey of residents of the Middle Atlantic states (NY, NJ, PA)
shows confidence slipping moderately in March, though it remains well above its lows of last October.
Tourism activity has been fairly robust since the last report, and hotel bookings for upcoming months
look strong as well. Albany area hotels report rising occupancy rates in February. New York City hotels
report that total revenues per room were up roughly 6 percent from a year ago in February and March,
with particular strength in the last couple of weeks. All of the increase reflects higher occupancy rates, as
room rates have leveled off. Moreover, an industry contact notes that advance bookings are very strong
and that room rates are poised to rise. Attendance at Broadway theaters was fairly robust in February but
has tapered off in March, largely because fewer shows are running than at this time last year; however,
revenues continue to run ahead of 2011 levels, reflecting a substantial rise in ticket prices.
Construction and Real Estate
Housing markets across much of the District appear to have picked up since the last report, while
rental markets continue to firm. Home sales are reported to be on the upswing in northern New Jersey,
though prices are steady to declining, largely due to more distressed properties coming to market. One
industry expert notes surprising strength in new multi-family construction in New Jersey—almost entirely
rental units—thus far in 2012; this segment now accounts for well over 50 percent of all new
homebuilding, which is said to be unprecedented. Apartment rental markets in both New York City and
northern New Jersey continue to firm, with inventories tight and rents rising steadily. A major New York
City appraisal firm notes that Manhattan’s co-op and condo market has firmed since mid-February: while
prices remain flat, sales have picked up—especially for studio and 1-bedroom co-ops—and new contract
activity is estimated to be running 7 percent ahead of a year earlier. Conditions in the outer boroughs
II-3
have been somewhat softer. Real estate contacts in western New York State report continued gradual
improvement in home sales activity but note some downward pressure on prices.
Commercial real estate markets have been mixed but, on balance, steady since the last report.
Office vacancy rates in New York City and on Long Island declined in the first quarter, while rents have
risen moderately. By contrast, office markets have slackened in northern New Jersey, Westchester and
Fairfield counties, and in Rochester. Most other metro areas in upstate New York have seen steady to
slightly declining vacancy rates. Industrial markets across the District have been fairly stable.
Other Business Activity
A major New York City employment agency specializing in office jobs reports that hiring activity
has held steady since the last report. Legal hiring has picked up somewhat but for specific positions with
specialized qualifications, while finance-sector hiring remains modest. More broadly, though, a sizable
number of manufacturers and a growing number of business contacts in other sectors say that they plan to
step up hiring activity in the months ahead.
Looking at business conditions more generally, manufacturers across New York State report
continued improvement since the last report, while a growing proportion of non-manufacturing contacts
report increases in business activity. Business contacts in both manufacturing and other sectors report
that input costs are rising; however, selling prices are reported to be holding steady, on balance.
Financial Developments
Small to medium-sized banks in the District report increased loan demand in all categories, but
particularly for commercial mortgages. Bankers indicate increased demand for refinancing but to a less
widespread degree than in recent months. Credit standards are reported to be little changed across all loan
categories. Respondents note a decrease in spreads of loan rates over the cost of funds for all loan
categories—particularly for commercial and industrial loans where well over two in five bankers report
lower spreads, while none report higher spreads. Respondents also indicate some decline in average
deposit rates. Finally, bankers report decreases in delinquency rates for all loan categories. Moreover,
II-4
the reported decreases are more widespread among our banking contacts than at any time since the late
1990s.
III-1
THIRD DISTRICT – PHILADELPHIA
Overall, business activity in the Third District has continued to show slow, steady improvement
since the previous Beige Book. Overall sentiment improved, and the unseasonably mild weather
undoubtedly contributed to this. Since the last Beige Book, manufacturing activity has grown further, and
many manufacturing industries have contributed to this growth; however, the pace has slowed slightly.
Retail sales continued to grow modestly. Motor vehicle dealers experienced unseasonably strong sales
growth in February, but sales were less robust in March. Third District banks have reported slight growth
in demand and continued strong credit quality since the last Beige Book. New home construction
continued to improve in Pennsylvania but slowed in New Jersey due to the large inventory of distressed
homes. Little change was seen by commercial real estate contacts who reported slowly improving
markets. Overall, service-sector firms reported continued growth. Price pressures have remained
contained for most sectors, with little change from the last Beige Book.
The outlook remains relatively optimistic among most firms, similar to the sentiment expressed in
the last Beige Book. Manufacturers’ expectations for the next six months have changed little and remain
relatively high. Retailers continue to expect slow, steady improvement. Auto dealers anticipate continued
strong sales; however, they acknowledge that the robust first quarter might shave a little off the typical
spring seasonal surge. Banking, real estate, and service-sector firms continue to plan for slow growth in
2012. In general, business plans remained cautious; however, there was a noticeable lack of the litany of
risks and uncertainties as expressed by contacts over the last six months.
Manufacturing
Since the last Beige Book, Third District manufacturers have reported continued growth of new
orders and shipments, although the pace has slowed slightly. Gains were widespread among the makers of
food products, lumber and wood products, fabricated metals, industrial machinery, and instruments. New
apartment construction, rising auto sales, and Marcellus shale activity are driving increased demand,
according to various contacts. A lumber firm expects growth but mostly from market share gains.
III-2
Manufacturers of food products and of chemicals expressed concerns about the impact of rising fuel
prices on their input and output prices.
About nine out of 10 Third District manufacturers expect business conditions to improve or stay
the same during the next six months; firms are evenly divided. Seasonal trends may be responsible for
some of the anticipated improvement, but the optimism is nearly uniform across all major sectors. The
usual litany of risks and uncertainties to the outlook – typical over the past six months – was virtually
absent from current comments by manufacturers. However, caution remains; expectations of capital
spending and future hiring have changed little since the last Beige Book.
Retail
Third District retailers reported modest growth rates overall but expressed greater certainty that
mild weather had played a significant role in year-over-year comparisons. According to one contact,
outlet malls fared better than broad retail but they should have experienced stronger sales. Gas prices
pinched. While mild weather attracted more people, the average purchase per store dropped from yearago levels. Overall, retail contacts see the economy firming but remain very cautious.
Auto sales were robust in February for dealers in New Jersey and Pennsylvania. For the first two
months of the year, year-over-year sales growth in New Jersey was reported to be higher than national
growth despite a soft January report. Pennsylvania contacts indicated that March sales were strong but not
as robust as in February. The outlook for auto sales remains strong. However, contacts indicate that the
rapid first quarter pace may somewhat dampen the spring sales season, which typically peaks in May or
June. Modest hiring continues at select dealers, but caution remains the trend.
Finance
Overall, loan demand has continued to grow slightly in the Third District since the previous Beige
Book; however, activity has been uneven. Mirroring trends noted by other sectors, community banks note
that the strongest loan demand has been for inventories and capital equipment to manufacturers and for
investments in higher education, health care, technology sectors, and multifamily housing. One large bank
III-3
contact noted strong demand from middle-market private equity firms, while the pace of refinancing had
diminished. Most contacts reported solid credit quality.
Real Estate and Construction
Since the last Beige Book, residential builders have reported mixed results for sales – and hence
for their construction activity – depending on the extent of distressed sales activity in their region.
Builders reported slower sales in southern New Jersey – where foreclosure rates are the highest – but
continued apace in Pennsylvania. A Pennsylvania builder was more encouraged than at any time in the
past five years; the company is doing more hiring for sales and for construction workers. One contact
observed the resumption of heavy flows of specialized construction trade workers on the roads between
Philadelphia area worksites and their Lancaster area homes; this level of activity has been absent for five
years. Residential brokers reported strong, weather-aided year-over-year sales growth. The outlook
among builders and brokers remains somewhat more positive.
Nonresidential real estate activity has continued to slowly improve since the last Beige Book,
with few changes. The industrial real estate market remains the strongest, followed by higher education,
multifamily residential investment, and activities related to Marcellus shale. Philadelphia’s Center City
office market is characterized by a continuing trend toward consolidations and a growing trend toward
conversions to apartments. The overall outlook for nonresidential real estate remains positive but modest.
Services
Most Third District service-sector firms have reported further growth since the last Beige Book.
Firms’ strongest demand emanated from higher education and health-care institutions. Hospital systems
reported rising admissions. Staffing firms reported mixed results, with strong orders from the
manufacturing, health-care, and technology sectors. Demand for general administration and for clerical
workers has been softer; however, clients were beginning to talk of hiring plans. Service-sector firms
anticipate that growth will steadily improve in 2012.
III-4
Prices and Wages
Price levels have changed little since the previous Beige Book – remaining generally constrained.
Some deals and promotions are beginning to sap strong auto dealer pricing power. This was anticipated as
Japanese automakers resumed normal production levels. New federal regulations, including medical
certification requirements for commercial drivers, have exacerbated truck driver shortages. Favorable
pricing power for freight shippers will push costs along to their customers and end-users. As a recent
study predicts, these high costs could rise even further if the need arises to truck fuel to nearby markets
that are currently being served by pipeline from refineries that are being closed. Price pressures have
eased somewhat for manufacturing firms since the last Beige Book. Retailers and homebuilders continued
to report tight margins with high, not rising, nonlabor factor costs. House prices have fallen further;
however, nonresidential rents are stabilizing in some sectors. Contacts continued to report a lack of wage
pressures, other than for medical benefits.
IV-1
FOURTH DISTRICT – CLEVELAND
The economy in the Fourth District grew at a modest pace since our last report. Manufacturers
reported a small increase in production, while activity in residential and nonresidential construction
picked up slightly. Many retailers and auto dealers characterized February sales as good. Energy
production was stable except for shale gas, where activity expanded. Freight transport volume trended
higher at a moderate rate. And the demand for business and consumer credit improved slightly.
Hiring remains at a low level and was mainly limited to the manufacturing and freight transport
sectors. Staffing-firm representatives reported that the number of job openings has increased, especially
for information technology and healthcare workers. Wage pressures are largely contained. Prices were
largely stable apart from increases in petroleum-based products, metals, and some building materials.
Manufacturing
Production at District factories showed a small increase during the past six weeks, and a majority
of manufacturers said that output was above year-ago levels. However, several contacts reported that the
boost in new orders they had seen late last year is leveling off and they are uncertain about sales to
European customers. Some of our respondents expressed a more cautious outlook than at the start of
2012, but they are not expecting a significant weakening. Shipping volume by steel producers and service
centers was trending slightly higher. Demand is being driven by the auto, energy, and industrial
equipment markets. Steel representatives are cautiously optimistic about second-quarter shipments, and
they expect the positive growth trend to continue. District auto production showed a modest rise during
February on a month-over-month basis, while increasing substantially from prior-year levels. Increases
were attributed, in part, to the abatement of supply chain issues.
Capacity utilization has returned to normal rates for the majority of our contacts, while
inventories were consistent with demand. Capital budgets remain on track, with many manufacturers
reporting that they plan to increase outlays during the next several months. Input- cost changes were
mainly limited to rising prices for petroleum-based products and metals. Only a few producers said that
IV-2
they are considering raising product prices during the second quarter. Manufacturers continued to hire,
but at a modest pace. We heard reports about difficulties recruiting professional and high-skilled
production workers. Wage pressures are contained. Several contacts said that they need to allocate
additional monies for pension plans due to low rates of return.
Construction
Single-family-home construction has improved slightly during the past couple of months,
although overall sales remain at very low levels. Activity in multi-family construction and remodeling
remains strong. Single-family-home builders are a little more optimistic in their outlook due to the time
of year and low mortgage interest rates. A few builders reported reducing house sizes and altering
interior specs as a means of holding new- home prices steady. Employment and wages were stable.
Activity in nonresidential construction for small to medium-size contractors continues to
strengthen and is at a higher level than a year ago. Inquiries were up substantially for most of our
contacts, although backlogs, while growing, are not as strong as builders would like. Financing projects
remains one of the biggest challenges facing contractors. Construction activity is broad-based, driven by
student housing, senior housing, healthcare, office, and manufacturing. Our contacts expect that business
will slowly improve as the year progresses, but it will remain below pre-2008 levels. Looking at
building-materials prices, residential and nonresidential contractors reported increases for petroleumbased products, drywall, and lumber. Hiring by nonresidential general contractors was limited. Several
commented that they need to see more robust growth before expanding their payrolls.
Consumer Spending
Retailers reported that sales were ahead of plan during the past six weeks and increased by single
digits relative to year-ago levels. Almost all of our contacts cited the unusually warm weather as a
primary factor for the pickup in sales, which was seen across their product lines. However, several of our
respondents described middle-income households as challenged. These consumers are trading down,
looking for value, and they remain very sensitive to rising gasoline prices. Most retailers expect second-
IV-3
quarter sales to increase over prior-year levels, mainly in the low- to mid-single digits. However, grocers
anticipate little change in sales. Reports on vendor pricing were mixed. Upward pressure was attributed
mainly to rising transportation and offshore labor costs, with little emphasis on changes in raw material
pricing. There was some reluctance to pass through rising costs to consumers. Inventories were
characterized as being in good shape. Capital spending for the year remains on track. Outlays will be
used largely for technology enhancements, distribution facilities, store expansions, and new store
construction. Little hiring is anticipated except at new stores.
Auto dealers described new-vehicle sales during February as good. Sales received a boost from
the unusually warm weather. We heard one report of a shale gas producer purchasing 75 vehicles from a
dealer. On a year-over-year basis, sales were mainly higher. However, some dealers reported seeing a
lull in activity, which they attributed to a significant pick up in vehicle leasing at the beginning of 2011.
Inventories are light on the domestic side, but foreign nameplates are rebuilding stocks rapidly, as those
manufacturers are trying to recapture market share. The outlook for the remainder of this year was
mixed. Half of our contacts expect the rise in 2011 sales will be repeated, while others believe that the
rate of increase seen last year is unsustainable. Purchases of used vehicles were fairly strong. On the
financing side, interest rates are competitive, but it remains difficult to arrange financing for customers
with low credit scores. Auto dealers are hiring at a very slow rate.
Banking
Demand for business credit was described as either steady or rising, with a majority of bankers
telling us that loan pricing remains competitive. Requests are being driven by commercial real estate,
including multifamily housing, and healthcare. Consumer credit requests rose slightly during the past six
weeks. Demand was mainly for auto lending (direct and indirect) and home equity lines of credit.
Several community bankers commented that it is difficult competing against large banks, credit unions,
and captives, especially for motor vehicle loans. In the residential mortgage market, demand was
described as steady to very strong. A high percentage of applicants are looking to refinance. No changes
IV-4
were made to loan application standards. Delinquencies were generally steady or declined; any increases
were found largely in real estate portfolios. Core deposits continued to grow. Payrolls were stable, with
little hiring expected.
Energy
Conventional oil and natural gas drilling and production were flat since our last report, with little
change expected in the upcoming weeks. Our contacts attributed these conditions to low natural gas
prices and regulatory costs. Well-head prices for oil were up slightly. Leasing activity in Ohio’s Utica
shale continues to expand, and energy companies are redeploying drilling resources from dry gas to the
wet gas areas of the Marcellus shale due to its significantly higher market value. The outlook for coal
production during 2012 is similar to 2011 levels. However, there is a growing likelihood that output will
decline due to the regulatory environment and lessening demand from electrical utility companies and
offshore markets. Spot prices for metallurgical and steam coals continued to decline. Production
equipment and materials prices were fairly steady except for rising diesel fuel prices and the cost of items
tied to steel. Energy payrolls were stable, though some small oil and gas companies are considering
layoffs because of reduced revenues.
Transportation
Freight transport volume has been trending higher during the past few weeks. Industries driving
demand include energy and metals. One executive noted a significant upswing in long-term leasing of his
railroad cars. Volume is expected to continue growing at a moderate pace for the remainder of the year.
Costs associated with truck maintenance have begun stabilizing after increasing for two consecutive
quarters. The price of diesel fuel continues to rise, although a few of our contacts characterized it as
manageable. Some of the increase was passed through via surcharges. Capital spending for 2012 remains
on plan. Outlays are allocated for replacement of aging units and adding capacity, although it remains
difficult to recruit qualified drivers. We heard two reports of additional drivers being hired to meet
IV-5
potential staffing requirements under the new hours-of-service rules. Some wage pressure exists due to a
tightening of the driver pool.
V-1
FIFTH DISTRICT–RICHMOND
Overview
Business conditions have improved in the Fifth District economy since our last report.
Manufacturing activity continued to advance, although somewhat more slowly than at the beginning of
the year. While trade activity increased, imports improved somewhat more slowly than exports. Retail
sales activity rose sharply, as shopper traffic increased and big-ticket sales strengthened. Servicesproviding firms also recorded solid revenue growth in recent weeks, and unseasonably warm weather
bolstered tourism. Bankers reported modest gains in most types of lending; however, other than
refinancing, the amount of mortgage lending remained relatively weak. Nonetheless, Realtors noted an
increase in sales of existing homes, and contractors reported an uptick in new home construction.
Commercial real estate activity also improved moderately across most segments of the market, although
contractors reported fewer government-related new construction projects. Hiring activity picked up,
especially for temporary workers. Finally, the pace of price increases rose marginally over the last month,
according to our latest manufacturing and service sector surveys.
Manufacturing
Activity expanded moderately over the last month. However, shipments, new orders, and
employment all grew at a somewhat slower pace since our last report, with several contacts citing the
increasing cost of petroleum–based products as a major factor affecting their business. An automotive
parts manufacturer reported that customer orders remained elevated, but he was concerned that orders and
sales could weaken if recent high fuel prices persist. A contact at a lumber mill stated that he had seen
improvement in both sales and output prices since the beginning of the year. In contrast, a paper producer
said that his firm was experiencing a significant decline in business, adding that most of his employees
were currently on a thirty hour workweek. A textile manufacturer said that synthetic raw material prices
were ―soaring,‖ but that it was difficult to pass these increases through to customers. According to our
V-2
recent survey, prices of both raw materials and finished goods grew at a somewhat quicker pace than a
month ago.
Port activity in the District continued to strengthen since the end of last year, with exports slightly
outperforming imports. Several port authorities reported that roll-on, roll-off stock was up. Indeed,
several officials noted that autos and automotive parts were key products boosting both imports and
exports. Exports of bulk goods, including coal, wood by-products, and agricultural goods, continued to be
robust. An executive at a large container carrier noted that downward pressure on shipping rates persisted
due to excess capacity. Rising fuel costs were cited as causing serious problems for both land and ocean
shippers. However, most port contacts expected that exports and imports would continue to strengthen.
Retail
Retail sales strengthened markedly since our last report. Gains were led by rising shopper traffic
and an uptick in big-ticket sales, while inventories flattened. A store manager in West Virginia remarked
that unusually warm weather had caused sporting goods sales to pick up earlier than normal. Additionally,
home improvement sales were up at most of the merchants polled in our latest survey. A contact at a
home improvement chain noted particular strength in sales of kitchen remodeling components. Higher
gasoline prices led to freight surcharges, according to several contacts. Sales of both domestic and foreign
cars remained strong, as consumers replaced aging vehicles and looked for better fuel-efficiency.
Consumers continued to bargain intently, with a North Carolina furniture retailer commenting that
margins were "the tightest they've ever been." A contact at a Virginia food chain remarked that customers
were purchasing more selectively, as retail prices accelerated. However, a home appliance retailer noted
that consumers absorbed significant price increases.
Services
Revenues expanded at service-providing firms, despite concern about the rising cost of gasoline.
Contacts at construction-related service firms reported an increased volume of business, and sales activity
picked up at several advertising firms and travel services. Information technology firms also noted greater
V-3
demand, particularly from the healthcare industry. Stronger demand allowed some trucking firms to raise
prices to offset fuel cost increases. However, a trucking executive indicated that the shortage of drivers
remained a serious concern. A manager of a restaurant chain in Maryland noted that people were eating
out more, but area restaurants still needed to increase their use of incentives to compete for customers.
Finally, a recent survey indicated that the pace of price change inched up at services-providing firms.
Finance
Modest improvements in lending activity were widely reported since our last assessment.
Officials at several large banks reported slow upward movement in commercial lending, particularly to
small businesses that were financing inventory and new equipment. Several community banks around the
District noted an increase in commercial lending for office and retail space. A lending officer in
Richmond reported further strength in consumer borrowing, especially to meet home improvement and
auto financing needs. Many bankers stated that mortgage financing remained weak, with the exception of
home refinancing. However, several bankers from across the Districted noted a slight pickup in new home
loans beyond seasonal norms. Competitive pressures among banks remained intense, putting downward
pressure on rates. Several bankers reported that they were offering easier terms to attract new commercial
borrowers. Loan quality and payment timeliness continued to improve, according to most bank officials.
Real Estate
Residential real estate activity showed promising signs of recovery since our last report. Several
contacts stated that they were beginning to see a ―ray of hope‖ in the housing sector, and several builders
reported starting construction in areas that had not seen new building activity for several years. For
example, a source from Charlotte said that real estate was starting to move again in his area, and another
North Carolina contact described multi-family housing activity, particularly for senior citizens, as being
―on fire‖ in recent months. Lower inventory of both new and existing homes was reported in northern and
central Virginia, with contacts noting that ―days on market‖ were down as well. Moreover, a few contacts
noted that housing prices had stabilized and, in some markets, prices were beginning to trend upward.
V-4
Some agents attributed the rise in sales price to greater buyer traffic as a result of unseasonably warm
weather. Several Realtors reported sales of higher priced homes were faring better than other price
categories. A number of Realtors held a positive outlook for expected sales.
Commercial real estate leasing and construction activity improved across most segments of the
market since the beginning of the year. Several commercial Realtors reported solid increases in inquiries
about availability of office and retail space, but only moderate growth in leasing of those properties. Still,
leasing rates were firming, according to agents, due to the reduction in the number of attractive properties
still on the market. Most contractors cited moderate increases in private sector construction projects.
Unusually warm weather helped contractors finish projects ahead of schedule, but some contractors with
weak backlogs sought to spread out work in order to keep their workforce active. In contrast, government
sector projects declined dramatically, according to several contractors, although one builder noted an
increase in demand for secondary education facilities. Both contractors and Realtors reported that access
to financing continued to be limited, and the required paperwork was inhibiting completion of loans on a
timely basis. Prices of construction-related goods, especially petroleum-based products, cement and
drywall increased in recent months, according to contacts, with most having only minimal success
passing through any cost increases.
Labor Markets
Fifth District labor markets improved moderately in recent weeks, with several employment
agencies citing strong demand for temporary workers. The increase in overall demand was attributed to a
general strengthening in the economy and also to the opening of new companies, coupled with a revival in
activity at previously dormant companies. Several employment agencies indicated that some of their
clients remained uncertain about future demand, however, and preferred hiring temporary workers. A
representative at a North Carolina staffing agency reported that demand for information technology
workers was much higher than supply and that the gap was worsening. She added that schools did not
have enough graduates to meet the demand in that sector. District manufacturers increased employment
V-5
more slowly than a month ago, according to our latest survey, while wage gains picked up. Growth in
employment and wages in the broad services sector nearly matched our last report.
Tourism
Unseasonably warm temperatures contributed to strong tourist activity since our last report. A
North Carolina contact from the outer banks cited exceptional attendance at early spring events. While
beach house rental rates were unchanged in recent weeks, real estate rental companies were able to
remove incentives that had been included since last autumn. In Washington, D.C., the atypical
temperatures resulted in cherry blossoms peaking at the second-earliest date ever. Tourist-related
businesses were busy and restaurants were full. This year marks the one-hundred year celebration of the
gift of the cherry trees from Japan, with numerous special events planned, drawing a significantly higher
volume of foreign visitors than normal. A contact described the crowds as "wall-to-wall humanity."
VI-1
SIXTH DISTRICT – ATLANTA
Summary
Reports from Sixth District business contacts indicated that the pace of economic activity
expanded at a moderate pace in late February through March. Expectations remained generally positive
across most sectors, although contacts expressed concern regarding the impact of higher energy prices on
the outlook.
Retailers mostly indicated sales were growing at a modest pace and auto sales remained strong.
Leisure and hospitality businesses reported robust activity in all segments except cruise lines.
Homebuilders and brokers experienced improvements in sales of new and existing homes while
multifamily construction remained strong. General contractors noted slow improvements in commercial
construction conditions. Manufacturers and transportation contacts reported positive production trends,
on balance. Loan demand remained relatively weak according to community bank contacts. The share of
firms reporting they were hiring continued to increase, although many contacts continued to express a
preference for part-time or temporary contract workers. Most contacts continued to report having
relatively little pricing power. However, the proportion of firms saying they were successful in their
attempts to pass on price increases rose since the last report.
Consumer Spending and Tourism
Most contact reports on consumer spending were generally positive. Sales of home appliances,
furniture, and autos were solid, while apparel was more mixed. Most retailers remained optimistic that
sales would improve over the next three months, but noted that the impact of higher gasoline prices posed
a downside risk to their sales outlook.
Tourism activity remained strong and contacts were optimistic about the outlook for leisure and
hospitality spending in the summer. Occupancy rates were up in many areas and South Florida continued
to be boosted by visitors from South America and Canada. Convention activity continued to improve as
well. Similar to retail, tourism contacts expressed concern about higher fuel costs and the potential
VI-2
impact on domestic travel to many regional tourist destinations. There continued to be a modest drop off
in bookings on some cruise lines, which was attributed mostly to the recent disaster off the coast of Italy.
Real Estate and Construction
The majority of residential broker contacts reported that home sales exceeded the year earlier
level in late February and March. More than two-thirds of the brokers indicated that sales met or
exceeded their expectations. Florida contacts noted strengthening sales, particularly in South Florida
markets. Many noted that inventory levels across the District continued to decline on a year-over-year
basis and, in spite of this, home prices were flat to slightly down compared with a year ago. The outlook
among brokers for sales growth remained positive, with most anticipating modest year-over-year gains
over the next several months.
The majority of homebuilder contacts reported that new home sales and construction rose
modestly during late February and March compared with a year earlier. Similar to brokers, builders also
noted that home price declines abated somewhat and new home inventories continued to decline on a
year-over-year basis. Contacts observed that multifamily construction remained robust across much of
the District and new projects continued to be announced. Over the next several months, homebuilders
anticipate sales and construction to be flat to slightly up compared with a year ago.
Most commercial real estate contacts indicated that conditions continued to improve slowly in the
region. Contractors noted a slight improvement in demand, but the market remained very competitive and
overall activity remained at low levels. Commercial real estate brokers continued to report modest
improvements in demand, mostly for class A space in urban markets. Some reported that businesses have
become more willing to move ahead with lease plans. Rent concessions continued to be noted with
several brokers reporting that rates have begun to stabilize; however, longer leases were reported which
included generous tenant improvements. The outlook among contacts was a bit more positive than
previously reported, but most contractors and commercial real estate brokers continued to anticipate that
activity would improve slowly this year.
VI-3
Manufacturing and Transportation
Manufacturing activity across the Sixth District improved compared with the last report. Most
contacts reported an increased level of both new orders and production. Several large auto manufacturers
announced plans to hire more workers to meet increased demand for their products. A major industrial
equipment producer and two medium-sized manufacturers announced plans to increase their presence in
Georgia. Most manufacturers also indicated some increase in non-labor input costs.
Transportation contacts continued to report volume growth across most segments with the
exception of air cargo, which is being hindered by slowing global demand and rising fuel costs. A railroad
contact noted significant volume increases in automobiles, steel, and forestry products. Domestic coal
shipments slowed because of the effects of warmer weather and lower natural gas prices. A port contact
indicated strong container volumes and increases in steel imports. The majority of transportation contacts
reported substantial investment spending in anticipation of future demand.
Banking and Finance
Contacts at community banks indicated liquidity levels remained high, a result of increasing
deposit balances and relatively soft loan demand. Some contacts acknowledged a slight increase in
demand for C&I and commercial real estate loans in some metropolitan areas, and a general rise in
demand for automobile loans. In rural areas, however, low property valuations were said to be hindering
overall loan activity. The demand for mortgages varied widely by market and some community bank
contacts indicated that they have exited the mortgage origination market altogether. Lending standards at
these institutions have remained largely unchanged. Smaller institutions noted tough competition from
larger banks for credit customers. Many of these contacts expressed concern that regulatory compliance
costs were affecting profit margins.
Employment and Prices
Overall hiring trends were positive, but growth remained relatively modest in late February and
March. While business contacts noted some increased optimism about the economic outlook, most firms
VI-4
continued to approach expansion plans with considerable caution. Among firms adding to payrolls, many
were utilizing temporary or contract hires in order to contain costs and retain flexibility. Reports indicated
that smaller businesses were looking to rebuild margins before proceeding to adjust their payrolls. Several
businesses, including trucking related firms, asserted that they were faced with a lack of qualified labor.
One large manufacturer addressed the issue of the lack of qualified workers by bringing back retirees on a
contract basis to help train new hires.
Though most contacts continued to report having little pricing power, more firms recounted
successful attempts or plans to pass on price increases since the last report. Increased transportation costs,
including those resulting from higher gasoline and other fuel prices, were reportedly passed on to
consumers without much difficulty. According to the firms surveyed in the Atlanta Fed's March Business
Inflation Expectations survey, unit costs were expected to rise two percent for the year ahead, up slightly
from February. According to the businesses surveyed, profit margins, though still below normal, have
begun to improve. Firms expect modest improvement in margins over the next year.
Natural Resources and Agriculture
Investment in transportation infrastructure for oil and natural gas continued to increase; however,
contacts noted that more investment is needed to accommodate recent increases in domestic and Canadian
energy production. District refining contacts noted that the capacity to process the heavier grades of crude
oil that are increasingly available is limited, despite recent investment in additional refinery capacity.
While conditions improved in parts of the District, much of Georgia and Florida continued to experience
varying degrees of drought. Contacts also reported that Florida citrus growers continued to fight greening
disease. Prices paid to farmers for poultry and soybeans were up from the previous reporting period.
Contacts continued to report concerns regarding available labor supplies in Georgia and Alabama,
attributing this to the tougher immigration laws.
VII-1
SEVENTH DISTRICT—CHICAGO
Summary
Economic activity in the Seventh District continued to expand at a moderate pace in late February
and March. Growth in consumer spending picked up, and business spending continued to increase. The
pace of growth in manufacturing production was little changed and construction activity increased. Credit
conditions improved slightly. Energy prices increased, but with limited pass-through to downstream
prices, and wage increases remained moderate. Soybean and cattle prices rose, while corn, wheat, milk,
and hog prices decreased.
Consumer spending
Consumer spending increased significantly in late February and March. Retailers reported
unseasonably warm temperatures boosted retail sales. Because of the earlier-than-normal start to the
spring shopping season, inventories of some lawn & garden, home improvement, and leisure items ended
the reporting period on the lean side. Several contacts thought that the recent gains in consumer spending
might dissipate over the medium-term, pointing to the temporary nature of the boost from warmer
weather and concerns about the impact of higher gasoline prices on consumer budgets. Auto sales
increased, with contacts noting improved availability of financing for prospective buyers with belowprime credit ratings. Dealerships continued to report some difficulty in stocking popular models because
of supply-chain constraints.
Business spending
Business spending continued to increase in late February and March. Contacts reported that
inventories were generally at comfortable levels, with the exceptions in auto and consumer goods noted
above. Capital spending increased steadily. Purchases of heavy equipment picked up, led by robust
activity in the energy sector. An exception was the coal mining industry which a contact noted was being
negatively impacted by mild weather and the cheaper extraction costs for natural gas. Several
manufacturers reported spending for technological upgrades as well as moving ahead with planned
VII-2
increases in capacity. Contacts also noted a pick-up in building renovation and increased spending on
marketing and for labor force training. Labor market conditions continued to improve. Hiring increased,
although it remained selective in many industries. Manufacturing contacts continued to report difficulty in
attracting job applicants with ideal skill sets, and in some cases have reduced experience requirements or
increased salaries to fill open positions. A staffing firm reported an increase in demand for light industrial,
office and clerical, and IT and engineering positions. However, gains in these areas were being offset by
declines in others, so that on net temporary employment was little changed.
Construction/real estate
Construction activity increased in late February and March. Demand continued to be strong for
multi-family construction, particularly apartments. That said, a few contacts questioned whether current
apartment building plans would lead to overbuilding in this segment. Overall, residential real estate
conditions improved slightly. Single-family construction was up some from its depressed levels, as large
homebuilders have seen a solid increase in sales in the last three months. Realtors noted some increase in
activity in the market for existing homes, although many buyers are still waiting for prices to come down
further. Foreclosures continued to put downward pressure on prices. Nonresidential construction also
increased. Contacts noted a pick-up in industrial, healthcare and infrastructure building activity.
Commercial real estate conditions were mixed by segment. Vacancy rates decreased for office and
industrial properties, but contacts indicated that excess retail space continues to exist, especially big box
stores and strip center/mall space. Commercial rents were flat, as was the available sublease space on the
market.
Manufacturing
After a strong start to the year, growth in manufacturing production leveled off in late February
and March. With an increase in quoting activity and deepening order books, contacts remained cautiously
optimistic that growth would pick up again in the coming quarters. The auto industry continued to be a
source of strength. Automakers expected sales to continue to increase over the year, but voiced concern
VII-3
that it would be challenging for production to rise much further above what is already planned given the
capacity constraints faced by their suppliers. Confirming this production limit, several auto suppliers
reported that they have already been asked by their customers to increase capacity. Capacity utilization in
the steel industry was steady, but an industry contact expected to see some acceleration in production in
the near term. Demand for heavy equipment was boosted by the need to replace ageing equipment.
Exporters continued to benefit from advantageous terms of trade; and despite some softening in demand
from Western Europe, again reported robust orders from Asia and Latin America.
Banking/finance
Credit conditions were slightly improved from the prior reporting period. Volatility and risk
premia edged lower and concerns about European sovereign debt continued to subside. Several contacts
noted an increase in risk appetite, pointing to higher demand for equities and real estate. Banking contacts
indicated that business loan growth remained moderate, with their larger corporate clients continuing to
cite policy uncertainty as a reason for caution in borrowing. In contrast, consumer loan growth picked up,
with credit card usage increasing. Credit availability for households improved, particularly for auto loans
and credit cards, where greater competition was leading to more favorable terms for borrowers. However,
credit conditions remained tight for homebuilders and small businesses.
Prices/costs
Cost pressures increased in late February and March. Contacts noted higher energy prices,
particularly for gasoline, although natural gas prices remained at historic lows. Prices for chemicals,
steel, and non-ferrous metals also edged up. Wholesale prices increased; however, retail contacts
indicated that it had become increasingly difficult to pass on higher wholesale costs to consumers. Wage
pressures increased, but continued to be moderate. Contacts expected that wage and benefit increases this
year would not exceed inflation. However, a shortage of skilled manufacturing workers contributed to
upward pressure on wages to attract qualified candidates as well as improved benefit packages to retain
current employees.
VII-4
Agriculture
Unseasonably warm weather has jumpstarted field work and corn planting in the District. There
were reports of tight supplies of some agricultural chemicals, as well as some types of corn seed. Most of
the District has sufficient moisture for a strong start to the corn crop. With spring planting taking place up
to a month early, some corn will be harvested in August; combined with the potential of a record corn
crop, concerns about corn stocks being low before the traditional harvest time diminished and corn prices
moved lower. Soybean prices have risen in response to lower-than-expected harvests in South America.
The increase in soybean prices relative to corn prices, as well as some acreage being removed from
environmental protection restrictions, resulted in an increase in the number of acres that famers expect to
plant in soybeans. Milk and hog prices decreased, while cattle prices continued to rise.
VIII-1
EIGHTH DISTRICT—ST. LOUIS
Summary
The economy of the Eighth District continued to grow at a modest pace since our previous
survey. Residential real estate market conditions have improved moderately. Similarly, commercial real
estate market conditions also have improved. However, recent reports of plans from firms in the
manufacturing and services sectors were more mixed. Overall lending at a sample of small and mediumsized District banks was essentially unchanged during the three-month period from mid-December to
mid-March.
Manufacturing and Other Business Activity
Reports of plans for manufacturing activity have been mixed since our previous report. Several
manufacturers announced plans to increase operations and hire workers, while a similar number of
contacts reported plans to close plants and lay off workers in the near future. Firms in the pipe, bathroom
products, all-terrain vehicle, construction machinery, processed poultry, and power tool manufacturing
industries announced plans to increase existing operations or open new plants in the District. In contrast,
firms in the oil blending and packaging and fish farming industries announced plans to close plants and
lay off workers. In addition, a major firm in the printing industry announced plans to close a plant in the
District and lay off a large number of workers.
Reports of planned activity in the District's services sector also have been mixed since our
previous survey. Firms in hotel, business support, distribution, and natural gas distribution services
announced plans to expand operations and hire new workers. In contrast, contacts in health care,
distribution, freight transportation, casino, and storage services announced plans to close facilities and lay
off workers. General retail contacts have reported strong sales for the first two months of the year, and
they expect positive sales growth to continue through 2012. District auto dealers have reported strong
demand in the luxury automobile market while truck sales have been down.
Real Estate and Construction
VIII-2
Home sales increased throughout most of the Eighth District on a year-over-year basis. Compared
with the same period in 2011, February 2012 year-to-date home sales were up 10 percent in Memphis, 24
percent in St. Louis, 19 percent in Louisville, and 14 percent in Little Rock. Residential construction
increased in the majority of the District over this time period. February 2012 year-to-date single-family
housing permits increased in the majority of the District metro areas compared with the same period in
2011. Permits increased 22 percent in Memphis, 63 percent in Louisville, 28 percent in Little Rock, and
25 percent in St. Louis.
Commercial and industrial real estate conditions improved moderately throughout most of the
District. Contacts in northeast Arkansas continued to report strong commercial real estate activity in the
Jonesboro area. A contact in Little Rock noted stronger commercial real estate activity for office and
retail space than last year. Contacts in the Louisville metropolitan area reported improvement in office
real estate activity and expect increases in the demand for industrial space. However, a contact in central
Kentucky noted that commercial real estate activity is very soft. Commercial and industrial construction
activity showed modest improvement in several parts of the District. A contact in Little Rock reported
that new construction activity has improved because of the mild winter weather, but it is still at weak
levels. Contacts in central Arkansas reported increased bidding in commercial construction projects, while
a contact in western Kentucky noted large commercial and industrial construction projects to be
completed in Owensboro.
Banking and Finance
Total loans outstanding at a sample of small and medium-sized District banks were essentially
unchanged in the three-month period from mid-December to mid-March. Real estate lending, which
accounts for 73.7 percent of total loans, decreased 0.4 percent. Commercial and industrial loans,
accounting for 15.8 percent of total loans, grew 2.2 percent. Loans to individuals, accounting for 4.7
percent of loans, decreased 1.3 percent. All other loans decreased 8.8 percent and accounted for 5.8
percent of total loans. Over this period, total deposits increased 1.9 percent.
VIII-3
Agriculture and Natural Resources
Monthly output of commercial red meat in the District for February 2012 increased 9.9 percent
compared with February 2011. However, monthly output of commercial red meat declined 4.4 percent
between January and February 2012. The number of chickens slaughtered and the total live weight also
decreased by 4 to 5 percent between January and February 2012. The District’s year-to-date coal
production for early March was 3.5 percent lower compared with the same period last year. Similarly, the
District’s coal production for February was 2.4 percent lower than in February 2011.
IX-1
NINTH DISTRICT—MINNEAPOLIS
The Ninth District economy grew at a solid pace since the last report. Strength was noted in
consumer spending, professional services, construction, manufacturing, energy and mining, and agriculture.
Residential real estate had an unexpectedly large increase in sales activity. Warm weather slowed winter
tourism activity. Hiring activity outpaced layoffs since the last report. Wage increases were moderate, and
price increases were generally subdued.
Consumer Spending and Tourism
Consumer spending continued to expand moderately. Same-store sales at a Minnesota-based
retailer increased 7 percent in February compared with a year ago. February sales at a Montana mall were
up about 10 percent over last year; remodeling activity was strong for new stores and expansions. March
sales were up over 5 percent compared with a year earlier at a North Dakota mall. However, a Minnesotabased hair salon plans to close some of its stores. A Minnesota auto dealer reported that mild weather
depressed service and vehicle sales during January and February, but auto sales bounced back in March.
In addition, higher gasoline prices don’t seem to be influencing buying decisions away from SUVs and
light trucks.
Lack of snow and warm temperatures slowed winter tourism in a number of areas; however, lateseason snow perked up activity in some places. Enough snow fell in northwestern Wisconsin during
February to hold the annual American Birkebeiner cross-country ski race, bringing thousands of visitors
to the area. Western South Dakota received late-season snow, which enabled a strong finish for
snowmobiling and downhill skiing. A ski resort in Montana reported that visits and revenue were up from
a year ago.
Construction and Real Estate
The continued warm weather aided construction activity. The value of commercial building
permits in the Sioux Falls, S.D., area was up in February from a year earlier. The value and number of
new commercial permits increased in Fargo, N.D., during the first two months of 2012 compared with the
IX-2
same period in 2011. Residential construction increased from a year ago. The value of residential building
permits increased significantly in the Sioux Falls area in February. The number of single-family building
permits increased in Minnesota in January 2012, compared with January 2011. Several new multifamily
projects were planned for the Minneapolis area.
Commercial real estate market activity increased. A commercial broker in Minneapolis noted
more leasing activity, especially for class A space. Residential real estate had an unexpectedly large
increase in sales activity. Home sales in February were up 23 percent from the same period a year ago in
the Minneapolis-St. Paul area, and the inventory of homes for sale was down 27 percent. However,
median sales prices dropped slightly. In the Sioux Falls area, February home sales were up 5 percent and
inventory was down 7 percent relative to a year ago. A broker noted that lower-priced homes saw an
investor ―feeding frenzy,‖ with properties selling in a few days with multiple offers.
Services
Activity at professional business services firms increased slightly since the last report. An
accountant noted that this tax season was busier and that many firms saw an increase in earnings in 2011
compared with 2010. A bank director from Montana noted that law firms were experiencing mixed
activity and that firms specializing in petro-chemical and environmental engineering were seeing
increased activity, while mechanical and structural engineering activity was flat to down.
Manufacturing
Manufacturing activity expanded. A survey of purchasing managers by Creighton University
(Omaha, Neb.) found that manufacturing activity in Minnesota and the Dakotas increased in March. A
manufacturer based in northwestern Wisconsin announced plans to build a production plant. A mill in
Minnesota will begin a $170 million conversion from producing pulp for paper mills to producing
cellulose for textiles. A brewery in Minnesota is expanding its operations. In contrast, a manufacturer of
recreational vehicles in South Dakota has halted production and may not reopen.
IX-3
Energy and Mining
Activity in the energy and mining sectors continued at strong levels. Oil and gas exploration
activity in North Dakota increased since the last report, but was flat in Montana. A Federal Circuit Court
judge upheld a permit for construction of a $10 billion oil refinery in southeastern South Dakota, which
would be the first new refinery in the United States since 1976. A separate $500 million diesel refinery
was in early planning stages in western North Dakota. Two District ethanol plants are planning
conversions to produce a different biofuel. Ninth District iron ore mines continued to operate at near
capacity. A mining firm is developing plans in northern Minnesota for a large underground mine to tap a
recently discovered copper deposit. Meanwhile, a tribe in western Montana moved to block a copper and
silver mine on a wilderness site.
Agriculture
Agricultural conditions remained strong. Cattle ranchers benefited from both high beef prices and
strong export demand as well as ideal weather for the calving season. Drought conditions remained in
Minnesota, the Dakotas and western Wisconsin, but were abated somewhat by recent rain and snowfall.
Drier conditions may actually lead to increased corn plantings in the eastern Dakotas by making longflooded fields available. Unseasonably warm weather has led to reports of early spring wheat plantings in
some areas. Prices received by farmers for wheat, corn, dry beans, cattle, hogs, eggs and poultry increased
in March from the previous month, while dairy prices fell for the month and the year.
Employment, Wages and Prices
Hiring activity outpaced layoffs since the last report. The new production plant in northwestern
Wisconsin is expected to hire 300 workers. In Montana, a company that services student loans could hire
about 100 more people this summer. A new wheat straw pulping and molding factory in North Dakota
will create 100 jobs. A major Minnesota-based employer noted that fewer employees accepted a recent
early retirement offer than expected. In contrast, a telecommunications firm in Minnesota will eliminate
85 positions as part of a restructuring plan, and a printer laid-off almost 50 workers.
IX-4
Wage increases were moderate. In a first quarter business survey by St. Cloud State University
(Minnesota), 65 percent of respondents left wages unchanged in the past three months. However, in
western North Dakota and eastern Montana, strong oil-drilling and production activity continued to bid up
pay. In contrast, a Minnesota business that makes in-store advertising for retailers was cutting
compensation for salespeople and some managers while laying off some staff.
Price increases were generally subdued; however, some exceptions were noted. More than twothirds of respondents to the St. Cloud survey reported that prices at their companies did not change over
the past three months. Late March Minnesota gasoline prices were up about 25 cents per gallon from midFebruary and 20 cents per gallon from a year ago. Airlines raised airfares during the past couple of months
in response to higher fuel costs. A Minnesota-based food company noted that input cost increases were
above 10 percent. Amid higher oil prices, low natural gas prices have spurred energy and transportation
companies to pursue conversion projects.
X-1
TENTH DISTRICT - KANSAS CITY
The Tenth District economy expanded at a faster pace in late February and March. Consumer
spending improved, residential real estate activity rose solidly, and commercial real estate activity edged
higher. Growth in the energy industry eased slightly but remained solid. Manufacturing firms reported
further increases in activity, and agricultural conditions improved from the previous survey.
Transportation activity picked up slightly, and high-tech service firms said sales growth was mostly solid.
Bankers noted steady loan demand, better loan quality, and rising deposits. Prices rose slightly, but wage
pressures were contained outside of a few skilled positions.
Consumer Spending
Consumer spending improved and expectations for the months ahead remained solid. Retail sales
rose moderately from the previous survey, although several contacts noted concerns about lower
discretionary spending due to rising gasoline prices. Store inventories remained stable and were expected
to rise only slightly in future months. Auto sales rebounded strongly from the previous survey, with
several dealers citing increased customer traffic and pent up demand as key reasons. Contacts said rising
fuel prices have led to stronger sales of fuel efficient vehicles, and sales of large SUVs and trucks
weakened. Expectations for future auto sales remained positive and inventories continued to increase.
Restaurant sales improved, with further growth expected in coming months. Tourist activity edged
higher, with several contacts noting increased business travel. Tourism contacts remained generally
optimistic about future months.
Manufacturing and Other Business Activity
District manufacturing activity grew solidly, and expectations for future activity strengthened.
Factory orders and shipments increased, and employment growth remained steady with some future hiring
planned. Continued strong commodities-related activity boosted machinery production, and high-tech
and aircraft manufacturing growth remained strong. Although rising gasoline prices and continued
economic uncertainty restrained activity in several segments, most plant managers indicated moderate
X-2
growth in capital spending plans. Growth in transportation activity picked up slightly, although several
contacts cited driver shortages and higher contractor fuel costs as barriers to growth. Expectations for
future sales were mostly positive, but capital spending plans among transportation firms were somewhat
subdued. The majority of high-tech services firms reported solid growth in sales, but the pace of growth
slowed somewhat from the previous survey. Several high-tech contacts noted higher activity in the
energy and health care market, and future capital spending plans were generally positive.
Real Estate and Construction
Residential and commercial real estate activity increased in late February and March, and
expectations were solid heading forward. Housing starts edged slightly higher, with several contacts in
Nebraska noting increased demand due to the booming agricultural industry. Expectations for future
homebuilding remained positive, and building materials were generally available. Sales at construction
supply firms were stable, with some contacts noting increased business among multi-family and
remodeling contractors, and expectations for future activity were favorable. Home sales rose markedly
from the previous survey period and inventory levels fell, which contacts attributed to seasonal patterns,
favorable weather, lower interest rates, and newfound optimism in the overall economy. Expectations for
future home sales continued to strengthen, and home price levels improved slightly. Mortgage lending
activity was positive and remained above year-ago levels, though contacts expected refinancing volume to
slow somewhat as rates begin to rise. Commercial real estate activity continued to edge higher, and
expectations for future sales were mostly positive. Vacancy rates dropped and were expected to fall
further. Office prices and rents remained subdued but were slightly higher than a year ago, and
expectations were largely flat. Several commercial real estate contacts in Oklahoma noted strong sales
due to heavy activity in the energy industry, while a contact in Missouri expressed continued financing
difficulties.
X-3
Banking
Bankers generally reported steady or stronger loan demand, stable or improved loan quality, and
increased deposits. Overall loan demand was steady or improved. Most respondents reported stable to
increased loan demand for residential real estate loans, while loan demand for commercial and industrial
loans and commercial real estate loans remained steady. Loan demand was stable to weaker for consumer
installment loans. Credit standards remained largely unchanged in all major loan categories, and the
majority of respondents continued to report increased deposits. Most bankers reported stable or improved
loan quality compared to a year ago, and every banker respondent believed the outlook for loan quality
over the next six months would be steady or improving.
Energy
Energy activity grew solidly in late February and March, though the pace of growth slowed
slightly from previous surveys. Contacts reported a sharp slowdown in natural gas drilling, with many
noting a shift towards oil exploration. Natural gas prices reached decade-low levels in recent months, and
most producers expected prices to stay low due to oversupply and mild weather. Crude oil prices climbed
higher from the previous survey period, which many contacts attributed to continued Middle East conflict
concerns. Contacts reported some shortages in equipment and labor, particularly for engineers and
experienced technical support, and one producer noted continued delays in receiving permits for drilling
on federal land.
Agriculture
Agricultural growing conditions improved since the last survey. Scattered rains increased soil
moisture levels in many areas, although drought conditions persisted in some western areas of Kansas and
Oklahoma. Winter wheat development was ahead of normal with most of the crop upgraded to good
condition. Mild winter weather was favorable for calving and encouraged forage growth, reducing the
need for supplemental feeding. Spring field work began early, and crop prices moved higher. Low cattle
inventories trimmed beef production, and strong domestic and export demand pushed up cattle and hog
X-4
prices. Operating loan demand declined as many producers used cash to buy crop inputs. Farmland
values rose further and were expected to remain at record highs.
Wages and Prices
Prices rose slightly and were expected to continue to increase, but wage pressures were mostly
contained outside of a few skilled positions. Retailers reported a slight uptick in prices with further
increases anticipated. Manufacturing materials price increases continued and were expected to increase
further, although fewer firms planned on raising selling prices. Higher prices for construction materials
narrowed profit margins, as the majority of firms were unable to pass these costs through to customers.
Transportation firms reported higher input prices, and increased food costs continued to impact profit
margins and selling prices for hotels and restaurants. Wage pressures were still generally contained in
most industries, although some firms reported continued difficulties in obtaining skilled labor.
XI-1
ELEVENTH DISTRICT—DALLAS
The Eleventh District economy grew at a moderate pace over the past six weeks. Overall
manufacturing activity continued to expand. Demand for business services rose slightly, and
transportation services activity remained positive overall. The housing sector continued to improve
modestly, and nonresidential leasing activity remained solid. Respondents said retail sales grew at a
modest pace and auto sales strengthened. Financial firms noted a modest pickup in loan demand. Energy
activity continued to be strong, although gas-directed drilling activity weakened. Drought conditions
improved. Employment levels were steady to slightly higher. Prices were unchanged or somewhat higher,
according to contacts. Outlooks across industries remain positive, but more respondents noted concern
about higher energy costs.
Prices
Responding firms said prices held steady or increased, and several noted concerns regarding
rising fuel costs. Food producers reported increases in selling prices to offset high input costs, and airlines
noted higher fares. Intermodal transportation firms said they had increased prices in response to higher
fuel costs, and parcel shipping firms noted plans to increase surcharges to offset rising fuel costs.
Retailers and automobile dealers said higher gas prices had not significantly affected sales. Agricultural
commodity prices declined since the last report.
The price of WTI averaged $105.95 per barrel during the reporting period. Natural gas prices fell
from $2.50 per thousand cubic feet to below $2.20. Gasoline prices rose by 34 cents per gallon over the
past six weeks, and the price of diesel rose by 20 cents. Prices of petrochemicals and plastics also
increased since the last report.
Labor Market
Most responding firms said employment levels held steady since the last report, although several
noted slight increases. Staffing firms said demand softened slightly in March, but direct hires were still
strong. Staffing contacts also noted shortages of skilled workers in IT and accounting. There were
XI-2
scattered reports of small employment increases in the high-tech manufacturing, transportation
manufacturing, metals, auto sales and airline industries. Accounting firms noted a pickup in temporary
workers due to the tax season. Wage pressures remained minimal, although slight salary increases were
noted by some legal, auto and high-tech manufacturing firms.
Manufacturing
Overall demand for construction related products increased since the last report, although a few
respondents’ outlooks have become slightly more guarded. A cement producer and a lumber firm noted
improving demand in the residential sector, while a fabricated metals producer said private projects
related to oil and gas, manufacturing and highway construction were driving the pickup in demand.
Primary metals firms noted that commercial construction projects including hospitals, schools and
government buildings were a factor behind improving demand, along with solid sales to truck and trailer
manufacturers.
Respondents in high-tech manufacturing reported that orders continued to grow at a modest pace
since the last report. According to contacts, key demand drivers continue to be mobile applications, cloud
computing and automobiles. One contact noted that demand for DRAM memory remains weak relative to
supply, while demand for flash memory and logic devices is generally good. Most respondents expect
demand to continue to grow at a modest pace over the next three to six months.
Aviation equipment manufacturers said demand weakened during the reporting period. Contacts
were less optimistic in their outlooks for the year, citing high energy prices and the bankruptcy of several
service and maintenance companies that serve the airline industry. Food producers said sales activity
increased over the past six weeks, and near-term outlooks were positive. Reports from paper
manufacturers were mixed but overall suggested steady to slower growth in demand. Contacts expect
moderate growth for the year.
Petrochemicals producers said planned maintenance outages have tightened capacity, constrained
production and raised the price of ethylene. Capacity was reduced by closures during the recession, and
XI-3
new modern plants will not be on line for several years. The pass-through of higher ethylene prices has
weakened export demand for petrochemical products including polyethylene. Gulf Coast refiners noted
steady margins overall since the last report.
Retail Sales
Retail sales grew modestly over the comparable period a year ago and performed in line with
expectations. According to some national retailers, the Eleventh District’s strength relative to the nation
declined as warm weather in the north and east prompted strong spring clothing sales in those regions.
Contacts noted that consumer demand appears healthier, and most expect moderate sales growth for the
year. Inventories are being managed closely.
Automobile sales showed strength in late February which continued through the first half of
March. Contacts noted that customer concern over gas prices remains muted at this point, but they have
seen more interest in smaller vehicles recently. The outlook for sales remains optimistic.
Services
Demand for staffing services softened slightly at the end of March, following solid activity earlier
in the year. Still, orders for direct hires remained strong and shortages of skilled accounting and IT
professionals were reported. Outlooks were positive as contacts expect demand to bounce back in the
second quarter. Legal firms reported a slight pickup in demand for their services. Contacts said mergers
and acquisitions and transactional service activity had surpassed expectations, and there is continued
strength in demand for intellectual property, energy and some real-estate related legal services.
Accounting firms reported a modest increase in overall activity and characterize this year’s tax and audit
season as unusually good.
Reports from transportation service firms were mixed. Intermodal firms reported an increase in
cargo volumes buoyed by shipments of oil field supplies. Small parcel shipments increased, while air
cargo volumes and railroad shipments declined during the reporting period. Airlines reported solid
passenger demand over the past six weeks. Domestic air travel increased, while international air travel
XI-4
demand was flat. Contacts said customers remained price sensitive and were purchasing restricted
discount fares. Airline contacts expect passenger demand to remain stable or improve in the near-term.
Construction and Real Estate
Housing demand continued to pick up over the past six weeks. Tight new home inventories led to
a modest rise in construction activity. Sales activity rose and inventories fell in the existing home market.
Some contacts expect lower inventories to impact prices positively in 2012. Apartment leasing activity
remained robust since the last report.
Office and industrial leasing activity continued to improve. Contacts noted that the energy and
high tech sectors were driving much of the demand for space. Sales of nonresidential investment
properties were unchanged over the past six weeks. Respondents noted some trepidation among investors,
even though capital is widely available. The one exception was apartment properties, which remain
popular among investors according to contacts.
Financial Services
Financial firms reported a modest uptick in loan demand. National banks reported strength in
middle-market lending and large corporate lending activity. Regional banks also noted improved
sentiments, and several banks suggested energy-related activity remains robust. Outlooks are generally
less pessimistic, and some outright optimistic, with an overall theme that ―loan demand is slightly
stronger.‖ The most optimistic contacts were large bank lenders or regional banks that expressed strength
in renewed corporate lending. Loan pricing remains competitive. Outstanding loan quality continues to
improve, and contacts continue to note fewer problem loans.
Energy
Contacts at energy-related service firms said demand and backlogs from oil-producing areas
remained very strong over the past six weeks. Many respondents, however, were concerned about weaker
than expected demand for gas-directed drilling and a related decline in demand for fracturing services and
horizontal drilling services. While respondents said overall demand in Texas is still very strong, several
XI-5
noted that crews were being shifted from dry gas-producing basins such as the Barnett shale to oilproducing basins such as Permian and Eagle Ford. While such disruptions were expected to be temporary,
some contacts had lowered expectations for 2012.
Agriculture
Rainfall continued to ease drought conditions in many parts of the District. West Texas did not
receive much moisture, however, and the severity of drought there worsened over the reporting period.
Prospects for 2012 crops are improved due to better soil moisture, and producers will have more
flexibility with what to plant.
XII-1
TWELFTH DISTRICT–SAN FRANCISCO
Summary
Economic activity in the Twelfth District continued to expand at a moderate pace during the
reporting period of late February through the end of March. Despite higher energy prices, overall price
pressures for final goods and services remained modest, as did wage gains. Sales of retail items and
demand for business and consumer services rose further. District manufacturing activity increased on net.
Demand was robust for agricultural producers but remained uneven for providers of energy resources.
Activity in District housing markets strengthened modestly but remained lackluster on balance, and
demand for nonresidential real estate was largely unchanged. Contacts from financial institutions
reported small increases in overall loan demand and slight improvements in credit quality and availability.
Wages and Prices
Price inflation for most final goods and services remained subdued during the reporting period,
with the notable exception of gasoline. While contacts noted an increase in the prices of oil and selected
other commodities, resulting cost increases generally were absorbed in profit margins rather than passthrough to final prices. Restaurant prices were an exception, with notable increases reported. Looking
ahead, contacts in general expect prices for their products to hold largely stable or increase slightly during
the second half of the year compared with the first half.
Upward wage pressures were quite modest overall, held down by high levels of unemployment
and limited demand for new workers. However, wage gains remained pronounced for highly skilled
workers in information technology fields, and significant gains were also reported for experienced
workers in some segments of manufacturing. The reports suggested that wage gains are likely to remain
limited going forward, as most contacts plan to engage in only modest hiring for the foreseeable future.
Retail Trade and Services
Retail sales continued to improve. Discount chains reported modest increases in sales, while
traditional department stores noted stronger gains, particularly in the luxury segments of the
XII-2
market. Demand continued to improve for retailers of home furnishings and major appliances. By
contrast, sales remained largely flat for grocers. Sales of new automobiles continued to strengthen, with
high gas prices spurring especially strong growth for fuel-efficient vehicles. Similarly, demand for used
vehicles remained robust.
Demand for business and consumer services strengthened further on balance. Sales continued to
expand at a moderate pace for providers of technology services, and contacts anticipate growth will pick
up in the second half of the year. Demand has improved in the radio and television broadcasting
industries. By contrast, demand for professional services was largely flat, as was demand for health-care
services. Sales activity was reported to be up somewhat for restaurants and other food-service providers.
Activity in the District’s travel and tourism industry picked up further, with contacts in Hawaii and
Southern California noting ongoing gains in visitor volumes and hotel occupancy rates.
Manufacturing
District manufacturing activity rose a bit on net during the reporting period of late February
through the end of March. Makers of commercial aircraft and parts saw limited new orders, but an
extensive order backlog kept production rates near capacity. Manufacturers of semiconductors and other
technology products reported some firming in new orders and indicated that they expect demand growth
to pick up further in coming months. Capacity utilization rates continued to hold largely stable for
petroleum refiners as weak domestic gasoline demand was offset by strong foreign demand for distillate
products. Production activity was largely unchanged for metal fabricators, but demand remained quite
depressed for producers of wood products. Food processors saw solid growth in orders and sales.
Agriculture and Resource-related Industries
Demand for agricultural products and mined metals remained strong, while extraction activity of
natural resources used for energy production was uneven. Final sales and orders were robust for a broad
range of crop and livestock products, and recent precipitation has eased concerns in parts of the District
about drought during the upcoming growing season. Contacts noted increases in the costs of some inputs,
XII-3
such as fertilizer. Expanding activity in the mining sector continued to be supported by high prices for a
variety of precious metals and metallic elements used for specialized industrial purposes. Mild winter
weather continued to tamp down demand for natural gas, prompting additional declines in extraction
activity, while elevated price levels and robust foreign demand spurred further increases in oil extraction.
Real Estate and Construction
District home demand improved slightly but remained weak on balance, and demand for
commercial real estate was largely unchanged. Sales of new and existing homes continued to improve
modestly in certain areas of the District, although the pace remained quite lackluster overall.
Furthermore, despite relatively low interest rates, contacts noted that tight financing terms more generally
held down the pace of sales. With inventories of available homes still very high, new construction
activity stayed at depressed levels and home prices remained largely flat. Demand for commercial real
estate continued to be weak overall, as reflected in elevated vacancy rates and limited leasing activity for
office and industrial space in many parts of the District. On the other hand, growth in the technology
sector has led to rapid absorption of commercial space in certain locales, such as the San Francisco Bay
Area and Seattle. As a result, increased construction activity for new office space is expected for these
areas over the next twelve months.
Financial Institutions
District banking contacts reported that overall loan demand rose modestly since the prior
reporting period, and credit quality and availability improved slightly. While businesses generally
remained highly cautious about their capital spending plans, the volume of new commercial and industrial
loans edged up as businesses continued to pursue targeted investments geared towards increasing
productivity. On the consumer side, demand for credit was largely unchanged. Credit quality improved
slightly, with reports indicating a general decline in loan delinquencies. Although lending standards have
remained relatively restrictive for most types of business and consumer loans, contacts reported modest
improvement in overall credit availability. The reports also indicated that competition among lenders has
XII-4
been creating downward pressure on rates and fees for well-qualified small and medium-sized businesses.
Cite this document
Federal Reserve (2012, April 24). Beige Book. Beige Book, Federal Reserve. https://whenthefedspeaks.com/doc/beige_book_20120425
@misc{wtfs_beige_book_20120425,
author = {Federal Reserve},
title = {Beige Book},
year = {2012},
month = {Apr},
howpublished = {Beige Book, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/beige_book_20120425},
note = {Retrieved via When the Fed Speaks corpus}
}