The Beige Book
October 15, 2008
Summary
Prepared at the Federal Reserve Bank of Chicago and based on information collected on or before October 6, 2008. 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.
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Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook.
Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts. Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts. Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions. District reports on agriculture and natural resources were mostly positive, although adverse weather associated with hurricanes Ike and Gustav negatively affected the South and the Midwest.
Inflationary pressures moderated a bit in September. While several Districts noted continuing pass-through of earlier price increases for metals, food and energy, most indicated that cost pressures had eased. Labor market conditions weakened in most Districts, and wage pressures remained limited. Several Districts reported lower capital spending or reductions in capital spending plans due to the high level of uncertainty about the economic outlook or concerns over the availability of credit.
Consumer Spending and Tourism
Consumer spending was softer in nearly all Districts. Retail sales were reported to have weakened or declined in Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, and Kansas City; Dallas and San Francisco cited weak or sluggish sales; and Boston and New York indicated that sales were mixed and moderately below plan sales, respectively. Several Districts noted a reduction in discretionary spending by consumers and lower sales on big-ticket items. Several also reported increased activity at discount stores as consumers became more price conscious and shifted purchases toward less-expensive brands. Retailers cited these recent sales trends and concerns about credit availability as reasons for a weaker economic outlook, including a slow holiday season. Most Districts reporting on light vehicle sales saw declines, with several Districts pointing to reduced credit availability as a limiting factor for automobile sales. However, Kansas City, St. Louis, and Chicago noted that dealers offering incentive and discount programs had seen some positive effect on sales. Tourism was mixed or weaker for tourist destinations on the East and West coasts, while both Minneapolis and Atlanta indicated that increases in international travelers were helping to offset lower domestic travel.
Business Spending
Hiring and capital spending varied across Districts. Labor market conditions weakened in most Districts. Boston, Chicago and Richmond cited reductions in hiring or hiring plans. Atlanta, Minneapolis, Kansas City, San Francisco and Dallas all noted some weakening in employment. However, the demand for skilled labor remained strong in several Districts, and Kansas City noted market tightness for minimum-wage jobs in leisure and hospitality. Several Districts reported that capital spending decisions were being influenced by economic uncertainty. New York, Chicago, Dallas, and San Francisco noted weaker capital spending. Boston reported capital spending was mixed as firms were cautious about spending resources. Cleveland reported capital spending remained on plan but intentions to increase outlays have declined. Philadelphia indicated concerns over restrictions in access to credit were limiting future capital expenditures for some manufacturers. In contrast, Kansas City and Chicago reported that capital spending for producers of heavy machinery continued to be strong.
Nonfinancial Services
Nonfinancial service industries experienced weaker activity in most Districts. Several Districts reported that activity in real-estate and related industries such as legal and title services was weak. New York cited widespread deterioration in business conditions. Boston reported consulting firms were experiencing reduced demand for their services from a range of clients. Cleveland, St. Louis, and Dallas noted slower activity in the transportation industry; however, Dallas' slowdown was due mostly to temporary disruptions caused by hurricane Ike. Trucking contacts in Atlanta indicated declines in retail, automotive, and construction-related shipments, but increases in energy and farm products. Minneapolis reported continued strength in professional business services, while demand for professional business services was down in San Francisco and Philadelphia. Demand for healthcare-related services was strong in Boston, Richmond, and Chicago, but weaker in St. Louis and San Francisco. Staffing firms reported lower demand for their services in Richmond, Philadelphia, and Chicago, but noted steady demand in Dallas.
Manufacturing
Manufacturing activity moved lower in most Districts, and contacts expressed heightened concern about the economic outlook. Several Districts noted that credit conditions were contributing to a high level of uncertainty on the part of contacts. Declines in manufacturing activity of varying degrees were reported in Boston, New York, Cleveland, Richmond, Chicago, St. Louis, Kansas City, San Francisco, and Dallas. Atlanta reported that production remained at a low level, while Minneapolis described conditions as mixed and Philadelphia noted a slight increase in activity. Metals-related industries, including the domestic steel industry, reported slower activity, although overall levels of production were still high in several Districts. Producers of housing-related items, building materials and construction equipment continued to experience low levels of demand across the twelve Districts. Activity in the automotive industry also continued to decline. Kansas City, Richmond, Philadelphia and Chicago reported continued strength in exports. However, Atlanta indicated a decline in export orders, reversing a trend of the past several months. Energy-related manufacturers and heavy equipment manufacturers with ties to energy or agriculture continued to do well in most Districts. Dallas and Atlanta reported that hurricanes Ike and Gustav disrupted oil production and refining, restricting the supply of petroleum and related products and leading to gasoline shortages in the Southeast and along the East coast.
Real Estate and Construction
Residential real estate and construction activity weakened or remained low in all Districts. Housing activity was reported to have moved lower in Boston, New York, Philadelphia, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco. While still slow, residential markets showed some signs of stabilizing in Cleveland, Atlanta, and Kansas City. Several Districts noted continuing downward price pressures and an increasing supply of homes for sale due to rising foreclosures. However, the inventory of unsold homes was reported to have declined in areas of the Boston and Atlanta Districts as well as in Philadelphia and Cleveland. Tighter credit conditions were cited as a limiting factor for demand in several Districts. Most Districts reported commercial real estate and construction activity had slowed, with New York, San Francisco and Dallas noting the sharpest declines. In contrast, Cleveland and St. Louis indicated steady activity. Increases in vacancy rates or sublease space were noted in Chicago, Boston, New York, Atlanta, and San Francisco. Several Districts reported project delays and cancellations due to tighter credit conditions and increased economic uncertainty.
Banking and Finance
Credit conditions tightened in all the Districts that reported on them. Bank lending was described as either stable or lower for both consumers and businesses. Cleveland, Kansas City, and San Francisco noted that loan quality had deteriorated. Credit standards were tightened, particularly for commercial and residential real estate loans, in several Districts. Several also indicated that lenders in their District had become more highly cautious and more conservative. Richmond noted increased scrutiny of loan applications by banks and higher collateral requirements on commercial lending, and Cleveland and New York cited increases in loan pricing. Some Districts also mentioned customers taking steps to ensure that existing deposits are covered by insurance and noted deposit withdrawals after reports of bank closings during September. Liquidity problems in inter-bank markets along with a higher cost of funds were reported in several Districts. As a result, Chicago reported that banks were increasingly utilizing alternative sources of funds like the discount window and the brokered CD market; and Kansas City noted that banks had become more cautious in their liquidity management. Several Districts cited reports from businesses of difficulties in obtaining credit.
Agriculture and Natural Resources
Agricultural conditions remained favorable in most of the Districts reporting on them. Corn and soybean harvests were somewhat behind schedule in Chicago, St. Louis, Minneapolis, and Kansas City. Heavier precipitation slowed the harvests in some Districts, but aided agriculture in Atlanta, Chicago, St. Louis, and Dallas. Drought continued to be a problem in parts of the Atlanta District, and hurricanes damaged agriculture in parts of the Dallas District. Yield projections slipped since the summer, but were still expected to be near historical averages. Livestock producers faced tighter margins due to high feed costs and problems with feed availability in some Districts. Most agricultural product prices fell in September. Exports continued to boost agricultural demand, while domestic demand lagged for some commodities. Conditions for the energy and mining sectors were positive, except for temporary damage to infrastructure from the recent hurricanes. Disruptions to offshore oil drilling in Dallas were not as extensive as they were after other recent major hurricanes. Drilling in the U.S. increased, especially for natural gas. Coal prices were stable, while oil and natural gas prices declined. Even so, energy operations looked to expand in Cleveland, Minneapolis, Kansas City, Dallas, and San Francisco. In addition, Minneapolis reported new mining activity.
Prices and Wages
Most Districts reported that cost pressures on prices had eased, although a number of Districts noted that the costs of energy, raw materials, food, and transportation remain elevated and margins were tight. Manufacturers in New York said that they plan selling price increases; but, with activity weakening, fewer other businesses anticipate price increases. Dallas noted that businesses facing softer demand plan to pass cost reductions on to customers, and Cleveland cited a decline in fuel surcharges as gasoline prices fell. However, respondents in Chicago and Dallas also reported that they continued efforts to pass-through earlier cost increases. Philadelphia, Dallas, and San Francisco noted increased discounting by retailers; Richmond reported that retail prices were rising less quickly; and Kansas City reported only a slight rise in retail prices. On the other hand, retailers in Chicago and Kansas City expect to raise prices further in coming months, and some in San Francisco also anticipate that the cost increases in train will lead to higher retail prices later this year and in 2009. Wage pressures across the twelve Districts remained limited outside of skilled labor positions that continue to experience high demand, such as the energy industry in Cleveland, Dallas, and Kansas City.
October 15, 2008
Summary
Prepared at the Federal Reserve Bank of Chicago and based on information collected on or before October 6, 2008. 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.
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Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook.
Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts. Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts. Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions. District reports on agriculture and natural resources were mostly positive, although adverse weather associated with hurricanes Ike and Gustav negatively affected the South and the Midwest.
Inflationary pressures moderated a bit in September. While several Districts noted continuing pass-through of earlier price increases for metals, food and energy, most indicated that cost pressures had eased. Labor market conditions weakened in most Districts, and wage pressures remained limited. Several Districts reported lower capital spending or reductions in capital spending plans due to the high level of uncertainty about the economic outlook or concerns over the availability of credit.
Consumer Spending and Tourism
Consumer spending was softer in nearly all Districts. Retail sales were reported to have weakened or declined in Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, and Kansas City; Dallas and San Francisco cited weak or sluggish sales; and Boston and New York indicated that sales were mixed and moderately below plan sales, respectively. Several Districts noted a reduction in discretionary spending by consumers and lower sales on big-ticket items. Several also reported increased activity at discount stores as consumers became more price conscious and shifted purchases toward less-expensive brands. Retailers cited these recent sales trends and concerns about credit availability as reasons for a weaker economic outlook, including a slow holiday season. Most Districts reporting on light vehicle sales saw declines, with several Districts pointing to reduced credit availability as a limiting factor for automobile sales. However, Kansas City, St. Louis, and Chicago noted that dealers offering incentive and discount programs had seen some positive effect on sales. Tourism was mixed or weaker for tourist destinations on the East and West coasts, while both Minneapolis and Atlanta indicated that increases in international travelers were helping to offset lower domestic travel.
Business Spending
Hiring and capital spending varied across Districts. Labor market conditions weakened in most Districts. Boston, Chicago and Richmond cited reductions in hiring or hiring plans. Atlanta, Minneapolis, Kansas City, San Francisco and Dallas all noted some weakening in employment. However, the demand for skilled labor remained strong in several Districts, and Kansas City noted market tightness for minimum-wage jobs in leisure and hospitality. Several Districts reported that capital spending decisions were being influenced by economic uncertainty. New York, Chicago, Dallas, and San Francisco noted weaker capital spending. Boston reported capital spending was mixed as firms were cautious about spending resources. Cleveland reported capital spending remained on plan but intentions to increase outlays have declined. Philadelphia indicated concerns over restrictions in access to credit were limiting future capital expenditures for some manufacturers. In contrast, Kansas City and Chicago reported that capital spending for producers of heavy machinery continued to be strong.
Nonfinancial Services
Nonfinancial service industries experienced weaker activity in most Districts. Several Districts reported that activity in real-estate and related industries such as legal and title services was weak. New York cited widespread deterioration in business conditions. Boston reported consulting firms were experiencing reduced demand for their services from a range of clients. Cleveland, St. Louis, and Dallas noted slower activity in the transportation industry; however, Dallas' slowdown was due mostly to temporary disruptions caused by hurricane Ike. Trucking contacts in Atlanta indicated declines in retail, automotive, and construction-related shipments, but increases in energy and farm products. Minneapolis reported continued strength in professional business services, while demand for professional business services was down in San Francisco and Philadelphia. Demand for healthcare-related services was strong in Boston, Richmond, and Chicago, but weaker in St. Louis and San Francisco. Staffing firms reported lower demand for their services in Richmond, Philadelphia, and Chicago, but noted steady demand in Dallas.
Manufacturing
Manufacturing activity moved lower in most Districts, and contacts expressed heightened concern about the economic outlook. Several Districts noted that credit conditions were contributing to a high level of uncertainty on the part of contacts. Declines in manufacturing activity of varying degrees were reported in Boston, New York, Cleveland, Richmond, Chicago, St. Louis, Kansas City, San Francisco, and Dallas. Atlanta reported that production remained at a low level, while Minneapolis described conditions as mixed and Philadelphia noted a slight increase in activity. Metals-related industries, including the domestic steel industry, reported slower activity, although overall levels of production were still high in several Districts. Producers of housing-related items, building materials and construction equipment continued to experience low levels of demand across the twelve Districts. Activity in the automotive industry also continued to decline. Kansas City, Richmond, Philadelphia and Chicago reported continued strength in exports. However, Atlanta indicated a decline in export orders, reversing a trend of the past several months. Energy-related manufacturers and heavy equipment manufacturers with ties to energy or agriculture continued to do well in most Districts. Dallas and Atlanta reported that hurricanes Ike and Gustav disrupted oil production and refining, restricting the supply of petroleum and related products and leading to gasoline shortages in the Southeast and along the East coast.
Real Estate and Construction
Residential real estate and construction activity weakened or remained low in all Districts. Housing activity was reported to have moved lower in Boston, New York, Philadelphia, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco. While still slow, residential markets showed some signs of stabilizing in Cleveland, Atlanta, and Kansas City. Several Districts noted continuing downward price pressures and an increasing supply of homes for sale due to rising foreclosures. However, the inventory of unsold homes was reported to have declined in areas of the Boston and Atlanta Districts as well as in Philadelphia and Cleveland. Tighter credit conditions were cited as a limiting factor for demand in several Districts. Most Districts reported commercial real estate and construction activity had slowed, with New York, San Francisco and Dallas noting the sharpest declines. In contrast, Cleveland and St. Louis indicated steady activity. Increases in vacancy rates or sublease space were noted in Chicago, Boston, New York, Atlanta, and San Francisco. Several Districts reported project delays and cancellations due to tighter credit conditions and increased economic uncertainty.
Banking and Finance
Credit conditions tightened in all the Districts that reported on them. Bank lending was described as either stable or lower for both consumers and businesses. Cleveland, Kansas City, and San Francisco noted that loan quality had deteriorated. Credit standards were tightened, particularly for commercial and residential real estate loans, in several Districts. Several also indicated that lenders in their District had become more highly cautious and more conservative. Richmond noted increased scrutiny of loan applications by banks and higher collateral requirements on commercial lending, and Cleveland and New York cited increases in loan pricing. Some Districts also mentioned customers taking steps to ensure that existing deposits are covered by insurance and noted deposit withdrawals after reports of bank closings during September. Liquidity problems in inter-bank markets along with a higher cost of funds were reported in several Districts. As a result, Chicago reported that banks were increasingly utilizing alternative sources of funds like the discount window and the brokered CD market; and Kansas City noted that banks had become more cautious in their liquidity management. Several Districts cited reports from businesses of difficulties in obtaining credit.
Agriculture and Natural Resources
Agricultural conditions remained favorable in most of the Districts reporting on them. Corn and soybean harvests were somewhat behind schedule in Chicago, St. Louis, Minneapolis, and Kansas City. Heavier precipitation slowed the harvests in some Districts, but aided agriculture in Atlanta, Chicago, St. Louis, and Dallas. Drought continued to be a problem in parts of the Atlanta District, and hurricanes damaged agriculture in parts of the Dallas District. Yield projections slipped since the summer, but were still expected to be near historical averages. Livestock producers faced tighter margins due to high feed costs and problems with feed availability in some Districts. Most agricultural product prices fell in September. Exports continued to boost agricultural demand, while domestic demand lagged for some commodities. Conditions for the energy and mining sectors were positive, except for temporary damage to infrastructure from the recent hurricanes. Disruptions to offshore oil drilling in Dallas were not as extensive as they were after other recent major hurricanes. Drilling in the U.S. increased, especially for natural gas. Coal prices were stable, while oil and natural gas prices declined. Even so, energy operations looked to expand in Cleveland, Minneapolis, Kansas City, Dallas, and San Francisco. In addition, Minneapolis reported new mining activity.
Prices and Wages
Most Districts reported that cost pressures on prices had eased, although a number of Districts noted that the costs of energy, raw materials, food, and transportation remain elevated and margins were tight. Manufacturers in New York said that they plan selling price increases; but, with activity weakening, fewer other businesses anticipate price increases. Dallas noted that businesses facing softer demand plan to pass cost reductions on to customers, and Cleveland cited a decline in fuel surcharges as gasoline prices fell. However, respondents in Chicago and Dallas also reported that they continued efforts to pass-through earlier cost increases. Philadelphia, Dallas, and San Francisco noted increased discounting by retailers; Richmond reported that retail prices were rising less quickly; and Kansas City reported only a slight rise in retail prices. On the other hand, retailers in Chicago and Kansas City expect to raise prices further in coming months, and some in San Francisco also anticipate that the cost increases in train will lead to higher retail prices later this year and in 2009. Wage pressures across the twelve Districts remained limited outside of skilled labor positions that continue to experience high demand, such as the energy industry in Cleveland, Dallas, and Kansas City.
