United States Federal Reserve March 3, 2010 Beige Book: Summary of Current Economic Conditions

Mar 3, 2010

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Summary of Commentary on
Current Economic Conditions
by Federal Reserve District



Prepared at the Federal Reserve Bank of Kansas City and based on information collected on or before February 22, 2010. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.


Reports from the twelve Federal Reserve Districts indicated that economic conditions continued to expand since the last report, although severe snowstorms in early February held back activity in several Districts. Nine Districts reported that economic activity improved, but in most cases the increases were modest. Overall conditions were described as mixed in the Atlanta and St. Louis Districts, though St. Louis noted further signs of improvement in some areas. Richmond reported that economic activity slackened or remained soft across most sectors, due importantly to especially severe February weather in that region.

Consumer spending improved slightly in many Districts since the last survey, but severe snowstorms in early February limited activity in some Districts. Tourist activity was reported as increased or mixed, with some improvement in hotel occupancies. The demand for services was generally positive across Districts, most notably for health-care and information technology firms. Of the five Districts reporting on transportation, three characterized activity as improved over the previous survey. Manufacturing activity strengthened in most regions, particularly in the high-tech equipment, automobile, and metal industries. Residential real estate markets improved in a number of Districts, although several Districts noted that activity softened or remained weak partly due to extreme winter weather. Most Districts characterized commercial real estate and construction activity as weak or having declined further, but some Districts noted slight stabilization and a few signs of modest improvement. Loan demand remained weak, and lending standards remained tight across the country. Harsh weather continued to negatively affect agricultural activity, although some Districts reported favorable crop conditions. Districts reporting on energy activity said it continued to strengthen, particularly drilling for natural gas.

Price pressures were mostly limited, with the exception of some increases in raw materials prices. Even with input costs rising, selling prices remained stable due to competitive pressures and limited pricing power. Although some Districts reported an uptick in hiring or a slowdown in layoffs, labor markets generally remained soft throughout the nation, which resulted in minimal wage pressures.

Consumer Spending and Tourism
Consumer spending showed signs of improvement in many Districts since the last report but was hampered in several regions by severe weather conditions in early February. Retail sales improved in the Chicago, Minneapolis, Dallas, and San Francisco Districts, and New York said sales were well above year-ago levels in January and met expectations in February despite inclement weather. Philadelphia also reported that sales were moving up slowly until snowstorms hit in February. Boston and Cleveland characterized sales as mixed but slightly higher overall than year ago levels. Sales were lower than expected in the Atlanta and Kansas City Districts and were down from year-ago levels in the St. Louis District. Several Districts reported that sales were strongest for lower-priced items, while sales of luxury and big ticket items remained sluggish. However, San Francisco noted scattered reports of increased discretionary spending, and Cleveland said some retailers noted a broader, if still slight, increase in demand across a variety of products. Inventories were being managed carefully and held at fairly low levels in most Districts, but Chicago said rising sales were leading retailers to begin rebuilding inventories from low levels.

Auto sales were generally reported as flat or down, with a few Districts again noting that some of the sluggishness was likely due to poor weather conditions. New York, Cleveland, and San Francisco all noted some softening in new auto sales, though New York cited brisk sales of used vehicles. Chicago and Kansas City also reported declining auto sales, while Dallas noted some seasonal softness and Atlanta said sales remained weak. Some Districts reported modest improvement in auto credit conditions. Cleveland noted that many consumers remain reliant on manufacturers’ incentives, and auto dealers in the Chicago District blamed part of their recent sales decline on reduced factory incentives.

Districts reporting on tourism said that activity was either rising or mixed since the last survey period. Ski resorts in the Richmond and Kansas City Districts reported at least modest rebounds in activity from year-ago levels, while Minneapolis characterized skier visits to a Montana resort as flat. New York said hotel occupancies in Manhattan were up considerably from a year ago in January and Broadway theatre activity was robust before falling off due to weather in February. Atlanta also reported rising tourism activity related to several successful major sporting events and a well-attended Mardi Gras in New Orleans. San Francisco noted increases in visitors to Hawaii and Las Vegas and said hotel occupancies stabilized in some other areas.

Nonfinancial Services
Nonfinancial services activity was reported as steady or improved by the majority of Districts. Boston, St. Louis, Minneapolis, and San Francisco reported generally solid demand in health-care services, although Minneapolis noted continued weakness in elective procedures. New York indicated that a growing number of service firms planned to increase capital spending in the months ahead, but investment expectations diminished among high-tech companies in the Kansas City District. Richmond reported that service revenues fell due to the record snowstorms, but a few contacts saw a slight pickup in demand, particularly architectural firms, hospitals, and financial service professionals.

In transportation services, Cleveland, Atlanta, and Kansas City reported an improvement in activity since the last survey, while Dallas said activity was mixed and St. Louis noted large job cuts in the industry. Regional rail loadings were above year-ago levels in the Atlanta District, especially for autos, chemicals, metals, and some construction-related equipment. Intermodal firms in the Dallas District reported no change in cargo volumes, with a rise in exports being offset by a decline in imports. Although shipping volumes increased, Cleveland noted that margins remained depressed due to over-capacity issues, limiting investment in new trucks.

Manufacturing activity increased further in most Districts, although Minneapolis, Dallas, and San Francisco characterized overall activity as flat or mixed. Philadelphia reported widespread production increases across most industries, and manufacturers in the Cleveland District reported a general rise in capacity utilization. Many Districts reported strong production in metals, and the Boston, Dallas, and San Francisco Districts noted strength in high-tech equipment, particularly semiconductors. Cleveland, Chicago, St. Louis, and Dallas noted solid improvements in auto-related manufacturing. A consumer goods company in the Boston District said European sales were at healthier levels. Contacts in the Chicago District reported strong growth in Asian exports but remained concerned about China’s underlying economic strength. Dallas reported that exports for natural-gas based products remained strong, but weak demand for refined products has trimmed margins and cut capacity utilization further. Construction-related activity remained weak in the Chicago and Dallas Districts, and new orders for commercial aircraft and parts were sluggish in the San Francisco District. Philadelphia and Richmond noted productions delays due to the winter snowstorms in February, but some factories were able to make up the losses with longer work hours and extended shifts. Several manufacturers in the Philadelphia District said production gains could be limited due to continued tightening in credit markets and adverse developments in taxes and regulations. Plant managers in a few Districts reported that a large number of customers were simply restocking inventories, leading to concerns about the sustainability of the increase. However, contacts in most Districts remained optimistic for future months, with several reports of planned increases in capital spending.

Real Estate and Construction
Residential real estate markets improved in a number of Districts, remained weak or softened further in the New York, Atlanta, and Chicago Districts, was little changed in the San Francisco District, and characterized as mixed in the St. Louis District. Richmond also reported overall housing activity as mixed, but one contact noted that absent the harsh weather, market conditions might have improved. Adverse weather conditions also hampered home sales and construction in the New York, Philadelphia, and Atlanta Districts. Most Districts attributed stronger home sales to the home-buyer tax credit, with several contacts apprehensive about future sales once the credit expires on April 30. Philadelphia, Cleveland, Kansas City, and Dallas reported that sales were strongest for low-priced and starter homes, while Dallas cited financing difficulties for high-end homes. Home construction was down or stagnant in most Districts, with the exception of the Minneapolis, Kansas City, and Dallas Districts. Atlanta said the most pronounced weakness was among Georgia homebuilders, and San Francisco attributed weak construction activity to elevated home inventory levels. Home prices mostly remained flat or declined slightly, but signs of improvement were noted in the Boston and San Francisco Districts. A real estate agent in a relatively upscale area of the New York District said prices have continued to drift downward but that short sales were relatively rare and most transactions were still above the mortgage balance.

Commercial real estate conditions remained weak or declined further in most Districts, although some Districts noted slight stabilization or modest signs of improvement. Commercial real estate activity weakened in the Richmond, Minneapolis, Kansas City, Dallas, and San Francisco Districts, though Dallas noted that leasing fell at a slower rate and San Francisco cited increased leasing in some segments. Boston and Philadelphia said conditions remain weak, but both noted some improvement in sales of commercial space. New York reported softer activity in the New York City area but some steadying in vacancies and rents elsewhere, while St. Louis said activity remained weak throughout the District. Several Districts also noted that many tenants were pushing for, and in some cases receiving, concessions on rents. All Districts reporting on commercial construction said that activity remained weak or slow, except for some moderate boost from federal stimulus projects and other public construction. Credit for commercial development and transactions was still very difficult to obtain in several Districts, though San Francisco noted a slight improvement in financing availability.

Banking and Finance
Loan demand remained weak across the country. New York, Cleveland, and Kansas City reported decreased demand for most types of loans. Other Districts said loan demand was unchanged but soft. Richmond and Chicago noted that the weak economic outlook was holding back loan demand, and San Francisco said caution about hiring and spending plans was keeping businesses from seeking credit. However, Philadelphia and Richmond reported banks were receiving more inquiries from businesses about loans, and Dallas said contacts were hopeful that loan demand would pick up by the end of the year.

Most Districts indicated that banks remained cautious about lending. New York, St. Louis, and Kansas City reported somewhat tighter credit standards on commercial real estate loans, and New York noted tighter standards for commercial and industrial loans. In other Districts, credit standards were little changed but remained tight. Atlanta reported that banks had ample liquidity but were reluctant to reduce cash reserves. Chicago said a leveling in asset quality was causing large banks to become more interested in lending to prime borrowers, but strained balance sheets were holding back lending by mid-size banks. In the Dallas District, smaller banks reported that regulatory requirements were limiting their ability to expand real estate lending. Loan quality remained a concern but showed signs of stabilizing in some Districts. New York, Dallas, and San Francisco cited further declines in loan quality. In addition, banks in the Philadelphia and Kansas City Districts were reported to be slightly less pessimistic about future loan quality than in the previous survey.

Agriculture and Natural Resources
Harsh winter weather continued to dampen overall agricultural activity, although crop conditions were still generally favorable in most Districts. Minneapolis, Kansas City, and Dallas reported that livestock were stressed by severe weather and that producers provided supplemental feed due to poor grazing conditions. Atlanta commented that cold temperatures caused minor freeze damage to vegetable and citrus crops. Despite below-average temperatures, Kansas City reported the winter wheat crop was in generally good condition. Dallas and San Francisco said that heavy rains and snowfall improved soil moisture for this year’s crop production, though some contacts were concerned that spring planting could be delayed if fields remain too wet. Crop prices edged down following the bumper fall harvest, but Chicago noted that high-quality grain was selling at a premium, due in part to strong export demand. Hog and cattle prices strengthened and dairy prices were flat. Kansas City noted stronger farm incomes from crop production, while agricultural lenders in the Minneapolis District expected farm income and spending to decrease.

Energy activity generally strengthened since the last survey period. Kansas City and Dallas reported increased drilling activity, especially for natural gas, and Cleveland noted increased natural gas-related investment. However, producers in the Kansas City District were concerned that a boost in supply from shale gas production could lower natural gas prices later in the year. Minneapolis reported that oil exploration expanded in February, while oil production was stable in the Atlanta and San Francisco Districts. Coal production in the Cleveland and Kansas City Districts remained below year-ago levels. Minneapolis reported brisk activity in metal mining and continued energy construction.

Employment, Wages, and Prices
The pace of layoffs slowed in most Districts, but hiring plans still remained generally soft. New York cited a slowdown in layoffs at a securities firm and noted a pickup in hiring in what was still characterized as an exceptionally weak legal industry. Staffing firms in the Boston District also saw a strengthening in demand, particularly from the financial and manufacturing sectors. Several manufacturing and construction firms in the Cleveland District began recalling workers, and temporary staffing accelerated in the Richmond, Atlanta, and Chicago Districts. However, Chicago said demand for permanent workers was low, and a manufacturing contact in the Richmond District held back employment due to productivity improvements. Layoffs were also reported at several retail and manufacturing firms in the Dallas District, and Minneapolis said companies in the medical insurance and financial services industries reduced employment. Wage pressures were minimal, but Boston and Cleveland noted a lift in salary freezes and Richmond said wages rose at service and retail businesses.

The majority of Districts reported limited price pressures, although several noted rising input costs due to higher commodities prices. Boston, Cleveland, Chicago, and Dallas noted an increase in metals prices, particularly steel, and Chicago and Kansas City said the upward pressure on some raw materials prices was likely to continue. Lumber prices rose in the Cleveland and Richmond Districts due in large part to weather-related supply issues. On the other hand, San Francisco reported commodity prices were stable or down, with declines in natural gas, copper, and aluminum prices. Some contacts in the Boston District said customers sought fewer price concessions from vendors in order to better ensure reliable deliveries. But nearly all Districts reported limited pricing power, with many firms unable to increase selling prices due to competitive pressure. Retail prices were stable in most Districts, although San Francisco noted heavy discounting. Districts generally expected stable prices overall heading forward.

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First District–Boston


Economic conditions continue to show improvement in the First District. Respondents in the manufacturing, software and IT services, staffing, and residential real estate sectors indicate that demand continues to strengthen, with several manufacturing contacts citing better-than-anticipated increases. Commercial real estate markets remain very weak, but respondents say they may be stabilizing. Recession-imposed hiring and pay freezes are being removed and prices are largely steady.

Contacted retailers in the First District report mixed sales results for the early months of 2010. Year-over-year same-store sales vary from negative mid single-digits to positive low double-digits. Respondents reporting growth attribute it in part to consumers who continue to seek value-priced products, while contacts with softer sales attribute them in part to recent inclement weather. All retail respondents are cautious in their outlook.

Contacts continue to manage inventory levels carefully, with several retailers reporting decreases from a year earlier. Capital spending remains cautious; a few contacts are considering favorable expansion opportunities and others report plans for store remodels or IT spending. First District retailers tell of increasing headcount in line with new store openings as well as opportunistic hiring of talent. Wages remain mostly steady, although one respondent reports restoring bonuses and merit increases. Vendor and selling prices are said to be stable.

Manufacturing and Related Services
Most manufacturing and related services contacts headquartered in the First District report that demand continued to strengthen in early 2010, in some cases by more than they had anticipated just a few months earlier. Manufacturers of semiconductors and related equipment report sharp snap-backs in orders, resulting in dramatic increases in backlogs, as well as some component shortages and production bottlenecks. An IT equipment maker indicates that demand continues to be strong in the first quarter, resulting in an ample backlog. A food processing firm also says that it is scrambling to meet customer demands for higher volumes and faster deliveries, while at another consumer goods company, European sales in particular are “racing back up” to healthier levels. Biopharmaceutical makers continue to report solid growth in sales. Some other respondents note that their customers remain cautious, but that sales are at least stabilizing after a period of considerable declines.

According to most responding manufacturers, input costs are largely holding steady. Metals prices are the main exception, with some rising and others decreasing. Most contacts are holding selling prices unchanged, except for a few that implemented increases of 2 percent to 3 percent at the beginning of the year. Some respondents note that they or their customers are applying less pressure on vendors to make price concessions as a consequence of a growing emphasis on ensuring reliable deliveries.

Most contacts plan to hold domestic headcounts relatively steady or increase them somewhat in coming months. Only a few firms are planning staffing reductions in 2010. Net hiring is concentrated on scientific, engineering, and other technical occupations. Manufacturers that had implemented pay cuts have now mostly restored wages and salaries to their previous levels. Almost all respondents that had suspended 401(k) plan matches have resumed making matches or expect to do so shortly. 2010 merit pay increases are expected to be in the range of 3 percent to 3.5 percent at most contacted companies.

Most manufacturing respondents are planning to increase capital spending in 2010. Many mention that they will be expanding their capacity to perform R&D or produce new products.

Manufacturers and related services providers describe themselves as either hopeful or optimistic about business conditions over the coming six to 12 months. However, contacts in the semiconductor industry express some concern that sales trends could weaken in the second half of 2010, given the unexpectedly vigorous pace of recovery in recent months.

Software and Information Technology Services
First District contacts in the software and information technology sectors largely report increased activity–ranging from slight upticks to significant growth–through the end of Q4 2009 and into Q1 2010; however, a few respondents caution that business conditions remain fragile and unpredictable. Contacts generally report increased demand across the board, including the financial, medical, and government sectors, although some corporate clients remain hesitant to spend money. One contact also notes that pricing pressure from competitors remains aggressive. While some firms have reduced headcount in recent months, others continue to add personnel; however, salary freezes from 2009 have been lifted, with anticipated merit increases generally in the 3-percent to 5-percent range. The outlook among New England software and IT contacts is more positive than in prior months, with 2010 largely expected to be a growth year. Despite these improved expectations, the possibility of a double-dip recession or a slow recovery remains a major concern.

Staffing Services
The majority of New England staffing contacts report that business continues to strengthen, although a few have experienced stagnant or volatile activity over the past three months. Yearly revenues for 2009 were generally 10 percent to 30 percent below 2008 revenues; however revenues continue to rise over-the-quarter. Labor demand has generally increased across industries, with notable improvements in the financial and manufacturing sectors. Increased activity is also reported in the medical, aerospace, and semiconductor industries. While the demand for direct hires remains depressed, several contacts noted increased conversion of temporary workers to permanent status. Labor supply remains plentiful, although candidate skills do not always meet client demand and an elongation of the hiring cycle persists. The downward pressure on bill rates throughout 2009 has lessened, and some applicants are no longer willing to accept lower pay rates. All First District staffing respondents anticipate improvement during 2010, with most expecting growth for the year to be in the 10-percent to 20-percent range.

Commercial Real Estate
Contacts report modest signs of improvement in commercial real estate markets across the region. In Boston, leasing activity in January and early February, while still light, was up from the preceding quarter as well as year-over-year. However, recent activity has typically involved renewal of existing leases, and renewing tenants, in many cases, gave back space. Net absorption remains slightly negative as increases in vacancy have moderated. Boston’s downtown vacancy rate was described as “a soft 16 percent” in the fourth quarter, while the Route-495 corridor is faring much worse, with vacancy rates between 25 and 30 percent. In Boston and Providence alike, renewing tenants have pushed to lock in currently low rental rates over the leasing term. Providence saw a moderate uptick in leasing activity in recent weeks, including activity occasioned by relocation and expansion of health and educational institutions. The class A downtown office market has held up relatively well, with a current vacancy rate of 9.5 percent, while class B downtown office space has a vacancy rate of 15 percent. In Hartford, leasing activity remains “very light” and absorption is still slightly negative, but the retail market has fared better than expected and our contact saw a bit more enthusiasm in the local economy overall in recent weeks.

Sales transactions in greater Boston, also up on a year-over-year basis, remain limited to the highest-quality properties, for which there is brisk demand from investors seeking to add real estate back into their portfolios without taking on excess risk. Investment sales have been “few and far between” in Rhode Island. While contacts report that credit conditions for commercial real estate have eased on a year-over-year basis, they remain watchful of rising commercial defaults both regionally and nationally and expect significant further write-downs of commercial real estate portfolios. A Boston banker reports that his bank’s balance sheet remains in excellent shape, however, and that the bank has sought aggressively to make new commercial loans in recent weeks.

One contact remained pessimistic concerning the outlook for the next six to 12 months, and the rest were cautiously optimistic. The caution came from concerns that recent upticks in leasing activity may prove unsustainable, especially if weak job growth (if not job losses) persists; one Boston contact thinks that rents in the city have further to fall.

Residential Real Estate
Home and condo sales continued to show significant year-over-year increases in December 2009, belying concerns that year-over-year declines would recur after the huge sales increases in November that were mainly attributed to the first-time homebuyer tax credit. Part of the continued strength may be due to the extension of the tax credit through April 2010 and expansion of the tax credit to include some existing homebuyers. Contacts report year-over-year home sales increases between 15 percent and 36 percent across the six New England states; condo sales increased between 29 percent and 66 percent year-over-year. January data from the Boston area show these home and condo sales trends continuing into 2010. While foreclosure sales and short sales made up 33 percent of sales in December in Rhode Island, this represents an improvement from 43 percent in December 2008.

Home prices also showed signs of improvement in December. While the median home price declined slightly year-over-year in December in New Hampshire, it increased modestly in Connecticut, Rhode Island, and Maine, and rose more substantially in Massachusetts (11 percent) and the Boston area (20 percent, and then 6 percent in January year-over-year). The median condo price fell year-over-year in December in Rhode Island but increased in Massachusetts, Connecticut, and New Hampshire. The median condo price in the Boston area increased 27 percent year-over-year in January.

Several contacts believe that sales will continue to increase year-over-year for the next few months while the expanded tax credit is still available. A Boston contact reports that traffic at open houses has been steady. Pending sales numbers for Massachusetts were strong in January.

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Second District–New York


The Second District’s economy has shown some further signs of strengthening since the last report, despite some apparent slowing in the housing market; input price increases have become more widespread. In general, business contacts report ongoing improvement in overall conditions and some pickup in hiring activity. Many manufacturing contacts also indicate plans to increase employment and capital spending in the months ahead. General merchandise retailers mostly report that sales were ahead of plan in January, and up from a year earlier, though some report that snowstorms slowed business in February. Auto dealers report mixed but generally sluggish sales results for January and early February, though used car sales remain strong. Tourism activity in New York City has picked up since the last report, though snowstorms in much of the East appear to have crimped activity in early February. Commercial real estate markets have been steady to softer since the last report, while the sales/investment market remains exceptionally weak. Residential real estate markets were mixed to weaker in early 2010. Finally, bankers report weakening in loan demand in all categories, rising delinquency rates–mainly in the household sector–but some leveling off in credit standards on consumer loans and residential mortgages.

Consumer Spending
Retailers report that same-store sales were ahead of plan in January and up 5 to 10 percent from a year earlier, though conditions were more mixed but roughly on plan in the first half of February. General merchandise chains attribute much of the slowing in February to inclement weather; one contact notes that on days and in places with no major weather issues, sales were stronger than expected. One major mall in western New York State reports some softening in business in February, but another reports that business remained strong through mid-month, helped by particularly strong business from Canadian shoppers–particularly on Presidents’ Day (Family Day, in Ontario) weekend. Virtually all retailers note that inventories were lean following the holiday season, though some report fairly heavy discounting.

New auto sales have reportedly been steady to softer in early 2010. Auto dealers in the Buffalo area report that sales were exceptionally weak in December and remained sluggish in January, running 20 to 25 percent below a year earlier, though some pickup was reported in February. In contrast, contacts in the Rochester area report that sales ended 2009 on a very strong note, buoyed by incentives, but softened in early 2010, slipping about 10 percent below year-earlier levels. However, used car sales have reportedly been brisk across the board. Auto dealers note modest improvement in credit conditions.

Tourism activity in New York City showed signs of picking up since the last report. Manhattan hotels report that last December was the best on record in terms of the occupancy rate, which rose to 86 percent–up from 82 percent a year earlier. Business remained strong in January and early February, with occupancy rates remaining ahead of comparable 2009 levels by similar margins. This rise occurred despite a roughly 6 percent increase in the number of hotel rooms, indicating a fairly substantial increase in the number of visitors. Room rates have been fairly steady in recent months, after accounting for seasonal variation, but are still down roughly 10 percent from a year earlier. After a relatively sluggish holiday season in 2009, Broadway theaters report a noticeable pickup in business in January–total revenues were up nearly 20 percent from a year earlier, while attendance rose roughly 8 percent. Business tapered off markedly in the first half of February, but this likely reflects heavy snow in many parts of the East. Finally, surveys by both the Conference Board and Siena College indicate that consumer confidence in the region climbed to a roughly two-year high in January.

Construction and Real Estate
Housing markets appear to have softened in early 2010, after hints of a pickup in late 2009. New York City’s sales and rental markets both showed signs of slackening since the last report. Rental activity, which had stabilized in December, has reportedly weakened more recently, while asking rents were relatively stable but lower than a year earlier. Co-op and condo transactions, which had picked up in the latter part of 2009, are said to have slipped across the board thus far in 2010, while prices have reportedly continued to drift down. Similarly, northern New Jersey’s single-family housing market has reportedly lost momentum in early 2010–particularly for new homes–after showing scattered signs of a pickup in late 2009. However, this may partly reflect unusually harsh winter weather this year in much of the state. Construction of both single- and multi-family homes is moribund, as developers are reportedly holding off on any new development. Still, a real estate agent in a relatively upscale area notes that short sales are not all that common and that most transactions are still above the remaining mortgage balance; however, she notes that prices continue to drift down–especially at the high end, where affordability remains a major factor. The homebuyer tax credit is not much of a factor because it represents a small portion of the typical house price. Buffalo-area Realtors indicate that sales were sluggish in both late 2009 and early 2010, though here, the recent extension of the homebuyer tax credit is expected to spur increased activity in the months ahead.

Commercial real estate markets across most of the District softened since the last report. Vacancy rates in Manhattan continued to climb, while asking rents continued to fall and were down more than 20 percent from a year ago. Vacancy rates also rose noticeably in Westchester and Fairfield counties, while asking rents were down by 6 percent. In most other areas around the District, however, vacancies and rents were relatively stable. Commercial real estate sales remained exceptionally weak across the board.

Other Business Activity
A major NYC employment agency, specializing in office jobs, reports that hiring activity has been sluggish but stable in early 2010, in contrast with the modest pickup that seemed to be taking hold in late 2009; still, conditions are reported to be not as bad as during most of 2009. There has been some pickup in hiring in the legal industry, which had been exceptionally weak. However, there is only scattered hiring in the financial sector, and mostly at smaller firms. Separately, a securities industry contact indicates that the pace of layoffs has slowed to more normal levels, giving greater job security to those still employed; nevertheless, firms are reluctant to hire in many areas due to uncertainty about both the economic and regulatory outlook. Although there has been little activity in mergers and acquisitions or IPOs (initial public offerings), other business lines are described as fairly good. Bonuses at large firms are up from last year’s depressed levels but largely restricted (i.e. options or stocks that cannot be sold immediately). There has been some shift in compensation away from bonuses and toward salaries.

Looking at business conditions more generally, both manufacturing and non-manufacturing contacts report continued improvement since the last report. Manufacturing firms in the District note some further improvement in business conditions, along with modest increases in employment. Contacts remain optimistic about the general business outlook and anticipate widespread increases in new orders, as well as increased hiring and capital spending. Non-manufacturing contacts overall report continued modest improvement in business and a slight pickup in employment for the first time since the start of the recession; contacts remain mostly optimistic about the general business outlook and a growing proportion plan to expand capital spending and employment in the months ahead. Both manufacturers and other firms report increasingly widespread rises prices paid but little or no change in selling prices.

Financial Developments
Bankers report decreased demand for all types of loans, particularly in the residential mortgage category, where more than half of those surveyed report weakening demand, compared with just 11 percent reporting a pickup. Bankers also reported decreased demand for refinancing. Respondents indicate further tightening in credit standards in the commercial mortgage and commercial and industrial loan categories but some leveling off in standards on consumer loans and residential mortgages. Still, no banker reported an easing of credit standards in any of the categories.

The spreads of loan rates over costs of funds increased for all loan categories–most notably in the commercial mortgage category. Respondents indicate widespread decreases in average deposit rates. Finally, respondents report continuing increases in delinquency rates for all categories except the commercial and industrial loan category, where rates are reported to have leveled off.

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Third District–Philadelphia


Economic conditions improved in some sectors in the Third District and have been about steady in others since the last Beige Book. Manufacturers, on balance, reported increases in shipments and new orders. Retailers indicated that a rising sales trend was interrupted by snowstorms in February. Motor vehicle dealers indicated that sales have been increasing slightly but were also hampered by snowstorms. Third District banks reported steady loan volume outstanding. Residential real estate agents and home builders said demand for homes has been on the rise, but February snowstorms adversely impacted construction and sales. Nonresidential real estate leasing, purchase, and construction activity continued to be weak. Service-sector firms generally reported steady activity. Business firms in the region indicated that prices of most goods and services have been steady, although there were reports of price increases for metals and some industrial products.

The outlook among Third District business contacts is that business conditions will improve slowly in most sectors in the months ahead. Manufacturers forecast a rise in shipments and orders during the next six months, on balance. Retailers expect sales to expand slowly as overall economic conditions improve. Auto dealers expect sales this year to be slightly above the level achieved last year. Bankers expect only slight increases in lending. Residential real estate contacts expect home sales to be boosted in the short term by the homebuyer credit, but they expect just a slow increase in sales after the expiration of the tax benefit. Contacts in nonresidential real estate expect leasing to advance as landlords reduce rents, but they expect construction to remain soft through most of the year. Service-sector firms generally anticipate slow growth in the near term.

Third District manufacturers reported increases in shipments and new orders, on balance, from January to February, with the number of firms posting gains exceeding the number recording declines by a fair margin. The improvement was also widespread, as most of the major manufacturing industries in the region posted increases. Comments from manufacturers indicated that their customers are beginning to step up orders after a period of slow activity. One contact said that “for the first time in 16 months there is slight optimism among our customer base,” and another said that “we are ramping up to handle a few large projects.” However, the overall expansion in manufacturing activity since the last Beige Book was constrained somewhat by production interruptions resulting from snowstorms during February.

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms polled in February, about half expect increases in new orders and shipments through the middle of the year; about one-tenth expect decreases. Capital spending plans among area manufacturers have improved since the last Beige Book. About one-third of the firms polled in February plan to increase expenditures for new plant and equipment, although one-half plan to maintain level spending. Despite the general improvement in current and expected conditions in the region’s manufacturing sector, some firms said further gains could be limited by continuing tightness in credit markets and adverse developments in regard to taxes and regulations.

Third District retailers reported that February snowstorms hampered shopping, offsetting a marginally rising sales trend. As a result, many of the stores contacted for this report said they will likely post month-to-month and year-to-year decreases in sales for February. Retail contacts generally indicated that, except for the snowstorms, sales have been moving up slowly. Most cautioned, however, that a strong growth trend is not imminent. One store executive said sales were “just turning the corner” toward improvement. Looking ahead, Third District retailers generally expect only slow growth in sales for some time. One retailer said, “Sales will be on a plateau until employment picks up.”

Third District auto dealers reported a slight improvement in sales since the last Beige Book, but a negative impact from February snowstorms. Looking ahead, dealers continue to expect total sales for this year to be slightly ahead of last year.

Total outstanding loan volume at Third District banks has been virtually level since the last Beige Book, according to bankers contacted for this report. On balance, commercial bank lending officers said slight increases in business loans and real estate loans were being offset by decreases in consumer loans. Several banks indicated that loan delinquencies have been about steady in recent weeks, although credit quality remained a concern. One banker said, “Credit quality is holding its own, but we are concerned that some borrowers will not be able to stay current beyond the first quarter.”

Third District bankers see some signs of loan growth ahead. Some reported increased inquiries about business loans. However, in general, bankers in the region expect consumer loan demand to remain soft, and they expect tight credit standards to limit expansion in lending of all types.

Real Estate and Construction
Sales of new and existing homes have picked up somewhat since the last Beige Book. Local real estate agents and home builders said the homebuyer tax credit was providing some impetus to sales, especially in the lower- and moderate-price segments of the market. Some builders have started speculative construction of houses to attract buyers who wish to take advantage of the tax credit before its expiration. However, snowstorms in February interrupted construction as well as sales, according to builders and real estate agents. Real estate agents said the inventory of homes listed for sale remained high, and sales prices have been steady to down across the region. Residential real estate contacts expect sales to rise seasonally in the spring, but several cautioned that sales might decline when the tax credit expires. Looking beyond that date, one agent said, “We are predicting a slow recovery in sales.”

Nonresidential real estate firms indicated that leasing, purchase, and construction activity remained slow, but there have been some slight increases in the sales of commercial buildings in some parts of the region. Contacts reported that vacancy rates have been about steady since the last Beige Book report, but effective rents have continued to decline. Much of the recent leasing activity has been for relatively small blocks of office space, according to agents, who say that tenants are reluctant to commit for large blocks of office space. Contacts reported a slight increase in leasing of industrial space, but they said the demand for retail space has remained weak. Contacts expect nonresidential real estate markets to remain soft through at least mid-2010, by which time improvement is expected in some, but not all markets. A contact in office markets said that “significantly reduced rental rates will be influential” in stimulating leasing activity in office markets, but a contact in industrial markets said that sector will be “tested” in 2010.

Service-sector firms generally reported that activity has been about steady since the last Beige Book. Some indicated a slight strengthening in demand for their services, which some described as only “stabilization” or “an uptick.” Some engineering firms noted that they have had increases in demand for work related to energy conservation and efficiency, but other construction-related activity continued to be very weak. The region’s service-sector firms expect slow growth, at best, in the near term. One noted that “clients are starting to talk about projects they have had on the shelf, but they’re not doing anything yet,” and another said, “We continue to be cautious.”

Reports on input costs and output prices have been mixed since the last Beige Book. A number of manufacturing firms noted increases in costs of the commodities they use. Most continued to report that they have not raised the prices of the products they make, although producers of metals and some types of industrial machinery have raised prices. Retailers reported mostly flat selling prices.

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Fourth District–Cleveland


The economy in the Fourth District continues to show some signs of improvement, although overall activity remains significantly below pre-recession levels. Reports from manufacturers indicated that production was stable or rose moderately and that orders have increased. New home sales improved slightly, while non-residential builders characterized activity in their industry as slow. Financing remains a major issue for residential and commercial contractors. January sales figures from District retailers and auto dealers were mixed. Energy production held steady, and reports showed a small upturn in freight transport volume. Demand by businesses and consumers for new loans remains weak, while the growth rate in core deposits is tapering off.

Labor markets are beginning to show a slight recovery, with some business owners recalling a few workers or increasing production hours. Staffing-firm representatives reported an increased number of job openings, especially in healthcare and, to a lesser degree, in manufacturing. Wage pressures are contained. We heard many reports of rising steel costs, otherwise, raw material and product pricing was generally stable. Capital spending is beginning to rise, but continues below pre-recession levels. Inventories remain under tight control.

Reports from District factories showed that production was largely stable or rose moderately during the past six weeks, with a majority of our contacts citing an increase in new orders. Most manufacturers told us that production levels have increased on a year-over-year basis, though by varying amounts. In general, our contacts are cautiously optimistic in their outlook. However, several believe that the recent rise in new orders is a result of customers restocking their inventories and may not signal a sustainable increase in production. Steel shipments were in line with expectations, with volume reports showing a gradual improvement. Although no end market is particularly strong, rising volume was attributed primarily to defense and energy. Our steel contacts are hopeful that improving conditions will continue. District auto production showed a small increase during January on a month-over-month basis and a substantial rise when comparing year-over-year data for domestic and foreign nameplates.

Manufacturers reported that inventories are in line with demand, while capacity utilization is beginning to improve. In general, capital investments continue on the low side. Nonetheless, a number of contacts said that they have increased their capital budgets for 2010; others commented that if new orders continue to rise, they are likely to spend more on capital projects later in the year. We heard many reports of increasing steel prices, which were attributed primarily to rising raw material costs. However, there was little response on the part of manufacturers to raise their own prices. Reports indicated that food-related commodity prices have dropped. Half of our respondents said that they have increased the number of work hours or recalled a few production employees, and wage pressures are contained.

Real Estate
In general, new home sales improved slightly during the past six weeks and on a year-over-year basis. Purchases of entry-level homes continue to do well, and several builders reported that the move-up category is gaining momentum. However, builders expressed concern about the potential effect on home sales once the first-time home buyers’ tax credit expires on April 30. They also reported that banks remain unwilling to lend money for constructing spec houses, and tight credit standards are keeping many potential buyers out of the market. Our contacts had decidedly mixed reports on the list prices of new homes and discounting. Construction material costs were generally stable, although the price of lumber has started to climb from its recent low. General contractors continue to operate with skeleton crews, but some reported that they are in the process of recalling a few workers. Subcontractors are struggling to keep busy.

Reports characterized activity in non-residential construction, including public works, as slow. Although most of our contacts said that business has fallen on a year-over-year basis and many have nearly depleted their backlogs, inquiries are picking-up slightly. Most projects under way fall within the public works and education categories. Nonetheless, two builders reported a small upturn in industrial construction. About half of our contacts expect activity to remain weak in 2010, while others see a slight improvement when compared to 2009. We continue to hear numerous accounts of difficulties in obtaining project financing. One executive noted that his firm is now financing some of its clients’ projects. Increased costs for construction materials were limited to steel, and subcontractor pricing remains very competitive. Employment by general contractors has been largely stable.

Consumer Spending
Reports comparing January retail sales to the previous 30-day period were mixed. However, a majority of our retail contacts said that sales improved slightly on a year-over-year basis. Although consumers continue to focus on buying necessities over discretionary items, several retailers noted that they see a slight pick up across a broad range of products, including housewares and furniture. Almost all of our contacts expect sales to improve somewhat during the next few months. Vendor and store pricing has been relatively stable. Retail inventories continued on the lean side. Auto dealers reported that new-vehicle sales tended toward the down side in January when compared to December. On a year-over-year basis, most new-auto sales figures showed an uptick. Used-vehicle purchases are seen as holding steady. Dealers expect overall sales to show modest improvements at best during the next few months. Auto store inventories were characterized as tight. Some contacts told us that credit and financing have improved a bit during the past few weeks, and that many consumers remain heavily dependent on manufacturers’ incentives. Reports show little change in staffing levels at retailers or auto dealers.

Demand for new business loans remains weak. Bankers experiencing increased volume attributed it mainly to draw-downs on existing lines and roll overs from other banks, rather than new activity. Interest rates and spreads were steady. On the consumer side, conventional loan demand dropped substantially since our last report, with several bankers characterizing demand as very soft. Activity in the residential mortgage market was stable to down and dominated by refinancings. On balance, core deposits continued to grow, but many bankers said that the rate of growth has tapered off. Credit standards remain tight, with many bankers emphasizing that they are actively managing or reviewing their existing loan portfolios and relationships. The credit quality of loan applicants was stable to weaker for consumers and businesses. Reports on delinquencies were mixed, with most increases occurring in real estate portfolios. Outside of some strategic hires and controlled attrition, banks have not appreciably changed their employment levels.

Little change in oil and gas output was reported during the past six weeks, with drilling activity in 2010 expected to be about equal to 2009. However, natural gas drilling may get a boost from recent investments made in Marcellus shale reserves. Spot prices for oil and gas are stable within a narrow range. Coal production continues to be below 2008 levels due to lower power generation and depressed steel production. Prices for coal were mixed. Capital expenditures by oil and gas producers are tightening, whereas investments by coal producers have been delayed until market conditions improve. Production equipment and material costs remain stable. Employment was steady, and little hiring is expected in the near future. Wage pressures are contained.

Freight transport executives reported a slight improvement in shipping volume since our last report. One contact noted that January shipments increased on a year-over-year basis. Margins remain depressed, with several executives commenting that over capacity continues to be the key issue facing the industry. Nonetheless, most contacts we spoke with are cautiously optimistic in their outlook and expect modest improvements in volume during 2010. Apart from fluctuating fuel costs, prices have been relatively stable. Capital spending is expected to increase somewhat on a year-over-year basis, but remain significantly below pre-recession levels. A few contacts noted that they plan to allocate monies for IT equipment. However, spending on new trucks will be limited until capacity utilization improves. Hiring was limited to replacement only. Wage reports were more upbeat: One contact said that he is partially restoring wage cuts made a year ago, while another said he is lifting his firm’s salary freeze.

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Fifth District–Richmond


Economic activity slackened or remained soft across most sectors of the Fifth District’s economy since our last assessment. However, severe winter storms throughout the District played an important role. Many consumers avoided driving during dangerous road conditions, causing weakness in retail sales (except for items such as food). One banker noted that even borrowers with pre-approved mortgage loans were unable to do much house shopping during the bad weather. Overall, the residential real estate market activity was generally viewed as mixed, although the commercial markets continued to weaken regardless of weather conditions. Tourism was also mixed, with heavy snows in the mountain areas contributing to booming activity at ski resorts, but keeping vacationers away from most other activities. Many manufacturers lost a few days of production during the storms, but were able to make up most of the lost production. Manufacturing shipments and backlogs, however, were largely unchanged over the last month, while new orders improved. Both manufacturing and service employment fell since our last report, although temporary employment agencies reported slight increases in demand, particularly among service-related occupations.

Retail revenues generally weakened since our last report, although a few merchants reported slightly higher sales. Big-ticket sales dropped sharply, including sales of automobiles and light trucks. Sales fell in many other categories; for example, a department store manager reported that customers were trading down from “label” apparel to the in-house brand. In addition, retail sales fell abruptly during recent major snow storms, although some of our contacts indicated that sales rebounded quickly as customers fought “cabin fever” by shopping when roads were cleared. However, many retailers were unable to recover lost sales and advertising expenses because those snow storms occurred on consecutive weekends. In contrast, District grocery sales rose, and the store manager at a chain discount retailer in North Carolina reported that sales of larger screen televisions were especially strong just prior to the Super Bowl football game and following the snow storms. Several store managers said their outlook for 2010 was more optimistic than in recent months, stating that raises and bonuses were on the table again after last year’s freezes. However, merchants remained cautious in their planning, and inventory levels were being managed tightly. Retail wages rose on average, while price increases slowed.

Revenues fell at most District services firms in recent weeks, partly due to snow storms at the end of January and beginning of February. Virginia airports attributed a decline in enplanements to the bad weather, and District hotels and restaurants also reported a drop in customer traffic. In addition, CFO’s and other executives at small businesses continued to express frustration at not being able to get loans. Architectural firms in Virginia and Maryland, as well as a few hospitals, reported an increase in consumer demand for services, however. Also, investment advisors and other financial services professionals indicated that revenues picked up in recent weeks, although overall business conditions remained mixed. A financial services contact reported that he was seeing a sense of optimism beginning to develop among his commercial clientele. Average wages inched up at services firms; price increases were mild.

District manufacturing activity was flat to up in February, with optimism for the near-term remaining guarded. Contacts on balance reported that shipments and backlogs held steady, while new orders posted solid increases. A textile producer said, “Business has definitely turned for the better.” His company, however, was using fewer employees due to increased productivity. Similarly, a textile mill manufacturer reported that sales, production and shipments continued to improve and that business was looking good over the next two months. Moreover, a chemical producer noted that his company had seen an increase in all of his business lines and believed that this increase would be sustainable for the next 18 months. In contrast, a primary metal manufacturer indicated an uptick in demand, but was not convinced that the gains would continue because his backlogs had slacked off recently. Likewise, an apparel producer said that sales had increased because retailers were building inventories. He noted, however, that his company was not increasing wages and was reluctant to hire because he believed present demand was a blip and would not last beyond this summer. Several manufacturers reported production disruptions during the snow storms, but were able to make up the losses by working overtime and during holidays. Although most contacts reported that both raw materials and finished goods prices increased at a slower pace since our last report, lumber prices were higher across the board due to weather-related supply effects.

Lending activity in the District remained soft and little changed from our last assessment, although adverse weather in both January and early February was partly to blame. With businesses closed and home buyers reluctant to drive during the extended period of bad weather, especially in the northern half of the District, banks were getting few customers. Yet, even in areas less affected by weather, several bankers described loan demand as tepid. One large bank reported that commercial and industrial lending remained weak across all market lines. Another banker stated that a modest tightening of credit standards was making loan approvals more difficult. Bankers noted that, while businesses were increasingly calling about loans, few were ready to make loan applications due to the sluggishness of the economy. Nonetheless, one large bank did see a “bit of a thawing” among businesses that needed to replace capital, and a small bank stated that their one area of increased activity was in home equity loans. Most bankers stated that more improvement in the economy and particularly consumer spending would be necessary before loan demand would strengthen appreciably.

Real Estate
Fifth District Realtors reported mixed housing activity across the District, citing weather as a limiting factor in many areas. For example, a Greensboro Realtor noted lower sales since our last report, adding that recent weather conditions had “shut them down.” Further, he cited the uncertainty of the economy as a big factor in holding down sales, and said this was the worst market he had ever experienced. Likewise, a Charlotte agent stated that, while house sales slowed in recent weeks, months’ supply of inventory was also down markedly. However, a Fredericksburg Realtor reported that, in spite of the adverse weather conditions, sales in her market were equal to a year ago and indicated that, absent the weather, there might have been an improvement in market conditions. Several agents reported that home sales in the lower price ranges continued to benefit from first-time homebuyers, although there was also an increase in foreclosures and short sales. Agents in most localities reported that home prices were either flat or had dropped.

Commercial real estate activity in the District slowed across all segments of the market. Several contacts reported that office, industrial, and retail vacancy rates edged higher, putting more downward pressure on prices and leasing rates. One contact cited an increase in late payments and even defaults. An agent stated that several retail chain stores were having trouble getting financing to sustain their outlet expansion plans. However, local retailers were benefiting from less competition for leasing space i