The Biege Book

Summary

Prepared at the Federal Reserve Bank of Richmond and based on information collected on or before June 2, 2008. 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 Federal Reserve Districts suggest that economic activity remained generally weak in late April and May. Three Districts described economic activity as softer, weaker, or lower, with an additional four Districts reporting slower, sluggish, or modest economic growth. The remaining five Districts of Philadelphia, Cleveland, Atlanta, St. Louis, and San Francisco described activity as stable or little changed in recent weeks.

Consumer spending slowed since the last report as incomes were pinched by rising energy and food prices. Higher energy prices also appeared to damp domestic tourism. Reports on nonfinancial services varied across Districts and industries. Manufacturing activity was generally soft in recent weeks, with weak demand for housing-related and some other products but with increasing demand for exports. Residential real estate markets remained weak across most Districts. Commercial real estate conditions varied across Districts, as did reports on nonresidential construction activity. Lending activity also varied across Districts and market segments, though tighter credit standards were reported for most loan categories. Districts reporting on the agriculture and energy sectors noted improved crop conditions and increased drilling and extraction activity.

Reports of higher input costs were widespread. Manufacturing contacts in several Districts noted some ability to pass along higher costs to customers. Retailers reported mixed results with respect to raising final goods prices. In most Districts, wage pressures were reported as moderate or limited for all but a few skilled-labor positions, as hiring activity remained spotty in most Districts.

Consumer Spending and Tourism

Consumer spending slowed further since the last report. Contacts in several Districts said rising energy and food prices contributed to softer sales in other categories. The overall pace of retail sales moderated in the Districts of Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis, Dallas, and San Francisco, and was level in Cleveland, Chicago, and Kansas City. Retail sales reports were mixed in Boston and New York. According to contacts, retail inventory levels were generally higher in the Atlanta District and among some types of stores in San Francisco; some establishments in the New York, St. Louis, and Richmond Districts expressed concerns about inventory levels. In the Boston District retail inventories were stable. Employment was on the whole unchanged at Boston District retailers, whereas retailers in the Cleveland District said they were only hiring for new stores, and Richmond District retail contacts reported job cuts.

Reports on overall sales of automobiles and light trucks were weak, with several Districts indicating that sales of trucks and SUVs declined. Although dealers generally struggled to move vehicles off of their lots, contacts in the Richmond, Atlanta, and Chicago Districts reported solid sales of hybrid and other fuel-efficient vehicles.

Tourist activity varied across Districts. New York contacts said that tourist activity had softened, noting lower attendance at Broadway theaters. San Francisco reported weaker hotel bookings in Southern California and in Hawaii, but record hotel occupancy rates in parts of Alaska. Higher gasoline prices appeared to weaken tourism activity in the Chicago District, but increased activity at some resorts in the Richmond District as families took vacations closer to home. International visitors boosted tourism activity in the Atlanta and Dallas Districts.

Nonfinancial Services

Reports from nonfinancial services industries varied among Districts. New York and Minneapolis reported weaker business conditions while contacts in the Richmond District reported slower revenue growth, except in telecommunications. Demand growth for service providers slowed in the San Francisco District. Demand at services businesses in Boston and Chicago, however, was mixed and the pace of business spending was little changed in the Chicago District. Meanwhile, demand in the service sector generally strengthened in St. Louis and Kansas City. Staffing agencies in the Richmond District reported somewhat weaker demand overall, while staffing agencies in the Chicago and Dallas Districts said that demand was stable. In transportation services, intermodal shipments edged down in the Atlanta and Dallas Districts, while freight service growth was flat in the Cleveland District. Reports on air travel remained strong despite route reductions, according to contacts in the Kansas City Districts.

In service sector labor markets, Chicago reported a slower pace of hiring in recent weeks and Minneapolis reported that employment in professional services companies decreased from a year ago and is expected to remain flat over the next year. Cleveland and Richmond reported little net change in services employment, while contacts in the St. Louis District said that expansion at firms in some services industries will lead to additional hiring. Boston and Dallas noted tight labor markets for some skilled workers.

Manufacturing

Manufacturing activity was generally soft since the last report. Boston, New York, Richmond, Atlanta, and Chicago reported that activity had weakened, although St. Louis, Minneapolis, Kansas City, and Dallas indicated that activity had increased slightly. Philadelphia, Cleveland, and San Francisco described factory activity as nearly steady. Reports of softer demand for housing-related products continued to be widespread. Many Districts cited higher production costs and cuts in employment that contacts attributed to slumping home sales and construction. The Atlanta and Chicago Districts indicated that automotive production or sales fell short of expectations, while the Cleveland District saw an uptick in the production of domestic nameplates. Reports on food processing were mixed with some Districts indicating that higher prices had constrained demand, while others noted rising demand.

Industries demonstrating increased activity were boosted, in part, by a strong overseas market. Cleveland, Atlanta, Chicago, and Dallas reported that the demand for steel was strong. The output of energy-related equipment increased in the Boston, Cleveland, Atlanta, and Dallas Districts, while strong sales of farm equipment boosted demand for manufacturers of heavy equipment according to Chicago and San Francisco. Dallas also reported strong demand for transportation equipment to supply defense and aircraft industries.

Real Estate and Construction

Residential real estate markets were generally weak across most of the nation. District reports indicated flat or declining home sales in Boston, New York, Cleveland, St. Louis, and Dallas, and contacts in Philadelphia did not expect housing activity to expand strongly this year. Contacts in San Francisco reported that housing markets remained exceptionally weak, although a few reports pointed to some recent pickup in home sales attributed to increased affordability. Scattered reports from Philadelphia and Kansas City indicated seasonal improvements. Inventory levels of new and existing homes remained high or were rising in New York, Philadelphia, Cleveland, Richmond, and San Francisco. Home sales prices decreased somewhat in Boston, Atlanta, Kansas City, and San Francisco, but remained relatively stable in Richmond and Chicago. The New York and Chicago Districts noted that some potential buyers had difficulty in obtaining financing. Residential construction declined in Chicago, St. Louis, and Minneapolis, but was flat to slightly higher in parts of the Atlanta District and spiked in areas of the Dallas District where demand for apartments was solid. Homebuilders in Cleveland expected no improvement in the housing industry for the remainder of 2008, and Chicago reported that limited credit availability for new developments had caused many builders to suffer losses on existing projects. Richmond and San Francisco noted an increase in home foreclosures.

Commercial real estate conditions varied in April and May, with some Districts reporting that activity had softened. Leasing activity eased in Boston, New York, Philadelphia, Richmond, and San Francisco. Minneapolis, however, reported that market activity was up modestly, while activity was mixed across the St. Louis District. Vacancy rates edged higher in Boston, Kansas City, and San Francisco, as well as in pockets of the Richmond and St. Louis Districts. Absorption was negative in Boston and in Minneapolis for both office and manufacturing space. Overall rents were on the rise in New York, but were stable or beginning to slip in Boston, Philadelphia, Richmond, and Kansas City. Sales trended downward according to the New York, Philadelphia, and Kansas City Districts.

Reports on nonresidential construction activity were mixed. Contacts from Chicago and Minneapolis saw slight increases in activity. Philadelphia, Cleveland, Richmond, Atlanta, and Dallas, however, reported easing or weak levels of construction. A number of Districts--Cleveland, Richmond, Chicago, and Dallas--reported that obtaining financing remained difficult for some projects.

Banking and Finance

Reports on lending activity varied across Districts, although reports of softening in the consumer segment persisted. Overall loan demand cooled in Richmond, Atlanta, St. Louis, and San Francisco, while Philadelphia and Cleveland saw a modest increase. New York reported little change in demand across all categories, while lending activity in Chicago was mixed. Residential lending activity remained generally weak in Richmond, Atlanta, and Chicago. In contrast, demand picked up in Philadelphia, Cleveland, Kansas City, and Dallas, but was about the same in St. Louis. Commercial and industrial lending activity was mostly unchanged or declining in New York, St. Louis, Kansas City, and San Francisco, while Philadelphia, Richmond, and Chicago saw slight increases. Atlanta reported commercial lending activity as mixed.

The New York, Philadelphia, and Cleveland Districts reported increases in overall delinquencies, with respondents in New York indicating a notable rise in late payments for consumer loans. Credit quality deteriorated further in San Francisco, but began to stabilize in Chicago and Dallas. Contacts in Kansas City and Dallas expected loan quality to deteriorate going forward. All Districts reporting on credit standards noted further tightening for consumer, residential, and commercial loans.

Agriculture and Natural Resources

Despite less-than-ideal weather, crop conditions generally improved for most reporting Districts. Reports from the Richmond, Chicago, St. Louis, and Minneapolis Districts indicated that the combination of cooler-than-normal weather and wet conditions delayed planting and development of many crops. St. Louis said that planting of major crops was behind its five-year average pace, while Minneapolis noted delayed planting and development of corn and soybeans. Richmond and Chicago reported that some crops would require replanting, although Chicago District contacts expected small losses in yields. Despite weather delays, Kansas City noted that corn planting was almost complete, soybean planting was in progress, and the winter wheat crop was in good condition. Chicago and Dallas cited high input costs and price movements for corn as factors leading farmers to shift production away from corn towards soybeans. Dairy and livestock producers in the Chicago and Kansas City Districts voiced concerns that rising feed costs were eating into profit margins.

Activity in the energy industry remained strong according to reports from the Minneapolis, Kansas City, Dallas, and San Francisco Districts. Cleveland said that energy producers reported a pickup in oil and gas drilling, and Minneapolis indicated that robust oil and gas exploration and production continued in their District. Kansas City noted that the number of active drilling rigs surged since the last survey period and remained well above year-ago levels. San Francisco reported that oil and natural gas extraction expanded further in response to growing demand, but that activity had been constrained slightly by a shortage of equipment and materials. In contrast, Dallas noted that high oil and natural gas prices had pushed drilling to the highest level in 20 years without any shortages of equipment and services to date.

Prices and Wages

Business contacts in most Districts reported increases in input prices since the last report, especially prices for energy, petroleum derivatives, metals, plastics, chemicals, and food. Manufacturing contacts in several Districts reported some ability to pass along the higher costs to customers and contacts in the Cleveland District noted that they are considering additional price increases in the near future if input costs continue to rise. On the other hand, contacts in the Cleveland, Atlanta, and Chicago Districts noted falling or stable prices for certain goods related to the construction industry. Retail price reports were mixed, with contacts in the San Francisco District reporting subdued price pressures for most products save food and energy-intensive goods. Contacts in the New York District reported steady retail prices with somewhat more aggressive discounting. However, retail contacts in the Richmond and Kansas City Districts reported higher prices, while retailers in the Chicago District reported increased pressure to pass along higher food and energy prices. Contacts in the Kansas City and Dallas Districts cited expectations for higher retail prices in the near future.

Business contacts in most Districts reported moderate or limited wage growth in response to some loosening of labor market conditions. Contacts in the Boston, Chicago, Kansas City, and San Francisco Districts noted wage pressures for certain skilled labor positions in industries facing worker shortages.