Text: Federal Reserve's Beige Book
Below is the full text of the Beige Book released by the Federal Reserve on January 16, 2008 and based on information collected on or before January 7, 2008:
Reports from the twelve Federal Reserve Districts suggest that economic activity increased modestly during the survey period of mid-November through December, but at a slower pace compared with the previous survey period. Among Districts, seven reported a slight increase in activity, two reported mixed conditions, and activity in three Districts was described as slowing.
Most reports on retail activity indicated subdued holiday spending and further weakness in auto sales. However, most reports on tourism spending were positive. Residential real estate conditions continued to be quite weak in all Districts. Reports on commercial real estate activity varied, with some reports noting signs of softening demand. Manufacturing reports varied across industries, with pronounced weakness noted in housing-related industries as well as the automobile industry. Strong export orders and increased demand in industries whose products compete against imports was reported by some Districts. Demand for nonfinancial services remained generally positive, although some Districts commented on continuing weak demand for transportation services.
Reports from banks and other financial institutions noted further declines in residential real estate lending, and lending to the commercial real estate sector was generally described as mixed. Some Districts reported lower consumer loan volumes, whereas the volume of commercial and industrial lending varied. Most Districts cited tighter credit standards.
Demand continued to decline for construction workers and those in housing-related industries, according to most reports, while demand generally held steady for skilled workers in nonfinancial service industries. Wage increases remained moderate overall. Increases in prices for food, petrochemicals, metals, and energy-related inputs continued to be widely reported, and production and delivery costs for many products increased because of higher fuel prices. Producers in the agricultural sector reported generally strong demand and favorable production conditions outside of the drought-stricken areas in the Southeast. Strong oil and gas exploration and production activity was noted by several Districts.
Consumer Spending and Tourism
Reports indicate that holiday sales were generally disappointing. Sales in the Atlanta, Boston, Chicago, Cleveland, Dallas, New York, Richmond, and San Francisco Districts were varyingly described as lackluster, weak, below year-ago levels, or mixed. Kansas City reported that spending was solid, but below expectations. Sales rose modestly according to Minneapolis, Philadelphia, and St. Louis reports. Atlanta and New York merchants noted that foreign buyers were a boost to holiday sales. Overall, the outlook for 2008 among retail merchants was cautious.
Most Districts reported that vehicle sales for late 2007 were below year-ago levels. However, the Minneapolis report noted strong demand from area farmers and Canadians purchasing vehicles across the border. The Atlanta and Kansas City Districts reported that sluggish vehicle demand has resulted in unexpected inventory accumulation. However, imports and fuel-efficient vehicles continued to sell well according to the Philadelphia, Kansas City, and Dallas reports. Atlanta noted that some foreign brands had turned to fleet sales to offset generally weaker retail demand. Dealers in Philadelphia and Cleveland anticipated that sales in 2008 would be flat to lower than in 2007.
Reports on tourism were mostly positive. The Atlanta District observed that Florida businesses catering to winter visitors experienced increased demand. The number of visitors from Europe and Canada were especially strong, and bookings for the Spring were robust. Minneapolis reported that solid snowfall in many parts of the District helped spur winter tourism activity. Richmond’s assessment of tourist activity was also generally upbeat. Tourism activity in New York City was said to have remained strong through year-end.
Most reports cited robust demand in several nonfinancial service industries including health care, hospitality, legal, and insurance. According to Atlanta, the demand for engineers, particularly in petrochemical fields, was very strong. Reports on temporary staffing services were mixed. For instance, Dallas and Philadelphia noted that employment firms reported weaker demand for temporary workers, whereas New York and Richmond reported relatively strong demand.
Demand for transportation services was generally weak, led by lower demand from the housing sector. Reports indicated that freight volume continued to weaken in the Atlanta and Cleveland Districts and was slow overall in the Dallas District. Inter-modal transportation volumes were also said to be lower in the Atlanta and Dallas Districts, although Dallas noted that rail shipments were up, led by strong agricultural shipments.
Reports on manufacturing activity varied. Kansas City reported that manufacturing was expanding and that manufacturers were relatively upbeat. Cleveland reported that manufacturing output remained steady overall, whereas Dallas indicated that conditions continued to soften. New York reported that manufacturing activity appeared to weaken somewhat in early December, but noted some improvement later in the month. Among the positive reports, San Francisco noted that production and new orders for commercial aircraft and parts remained solid, while sales of information-technology products continued to increase moderately. Boston said that sales of aircraft equipment and pharmaceuticals continued to rise at a robust rate. Atlanta and Minneapolis noted that defense and energy-related manufacturers reported strong activity. St. Louis and San Francisco reported that the local food production industry was expanding.
Philadelphia, Chicago, Kansas City, and Atlanta reported that many firms were expanding export activity. In some cases, demand was also said to have increased as a result of import substitution. For example, Chicago reported that domestic steel production was expanding, led by a moderation in imports. Demand for equipment used in energy extraction and mining continued to be robust as well.
However, according to most Districts, conditions in manufacturing industries producing construction and home-related goods remained weak. Richmond noted weakness in demand for electronics, and San Francisco described production of industrial equipment as tepid. In addition, auto-related production was soft according to the Cleveland, Chicago, and St. Louis reports.
Real Estate and Construction
Conditions in most housing markets remained quite weak through year-end. The pace of sales continued to be sluggish, and inventories persisted at historically high levels according to most Districts. Home construction levels continued to decline according to Atlanta, Chicago, Dallas, Kansas City, and St. Louis reports. Reports on home prices varied. While Dallas observed that home prices were steady, Atlanta, Cleveland, Kansas City, New York, and Richmond reported that prices declined; the Boston and San Francisco Districts said that changes in home prices were mixed. Overall, contacts anticipate that housing markets will remain weak during the first part of 2008.
Reports on commercial real estate activity varied, with some Districts noting that activity had eased late in the year. Contacts in the Atlanta and Boston Districts indicated that commercial markets were little changed while the Chicago, Kansas City, Minneapolis, Philadelphia, and Richmond reports suggested slower growth. Activity was stable to increasing according to the Cleveland, Dallas, and San Francisco reports. Vacancy rates were described as stable in the New York, Philadelphia, and Kansas City Districts, and as varied in the Richmond District. Chicago and Minneapolis contacts noted that retail vacancies had risen. Kansas City contacts reported that leasing activity was stable, whereas leasing activity in the Richmond, Philadelphia, and New York Districts had slowed. Most Boston District contacts reported that rents were flat, while rents were steady to declining according to the Chicago and Kansas City reports. New York and Richmond noted that rental rates had stabilized in the fourth quarter, whereas Dallas continued to report rising rental rates.
Contacts in the Boston and Chicago Districts indicated that commercial construction activity was slowing. Developers in the Atlanta and Richmond Districts reported smaller backlogs of projects while Cleveland District contacts said that backlogs had risen. Most contacts anticipate a slower pace of commercial development during 2008.
Banking and Finance
Reports suggest that both business and consumer lending activity slowed in most Districts from mid-November through December. Residential mortgage lending continued to contract in all Districts while refinancing activity varied. For instance, Chicago and Richmond noted increased refinancing activity, but New York cited widespread declines in refinancing. Reports on commercial real estate loan demand were also mixed, although Dallas and Cleveland noted relatively healthy demand. Most reports indicated that credit standards for most loan categories had tightened over the period. Downward pressure on deposits was noted by Chicago, New York, Philadelphia, St Louis, Kansas City, and Dallas. Several Districts reported declines in loan quality and increased delinquencies.
Agriculture and Natural Resources
The performance of the agricultural sector across Districts was generally favorable. Upbeat conditions in Chicago, Minneapolis, and San Francisco were attributed to a combination of higher crop prices and favorable weather. Dallas and San Francisco reported strong domestic and global demand for their products. Kansas City reported that strong demand and low inventories boosted prices and income for crop producers. However, despite recent rains, conditions for drought-stricken areas in the Atlanta and Richmond Districts remained generally poor.
Activity in the energy sector increased according to the Atlanta, Dallas, Kansas City, and Minneapolis Districts. Dallas noted a sharp rise in the Texas rig count while Kansas City cited strong drilling activity in Oklahoma and Colorado. However, seasonal factors dampened drilling activity in the Cleveland District, and reports on coal production in the region were mixed. Atlanta indicated that Gulf Coast crude inventories were low, but new offshore platforms should help boost production in 2008.
Prices and Wages
According to most reports, businesses continued to face rising costs for food, petrochemicals, metals, and energy-related inputs. Several Districts noted that transportation costs for most products increased. Philadelphia reported that some firms had raised output prices in order to cover higher energy costs. In the San Francisco District, price inflation was said to be limited in general, but significant for food and energy. Dallas reported that high or rising input costs were squeezing margins for most industries. Manufacturers in the New York District reported prices paid and received had increased and that this was expected to continue. Atlanta noted that input costs continued to increase for imported goods originating in Europe or Japan because of the lower value of the dollar. In contrast, producers of framing lumber, wallboard, and wood panels reported weak prices according to the Atlanta, Minneapolis, and Chicago reports.
Reports suggest that labor markets remained relatively tight overall, and especially for skilled workers, whereas housing-related industries continued to trim payrolls. Increases in employment costs were generally described as moderate. Kansas City reported that overall wage pressures eased, with only the energy sector citing significant wage pressure. Philadelphia reported that labor costs continued to increase at a moderate pace while Boston, Chicago, Dallas, and San Francisco reported that wage pressures remained limited outside of a few sectors that continue to experience shortages of skilled labor. Wage pressures were not significant according to the Cleveland report.
Closing out 2007 with mixed results, business contacts in the First District express considerable uncertainty about 2008. Manufacturers and business consultants mostly report recent revenue results similar to earlier in the year and meeting their expectations but say they expect the first half of 2008 to be slower. Contacted retailers cite a wide range of sales results in November and December, with "challenges" ahead. Residential real estate markets remain soft. Cost pressures, especially from oil prices, are widely noted; some retailers and manufacturers `expect to pass them along in higher prices. Manufacturers expect to increase wages in 2008 about the same or slightly more than they did in 2007, while selected business services firms plan to keep a somewhat tighter rein on their pay increases in 2008 than in 2007.
First District retailers report mixed sales results for the months of November and December. A contact in the hardware business says business has been "truly fantastic" because of heavy snow, while other respondents indicate inclement weather contributed to weaker than expected sales. Many retailers report strong sales in the week after the Christmas holiday. Some respondents note an increase in gift card purchases, continuing a trend of the past few years; gift cards are generally not reflected in sales numbers until redeemed.
Inventory levels are mixed, but several contacts note they are higher than expected because of decreased sales. Headcount is also mixed; several contacts report hiring in line with new store openings, while another--experiencing weak sales--plans layoffs in the near future. Capital spending is varied, with a couple of retailers shifting their focus to refurbishing current stores. The majority of contacted First District retailers observe varying degrees of price pressure, with modest increases being passed along to the consumer where possible. In particular, most respondents indicate they are feeling both direct and indirect effects of rising oil prices, including increased surcharges and decreased consumer spending.
Overall, retail respondents are cautious in their outlook and expect early 2008 to be challenging. Most retailers are worried about the impact of rising energy costs on both consumer confidence and disposable income. However, some are still cautiously optimistic, and one contact said that it surprises him that the consumer has been "so wonderfully resilient" over the last several months.
Manufacturers and related services providers headquartered in the First District report that year-over-year revenue changes in fourth quarter 2007 remained similar to those in the prior quarter. Sales of aircraft equipment and pharmaceuticals continue to grow at a robust rate, while demand for home construction products continues to decline. Several manufacturers of consumer products or consumer product inputs say they were relieved to experience somewhat improved business late in the fourth quarter. Makers of high-tech equipment and instruments indicate that sales trends remained solid through yearend, but they sense some hesitancy on the part of their customers going forward. Sales to western European markets appear to be slipping a bit, while other foreign sales remain on a positive course.
Most manufacturers report that materials costs are rising--especially for plastics, metals, grains, and energy--and they anticipate further escalation in coming months. Some contacts for whom such inputs account for a sizable component of overall costs describe these prices in terms such as "astronomical" or "out of control." For the most part, responding firms have been able to increase their selling prices somewhat in response to higher materials and energy prices, and they plan to continue to announce increases in 2008. However, about one-half of respondents express at least some degree of concern about growing margin pressures or obstacles to raising prices.
Manufacturers continue to adjust their U.S. headcounts only minimally. Average wage and salary increases are expected to remain in the range of 3 percent to 4 percent, but some firms employing mainly high-end technical workers are planning somewhat higher pay raises in 2008 than in 2007. More than one-half of the respondents say they will increase their U.S. capital spending in 2008, especially for research, development, and testing of new products and adoption of improved technologies. Most of the remaining firms intend to hold domestic investment steady.
Manufacturers and related services providers express a variety of views on their prospects in the coming 12 months, with some emphasizing that negative economic developments in late 2007 have led to growing uncertainty. Respondents increasingly voice concerns about margin pressures, the impacts of higher oil prices on the U.S. economy, or the ripple effects from the weak housing market and rising foreclosures. On the other hand, concerns about the availability of business credit seem to have abated, compared to the prior two Beige Books.
Selected Business Services
The majority of contacts at First District consulting firms report that fourth quarter revenues were strong, or stronger, than expected. Demand for consulting services from the airline industry and U.S. pharmaceuticals is robust; however, demand from the financial services sector has weakened. More generally, firms report that elevated economic and domestic political uncertainty is prompting their clients to delay committing to projects until they have a clearer picture of their situation.
The majority of contacted firms have put through modest price increases, while the remainder have left bill rates unchanged, citing a competitive market environment. Input costs are relatively stable. Headcounts at the majority of New England firms are growing, but at a slightly slower rate than revenues. Most respondents plan to increase wages by between 2 percent and 5 percent in 2008.
The majority of New England business services respondents expect to see lower revenue growth in the first half of 2008 than they had in 2007, while the rest anticipate stable growth.
Commercial Real Estate
The common theme of respondents this time is that conditions have not changed much since the last report, either for the better or for the worse. In general, credit is much tighter than it was in the first half of 2007. The ratio of cash flow to building value in Boston is said to have edged up about 100 basis points over the low levels seen in mid-2007. This movement reflects the tighter credit situation and is consistent with reports of price depreciation for office buildings in Boston, Hartford, and Portland.
In most markets and sectors, rents and vacancies are flat and sales activity is slow. Although there are growing signs of a slowdown in non-residential construction in all markets, strong construction activity by hospitals and universities in greater Boston has mitigated the slowdown there. Reports are conflicting about the apartment market in Boston, with one contact describing it as "relatively strong" and another saying it is "weaker than expected."
The consensus expectation is that 2008 will be a slower year for commercial real estate than 2007. Sales volume and construction are expected to be below 2007 levels, prices will appreciate more slowly or will fall outright, with office building prices the most vulnerable. Rent growth is expected to slow or stall, absorption to slow, and vacancy to hold steady or increase. The key factors that contacts are watching are job growth and credit supply.
Residential Real Estate
New England residential real estate markets showed substantial drops in home sales in October and November compared to the same months in 2006. Comprehensive data (including foreclosures) showed sales declines of 17 percent to 18 percent year-over-year in Connecticut and Rhode Island in October. Massachusetts and Maine single-family home sales declined by double-digit percentages in October and November compared to a year earlier. New Hampshire sales decreased by just under 10 percent in those months.
Median home price changes are somewhat more varied in New England markets. Comprehensive data for October and November show median single-family prices in Massachusetts down 6 percent year-over-year. Similar data indicate Connecticut prices decreased 1 percent in October compared to the year before, while Rhode Island prices dropped 10 percent. State Realtors' data (including only multiple listings) show a 1 percent year-over-year price decline in New Hampshire and a 1.6 percent year-over-year price increase in Maine in November. In Massachusetts and Connecticut, condo sales are also down, although median condo prices have actually increased somewhat year-over-year, as the high end of the market is still relatively strong.
Contacts in Massachusetts remain concerned that negative media reports are causing buyers to avoid the housing market. Tighter lending standards are also said to be having a negative effect on sales. Several contacts expect New England residential real estate markets to remain weak well into 2008.
Second District--New York
Economic growth in the Second District has slowed since the last report, though the labor market has remained fairly firm. Manufacturers report some weakening in business activity as of early December but note some improvement in early January. In general, contacts outside the manufacturing sector report little or no growth in business activity but some pickup in hiring. Retailers indicate that sales were relatively weak for the holiday season overall (November and December). Tourism activity in New York City has remained strong. Housing markets remain mixed but mostly weak, with the exception of Manhattan's co-op and condo market. Office markets in and around New York City were stable in the fourth quarter: vacancy rates are little changed since the last report, while asking rents are up slightly. Finally, bankers report weakening loan demand across the board, particularly for home mortgages, tightening credit standards in all categories, and rising delinquency rates, particularly on consumer loans.
Retailers report mixed but generally weak sales results for the holiday season. Overall, it appears that sales were flat to up modestly from 2006 levels. One major retail chain reports that same-store sales in the District were on plan, rising 5 percent from a year earlier, whereas another indicates that sales were below plan, falling more than 3 percent. Separately, a trade association survey of retailers across New York State indicates that sales were somewhat disappointing, with two in five indicating weaker sales than in 2006. In general, sales are reported to have picked up moderately after Christmas and into early January. Geographically, sales were reported to be relatively strong in New York City stores, as well as at those in the Buffalo area, with strength in the latter attributed to large numbers of Canadian shoppers.
Tourism activity in New York City remained strong through year-end. Hotels remained at close to full capacity in November and December. Hotel occupancy rates were reported to be close to 90 percent in both November and December, with room rates running roughly 13 percent ahead of a year earlier. Broadway theaters report that attendance and revenues bounced back in December, following the strike that shut down many shows for the final three weeks of November. Both attendance and revenues were down roughly 4 percent from a year earlier in December but still at relatively strong levels. Regional surveys point to declining consumer confidence in the final months of 2007. Based on the Conference Board's survey of Middle Atlantic residents, confidence fell for the third straight month in December and was at its lowest level in over two years. Siena College's survey of New York State residents shows confidence falling sharply in November and holding steady at a low level in December.
Construction and Real Estate
Office markets in the New York City area were generally stable in December and for the fourth quarter overall, with Manhattan's market remaining tighter than those in the surrounding areas. There was some slowing in leasing activity throughout the metro area, though vacancy rates were little changed, while asking rents rose modestly. In Manhattan, the Downtown market continued to tighten, offsetting some softening in Midtown. An industry contact notes that large rent differentials are prompting some firms to move from Midtown to Downtown Manhattan. Overall, Manhattan asking rents, which had been rising sharply through the third quarter, flattened out somewhat in the fourth quarter, though they continued to run roughly 25 percent ahead of a year earlier. The only other market registering double-digit rent increases over the past year is Fairfield County, Connecticut.
Housing markets in the District continue to be mixed. Manhattan's co-op and condo market showed continued resilience in the fourth quarter. A major appraisal firm reports an outsized increase in the average transaction price in the fourth quarter but attributes this mainly to a shift in the mix of units to newer, high-end condos; this contact estimates that prices of comparable units are up roughly 6 percent from a year earlier in Manhattan, with unit sales up 3 percent from a year earlier. In contrast, on Long Island, both prices and sales continue to run below year-ago levels. More broadly, reports from Realtors across New York State indicate increasingly weak market conditions for single-family homes, with prices down roughly 10 percent from a year ago and unit sales down 15 percent.
Other Business Activity
A major New York City employment agency, specializing in office jobs, describes hiring activity as surprisingly brisk in December, which is usually a slow month; hiring demand remained strong from the legal industry and the financial sector--largely hedge funds and private equity firms. The supply of qualified office workers continues to be characterized as sparse.
New York State manufacturers report that business activity weakened somewhat as of early December, but note some improvement in recent weeks. However, contacts report some further pullback in hiring activity, as well as hiring plans; they also express considerably less optimism, in general, about the six month outlook than in recent months. Manufacturers report continued widespread escalation in prices paid and prices received--both current and expected. Overall, non-manufacturing firms in the District report little or no growth in the level of business activity and express considerably less optimism about the general outlook than a few months ago. Unlike manufacturers, though, these contacts report a pickup in hiring and expect their employment levels to increase, on balance, in the first half of 2008.
Small- to medium-sized banks report falling demand for all types of loans--particularly in the residential mortgage category, where more than four in five respondents indicate declining demand. There were also fairly widespread declines in demand for consumer loans, and in refinancing activity. For all loan categories, respondents indicate further tightening of credit standards. No bankers reported eased standards in any loan category. Overall, the extent of tightening was comparable to the prior (November 2007) survey. Consistent with weakening demand, bankers report a decline in the spreads of loan rates over cost of funds for all types of loans. Again, the decline was most pronounced in the residential mortgage category. Bankers also reported a decrease in the average deposit rate. Finally, respondents indicate increases in delinquencies across all loan categories--most notably for consumer loans, where increases are reported to be more widespread than at any time in at least 13 years.
Business activity increased slightly in the Third District in December, although the real estate sector continued to be soft. Manufacturers, on balance, reported modest increases in new orders and shipments. Retailers generally reported small increases in sales for the holiday shopping period compared with the previous year. Auto sales showed little change from November to December and remained below the level of a year ago. Overall bank lending has been rising slowly, with better growth in business lending than in consumer and real estate lending. Residential real estate sales remained well below the level of this time last year. Commercial building leasing and sales have slowed. Service-sector firms generally indicated that their business has been expanding steadily, although employment agencies and temporary help firms reported slower growth in demand as 2007 came to an end. Firms reporting on labor costs generally noted a continuing trend of moderate increase in wages, but they continued to report large increases in health care benefits costs. Reports of increases in input costs and output prices were about as prevalent in December as they were in November, although more firms indicated that they were raising the prices of their own goods and services to cover higher motor fuel and energy costs.
Third District firms generally foresee continued growth, but most of those contacted for this report have scaled back their forecasts for 2008. Manufacturers, on balance, expect increases in demand for their products, but the number forecasting increases has declined since a month ago. Retailers generally expect slow sales growth during the year. However, auto dealers generally expect sales in 2008 to be somewhat less than sales in 2007. Bankers anticipate slow expansion in overall lending, with gains coming largely from business lending; they expect little expansion in consumer and real estate lending. Residential real estate agents expect sales to remain sluggish. Contacts in commercial real estate anticipate slower leasing and purchasing activity as markets adjust to reduced credit availability. Service-sector companies generally forecast growth this year to be about as strong as it was last year, but employment agencies expect hiring to be less active, at least in the early part of the year.
Third District manufacturers, on balance, reported rising shipments and new orders in December compared with November. Around one-third of the manufacturers surveyed noted increases and around one-fifth noted decreases. Increased demand for their products was reported by commercial printers and by producers of food products, textiles, apparel, and instruments. Decreased demand was noted by producers of lumber products, construction materials, and metals. For the Third District manufacturing sector as a whole, order backlogs edged down from November to December. Typical comments from Third District manufacturers are that business related to the housing market is “very difficult,” but “there has been an increase in export opportunities” and “reduced import pressure from China.”
The outlook in the Third District manufacturing sector is positive, although the level of optimism has declined somewhat recently. Just under one-third of the firms contacted for this report expect increases in new orders and shipments over the next six months, and nearly one-fourth expect decreases. Despite the modest outlook, Third District manufacturing firms have boosted capital spending plans recently, on balance. Around one-third of the firms in the region plan to increase capital spending during the next six months, and around one-tenth expect to reduce capital spending.
Retailers in the Third District generally reported modest increases in sales for the 2007 holiday shopping period compared with the prior year. Sales of electronic items rose strongly, but sales of most other lines of merchandise showed little or no growth year-over-year. Sales of apparel fell short of most retailers’ expectations, especially at some apparel specialty stores, for which the season was, according to several contacts “a real disappointment.” According to store executives in the District price markdowns were “up a little bit” from last year, but inventory “has been controlled.” Consequently, most stores plan to feature full-price merchandise through the rest of the winter. Third District retail contacts’ outlook for 2008 is cautious. Most expect consumers to restrain spending generally and postpone purchases of big-ticket items in response to uncertainties about housing and overall economic conditions.
Auto dealers in the region generally reported slow sales in December, with most indicating that sales were even with or slightly below the November sales rate. Most dealers indicated that inventories have been fairly steady at manageable levels. Dealers in the region expect sales in 2008 to be below sales in 2007, on balance, although some import dealers expect moderate increases.
Total outstanding loans at Third District banks rose somewhat in December. Commercial bank lending officers contacted for this report generally indicated, as they have for the past several months, that the increase was stronger for commercial and industrial loans, mainly to middle-market firms, than for personal and real estate loans. However, several bankers said that growth in commercial and industrial lending largely continues to fund leveraged buyouts and mergers and acquisitions, with smaller gains in lending to support capital expenditures. Most bank contacts indicated that asset quality overall weakened over the latter half of 2007. Further, they indicated that chargeoffs in 2007 were five to 10 basis points higher than had been projected. Contacts reported that attracting deposits is “an issue,” as competition among banks in the District has been strong. Looking ahead, bankers generally foresee slow growth in overall lending. They continue to expect little improvement in mortgage and personal lending, but most expect growth in business lending to continue to move up at around its current pace.
Investment companies reported strong cash inflows at year-end that boosted outstanding balances in equity, bond, and money market funds. Investment managers reported continuing volatility and some difficulty in trading in fixed-income markets.
Real Estate and Construction
Residential real estate activity in the Third District remained well below its pace of a year ago in the final months of 2007. Residential real estate agents said there were some signs of increased interest among potential buyers, but they do not expect a broad recovery to get under way soon. Commercial real estate contacts said there has been an increase in caution among investors, brokers, and property owners, leading to reduced leasing and sales. Contacts said the decline in leverage in commercial real estate financing has put a brake on building price increases.
Business services firms generally reported steady growth in the final months of 2007, and most of the firms contacted for this report said they expect their sales and revenue for the year as a whole to be close to their forecasts. However, employment agencies and temporary help firms reported that demand for workers has not been growing as strongly recently as it had been through most of 2007. Most of the service-sector firms polled in December expect business to continue to expand in 2008 at about the pace set in 2007, although one large business services firm expects “a rough patch” because its client companies are delaying expansion in response to volatility in credit markets. Employment agencies expect hiring in the Third District to be somewhat less robust in the first quarter of 2008 than it was through most of 2007.
Prices and Wages
Reports of increases in input costs and output prices from Third District business contacts were about as prevalent in December as they were in November. Manufacturers noted increases in prices of food products, chemicals, metals, and machinery. Retailers indicated that their cost of goods rose in 2007, and they expect further, possibly larger increases in 2008. Firms in a wide range of industries continued to report high motor fuel and energy costs, and an increasing number of firms have raised the prices of their own products and services to cover the higher costs. Most of the firms reporting on employment costs in December indicated that wage increases remained moderate. Firms reporting on health care costs continued to mention large increases, and the number of firms reducing health care benefit options and raising employee contributions appears to be growing.
Economic activity in the Fourth District expanded at a slow pace since mid November. Overall, manufacturing output remained steady though production at auto assembly plants declined. Residential builders reported new home sales were very weak while commercial contractors experienced an increase in their backlogs. Sales by District retailers were below plan. Demand for business and consumer loans was flat to declining and the number of delinquencies rose slightly. Reports on credit quality showed some deterioration, especially on the consumer side. Oil and gas production was steady to increasing, although drilling activity fell slightly. And truck freight volume was characterized as soft.
Employment levels across the District were largely unchanged. Staffing firms reported a modest increase in the number of job openings while the number of job seekers was flat. Demand was greatest in the health care and nonprofit sectors. Little upward pressure on wages was noted. Manufacturers reported increased costs for raw materials. Several producers reported raising their prices in response to rising input costs and others are planning to increase prices early in 2008.
In general, manufacturing output has been steady over the past six weeks. Reports of increased production were offset by slowdowns attributed to seasonal adjustments or exposure to residential construction. On a year-over-year basis, reports were evenly split between increasing and declining production. Looking forward, almost all of our contacts anticipate output to remain at current levels or to increase.
Steel shipments were mixed. Half of our respondents said volumes were higher than expected; others cited lower volumes but attributed them to seasonal factors. The strongest end markets for steel included transportation, energy, and defense. Auto assembly plants within the District reported lower production numbers during November. Foreign nameplates and their domestic counterparts shared in the decrease. In terms of year-over-year comparisons, auto production was flat.
Reports on capacity utilization were mixed. Further, capital spending remains on plan with several producers saying they expect to increase expenditures during 2008. Reasons cited include increased productivity, new product development, and equipment replacement. Almost half of our respondents reported increasing prices for raw materials. Further, several told us that they have raised their prices during the past six weeks, and more than half said they have plans to raise prices in the near future. Most manufacturers also expect modest inflationary pressures to continue. On balance, there was little change in employment levels; however, several contacts said they plan to resume hiring in 2008. Little wage pressure was reported.
Most home builders reported very weak sales over the past six weeks. However, one contractor in the central part of the District noted that construction was above projections for November. Sales continue to be down year-over-year. Looking forward, builders believe activity in 2008 will mirror that of 2007. Home prices were steady, and half of our respondents told us that they continue to use discounting as a means of selling homes. On balance, material costs were stable. Two contractors told us that they have reduced the size of their workforces since our last report. Further, additional layoffs are possible if business continues to deteriorate. Concerns about labor costs were limited to increases for health care coverage.
Commercial contractors reported that business has been stable to increasing since our last report and on a year-over-year basis. Looking forward, nearly all contractors said that they expect activity in 2008 will be at a higher level than in 2007. Further, all respondents noted a pickup in backlogs. For the most part, material costs were stable. Workforce levels remain largely unchanged; however, a few builders said they may add workers in 2008. No wage pressures were reported.
Overall sales by District retailers were flat to declining during November, with most retailers expecting sales to remain flat during the first quarter of 2008. However, one large discount chain reported rising sales with the expectation that the increases will persist during the next few months. Auto dealers reported a decline in sales of new and used vehicles during the past six weeks, and they anticipate flat to lower sales in the coming months. Vendor prices were steady to increasing during the past six weeks; increases were largely limited to food products. Employment levels were adjusted to meet seasonal demands. And capital expenditures remain as projected with little change anticipated during 2008.
A majority of bankers described business and consumer lending as flat to declining during the past six weeks. Any increases on the business side were generally limited to commercial real estate. The residential mortgage market remains very sluggish with little expectation for any improvement during the next six months. Further, most respondents characterized auto and home equity loan demand as slow. Almost all bankers reported no change to slight growth in core deposits. Net margins were either stable or had narrowed. In general, credit quality for business customers was stable while consumer quality deteriorated. Half of our respondents reported an increase in delinquencies, especially for real estate loans and home equity credit. On balance, employment levels were stable. Two bankers reported some wage pressures which they attributed to difficulty in recruiting qualified workers.
Oil and gas production has been steady to increasing over the past six weeks, although several producers noted a slight decline in drilling activity due to seasonal factors. Reports on coal production were mixed. Little movement was seen in prices received for coal, oil and natural gas and in the cost of materials and equipment. In general, capital expenditures remain on plan. Looking forward, half of our respondents reported that they plan to increase capital spending during the next few months. Employment levels were largely unchanged. Most producers reported some wage pressures, especially among experienced workers.
Trucking executives characterized freight volume as soft over the past six weeks. Looking forward, they anticipate 2008 will be a challenging year with little rebound in business activity until the second quarter at the earliest. Shipping prices remain very competitive while fuel prices continue to rise; however, most carriers are able to recover some of the increased cost through surcharges. Capital expenditures were also characterized as soft with little improvement expected in the upcoming months. Carriers told us that they are unwilling to spend in the current economic environment. On net, employment levels continue to decline slightly due to layoffs, and little wage pressure was reported.