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Beige Book: Full Text

The following is the full text of the Beige Book released by the Federal Reserve on September 3, 2008 and based on information collected on or before August 25, 2008:

Reports from the twelve Federal Reserve Districts indicate that the pace of economic activity has been slow in most Districts. Many described business conditions as "weak," "soft," or "subdued." Cleveland and St. Louis reported some weakening since their last reports while Boston and New York noted signs of stabilization. Kansas City reported a slight improvement.

Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending. Districts reporting on auto sales described them as falling or steady at low levels. Tourism activity was mixed but received support from international visitors in several Districts, and the demand for services eased in most Districts. The transportation industry was also adversely affected by rising fuel costs. Manufacturing activity declined in most Districts but improved somewhat in Minneapolis and Kansas City. Most Districts reported that residential real estate markets remained soft. Commercial real estate activity was slow in most Districts, and some reported further slackening in demand for office and retail space. Most Districts reported easing loan demand, especially for residential mortgages and consumer loans; lending to businesses was mixed. Districts reporting on the agricultural sector noted some relief from drought conditions. Districts reporting on energy and mining activity recorded increased activity.

Almost all Districts continued to report price pressures from elevated costs of energy, food, and other commodities, although some noted that there have been declines or slower increases in prices for several industrial commodities and energy products. Business contacts in a number of Districts indicated that they had increased selling prices in response to the high costs for their inputs. Wage pressures were characterized as moderate by most Districts amid a general pullback in hiring, although several Districts noted continued strong demand for workers in the energy sector.

Consumer Spending and Tourism
Consumer spending was slow in most Districts. Retail sales and other consumer spending was reported as mixed or little changed in Boston, Chicago, St. Louis, and Dallas and weak or declining in Philadelphia, Richmond, Minneapolis, and San Francisco. Sales were described as below expectations in Atlanta but on or close to plan in New York. Cleveland and Kansas City noted some improvement in retail sales since the last report. Several Districts reported that consumers were concentrating on food, staples, and other necessary items while reducing spending on discretionary items. Chicago, Dallas, and San Francisco reported noticeable declines in spending on apparel, electronics, and jewelry. Sales of furniture and household appliances were weak in most Districts. San Francisco described sales of this merchandise as exceptionally poor. A shift of consumer shopping patterns toward discount stores and lower-price brands and away from traditional department and specialty stores was observed in Philadelphia, Chicago, Dallas, and San Francisco. Sales of motor vehicles were reported to be weak or falling in all Districts, especially for larger, less fuel-efficient cars, SUVs, and trucks.

Tourism activity varied across Districts. Atlanta, Minneapolis, and Kansas City reported mixed or steady conditions since the last report. Boston, New York, and Richmond reported improvement since the last report. San Francisco reported that tourism was flat to down in most major destinations in that District, significantly so in Hawaii. International visitors boosted tourism in Boston, New York, and Minneapolis. In contrast, several Districts noted that domestic vacationers appeared to be reducing miles traveled and amounts spent on trips. Boston reported that business travel has been better than expected.

Nonfinancial Services
Districts reporting on nonfinancial services generally indicated some slowing in activity since the last report, although New York reported stabilization after several months of decline. Boston, Cleveland, Atlanta, and Dallas noted falling demand for freight and transportation services, and firms in those industries reported higher fuel costs negatively affecting their margins. Dallas reported that airlines were reducing capacity. Demand for information technology services was reported to be flat in Boston and down in St. Louis. St. Louis and San Francisco noted less strength in the health care sector since the last report. Business and professional services activity was weakening in St. Louis and San Francisco. Dallas reported that business was steady at accounting firms but down at legal firms. Temporary staffing activity was reported to be mixed in Boston and Richmond and stable in Dallas.

Manufacturing
Manufacturing activity was weak or declining in most Districts but improved in others. New York reported some stabilization after months of decline, Kansas City reported a rebound after a weakening in June, and Minneapolis and San Francisco have made gains since the last report. A number of Districts reported that export orders were bolstering manufacturing activity, but manufacturers in several of those Districts have noted some recent slowing in growth from this source. Boston, Philadelphia, Cleveland, Richmond, Chicago, and Dallas reported continuing declines in demand for housing-related products and construction materials. Boston reported declining output of aircraft and other transportation parts and equipment, but San Francisco reported a high rate of aircraft production. Output of motor vehicles and related products was falling in Boston, Cleveland, Atlanta, Chicago, and Dallas. Boston and San Francisco reported rising demand for information technology equipment, but Dallas reported some weakening in demand for high-technology products. Manufacturers in Philadelphia, Cleveland, and Kansas City have increased capital spending or plan to do so, but Boston reported that manufacturers in that District were reexamining capital spending plans, and Chicago reported that several firms were postponing capital projects.

Real Estate and Construction
Residential real estate conditions weakened or remained soft in all Districts, except Kansas City, which reported a modest increase in sales since the last report. Demand for housing was reported to be still moving down in Boston, New York, Chicago, St. Louis, and San Francisco. Residential real estate activity was sluggish in Philadelphia, Cleveland, Richmond, Atlanta, Minneapolis, and Dallas. New York reported low levels of single-family construction but a brisk pace of multi-family construction after an increase in permits in June occasioned by a change in the New York building code effective July 1. Chicago reported a faster rate of decline in residential construction since the last report as well as delays and cancellations in residential building projects. Richmond and Kansas City reported that lower and mid-price houses were selling at a better rate than more expensive houses. Atlanta and Dallas reported that inventories of unsold new houses were edging down.

Commercial real estate activity moved down or remained weak in all Districts except Dallas. Boston, New York, Philadelphia, Atlanta, and Chicago reported signs of softening demand for commercial real estate, including declining leasing activity, rising vacancies, and decreasing construction. Cleveland, Richmond, St. Louis, Minneapolis, Kansas City, and San Francisco reported that commercial real estate market conditions varied across those Districts but in general were not strong. Dallas reported an increase in office leasing but at a slower pace than in the last report. Chicago and Minneapolis noted drops in demand for retail space. Dallas and San Francisco reported that public projects were buoying construction activity.

Banking and Finance
District reports on bank lending generally indicated steady or slowing growth, with weakening demand for residential mortgages and consumer loans and near steady demand for commercial and industrial loans. Residential mortgage lending fell in New York and Richmond, remained slow in Chicago and Dallas, but gained slightly in Philadelphia. Consumer lending was flat to down in Cleveland, Atlanta, and St. Louis and showed little change in New York and Chicago. Commercial and industrial lending was near steady in New York, Philadelphia, and Cleveland and eased in Richmond, St. Louis, and Kansas City. Demand for commercial and industrial loans rose in Chicago--mostly from small and mid-size firms--and was described as solid in Dallas. San Francisco reported that overall loan demand has fallen since the previous report. All the Districts reporting on loan standards noted tightening. New York, Cleveland, Richmond, and San Francisco reported deterioration in credit quality. Dallas indicated that credit quality was holding up, although bankers in that District expected it to decline. Districts reporting on bank funding noted that competition for deposits remained strong. In Dallas, bankers said they were pursuing nondeposit sources of liquidity.

Agriculture and Natural Resources
The agricultural sector continued to struggle under drought conditions in the South, although there was some relief in July and August. In the Richmond District persistent dry conditions were expected to delay crop development and reduce yields; however, the fruit and vegetable harvests have been mostly completed. Atlanta reported some benefit from recent rains, although drought conditions persisted in Georgia. Chicago reported improved crop conditions, although corn and soybean development was behind schedule. Crop development was also behind schedule in the St. Louis District where conditions improved for grain but worsened for cotton. Minneapolis reported a better than expected harvest of winter wheat and expectations that corn production would exceed last year's harvest. Dallas reported dry conditions in much of the District and noted that Hurricane Dolly destroyed cotton and sorghum in the Rio Grande valley. Kansas City reported an increase in wheat yields. Although most Districts with significant agricultural sectors reported strong demand for their products, they also noted that fuel, feed, and fertilizer costs had risen, putting pressure on profit margins. High costs were reported for livestock operations, and Kansas City and Dallas reported that herds were being culled.

Energy and mining activity were strong and expanding in all of the Districts that reported on these sectors. Cleveland noted increases in oil, gas, and coal extraction since the last report. Minneapolis also reported an increase in energy activity and indicated that almost all mines in the District were operating at full capacity. Drilling activity has increased in the Kansas City District since the last report and was well above the year-ago level. Dallas reported a continued rise in the rig count, to levels above last year, with much of the increase due to drilling for natural gas. San Francisco noted an increase in petroleum production.

Prices and Wages
All Districts reported continuing upward price pressure from elevated input costs, although several noted recent retreats in some commodity and energy prices. Philadelphia reported rising prices for food products, industrial materials, and metals. Cleveland reported continuing increases in raw material costs, and business contacts in San Francisco said upward price pressure remained significant. Chicago, Minneapolis, and Dallas business contacts noted recent declines in commodity and energy prices but said price levels remained high. In Philadelphia, retailers reported rising wholesale costs. Retail price inflation edged up in Richmond. New York and Chicago reported little change in retail prices. Business contacts in Philadelphia, Atlanta, and Dallas indicated that high prices for their inputs were leading them to step up the pass-through of higher costs to their selling prices. Similar reports of the pass-through of costs to prices came from manufacturers in the Boston and New York Districts as well as from shippers in the Cleveland District. Chicago and San Francisco reported that the pass-through of costs to prices was more limited.

Labor market conditions were unchanged or somewhat softer in most Districts compared with the last report. Wage increases were typically characterized as moderate. Boston reported mostly modest wage increases except for greater hikes in salaries at information technology companies. Philadelphia reported moderate wage gains and limited hiring. Cleveland noted wage pressures in the energy sector but not in manufacturing or construction. Atlanta received scattered reports of wage increases, mainly in the professional services and the energy sectors, and more generally in coastal areas undergoing rebuilding after storm damage. Chicago indicated that labor markets have weakened and there was little wage pressure other than for a few skilled trades. Kansas City reported steady wage pressure but noted that there were shortages of qualified workers in the energy sector. Dallas also noted shortages of workers in the energy sector but indicated that wage pressure was mild overall. San Francisco reported some easing in upward wage pressure as firms in that District have been reducing staff counts, although demand remained strong for skilled workers in the resource extraction and information technology industries.

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