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Beige Book: National Summary

August 8, 2001

Reports from most Federal Reserve Districts point to slow growth or lateral movement in economic activity in June and July. Retail sales generally were sluggish and frequently below expectations, despite substantial discounting on a wide range of consumer goods. Manufacturing activity in nearly all sectors and regions declined further in recent months as producers adjusted to weak domestic and foreign demand and worked through accumulated inventories. Sustained weakness in the manufacturing sector spilled over to other businesses, with many Districts indicating declines in demand for office space and trucking and shipping services. In contrast, residential real estate markets remained stable and even expanded in some areas, with the relative strength of the sector attributed in part to lower mortgage interest rates. Agricultural producers continued to struggle against low prices, weak exports, higher energy costs, and the weather, although some regions reported improvement in growing conditions since the last survey period. Financial institutions across the country reported reduced demand for a wide variety of loans, tighter credit standards, and stable-to-deteriorating quality of existing loans and leases; residential mortgages were the notable exception to these trends.

Continued slow economic growth loosened labor markets and eased wage pressures in most Districts in June and July, but rising benefit costs continued to add to compensation costs. Prices for energy, fuel, and many material inputs fell in most regions. Falling input costs and stiff domestic and foreign competition kept prices of most consumer goods in check.

Consumer Spending
Retail sales generally remained weak in June and July, although there were scattered reports of a pickup in sales. Boston, Chicago, Cleveland, New York, Richmond, and San Francisco reported sales below expectations and well beneath comparable store sales for the same period last year. Atlanta, Dallas, Minneapolis, and St. Louis noted a slight pickup in sales since the last survey period, though sales were flat to down compared to last year. Kansas City and Philadelphia reported flat sales during the last survey period. The weakness in retail sales was broad-based across product lines and types of outlets. Within the sector, sales were strongest at large discount retailers, though many other retailers were offering discounts to promote sales. Auto sales apparently fared better than other areas of consumer spending in some Districts. Districts attributed the better-than-expected sales in part to manufacturer incentives and lower financing charges.

Districts reporting on inventories at retail outlets indicated that most businesses were able to keep stocks in balance. Still, there were scattered reports of retailers canceling orders or asking manufacturers to warehouse deliveries until existing inventories are cleared. Contacts noted that orders for back-to-school and Christmas merchandise were running lower than last year in anticipation of slower sales.

Services and Tourism
Districts reporting on the services sector indicated continued weak demand in June and July. In Dallas, Cleveland, and San Francisco, demand for business services, including advertising, computing and data processing services, and temporary employment agencies, was stagnant or declining in recent months, resulting in employment reductions in some areas. In Cleveland and Dallas, transportation and shipping activity declined further in June and July, as businesses continued to reduce orders in an effort to control inventories. Accounting, insurance, and legal firms also saw demand soften in some Districts, prompting more rigorous monitoring of payroll costs and other expenses. Dallas noted a pickup in demand for legal services related in part to energy market developments and increased bankruptcy filings.

Layoffs and slower economic growth reportedly damped tourism in many parts of the country. Many Districts noted that airline bookings, hotel occupancies, and hotel room rates fell in recent months. However, hotels principally struggled with a decline in business travel as companies worked to cut costs in light of slower earnings growth.

Manufacturing
Manufacturing activity declined further in recent weeks, as producers responded to ongoing weakness in demand and worked to balance inventories. Reports of reduced work hours, lost overtime, forced furloughs, planned shutdowns, and layoffs were pervasive. Nearly every District reported that new orders and shipments for durable and non-durable manufactured products remained sluggish during the recent survey period, with declines recorded for producers in some sectors. Weakness was especially evident among producers of apparel and textiles, computers, semiconductors, steel, and telecommunications gear. In addition to conditions in the domestic economy, Districts attributed the current malaise in manufacturing to softening international demand for U.S. goods—particularly in Europe and Asia. On the up side, Districts reported that producers were making progress in running down their excess inventories.

Real Estate and Construction
Conditions in commercial real estate markets softened in several Districts in June and July, in keeping with slow economic growth. Nine Districts reported increased office vacancies in metropolitan areas in the second quarter, with signs of additional weakening in July. A number of Districts noted that the swing in market conditions was due in part to an increase in sublease space. The rise in vacancies reportedly made it a buyer's market in some metropolitan areas. However, most Districts noted little movement in posted lease rates, with landlords opting for one-time inducements such as a free month's rent or property upgrades to attract tenants. In San Francisco, where commercial lease rates have declined, contacts noted that prospective tenants appear to be waiting for rates to fall further. Rising vacancies damped new construction activity in a number of areas.

Districts indicated that residential real estate markets generally remained stable in recent months, though signs of weakness were apparent in some regions. Atlanta, Cleveland, Minneapolis, New York, Richmond, and St. Louis reported continued brisk demand for low and moderately priced homes; one District reported that homes "priced right" continued to sell quickly, often attracting multiple bidders. In Boston, Chicago, and San Francisco, demand remained stable but weakness in the high-end market was noted. Dallas and Kansas City reported flat to slower growth in home sales, with some concerns about rising inventories. In general, Districts attributed the continued strength of residential real estate in part to lower mortgage interest rates.

Agriculture and Natural Resources
Reports on agricultural conditions were mixed across the Districts. Atlanta, Kansas City and St. Louis highlighted generally good conditions in their regions, with some crop yields coming in better than expected. Dry weather was having an adverse effect on farmers and ranchers in the Cleveland, Chicago, Dallas, and Richmond Districts. San Francisco reported favorable growing conditions, but ongoing struggles against low prices, weak export demand, and high energy costs.

Banking and Finance
Loan demand was flat to down in most Districts in recent weeks. However, the composition of the slowdown differed by region. In Kansas City and Philadelphia, commercial and industrial lending picked up, while consumer lending declined. Declines in lending in Atlanta, Chicago, and Richmond were largely in the commercial sector. In St. Louis, all types of loans declined, although the most pronounced reductions were in consumer borrowing. In Cleveland and New York, loan demand remained relatively flat, as both consumers and businesses curtailed borrowing. Several Districts reported increases in home mortgage lending.

Overall, Districts characterized financial markets as cautious, with both borrowers and lenders pulling back in response to economic uncertainty. There were some reports of deteriorating credit quality, particularly for credits to manufacturing and agricultural businesses. A number of Districts reported that lenders had tightened standards in recent weeks, particularly for business loans.

Labor Markets, Wages, and Prices
Most Districts reported that conditions in labor markets remained steady or loosened somewhat in recent weeks. Layoffs in many high-tech manufacturing and service firms boosted the number of highly skilled workers applying for jobs through temporary employment agencies. Employers in a number of Districts noted greater ease in finding and keeping qualified workers.

Looser labor markets in most Districts helped to contain wage pressures in recent months. However, benefit costs rose, particularly for health and other forms of insurance coverage. Rising insurance premiums and the slowing economy reportedly prompted some employers to reevaluate benefit packages. Kansas City reported that firms were working on ways to reduce employee benefits such as free parking and health club memberships.

Fuel and energy prices fell in June and July in most Districts, lessening the burden on businesses and easing pressure on consumer budgets. Lower gasoline prices allowed shippers and truckers to reduce or remove fuel surcharges imposed earlier this year. Lower energy costs also contributed to price declines for a number of manufactured goods. However, upward price pressure was reported for pharmaceuticals, various services, and single-family housing in some regions. In addition, retail electricity rates were up sharply in California in June, as previously authorized rate hikes took effect. In general, however, declining input costs and stiff domestic and foreign competition continued to restrain consumer prices.