National Summary

Prepared at the Federal Reserve Bank of Chicago based on information collected before Feb. 24, 2003. This document summarizes comments received from businesses and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts generally suggested that growth in economic activity remained subdued in January and February. Only a few Districts reported any notable changes from the last Beige Book. In particular, Richmond indicated that economic activity "grew modestly" and Kansas City noted "some signs of strengthening;" by contrast, New York said that the regional economy had "generally weakened." Many reports indicated that geopolitical and economic uncertainties were constraining consumer and business spending and tempering near-term expectations.

Consumer spending remained weak, on balance, with a few Districts noting a little improvement and others indicating a slight deterioration. Business spending was very soft, with little change in capital spending or hiring plans. Nearly all Districts indicated that real estate and construction activities were mixed, with strength on the residential side and weakness on the nonresidential side. Most Districts still described manufacturing activity as weak or lackluster, although half of the reports noted at least some degree of improvement. Refinancing activity continued to drive growth in household loans, while business loan demand remained weak.

Contacts in most Districts expressed concern over rising energy and insurance costs, but noted that businesses had difficulty passing along much, if any, of the cost increases to their customers. The agricultural sector continued to be affected by poor weather in many Districts. Mining and energy extraction activity picked up, but energy production was limited by supply problems and some shortages of skilled labor.

Construction and Real Estate

None of the Districts reported a general improvement in commercial real estate markets, and three suggested slight deterioration. Most regions said that net new demand for office space remained very weak. Vacancy rates continued to rise somewhat and downward pressure on rents persisted. Philadelphia and Richmond indicated that office-leasing activity picked up as existing tenants renegotiated with landlords for lower rents and/or concessions. Boston also reported an increase in leasing activity, largely due to consolidations. Cleveland noted that state and local fiscal difficulties were having an impact on public construction projects, and St. Louis reported that several announced hospital, church, and college projects have been delayed due to economic uncertainty.

Most reports suggested that there were few, if any, expectations of a near-term improvement in commercial real estate and building activities. Cleveland, however, noted an increase in demand for architects' services, which contacts suggested could be a precursor to increased commercial building activity.

1st District - Boston

The First District economy shows few signs of improvement. Retailers cite disappointing December results, although some gained in January and February. Most manufacturing contacts report weak demand. Commercial real estate markets in New England remain very slow. Most software and information technology providers say demand is declining. The outlook is highly uncertain and virtually no contacts are making plans based on expectations of an upturn.

Commercial Real Estate

In the Boston area, the published vacancy rates are around 15 percent in the city and 30 percent in the suburbs, but substantially more space is actually available for rent, as some companies make deals for space that is not even listed for sublease. Rental rates for Class A space have dropped to what Class B or Class C buildings commanded two years ago. With little expectation that the economy will improve in the near future, contacts predict a third consecutive year of negative absorption.

2nd District - New York

The Second District's economy has generally softened since the last report, with the notable exception of housing, which appears to have regained some momentum. Signs of weakness are particularly evident in the labor market. While business contacts report increased cost pressures, mainly for insurance and energy, these pressures show no signs of feeding into finished-goods prices. The Presidents Day snowstorm had a large effect on the retail sector but little disruptive effect on manufacturing or shipping.

Retailers note that sales were below plan in recent weeks, particularly during and after the blizzard. Selling prices and merchandise costs were described as steady to lower than a year ago, while retail inventories were said to be in fairly good shape. Manufacturers indicate mixed but generally softer conditions in recent weeks; they also note increased upward cost pressures but flat to declining selling prices.

Home construction and the housing market generally have picked up since the last report, though the upper end of the market remains weak. Manhattan's office market has been stable to slightly weaker in early 2003, with rents continuing to fall. Conditions in New York City's financial industry have reportedly deteriorated since the last report. Finally, bankers report some weakening in consumer loan demand, a modest upturn in consumer delinquency rates, and tighter lending standards on commercial borrowers.

Construction and Real Estate

Both single-family and multifamily housing permits in the District rebounded in December, after drifting down in the prior two months. More recently, homebuilders in northern New Jersey report that demand remains strong for homes selling for under $1 million, but note that demand has weakened further at the top end of the market, particularly in areas near New York City. An industry contact notes that labor and material costs are not a problem but that liability insurance coverage is increasingly difficult -- builders are more concerned about availability than the rising cost.

Manhattan's commercial real estate market was steady to slightly weaker in January. Lower Manhattan's availability rate inched up, after improving slowly but steadily in the second half of 2002. However, rates held steady in Midtown and edged down in Midtown South. Still, asking rents throughout the city continued to decline; they have fallen by roughly 20 percent from their early-2001 peaks, and industry experts note that the decline in actual rents has been much steeper. On the supply side, there is a moderate amount of new office space currently under construction in Manhattan: roughly 3 million square feet is scheduled for completion this year and another nearly 4 million in 2004. Together, this represents slightly over 1 percent of the total stock, and all of this new space will be in Midtown.

3rd District - Philadelphia

The pace of business activity in the Third District was virtually steady in February, as some sectors improved slightly and others slowed. Manufacturers reported a small increase in new orders for the month compared with January, but shipments were flat and order backlogs declined. Retail sales of general merchandise and auto sales eased in February from January and from February of last year. Bank lending has been rising slowly, with most of the growth coming from consumer loans, although some banks reported recent increases in business lending. Commercial real estate market conditions have shown little change. Vacancy rates have been nearly steady, but effective rents have edged down. Residential real estate sales have been steady at a fairly brisk pace, and builders' backlogs remain high.

Looking ahead, contacts in the Third District business community expect some improvement, although they do not foresee a strengthening in growth. Manufacturers forecast some increases in shipments and orders during the next six months, but their level of optimism has waned somewhat since the start of the year. Retailers anticipate a slow improvement in sales, but they are being very conservative in their sales plans for the spring. Auto dealers expect a pickup in sales as winter comes to an end, but they do not expect to match last year's sales rate. Bankers expect slight gains in lending, but they have become increasingly concerned that loan growth could stall if the pace of business activity in the region does not improve.

Real Estate and Construction

Residential real estate agents and homebuilders generally reported steady rates of sales in January and February at a fairly strong pace. Price appreciation continued to be strong in many parts of the region, although instances of multiple offers have diminished. Real estate agents expect sales of new and existing homes for the year as a whole to be a few percentage points below last year's level. Builders reported little or no decreases in backlogs, which have been kept up by strong sales while construction has been delayed by adverse weather. Residential construction contractors generally indicated that land prices continue to rise, but materials and labor costs have been mainly steady.

4th District - Cleveland

Economic conditions in the Fourth District remained mixed in January and through the first three weeks of February. On balance, conditions in this report were very similar to the last: Conditions in residential construction were positive. Although trucking and shipping contacts reported a slight seasonal decline, conditions remained generally stable. Manufacturing, banking, and retail reports were mixed. Commercial construction conditions remained poor. Winter weather did have an adverse impact on several businesses in the region. Businesses in retail and construction saw less customer traffic than usual, and many firms across several industries temporarily closed operations because of severe winter weather during the survey period.

While hints of future improvement can be found in this report (for example, new orders in manufacturing increased slightly), little suggested conditions would change in the near future. In the current environment, contacts remained reluctant to forecast future economic conditions -- most are basing future decisions on the expectation that conditions will remain flat over the next few months. A few firms reported reducing their capital expenditure plans since the first of the year, but most appear to have adopted a wait-and-see attitude before changing their budgets.

Labor market conditions have deteriorated since the last report--several manufacturers reported having reduced their labor forces or planning to do so. The few firms that were looking for employees reported no trouble in hiring -- one contact reported 8,600 applications for 200 jobs at a new facility that would be opening in the near future.

Construction

Commercial builders, on the other hand, continued to report weak conditions. Worsening state and local budget crises have had an impact on the availability of public construction projects (a major source of business for some firms in 2002). Competition for available projects in all areas of commercial construction has increased. Some contacts noted, however, that architects have been seeing an increase in business, suggesting a pickup will occur in commercial construction in about a year.

5th District - Richmond

Economic activity in the Fifth District grew modestly in January and the first three weeks of February, with a slight improvement in services and manufacturing conditions offsetting a listless retail sector. Services businesses reported generally steady to slightly higher demand, and some contacts cited higher orders for coming months. District manufacturing activity expanded somewhat faster, as shipments and new orders rose sharply in January and early February. In contrast, retail sales were little changed from our previous report, and retailers continued to trim payrolls. Price inflation remained modest according to contacts. In the real estate sector, District home sales rose at a solid rate, but commercial leasing activity slowed as war prospects unsettled potential lessees. In agriculture, unusually cold and snowy weather hampered field preparation and led to the abandonment of still-unharvested crops in some areas of the District.

Real Estate

Commercial realtors reported slower growth in leasing activity in recent weeks as potential lessees in the office sector adopted a "wait and see" attitude in light of political developments internationally. A realtor in Raleigh, N.C., captured the mood of many with the observation that "people are just waiting on the sidelines." The leasing of retail space picked up -- a realtor in Richmond, Va., for example, experienced "very high" growth over the past six weeks in retail leasing. But office and industrial space leasing was sluggish. Vacancy rates for retail space remained low, while office vacancy rates edged higher. Rents for retail space held firm, but edged lower for office space. Realtors in Washington, D.C. and Charlotte, N.C., noted that some tenants had recently renegotiated their leases, obtaining lower rents and other concessions. New commercial construction was generally flat across sectors -- several realtors in the Carolinas reported a shift to refurbishing older buildings in lieu of building new ones.

6th District - Atlanta

Contacts reported that economic activity in the Sixth District remained lackluster in January and February. Retail sales were sluggish, while manufacturers noted continued weakness outside of defense and auto-related production. The District's tourist sector continued its gradual improvement. Labor markets displayed a modest improvement in January and February; employers reportedly remained reluctant to add permanent staff but increased their use of overtime and part-time workers. The District's single-family housing market remained strong, but commercial real estate markets continued to suffer from low demand for space. Most contacts indicated that geopolitical concerns and higher fuel prices were weighing on near-term expectations for the District's economy.

Real Estate and Construction

7th District - Chicago

Reports from Seventh District contacts generally suggested that economic activity remained soft in January and February. Consumer spending was again relatively weak, and caution persisted in businesses' capital spending and hiring plans. Strength continued in sales of both new and existing homes, while nonresidential building and real estate activities were again soft. Manufacturing activity remained generally weak but appeared to have improved further from our last report. Bankers continued to report strong mortgage demand from households and weak loan demand from businesses. There were a few new reports of input cost increases, particularly for energy, but prices at the retail level remained largely in check. District farmland values in 2002 posted the largest year-over-year gain since 1997, even as concerns increased about the impact of drought and continued low dairy prices.

Construction and Real Estate

8th District - St. Louis

Contacts in the Eighth District reported lackluster business conditions in recent months, with little change from the last survey. In manufacturing, reports of weak sales, consolidations, closings and cutbacks have continued. Retail sales during December and January were mostly flat from a year ago but met expectations. Auto sales over the same period declined. Residential real estate markets are still strong, while commercial real estate markets remain weak. Over the past three months, there was essentially no change in lending activity.

Real Estate and Construction

Commercial real estate markets are still slow in most of the District. St. Louis continues to experience an increase in office vacancy rates. Contacts in both Louisville and Fayetteville reported increased office vacancy rates at the end of 2002. Commercial construction is weak in most District areas. In northeast Arkansas, activity has continued to be slow and is not expected to pick up in the spring. In Memphis, contacts reported that there is virtually no building. In central Kentucky, construction of hospitals, churches, and college facilities are under way or have just been completed, but several that have been announced are being delayed because of uncertainty about the economy.

[Banking and Finance] Credit standards for commercial real estate loans were tightened somewhat even though demand remained about the same. Both the credit standards and the demand for residential mortgage loans were reported to be generally unchanged.

9th District - Minneapolis

Ninth District economic activity was mixed from early January through late February. Agriculture, home building, and mining grew. Manufacturing, tourism, and energy were mixed. Consumer spending was flat and commercial construction was down. Over this period, labor markets loosened slightly. Overall wage and price increases were modest. Significant price increases were noted in heating costs, gasoline, and tuition.

Construction and Real Estate

Home building and residential real estate activity were solid. The number of housing units authorized in the Minneapolis-St. Paul area increased 14 percent in January compared with a year earlier. "Every indication is that 2003 should be another very busy year for builders," said a representative of a Minneapolis-St. Paul area builders association. However, the vacancy rate for apartments in Minneapolis-St. Paul increased to 6.6 percent in the fourth quarter of 2002, up from 4 percent a year earlier. A representative of a realtors association in La Crosse, Wis., expects 2003 to be another good year for single-family home sales, but says 2003 will likely fall short of the 2002 sales record.

10th District - Kansas City

The Tenth District economy showed some signs of strengthening in late January and February, despite widespread uncertainty among businesses and consumers. Retail sales posted slight gains, manufacturing activity improved, and energy activity picked up. In addition, residential real estate activity continued at a strong pace. On the negative side, auto sales were weak and commercial real estate remained in a slump. In the farm economy, many ranchers and farmers continued to suffer from the effects of drought. Wage and price pressures remained largely subdued across the District.

Real Estate and Construction

Home sales across the District were also solid, though reports were not as uniformly strong for housing starts. In the months ahead, most realtors expect sales to continue at the recent pace. Mortgage demand remained strong throughout much of the District, as refinancing activity continued at high levels. Nearly all recent refinancings have been used to reduce monthly payments-a contrast from previous surveys, when a sizable portion of refinancing activity was for the purpose of taking out cash. Lenders generally expect mortgage demand to stay solid and to possibly increase further in the spring. Commercial real estate activity remained weak across the District, with some markets experiencing even further deterioration. Office vacancy rates rose again in Denver, and commercial construction activity fell in nearly all markets. Absorption and prices of office space were down slightly in most areas, and many landlords were offering rent concessions to keep or attract tenants. Commercial realtors generally do not expect a turnaround in activity any time soon.

[Prices] Prices for construction materials were basically flat, but some builders expect lumber and gypsum wallboard prices to increase in coming months.

11th District - Dallas

From early January through mid-February, overall Eleventh District economic activity exhibited signs of inertia. Manufacturing activity remained lackluster. Service sector activity was mixed, with signs of a pickup in some industries and severe financial problems in others. Retail sales remain weak, and there is still little change in the financial services industry. Construction and real estate markets continued to decline. Energy activity picked up only mildly, despite a sharp increase in prices. Overall agricultural conditions were good.

Geopolitical uncertainties still dampen consumer and business confidence. High energy prices also weigh heavily on the outlook for some industries. Hiring is minimal, according to contacts who say investments are on hold until questions surrounding the war are resolved. Contacts report that concerns about terrorism seem to be distracting attention from normal business.

[Manufacturing] demand for construction-related materials is waning. Metals producers reported some increases in selling prices, partially passing along rising costs for scrap metal and reinforcing steel. Producers of stone, clay, and glass were surprised by better-than-expected demand over the past two months, but expressed increased uncertainty about the outlook. Paper and lumber producers report soft sales during the same period, partly because of import competition. Demand for PVC has been very strong to supply the housing market and Asia.

Construction and Real Estate

12th District - San Francisco

Reports from Twelfth District contacts indicate continued sluggish economic growth in much of the region during January and early February. While prices remained stable for most consumer goods and services, prices for energy and health care increased substantially. In labor markets, firms faced limited upward pressure on wages and salaries but noted continued rapid increases in costs for employee benefits. Many respondents pointed to uncertainties, due in part to geopolitical risks, as having negatively affected both consumer and business spending. Consumers appeared more cautious concerning expenditures on vehicles and travel.

Conditions in District manufacturing generally remained weak with limited signs of improvement. The agricultural sector benefited from improved exports and oil and natural gas producers operated at high levels of capacity. Contacts reported continued strength in residential real estate, while commercial real estate remained weak. Bank lending continued recent patterns of rapid growth in residential mortgage loans and weak demand for business credit.

Real Estate and Construction

In contrast, contacts indicated that residential housing markets across much of the District remained robust in January and early February. Sales of low-to-median priced homes remained high in most of the District, especially in Southern California and Hawaii, although the pace of sales and of price appreciation has moderated in some areas. Throughout the District, contacts noted that markets for high-end homes had cooled off. Respondents attributed continued strength in overall home sales primarily to low mortgage interest rates.

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