April 26, 2006 Summary of Commentary on Current Economic Conditions by Federal Reserve District

Summary Prepared at the Federal Reserve Bank of Boston and based on information collected on or before April 17, 2006. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. Reports from all twelve Federal Reserve Districts indicate that economic activity continued to expand in March and the first half of April. Three Districts--Minneapolis, Kansas City, and San Francisco--characterize growth as "solid," while a number of others describe the rate of economic activity as "modest," "moderate," or "steady." Richmond notes a quicker pace of growth, and Dallas indicates that activity continued to strengthen. By contrast, New York says the rate of growth may have slipped a bit since the last report. Most Districts report that orders or revenues in the manufacturing sector continue to come in ahead of year-earlier levels, although New York notes some deceleration in manufacturing activity, and Atlanta says that manufacturers' results were mixed. Non-auto retail sales are up from a year ago, as well, according to most Districts, although the shift of Easter from March last year to April this year makes comparisons difficult. Activity levels in service industries--including temporary help, health services, professional and technical services, and transportation and shipping--are also expanding according to District reports. The pace of housing market activity is said to be moderating in many Districts, while commercial activity is firming. A majority of Districts note that labor markets, at least for skilled workers, are tight or are tightening. While energy costs are high and costs for selected other inputs are rising, businesses continue to have limited ability to raise their selling prices. Consumer Spending and Tourism The majority of Districts cite improving retail sales overall, but Richmond and Cleveland experienced sluggish or disappointing results. Boston, New York, Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco all report modest to solid gains, although year-over-year comparisons have been complicated by Easter's shift from March in 2005 to April in 2006. Several Districts report strong sales in home and garden products and building goods. Reports on apparel and grocers are mixed. Retail inventories were generally at desired levels across the country. Auto sales were mixed across the Districts. Many Districts report that sales were short of year-ago levels, but Philadelphia, Cleveland, Richmond, Kansas City, and Minneapolis all indicate that sales improved from the prior survey period. While demand in San Francisco was stronger than expected, Boston, Atlanta, and Dallas all cite flat sales. Many Districts continue to say that sales of imports and used cars are stronger than new domestic vehicles. Most of the reports on travel and tourism are positive. Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco all cite modest to strong improvements, and while New York saw tourism softening slightly, it was still at high levels. In contrast, tourism was mixed in Richmond. Ski resorts in the Boston District continued to suffer from lack of snowfall, but tourism was thriving in the Boston metro area. A record-setting ski season was reported in Virginia, and Minneapolis saw a positive ski season in parts of the District. Services Industries All Districts reporting on nonfinancial services note increased activity during the first quarter relative to a year ago. Health-care services expanded in the Richmond, St. Louis, and San Francisco Districts. Professional and technical services activity increased according to Boston, Philadelphia, Richmond, St. Louis, and Dallas, while San Francisco notes mixed conditions in information technology services. Temporary employment firms in the New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Dallas Districts report modest demand growth in the first and early second quarters. A large New York employment agency found increased demand for legal and financial services employees, while Dallas contacts noted increased demand for temporary workers in high-tech and light industrial manufacturing. Transportation services activity improved this quarter, according to reports from the Atlanta, Dallas, and San Francisco Districts. Trucking and shipping respondents from the Philadelphia, Cleveland, and St. Louis Districts report increased growth relative to a year ago. While Cleveland's contacts continue to express concern about fuel costs, many now believe that they can increase their base rates, given the strength of demand. Manufacturing Reports on manufacturing activity remain positive. Districts describe shipments and orders as continuing to strengthen--significantly in some cases and gradually or steadily in others. Only Atlanta characterizes overall manufacturing activity as mixed, although New York indicates a retrenchment in orders and shipments in early April followed a strong March. All Districts mentioning near-term forecasts say that, on balance, manufacturers expect business to remain on an upward trajectory. Multiple Districts note strong or expanding production of steel, construction inputs, machine tools, aircraft equipment, and food. Production capacity for mining equipment in the Chicago District is reportedly booked through 2007. Chicago described heavy- and medium-duty truck orders as remaining solid, but light vehicle sales as flat, with some signs of excess auto inventories. Other District updates on auto assembly and parts production were mixed--some up and others down. Trends in apparel-making also varied, with Richmond and Dallas citing increases but Atlanta, St. Louis, and San Francisco indicating shutdowns or disappointments. Although several Districts describe labor demand in the manufacturing sector as mixed, most report some form of pickup. For example, Richmond says that "factory employment grew modestly," Cleveland notes more hiring on the part of durable goods producers, and Boston indicates that most manufacturers were hiring in order to obtain a "higher skill mix." District reports on capital spending tend to be either modestly positive or mixed. Real Estate and Construction Most Districts report cooling and moderation in their residential real estate markets. In general, year-on-year price appreciation seems to be lower than in quarters past, with San Francisco, Cleveland, Kansas City, Richmond, New York, and Boston all reporting more modest price growth in residential sales. Several Districts' contacts noted that slower price increases were a healthy market outcome. Residential inventories are increasing; Kansas City, Minneapolis, Chicago, Atlanta, New York and Boston all saw increases in residential inventories compared with the first quarter of last year. The Dallas District, by contrast, registered particularly strong residential sales. Residential construction is more regionally differentiated than overall residential sales and prices. In the West, Dallas and San Francisco both cite high levels of residential construction activity, with Dallas homebuilders reaching record sales for the first quarter of 2006. In the Midwest, Kansas City, Minneapolis, and St. Louis report declining residential construction. As well, the Chicago District mentions slower residential building in most areas. In the South, Atlanta indicates that single family construction remained strong but that some condominium projects have been postponed or cancelled. The commercial real estate outlook appears to be predominantly positive across the reporting Districts--none report weakening commercial demand. San Francisco, Dallas, Minneapolis, St. Louis, Atlanta, and New York all register strong commercial activity. Kansas City, Chicago, and Richmond report steady to improving levels of activity. With vacancies declining in many locations, rents appear to be edging upwards. In the West and the Midwest, commercial construction appears to be responding to increased commercial demand. Dallas, Cleveland, Minneapolis, Chicago, and St. Louis all report increasing or soon-to-be increasing commercial construction. San Francisco cites continued high levels of construction activity. In the South, Richmond reports little change in new construction, while overall development in Atlanta remained at low levels. The New York District featured relatively stable commercial construction. Banking and Finance Reports of lending activity are mixed, as most Districts reporting on financial services continue to see decreases in demand for consumer loans and residential mortgages, coupled with moderate expansion of commercial and industrial lending. St. Louis and Kansas City, in particular, saw a decrease in consumer lending, while both Chicago and Kansas City witnessed decreased demand for home equity loans. Almost all Districts report declining demand for residential mortgages. Meanwhile, commercial and industrial lending increased in nearly all Districts, with only St. Louis reporting a decline. Bankers in Richmond noted that commercial lending for mergers and acquisitions and construction remained high. Respondents in San Francisco mentioned an increase in venture capital financing. While reports of credit quality are positive across the board, delinquency reports are more varied, with low delinquency rates in Atlanta, commercial and industrial delinquency rates increasing slightly in New York, home mortgage delinquency rates increasing somewhat in Dallas, and respondents in Philadelphia predicting a possible future increase in delinquencies due to rising interest rates on adjustable-rate mortgages. Deposit growth was steady in Cleveland and Kansas City, sluggish in Chicago, and flat in Dallas. Philadelphia, Dallas, and San Francisco all report fierce competition for loans and narrow net interest margins. However, credit standards remained virtually unchanged in all Districts except for New York, where standards tightened slightly for consumer loans. Agriculture and Natural Resources Adverse weather conditions and high energy costs are affecting agricultural prospects in much of the country. Although recent rains have brought some relief, dry weather has reportedly stressed pastureland and crops in the Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts. By contrast, unusually wet weather has delayed fieldwork in the San Francisco District. Ranchers facing poor pasturage in Kansas City and Dallas are culling their herds and giving supplemental feed unusually early; as a result, Kansas City reports downward pressure on prices for feedlot cattle. In San Francisco, prices received by ranchers have softened but remain at a high level. St. Louis and Minneapolis report that one-half to two-thirds of the winter wheat crop is in good to excellent condition, but the Kansas City crop is described as poor, and Dallas reports that half the District wheat crop will be lost. Reflecting relative crop prices and the high cost of fertilizer, Chicago and St. Louis farmers are said to be shifting acreage from corn to soybeans. Contacts in Dallas and San Francisco also note the high cost of fertilizer and fuel, while Chicago and Dallas indicate that these costs are combining with dry conditions to cause cash flow problems for farmers. In the energy sector, demand for oil and natural gas or oil services remains robust and energy activity continues to expand, according to contacts in the Dallas, Kansas City, and San Francisco Districts. Minneapolis reports that energy activity is stable at a high level. Dallas and Kansas City indicate that the count of active oil and gas rigs continues to rise. In the Gulf of Mexico, Dallas notes that the rig count is close to pre-Katrina levels, while Atlanta reports that the share of oil and gas still "shut in" amounted to just 23 percent for oil and 14 percent for natural gas in early April. Dallas, Kansas City, and San Francisco contacts see little or no excess capacity in the energy sector. In particular, Kansas City contacts say that shortages of equipment and workers are constraining drilling activity; pipeline capacity is also limited in some areas. In the Minneapolis District, almost all open mines are producing near capacity. Prices and Wages High energy prices were at the forefront of most Districts' mentions of cost pressures. Manufacturers in most Districts cite rising costs for other inputs, with metals mentioned most frequently along with petroleum-related products. While no District reports that cost increases have intensified in the latest survey period, Kansas City says that firms were having greater difficulty obtaining steel and aluminum. Services firms are also reported to be facing higher costs, notably for utilities, shipping, and transportation. Many Districts describe firms as attempting to raise selling prices but having mixed success, with price increases generally either smaller than the cost increases or less widespread. Richmond, Cleveland, and Chicago, for example, mention manufacturing firms' limited ability to recoup higher costs; Boston and Dallas say competitive pressures are constraining some price increases, and Atlanta notes that the ability to pass on cost increases varies across firms, depending in part on the strength of demand and contract arrangements. Construction materials costs have also risen, or supplies are tight, according to reports from Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, and Dallas. A number of Districts, including Cleveland, Richmond, and Dallas, cite high energy prices as an explanation for weaker than expected tourism results, auto sales, or retail sales, especially to lower-income consumers, with the impact occurring both directly by constraining consumers' driving and indirectly by reducing the income available for purchases after paying for home fuel and transportation fuel. Atlanta and Chicago note the possibility of such energy cost impacts as a risk to the summer outlook. District reports from Boston, New York, Richmond, Kansas City, and Dallas say that labor markets are tightening, especially for skilled positions. Philadelphia, Minneapolis, San Francisco, and Atlanta indicate that labor markets remain tight in at least some parts of their Districts. Contacts in Atlanta, Richmond, Cleveland, Kansas City, and Dallas state that truck drivers are in short supply. Wages continue to move up, but only a few Districts--New York, Dallas, and Kansas City--mention a pickup in the pace of raises, while Philadelphia cites firms more often paying in the high end of salary ranges. Richmond reports no pickup, but a continuation of "brisk" wage increases in services. Boston says manufacturing wage increases are in the same range as last year, Chicago cites a steady pace of labor cost increases, and Cleveland notes no reports of accumulating wage pressure, while Minneapolis and San Francisco mention moderate overall wage increases. Return to top First District--Boston Business activity continues to increase in the First District. Most manufacturers and selected business services firms report revenues well above year-earlier levels in the first quarter of 2006; retailers also indicate sales were ahead of a year ago in February and March. A majority of firms are passing cost increases on to customers. Manufacturers and consulting firms indicate the labor market for professional positions is tightening. Residential real estate markets continue to slow compared with a year ago; observers characterize current activity levels as more sustainable than those during the past few years. Retail and Tourism Retail contacts in the First District report positive results in February and March, as year-over-year sales range from flat to single-digit gains. Products that sold particularly well this period include footwear, accessories, home goods, and kitchen and bath-related products, although one retailer mentioned that year-over-year comparisons are complicated by Easter's shift from March to April. A restaurant contact notes that warmer weather seems to have helped sales. However, both women's and men's apparel sales were softer than expected, and an automobile dealers' group indicates that sales continue to be weak. Inventory levels are mixed, but reportedly in line with expectations. Vendor prices are varied, with some contacts noting ongoing price decreases, on imported apparel, for example. Selling prices also continue to be mixed; some retailers are passing increases along to consumers, while others are holding prices steady or decreasing them slightly. Same-store employment is generally steady, although one contact has had layoffs. A couple of contacts report reduced capital spending, while several others are planning new store and showroom openings, the acquisition of new vehicles, store remodeling, or minor technology updates. A travel and tourism contact reports "feeling good" about tourism in New England. While the ski season was weaker than expected and last minute bookings are still prevalent across New England, tourism in the Boston area is booming. The contact says business and convention travel is recovering and leading to increased advanced bookings; she expects tourism in Boston and nearby coastal areas to thrive in the summer months. With the exception of the auto dealers association, most retail and tourism respondents are cautiously optimistic in their outlook, with expected growth in the remainder of the year ranging from flat to high single-digit increases. Manufacturing and Related Services Most First District manufacturers and related services providers report that first quarter sales were higher than a year ago. Many had double-digit or high single-digit percentage revenue gains, and several comment that overseas demand rose faster than domestic demand. Order backlogs are signaling continued revenue growth in the second quarter. Biopharmaceutical sales are doing particularly well. Many respondents express concern about high or rising costs for energy, transportation, and metals (chiefly steel and copper). Some also face increased costs for food and other agricultural-based inputs. About two-thirds of the contacted manufacturers--makers of both intermediate and final goods--have raised their selling prices in recent months. Some of these firms are satisfied with their ability to increase prices, while others feel that competitive pressures are constraining their increases. Companies not raising prices describe the situation as "horrible" or "a big problem." Manufacturers are fairly evenly balanced in their intentions to reduce, hold constant, or increase their U.S. headcounts, but almost all firms (even some with layoffs) are hiring as they seek a higher skill mix. The market for skilled workers is said to be tight or somewhat tighter than in late 2005. Contacted companies are experiencing difficulties filling vacancies in fields such as finance, accounting, supply-chain management, engineering, and scientific R&D. However, overall average pay increases for 2006 mostly are targeted to remain in the same range as last year, that is, 2.5 to 4 percent. Domestic capital spending plans are quite varied. Some manufacturers are planning to add capacity or new production capabilities. Others intend to reduce capital expenditures as they complete big projects, engage in outsourcing or off-shoring, or feel a need to conserve cash. Most manufacturers expect the demand for their products to increase in 2006. Their concerns center around high energy, materials, or regulatory costs; rising interest rates; and problems in the domestic auto industry. Depending on the company, these forces are viewed as risks that could possibly reduce profitability or--toward the end of 2006 or in 2007--cause a cutback in spending that would hurt revenues either directly or through a weakening of the general economy. Selected Business Services All responding First District advertising and management consulting firms enjoyed improving business conditions and revenue growth in the first quarter of 2006, with most firms reporting double digit gains from a year ago. Contacts attribute their improved growth rates to increased merger and acquisition activity and a general improvement in the economic climate, noting that all of the industries they serve have seen increased sales. The majority of responding consulting companies have earned moderate price increases over year-ago levels with no discernible effect on demand; however, one contact commented that his firm was not getting price increases per se, but rather reducing the amount of discounting. Three contacts note that costs have increased substantially for travel, with hotel and airfare costs both up more than 10 percent relative to a year ago. While most of these expenses are passed on to the client, one firm noted that non-billable travel and training costs hurt their bottom line by a couple of margin points in the first quarter; as a result, they are buying space for a training room to avoid renting increasingly costly hotel space. A majority of New England business services contacts plan to increase their headcounts in 2006. Several firms note that the labor market is tightening, with one contact describing it as a "war for talent;" while qualified people are out there, they all have multiple offers. Most contacts raised wages by 3 percent to 6 percent over the last year. All respondents have a positive outlook, with one commenting that, "unless there is a catastrophic shift in the business cycle, we anticipate more of the same for the rest of 2006," which another stated, "means we'll be pretty darn busy." Residential Real Estate Residential real estate contacts in the First District uniformly cite a continued slowing in the pace of sales. The Massachusetts real estate market has seen five consecutive months of year-on-year sales declines in detached single family homes. Condominiums in Massachusetts, however, are performing well, setting monthly volume records in both January and February. The slowing residential sales pace has led to an overall increase in inventory. Compared to about 10 months of inventory at this time in 2005, the Massachusetts market currently features 16 months of inventory. Contacts across New England suggest that the inventory awaiting sale is not evenly distributed across price ranges, but rather that there are many high-end properties on the market, while entry level and midrange properties are tight in many communities. Residential real estate prices appear to be leveling off. Price appreciation, although still positive overall, is below 5 percent year-on-year in most markets. Contacts feel that the deceleration in price increases is a positive sign; they characterize the New England market as being slower but healthier than in the last few years. Though much of the current year's performance will be determined by spring sales, the general expectation is for prices to remain steady and for the sales pace to be slower than in recent years past. One Massachusetts contact said that even with slower sales, he expects 2006 to be among the top five years all time for residential real estate. Return to top Second District--New York The Second District's economy has continued to expand since the last report, but the overall rate of growth may have slipped a bit. The labor market has grown increasingly tight, and there are signs that wages have accelerated in some sectors. More broadly, though, input price pressures remain widespread but do not appear to have intensified. Manufacturers report some deceleration in activity in recent weeks but continue to report increased employment. Despite unseasonably cool weather, retailers report that sales were generally close to plan in March and early April, though tourism has softened slightly since the last report. Consumer confidence improved in March. Housing markets showed ongoing signs of softening in the first quarter, though sales of Manhattan apartments reportedly picked up in March. Commercial real estate markets across the New York City metro area were mixed in the first quarter: office rents were up from the prior quarter, but rents on industrial space slipped. New commercial construction remains relatively sluggish, but residential development continues to be robust. Finally, bankers again report some weakening in loan demand, some tightening in credit standards on consumer and home mortgage loans, and an up-tick in delinquency rates. Consumer Spending Retailers report that sales were generally close to plan in March and early April, despite unseasonably cool weather over much of the period. Retail contacts continue to note that higher-end (premium) merchandise was selling a good deal better than lower-end lines. Sales of home furnishings have continued to lag most other categories. Overall, inventories are reported to be at favorable levels, and selling prices are little changed, on average. Tourism has softened slightly since the last report but remains at a high level. Manhattan hotels report that occupancy rates tapered off in February, but rebounded in March; still, occupancy rates have been running about 3 percentage points below comparable 2005 levels. However, room rates were reported to be up 10 percent from a year earlier in February and up 13 percent in March. Broadway theaters report that attendance slipped below comparable 2005 levels in March, while revenues were little changed, but both rebounded noticeably in early April. Consumer confidence in the region strengthened in March. Based on the Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, PA), consumer confidence rose sharply in March, reaching its highest level in nearly four years. Based on Siena College's survey of New York State residents, confidence posted a more moderate gain, climbing to a 14-month high. Construction and Real Estate The region's housing market was mixed but generally softer in early 2006. New Jersey homebuilders report continued sluggish demand for new homes, reflecting some spillover of weakness from the existing market. Prices of new homes have leveled off, but builders have yet to make any significant downward price adjustments. The inventory of unsold existing homes is reported to have risen sharply over the past year--from a 3-month to a 7-month supply, based on concurrent sales activity. Manhattan's co-op and condo market was mixed in the first quarter. A major appraisal firm reports that prices were little changed from the prior quarter but still up 6 percent from a year earlier, while sales were down slightly from a year earlier; at the end of March, the inventory of apartments on the market was up 60 percent from a year earlier. A major Manhattan real estate firm similarly reports a sizable increase in the number of homes on the market and a leveling off in prices but notes that sales volume rebounded above comparable 2005 levels in March, with new developments accounting for a growing share of sales volume. In general, residential development in Manhattan remains strong. Commercial real estate markets were mixed in the first quarter. Office vacancy rates across the New York City metro area were mixed but down slightly overall; northern New Jersey's rate, though still relatively high, edged down to a nearly four-year low. Asking rents for office space were up sharply in Manhattan but were generally flat in the outlying markets. The industrial market showed signs of weakening: although vacancy rates were little changed, rents declined throughout the New York metropolitan area. Overall, commercial construction activity appears relatively stable--compared with 2005, there is reported to be somewhat less industrial construction underway but more office and hotel construction. Still, contacts note that the level of commercial development remains relatively low and note that a good deal of office and hotel space, predominantly in New York City, has been converted to residential use. Other Business Activity A major New York City employment agency, specializing in office jobs, reports that labor market conditions are increasingly tight, with a sizable number of job openings--particularly in financial and legal services--and fewer job seekers. This contact also estimates that salaries are up at least 15 percent from a year ago for experienced office workers, after several years of little change. A contact in the financial services sector reports continued brisk growth in both employment and compensation. New York State manufacturers also report continued expansion in employment levels in early April. More generally, though, while manufacturers are increasingly optimistic about the near-term outlook, they report a deceleration in general business activity and a particularly sharp slowing in new orders and shipments in April, following a strong March. Manufacturers also continue to report fairly widespread increases in input prices but more moderate increases in selling prices. Non-manufacturing firms in the district also report continued widespread increases in input prices and some acceleration in wages. Financial Developments Bankers at small to medium-sized banks in the 2nd District report decreased demand for all types of loans since the last report; decreased demand continues to be most evident in residential mortgages. Refinancing activity has also continued to weaken. Credit standards tightened slightly for consumer loans and residential mortgages but remained little changed for commercial mortgages and loans. Bankers again report widespread increases in both loan rates and deposit rates. Finally, bankers report somewhat higher delinquency rates on commercial and industrial loans, and marginally higher delinquencies on non-residential mortgage and consumer loans. Return to top Third District--Philadelphia Economic activity in the Third District increased in April. Manufacturers reported that shipments and new orders were up during the month. Retail sales of general merchandise rose, and the year-to-year gain improved compared with March. Auto sales increased slightly in April. Bank lending has been increasing, although demand for residential mortgages has slowed. Firms in the District's major service industries reported steady, moderate growth in business. Third District business contacts generally expect business activity in the region to continue to expand at a moderate rate. Manufacturers expect business to continue moving up at its current growth rate. Retailers anticipate steady gains through the spring. Auto dealers expect the sales rate to be level in the months ahead and below last year's pace. Banks expect business and personal lending to increase moderately, but they forecast a decrease in residential mortgage lending. Area companies in the service industries generally expect steady growth at about the current rate. Manufacturing Manufacturers in the Third District reported increased demand for their products in April. Overall, activity in this sector appeared to be growing at about the same pace as it did in the March. Around one-third of the companies contacted in April said that shipments and new orders rose from the previous month, twice as many as reported declines. On balance, area manufacturers reported an upturn in order backlogs, but no change in delivery times. Business improved in April in most of the District's major manufacturing sectors. Overall, manufacturers expect growth in business activity to stay on an upward trend in the months ahead. Half of the firms contacted in April expect their shipments and orders to increase during the next six months; about one-tenth expect decreases. On balance, capital spending plans among District manufacturers call for modest increases in expenditures. Retail Most of the retailers contacted for this report indicated that sales picked up somewhat from the March pace. Sales of general merchandise increased a bit more quickly in April on both a month-to-month and year-to-year basis. Area merchants said a return to warm weather, school vacations, and Easter stimulated sales. Sales increased for most categories of merchandise, with the strongest gains in sporting goods, home and garden supplies, and spring apparel. In general, Third District retailers expect the recent rate of sales growth to persist for the next few months until the usual summer slack period. Auto sales in the region rose slightly in April. Dealers said the sales rate in recent weeks has been somewhat better than it was earlier in the year. Foreign models continued to have better year-to-year sales comparisons than domestic models. Sales have slowed for vehicles that are not eligible for manufacturers' incentives. Inventories were said to be fairly low as dealers have kept orders to manufacturers under control and some smaller dealerships have closed. The consensus among auto dealers in the region is that sales will be close to steady for the rest of the year but slower than last year's pace. Finance The volume of loans outstanding at Third District banks rose from March into April, according to commercial bank lending officers contacted for this report. Commercial and industrial lending increased for most banks. Consumer lending also rose, and some banks reported increases in home equity lending. Demand for residential mortgages at banks and other financial institutions slowed. Some banks indicated that they had increased the amount of mortgage loans they were retaining in their portfolios. Banks and other lenders in the region reported that competition for loans continues to be strong and net interest margins remain thin. Bankers in the District expect moderate growth in business and consumer lending in the months ahead but foresee further weakening in residential mortgage lending. Commercial bank loan officers contacted for this report generally indicated that credit quality remained good, but several expressed concern that rising interest rates on adjustable-rate mortgages might lead to an increase in delinquencies later in the year. Services Most of the Third District service firms contacted in April reported that activity continued to expand at a steady, moderate pace. Business services firms and information technology service firms posted steady growth during the first quarter. Employment agencies and temporary help firms reported that demand for workers has been rising. Most indicated that the advance has been fairly steady, but some said hiring has picked up somewhat after a slow start to the year. Trucking firms reported increases in activity during the first quarter. Most of the service-sector firms polled expect business to continue to advance at about its current growth rate in the months ahead, although some firms that do business for government entities expect a gradual slowdown in revenues from those sources. Prices and Wages Business firms in the Third District reported continuing increases in costs of materials and intermediate goods, although the rate of increase does not appear to be accelerating. Manufacturers continued to face price increases for metals, petroleum-based products, and chemicals. Construction firms reported continued tight supplies for some materials. Some commercial real estate companies noted that building operating and maintenance costs have been rising. They expect tenants, especially retail stores, to raise the prices of the goods or services they market in order to cover the increases. Employers in a range of industries reported that labor markets remain tight. Several area firms that are expanding noted that they are paying at the high end of salary ranges more often than last year for positions they need to fill. Employment agencies expect the pace of recruiting to be steady or to accelerate in the second quarter. Return to top Fourth District--Cleveland Economic activity continued to show steady gains throughout the District in March and early April. Manufacturers saw steady increases in production in the six weeks through the middle of April, relative to earlier this year. Construction activity also appeared to strengthen, though rates of home building were below those of this time last year. Commercial lending remained relatively robust. And the demand for trucking and shipping services was strong and broad-based. While retailers reported that sales were weaker-than-expected in March and early April, this was thought to be partly attributable to Easter's arrival in April. In general, hiring remained relatively limited across the District. For firms that were hiring, outside of a few specialties, employers appeared able to find the workers they needed; there were no reports of any accumulating wage pressure. Staffing services companies, however, did report that those seeking jobs were able to find them more quickly than in the recent past. Regarding cost pressures, contacts reported increases in the prices for cement, various metals, and petroleum products, and some ability to pass price increases through to end users. Nevertheless, retail prices remained relatively flat. Manufacturing Contacts continued to report steady increases in production at the District's durable goods facilities in March and early April, with production levels generally above those of this time last year. Orders for future shipments were also strong. Steel producers saw strong demand from an array of industries, though shipments to the auto sector were mixed, as some American automakers attempt to reduce capacity. At District auto assembly plants, production rose roughly 5% on a year-over-year basis. Durable good producers generally planned to spend as much or more on investment outlays through the next six months as they are currently spending. More hiring also appears to be occurring, with additional increases in staff planned. Finally, firms reported increases in input costs, especially for various metals and petroleum products, with only some firms able to offset these increases through price changes. Production showed slight increases for many manufacturers of nondurable goods in March and early April, relative to earlier this year. And new orders showed increasing strength as well, suggesting that production may continue to improve in the months ahead. Nevertheless, current production levels remain less than those of a year ago. In general, nondurable goods manufacturers are not investing in additional capacity. Most firms are also not adding to their staffs. Like durable goods producers, many nondurable goods manufacturers mentioned increases in metals and petroleum prices, though some petroleum-derived products were actually less expensive than earlier this year. Retail Year-over-year sales gains were generally weaker-than-anticipated at District retail outlets in March and early April. However, contacts cautioned that these comparisons were problematic since Easter fell in late March last year, but mid-April this year. Some weakness was also attributed to increases in gasoline prices, particularly at discounters and others offering lower-price point merchandise. While sales at specialty-apparel shops were weaker-than-expected, drug stores and grocers generally reported sales above the levels of this time last year. Most contacts reported that markdowns and promotional activity were within the normal ranges. Hiring in the industry continued to be limited. Sales of new and used automobiles improved slightly in March, relative to the beginning of this year. However, sales of new domestic nameplates remained at relatively lower levels. Contacts reported attempting to more effectively manage their inventories, and trim the number of vehicles on their lots, given that holding costs have increased. Construction Residential builders reported a slight increase in sales in March and early April, relative to earlier this year. Nevertheless, some of this increase relates to regular seasonal fluctuations. Compared to this period a year ago, most builders reported a reduction in sales. Most contacts expect sales in 2006 to be below the totals of recent years. Accordingly, prices are rising less rapidly, with many builders more willing to discount than during the previous two years. Regarding input costs, most contacts reported that their materials costs remained relatively stable in March and April. Some builders said concrete costs continued to increase, though several said that lumber costs fell. Few firms reported hiring in recent weeks, while subcontractors were thought to be more available than typical for this time of year. For firms involved in commercial construction, sales increased slightly relative to earlier this year, and were also up relative to a year ago. In addition, most commercial contractors reported that their backlogs were strong. Demand was driven in part by health care providers and educational establishments; construction of new office space was relatively less robust. Increases in materials costs were more widely reported among commercial contractors. Many builders reported increases in steel, cement, and petroleum-product prices. Still, most builders have been able to pass through these costs increases. Hiring remained relatively limited in the industry, and while subcontractors seem to be readily available at present, some contacts were concerned that there will be shortages soon. Banking In March and early April, commercial loan demand increased slightly among smaller lenders in the District, and remained steady at bigger banks. The latter also reported that lending for commercial real estate remained strong. Consumer loan demand was more mixed across institutions, though the issuance of mortgages and autos loans appeared in general to fall from previous levels. Contacts expressed concerns about narrow net-interest margins, though credit quality continued to be described as strong. Finally, contacts reported that their core deposits rose in recent weeks. Transportation Demand for trucking and shipping services remained strong through early April, though some contacts reported a slight softening in activity in March. As fuel prices trended up in March and April, contacts expressed concern over the level of fuel costs. However, these costs continue largely to be passed through to end-users using surcharges. Moreover, many contacts believe that they can raise their base rates if needed, given the strength of demand. Drivers remain in short supply, according to contacts, though wage rates were generally unchanged. As previously reported, capital spending in the industry is strong, as firms attempt to purchase trucks that don't need to meet impending EPA guidelines. Return to top Fifth District--Richmond Fifth District economic activity expanded at a somewhat quicker pace since our last report, as a pickup in manufacturing activity outweighed softening in housing and retail activity. District manufacturers said that shipments and new orders rose briskly in March and early April, and that factory employment grew moderately. District services businesses also reported solid revenue gains and higher employment. Retail sales remained soft, however, and employment in the sector continued to slip. District real estate contacts reported continued strength in commercial leasing activity in recent weeks but said that home sales slowed and that home price appreciation moderated in some areas. In the financial sector, growth in both residential and commercial real estate lending slowed. Business contacts generally reported that price increases for goods and services remained moderate since our last report. In agriculture, unusually dry weather depleted soil moisture and slowed crop development, though recent rainfall offered some relief. Services Service-producing firms reported solid growth in revenues since our last report. The increases were widespread across industries: architectural and engineering firms, hospitals and health care centers, and hotels and restaurants were among the types of organizations reporting solid growth. After pausing in March, services hiring picked up the pace in April, and wages continued to rise briskly. Shortages of nurses and truck drivers were reported in some communities--contacts reported offering substantially higher wages to attract applicants. Price growth in the services sector edged up since our last report, though increases remained modest. Looking ahead, respondents expected somewhat higher price increases in the months ahead. Retail District retailers continued to report sluggish sales in March and the first half of April. Contacts at apparel stores in Maryland and West Virginia said their sales pace softened. Among categories, sales were flat at grocery stores and grew less rapidly at big-box retailers, reportedly because higher gasoline prices caused some customers to trim their purchases. Automobile and light truck sales rose at dealerships in some areas in recent weeks, but sales of other big-ticket items remained generally lackluster. Retail employment softened in March and early April, with the latest readings suggesting that the softness is lessening. Retail prices rose more slowly in March and early April, and expectations of future increases waned. Manufacturing District manufacturing activity strengthened considerably since our last report. Shipments, new orders, and capacity utilization rose briskly in March and the first half of April. Producers of electrical equipment, textiles and apparel, and tobacco products recorded the strongest gains in output. An electrical equipment manufacturer in South Carolina told us that increased demand from the Middle East lifted his sales in recent months. Consistent with stronger activity, manufacturers reported a pickup in hiring again after several months of modest payroll declines. Contacts said that the pace of growth in raw materials prices was little changed since our last report, while growth in final goods prices moderated. Some manufacturers noted difficulty in passing higher costs along to their customers--a North Carolina furniture manufacturer, for example, said that higher fuel surcharges on his raw materials were "eating into profits." Finance District bankers reported that lending activity grew more slowly in March and the first half of April. Some lenders said higher interest rates on home mortgages damped growth in home sales, while others told us that home price escalation trimmed demand and that "a large part of the population is now priced out of the market." District bankers said rising interest rates also slowed growth in commercial lending, though they noted that commercial lending for mergers and acquisitions activity and for construction of office buildings remained at high levels. A Richmond, Va., banker reported that private equity groups had "lots of money to invest" and were expected to boost merger and acquisition activity throughout 2006. Real Estate Residential real estate agents reported generally slower home sales and more moderate price growth in March and early April. A contact in Vienna, Va., said that housing markets remained healthy, but that sales were "softer." "Buyers are out there, but they won't make quick decisions," he noted. An agent in Virginia Beach, Va., similarly remarked: "People are thinking more before buying. They take more time to shop around now." In Washington, D.C., an agent said that the real estate market had slowed over the past several months, including less traffic at open houses. Contacts in some areas in the Fifth District noted that homes--particularly those in upper price ranges--were staying on the market longer. Real estate agents generally reported that home prices were no longer escalating at the rapid pace of 2005. A contact in Washington, D.C., said that many area home sellers were reducing asking prices: "It's clearly a buyers' market now and buyers can negotiate better prices," he noted. Commercial real estate agents reported continued strength in leasing activity in most areas. An agent in Raleigh, N.C., said "it [leasing activity] has not been gangbusters, but it's been pretty steady." Agents reported that vacancy rates for office and retail space remained low and that demand continued to be strong. A contact in Prince William, Va., described a large office building that was just recently put on the market and was already half leased. District real estate agents said that commercial rents rose modestly since our last report. A Charlotte, N.C., agent mentioned that with vacancy rates so low, the increase in rents was "simply a matter of good old supply and demand." Little change in new construction was reported. Tourism Tourism was mixed since our last report. A manager at a mountain resort in Virginia reported that his company had just completed a record-setting ski season and said that bookings for the Easter weekend were double those of a year ago. In contrast, contacts along coastal areas said that higher gasoline prices had hampered business there--a hotelier in Virginia Beach, Va., told us "bookings get slower as the price of gasoline gets higher." Higher gasoline prices, however, did not diminish attendance at the 94th annual National Cherry Blossom Festival in Washington, D.C. Approximately 1 million people showed up for the festival this year. Temporary Employment Temporary employment agencies generally reported stronger demand for workers in March and early April. An agent in Richmond, Va., said that the area's low unemployment rate had made it more difficult for companies to find qualified workers, boosting demand for temporary workers. Contacts in Washington, D.C., and Cary, N.C., reported that demand for temporary workers had been boosted by stronger economic growth in those areas. Employment agents noted that it had become harder to find workers and said that they would be raising wages over the next six months to attract more applicants. Agriculture Dry weather during much of March and early April depleted soil moisture and stressed pastures and crops in many areas of the District. Agricultural analysts said that pastureland in Virginia and the Carolinas was in generally poor condition due to the lack of rain. Hay and small grain development in Virginia was also slowed by the dry conditions. As for brighter notes, widespread rainfall was received in mid April, lessening concerns about dry conditions. In addition, spring planting of corn was ahead of schedule in most of the District and livestock were reported to be in good condition in Virginia and West Virginia. Return to top Sixth District--Atlanta Reports from Sixth District business contacts were mostly positive in March and early April. Merchants experienced modestly increasing sales, while vehicle sales were little changed over the month. Real estate contacts noted softening sales in some parts of the District, and declining sales in Florida. Residential construction remained strong throughout the region as builders worked off backlogs. Nonresidential sales and construction improved overall, but there were some reports of commercial projects being delayed because of rising costs. Manufacturing reports were mixed. Strong demand boosted production and hiring in some manufacturing sectors, while layoffs were announced in others. The demand for transportation services remained robust. Reports from the tourism industry were positive, although rising gasoline prices and concerns about the upcoming hurricane season clouded the outlook. Commercial and industrial lending activity strengthened while residential loans slowed in parts of the District. Labor market conditions remained firm with numerous reports of labor shortages, especially in skilled positions. Contacts again cited high prices for building materials, energy, and industrial inputs, while firms' ability to pass on higher costs to consumers varied. Consumer Spending Most retail contacts reported that activity during March and early April rose modestly compared with a year ago, and the majority said that sales were above plan. Most merchants contacted said that they were satisfied with their current inventory position. The outlook was upbeat with most anticipating rising sales over the next several months. The overall pace of vehicle sales was little changed. Contacts noted that imports continued to gain market share while domestic dealers reported lower sales. The demand for fuel efficient vehicles increased. Commercial fleet sales by domestic automakers declined from earlier in the year. Real Estate According to reports from homebuilders and residential real estate contacts, single-family home sales softened in some parts of the District during March and early April, and declined in Florida from record levels. Despite this, single-family construction remained strong as builders worked to fill the backlog of orders made last year. As a consequence, home inventories rose in most Florida markets, while there were scattered reports of higher inventories in other parts of the District. Condominium sales in Florida continued to weaken, with more projects cancelled or postponed. Contacts anticipate that recent trends in District housing markets will continue during the second quarter. District commercial real estate markets continued to experience stronger levels of demand, but overall development remained at low levels. There were scattered reports of projects put on hold or delayed because of rising construction costs. Some contacts noted that projects have been scaled back or redesigned in an effort to rein in costs. The pace of redevelopment along the Gulf Coast remains slow and debris removal continues to dominate activity. Manufacturing and Transportation Production and hiring increased in some manufacturing sectors, while new layoffs were reported in others. Recent announcements of an expansion of an aerospace firm and a new vehicle production facility will add thousands of jobs to Georgia's transportation equipment sector over the next several years. Building materials manufacturers throughout the District continued to report robust activity. Tool and die companies reported that business was good, while some steel producers noted improving orders. The textile and apparel segment continued to struggle, however, with plant closures announced in Alabama and Georgia. Demand for transportation services remained strong. Tourism and Business Travel Tourism activity remained positive in March and early April, according to most reports. South Florida tourism was characterized as vibrant, and strong attendance was noted for central Florida theme parks over Spring break. A special study for the Florida Commission on Tourism related that although the industry is currently reporting positive advance bookings, there is concern about the potential negative impact of the approaching hurricane season. The new Georgia Aquarium recorded more than 1 million visitors in its first 98 days, greatly exceeding expectations. Six more casinos are expected to be opened along the Mississippi Gulf Coast by the end of summer, in addition to the three that are already up and running. A large New Orleans amusement park announced that it would not re-open in 2006, a setback to the local tourism industry there. Banking and Finance Credit quality in the District continued at strong levels and delinquency rates remained low. Loan growth was healthy, but there was some slowing in real estate lending. An increase in commercial and industrial lending activity was noted in March. Employment and Prices Labor markets remained tight in March and early April, according to most reports. The shortage of skilled workers continued in many parts of the District, and lower skilled personnel remained scarce in Katrina-affected areas. A staffing firm said that business over the next six months is expected to trend upward because of continuing high demand for labor. Developers throughout the District again relayed concern over a labor shortage in the construction industry. A significant number of merchants surveyed noted difficulty filling positions. A shortage of qualified truck drivers was also noted by several business contacts. Energy costs were noted as a constraining factor in most industries, and higher input prices continued to affect manufacturers and builders. The ability to pass on higher costs to customers varied across firms. Contacts noted that more building contractors were adding a margin to their quotes to try and protect themselves against further input price increases. However, those with fixed contracts have been unable to pass along cost increases, and some firms have reportedly delayed projects as a consequence. Oil service companies have been able to increase prices for equipment and services because of strong demand. Agriculture and Natural Resources Recent dry weather had a mixed impact on regional crops. Vegetable harvesting was in full swing in south Florida. In Georgia, the lack of rains reportedly slowed some livestock pasture growth. Meanwhile, poultry prices remained depressed because of uncertainties related to the impact of the Avian Flu on export markets. Government reports show moderate declines in the amount of shut-in oil and gas in the Gulf of Mexico. By early April, approximately 23 percent of oil and 14 percent of natural gas remained shut-in. A little over 40 percent of the remaining shut-in oil production is attributable to a single platform that is expected to return to production in the second half of this year. Return to top Seventh District--Chicago Economic activity in the Seventh District continued to expand at a moderate pace during March and early April. Spending by both consumers and businesses increased at rates similar to those in the last report. Labor market conditions were little changed, with small employment gains in some industries and only sporadic reports of layoffs. Manufacturing activity remained strong. Residential construction and real estate activity softened, while commercial real estate activity increased at a slow pace. Mortgage demand was down, but the expansion in commercial lending continued. Cost and price pressures remained firm. Rains boosted moisture conditions but slowed preparations for planting in parts of the District. Consumer spending Consumer spending continued to increase modestly in March and early April. Retailers in most areas said that sales gains from last year were running at low single-digit growth rates. Electronics and gardening items recorded strong increases. High gasoline prices have reportedly slowed sales at discounters but have had little effect on the demand for expensive durable goods, such as pleasure boats and recreation vehicles. Several contacts expressed concern that higher gas prices during the summer driving season would lead to softer retail sales in coming months. Retail inventories were at desired levels. Auto dealers said that sales of new vehicles remained soft, but used car sales were holding up well. Several dealers said that high gas prices were eroding demand for light trucks, but a few also said that vehicle prices and finance rates were becoming bigger factors in consumers' decision making. Tourism increased modestly in the District, with hotel bookings running ahead of a year ago. Business spending Business spending and hiring expanded again. For the most part, District firms were holding to their existing capital spending plans; these generally call for higher outlays this year than last. The largest gains were budgeted for equipment purchases, but a significant number of contacts planned to increase construction spending. A local information technology firm noted an increase in the number of projects started during the first quarter and forward-looking indicators suggested that activity would remain solid this year. Overall labor market conditions were little changed, with small employment gains in some industries and only sporadic reports of layoffs. Demand for information technology workers was increasing. One pharmaceutical firm said its head count was up nationwide, but down at their Midwest locations. Retail hiring was limited to staffing new stores. In contrast, several auto suppliers and mortgage brokers reported reductions in workers. Temporary help firms reported that growth in billable hours had firmed in the District as a whole, as the long-running declines in bookings in Michigan had showed signs of "settling out." Shortages of skilled manufacturing workers persisted in the District. One contact noted that enrollments in an apprenticeship program had increased recently. Construction/real estate Construction and real estate activity was mixed by both location and market segment. Residential activity continued to slow from high levels in most areas. Contacts in Illinois, Indiana, and Michigan said that sales had softened, while real estate agents in Wisconsin said that sales in March had recovered some. Most contacts indicated that the supply of new and existing homes for sale was growing, buyer traffic was down, and homes were staying on the market longer. In addition, new home construction slowed in most areas. Apartment vacancy rates were steady. On balance, commercial construction and real estate continued to expand at a slow pace. In southeast Michigan, demand for all types of commercial space was weak. In contrast, contacts in Chicago reported a sharp pickup in net absorption of office space, with a number of large block tenants entering the market. The amount of space under construction ticked up in the first quarter. Commercial vacancy rates were either little changed or down slightly. Manufacturing Manufacturing activity remained strong during March and early April. Demand for heavy equipment continued to be solid and order backlogs increased. Orders for mining equipment remained especially strong; current production capacity has been booked through 2007 and some producers have begun taking orders for 2008. One industry analyst noted that equipment makers have been trying to increase capacity by outsourcing more intermediate work and just focusing on assemblies. Orders of agricultural equipment were flat. Activity in the tooling industry remained brisk, led by demand from the energy sector. Steel producers reported strong demand from all markets and growing backlogs. Steel imports were increasing as well. Wallboard production continued to run near full capacity. Heavy- and medium-duty truck orders remained solid, reflecting in part the continued pre-purchase of trucks before new EPA standards go into effect at the beginning of next year. Nationwide, light vehicle sales were flat between March and early April. One automaker said that vehicle inventories were "excessive," and that this would lead to either production cuts or higher incentives. Banking/finance Lending activity moderated further. Bankers noted additional declines in mortgage applications for both purchases and refinancing. Still, one contact said that a number of customers were refinancing from adjustable to fixed-rate loans in order to lock in rates before they moved any higher. Demand for home-equity loans declined, which most contacts attributed to slower increases in home values. Mortgage spreads were slim due to competitive pressures. As a result, one banker in Chicago expected to see a number of originators exit the market in the second quarter. Reports on household credit quality were favorable, though exceptions were noted from Michigan. Deposit growth was sluggish, and contacts said that deposit rates were priced aggressively. Commercial lending expanded, continuing the trends seen earlier in the year. Loan volume and use of existing credit lines picked up, and demand was solid across product markets. One contact noted that their optimism about loan demand had improved markedly since the last reporting period. Commercial credit quality remained in good shape. Prices/costs Price and cost pressures remained firm in March and early April. Many contacts noted that higher energy prices were boosting costs, and only heavy truck manufacturers and toolmakers indicated that they had been successful in passing these costs through to their customers. Steel prices increased noticeably since the last reporting period. A construction industry analyst noted that roadbuilding material costs have moved significantly higher, leading some state governments to reevaluate their projects. Price reports at the retail level were mixed. One retail chain said it was increasing prices of its private label goods, but an industry analyst said that competitive pressures were keeping most retailers reluctant to increase prices. Hotel room rates were flat to slightly higher, while new vehicle prices were flat to slightly lower. Labor costs increased at a steady rate in most industries. Agriculture Agricultural conditions improved in March and early April. Recent rains reduced the area of the District affected by drought, although the rains also slowed planting preparations in parts of the region. Still, contacts said that more and timely rains will be critical for the growing season. Contacts continued to believe that soybean acres would increase relative to corn this year. However, the gains likely will be not as big as previously reported due to recent changes in the relative crop prices and fertilizer costs. Also, increases in ethanol production were expected to boost the demand for corn further. Cash flows were tight during the reporting period for crop farmers, dairy operators and cattle feeders. In contrast, hog producers managed better than expected, and some expansions are under consideration in Indiana. There were mixed reports on farmland values. Return to top Eighth District--St. Louis Eighth District economic activity expanded modestly since the previous survey. During March, the service sector continued to grow, and manufacturing showed signs of continued improvement. Many contacts in retail trade reported gains relative to last year, although reports from auto dealers indicated decreases in sales relative to this time in 2005. Commercial construction activity continued to increase, while home sales and single-family residential permits in January and February varied across the District. Total lending activity among small and mid-sized banks remained steady. Manufacturing and Other Business Activity Manufacturing in the District continued to show signs of moderate expansion. Based on reports received during March, several manufacturers are expanding or opening plants, whereas fewer reported plant closings and workforce reductions. Firms in the plastics, auto parts, and wood products industries announced plans to open new facilities in the District. Contacts in the auto parts, food, transportation equipment, machinery, electronic products, fabricated metal products, and motor vehicles industries reported plans to expand existing facilities and hire additional workers within the next 12 months. Several contacts in the apparel industry, however, reported plans to close plants and lay off workers. In general, most contacts characterized economic activity and the outlook for the future as either "growing" or "stable." The District's service sector continued to expand in most areas. Contacts in the business support, warehousing, and health services industries reported plans to expand their workforces. Contacts in the freight transportation industry reported strong demand for their services. Most District retailers reported increases in sales of 5 to 10 percent over March 2005 levels. Clothing, building materials, and "big box" retailers reported especially strong growth. Auto sales during March, in contrast, remained below 2005 levels in most areas of the District. Domestic and sport utility vehicles, as well as trucks, experienced the largest decreases in sales. Several auto dealers also reported that sales of luxury models were "soft." Imports and used vehicles fared better, with sales of these described as "relatively brisk" in some areas of the District. Real Estate and Construction Home sales were mixed throughout the District. February year-to-date sales were up 21 percent in Memphis and over 6 percent in St. Louis compared with the same period in 2005. In Little Rock, February year-to-date home sales were down 6 percent, and in Louisville home sales remained virtually unchanged from the same period last year. Residential construction continued to be slow in much of the District. February year-to-date single-family residential permits declined 44 percent in Louisville, 6 percent in St. Louis, and over 4 percent in Memphis. In contrast, permits were up 16 percent in Little Rock. Commercial real estate markets in the District continued to grow. Contacts in southern Indiana reported that commercial construction was active, and contacts in northeast Arkansas reported that a number of projects were being planned. Reports indicated strong commercial construction activity in Little Rock, and contacts in St. Louis reported that, in terms of square footage, commercial construction for 2006 would surpass commercial construction projects completed in 2005. Contacts in west Tennessee reported positive expectations for commercial and industrial construction for 2006, and contacts in northeast Mississippi reported that a large industrial project was recently announced for that area. Banking and Finance Total loans outstanding at a sample of small and mid-sized District banks showed essentially no change from early January to late March. Real estate lending, which makes up 72.4 percent of total loans, increased 1.3 percent. Commercial and industrial loans, accounting for 17.2 percent of total loans, decreased 1.2 percent. Loans to individuals, roughly 4.7 percent of total loans, fell 2.3 percent. All other loans, approximately 5.7 percent of total loans, decreased 9.5 percent. Over this period, total deposits at these banks decreased 0.7 percent. Agriculture and Natural Resources Farmers in the District reported that they expected to plant 8 percent fewer acres of corn, 4 percent fewer acres of sorghum, 14 percent fewer acres of rice, and 15 percent fewer acres of tobacco this year than in 2005. They also anticipated planting 7 percent more acres of soybeans and 4 percent more acres of cotton than last year. Some farmers reported switching from corn to soybeans because the latter were cheaper to grow in terms of nitrogen fertilizer and fuel, which have increased in cost. This year's total winter wheat acreage increased by more than 40 percent from last year, and at least 68 percent of each District state's crop was reported to be in good or excellent condition. At least two-thirds of the pastures in each state were reported to be in fair or good condition. Return to top Ninth District--Minneapolis The Ninth District economy grew at a solid pace since the last report. Increases in activity were noted in consumer spending, manufacturing, tourism, mining, agriculture, construction, and commercial real estate. Meanwhile, residential real estate softened. Overall employment levels and wages increased modestly. Significant price increases were noted in gasoline and some construction materials. Consumer Spending and Tourism Overall consumer spending increased moderately since the last report. Retail sales were up slightly in March compared with last year's earlier Easter season. A major Minneapolis-based retailer reported same-store sales up 2 percent in March compared with a year ago. A Minneapolis mall manager noted that March traffic was about even with a year ago, with sales up about 2 percent; sales and traffic were brisk on the Friday and Saturday of Easter weekend. Recent sales and traffic at another Minneapolis area mall increased about 2 percent from a year earlier. A mall manager in Montana noted that March apparel and food sales increased from a year ago; overall sales in February increased 10 percent. Recent vehicle sales were generally lower than a year ago in Montana, according to a representative of an auto dealers association. After slow vehicle sales in South Dakota during January and February, sales in March and early April showed some signs of improvement, according to a representative of an auto dealers association. The winter tourism season finished solid in several parts of the district. Downhill ski resorts in Montana reported deep snow pack and late season lift ticket sales above a year ago. Tourism destinations in eastern Montana also reported that visits were up compared with last year. A chamber of commerce representative in northwestern Wisconsin noted that the winter tourism season finished stronger than last year. Recent hotel room occupancy rates in Minneapolis have trended upward as corporate convention business has shown signs of strengthening. Construction and Real Estate Overall construction activity grew modestly. Commercial construction contacts surveyed in the district reported year-to-date activity to be higher or about the same compared to last year. Commercial real estate developers in the Upper Peninsula of Michigan expect a stronger construction season this year than in recent years. Commercial building permits were up significantly in number and value over last year in Fargo, N.D., and Rochester, Minn. "We had a good year in 2005; 2006 looks even stronger," said a Minnesota concrete contractor. Year-to-date commercial building activity is up over last year in Minneapolis-St. Paul; however, March home-building permits were down 10 percent in value from a year earlier. March new home permits in Rochester, Minn. were down significantly in value from a year earlier. While year-to-date residential permits were down slightly in Sioux Falls, S.D., developers there announced plans for a 300-acre residential and retail project on the city's east side. Commercial real estate was strong. The Minneapolis-St. Paul office market continued to grow, with a market research firm predicting growth in absorption through 2007 with little increase in supply. Meanwhile, the industrial market there is heating up, with increased absorption. In contrast, residential real estate softened. Realtors in Fargo, N.D., reported March closed sales down 2 percent last year and an increase in listings. New listings in the Minneapolis area were up 47 percent over last year, but buying activity was level and time on the market trended upward. Manufacturing Manufacturing activity expanded. A March survey of purchasing managers by Creighton University (Omaha, Neb.) indicated fast growth of manufacturing activity in the Dakotas and Minnesota. In Minnesota, a company plans to double the size of a construction equipment component plant, a radiator company plans to build another factory, and a printing company is building a new facility. A control panel manufacturer in the Upper Peninsula is adding manufacturing and warehouse space. Energy and Mining Activity increased in the mining sector and was stable at a high level in the energy sector. Nearly all open mines in the district were producing at near full capacity. A mine in Montana is planning to expand capacity. In addition, several companies are exploring or developing mineral properties in Montana and Minnesota. Oil and gas exploration and production were about level from late February through late March. Agriculture Activity in the agricultural sector increased. Spring rains across the district bode well for the upcoming growing season. Half the winter wheat crop in Montana is rated good or excellent, and the calving season is progressing ahead of last year and the five-year average. Meanwhile, prices remained relatively solid throughout March for the main agricultural products produced in the district. Employment, wages and prices Overall employment levels increased modestly since the last report. According to a survey of Minneapolis-St. Paul companies by a temporary staffing agency, 29 percent of respondents expect to increase staffing levels during the second quarter, while 9 percent expect decreases. Montana bank directors reported tight labor market conditions in many areas. March initial claims for unemployment insurance were flat from a year ago in Minnesota. Some companies announced upcoming staff reductions. A slowdown at a motor vehicle plant in St. Paul could result in at least 150 layoffs during the summer. Also in Minnesota, a consumer electronics retailer recently announced the elimination of 300 positions at its corporate headquarters and an investment bank recently announced plans to reduce staff by 350 positions following a purchase of the company. Overall wage increases were moderate. Aside from notable increases in certain trades, overall wage increases were modest, said a Montana bank director. According to results of a recent St. Cloud (Minn.) Area Business Outlook Survey, 50 percent of respondents expect to increase employee compensation over the next six months. In the same survey a year ago, 54 percent of respondents anticipated increases. Significant price increases were noted in gasoline and some construction materials. Minnesota gasoline prices in the middle of April were up about 45 cents per gallon from February and almost 50 cents per gallon from a year ago. Price increases for construction materials include lumber, concrete, aluminum, and some steel products. Copper prices in April were more than 50 percent higher than levels in 2005. Return to top Tenth District--Kansas City The Tenth District economy grew solidly in late March and early April. Growth in manufacturing activity increased, consumer spending expanded, and labor markets firmed. Energy activity continued to rise, while drought conditions eased but remained a concern in the agricultural sector. Commercial real estate activity held steady, and residential construction declined somewhat. Wage pressures and wholesale price pressures rose slightly, while retail price pressures edged down. Consumer Spending Consumer spending expanded solidly in the period from late March to early April. Most retail contacts reported that sales were higher than in the prior survey period and above year-ago levels. However, several mall managers noted a decline in traffic in recent weeks. For the most part, store managers were satisfied with inventory levels and continue to be optimistic about future sales. Auto dealers reported that sales in late March and early April were up slightly from the previous survey period but generally lower than a year ago. Fuel-efficient cars were reported to be selling well, while sales of large SUVs and pickup trucks were characterized as weak. Inventory levels were said to be satisfactory at most dealerships, and dealers generally expect sales to hold steady in the coming months. Travel and tourism contacts reported solid growth in activity since the previous survey. Passenger counts were higher than a year ago at most airports across the district, and several airports reported record traffic. Hotel occupancy rates also remained higher than a year ago in most areas. Contacts generally expect that tourism activity will stay strong in the months ahead. Manufacturing Manufacturing activity in the district continued to expand in late March and early April. Many plant managers reported increases in production and new orders, and growth in capital spending increased after slowing somewhat in the previous survey period. A substantial fraction of respondents expect further increases in production going forward. Contacts reported that some materials, including steel and aluminum, had become more difficult to obtain than in previous survey periods. Most contacts expect these difficulties will not be resolved in the near future. Real Estate and Construction Residential construction declined slightly in late March and early April, and commercial real estate activity held steady. Most home builders reported that starts decreased somewhat since the previous survey. Many builders expect further declines in the months ahead, although new home construction is expected to remain strong in a few areas. Construction materials were generally reported to be readily available, and no significant problems obtaining materials are anticipated in the coming months. Residential real estate agents said that home sales were up slightly since the previous survey, and they expect sales to generally remain unchanged in the coming months. Inventories of unsold homes continued to rise in many markets and, for the most part, were well above year-ago levels. Home price appreciation remained modest in most areas, and real estate agents expect moderate growth in home prices going forward. Mortgage lenders reported a slight increase in home purchase loans since the previous survey and said demand was similar to a year ago. Demand for refinancings was unchanged from the previous survey and remained below year-ago levels. Commercial real estate activity in the district held steady in late March and early April. In most markets, vacancy rates and rents for commercial space were little changed from the previous survey period, although conditions remained stronger than a year ago. Commercial real estate markets are expected to improve slightly in the months ahead, and most contacts expect commercial construction to be at least as strong in 2006 as 2005. Banking Bankers reported that deposits increased and loans held steady since the last survey, causing a decline in loan-deposit ratios. Demand rose slightly for commercial and industrial loans, while demand for consumer loans, home equity loans, and commercial real estate loans fell somewhat. On the deposit side, all types of accounts increased. All respondents raised their prime lending rates and consumer lending rates since the last survey. Lending standards were unchanged. Energy Energy activity continued to expand in the district during late March and early April. The count of active oil and gas drilling rigs in the region increased modestly since the prior survey period and remained well above year-ago levels. Many contacts continued to report that shortages of equipment and workers were constraining drilling activity. Pipeline capacity was also reported to be limited in certain areas of the district. Nevertheless, firms throughout the district expect further increases in drilling in the months ahead. Agriculture Dry weather remained a concern in parts of the district despite scattered precipitation. In southern portions of the district, moisture received over the last month was lost to unusually warm and windy weather. District winter wheat conditions were poor, especially in Oklahoma. Planting of spring crops was reported to be running somewhat behind a year ago but in line with five-year averages. Pasture conditions remained poor in many areas despite the recent precipitation. As a result, some ranchers were forced to place calves in feedlots earlier than normal, putting downward pressure on fed cattle prices. Labor Markets and Wages Labor markets firmed in late March and early April, while wage pressures edged up. Hiring announcements outpaced layoff announcements by a sizeable margin. Several aerospace firms announced that they were expanding in the district, and a number of high-tech manufacturers also said they plan to add workers. A slightly larger percentage of contacts reported labor shortages than in the previous survey. Among the workers reported to be in short supply were auditors, auto technicians, skilled and unskilled manufacturing workers, oil and gas workers, and truck drivers. The fraction of firms reporting above-normal wage increases rose from the previous survey, although the share remained well below the levels seen throughout the late 1990s. Prices Wholesale price pressures increased slightly in late March and early April, but retail price pressures edged down. The percentage of manufacturers reporting increases in materials prices and the percentage reporting increases in finished goods prices were both little changed from the previous survey period. However, the share of plant managers expecting materials prices to rise in coming months and the share expecting finished goods prices to rise both edged up. Builders indicated that raw materials costs were mostly stable, and they did not expect any large increase in materials prices in the months ahead. The share of retailers reporting higher prices than a year ago was lower than in the previous survey, and the percentage of retail stores that plan price increases in the future also declined. Return to top Eleventh District--Dallas Eleventh District economic activity continued to strengthen in March and the first half of April. The energy industry remains very strong, while activity continued to pick up in the manufacturing and service sectors. Construction and real estate activity accelerated, boosted by vigorous homebuilding and mounting commercial construction. Contacts in the financial services sector report little change overall. Agricultural conditions are poor. Prices Price pressures are expanding, fueled by rising costs. Prices are up for utilities, gasoline and transportation. More contacts appear to be resigned that oil prices will be high for several months. While some industries still report that stiff competition is holding down selling price increases, there are increasingly reports of price increases from firms that had previously considered them impossible, both in the manufacturing and service sectors. Crude oil prices increased from near $60 per barrel in early March to over $70 in mid-April. Heavy maintenance at refineries reduced demand for crude putting downward pressure on prices, but this was offset by international tensions in oil-exporting countries like Nigeria and Iran. Oil inventories have built to very high levels, well above any recent history, presumably as a precaution. Gasoline prices increased 25 cents per gallon at the pump during the period, pushed up by strong demand, rising crude prices and shortages of ethanol, an additive that is being used in the transition to low-sulfur, non-MTBE gasoline. Diesel prices increased 10 cents at the pump. Natural gas prices remained near $7 per thousand cubic feet, held down by heavy inventories, which are now more than 60 percent above normal and well above the 5-year maximum. Labor Market The labor market continues to tighten. Reports of hiring have increased from both manufacturing and service firms. Contacts still note shortages of skilled workers, and there are more reports of a tightening of the market for unskilled workers. In some areas of the District, there are reports of difficultly finding workers who meet basic qualifications of employment, such as background checks and drug tests. The labor market is particularly tight in the portions of the District that had received an influx of residents who relocated following the hurricanes. Wage pressures are building for some industries, stiff competition is limiting profitability and the ability of firms to raise salaries. However, an increasing number of industries report that they must and are increasing salaries to obtain and retain workers. Manufacturing Overall manufacturing activity was strong and picked up slightly. Activity is strongest among producers supplying the energy and construction sectors. A number of manufacturers reported raising selling prices, including those in the apparel industry. Demand remained strong for construction-related products, such as lumber, fabricated metals, stone, clay and glass; and capacity constraints were limiting some production. Apparel producers report an increase in demand, and sales of food products is up slightly. High-tech manufacturers reported good, steady growth in sales and orders. Respondents say most of the output gains are coming from continued strong productivity growth rather than hiring. Inventories are at desired levels. Prices are not declining as fast as normal, they say, and profits are increasing. Petrochemical production is weaker than a year ago. Prices fell for most petrochemical products, but some prices still remain above where they were prior to the hurricanes. Stronger prices in the United States than in other parts of the world are attracting petrochemical imports. With increased imports and relatively low prices abroad, domestic producers of petrochemicals are finding smaller markets for their products. The industry continues to recover from the hurricanes, with some plants just now coming back on line. Some producers are going through an extensive maintenance that was postponed by the hurricanes, and this is affecting the ethylene market, in particular. Refiners also had a long maintenance season, and refinery utilization rates have been low. Inventories of raw gasoline are at 5-year highs, but refiners lack sufficient quantities of the additive ethanol that is now required in most gasoline sold in the United States from late spring to early fall. Refined product imports have settled back to historical ranges, after soaring to as high as 5 million barrels per day after the hurricanes. Services Demand for business services remains strong, and several firms report increased activity compared with last year. Temporary service firms report good demand, particularly for high tech and light industrial manufacturing workers. Legal firms report steady demand overall. Real estate, transactional and corporate work remains robust, but litigation activity is down. Accounting firms say activity is still strong especially for audit services; however, demand for Sarbanes-Oxley related work has slowed. Demand for transportation services remains strong and up significantly compared with last year. Railroads are planning to build additional rail lines to increase capacity. Trucking firms continue to report difficulty finding qualified drivers. Demand for air travel is strong, and contacts say forward bookings look good. Airlines report that reduced domestic capacity has increased load factors and that, along with rising fares, is helping them keep up with soaring fuel costs. Retail Sales Retailers report good sales growth, but year over year comparisons have been complicated by Easter's shift from March in 2005 to April in 2006. Sales are weakest to low-income consumers for who, contacts suggest, are paying a larger share of disposable spending to high utilities and gasoline costs. One large retailer noted a recent deterioration in credit portfolios and spike in delinquencies, suggesting that some customers are unable to pay all of their bills. Contacts say that competition in the industry remains stiff, but there is "some pricing authority," which has permitted price increases or fewer discounts. Product costs are also rising. Auto dealers report flat demand and very slow sales for cars and trucks made by American-owned companies. Inventories are very heavy for some vehicles, pressuring dealers to lower prices and bring back rebates for those models. Construction and Real Estate Residential markets remained strong. Homebuilders reported record setting sales for the first three months of 2006. Demand for existing homes was also strong. Single-family home markets are extremely competitive, however, and builders say they are reluctant to increase prices, even as construction costs have risen. Contacts remain concerned about news reports of slowing home markets nationwide but seem more confident than at the time of the last Beige Book that local markets will be unaffected. Builders in Dallas/Fort Worth are keeping their eyes on higher inventories. Contacts are seeing some increased investor activity, but say the price gains appear driven by economic fundamentals. Apartment leasing continues to increase, and contacts say demand is stronger than usual for this time of year. Inventories remain at good levels with only moderate construction planned for this year. An exception is San Antonio, where contacts are concerned that there may be too much building. Apartment rents are up in Houston, but rents are not firming as much as expected in Dallas/Fort Worth and Austin. Commercial construction activity is strengthening. Demand for retail space is strong in all the major metropolitan areas. Office and industrial occupancy continues to rise, which is spurring construction activity. Houston will see a good bit of construction this year, with several new industrial development projects underway near the Port of Houston and strong demand for professional and medical office space. Dallas office demand has picked up, say contacts, with some suburban sectors nearing full occupancy, according to contacts. However, downtown Dallas continues to have ample vacant space. Contacts expect commercial construction to be especially strong in Austin. Financial Services Financial services respondents continue to report fierce competition for loans. While there have been some increase in home mortgage delinquencies, contacts say overall loan quality is very good. Short-term interest rate increases have not adversely affected clients nor slowed loan demand. Respondents would prefer stronger growth in deposits, which has been flat. Energy The oil services industry reported that demand is still very strong, and capacity is tight, with growing backlogs, and an increasing rejection of work that cannot be scheduled. The rig count continues to rise over the past six weeks, with the number of working oil and natural gas rigs up by over 50 in Texas and by over 80 in the United States. The growing rig count owes to new rigs entering the market and some refurbished and rebuilt rigs. Also, the Gulf of Mexico returned to over 90 working rigs--near the levels before the hurricanes. Rigs continue to leave the Gulf, however, and the day-rates in the Gulf have picked up very sharply since the hurricanes. Agriculture Wildfires and continued dry weather have led to a deterioration in agricultural conditions. About 10,000 head of cattle and over 800,000 acres of land were lost to wildfires in March. Ranchers are heavily culling their herds in the driest regions of the District, and supplemental feeding remained necessary. Contacts say wheat and oat crops are in poor condition, and more than half of the planted wheat crop is expected to be lost. Recent rains have improved planting conditions and spurred land preparation for spring planting in East and Central Texas, but overall moisture levels were still below average. Crop insurance may be the only way that some producers can cover their costs, according to contacts, who say that dry conditions and high energy costs are making the production outlook uncertain. Even with insurance program payments, agricultural lenders expressed concerns that statewide credit quality conditions may deteriorate in the second half of the year. Return to top Twelfth District--San Francisco The Twelfth District economy expanded at a solid pace during the survey period of March through mid-April. Contacts reported modest wage and price inflation on net, although wage growth remained rapid for selected worker groups with specialized skills in some industries. Retail sales rose, owing in part to a rebound in auto sales, and demand for services was strong. Output and sales grew significantly in most manufacturing sectors and for producers of agricultural and resource-related products. Residential construction, sales activity, and price appreciation slowed slightly in most areas, while the demand for commercial real estate grew further. District banks reported strong loan demand on net and very good credit quality. Wages and Prices Contacts reported that upward price pressures were modest overall. Prices for energy-intensive products and selected building materials were at high levels but generally held steady or fell somewhat relative to recent survey periods. Final prices for most goods and services reportedly rose at a modest pace, or in the case of information technology products and services continued to decline, owing to domestic and international competition and ongoing productivity gains. Overall wage increases remained moderate on net, with numerical reports for broad worker groups in the range of 3 to 4 percent on an annual basis. However, availability remained tight and wage increases remained relatively rapid for some groups of workers with specialized skills, notably in the financial, construction, health-care services, information technology, and professional services sectors. Contacts also noted that employers' costs for employee benefits, particularly for health insurance, continued to rise more rapidly than wages. Retail Trade and Services District retail sales grew at a solid pace in most areas during the survey period. "Big-box" retailers of home improvement products and services reported robust orders and sales, while sales of toys and other small retail items grew at a more modest pace. Demand for new and used automobiles bounced back and was stronger than expected during the survey period, with improved sales of domestic makes and continued strength in sales of imported vehicles. Activity in the services sector generally was vibrant, with some exceptions. Demand remained strong in the health-care services, professional services, and transportation sectors, while conditions were mixed for providers of information technology and media services. District travel and tourist activity expanded further from very high levels, although contacts in Hawaii and California noted that hotel occupancies have been leveling off. Contacts also noted general growth in demand for air travel and improved financial performance by major carriers. Manufacturing District manufacturers reported significant growth in output and sales during the survey period of March through mid-April. Orders and sales of semiconductors were strong and industry-wide capacity utilization remained very high; inventories increased slightly but remained near target levels. Production of commercial aircraft continued at a rapid pace in the Pacific Northwest, and orders for new aircraft remained strong. Machine tool makers saw further increases in demand and reportedly have been operating at close to full capacity. Food processors also saw demand growth. In contrast, sales were slightly disappointing for District apparel manufacturers, and excess capacity remains in that sector. More generally, contacts noted that capacity utilization has been rising in most manufacturing sectors, but worldwide competitive pressures have been restraining pricing power. Agriculture and Resource-related Industries Demand grew significantly for District agricultural and resource-related products. Sales were robust for most crops and livestock; demand for beef cattle softened slightly but prices received by ranchers remained at very high levels. Contacts noted some supply constraints, including continued high prices for fuel and fertilizer, tight markets for agricultural labor, and unusually wet weather that delayed planting and field work in parts of California. In the resource sector, producers of oil and natural gas continued to see robust demand and little or no excess capacity. Real Estate and Construction Activity in residential real estate markets was at high levels but showed signs of further moderation in most areas, while demand for commercial real estate continued to expand. Home sales and construction activity were at high levels overall. However, these and other measures of market conditions, such as the pace of price appreciation and time on the market, suggested significant cooling in most areas. The main exceptions were Utah and parts of the Pacific Northwest, where activity remained robust. On the commercial side, office and retail vacancy rates fell and rental rates rose further in most major markets. Overall construction activity remained at high levels, reflecting an extensive array of residential, commercial, and large public projects in most areas. Several contacts reported that builders continued to face cost increases and minor project delays as a result of tight availability of skilled workers and selected materials such as steel, cement, and lumber. Financial Institutions District banking contacts reported strong loan demand on net. The volume of commercial and industrial lending rose, while mortgage lending, particularly in subprime categories, fell somewhat from very high levels. One contact noted that compression of profit margins resulting from intense competition and narrow interest spreads has been offset in part by "excellent" asset quality. Venture capital financing has risen in some areas, and one Silicon Valley institution with venture capital interests noted plans to expand employment significantly this year. Return to top