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January 17, 2001

Summary of Commentary on

by Federal Reserve District

January 2001


January 2001



SUMMARY .......................................................................
First District - Boston ....................................................
Second District - New York ................................................


Third District - Philadelphia .............................................


Fourth District - Cleveland ...............................................


Fifth District - Richmond ..................................................


Sixth District - Atlanta ..................................................
Seventh District - Chicago ...............................................
Eighth District - St. Louis .............................................


Ninth District - Minneapolis ..............................................


Tenth District - Kansas City ................................................


Eleventh District - Dallas ................................................
Twelfth District - San Francisco .........................................



Reports from Federal Reserve Districts indicate that economic growth slowed in
December, easing labor shortages somewhat and limiting price pressures for finished goods and
services. Most districts reported a further deceleration in growth from the previous survey.
Philadelphia reported an actual decline in activity, while Cleveland said that economic growth
remained at the same slow rate as in the previous report. New York and San Francisco indicated
that growth remained solid but showed some signs of softening.
Despite heavy discounting, nearly all districts reported lackluster retail sales growth
during the holiday season. Automobile sales slowed substantially and most districts reported a
sizable buildup of dealer stocks. All districts reported weaker manufacturing activity in
December. Residential construction cooled in most districts but remained strong in New York
and San Francisco. Commercial real estate activity also showed some signs of slowing. The
tourism industry reported a strong start to the winter season, but other service activity weakened,
particularly for trucking and other transport. Activity in the energy sector expanded as fast as
drillers could find workers and rigs. Banks did not report any deterioration in credit quality but
kept a watchful eye over their loans.
Labor markets eased somewhat but remained tight. Layoffs in a wide variety of industries
were announced in most districts. However, business contacts expected laid-off workers to be
quickly reabsorbed due to strong pent-up demand for labor at other firms. In most districts, wage
pressures were similar to or slightly less intense than those in the previous survey. Prices for

* Prepared at the Federal Reserve Bank of Kansas City and based on information
collected before January 10, 2001. This document summarizes comments received from
businesses and other contacts outside the Federal Reserve and is not a commentary on the views
of Federal Reserve officials.

most manufactured goods were flat to down despite higher costs for energy and other inputs.
Consumer product prices were constrained by heavy holiday discounting.

Consumer Spending
Holiday retail sales were disappointing in nearly all districts, despite early and extensive
discounting. Most districts reported that sales were up only slightly from the holiday season a
year ago, when strong gains were reported. An exception was the New York district, where sales
increases were on or close to plan. The overall weak sales growth led several national and
regional retailers to close some or all of their stores. Many districts cited diminished consumer
confidence as the biggest reason for the slower growth in activity this December. Retailers in the
Richmond, Chicago, St. Louis, and Dallas districts reported that brutally cold weather further
dampened sales. Winter weather items sold very well in December, as did apparel in most
districts. But sales of home furnishings, fine jewelry, computers, and most other items lagged.
Kansas City and San Francisco reported significant growth in online retailing during the 2000
holiday season, although the growth was below expectations in the San Francisco district.
Inventory levels were reported to be satisfactory to slightly excessive in most districts. Managers
seemed confident, however, that any surpluses would be trimmed during January clearance sales.
Looking ahead, most store managers seemed cautiously optimistic about retail sales in the first
quarter of 2001.
Automobile sales in all districts reporting on such activity were characterized as either
weak or slowing. Sales of domestic cars and light trucks were reported to be especially weak in
the Philadelphia and Chicago districts. St. Louis noted that used car dealerships experienced the
largest decline in sales. Dealers in the Kansas City district had difficulties moving all makes and

models of motor vehicles. Inventories of unsold cars throughout the country were high, and in
most districts expectations for auto sales in coming months remained subdued.

Manufacturing activity weakened in all districts in December. Steel producers were
reported to be in difficulty in many districts, with Cleveland and Chicago reporting a number of
bankruptcy filings among steel firms. There were also announcements in several districts of
temporary auto assembly plant shutdowns in the first quarter. Slower construction activity in
recent months has precipitated a dropoff in production of construction-related materials and
equipment in the Boston, Dallas, and San Francisco districts. On a positive note, activity at many
of the nation's refineries remained solid. Production of computer-related equipment remained
strong in the Boston district, but Dallas reported a sharp falloff in computer production, due to
weaker consumer demand for PCs and to reductions of technology-related investment by
High input costs, the strong dollar, and weaker domestic demand were cited the most
often as reasons for the slowdown in factory activity. Boston, Richmond, and St. Louis reported
that higher input costs were squeezing profits for some firms. Half the districts also mentioned
widespread concern among manufacturers about higher energy costs. Some fertilizer, chemical,
and smelting plants in the St. Louis, Minneapolis, Kansas City and San Francisco districts have
even shut down in order to resell their electricity or natural gas supplies on the open market.
Philadelphia, Cleveland, Richmond, Atlanta, and Kansas City reported that heavy import
competition, due largely to the strength of the dollar, was hampering manufacturing sales.

Atlanta also reported that uncertainty about the U.S. stock market was adversely affecting firms'
capital expenditure plans.

Real Estate and Construction
Residential real estate activity cooled in most districts. Single-family residential
construction remained strong in the New York and San Francisco districts, but it declined in the
St. Louis, Kansas City, and Dallas districts and showed signs of slowing elsewhere.
Homebuilders in the Cleveland district reported that they have far fewer projects scheduled for
coming months than at the same time last year. In contrast, builders in the New York district
reported a persistent backlog of projects. Home sales were mixed across housing markets, with
New York again reporting the most robust activity. Boston and Richmond reported that reduced
consumer confidence was adversely affecting sales, with potential homebuyers showing greater
willingness to delay home purchases. Unusually cold weather was also reported to have held
down activity in some districts.
There were also signs of slowing in commercial real estate activity in some districts.
Commercial construction slowed in the Dallas, Richmond, and Atlanta districts, and was
described as mixed in the St. Louis and Cleveland districts. Commercial building remained solid
in the Kansas City district. New York and Richmond reported that contraction by dot-com
enterprises has helped free up some office space, although the office market in the New York
district remains very tight. Shortages of office space were also reported in parts of the Richmond,
St. Louis, and San Francisco districts.

Tourism and Services
Tourism was better than expected in those districts reporting activity. Unusually cold
weather and a good snow base boosted visits to ski resorts in the Richmond and Minneapolis
districts. Atlanta also reported that holiday travel to Florida was very strong.
Activity in other service industries was generally down. Demand for trucking services
fell considerably in the New York and Cleveland districts, and was down slightly in the Dallas
district. Meanwhile, trucking firms' fuel, insurance, and labor costs continued to rise, resulting in
an increase in bankruptcies and truck repossessions in the New York district. St. Louis reported a
slowdown in barge traffic on the Mississippi River due to low water levels. Richmond and Dallas
reported that revenues fell at most business service firms. In contrast, revenues were up in the
Boston district's insurance industry.

Financial Services
Bank loan growth slowed somewhat in most districts in December. Bankers in the
Cleveland district said decisions by some manufacturing firms to delay investment projects had
reduced demand for business loans. Atlanta and Chicago also reported some slowing in business
loan demand. New York, Kansas City, and San Francisco reported somewhat weaker demand for
both consumer and business loans, while Dallas reported that demand slowed for all categories
except loans to energy firms. Demand for home mortgages was mixed, but lenders in several
districts said they expect refinancing activity to pick up if low mortgage rates persist.
There were no new reports of decreases in credit quality, but banks generally continued
to tighten credit standards and said they were keeping a watchful eye on the financial condition
of their borrowers. Banks in the New York, Philadelphia, Atlanta, Chicago, and Dallas districts

reported they were continuing to tighten their credit standards. Banks in many districts also said
they were monitoring credit quality carefully to detect any deterioration. Bankers in the Chicago
district reported they were keeping an especially close eye on loans to retail and manufacturing
sectors, while bankers in the Richmond district said they were paying special attention to loans to
cyclical industries.

Natural Resources and Agriculture
The energy sector continues to expand. Despite recent easing in oil prices, contacts in the
Dallas, Kansas City, and Minneapolis districts reported that oil and natural gas prices remain
sufficiently high to promote continued expansion of exploration and production. However,
Dallas and Kansas City reported that the pace of industry expansion is constrained by worker and
equipment shortages. Given these shortages, the recent dramatic rise in natural gas prices is not
expected to produce a further acceleration in drilling activity. Other extraction industries are not
doing as well, as metal mining and processing activity in the Minneapolis district continued to
decline in the face of falling commodity prices and high electricity costs.
In the farm economy, the onset of winter weather across the country has had mixed
effects. Minneapolis reported that moisture from heavy snowfalls has benefited the winter wheat
crop and is expected to reduce the likelihood of drought conditions in the coming growing
season. However, severe winter weather also contributed to a worsening in pasture conditions for
livestock and an increased use of alternative forages in the Richmond, Minneapolis, Kansas City,
and Dallas districts. The alternative supplies seem to be generally available except for some
reports of hay shortages in the Dallas district.

Labor Markets, Wages, and Prices
Labor markets eased somewhat but remained tight in most districts. Layoffs in a wide
variety of industries were announced in most districts. Due to strong pent-up demand for labor at
other firms, however, contacts in most districts expected laid-off workers to be quickly
reabsorbed. Contacts in the Boston, New York, Atlanta, and Kansas City districts also expressed
hope that recent dot-com layoffs would alleviate the severe shortage of information technology
workers. Businesses that were still having difficulty finding qualified workers included retailers
in the New York and Cleveland districts, construction firms in the New York and San Francisco
districts, and health care firms in the Atlanta district. In contrast, service firms in the Chicago
district said they were having more success in finding qualified workers in the last few weeks of
the year, and firms in the St. Louis district reported that the slowdown in demand in the district
was making it easier to fill vacancies.
Wage pressures in most districts either held steady or decreased slightly in response to
the easing in labor markets. Chicago, Dallas, Kansas City, and San Francisco all reported some
moderation in overall wage pressures. New York described wage pressures as strong but steady,
while Minneapolis reported that wages continued to increase at a moderate pace. Despite the
overall slowdown in economic growth, a number of districts reported strong wage pressures for
certain types of workers, including information technology workers in the Boston district, retail
workers in the Richmond district, construction workers in the San Francisco district, and union
workers in the Cleveland district.
Price pressures for consumer goods were subdued, while prices for most manufactured
goods were flat to down despite higher input costs. Extensive discounting by retailers during the
holiday shopping season helped constrain consumer prices in most districts. Retail prices


increased at a slower rate in the Richmond district, held steady in the Boston district, and
declined somewhat in the Kansas City and Dallas districts. Manufacturers in many districts
reported that their input costs rose in December, especially for energy, but that they were unable
to pass these cost increases on to customers due to intense foreign and domestic competition and
slowing demand. The most notable reports of downward pressure on selling prices were for steel
firms in the Cleveland and Chicago districts and for a wide variety of manufacturing firms in the
Dallas district, including producers of metals, cement and concrete, paper, and lumber. In the
service-producing sector, telecommunications firms in the Dallas district reported their prices
were falling rapidly, but insurance firms in the Boston district said that reduced price
competition had enabled them to raise premiums to more profitable levels.


Economic growth is slowing in New England, according to Beige Book contacts. Retailers say
that sales during the holiday season were generally above year-earlier levels, but that they expanded less
than last year. With exceptions, manufacturers report slower growth or declines in business from yearearlier. Selling prices are said to be mostly flat. Respondents indicate that they view 2001 with caution.
Retail contacts say that sales continue to grow, but at rates slower than last year. For the October
through December period, sales increases at responding firms averaged a modest 3 percent from yearearlier. Sectors reporting better than predicted sales growth were apparel and tourism. Weaker than
expected results were reported in art and architectural supplies, furniture, and the discount retail sector.
Newspaper reports indicate that poor holiday sales growth in the discount sector led some large regional
retailers to close down operations.
Employment levels are mostly said to be holding steady. Labor shortages continue to be a
problem, leading to some additional wage increases aimed at retaining critical help. Base wages are
reported to be growing at a 4 to 6 percent rate. Retail contacts say they are not raising store prices and
they see only sporadic increases in vendor prices. Profit margins are reported to be holding steady.
Retailers have become more cautious, with most respondents indicating that they do not intend to
add new stores in 2001. Contacts remain cautiously optimistic about consumer spending and their own
sales in 2001; they say they expect a slowdown in economic growth during 2001, but not a recession.
Manufacturing and Related Services
A slight majority of First District manufacturing contacts indicate that recent sales or orders are
up relative to a year earlier. However, compared to the previous Beige Book, a larger share of responding
firms say business is down (rather than flat). Further, among respondents reporting growth, several
indicate that business has slowed recently. Most manufacturers indicate that they are cautious about
prospects in 2001, with some anticipating a weak first half.

The most negative reports come from suppliers to the auto industry; in some cases, revenues are
down at a double-digit rate from late 1999 or early 2000. Manufacturers of construction-related materials
and equipment see some deterioration from prior trends; some believe the results reflect cold weather or
construction labor shortages, while others interpret the results as evidence of a slowing economy. Makers
of consumer products report, at most, modest revenue growth, and they are bracing for a deterioration as
wholesale and retail business customers reduce their inventories or undergo consolidation. By contrast,
contacts making products for the electric power industry, computer-related equipment, non-automotive
transportation equipment, and medical equipment mostly report continued positive trends. Some firms
have double-digit gains in sales or orders from a year ago for these products.
Contacts make widespread mention of higher energy costs. For many, fuel and freight bills are
way up from a year ago. The costs of some petrochemicals materials such as plastics also have risen, as
have costs for materials produced using energy-intensive processes (e.g., glass). Selling prices are mostly
flat or rising at low single-digit rates. Contacts continue to claim savings associated with aggressive
purchasing programs, long-term contracts, or productivity enhancements. However, they are making
more frequent references to a squeeze on profits associated with higher input costs, plans to raise selling
prices in order to recoup higher costs, or a more cautious stance with respect to capital spending in order
to contain costs.
Contacts report some easing of labor market pressures either because their own labor
requirements are falling or because workforce reductions at area firms (especially dot-coms) have
augmented the available labor supply. Almost half the group mention cuts in temporary staffing or
layoffs at their own firm. However, manufacturers continue to characterize markets for technically
oriented professionals as tight, and most have seen no softening of overall wage and salary trends.
Residential Real Estate
Residential real estate markets in New England are fairly quiet. Activity has slowed in most
areas, reflecting the usual seasonal pattern plus changing economic conditions. The stock market

downturn and more generally perceived economic slowdown have generated uncertainty. Anticipated
declines in interest rates are said to have caused potential buyers to delay house purchases. Although
Massachusetts contacts report an increase in the number of sales in October and November compared to
the same period last year, contacts in other states say that potential buyers are in a "wait and see" mode.
Upper-end property sales are stronger than lower-end sales; in Massachusetts, the number of sales in the
$500,000 and above range increased every quarter this year. Inventory is stable. Most contacts anticipate
that activity will remain slow through the winter, but are hopeful that sales will pick up in the spring.
Most contacts in the insurance industry report increases in sales in the last quarter of 2000. They
indicate that reduced price competition has allowed them to raise some insurance rates to more profitable
levels. On the down side, a couple of respondents mention that claims rose at the end of the year. Among
the companies contacted, employment is generally flat. Two companies say they are moving some work
to Florida or India where they face lower space and personnel costs.
Although none of the contacted companies mention new hiring initiatives, they all say that the
labor market for information technology workers is very tight. Two contacts are seeing positive results
from retention programs and others note reduced labor competition from the dot-com sector.
Generally, contacts are rather optimistic about 2001. They expect insurance sales to continue to
increase although some express concern about the impact of stock market fluctuations on the profitability
of their investment divisions.


Economic activity in the Second District is generally well maintained at a high level, though
there have been scattered signs of softening since the last report. Input cost pressures have intensified
somewhat, but prices of finished goods and services remain generally stable. Despite a number of
layoff announcements, labor markets remain tight, with brisk hiring activity reported in financial and
related services. Wage pressures remain strong but steady, while there are ongoing reports of large
hikes in health benefit costs.
Retailers report that sales were on or close to plan in December, with same-store sales up
moderately from the strong levels of a year earlier. Inventory levels were generally described as
satisfactory; both prices and merchandise costs were little changed from a year ago. Real estate and
construction activity remain generally robust, although Manhattan's residential and commercial real
estate markets have cooled somewhat. Purchasing managers report some slowing in the manufacturing
sector. The trucking industry has seen a sharp increase in bankruptcies and truck repossessions, as
business has slowed while costs have risen. Finally, bankers report weaker consumer loan demand,
rising consumer delinquency rates, and tighter credit standards-particularly on commercial loans.
Consumer Spending
Retail sales were on or close to plan in December. Compared to a year earlier, same-store sales
at major chains ranged from modest declines to gains of close to 5 percent. Similarly, smaller retailers
across New York State indicate gains of 2-4 percent. Most contacts note that weakness in the first half
of the month was offset by a late surge in the days immediately before Christmas. Fairly strong sales
were also reported for the week after Christmas, but a major snowstorm on December 30-the last day
of the fiscal month for most chains-held down the monthly total. Sales have generally been described
as brisk in early January. Strong sales were reported for apparel (especially women's apparel), but sales


of home furnishings were generally described as sluggish. Retailers report that inventories are in good
shape in most categories, though some contacts report stock-outs of a wide range of winter-weather
merchandise, ranging from automotive products and shovels to boots and outerwear. Almost all contacts
indicate that both selling prices and merchandise costs were virtually unchanged from a year earlier.
In addition, most contacts say that the degree of discounting is about the same as a year ago. While
a number of retailers say that their stores were under-staffed because they were unable to hire as many
workers as desired, wage pressures during this past holiday season were described as comparable to the
prior year. However, some contacts report large increases in health benefits costs.
Construction and Real Estate
Despite scattered signs of cooling in the residential and commercial real estate markets, prices
are still up substantially from a year ago, and construction activity remains strong. Manhattan's office
market remains tight, with asking rents running 30 percent higher than a year ago; however, availability
rates (space that is vacant or coming on the market over the next year) have edged up from the
extraordinarily low levels seen in the third quarter. There are also reports of a sizable increase in office
space available for sub-lease-largely from dot-coms-which is not included in the availability rates.
Realtors report that the market for existing single-family homes was robust in November, with
prices up 10-15 percent from a year earlier across the New York City area, and up roughly 3-5 percent
in upstate New York. Unit sales also picked up in November and were higher than a year earlier-both
upstate and downstate. More recently, though, Manhattan's co-op and condo market has shown more
signs of softening. According to a major New York City realtor, as well as a leading appraisal firm,
apartment prices remained well above year-earlier levels in the fourth quarter; however, unit sales fell,
properties stayed on the market for longer, and there were more price concessions and fewer bidding
wars. Both buyers and sellers are said to be increasingly "nervous", and the market is described as

much less speculative.
Residential construction activity remained strong in the fourth quarter, and a persistent backlog
of orders for new homes, as well as public infrastructure projects in the pipeline, should provide strong
momentum for the industry during 2001. Permits to build multi-family housing picked up in New York
and, especially, in New Jersey in November. It appears that more apartment units will have been started
in the District in 2000 than in any year since 1987. Single-family permits held steady in November and
were little changed from a year earlier. Still, homebuilders in northern New Jersey indicate that land
and labor shortages persist, that demand continues to outstrip supply, thus driving up home prices,
which are running 10-15 percent higher than a year ago.
Other Business Activity
Despite a sizable number of layoff announcements at both Internet firms and Web divisions of
traditional media companies, the New York City area's labor market is still described as extremely
tight. A leading employment agency reports that strong pent-up demand for workers persistsparticularly from the financial services and legal services industries. In addition, most workers losing
their jobs at dot-coms are being snapped up by other firms. There remains particularly strong demand
for legal, administrative support and computer-savvy workers.
Purchasing managers report some slowing in the region's manufacturing sector, along with a
pickup in price pressures. Buffalo-area purchasers report that the local economy continued to expand
at a moderate pace in December, as production activity and employment levels held steady while new
orders continued to increase. However, purchasers in the New York City area report that manufacturing
activity retreated in December, after expanding steadily since mid-year. They have also become less
optimistic in their expectations for the business outlook-many have scaled back their hiring intentions,
and a large majority of manufacturers have reduced their purchases (more than the seasonal norm).


Virtually all respondents in the New York City area note rising energy costs, while cost increases are
also reported for construction and architectural services. More generally, purchasers in both areas report
increasingly widespread rises in input costs.
The trucking industry is experiencing hard times, according to an industry expert. Demand for
trucking services has softened considerably, while fuel, insurance and labor costs have risen
significantly. Many firms have imposed fuel surcharges on customers, but these are being limited by
the threat of competition from railroads. With more trucking firm bankruptcies in 2000 than in a
number of years, there has been a sharp increase in truck repossessions, which has, in turn, created a
glut of used trucks and a drop in prices.
Financial Developments
Demand for all types of loans fell over the last two months, according to the latest survey of
small to medium-sized Second District banks. Declines were particularly widespread for consumer
loans and residential mortgages, even after adjusting for seasonality.

Refinancing activity also

weakened. Bankers reported further tightening in credit standards-particularly on commercial loans
and non-residential mortgages. Interest rates on both loans and deposits fell over the last two months.
Loan performance was mixed. Delinquency rates rose for consumer loans but declined for nonresidential mortgages; they were essentially unchanged in other categories.



There were signs of slower business activity in the Third District in December
compared with November. Manufacturing production appeared to ease, although
shipments remained steady. Retailers made scant gains in the Christmas shopping period
compared with the previous year. Auto sales slipped in December for the second month
in a row. Total bank lending increased slightly, largely because of growth in consumer
The consensus among the business firms contacted for this report is that economic
activity will be essentially flat in the quarters ahead, although some contacts expect slow
growth for their businesses. Manufacturers expect only steady conditions during the first
half of the year. Retailers anticipate a slight gain in sales during the next few months but
continued pressure on profit margins. Auto dealers expect sales to run at steady pace in
2001, but to be below last year's rate. Bankers forecast little if any gains in lending
through the first half of this year. Despite the current slowdown in growth and subdued
prospects for the year ahead, firms in a range of industry sectors continue to report that
they are having difficulty finding qualified workers at all skill levels.

Conditions in the Third District manufacturing sector were virtually flat in
December, although there were some indications that production was slipping. New
orders and shipments were steady, but employment and working hours slipped. Order
backlogs declined as well. There was little variation in business conditions across the
range of goods-producing industries in the region. However, makers of industrial
materials and equipment seemed to be facing a weaker situation. Several firms in these
sectors reported that the high value of the dollar in relation to foreign currencies was
hampering their exports and aiding foreign producers in competition for domestic

Manufacturers expect basically steady activity in the first half of the year, on
balance. While some forecast gains in orders and shipments, others expect demand for
their products to weaken further before rebounding. Producers of industrial and business
equipment, in particular, say sales may not increase until well into the year. Despite the
lackluster outlook, capital spending plans among area manufacturers remain fairly robust.
Over one-third of the firms contacted for this report have scheduled higher outlays for
new equipment and expanded facilities in the first half of the year, and only about one in
ten have trimmed capital spending budgets.
Manufacturers indicated that input costs continued to rise at the turn of the year,
but reports of price increases appear to be less widespread than they were through much
of 2000. Comments from firms in the region suggest that the costs of some agricultural
products and basic materials have risen recently, but overall, industrial prices have been
steady. Higher energy costs, however, continue to be a concern for manufacturers as well
as other businesses in the region. Despite the rising cost of energy and a few other
inputs, most firms have not raised prices for the products they make.

Retail sales in the Third District during the holiday shopping period fell below
most retailers' expectations, and year-over-year gains were minimal, on balance. Sales of
apparel and jewelry were particularly weak, although merchants said sales in nearly all
merchandise lines were less than they had anticipated. Store officials attribute the poor
performance to the absence of new products this year and a recent retrenchment in
consumer confidence. Discounting was extensive, and store executives said profit
margins fell. Inventories in early January were above plan for most of the retailers
contacted for this report, although the extent of excess merchandise did not appear to be
great. Merchants expect that most of the overhang will be reduced through clearance
sales in January. The balance of opinion among the store executives surveyed in January
is that sales will be steady to slightly up during the first quarter.
Auto dealers reported that sales of new and used autos and light trucks fell in
December. Most of the drop in new-car sales was the result of falling demand for
vehicles produced by U.S. companies. Sales generally rose for imported vehicles and


those made in the U.S. by foreign-based manufacturers. Overall, dealers in the region
indicated that their inventories were above desired levels. Dealers believe that the fall in
demand for cars and trucks can be attributed to buyers' waning interest in the models
produced by domestic manufacturers as well as a recent slip in consumer confidence.
Dealers in the region expect sales in 2001 to be about 5 to 10 percent below the rate set in

Total loan volume outstanding at Third District banks has been edging up
recently. Consumer lending has risen, although bankers indicated that much of the gain
has been seasonal. Real estate loan volumes have increased at many banks in the District
for both residential and commercial properties. Business lending has varied. Some
banks have posted modest gains in loans to businesses, but there have been nearly equal
numbers of banks that have had decreases or merely steady business loans outstanding.
Bankers in the Third District expect overall loan volumes to be flat or grow
slowly this year. Several bankers noted that commercial loan standards and interest rates
have firmed recently, and they expect fewer potential business borrowers to qualify for
credit in the next quarter or two than would have last year. Some bankers also noted
recent declines in profitability among their current commercial customers, which could
lead to reductions in the amount of credit extended to these firms. Bankers generally
expect real estate lending to ease, although they anticipate an increase in residential
mortgage refinancing activity if recent declines in mortgage interest rates persist.



General Business Conditions
Growth in economic activity in the Fourth District remained at the same slow rate
described in our last report. The steel industry in particular continues to show a great
deal of strain as a result of strong foreign competition and weaker domestic demand.
Retail stores experienced a slower-than-expected holiday season, as consumer spending
remained soft. However, labor markets have remained fairly buoyant, although less so
than they had been earlier in the year.
Industrial Activity
The steel industry is facing some tough times. Mills are operating 10 to 30 percent
below capacity, domestic demand has slowed, and there is intense competition from
foreign producers, in part due to the strong dollar. Several firms have filed for chapter
11, and more filings are expected. January orders are a little stronger than December's,
but first-quarter orders are expected to be weak. Producers of specialty steel are in a
better position. While prices on specialty steel products decreased along with carbon
steel, orders for specialty steel remain stronger.
Consumer Spending
Retail stores reported disappointing sales during the entire holiday season, with
the lackluster performance extending across all categories. Retailers were forced to mark
down many items to boost sales. Some did so as early as the first week of December. A
discount retailer reported that at stores open at least a year, sales were down 1 percent
from last year and over 3 percent below expectations. A more upscale apparel store
reported sales were off over 7 percent from expectations.


Although sales of new vehicles through the first three quarters of 2000 were better
than or just slightly below the record pace of 1999 for District dealers, sales slowed in
this year's last quarter compared to 1999's. Moreover, it was reported that sales worsened
as the quarter progressed. Finally, results for each dealer varied widely depending upon
incentives offered by manufacturers. A current concern for area dealers is the bloated
state of their inventories. Most reported having a 75-day or greater inventory, yet a 60day inventory is preferred. Weak sales are anticipated to continue for the next couple of
Labor Markets
The slowdown in retail spending has not translated into an easing in the labor
market. Firms continue to struggle to find and keep qualified employees. Demand for
temporary workers remained unchanged from the tight levels reported November and
According to several union contacts, wage growth in current contracts has
increased, most in the range of 3.5% to 4%--a rate still below the 4.7% that total private
hourly earnings rose in the fourth quarter. While benefits growth appears to be
concentrated mostly in pensions, health care remains an area of concern. Cost shifting,
co-payments, and stop-loss arrangements have increased the costs borne by union
Banking and Finance
Commercial loan activity slowed in December as manufacturing firms received
fewer orders and delayed investment because of slower anticipated economic activity and


lower interest rates. Demand for consumer loans also declined, but less than commercial
Credit standards and delinquency rates have not changed significantly, but banks
are watching their customers' ability to make payments more closely. Also, banks are
paying more attention to the value of the collateral for loans.
Commercial builders throughout the District reported mixed conditions. While
some contractors reported dramatic declines in economic activity, others reported largely

stable economic conditions. There have been no substantial layoffs, but firms do not
anticipate hiring additional workers. With the exception of prices for petroleum-based
products, most materials prices have stayed relatively flat.
District homebuilders continued to report little change in business conditions.
Some are concerned, however, about how much work they will have in 2001. At this
time last year, many homebuilders had nearly twice as many projects scheduled for the
upcoming 12 months as they do now; of course, last year was exceptionally strong.
Trucking and Shipping
Most shippers reported a slowdown in business in December from November, and
nearly all reported a decrease in shipping activity compared to December 1999. In
November and December, revenue decreased slightly less than shipping activity, or not at
all, due to price increases and fuel surcharges. Shipping volume declined, confirming the
slowdown in steel-, manufacturing-, and automotive-industry-related products.
Over the last month, fuel costs have stabilized and even gone down slightly for
some companies. But even with lower fuel prices, unusually bad winter weather has


resulted in rising costs anyway. Most contacts expect the decline in shipping activity to
continue into the first quarter of 2001.

Overview: Fifth District economic growth continued to slow in December and
early January. Seasonally-adjusted retail sales fell at automobile dealerships, and were
weak at other stores, as sagging consumer confidence and unusually cold weather reduced
spending. Service providers reported lower revenues and employment. Manufacturing
output continued to slip somewhat in December and new orders dropped sharply, but
manufacturers remained optimistic that conditions will improve by midyear. In the real
estate and financial sectors, lower mortgage rates boosted December activity but lower
consumer confidence damped expectations of business activity in coming months.
Turning to District labor markets, strong wage gains continued in retail, but wage growth
was moderate elsewhere. Consumer prices continued to rise at a modest pace.
Retail: District retailers reported that sales changed little in December from a year
earlier. Also, heavier-than-normal price discounting was needed to sell much of their
holiday merchandise. Contacts at big-box stores indicated that their holiday sales fell
short of last year's levels. In addition, a large retailer in Columbia, Md., said that their
sales fell sharply and noted that customers were "keeping their money closer to the
pocket." In parts of the District, bad weather slowed customer traffic and put a damper on
post-holiday sales. Automobile dealerships generally reported lower sales in recent
weeks, and several said that their inventory levels rose as a result. Seasonally-adjusted
retail employment growth slipped in December, but wages continued to rise at a brisk
pace. Retail prices rose at a slower rate, in part because of extensive price discounting.
Services: District firms reported lower revenues in December. Contacts at
services companies in Charlotte, N.C., said that banking industry restructuring had
reduced demand for consulting and other services by the banking industry. Other firms
noted cutbacks in hiring and little change in wage levels. Firms reported that prices rose
only slightly in December.
Manufacturing: Activity continued to contract in December. Shipments declined
at a slightly faster rate in recent weeks, and new orders and backlogs dropped sharply. A
paper manufacturer in Charlotte, N.C., told us that new orders were at the lowest level
since 1984. Several paper and rubber product manufacturers reported that increases in
raw materials and energy prices were squeezing their profit margins. In the textiles

industries, contacts indicated that competition from abroad continued to hold prices in
check. In spite of the recent declines in activity, most manufacturers remained optimistic
about their future prospects and many expected orders and shipments to rebound by
midyear. Both manufacturing employment and the average workweek slipped, while
wages rose moderately.
Real Estate: Residential realtors and homebuilders reported that growth slowed
in December, as the beneficial effects of lower mortgage interest rates were more than
offset by failing consumer confidence and colder-than-normal temperatures. A realtor in
Asheville, N.C., noted that buyers were looking longer before making a purchase. A
counterpart in Greensboro said that sales in that area fell "a fair amount" and inventories
of starter homes remained high. Homebuilders throughout the District reported sluggish
growth in housing starts. Contacts said that subcontractors were available and that the
costs of building materials were slightly lower. Home prices were steady across the
Commercial realtors reported softer growth in leasing and construction activity in
recent weeks. Realtors in the District of Columbia said that the demand for office space
had slowed in part because a number of struggling "dot-com" companies had recently
backed out of rental contracts. Commercial realtors in Maryland, Virginia, and the
Carolinas reported substantially slower growth in all types of commercial construction,
with very few speculative projects currently underway. On a stronger note, contacts in
Raleigh, N.C., and Columbia, S.C., reported a pickup in leasing activity in the retail
sector and they said that the supply of Class A office space remained tight. Commercial
rents across the District were generally stable to moderately higher.
Finance: District loan officers reported that lending activity grew at a somewhat
slower pace in December. Commercial bankers noted that the demand for loans remained
at a moderate level but they were increasingly "watchful" for signs of deteriorating
financial conditions in cyclical industries, particularly construction and manufacturing. A
commercial lender in Greenville, S.C., reported that a smaller percentage of
manufacturing plants in that area were expanding, slowing the demand for loans. A
banker in Chesapeake, Va., said that she was still lending to companies in weakening
industries, but was making sure her bank was "compensated for assuming additional

risk." Residential mortgage lenders reported moderately slower demand growth; several,
however, noted that further declines in interest rates this year would likely spark more
refinancing in coming months.
Tourism: Tourist activity strengthened further in December. Contacts at area ski
resorts reported strong patronage in recent weeks, particularly during the week between
Christmas and New Year's Day. A manager at a ski resort in Virginia said that occupancy
rates for his resort's time-share units reached a record high during the holidays. He
attributed the increase to colder-than-normal weather and a good snow base. A contact at
a West Virginia ski resort reported a sharp rise in spending at retail shops there. Along
the District's coast, tourism remained vibrant despite the unusually cold weather.
Temporary Employment: Demand for temporary workers continued to be mixed
in recent weeks. A Charleston, W.V., agent said that he had seen the demand for
temporary industrial workers rise sharply in recent weeks. Agency contacts in Maryland
and North Carolina, however, reported weaker demand for workers although several
noted that the holidays were partly to blame. A Hagerstown, Md., agent added that he
expected a slowing economy to lead to further declines in his business in the first quarter
of the year. Wages of temporary workers remained generally steady since our last report.
Agriculture: Generally mild weather in the first week of December allowed
District farmers to make good progress on late fall fieldwork. By mid-month, they had
harvested most fall crops and had seeded small grain and winter grazing crops. Later in
the month, however, snow cover and colder-than-normal temperatures led to greater use
of feed and hay.

Summary: The District economy expanded modestly during December amid further signs
of economic deceleration. As expected, holiday sales results did not achieve the high levels of
growth experienced last year, and the outlook for the first quarter was soft.


construction and home sales remained sluggish, and nonresidential construction declined in most
parts of the District. Manufacturing weakened, and the near-term outlook was for further reductions
in factory activity. Overall loan demand, credit availability, and loan quality were at relatively
healthy levels but with reports of stricter lending standards and slowing demand in some areas.
Reports from the tourism and hospitality sector were generally positive. Labor market conditions
eased slightly.
Consumer Spending: Holiday sales growth was low compared with the rates experienced
last year, and several retailers said that sales did not even meet their lackluster expectations. Results
varied considerably from store to store, but discount department stores generally performed better
than department store and mall retailers. Strongest sellers included apparel and toys, whereas
jewelry and home-related product sales were sluggish. Many retailers expressed concern about the
impact of widespread discounting on profits.

At year-end most merchant contacts described

inventories as being broadly in balance, but little growth was expected in the first quarter.
Construction: Single-family construction and home sales remained sluggish. Most of the
builders contacted said that construction and new home sales fell during November and December
on a year-over-year basis. Additionally, more builders reported declines in buyer traffic and greater
use of price concessions than in earlier reports. According to real estate agents, fourth-quarter home
sales fell below the year-ago level. Builders continued to report that housing inventories were in


Summary. Economic activity in the Seventh District slowed further in December, in
part due to severe winter weather adversely impacting virtually all economic sectors. Retailers
reported that brutal weather kept store traffic down and, with few exceptions, holiday sales fell
below merchants' expectations. Builders and realtors also cited the weather as contributing to a
general slowdown in construction and real estate activity. Recent softening in the auto industry
contributed to a further slowing of the District's overall manufacturing activity. Lenders
reported moderating growth in business loan volumes while many noted a discernible increase in
mortgage refinancing applications. Labor markets, while remaining very tight, appeared to ease
somewhat as 2000 drew to a close, alleviating some worker shortages and wage pressures. With
the notable exception of heating costs, price pressures appeared to ease slightly as economic
conditions softened. Many contacts noted a discernible drop in both consumer and business
confidence since our last report. Contacts were more optimistic after the Federal Reserve's
unexpected rate cut in early January, but remained cautious in their business expectations for the
first half of the year.
Consumer spending. Overall retail sales were very sluggish in the Seventh District
through December, contributing to one regionally-headquartered retailer announcing it was
going out of business and a few others announcing store closings. Retailers with a national
presence suggested that sales in the Midwest fell below the nation's "disappointing" results, as
brutal winter weather gripped the region and discouraged shoppers from leaving their homes.
With a few exceptions, both discounters and department stores reported lackluster year-over-year
sales results. Preliminary reports indicated that nearly 60 percent of respondents to a survey of
small retailers in Michigan had fewer shoppers over this holiday season than last year, and an
even greater share reported slower sales. Regionwide, cold-weather items (outerwear, auto
batteries, etc.) were selling well, and there were reported shortages of some items such as snow
throwers, shovels, and sleds. However, sales of electronics, home decorating items, and men's
apparel were said to be slow. Contacts reported that shipments of consumer-related durables
were fairly strong in December, but one transportation company noted that an increasing share of
their business was picking up excess inventory from big-box retailers and returning it to the
manufacturers. Contacts also indicated that the region's auto sales were slower than the national


average, with demand for domestic nameplates much softer than foreign nameplates. There were
a few indications that price pressures at the retail level may have eased somewhat recently.
Retailers generally reported that the economic environment necessitated greater price cutting this
holiday season, and a contact in casual dining noted that a planned price increase was "put on the
back burner" as the economy slowed. However, home heating bills rose sharply in December
and may have contributed to slower growth in spending on other consumer goods and services.
Construction/real estate. Overall construction and real estate activity appeared to soften
further in December, but contacts suggested this may have been largely due to inclement
weather. Store closings by major retailers were expected to free up millions of square feet of
space in the region in the first half of 2001. While this was a source of concern for some real
estate contacts, others were looking at it as an opportunity. Consumer traffic was generally low
at the stores being closed and freeing the space up for new tenants may reinvigorate many strip
malls, according to some analysts. On the residential side, sales of new and existing singlefamily homes were again relatively soft, but realtors and builders were quick to point out that
sales remained at high levels. In addition, contacts noted that severe weather may have
discouraged many would-be buyers from house hunting in December. By contrast, development
of multifamily residences remained very strong in the Milwaukee and Chicago downtown areas.
Manufacturing. Manufacturing activity slowed further in recent weeks with virtually
every segment showing signs of softening. Even the auto industry, the region's star performer in
recent years, was sluggish. Nationwide, December's light vehicle sales for domestic nameplates
were significantly below year-ago levels, with particular softness in passenger cars. With
weaker sales and sales expectations, as well as excessive inventories, automakers were planning
"significant" downtime for some assembly plants in the first quarter. New orders for heavy
equipment continued to slow substantially across practically all categories, but inventories were
said to be in good shape due to earlier production cutbacks. December shipments of gypsum
wallboard were below a year ago, and prices continued to erode. Demand for steel products,
while still strong, softened somewhat, and foreign competition continued to put a strain on
domestic producers. One industry analyst suggested that conditions in December were the worst
for domestic steel producers since the early 1980s. According to this contact, unprecedented
downward price pressures, due in large part to a flood of imports, forced some companies to file
for bankruptcy and has left very few domestic steel producers "economically viable." Lower

steel prices, however, translated into lower input costs for producers of other manufactured
goods, including office furniture. In contrast to other industries, demand for office furniture
remained strong, despite modest softening in new orders toward the end of 2000.
Banking/finance. Overall lending activity remained strong in the District, but not quite
as robust as in early 2000. Growth in business loan volume continued to slow in late December
according to most contacts, despite strong demand from small and medium-sized businesses.
Overall quality on business loans generally was described as good, but many bankers were
"keeping their eyes on" specific industries (especially retail and manufacturing) for any signs of
deterioration. Business credit standards may have tightened further in recent weeks, and one
lender suggested that some loans approved a year ago would have "zero chance of being
approved now." On the household side, lending activity was mixed. Some bankers reported a
notable decrease in new mortgage originations as 2000 drew to a close. Contacts were unclear,
however, as to whether this drop was due to deteriorating market conditions or simply to harsh
weather conditions. At the same time, many lenders noted increased refinancing activity as
fixed-rate mortgage interest rates continued to move lower. Several contacts expressed optimism
that refinancing activity would pick up further in the first quarter. Some banks, particularly
smaller ones, again reported difficulty in attracting deposits to fund loans. With recent stock
market volatility, a few lenders were anticipating a boost in deposits as investors were expected
to seek less risky investments. However, one analyst suggested that funds that fled the stock
market found their way into other investment vehicles, but not into bank deposits.
Labor markets. Labor markets generally remained very tight in the Seventh District,
although there were increasing reports that some slack may have developed. After falling more
or less steadily for three straight years, initial claims for unemployment insurance benefits rose
dramatically above seasonal trends in November and December. Many of these claims were the
result of layoffs in manufacturing industries. Some retailers announced that layoffs were in the
offing, but most industry analysts were confident that these workers would be quickly
reabsorbed. Some service industries that had difficulty attracting workers in the past reported
greater success in the last few weeks of 2000. Staffing agencies indicated that new orders for
temporary help softened toward the end of December, although one agency noted that clients
weren't sending workers back, they just weren't placing new orders for additional help. Contacts
suggested that wage pressures appeared to ease modestly as a result of softer demand for

workers. Additionally, in contrast to our previous reports, there were no further reports of
intensifying pressure on non-wage employment costs.

The District economy shows several signs of slowing. Sales during the recent holiday
season have been weak and below expectations, leaving many retailers with overstocked
inventories. Early winter weather hurt. New and used vehicle sales are also slow, and inventories
are high. Declines in demand have affected many industries; however, these declines have helped
to ease labor market tightness somewhat. Many firms' profits are being squeezed by high fuel costs.
Although new housing construction continues to slow, home sales have recently picked up in some
areas. Loan demand has softened somewhat, while loan growth has been very mild. Several
makers of fertilizer have stopped producing and, instead, have been selling their natural gas stocks
on the market to boost profits.
Consumer Spending
Retailers report weak sales during the 2000 holiday season. Despite a last-minute pickup in
activity just before and after Christmas, contacts report that, overall, sales are down 5 percent on
average from a year earlier. Inclement weather resulted in many stores losing sales over several
periods during the season, which partially accounts for sales growth that was below expectations.
The weather did spur strong sales of seasonal products, such as winter coats, clothing and boots.
Contacts at several major department stores report that electronics and small appliances have also
been popular sellers. Fine jewelry and women's apparel, however, have not moved well. About half
of the contacts report that current inventories are at desired levels, while others plan to reduce
excess inventories by significantly discounting items in early 2001. Contacts report that the use of
debit cards for purchases has increased substantially this season over last, even though their overall
use is still small. Most retailers are guardedly optimistic that sales in the first quarter of 2001 will
rebound, if weather conditions are favorable.
Car dealers report that sales during the last two months of 2000 are down more than 5
percent on average from a year earlier. Used car sales, in particular, have experienced the largest

decline. An early blast of winter weather, coupled with economic uncertainty and an anticipation of
lower interest rates, are believed to have kept buyers away from showrooms. About two-thirds of
the dealers note that current inventories are above desired levels. Most contacts are cautiously
optimistic that sales in the first quarter of 2001 will rebound because they plan to offer more
incentives-such as a wider use of rebates-to help boost sales and reduce inventories.
Manufacturing and Other Business Activity
Contacts in a variety of industries are experiencing a noticeable slowdown in demand.
Slowing demand has helped ease labor markets somewhat, which has enabled firms to fill some of
their vacant positions. Contacts continue to cite high fuel costs as a major problem. Although many
firms pass on these higher costs to customers as surcharges, profit margins are still being
Weak demand for automobiles has caused two manufacturers to idle several plants for at
least one week. The local steel industry continues to weaken, with several producers going out of
business in the past few months because of lower demand and foreign competition. The wholesale
trade industry in northeast Arkansas and the furniture manufacturing industry in northeast
Mississippi are both experiencing reduced profits because of slower demand. The District's apparel
industry continues to shrink, as a Fruit of the Loom plant in Arkansas closes to eliminate excess
production capacity.
Employment growth has been boosted by several firms expanding and relocating to the
District. Memphis, for example, is increasing its status as a regional distribution hub, as a food
distributor constructs a new warehouse and distribution center that will create 600 new jobs. A
contact at a credit card company notes that it will employ more than 1,000 new workers at its global
technology center in the St. Louis area during 2001. The District's high-tech sector continues to be
volatile: Companies moving to the Louisville, Memphis and northwest Arkansas areas will create
nearly 1,000 jobs in the coming months; several Internet companies currently in the St. Louis,
Memphis and Louisville areas, however, have already cut their workforces, eliminating more than

600 jobs in the past two months. Despite slower demand in other sectors, General Electric is
anticipating a strong year, as it plans to roll out more than 40 new products this year at its Kentucky
Appliance Park.
Real Estate and Construction
Real estate agents report that home sales have recently picked up in some areas, especially
Memphis and Little Rock, where year-to-date sales are above last year's levels. Median home
prices in many District areas are currently down from their year-earlier levels.
Residential construction continues to slow, with permits down from their month- and yearearlier levels in all District metropolitan areas. Builders, however, have expressed optimism about
construction activity in 2001 because of expectations of lower mortgage rates. Nonresidential
construction has been mixed, with pockets of activity in some areas, such as Little Rock, and
substantial slowing of the market in others, such as St. Louis. As a result of the slower residential
and nonresidential construction, fewer contractors are experiencing backlogs.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks are essentially
unchanged, growing only 0.4 percent between mid-October and mid-December, thus continuing a
trend of mild growth. Several contacts are reporting that loan demand has recently softened
somewhat. Growth in commercial and industrial loans and real estate loans has been stagnant
during this period. Consumer loan growth, however, is down about a percentage point; it had been
up about 1.4 percent between mid-August and mid-October. At the same time, total deposits have
grown about 1 percent, which is a slight uptick in this growth rate.
Agriculture and Natural Resources
A contact reports that nitrogen fertilizer prices have increased substantially over the past
year, particularly during the fall, because the price of natural gas-a major cost-component of
nitrogen-based fertilizer products-has more than quadrupled. In fact, some manufacturers have
begun selling off natural gas stocks rather than producing fertilizer because this strategy is currently

more profitable for them.
Low water levels and ice on the Mississippi River have made travel difficult for barges and
tugboats, hampering cargo shipments of commodities such as corn, soybeans and wheat. These
conditions have also caused some barges to run aground earlier in the season than usual.


Economic growth in the Ninth District is weakening. Manufacturing levels and mining
production are decreasing. Consumer spending is flat, and housing construction and
agriculture continue to grow at a slow rate. Some signs of strength persist: The energy,
tourism and commercial real estate sectors are expanding at a solid pace. Labor markets are
still tight, although several layoffs were announced. Wages are increasing at a moderate
pace. Overall price increases are moderate, but significant increases are noted for energy,
residential rents, health care and package delivery.
Construction and Real Estate
Construction continues to grow at a moderate pace. Building contracts awarded in the
Dakotas and Minnesota increased 13 percent for the three-month period ending in
November compared with the same period last year. A real estate consultant in Sioux Falls,
S.D., projects strong demand in 2001 for retail space and flat demand for office and
industrial buildings. Vacancy rates in the third quarter of 2000 for office buildings in the
Minneapolis-St. Paul area have reached a four-year high at 8.8 percent. Meanwhile, a
Minneapolis-St. Paul construction company representative reports growth in construction
activity has recently decreased to the moderate levels of 1997.
Homebuilding increased slightly from the last report. Housing units authorized
were up 2 percent in the district for the three-month period ending in November compared
with a year earlier. Housing permits in the Minneapolis-St. Paul area were expected to
finish 2000 at near record levels, and favorable mortgage interest rates are boosting home
sales, according to a mortgage consultant. In contrast, almost 50 percent of respondents in
the Minneapolis Fed's annual business conditions survey conducted in November expect
housing starts to decrease in 2001.
Consumer Spending and Tourism
Consumer spending in the district was flat to down slightly compared with last year.
Registrations of new cars and trucks are about even with last year in North Dakota and
down 6 percent in South Dakota. A major Minneapolis-based department store retailer
noted that December same-store sales were flat compared with last year. Sales were off
almost 10 percent for December compared with a year ago at a North Dakota mall. Lastminute purchases brought December mall sales in Duluth, Minn., from a decrease of 9
percent to about even with a year ago. Almost 30 percent of respondents to the


Minneapolis Fed's business conditions survey expect consumer spending to decrease in
their communities in 2001, up from 15 percent in last year's survey. Three major national
retailers announced the closing of several unprofitable stores across the district.
An early start to winter recreation activities has boosted tourism. A ski resort in
Montana reports bookings for January and February up 4 percent from a year ago. Winter
sports participation in South Dakota is up 25 percent in December compared with a year
earlier. An official reports that winter tourism in the Upper Peninsula of Michigan was
ahead of last year for November and December, but softer during the holidays.
Overall manufacturing activity in the district decreased. A December purchasing manager
survey by Creighton University indicated slower manufacturing activity in Minnesota and
in South Dakota. As evidence, a Minnesota automobile assembly plant will stop production
for one week in January. In 2001, a refrigeration, air conditioning and heating equipment
company will shut down a Minnesota factory in the first quarter, and an industrial
equipment manufacturer in Minnesota plans to reduce production. In addition, a boot
producer cut production at a western Wisconsin plant. A Montana cement company and a
cardboard box manufacturer temporarily shut down due to very high electricity costs.
However, due to heavy snowfall, a Minnesota snow removal equipment manufacturer sold
out its inventory two months earlier than normal.
Mining and Energy
The energy sector continued to expand, while the mining industry contracted. District oil
and natural gas exploration and production increased as prices for these products remain at
high levels. Meanwhile, due to softening demand, high electricity costs and low
commodity prices, mining production is decreasing. A Minnesota iron ore mine shut down
earlier than expected and another two mines reduced production due to softening demand.
A Montana aluminum smelter cut production 50 percent, and a copper mine remains shut
down due to high electricity prices. However, palladium/platinum production remains at
full capacity, according to a Montana mining official.
Snow and prices paint a mixed picture for agriculture. Heavy snow cover across most of the
district slightly reduced the likelihood of another summer drought and aided the winter
wheat crop, but added stress to livestock producers. In addition, the U.S. Department of


Agriculture predicts continued low corn, wheat and soybean prices in 2001 but expects
healthy livestock prices. Meanwhile, dairy producers have been buffered from lower milk
prices by a federal government dairy market loss-assistance program.
Employment, Wages and Prices
Labor markets remain tight, although several companies reported layoffs in December and
early January. A northern Minnesota mine closed affecting about 1,000 workers and a
direct marketing firm is laying off 550 warehouse workers in St. Cloud, Minn. A
Minneapolis area-based online education firm reduced staff by 14 and placed its remaining
120 employees on a two-week unpaid leave; an e-commerce business will lay off 91
employees, almost half its workforce. A Minnesota printing and service firm is reducing
staff by 50 jobs. A footwear company in La Crosse, Wis., recently laid off 200 employees.
The upcoming shutdown of a Montana lumber mill will leave 140 out of work.
Still, several companies are looking for new employees. A new high-tech company
in Rapid City, S.D., plans to hire 100 employees in the two years. The construction of a
poultry litter-fired power plant in western Minnesota will require 300 workers. Some
manufacturers are expanding outside the district due to a lack of available labor, according
to a bank director.
Wages continue to increase at a moderate pace. About three of five respondents to
the Minneapolis Fed's business conditions survey expect a modest increase in wages for
their communities in 2001. A December survey of manufacturers in the Dakotas,
Minnesota and Wisconsin shows that about 48 percent of respondents have raised wages
over the past two months compared with 53 percent a year ago.
Overall price increases are moderate, but significant increases are noted for energy,
apartment rental rates, health care and package delivery. The cost to heat homes this winter
has doubled in many district locations. Apartment rental rates increased 11 percent in the
Minneapolis-St. Paul area in December compared with a year earlier. A hospital in La
Crosse is increasing rates by an average of 12 percent over a year ago, the largest single
increase in over a decade. Two major package delivery companies are raising rates up to 5
percent. A December St. Cloud State University QuarterlyBusiness Report survey showed
that 23 percent of respondents in central Minnesota noted increases in product prices, down
from 29 percent a year ago.


Overview. The Tenth District economy slowed in December. Manufacturing activity fell,
residential building declined further, and sizable layoffs were announced at several district firms.
Auto sales also dropped sharply, and overall retail sales were sluggish during the holiday season,
despite heavy discounting. On the positive side, commercial construction activity remained solid,
and energy activity continued to rise. In the farm economy, poor pasture conditions have limited
expansion of cattle breeding herds. District labor markets remained tight, but wage pressures
appeared to ease somewhat, especially in the retail sector. Prices were flat, except for declines in
some manufacturing materials.
Retail Sales. Retail sales in December were only slightly higher than a year ago in most
locations. Sales of home electronics were solid and winter clothing sold well with the onset of
unusually cold weather, but sales of other items were generally weak despite heavy discounting. In
contrast to bricks-and-mortar retailers, several Internet retail firms based in the district reported that
growth in online purchases matched or exceeded expectations. Looking ahead, store managers
expect sales to pick up again by Easter. Motor vehicle sales continued to slow and were much
weaker than a year ago. Dealers reported difficulties moving all makes and models, despite
significant manufacturer incentives. Inventories of unsold cars were up throughout the district, and
many dealers have delayed purchasing new vehicles. Expectations for sales in coming months
remain subdued.
Manufacturing. District factory activity fell in December, with fewer firms reporting high
levels of capacity utilization than in the recent past. Weaker demand, higher input costs, and the
strong dollar all contributed to the slowdown. The most prominent increase in input costs was for
natural gas, as some fertilizer and chemical plants reported they were drastically reducing production

to sell their natural gas supplies on the open market. No material availability problems were
reported, and lead times were virtually unchanged. Managers do not anticipate material availability
problems in coming months. Firms continued to trim inventories and many plan to trim further
through the spring.
Real Estate and Construction. Residential construction activity continued to slow in
December, while commercial building remained solid. Housing starts fell in most of the district and
were well below year-ago levels in some areas. Builders expect a flattening out of residential
building activity over the next three months. Sales of new and existing homes remained solid in
western parts of the district, but were slow elsewhere. Mortgage demand was mixed relative to the
previous month, but still down considerably from a year ago. Lenders expect refinancing activity to
increase in coming months in response to the recent easing in mortgage rates. Commercial
construction activity held steady, and vacancy and absorption rates remained largely unchanged.
There was, however, some concern about overbuilding in the retail sector.
Banking. Bankers reported that loans edged down and deposits increased in December,
reducing loan-deposit ratios somewhat. Demand eased for all major loan categories except home
equity loans and agricultural loans, both of which were flat. On the deposit side, demand deposits,
NOW accounts, money market deposit accounts, and small time and savings accounts were all up,
while large CDs were unchanged. Most banks attributed the deposit increases to seasonal factors. All
respondent banks left their prime lending rates unchanged in December, and almost all banks held
their consumer lending rates steady. Lending standards were generally unchanged.
Energy. District energy activity continued to rise as rapidly as drillers could find workers
and rigs. The count of active oil and gas rigs in the district rose 10 percent in December to reach an
eight-year high. District sources reported that the national rig fleet is now fully employed. Further
expansion will require the manufacture of additional equipment. Natural gas prices doubled to more

than $10 per mcf in December, but producers said this price increase would have little effect on their
investment decisions because prices were already high enough to justify expansion.
Agriculture. The district's winter wheat crop was hurt by dry weather in the fall months.
While fewer wheat fields are suitable for grazing as a result of the damage, other forages are in
ample supply for winter. Nonetheless, the poor pasture conditions have made district cattle ranchers
reluctant to expand their breeding herds. District bankers indicate big government payments and
strong livestock profits have limited serious problems in farm loan portfolios, but they expect low
crop prices to hold down incomes for crop producers. District farmland prices edged up as a result of
some farmers expanding their operations and nonfarm investors purchasing land for recreation uses.
Wages and Prices. District labor markets remained tight in December. However, contacts
reported that recently announced layoffs at district retail establishments, communications firms,
automobile plants, and Internet startups could help alleviate labor pressures in some areas. The
greatest labor shortages were for skilled positions in information technology, manufacturing
production, health care, and oil and gas drilling. Specific jobs experiencing acute shortages included
masons, framers, welders, machinists, nurses, and pharmacists. The proportion of business contacts
reporting increased wage pressures was down from the previous survey, particularly in the retail
sector. However, wages rose considerably for oil and gas field workers. Retail prices were down in
December, due to early discounting in the holiday shopping period. Store managers expect prices to
remain steady through Easter. Prices fell for several manufacturing inputs, including steel and
plastics, but are expected to stabilize in coming months. Building material prices were largely



Overall Eleventh District economic activity continued to decelerate in December and early January.
Manufacturing activity declined, with a considerable drop in demand for some industries. Weaker sales
growth was reported in the service sector; demand for business services and retail sales decelerated.
Construction and real estate activity also slowed, with a substantial slowing in the demand for residential
building. Financial service firms said activity was slightly slower and, while credit quality remains stable,
most respondents reported continued tightening of credit standards. The energy industry remains a bright
spot, with international activity picking up, but a lack of labor and machinery is constraining drilling
activity. Freezing weather hampered agricultural conditions.
Prices. Price declines have become widespread, and several manufacturing industries reported
rising inventories. Metals producers said weaker than expected demand left inventories higher than desired,
and prices are low and falling. Cement and concrete inventories are also high, and selling prices have
decreased despite high energy and fuel costs. Prices declined for some paper products, and some firms
reported that inventories are a little too high. Lumber producers say inventories are very high and selling
prices have dropped "like a rock." Falling construction costs are being passed on to new homebuyers
because builders are reducing prices to help stimulate sales. Some telecommunications firms said their
inventories are in good shape, but others said inventories are too high. Telecommunications prices are
falling fast while costs are just slightly lower. Some telecommunications firms said they are outsourcing
production to lower costs. Most retailers said selling prices have been lower than a year ago.
Spot prices for West Texas Intermediate crude oil has declined nearly $10 (more than 25 percent)
per barrel since peaking in late November, but remained strong by standards set over the past two years.
Crude inventories, which have been very tight, increased slightly in December and are expected to
normalize. Oil product prices are generally following the price of crude downward. Ethylene prices fell
throughout the second half of 2000 and are expected to continue falling. Feedstock prices for ethylene and
propylene have reached unprofitable levels as producers have watched in horror as natural gas prices
doubled from what was thought to be an incredibly high $5 per Mcf up to $10. (The highest prices ever


reached--even when adjusted for inflation.) A number of plants that convert natural gas into other products
have been shutting down, reducing U.S. methanol capacity by 50 percent and ammonia capacity by onethird. Ethylene capacity has been reduced by 10 to 15 percent.
Glass producers noted higher fuel costs, which some firms are passing forward. Business service
firms said that fees have been rising but not as fast as their costs. Transportation service firms have
increased prices and fares to cover rising fuel costs. Prices are rising for energy-related labor, products and
Labor Markets. Labor markets loosened in December and early January but are still tight,
according to contacts. Some industries, such as glass, lumber, metals and telecommunications, reported
layoffs. Some manufacturers have reduced worker hours because production has slowed. Others are making
preparations to shut down production and lay off workers in case the situation worsens. Wage pressures
have eased in many industries. Telecommunications firms say they are hiring at a new, lower pay schedule.
Several business and transportation service firms were also hiring. Most service firms said salaries are still
high, but wages have not risen notably.
Manufacturing. Manufacturing activity has decreased since the last beige book, with nearly all
contacts reporting falling demand. Bad weather, the weak stock market and a weaker outlook for the U.S.
economy were cited as explanations for the drop in demand. Import competition and new capacity coming
on line were exacerbating supply imbalances for some industries, such as lumber and steel. Sales growth
weakened sharply for producers of high tech equipment, such as computers, semiconductors and
communications equipment. Businesses have begun to curtail technology-related investment, according to
contacts, who added that consumer demand for PCs has been weakening since the Fall of 2000. Demand
for construction-related products, such as glass, lumber, cement, concrete and metals, softened
significantly, which contacts attribute to a combination of seasonal factors, tighter credit, declining
consumer confidence, import competition and bad weather. Many lumber companies are shutting down
plants. Steel producers say competition is very stiff, and smaller producers are particularly concerned about
their outlook. Sales of corrugated boxes have also declined over the past month. Demand for apparel
manufacturing slowed in the fourth quarter of 2000, and inventories are heavy for some firms. Demand for


petrochemicals has dropped in all markets, including housing, autos and consumer packaging. The
petrochemical industry continues to struggle with a glut of capacity and soaring costs, and margins have
fallen sharply. Excess capacity is expected to weigh heavily on the market through 2003. In contrast,
refineries on the Texas and Louisiana Gulf Coast operated at high levels of capacity utilization in recent
weeks, between 96 and 99 percent.
Services. Demand for business services was lower, and sales growth was weaker than reported in
the last beige book. Demand for temporary services continued to be robust for energy-related firms in
Houston. Demand from the manufacturing sector remained moderate, but contacts noted some slowing
from telecommunications and PC firms. Legal and accounting firms reported slightly slower activity over
the past six weeks, but said business was still "good." Transportation firms-airlines, trucks and
railroads-reported slightly slower demand over the past six weeks, which contacts attributed to bad
weather and a slowing economy. Demand for services from the telecommunications industry also
continued to decline, and contacts said demand growth was lower than a year ago.
Retail Sales. Retail sales were up slightly over last year, which retailers said were "slower than
anticipated but not a disaster." Weak sales growth was attributed to bad weather and slower consumer
spending because of high utility costs and the weak stock market. Sales were noted as particularly weak for
men's and children's apparel, while shoes and outerwear were areas of strength.
Financial Services. Growth of overall lending activity slowed slightly-with smaller institutions
and credit unions reporting brisker activity than larger institutions. Commercial lending slowed somewith the exception of that related to the energy industry. Residential real estate lending remains stable to
slightly up, which bankers said was due to lower long-term rates. Contacts say that credit quality remains
stable, with no reports of increasing loan loss reserves or increased delinquencies. Most respondents
reported continue tightening of credit standards.
Construction and Real Estate. Sales and construction activity slowed over the past six weeks,
which contacts attributed to normal seasonal slowing and a drop in consumer confidence. Demand for
home building slowed substantially, according to contacts. Non-residential activity also was weaker over
the past few weeks. Most contacts say they are optimistic about the overall health of the real estate markets,


but expressed concerns about the recent slowing. Respondents contacted after January



said they had

revised their outlook upward following the interest rate cut.
Energy. The U.S. rig count flattened out at near 1100 working rigs. More exploration work is
being done, as opposed to easy expansions of existing fields. International work is picking up, increasing
demand for Houston-based services and equipment. Constraints to the number of active rigs have been
reached, both in terms of people and equipment. Global competition for people, equipment and
manufacturing capacity is expected to restrain domestic activity. Drilling expenditures from producer
capital budgets is widely forecast to increase by 20 percent or more, but half or more of the increase is
expected to be consumed by rising prices of labor, oil field services and machinery.
Agriculture. Cold, freezing temperatures damaged fruit trees, slowed planting and impaired
livestock conditions. Supplemental feeding of livestock continued, but hay supplies were difficult to locate
in some areas. Cold, wet weather delayed planting of the winter wheat crop, and in some areas it is now too
late to plant. While crop growth was hampered, recent freezing weather isn't expected to affect yields.




Reports from Twelfth District contacts indicated continued expansion in most District
states, although there are signs of slowing in several key sectors and of easing in tight labor
markets. Contacts reported that holiday season retail sales were mixed, falling below
expectations in many states. Conditions in the District manufacturing sector softened, and
respondents noted some accumulation of inventories. Conditions in the District agricultural
sector weakened further in recent weeks, as sales softened and prices remained low. Real estate
and construction activity remained strong, especially in California and Hawaii. District contacts
reported weaker loan demand and diminished credit availability for new office construction and
for high-tech firms with weak profits. High energy prices reportedly have driven up costs for the
manufacturing, transportation, and agricultural sectors. However, producers noted that
competitive pressures have limited their ability to pass those higher costs on to consumers.
Wages and Prices
With the exception of energy, contacts throughout the District reported generally
stable prices for inputs and consumer goods. Respondents also indicated some easing of tight
labor markets and signs of slower job turnover rates since the last survey. These observations
were attributed to increased uncertainty about the strength of the economy and slowing in the
dot-com and technology sectors. One major high-tech manufacturer located in the District
recently announced a hiring freeze and postponed raises for at least one quarter. Most
respondents reported that wage increases have moderated somewhat, although several noted that
health care costs continued to rise. In contrast, construction industry contacts in California
indicated that labor shortages continued to put upward pressure on wages and construction costs.
Numerous District contacts cited concerns about energy shortages and costs. Respondents
noted adverse impacts from soaring electricity and natural gas prices on the agriculture,

XII - 2

transportation, and manufacturing sectors. For example, the costs of harvesting seafood, drying
foods, and transporting and manufacturing goods have risen. Several agricultural,
manufacturing, and retail sector respondents indicated that competitive pressures continued to
limit their ability to raise prices of final goods and services. Respondents expect higher energy
costs to affect retail prices and construction costs in the year ahead. Despite electric power and
natural gas shortages and steep increases in energy costs, relatively few District contacts have
revised their energy procurement strategies.
Retail Trade and Services
District retailers reported mixed holiday season sales growth. In most District states,
holiday sales were reported to be at or below last year's dollar volume; in contrast, contacts in
California and Hawaii reported increased holiday sales. Respondents noted that consumers were
more cautious about their spending this holiday season, especially on big-ticket items, including
computers. New car sales were weak, despite efforts to boost sales volume with discount pricing
and low-cost financing packages. Contacts throughout the District reported that retailers moved
early and aggressively to discount merchandise, especially clothing and electronic goods.
However, while sales incentives helped move products, lower prices for consumer electronics
and computers resulted in lower revenues from those sales.
District contacts indicated that holiday season Internet sales increased compared to 1999.
Increased sales were attributed to more website visitors, increased confidence in Internet
transactions, and more frequent use of the Internet by traditional retailers. Despite the strong
growth, holiday Internet sales fell below expectations.
District manufacturing conditions weakened in recent weeks. Contacts reported slower
sales growth in the biotech, machine tools, and automobile sectors and flat construction
equipment sales. Respondents cited indications of rising inventories among providers of high-

XII - 3

tech equipment, construction equipment, and sporting goods. In contrast, shortages of raw
materials used in the production of fiber optics equipment were reported.
Manufacturers expressed widespread concern about the negative effects of higher energy
costs. Higher energy prices have driven up costs of producing most manufactured goods. One
Nevada contact indicated that small business energy costs doubled in December, even with
moderate weather. Production disruptions were noted: For example, one aluminum plant in the
Pacific Northwest shut down its smelter operations because it was more profitable to resell the
electricity under contract than to operate the plant.
Agriculture and Resource-related Industries
District farmers reported weaker conditions in the latest survey period. Low prices, weak
sales, and an increase in order cancellations have lowered profits for fruit and vegetable
producers. The strong exchange value of the dollar also has limited exports of District farm
products. Producers continued to find it difficult to pass on higher energy costs to wholesalers and
retailers. District ranchers have fared better in recent weeks, with strong demand for calves and
low feed costs.
Real Estate and Construction
Residential real estate construction activity remains strong in the District, although yearto-date housing permit activity in 2000 is reportedly below 1999 levels in all states except
California and Hawaii. Respondents in those two states noted strong real estate activity and
shortages of skilled construction labor and subcontractors. In contrast to previous survey periods,
building materials reportedly are becoming easier to obtain. Contacts in Northern California and
Washington reported a shortage of commercial office space. Respondents also reported that
financing for new office construction has become more difficult to find in recent months.
Financial Institutions

XII -4
Credit demand in the District has reportedly slowed in recent weeks. Financial industry
contacts reported lower demand for both consumer and business loans. Respondents noted that
financial institutions tightened credit standards and began monitoring credit quality more