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June 11, 2003

Prepared at the Federal Reserve Bank of Dallas and based on information collected before June 2, 2003.
This document summarizes comments received from business and other contacts outside the Federal
Reserve and is not a commentary on the views of Federal Reserve officials.

Although reports from the twelve Federal Reserve Districts indicated some signs of
increased economic activity in April and May, conditions remained sluggish in most
Districts. No District report suggested that economic conditions had deteriorated since the
last Beige Book. Economic activity increased or showed signs of improving in the Dallas,
Kansas City, New York, and Minneapolis Districts. The Philadelphia and Cleveland reports
characterized activity as mixed, while other Districts generally saw sluggish, subpar, or
subdued economic growth. The unwinding of war-related concerns appears to have provided
some lift to business and consumer confidence, but most reports suggested that the effect
has not been dramatic.
Consumer spending remained lackluster overall. Retail sales rebounded as the hostilities in
Iraq subsided, but sales remained below the level of a year ago. Manufacturing activity was
mixed, with some Districts reporting signs of improvement since the last Beige Book but
others still seeing declines in orders. Service sector reports, although limited, suggested
sluggish activity overall. Low mortgage rates continue to stimulate residential construction
and home sales in most Districts, but commercial construction and real estate markets were
still weak. The energy industry continued to strengthen. Agricultural production was
impaired by wet weather in some areas. Most Districts continued to report weakness in labor
markets and some downward pressure on wages, although benefit costs continued to
Consumer Spending
Overall consumer spending was soft in April and May. Retail sales picked up some after
subdued sales in March, but most reports indicated that sales remained below the level of a
year ago. A few Districts noted that retail sales did not pick up as much as expected after the
winding down of hostilities in Iraq. Wet weather was blamed for having damped sales in the
Chicago, Cleveland, New York, Philadelphia, and Richmond Districts, but the very recent
wet weather had a positive effect on foot traffic and sales in the Boston District. Most
Districts indicated that inventories are in line with expectations, although a few Districts

said inventories were on the high side, particularly apparel.
The outlook for consumer spending was described as cautiously optimistic. The Boston
District reported that most contacts are less concerned about economic uncertainties than in
previous months and anticipate that sales will increase modestly in the next few months.
Retailers in the Richmond and Kansas City Districts also expressed optimism about sales in
coming months, noting that they are planning to hire summer help. However, contacts in the
Dallas and Philadelphia Districts expressed caution that sales would not pick up
significantly until employment conditions improve.
Lower selling prices were reported by the Dallas, New York, and Philadelphia Districts, and
widespread promotional activity and discounts were reported by the Atlanta District. The
Boston and Dallas Districts noted that retailers continue to focus on ways to reduce their
costs and become more efficient--using such strategies as improving their marketing,
investing in faster cash registers, and increasing the use of part-time workers.
Auto sales were mixed in April and May. Sales weakened since March in the Chicago, New
York, and San Francisco Districts but improved in the Atlanta, Kansas City, and
Philadelphia Districts. Sales were below the level of a year ago in the Boston, Cleveland,
Kansas City, Philadelphia, and St. Louis Districts. Most Districts reported that dealer
inventories have risen above desired levels. Some new incentives have been added, but
contacts in the Philadelphia and Cleveland Districts suggested that consumers do not appear
to be as responsive to the current offers as automakers and dealers had hoped.
Manufacturing activity remained mixed. Three Districts--New York, Minneapolis, and
Cleveland--reported an increase in manufacturing activity in April and May although three
others--Philadelphia, Richmond, and Boston--indicated deterioration since the last report.
The remaining six Districts reported little change from conditions that continued to be
characterized as "sluggish," "weak," "soft," or "mixed." Still, four of those Districts reported
signs of improvement or optimism about future activity.
Boston, Atlanta, and Dallas noted that production related to defense and construction
activity remained among the bright spots in the manufacturing sector. San Francisco noted
strong demand for advanced technology production. Energy-related manufacturing activity
in the Dallas District remained relatively strong.
At the same time, the Richmond District's traditional manufacturing industries--textiles and
furniture--recorded particularly sharp declines in April and May. The Chicago District
reported that automakers said sales of light vehicles slowed nationwide in May, and
inventories remained high; Cleveland noted a sharp cutback in motor vehicle production.
The Chicago and Cleveland Districts also reported that, despite an increase in demand for
specialty steel, steel shipments slowed early in the second quarter. Due to limited demand
for new planes by the airlines, the San Francisco District reported that production of
commercial aircraft has dropped to the lowest levels since the mid-1990s.
Airline traffic has steadily increased in recent weeks, according to the Dallas District but,
with airline capacity abundant, expectations are for a summer with low fares and intense
competition. Airlines are carrying fewer passengers than a year ago and are continuing to
cut costs through additional layoffs.

The Cleveland District reported that demand for trucking and shipping was flat in May
compared with April and slightly lower than one year ago. In the St. Louis District, business
has picked up recently for midsize to large trucking firms because several smaller firms
have gone out of business. The Dallas District reported an improved outlook for trucking
companies and an increase in rail shipments. Contacts in the San Francisco District note that
fears about the spread of SARS had no discernible affect on overseas shipping activity.
District reports on the temporary employment industry are mixed. In the Boston District,
half of the temporary employment firms contacted reported an improvement in business in
the first quarter, with demand for workers in health care and selected financial services up,
but light manufacturing still weak. In the New York District, an employment agency
specializing in office jobs has also seen a pickup. Temporary staffing firms in the Dallas
District report that demand has steadied. However, the vast majority of temporary help
industry contacts in the Chicago District said that new orders fell in recent weeks, and those
in the Richmond District reported lukewarm demand for workers in recent weeks.
Reports on tourism and travel activity were also mixed. Tourism activity was soft in the
Minneapolis District, declined modestly in the Richmond District, but picked up seasonally
in the Boston District. In Chicago, tourism remained fairly steady, and hotel occupancy rates
improved slightly in some areas. Although tourism was weaker than expected at Rocky
Mountain ski resorts in the Kansas City District, summer bookings at family destinations are
solid. Concerns about the SARS epidemic in East Asia reduced business and leisure travel
in the San Francisco District in recent weeks. In the Atlanta and San Francisco Districts,
increases in domestic tourism helped offset a decline in the number of overseas arrivals.
Hotels in the Atlanta District continue to struggle because of the low volume of business
travel. The Dallas District reports that hotel industry occupancy is 4 percent to 5 percent
below a year ago.
Construction and Real Estate
Residential real estate markets and construction activity strengthened in the Atlanta,
Chicago, Cleveland, Kansas City, New York, Philadelphia, Richmond, and St. Louis
Districts and was still "solid" in the Minneapolis District. In some instances, sales growth
was very strong. For example, in April and May, many homebuilders in the Cleveland
District reported sales increases of more than 10 percent over the high level of sales one
year ago. In some areas of the Richmond District, home sales in recent weeks displayed
"unprecedented strength," including real estate agents reporting their best sales growth in
more than twenty-five years. However, inventories of unsold homes in late April and May
were higher than a year ago in cities in the Kansas City District and were at record levels in
Denver. In the Dallas District, new home building continued to lose steam, and sales of
existing homes were very weak--contacts there say that it will take new jobs and increased
confidence to stimulate demand for new homes.
Overall commercial real estate continues to be weak, with only scattered indications of
conditions stabilizing at a low level. The Boston District has seen high and rising office
vacancy rates and falling rents. Office vacancy rates have also edged up in suburban
Philadelphia. Nonetheless, both Districts reported an increase in purchases of office
buildings by institutional investors and real estate investment firms. New York's office
market has shown signs of improving recently, after having weakened in the first quarter.
Brisk leasing activity in Lower Manhattan--largely from the health sector--pushed that area's

vacancy rate down sharply to its lowest level in one year. Commercial leasing and
construction activity in the Richmond District was generally flat in recent weeks, but the
retail sector was one of the bright spots in recent weeks.
Banking and Finance
Lending activity continued to increase, mostly for refinancing residential mortgages. The
Chicago District reports that many households appear to be taking advantage of refinancing
to pay down other debt, which is limiting growth in credit card balances. Business lending
increased in the Dallas, Cleveland, and Philadelphia Districts, but was weak in the Atlanta
and Chicago Districts and in most of the San Francisco District. The Richmond District
reports no signs of a pickup in commercial lending any time soon.
Most Districts reported little change in loan delinquencies. The Cleveland District noted a
few reports that credit quality had slipped, and bankers in the Philadelphia District expect
commercial loan quality to slip in the second half of the year because revenue growth for
many business borrowers has been weaker-than-expected. However, the Chicago District
indicated that the credit quality on commercial loans was improving modestly, while the San
Francisco District reported that the credit quality of bank loans was generally stable to
slightly improved. A mild increase in residential mortgage foreclosures was reported in the
Atlanta District, while the Dallas District reported a May spike in home foreclosures in the
Dallas-Fort Worth area. Banks in the St. Louis District reported that they had tightened
lending standards for small firms.
Agriculture and Natural Resources
Wet weather delayed spring planting and other farm activity in the Atlanta, Chicago, Kansas
City, Richmond, and St. Louis Districts. The heavy rains damaged crops in some areas, such
as in the Richmond and St. Louis Districts, where contacts expressed concerns about
reduced crop quality. But the moisture was welcomed in the Atlanta, Chicago, and
Minneapolis Districts, where rainfall improved the outlook for yields. Conditions remain too
dry in the Dallas District, where cotton planting was delayed because of insufficient
moisture to germinate seed. The San Francisco District noted that sales were strong for beef
cattle and for most crops, in part because the depreciation of the dollar boosted demand. The
Atlanta District reported a bumper winter wheat crop. The Chicago and Minneapolis
Districts reported that milk prices are very low.
The energy industry continues to strengthen, according to the Dallas, Kansas City,
Minneapolis, and San Francisco Districts. Drilling activity picked up in response to robust
demand for oil and natural gas. Contacts in the Dallas and Kansas City Districts expect
drilling and related activity to continue to grow through the end of the year. The
Minneapolis District reported a decline in the region's mining sector, with the closing of an
iron ore mine due to financial difficulties and disruptions to production and shipments at
other plants.
Labor Markets
Most District reports continued to indicate that labor markets were soft. In the Kansas City
District, the pace of layoff announcements continued to ease, but layoffs continue at some
large employers in the Dallas District and at some manufacturers in the St. Louis District. A
few employers in Cleveland continued to report layoffs, but most indicated plans to augment
or maintain their workforces. In the Atlanta District, firms are not yet hiring permanent
employees but are leveraging existing staff by increasing hours and, or adding temporary

personnel. In the New York District, a major employment agency specializing in office jobs
reports a noticeable pickup in hiring since the last report.
District reports suggested little pressure on wages, although benefit costs continued to
increase. In the Chicago District, contacts reported that many firms were instituting wage
freezes and, or limiting or delaying merit increases. The Dallas District reported downward
wage pressure in several industries, although some contacts said that the labor market had
not eased sufficiently to allow the wage reductions they would desire. Service firms in the
Boston and Dallas Districts report that downward pressure on fees has depressed pay rates.
In the Kansas City District, wage pressures remained subdued, but some managers reported
that their average wages had risen over the past year because lower-paid junior workers
were laid off. Respondents in the San Francisco District noted very limited upward pressure
on wages overall. Several Districts reported a continued rise in the cost of employee health
benefits, particularly insurance.
Anecdotal reports suggest that price pressures are mixed, with no widespread inflationary or
deflationary pressures. Lower prices were reported for crude oil, fuel, and some
manufactured products. Prices also continue to be soft for many retail products. However,
there were reports of rising cost pressures for tuition, state taxes, transportation, and all
types of insurance. Natural gas prices rose, pushing up prices of most petrochemical
products to record levels. The San Francisco District noted that depreciation of the dollar
has led to higher costs for some imported raw materials and textiles.
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First District--Boston
The First District economy remains stalled. While retail respondents report sales meeting
expectations, manufacturers, especially those producing consumer durables, cite further
softening. Some staffing firms indicate demand is rising, but commercial real estate markets
remain in the doldrums and software firms see little cause for optimism.
Retail contacts in New England report sales are mostly in line with expectations in April and
May. Many respondents say sales were down in early March because of the war, but made a
slow recovery later in the month. Some contacts indicate the very recent wet weather has
positively affected sales and foot traffic.
Auto sales are said to be down slightly compared to a year ago, but better management of
inventories and internal cost-cutting have raised profits. Imaging products such as digital
cameras and printing materials are reportedly selling well in the office-supply sector. The
seasonal pickup associated with academic graduations combined with business conventions
produced strong sales for the travel and tourism sector in May.
Contacted merchants report that employment is mostly steady, with a recent rebound in the
tourism sector. Wages are level, with minimal annual increases. Vendor prices are said to be
stable, although a firm dependent on imports reports slight price increases because of the
weaker U.S. dollar. Selling prices are mostly steady; however, there is some upward
pressure. Capital budgets for 2003 are mixed, with about half reducing spending and the
remaining half mostly holding spending flat.

Many respondents continue to focus on becoming more efficient, attempting to maintain
lower internal costs and improve their marketing strategies. Most contacts are less
concerned about economic uncertainties than in previous months and anticipate sales will
increase modestly in the next few months.
Manufacturing and Related Services
First District manufacturing contacts see little if any evidence of a recovery in their sector.
Makers of consumer and commercial nondurables report that current quarter sales are
running below expectations and are flat to down from a year ago. Furniture makers have
seen more store traffic in the last month or two, but they are divided on whether this has
translated into higher sales. Aircraft and transportation-related sales remain depressed. Two
companies in the semiconductor industry say their sales are up 10 percent or more from a
year ago; although one characterizes business as continuing to be very good, the other says
conditions are still gloomy. In contrast to general trends, defense-related business is up
Most selling prices remain flat to down. Materials costs mostly remain under control. About
one-half of the sample say that they or their customers are trimming inventories or
preventing further buildup. More than half are reducing employment.
Capital spending plans for the coming six to twelve months are mixed. Some companies are
making large investments in more modern production technologies. Others need to
restructure their operations or expand capacity in specific lines. About one-half plan to
decrease capital spending or leave it unchanged. They cite factors such as ample capacity,
low sales growth, and a need to preserve cash.
Manufacturers appear to be basing their expectations about the coming six to twelve months
on trends for the year to date. Those that have not yet seen a pickup are inclined to believe
that the economy will not turn around until 2004.
Temporary Employment
About half of responding temporary employment firms report 2003:Q1 revenues higher than
those of 2002:Q1, with increases ranging from 5 percent to 20 percent. The remaining
agencies' revenues were flat or down by as much as one-fourth over the same period, with
some companies posting negative profits in 2003:Q1. Health-care-related employment is
said to be still strong, as well as employment in selected financial services such as mortgage
and insurance. Some respondents see signs of a rebound in technology employment.
Contacts say employment in light industry and other manufacturing continues to be weak,
facing intense competition from overseas, while traditionally stable areas of employment
like academia and consumer goods have been disappointing of late.
Amidst sluggish labor demand and abundant labor supply, many respondents say client
companies have pressured them to reduce bill rates, and they have reduced pay rates to
maintain profit margins. Others have kept prices and wages unchanged, aiming to keep the
quality of their personnel high and investing in long-term client relationships. With many
companies restructuring in 2002, employment and capital spending levels in 2003 are
Some contacts at temporary employment agencies are hopeful about the future, expecting
revenues to be higher during the second half of 2003 than in the first half. Those who

anticipate a recovery expect it to be modest and slow, and say they need to see more tangible
signals before changing their strategies. Respondents express much less concern with
geopolitical issues than when contacted last quarter, and more concern about rising
insurance costs and the possibilities of a double-dip recession or deflation.
Commercial Real Estate
Commercial real estate markets in New England continue to perform poorly. Contacts report
high and rising office vacancy rates and declining rents throughout the region. Although
some respondents point out that the pace of increase in vacancy rates has slowed, there are
few bright spots and no signs of recovery so far. As companies throughout the region
continue to have layoffs, the demand for office space is weakening. At the same time, there
is strong demand by institutional investors for office buildings, and sale prices of buildings
with tenants remain high. As a result, new office construction continues, further raising the
inventory of available rental space. As existing leases get closer to their expiration dates, the
sublease market is diminishing in importance. Contacts expect the market to continue to
deteriorate as long as layoffs continue. No turnaround is expected until 2004 or even three to
five years out.
Software and Information Technology (IT) Services
The recovery of the software sector remains stalled after a disappointing January and
February and a somewhat busier March and April. Less cyclical businesses such as
health-care and human resources software continue to outpace the rest of the sector, which
has seen little pickup attributable to economy-wide conditions. Although exchange rates
have provided a modest boost to software exports, contacts say the domestic software
market has not improved.
While the March pickup helped prevent imminent workforce reductions, several companies
signal that they may reconsider if stagnation persists. Medical and human resource software
firms, which are still adding labor, report downward revisions to their hiring targets. Further
cuts in capital spending are planned or expected by wireless IT services, network software,
and custom applications providers; they cite negative cash flow, low sales, and low capacity
utilization as reasons for the contraction. Contacts agree that the recovery depends on
aggressive increases in capital spending that they have not seen so far.
The short-term outlook remains flat and technical contacts suggest that they see no reason
for the current pattern to change in the medium term. Most respondents point to mid-2004 as
the earliest date for an economy-wide expansion but caution that clear signs supporting that
expectation are lacking.
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Second District--New York
The Second District's economy has shown fairly widespread signs of a pickup since the last
report, although businesses note diminished input price pressures. The labor market appears
to be strengthening, mainly in and around New York City. Retail sales were mixed in May,
with inclement weather hampering sales of seasonal merchandise. According to two
separate surveys, consumer confidence improved again in May. Manufacturing activity also
appears to have picked up in May.
Both home construction and the market for existing homes have been steady and fairly

strong since the last report, and there are signs of a pickup in New York City's office market.
Finally, bankers in the District report increased loan demand, especially for home
mortgages, slight improvement in delinquency rates, and steady to slightly tighter credit
Consumer Spending
Major retail chains report that sales in the District were mixed in May, with unusually cool
and wet weather hampering sales of seasonal merchandise. On a comparable-store basis,
sales ranged from down 4 percent from a year earlier to up 5 percent. Sales were generally
described as on or above plan at department stores, but below plan at discount chains. While
the weather hampered sales of seasonal merchandise--lawn and garden, swimwear, and
spring apparel--most contacts indicate that overall business was better in May than in March
or April.
Most retailers indicate that both selling prices and merchandise costs have declined,
particularly for apparel, electronics, and lumber. Inventories are generally reported to be on
the high side, but most contacts characterize them as manageable; overstocks of seasonal
merchandise are expected to sell briskly once hot weather arrives. Separately, a western
New York association of automobile dealers reports that vehicle sales weakened in May and
characterized inventories as high and rising. As of June 1, New York State's sales tax was
increased ¼ percentage point, and moderately priced clothing (under $110) is no longer
exempt from sales tax; a number of counties, as well as New York City, are also increasing
their sales tax rates.
Two separate surveys point to further improvement in consumer confidence in May. Siena
College's monthly survey of New York State residents showed confidence rising in May for
the third consecutive month. Similarly, the Conference Board reports that confidence in the
Middle Atlantic states--New York, New Jersey, and Pennsylvania--rose for the second
month in a row.
Construction and Real Estate
Residential real estate markets and construction activity were characterized as steady and
relatively strong in May. A contact in New Jersey's homebuilding industry reports that,
although adverse weather hampered housing starts in the first quarter, activity rebounded in
April and May, and year-to-date construction is running on par with 2002 levels. This
contact describes demand as robust, but indicates that regulatory constraints have hampered
the pace of development. Separately, an Albany area homebuilder reports that May was a
record-setting month for sales, reversing a slowdown in April, and also notes a lean
inventory of homes on the market.
The market for existing homes has also shown signs of renewed strength. Median home
prices have continued to register double-digit price gains over the past year across northern
New Jersey, downstate New York, and the Albany area. However, prices across much of
upstate New York were up only modestly. The number of transactions, however, has been
running below 2002 levels, with some contacts attributing this to a lack of inventory.
Manhattan's co-op and condo market showed signs of renewed strength in May. A major
real estate agent and a leading residential appraiser both report a pickup in sales in May,
though volume was down from the exceptionally busy period a year ago. Selling prices have
remained stable overall, with small apartments seeing modest price appreciation, but larger

units seeing modest price declines.
New York City's office market has shown signs of improving recently, after weakening in
the first quarter. In particular, brisk leasing activity in Lower Manhattan-largely from the
health sector-pushed that area's vacancy rate down sharply to its lowest level in one year,
though asking rents continue to run more than 20 percent below the 2000 peak levels.
Midtown Manhattan's vacancy rate was little changed.
Other Business Activity
A major New York City employment agency, specializing in office jobs, reports a noticeable
pickup in hiring since the last report. There has been a modest pickup in activity from the
financial sector but not from the large firms. More generally, much of the recent hiring is
said to be coming from small companies in a variety of industries. Also, fairly strong labor
demand continues to come from the legal industry. A financial-industry contact reports that
New York City's securities industry showed renewed signs of improvement in May, after a
poor performance in April, and expects the higher profits to soon lead to strong gains in
variable pay. However, this contact notes that the industry is seeing "massive productivity
gains," driven by investments in technology, and that employment is not expected to
increase noticeably in the near term.
Manufacturing industry contacts report fairly widespread improvement since the last report
as well as diminishing input price pressures. Similarly, the May survey of New York
City-area purchasing managers shows continued improvement in manufacturing sector
conditions, though Buffalo-area purchasers report some weakening in activity. In both areas,
purchasers indicate diminished price pressures.
Financial Developments
Contacts at small to medium-sized Second District banks report increased demand for all
types of loans--in particular, more than 40 percent of bankers indicate higher demand for
residential mortgages, compared with less than 10 percent reporting lower demand.
Widespread increases in refinancing activity are also reported. Credit standards on home
mortgages were unchanged, but slightly tighter credit standards were reported for other loan
categories. Widespread declines in interest rates were again reported across all categories of
loans and deposits. Finally, lenders report little change in delinquency rates on consumer
loans but lower delinquencies on home mortgage and commercial loans.
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Third District--Philadelphia
Economic conditions in the Third District were mixed in May; some sectors improved
slightly and others remained weak. Manufacturers reported continuing declines in orders
and shipments. Retail sales of general merchandise picked up during the Memorial Day
weekend, although sales for the month as a whole were somewhat below the year-ago level.
Auto sales improved in May from April but were below the level set in May of last year.
Bank lending has been rising slowly, with relatively stronger gains in residential real estate
lending and slight growth in consumer and business lending. Commercial real estate market
conditions remained soft, with rising vacancy rates in some markets and falling effective
rents. Residential real estate sales rose in May compared with April, and house price
appreciation has been strong.

Looking ahead, contacts in the Third District business community generally expect
improvement in the coming months, although their views are mostly cautious.
Manufacturers forecast some increases in shipments and orders during the next six months,
but a significant number are considering reductions in production plans for the second half
of the year compared with their earlier intentions. Retailers say the outlook is uncertain, and
they do not expect significant improvement during the second half of the year. Auto dealers
anticipate only a slight increase in sales from the current rate. Bankers expect continued
slow growth in lending, mainly from residential real estate activity. Residential builders and
real estate agents expect home sales this year to be about in line with last year's results or
somewhat better, but commercial real estate agents do not anticipate any strengthening in
office markets until next year.
Orders and shipments at Third District manufacturing plants edged down in May compared
with April, although the number of industrial firms reporting increases in new orders has
risen recently and the number reporting decreases has fallen. However, the net improvement
has been slight, and the trend in orders remained weak and order backlogs continued to
decline. Manufacturers also continued to report declining inventories. Conditions varied
among the major industry sectors in the region. Firms that make products used in residential
construction reported rising orders, although some of the increase was said to be seasonal,
and some makers of business and industrial equipment noted increased demand for their
products. Declines in orders were reported among apparel makers, producers of basic
industrial materials, and transportation equipment.
On balance, the region's manufacturers forecast improvement. Over half of the firms
surveyed in May expect increases in shipments and orders, and around one in ten anticipate
decreases during the next six months. Although their outlook is positive, on balance, a
significant number of area manufacturers appear to be trimming their expected production
rates for the second half of the year relative to the plans they had made at the beginning of
the year. Around half of the firms surveyed in May said they expect production in the
second half to be consistent with their earlier plans, but more than 40 percent said they
might reduce production rates compared with plans, and only a few firms are considering
production rates above earlier plans. Capital spending plans among area manufacturers call
for increases, on balance. About one in four of the firms polled in May have scheduled
higher outlays during the next six months, but the proportion of firms reporting they will
reduce capital spending has risen recently, to nearly one in five of those polled in May.
Third District retailers generally reported that current dollar sales in May were below sales
in May of last year, despite a pickup during the Memorial Day weekend. Retailers indicated
that store traffic has improved, but their revenues were being kept in check by falling prices
for many lines of merchandise as well as by cautious consumer shopping. Merchants said
sales of spring apparel have increased, but sales of other seasonal merchandise have been
hampered by unseasonably cold and wet weather. Store executives said they were fully
stocked for the start of the summer sales season, but they were limiting inventories in light
of the lackluster sales pace so far this year.
Most of the retailers contacted in May expect the second half of the year to be challenging.
They said consumers are unlikely to step up spending significantly until employment

conditions improve. With cautious views of sales this year, retail companies in the region
have generally trimmed expansion plans for the year compared with their average rate of
store openings and remodelings in the past few years.
Auto sales in the District picked up slightly in May compared with April, but dealers said
sales in both months were fewer than in the same months last year. Inventories have risen
above desired levels for most dealers. Some domestic manufacturers are adding new
incentives, but dealers generally expect this will produce only a slight boost in sales, at best.
Outstanding loan volume at Third District banks rose slowly in April and May. Residential
real estate lending continued to move up, and depository institutions and mortgage
companies reported a heavy rate of applications for both refinancings and purchase
mortgages. Consumer credit also continued to expand. Commercial banks in the District
reported slight gains in business lending, on balance. Several commercial loan officers said
they expected commercial loan quality to slip in the second half of the year, as many of their
business borrowers were not achieving the revenues they had forecast.
Looking ahead, bankers in the Third District expect continued, although slow, growth in
total lending. Bankers said possible further declines in interest rates might extend growth in
residential lending, but they do not expect commercial lending to strengthen until business
profits improve. Some bankers also said that further declines in loan interest rates will
negatively affect their banks' interest margins because they cannot reduce deposit rates
without experiencing deposit outflows.
Real Estate and Construction
Recent surveys by commercial real estate firms in the Third District indicated that overall
office vacancy rates have edged up in suburban markets, where new buildings have recently
become available, although the vacancy rate in the Philadelphia central business District has
been nearly steady. Vacancy rates in suburban markets were estimated in a range of
approximately 12 percent to 21 percent, up around 1 percentage point to 2 percentage points
since the start of the year. The office vacancy rate in the Philadelphia central business
District was recently estimated at around 13 percent, unchanged since the start of the year.
Quoted rents remained fairly stable, but effective rental rates continued to decline as
landlords offer tenant improvement allowances and rent-free periods. Leasing activity has
been soft throughout the District, but there has been an increase in purchases of top-rated
buildings in the Philadelphia central business District by real estate investment firms.
Commercial real estate contacts say markets are likely to remain soft through the rest of the
year, but they expect demand for space to begin growing sometime next year if economic
conditions improve and area firms start to increase employment. Local commercial real
estate brokers expect rents to rise, perhaps significantly, once demand for space turns up.
Residential real estate agents and home builders generally reported that sales have been
running higher in May than in March and April. Price appreciation for new homes continued
to be strong in many parts of the region, especially in areas where land available for
development has been limited. Price appreciation for existing homes remained rapid also, as
the inventory of homes for sale has declined. Real estate agents had been expecting a slight
drop in sales of existing homes this year compared with last year, but the continuing decline
in mortgage interest rates has led some to predict that home sales this year could match last
year. Homebuilders have mixed views: some expect their sales this year to equal or exceed

last year's sales, but others said their ability to increase sales will be constrained by scarcity
of land and limitations on development.
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Fourth District--Cleveland
Economic activity remained mixed in the Fourth District during April and May, with some
industries reporting improvements and others reporting deterioration over this period. On
the positive side, most manufacturing contacts noted steady or improving production and
sales, with the expectation that conditions would continue to improve in the near future.
Residential homebuilders reported strong year-over-year gains in April and May (2002 was
a record-sales year). Banking, for the second consecutive report, noted some improvement
in commercial loan demand.
Still, some signs of weakness persisted in the economy. Retailers continued to characterize
the retail environment as soft. Auto dealers reported slowing sales. Commercial builders
continued to report depressed economic activity. Trucking and shipping contacts noted a
downturn in activity.
Most contacts in manufacturing and residential construction expect conditions to continue
improving within the next six months, although contacts in retail, trucking and shipping, and
commercial construction all seemed pessimistic about prospects for the last half of the year.
The labor supply remains plentiful, and those firms that are hiring reported no difficulty in
finding qualified labor. Although most firms indicated plans to maintain or augment their
current workforces, a few firms did report that they planned layoffs.
Overall, prices remained stable in this reporting period. The exception appeared to be both
rolled and specialty steel--prices continued to fall for these commodities in April and May.
As was the case in the last report, most manufacturers noted that production and sales in
May were steady or improving on both a monthly and year-over-year basis. Finished goods
inventories are still lower than year-ago levels for most producers, and the level of idle
capacity appears to have decreased from the last report.
Roughly one-third of our contacts noted that they were hiring, one-third noted keeping their
workforce steady, and the remaining one-third reported staff reductions. Roughly half our
contacts noted overtime in recent weeks. Regarding the outlook, more than half our contacts
expect production and sales to increase in the near future.
Auto production fell at most plants in the District in April and May, with Districtwide
production roughly 10 percent below 2002 levels, adjusting for models that moved
production or were discontinued. Four of the five major auto producers in the District
reported a decline in production from April to May--the declines ranged from 15 percent to
25 percent.
Demand for rolled steel softened in May, with contacts reporting production roughly 5
percent to 10 percent below April levels. Prices continued to fall, and are roughly 10 percent
to 15 percent below their level at the close of 2002. Many contacts noted that they would

lay-off workers if they were not constrained by labor contracts--others noted either a
planned workforce reduction negotiated into next year's labor contract or temporary
two-week layoffs. Contacts do not expect conditions to improve.
Specialty steel producers, however, have seen an increase in demand, and sales have
increased roughly 5 percent to 10 percent from one month ago, but they are still below 2002
levels. Unlike firms in the rolled-steel industry, specialty steel producers reported either
calling back laid-off employees or expanding their workforces.
Retail Sales
Retailers continued to characterize the retail environment as soft in April and May, with
many contacts reporting below-plan sales and either flat or year-over-year decreases in
comparable store sales. Mall traffic continues to be down, and apparel sales have been poor,
in part due to the cool weather. Some contacts noted that they had hoped for a pickup in
sales with the resolution of the military campaign in Iraq, but this pickup did not
Prices remained stable in May, and contacts continued to manage inventories very
conservatively. Although labor is plentiful, very few contacts are hiring. Most of our
contacts expected flat sales in the coming months.
Automobile dealers also noted sluggish activity. Despite some improvement in sales in early
March, sales for March and April were below expectations--one contact noted sales had
dropped off as much as 25 percent from the previous year. In terms of the aggressive
incentives being offered, consumers do not appear to be as responsive to the current offers
as automakers and dealers had hoped. Inventories at dealerships have been rising: Contacts
reported inventories from near seventy-day to ninety-day supplies, well over the sixty-day
supply that most dealers try to maintain. Contacts did not expect conditions to
improve--most expect sales growth to remain flat through the end of the year.
Homebuilders reported strong sales in April and May, with many builders reporting sales
increases of more than 10 percent over the high level of sales one year ago (2002 was a
record-sales year for most of our builders)--one contact reported that April was his best
month on record. The strength in homebuilding does not appear to be attributable to one or
two specific housing markets; rather, it appears to be spread across the District.
Commercial builders, on the other hand, continued to report poor conditions. One contact
noted that the work his firm currently has is not new business, but, rather, projects that were
postponed last year. Another contact noted that lending activity appears to be constraining
demand: Although some clients are interested in pursuing new building projects, the
narrowing spread for lenders appears to leave them reluctant to lend money for projects.
Although activity from health-care projects has slowed some in recent months (most
contacts believe it is due to consolidation in the industry), the health-care industry continues
to be one of the few sources of new activity among commercial builders. School
construction, which has been steady over the past two months, remains the other source of
new activity in commercial construction.
Trucking and Shipping
Demand for trucking and shipping was flat in May compared with April, and slightly lower

than one year ago. Prices in the industry have remained stable over the least year, but some
contacts speculate a price increase may be attempted by carriers sometime during the
summer if excess capacity in the industry continues to fall at the pace it has fallen the last
couple of months. The drop in excess capacity is due in part to a decision by firms to delay
purchasing new engines. Many firms remain reluctant to invest large sums of money in new,
unproven engines that meet the EPA regulations that took effect last October. Rather than
invest in new engines, firms are making expenditures on technology to improve efficiency.
For the second consecutive report, a growing number of bankers reported slight
improvement in commercial loan demand--for this report, more than half our contacts
reported commercial loan demand had increased both year-over-year and year-to-date.
Consumer loan conditions remained mixed: Half our contacts reported demand was slightly
up, while the rest reported demand was flat or slightly down compared with one year ago.
Most bankers continued to report that growth in core deposits was either flat or slightly up.
Credit standards had not changed, and the number of loan applications remained roughly the
same compared with one month ago, but a few contacts did note deteriorating credit quality
among applicants. Most bankers reported mortgage, installment, and business loan
delinquencies were flat or very slightly increased compared with a year ago.
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Fifth District--Richmond
Economic growth in the Fifth District was subpar in the weeks since our last report as
softness in the retail and manufacturing sectors persisted. Retailers reported that sales were
sluggish with unusually rainy weather constraining shopper traffic in some areas.
Nonetheless, retailers generally remained optimistic about sales prospects in the months
ahead. District manufacturers--particularly those in the textiles and furniture industries-indicated that shipments and new orders again moved lower and that they continued to trim
payrolls and hold the line on capital spending. Declining interest rates boosted mortgage
lending and residential housing sales, but only slight growth was recorded in broad services
sector activity. In agriculture, the incessant rainfall during May delayed planting activity and
flooded crops in some areas. Although scattered reports of price declines in manufacturing
were received, contacts generally indicated that prices grew modestly in most sectors of the
District's economy.
Across the District, the unusually large number of rainy days in May generally weighed
down store sales; contacts in the Tidewater area of Virginia, for example, told us sales were
slow as did a department store in the South Carolina lowlands. A big-box discount retailer
with stores throughout the District reported unchanged sales over the period, although
"discretionary spending" on certain items such as electronics had fallen. But, there were
scattered bright spots. The big-box contact said that despite a prolonged lull, mid-May
spending on necessities rose at his stores. In addition, a department store retailer in
Annapolis, Maryland, reported that their sales increased by double-digits in May because
people cooped up by the weather were looking for reasons to get out of the house. District
retailers were generally optimistic about sales in coming months and planned to hire
summer help. A large bookstore in central North Carolina, for example, cited plans for

seasonal hiring, as did a West Virginia car dealer.
Customer demand at services businesses grew modestly from mid-April through May
though the experiences of individual firms varied. On the weaker side, an executive search
firm in the Washington, D.C., area said business was the worst he had seen in thirty years,
and a freight company in central North Carolina said customer demand had softened in May.
In contrast, a sports complex in central North Carolina reported that attendance was flat, and
a computer services firm in the Clarksburg, West Virginia, area reported unchanged demand.
But a number of District services firms reported somewhat higher revenues. A computer
firm in the Research Triangle region of North Carolina, for instance, said business had
picked up recently.
District manufacturing activity contracted further in April and May. Manufacturers told us
that shipments, new orders, and employment were all generally lower during the period. The
District's traditional manufacturing industries--textiles and furniture--recorded particularly
sharp declines. A textile producer in North Carolina told us that his plant was operating only
four days a week now because of poor sales. He added that he did not anticipate a pickup in
new orders in the months ahead. Several plant managers voiced concern about falling prices.
A furniture manufacturer in North Carolina told us that lower prices were "everywhere in
the furniture industry." A plastics manufacturer in South Carolina said that he was forced to
cut prices to maintain market share. Although most manufacturers remained optimistic that
business would pick up in the second half of the year, they said their plans for capital
spending remained on hold until they saw an increase in new orders.
District loan officers said declining mortgage interest rates pushed residential mortgage
lending higher, but that commercial lending was stagnant. As conventional thirty-year
fixed-rate mortgage rates dropped below 5½ percent, mortgage lending surged. A banker in
Charleston, South Carolina, reported that he had all the residential mortgage business he
could handle, and a counterpart in Greenville, South Carolina, told us he was "swamped"
with loan applications. Commercial lenders were less sanguine, reporting that a "wait and
see" attitude persisted among many of their business clients. A loan officer in
Charlottesville, Virginia, noted that although there were a few signs of economic
improvement in his area, businesses generally remained cautious about borrowing in the
current economic environment. Several bankers in Richmond, Virginia, said they foresaw no
signs of a pickup in commercial lending anytime soon.
Real Estate
Residential realtors across the District reported generally higher home sales in recent weeks.
In some areas, housing markets displayed unprecedented strength. A Virginia Beach,
Virginia, agent, for example, said that home sales were the best he had seen in his
thirty-seven years in business. A realtor in Fredericksburg, Virginia, characterized sales
there as "amazing"--the best in her twenty-seven years of experience. Although agents in
Washington, D.C., Richmond, Virginia, and Greenville, South Carolina, were somewhat less
upbeat, they also reported solid sales growth, particularly of low- to moderate-priced homes.
District homebuilders noted that the persistent rains in April and May slowed construction
activity but said that they continued to apply for a large level of building permits.

Commercial leasing and construction activity in the District was generally flat in recent
weeks. Contacts reported that their clients remained hesitant to commit to real estate deals in
the sluggish economy--a realtor in the Raleigh, North Carolina, area told us firms there had
"no sense of urgency" to obtain additional space. The retail sector was one of the bright
spots in recent weeks; retail vacancies remained low and rents held firm. "We are very
upbeat [about retail]…things are headed in the right direction," remarked a realtor in Bristol,
Virginia. In contrast, office leasing activity was slow and vacancy rates remained high.
Industrial vacancy rates were also high and leasing activity in the sector was "very quiet."
Tourist activity declined modestly in April and May, slowed in part by rainy weather during
the period. A hotel manager in Virginia Beach, Virginia., said that business during the
Memorial Day weekend was somewhat below that of a year ago, and she attributed the
decrease to bad weather and heightened concerns about terrorism. She reported that her
hotel was discounting rates to attract visitors. A contact at a hotel on the Outer Banks of
North Carolina told us that their occupancy rate was down about 8 percent compared with
last year. On a brighter note, a contact at a mountain resort in Virginia told us that his resort
was completely booked during Memorial Day despite the gloomy weather.
Temporary Employment
District temporary employment agencies reported lukewarm demand for workers in recent
weeks. An agent in Raleigh, North Carolina, said that although some signs of economic
recovery had appeared in the area, there had not been a sustained trend toward recovery and
increased hiring. Many employment agents, however, expected the economy to pick up in
coming months and looked for stronger demand for their workers to follow.
Cooler than normal temperatures and saturated fields prevailed in most areas of the District
in recent weeks, delaying spring planting activity. Hay harvesting was behind schedule in
North Carolina, Virginia, and West Virginia, and the planting of peanuts and soybeans was
delayed in South Carolina. Small grain crops in some areas of Virginia were damaged by
winds and rain and excessive moisture. Throughout the District, crop producers expressed
concerns about disease outbreaks and crop quality.
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Sixth District--Atlanta
Contacts reported that economic activity in the Sixth District remained subdued during the
spring. Merchants' sales reportedly matched year-ago levels, and inventories were largely in
balance. Retail sales continued to be driven by discounting and promotional activity.
Contacts noted that new factory incentives led to an uptick in regional vehicle sales during
May. Low mortgage interest rates continued to support the housing sector, especially in lowand mid-price markets, whereas commercial real estate markets remained weak. Reports
from the travel and hospitality industry noted a modest improvement during late April and
May, while most manufacturing sector contacts reported that activity remained lackluster
and hiring and capital spending plans were restrained. Labor markets continued to display
little sign of improvement, and employers remained reluctant to hire full-time employees.
Lower fuel prices benefited District transporters, but health-care cost increases continued to

adversely affect many businesses in the region.
Consumer Spending
Retail contacts reported that May sales were near year-ago levels. Most indicated that spring
results were in line with expectations and that inventories were balanced. Regional
consumer confidence surveys noted an improvement in consumer sentiment since the end of
the Iraq war. Promotional activity and discounts remained widespread in the retail sector,
particularly in apparel. Retailers anticipate that sales in the second quarter will be near last
year's level. Several District car dealers reported improving vehicle sales in May. Contacts
noted that factory incentives appeared to be behind the better-than-expected results.
Nonetheless, most dealers reported higher-than-normal vehicle inventory levels. Used car
sales continued to be weak.
Low mortgage rates continued to drive District housing markets in late April and during
May. Most homebuilders reported that new home sales and construction either equaled or
exceeded year-ago levels. However, some contacts noted that heavy rains across much of the
District had delayed several projects in May. Reports from District real estate agents
indicated that home sales during late April and May were similar to year-ago levels, with
low- and mid-price segments being the strongest performers. Several contacts in south
Florida noted that home sales, although still at a high level, had slowed some from the
robust pace of last year. Contacts from the District's commercial real estate markets reported
relatively low levels of activity in late April and during May. Vacancy rates remained high
in most parts of the region and sublease space continued to put downward pressure on rental
Manufacturing activity remained sluggish in late spring, according to most reports. Several
contacts noted that although their outlook was more optimistic, hiring and investment plans
remained on hold. Some job losses were reported in the chemical industry because of higher
natural gas prices, and producers of lumber and plywood reported high inventories. Pulp and
paper and textile industry contacts noted low demand and a renewed focus on cost cutting.
Defense-related production was characterized as "bright" by several contacts, and suppliers
to the housing construction industry reported steady demand. In Alabama, plans for new
facilities to supply parts to Hyundai, General Motors, and Saturn have been announced.
Tourism and Business Travel
Reports from the tourism sector were mostly positive in late April and during May. Some
hotels and restaurants in south Florida reported an increase in the number of domestic
travelers who had reconsidered plans to travel abroad. The increase in domestic traffic
helped offset a reported decline in the number of overseas arrivals. Contacts also noted that
discounting and late bookings continued to be the norm in the cruise industry. Central
Florida theme parks announced summer discounts and new attractions in an attempt to
increase the number of visitors. Revenues from Gulf Coast casinos were up from a year ago
according to reports, and plans for a new casino in Biloxi, Mississippi, have been
announced. Atlanta's hotel industry continued to struggle because of the low volume of
business travel.
Banking and Finance
Responses from the financial sector were mixed in late April and May. Deposit growth at

regional banks remained moderate and nonperforming loans were at relatively low levels,
according to most reports. In many parts of the District, mortgage activity was very strong,
whereas corporate and commercial lending remained weak. A few reports did note a mild
increase in residential foreclosures during the first quarter. Small-business loan demand
remained soft overall, but a modest pickup in demand was noted in a few areas. Contacts
reported continuing inactivity in local venture capital markets.
Wages and Prices
Reports suggested that firms continued to leverage existing staff by increasing hours and, or
adding temporary personnel rather than hiring permanent employees in late April and during
May. Some contacts observed that there was also an increase in the amount of outsourcing.
Fuel prices declined during May, but other pricing trends were little changed. District
trucking companies were more optimistic because of lower diesel prices. Contacts remained
concerned over continuing increases in health insurance costs. Many employers were
reportedly shifting some of the costs to employees.
Heavy rains across the District in May were welcomed by most farmers, although some
fieldwork was delayed in parts of Alabama, Mississippi, and Tennessee. A bumper regional
winter wheat crop boosted bulk shipments out of the Port of Brunswick.
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Seventh District--Chicago
Economic activity in the Seventh District remained sluggish in April and May. The quick
end to major military operations in Iraq had not yet brought the boost in economic activity
that many contacts had expected. However, most were optimistic about prospects for
stronger growth in the second half of the year. Consumers and businesses remained cautious
about spending in recent weeks. Housing markets were still robust, but there was little
improvement in nonresidential construction and real estate activity. Manufacturing activity
was again weak with few signs of strengthening. Lenders reported another surge in
residential refinancing activity, while business lending was still weak. Generally sluggish
economic conditions further limited increases in prices and wages. Above average rainfall
delayed spring planting for many farmers, but it also helped alleviate drought-like
conditions in much of the District.
Consumer Spending
Overall, consumer spending remained soft in April and May, though reports were mixed.
Most retailers indicated that sales were in line with their expectations, but coolerthan-normal temperatures in much of the District may have dampened sales of seasonal
items and apparel. Restaurant sales increased marginally after the war, but one contact said
that sales gains were less than expected. Tourism remained fairly steady and hotel
occupancy rates improved slightly in some areas. Theater ticket sales were relatively soft in
April, but picked up modestly in May with the release of some highly anticipated movies.
Auto dealers in the District said that new car sales weakened in May, and showroom traffic
was "spotty" despite high incentives. Light vehicle inventories continued to rise and many
dealers reported cutting back orders. Service and parts sales were also said to be lagging.
Business Spending

Businesses remained very cautious about their spending and hiring, even after the war.
Capital spending was again weak, and there was little evidence that firms were ready to
boost investment just yet. Most contacts cited slow revenue growth and a limited need to
replace information technology and other equipment as the primary factors holding back
capital expenditures. We continued to hear that many businesses had funds earmarked for
capital outlays, but most had not yet released them. Spending on services such as advertising
and business travel also remained soft. Hiring plans appeared more cautious in May. The
vast majority of temporary help industry contacts said that new orders fell in recent weeks.
One large firm said that year-over-year growth in billable hours, which had been slowing
since the beginning of the year, turned negative in May, and an expected seasonal pickup did
not occur. While softness in labor demand was broad-based, retail trade and manufacturing
were said to be weaker than other industries. There appeared to be little forward-looking
business spending taking place, with one contact saying that decision-makers were only
spending "what was necessary to keep the lights on." At the same time, there were fewer
reports that firms were planning further spending cuts.
Construction and Real Estate
Construction and real estate activity was again strong on the residential side and soft on the
nonresidential side. On balance, home sales remained robust. Realtors said that the resale
market was still "very active," and many continued to realize year-over-year sales increases
through May. Home price appreciation, while still solidly positive, slowed in some areas.
New home sales generally remained strong, though builders' reports were mixed as were
contacts' expectations for home sales in coming months. Nonresidential activity remained
relatively slow, but there were a few reports of modest improvement in some segments.
Office vacancy rates appeared to have topped out in most areas, while rents look to have
bottomed. Requests for office property showings increased in some metropolitan areas,
though these had not yet translated into positive net absorption. Vacancy rates and rents for
industrial properties also stabilized somewhat in April and May, and one contact suggested
that industrial vacancy rates will start coming down by the end of the summer. Retail
activity was also relatively stable, although a few contacts noted that the number of big box
plans in the pipeline had slowed.
Manufacturing activity generally was still weak in April and May. Automakers said that
light vehicle sales nationwide slowed in May and inventories remained high. Heavy
equipment sales remained below year-ago levels, although one industry analyst suggested
that some dealers were rebuilding their rental fleet inventories, and used equipment sales
were "higher than they have been in a while." Steel shipments slowed early in the second
quarter after holding fairly steady in the first quarter. Gypsum wallboard production was off
slightly from high levels last year. Reports from tool producers were mixed, but generally
indicated relatively soft demand. One industry contact said that the number of price quote
inquiries continued to rise, but this had yet to lead to an increase in orders. A leading
producer of home appliances reported that an inventory adjustment by dealers led to a drop
in shipments in April. However, this contact said that shipments bounced back in May and
demand was firming.
Banking and Finance
Lending activity was again robust on the household side and weak on the business side.
Thirty-year fixed-rate residential mortgage rates continued to fall, leading to another wave
of refinancing activity. One bank reported that its mortgage applications increased by 40

percent in the last three weeks of May, with refinancing accounting for nearly 90 percent of
the rise. Another suggested that many households were taking advantage of refinancing to
pay down other debt, which was limiting growth in credit card volume. Standards and terms
on household loans were largely unchanged, as was overall credit quality. Business lending
remained weak with overall loan volumes flat. Many large businesses continued to take
advantage of favorable lending conditions to refinance or restructure existing debt, and a
few lenders noted some merger and acquisition activity. But demand for new investment
loans was described as "lackluster" and "lacking energy." Standards and terms on
commercial loans were largely unchanged, while credit quality was said to be improving
modestly. Bankers suggested that the quick war brought a palpable sense of relief to many
of their business customers, but a general aversion to risk persisted among many decisionmakers.
Prices and Employment Costs
Generally sluggish economic conditions continued to limit upward pressure on prices and
wages. Businesses noted increases in the cost of some inputs, such as energy, metals, and
beef, as well as higher state tax burdens. However, contacts said that weak demand and
fierce competition left them with little leverage over output prices. Producers of heavy
equipment and gypsum wallboard attempted to push through price increases with limited
success. But retailers and auto dealers reported using steeper discounts on more products in
recent months. Upward wage pressures were virtually nonexistent in most industries. In fact,
contacts reported that many firms were instituting wage freezes, and/or limiting or delaying
merit increases.
Above-average rains in May across most of the District delayed completion of planting,
forced some replanting, and shifted acres from corn to soybeans. However, recharged
moisture levels have improved the outlook for both corn and soybean yields. The discovery
of a single cow in Canada with "mad cow disease" disrupted cattle markets, but did not have
a major impact on cattle prices. Hog prices continued to rise in May, and surpassed
year-earlier levels. Dairy operations were again struggling with very low milk prices.
Contacts said that low interest rates and the new tax law may release some pent-up demand
for farm machinery if harvest prospects remain favorable. Renewing agricultural operating
loans has become "tougher" for farmers who had low yields last year, especially if their
planting was delayed this year. One contact said that federal farm program checks will help
boost income, and "buffer the pain" experienced by some farmers in harder hit areas.
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Eighth District--St. Louis
With little change since the last report, economic activity in the Eighth District remains soft.
Manufacturing sales declined in recent weeks compared with last year, and reports of
cutbacks and plant closings continue. Retail sales were flat in April and May compared with
the same months last year, but contacts are optimistic about summer sales; auto sales
declined over the same period. Home sales are still up in most District areas, and
commercial real estate markets remain sluggish. Over the past three months, there was
essentially no change in lending activity. District farmers are concerned about crops
damaged by recent storms and tornadoes.

Consumer Spending
Contacts report that spending in April and May was flat, on average, from year-earlier
levels. Half of the retailers surveyed note that sales levels met their expectations, while a
third of the contacts report that sales were below what they had anticipated. Jewelry,
apparel, home outdoor items, and seasonal merchandise were strong sellers, while luggage,
home decorative items, and gift items were moving more slowly. Despite the slow sales,
more than 75 percent of retailers surveyed note that inventories are at desired levels, while
less than 20 percent report excess inventory. Most contacts indicate no additional plans to
discount merchandise. Expectations for the summer of 2003 remain cautiously optimistic,
with about 90 percent of contacts expecting a small increase in sales from last year, and the
rest expecting sales to remain flat or below 2002 levels.
Car dealers in the District report that sales in April and May were down, on average,
compared with a year ago. Most contacts attribute this decline to an uncertain economy and
buyers' apprehension about taking on a large amount of debt. Several car dealers report that
fluctuating gas prices and low consumer confidence are causing used and low-end cars to
sell better than new and high-end cars. Over half of the car dealers surveyed indicate that
overall, inventories are too high. Approximately 20 percent were satisfied with their
inventory levels, while the remaining 20 percent note that inventories, mostly of used cars,
are too low. About 20 percent of the contacts surveyed note higher acceptance rates of
finance applications, while roughly 14 percent report lower acceptance rates; the rest have
seen no change. Despite sluggish sales, however, car dealers in the District remain
cautiously optimistic about summer sales, expecting a moderate increase over last year.
Manufacturing and Other Business Activity
The Eighth District's manufacturing sector continues to be soft. Several contacts note that
sales are low compared with last year, and some District companies have continued with
plans for cutting back or ceasing plant production, while others have announced plans to do
so. Affected industries include food, apparel, telecommunications, paper, furnace and air
conditioning, auto parts, and tools. However, a few companies have announced plans to
expand or move to the District, including some in the furniture, energy, and packaging
industries. Most contacts note that capital spending plans are flat to up from last year and
are primarily centered on replacing or upgrading existing capital equipment and technology.
A few contacts in the distribution and logistics industry report that business has picked up
recently for midsize to large trucking firms because several smaller firms have gone out of
business. The airline industry continues cost-cutting efforts, announcing additional layoffs
that will affect District workers. Recent tornadoes and inclement weather in the District
damaged many businesses and factories, and repairs are under way.
Real Estate and Construction
Home sales are still booming throughout the District. Compared with the same month last
year, April home sales rose 23.9 percent in Memphis, Tennessee, 6.9 percent in the Little
Rock, Arkansas, area; and 16 percent in northern Kentucky. April year-to-date single-family
housing permits were up in most of the District's metropolitan areas compared with the same
period last year. Permit levels increased 22.6 percent in Little Rock, 11.4 percent in
Memphis, and 2 percent in the St. Louis area.
Commercial real estate continues to lag behind residential markets in most of the District.

During the first quarter of 2003 the industrial vacancy rate in the St. Louis area was around
8 percent, while the office vacancy rate was about 16 percent. Office vacancy rates in the
Memphis area are trending up and are expected to reach 17 percent by mid-2003. Office
leasing was also sluggish in Little Rock. Commercial construction has started to improve in
some areas. Several new construction projects are under way in Danville, Kentucky, while
March commercial permits increased considerably in Jackson, Tennessee. Construction was
still stagnant in Evansville, Indiana, and continued to be slow in northeast Arkansas.
Banking and Finance
A recent survey of senior loan officers at a sample of District Banks indicates little change
in the overall lending activity over the past three months. Banks' credit standards for
commercial and industrial loans remained generally unchanged for large firms, but a few
contacts reported slightly tightened standards for small firms. The banks that reported
tightened credit standards for small firms cited reduced risk tolerance and worsening
industry-specific problems as the main reasons for the change.
This survey introduced questions about the delinquency and charge-off rates over the past
two quarters. Contacts cited the tightening of lending standards as the most important reason
for the stabilization of delinquency rates and the low recovery rates on delinquent loans as
the most important reason for the increase in charge-off rates. Credit standards for
commercial real estate loans remained mostly unchanged over the past three months. Both
the terms of credit and the demand for residential mortgage loans remained generally
unchanged, but the demand for consumer loans decreased slightly.
Agriculture and Natural Resources
Unusually stormy wet weather throughout the District has slowed fieldwork and may
necessitate replanting of corn and soybeans. Because of the rain, the fraction of soil with
surplus moisture was up 81 percent from April. Corn farmers are concerned that the wet
weather will continue to turn emerged corn yellow, while wheat farmers are concerned that
the wet weather will damage the already heading crops. Though overall ratings have fallen
since April, about 68.5 percent of winter wheat across the District is still rated in good to
excellent condition. Despite the wet weather, planting is under way in most areas. District
farmers have planted between 73 percent and 100 percent of their intended corn and, on
average, 41 percent of soybeans and 70 percent of intended cotton. Farmers in Mississippi
and Arkansas have planted more than 90 percent of their sorghum, while those in Kentucky
and Illinois have planted less than 10 percent.
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Ninth District--Minneapolis
Ninth District economic activity increased slightly in late April and May. The residential
real estate, manufacturing, consumer spending, energy, and agriculture sectors grew.
Meanwhile, commercial real estate and mining were down, and tourism and labor markets
were mixed. Overall wage and price increases were modest. Significant price increases were
noted in insurance, gasoline, and tuition.
Construction and Real Estate
Commercial real estate activity was slow. Contracts awarded for large construction projects
were down 10 percent for the three-month period ended in April compared with a year ago

in Minnesota, North Dakota, and South Dakota. A commercial real estate firm predicts that
vacancy rates for office buildings in the Minneapolis-St. Paul area will stay at historically
high levels through the rest of the year, while rents are expected to decrease slightly.
Another commercial real estate firm reported that a surplus of sublease office space weighed
particularly heavy on the Minneapolis and St. Paul downtown areas. The same firm also
noted that the current overall market for industrial space in the Minneapolis-St. Paul area
was sluggish, but that the retail market was healthy.
Homebuilding and residential real estate activity were solid. A homebuilder in Bismarck,
North Dakota, noted that recent building activity was higher than a year ago. April home
sales were up 8.7 percent compared with a year ago in the Minneapolis-St. Paul area. A real
estate firm reported strong residential sales in Missoula, Montana. An advisory council
member from the Upper Peninsula of Michigan expects sales of his manufacturing firm's
bathroom fixtures to increase 5 percent for the first half of 2003 because of strength in
residential homebuilding and remodeling. However, a real estate firm expects fewer permits
for multiunit housing in 2003 compared with 2002 for the Minneapolis-St. Paul area, as the
vacancy rate for apartments is predicted to reach 7.4 percent by year-end, up from 5.6
percent in 2002.
Consumer Spending and Tourism
Retail spending grew slightly in April and May. A major Minneapolis-based department
store and discount retailer reported same-store sales in April up 3.9 percent compared with a
year ago, while May sales were likely to exceed forecast. April sales were about 3 percent
above last year, according to a Minneapolis mall manager, who also said that May looked
good. A Montana mall manager reported April sales up 3 percent from a year ago. A North
Dakota mall manager noted generally level traffic and sales in April, with increases in traffic
during May.
In contrast, another mall manager in Montana reported that April sales were down about 3
percent from a year ago, and May will also finish with a decrease, as shoppers spent more
on clothing but less on gifts. Indicating soft consumer confidence, a recent University of
North Dakota survey showed that 54 percent of residents in a forty-mile radius of Grand
Forks expect that they will do worse financially over the next year, while 36 percent expect
to do better.
Recent auto sales were solid in North Dakota, according to a representative of an auto
dealers association.
Spring tourism activity was soft, but the outlook for the summer season is positive. An
official in South Dakota reported tourism activity down about 12 percent in April but noted
strong business on Memorial Day weekend. A tourism official in northwestern Wisconsin
expects a solid summer season. Upper Peninsula tourism activity in May was about the
same as last year, according to an official; inquiries for the summer activity were reported
down during March and April, but they picked up since mid-May. However, a major airline
based in Minnesota reported that it flew 5.5 percent fewer passengers in April compared
with a year ago.
Manufacturing activity was up slightly. A May survey of purchasing managers by Creighton
University (Omaha, Nebraska) indicated significantly increased manufacturing activity in

the Dakotas and some weakness in Minnesota. As evidence, a South Dakota truck
equipment producer is building an additional manufacturing plant, and an industrial
manufacturer reported strong sales. Several manufacturers reported increased capital
spending plans for 2003 compared with 2002. However, a lumber mill in Montana will close
because of low prices and difficulty finding timber.
Energy and Mining
Activity in the energy sector increased, while the mining sector was down slightly. Mid-May
District oil and natural gas exploration levels increased from early April. Meanwhile, an
iron ore mine in northern Minnesota closed because of financial difficulties, and intense
rains disrupted a large power plant in the Upper Peninsula, which caused two iron ore mines
to shut down because of lack of electricity. In addition, flooding caused a rail bridge to shut
down, which disrupted iron ore shipments. However, a Montana mining official noted that
mining was stable in the state, with some potential improvement in activity later this year.
Agricultural economic activity increased. Heavy rainfall during May across most of the
District benefited farmers and ranchers. District farmers have planted most crops, and the
majority of pastures and livestock are in good to excellent condition. The calf and lamb
season is essentially finished, with little loss of life reported. April meat production is up
slightly from last year in South Dakota. Meanwhile, milk prices remain depressed;
Minnesota and Wisconsin milk production was down in April compared with March.
Employment, Wages, and Prices
Labor markets were mixed, as companies reported a combination of layoffs and
employment increases. A mining company will shut down a mine and a processing plant in
northern Minnesota, affecting 450 jobs. The Minnesota Department of Transportation
recently laid off 160 workers. In Sioux Falls, South Dakota, a computer manufacturer
recently announced plans to lay off 75 employees. According to a bank director, companies
in southwest Minnesota are generally reluctant to hire additional employees. A labor
economist for the state of Minnesota noted that the pace of layoffs hasn't picked up but that
layoffs are at relatively high levels. Initial claims for unemployment insurance benefits in
April increased less than 1 percent in Minnesota compared with a year ago.
In contrast, a commercial cleaning and sanitizing company expects to add at least 150 jobs
in downtown St. Paul over the next three years. A financial services company recently
announced plans to add about forty sales staff in the Minneapolis-St. Paul area. An advisory
council member expects that the demand for labor in the construction trades in the
Minneapolis-St. Paul area will increase slowly into the summer.
Wage increases were modest. According to a recent survey by the Quarterly Business
Report in St. Cloud, Minnesota, 53 percent of respondents expect to increase employment
compensation over the next six months. In last year's survey, 61 percent of respondents
anticipated increases in compensation. Hired agricultural workers surveyed in April in
Minnesota, Wisconsin, and Michigan earned about the same level of wages as a year ago.
Overall price increases were modest, except for significant increases in insurance, gasoline,
and tuition. Only 30 percent of respondents to the Quarterly Business Report survey in St.
Cloud expect to increase prices over the next six months, down from 45 percent in last
year's survey. An advisory council member reported that recent health insurance prices rose

25 percent from a year ago. As of May 19, Minnesota gasoline prices were up 9 percent
compared with the same week a year earlier. Plans to raise tuition were reported by several
colleges and universities in the District. For example, tuition will increase up to 19 percent
at Michigan Tech University in Houghton, Michigan.
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Tenth District--Kansas City
The Tenth District economy improved slightly in late April and May, but signs of softness
were still present. Retail sales edged up, residential real estate activity strengthened further,
and energy activity continued to expand. In addition, the pace of layoff announcements
slowed. Manufacturing activity was still sluggish, however, and commercial real estate
markets remained soft. In the farm economy, recent rains eased drought conditions in some
parts of the District, but further precipitation was needed. Wage and price pressures were
largely subdued.
Consumer Spending
Retail sales in the District increased slightly in late April and May after slowing during the
Iraq war. Despite the improvement, sales at most stores remained lower than a year ago.
Among product categories, sales of home furnishings were strongest, while apparel sales
were relatively weak. Most managers were optimistic that retail sales would continue to
improve during the summer. Managers were generally satisfied with inventory levels, and
most planned to make only small adjustments to stock levels in coming months. Motor
vehicle sales strengthened somewhat in late April and May but remained lower than
year-ago levels. Demand continued to be solid for new light trucks and SUVs. Dealers also
reported that sales of late-model used cars had picked up. Most dealers remain optimistic
that sales will continue to increase through the summer months. In the tourism industry, the
Rocky Mountain ski resorts experienced a weaker-than-expected end to the ski season
following strong activity earlier in the year. However, owners of family destinations in the
District were optimistic about summer activity, as early bookings were solid.
District manufacturing activity was sluggish in late April and May, but optimism about
future activity remained relatively high. The end of the war in Iraq appeared to have little
effect on factory activity. Production and new orders remained close to year-ago levels, and
most firms continued to operate at medium levels of capacity utilization. On a positive note,
employment levels appeared to stabilize somewhat in May, and expectations for future
exports increased notably during the month. Expectations for future production and sales
remained high, but plans for future hiring and capital spending were still rather muted. Over
the remainder of the year, a slightly higher percentage of firms plan to increase capital
spending than plan to decrease such spending, with most firms citing expected growth in
sales as the primary influence on their investment decisions.
Real Estate and Construction
Residential real estate activity in the District strengthened further in late April and May,
while commercial real estate activity remained soft but showed signs of stabilizing. Singlefamily housing starts continued to increase in most District cities, especially for lowerpriced homes and townhouses. Building activity is expected to remain solid through the
summer. Builders in Kansas City and Oklahoma City expect an added boost in coming

months as homeowners rebuild following destructive tornados in early May. Home sales
increased in much of the District in late April and May, although inventories of unsold
homes were higher than a year ago in many cities and at record levels in Denver. Most real
estate agents expect home sales to remain steady in coming months. Mortgage demand
remained strong throughout the District. Lenders expect the robust activity to continue,
although they anticipate a shift in demand from refinancings to home purchases later in the
summer. Although commercial real estate activity remained weak across the District in late
April and May, it showed signs of stabilizing in most markets. Office vacancy rates and
rental prices for office space were virtually unchanged from the previous survey. Most
commercial real estate agents expect sales of office space to increase slightly this summer,
and absorption rates are expected to edge up in some cities as well.
Bankers report that loans and deposits both edged up since the last survey, leaving
loan-deposit ratios unchanged. Demand for home mortgage loans continued to grow,
outweighing small declines in demand for consumer loans and business loans. Some
bankers attributed the sluggish demand for business loans to a wait-and-see attitude on the
part of businesses. On the deposit side, demand deposits, NOW accounts, and money market
deposit accounts all edged up. All respondent banks left their prime lending rates
unchanged, but a few lowered their consumer lending rates. Lending standards were
District energy activity continued to expand in late April and May. The count of active oil
and gas drilling rigs in the region rose nearly 10 percent since the previous survey, with
most of the increase occurring in Wyoming. The opening of a major gas pipeline in early
May relieved a capacity constraint out of southwestern Wyoming, leading to a 33 percent
rise in Rocky Mountain natural gas prices and a 40 percent increase in Wyoming drilling
activity by Memorial Day. Contacts expect energy prices to remain high through the rest of
the year, helping sustain drilling activity.
In the farm economy, recent rains eased drought conditions in some parts of the District, but
additional precipitation is needed for further development of crops and pastures. The
moisture helped the winter wheat crop, which was reported in good condition throughout
much of the District, but delayed planting of corn and soybeans in some areas. The moisture
also improved pasture conditions, prompting some cattle producers to consider retaining
more of their herds than they had anticipated. District bankers indicated that they had
extended credit to the typical number of farm borrowers, although some bankers increased
their use of government guarantees on farm loans. New-equipment sales remained sluggish,
but land sales edged higher.
Wages and Prices
Wage and price pressures remained generally muted across the District. Labor markets were
still very slack in late April and May, although the pace of layoff announcements continued
to ease. Managers reported few problems finding workers, except for some highly skilled
positions in manufacturing and health care. There were also reports that high school and
college students were having difficulty finding summer jobs because of competition from
laid-off adult workers. Wage pressures remained subdued, and some employers reported
slower growth in health-care benefit costs. Despite the lack of wage pressures, some

managers reported that their average wages had risen over the past year, as lower-paid junior
workers were laid off. Retail prices were virtually unchanged from the previous survey and
are expected to remain flat through the summer. Manufacturers continued to report rising
prices for some petroleum-based inputs, but prices for most other materials were relatively
stable. While manufacturers reported another small decline in finished goods prices, they
expect output prices to rebound somewhat in coming months. As in previous surveys, prices
for construction materials were flat and are expected to remain largely unchanged through
the summer.
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Eleventh District--Dallas
Eleventh District economic activity showed signs of improving from mid-April through
May, but the rebound is slow and inconsistent. The energy industry continues to strengthen,
with growing optimism that demand will continue to pick up. The service sector is showing
scattered signs of improvement. The financial services industry reported that conditions are
unchanged to slightly improved. Manufacturing activity was still mixed, however, and retail
sales remained weak. Construction activity continued to soften, and real estate markets
remained weak. Dry conditions have hampered agricultural production.
Price pressures were mixed. Crude oil prices were sharply lower following the start of the
Iraq war and then rebounded slightly. Prices for West Texas intermediate crude oil are nearly
$10 per barrel lower than they were before the war, but inventories are 12 percent below last
year--outside what the Department of Energy regards as a normal range. Natural gas prices
rose from $5 to $6 per million Btu over the past six weeks and are expected to remain high
through the rest of this year. Prices for most petrochemical products have pushed up to
record levels as producers attempt to cover the high cost of natural gas and other feedstocks.
Other industries reported that competition was pushing prices downward, particularly for
retail products. There were widespread reports of rising cost pressures, however, particularly
for transportation and all types of insurance.
Labor Markets
Layoffs continue at some large employers in the Dallas-Fort Worth area. There are reports of
downward pressure on wages in several industries, but some contacts say that the labor
market is still too tight to allow the wage reductions they would desire.
Manufacturing activity continues to be mixed. Energy-related activity remains relatively
strong, but production of other manufactured products is mostly unchanged. There were
some scattered signs of improvement, but contacts say it is weak and uneven. Defense
manufacturing continues to increase, although hiring has slowed.
There was little change in demand for paper products, stone, brick, glass, apparel, and food
products. Demand for primary metals was also unchanged, but that was counter to the
normal seasonal pickup that occurs this time of year. Demand for lumber has been slightly
improving, but the industry is still reporting losses because excess capacity is eliminating
pricing power.
Conditions in the high-tech sector were mixed, with some respondents reporting slightly

weaker sales while others reported a slight improvement. One respondent noted that
international demand has weakened because of SARS and the earthquake in Japan. Another
contact noted that sales have been flat over the past three months and the expected pickup is
not happening. A respondent in the semiconductor industry reported slight gains in sales and
noted that growth is occurring without an increase in jobs; firms are interviewing more,
however, and he expects net job growth in thirty to ninety days. Inventories remain very
lean, and many products still face significant downward price pressure. Most respondents
said that while they still expect a pickup over the next twelve months, businesses are still
very cautious, and a significant war or terrorist event likely would have very negative effects
on sales.
Refiners report that sales are flat for gasoline, down for jet fuel and very strong for residual
fuel oil that can substitute for natural gas. Inventories are at the bottom of the normal range
for both gasoline and distillates, and there has been little progress in refilling storage despite
high levels of production by refineries.
Demand for petrochemicals was very strong in April but has cooled for a number of
products in May, including for ethylene, propylene, PVC, styrene, and MTBE. Contacts
gave several reasons for the slowing demand, including a weaker housing market, weak
demand from Asia, and buying ahead of the Iraq war that left excess inventory.
The service sector is showing scattered signs of improvement. Demand for temporary
staffing has steadied, according to contacts, particularly for light industry along the TexasMexico border. Activity in Houston and Dallas remains fairly quiet. There is increasingly
downward pressure on wages and salaries because firms say they are aware of having a
larger labor supply.
Demand for legal services remained strong, especially for litigation and trial activity.
Bankruptcy work, although still active, has slowed some, which contacts read as a positive
sign for a recovery. Firms are also seeing some activity in transactional work, IPOs, and
acquisitions. The accounting industry remained very active, with a recent increase in work
for the energy industry. Wages and salaries are up 5 percent to 9 percent, and insurance costs
are also skyrocketing, which is putting upward pressure on fees.
The outlook for trucking continues to improve, but higher liability insurance costs remain a
concern. Rail shipments were higher than year-ago levels. Airlines report that traffic has
steadily increased since the end of the war with Iraq, but expectations are for a summer with
low fares and intense competition. Generally, demand has increased among leisure
passengers while bookings for business travelers remain weak. SARS remains a concern.
Airline capacity is still abundant, and airlines continue to seek productivity improvements to
lower costs.
Hotel occupancy during the war was well below year-earlier rates, but bookings have picked
up in recent weeks, partly making up for activity that was put on hold because of the war.
Overall industry occupancy is still 4 percent to 5 percent below a year ago. Customers
typically book rooms ninety days ahead of time, but that window has shrunk, with more
people booking at the last minute.
Retail Sales
Retail sales remained soft, with most stores still reporting sales below a year ago. Although

some retailers reported slight signs of improvement, others did not. Generally disappointed
that sales haven't picked up more following resolution of the war, most contacts believe
weak demand results from a lack of disposable income rather than consumer confidence.
Stores are relying on promotions to improve traffic. With selling prices declining, retailers
continue to look for ways to reduce their expense structures, including faster cash registers
and increased use of part-time workers. Some retailers reported high inventory, particularly
with apparel. Automobile sales have been flat, resulting in high inventories and downward
pressure on prices.
Financial Services
Conditions are unchanged to slightly improved, but conditions have improved more slowly
than most contacts would hope for. Competition is stiff. Deposit growth remains relatively
strong. Loan demand has been mostly unchanged, although there has been an increase in
demand for commercial loans. Mortgage lending, mostly for refinancing, remains the
strongest category. Auto lending remains soft.
Construction and Real Estate
Construction activity continued to soften, and real estate markets remained weak.
Commercial rents and occupancy rates continue to decline. The multifamily market is still
facing weak leasing demand and too much new supply. New-home building continues to
lose steam, and sales of existing homes are very weak. Contacts say that it will take new
jobs and increased confidence to stimulate demand for new homes. Dallas-Fort Worth area
home foreclosures spiked in May but dropped off in June.
The energy industry continues to strengthen, with growing optimism that demand for oil and
gas services and energy-related manufacturing will continue to pick up. The U.S. rig count
has pushed up to more than 1,000 working rigs, the first time it has seen that level since late
2001. Increases are natural gas-directed and still mostly conservative, low-risk projects.
Contacts say that there is still substantial excess capacity until the domestic rig count
reaches about 1,200 but seemed optimistic that 1,200 to 1,300 rigs would be working in the
United States by the third quarter. International drilling has also increased moderately.
Dry conditions have hampered agricultural production. Demand for cotton is up on world
markets, but competition is stiff. Cotton planting has been delayed because there is not
enough soil moisture to germinate seed. There is also insufficient moisture to make forage.
After planting was delayed because of overly wet conditions, corn production is now
suffering from stunted growth because of dry conditions.
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Twelfth District--San Francisco
Reports from Twelfth District contacts indicate continued sluggish economic growth from
mid-April through the end of May, although there were scattered reports of modest
improvement in some sectors. Prices of final goods and services exhibited little upward
pressure overall, despite rising costs for some imported inputs and for employee health
benefits. The winding down of hostilities in Iraq apparently did not alleviate fully consumer
caution, as most retailers indicated that business was still only comparable to that before the

start of hostilities. The effects of the SARS outbreak in East Asia largely were limited to the
travel and tourism sector. The manufacturing sector continued to struggle with weak
demand and substantial excess capacity, although sales and orders strengthened a bit for
some products. District agricultural producers faced solid demand for most crops.
Conditions in commercial real estate markets remained soft, while residential real estate
remained vibrant in most parts of the District. Bank contacts reported weak demand for
commercial and industrial loans but continued strong growth in real estate lending.
Prices and Wages
Respondents noted very limited upward pressure on prices and wages overall. Vigorous
competition held prices down for most retail items, and many retail providers offered
products at discounted prices during the survey period. The depreciation of the dollar has
led to higher costs for some imported raw materials and textiles, but further declines in oil
prices have translated into lower retail fuel prices. Except for scattered shortages of
construction labor, notably in Hawaii, labor was in ample supply. As a result, wage
pressures were limited throughout the District, although many employers noted a continued
rise in the cost of employee health benefits and workers' compensation insurance.
Retail Trade and Services
Conditions in the retail sector were mixed, but, on net, sales appear to have improved
slightly compared with the previous survey period, which included the period of major
hostilities in Iraq. The winding down of hostilities in Iraq, however, apparently did not fully
alleviate consumer caution, as most retailers indicated that business was still only
comparable to that before the start of the war. Auto sales remained at high levels but were a
little slower than during the previous survey period, and contacts noted significant inventory
accumulation at dealers. Outside of autos, sales generally were described as still being a bit
slow; retailers kept inventories quite lean, and their planned capital spending was flat
compared with last year.
District service providers also faced mixed conditions. Demand for health services grew
further, and some providers expanded capacity through new investments. However,
providers of telecommunications, cable, and internet services continued to struggle with
substantial excess capacity. Concerns about the SARS epidemic in East Asia reduced
business and leisure travel in the District in recent weeks, although in such destinations as
Hawaii and Las Vegas, weak international tourist traffic was largely offset by solid domestic
tourism. Contacts also noted that fears about the spread of SARS had no discernible impact
on overseas shipping activity.
District manufacturers faced weak demand and substantial excess capacity in general,
although a few contacts noted solid conditions or signs of improvement. Producers of the
most advanced information technology products saw strong demand and have plans to
expand production capacity. Most manufacturers of information technology products,
however, struggled with slow sales and low capacity utilization. In the Pacific Northwest,
some manufacturers of wood products and paper responded to weak demand by temporarily
idling production processes. Because of limited airline demand for new planes, District
production of commercial aircraft reportedly has dropped to the lowest levels since the
mid-1990s. In contrast, manufacturers of construction equipment saw stepped-up demand,
partly because of a seasonal pickup in construction activity. Moreover, a few firms in
various industries reported plans for increased capital spending, although these plans were

largely limited to replacement of aging equipment. Concerns about the spread of SARS
reduced business travel and reportedly caused some disruption of overseas supply chains,
such as delayed product development in apparel manufacturing, but the net impact on
manufacturing was small.
Agriculture and Resource-related Industries
Overall conditions for District agricultural and resource-related businesses remained solid in
the most recent survey period. Sales were strong for beef cattle and for most crops, in part
because the depreciation of the dollar boosted demand. Contacts noted that demand for oil
and natural gas was robust, and producers responded with further expansion of extraction
Real Estate and Construction
Conditions in District real estate markets remained sluggish on the nonresidential side but
vibrant on the residential side. Vacancy rates for commercial space have been stuck at
elevated levels in most areas, with little or no sign of improved demand. As a result,
commercial rents were flat or slightly down, and commercial construction activity remained
languid. By contrast, low interest rates reportedly spurred brisk sales of new and existing
homes in most areas, driving prices and construction activity up further. Moreover, in the
San Francisco Bay area, where the market for rental housing had been in a slump for the
past two years, rental rates for apartments reportedly rebounded a bit during the recent
survey period.
Financial Institutions
District banking contacts reported strong demand for new residential mortgages and further
gains in refinancing activity for residential and commercial real estate loans. In contrast,
commercial and industrial loan demand remained weak in most areas, except in Hawaii,
which saw further expansion because of relatively robust economic conditions. Respondents
from several parts of the District reported stable or slightly improved credit quality of bank
loans. Some banks reported investment plans to replace information technology equipment.
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Last update: June 11, 2003