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October 19, 2005

Summary
Prepared at the Federal Reserve Bank of Philadelphia based on information collected before October 11,
2005. This document summarizes comments received from businesses and other contacts outside the Federal
Reserve and is not a representation of the views of Federal Reserve officials.

Economic activity continued to expand in September, according to information received by
Federal Reserve District Banks. Most Districts described the pace of activity as moderate or
gradual. Richmond reported some quickening in the pace of growth while New York reported
a slowdown. Atlanta reported mixed economic conditions, with significant negative effects
on the District economy from hurricane damage. Dallas reported expansion overall but also
experienced noticeable disruptions to the District economy as a result of Hurricanes Katrina
and Rita.
Retail sales of general merchandise increased in most Districts, but a number of Banks
reported that retail sales were either below plan or weak. Auto sales fell throughout the
Districts. Tourism activity was mixed. Service sector activity continued to expand.
Manufacturing advanced in all Districts except St. Louis and Atlanta. Commercial real estate
markets continued to firm up. Residential real estate activity remained generally strong, but
reports that demand for homes has eased have become somewhat more common.
Agricultural conditions were viewed as mostly good. Mining and energy production
increased except in the Gulf of Mexico, where damage to onshore and offshore oil and gas
facilities is still being repaired. Bank loans and deposits rose.
Employment has been rising, and Federal Reserve Districts reported some tightening in labor
markets. Wage increases have been moderate, although a number of Districts noted increased
upward pressure on wages and salaries in the service sectors and for some skilled
occupations in several industries. All Districts reported cost increases for energy,
petroleum-based products, building materials, and shipping. Several Districts indicated that
input cost increases are being passed through to retail prices.
Consumer Spending
Retail sales of general merchandise rose moderately in most of the Federal Reserve Districts
in September, but other Districts reported some softness in the retail sector. Sales increased in
Boston, Philadelphia, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, and Dallas.
Atlanta District retailers also had increased sales except in areas where hurricane damage

forced stores to close. Retailers in New York and St. Louis reported that sales in September
had not met their plans, and retail sales in San Francisco were said to have weakened
somewhat. Retailers in many Districts noted that consumer confidence has ebbed as gasoline
prices have risen.
Auto sales fell in the Districts that received reports from auto dealers. The drop came as
manufacturers ended their discount programs. Sales of light trucks and large sport utility
vehicles were reported to have declined sharply. However, within the generally slower sales
environment, Atlanta and Dallas reported that sales of smaller, more fuel-efficient cars and
hybrid vehicles were strong.
Reports on tourism and leisure travel were mixed. New York, Chicago, and San Francisco
reported ongoing gains in tourism business and high rates of hotel occupancy. Richmond and
Minneapolis reported slower tourism activity, although Minneapolis indicated an increase in
business travel was boosting hotel occupancy. Tourism in Kansas City was said to be largely
unchanged after a period of strong expansion. Tourism activity declined in Richmond, and
fell in Atlanta as a result of hurricane damage in New Orleans and along the Mississippi Gulf
Coast.
Services
Service activity expanded in almost all the Districts that reported on this sector. Health-care
services expanded in Boston, St. Louis, and San Francisco. Professional and technical service
business increased in Boston, Richmond, St. Louis, and Dallas. Philadelphia reported gains
in business services and information technology services. Transportation activity was strong,
according to New York, Philadelphia, Cleveland, St. Louis, Dallas, and San Francisco.
Atlanta gave a mixed report on transportation: demand for shipping was said to be strong, but
damage to port facilities and railroads was severely limiting capacity.
Manufacturing
Manufacturing activity rose in all Federal Reserve Districts except St. Louis, where
manufacturers gave mixed reports, and Atlanta, where manufacturers along the Gulf Coast
are still recovering from hurricane damage. There were noticeable increases in demand for
food products in Philadelphia, Dallas, and San Francisco, but St. Louis reported decreased
demand at food processors there. Increased demand for industrial equipment was noted by
Chicago, St. Louis, and San Francisco. Boston and St. Louis reported increased demand for
pharmaceuticals. Richmond's producers saw increased demand for chemicals and a variety of
durable goods. Cleveland and Kansas City also reported increased demand for durable goods
generally. Dallas and San Francisco cited increased demand for building materials, and
Atlanta noted increased demand for manufactured housing as part of the rebuilding effort in
hurricane-affected areas. Producers of metals and metal products reported rising demand in
Cleveland, Richmond, and Chicago, but they reported slower demand in Philadelphia and St.
Louis.
Real Estate and Construction
All the Districts reporting on commercial real estate conditions noted rising demand for
office, retail, or industrial space. Increased demand for commercial space was reported by
New York, Richmond, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
Cleveland and Richmond cited growing construction of commercial buildings. Atlanta
reported a surge in demand for commercial space in areas where firms relocated after the
hurricanes struck the Gulf Coast. Chicago indicated that demand for commercial space was

rising in many parts of the District, although not in downtown Chicago. Office vacancy rates
were declining in New York, St. Louis, Kansas City, and Dallas. San Francisco reported
rising commercial rental rates. Chicago indicated that rents rose in areas other than
downtown Chicago. Dallas reported that rents were holding firm but landlords were reducing
incentives.
District banks gave mixed reports on residential real estate markets. Although levels of
activity appeared to remain generally high, a number of Districts indicated that demand for
housing was slowing in some regions. Residential real estate activity continued to expand in
Chicago, St. Louis, and Dallas, and remained strong in San Francisco. Richmond reported
continued strength in housing construction, but indicated that demand was easing in some
parts of the District. Minneapolis reported that home sales had slowed in some areas but were
strong in others. Boston reported that homes were taking longer to sell, as did New York.
Cleveland reported little growth in residential construction. Kansas City reported some
easing in home sales and a growing inventory of houses for sale. Chicago also reported
higher inventories of unsold homes on the market. Atlanta reported a strong increase in
demand for housing in areas where evacuees from the coast were relocating, but indicated
that demand for homes was moderating elsewhere in the District.
Agriculture
Agricultural conditions have been mostly good, but not uniformly so around the country.
Atlanta received mostly positive crop and livestock reports, although the storms damaged at
least half of the Louisiana sugarcane crop. Chicago reported that corn and soybean yields
have been greater than expected. Crop yields in Minneapolis were up for most crops. Kansas
City reported favorable harvest conditions and good progress in winter wheat planting. Less
positive reports came from St. Louis, where the rain brought by the hurricanes damaged corn,
rice, and cotton crops. Dallas reported that hot, dry weather in parts of the District has
stressed crops, although cotton yields were high. Richmond reported that hot, dry conditions
were hindering fall planting of winter wheat, rye, oats, and barley. Kansas City said that the
transportation difficulties associated with the hurricanes hampered crop exports. Chicago
also reported that transportation of grains was disrupted, and farmers were unable to obtain
adequate storage space; As a result, crops were left in the fields or sold at lowered prices.
Natural Resources Industries
Districts reporting on the energy sector noted strong demand in the midst of supply
constraints. The limits on supply are a result of hurricane damage to oil and gas production
and refining facilities along the Gulf Coast and to shortages of drilling equipment and oilfield
workers elsewhere. Atlanta reported that production in the Gulf remained severely disrupted,
and that safety inspections and repair work continued. Kansas City saw an increase in the rig
count, but indicated activity could have expanded further if more equipment and workers
were available. Dallas also reported increased activity, but noted that the loss of rigs in the
Gulf had cut oil and gas production, and that damage to staging areas on the coast was
retarding the repair effort. San Francisco reported that producers of natural gas in that
District were operating at or near full capacity. Minneapolis reported that mining and energy
activity was steady at a high level.
Financial Services and Credit
Lending rose in most Federal Reserve Districts in September. Commercial and industrial
lending advanced in Philadelphia, Richmond, Chicago, Kansas City, and San Francisco.
Commercial and industrial loan demand was reported to be steady in New York and St.

Louis, but business borrowing slowed in Cleveland. New York noted decreased demand for
consumer loans and residential mortgages. Chicago and Kansas City reported an easing in
demand for residential mortgages, but St. Louis reported gains. Dallas and San Francisco
noted growth in lending in general. St. Louis, Kansas City, and Dallas reported growth in
deposits. In the Atlanta District, small banks in areas devastated by the hurricanes are
concerned that they will not retain their customer base if their market areas do not regain
their resident populations. Competition for loans was reported to be very intense in most
regions.
Employment and Wages
Federal Reserve Districts reporting on employment noted tightening in labor market
conditions. Increased hiring was noted in a variety of industries. Boston reported increased
demand for professional and technical service workers. New York cited stepped up hiring of
office workers, especially in the financial industry. Increased hiring in the financial sector
was also reported by Chicago, Minneapolis, Dallas, and San Francisco. Philadelphia and
Cleveland noted that trucking firms in their Districts were having difficulty attracting and
retaining drivers. Dallas also indicated strong demand for truck drivers. Chicago reported
increases in hiring at firms in the software and telecommunications industry and among
chemical companies, but noted layoffs among manufacturers of motor vehicles, paper
products, and communications equipment. St. Louis reported increased hiring in the lodging
industry and the health care sector. Minneapolis and San Francisco reported hiring in the
mining industry, and Kansas City and Dallas reported increased hiring in the energy industry.
Richmond and Chicago noted an upturn in hiring at temporary staffing companies.
Atlanta reported significant problems resulting from dislocation of workers caused by the
hurricanes. Temporary help agencies have been active in recruiting workers for disaster relief
and cleanup operations. In locations outside the areas damaged by the hurricanes,
employment centers have been established, and job fairs have been held to assist displaced
workers find jobs. However, employers in the Dallas District have looked to evacuees to
bring needed skills to the District labor pool.
Most of the Districts reporting on wages said recent increases have been moderate, and
Kansas City indicated that wage pressures have edged down. However, Richmond noted that
wages in the service sector have been increasing briskly, and San Francisco reported that
wage pressures have risen noticeably for skilled workers in finance, construction,
information technology, resource extraction, and health care. Employers in the Philadelphia
District said their benefit costs have been rising steeply. San Francisco reported that
employers there said their benefit costs have been rising faster than wages, but not as rapidly
as in previous survey periods.
Prices
All Federal Reserve Districts reported a pickup in cost pressures from recent increases in the
prices of energy, petroleum-based products, and shipping. Reports of price increases for
building materials, such as cement, sheetrock, and lumber, were also widespread. These price
increases have come largely in the wake of the recent hurricanes, as the supply of oil and
natural gas has been disrupted and repair and rebuilding have increased the demand for
construction materials. Nevertheless, many business firms indicated to the District Banks that
they expect high prices for energy and construction materials to persist. In addition, New
York and Kansas City reported a general escalation of costs for manufacturing inputs.

While a number of Districts noted increases in prices of final goods, others continued to
report that those prices remain relatively stable. Chicago cited price increases for
pharmaceuticals and air travel. In Richmond and Atlanta, retailers and other business firms
reported passing their cost increases through into their selling prices, and in Philadelphia and
Dallas, large numbers of business firms said they have raised, or plan to raise their prices.
However, San Francisco reported that prices of final goods have remained stable, and Boston
and Chicago said that the ability of businesses in their Districts to raise prices downstream
was limited.
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First District--Boston
Most business contacts in the First District report year-over-year growth in sales or revenues
in the third quarter, with some sectors enjoying a pick-up in the pace compared with earlier
quarters and others seeing slower growth. Some retailers cite recent reductions in consumer
spending resulting from high gasoline prices, which they predicted earlier, but had not yet
observed six or 12 weeks ago. Manufacturers are facing cost increases, but vary considerably
in their ability to raise their own prices. Residential real estate markets in New England are
becoming "more reasonable" as they cool slightly from record highs.
Retail
Retail respondents in the First District report mixed results for the quarter ending in
September. While the quarter's sales were mostly ahead of year-earlier levels, several
contacts note a marked slowdown in the closing weeks.
According to one contact in the apparel industry, same-store sales were up more than 4
percent in the third quarter partly due to better merchandising decisions, but year-to-date
sales are virtually unchanged from last year. Another apparel contact noted that same-store
sales were either up marginally or flat compared with a year ago in the months of August and
September, with overall year-to-date sales still up just slightly from last year. Both
respondents emphasized the negative impact skyrocketing fuel prices are having and threaten
to continue to have on consumer spending. A contact in the surplus merchandise market
echoed this sentiment and remarked that sales were okay until gasoline hit the $2.00 mark,
with "the bottom falling out" once prices surpassed $2.50. An automobile dealers' group
indicates that sales were strong in the summer months due to a successful employee-pricing
incentive, but have now slowed dramatically compared to year-ago levels. Sales in the
lumber business were strong according to one contact, but he also expected 2005 sales to end
up flat compared to last year.
Inventory levels are mixed, but generally in line with plans. Vendor prices and selling prices
are mostly stable, although several respondents report price increases for petroleum-based
products. Capital spending is focused on new store openings. Some respondents note
increased staff turnover; they are hesitant to hire other than for replacement or to staff new
stores until business is better.
Almost all contacted retailers are less optimistic than in previous months; they remain
cautious in their outlook, with many revising previous forecasts. Concerns include rising oil
prices, the war in Iraq, and interest rates.

Manufacturing and Related Services
For the most part, First District manufacturing sales are continuing in line with first and
second quarter trends. Slightly more than one-half of First District contacts in manufacturing
and related services report that sales are currently running near-zero to 5 percent higher than
a year ago. The others report greater growth, mostly as a result of strong demand for defense
and aircraft products and biopharmaceuticals. Contacts characterize any negative revenue
impacts of Hurricanes Katrina and Rita as relatively minor--in all cases less than 2 percent in
the third quarter--and some capital goods makers foresee added business associated with the
reconstruction of damaged areas.
Many respondents describe metals costs as high but no longer rising, and some mention that
paper prices have not subsided after increasing earlier in the year. Distribution and
transportation costs are said to have risen in the last several months. Reports on selling prices
vary considerably. At the high end, a paper products company reports that its prices are up 7
to 25 percent from levels in the second quarter. On the other hand, some other firms indicate
that competition or long-term contracts have left them with no ability to pass cost increases
on to their customers for the time being. Most contacted manufacturers are between these
extremes. For example, a housewares company has managed to improve margins by
increasing selling prices since mid-year, and a couple of publishing companies describe their
customers as being willing to pay a little more for value.
Companies generally report domestic headcounts are flat or up a little in response to growing
needs for professional and technical workers. Wage and salary increases are in the range of 3
percent to 4 percent, with many manufacturers citing bonuses as a means of accommodating
temporary situations.
Capital spending is reported to be increasing somewhat, with a couple of contacts indicating
that they plan to ramp up IT spending in 2006. On the whole, however, manufacturers'
attitudes are cautious in light of a perceived need to contain costs or to react to business
uncertainties.
Manufacturers generally see "more of the same" for the remainder of 2005 and in 2006.
Several mention downside risks associated with federal government budget or regulatory
policy, and some express concern that higher energy prices could constrain their customers'
spending.
Selected Business Services
Almost all First District advertising and management consulting contacts report third quarter
revenues above year-earlier levels. While the majority of companies say clients continue to
increase their discretionary spending, a handful of contacts note a recent pullback. Demand
from clients in technology-related industries appears robust, while reports on healthcare
demand are mixed, and government-related demand is said to be weak.
Nearly all responding companies have kept prices flat relative to a year ago. Labor-related
costs have increased modestly, and marketing firms note a rise in fuel expenses. Companies
are making only minimal adjustments to headcounts to accommodate demand, with typical
wage and salary increases in the range of 3 percent to 5 percent.
Residential Real Estate
Housing prices across New England continue to rise, with contacts reporting year-over-year

price appreciation on the order of 5 percent to 9 percent. Most respondents call these price
increases more reasonable than in quarters past. Sales volume continues to increase, although
several contacts mentioned that year-over-year price and volume increases may mask a
flattening during the most recent quarter.
In the Greater Boston market, condominium inventory is up 50 percent while single family
inventory is up about 25 percent. Similarly, inventory is increasing or stable in other New
England markets due to construction and trade-up selling. Affordable inventory attractive to
first-time buyers is low, particularly single-family houses.
Although many markets are still seller-oriented, with lower than normal selling times, the
balance may be shifting somewhat towards buyers. Contacts say buyers are making fewer
full price offers and negotiating harder. Times on the market are creeping up as sellers
struggle to maintain high initial prices.
Moving into the winter months, respondents expect the region to see a seasonal slowing as
cold weather and holidays dampen activity.
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Second District--New York
Economic growth in the Second District has moderated since the last report. Consumer
confidence in the region declined moderately in September, and consumer spending has been
weaker, in part due to unseasonably warm weather. The housing market has shown signs of
softening, especially at the high end, though the rental market has continued to strengthen.
On a more positive note, labor markets and commercial real estate markets have continued to
firm, and tourism has continued to show exceptional strength. Freight traffic at the Port of
New York and New Jersey has been robust and reportedly little affected by the recent Gulf
hurricanes. Generally, manufacturers indicate little or no disruption from the storm and report
ongoing improvement in business conditions. Finally, bankers report weaker loan demand
from the household sector but little change in delinquency rates or credit standards.
Consumer Spending
Retailers report that sales were below plan in September, with weakness again attributed to
unseasonably warm weather and high energy prices. Overall, comparable-store sales were
little changed from a year earlier, though a number of major Manhattan stores report brisk
gains, attributed to strong tourism. Despite the sluggish sales, retail inventories were said to
be at or near desired levels. There was little change in retail selling prices, aside from
gasoline. Consumer confidence fell moderately in September, based on both Siena College's
survey of New York State residents and the Conference Board's survey covering the Middle
Atlantic region.
Tourism remained exceptionally strong in September. Preliminary reports from Manhattan
hotels point to a record month for overall revenues: occupancy rates continued to hover near
90 percent while room rates soared nearly 20 percent above a year earlier, pushing revenues
above the peak levels of 1999 and 2000. Moreover, an industry contact indicates increased
plans for new hotel development. Broadway theaters report that business strengthened
sharply in September, following somewhat of a lull in July and August. Both revenues and
attendance were up more than 10 percent from the same time last year.

Construction and Real Estate
The region's housing market has shown further signs of softening since the last report. New
Jersey homebuilders indicate that they have not lowered prices thus far, but they are no
longer raising prices, despite sharp increases in the costs of lumber and other building
materials, which are expected to rise further once post-hurricane rebuilding gets underway.
One industry contact in New Jersey notes that existing homes are taking longer to sell and
that the inventory of homes on the market has increased noticeably. This contact also
expresses concern about increased use of bridge loans, which are typically taken out by home
buyers that have not yet sold their old home.
Manhattan's co-op and condo market was mixed in the third quarter. While selling prices
continued to increase, the number of transactions declined and the inventory of apartments
has increased--particularly at the high end of the market. However, a contact at one of
Manhattan's leading real estate firms reports continued gradual strengthening in the rental
market: while the supply of available apartments has been boosted by more individuals
renting out investment property, new inventory is being absorbed without concessions. In
contrast with the sales market, the high end of the rental market is said to be doing
particularly well.
Commercial real estate markets across the New York City metropolitan area generally
strengthened during the third quarter. Office vacancy rates fell to a four-year low throughout
Manhattan, as well as in Brooklyn, while rates were virtually unchanged in Long Island and
Northern New Jersey. However vacancy rates edged up in Westchester and Fairfield
Counties. Industrial markets were also steady to stronger: vacancy rates were steady at a
relatively low 5 percent in New York City and Long Island, and at just below 8 percent in
northern New Jersey. In Westchester and Fairfield Counties, industrial vacancy rates were
down modestly but still fairly high at 13 percent.
Other Business Activity
A major NYC employment agency, specializing in office jobs, reports that the pickup in
hiring activity noted in August has gained further momentum in recent weeks, led by the
financial sector. September was characterized as a very busy month and much stronger than a
year earlier, and this contact reports that there are substantially fewer people looking for
work than a year ago.
A contact at the Port of New York and New Jersey reports robust shipping activity in recent
months, following a second-quarter lull, and indicates little effect from the Gulf Coast
hurricanes. A number of manufacturing contacts in New York State report that the hurricanes
caused some disruptions in business during September, but most of these disruptions were
characterized as minor. More generally, manufacturers report ongoing improvement in
general business conditions but have become slightly less optimistic about future conditions,
noting widespread escalation in input prices, which is expected to continue. Separately,
purchasing managers in the region report mixed results for September: those in the New York
City area indicate continued favorable conditions, but those in the Buffalo and Rochester
areas note some slowing in activity.
Financial Developments
Small to medium-sized banks in the district report decreased demand for consumer credit and
residential mortgages but steady demand for commercial loans and mortgages. One in four

bankers indicate weakening demand for consumer loans, while fewer than 10 percent report
increased demand. Refinancing activity remained weak: 42 percent of bankers report
decreases, while only 6 percent report increases. Credit standards were mostly unchanged
since the last report, except on commercial mortgages, where some tightening in standards
was noted. Higher loan rates were reported for all loan categories--particularly for
commercial borrowers. As in the prior survey, almost all of the banks surveyed report
increases in average deposit rates. Delinquency rates remain unchanged across all loan
categories except commercial and industrial, where there was a modest decrease.
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Third District--Philadelphia
Economic activity in the Third District advanced slowly in September. Manufacturers
reported a slight increase in shipments during the month but a steady rate of new orders.
Retail sales of general merchandise rose from August to September, but year-to-year gains
were modest for most stores. Auto sales fell in late September and remained slow in early
October. Banks and other lenders reported that lending continued to move up in September,
but many said loan growth had slowed. Service firms generally indicated that their business
activity has been expanding at a steady, moderate rate. Business contacts in all industries
expressed concern about rising energy costs and price increases in general. The number of
firms reporting pressure on profit margins, primarily from rising energy and material costs,
has increased. Many firms are looking for ways to reduce energy expenses but most have not
yet made firm plans to implement any energy-saving measures.
Third District business contacts generally expect business activity in the region to continue to
expand, but several expect growth in the fourth quarter to be slower than in the third quarter.
Manufacturers expect business to pick up from the September pace, but not strongly.
Retailers anticipate slow growth and difficulty meeting fourth-quarter sales targets. Auto
dealers expect slow sales in the months ahead. Bankers anticipate continued growth in
lending, but many expect the pace of loan growth to ease. Service firms expect activity to
advance at about its current rate through the rest of the year.
Manufacturing
Manufacturers in the Third District reported generally steady demand for their products in
September. About half of the companies contacted said that new orders received during the
month were level with orders received in the prior month, and the number of firms reporting
decreases was offset by an equal number reporting increases. On balance, shipments
increased among area manufacturers, but order backlogs fell. Among the District's major
manufacturing sectors, business improved in September for producers of food products,
apparel, and industrial materials but weakened for makers of furniture and chemicals.
Producers of primary metals and transportation equipment reported continuing declines in
orders for their products.
Overall, manufacturers expect growth in business activity to pick up in the months ahead.
About one-third of the firms contacted in September expect their shipments and orders to
increase during the next six months, and one-fourth expect decreases. Capital spending plans
among District manufacturers call for stepped-up expenditures, on balance, but in September
the number of firms scheduling increased outlays remained somewhat lower than in the first
half of the year.

Retail
Retailers in the Third District, on balance, reported increases in sales from August to
September; for most year-over-year gains were modest. Also, the majority of retailers
reported a decline in store traffic month-to-month and compared to a year ago. Store
executives said the exceptionally warm weather during the month reduced sales of fall
apparel. They also said consumers appeared to be limiting discretionary spending in the face
of rising energy costs. Stores selling teen-oriented merchandise or luxury goods posted
greater annual sales increases than other types of stores. Discount stores had moderate gains.
Stores specializing in mid-price merchandise had mixed results; some had slight
year-over-year increases, and others had slight decreases.
Slow sales of fall apparel have left some stores with large inventories, and they have stepped
up price reductions and added sales events to their calendars for October. Looking ahead,
most retailers in the region expect sales growth to be slow through the rest of the year. Some
said they expect their fourth-quarter results to fall short of plan unless consumer confidence
improves.
Auto dealers in the region reported a sharp drop in sales as manufacturers' discount programs
ended in September. Inventories of 2005 model year vehicles were nearly depleted, except
for large sport utility vehicles. Dealers reported a sharp decline in demand for these vehicles.
Dealers said sales of new model year vehicles have been slow, and they expect sales for the
fourth quarter to remain well below the pace achieved in the first three quarters of the year.
Finance
The volume of loans outstanding at Third District banks rose in September compared with
August and with September of last year. However, banks gave mixed reports on the
magnitude of the gains; many indicated that loan growth has been sluggish, although a few
said it has been robust. Among major credit categories, growth has been relatively faster for
commercial and industrial loans and credit card lending, and less rapid for other types of
consumer loans and residential mortgages. All the financial companies contacted for this
report indicated that competition for loans, as well as deposits, has been strong among banks
and other financial institutions. Bankers and other lenders in the District expect lending to
continue to move up at around the current pace for the rest of the year, but several said they
expect growth to be slower in 2006 than in 2005.
Investment companies reported steady overall cash inflows in recent weeks. They indicated
that inflows to money market funds have increased substantially and inflows to bond funds
have risen somewhat, but inflows to equity funds have eased. Investment company officials
said investor confidence appears to be stable, although both individual and institutional
investors have been reluctant to increase the portion of their investments allocated to stocks
or long-term bonds.
Services
Most of the Third District service firms contacted in early October reported continuing
moderate growth in activity and at about the same pace as during the summer months. Firms
providing information services have picked up some business from new clients. Activity at
business services firms has been growing as their existing clients make more use of their
services. Trucking firms reported continuing high rates of activity, resulting in difficulty
finding sufficient numbers of drivers. Most of the service sector firms contacted for this

report expect business to continue to advance at around its current growth rate during the
balance of the year. However, firms providing business services noted that their customers
are looking for ways to reduce operating expenses in order to cope with rising energy costs,
and they expect the amount and price of outsourced services will be reviewed as part of this
process.
Wages and Prices
Business firms in the Third District generally indicated that wages have not been rising at a
rapid pace, but nearly all of those surveyed said they face continuing steep increases in
benefits costs. Many firms said they were reviewing ways to reduce these costs as they
prepare their 2006 budgets.
Third District firms in all industries contacted for this report said the costs of their inputs
have been rising, and many said the rate of increase has accelerated recently. Firms reported
rising prices for a range of basic materials, petroleum-based products, and energy. Firms that
purchase large quantities of motor fuels and other energy products have begun to make more
use of hedging, and some have instituted other measures to control current and future energy
costs, including negotiating long-term and bulk purchase contracts. Trucking firms said fuel
costs have reached record highs and they have raised fuel surcharges to their customers.
Expectations of further price increases are widespread, and the number of area firms that
have raised, or plan to raise, prices for their own goods and services has increased.
Executives at many Third District firms say the costs of the goods and services they purchase
are rising more rapidly than official price measures. One contact said his firm is developing a
cost index to replace the consumer price index for automatic price escalation in long-term
contracts.
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Fourth District--Cleveland
The District's business conditions continued to show gradual improvement, despite declines
in some areas, for the six-week period through the end of September. Manufacturing activity
was stronger through the last several weeks for the District's durable goods producers. And
District retailers saw sales rebound somewhat in September. In nonresidential construction,
contractors again reported increases in activity, though sales seem to have peaked for many
of the District's homebuilders. Demand for trucking and shipping services remained strong in
September. And, on a year-over-year basis, loan demand at District banks was generally
steady or slightly increasing.
Increases in firms' input costs intensified somewhat in September, especially for
petroleum-based products, and partially as a consequence of the storms that struck the Gulf
Coast. However, outside of the construction sector, contacts saw storm-induced increases in
costs as likely to be short-lived. Hiring remained modest across most industries, with staffing
services companies noting that employment conditions continued to improve throughout the
District, but much more slowly than in the rest of the country.
Manufacturing
Business conditions continued to show steady improvement for the District's durable goods
manufacturers through the six weeks ending September. However, on a year-over-year basis,
contacts generally reported that their production levels were flat. Conforming to this pattern,

steel producers, which had seen shipment levels fall throughout the earlier part of this year,
reported rising shipments in recent weeks. Contacts attributed the improvement in conditions
to strengthening demand in some sectors and lower inventory levels throughout the steel
distribution channel. Hurricane Katrina had yet to have a noticeable impact on steel
shipments, but as reconstruction efforts expand, contacts expected this to change. The
automobile sector was among those that registered an increase in demand for steel. Relative
to a year ago, District automobile plants posted increases in production in August and
September. Outside of durable goods manufacturing, nondurable goods producers generally
reported that production levels were flat for the last several weeks, as well as relative to this
time a year ago, with the pace of new orders remaining relatively unchanged for most firms.
Both durable and nondurable goods manufacturers mentioned increases in energy prices in
recent weeks, only some of which were thought to be related to the hurricanes. Thus far, the
primary impact of the storms that struck the Gulf Coast on the District's manufacturers has
largely been confined to changes in input costs. In some cases, the temporary unavailability
of certain inputs caused disruptions to firms' production facilities. Nevertheless, most firms
expect the impact of the recent hurricanes on their operations to be short-lived, and
accordingly, few have changed their capital spending or hiring plans, which were already
generally cautious.
Retail
Business conditions in the retail sector seemed to strengthen in September, after District
retailers had reported a disappointing August. Activity at the District's discount retailers was
reported to be above year-ago levels, and typically conformed to firms' sales projections.
Additionally, some discount retailers reported successfully shifting their product mixes
toward higher quality items. In general, the District's specialty retailers also reported
somewhat stronger sales than at this time a year ago. One contact observed that brands for
buyers who are younger have tended to sell relatively better recently. However, in keeping
with recent reports, the District's department stores generally reported that their sales were
down dramatically from the levels of a year ago.
Contacts were cautious in their assessments of the outlook, since most expected energy prices
to remain high and to continue to undermine consumer confidence. Accordingly, hiring plans
among retailers remained modest. Still, contacts generally thought that the storms in the Gulf
had not yet noticeably affected their sales or operations. With respect to prices, the District's
department stores reported increases in mark-down activity, while other retailers reported that
they were able to pass higher-priced merchandise along to consumers.
After strong sales in August, the District's automobile sales appeared to fall sharply in
September when compared with a year ago, despite the continuation of several
manufacturers' employee-discount pricing promotions. Some dealerships speculated that
consumers who had planned to purchase cars this year rushed to make their purchases earlier
in the summer.
Construction
The economic environment for the District's homebuilders generated little growth in recent
weeks, with roughly as many builders seeing sales increase as decrease. Relative to a year
ago, a majority of residential builders reported that their sales had fallen somewhat. Given
the current business climate, most builders have not tried to increase prices, which are
generally only slightly higher than at this time last year. Regarding changes in input costs,

several contacts noted that many materials prices--notably prices for petroleum-based
products, concrete, and drywall--appeared to rise as a direct consequence of the recent
hurricanes that affected the Gulf Coast. Some contacts thought that input costs would
increase further in the months ahead, although lumber prices--which have not risen as much
after the current set of storms as was true after the several that struck the U.S. a year
ago--were not expected to see sharp increases.
Commercial contractors in the District, unlike their counterparts involved in residential
building, continued to see steady increases in activity in the six-week period through the end
of September. In addition, most firms indicated that their backlogs would keep them
occupied through at least the end of 2005. Commercial contractors also reported increases in
input costs, citing many of the same increases in materials prices to which residential
builders referred. Regarding specific building segments, contacts cited industrial and
institutional building as faring particularly well. Despite recent improvements in business
conditions, hiring among commercial builders continued to be limited.
Trucking and Shipping
Demand for trucking and shipping services in the District remained robust in September,
despite increases in transportation costs from higher fuel surcharges. Even with the support
of surcharges, increases in fuel prices still adversely affected shipping firms' profits through
truck operations that could not be billed to clients. With fuel surcharges nearing historical
highs, contacts reported that their customers were increasingly putting pressure on them to
find ways to cut costs. Attracting and retaining drivers continued to be difficult for many
firms in the industry. In fact, some contacts noted that they cannot accommodate all of the
existing demand due to their inability to attract and retain drivers.
Banking
Trends in the banking sector remained relatively favorable. While some seasonal slowing
was reported, on a year-over-year basis, commercial borrowing continued to be firm. District
banks also reported that the healthcare sector saw especially strong loan demand. However,
demand for consumer credit was more mixed across institutions. With respect to specific
consumer borrowing categories, institutions reported that the demand for auto loans fell to
more typical levels, as auto sales generally slowed in September. Additionally, there was a
slight increase in demand for home equity loans. Credit quality was still seen as strong at
most District banks, though some banks reported a minor increase in delinquencies.
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Fifth District--Richmond
Fifth District economic activity expanded at a somewhat quicker pace since our last report as
services and manufacturing activity gained some momentum. District service-producing
firms reported stronger growth in revenues and steady gains in employment in September
and early October. Retail revenues rose as well, despite sluggish sales of automobiles and a
pullback in hiring in September. Manufacturing output gathered some steam; shipments, new
orders, and capacity utilization picked up the pace in September and early October. District
housing sales remained generally solid and demand for office and retail space strengthened.
In the financial sector, bank lending expanded at a moderate pace. On the price front,
substantially higher energy and building materials prices rippled through the economy in the
wakes of Hurricanes Katrina and Rita, leading District businesses to raise their prices. In

agriculture, unusually hot and dry weather during much of September depleted soil moisture
and slowed fall planting, but early October has seen steady rainfall and improved soil
conditions.
Retail
District retailers reported moderate growth in shopper traffic and sales in September and
early October. A manager at a large department store in North Carolina said that sales were
"on track" heading into the holiday season, and furniture retailers throughout the District
generally reported stronger sales growth in recent weeks. But several of our contacts said that
higher gasoline prices were hampering sales growth. An automobile dealer in the
Washington, D.C., metropolitan area said "when there's news of gas price spikes, business
stops." Retailers generally passed along some of the higher costs of energy and commodities
to their customers, leading to a quickened pace of retail prices in the past six weeks. A
Richmond, Va., hardware store owner reported that he tacked on freight surcharges, while a
South Carolina lumber retailer raised prices to recover higher wholesale lumber costs. Retail
hiring contracted modestly since our last report.
Services
Services firms reported stronger revenue growth in September and early October.
Professional, scientific, and technical firms generally reported faster revenue growth. A
contact at a North Carolina trucking firm indicated that business was still good, despite
raising prices to recover higher diesel fuel costs. Hiring in the services sector rose moderately
and wages increased briskly. An executive at a healthcare system in North Carolina told us
that wages in some medical professions, particularly nursing, had risen substantially. Despite
some transportation-related price increases, most services sector contacts said that price
increases remained modest.
Manufacturing
District manufacturing activity rose at a quicker pace in September, driven by faster growth
in factory shipments and new orders. Product demand strengthened appreciably in the
chemicals, fabricated metals, furniture, rubber and plastics, and transportation equipment
industries. A North Carolina plastics manufacturer told us, "We are busy now; the outlook is
good, and we will probably be adding people and equipment." In contrast, some textile
manufacturers continued to indicate that their shipments and new orders were declining. A
textile manufacturer in Greensboro, N.C., said his firm was closing a denim plant in part
because of stiff competition from Far Eastern manufacturers. Raw material prices continued
to escalate and a number of respondents expressed concerns about declining profit margins.
A fabricated metals manufacturer, for example, reported that raw materials prices were
"skyrocketing" and he planned to partially offset higher costs by raising prices. He
anticipated losing some sales as a result, however.
Finance
District bankers said that lending activity continued to expand at a moderate pace in
September. Commercial lending was somewhat higher, boosted by increased merger and
acquisition activity. Several bankers, however, noted that some business clients were
reluctant to borrow because they were concerned about their future business prospects, while
other clients had little need to borrow because they were "sitting on" large cash reserves.
Residential mortgage lending rose at a modest pace, bolstered by continued gains in home
sales and mortgage interest rates below 6 percent. Credit standards were generally unchanged
and credit quality remained good.

Real Estate
Residential real estate agents reported mostly strong housing activity in September, although
demand continued to cool in some areas. Agents in Fairfax County and Virginia Beach, Va.,
said their local housing markets "were doing very well." A contact in Greenville, S.C., said
"sales were outstanding," while a contact in Greensboro, N.C., reported "lots of activity." But
signs of moderating activity were a little more widespread in recent weeks. An agent in
Fredericksburg, Va., noted "the market's not as crazy as it once was," while a contact in
Odenton, Md., said she was not seeing as many multiple offers on properties for sale.
Although home prices in many areas continued to rise, there were a number of reports of
prices leveling off. Residential homebuilders reported relatively strong housing starts and
building permits in September and higher costs of construction materials, particularly lumber.
Commercial real estate agents reported generally steady growth in leasing activity in
September. Demand for office and retail space strengthened, with activity in Washington,
D.C., continuing to lead the way. An agent in the District of Columbia noted that office and
retail leasing was advancing at a healthy clip and that he had "never seen such strong
markets." Agents in Greenville and Columbia, S.C., reported steady gains in office and retail
leasing and a pickup in industrial leasing activity. Commercial construction activity was
modestly higher; a contact in Raleigh, N.C., said there were "lots of dump trucks on the
road," signaling strong construction activity in the area. But construction costs were rising.
An agent in Northern Virginia said that costs had risen by 30 percent over the past 18
months, and several contacts speculated that construction costs would rise further in coming
months.
Tourism
Tourist activity slowed in September and early October. Contacts in coastal areas said
bookings for the Columbus Day weekend were soft, which they attributed to higher gasoline
prices. A hotelier in Virginia Beach, Va., said that group bookings had declined in recent
weeks and that the industry was anticipating lower occupancy in the weeks ahead. On a
brighter note, a manager at a Virginia mountain resort told us that their business had picked
up and noted that timeshare sales were particularly strong.
Temporary Employment
Contacts at temporary employment agencies in the District generally reported stronger
demand for workers since our last report. Although some firms remained concerned that
rising energy prices might slow economic growth and with it demand for temporary
employment services, most agents looked for firmer demand over the next six months.
Distribution and warehouse workers, customer service representatives, and administrative
assistants were widely sought.
Agriculture
Hot and dry weather in September depleted soil moisture and hindered fall planting in many
areas of the District, though widespread rainfall in early October improved soil conditions.
As of October 3rd, 77 percent of farmland in North Carolina and over 80 percent of farmland
in other District states was short of moisture. Analysts said that planting of winter wheat, rye,
oats, and barley proceeded slowly because of dry soil in September but substantial rainfall in
October improved planting conditions. The rain came too late, though, to improve yields for
many crops reaching maturity and being harvested.

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Sixth District--Atlanta
Reports from Sixth District business contacts suggested that the pace of economic activity
was mixed in September and early October. Hurricanes Katrina and Rita had a significant
impact on activity throughout the District. Loss of life and property damage was tragic, and
individual and firm dislocations were widespread. Business contacts reported that economic
activity remained severely disrupted in coastal Louisiana and Mississippi. Reports from other
areas noted spillover effects, including shipping delays, higher fuel and building material
costs, and increased demand for commercial and residential real estate in some locations.
Consumer Spending
Retail sales varied widely across the District, according to merchants. Building supply and
grocery stores experienced a surge in demand prior to the storms. Most retailers directly in
the storms' paths remained closed because of damage, whereas many others were unable to
open for some time because of the lack of power, shortages of workers, and transportation
delays. Merchants in several areas, such as Baton Rouge, experienced strong year-over-year
sales gains in September and early October because of the influx of evacuees. Outside of the
storm-affected areas, a few contacts reported that their sales had been hurt by higher energy
prices, and some clothing retailers noted that unseasonably warm temperatures had slowed
sales.
September vehicle sales fell across the District. Most regional contacts blamed high gasoline
prices for their disappointing performance. Several domestic dealers that had enjoyed good
sales volumes in previous months reported a decline in activity and a large increase in the
inventory of trucks and SUVs. In contrast, an import distributor noted that economy cars and
Hybrid models sold extremely well across the region.
Real Estate
Reports from building contacts across the region noted delays and higher prices for
shipments of building materials in September and early October, including concrete, lumber,
and sheetrock. Many contacts expected that shortages and higher prices will persist as
reconstruction in hurricane-damaged areas gets fully underway. Housing demand in
neighboring areas surged as evacuees sought new living arrangements, and commercial real
estate markets tightened as businesses set up temporary operations. Damage to schools,
hospitals, roads, bridges and other public infrastructure was extensive in southern Mississippi
and Louisiana, and reconstruction activity is expected to provide a significant boost to the
regions' commercial construction industry over coming months. Housing markets in some
other parts of the District showed signs of moderating in September, although reports from
many homebuilders and Realtors suggested that activity in Florida remained strong.
Manufacturing and Transportation
By early October, manufacturing activity had partially recovered in the storm-affected areas,
although some contacts reported labor and material shortages and ongoing transportation
difficulties. Several petrochemical plants along the Gulf Coast have come back on line as
damage repairs were completed. Several shipyards in the area were also returning to an
operational status, and in some cases were supplying temporary onsite housing for workers.
Contacts noted that some lumber producers planned to restart idled plants to meet an

expected rise in demand. Producers of manufactured housing reported that they have
received contracts from FEMA to build houses for hurricane victims.
Most transportation contacts reported mixed business conditions in early October. Demand
for freight was said to be quite strong, although uncertainties about fuel costs remained a
concern for smaller trucking firms. A major District rail company suffered substantial
infrastructure damage because of Hurricane Katrina and the normalization of services to the
Gulf area could take several months. Repairs at the port of New Orleans could also take
several months, and the port has been operating far below capacity. By early October,
Mississippi river ports that handle grain shipments had largely returned to normal operations.
Tourism and Business Travel
The hurricanes severely affected several tourist and business destinations. For instance, most
casinos along the Mississippi Gulf Coast suffered extensive damage and will need to be
rebuilt. In New Orleans, events at the damaged Morial Convention Center have been
cancelled through March of 2006, and many conventions have chosen to relocate to places
such as Atlanta and Orlando. Officials in other areas, such as Florida, expressed concern that
high gasoline prices could put a damper on travel plans.
Banking and Finance
Financial operations in most of the District were stable following the hurricanes. Loan losses
were reported to be low and deposits remained strong overall. Potential short-term liquidity
problems in the wake of the hurricanes appeared to have been avoided, and most institutions
were operating. Some smaller banks with business concentrations in evacuated areas reported
concerns about the loss of their customer base.
Employment and Prices
Contacts reported that employee dislocation presented significant problems for businesses
that were reestablishing operations in the affected areas. Temporary employment agencies
reported strong business activity placing workers in cleanup or disaster relief positions. In
neighboring areas, career centers and job fairs had helped displaced workers find
employment.
Higher energy prices continued to be noted as a concern by most contacts. For instance,
operators in the petrochemical and paper industries noted that high natural gas prices would
reduce international competitiveness, while higher fuel costs were said to be adversely
affecting farmers. Builders across the region reported higher prices for building materials,
especially for repair-related items. Fuel cost increases were being passed on in a number of
industries. Plastics and fertilizer companies were increasing prices on a variety of products
because of higher feedstock prices, for example.
Natural Resources and Agriculture
Energy production in the Gulf of Mexico remained severely disrupted because of damage to
offshore facilities and the need to complete safety inspections. Through the first week of
October nearly 90 percent of normal pre-storm oil production and more than 70 percent of
natural gas production remained off-line. Refining capacity also remained lower because of
storm damage, and contacts anticipated that it may be several months before all the
processing plants are operational.
Reports on District crop and livestock conditions were positive overall, although it was noted
that the hurricanes damaged at least half of the Louisiana sugarcane crop

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Seventh District--Chicago
Economic activity in the Seventh District continued to expand at a moderate pace during
August and September. Consumer spending continued to increase modestly, and business
spending and hiring expanded at a gradual pace. Both residential and commercial
construction and real estate activity strengthened. The manufacturing sector expanded again,
though some firms in the District experienced minor supply chain disruptions related to
Hurricane Katrina. Mortgage demand was flat to down, while commercial lending activity
grew at a slower pace than earlier in the year. Cost and price pressures firmed on balance in
August and September. Corn and soybean prices fell because yields were higher than
expected and Hurricane Katrina disrupted the transportation of grain for export.
Consumer spending
Consumer spending continued to increase modestly in August and September, though
retailers reported that the pace of sales in the Midwest generally lagged that of the nation.
Contacts believed the effects of higher fuel prices have been limited thus far. However,
several expressed concerns that energy costs would weigh more on spending during the
winter, particularly by low-income and rural consumers who spend a greater portion of their
income on energy. Michigan retailers' plans for holiday-season ordering were on par or down
slightly when compared with last year. Most District auto dealers reported further declines in
sales. A national restaurant chain reported that demand in the Midwest was softening.
Tourism spending continued to increase.
Business spending
Business spending and hiring continued to expand at a gradual pace. Firms in a wide range of
industries--including telecommunications, food services, health care, and pharmaceuticals-planned to increase capital spending. There were limited reports of firms boosting investment
to improve their energy efficiency. One transportation firm scaled back its planned increase
in capital spending due to higher fuel costs. Business air travel continued to expand steadily
on both domestic and international routes. Increased hiring was reported by firms in the
chemical, software, telecommunications, furniture, food services, and banking sectors; in
contrast, layoffs were reported in the paper, automotive, and communication equipment
industries. Staffing services firms said that demand picked up steadily in all District states
except Michigan. They also noted a general tightening in labor market conditions, with one
citing fewer visits to their online job postings by individuals looking for work and another
saying it had seen an increase in temporary worker turnover.
Construction/real estate
Construction and real estate activity expanded. Homebuilders reported a small increase in
sales, though one contact felt the increase would be short lived. Sales of mid-priced homes
continued to lag those of high-end homes in most areas. Several contacts expressed concern
about the growing number of homes for sale. Commercial activity expanded further in many
locations, and retail development was continuing apace. Demand for office space in
downtown Chicago was flat, with one developer in the area expressing concern about
overbuilding. In contrast, a contact reported declines in office vacancy rates and the amount
of sublease space available in Indianapolis. Rents for office space increased in parts of
Indiana and suburban Chicago, but decreased slightly in downtown Chicago.

Manufacturing
Manufacturing activity continued to expand in August and September. Light vehicle
manufacturers reported a steady pickup in production as they replenished lean inventories.
Nationwide, vehicle sales were down in September, though they were better than many
industry analysts had expected in light of the drop in consumer sentiment and the increase in
gasoline prices. Industry contacts forecast that sales in the fourth quarter would run near the
average pace recorded in the first half of the year. Heavy truck demand held steady. In
contrast, demand for medium duty trucks was soft, in part because accelerated depreciation
tax credits had pulled sales forward. One industry analyst reported high demand from the
Gulf Coast for towable recreational vehicles. Shipments of heavy equipment were still
strong, although growth was down from the extremely robust rates of earlier in the year.
Demand for mining equipment remained very strong. Conditions in the steel industry
continued to improve, with order books filling up, capacity usage increasing, and inventories
running slightly lean. Cement shipments continued to increase year-to-date, though demand
was expected to soften in the fourth quarter. Machine tool producers reported steady, solid
growth in sales. The damage from Hurricane Katrina led to some disruptions in District
firms' supply chains. While most disruptions were short lived, hydrogen (used to galvanize
steel) and many resins remained in short supply.
Banking/finance
Lending activity moderated. Contacts reported little change or declines in home-purchase and
refinancing mortgage demand. Mortgage credit quality was in good shape, and delinquencies
remained low. In contrast, one banker said home equity loan delinquencies had ticked up, and
an industry analyst reported that consumer credit scores were down from last year.
Commercial lending continued to expand, though at a slower pace than earlier in the year.
Contacts noted that competitive pressures continued to lead to easier standards and terms,
and one banker expressed concerns about profitability. In addition, a Chicago-area banker
said that excess capacity in mortgage lending was squeezing margins in that line of business.
Prices/costs
Price and cost pressures firmed on balance in August and September. Contacts reported
increases in the costs of a number of materials, including oil and gas, steel, concrete, and
resins. A number of contacts said that their suppliers had put on new or additional fuel
surcharges. A contact in the air travel industry noted that the spread between jet fuel and
crude oil prices was running three to four times larger than historical norms because of
refinery disruptions. Downstream, prices for air travel rose again, and new price increases
were reported for pharmaceuticals and hotel rooms. In contrast, appliance manufacturers said
that they were unable to raise prices to cover higher freight costs, an automaker planned new
incentives, and retailers in Michigan reported an easing in price increases in August. Wage
gains held relatively steady in most industries. However, a staffing firm noted that their
recruiting expenses have increased noticeably.
Agriculture
Corn and soybean yields in much of the District were higher than had been expected before
the harvest began. Current expectations were that this year's corn harvest will be the second
largest ever and the soybean harvest will be in the top five. One reason is that genetic
advances in seeds seemed to reduce losses in areas affected by the drought. Still, contacts
were concerned that many farmers did not have adequate crop insurance. Grain storage has
become a major issue for the District because of the transportation network backup after the

hurricanes and large stocks left over from 2004. Furthermore, higher energy prices have
pushed up the costs of drying grain, leading farmers to let corn dry longer in the fields.
Contacts were worried about the impact of increased operating costs. Dairy and livestock
producers benefited from lower feed costs, as well as generally higher prices for sales. In
farmland auctions, some winning bids were lower than market participants had expected.
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Eighth District--St. Louis
Economic activity in the Eighth District expanded moderately since our previous survey. The
services sector continued to grow. Reports in manufacturing, however, were mixed. Home
sales continue to increase throughout the District, while business conditions in commercial
real estate markets continue to improve. Lending activity at a sample of small and mid-sized
District banks increased from early June to mid-September.
Manufacturing and Other Business Activity
Reports from manufacturing contacts in the Eighth District were mixed. Several
manufacturers reported plans to open plants and expand operations and a similar number of
contacts reported plant closings and layoffs. Firms in the rubber product, machinery,
chemical, pharmaceutical, software, and plastics industries announced plans to open new
facilities in the District. Firms in the motor vehicle parts, machinery, paper, and insurance
industries reported plans to expand facilities and hire additional workers. In contrast, contacts
in the fabricated metal product, electronics, furniture, transportation equipment, food, and
apparel industries reported plant closings and layoffs. Several of these firms also cited
slowing demand or plans to move production abroad.
The District's services sector continued to expand in most areas since our previous report.
Firms in the health care, traveler accommodation, and management and consulting services
industries reported plans to open new facilities and hire additional workers. Contacts in the
wireless telecommunications industry experienced solid customer growth and high sales
volume. Despite overall positive growth, several contacts in the freight transportation
industry expressed concern over rising fuel costs and softening in demand. District retailers
generally reported increased sales in August compared with the same month last year. Most
retailers, however, reported that sales failed to meet expectations during September. District
auto dealers also reported increased sales in August compared with last year, but they
indicated a decline in September sales, when compared with August.
Real Estate and Construction
Residential sales continued to increase throughout the District. Compared with the same
period in 2004, August year-to-date home sales were up 9.8 percent in Louisville, 7.7 percent
in Memphis, 2.2 percent in Little Rock, and 1.2 percent in St. Louis. Contacts indicated that
housing demand in Memphis and Little Rock increased in September. August year-to-date
single-family housing permits increased in most of the District's metropolitan areas compared
with the same period last year. Permits were up 3 percent in St. Louis, 5 percent in
Louisville, and over 8 percent in Memphis and Little Rock. September residential
construction was reportedly high in Memphis and Little Rock, while contacts in northern
Mississippi reported that early September residential construction fell sharply.
Business conditions in many of the Eight District's office and industrial real estate markets

have improved. In Little Rock, third-quarter office and industrial vacancy rates declined
compared with the second quarter. In Memphis, contacts reported that office and industrial
real estate markets were strong, and contacts in St. Louis reported a strong industrial market
as well. Commercial construction activity was mixed throughout the District. Contacts in
northeast Arkansas reported that commercial construction was strong. In contrast, contacts in
northeast Mississippi reported that new commercial development was down during July and
August compared with the same months last year, but they indicated that a large industrial
construction project in that area is slated to begin later in the year. Contacts in western
Tennessee indicated that a large industrial construction project is on the horizon as well.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks increased 2.4
percent from early June to mid-September. This increase stemmed primarily from real estate
lending, which rose 3 percent and accounts for 71.3 percent of total loans. Commercial and
industrial loans, which represent about 17.5 percent of total loans, decreased 0.1 percent.
Loans to individuals, which account for nearly 5.4 percent of total loans, rose 2.7 percent. All
other loans, roughly 5.8 percent of total loans, increased 3 percent. Over this period, total
deposits at these banks increased 1.2 percent.
Agriculture and Natural Resources
Heavy winds and rain from Hurricane Katrina caused some corn lodging (i.e., falling to the
ground) throughout the District, but the rain improved the dry conditions of crops and
pastures. The rain also caused significant rice lodging and cotton stress in Arkansas and
Mississippi. Crop harvest is in full swing across the District. The corn harvest is nearly
complete in Arkansas and Mississippi, but it is less than halfway finished in Illinois and
Indiana. At least 20 percent of the soybean harvest is complete in all states except Missouri.
The sorghum harvest is nearly complete in Arkansas and Mississippi. In contrast, the cotton
and the rice harvest are behind average pace in the District.
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Ninth District--Minneapolis
The Ninth District economy grew moderately during September and early October. Increases
in activity were noted in consumer spending, manufacturing, real estate, and construction.
Meanwhile, agriculture was mixed, energy and mining were stable at a high level, and
tourism was slow. Some signs of tightening in labor markets were noted since the last report.
Meanwhile, wages grew at a moderate pace. Significant price increases in energy, fuel, and
some construction-related plastics were the most visible effects of Hurricanes Katrina and
Rita on the district.
Consumer Spending and Tourism
Overall consumer spending increased since the last report. A major Minneapolis-based
retailer reported same-store sales up almost 6 percent in September compared with a year
ago. A mall manager in North Dakota reported that sales were soft in the early part of
September compared with last year, but grew at near double-digit levels during the later part
of September. August and September traffic at a mall in Montana was up over a year ago;
retailers reported strong back-to-school sales.
According to a Minnesota auto dealer, sales were brisk in August and early September, but

slowed by late September. In western Montana, sales of domestic vehicles were slow during
September compared with the summer due in part to a lack of supply. In addition, customers
were shopping with more sensitivity to higher gas prices as sales of cars have picked up
relative to trucks and SUVs.
Early fall tourism activity was slower than a year ago. A tourism official in the Upper
Peninsula of Michigan noted that tourism activity during late summer and early fall was slow
compared with last year. In South Dakota, a tourism official reported that September activity
was likely affected by higher gas prices; sales and traffic were off about 10 percent from a
year ago. However, recent hotel occupancy and room rates were above year-ago levels in
Minneapolis due in large part to stronger business travel.
Construction and Real Estate
Construction continued at a strong pace. In Minneapolis, developers announced plans to
renovate a downtown skyscraper for mixed use, and a major hotel project was announced for
Bloomington, Minn. Developers in Sioux Falls, S.D., announced plans for a $15 million
waterfront redevelopment and a $32 million recreation center. August building permits in
Grand Forks, N.D., were well above a year earlier. September residential permits for
Minneapolis-St. Paul were above August levels, but below year-earlier levels.
Real estate was mixed. A contact in Sioux Falls, S.D., who has been in business for 30 years
said he has never seen a boom in commercial office and retail as strong as the city is
currently experiencing. A Minneapolis Realtor said home sales are continuing to slow, in part
due to seasonal trends; the pace of housing price appreciation is expected to slow, but still
increase 7 percent over the next year. Realtors in Fargo, N.D., said the housing market boom
continued there.
Manufacturing
Manufacturing activity expanded. A September survey of purchasing managers by Creighton
University (Omaha, Neb.) indicated strong manufacturing activity in Minnesota and the
Dakotas. In Minnesota, a glassmaker plans to expand capacity through additional capital
investment. In North Dakota, a soybean-crushing facility is under construction. In South
Dakota, a tool and die maker plans to double the size of its manufacturing facility. In the
Upper Peninsula, a sewing business reported that "business is flourishing." However, in
Minnesota, an automobile assembly plant temporarily shut down.
Energy and Mining
Activity in the energy and mining sectors was stable at a high level. Oil and gas exploration
and production were about level from mid August through late September. Meanwhile,
several new wind farms and ethanol plants were recently proposed or under construction.
Mines in the western portion of the district were producing at near full capacity. However,
taconite mines in northern Minnesota and the Upper Peninsula stabilized production in the
face of softening demand.
Agriculture
Economic activity in the agricultural sector was mixed since the last report. Yields and
production were large for most district crops. However, crop prices softened, and costs for
many inputs grew. Some producers are delaying harvest to let the grain dry naturally in fields
due to higher energy costs. In addition, barge transportation costs increased as Mississippi
barge traffic was disrupted due to hurricane-damaged Gulf ports. Meanwhile, the first cases

in 34 years of tuberculosis-infected animals were reported in three Minnesota cattle herds.
Employment, Wages, and Prices
Some signs of tightening in labor markets were noted since the last report. A local job service
representative in Montana noted that there were more job openings than qualified people
available. Bank directors reported that openings for mining and finance-related positions in
Minnesota, call center positions in South Dakota, and construction trades in Montana were
difficult to fill.
Employment surveys indicate moderate hiring activity. According to a survey by a temporary
staffing agency, 26 percent of businesses in Minneapolis-St. Paul expect to hire employees
during the third quarter while 13 percent plan to reduce staffing levels. A year ago, 32
percent planned increases and 4 percent expected reductions. According to the recently
released St. Cloud (Minn.) Area Business Outlook Survey, 32 percent of respondents plan to
increase staffing levels during the next six months; 11 percent anticipate decreases. A recent
survey of about 100 business leaders in the Upper Peninsula showed that employment was
expected to grow, but at a relatively sluggish pace.
In contrast, the number of initial claims filed for unemployment benefits in Minnesota
increased 15 percent in September compared with a year ago. A Minnesota-based airline
recently announced plans to lay off 400 pilots and 1,400 flight attendants companywide. A
hair care product plant closed in St. Paul that affected over 100 jobs.
Overall wage increases were moderate. For example, a South Dakota county recently
announced plans to give county employees 3 percent raises next year. Results from the St.
Cloud Area Business Outlook Survey show that just more than half of respondents expect to
increase employee compensation over the next six months. However, a bank director noted
that a fast food restaurant in southwestern Montana was recently offering starting wages of
$10 per hour.
Significant price increases in energy, fuel, and some construction-related plastics were the
most visible effects of Hurricanes Katrina and Rita on the district. Home and commercial
heating bills recently increased 27 percent in Montana; similar increases are expected in
other district states. During the first week of October, average gasoline prices in Minnesota
were 92 cents higher than a year ago, but down 8 cents from their peak in early September.
Surcharges were common at various stages of production for several goods, ranging between
3 percent and 12 percent. Prices for construction-related plastics, including PVC pipe, have
increased significantly.
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Tenth District--Kansas City
The Tenth District economy continued to expand moderately in September and early
October. Expansion in the manufacturing sector was strong, and labor markets showed solid
improvement. In addition, activity in the commercial real estate and energy sectors improved,
and agricultural activity remained solid. On the other hand, consumer spending increased less
than in previous surveys, and residential real estate activity eased slightly. Wage pressures
edged down, but wholesale price pressures rose further and retail price pressures increased
moderately.

Consumer Spending
Growth in consumer spending was somewhat weaker in September and early October than in
previous surveys. Retailers, mall managers, and restaurants reported modest year-over-year
increases in sales in September and early October, following stronger growth during most of
the summer. Sales of apparel were generally reported to be strong, but several contacts noted
that sales of "big-ticket" items such as electronics and jewelry were weak. Some retailers
reported that stock levels were somewhat too high, although they plan few changes to
inventories in coming months. Store managers were less optimistic about future sales than in
previous surveys due to concerns about the impact of high energy prices on holiday
spending. They generally expect sales to be flat to slightly higher in the months ahead. Most
auto dealers reported a decline in vehicle sales as manufacturers' employee price discounts
came to an end. Sales were down both from the previous period and from a year ago.
Smaller, fuel-efficient cars were reported to be selling relatively well, while sales of trucks
and SUVs were said to be weak at most dealerships. Most dealers believe that sales will
remain sluggish in the months ahead due not only to the termination of employee price
discounts but also to high gasoline prices. Travel and tourism activity in the district was
largely unchanged in September and early October after expanding strongly in recent
surveys. Most hotels reported that occupancy rates remain above year-ago levels. Tourism
contacts generally expect activity to remain high in coming months.
Manufacturing
District manufacturing activity expanded strongly in September and early October. Many
plant managers reported increases in production, shipments and orders from the previous
survey, and factory activity was up considerably from a year ago. The strongest growth was
reported by producers of durable goods, although producers of nondurable goods also noted
continued solid gains. A number of firms reported that raw materials had become more
difficult to obtain, due in part to transportation delays caused by Hurricanes Katrina and Rita.
Manufacturers generally expect production to increase in the months ahead, although those
firms that are heavy users of petroleum-based inputs tend to be less optimistic.
Real Estate and Construction
Housing activity eased slightly in September and early October, while commercial real estate
continued to show modest improvement. Builders reported that housing starts generally
declined somewhat from the previous survey, with starts below year-ago levels in some areas.
In the months ahead, starts are expected to continue to ease in most areas. Although most
builders said that they have had no significant problems obtaining materials, many expect
that availability will become a problem in coming months. Real estate agents reported that
home sales were generally flat since the previous survey and unchanged from a year ago.
Several contacts noted an excess inventory of unsold homes in their markets. Year-over-year
home price growth remained moderate in most areas, and realtors expect similar growth in
home prices through the end of the year. Mortgage lenders reported that demand for new
home mortgages and refinancings declined modestly since the previous survey. Commercial
real estate activity in the district continued to improve modestly in September and early
October. In several cities, vacancy rates edged down, while absorption rates and sales edged
higher. Prices and rents for office and other commercial space were largely unchanged.
Commercial real estate agents generally expect further slight improvements in office markets
in the months ahead.
Banking

Bankers report that loans and deposits both edged up since the last survey, keeping
loan-deposit ratios unchanged. Demand rose slightly for commercial and industrial loans,
home equity loans and residential construction loans, while home mortgage demand fell
slightly. On the deposit side, demand deposits and money market deposit accounts increased
slightly, while other types of accounts held steady. All respondents increased their prime
lending rates since the last survey, and almost all respondents also raised their consumer
lending rates. Lending standards were unchanged.
Energy
District energy activity expanded solidly in late September and early October. The count of
active oil and gas drilling rigs in the region continued to increase, although several contacts
noted that they were still constrained by a lack of workers and equipment. Drilling is
generally expected to increase further in the months ahead. Most contacts believe natural gas
prices will continue to rise due to shut-in production in the Gulf of Mexico, and oil prices are
also expected to remain elevated. Several contacts said oil and gas production in some parts
of Wyoming will be boosted during the winter months by the lifting of seasonal drilling
restrictions.
Agriculture
Agricultural conditions in the district remained solid in September and early October.
Bankers report that warm, dry weather allowed for favorable harvest conditions. Many
producers were able to take advantage of the weather to dry crops in the field rather than
incur drying costs at elevators. However, following Hurricanes Katrina and Rita, producers
faced lower prices for their crops due to transportation disruptions that significantly
hampered grain exports. Winter wheat planting was progressing well due to the dry
conditions, and cattle producers were benefiting from lower grain prices. However, high
energy and fuel prices remain a key concern heading forward.
Labor Markets and Wages
Labor markets continued to firm in September and early October, but wage pressures edged
down. Hiring announcements exceeded layoff announcements by a sizeable margin, and the
percentage of contacts experiencing labor shortages rose slightly from the previous survey.
Specific types of workers reported to be especially difficult to find included rig workers,
retail salespeople, and resort staff. Nonetheless, the percentage of firms reporting wage
pressures was lower than in recent surveys, as was the percentage of contacts expecting wage
pressures to increase in the months ahead.
Prices
Wholesale price pressures continued to rise in September and early October, and retail price
pressures also increased moderately. The share of manufacturers reporting materials price
increases was the highest on record. Price increases were reported for a wide variety of
inputs, including steel and petroleum-based materials. Transportation costs were also
reported to have increased sharply. The share of manufacturers raising output prices also
rose, and plant managers expect materials prices and output prices to rise still further in the
months ahead. Most builders reported increased costs for a wide range of materials, and they
expect that prices will continue to rise in the months ahead. More retail stores than in the
previous survey reported raising selling prices, and many stores plan further increases in
prices going forward. Hotels generally reported higher daily room rates than in the previous
survey, and additional increases are expected in coming months.

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Eleventh District--Dallas
Eleventh District economic activity continued to expand in September and early October.
Two major hurricanes caused loss of life and significant economic disruptions in some areas,
destroying property and dislocating families and businesses. Many areas of the District
received an influx of evacuees that accelerated activity and made assessment of the
underlying business cycle more difficult. Some firms anticipate increases in demand, at least
temporarily, to supply goods and services to evacuees and to support rebuilding efforts. Still,
in the near term, many contacts say the higher cost of fuel, energy and other inputs has
dampened the economic outlook.
Demand for energy and manufactured products remained strong, but hurricane damage
slowed the rate of growth of activity. Retail sales and service sector activity increased and,
for some firms, was boosted by the storms. Construction and real estate activity continued to
strengthen, and some markets were strongly stimulated by demand from hurricane evacuees.
There was little change in activity in the financial services sector, where contacts say the
supply of credit continues to outstrip demand. Agricultural producers reported that dry
conditions are hurting some production, but hot weather is encouraging a large cotton crop.
Prices
There were numerous reports of price increases--some sizeable--since the last Beige Book,
most notably for energy, petrochemicals, plastics, transportation and some constructionrelated products, such as sheet rock and cement. Lumber prices increased considerably after
Katrina, partly because of increased demand but also because of uncertainty about shortages
and about the extent of the damage. Lumber contacts say prices are not expected to rise
further but may remain high for some time. Fuel surcharges and rising energy costs have
become a serious concern for most manufacturers. Some manufacturers have been able to
pass a portion of the cost increase to selling prices, but others say stiff competition is forcing
them to absorb rising costs by looking for additional productivity increases. Retailers report
upward price pressure from vendors, but stiff competition is limiting the ability to pass cost
increases forward to selling prices. Some manufacturers and retailers say they are making
plans for price increases in the first quarter of 2006.
Heavy demand and hurricane disruptions pushed crude oil prices to near $70 per barrel, but
prices fell to $62 per barrel in early October, the lowest price of the last two months. Crude
inventories remain near 5-year high levels. Distillate inventories (diesel and heating oil) are
near a 5-year high, but contacts say inventories should be building more rapidly. A series of
mechanical problems, fires in the refinery system and a strategy of building distillate
inventories had reduced gasoline inventories prior to the storms. Gasoline inventories have
bounced back strongly as increased imports bolstered supply and consumers reduced
gasoline consumption in response to high retail prices. Natural gas prices increased from $9
per million Btu to $14. With the approaching heating season, contacts are concerned about
the loss of natural gas production in the Gulf of Mexico. Natural gas inventories were heavy
last spring but were reduced close to normal levels by a very hot summer. Injections into
inventory have been near normal in recent weeks despite the loss of Gulf production, partly
because so many large gas-using petrochemical plants are down.

The strength and uncertain path of Hurricane Rita led to an unprecedented shutdown of 90
percent of petrochemical capacity on the Gulf Coast. Coming on the heels of Katrina, the
result has been widespread shortages of many chemicals and plastics. A number of large
producers declared force majeure, allowing them to break contracts. Basic chemicals and
plastics are now on allocation, with sizable price increases for ethylene, propylene,
polyethylene, PET bottle plastic, polystyrene, polyvinyl chloride and polypropylene.
Chemical prices have not risen in the rest of the world, but contacts say it takes roughly six
weeks for imports to reach U.S. markets.
Labor Market
The labor market appears to be tightening. There are more reports of rising wages, such as
for workers to support the energy industry, professionals with financial experience,
accountants, auditors, auto mechanics, truck drivers, engineers and software programmers.
Anecdotal reports suggest accountants are receiving sizable raises and bonuses. The high cost
of gasoline is discouraging some workers from taking low-paying jobs with long commutes.
Temporary service firms expect wages to gradually increase to keep pace with higher energy
costs.
Contacts expressed optimism that evacuees would bring much needed skills to the labor pool,
and some businesses report hiring skilled workers who intend to stay in the District. Hiring
has picked up to provide goods and services to evacuees.
Manufacturing
Manufacturing activity expanded but hurricane disruptions slowed the rate of growth,
particularly for energy-related products. Demand for construction-related materials remained
strong and in some instances increased. Food manufacturers also reported higher demand.
Demand for metals was mixed. Some producers experienced a strong surge in orders to
supply product to the Gulf Coast, but others reported a dip in orders, largely because of a loss
of the New Orleans market. Prices are up for some metals, such as for copper and scrap steel.
Demand for lumber was stronger than usual because competitors in the Gulf Coast and New
Orleans were unable to fill their orders. Demand for paper products was unchanged over the
past month.
Respondents in high-tech manufacturing said sales and orders continued to grow at a solid
pace. The semiconductor industry reported no noticeable impact from the hurricanes,
although some electronics producers had increases in orders for emergency related items,
such as two-way radios. Demand from Asia continued to pickup.
Refinery utilization rates have fallen sharply, with about 15 percent of U.S. capacity still out
of service. The decline in utilization has been similar to the drop that occurs with the usual
fall maintenance schedule, but maintenance has not been done. Contacts expect more
mechanical problems because some plants are being run hard. Respondents say refinery
margins have increased from an "excellent" $10 per barrel to $22 in September. Refined
product imports have soared.
A lack of basic inputs is keeping a number of chemical plants on partial or complete
shutdown. Contacts say the actual damage to these plants is not serious. The system is
unbalanced for a number of products, pushing up costs and prices. For example, chlorine and
caustic soda are joint products. Much of the demand for chlorine was put out of service by

Katrina, but the demand for caustic soda remains strong. Chlorine is hard and expensive to
store, so caustic soda users (particularly pulp manufacturers in the southeast) are facing
allocations and large price increases.
Services
Demand for temporary staffing services picked up in most parts of the District, with some of
the increase resulting from the disruptions caused by Hurricane Katrina. Orders to supply
workers to lumber and mobile home manufacturers climbed sharply, while demand for
skilled workers in high-tech manufacturing in Dallas and Austin remained strong. Legal
firms reported good demand for their services. Accounting firms report very strong demand,
especially for audit services, mergers and acquisitions and Sarbanes-Oxley related services.
Demand is up for railroad, trucking and cargo firms. The rail and trucking industries say they
are operating at or near full capacity. Trucking firms say Katrina and Rita have recently
stimulated demand for shipping, but their ability to increase fees is not keeping pace with
rising fuel prices and, in some instances, customers are choosing to forgo shipments because
prices are too high. The rail industry has been unable to meet demand because of a lack of
capacity. Grain volumes have almost tripled because grain that used to be shipped down the
Mississippi by barge to the New Orleans port and is now being shipped by rail to other
international ports. Shipments decreased significantly for chemicals, petroleum products,
coke, pulp, paper, lumber, wood and raw logs. Contacts were surprised by a significant and
unexpected slowing in rail shipments of metals, metallic ores (used in cars, appliances and
construction), cars and other construction-related materials. This was unrelated to the
hurricanes, they say, and suggest that this may indicate an upcoming slowdown in
consumption of intermediate goods and home building.
A sharp increase in jet fuel costs has added to the airline industry's difficulties. Contacts say
demand remains strong despite fare increases. But higher ticket prices have not been
sufficient to cover fuel costs for most airlines, leading some carriers to reduce flights. This,
along with the bankruptcy of two more major carriers, has reduced capacity in the domestic
market--but not enough for most carriers to be profitable. The labor market for airline
employees has become even looser as some workers attempt to flee newly bankrupt carriers.
High fuel costs along with proposed pension reform are expected to force further structural
change in the industry.
Retail Sales
Retail sales continued to increase, with strong sales of bottled water, generators and gasoline.
The District became home--at least temporarily--to upwards of a quarter of a million
evacuees. Contacts say these additional shoppers will make it difficult to interpret sales
figures. Retailers serving higher income customers reported better sales growth than those
serving lower income customers, who are spending a larger share of their income on
gasoline. A large retailer noted that customers had increased use of credit cards instead of
debit cards and questioned if they are conserving cash or are cash constrained. Contacts were
less optimistic about the outlook for sales for the rest of the year, and at least one national
retailer had canceled orders in anticipation of slower national sales. Auto sales were mixed.
Demand for fuel efficient vehicles increased slightly, but sales of trucks and SUVs fell 20
percent.
Construction and Real Estate
The large influx of evacuees generated a surge in real estate activity. The long-term impact of

the hurricanes is a wild card for real estate markets because it is unclear where displaced
businesses and residents will choose to put down roots. Apartment demand was
strengthening prior to Katrina and exploded as evacuees fled New Orleans. Sharply increased
demand affected apartment markets in most metropolitan areas, but the effect was most
dramatic in Houston, where the market tightened up virtually overnight after being one of the
most overbuilt markets in the country. Big blocks of class A apartments were snapped up by
employers to use as corporate housing. Demand from evacuees in the Dallas area was mostly
for older properties, helping reduce the chronic overhang of class C and D properties, at least
temporarily. Contacts expect occupancies to tighten over the next year because there is little
construction planned for 2006.
Demand for new and existing homes remained strong. While demand was slightly boosted by
sales to hurricane evacuees, the larger influence continued to be from relocations and
investment purchases. In Austin, sales strengthened for higher-priced homes. Builders in
Dallas say competition is stiff, holding down price increases despite strong demand. Rising
construction costs have led builders to be more uncertain about the outlook.
Office markets continued to improve at a steady pace. Leasing continued to increase in
Dallas, and landlords are reducing incentives while rents are holding firm. Houston's office
sector also continued to improve, with rising occupancies and rents, but contacts say
Katrina's impact has not been huge. Some temporary space has been absorbed by legal and
energy firms with operations in both Houston and New Orleans, and some of the energy
firms may choose to remain in Houston, which reflects an on-going trend.
Financial Services
Deposit and loan growth remained solid, according to contacts, who report that the supply of
credit continued to outstrip demand. Respondents report continued pressure on net interest
margins and a lot of competition on the pricing of loans, but credit quality is still good.
Hurricane-related disruptions to financial services appear to have been only short-term.
Energy
Although the hurricanes weakened activity in this sector, contacts report strong underlying
demand and emphasized their inability to fill orders or provide services without long lead
times. International activity also remained strong. Service firms continued to push through
price increases and build margins.
The hurricanes caused some significant loss of rigs in the Gulf of Mexico, and repairs have
been hampered by a lack of infrastructure. Katrina's damage to Louisiana's staging areas for
the Gulf forced the industry to move its logistical base to Cameron, Texas, which was wiped
out by Rita. Loss of docks, boats, warehouses and equipment has hampered repairs in the
Gulf. The repair effort will create jobs for diving companies, supply boats and helicopter
transportation for months or years to come.
Agriculture
Hot and dry weather conditions prevailed across most of the district, stressing crops and
pastures, reducing hay production and compelling ranchers in the driest areas to liquidate
cow herds. The cotton crop has benefited from the hot weather conditions, and producers are
expecting yields to be just under last year's record harvest. Cattle prices are high. Contacts
are uncertain about the full economic impact of the hurricanes. There were pockets of
considerable disruptions, particularly to poultry producers in East Texas and to the rice crop

that was ready to be harvested. Producers are extremely concerned about the recent surge in
fuel prices which has pushed up fertilizer, chemical, irrigation and other production costs.
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Twelfth District--San Francisco
The Twelfth District economy expanded further during the survey period of September
through early October. Increases in energy prices added to inflationary pressures in some
industries, although overall price inflation remained modest. District labor markets tightened
further, with significant wage increases reported for selected high-skill occupational
categories. District retail sales weakened somewhat, but service providers saw continued
strong demand. Most manufacturers and producers of agricultural and resource-related
products saw further growth in output and sales. Activity in residential real estate markets
remained robust but slowed slightly in some areas, and commercial real estate markets
improved further. District banks reported strong loan demand and good credit quality.
Wages and Prices
Price increases generally were limited to products and services for which energy costs are a
significant share of total costs. Prices rose significantly for transportation services and
energy-intensive goods such as plastics, petrochemicals, fertilizers, and selected building
materials, and contacts noted fuel and freight surcharges of up to 30 percent for some items.
Final prices for most goods and services were largely stable, however, with contacts citing
strong competitive pressures and continued gains in production efficiency as factors that
limited the impact of rising input costs on final prices.
Respondents reported further tightening in District labor markets in recent weeks, especially
for workers with specialized skills in the financial, construction, information technology,
resource extraction, and health-care services sectors. Wage pressures for these occupations
were up noticeably, and one producer of natural gas in Idaho reported recent salary increases
near 14 percent for selected occupations. By contrast, salary increases remained much more
modest outside of these sectors and occupations, in the range of 3 to 4 percent on an annual
basis. Employers' costs for employee benefits continued to rise more rapidly than wages,
though less rapidly than in previous survey periods.
Retail Trade and Services
District retail sales weakened somewhat. Retail contacts in several areas noted slower sales,
reportedly due in part to a decline in consumer confidence and reduced spending power
arising from higher gasoline prices. Automobile sales fell relative to the previous survey
period but reportedly remained at high levels. Sales of imported vehicles were strong, but
sales of domestic brands slowed, due in part to a shift away from SUVs and trucks to more
fuel-efficient automobiles.
Activity in the services sector expanded significantly on net. Demand grew further for
providers of health-care, media, real estate, and transportation services, but contacts noted
uneven demand for high-tech services. District travel and tourist activity remained vigorous,
notably in Hawaii, where domestic and international visits have been at record levels. Hotel
occupancies and room rates rose further in several markets, with demand stimulated in part
by relocation of business conferences away from cities affected by the recent hurricanes.
Manufacturing

District manufacturers in general reported solid demand and sales for their products in
September and early October. Semiconductor contacts reported a modest increase in orders
and sales and a steady rise in capacity utilization, with improved profitability noted as well.
Makers of machine tools and industrial equipment saw strong demand. A strike by Boeing
machinists put a temporary halt on commercial aircraft production in the Pacific Northwest,
but the strike was resolved within a month and production returned to its earlier high level.
Increased demand arising from the recent hurricanes added to underlying demand strength
for several product groups, including processed foods and beverages, shelter and storage
products, and selected building materials. Contacts also reported scattered materials
shortages due to interrupted production in areas affected by the hurricanes, notably for plastic
pipes. Apparel manufacturers reported little change in output and sales.
Agriculture and Resource-related Industries
Providers of agricultural and resource-related products reported strong demand. Orders and
sales for a variety of crops, beef cattle, and dairy products expanded further, and contacts
noted good profitability despite rising input costs. In the energy sector, District producers of
natural gas operated at or near full capacity, and inventories reportedly were adequate.
Real Estate and Construction
Demand for residential real estate remained strong, while the market for commercial real
estate tightened further in most areas. Home sales, price appreciation, and construction
activity continued at rapid rates, although contacts in some areas noted a gradual slowing in
the pace of price increases and sales. On the commercial side, demand for office space
strengthened further, and rental rates rose in most major markets. In the midst of high levels
of construction activity, scattered shortages of building materials emerged, reportedly leading
to project delays and potential cancellations in a few rapid-growth areas.
Financial Institutions
District banking contacts reported further growth in loan demand and solid asset quality
during the survey period. Demand for commercial and industrial loans grew further in most
areas, while demand for construction, commercial real estate, and home loans remained at
high levels or grew as well. A Southern California respondent noted slight slowing in the
pace of loan growth in that region. Asset quality reportedly was high, with declining
delinquencies noted in some areas.
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Last update: October 19, 2005


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