The Federal Reserve's Beige Book Summary

September 5, 2007

Prepared at the Federal Reserve Bank of Cleveland and based on information collected before August 27, 2007. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the Federal Reserve Districts indicate that economic activity has continued to expand. St. Louis and Kansas City described the pace of activity as moderate; Cleveland, Chicago and Minneapolis said their economies were expanding at a modest rate; and Boston and Atlanta reported that activity was mixed. New York cited continued expansion. The economies in Philadelphia, Richmond, Dallas, and San Francisco continued to grow; however, the pace of activity has slowed.

Most Banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around. While several Banks noted that commercial real estate markets had also experienced somewhat tighter credit conditions, a number commented that credit availability and credit quality remained good for most consumer and business borrowers. Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.

Retail sales were generally positive, with increases characterized as modest to moderate. However, several Districts described motor vehicle and furniture sales as slow. Manufacturing activity expanded across most Districts, with reports of softening demand for building materials and autos. The weakness in the housing market deepened across most Districts, with sales weak or declining and prices reported to be falling or flat. Most Districts reported a continuing contraction in the residential mortgage market. Commercial real estate activity was generally stable to expanding. Demand for business loans held steady or weakened, while consumer lending was mixed. Agricultural conditions varied widely across Districts, with several reporting damage to crops and pastures as a result of excessive heat and drought conditions. Activity in the energy and mining sectors remained positive in all of the Districts reporting on these sectors. Nearly every District reported at least modest increases in employment during the recent survey period. Most Districts characterized their wage increases as moderate or steady. Wage pressures were intense only in isolated professions in short supply. And most Districts reported little change in overall price pressures.

Consumer Spending and Tourism

Districts generally reported modest to moderate increases in sales, although Boston, Cleveland, and San Francisco described retail sales as mixed. Dallas reported little change in consumer spending growth. Richmond reported that retail sales posted modest gains in July but pulled back sharply in August. New York, on the other hand, described July sales as somewhat below plan, but August sales as ahead of plan.

Furniture sales declined in Philadelphia, Richmond, St. Louis, and San Francisco while Boston experienced stronger sales. Merchants in New York and Chicago reported a slight pickup in sales of home furnishings. Retailers in Philadelphia, Richmond, Atlanta, and Kansas City noted solid-to-strong back-to-school sales. However, Chicago and Dallas reported difficulty comparing back-to-school shopping with last year because of school-year timing. Boston and Kansas City reported strong sales of apparel items while New York and St. Louis experienced mixed results. Some weakening in apparel sales was seen in Philadelphia, Cleveland, and Chicago.

Vehicle sales were described as slow or subdued in many Districts. Cleveland, Richmond, Atlanta, Chicago, St. Louis, Dallas, and San Francisco, all reported sluggish new vehicle sales. In contrast, auto dealers reported that sales increased modestly in Kansas City and picked up slightly in Philadelphia. Cleveland and San Francisco noted strength in used vehicle sales. Many auto dealers reported anxiety about future sales due to tighter household credit conditions.

Districts that commented on retail inventory levels generally described them as at or above desired levels. Several retailers reported that they planned to or had already heavily discounted merchandise to move inventory.

Most reports on tourism were positive, with the New York, Atlanta, Minneapolis, and Kansas City Districts reporting particularly solid growth in tourist spending. Minneapolis cited dry, warm weather for helping the tourism industry. Two Districts were less positive on tourism: San Francisco experienced slowing tourist activity and Chicago described a pessimistic outlook for the rest of the year despite a slight pickup in some parts of the District in August.

Services

Reports on the service industry were generally neutral to positive. Several Districts posted strong gains in financial services, health care, information technology, and technical and professional services. Demand for legal services was stable or showed modest increases. Demand for transportation services showed signs of softening—Atlanta and Dallas reported decreased activity while Cleveland and Chicago cited no change. Reports from Boston, Richmond, Minneapolis, and Dallas indicated that the recent volatility in financial markets may slow down the pace of business activity.