“Private nonresidential construction eked out a small gain in July,” said Kenneth D. Simonson, chief economist for the Associated General Contractors of America (AGC), the nation’s leading construction trade association. “I expect private nonresidential construction to outperform last year’s disastrous double-digit declines but I suspect the industry is still a few quarters away from full recovery.

“New data today from the Census Bureau shows that the overall value of construction put in place edged up 0.2% in July from an upwardly revised June total to a seasonally adjusted annual rate of $880 billion, just short of the all-time high of $883 billion set last January,” Simonson pointed out.

Census reported that private residential construction rose 0.6% from June to a record $450 billion. Private nonresidential construction totaled $215 billion and public construction amounted to $216 billion, 0.4% below the June figure.

“My biggest worry at the moment is what will happen to highway construction,” Simonson said. “If Congress and the President fail to enact a highway bill by the end of September, tens of billions of dollars of needed highway construction could halt abruptly. That would be catastrophic for contractors; manufacturers of paving materials, steel, and construction machinery; and thousands of small service businesses.” The Census Bureau reported that highway construction put in place in July was 0.9% below the June total.

“The other big public category, educational construction, dropped 1.2% in July,” Simonson added. “The results would have been worse if not for a 3% rise in higher education construction. But I’m concerned that recent legislative cutbacks and tuition hikes will mean a dropoff in college construction spending later this year.

“As for private nonresidential construction, the gains in July were spotty, and that story is likely to persist for several months. For instance, construction of hospitals, medical buildings and special health care facilities rose 0.6% for the month. That category is up 12% for the first seven months of 2003 compared to January-July 2002. Given the rapid rise in health care spending and insurance premiums, I expect more healthcare-related construction for a long time to come,” Simonson said. “In fact, two other health-related construction categories also did well in July: drug stores were up 10%, and chemical plants, which include pharmaceuticals, gained 1%.”

Simonson noted, “Automotive sales and service/parts construction rose 5% and 33%, respectively, for the month but on a year-to-date basis they are down by 15% and 23% compared to the first seven months of 2002. Similarly, electric power construction rose 3% in July but is off 7% year-to-date. Other private nonresidential categories are likely to have seesaw patterns for several months until the recovery becomes more widespread.”

Simonson concluded, “Housing and home-improvement construction are close to topping out but should decline only gradually over the next several months.”

Summary plus Real Estate and Construction-Related Excerpts from the Fed’s Sept. 3 “Beige Book”

The Federal Reserve’s “Beige Book” is a summary of economic conditions reported by businesses in informal surveys conducted by the 12 Federal Reserve Banks around the country (which are referenced by number and name of the headquarters city). Following are the opening paragraphs from the national and regional summaries, plus any construction- or real estate-related comments. Click on the links shown for the full Beige Book or regional report. If you are not yet receiving regional construction excerpts and want to, send an email to simonsonk@agc.org listing the states for which you want regional excerpts. (Some states are split between two banks; both bank reports will be sent to those state lists. A map showing the territory of each bank is at http://www.federalreserve.gov/otherfrb.htm.)

National summary

(full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/default.htm. Prepared at the Federal Reserve Bank of Boston and based on information collected before August 25, 2003. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.)

Reports from the twelve Federal Reserve districts indicate that the economy continued to improve in July and August. Eleven districts say that activity levels increased during the summer. In some districts, improvement occurred in selected sectors, and in others, it was broad-based. Even in the Dallas district, where activity remains generally weak, contacts are said to be more optimistic.

Consumer activity showed improvement in most districts. But Kansas City, Philadelphia, and Boston noted that the increases in retail sales were slight or modest, and New York indicated retail results were better in July than August (partly on account of the August blackout). And retail sales were weak or softening according to respondents in the Cleveland and St. Louis districts.

Ten districts report increases in manufacturing activity. The exceptions were Dallas, where there was little change, and Richmond, which reports that manufacturing weakened. District reports on nonfinancial services firms--temp agencies, software and IT companies, or trucking and shipping--mostly indicate activity increased during the summer months. Among districts reporting on bank lending, a majority cite increases. Most districts report strong housing markets and weak commercial real estate markets, with the latter showing scattered signs of improvement.

Business reports from the New York, Cleveland, Atlanta, Chicago, and Dallas districts mention the mid-August blackout. While respondents note a comprehensive assessment is premature in this round of information-gathering, the effects were generally small. Even where firms were closed for several days, affected contacts suggest they are not anticipating difficulties in making up for lost production or shipments.

Construction and Real Estate

Residential real estate activity remained strong in most districts in July through mid-August, with some contacts reporting all-time sales highs. Respondents in the Chicago, Cleveland, Kansas City, Minneapolis, Philadelphia, Richmond, St. Louis, and San Francisco districts report that overall sales were strong in recent weeks. Dallas indicates that real estate markets "improved" in July and early August, but that the industry "remains very competitive, restraining price increases." In contrast to most districts, real estate contacts in Atlanta report a "slight weakening in overall sales growth, especially at the higher end;" some of this weakness they attribute to unusually wet weather over the summer months. Contacts in the Chicago, Dallas, Kansas City, New York, Philadelphia, Richmond, and San Francisco districts say that the recent upturn in mortgage interest rates prompted a rush to complete sales of both new and existing homes in August. Contacts in Atlanta anticipate some continued slowing through the end of the year as a consequence of rate increases.

Although commercial real estate markets remained lackluster in most districts in July and early August, scattered signs of improvement were reported. Overall conditions are "soft" in Chicago, "weakened" in Kansas City, "sluggish" in Minneapolis, and "lagging" in St. Louis. Boston reports that commercial real estate markets are "holding steady" and Richmond cites "flat" conditions. By contrast, New York respondents note continued improvement, particularly in areas of Manhattan. Atlanta cites "small improvements," and Dallas reports signs of optimism. Most districts report high vacancy rates and some edged higher, but New York cites moderate declines in vacancies, led by strong leasing activity in the Class B segment. Looking forward, contacts in several districts indicate they expect continued weakness until employment growth improves.

1st District (Boston)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/1.htm.)

Conversations with First District business contacts again have a positive tone. Retailers say sales were up modestly during the summer months, and manufacturers report second quarter demand improvements in selected areas. Temp firms and software and IT companies also see some pickup. Commercial real estate markets are said to be stabilizing. Contacts in all sectors indicate that they remain cautious.


Capital spending plans are mixed among contacted retailers, with about half holding spending steady. New store openings account for most increases, while decreases reflect computer-related cutbacks.

Commercial Real Estate

Commercial real estate markets in New England are holding steady. Contacts report no substantial improvement, but no material deterioration either. High office vacancy rates continue to prevail throughout the region. Even though Boston experienced positive market absorption in the second quarter for the first time in over two years, the area's vacancy rates increased as a result of new office space added to the market. Office rents continue to decline in the Boston area and are "nowhere near building replacement cost." Consequently, new construction is being put on hold until it becomes cost effective, which will likely take "a long time." Activity levels are low in all markets, although some contacts attribute that to usual seasonal slowdowns and anticipate more activity in the fall. Others expect the high vacancy rates to persist for quite a while, insisting that substantial employment growth is necessary to improve conditions in commercial real estate markets.

2nd District (New York)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/2.htm.)

The Second District's economy has given mostly positive signals since the last report. The mid-August power outage evidently had a minimal effect on overall economic activity-some impact was reported on retailers and contract employers. Retail sales, which were above plan in July, were close to plan, on balance, in the first three weeks of August; inventories were generally reported to be at desired levels. Manufacturing activity continued to improve in July and early August, and there was a noticeable pickup in port traffic.

Housing markets have continued to show strength, although some contacts view brisk summer activity as an artifact of rising mortgage rates. New York City's office market continued to improve in July, with particular strength in the Class B segment, and city hotels report increased business. Finally, bankers in the district report stable loan demand, little change in credit standards, and increased delinquency rates on commercial loans but decreased rates on home mortgages.

Construction and Real Estate

The housing market has remained robust in recent weeks. New Jersey home-builders report that housing demand has been unusually strong for August, as rising mortgage rates have reportedly spurred a sense of urgency among buyers. Construction is lower than in 2002, mainly due to a dearth of available land, and selling prices are said to be leveling off but still higher than a year ago. Buffalo-area realtors indicate that home sales were strong in July and that selling prices were up roughly 10 percent from a year earlier. Across most of New York state, compared with a year earlier, there were fewer sales transactions but median selling prices posted double-digit gains. Manhattan's co-op and condo market was described as unusually busy during the first half of August; selling prices were steady but still noticeably higher than a year ago. Apartment rental markets have been mixed but generally sluggish. In Manhattan, while rents remain moderately below a year earlier, they are said to have firmed modestly since the end of 2002. In contrast, New Jersey's Hudson riverfront rental market has experienced persistently high vacancy rates and little or no rebound in rents.

Manhattan's office market showed continued improvement in July, led by strong leasing activity in the Class B segment, largely from small to medium-sized firms. Overall, vacancy rates declined moderately in Midtown and Midtown South; Lower Manhattan's rate inched up but is still substantially lower than at the end of the first quarter. Asking rents appear to have leveled off this year but are still roughly 8 percent lower than a year ago.

Financial Developments

Interest rates rose for all types of loans-in particular more than three in four bankers report higher rates for residential mortgages, and more than half report an increase in rates for commercial mortgages.

3rd District (Philadelphia)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/3.htm.)

Business activity in the Third District continued to advance slowly in August. Manufacturers reported increases in orders and shipments for the month. Retail sales of general merchandise picked up in August for the usual back-to-school shopping period, although the year-over-year gain appeared to be slight. Auto and light truck sales have been strong as model year close-out promotions boosted the sales rate. Bank lending has been rising slowly, with most of the gain coming from residential lending. Commercial real estate markets remain soft, but home sales have increased. Overall tourism business for the summer season appears to be matching last year's level, but lodging activity is off from last summer.

The outlook among contacts in the Third District business community is for steady or slowly improving conditions. Manufacturers forecast increases in shipments and orders during the next six months. Most of the retailers surveyed in August expect sales to rise slowly through the fall. Auto dealers anticipate some slippage in sales after 2003 models are cleared out. Bankers expect slow growth in lending as the pace of economic activity in the region gradually rises.

Real Estate and Construction

Commercial real estate firms in the Third District reported that overall office vacancy rates have increased in suburban markets, where several new buildings have recently become available with substantial amounts of space not pre-leased. Vacancy rates in suburban markets were estimated in a range of 12 to 24 percent, up around 1 percentage point since the spring. The vacancy rate in the Philadelphia central business district has been nearly steady at around 13 percent, virtually unchanged in recent months. Effective rental rates continued to decline as landlords offer tenant improvement allowances and rent-free periods, and several major tenants have negotiated renewed leases at lower rents. Commercial real estate contacts say office vacancy rates will probably begin to edge down near the end of the year as the number of new buildings becoming available declines.

Residential real estate agents and home builders generally reported that sales have accelerated. They said the recent upturn in mortgage interest rates prompted a rush to complete sales of both new and existing homes. Home builders generally expect sales to remain strong, although some indicated that their backlogs appear to have peaked. Real estate agents expect a strengthening economy to support a fairly good rate of home sales despite higher mortgage rates.

4th District (Cleveland)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/4.htm.)

Most Fourth District contacts reported increased economic activity since the last report, although growth appears to be modest. For the third consecutive report, manufacturers cited steady or improving production and sales. Residential homebuilders reported continued sales growth. Demand for commercial loans increased since the last report, while consumer loans remained constant.

Reports from other areas of the economy were mixed. Retailers and auto dealers experienced continued slow sales, though these were not necessarily unanticipated. Activity in commercial construction accelerated in parts of the District, but it remained sluggish in others. After a more optimistic report in July, conditions in steel did not show further improvement. Though overall prices of inputs were flat or declining, utility prices rose. Employment levels did not change for most contacts; some added employees, and a few firms reported layoffs. While there is plenty available labor, contacts stated there is less available now than during the same time last year. Rising insurance costs have caused a number of firms to change features in benefits offered to employees, both by passing some costs to employees and curtailing some benefits.

Most contacts in manufacturing, residential construction, banking, and trucking and shipping expect conditions to continue improving throughout the rest of the year, while contacts in steel, commercial construction, and retail were more mixed with regard to continued activity.

This District was affected by the blackout in mid-August. Though most contacts could not immediately discern the total impact, retail and manufacturing experienced the greatest impact as a result of closures. Other sectors of the economy experienced minor or no problems due to the electricity problems.


Continued strong sales were cited by homebuilders in the District, as in last month's report. Growth in sales has continued since the spring and, while not uniform, some contacts cited this period being one of the strongest ever. Sales for most builders are above plans, which anticipated sales increases of about 3 to 5 percent during 2003 relative to 2002.

Commercial building continues to be slow, though parts of the District show signs of improvement. Within the last several weeks in the Cleveland area, the number of new projects in several building segments, including manufacturing, warehousing, and distribution had accelerated. There also appears to be increased activity in the Pittsburgh area, while in the Columbus area and the southern part of the District demand remained sluggish.

5th District (Richmond)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/5.htm.)

Economic growth in the Fifth District picked up in late July and August, although manufacturing activity weakened somewhat. Retailers generally reported higher sales, particularly at automobile dealerships and home improvement stores. Services businesses recorded a noticeable improvement in revenues as well, although employment growth in the sector remained subpar. The District's manufacturing sector wobbled, however, weakened by further declines in production and employment, especially in the textiles and furniture industries. In addition, manufacturers trimmed their forecasts for shipments and capacity utilization for the remainder of the year. In housing, rising mortgage interest rates brought a decline in residential mortgage refinancings, but home sales and housing starts continued to be strong. On District farms, incessant rain delayed small grain harvests and thwarted hay production in some areas, but assisted corn and soybean development.

Real Estate

Real estate agents across the District continued to report strong home sales since our last report. A realtor in Greenville, S.C., told us that business had been "incredible," adding that 2003 was a "banner year" for sales at his firm. Likewise, an agent in Charlotte, N.C., said sales had been "off the charts" in recent weeks. Most agents contacted stated that the recent increase in mortgage interest rates had sparked higher sales in August as fencesitters bought ahead of possible further mortgage interest rate hikes. Homes priced in the low-to-middle range remained the best sellers, while sales of homes in the upper ranges continued to be sluggish. Home prices remained relatively steady across the District.

Fifth District commercial realtors reported that overall leasing activity was generally flat in recent weeks, although signs of life were emerging in some areas. A realtor in Bristol, Va., noted continued strength in retail and office space leasing around a booming interstate exit in the area. Stronger retail leasing activity was also reported in Charleston and Huntington, West Virginia. A contact in Roanoke, Va., was "extremely encouraged" by a sharp increase in sales of commercial tracts, while a contact in Raleigh, N.C., reported that office space absorption was positive for the first time in five quarters. All the news wasn't upbeat, however. Demand for industrial and warehouse space remained weak across most of the District and construction activity was generally flat.

6th District (Atlanta)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/6.htm.)

Reports from Sixth District contacts pointed toward a modest improvement in economic activity from late July through mid-August. Retail contacts were positive about sales activity and the manufacturing sector displayed some welcome signs of improvement. The pace of factory orders was reported to have increased in some industries, and transportation contacts noted an increase in shipping activity. Despite the recent run up in mortgage rates, single-family construction and sales remained flat to slightly up. Commercial construction was still limited by low demand for new space. Nonetheless, office leasing activity and net absorption conditions continued to improve in most markets. The District's tourism and business travel sectors continued to lag, and higher gasoline prices in August were expected to further dampen travel. The healthcare and education sectors continued to report increased demand for workers, whereas the pace of the layoffs in the manufacturing sector slowed from earlier in the year. The strongest employment reports came from Georgia and Florida.

Real Estate

According to reports from single-family homebuilders, new home construction and sales from late July through mid-August was flat to slightly up compared with last year. However, wet weather continued to dampen activity in some areas. For instance, one report noted that Atlanta has had one of the wettest summers on record. Reports from District real estate agents noted a slight weakening in overall sales growth, especially at the higher end. Although contacts anticipated some continued slowing through the end of the year as a consequence of higher mortgage rates, a dramatic drop-off in activity is not expected. The region's commercial real estate markets continued to show small improvements, especially regarding leasing activity and net absorption. However, weak demand for new space persisted in most markets.


Reports from lumber mills, high-tech producers, and building material suppliers indicated increased shipping volume and orders.

7th District (Chicago)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/7.htm.)

Seventh District economic activity improved in late July and the first few weeks of August, with contact reports suggesting that gains, while modest, were broad based. The power "blackout" of mid-August forced many Michigan businesses to close for a day or two, but contacts were confident that any lost production and/or sales would be quickly recouped. More generally, both consumer and business spending picked up in late July and August, though households and firms remained cautious. Home sales rose as buyers rushed to lock in interest rates, while commercial real estate markets remained weak. Manufacturing activity also increased slightly, with widespread improvements in key industry segments. Overall lending activity slowed, as mortgage applications dropped sharply. Prices firmed for some producer goods and services, but fierce competition kept retail prices in check. Little precipitation in late July and early August lowered expectations for the corn and soybean harvest, dampening hopes of expanded capital spending by farmers and boosting the likelihood of an increase in operating loan renewals and extensions.

Construction and Real Estate Home sales rose in much of the District in July and early August, while commercial real estate markets remained weak. Realtors and builders in some areas said that July was a "barn-burner month" for home sales, with many reporting all-time sales highs for the month. Several contacts said that rising mortgage interest rates helped boost home sales as potential buyers rushed to close deals, fearing rates would move higher. A few contacts noted that traffic and sales activity slowed modestly in mid-August, but they did not think it was the start of a trend. Realtors and builders were still optimistic about prospects for the fall, as long as interest rates did not rise substantially further. Commercial real estate activities remained soft, and contact reports suggested that markets had not changed much in recent weeks. Demand for office space was still weak. One contact attributed the softness to slow job creation, stating "if tenants aren't adding bodies, they don't need more space." With the lack of payroll employment gains, many property holders again pushed back their timetable for a recovery in office markets.

Prices and Costs

Some manufacturers (including steel, gypsum wallboard, and heavy equipment producers) suggested that firmer demand was allowing them to raise prices and/or trim discounts. Over the last few years, prices had been eroding more or less steadily for many manufacturers due to a combination of weak demand, a strong dollar, and intense competition.

8th District (St. Louis)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/8.htm.)

Economic conditions in the Eighth District, particularly in manufacturing, have improved moderately since our last report. Recently, there have been announcements of plant openings, product line expansions, increased spending on research and marketing, and new jobs created. Retail sales in July and August were down slightly, on average, from a year ago. Auto sales over the same period rose slightly. Over the past three months, District banks have seen almost no change in lending activity. Residential real estate markets in the District continue to do well, while commercial markets are still lagging behind.

Real Estate and Construction

Residential sales are still doing well in most of the District. In June, Memphis year-to-date home sales were 10.3 percent higher than in June 2002. Over the same time period, Little Rock had a 6.1 percent increase and northern Kentucky had a 14.0 percent increase. Contacts report that new home sales continue to be strong despite recent mortgage rate increases. June year-to-date single-family housing permits were up in most of the District's metropolitan areas from last year. Permit levels increased by 22.8 percent in Little Rock and by 5.6 percent in the Memphis area, but decreased by 5.0 percent in the St. Louis area. Commercial real estate markets are still lagging behind residential markets in most of the District. The St. Louis area office vacancy rate was 17.3 percent for the second quarter of this year, up from 16.5 percent in the first quarter; the industrial vacancy rate remained stable at 7.9 percent. The second quarter industrial vacancy rate in Louisville was 21.0 percent, and the midyear office vacancy rate was 20.2 percent---a modest increase when compared with the same period one year ago. Although industrial vacancy rates have also been increasing in Little Rock and in Tupelo, Mississippi, contacts in those two cities report that construction is picking up. Commercial construction is also doing better in other parts of the District, including several new projects being undertaken in Danville, Kentucky.

Banking and Finance

Credit standards and demand for commercial real estate, residential mortgage, and consumer loans remained generally unchanged over the past three months.

9th District (Minneapolis)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/9.htm.)

Overall Ninth District economic activity increased in July and August. The residential real estate, consumer spending, manufacturing, energy and mining sectors grew, and tourism was mixed. Meanwhile, commercial building was sluggish, and agriculture was down slightly. Labor markets were soft. Wage and price increases were generally modest; however, significant price increases were noted in natural gas, long-term care insurance and tuition.

Construction and Real Estate

Overall commercial building was sluggish, but some areas of improvement were noted. During the first half of 2003, commercial construction activity in the Minneapolis-St. Paul area office and industrial markets was at its slowest level in almost 10 years, according to a real estate firm; however, leasing activity has picked up during the past two months. Another Minneapolis-St. Paul real estate company noted that July sublease space in the office market decreased by about 25 percent from year-end 2002. A number of new health care related building projects are under way or planned in northeastern Minnesota. The value of office and institutional building permits for July year-to-date in Sioux Falls, South Dakota more than doubled from a year ago.

Home building and residential real estate activity grew. By the end of July, 401 permits for new single-family homes were issued year-to-date in Billings, Montana compared with 318 for the same period a year ago, according to a city official. In the Minneapolis-St. Paul area, the number of housing units authorized was 6 percent higher in July compared with last year, and the number of home sale closures was up 10 percent.


...a human vaccine producer plans to expand in South Dakota, and a North Dakota brick manufacturer recently completed a plant upgrade to double production. A shower and bath spa company in the Upper Peninsula recently added a production facility and additional shifts to keep up with demand. However, a North Dakota cheese processing plant and a pasta factory shut down, and a consumer housewares producer plans to close a manufacturing facility in Minnesota.

Energy and Mining

...a power plant, a gasoline refinery, and wind and ethanol facilities are in development or design in the district.

10th District (Kansas City)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/10.htm.)

The Tenth District economy continued to improve in late July and early August, and business contacts were generally upbeat about future activity. The manufacturing sector added to gains made earlier in the summer, retail sales again rose slightly, and housing and energy markets remained strong. On the negative side, commercial real estate activity weakened slightly after showing signs of stabilizing in recent months. In the farm economy, hot, dry weather harmed crop and pasture conditions. Wage and price increases remained minimal, while employee benefit costs continued to rise.

Real Estate and Construction

Residential real estate activity in the district remained strong in late July and early August, while commercial real estate activity weakened slightly. Single-family housing starts maintained a rapid pace in most district cities, with starts of entry-level homes particularly robust. Builders reported that demand for virtually all types of homes was boosted somewhat in recent weeks by home-buyers rushing to sign contracts for new houses before mortgage rates rose further. Builders generally expect strong single-family construction to continue through the fall. Home sales also remained brisk across the district in late July and early August, and inventories of unsold homes showed signs of stabilizing in most markets after rising earlier in the year. Like builders, realtors in some cities reported increased buyer traffic in July after mortgage rates began to rise. Most realtors expect sales to hold steady in coming months. The strong residential real estate activity boosted demand for home purchase mortgages, partly offsetting a steep decline in refinancings. Mortgage lenders generally expect the shift from refinancings to home purchase loans to continue, with overall loan demand moving lower through the fall. Most commercial real estate markets in the district weakened slightly in late July and early August after showing signs of stabilizing in previous surveys. Sales and absorption of office space eased in most cities, while vacancy rates edged higher. Looking forward, realtors expect commercial real estate activity to remain sluggish for at least the remainder of the year, but they generally do not anticipate further deterioration in conditions.


Demand for home purchase mortgages continued to rise, and demand for commercial real estate loans increased as well.

Wages and Prices

Retail prices remained flat, and building contractors and manufacturers reported little ability to raise their prices in the face of rising fuel and energy costs. Retailers expect little change in prices in coming months. However, manufacturers anticipate some increases in steel prices heading forward, and builders expect slight increases in some construction material prices, including gypsum wallboard.

11th District (Dallas)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/11.htm.)

Eleventh District economic activity remained generally weak from mid-July to late-August but there is improved optimism about the outlook for activity. There was little change in manufacturing or service sector activity, but retail sales were higher. Contacts at financial institutions reported slightly improved conditions. Construction and real estate markets were also very slightly improved. There was little change in energy activity, and dry weather hampered agricultural production.


Construction-related manufacturers reported a slight increase in demand but expressed concern that, without a backlog of orders, the outlook for activity is uncertain. Demand for fabricated metals and lumber picked up. The increase in lumber sales was partially seasonal, and contacts say that sales are just "less horrible" than they have been in the past. Demand for brick and cement was unchanged, but competitive pressures remain stiff. Companies say they are still finishing up projects stimulated by lower interest rates, and indicated some worries that rising mortgage rates could dampen demand down the road.

Construction and Real Estate

Construction and real estate markets improved some over the past six weeks. Contacts say the up-tick in mortgage rates pushed some fence-sitters into the new and existing-home markets. The industry remains very competitive, restraining price increases. New home construction rose in some metro areas, but contacts believe building will ease in the latter part of the year. The strong housing market has come at the expense of the apartment market, which continues to experience growing supply and reduced demand.

Contacts are more optimistic about commercial real estate markets. A recent pick up in leasing inquiries seems to have ended the deterioration in the office market. With little office construction underway, contacts are hoping for improvement later in the year, although it is unlikely that a noticeable turnaround will occur until 2004. Retail markets remain the best performing of the commercial sectors. Demand for industrial space was up in Houston and flat to down in Dallas.

12th District (San Francisco)

(Full report: www.federalreserve.gov/fomc/beigebook/2003/20030903/12.htm.)

Reports from Twelfth District contacts indicated a modest increase in overall economic activity in late July and August, representing an improvement in the pace of growth. With the notable exceptions of health care services and energy, contacts noted little upward pressure on prices and wages. Retailers reported that sales were generally up and that discounting was less pervasive than in past survey periods. The District's software services, travel, and tourism sectors saw improvements. Reports indicated that manufacturing activity continued to rise; orders strengthened for manufacturers of semiconductors, machine tools, and basic metals. Conditions for District agricultural and resource-related businesses remained solid. Respondents indicated that demand for homes continued to be strong, while commercial real estate generally remained in the doldrums. Banking contacts reported some slight improvements in commercial loan originations, particularly among small businesses, and a sharp decline in mortgage refinancing in response to the rise in long-term interest rates.

Retail Trade and Services

In response to stronger sales, a big-box retailer finally acted on its expansion plans and proceeded with the construction of additional stores in the Pacific Northwest.

Real Estate and Construction

Housing demand remained a bright spot in the District's economy. New home construction continued at a brisk pace across the District, particularly in areas where demand exceeded supplies, namely Hawaii and Southern California. Several respondents believed that housing demand increased as some home buyers rushed into the market fearing that interest rates may escalate further.

On the commercial side, high vacancy rates continued to characterize many District markets, including the San Francisco Bay Area and Las Vegas. Contacts reported very little commercial construction activity outside of Hawaii and Southern California.