Beige Book March 2009

The Federal Reserve Bank gathers anecdotal information on current economic conditions through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information.

The Federal Reserve has issued its Beige Book report for March. The Fed commented on the national real estate and construction market as follows:

Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February.  Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies “remained weak.”  The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions.  Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.

Residential real estate markets remained in the doldrums in most areas, with only scattered, very tentative signs of stabilization reported.  The pace of sales remained very low in most areas and declined further in some; most Districts reported small declines, but New York cited a sales drop of 60 to 65 percent in Manhattan compared with twelve months earlier.  By contrast, Cleveland, Richmond, Dallas, and San Francisco each reported a rising or better-than-expected sales pace for existing or new homes in some areas, attributed largely to falling prices and improved financing terms for some types of home mortgages.  House prices continued to decline, reportedly at double-digit paces in some areas, with little or no signs of a deceleration evident.  Builders in various Districts generally remain pessimistic regarding recovery prospects this year, and consequently the pace of new home construction declined further in most areas.

Demand for commercial, industrial, and retail space fell further during the reporting period, with some evidence of more rapid deterioration than in preceding periods.  Vacancy rates rose and lease rates declined on a widespread basis; New York noted that commercial real estate markets “weakened noticeably,” while Atlanta described reports on commercial real estate that were “decidedly more negative” than in previous periods.  Construction activity has declined commensurately, and assorted reports suggest that market participants expect this weakness to continue at least through the end of 2009.  Cleveland noted that public works projects have shown stability of late, although they declined in the San Francisco District as a result of the budgetary struggles of some state and local governments there.  Credit constraints and uncertainty were reported to be a drag on commercial construction and leasing activity in the Philadelphia, Chicago, Dallas, and San Francisco Districts.

Lending activity fell further on net, with mixed results across Districts and loan categories.  Demand for commercial and industrial loans was reported to be lower in most Districts, although Philadelphia reported recent growth in this category.  Consumer loan demand also fell in general, although Cleveland reported that it was “stable to up” during the reporting period.  Demand for new mortgages remained depressed, but New York, Cleveland, and Richmond noted that refinancing activity continued at high levels or increased further.  Boston and Cleveland reported that loan demand and the availability of funds were more favorable for community banks than for institutions with a national scope.

The availability of credit generally remained tight.  Lenders continued to impose strict standards for all types of loans, with scattered reports of further tightening and particular scrutiny focused on construction projects and commercial real estate transactions.  Despite stringent standards, Atlanta and Chicago noted that funds were available for well-qualified applicants, and Dallas cited contacts who reported that capital has become more readily available.  Credit quality fell for all loan categories, with declines cited by most Districts with the notable exception of Kansas City, where current loan quality was unchanged and expectations for future quality improved modestly.  New York reported that the deterioration in quality was most pronounced for consumer loans, while Chicago emphasized deterioration in the quality of business loans as a result of rising bankruptcies.  Scattered reports suggested improved liquidity in some credit markets and reductions in interest spreads, with Chicago noting that conditions for the commercial paper and corporate bond markets “improved significantly.”

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