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The Seventh District economy continued to expand moderately in November and December, while wage and price pressures remained generally subdued. Retailers in the District generally reported that holiday sales met or exceeded their expectations. Overall construction activity softened somewhat in recent weeks but remained relatively strong. Manufacturers indicated that production remained high, but pockets of softness persisted. Bankers continued to report strong demand for business loans and slowing household lending activity. Worker shortages persisted in the District while reports of intensifying wage pressures remained isolated. Farm commodity prices remained depressed and District pork producers have responded to low prices by reducing the size of their herds.
The century rollover turned out to be a non-event for nearly all of our contacts. There were no reports of significant inventory buildups ahead of, or overhangs following, the changeover period. There were no reports of major computer glitches disrupting general business operations, although a few minor problems were noted.
Overall retail sales met or exceeded most merchants' expectations over the holiday season, with discount stores outperforming general merchandisers. Sales of traditional gift items such as jewelry, electronics, and small appliances were reportedly very strong. In addition, most merchants indicated that apparel sales, which had been soft due to warm weather, picked up in December. Inventories were generally in line with retailers' sales expectations and, as a result, there were no reports of increased promotional activities. Dealers and manufacturers indicated that light vehicle sales in the Midwest were softer than elsewhere in the country. One contact reported that casual dining receipts in the Midwest were up considerably from the same period last year, but noted that some of this strength was due to very soft sales in the year-ago period due to bad weather. An airline contact noted that traffic in December was down about 5 percent from the previous year. This contact also suggested that higher fuel prices were beginning to impact the industry's cost structure and that passing these higher costs along would be difficult. There were no reports of intensifying pressure on prices at the retail level.
Construction and Real Estate
Overall construction activity appeared to slow slightly in both the residential and business segments in recent weeks. Contacts reported that sales of both new
and existing homes softened beyond a normal seasonal slowdown in December, but most continued to describe demand as "healthy." Some markets were reporting that slight inventory overhangs had developed in both new and existing residential structures, yet most contacts were not concerned about it. On the business side, construction activity appeared to moderate somewhat. Like the residential segment, however, activity was generally described as healthy. One contact noted that office vacancy rates remained low in most major metro markets and suburban office development was "reasonably good." Demand for light industrial space, mostly warehousing, was said to be softening. The wallboard shortage that persisted through the better part of 1999 was quickly subsiding toward the end of the year while labor shortages continued to delay some projects. One contractor group noted that increasing labor costs continued to put pressure on their margins.
Similar to our last report, manufacturing activity remained robust in the Midwest although some pockets of weakness (such as in agricultural equipment) persisted. Automakers reported that nationwide sales remained very strong in December, finishing off a record year. Most producers were predicting lower total unit sales for 2000, but increased their forecasts slightly in recent weeks. In spite of strong demand, the pricing environment remained soft and most producers expected to continue heavy use of incentives. A large producer of office furniture indicated that demand, which was weaker than expected for much of 1999, picked up in November and December. In addition, furniture demand may receive a boost in the new year as companies free up some of their Y2K-related expenditures. The region's steel industry was generally robust and new orders for the first quarter were very strong. One industry watcher noted that steel inventories were building ahead of soon-to-be-instituted price increases. This contact suggested that this is a sign that most steel buyers expect the increases to hold. At the same time, a major producer of wallboard indicated that the pricing environment for their products was softening as demand moderated and imports increased.
Banking and Finance
Overall lending activity was brisk as 1999 drew to a close, even as residential loan demand remained soft. Most contacts suggested that business lending activity was very strong and continued to pick up. One banker pointed out that business lending typically picks up toward the end of the year, partly as a result of tax considerations, but was still strong after stripping away the seasonal factors. Asset quality of business loans was virtually unchanged, but lenders reported that competition remained fierce and margins tight. Household borrowing remained soft as overall mortgage activity again was slow. Most bankers indicated that refinancing activity was "out of the picture," but new mortgage originations, while softer than a year ago, were stronger than expected. Contacts noted that consumers' cash holdings during the century rollover were up only slightly from the same period a year earlier and that any extra vault cash was being sent back to the Federal Reserve.
The Seventh District's labor markets continued to be characterized by worker shortages and, partly as a result, slower employment growth than in the nation as a whole. Contacts in industries ranging from construction to fast food reported that labor shortages remained a concern, but had not intensified in recent weeks. A contact in Iowa noted that fast food restaurants, in an effort to find and retain workers, recently began offering health benefits to part-time workers. Reports of accelerating wage increases remained isolated, but one contact indicated that wages for the company's truck drivers were up 10-15 percent over last year. A large durable goods producer noted that upward wage pressures were building for exceptionally hard-to-fill positions on the third shift. Overall, however, there was little evidence to suggest that general wage pressures were intensifying.
District pork producers were liquidating their stock faster than producers elsewhere in the U.S. The December Hogs and Pigs report indicated that the size of the District breeding herd contracted 13 percent from a year earlier, while the market herd registered a 6 percent decline. Total hog numbers registered a sharp year-over-year decline in each District state except Iowa, where the decrease in the size of the breeding herd was more than offset by expansion in the number of market animals. Hog prices declined in December, but farmers were relieved that prices did not reach the extremely low levels of a year earlier. Corn and soybean prices at central Illinois terminals remained depressed due to large global supplies. Wisconsin dairy farmers face smaller returns as the monthly average milk price posted its third consecutive month-to-month decline in December, and was 30 percent below a year earlier.