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Economic activity in the Seventh District expanded at a moderate pace again during June and early July, though a few reports suggested the pace of expansion slowed from earlier in the year. Consumer spending continued to increase modestly. Business spending and hiring increased again. Manufacturing activity remained strong, though some contacts noted a slower pace of growth than in the previous reporting period. Residential construction and real estate activity continued to decline from high levels. Demand for commercial real estate space continued to increase; however, the pace of new commercial construction slowed. Mortgage demand was down again, while the expansion in commercial lending continued at a slower pace than in the previous report. Nonlabor input cost pressures remained firm in June and early July, but increases in retail prices and wages were modest. Growing conditions for corn and soybeans retreated some, due to below-average rains.
Consumer Spending
Consumer spending continued to increase modestly in June and early July. Retailers in Illinois and Indiana said June sales were "OK" or "pretty good;" nonetheless, they said sales were generally a bit below expectations. Retail sales in Michigan during June were held back by sluggish results in vacation destinations, but one analyst said that overall activity has been busier so far in July. High gasoline prices reportedly dampened spending in the District, both by squeezing budgets and by leading shoppers to make fewer trips to the store. Retail inventories were at desired levels. Retail promotions generally followed the usual seasonal patterns, though some big grocery chains were said to be advertising more aggressively than normal. Auto dealers said that vehicle sales have held up well and showroom traffic has been brisk relative to earlier in the year. New vehicle inventories were moving down toward desired levels. Tourism activity in Michigan was running below a year ago.
Business Spending
Business spending and hiring expanded again in the District. For the most part, capital spending continued to increase at similar rates as in the previous reporting period. Several small manufacturers maintained their plans to increase capacity, and a bank in the District reported an increase in information technology spending by its commercial lending divisions. Rail freighthauling expanded at slower pace than in recent months, as shipments of lumber and other construction materials moderated. Overall labor market conditions were little changed, with small gains in employment on net. Factory employment ticked up, led by growth at heavy equipment manufacturers and toolmakers. Shortages of skilled manufacturing workers persisted, and there were new reports of difficulty in filling engineering and finance job openings. A temporary help services provider said that demand growth in the District held firm but continued to moderate in the rest of the country.
Construction and Real Estate
Residential construction and real estate activity continued to decline from high levels in most areas, though there were a few regions with persistent strength. One large builder reported new orders have declined, but a solid backlog of orders was keeping construction activity afloat. Existing home sales slowed as well, though Realtors in Wisconsin noted an uptick during June. Most builders and real estate agents indicated that the supply of new and existing homes for sale was growing. The pace of new commercial construction moderated; however, demand for commercial real estate space continued to strengthen. A developer in the Chicago-area said that net absorption of office space remained strong in the second quarter, contrary to expectations, with demand driven by a large number of small deals. High construction costs were reportedly constraining development of speculative office space. A developer in Iowa that also operates in other parts of the country said that it had passed on three developments and moved to reduce its "bare ground" holdings after observing "an abrupt halt" in sales of both commercial and residential space.
Manufacturing
Manufacturing activity remained strong during June and early July, though some contacts reported a slower pace of expansion than earlier in the year. Demand for heavy equipment continued to be solid, led by the mining and energy sectors. Orders for large construction equipment typically used in nonresidential projects were holding up well, while orders for smaller equipment were weakening. Heavy-duty truck orders fell in June, largely because order books are full for 2006 and there are no more spots to pre-purchase trucks before new EPA standards go into effect at the beginning of next year. Nonetheless, the decline in orders was less than expected. Orders for medium-duty trucks remained solid, and demand for trailers was steady at high levels. Toolmakers reported strong demand and high order backlogs, and said that their production was running at high capacity utilization rates. Steel producers reported strong demand growth from most markets. Inventories at steel service centers were increasing but remained in line with sales. Cement consumption showed robust growth year-to-date, but growth was expected to tail off in the second half. A wallboard producer noted its order growth remained very strong and production continued at high rates, but added that it has yet to see much of a slowdown in bookings from residential builders.
Banking and Finance
Lending activity moderated further. Bankers noted additional declines in mortgage applications for both purchases and refinancing, though the fall-off in refinancing was more marked. Demand for home-equity loans was "losing steam," with the total volume of loans outstanding down slightly and usage rates unchanged. Mortgage delinquencies remained low, while delinquencies on home equity loans edged up. Credit scores on newly approved loans increased at one bank, though the improvement largely reflected lending officers stepping up their scrutiny and turning down less-qualified borrowers. Commercial lending continued to expand, but at a slightly slower pace than earlier in the year. Commercial lending conditions were "crazy competitive" according to one contact, with banks turning away from more deals because the customers were asking them to give up too many protections. Spreads edged down further in some segments, and fee income declined. Commercial credit quality remained in good shape. Deposits increased at a steady pace, but pricing was competitive and net interest margins were narrowing.
Prices and Costs
Nonlabor input cost pressures remained firm in June and early July, while increases in retail prices and wages were modest. Almost all contacts reported higher energy costs. One manufacturer said it had not seen any further increases in plastics and resin costs, but they were expecting surcharges in the coming months. Other materials prices were increasing as well, including copper, steel, concrete, wallboard, and paper. The ability to pass these cost increases on to customers varied. Price increases at the consumer level were modest. Prices of used compact cars were up sharply, while prices of used full-size sport utility vehicles declined noticeably, raising automakers' concerns about residuals on leased vehicles. Apartment rents in Michigan were little changed. Wage pressures were limited to certain professions facing skill shortages.
Agriculture
Most of the District experienced below-normal precipitation during June and early July. The lack of rain expanded the drought in Iowa, and extended it into Illinois and Wisconsin. Some ponds in Iowa dried up, forcing ranchers to haul water for livestock. Crop conditions deteriorated in all District states except Indiana. Nonetheless, corn and soybean conditions remained better than a year ago in Illinois and Indiana. Subsoil moisture in parts of the District sustained plant growth, but subsoil reserves were drained in many areas. The lack of rain also reduced potential crop yields, with the possibility of greater damage from the recent hot weather. Crop futures prices increased relatively more than cash prices, due to the stocks of crops left over from last year. Hog and cattle prices increased from the previous reporting period. Higher operating costs, especially for energy and interest on loans, exacerbated cash flow problems. Some farmers took out operating loans for the first time in years.
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