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Economic activity in the Seventh District expanded at a moderate pace during
late August and September. Consumer spending continued to increase modestly,
and business spending expanded again. Labor market conditions were little changed,
with small gains in employment on net. Residential construction and real estate
activity declined again in most areas, while nonresidential construction advanced
at a steady pace. Manufacturing activity expanded again, though at a modestly
slower pace than in the previous reporting period. Mortgage lending declined,
while commercial lending increased at a slightly slower rate than in the previous
reporting period. Nonenergy price pressures and overall wage increases held
steady. Corn and soybean harvests in the District were delayed by cool and rainy
weather in September, and early results indicated mixed yields relative to a
year ago.
Consumer spending
Consumer spending continued to increase modestly in August and September. Retailers
said back-to-school sales were within their expectations but "nothing
stellar." Cool weather reportedly helped apparel sales in some areas.
Retailers thought that lower gasoline prices had only a modest impact on their
sales. Retail inventories were at desired levels for general merchandisers,
but a furniture retailer said it was running down its inventories because its
suppliers were well stocked and able to fill orders quickly. Auto dealers reported
that sales trends have changed little in recent weeks; Big Three vehicles lagged
behind foreign nameplates and high-gas-mileage vehicles continued to sell well.
Tourism in Michigan was running similar to a year ago after a small pick-up
in recent weeks.
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. Trucking volumes were up slightly over a year earlier, though one contact
said customers have been tentative and saw a chance of stronger activity in
the fourth quarter. Overall labor market conditions were little changed, with
small gains in employment on net. Manufacturing employment was mixed by industry.
Auto manufacturers and suppliers laid off workers, while toolmakers increased
employment. A contact in Rockford reported that a number of warehouses serving
retailers were significantly increasing employment. A local internet job posting
business said that job advertising continues to be robust. Shortages of skilled
manufacturing workers persisted. A temporary help services provider said that
demand growth in the District during the third quarter was a bit stronger than
the second quarter, led by a pickup in Illinois and Wisconsin.
Construction/real estate
Residential construction and real estate activity declined again in most areas.
Homebuilders observed sluggish demand in all market segments, and a Chicago-area
builder said high-end properties have been taking noticeably longer to sell.
However, a contact in the Milwaukee area said traffic through model homes was
holding up well. Builders in southeast Michigan reported a number of project
cancellations. New home prices were steady to down, and several builders were
adding free upgrades to help sell homes. A contact in Michigan noted that list
prices of existing homes were being reduced as well. Nonresidential construction
expanded at a steady pace. However, net absorption of office space slowed and
neared zero in many parts of the District, which a Chicago-area contact attributed
to the return of sublease space into the market. Looking forward, a few contacts
said that the development pipeline looked slower than average and that some
projects were delayed for budget reasons.
Manufacturing
Manufacturing activity expanded again in late August and September, though the
pace of expansion was a bit slower than in the previous reporting period. Sales
of large- and medium-sized heavy equipment continued to be strong, but overall
order backlogs dipped below recent highs and deliveries of machines used in
home construction have fallen below year-ago levels. Sales of high-tech equipment
were growing well, with demand spread across cell phones, cellular infrastructure,
and defense communication equipment. A specialty steel producer reported robust
order growth and said that it was picking up new customers that had been having
trouble filling orders with their existing supply base. Toolmakers reported
continued strong order growth. One toolmaker added that it had not seen any
weakening in its oil-related business since crude prices have declined, and
another noted that demand from foreign firms has been strong. Heavy-duty truck
production and sales were at record levels. Net orders continued to fall, but
the decline was within expectations since production capacity was booked through
the end of the year, when new emission standards go into effect. Demand for
medium-duty trucks was driven by orders from truck dealers, as analysts report
that end-users were "clueless" about the new emission standards.
Light vehicle manufacturers forecast steady or slightly slower sales for the
rest of the year, though one expected lower gasoline prices and higher equity
prices to support demand. A steelmaker noted that vehicle production cuts were
starting to show through in weakening orders for flat-rolled steel and growing
inventories at steel service centers.
Banking/finance
Lending activity moderated further. Bankers noted continued stagnation in mortgage
applications for home purchases but said that refinancing activity firmed between
August and September. One bank indicated that slower home price appreciation
was restraining demand for new home equity loans. Home equity credit line balances
declined further, though demand for closed-end loans ticked up. Household credit
quality remained in good shape in most places with stable delinquency rates
on mortgages and home equity loans; the exception was in Michigan, where delinquency
rates moved higher. Commercial lending continued to expand but at a slightly
slower pace than in recent reporting periods. Bankers in the Chicago area noted
that customers remained upbeat about business conditions and were increasing
their demand for financing, while bankers in Michigan reported little loan growth.
Commercial lending conditions continued to be competitive and interest rate
margins were narrow. One banker noted that competitive pressures were spreading
into second-tier lending, such as small business loans collateralized with personal
assets. Commercial credit quality remained in good shape, which one Detroit-area
banker attributed to the reluctance of lending officers to loan funds to problem
industries.
Prices/costs
Nonenergy price pressures and overall wage increases were similar as in the
previous reporting period. Several contacts reported recent declines in energy
costs, but a manufacturer said their suppliers were waiting to make sure energy
prices stabilized before passing along the cost reductions. An appliance manufacturer
said the cost environment remained "unfavorable," due to high materials
prices. Construction materials costs were stabilizing at high levels. There
were no reports of significant changes in price movements at the retail level.
Wage increases continued at similar rates as in the previous reporting period.
Agriculture
Corn and soybean harvests in most of the District were delayed by continued
precipitation and unseasonably cool weather. The weather also inhibited crops
from drying in the fields, forcing farmers to use energy-intensive, mechanical
drying. Early reports on corn and soybean yields indicated mixed results around
the District, as extensive cloud cover late in the growing season hampered crop
development. Net crop receipts decreased across the District. Contacts expressed
concern about cash flows for grain farmers given higher operating costs for
the crop year overall, though the recent decline in energy prices has been a
positive factor, especially by reducing the cost of drying grain. Hog prices
declined in September, while cattle and dairy prices increased.
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