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Economic activity in the Seventh District improved at a moderate pace in January and February. Consumer and business spending increased slightly. Manufacturing continued to improve, while construction remained weak. Credit conditions were little changed. Price pressures for most raw materials leveled off, and wage pressures were minimal. Hog and cattle prices rose, while feed costs fell along with corn and soybean prices.
Consumer spending increased slightly in January and February. Retail sales continued to improve, although contacts indicated that the rate of increase had slowed in recent weeks. Sales of consumer durables and luxury items remained weaker than nondurables and necessities, but a small pick-up in demand for appliances was reported. Rising sales led retailers to begin to rebuild inventories from their very low levels. Contacts expected that this would likely continue through the first half of the year. Auto sales were down from the previous reporting period. Fewer incentives, inclement weather, and the Toyota recall contributed to the decline. Contacts indicated that many Toyota customers had likely held off on purchases given concern over the recall's negative impact on the residual value of their Toyota vehicles. Auto dealers reported that inventories, while still lower than normal, were at comfortable levels.
Business spending also increased slightly from the previous reporting period. Contacts indicated that inventories were currently being restocked only as needed to keep up with demand. Several manufacturing contacts questioned the sustainability of any further inventory accumulation, pointing to uncertainty surrounding the economic outlook, volatility of materials prices, and tighter credit as forces keeping inventories lean. Most contacts, however, thought that these factors would at worst only serve to delay the rebuild in manufacturing until the second half of the year. Labor market conditions improved somewhat in January and February with layoffs declining and the workweek increasing. In addition, the demand for temporary workers remained strong with a large staffing firm reporting that billable hours increased substantially, particularly from the manufacturing sector. Permanent hiring continued to be slow, but contacts indicated some improvement in demand in information technology, healthcare, sales, and financial services.
Construction and Real Estate
Construction activity remained weak in January and February. Residential development was at a standstill, with very few substantial new projects expected to come on-line in the near future. In contrast, interest in investing in existing apartment buildings was indicated to be very strong. Contacts did, however, expect that residential construction would increase some through the spring as developers meet demand stemming from the homebuyer tax credit that expires in April. To do so, most builders are working solely off existing lots given the large inventory of distressed land still available for sale. Demand remained weak for nonresidential construction. The overhang of vacant buildings continued to hold back commercial and industrial construction. Infrastructure construction was the lone bright spot with the federal stimulus bill funding providing some boost.
Manufacturing activity gradually improved in January and February. Orders increased, primarily reflecting the restocking of inventories. In contrast, contacts noted that order backlogs were declining and customers were hesitant to place new bookings much beyond the first quarter. The auto industry remained a strong source of growth in manufacturing, as did pharmaceuticals. Steady improvement was also noted in steel and heavy machinery, particularly sales of mining and agriculture equipment. Demand from Asia continued to propel export activity; but with growth in the Chinese economy expected to slow, contacts thought export activity would recede some in the near future. Manufacturers with ties to residential or commercial construction were much less positive, and did not expect to see much of a recovery in 2010. However, a contact noted that dealer inventories of heavy equipment had returned to a more normal level and indicated that distributors were being told to prepare for an increase in shipments by a large manufacturer of heavy equipment. This was seen as providing justification for an expected pick-up in manufacturing activity in the second half of the year.
Banking and Finance
Reports on credit conditions were little changed from the previous reporting period. Banking contacts reported that business loan demand remained low with utilization of credit lines continuing to decline. Consumer credit conditions, on the other hand, continued to slowly improve with auto lending leading the way. Contacts noted that many of their business and consumer clients were still waiting for the uncertainty surrounding the economic outlook to pass before taking on new debt. Several indicated, however, that with the significant declines in loan volume in recent months, competition for high-credit-quality, high-return customers was beginning to pick up slowly. This was especially true for larger banks where declines in asset quality showed further signs of leveling off in January and February. However, the strained balance sheets of many midsize banks continued to limit the availability of credit. Contacts generally expected that credit availability would increase only slowly in 2010, in line with their expectations for a gradual recovery in economic activity.
Prices and Costs
Price pressures for most raw materials flattened out from the previous reporting period. In contrast, upward pressure on prices for industrial metals like steel and copper was expected to continue, as demand outstripped capacity currently on-line. The colder than expected winter led to higher natural gas prices, increasing energy costs. However, contacts indicated that natural gas in storage remained very high and that the current pressure on prices was likely to be temporary. Pass-through of cost pressures to downstream prices was small on balance, as contacts indicated pricing power remained limited in many industries. Wage pressures were reported to be minimal.
News that last fall's corn harvest was a record triggered declines in the price of corn, even though a higher than typical percentage of corn acres remained unharvested. There continued to be problems with the quality of corn in storage, leading to price discounts at delivery. Higher than normal drying costs compressed corn margins, too. In contrast, high quality grain was selling at a premium reflecting in part export demand. With much field preparation work left undone last fall and above normal snows this winter, weather this spring will play a larger role than typical in planting decisions. Hog and cattle prices moved up during the reporting period, although dairy prices flattened out. Feed costs declined with corn and soybean prices, and financial pressures on livestock producers lessened from those experienced during a challenging 2009. Still, contacts reported that refinancing agricultural loans was more difficult than in recent years.