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The pace of economic activity in the Seventh District picked up moderately in September. Contacts were generally more optimistic about the outlook for the remainder of the year and the beginning of 2011. Manufacturing production increased, and construction activity improved slightly. Consumer spending continued at a steady pace and business spending increased. Credit conditions continued to gradually improve. Price and wage pressures were moderate, while agricultural prices increased on balance.
The pace of consumer spending was little changed from the previous reporting period. Contacts indicated that consumers were slowly regaining confidence, although they remain very price-conscious. As such, promotions and sales persisted as the primary driver of traffic in stores and showrooms. Retail sales excluding autos in September were nearly on par with the August sales pace. Clothing items continued to sell well, as did electronics and appliances; but furniture sales were again weak. Auto sales held steady even as fewer incentives were offered and access to credit continued to slowly improve.
Business spending increased in September. Capital spending rose as recent tax accounting changes pulled forward demand before the year's end. Contacts indicated that spending was heavily concentrated in replacement of older equipment and other efficiency improving investments. While less widespread, new investments in capacity, research and development, and employee training were also reported. In contrast, inventory rebuilding slowed. Both manufacturers and retailers reported comfortable levels of inventories in September, even though they remain relatively lean historically. The pace of hiring continued to be slow, but engineering, information technology, and healthcare were exceptions to this trend. Manufacturers' were reluctant to add permanent employees, continuing to use temporary hires instead. In addition, the manufacturing workweek leveled off, as firms pulled back on overtime. Contacts also noted that state and local government employment was sharply declining given the budgetary constraints faced by several District states and their local municipalities.
Construction and Real Estate
Construction activity improved slightly in September. With housing inventory still elevated, residential building was minimal, particularly for multifamily properties. A contact noted, however, that a few large builders had begun to rebuild their inventory of single-family homes after a recent uptick in contract signings. Attractive pricing led to higher showroom traffic, but contacts indicated that the limited availability of conventional mortgage financing remained a constraint for potential buyers. Private nonresidential construction remained subdued, particularly for office and retail buildings. However, rising vacancy rates leveled out in many areas of the District, and contacts reported small improvements in demand for large industrial and small retail facilities. Public infrastructure construction continued to expand.
Manufacturing production increased in September, refreshing from the late summer pause. Several metals manufacturers reported that September sales were the best so far this year. Power generation, mining, and medical equipment manufacturers also reported an increase in orders. In addition, export activity continued to be robust with slower growth in developing countries in Asia and South America offset by strengthening demand from Europe. The automotive and heavy equipment sectors remained strong sources of growth. In contrast, a manufacturer of household appliances noted a reduction in fourth quarter production, and capacity utilization in the steel industry edged lower. Although contacts in some industries indicated that new orders and order backlogs had eased as inventory rebuilding slowed going into early October, manufacturers in general expressed a very positive outlook for the remainder of 2010 and early 2011.
Banking and Finance
Credit conditions continued to gradually improve in September. Contacts indicated that the corporate financing environment remains very favorable, but the availability of credit for small businesses remained a source of concern for some. Business loan demand was steady, driven mostly by refinancing and merger and acquisition activity. Recent tax law changes and increasing pressure from shareholders to productively employ the large amounts of cash on firm balance sheets were seen as contributing to the latter. Furthermore, a contact noted that private equity funds that are required to invest funds by year-end or return them to investors were another likely factor. Investment demand for distressed commercial properties remained strong. Moreover, limited improvement in the availability of bank loans for commercial real estate was noted, although it was concentrated among a few banks.
Prices and Costs
Price and wage pressures were moderate in September. Retailers reported wholesale price increases were becoming more widespread. Prices also moved higher for industrial metals like copper, aluminum, zinc, and gold. Shortages of silicone and copper contributed to the increase in industrial metal prices. The depreciation of the dollar was cited as one of the primary drivers of higher demand for gold. Energy costs, in contrast, were steady with natural gas prices at historically low levels. Limited pricing power continued to constrain pass-through of cost pressures to downstream prices. Wage pressures again increased only modestly on balance, although some contacts highlighted large expected increases in the cost of healthcare for employees.
The District harvest started early and progressed rapidly, although parts of Iowa and Wisconsin had a slower harvest due to heavy rains. Corn yields varied widely, sometimes even within the same field. The quality of the corn crop was, however, higher than a year ago. Soybean yields were reported as above-average in most of the District, with soybean disease issues in Iowa appearing to be limited in scope. Corn and soybean prices were above the levels of a year ago. Contacts indicated that farmers were selling soybeans, but holding on to newly harvested corn in the hope of even higher prices. Prices for milk, hogs, and cattle remained higher than last year, helping offset a sudden increase in feed costs for livestock. Fertilizer costs also increased, but drying costs for corn decreased substantially from the previous year.