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In August and early September, the Seventh District economy expanded at a slightly higher rate than in our last report. Consumer spending picked up as the weather cooled across the region and back-to-school sales met or exceeded merchants' expectations. Commercial building activity continued to lead the housing/construction sector, while sales of existing homes improved. Manufacturers continued to produce at very high levels and order books generally remained full. Bankers reported increased lending activity in most areas with the business side continuing to outpace the consumer side. While labor markets remained very tight, there was little, if any, change in wage pressures. Crop conditions improved due to recent rains, and farmland values continued to trend upward.
Consumer Spending
Cooler-than-normal weather across the Midwest reportedly boosted retail sales in August and early September. Most contacts noted strong year-over-year sales gains, which exceeded their expectations. Apparel sales continued to lead the way, in large part due to cooler weather. Sales of women's apparel were particularly brisk and sales of men's and children's apparel and shoes were also strong. Back-to-school sales generally met or exceeded retailers' expectations. Home appliance sales were reported to have improved over the past two months. On average, higher-than-expected sales led to some inventory reductions, but as one merchant stated, "no one's complaining about it." Contacts reported that the Midwest continued to be one of the more competitive retailing environments in the nation. There were no reports of price increases although some chains continued to cut back on promotional activities. One large retailer noted increased profitability due to fewer promotions as well as an improvement in credit card delinquencies.
Housing/Construction
Overall construction activity increased again in July and August, but the residential segment was mixed. Homebuilders indicated that sales and construction of new homes were below last year's record levels and building permit data for District states support these reports. In addition, a concrete dealers' association indicated that shipments to residential builders had slowed throughout the Midwest. Sales of existing homes, on the other hand, continued to improve over the summer. Though year-to-date sales remain below last year's record levels for most realtors, the spread has narrowed considerably in the last two months. One large realtor in the Chicago area reported particular strength at the upper end of the resale market. Momentum in nonresidential construction continued to mount in most areas. Contacts indicated that most of the strength was in the light industrial segment, with public works (including schools) also strong, but to a lesser extent. Materials pricing remained "flat, but firm" and there were no new reports of shortages, though one concrete dealer noted that supplies continued to be tight.
Manufacturing
Manufacturing activity continued at very high levels through the summer
and orders remained strong. Composite indexes from Chicago, Detroit, and Milwaukee purchasing managers' surveys all showed activity increased at a faster pace in August than in July. Steel producers were struggling to build inventories to keep them in line with sales. One large steelmaker reported that the normal summer slowdown did not take place this year, and noted particular strength in demand from the construction, oil and gas, and machinery industries. Automakers reported that inventories of both 1997 and some 1998 models were low, on average, and expect third quarter production to outpace that of the second quarter. The short supply of some 1998 models was due, in part, to lingering effects of earlier labor strikes as well as normal delays associated with major model changeovers. Demand for heavy trucks and over-the-road freight-handling equipment was reported to be strong and order backlogs were increasing. Demand for heavy equipment (land moving, mining, agricultural, etc.) remained very strong and exports to Latin America and Europe were reported to be increasing. One heavy equipment producer noted that orders had tapered off somewhat recently from very high levels, but this may be a result of orders being placed earlier in the year by some of their customers. Inventories of most heavy equipment remained low, yet pricing was flat. An already competitive pricing environment for most manufacturers had become more intense with the strengthening dollar. As in our last report, prices for inputs were reported to be flat to down.
Banking/Finance
Overall lending activity picked up on a seasonally adjusted basis in August and early September with the bulk of the strength on the commercial side. A contact at one of the region's larger banks stated that "lending activity continued to surprise on the upside." Bankers around the District noted that the normal late summer slowdown had yet to materialize, echoing reports from contacts in other industries. Loan volume for commercial real estate continued to increase, particularly in the light industrial segment. One large bank expressed concern that lenders were lowering credit standards somewhat for commercial mortgages, a concern that was noted by a contact in another metro area in our last report. Consumer lending continued to soften slightly. Home mortgage lending was mixed, with activity increasing for existing home loans but decreasing for new homes. Asset quality on credit card loans was reported by one large institution to have improved slightly, but this contact also indicated that this improvement may be temporary. One large card issuer indicated that promotional activity targeting households with excellent credit ratings had increased recently. Overall standards for consumer loans continued to tighten somewhat. Most indicated that the tightening has been gradual, "not a knee-jerk reaction, but slow and steady." None of the institutions contacted indicated any deterioration in asset quality in the past few weeks.
Labor Markets
Labor markets remained very tight throughout the District while employment growth continued to lag the nation's. The average unemployment rate was below 4 percent in July for the third straight month and there is no indication that it has risen from there. Roughly one-third of the District's metropolitan areas had seasonally adjusted unemployment rates below 3 percent for the month. (The Madison, Wisconsin area has been below 2 percent since December 1994.) In addition, analysts from state agencies indicated that claims for unemployment benefits over the last six to eight weeks nearly mirrored last year's very low levels for the same period. Staffing agencies noted that order backlogs for the industrial segment of their business continued to rise in most areas. Reflecting strength in nonresidential building, demand for construction workers (which normally starts to taper off at this time of year) remained very strong. In a national survey, Midwest firms reported their strongest fourth-quarter hiring plans since 1978, with the durable goods manufacturing and construction industries leading the way. There were no new reports of wage pressures intensifying, although shortages of workers persisted in most areas. A small business association representative reported that entrepreneurs, who two years ago were clamoring to buy fast food franchises, are now eager to sell because they can't find or retain productive workers.
Agriculture
Crop-condition ratings for most District states improved slightly in recent weeks as adequate moisture helped sustain plant growth. Nevertheless, recent reports suggest dry weather in late July may have caused more yield losses in some areas than originally thought. In general, crop development was slightly ahead of the average pace of recent years. However, it will likely be early October before crops in northern portions of the District reach maturity and are safe from frost damages. Our latest survey of District agricultural banks found that farmland values continued to trend upward, but at a somewhat slower pace than in recent quarters. Farm loan demand continued to be strong at surveyed banks during the second quarter reflecting, in part, the continuing strength in farm machinery and equipment sales. However, the availability of funds for making farm loans reportedly tightened somewhat, reflecting higher loan-to-deposit ratios and the increased presence of other farm lenders.
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