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Economic activity in the Seventh District slowed further in May, but contacts in some key factory segments were optimistic that the worst was over. Following a modest pickup in April, consumer spending softened in May, partly as a result of unseasonably cool weather. Construction and real estate activity was also modestly weaker, but remained generally strong. The region's manufacturers continued to work off excess inventories, with most contacts confident that conditions had bottomed. The District's labor markets slackened further in April and May, and recent college graduates were finding the job market far less accommodating than last year. Farmland values continued to increase in the first quarter of the year. Spring planting neared completion although wet soil conditions have hampered progress in portions of Iowa and Wisconsin. In general, signs of any pickup in price inflation were absent from contact reports.
Consumer Spending
Consumer spending softened somewhat in May after slightly stronger-than-expected results in April. Retailers generally reported that sales results in the District were falling short of their lowered expectations in recent weeks. Some were quick to point out that unseasonably cool weather had adversely affected sales results, particularly for seasonal items and apparel. One contact, citing continued strong sales of big-ticket appliances and home-related items, suggested that consumers weren't "running away" from stores and remained fairly optimistic. One large auto dealer group reported that sales of foreign-nameplate light vehicles were "doing fine," while sales of domestic-nameplates were weaker. This contact also noted a pickup in demand for smaller, more fuel-efficient vehicles. Demand for air travel continued to weaken in May, especially for business travel, and one contact in the industry indicated that the airline was increasingly shifting aircraft on routes to keep planes as full as possible. This contact also noted that the outlook for the industry over the next few months "is not a pretty picture."
Construction and Real Estate
Overall real estate and construction activity appeared to soften modestly in April and May, but remained strong by historic standards. New construction of office space was again strong in some areas, but with vacancy rates inching higher, projects "in the pipeline" have slowed. Residential real estate and construction activity appeared to be a little softer in the District than for the nation as a whole. New home sales remained below year-ago levels, according to many builders. One contact in a major metropolitan area noted that sales at the upper end of the new home market had slowed and a substantial inventory overhang had developed. Sales of existing homes also were off modestly from year-ago levels, but the general sense among Realtors was that the market remained strong by historic standards. With little new development, apartment rents were said to be rising a little faster. One landlord, who had been pushing for 8 percent rent increases at turnover earlier in the year, more recently was pushing for 10 percent. This contact said that renters were "belly-aching" over the rent increases, but were paying them nonetheless.
Manufacturing
Manufacturing remained weak in April and May, but many industry contacts were optimistic that the worst was over for the Midwest's mainstay industries. Most of the region's manufacturers have been successful in working down excessive inventories by aggressively cutting production, but contacts cautioned that this was an ongoing process. Nationwide, light vehicle sales in May were off from year-ago results, but remained at high levels, according to contacts. Inventories were in good shape for automobiles, but slightly high for light trucks. Despite steel industry conditions that were described by one contact as "the worst in the post-war era," contacts were confident that the industry had "bottomed out" in the fourth quarter of last year. While still below year-ago levels, capacity utilization was up from earlier this year. Although inventories remained high, some of the excess had been worked down. Steel prices generally continued to languish near 20-year lows. New orders for heavy equipment were again very soft, but there was some modest firming in demand in a few segments, notably for energy-related and highway construction-related heavy equipment. Demand in the District's high-tech sector was reported to have been weak again in May.
Banking and Finance
Overall lending activity moderated in April and May, with most of the weakness occurring on the business side. Demand for business loans remained at good levels, but lenders reported that many applications were being turned down because potential borrowers were more financially strained. Bankers continued to tighten standards and terms for business loans, though most contacts suggested that the majority of tightening was behind them. One lender noted that standards were being tightened more on loans to large businesses than to small businesses. Credit quality on business loans was said to have eroded slightly, but most of the deterioration was concentrated in loans to highly leveraged firms or those to companies in highly cyclical industries, like durable goods manufacturers. On the household side, credit card volumes were generally flat, while mortgage refinancing activity fell off in recent weeks as interest rates on fixed-rate mortgages continued to trend upward. A recent uptick in consumer credit defaults was said to be dissipating as the effects of higher winter heating bills waned, easing the strain on consumers' budgets. One contact noted that an increase in bankruptcy filings resulted from expected changes to bankruptcy laws.
Labor Markets
Virtually all signs pointed to further easing in the District's labor markets in April and May. Indexes reflecting the volume of help-wanted advertising in local newspapers were down from last year in every major metropolitan market in the District, and initial claims for unemployment insurance in mid-May were running around 60 percent above last year. One contact noted that the number of continuing claims for unemployment insurance also appeared to be on the rise (mirroring a national trend) and suggested that idled workers were finding it more difficult to find new jobs. College graduates were finding the high-tech job market more challenging, with some students reporting that internships and job offers made a few months ago had recently been rescinded. Reports of worker shortages have largely subsided, though there were isolated reports of continuing shortages in certain areas and occupations. Wage pressures generally remained subdued, but there were further reports of intensifying pressure on non-wage employment costs, particularly for health benefits and other worker-related insurance.
Agriculture
District farmland values rose 1 percent, on average, in the first quarter of 2001, about the same as reported for each of the previous three quarters, according to a survey of agricultural bankers. Most farm debt continued to be serviced in a timely manner. However, an increased proportion of the bankers noted a higher incidence of requests for farm loan renewals and extensions, indicating some weakening in farm credit conditions. Most of the District's corn acreage has been planted and has emerged. Wet soil conditions slowed soybean planting in the western and northern portions of the District, leaving progress in Iowa and Wisconsin well behind a year ago.
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