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Economic activity in the Seventh District continued to expand at a moderate pace during March and early April. Spending by both consumers and businesses increased at rates similar to those in the last report. Labor market conditions were little changed, with small employment gains in some industries and only sporadic reports of layoffs. Manufacturing activity remained strong. Residential construction and real estate activity softened, while commercial real estate activity increased at a slow pace. Mortgage demand was down, but the expansion in commercial lending continued. Cost and price pressures remained firm. Rains boosted moisture conditions but slowed preparations for planting in parts of the District.
Consumer spending
Consumer spending continued to increase modestly in March and early April. Retailers in most areas said that sales gains from last year were running at low single-digit growth rates. Electronics and gardening items recorded strong increases. High gasoline prices have reportedly slowed sales at discounters but have had little effect on the demand for expensive durable goods, such as pleasure boats and recreation vehicles. Several contacts expressed concern that higher gas prices during the summer driving season would lead to softer retail sales in coming months. Retail inventories were at desired levels. Auto dealers said that sales of new vehicles remained soft, but used car sales were holding up well. Several dealers said that high gas prices were eroding demand for light trucks, but a few also said that vehicle prices and finance rates were becoming bigger factors in consumers' decision making. Tourism increased modestly in the District, with hotel bookings running ahead of a year ago.
Business spending
Business spending and hiring expanded again. For the most part, District firms were holding to their existing capital spending plans; these generally call for higher outlays this year than last. The largest gains were budgeted for equipment purchases, but a significant number of contacts planned to increase construction spending. A local information technology firm noted an increase in the number of projects started during the first quarter and forward-looking indicators suggested that activity would remain solid this year. Overall labor market conditions were little changed, with small employment gains in some industries and only sporadic reports of layoffs. Demand for information technology workers was increasing. One pharmaceutical firm said its head count was up nationwide, but down at their Midwest locations. Retail hiring was limited to staffing new stores. In contrast, several auto suppliers and mortgage brokers reported reductions in workers. Temporary help firms reported that growth in billable hours had firmed in the District as a whole, as the long-running declines in bookings in Michigan had showed signs of "settling out." Shortages of skilled manufacturing workers persisted in the District. One contact noted that enrollments in an apprenticeship program had increased recently.
Construction/real estate
Construction and real estate activity was mixed by both location and market segment. Residential activity continued to slow from high levels in most areas. Contacts in Illinois, Indiana, and Michigan said that sales had softened, while real estate agents in Wisconsin said that sales in March had recovered some. Most contacts indicated that the supply of new and existing homes for sale was growing, buyer traffic was down, and homes were staying on the market longer. In addition, new home construction slowed in most areas. Apartment vacancy rates were steady. On balance, commercial construction and real estate continued to expand at a slow pace. In southeast Michigan, demand for all types of commercial space was weak. In contrast, contacts in Chicago reported a sharp pickup in net absorption of office space, with a number of large block tenants entering the market. The amount of space under construction ticked up in the first quarter. Commercial vacancy rates were either little changed or down slightly.
Manufacturing
Manufacturing activity remained strong during March and early April. Demand for heavy equipment continued to be solid and order backlogs increased. Orders for mining equipment remained especially strong; current production capacity has been booked through 2007 and some producers have begun taking orders for 2008. One industry analyst noted that equipment makers have been trying to increase capacity by outsourcing more intermediate work and just focusing on assemblies. Orders of agricultural equipment were flat. Activity in the tooling industry remained brisk, led by demand from the energy sector. Steel producers reported strong demand from all markets and growing backlogs. Steel imports were increasing as well. Wallboard production continued to run near full capacity. Heavy- and medium-duty truck orders remained solid, reflecting in part the continued pre-purchase of trucks before new EPA standards go into effect at the beginning of next year. Nationwide, light vehicle sales were flat between March and early April. One automaker said that vehicle inventories were "excessive," and that this would lead to either production cuts or higher incentives.
Banking/finance
Lending activity moderated further. Bankers noted additional declines in mortgage applications for both purchases and refinancing. Still, one contact said that a number of customers were refinancing from adjustable to fixed-rate loans in order to lock in rates before they moved any higher. Demand for home-equity loans declined, which most contacts attributed to slower increases in home values. Mortgage spreads were slim due to competitive pressures. As a result, one banker in Chicago expected to see a number of originators exit the market in the second quarter. Reports on household credit quality were favorable, though exceptions were noted from Michigan. Deposit growth was sluggish, and contacts said that deposit rates were priced aggressively. Commercial lending expanded, continuing the trends seen earlier in the year. Loan volume and use of existing credit lines picked up, and demand was solid across product markets. One contact noted that their optimism about loan demand had improved markedly since the last reporting period. Commercial credit quality remained in good shape.
Prices/costs
Price and cost pressures remained firm in March and early April. Many contacts noted that higher energy prices were boosting costs, and only heavy truck manufacturers and toolmakers indicated that they had been successful in passing these costs through to their customers. Steel prices increased noticeably since the last reporting period. A construction industry analyst noted that roadbuilding material costs have moved significantly higher, leading some state governments to reevaluate their projects. Price reports at the retail level were mixed. One retail chain said it was increasing prices of its private label goods, but an industry analyst said that competitive pressures were keeping most retailers reluctant to increase prices. Hotel room rates were flat to slightly higher, while new vehicle prices were flat to slightly lower. Labor costs increased at a steady rate in most industries.
Agriculture
Agricultural conditions improved in March and early April. Recent rains reduced the area of the District affected by drought, although the rains also slowed planting preparations in parts of the region. Still, contacts said that more and timely rains will be critical for the growing season. Contacts continued to believe that soybean acres would increase relative to corn this year. However, the gains likely will be not as big as previously reported due to recent changes in the relative crop prices and fertilizer costs. Also, increases in ethanol production were expected to boost the demand for corn further. Cash flows were tight during the reporting period for crop farmers, dairy operators and cattle feeders. In contrast, hog producers managed better than expected, and some expansions are under consideration in Indiana. There were mixed reports on farmland values.
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