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Economic activity in the Seventh District expanded more slowly in April and May. Growth in consumer spending was slower, while the rate of increase in business spending was steady. Manufacturing production grew more slowly, and construction was again subdued. Credit conditions continued to improve. There was some further pass-through of higher commodity prices to downstream prices. Planting of corn and soybeans was delayed by wet and cool weather.
Consumer Spending
Consumer spending increased at a slower rate than during the previous reporting period. Retailers reported that sales were mostly flat. Higher food and energy prices caused consumers to make fewer shopping trips and purchase fewer discretionary items. Auto sales edged up, as higher demand for passenger cars offset a slight decline in sales of trucks and SUVs. Auto dealers reported that their inventory levels of small passenger cars were starting to come under pressure due to higher than anticipated demand for fuel efficient vehicles and production disruptions related to the situation in Japan. Dealers of Japanese vehicles expect that supply problems will continue to affect their inventory levels for the remainder of the year. These supply constraints were noted to be causing used car prices to rise, as well as benefitting passenger vehicle sales of the Detroit automakers. Quality improvements were also said to have put the Detroit 3 in a better competitive position.
Business Spending
Business spending increased at a steady pace in April and May. Inventories were little changed on balance. However, a few manufacturers in the auto industry said they had increased inventories to guard against potential future supply disruptions stemming from the situation in Japan. Contacts indicated that capital expenditures were proceeding as planned, with some manufacturers reporting a slight increase in capacity. There also was a pick-up in merger and acquisition activity in the manufacturing sector. Labor market conditions improved with continued strength in manufacturing, where contacts again cited a shortage of qualified applicants for highly skilled trades. A large staffing firm reported that billable hours ticked up and permanent placement activity continued to increase. However, demand for temporary workers softened in some regional labor markets and remained slow in some industries, such as finance.
Construction and Real Estate
Construction activity was again subdued in April and May. Single-family home construction continued to be constrained by the overhang of distressed properties in the resale market. However, existing home sales picked up in parts of the District, lowering the inventory of unsold homes to a degree. In the multifamily sector, the rental market continued to improve. Residential rents rose further, and credit has become increasingly more available for the purchase of apartment buildings. With minimal single-family and condo development planned in the District, contacts expect to see an increase in the construction of apartments in the near future. Nonresidential construction edged up with stronger demand from the automotive industry, small retail projects, and renovation. Contacts indicated that while more private sector building projects are coming up for bid, stiff competition continues to put downward pressure on pricing. Furthermore, while public sector projects remain a source of strength, they are becoming smaller. Commercial real estate conditions were little changed, with vacancy rates steady and landlords keeping commercial rents low to maintain occupancy at existing levels.
Manufacturing
Manufacturing production growth slowed from the previous reporting period, although contacts expected the recent slowdown would be temporary with conditions expected to rebound in the coming months. Capacity utilization in the steel industry was only marginally lower; and while other manufacturers of industrial metals noted a softening in orders for second quarter delivery, several also indicated that order books for third quarter delivery were more positive. A contact speculated that the recent volatility in industrial metals prices was leading some customers to delay orders, expecting lower surcharges in the coming months and to avoid getting caught holding inventory at elevated prices. Manufacturers of construction materials and household goods also reported a decline in activity. In contrast, orders for heavy trucks, agricultural and construction equipment were up. Fleet replacement and robust activity in oil and gas extraction were cited as reasons for the continued strength in demand for heavy equipment. Supply chain disruptions reduced activity in the automotive sector, but mostly for the Japanese automakers and their suppliers. District automakers were able to avoid the most severe dislocations by reallocating parts to vehicles that are in high demand and implementing contingency plans for alternative supply sources. Contacts indicated that while it remains to be seen how effective these measures will be over an extended period, these supply chain adjustments were occurring at a faster rate than previously expected. In addition, a contact noted that some automakers and their suppliers are moving planned summer shutdowns forward into June to give supply chains time to repair and thus be in better position for a ramp up in production in the third quarter.
Banking and Finance
Credit conditions continued to improve in April and May. Corporate funding costs for a number of large firms in the District decreased, and contacts noted that liquidity in corporate credit markets remains ample. Banking contacts reported a slight increase in business loan demand. Although much of this continued to be refinancing of existing debt, contacts noted that they were starting to see more new commercial and industrial loans in the pipeline. Credit availability, however, remained an issue for some small business borrowers. A contact noted that larger banks have recently begun to return to small business lending, but that the loan capacity of community banks who have traditionally serviced this segment is still impaired. Outside of banking, conditions in the municipal bond market improved and there was an increase in investment activity by hedge funds, venture capital firms and other forms of private equity.
Prices and Costs
Cost pressures increased in April before subsiding some in May. Food and energy prices ended the period mostly lower, as did prices for steel, copper, and other industrial metals. Despite the recent declines, commodity prices remain elevated, and surcharges for fuel, metals, and other commodities increased significantly during the reporting period. Lead times also continued to be longer than normal, and shortages of some raw materials were reported. Pass-through of higher costs to prices further downstream remained moderate. Retailers reported that they were unable to pass along much of the recent increase in wholesale prices; and in many cases, were trying to compensate for the impact of higher food and energy prices on consumer budgets by increasing promotions and discounts. Retail contacts also noted that margins were tight, particularly for grocery stores, and further increases in costs would likely need to be passed along. Wage pressures remained moderate.
Agriculture
Corn and soybean planting lagged the pace of last spring in the District, as excess precipitation and cool temperatures slowed field work. Planting conditions were best in Iowa and Illinois, where planted acres had caught up to five-year averages after a slow start. The emergence of corn and soybean plants was behind normal, except in Iowa. The poor start to the growing season reduces the yield potential of the District corn crop. Even so, there is still the chance of a very large crop. Agricultural commodity markets were choppy during the reporting period. After peaking earlier this year, corn, soybean, and wheat prices ended down. Cattle and milk prices edged lower, while hog prices edged up.
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Atlanta