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The Seventh District economy continued its modest pace of expansion as 1998 drew to a close and 1999 began, with little change in momentum. Consumers appeared to be the major driving force behind economic growth. Retail sales were generally above merchants' plans for the holiday season, although heavy promotional activity was necessary to attain these results. New and existing home sales were, again, exceptionally strong as mortgage interest rates remained favorable. While some key manufacturing sectors continued to feel the adverse impacts of turmoil overseas, the motor vehicle industry and construction-related industries remained very robust. Overall lending activity was high, buoyed by household borrowing. Employers in the region continued to find qualified labor in short supply, and there were a few new reports of intensifying wage pressures in some entry-level positions. District farmers continued to face financial losses due to extremely low hog prices.
Consumer Spending
On average, retail sales in the District were modestly above merchants' expectations for the holiday season, but many reported higher-than-expected promotional activity to attain these results. Discounters and some specialty stores fared better in December and early January than did general department stores. Unseasonably warm weather in the first few weeks of December hindered sales of winter apparel and other seasonal merchandise, forcing some retailers to steeply discount items languishing on their shelves. A raging snowstorm over the New Year's weekend, followed by an arctic blast, kept many consumers home and forced some merchants to close stores on the last big shopping weekend of the holiday season. The onset of cold weather did boost the sales of some items, such as automobile tires, batteries, snow blowers, and shovels. Winter apparel also began to move more quickly, but after stores had already marked down prices on these items. Contacts reported that appliances, home electronics, furniture, and home decorating items continued to register healthy sales gains, due in large part to strong home sales. Overall, post-holiday inventories were said to be in line with sales expectations.
Construction and Real Estate
Reports from realtors and construction professionals continued to point to exceptional strength in residential and nonresidential activity. Sales of both new and existing homes were reported to be at or near record levels in many areas in the District, as mortgage interest rates remained favorable. Contacts suggested that builders in many areas were experiencing double-digit gains in new home sales relative to strong results a year earlier. Construction of multifamily units was especially robust in Wisconsin, up approximately 35 percent year-to-date through November. Moreover, most contacts suggested that there were few if any signs of slowing residential construction activity in December, taking into consideration normal seasonal variations. A realtor in one of the District's largest metro areas noted that sales of existing homes set records in November and, like residential construction, displayed no signs of slowing in December. Nonresidential activity also remained brisk in the District. Infrastructure development was generally reported to be strong, although several contacts suggested that the severe winter weather in late December and early January may have slowed some projects, particularly highway projects. Commercial development also remained robust in most metro areas, particularly in the suburbs. Sites for commercial development in one large metro area were selling before any roads or sewer lines were in place, and twice as fast as projected.
Manufacturing
Although generally strong, manufacturing activity continued to be a mixed bag in the District as softness in some key industry segments persisted. Strength was reported for the motor vehicle industry and several housing/construction-related industries. Strong demand for both passenger cars and light trucks boosted national sales of light vehicles to the strongest monthly sales rate in 12 years, which led some industry analysts to increase their sales forecasts for 1999. Appliance manufacturers continued to benefit from strength in housing markets, with 1998's sales results expected to be at record levels. One industry analyst noted a "wealth effect" from strong gains in the stock market, with consumers purchasing more "high-end" appliances, increasing producers' profit margins. Also benefitting from strong home sales were wallboard producers, where one District producer recently announced a 10 percent price increase, and manufacturers of construction equipment. In contrast, sales and production of agricultural equipment remained very soft as a result of some problems in the domestic agricultural industries as well as turmoil overseas. The region's steel producers also continued to struggle, with one analyst describing the industry as "very weak" in December. Imports continued to flood the market, bloating inventories and putting intense downward pressure on steel prices. Overall, however, inventory levels in most other industries were described as being in line with sales expectations.
Banking and Finance
Overall lending activity remained "vibrant" in December and the first week of January, with most contacts reporting little if any change in momentum. While noting a normal seasonal slowdown in some business segments, District bankers generally suggested strong demand for commercial and industrial loans and modest growth in loan volume. Most remained cautious in their underwriting standards for commercial real estate loans, with one banker stating that a "crimp" remained in the credit pipeline for this segment. Contacts were universal in their assessment that lending to households remained very robust. Leading the way were new mortgage originations, a direct result of the strength in home sales. Mortgage interest rates were very attractive toward the end of 1998, although they began to edge up slightly toward the end of December which, according to some bankers, curtailed the level of refinancing activity somewhat. Overall asset quality was described as good on both business and consumer loans, and profitability has benefitted from an increase in fee income resulting from the strong lending activity. A large insurance carrier headquartered in the Midwest reported that medical claims costs in auto accidents were rising. The costs to the company, however, were being offset by improving safety trends (aging of the population, reductions in drunk driving, etc.) so that overall claims costs are expected to remain stable. This contact also suggested that intense competition, particularly via the Internet, will continue a downward trend toward rate cuts for auto insurance in 1999.
Labor Markets
Tightness continued to characterize the District's labor markets as 1998 drew to a close and the new year began. The average unemployment rate for the five District states leveled off toward the end of 1998, at approximately 3.6 percent. This rate is slightly higher than the very low levels attained earlier in the year, but 0.3 percentage point below year-earlier levels. With labor markets tighter in the region than for the nation as a whole, employers continued to report difficulty finding qualified workers. Employment growth in the region remained slower than in the nation in 1998, at just under 2 percent year-to-date though November. While job growth remained strong in the business and financial services sectors, contacts at staffing services firms noted that softness in the manufacturing sector persisted. Decreases in the employment components of some of the District's purchasing managers' surveys supported these assessments. There were a few new reports of the adverse affects of very tight labor markets, specifically higher turnover rates and intensifying wage pressures for some entry-level positions at smaller companies.
Agriculture
Hog prices softened in December as record-large marketings strained the capacity of the pork processing industry. In mid-December, hog prices were nearly 60 percent below year-earlier levels. Despite a modest price recovery in early January, there were reports of farmers donating hogs to charity since they were unable to recover their feed costs by selling. A USDA survey indicated that the number of market hogs in District states was up 5 percent from a year ago in December, but a decline in the number of breeding animals and farrowing intentions suggests the hog industry--both District and nationwide--is moving into a contraction phase. Beef cattle prices remained fairly steady in recent weeks and dairy farmers continued to benefit from higher-than-normal milk prices. Corn and soybean prices remained under downward pressure from large domestic supplies and the prospect of fewer hogs and lower feed demand, with soybean prices also affected by sluggish exports.
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