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Summary
The Seventh District economy expanded solidly in late April and May, due in part to a stronger, broader-based advance in manufacturing. Consumer and business spending increased, and hiring picked up. Overall construction and real estate activity moved slightly higher, reflecting some improvement on the nonresidential side. Lending volumes were fairly flat. Contacts continued to express concerns over rising input costs, but retail price pressures remained largely subdued. Agricultural conditions in the District were mixed, as excess precipitation followed a quick start to the planting season.
Consumer spending
Consumer spending picked up modestly in late April and May. More retailers noted stronger sales growth than during our previous reporting period. Lower-priced goods, especially food and consumables, were again top sellers for many retailers. One national chain reported that strong demand for apparel and home furnishings boosted sales beyond its expectations. By contrast, another noted softening sales of big-ticket items, such as appliances and electronics. Merchants generally suggested that inventories were slightly lean relative to their sales expectations, and that margins had improved. Auto dealers indicated that light vehicle sales in the District picked up from April to May, though some said that more aggressive pricing was used to close deals. Light vehicle inventories were still high for some dealers, with one stating that his lots were "bursting at the seams." Parts and service sales remained solid. Tourism and travel was basically flat relative to a year ago.
Business spending
Business spending continued to strengthen as firms appeared more confident about their near-term investment and hiring plans than at any point so far this year. We continued to hear reports of strong replacement demand for capital equipment. In addition, some contacts said that capacity constraints have motivated them to boost capital spending. This was particularly true in the transportation sector. With the volume of goods shipments increasing across the country, more over-the-road trucking firms reported investing in tractors and trailers. Similarly, rail freight companies said they were purchasing boxcars and containers. On the hiring front, staffing services firms noted stronger new orders for temporary workers in much of the District, though Michigan appeared to be lagging. The pickup was broad-based across market segments--industrial (outside of autos), office/clerical, and professional/technical occupations. One large online job posting service reported that listings for open positions rose in April and May, and hiring plans at some firms had shifted from "hopeful anticipation" to "immediate need today." More small manufacturers reported adding permanent full-time employees. Most employers were having little difficulty finding adequately skilled workers, though there were isolated reports of shortages in trucking, specialized IT, and accounting professions.
Construction/real estate
Overall construction and real estate activity moved slightly higher in late April and May. Contacts suggested that home sales flattened out somewhat, but remained at high levels. Realtors and builders indicated that many "fence-sitters" had already jumped into the market earlier when mortgage interest rates began to rise. Some builders said that model traffic had slowed considerably and "festival of homes" events were disappointing. As a result, builders were applying for fewer permits. Contacts in some areas also reported that sales in the upper-priced ranges for both new and existing homes had softened again. In contrast, nonresidential activity appeared to pick up. Office showings and lease signings were up in a few metropolitan areas. On balance, net office space absorption was positive, though rents were flat. However, contacts said that office markets "still have a long way to go," and there was very little new development in the pipeline. Absorption of light industrial space was also said to be improving, and there appeared to be a modest increase in development. Retail development remained strong, and one contact expressed surprise at a recent pickup in the absorption of vacant big-box space.
Manufacturing
Contacts reported a stronger, broader-based advance in manufacturing activity in April and May. Several of the District's important industries--including gypsum wallboard, cement, steel, and heavy trucks--were said to be running at, or very near effective capacity. Strong worldwide demand, particularly from China , was reportedly limiting imports and contributing to domestic shortages of commodities such as cement and steel. Producers of steel indicated that orders were booked for the foreseeable future. In addition, a steel service center contact reported that his firm was on allocation for some products, and "deliveries were out as far" as he had ever seen them. Heavy trucks may soon be on allocation as well, according to one industry contact, as heavier shipping volumes led to a surge in truck demand. New orders for other heavy equipment (construction, agricultural, mining, etc.) were up substantially from a year ago with practically all of our industry contacts reporting improvement. Producers of office furniture noted a modest increase in orders, leading one firm to scrap previously announced layoff plans. Nationally, light vehicle demand was stronger than expected in May, which helped bring bloated inventories in the U.S. closer to desirable levels. However, auto manufacturers have not altered their production plans since the previous Beige Book reporting period. Automakers also said that record-high gasoline prices had not had a discernible negative impact on light truck sales. Small manufacturing firms were seeing higher production, new orders, and backlogs virtually "across the board," according to some industry sources; one producer of specialty machine tools said that demand was stronger than it had been in the last three years.
Banking/finance
Overall lending activity remained fairly flat. On the consumer side, refinancing tapered off considerably with higher mortgage interest rates. New originations were still relatively strong, with many homebuyers switching from fixed-rate to adjustable-rate mortgages. Margins continued to be squeezed as lenders competed for a smaller pool of potential mortgage borrowers. On balance, consumer credit quality continued to improve, and there were no changes reported in standards and terms for household loans. Business loan volumes appeared to edge up "incrementally," but were again relatively flat. One lender said that "commercial loan officers were pounding the pavement looking for deals," but weren't finding many. Contacts suggested that firms continued to use improved cash flow to meet their short-term liquidity needs, rather than borrowing. Business loan quality improved further in May, although some banks were reportedly lowering standards to secure deals in an increasingly competitive lending environment.
Prices/costs
In general, many more business contacts said that strong demand throughout the economy was enabling them to push prices up modestly, albeit from very low levels. Contacts continued to express concerns over rising input prices, but most believed that the big cost increases for inputs such as steel and energy were largely behind us. More firms reported success in pushing through at least part of higher input costs to their customers, though many still said that margins were being squeezed. Freight costs continued to rise as stronger economic activity put a strain on shipping capacity. At the retail level, merchants (with the exception of auto dealers) generally continued to pull back on discounting. There were no new reports of upward pressures on wages and other labor costs.
Agriculture
The agricultural situation was in greater-than-usual flux during the Beige Book reporting period. Almost all corn acres and a large portion of soybean acres had already been planted when heavy rains fell across most of the District. Corn and soybean planting in the District was ahead of the 5-year average, though soybean planting in Michigan and Wisconsin lagged. The emergence of corn and soybeans was well ahead of the 5-year average, except in the northern reaches of the District. The overabundance of moisture, however, delayed the end of planting and raised concerns about crop yields. Many drowned-out acres will be replanted to soybeans, but some acres will not be replanted. Land values continued to increase, in part due to tax-free exchanges and the lack of farmland for sale.
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