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The Seventh District economy, as in our last report, expanded
at a moderate rate in October and early November, while price pressures remained largely
in check. Consumer spending appeared to have rebounded from a sluggish September,
and regional retailers reported that they were aggressively seeking seasonal workers.
Housing activity continued to slow moderately, although most contacts continued to rate
the market as strong. Manufacturers were operating at very high levels and indicators
suggest a near-term pickup. Banking activity remained strong despite some softening in
commercial and industrial lending. Very tight labor markets persisted, while overall job
growth in the District lagged that of the nation.
Consumer Spending
While still above year-ago levels, retail sales
remained relatively flat in early November, following October�s improvements. Several
large retailers attributed overall sales gains to strength in apparel sales, aided partly by
the onset of cold weather. Home appliance and electronic sales were soft compared to
earlier months, but retailers expect a pickup in December. Inventory levels were
considered to be in good to excellent shape by retailers. Several retailers noted that there
will be a big push in promotional activity ahead, mainly because November sales targets
will be hard to achieve with Thanksgiving coming so late in the month. One retailer,
trying to maintain market share, reported plans to increase their price-discounting
promotions. Most retailers, however, appeared to be focusing on boosting advertising to
attract customers as early in the holiday season as possible. Retailers contacted remained
very optimistic about sales during the holiday selling season (despite fewer shopping
days), with Midwest sales expected to outperform other regions of the country. One
major retailer felt that sales for the holiday selling season as a whole would not be
affected by the late Thanksgiving because many consumers start their holiday shopping
around mid-December.
Housing/Construction
Housing activity continued to slow in the District,
but most contacts reported that the market remained very strong. One of the region�s
largest realtors reported that October�s existing home sales had decreased from the torrid
pace earlier in the year, but it was still their second best October ever. New home sales
also declined in October and early November in most areas but, again, remained at very high
levels. A national survey of home builders suggested that the Midwest�s early November
sales continued to decline slightly from the late summer�s weather-delayed gains.
Builders noted a sharp drop-off in foot traffic, causing several builders to lower their
expectations for the remainder of 1996 as well as the first quarter of 1997. Among
building material suppliers, one major wallboard producer reported that shipments to the
Midwest remained very strong, noting that there is about a three-month lag between
changes in housing starts and wallboard shipments. This producer reported that the
industry was able to push through a modest price increase in September and has
announced another for December. If it holds up, as the industry expects, it would be the
first time in several years that the industry was able to push through an increase this late
in the year, a sign which this contact said indicates the strength in the market. Activity
on the commercial side of the real estate market picked up slightly in recent weeks, due
in large part to declining interest rates. One contact also reported that commercial
refinancing activity was increasing.
Manufacturing
Despite some disruptions from the auto strikes,
manufacturing activity remained strong in October and early November, with some reports
suggesting a slight pickup in the pace of expansion. Several purchasing managers'
surveys indicated moderate increases in October and November from already high levels
of overall activity in September. New orders were particularly strong, but inventory
building was also evident. However, prices paid remained relatively flat and, in one area
surveyed, delivery times were shortening. A sharp increase in new orders of heavy-duty
trucks was reported by the industry for October, with orders strength continuing into
November. Heavy ordering occurred from the major haulers, something that was absent
a year ago due to already huge backlogs at that time. A producer of heavy construction
equipment reported that unit sales for the industry in October were slightly above year-
ago levels. Appliance shipments, which declined in September on a year-over-year basis,
rebounded in October and appeared to be holding up in November. Steel orders into the
first quarter are strong, but new capacity coming online (albeit more slowly than the
industry expected) is holding down price increases. Although a slowdown in auto
production from the third quarter was widely expected, several auto suppliers reported a
drop in their shipments related to auto production cutbacks during the GM strikes. A
major supplier of chemicals noted a plateauing of demand in recent weeks that was at
least partly linked to the auto strikes. Despite solid sales growth so far this year, this
producer also reported that they have staunchly resisted price
increases from their raw material suppliers.
Banking
Lending activity remained strong in October and early
November, but growth in most areas of the District has plateaued. On the commercial
side, several large regional banks described loan demand as flat to slightly down. Most
of the recent activity has been driven by mergers and
acquisitions, with little currently going to
new plant and equipment purchases.
However, some increase in inventory
financing was also noted. On the consumer
side, lending activity was still increasing,
but at a slower pace than two months ago.
Several medium-sized banks reported that
home equity and home improvement lending
was accounting for much of their activity.
However, several area bankers cited
lengthening terms on auto loans and less
equity being put into loan transactions as an
indication that consumers were getting
stretched out. A consumer finance
institution reported a rise in revolving credit
balances, which also was interpreted as a
potential sign of an increasingly debt-
constrained consumer. However, this
contact emphasized that overall credit
quality in the Midwest remained very good.
Several financial institutions reported some
tightening of standards, but also indicated
that much less was required in their
Midwest markets.
Labor Markets
The District�s labor markets
remained very tight in October and early
November, with shortages in some sectors
becoming particularly acute. Retailers have
been finding it especially difficult to attract
holiday help this year. A recent direct-mail
promotion in Michigan advertising a retail
"jobs fair" received a minuscule one percent
response rate. Retailers in the state have
teamed up with the state employment agency
in a promotional effort to recruit seasonal
workers. In addition, a temporary help
agency in one of the District�s large metro
areas reported that orders were already
coming in for tax help (accountants,
business analysts, etc.) in mid-November, a
month earlier than in past years. Perhaps
because of historically low unemployment
rates, most sectors� job growth was well
below the national average (retail trades
being an exception). Construction
employment remained strong, while home
builders in several areas reported that
shortages of skilled labor persisted.
Manufacturing employment levels
continued a pattern of bouncing up and
down slightly from month to month, with no
trend evident in either direction. However,
a national survey of hiring plans indicated
that more manufacturers in the Midwest
plan to increase their payrolls in the first
quarter of 1997 than was reported a year
ago. A contact at a national temporary help
agency reported that margins were being
squeezed in the Midwest due to demands for
higher wages from workers and lower
prices from clients.
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