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The Seventh District economy continued its moderate rate of expansion with few new reports of intensifying wage or price pressures. Retail sales were above year-ago levels despite being hampered by unseasonably cool weather. Overall construction activity remained very strong, particularly in nonresidential segments. Manufacturing production picked up in response to strong demand for steel and heavy equipment. Bank lending activity remained strong, mostly concentrated on the business side. Labor markets continued to tighten across the District, amid reports of increased competition for recent college graduates. Corn and soybean planting proceeded at a rapid pace, but crop development was hindered by cool weather.
Consumer Spending
Retail sales were above year-ago levels in April and May, but most retailers again indicated that unseasonably cool weather had limited sales gains. One retailer even noted that weather had reduced �impulse buying' by consumers. Sales of apparel, primarily women's, continued to outperform other product lines, according to most retailers. Sales of seasonal merchandise--such as lawn mowers, patio furniture, and garden supplies and plants--picked up toward the end of May after poor sales results earlier in the spring. Most retailers expect to recoup weather-related sales losses in June. Midwest sales results were seen to be in line with, or only slightly lagging, those of the nation. Inventories generally continued to be in line with sales expectations, although one major retailer noted that purchases had been cut back to keep inventories in line. There were no new reports of heavy discounting. Contacts reiterated that competition remains fierce, limiting their ability to raise prices.
Housing and Construction
Overall construction activity remained robust during late April and May, with most of the strength still on the commercial side. Residential resales were described by most realtors as steady. A large Chicago area realtor noted that April's sales were slightly higher than April 1996 levels and also expects May sales to be up slightly year-over-year. Year-to-date, however, sales were off between 5 and 10 percent from last year's very high levels. Median existing home prices in the Midwest were running 5 percent above last year. Most builders in the District reported that sales of new homes in May were down slightly from April and off noticeably from last May. However, none described the market as weak, and the drop-off from last year's sales was largely anticipated. Consequently, inventories remained at or slightly below last year's levels, and there were no new reports of significant price discounting. Builders remained optimistic for the coming months, citing increased traffic and declining interest rates in May as signs of strength. Commercial construction activity remained strong across the District, and one source pointed to increased efficiency in the delivery of funds as contributing to this strength.
Manufacturing
Manufacturing activity picked up slightly in late April and May, buoyed by sustained demand and settled strikes. Steel producers across the District generally reported that levels of production and capacity utilization remained very high, slightly above last year's levels. Inventory-to-sales ratios declined despite some inventory building, and new orders remained strong. Most producers were successful in pushing through moderate price increases recently, but steel prices remain below their 1994 peak. Manufacturers of steel plate products, however, were generally unsuccessful in raising prices due largely to increasing imports. Heavy equipment makers indicated that production picked up in May from already high levels, and inventories were lower than anticipated. Orders remained very strong with some products booked well into next year. Although equipment prices were generally unchanged, one large producer reported using fewer incentives to sell equipment. The demand for light vehicles was decidedly mixed--with light trucks faring well and autos softening considerably. One automaker reported that the weakness on the auto side has resulted in a sizable inventory buildup, and the company may have to increase its use of incentives to clear inventory. Several contacts noted that competition and the high value of the dollar will make it difficult for automakers to raise prices on their 1998 models. For the most part, manufacturers indicated that prices paid for raw materials were flat, and there were no new reports of shortages.
Banking/credit
Bank lending activity remained strong, similar to our last report. Most of the strength in April and May was on the business side, where demand remained high and competition fierce for business customers. Fewer banks reported lowering credit standards to attract business deals but margins continued to be squeezed. One large regional bank pointed to "terrific" growth in the middle market segment resulting from new business formation. An increase in lending related to mergers and acquisitions, restructurings, and international acquisitions and expansions was also noted. Homebuilders continued to borrow in anticipation of an improving new home market in the second half of the year. On the consumer side, residential mortgage lending remained mixed, while most contacts reported a noticeable increase in home equity loans. Credit card usage slowed in April and May according to one large issuer, and most contacts indicated that delinquencies remained high. Overall asset quality continued to be good at those banks contacted.
Labor Markets
Employers continued to squeeze the slack out of the District's labor markets in April and May. The unemployment rate in District states continued to inch down toward 4.0 percent. Contacts at state employment agencies indicated that initial claims for unemployment insurance fell dramatically in May. Although claims had shown a strike-related increase in April, May's levels were the lowest since 1994 for this period. Changes in the employment component of purchasing managers' surveys were mixed in May, though all remained in the expansionary range. As was the case in our last few reports, labor shortages persisted throughout the District, particularly in the technology, professional, and managerial occupations. Several contacts indicated that these shortages resulted in significant year-over-year increases in entry-level salaries, with some paying large signing bonuses to recent college graduates. One staffing agency contact reported that orders for administrative assistants and professionals had picked up noticeably in April and May. This source also noted an increase in longer-term temporary assignments. Outside of those occupations where shortages persisted, there were few other reports of intensifying wage pressures. Retailers have not had to raise entry-level wages in order to attract workers, but concerns persisted about how long this situation will last. Many contacts suggested that the lack of widespread upward price pressures was the result of improving efficiency and productivity as well as fierce competition.
Agriculture
May weather in the Midwest was characterized by little rainfall and lower-than-normal temperatures. While this allowed corn and soybean planting to proceed at a pace well above average, the emergence of the new crop was hindered by the cool weather, and the lack of rainfall generated concerns about the adequacy of soil moisture. In addition, there were scattered reports of early-planted corn being re-seeded in some areas. However, the outlook improved considerably with widespread rainfall during the Memorial Day weekend and subsequent warmer temperatures. The gain in farmland values continued to be strong, rising 2 percent in the first quarter and 9 percent year-over-year. Cash rental rates paid by farmers this spring were also up from a year ago, registering an average increase of 8 percent.
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