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The Seventh District economy continued its moderate rate of expansion in September and first half of October while prices remained in check. Retail sales were hampered by unseasonably warm weather, but showed some improvement as temperatures cooled in mid-October. On the other hand, warm weather was attributed for boosting new home sales and overall construction activity in the District. Manufacturing production continued at very high levels and new orders remained strong. Lending activity was again mixed by market segment, with the business side stronger than the consumer side. Labor markets continued to tighten and there were a few new reports of intensifying wage pressures, most notably in rural areas. Warm, dry weather permitted faster-than-normal progress with the fall harvest, yet grain prices rose contra-seasonally because of uncertainty over China's grain production and the effects of El Nino on tight world grain markets.
Consumer Spending
Retail sales in the District were below most merchants' expectations but in line with national results. Unusually warm weather in September was cited for slow sales of seasonal goods, particularly apparel. However, as cool weather hit the region in early- to mid-October, contacts noted a sharp increase in both store traffic and sales. Inventories, particularly apparel, were generally above plan due to the slower-than-expected sales. Most retailers feel that there is some pent-up demand, however, and there were no plans to increase the use of discounts to clear inventories. Sales of "hard lines," such as home decorations, were reportedly strong while sales of furniture were soft. Retailers remained very optimistic heading into the holiday season with their main concern being finding holiday help.
Housing/Construction
Overall construction activity remained robust across most of the region, with a slight pickup in new home construction noted in many areas. Commercial construction remained very strong and one contact reported that commercial contractors were "inundated with work" and were turning down projects. Little has changed in the commercial segment from our last report although one contact in the Indianapolis area noted that the industrial segment in that area may be slightly overbuilt. New home sales and construction benefitted from unseasonably warm weather in the region. Builders, however, noted that the level of traffic through models was down. Most expected traffic to be higher since the economy is so strong and mortgage interest rates so low. However, few expressed concern and most described the market for new homes as "healthy." Inventories remained in line with builders' expectations and there were no new reports of incentives or discounts. Most building materials remained readily available--though railway problems were causing some delays in shipments of lumber--and price pressures remained subdued.
Manufacturing
Manufacturing production continued at very high levels in recent weeks while prices for both inputs and outputs remained in check. Production of heavy equipment was reported to be picking up from already high levels and orders remained very strong, particularly for farm equipment. Strength in exports to Canada and Latin America was noted by some industry contacts and there was some improvement in European markets. Inventories of heavy equipment were falling and generally described as low, which would suggest continued high levels of production heading into 1998. Steel plants were also operating at very high levels and most contacts expected the strength to last for the remainder of the year. There was some weakening in the demand for domestic cold-rolled steel due to increased foreign competition. Automakers reported that low inventories of light vehicles were keeping production levels high despite some softening of sales over the last six to eight weeks. For the most part, prices of raw materials to manufacturers remained flat as did output prices. A major producer of wallboard reported that a 6 percent price increase pushed through earlier in the year had been whittled down to 3 percent and continued to be trimmed. Most contacts cited intense competition for manufacturers' inability to raise prices.
Banking/Finance
Business lending activity remained strong through September and early October while most bankers indicated that efforts to tighten credit standards on the consumer side continued. The strength on the business side was broad-based with demand for C&I, mergers & acquisitions, and commercial real estate loans showing no signs of subsiding. A contact in one of the District's largest metro areas noted that significant competition was compelling the bank to approve deals that would have been turned down just three months ago. In contrast, another contact in the same metropolitan area stated that business lending standards were being tightened somewhat. Virtually all contacts indicated that caution continued on the consumer side. Mortgage originations were strong and one bank reported a slight pickup in refinancing activity. Banks continued to tighten credit card standards, however, and this was paying off in the form of increased profitability. Asset quality was generally described as very good in the business segment, and good to improving in the consumer segment.
Labor Markets
The District's labor markets continued to tighten and there were a few new reports of intensifying wage pressures. State analysts reported that initial unemployment claims at the beginning of October had reached their lowest level for the period since 1994. Temporary help services were turning to state employment agencies to help fill orders, according to one state analyst. One contact noted that some businesses are "desperately short of people" and manufacturers are most widely cited as having the most difficulty, particularly in filling entry-level positions. Many areas reported that manufacturing employment was picking up, but this is not being reflected in the government's official statistics. Contacts in eastern Wisconsin and central Illinois cited strong job growth in the capital equipment industry, while a Detroit area staffing service noted softening orders from auto suppliers. Many areas were experiencing increases in finance and accounting occupations, with demand broad-based across industry sectors. Retailers in the region were already expressing concerns about finding holiday help and were still finding information and technology workers in short supply. Wage pressures continued to mount in those occupations where the most severe shortages existed and there were new reports of intensifying pressures in rural areas, where labor markets were tightening.
Agriculture
The fall harvest has made excellent progress in District states, aided by ideal weather conditions. The faster-than-normal harvest pace will help to minimize any late-season yield losses. However, it may add to the seasonal glut that often temporarily clogs grain storage and transportation facilities in rural areas at this time of year. The widely-reported railcar problems have the attention of many observers, but as yet have not been much of a factor in District grain markets. Over the years, trucks have handled an increasing share of the local grain hauling requirements.
A surge in grain prices during the first half of October departed from the downtrend that normally extends through the harvest season. The sharp rise reflects some pivotal issues that add to the speculative momentum in the relatively tight world grain markets. The growing focus on El Nino and the uncertain weather implications that might result in food-growing areas of the world is one such issue. Another reflects the uncertainty as to whether China will be a net importer or exporter of feed grains in the year ahead.
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