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The Seventh District's economic expansion picked up modestly in January and February, led by increases in consumer spending and housing activity. Some contacts, however, suggested that the unseasonable strength in retailing and housing early in the first quarter may be borrowing from later in the year. Manufacturers continued to operate near capacity and strong new orders showed no signs of softening. Lending activity picked up as many consumers refinanced their existing mortgages. Overall wage pressures remained generally subdued despite very tight labor markets and worker shortages in some occupations and industries. Credit guarantees cushioned any Asian impact on crop exports this winter, but low livestock prices triggered heavy operating losses for many District farmers.
Consumer Spending
Most District retailers were quite satisfied with sales results in January and February. Sales were generally described as above expectations and most merchants indicated that this strength was broad-based. Unseasonably warm weather in the early part of 1998 increased traffic through most stores and greatly boosted sales of spring items, as well as some other goods. Spring apparel sales were doing very well with women's lines particularly strong. Some motorcycle dealers in the region credited the effects of El Nino for record high sales in January and February, at levels far above their seasonal averages. Exceptionally strong housing markets boosted the sales of complimentary items, such as furniture, home decor, appliances, electronics, and household tools. In addition, the spurt in mortgage refinancing activity improved consumers' debt positions, which some merchants credited with increasing sales of household and home improvement items. Inventories were in good shape, allowing most retailers to limit their use of promotional activities and concentrate on profit margins.
Housing and Construction
Overall construction activity picked up moderately in January and February, led by a sharp rebound in new housing construction. A healthy economy, low mortgage interest rates, and very mild winter weather were frequently cited by contacts as factors contributing to an unseasonably strong new home market. Most builders described sales as exceptional for this time of the year, with one adding "if builders aren't selling now, they never will!" The strength appeared to be broad-based across both geographic and market segments. Some builders felt that strong sales this early in the year may lead to a slower-than-normal spring rush. This would not be entirely unwelcome to builders, given some of the labor shortages and materials bottlenecks that have occurred periodically over the last few years. Sales of existing homes continued to surprise on the upside, with most realtors reporting early 1998 sales results that were near record levels for this time of year. Broad-based strength in commercial construction activity was also reported, but contacts indicated that growth may be slowing in some segments.
Manufacturing
Manufacturing activity remained robust in the District with virtually every sector running near capacity. Contacts in the heavy truck industry indicated that demand was high and production was running "full tilt," with only capacity constraints restraining stronger growth. The heavy/agricultural equipment and steel industries experienced similar strength, with orders booked through the second quarter and plants operating near capacity. One large steel producer reported having to turn new orders away. Output of light vehicles remained very healthy in the region amid continued reports of strong sales. There was some concern that momentum in the industry was being buoyed by discounting, with one contact noting that incentives were at levels normally reserved for the end of the model year. Inventory levels for most manufacturers were in good shape, although they were slightly low for producers of heavy and agricultural equipment and slightly high in the auto industry. Prices for raw materials continued to show very little movement as did product prices. Steel producers were successful in pushing through very modest increases, but prices were still below 1994 levels. A producer of supplies to the construction industry also raised prices, but only expected to reap half the announced increase. Adverse effects from East Asia's turmoil remained generally concentrated in the heavy/agricultural equipment sector. There were no reports of these effects spreading or worsening.
Banking and Finance
Business lending activity was strong throughout the District and the consumer segment showed signs of gaining momentum. The unseasonably warm weather and low interest rates boosted housing activity and, as a result, mortgage originations. The exceptional activity, however, was in the refinance market. Every banker contacted reported that refinancing activity was up sharply in January and February, with one stating that activity was like nothing he's ever seen before. Reports indicated that personal delinquencies, repayments on credit cards, and bankruptcies were improving. On the commercial side, loan activity remained brisk, but loan growth appeared to be slowing. Overall asset quality was generally described as good, and improving slightly on the consumer side. Some bankers expressed concern that fierce competition in the commercial segments may have slightly eroded asset quality. Continuing a trend noted in our last report, additional contacts indicated that Asian lenders were withdrawing from U.S. lending markets as a result of the "Asian Contagion" turmoil.
Labor Markets
In January and February, conditions in the District's labor markets changed little from late last year. While unemployment rates remained very low and shortages persisted in some industries and occupations, wage pressures were relatively unchanged. Construction help and information technology workers were most frequently cited as being in short supply. Entry-level positions continued to be difficult to fill and one contact indicated that this was due, in large part, to skill-matching problems. Most businesses indicated that growth in base salaries remained relatively subdued (with the exception of occupations in short supply, where wage increases were more pronounced), while the use of bonuses and other "one-time" incentives increased. One analyst noted that businesses were becoming ever more creative in their recruiting efforts, with at least one firm offering modest weekend trips as an incentive. The employment component of purchasing managers' surveys from throughout the District all showed sharp increases from January to February as well as in year-over-year comparisons. The same trend was evident in indexes derived from the volume of help-wanted advertising in local newspapers and quarterly hiring plans surveys. One contact cited very tight labor markets in Iowa as impeding economic growth in the state, and a regional manufacturer indicated that increased use of overtime was cutting into the company's profit margins.
Agriculture
Corn export prospects remain depressed. As of late February, corn export commitments (shipments-to-date plus outstanding orders) for shipment in the year ending with August were down one-fourth from a year ago. Ironically, however, the decline in corn export commitments to all Asian markets was no worse than that for all other destinations. Late-February soybean export commitments were nominally above the year-ago level, but somewhat weaker for Asian markets than elsewhere. Export credit guarantee programs offered by the U.S. Department of Agriculture to hard-hit Asian countries helped sustain new corn and soybean commitments to those markets during January and February. District livestock farmers experienced extensive operating losses this winter. Large meat supplies and weak demand, for both domestic consumption and exports, depressed cattle and hog prices. The losses for pork producers are likely to continue for several months.
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