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The Seventh District economy continued to expand moderately in March and April, with few signs of slowing growth. Consumer spending remained robust with much of the strength resulting from exceptional activity in housing markets. The manufacturing sector continued to operate near capacity with strong new orders and lean inventories, although makers of high-tech electronics experienced considerable softening as a result of weakness in East Asian markets. Overall lending activity was brisk through the reporting period with the consumer segment exceeding most bankers' expectations. Labor markets tightened further and reports of wage increases, though modest, became more frequent. Spring planting was slowed by rain and wet soil in April, but most farmers were not significantly behind schedule.
Consumer Spending
Retail sales were generally above plan in March and April according to most contacts. Discounters appeared to have fared better than general merchandisers, but none of the retailers reported sales that were below expectations. Contacts at national chains indicated that sales growth in the Midwest was at, or above, their national storewide averages. Items that were selling particularly well included appliances, computers, furniture, lawn and garden equipment, and home improvement items. Merchants attributed brisk sales of these items to strength in the new and existing home markets. Sales in other retail categories were generally described as being in line with expectations. Overall inventory levels were in good shape and promotional activity was relatively unchanged from the same period last year. Some retailers noted that customers were paying down balances on their revolving credit accounts and relying more on cash to make purchases. New vehicle sales improved at some District dealerships, especially for a few luxury car models, although some softness remained due to competition from used vehicles.
Housing and Construction
Overall construction activity was stronger than expected, led by a weather-related surge in residential activity. Unseasonably warm weather in January and February brought house hunters out earlier than expected and, as a result, new home sales and construction activity have picked up markedly since. A survey of homebuilders revealed that Midwest home sales in April were up significantly from March as well as from April 1997. In addition, near-term expectations of builders are much higher than they were at the same time last year. There was mild concern that strong new home sales in the first quarter may have been borrowing from the second quarter. One lumber supplier stated that new orders were somewhat softer than he would expect in a very strong market. Sales of existing homes were also booming in the District. Most realtors noted very strong sales with some reporting record levels of activity in the first quarter. Contacts attributed this "surprising" strength to solid economic conditions--tight labor markets, low mortgage interest rates, and the runup in the stock market--as well as the unseasonably warm weather.
Manufacturing
Manufacturing activity was very robust in March and April as demand remained strong. Production was reported to be high in virtually all industry segments. Steel and wallboard producers exhibited the most strength and contacts in both industries cited demand from the construction industry as a contributing factor. Production of heavy and agricultural equipment and electronics remained high, but exhibited very little increase. Overall inventories were in good shape but varied widely by industry. Contacts suggested that steel inventories were "quite low," but had been building. Automobile manufacturers indicated that inventories were slightly high, especially in the small car segment; and electronics producers also noted that inventories were slightly high, but "okay." Very strong demand from the construction industry buoyed the overall strength in new orders for the region's steel, wallboard and heavy equipment producers. One contact described the demand for steel as "nothing short of phenomenal." In contrast, orders for high-tech electronics were weak "across the board," due in large part to softness in East Asian markets. Light vehicle producers also noted some softening of demand, particularly in the retail segment of the market, although fleet orders remained strong. As a result, automobile manufacturers were planning on increasing the use of incentives on some models, suggesting that the market's soft pricing environment will continue in the near term. Prices for some of the region's high-tech electronics were "dropping like a stone" according to one contact, again due to weakness in East Asian markets. On the other hand, steel and wallboard manufacturers were having success at pushing through modest price increases and analysts in both industries expect at least part of the increases to hold.
Banking and Finance
Lending activity remained very strong in the Midwest over the reporting period, with strength on both the consumer and business sides. Consumer lending was generally described as "better than expected," due in large part to strength in the housing markets. While slower than in our last report, most bankers indicated that refinancing activity was still robust and exceeding their expectations. In addition, new mortgage originations picked up as a result of the exceptional strength in the housing industry. Some bankers noted that credit card writeoffs continued to improve, but it was unclear if the progress was only temporary. There was scattered evidence that lenders were tightening standards on some consumer loans. A few dealers reported increasing difficulty in pushing through loans for marginal customers seeking to purchase light vehicles and motorcycles in April. On the business side, lending activity was generally described as strong and steady. New deals continued to come in and strength in the middle market was surprising on the upside, according to one large regional bank. Competition nudged some banks into approving a few deals that wouldn't have been made in the past. However, the concessions appeared to be on the loan terms, not standards, and overall asset quality was reported to be very good.
Labor Markets
The District's labor markets tightened further in March and April, and upward wage pressures continued to mount. The five-state average unemployment rate was 3.8 percent in March, nearly a full percentage point below the national average. Employment growth in the region remained below the national average in the first thee months of 1998, but demand for workers in the Midwest is as strong as, if not stronger than, the nation. Help-wanted advertising, hiring plans surveys, and the employment components of purchasing managers' surveys suggested that demand for labor remained very strong, and contacts throughout the region continued to report broad-based worker shortages. Due to space limitations, a career expo and jobs fair for high school students in the Chicago metro area had to turn away 25 percent of the 200 plus companies that wanted to participate, a first in the event's short history. One Michigan employer summed up the conditions in most of the District, stating that "we will continue to hire as qualified workers apply." Information technology (IT) and construction workers were, as in our last report, most often cited as being in short supply. In Wisconsin, employers were reported to be "stealing" IT workers from other companies, a trend that was driving up wages in those occupations. The strength in the new home market exacerbated shortages of skilled construction workers. Reports of broad-based wage gains were more frequent, with one contact noting that there was "creeping wage inflation, (but) nothing spectacular."
Agriculture
The number of acres devoted to corn and soybean planting is expected to be the same as last year according to District farmers, with a modest increase in soybean acres offsetting a decrease in corn acres. Field preparations and planting slowed in April as the result of rain and wet soil, although farmers were not running appreciably behind schedule. Several agricultural banks noted that while farmland values continued to increase, appreciation may slow due to relatively low grain and livestock prices. Milk prices, however, were relatively strong and fed cattle prices moved higher in April.
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