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The Seventh District economy continued to expand at a modest pace in August and early September, but reports became more mixed than earlier this year. Reports on consumer spending trends varied as the later Labor Day holiday may have delayed sales of some items. Overall construction activity remained robust, with exceptional strength in housing and highway development leading the way. Manufacturing activity became more mixed, partly as a result of softening markets abroad. Lending activity remained brisk, although business demand may have softened somewhat. The District's labor markets quickly shook off the ill effects of auto industry strikes and remained much tighter than the nation as a whole. Crop conditions in the Seventh District were steady and generally favorable heading into September, but prices for most agricultural products continued to lag year-earlier levels. Most contacts stated that it was too early to assess any impacts from the recent stock market volatility and economic turmoil in Russia.
Consumer Spending
Contacts in the retail trades reported mixed results for August and early September. Sales at discount stores appeared to have been stronger than department stores. A contact at one national discounter suggested that the recent retrenchment in the stock market may have actually helped their sales. Department stores reported that apparel and back-to-school items were selling slower in August than in previous years as a result of the later Labor Day holiday. Most contacts expected sales to pick up after the holiday weekend, and inventories and promotional activities were in line with most merchants' expectations. Sales of home items (electronics, appliances, furniture, draperies, etc.) remained very strong. Providers of home services such as lawn care, pest control, and cleaning services also noted strong sales. Regional auto sales were mixed. One large manufacturer reported that light vehicle sales in August were up nearly 40 percent in the Midwest region (compared to 10 percent for the nation as a whole) and carryover of 1998 models was lower than it's ever been. However, a District auto group noted that traffic through showrooms was slow and sales were down across most makes and models. A few contacts indicated that sales of GM products were hampered by a large carryover of post-strike assembled 1998 models and slow delivery of 1999 models.
Housing and Construction
Activity in housing markets continued to exceed most contacts' expectations and overall construction activity remained very robust. Sales of existing homes remained strong, with one large District realtor reporting that August sales results were in line with a record sales pace attained earlier in the summer. This contact suggested that inventory was turning over so quickly that the company had to increase its promotional activities to attract new listings. A recently released report indicated that home prices in the Midwest were appreciating faster than any other region in the country. New home sales were becoming more mixed. Many builders indicated that the market for new homes was "steady as she goes" while a few indicated that activity had slowed somewhat from very high levels. One contact noted that a builder of upper-end specialty homes was booked completely through 1999. On the commercial side, announcements of new office development were becoming more frequent in some metro areas as vacancy rates remained very low. At least one contact, however, cautioned that some of these announcements are aimed at gauging large tenants' interest in the project; if potential tenants show no interest, the project never gets off the ground. Although activity remained brisk, development of retail and light industrial space has slowed in some areas. Analysts suggest that this softening may be a brief period of absorption following strong development earlier in the year.
Manufacturing
Production levels remained high in the District's manufacturing sector, although growth had slowed noticeably in some industries. Reports from producers of heavy trucks and construction equipment indicated the most strength. One analyst in the heavy truck industry noted that lead times continued to build and the industry would probably break records in 1998 for both production and sales of heavy trucks. Output of construction equipment remained high, benefitting from exceptional housing activity and highway development. Two major manufacturers of construction and other heavy equipment, however, noted a slowdown in orders and one has already cut production schedules for the second half of the year. Inventories of agricultural equipment were reported to be building as producers continued to struggle under the combined weight of the economic turmoil in Asia and declining food commodity prices. Growth in sales of light vehicles nationwide has slowed from the first half's torrid pace and most contacts indicated that inventories were in very good shape heading into the new model year. Steel consumption was up approximately 3 percent year-to-date through the end of July, with exceptional strength in the domestic market and increased shipments to western Europe outweighing decreased exports to Asia. The long anticipated surge of imported steel, however, appeared to have finally arrived in the late summer months and analysts expect record levels by the end of the year. Pricing generally remained flat across manufacturing segments though some very modest increases were being pushed through in select industries.
Banking and Finance
Like manufacturing, lending activity remained high, although loan growth had slowed. Consumer lending remained very strong, largely as a consequence of strength in housing markets and low interest rates. New mortgage originations, which normally drop off seasonally toward the end of summer, remained relatively steady. At the same time, declining interest rates continued to bolster refinancing demand. On the business side, there was a discernible softening in demand, "not a contraction, just a slowing of growth," according to one banker. Demand for acquisition loans remained firm though a major lender noted that growth, while still in the double-digits, was roughly half that experienced in 1997. Lending for capital and automation investment waned as concerns over softening overseas markets made some borrowers more cautious. Commercial real estate lending activity remained very brisk and was reported to be picking up, with competition among lenders very intense. This continued to raise concerns among some contacts over the asset quality of these loans. Profitability, however, remained very "solid" according to most bankers.
Labor Markets
Labor markets in the Seventh District remained much tighter than the nation as a whole, despite the disruptions caused by the auto industry strikes. Unemployment rates in the region ticked up in June and July, and claims for unemployment insurance benefits soared as a result of the strikes. Once a settlement was reached, however, initial unemployment claims dropped and by late August were back to the very low levels that the region has experienced over the last three years. Information Technology (IT) and construction workers remained the most popular response to the question, "What occupations are in short supply?" General wage pressures again remained subdued, with employers using more non-wage incentives (bonuses, casual dress, flexible hours, etc.) to attract and retain quality workers. The exceptions were in occupations where severe shortages persisted, such as IT workers. One large corporation had recently restructured the compensation packages for employees working on their "Y2K" issues, a move intended to lock in their services through the year 2000. Several locales were reporting increased wage pressures in some of the higher-skilled clerical occupations.
Agriculture
Crop conditions in the Seventh District were steady and generally favorable heading into September. A recently-released yield survey suggested the potential for a large corn crop this fall as well as a record-large soybean harvest.
However, crop conditions in Michigan lagged the other District states due to a lack of rainfall. Corn and soybean prices continued to decline in August, with corn prices reaching their lowest level in ten years. In addition, prices for hogs and beef cattle continued to run well below year-earlier levels. In contrast, dairy farmers benefitted from lower feed costs and milk prices that were, on average, 20 percent higher than in August 1997. Our survey of agricultural bankers indicated that overall farmland values were unchanged during the second quarter, and most bankers expected farmland values to remain stable in the third quarter. The bankers also noted that the pace of loan repayments was slower than a year ago and anticipated a year-over-year decline in requests for loans to purchase farm machinery and equipment this fall.
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