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The Seventh District economy continued to expand modestly in early 1999, despite weakness in some of the region's mainstay industries. Consumer spending remained strong, exceeding many merchants' expectations. Home sales slowed somewhat from December's torrid pace, but overall construction activity remained brisk. Manufacturing activity was mixed as strength persisted in some key industry segments, such as motor vehicles, while softness continued in others, particularly steel and agricultural equipment. Lenders indicated that loan demand remained strong even as mortgage refinancing activity fell off somewhat. Worker shortages persisted in the District and there were a few new reports of increasing wages in entry-level positions. Low commodity prices and a poor farm income outlook helped push farmland values down in Illinois and Iowa during the last three months of 1998.
Consumer Spending
Retail sales in January and February met or exceeded most contacts' expectations, led by strength in sales of home-related items and light vehicles. Exceptionally strong home sales in late 1998 continued to boost sales of big-ticket items, such as furniture and appliances, as well as home improvement goods, such as tools and paint. Strength in apparel sales was broad-based, although one contact indicated that discounting had been planned to generate sales instead of profits. Inventories were generally reported to be in line with sales expectations heading into the spring. Discounters, again, fared better than general merchandise stores. A contact at one national general merchandiser suggested that the increasingly price-driven retail industry was forcing the company to rethink its pricing strategy. District auto dealers reported that sales mirrored the strength in the nation, reflecting high consumer confidence and increased affordability. Despite strong consumer demand, price pressures at the retail level, for the most part, remained subdued.
Construction and Real Estate
Overall construction activity remained robust in the District even as December's hot housing market cooled off somewhat early in 1999. Existing home sales in the Midwest were down only slightly from December, according to a national report, but a leading real estate firm in one of the District's largest metro areas reported their second best January sales results ever, down less than 1 percent from last January's record level. Most homebuilders contacted noted that once seasonal factors are considered, the market for new homes appeared to be strong and steady. Builders of entry-level homes noted they were struggling with "razor" thin margins resulting from intense competition, leading to some consolidation in the industry. Commercial construction activity generally remained strong, but reports were mixed. Contacts in some metro areas reported a resurgence in downtown retail building activity, particularly in Milwaukee. On the other hand, another contact noted that some office projects already underway in downtown Chicago had been put on hold. Apartment vacancy rates remained very low and rents were reported to be up about 5 percent from a year ago in the Chicago area, where two new downtown high-rise apartment projects were announced in the last month. Activity on public projects and infrastructure remained strong in most areas and may have picked up in February, according to contacts.
Manufacturing
District manufacturing activity remained mixed in January and February, as some key industry segments continued to be adversely affected by economic turmoil abroad. Light vehicle production remained exceptionally strong in the region as manufacturers benefitted from February sales results that exceeded virtually all expectations. As a result, most auto analysts have already increased their sales forecasts for 1999. Despite strong sales, as well as lean inventories, most industry analysts expected auto prices to remain soft. Demand for heavy trucks also remained very strong, as low fuel prices have made truck transportation more competitive and profitable. Production of most construction-related equipment was "going gangbusters" according to contacts, but demand for other heavy equipment remained lackluster as a result of soft export markets and problems in the farm sector. Agricultural equipment continued to be the weakest performer in the heavy equipment sector, with industry analysts expecting sales losses to exceed 20 percent in 1999. Pricing for heavy equipment remained soft, even for most construction-related products that were selling well. The region's steel industry, while still struggling, showed some slight improvement early in 1999 as domestic consumption remained strong and imports fell off in December and January. Prices for some steel products increased modestly in February, but remained well below year ago levels.
Banking and Finance
Contacts in the financial services industry indicated that demand for both consumer and business loans remained strong. Consumer lending activity generally remained brisk, although reports of mortgage lending became mixed. Bankers in some areas indicated that mortgage originations and refinancing applications peaked in the fourth quarter of 1998 and had fallen off somewhat early in 1999 as interest rates on fixed-rate mortgages trended up. One banker, however, suggested that rising interest rates hadn't necessarily dampened overall demand, but shifted it from fixed-rate to variable-rate or balloon mortgages. Credit quality continued to improve as consumers paid down their credit card debts with retailers, and used more cash and debit cards for purchases. Some analysts suggested that consumer credit quality typically improves with a surge in refinancing activity. Business lending activity generally remained strong as well. Competition for quality middle-market customers remained intense and continued to squeeze margins for most institutions. A few bankers reported that margins on syndicated loans had improved as a result of Japanese banks pulling out of the market. With few exceptions, the quality of commercial loan portfolios was reported to be good as borrowers remained diligent in containing costs and improving profits.
Labor Markets
District labor markets remained much tighter than in the rest of the nation during January and February, and most contacts continued to report difficulties finding and retaining workers. The average unemployment rate for District states was 3.6 percent in January, down slightly from December, and well below the national average of 4.3 percent. There was no evidence suggesting that any slack developed in February and early March. Long-running shortages in information technology and skilled trade occupations persisted throughout most of the District. Contacts with casual dining establishments indicated that staffing problems were hampering expansion plans as well as hours of operation at some locations. Shortages of truck drivers were also noted by contacts, with one firm adding that they were continually upgrading trucks and equipment as part of the overall package to attract and retain drivers. An accounting firm in one large metro area reported difficulty in finding accounting professionals, and the firm was turning to more temporary help. Wage pressures continued in those occupations where severe shortages have persisted, but there were also new reports of wage increases for entry-level positions. Several contacts, citing significant resistance to price increases, insisted that increased wages would have to be offset by productivity gains or other cost-cutting measures.
Agriculture
A survey of agricultural bankers indicated that farmland values declined over the last three months of 1998 in Illinois and Iowa, but rose in Indiana, Michigan, and Wisconsin. The survey also showed that farm loan repayment rates were down from a year earlier due to low grain and livestock prices. The situation was relatively worse in Illinois, Indiana, and Iowa because of their greater dependence on hog, corn, and soybean enterprises. Bankers also noted that credit standards for agricultural loans had been raised. The impact of low commodity prices continued to haunt District farmers, as corn and soybean prices decreased through February while hog prices stabilized. Milk prices paid to farmers, which had increased throughout the second half of 1998, fell in January and February, but remained above a year earlier.
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