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Economic conditions in the Seventh District remained strong in March and April, similar to our last report. Retailers continued to reap the benefits of confident consumers and strong home sales. Overall construction activity appeared to gain momentum in spite of shortages of skilled labor and some building supplies. Again, manufacturing activity was strong, but mixed, as some of the region's mainstay industries continued to struggle. Lending activity was brisk as demand for both business and consumer loans remained high. Concerns over labor shortages became more pronounced and there were a few new reports of intensifying wage pressures. Low commodity prices continued to plague farmers and a majority of the District's agricultural lenders reported slower farm loan repayments than a year ago.
Consumer Spending
Overall consumer spending was strong in March and April, as consumers' confidence remained high. Retail sales in the first three weeks of April were robust, but relatively flat from a year ago, with most contacts suggesting that an early Easter shifted some of the month's sales to March. Retailers noted that women's apparel was selling well as were household items (appliances, home electronics, etc.) which continued to benefit from a strong housing market. Providers of household services (lawn care, cleaning, pest control, etc.) cited strong year-over-year sales growth. Contacts in the casual dining industry reported that business had bounced back in March and April, after some weather-related softness earlier in the year. New and used light vehicle sales in the District were robust, with one dealer noting a pickup in demand for lower-priced used cars. Most retail contacts attributed strong sales results to high consumer confidence in the economy, with one analyst suggesting that rightly or wrongly, people seem to think the economy is indestructible. Most contacts indicated that despite strong sales results and high consumer confidence, intense competition kept prices relatively flat at the retail level.
Construction and Real Estate
Construction activity remained robust as strength in commercial segments more than compensated for slowing growth in new home construction. Public infrastructure construction was reportedly strong in most of the District and is expected to increase further as more planned projects get underway with summer approaching. Development of retail space was also robust, but light industrial development (warehouses, etc.) was mixed. Development of office space began to show signs of life in the Chicago area as contractors restarted work on some projects that had been on hold for months. Demand for office space of all types was increasing in some large metro areas, allowing property owners to pull back on concessions. Housing market contacts continued to describe demand as very strong. Sales of existing homes remained brisk in most of the District, exceeding most realtors' expectations and setting records for some. One contact noted that some properties were being sold before they were listed with the Multiple Listing Service. A national survey of homebuilders suggested that new home sales in the Midwest remain very strong, but most builders contacted were expecting 1999 to be a little slower than last year. A building materials supplier reported that April lumber shipments were slightly above year-ago levels, but below expectations. This contact noted, however, that shortages in wallboard and labor were likely contributing to a slowing in demand for other inputs.
Manufacturing
Manufacturing activity remained strong in March and April, especially for small and medium-sized producers, but some key industry segments continued to struggle. The motor vehicle industry was again the region's star performer as national sales of both light vehicles and heavy trucks were described by contacts as "outstanding" and "exceedingly strong." Industry analysts were expecting April sales of light vehicles to come in only slightly below March's very strong results. Inventories of both cars and light trucks were generally in line with sales expectations, and some automakers were becoming bolder in their pricing by reducing incentives or allowing existing incentives to expire. Activity in heavy equipment remained mixed as construction-related equipment remained strong while the agricultural equipment sector was "still a disaster," according to one contact. The region's steel industry remained soft in March and April. Despite a dropoff in 1999, record imports in late 1998 led to substantial inventory overhangs which has slowed the industry's anticipated recovery. Some steel industry analysts, however, remained optimistic that production would rebound "very soon" and prices were reported to be recovering slightly from last year's declines. Capacity utilization rates were also increasing and expected to be above 80 percent by the end of April, up from fourth-quarter rates in the mid-70s.
Banking and Finance
Lenders continued to report strong demand for both business and consumer loans. Overall volume on business lending was said to be rising, with one major bank noting strong merger and acquisition activity. Generally, the quality of business loans was again reported to be very good. One major bank, however, noted that the lingering effects of problems in East Asia led to slightly increasing defaults from borrowers in the steel industry. This contact suggested, however, that these developments were not a major concern. Lending on the consumer side also remained strong but reports were mixed. Some retailers suggested that consumers' balance sheets continued to improve as customers paid down their store-card debts and used more cash in their purchases. One large bank, however, noted a pickup in consumer lending as the positive consumer balance sheet effects of the recent boom in refinancing activity began to wane. Overall, most contacts suggested that consumer credit quality was good and delinquencies were down. Bankers continue to plan for the year 2000. The District's lenders are working with their customers to ensure that their capital needs will be met, and that credit products are appropriately priced. One large lender noted that it was attractively pricing longer-term CDs to ensure that adequate funds were available for an anticipated pickup in lending activity in the fourth quarter.
Labor Markets
Labor markets in the Seventh District remained much tighter than the nation as a whole in March and April, as employers' concerns over labor shortages became more pronounced. A recent survey of businesses in Michigan revealed that over 50 percent of respondents in most areas believed that shortages of labor were lowering their output potential. Labor woes in the construction industry illustrate the problems other businesses face--an ongoing shortage of skilled labor is exacerbated by a shortage of qualified truck drivers, which has led to bottlenecks in the delivery of some construction materials. Rather than working their existing employees longer hours, District manufacturers continued to aggressively outsource some in-house functions (such as specialized legal services) and re-engineer production processes, according to one contact. Amid the very tight supply of and continued strong demand for quality workers, there were a few new reports of intensifying wage pressures. Contacts continued to note wage increases in entry-level positions, particularly for general industry workers, and one service provider suggested that performance reviews, and accompanying pay raises, were coming more often. There were few reports, however, that increasing wage pressures were translating into higher prices.
Agriculture
Low commodity prices continued to adversely impact District farmers as spring plantings began. In the first half of April, corn prices at central Illinois terminals were 15 percent below a year earlier, and soybean prices were down more than 25 percent. Hog prices stabilized in April, but remained well below the breakeven level, spurring some District farmers to reduce the size of their breeding herds. Low commodity prices have made it more difficult for farmers to pay off old debt and obtain new financing. In a recent survey of District agricultural banks, a majority of the respondents indicated that farm loan repayments were coming in slower than last year. However, one contact indicated his bank was able to finance marginal customers by obtaining loan guarantees from the Farm Service Agency. Spring planting has begun, but recent cool, rainy weather has put planting on hold in many areas. A survey by the USDA indicated that District farmers intend to hold corn acreage constant, relative to last year, but to increase the number of acres planted to soybeans by two percent.
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