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Summary
The Seventh District economy continued to expand moderately in August and early September, despite some slowing in residential housing activity. Consumer spending remained strong in the region and was in line with most retailers' expectations. Overall construction activity remained robust despite a modest softening in the residential segment. Manufacturing activity appeared to be picking up, led by exceptional demand for light vehicles. Overall lending activity was brisk despite the anticipated softening in residential mortgage demand. The District's labor markets were again tighter than the nation as a whole, but there were few new signs of intensifying pressure on wages. Crop conditions deteriorated in Illinois, Indiana, and Michigan, but remained steady in Iowa and Wisconsin. Hog and grain prices increased, yet remained at low levels.
Consumer Spending
Merchants indicated that overall retail sales in August and early September were good and in line with their expectations, with "back-to-school" sales performing well. Sales of "hard goods"--appliances, furniture, lawn and garden equipment--were reportedly brisk, while sales of "soft goods" were mixed. Most general merchandisers reported slightly soft sales of apparel, but some discounters indicated that apparel sales were strong, particularly women's. Several retailers reported that sales of sporting goods were very soft. Retail inventories were generally in line with sales expectations and there were no reports of extraordinary promotional activities. Casual dining was reportedly strong in the District, with one contact reporting that total receipts in the July-to-early September period were up more from a year ago than gains seen in the first half of the year. Reports from a large auto group suggested that the strength in light vehicle sales in the District mirrored that at the national level in August; service sales, which are typically slow in late summer, were also strong. Upward pressure on retail prices remained generally subdued, but some contacts indicated that increased costs for labor and other inputs were squeezing profit margins.
Construction and Real Estate
Overall construction activity appeared to slow somewhat in the District, largely as a result of softening in the residential segment. Sales of new and existing homes slowed in August, with many contacts citing increasing mortgage interest rates as a major contributing factor. Many contacts, however, also indicated that the market has been so good for so long that some slowing was inevitable and, perhaps, even welcomed. Despite slowing residential sales, most contacts felt that the market remained strong and that fundamentals remain good for continued strength. Builders continued to report that labor shortages persisted, particularly for skilled workers, and that lumber and drywall were also in short supply. Conditions in the business construction/real estate segment changed little, if at all, from our last report, with no new signs of slowing.
Manufacturing
Manufacturing activity appeared to gain some momentum in August and early September, even as softness persisted in some industry segments. As in our last report, production of light vehicles led the way. Light vehicles were "selling like hotcakes," according to one contact, a phenomenon that some industry analysts were at a loss to explain. While conditions remained favorable for light vehicle sales, one contact expressed reservations about whether such strong sales levels could be sustained. Automakers remained very aggressive on pricing, with incentives being offered on some models where previously there had been none. New orders for heavy trucks softened somewhat in recent weeks, but production is booked through the first quarter of 2000. One industry analyst indicated that a slowdown would be welcomed, allowing some manufacturers to perform maintenance on equipment that had been running virtually nonstop. Orders for construction equipment were again soft and inventories were reported to be building slightly. Production of agricultural equipment continued to slow as new orders remained soft and producers worked down excessive inventories. Steel production picked up, with capacity utilization running at approximately 90 percent, and some producers' order books are filled through the end of the year. Steel producers are benefiting in part from improving markets abroad and slower imports. Output prices increased modestly for some manufacturers, most notably for steel and wallboard, where the industry continued to run near capacity.
Banking and Finance
Overall lending activity remained robust in recent weeks, despite a noticeable decrease in residential mortgage activity. Household loan demand softened as the effects of higher mortgage interest rates set in. Refinancing activity, which had slowed considerably earlier in the summer, softened even further in August. New mortgage applications, while "not falling off a cliff," also showed some signs of easing according to most contacts. At the same time, business lending activity remained strong and new applications showed no signs of slowing. One banker attributed the strength in business lending to very good economic performance and prospects. There were no reported changes in either standards or terms for commercial loans. At the same time, the quality of agricultural loans remained a concern for some District lenders. One banker noted increased competition from nonbank sources in some commercial lending segments. Banks have been offering higher interest rates on some deposit products to ensure liquidity in the case of increased demand for cash that may result from Y2K concerns in the fourth quarter. The consensus among our contacts, however, was that Y2K is not so much a computer problem as it is a public perception problem.
Labor Markets
Labor markets in the Midwest remained much tighter than the nation as a whole as worker shortages continued to plague most industries. Unemployment rates ticked down in July, and claims for unemployment insurance were running below year-ago levels through August. According to contacts, worker shortages were again widespread but appeared to be most severe in construction and information technology occupations. One contact in casual dining indicated that worker shortages have led to increased overtime for their employees and that productivity growth had not been keeping pace with the increased labor costs. While reports of increasing wages at the upper and lower ends of the wage scale continued, there were no new reports of intensifying general wage pressures. Many contacts noted increased use of non-wage incentives (such as casual dress and flex-time scheduling) to slow the rate of employee turnover, which had been increasing recently.
Agriculture
Hog, corn, and soybean prices increased during August, but remained at low levels. Milk prices also increased, buoyed by strengthening cheese prices. Crop conditions were mixed among District states in early September. Timely rainfall kept conditions quite favorable in most of Iowa and Wisconsin during August, while the condition of the corn and soybean crops deteriorated in Indiana, Illinois, and Michigan as a result of dry weather that depleted soil moisture reserves. Nonetheless, the USDA's September projection for corn production in District states was little changed from the prior month, while that for soybeans was raised slightly. A large grain processor announced in early September that it wanted suppliers to segregate crops containing genetically-modified material from conventional crops, raising concerns among District farmers that they may be forced to accept lower prices for some of their corn and soybeans this fall.
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