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The Seventh District's economy remained strong in October and early November but was expanding more slowly than earlier in the year. Reports on consumer spending were mixed, with contacts noting strong sales growth for the first weekend of the holiday shopping season. Construction activity generally was strong, despite softening on the residential side. Overall manufacturing output remained strong, but conditions were varied across industry segments. Lenders reported conditions similar to those noted in our last report, and contacts reported no signs of Y2K-related surges in inventory borrowing or cash demand. The District's labor markets remained much tighter than the rest of the nation and seasonal demand put additional strain on some sectors of the market. The fall harvest was complete, as was the planting of winter wheat. A survey of agricultural bankers indicated that slow farm loan repayments continued to be a problem.
Consumer Spending
Reports on consumer spending activity were mixed. Prior to the Thanksgiving weekend, sales were well below most merchants' expectations. However, several District retailers reported double-digit sales gains from a year ago for the Thanksgiving weekend and most merchants expected a strong holiday sales season. Most retailers contacted cited unusually warm weather as contributing to lackluster pre-Thanksgiving sales results, especially for cold weather apparel. By contrast, sales of appliances, electronics, and lawn and garden goods had continued to be strong. Retailers reported that inventories for most goods were in line with their planned levels, but inventories of winter merchandise were high. They also noted that they had not changed their promotional activity from a year earlier. Auto dealers reported that lighter floor traffic and a slowdown in light vehicle sales continued through October and into mid-November. One large District auto group noted that service activity was also down and that used car prices weakened considerably.
Construction and Real Estate
Similar to our last report, overall real estate and construction activity was robust, but softer than earlier in the year. Demand for both new and existing homes continued to ease in October and early November, but most contacts described the market as strong. Those realtors contacted indicated that sales in October and early November were down about 10 percent from very strong results a year earlier. Homebuilders' reports appeared to be more positive than realtors' reports, with most contacts indicating new home sales were unchanged or down slightly. Conditions in the nonresidential sector remained strong and steady for the most part, according to contacts. Development of light industrial space was steady to down slightly, as was the development of infrastructure projects. A report from one of the District's largest metro areas suggested that a few large office projects that have recently broken ground might be the last of the current downtown office expansion. Some contractors noted that many customers have changed strategies, preferring to hire the contractor viewed as most likely to complete the job on schedule rather than going with the low bidder.
Manufacturing
The manufacturing sector generally remained strong although activity varied by industry segment. According to most automakers, orders for light vehicles remained strong nationwide. Inventories were generally in good shape, although they were reportedly lean for select models. Despite these conditions, the pricing environment remained soft with an increase in incentive spending noted by some contacts. Producers of agricultural and heavy construction equipment reported further softening in output in recent weeks, and most planned to reduce inventories further next year, although not as aggressively as this year. Contacts expected domestic demand would be relatively soft in the coming year while foreign demand was expected to pick up. Wallboard producers indicated that demand remained very strong and factories continued to run near capacity. With new capacity coming on stream, however, price increases were expected to moderate in the coming months. A large manufacturer of telecommunications equipment noted that orders continued to recover from weak sales early in the year, due in large part to strengthening demand in Asian markets.
Banking and Finance
Lending activity continued to be mixed in October and early November. Business lending remained robust and most bankers suggested that growth was steady. A few contacts indicated that overall asset quality on commercial loans might have deteriorated slightly, as intense competition for customers led some lenders to relax standards slightly. Some bankers appeared to be less optimistic about the near-term commercial lending outlook than they had been in recent months. Household loan demand softened further, according to most lenders, as new mortgage and refinancing activity continued to slow. Contacts noted that asset quality on consumer loans improved as existing bank and store credit card balances were paid down, delinquencies slowed, and personal bankruptcies decreased. A contact at one large money center bank attributed this improvement to a lagged effect from strong refinancing activity earlier in the year and, as a result, did not expect the improvement to endure. None of the bankers contacted noted any unusual borrowing by businesses that would indicate an inventory buildup ahead of the year 2000 rollover, nor was there any noticeable increase in the demand for cash by consumers.
Labor Markets
Labor markets in the District remained very tight in October and early November, and worker shortages appeared to intensify as the holiday hiring season began. Retailers and others who increase hiring for the holidays were finding it particularly difficult to staff positions this year. According to one contact, many traditional seasonal workers (such as students, homemakers, etc.) were already employed elsewhere, either part- or full-time, as a result of overall strength in the economy. Some retailers reportedly have gone to extraordinary lengths to attract seasonal hires by offering, among other things, increased wages, steeper in-store discounts, and even tuition reimbursement for part-time workers. Demand for workers in most other sectors remained strong as well. Temporary help firms in some metro areas reported increasing demand for manufacturing workers, while there were a few reports of slackening demand for financial services professionals, partly as a result of slowing mortgage applications. On balance, contacts suggested that overall wage pressures had not intensified further in recent weeks. Staffing services contacts indicated that wages were increasing fastest in the administrative/clerical occupations while a slowdown in wage growth was noted for information technology professionals. A contact at a large District trucking firm noted the continued shortage of drivers is especially serious during the current high seasonal demand for transporting goods. Most contacts continued to argue that worker shortages were hampering the economic expansion.
Agriculture
The fall corn and soybean harvest was essentially complete in District states. Storage space for corn and soybeans was reported to be tight in some areas, due to strong yields and a quick harvest pace that caused grain deliveries to bunch up at elevators. Winter wheat planting was finished and most of the crop had emerged, but its condition had deteriorated in some areas due to dry weather. A survey of agricultural bankers indicated that farmland values were steady to weak during the third quarter in Illinois, Indiana, and Iowa, but rose in Michigan and Wisconsin. Bankers also indicated that slow farm loan repayments continued to be a problem, and a majority believed there will be an increase in the incidence of financially stressed farmers selling assets during the fall and winter.
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