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Summary
There were some further signs that the economic expansion was slowing in the Seventh District, but overall activity remained strong in June and July. Consumer spending moderated further as higher interest rates and mild summer weather hampered sales of some durable goods. Both new and existing home sales were down from last year's torrid pace, but remained strong. Manufacturing activity slowed, even as the auto industry remained on a record sales pace. Loan demand remained strong from both consumers and businesses, and overall loan quality was very good. Employers continued to struggle with labor shortages, although some reported better success in finding workers. Field crop prices continued to decline as favorable conditions in most areas increased prospects for good-to-excellent corn and soybean harvests.
Consumer Spending
Consumer spending appeared to moderate in recent weeks. Retailers reported low-to-middle single-digit sales increases from the same period last year, with nondurable goods selling slightly better than durable goods. Some merchants suggested that sales of seasonal items, such as fans and air conditioners, were slow due to mild summer weather. Contacts generally described inventory levels as satisfactory, although one national chain reported that inventories were building in their Midwest stores. Some retailers indicated that promotions and price discounting were more significant this summer. Light vehicle sales in the Midwest were reportedly flat to down from a year earlier. One auto dealer reported that incentive activity shifted towards rebates and away from leasing and financing. Dealers also reported a slowdown in service activity, which one attributed to a newer and higher quality fleet of vehicles. Sales increases at Midwest casual dining restaurants slowed in July according to an industry contact, from 10 percent to 5 percent, largely the result of temperate weather. A Northern Michigan retailer reported that tourism activity in the area remained strong, but noted that vacationers were "not spending as much" as they had in previous years. There were no new reports of intensifying pressure on prices at the retail level.
Construction and Real Estate
Overall construction activity was again strong in June and July, despite higher interest rates than last year. Contacts reported that commercial construction activity was strong, but growth was slower. One contact noted renewed strength in light industrial development in central Indiana. A few contacts noted that some slack was apparent in developed retail space and another noted an increase in vacancy rates of Class B and C office space in a few metro areas. Home sales, both new and existing, were off from last year's exceptionally high levels, but remained very resilient in the face of higher mortgage interest rates. One realtor reported that home sales in June were down nearly 10 percent from the same month last year, yet were still the second best June results ever. Contacts suggested that the first-time buyer segment was soft, while upper-end homes continued to sell very well. Both builders and realtors noted that higher interest rates had a much larger impact on buyers at the lower end of the market. Materials shortages were virtually non-existent while most builders continued to report severe worker shortages.
Manufacturing
Manufacturing activity slowed somewhat recently, as higher interest rates dampened demand for some durable goods. The region's auto industry remained its star performer as national light vehicle sales continued on a record year-to-date sales pace through July, though unit sales had slowed from the beginning of the year. Incentive spending was still high as manufacturers reported an increase in inventories for some products. Steel production remained strong, despite a pause in June as factories performed maintenance. Posted prices for steel moved up, but actual transaction prices declined on renewed competition from imports; scrap prices were generally lower. Sales and production of heavy equipment continued to slow. One contact suggested that demand for construction equipment softened due to higher interest rates. Machine-tool makers also cited higher interest rates as contributing to slower growth. Prices for agricultural equipment "firmed," though demand remained soft, while there was "deep" discounting on construction equipment. Heavy truck sales and build rates fell, with a sharp decrease in orders and backlogs for trailers. An industry analyst noted that this was surprising given the severe shortage of drivers, which normally increases demand for trailers. Gypsum wallboard shipments decreased about 2 percent for the first half of 2000, and prices fell 9 percent from the first quarter to the second.
Banking and Finance
Lending activity was generally described as strong, although growth appeared to slow somewhat. Virtually every contact indicated that commercial and industrial lending activity remained very strong, with little change in momentum. One contact did note a slight slowing in commercial real estate lending activity. While a few contacts indicated a slight increase in non-performing loans, the level was still well within an acceptable range and overall portfolio quality remained very high.
A contact at one large institution noted more conservative pricing of loans, but that their customers "didn't seem to mind." Overall, however, competition and higher interest rates continued to put pressure on margins. Some agricultural lenders were concerned that low corn, soybean, and milk prices were negatively affecting some farmers' balance sheets. Most contacts indicated that home mortgage lending activity was slower than in the same period last year, but stronger than they expected given higher interest rates. One lender noted a slight shift in borrowers' preference back to fixed-rate mortgages in recent months as these rates have come down from earlier in the year. A few contacts noted that consumers were starting to run up balances on their credit cards. Some bankers noted a slight "step back" in loan quality, but stressed that overall loan quality remained high.
Labor Markets
Labor markets in the Seventh District remained very tight, although some contacts noted a slight easing. Most contacts indicated that worker shortages remained severe. Contacts in the construction and retail sectors suggested finding and retaining workers remained difficult, and a staffing service contact in the Chicago area indicated that meeting customers' needs for workers was "like torture." Some reports, however, suggested that labor market tightness may have eased somewhat. The seasonally adjusted unemployment rate for the five District states, which had been as low as 3.3 percent early in the year, had crept up to 3.6 percent in June. One temporary help agency noted that an influx of students seeking IT training and experience, up 25 percent from last year, may have helped ease shortages temporarily. A contact in casual dining, whose restaurants had been forced to cut back hours of operation due to labor shortages, reported that June was their "best hiring month in two years." There was little change in overall wage pressures noted by contacts. Most suggested that wages continued to "creep" up in recent months, although there were limited reports of more substantial wage gains. Some businesses, however, expressed concern over rapidly rising health care costs.
Agriculture
Crop conditions continued to improve in most areas of the District. Recent unseasonably cool temperatures were ideal for pollination/silking in the corn crop and pod-setting in soybeans. Regular rainfall during June and July relieved drought conditions in all but the westernmost portion of the District. However, improved prospects for the major field crops exerted additional downward pressure on prices in the cash and futures markets, which fell to near lows for the decade. In turn, the District's dairy, hog, and beef cattle farmers benefited from lower feed prices. Dairy farmers continued to face low product prices as milk production continued to expand year-over-year. Prices for fed beef and hogs continued at profitable levels.
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