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The Seventh District economy continued to expand in recent weeks, although growth appeared to be slow. Retail sales were higher than most merchants expected as the holiday shopping season began, but much of the strength seemed attributable to higher-than-normal promotional activity. Sales of both new and existing homes remained relatively strong, yet softer than a year ago, and growth in nonresidential building activity slowed somewhat recently. Manufacturing activity remained slower in recent weeks and the pricing environment was again very soft. Labor markets were very tight, though there were some reports of lower demand for manufacturing workers. District farmland values rose less than 1 percent during the third quarter. Despite low commodity prices, farm debt continued to be serviced in a timely manner as government payments substantially augmented farm-derived income.
Consumer Spending
Retailers generally indicated that sales over the Thanksgiving weekend met or exceeded their moderate expectations--buoying their confidence for the holiday shopping season--but the good results were not shared by all. Most merchants said that traffic and sales were very strong on Friday, but were tempered somewhat on Saturday and Sunday by rainy weather. Prior to the Thanksgiving holiday, retail sales were generally reported to be good, as promotional activity picked up earlier than in previous years. Seasonal apparel (such as coats, gloves, scarves, etc.) was moving rapidly as colder-than-usual weather took hold in November, and some traditional gift items (diamonds and fine jewelry) were also selling well. In contrast, one national chain reported that sales in the Midwest met their very low growth expectations, and a survey of small and medium-sized retailers in Michigan indicated that sales volume actually decreased from last year. Spending remained strong at casual dining establishments, according to one contact. Light vehicle sales in the District decreased in recent weeks, according to one large dealer group, although this contact expected to finish the year with higher sales than in 1999. In addition, auto-related advertising was said to be declining in at least one metro area. Contacts felt that both consumer and business confidence levels were down from earlier in the year, which moderated their expectations for 2001.
Construction and Real Estate
Overall construction activity softened slightly in October and November, as nonresidential building appeared to take a breather. Contacts in many areas pointed out that 2000 will be a record year for nonresidential building activity, with many describing the environment in recent weeks as one of "steady-to-slowing growth." Infrastructure building was again robust and one contact expected this strength to continue given state governments' overflowing coffers. There were, however, some signs that other nonresidential segments may have slowed, or may soon be slowing. A large retailer noted that construction bidding was becoming more competitive, and another contact, citing adequate office space currently on the market, suggested that this segment would likely be slower in 2001. Based on conversations with builders and realtors, it appeared that the housing market softened further in October and November, yet remained relatively strong. One builder noted that while new home sales so far this year were off from exceptionally strong years in 1998 and 1999, they were still on par with 1996 and 1997, which the industry considered to be good years. In addition, residential building permits in District states, year-to-date through October, decreased only slightly from last year. Sales of existing homes were also softer in recent weeks. One realtor in a large metro area noted that despite slower unit sales, increases in dollar volume had been substantial, suggesting that sales of lower-priced homes were softer than higher-priced homes.
Manufacturing
Manufacturing activity generally was slower in October and the first few weeks of November. Light vehicle sales nationwide remained softer than earlier in the year and inventories were high for some models. As a result, contacts suggested that producers were scaling back first-quarter 2001 light vehicle assembly schedules. New orders for heavy trucks remained weak, partly as a result of high used truck inventories, and some industry analysts were predicting it would be at least another year before the industry rebounds. Heavy equipment industries (construction, agriculture, etc.) were also soft, with little change in new orders, production, or inventories over the last six months. While sales of steel products remained robust, much of this demand was being met by imports. Imports were exerting significant downward pressure on prices, straining producers' margins, and forcing at least one domestic producer to file for bankruptcy. Prices for gypsum wallboard in October were down sharply from a year ago as shipments and capacity utilization fell. New orders for office equipment remained strong and backlogs continued to rise, as some manufacturers were surprised by the surge in demand earlier in the year.
Banking and Finance
Overall lending activity moderated in recent weeks, due mainly to slowing growth in business loans. A contact at one large bank noted that after a "mammoth" record volume year so far in 2000, business loan growth slowed in recent weeks. According to contact reports, lending standards were tightened further, even though there was reportedly no change in overall business loan quality. One contact noted that prudent lending standards in recent years continued to pay off. New residential mortgage originations remained flat for most lenders, while refinancing activity picked up in some areas. One large metro area bank reported that refinancing activity accounted for roughly 25 percent of applications in recent weeks, up from 10 percent earlier in the year. There was no change reported in consumer loan quality and charge-off rates remained relatively stable.
Labor Markets
Demand for workers generally continued to outpace supply, although there were a few reports of increasing worker availability in some areas and occupations. Contacts with temporary staffing services suggested that demand for manufacturing workers dropped off notably in the last 6-8 weeks, and there were some new reports of manufacturing layoffs in some areas. A few contacts at tech consulting firms reported that more workers were "sitting on the bench" as many projects had been cancelled. Also, higher fuel prices drove many independent truck drivers out of business, making it easier for larger haulers to find qualified drivers. For the most part, however, contacts continued to find it difficult to hire and retain qualified workers. Again this holiday shopping season, retailers were challenged to adequately staff their stores and there appeared to be a more concerted effort to lure retirees back into the workplace. Reports of increasing non-wage labor costs, that previously had been limited to health insurance costs, have expanded to include liability and casualty insurance costs. There were few new reports of intensifying pressure on wages or salaries.
Agriculture
District farmland values rose less than 1 percent, on average, in the third quarter, about the same as reported in the second quarter, but half the rate of gain reported in the previous two quarters, according to a survey of the District's agricultural bankers. Strong demand by residential, commercial, and recreational use buyers continued to exert substantial upward pressure on farmland prices in some areas. Bankers expressed concern about low levels of farm-derived income but observed that government payments were making it possible for most farmers to continue to service debt in a timely manner. At the same time, many bankers noted concern about the longer-term viability of this environment.
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