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Economic activity in the Seventh District remained slow in late January and early February, due mainly to softness in the manufacturing sector. Retail sales were stronger than most contacts expected, but spending was driven in large part by substantial price discounting. Overall construction activity remained relatively strong, despite some softening in nonresidential building. The manufacturing sector continued to contract, and most contacts did not expect to see much improvement until the second half of the year. Business lending slowed slightly in recent weeks and there were a few new reports of deteriorating loan quality. Labor markets generally remained tight, but employers were reporting greater success in finding and retaining workers. Retail price inflation generally was subdued, but there were new reports of increasing prices at the producer level. High natural gas prices continued to impact nearly all sectors, and were expected to be a disruptive influence on spring planting as the consequent high cost of nitrogen fertilizer forces Corn Belt farmers to rearrange planting priorities.
Consumer Spending
Consumer spending in January and the first few weeks of February generally met most merchants' lowered expectations, with sales increases predominantly reported to be in the low single-digits. Some contacts suggested that sales were softer in the Midwest than the national average, particularly in Michigan, Indiana, and Wisconsin. Heavy promotional discounting helped work down high inventories left over from slower-than-expected holiday sales, but most contacts noted that stocks remained high. Apparel sales were stronger than many merchants expected, but appliance sales were weak. Several contacts noted that higher home heating costs and lower consumer confidence were hindering overall sales. One contact in the casual dining industry noted that business at mid-level stores remained brisk, but sales at both upper and lower-priced stores softened somewhat. One contact with a large auto group in the District, whose sales were slow last year, noted that light vehicle sales were fairly strong early in 2001, and this dealer was optimistic about prospects for the remainder of the year.
Construction and Real Estate
The real estate market remained relatively strong in January and the first few weeks of February, despite some softening noted on the nonresidential side. Overall nonresidential construction may have weakened slightly but was still robust, in part due to continued strength in publicly funded projects. There were limited reports that a generally softer economy was leading to an increase in vacant space in some office buildings. One contact in the Chicago area suggested that effects from the dot-com shakeout were showing up as some companies that had been expanding rapidly were taking a "wait and see" attitude so far this year. This contact also noted an increase in the number of tenants filing for bankruptcy and, in turn, breaching lease agreements. On the residential side, builders and realtors suggested that traffic and sales activity picked up modestly in recent weeks after severe winter weather dampened sales in December. Many contacts noted that interest in entry-level homes had picked up as fixed-rate mortgage interest rates came down. Members of one statewide builders association indicated that more speculative homes were being put up than they would have anticipated late last year. Stock of new housing was in good shape and there were no reports of discernible changes in sales incentives. Many realtors continued to report a shortage of listings, although this shortage had eased modestly in some areas.
Manufacturing
The manufacturing sector continued to contract, with the slowdown evident in virtually every industry. Nationwide, light vehicle sales came in stronger-than-expected in January, driven in part by increased incentive spending, and contacts reported that these trends had continued into February. Still, manufacturers continued to scale back production to keep inventories in line with anticipated sales, which some analysts expected to weaken somewhat in coming months. A contact with one large producer of high-tech goods noted a sharp drop-off in orders, a drop-off that spilled over to smaller producers of high-tech goods and services. Year-to-date steel production was down in the region and some analysts suggested that the industry might not have hit bottom yet. Some steel producers announced price increases, but inventories built last year continued to exert downward pressure on prices of most steel products. Conditions in the heavy truck industry remained bleak, as production was running at very low levels. In addition, customers were delaying delivery of trucks already ordered, and one contact noted that these orders may be cancelled altogether if freight does not improve. Prices for gypsum wallboard were off approximately 15 percent from a year ago, and one industry analyst expected prices to come down further. Capacity utilization in the industry continued to fall and there were reports of a few older, less efficient plants closing down.
Banking and Finance
Overall lending activity slowed in recent weeks, as some signs of softening appeared on the business side. A contact at one large bank reported a notable decline in business loan demand, with an actual decrease in outstanding loan volume. A few bankers suggested that overall business loan quality had decreased recently, but according to one contact most of the decline was limited to trucking, manufacturing, and other very specific industries where business conditions had softened. Another bank indicated that small business lending activity remained robust, as banks were targeting smaller companies to expand their loan portfolios. One contact noted that small high-tech companies in the Chicago area continued to face a paucity of venture capital. On the household side, loan demand firmed up in recent weeks, particularly for new and refinanced mortgages as interest rates on fixed-rate mortgages continued to trend down. There were also some reports suggesting an increase in credit card usage. One contact noted that consumers were paying a smaller percentage of their credit card balances each month, due in large part to the financial strain caused by substantially higher home heating bills this winter. Higher energy costs also were cited as contributing to an increase in default rates on auto and home-equity loans, although this effect was expected to be transitory.
Labor Markets
For the most part, labor markets remained tight in recent weeks, though there were further signs of softening demand for workers in some areas and industries. Initial unemployment claims in District states remained well above year-ago levels, with the biggest increases in Michigan and Indiana. Manufacturing workers were being affected more than others, with announced layoffs by manufacturing firms becoming more frequent in recent weeks. Staffing agencies in the region reported that demand continued to soften, with one large company noting a substantial decline in billable hours in the first two weeks of February. Despite the layoff notices, many contacts reported that furloughed workers were quickly finding new positions elsewhere. Worker shortages persisted in many areas, particularly for entry-level jobs, but many employers reported greater success in filling positions. One major freight hauling contact noted that after a few years of severe shortages, the company has had no problem finding qualified drivers after many owner-operators went out of business last year. This contact also noted that the firm had pushed through price increases, helping to offset increased fuel and unit labor costs.
Agriculture
On average, District farmland values rose less than one percent in the fourth quarter of 2000, about the same as reported for the second and third quarters, according to a survey of the District's agricultural bankers. Bankers reported that most farm debt continued to be serviced in a timely manner, despite low commodity prices. Government support payments were a major factor making this possible. A major concern facing Corn Belt farmers, as spring planting approached, was the availability and price of nitrogen fertilizers, which are derived from natural gas. With natural gas prices up sharply from a year ago, fertilizer application was expected to decline, with a consequent reduction in corn yields.
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