| Skip to content
|
Economic activity in the Seventh District remained slow in March and the first few weeks of April. Consumer spending picked up modestly in early to mid-April, after a generally soft early spring. Real estate and construction markets were active, but growth remained slow. Manufacturing activity was again weak, but contacts reported that some of the huge inventory overhangs that led to slower production had been substantially reduced. Lower interest rates spurred mortgage refinancing activity, while demand for business loans softened somewhat. The District's labor markets continued to develop slack as the region's unemployment rate topped the national average for the first time in nearly a decade. Spring planting was underway and progressing at a normal pace, but flooding along the Mississippi may cause some delays, and may result in disruptions to the flow of grain shipments out of northern terminals. Upward wage pressures continued to subside, while non-wage costs, particularly for medical coverage, remained a concern for small businesses. With the exception of energy costs, price increases at both the producer and retail levels remained subdued.
Consumer Spending
Consumer spending was generally soft in recent weeks, though some contacts noted a slight pickup in early April. Most retailers reported that overall sales growth was meeting their generally modest expectations of low single-digit increases, but cooler-than-normal weather was hampering sales of some seasonal items. Appliances were selling well (buoyed by relatively strong home sales), as were electronics. Inventories were generally in good shape and there were no further reports of extraordinary promotional activity. Consumers appeared to be using credit cards more frequently to pay for their purchases, according to a small retailers' association contact who expressed concern that higher balances may lead to softer sales later in the year. Sales growth at casual dining stores also slowed to the low single-digits in year-ago comparisons. An industry contact noted that red meat prices had increased significantly and that the company continued to "take a hit" from higher energy costs, but menu prices were basically unchanged. A large auto group reported lower sales in March and April, as well as slightly slower service purchases. This contact also noted that new vehicle prices remained soft, but used car prices had firmed in recent weeks. Despite slower sales growth and generally softer economic conditions, most retailers reported that they were going ahead with expansion and capital expenditure plans. Gasoline prices rose sharply again this spring, but unlike last year, slower revenue growth is preventing at least one state from temporarily suspending gasoline sales taxes.
Construction and Real Estate
Overall real estate and construction markets were "active," according to contacts, but growth remained slow. Office vacancy rates were steady to slightly higher in most metro areas, although vacancies were reportedly rising faster in the suburban Chicago market, where new product continued to come on the market. There was downward pressure on rents in those areas where vacancy rates were rising, particularly for class B and older class A space. Development of light industrial space reportedly slowed somewhat in recent weeks, while retail development was said to be steady. Residential activity was holding up better than most contacts had expected, despite what they considered to be less-than-favorable economic news. Both new and existing home sales were off modestly from year-ago levels in most areas, though there were pockets of strength. Average market time for existing homes was reportedly up, but home price appreciation continued strong as realtors indicated that shortages of listings persisted. Apartment rents continued to rise in most metro areas as vacancy rates decreased and little new product was being developed. One commercial builder indicated that the industry was holding back on capital spending until the second half of the year, when economic conditions were expected to improve and prices for heavy equipment were expected to decrease.
Manufacturing
The region's manufacturing sector remained weak into April, with few signs of improvement. Light vehicle sales nationwide were strong in the first quarter and incentive spending remained high, which along with production cuts helped bring inventories down to more desirable levels. Contacts, however, expressed concern that strong first-quarter sales may lead to slower sales later in the year. In addition, one industry contact reported that production was exceeding sales in April and that further inventory adjustments were probable. New orders for some heavy equipment products were reportedly at "recessionary levels," while inventories remained bloated and pricing power was virtually non-existent. Most contacts expected softness in heavy equipment industries to persist in coming months. A steel industry analyst indicated that imports of steel products fell off "dramatically." Some domestic steel producers announced price increases, but reported varying degrees of success in pushing them through to customers. By contrast, prices for gypsum wallboard remained well below year-ago levels, despite stronger shipments in the first quarter, as the industry struggled with low capacity utilization. A large telecommunications company contact reported that a "tremendous" inventory overhang will most likely keep the communications industry soft through yearend. The strong dollar continued to hamper exports of manufactured goods, according to an industry watcher. Most manufacturing contacts reported that their capital spending plans were being reviewed, substantially reduced, or put aside entirely.
Banking and Finance
Overall lending activity was generally softer than earlier in the year with many contacts noting softening demand from business customers. Household lending, however, remained robust. All of our contacts said that mortgage refinancing activity had picked up or remained very strong, and new origination volume was stronger than had been expected. Most lenders suggested that the refinancing activity could lead to stronger consumer spending in the second half of the year, although one noted that some borrowers were choosing instead to pay down home equity loan balances. Virtually all of our contacts suggested that there was a discernible softening in demand for business loans. Only a few contacts reported stronger business lending activity, but they all suggested that the increase came at the expense of their competitors (market share) or from businesses whose other sources of funds (commercial paper, venture capital, etc.) had dried up. Generally, bankers indicated that commercial lending standards had been tightened somewhat in recent weeks and overall credit quality was slightly lower. Margins on business loans were said to be increasing, despite lower interest rates. While plenty of money was available, some smaller high-tech companies found it difficult to attract capital as venture capitalists were becoming less diversified in their investments, according to one industry analyst. A contact in casual dining reported that some franchisees were seeking to sell back their stores because they could not obtain operating capital from their banks.
Labor Markets
The average unemployment rate for District states climbed above the national average in February and March for the first time since mid-1992. In addition, initial unemployment claims through the first week of April were running nearly 80 percent above year-ago levels, and layoff announcements were frequent through most of the period. Most expanding companies reported greater success in finding qualified workers as labor shortages eased, but there were exceptions as some contacts in the construction and tourism/travel industries noted continued difficulty finding and retaining some workers. The manufacturing sector appeared to be the source for most of the softening, according to contacts. Manufacturing employment in the region was running about 2 percent below last year's levels, with many contacts pointing to the automotive industry as the primary source of weakness. One contact, however, argued that most of the manufacturing layoffs were behind us, but that cuts in the services sector were just beginning. As the economy slowed, some contacts suggested that wage pressures were abating and the pace of worker productivity increases had moderated somewhat. Small businesses continued to express concern over the increasing costs of providing their workers with health insurance, and reports of reduced benefits and dropped coverage became more frequent.
Agriculture
Crop acreage planted to corn was expected to decline about 3 percent from a year ago in District states, and fall 4 percent in the nation as a whole, according to the USDA's initial planting forecasts. However, soybean acreage was expected to increase about 3 percent in both the District and the nation. Seeding of the corn crop is underway in the Corn Belt with planting progressing at a "normal" pace, although slightly behind that of a year ago when dry soil conditions facilitated early and rapid progress in spring fieldwork. Planting in the agricultural lowlands near the flooding Mississippi River and its tributaries will be delayed--the extent of the impact is not yet established. In addition to the flooding, high water has closed extensive portions of the river to barge traffic and, in turn, disrupted the flow of grain shipments out of northern terminals.
|
Atlanta