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Economic activity in the Seventh District appeared to improve in March and early April, although reports from our contacts remained mixed. Comments on consumer spending varied, but were generally more positive than in our last summary. Residential real estate and construction markets eased somewhat, but nonresidential markets appeared to stabilize. There were further signs of improvement in the District's manufacturing industries, but with only modest increases in new orders and production. Overall lending activity slowed as demand for household loans softened. Labor markets remained relatively slack, but there were more frequent reports of hiring. Retail price pressures were again generally subdued, but there were isolated reports of price increases at the producer level. Spring planting began in the south and central portions of the District, but wet/cold soils slowed progress. It is still early in the season, however, and weather forecasts portend a normal pace for spring planting.
Consumer Spending
Consumer spending was mixed in March and early April, but there were some signs of strengthening in a few key segments. Retailers indicated that sales picked up modestly in late March and early April, with discounters continuing to outperform general merchandisers. Consumables, entertainment equipment, and toys were said to be selling well, while apparel sales were soft. Inventories were reportedly at desired levels, but merchants still increased promotional activities. Some retailers noted that sales growth in the Midwest was equal to or slightly better than the national average, following several months of lagging sales. Movie theater ticket sales remained robust, according to one contact who added that spending on extras (popcorn, snacks, etc.) had increased recently. Contacts in casual dining reported that sales growth was somewhat soft again, with results in the Midwest still a little weaker than in other regions. With regard to light vehicle sales in the District, Iowa dealers reported strong increases while Chicagoland dealers reported substantial decreases. Reports on tourism and travel were mixed. A contact with one large airline indicated that the company added capacity back into the market primarily in response to increasing demand for international travel; overall capacity was still 10 percent to 15 percent below year-ago levels. The majority of District states reported that other tourism and travel-related industries remained soft. Contacts said that price-conscious consumers helped keep a lid on prices, pressing retailers to offer more discounts and/or discouraging them from implementing planned price increases.
Construction and Real Estate
Real estate and construction activities were mixed in March and early April, as residential sales appeared to soften somewhat, while some reports suggested firming on the nonresidential side. Sales of both new and existing homes softened modestly during the period. A realtor in one large metro area noted that existing home sales in March were off roughly 7 percent from a year ago, and a builders' association contact in the same area reported similar results for new home sales. Many contacts noted that softness persisted in sales of homes at the upper end of the price range, and there were isolated reports that sales in the trade-up markets weakened recently as well. Sales in the lower price ranges generally remained robust. On the commercial side, contacts in many areas reported that office vacancy rates were stabilizing after several months of more or less steady increases. At the same time, there were scattered reports that some sublease space was being pulled off the office market by tenants who had overestimated the business slowdown and subsequently underestimated their office space needs. Despite signs of firming demand, contacts suggested that landlords continued to lower office rental rates and increase incentives to prospective tenants in order to fill empty space.
Manufacturing
Manufacturing activity appeared to pick up modestly, but growth in production and new orders was slow. At the same time, many contacts expressed optimism that the manufacturing sector was improving. Automakers reported that light vehicle sales nationwide remained strong in March and early April. Manufacturers also noted that light vehicle inventories were lean, down approximately 12 percent from a year ago, and below desired levels. Largely due to increased orders from the auto sector, steel production increased significantly in recent months, from very low levels in the fourth quarter of last year. Some producers were said to be rebuilding lean steel inventories, and prices were reportedly increasing to "real world (above cost)" levels. A producer of gypsum wallboard noted that demand remained strong for construction materials, prompting the company to announce a 15 percent increase in wallboard prices for the second quarter, with about half of that increase expected to stick. In the telecommunications industry, one contact reported that demand for equipment firmed in recent weeks, adding that the industry was recovering quicker than expected. Heavy truck orders continued to surge ahead of an October 1 EPA regulation change, but new orders for and production of other heavy equipment remained relatively soft and basically unchanged from our previous report. Outside of the exceptions noted above, the pricing environment remained very soft for manufacturers.
Banking and Finance
Overall lending activity slowed somewhat in March and early April, as demand for household loans abated modestly. According to our contacts, mortgage refinancing applications slowed significantly from the torrid pace of the fourth quarter; the level of new mortgage applications was still strong, but down in some areas. Credit card borrowing was said to be soft, which one contact attributed to the lingering effects of record mortgage refinancing in the fourth quarter of 2001. Reports on consumer credit quality were mixed, with some bankers noting a sharp drop in delinquencies and defaults, while others noted significant increases. The vast majority of our banking contacts said that business loan demand and volumes were flat in March and early April. While many lenders indicated that business sentiment was improving, there were few signs that any optimism was translating into increased loan demand. Most contacts also noted that the deterioration in business loan quality had leveled off, with one describing it as steady but "fragile." There were no changes to lending standards or terms reported. Loan margins were said to be good and increasing for some products, and a few lenders noted improved profitability.
Labor Markets
Labor markets remained fairly soft, but there were a few reports of increased demand for workers in some industries. Contacts in some of the most heavily industrialized states reported a pickup in demand for manufacturing workers, particularly from producers of consumer durables. At the same time, layoff announcements were said to be slowing in many areas. Despite the pickup in demand, labor markets remained relatively slack in most areas; contacts again indicated that labor shortages were virtually nonexistent and wage pressures were subdued. A contact with a large national staffing company said that its average hourly wage increase was about 2 percent in the first quarter, down from nearly 7 percent in the first quarter of 2001.
Agriculture
Corn acreage in Seventh District states is expected to increase a little over 3 percent from a year ago, as compared with a 4 percent gain for the nation overall, according to the USDA's initial planting expectations. Soybean acreage in the five states is expected to decline about 2 percent, proportionally a little larger reduction than for the nation overall. As of mid-April, substantial seed-bed preparation was in progress in the southern and central portions of the District, but recent rainfall and cold soil temperatures had retarded planting operations. Contacts indicated that if forecasts for "good drying days" and air temperatures in the 60s and 70s at mid-month hold, corn planting soon would be in full swing.
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