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Reports from Seventh District contacts generally suggested that economic activity softened in September and early October. Consumer spending weakened, and many contacts noted that consumer sentiment had deteriorated somewhat. Home sales remained robust, while nonresidential activity was again weak. Manufacturers' reports indicated that the sector's activity slowed in recent weeks. Lending activity was again mixed, with strong household loan demand, but weak business loan demand. Labor markets softened somewhat as businesses were reluctant to hire. Crop conditions varied widely across the District, but forecasts generally suggested a lower overall harvest than last year. Upward wage and price pressures remained subdued for the most part, but reports of increasing insurance costs persisted. Through mid-October, the West Coast dock situation had had a limited impact on the District's economy.
Consumer Spending
Consumer spending weakened in September and early October, and many contacts noted deterioration in consumer sentiment. Most retailers, including discounters, indicated that sales results failed to meet their plans, and many lowered expectations for coming months. Demand for appliances and food and consumables was said to be stronger than for other items, particularly apparel and electronics. Inventories were reportedly low, due to reduced ordering and the West Coast dock situation. Contacts in casual dining indicated that sales softened from our previous account, with the Midwest weaker than other regions. Auto dealers from around the District reported that showroom traffic and sales had decreased significantly in September and early October, from very high levels in July and August. Dealers' inventories, which had been exceptionally lean, have been building as sales slowed; as a result, one large dealer group had cut new orders for delivery in the late November period. Tourism was mixed by mode of travel; traffic remained strong at some of the District's driving destinations, but a major air carrier reported that--like business travel--tourism-related air travel was down. There were no new reports of intensifying pressure on prices at the retail level, and many contacts noted increased use of promotions, discounts, and incentives.
Construction and Real Estate
Construction and real estate activity continued to be strong on the residential side and soft on the nonresidential side. On balance, reports from both realtors and builders indicated that home sales remained robust through September and into October. One builders' association in the Chicago area reported significant softening in the downtown market, but another in Milwaukee noted a pickup in new home sales in recent weeks. Some builders also reported strong traffic through models during their "Fall Festival of Homes" and said that visitors appeared very enthusiastic about buying. Builders in some markets reported that potential homebuyers had become more price conscious recently and were bargaining harder. Overall nonresidential activities remained soft, and many contacts pushed back the timetable for a recovery in commercial real estate. Office vacancy rates were unchanged in many areas; in areas where vacancy rates were still rising, they were doing so at a slower rate. Still, rents remained under downward pressure, which one contact attributed to "unusually weak demand." Vacancy rates for light industrial space continued to rise, according to contacts, keeping downward pressure on rents and leading to fewer new projects. Reports on retail development were mixed by both retail category and geography. Many nonresidential contacts noted that businesses were making inquiries, but not a lot of deals were getting done.
Manufacturing
Contact reports were mixed, but generally indicated that the region's manufacturing activity slowed in September and early October. Light vehicle demand nationwide softened in recent weeks. However, with lean inventories and a fairly optimistic industry outlook for the remainder of the year, automakers reported that no changes had yet been made to fourth-quarter production schedules. Consistent with analysts' expectations, a producer of diesel truck engines reported that the company was "reducing build schedules as fast as we can" in response to exceptionally low new orders engendered by new emission requirements. Demand for heavy equipment remained weak, although one contact noted a slight increase in agricultural equipment orders. This contact also said that heavy equipment rental companies had delayed capital expenditures for the last four years and that the machinery is aging, spurring hopes that fleet sales would improve in 2003. The machine tool industry continued to be hampered by overcapacity and a lack of capital spending. One contact described industry conditions as "the worst I have seen in 30 years," and that new orders were "bouncing along" with no real direction. A large producer of home appliances indicated that shipments slowed in August and September, after a strong July. Growth in domestic steel production slowed somewhat, in part due to increasing imports. One industry contact reported that demand for gypsum wallboard reflected the disparate strength in construction markets; residential shipments were up in the third quarter while commercial shipments were down. There were no new reports of intensifying pressure on input costs, and output prices largely remained subdued as well.
Banking and Finance
Overall lending activity slowed slightly in September and early October. On the household side, refinancing activity remained very robust, with some lenders suggesting that volumes were as high as they could accommodate. While overall consumer loan quality was said to be good, some of our bank contacts noted a modest increase in delinquencies and non-accruals. Business lending remained weak. Most bankers indicated that business loan volumes were either flat or down in September and early October. In addition, many lenders noted that business customers expressed a heightened sense of caution and uncertainty. A contact with one large bank in the District suggested that businesses were "getting all their ducks in a row," but were not yet ready to borrow. Another indicated that businesses were not drawing as much on their lines of credit. According to this contact, in an expanding economy businesses typically draw roughly 70 percent of their available credit, while they are presently drawing about 50 percent. With the heightened sense of caution, many bankers did not expect to see businesses expanding, or increasing capital investments in the fourth quarter.
Labor Markets
Reports on hiring activities generally suggested some softening in labor demand in September and early October. Contacts with large staffing firms indicated that new orders for temporary workers had leveled off, after trending up modestly earlier in the year. New orders for industrial workers were said to be down considerably. According to our contacts, businesses appeared unwilling to make longer-term hiring plans, with one noting that while businesses had been talking about their staffing needs for next year, "that talk has now stopped." Staffing firms reported a slight seasonal pickup in orders, a trend that was absent last year due in part to economic uncertainties resulting from the terrorist attacks. Wage pressures eased further in recent months, but employers continued to express concern over rising health insurance costs. One contact said that any merit increase for the firm's employees would likely be "eaten up" by higher health insurance contributions.
Agriculture
District corn and soybean harvests were somewhat behind last year's pace due to late spring plantings and untimely rains. Based on early October USDA estimates, Iowa's projected corn yields look much better than they did in September. Nonetheless, for the region as a whole, corn output is still projected to be down slightly from last year's harvest. The soybean forecast was unchanged, still calling for a sizeable decrease from last year. Observing poor yields, a contact in Illinois commented that local economies will face stress next spring when farmers face increased difficulty paying off operating lines of credit.
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