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Summary
Seventh District economic activity continued to improve modestly in late November and December. On average, consumer spending picked up modestly, driven by a surge in buying during the last few days of the year. Business spending also increased modestly. Construction and real estate activity slowed somewhat. The manufacturing sector continued to pick up, and the improvement was broad based. Overall lending activity was relatively flat at the end of the year. Upward retail price pressures remained generally subdued, while reports of increasing input costs became more frequent. Cattle prices fell significantly on mad cow concerns, but remained above year-ago levels. Meanwhile, corn and soybean prices rose in December, partly due to improved export prospects.
Consumer spending
Overall consumer spending picked up modestly in late November and December. Retailers reported that holiday sales results were somewhat stronger than a year ago, and were generally in line with their expectations. Sales were particularly robust during post-Christmas promotions, as consumers snapped up deeply discounted merchandise and redeemed gift certificates. District auto sales showed a similar pattern, as dealers reported a flurry of sales in the last few days of December. One contact with a regional theater chain indicated that movie ticket sales also improved markedly toward the end of the month. By contrast, casual dining sales were said to be flat. Tourism and travel-related spending picked up modestly, and was slightly ahead of a year ago. Many contacts expect tourism and travel spending to accelerate in 2004 with a general improvement in overall economic activity.
Business spending
Business spending continued to increase as 2003 drew to a close, but the gains were generally modest. Many businesses continued to repair and replace existing equipment, but there were few reports of capital expansion. Temporary help firms noted that the number of workers on assignment showed a seasonal decrease, but the decline was not as pronounced as in the previous two years. One contact also said that average hours per assignment, which typically fall toward the end of the year, held firm in December. Business contacts were increasingly confident that demand will continue to firm in 2004, and many have boosted their hiring and capital spending plans.
Construction/real estate
Overall construction and real estate activity appeared to moderate in December. On the residential side, builders and realtors noted that property showings and sales softened toward the end of the year, though the level of activity remained strong. At least part of the slowdown was attributed to the onset of winter weather. But contacts also said that some moderation was inevitable after exceptional housing market strength in the summer and fall. Still, builders and realtors expect that low mortgage interest rates and an improving job market will buoy home sales in 2004. Nonresidential construction and real estate activity changed little from our previous report. Vacancies remained elevated in most commercial segments and rents were still depressed. Contacts said there was little indication that demand for commercial properties had firmed at the end of the year, but December is not typically an active month for property inquiries.
Manufacturing
District manufacturing activity continued to improve moderately in December, and the improvement appeared to be widespread. According to contacts, a wide array of manufacturing firms boosted production to meet increasing demand. Manufacturers' inventories remained very lean and there was little evidence that firms were rebuilding stocks in December. However, with strong new orders, low inventories, and improving earnings, contacts were confident that the recovery in manufacturing would continue to gain momentum in 2004. Manufacturers of consumer goods said that demand should hold at high levels, while producers of capital equipment expected the equipment replacement cycle to pick up steam.
Banking/finance
On balance, overall lending activity was fairly flat. On the consumer side, mortgage applications in December remained well below levels reached earlier in 2003. Refinancing activity has dropped off considerably, and while still fairly strong, new mortgage originations have slowed somewhat. One lender said that margins on mortgage loans continued to tighten through the end of the year. This lender also noted that household loan quality eroded slightly in December, particularly in the bank's mortgage portfolio. On balance, business loan volumes were again flat, although some banks reported increasing inquiries, particularly from small firms. Furthermore, as several lenders pointed out, business borrowing typically slows toward the end of the year. Business loan quality continued to improve modestly. One contact said that a few large banks were loosening standards on business loans in order to boost lending.
Prices/costs
Upward retail price pressures remained largely subdued, while reports of rising input costs increased. Retailers said that intense competition and value-conscious consumers combined to keep a lid on price increases. More manufacturers, meanwhile, reported rising input costs, flat output prices, and narrower margins. Contacts specifically cited increasing energy, insurance, and employee benefits costs. One contact said that steel prices continued to rise, despite the government's recent decision to drop import tariffs. Wage gains remained relatively weak.
Agriculture
After rising to record levels during the fall, cattle prices dropped substantially following the discovery of a single cow with mad cow disease on the West Coast. Cattle prices have since stabilized and remained above year-ago levels, but much uncertainty persists. Some industry analysts said that import bans by key trading partners will curb demand for the District's high-quality beef. Milk production picked up nationally, pushing prices down further. Hog production remained strong, as packers sought to keep profitable lines running. Corn and soybean prices rose in December as export prospects improved. Drought conditions receded in western portions of the District, though some areas still need a lot more moisture by spring for the new crop year.
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