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Seventh District business conditions in April and May were similar to conditions during the previous reporting period; the economy continued to expand at a moderate pace, though activity lagged in Michigan. Consumer spending was again generally subdued, while business spending continued to increase. Residential construction remained solid, and commercial real estate development increased at a steady pace in many parts of the District. Manufacturing activity continued to expand, though the rate of increase slowed in many industries. Lending activity to both businesses and households picked up from the previous survey period. There were reports of price increases throughout the supply chain, but overall cost and price pressures were moderate. Spring planting proceeded quickly, but farmers expressed some concerns about slow crop development due to cool weather and, in many parts of the District, inadequate rainfall.
Consumer Spending
Consumer spending was again generally subdued. Retailers reported that sales in the Midwest during May were weaker than in other parts of the country and below expectations, in part because of unseasonable weather. One contact said that sales of home and garden merchandise were especially slow. As a result, inventories of these goods were heavy, but the contact believed sales would pick up as the weather improved in June. Auto dealers' characterizations of new vehicle sales in May ranged from "OK" and "decent" to "tough." Vehicle inventories remained high. A large restaurant chain noted that sales in the Midwest were still strong, but not as robust as at the end of last year. Tourism contacts in Chicago reported positive conditions, while those in Michigan reported a sluggish pace of spending, in part due to the colder weather in May. Hotels in Michigan said that summer reservations were running below year-ago levels, but they remained optimistic and speculated that travelers had grown more willing to make plans on short notice.
Business Spending
Business spending continued to increase. A majority of contacts planned to expand capital spending during the next twelve months, and reports of decreases in investment were sporadic. Trucking volumes moderated some, particularly for consumer goods; nonetheless, one industry analyst forecasted a pickup later in the year. Labor market conditions continued to improve, with several contacts indicating that job openings had increased. Demand reportedly firmed for workers in professional services, health care, and, to a limited extent, some manufacturing industries. In contrast, layoffs occurred at a large retailer, a food manufacturer, and an auto supplier; and a large staffing services firm reported a small decline in demand for temporary workers relative to a year earlier. Truck drivers were easier to find. However, other skilled workers--notably in manufacturing--were in short supply, and one staffing firm said that businesses were more willing to pay direct-hire fees to fill openings.
Construction and Real Estate
Reports on construction and real estate activity were mixed by location and market segment. Residential construction continued to be solid overall, though it showed signs of moderating in some parts of the District. The supply of unsold single-family homes fell slightly in Milwaukee, but ticked up in the Detroit area. Commercial real estate development continued to expand at a steady pace in many parts of the District. However, one contact in Michigan noted a further slowdown in commercial development there and attributed the decline to the weak performance of the auto industry. On balance, commercial vacancy rates and rents were stable. Some further declines in vacancies were reported in suburban Chicago, but contacts expressed some concern about excess space in parts of Iowa.
Manufacturing
Manufacturing activity continued to expand in the District during April and May, though the rate of increase slowed in many industries. Heavy machinery producers reported slower growth in shipments for equipment. Activity in the steel market was reportedly "sluggish and slowing down," which one contact attributed to heavy inventories at service centers. A toolmaker reported some slowdown in orders, but added that bookings remained healthy and demand from abroad was increasing. Shipments of wallboard and cement continued to increase, and contacts in both industries reported high capacity utilization rates. Cement inventories were said to be extremely tight nationwide, though an increase in imports had reduced the number of shortages in the southeast. Manufacturers also reported continued shortages of large tires, some specialized steel products, foundry castings, bearings, and titanium. The light vehicle sector remained weak. Automakers revised down overall third-quarter production schedules from their earlier plans and shifted around product mix. Nonetheless, contacts remained optimistic and maintained their forecasts for light vehicle sales to firm later in the year. An analyst in the heavy truck industry noted a softening in orders, though order backlogs remained high and build rates continued to increase.
Banking and Finance
Lending activity picked up from the previous reporting period. Business loan demand continued to improve, with broad-based gains across market segments and loan types. Business credit quality was generally stable or slightly better: one contact noted improvements in non-accruing loans and the number of assets on its watch list. Several contacts noted that standards and terms for commercial loans remained fairly generous due to competitive pressures, but they added that there had been no further easing. Household loan demand ticked up during April and May. Demand for home-purchase mortgages remained strong and applications for mortgage refinancings increased slightly. Consumer credit quality was generally good and little changed from earlier in the year. Contacts reported that spreads for business and household loans remained narrow due to competitive pressures.
Prices and Costs
There were reports of price increases throughout the supply chain, but overall cost and price pressures were moderate. A number of manufacturers noted higher prices for inputs such as energy, resins, and plastics, but prices for finished steel declined somewhat. Manufacturers reported some success in raising the prices of their products to cover higher costs. However, one heavy machinery producer said customers recently showed more resistance to price hikes than they had earlier in the year. One appliance maker was focusing on covering their cost increases through productivity improvements. At the retail level, reports of price increases were still sporadic, but they outnumbered the reports of price declines. Wage gains remained modest. The state of Wisconsin raised the minimum wage at the beginning of June, affecting 2 percent of the state's workforce.
Agriculture
Spring planting proceeded at a quick pace, inducing some shift in acreage from soybeans to corn. Corn development was slightly behind a year ago in all District states, though ahead of the 5-year average. Soybean emergence lagged last year's pace in Indiana and Iowa, but was close to the 5-year average in most of the District. Moderate drought conditions stretched from central Illinois into Michigan, with much of Wisconsin and northern Indiana behind on precipitation as well. Conditions to date have likely ruled out a repeat of last year's extremely high yields, but timely rainfall this summer could still produce a good harvest. As poor weather pushed up futures prices, more farmers locked in prices on at least part of their fall harvest. Some farmers, worried about "hot spots" and other problems with corn currently in storage, sold it rather than wait for higher prices. Hog prices moved up during the reporting period, but milk and cattle prices declined. Farmland values in the District increased 4 percent from the fourth quarter of 2004 to the first quarter of 2005.
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