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Economic activity in the Seventh District expanded at a modest pace during
October and early November. Consumer spending continued to increase at a gradual
rate, and business spending expanded again. Overall labor market conditions
were little changed, with small gains in employment on net. Residential construction
and real estate activity continued to decline in most areas, while nonresidential
construction was steady on balance. Manufacturing expanded at a modest pace.
Lending activity moderated further. Overall, nonwage price pressures eased a
bit, while overall wage increases were similar as in the previous reporting
period. Prices for corn and soybeans rose, as this year's yields turned out
to be smaller than were expected in September.
Consumer Spending
Consumer spending continued to increase at a gradual rate in October. Retailers
said Halloween sales were "positive," and one contact thought this boded well
for the holiday shopping season: "If they'll spend at Halloween, just think
how much they'll spend at Christmas!" Nonetheless, retailers were said to have
taken a conservative approach to inventories. Restaurant sales were higher than
expected over the past six to eight weeks; one contact suggested that lower
gas prices helped support demand. Auto dealers reported that sales remained
relatively steady in recent weeks, though showroom traffic was soft. Tourism
was similar to a year ago.
Business Spending
Business spending and hiring rose again in the District. For the most part,
capital spending continued to increase at similar rates as in the previous reporting
period. A toolmaker reported plans for further capacity expansions in 2007,
a restaurant chain increased its planned outlays for renovations, and a manufacturer
noted continued strong levels of spending on high-tech equipment. Overall, labor
market conditions were little changed, with small gains in employment on net.
Manufacturing employment was mixed by industry. Toolmakers increased employment
but noted continued shortages of skilled workers. In contrast, an automaker
said that the planned reductions in their workforce were running ahead of their
targets. A temporary help services provider said that billable hours growth
in the District was a bit softer, but the firm's outlook was favorable as forward
orders had maintained their previous trends.
Construction and Real Estate
Residential construction and real estate activity continued to decline in most
areas and market segments. One notable exception was the Milwaukee area, where
homebuilders reported high traffic through model homes and strength in the construction
of upper-end homes. One contact said that lot sales were soft and that some
people who already owned lots were waiting for construction costs to come down
before building. Nonresidential construction was steady on balance: new development
was flowing at a steady pace, and there were few reports of project cancellations.
A contact in Michigan reported strong demand for medical space, while net absorption
of office space in Chicago slowed. Commercial rents were creeping up in Indianapolis,
but flat in Michigan and Illinois.
Manufacturing
Manufacturing activity expanded at a modest pace in October and early November.
Sales of large- and medium-sized heavy equipment continued to grow at solid
rates. Demand for equipment related to nonresidential construction was expected
to expand at a slower rate in 2007, while demand for smaller equipment used
in home construction was expected to decline further. Manufacturers of machine
tools and equipment parts reported continued strong order growth in most market
segments outside of motor vehicles. One partmaker noted that demand was led
by the electronics and semiconductor industry. Another toolmaker noted that
its exports continued to grow faster than the rest of its business. Light vehicle
manufacturers reported softer sales nationwide. They indicated that there was
little room to alter production plans for the fourth quarter but cuts in the
first quarter schedules were possible. A steelmaker noted that vehicle production
cuts continued to show through in weaker orders for flat-rolled steel, but other
segments of the steel market were slowing as well and were expected to remain
sluggish through the first quarter. Steel production in the Midwest was said
to be slowing more sharply than in the rest of the nation. Steel inventories
moved further above desired levels. Wallboard shipments fell, and capacity utilization
in the industry declined.
Banking and Finance
Lending activity moderated further. Bankers noted continued stagnation in mortgage
applications for home purchases. But refinancing activity firmed in October
and early November as lower interest rates stimulated demand. Demand for new
home equity loans declined further, but the usage rate of existing credit lines
ticked up. Household credit quality generally remained in good shape: delinquency
rates on mortgages were stable, but delinquencies on home equity loans edged
up. Retail deposit growth slowed, as some depositors sought higher returns in
money market accounts. Business loan demand was flat. Lending for equipment
and inventories remained steady, but real estate lending leveled off following
a period of solid gains. A banker in the Chicago area said that institutional
real estate investors remained active, though there had been some slowdown by
smaller investors. Commercial lending conditions continued to be competitive
and interest rate margins remained narrow. One banker noted that commercial
real estate borrowers were starting to seek interest-only and other alternative
loan structures. Commercial credit quality remained in good shape, with steady
ratios of non-accruing loans.
Prices and Costs
On balance, nonwage price pressures eased a bit, while overall wage increases
were similar as in the previous reporting period. Several contacts reported
continued declines in energy costs, and a few transportation firms had begun
rolling back surcharges. Prices for hot rolled and scrap steel declined, and
wallboard prices also fell. In contrast, toolmakers reported further price hikes,
and many food prices increased as well. There were no reports of significant
changes in price movements at the retail level. One automaker increased discounting,
and incentive activity was expected to increase further as inventory levels
remained high. Wage increases continued at similar rates as in the previous
reporting period. A temporary help firm noted that wages for high-skilled positions
were moving "appropriately" higher, but their customers were reluctant to increase
wages for lower-skilled positions, even though these jobs were getting a bit
more difficult to fill.
Agriculture
Most farmers completed their harvest during the reporting period. Corn and soybean
yields were at least average, though not as good as expected last reporting
period. Corn and soybean prices increased to substantially higher levels than
a year ago. Many farmers held grain off the market as they waited for prices
to move even higher. Contacts indicated that more farmers than usual already
had locked in prices for the next growing season and some were writing contracts
for even farther in the future. Ethanol production kept rising, but some plans
for new plants and expansions of existing facilities have been postponed or
put on hold. In some cases, construction delays stemmed from the lack of availability
of equipment for the plants. In other cases, investors reassessed the feasibility
of their plans based on the rapid increase in ethanol supply and zoning issues.
Livestock and poultry operations were hurt by higher feed costs. In addition,
District dairy producers struggled with low milk prices.
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