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Reports from Seventh District contacts again suggested a slow and uneven expansion in the region's economy. Consumer spending remained sluggish in the District. The residential housing market continued to be strong, while softness persisted in nonresidential construction and real estate markets. Manufacturing conditions varied widely across industries. Overall lending activity increased modestly, as strong household loan demand outweighed soft commercial loan demand. Reports on labor market conditions continued to be mixed. Crop conditions in the Midwest have been highly variable throughout the current growing season, but on average remain substantially less positive than a year ago. Price pressures remained subdued at the retail level and there were no significant reports of upward wage pressures.
Consumer spending remained sluggish from mid-July through August, according to District contacts. Retailers generally reported that sales were flat, in line with national trends. Discounters again reported better sales results than general merchandisers as consumers remained price conscious. Reports indicated that spending on back-to-school apparel was disappointing so far, and expectations were mixed for the rest of the season. However, back-to-school supplies were said to be selling well, along with food and other consumables. Retail inventories generally were reported to be at desired levels. Looking ahead, a survey of Michigan retailers suggested that merchants expected to order less for the upcoming holiday season than they did last year. One District auto group indicated that regional vehicle sales were reflecting the strength seen in national numbers, in contrast to the relative weakness noted in earlier accounts. Contacts in the casual dining industry again reported that sales were weak, with the Midwest softer than the rest of the nation. One contact observed that diners were still eating out, but spending less per meal and trading down to less expensive restaurants. A contact in Michigan reported that movie and theatre ticket sales continued to be strong, in spite of good weather in the area. Tourism contacts indicated that the number of travelers was relatively high, though consumers were spending less while traveling. Price pressures for most consumer products were generally subdued.
Construction and Real Estate
Construction and real estate activity continued to exhibit strength on the residential side and softness on the nonresidential side. The housing market remained very strong through the end of August; one contact likened the momentum in the industry to a locomotive, with low interest rates "driving the train." Existing home sales remained robust and even picked up in some markets in July and August. Sales of new homes were again brisk, but growth appeared to be moderating. Realtors and builders reported that the first-time-buyer segment continued to lead the market; both groups also noted a slight recovery at the relatively soft upper-end of the market. Chicago's apartment rental market was reportedly soft, but one contact said that their occupancy rates were improving due in part to more generous concessions. Nonresidential activity remained slow, but contacts suggested that the deterioration was leveling off. Reports suggested that vacancy rates continued to be stable in most commercial segments, although there were reports from the Chicago area of an increase in vacant industrial space. Effective rents remained under downward pressure across commercial segments, and landlords were still offering attractive concessions.
District manufacturers reported conditions were mixed in July and August. Automakers noted that motor vehicle demand remained solid nationwide, though it was softer than in July. Zero-percent financing offers kept consumer interest high and at least one manufacturer extended the program to the end of September. Light vehicle production continued to increase and one contact said that inventories were "right where we would want them to be." A steel industry contact noted that orders "still look really good" and production continued to increase, while inventories remained within their target range. Steel prices have increased, and import volumes "have backed off a bit," according to this contact. Orders for gypsum wallboard surged in pre-buy activity after the industry announced that price increases would take effect in mid-September, and inventories were low as a result. One contact, however, was skeptical that the price increases would stick. Conditions in heavy equipment markets remained very soft. New orders for heavy trucks were at "deep recessionary" levels, according to one industry analyst, after customers had pulled orders ahead earlier this year due to changes in engine emission regulations. This analyst also said that truck assemblies should drop-off after October once the current supply of old engines has been installed. Toolmakers reported that the industry was still down from a year ago, but things had improved slightly in mid-August; the auto industry has kept replenishing some of their tools, but "the big stuff is down."
Banking and Finance
Overall lending activity rose modestly, led by household loan demand. All of the contacted bankers noted an increase in applications for mortgage refinancing, with one contact adding that heavy volume has kept mortgage rates higher than they otherwise would have been. New originations remained strong throughout the District as well. Consumer credit quality was said to be stable with delinquencies and non-accruals flat. Contacts indicated that business loan demand remained soft, but was leveling off. One contact at a large bank noted a very slight increase in their loan base in July, following several months of a downward trend. Business credit quality was generally stable, but there were some mixed reports. One contact noted that fewer loans were past due, but since many companies were not as profitable, they had increased the number of firms on their "problem watch list." A large insurer from the District said that rates charged policyholders continued to climb and underwriting standards were tightened further.
Reports on labor markets continued to be mixed but, on balance, suggested neither improving nor deteriorating conditions. One contact from northern Illinois noted that manufacturing employment increased modestly between June and July, although average hours worked declined. Demand for workers in the retail industry trended downward according to multiple sources. Contacts reported no major layoffs in the District, which led a few to be optimistic for the end of the year. One report, however, noted that most layoffs traditionally occur in the fourth quarter and speculated that tight profit margins could lead this year to be worse than last year. There were no new reports of significant upward pressure in wages, though contacts continued to note that rising health insurance costs were affecting labor costs.
Corn and soybean crop conditions continued to vary considerably across the District as of late August. However, rainfall across much of the Corn Belt during the latter half of August prevented further deterioration in crop conditions. Crops in Illinois and Indiana remained notably less favorable than elsewhere in the District, and contacts in central Illinois observed that corn yields might be down as much as one-third from a year ago. In contrast, contacts in central Iowa expected near record corn and soybean yields. Still, on balance, crops in the major corn and soybean producing states appear markedly less favorable at this stage of the season than was the case a year ago. As a result, crop prices at the farm gate continued to rise. On average, farmland values in the District were up 1 percent in the second quarter, compared to the 3 percent increase in the first quarter.