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Economic activity in the Seventh District improved in March, and contacts indicated that consumer and business confidence were on the rise. Manufacturing continued to lead the way, while consumer and business spending also increased and credit conditions improved. Construction, however, remained weak. Price pressures were small on balance. The spring weather resulted in good progress toward normal planting conditions.
Consumer spending increased in March. Retail sales continued to improve, with the rate of increase accelerating some in late March. As in the previous reporting period, the strongest performance was for sales of nondurables and necessities with some improvement in sales of durable and luxury goods. Auto sales increased substantially in recent weeks. Dealers noted an increase in showroom traffic as more serious buyers were being lured in by favorable pricing and credit terms. Furthermore, dealers also reported that new incentives from Toyota were helping to offset some of the decline in their sales in February. The pace of tourism activity increased slightly with hotel occupancy rates rising due in part to cuts in daily rates, especially at luxury hotels.
Business spending also increased from the previous reporting period. Contacts indicated that with overall inventory levels still relatively low, some inventory rebuilding was occurring in retail trade as well as manufacturing. In a further sign of rising business confidence, capital expenditures on equipment and merger and acquisition activity were also noted to have increased. Labor market conditions improved slightly from the previous reporting period. Several manufacturing contacts added overtime or additional shifts, and were beginning to consider adding more employees with business conditions continuing to improve. Demand also continued to be strong for temporary workers with a large staffing firm reporting that billable hours had increased substantially. Some permanent hiring was noted in manufacturing and retail trade; however, in general, hiring remained limited with many firms still wary of adding employees.
Construction and Real estate
Construction activity remained weak in March. Residential construction was limited, and contacts noted downward pricing pressure as builders continued to try to compete against short sales and foreclosures in the resale market. Credit was still tight for developers; but a few smaller builders reported that they had been able to secure financing for homes that were expected to be occupied immediately. Demand for single-family homes increased some in recent weeks with more purchase contracts being signed before the expected expiration of the homebuyer tax credit in April. Demand remained weak for nonresidential construction. The overhang of vacant facilities and excess retail space dampened demand for new commercial and industrial construction, and contacts reported continued downward pressure on commercial rents. Credit conditions were also still tight for commercial real estate, although a contact cited very slight improvement in credit availability in recent weeks for higher quality properties.
Manufacturing picked up in March, and contacts indicated business confidence was on the rise. Orders increased, particularly in recent weeks, stemming in part from the restocking of inventories. Contacts also reported that production schedules were beginning to firm into the second half of 2010 and viewed this as a sign that some pent-up demand was being released now that the economic outlook was improving and less uncertain. The auto industry remained a strong source of growth, as did the pharmaceutical, mining, and energy sectors. Activity in the steel industry continued to improve, and a contact noted that they were having a hard time meeting demand with the capacity currently on-line. Export activity also remained strong with developing countries providing a boost to demand. In contrast, business conditions for manufacturers with strong ties to construction were weaker, although a contact did note a small increase in the demand for construction equipment. Credit availability for suppliers and distributors remained a concern for manufacturers, with contacts noting an increase in requests to extend payment periods beyond the customary 30 days. Several contacts did indicate, however, that bank credit seemed to be more available now than in the recent past.
Banking and Finance
Credit conditions improved from the previous reporting period. Banking contacts again reported improvement in consumer and business loan quality, although credit quality for many smaller firms continued to decline. The pipeline for new loans was still relatively weak. Many upper middle market firms were said to be making due with cash reserves, holding back on borrowing. However, contacts indicated that this may change going into the second half of 2010 as some higher quality borrowers were already beginning to make inquiries now that economic conditions were improving. Credit spreads narrowed for a number of District firms, and volatility declined across financial markets. In addition, contacts reported that liquidity continued to improve. An exception was the repo market where volume was still very low and bid-ask spreads wide by historical comparisons.
Prices and Costs
Price pressures were small on balance in March. Contacts indicated upward pressure on prices for plywood, industrial metals, and petroleum-based fuels, although natural gas prices remained at historically low levels. In contrast, retailers reported no significant change in wholesale prices. Wage pressures were minimal. However, an increase in healthcare costs was noted. Pass-through of cost pressures to downstream prices was limited.
The District should have normal planting progress this year, as field conditions were better in March than contacts had anticipated previously. Snow cover melted gradually enough and rains were spaced out enough to avoid major flooding in the District. Farmers in most areas started catching up on field work that was left undone last fall, especially fertilizer applications. There was also harvesting of fields left standing over the winter. Blending together poor and better quality corn minimized problems with the feeding and storing of corn, but some farmers were still stuck with lower quality corn. More acres of corn and soybeans were expected to be planted than a year ago, as fewer acres of wheat were planted. Corn and soybean prices were up slightly during the reporting period, while wheat prices declined. Hog and cattle prices increased, but milk prices decreased.