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Economic activity in the Seventh District continued to improve in June and early July, but the rate of improvement slowed further. Most contacts remained cautiously optimistic. However, increased uncertainty about the path of the economic recovery negatively affected business and consumer confidence and spending. Growth in manufacturing production eased and orders softened. Construction decreased apart from public infrastructure. Consumer and business spending increased at a slower rate. Credit conditions were slightly improved, and price and wage pressures were small on balance. Crop conditions deteriorated modestly.
Consumer spending increased at a slower rate in June and early July. Retail sales excluding autos edged up. While spending on food and other necessities rose, spending on home-related and luxury items decreased. Retailers reported maintaining relatively low inventories amid dampened optimism for the back-to-school shopping season. The pace of tourism activity also slowed with hotel occupancy increasing at a reduced rate. Auto sales were lower in June, but auto dealers reported showroom traffic picked up in early July in part supported by increased incentives. In addition, several dealers indicated inventories were lower than desired.
The rise in business spending moderated further in June and early July. Inventory investment continued to slow in manufacturing, and contacts in retail trade indicated a slower rate of inventory investment for higher priced goods. However, capital spending on equipment and information technology continued to steadily grow. Labor market conditions continued to gradually improve, although the pace of hiring decreased. Contacts noted more caution in hiring primarily due to an increasingly uncertain outlook for the second half of 2010. For example, while temporary hiring continued to increase, it did so at a slower rate. In contrast, a large staffing firm noted billable hours from the industrial sector remained strong and had accelerated for the information technology sector. Moreover, employment and hours worked continued to expand in manufacturing.
Construction and Real Estate
Construction activity decreased from the previous reporting period. Residential building was minimal as builders were not introducing new inventory without a signed contract on a home. Sales decreased after the end of the homebuyer tax credit, but showroom traffic and contracts were up slightly in recent weeks. New mortgage applications were down, but the decline was partly offset by an increase in refinance activity as mortgage rates moved lower. Elevated vacancy rates and downward pressure on commercial rents continued to restrain private nonresidential construction. In contrast, public construction increased at a faster rate as infrastructure construction picked up.
Growth in manufacturing production slowed from the previous reporting period. Orders softened over the course of June and into early July as inventory replenishment decreased. However, contacts remained cautiously optimistic, stressing the seasonal nature of the slowdown. Steel production decreased, and capacity utilization edged lower. A contact indicated that service centers were being cautious with new orders despite the low level of inventories due to declining steel prices and a more uncertain outlook for economic activity. Manufacturers of industrial metals also noted a retraction in activity. Housing and construction-related manufacturers continued to report weak business conditions. Nonetheless, a contact in the household appliance industry indicated that the need to rebuild inventories was likely to boost production in coming months. In addition, automakers reported that sales through the first half of July were above expectations, and automotive suppliers continued to note strength in demand for their products. Demand for heavy equipment also increased, both domestically and abroad. Exporters, in general, cited positive business conditions, but several contacts expressed concern about a potential slowdown in China and European markets.
Banking and Finance
Credit conditions were slightly improved in June and early July. Credit spreads narrowed for a number of District firms, and overall borrowing costs decreased. Business loan demand continued to gradually increase, driven mostly by refinancing and acquisition activity. Several banking contacts noted that fierce competition for high quality borrowers was leading to greater flexibility in pricing and terms on business loans. Consumer lending conditions were largely unchanged. However, a contact noted that the gradual reemergence of private mortgage insurance companies was beginning to improve the availability of mortgage credit. In contrast, credit remained limited for commercial real estate. Bank loan quality continued to improve gradually, although a contact indicated that the pace of improvement had slowed in recent weeks.
Prices and Costs
Price and wage pressures, on balance, continued to be small in June and early July. Contacts noted increases in the price of energy, paper, plastics, and resins, while prices for industrial metals like steel, aluminum, nickel, and zinc declined. Similar to the previous reporting period, wage pressures increased only modestly. Pass-through of cost pressures to downstream prices remained minimal, with pricing power in most industries continuing to be weak.
Crop conditions varied across the District, deteriorating modestly in June and early July. Excess precipitation in some areas reduced hay output, damaged corn and soybean plants, and forced replanting. However, contacts continued to expect good corn and soybean yields this fall. In the recent period, smaller than expected stocks of corn and soybeans led to crop price increases amidst concerns about how much rationing will occur before the harvest. Hog and cattle prices remained above year ago levels, although they declined during the reporting period. In addition, milk prices increased, aiding the struggling dairy sector. Problems with disease and the need for extra fertilizer pushed up input costs, but crop farmers should be able to cover their production costs for this year. The cost of refinancing debt also put pressure on margins for many livestock operations.