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The Seventh District economy continued its moderate pace of expansion in September and early October, while wage and price pressures were generally constrained. Retail sales growth in the District remained at or above national averages, due in large part to strong apparel sales. Overall construction activity was robust, led by strong growth in commercial construction. Manufacturing activity continued at high levels but the Canadian auto strike in October was causing minor disruptions for a few auto suppliers. Employment growth continued at a moderate pace with shortages of skilled labor persisting. Improving crop prospects began to moderate the decline in livestock production in September and October.
Consumer Spending
Retail sales improved moderately from August to September, but early October results were mixed. Several large retailers attributed overall sales gains to strong year-over-year sales of men's and women's fall apparel. Several retailers reported that sales gains in District states were in line with or slightly above national gains in September. Home improvement goods and appliances have been performing better than last year, but not as well as apparel. One major retailer noted intense competition leading to downward price pressures, which--along with continuing modest wage gains--was squeezing profit margins. One discount retail chain, which experienced weaker-than-expected sales in early October, began cutting prices in an effort to regain market share lost earlier in the year. Most retailers contacted were very optimistic about sales heading into the upcoming holiday season, with Midwest performance expected to continue at or above the nation's.
Housing/Construction
Overall construction activity remained strong with a pickup in business construction offsetting some slowing on the residential side. Commercial and retail construction was particularly strong and momentum appeared to be mounting, with building taking place in both the suburbs and inner cities. Industrial construction, notably warehouse space, continued to be sluggish in the region. Realtors and builders reported that sales of both new and existing homes continued to edge down from May's very high levels in the western half of the District, while sales growth remained positive in Michigan and Indiana. Mortgage lenders also reported that applications were down in the western half, while noting slowing growth in Michigan and Indiana. Several home builders reported an increased use of incentives recently, while at the same time there were no new reports of unwanted inventory buildup. A national survey of home builders indicated that Midwest builders are less optimistic than earlier in the year, though the survey results clearly suggest a very strong housing market. A builder in one of the District's largest metro areas reported that traffic remained high and moderating mortgage interest rates could lead to slightly stronger sales in the fourth quarter. Builders also reported that the less robust housing market had nearly allowed them to catch up on the projects delayed by inclement weather earlier in the year.
Manufacturing Activity
Manufacturing activity in September and early October increased throughout the District, but indicators were mixed as to whether the pace of expansion was picking up or slowing down. Purchasing managers' surveys for September generally showed strong gains in both production and orders, even in metropolitan areas where the overall pace of activity appeared to be slowing from a month earlier. The prices-paid component of the surveys suggested modest price increases. However, lead times in most cases were either increasing at a slower pace or actually shorter than in August. Reports from individual producers suggested that demand remained at relatively high levels, especially among auto suppliers, although some of that strength was attributed to inventory building in anticipation of a possible auto strike in October. A steel producer reported that the order book for the first quarter of 1997 was beginning to fill up, but noted that hopes for an increase in contract prices for steel were fading.
Several machine tool producers experienced a plateauing of orders in September and early October, even though order levels have been somewhat higher than expected at the beginning of summer. A producer of heavy construction equipment noted that dealers were very optimistic about sales going into next year, although foreign competition (aided by a strengthening dollar) has resulted in a rollback of virtually all of the modest price increase announced earlier in the year.
The October Canadian auto strike began to have an impact almost immediately on about a dozen GM plants in the District, but only a few have been closed. Independent auto suppliers reported little effect through the first three weeks of the strike. If the strike continues into the last week of October, several GM suppliers expect that their sales to GM will be halted. If the strike is perceived to be nearing a conclusion, several auto suppliers stated that they expected to continue production and stock the parts, based on the expectation that auto assembly plants will work overtime to recapture any lost production. One auto analyst expects workers to return to work within two days of a settlement.
Labor Markets
District labor markets tightened slightly through September and early October while reports of new wage pressures were virtually non-existent. Labor shortages continued to be a problem in most areas, with demand for skilled machinists, computer-literate clerical workers, technology workers, and skilled construction workers outstripping supply. Manufacturing employment appeared to be on a slow downward trend in the region, with Indiana experiencing the most significant decrease. Purchasing managers' surveys from across the District support this point, with the employment components signaling flat to slightly lower employment levels. Most manufacturers contacted indicated that they had not been hiring in the last six months. Overall wage pressures appear to have remained concentrated at the lower end of the pay scale, and several contacts indicated that this pressure may be intensifying. Some fast food restaurants were reportedly advertising bonuses on their marquees to attract help. However, none of our contacts reported that wage increases at the lower levels were translating into price increases.
Agriculture
The fall harvest, after a late start, is well underway. Despite some local exceptions, most of the District's slow developing crops have reached maturity with little or no frost damage. As a result, harvest prospects have improved in recent weeks and grain prices have fallen sharply. Livestock production continued to lag year-ago levels, with the cuts in hog and milk production more apparent in this District than elsewhere. However, the rate of decline in livestock production appears to have slowed in response to lower feed costs.
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Atlanta