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The Seventh District economy continued to expand moderately as the old year ended and the new year began. Consumer spending over the holiday season ended up in line with most retailers' expectations, despite unseasonably warm weather hindering the sale of some seasonal items. The normal seasonal slowdown in the region's construction activity was less pronounced than in the past, with December's warmer weather allowing more projects to be started. Manufacturers' plants continued to run near capacity, although new orders appeared to soften slightly in some industries, in part reflecting developments in Asia. Business lending activity remained brisk, and mortgage refinancing activity picked up noticeably as interest rates continued to fall. Shortages of skilled labor persisted in most areas and there were new reports of some projects being canceled as a result. Prices for most key Midwest farm commodities have declined considerably in recent weeks, adding to the likelihood of lower farm sector earnings in 1998.
Most merchants were generally pleased with December's sales results. Consumers in the Midwest were reluctant to spend early in the month, but sales activity picked up dramatically the week of Christmas and continued strong through the post-holiday sales events. Despite consumers waiting until the last moment to do their holiday shopping, there was very little use of unplanned discounting to clear inventories. These results were nearly universal across store types--with discounters as pleased as department stores--although one large national chain reported District sales to be well below expectations, but in line with their national results. Most merchants noted that sales of appliances, electronics, jewelry, and consumables were exceptionally strong, while apparel did well. Sales of some seasonal merchandise, such as snow-blowers and outerwear, were hampered by unseasonably warm weather in December. Despite their earlier concerns about shortages, none of the merchants contacted indicated that the availability of seasonal help had any discernible impact on sales.
Housing and Construction
Overall construction activity remained robust with the seasonal slowdown less than usual. As in our last few reports, the commercial segment was stronger than the residential side, although the latter showed a slight rebound in December in some areas. Homebuilders in Wisconsin and Illinois said that unseasonably warm weather had boosted traffic in December, usually one of their worst months, which subsequently boosted sales. Most homebuilders in the District expect 1998 to be down slightly from last year's very high levels, though December's strong showing made some less certain. The commercial segment experienced a normal seasonal slowdown, but most contacts felt that it was less pronounced than in previous years. Public projects remained very strong and expectations for 1998 were very high among contacts in this segment. One District materials supplier suggested that this is the highest level of public construction activity he had seen in years.
The District's manufacturing sector was very strong and continued to expand at the end of 1997, but momentum may have been slowing slightly heading into the new year. Though most contacts noted that production continued to be near capacity, new orders--previously described as "strong"--were generally described as "holding up," and inventories--which had been "lean"--were being called "okay." The Midwest's strong construction industry continued to boost sales of heavy equipment, and construction equipment dealers were reported to be "crying for more inventory." Strong motor vehicle sales in December bolstered production for the District's automakers, although one contact worried that December's strong showing may have borrowed from January sales. Most producers expected light vehicle sales to soften slightly in 1998 but to remain near the very good 15 million unit level. A major producer of high-tech components indicated that new orders were softer than at this time last year, but that the company "can live with it." The pricing environment for most manufacturers remained very soft and raw material costs were either flat or down in most instances.
The turmoil in Southeast Asia has begun to filter through the manufacturing sector since our last report. Heavy equipment producers appeared to be influenced most directly, with exports to the region falling off noticeably. One producer described the Asian market as "a disaster," as the company's sales to the region were cut nearly in half. The District's automakers expressed some concern that competitors from Southeast Asia would increase the use of incentives in the U.S., though there were few reports of this taking place recently. This would further soften the pricing environment for the industry.
Banking and Finance
Bankers in the District suggested that lending activity remained very strong as 1997 drew to a close. As was the case in our last few reports, commercial lending was stronger than consumer lending, with one large bank noting that loan growth was "outstanding." While business lending activity normally picks up at the end of the year, one major bank reported an extraordinary increase in December which showed no signs of slowing in early January.
Other banks noted that the growth in business loans had tapered off somewhat, but remained at very high levels. Competition for quality commercial customers remained very fierce and margins continued to be squeezed. On the consumer side, the big story was a sharp increase in mortgage refinancing activity. Falling interest rates lured many homeowners back into the mortgage market in December and one major bank reported that refinancing now accounts for over 60 percent of new applications, up from approximately 30 percent. Overall asset quality was unchanged, with most contacts describing it as "excellent."
Labor markets remained very tight through December and early January, although the steady decrease in the region's unemployment rate appeared to have ended. The average unemployment rate, which began declining in mid-1992, flattened out in the latter half of 1997 and may be trending upward ever so slightly. The major concern of employers, however, continued to be labor shortages. Though these shortages were broad-based, information technology and construction workers were most often cited as being in short supply and accounting professionals were again hard to find heading into the upcoming tax season. A major producer of high-tech equipment reported that some projects had to be scuttled because of the shortage of engineers. Homebuilders' associations in Wisconsin recently began setting up recruiting booths at some of the state's "home shows." The shortages continued to hinder the District's employment growth and most analysts contacted expect this to continue into 1998. A survey of employers' hiring plans forecasted that the Midwest's payrolls would continue to expand in the first quarter of 1998, with Detroit and Milwaukee area employers being the most optimistic. Wage pressures generally remained subdued, with new reports of increasing wage gains generally confined to those occupations where skill levels were upgraded, such as upper-end administrative staff with project leadership or report writing skills.
Prices for most key Midwest farm commodities have declined considerably in recent weeks, adding to the likelihood of lower farm sector earnings in 1998. Sluggish export prospects, compounded by recent problems in several Asian markets, contributed to the price decline for both crops and livestock. Livestock prices were further undermined by a seasonal rise in domestic hog marketings and by a bulge (presumably temporary) in hogs imported from Canada, where labor strikes curtailed operations at several packing plants. In addition, recent surveys confirmed a major buildup in the number of hogs on U.S. farms during the latter half of 1997, foreshadowing large gains in pork production for much of this year.