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Economic activity in the Seventh District was again soft in December and early January, with scattered reports of improvement in a few sectors. Most retailers failed to meet their holiday sales goals, despite heavy discounting and extended shopping hours. Residential construction and real estate activity picked up somewhat toward the end of 2001, while softness in the nonresidential segment persisted. Despite progress in working down inventories, industrial production remained weak in the District. Overall loan demand softened toward the end of the year as higher mortgage interest rates put a damper on new mortgage refinancing activity, and business borrowers stayed on the sidelines. Labor markets were relatively weak, but the rate of job losses appeared to be waning in some areas. Upward pressure on wages and prices continued to ease due to the general economic slowdown.
Overall consumer spending remained relatively soft in December and early January. Holiday sales failed to meet most retailers' expectations, despite extended shopping hours and heavy discounting that began earlier in the season. According to some national retail chains, as well as national casual dining chains, sales results in the Midwest were weaker than in most other regions. Many contacts reported that sales picked up noticeably in the days immediately before and after Christmas day, but not enough to overcome softer sales earlier in the period. However, electronics and home-related items were said to have sold well. Winter apparel sales were hampered for most of December by unseasonably warm weather, but did pick up with large discounts and colder temperatures in late December and early January. Businesses dependent on winter sports also suffered as a result of the relatively warm temperatures, as well as a lack of snow. Light vehicle sales in the District slowed modestly from November to December, but remained seasonally strong as a result of steady advertising and generous consumer incentives. Overall retail inventories were reported to be in good shape, as many retailers had already planned for softer holiday sales, but new light vehicle inventories continued to be quite low. One airline contact noted that flights were fuller than expected over the holidays, and the company had recently added marginally to its capacity. There were few reports of intensifying upward pressure on prices and, in fact, one contact reported that a price increase sparked many more complaints than in previous years.
Construction and Real Estate
Construction and real estate reports were mixed as 2001 drew to a close, as residential activity remained fairly robust while nonresidential activity continued to weaken. Sales of both new and existing homes were said to be relatively strong, largely due to favorable interest rates. While fixed-rate mortgage interest rates increased modestly from recent lows, many contacts indicated that home sales continued to show improvement from the effects of September 11. Some realtors and builders suggested that December's sales results may have equaled the previous December, after several months of decreases in year-ago comparisons. First-time-buyer homes sold briskly while luxury homes continued to languish on the market. Likewise, price appreciation was said to be stronger at the lower end of the market than at the upper end. Many contacts suggested that the confidence of potential home buyers continued to recover from the effects of September 11, and expected 2002 to be a very good sales year. Nonresidential activity remained sluggish in December and early January. Office vacancy rates continued to rise, putting further downward pressure on rent rates. In addition, landlords were said to be increasingly willing to offer concessions such as more generous tenant improvement packages. A commercial realtor in one large metro area, however, reported a significant increase in the number of "lookers" coming through office buildings since Thanksgiving. The market for light industrial and retail space was reportedly steady but soft, and retail vacancies were increasing in some areas. Construction of infrastructure projects was reportedly softening in some areas as well.
Overall manufacturing activity remained weak at the end of 2001, but there were scattered signs of modest improvement in some industries. Largely due to extraordinary incentives, nationwide light vehicle sales exceeded manufacturers' expectations again in December, despite softening from November. As inventories remained very lean, one manufacturer indicated that its light vehicle production in the first quarter of 2002 would be 6 percent to 7 percent higher than a year earlier. Steel production picked up in the last week of December and prices reportedly increased modestly from very low levels. With inventories said to be well below desired levels at both mills and service centers, one industry contact stated that "the reduction in steel inventories is over." Prices of gypsum wallboard continued to move up from very low levels, but were flat with a year ago. One industry contact forecast that wallboard shipments would be down 5 percent to 10 percent in 2002, adding that 2001 was the second best year ever for the industry. Conditions in heavy equipment industries (including heavy trucks) remained very weak, and most manufacturers of heavy equipment cut their forecasts for 2002. Noting that retail sales of equipment were no longer falling, however, one industry contact said that the bottom of the downturn was near. A machine tool producer in the District said that "things are getting better every day," and this firm had begun to hire new workers.
Banking and Finance
Bankers' reports on lending activity were mixed. Household borrowing remained strong, but tapered off in December as long-term interest rates rose. Some banks reported record volumes of mortgage refinancing closings in December, although the number of deals in the pipeline fell off during the month. Standards and terms for household loans were largely unchanged and credit quality was said to be holding steady to improving slightly. Reports on business lending activity were mixed, but generally indicated continued softness. Most lenders noted little or no pickup in demand beyond normal seasonal variations. One large bank, however, reported that business loan volumes were up about 6 percent in December in year-ago comparisons, after being flat for most of 2001. There were a few reports from bankers of further tightening of standards for loans to firms in industries that have been hit hard by the general economic slowdown, such as tourism and travel. At the same time, the number of small businesses complaining of a lack of access to credit became more frequent, with one contact noting that "some firms cannot get operating credit even though they are profitable." There was little further deterioration in overall business loan quality reported, although one lender said "we will be holding our breath for the next six months."
Labor markets remained soft in December and early January, although there were some signs that they may be stabilizing in some areas. Year-over-year growth in initial unemployment insurance claims in District states fell to near zero in late December, after being as high as 80 percent earlier in 2001. However, continuing claims remained high and there were several reports indicating that many workers were still out of a job. A large District auto group noted that resumes from workers seeking office jobs were very high in recent weeks and a large realty firm indicated that new realtor classes were "exceptionally large" in November and December. Some state analysts said they did not see the typical seasonal "bump" in retail employment and contacts in casual dining suggested that workers were "easy to find." Layoff announcements from manufacturers became less frequent and some companies actually reported new hiring. With persistent softness in labor markets, upward wage pressures continued to abate. Contacts from a wide variety of industries indicated that wage increases had fallen from mid-single digits early in 2001 to low single digits by the end of the year.