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The Seventh District economy continued to expand at a moderate pace from late
October through mid-November. Consumer spending remained relatively soft, but
business spending continued to pick up. Construction and real estate activity
was largely the same as at the time of our last report. Manufacturing continued
to be robust, with contacts reporting further gains in production, new orders,
and backlogs. Bankers said that demand increased slightly for both household
and business loans. High input costs persisted, but retail price pressures were
largely subdued. Agriculture prospects remained strong, with bumper corn and
Consumer spending remained relatively soft from late October through mid-November.
Retailers generally indicated that sales nationwide were coming in at the lower
end of their expectations, with the Midwest softer than other regions. However,
some said that store traffic and sales of seasonal merchandise picked up as
temperatures cooled. Despite stronger job growth and higher consumer confidence,
merchants' expectations for the holiday shopping season remained somewhat cautious.
Retail inventories were said to be in line with sales plans. Many restaurants,
from quick-casual to high-end, noted stronger sales during the reporting period.
One property manager noted that restaurants were benefiting from a general upswing
in shopping center traffic. District auto dealers said that light vehicle sales
were relatively soft in early November, which was in line with expectations,
and that inventories were slightly high. Once again, tourism and related spending
was reported to be a bit above year-earlier levels.
Business spending continued to increase and more firms appeared to be hiring.
Many businesses reportedly boosted outlays for production machinery, office
equipment, and computers. Still, contacts again suggested that a large portion
of capital outlays was devoted to replacing outdated or worn equipment and/or
cost-saving technologies, rather than expanding productive capacity. Business
travel and advertising continued to rise modestly. With regard to hiring, one
large temporary help firm indicated that new orders increased significantly
in October and early November after falling off in September. This firm, and
others, noted that demand for temporary workers was strong across industry and
occupational categories. In addition, temp-to-permanent placement fees continued
to rise. Outside of temporary help firms, reports of additional permanent hiring
became more frequent, particularly from manufacturers.
On balance, there was little discernible change in real estate and construction
activity in recent months, as some slowing in housing markets was offset by
a slight strengthening on the nonresidential side. Though reports were mixed,
Realtors and builders generally indicated that housing markets remained strong
even though sales were a little slower than earlier in the year. However, a
contact with one builders' association suggested that most homebuilders were
expecting mortgage interest rates to rise next year, heightening uncertainty
among many of them. Commercial construction and real estate activity continued
to increase slightly. Despite recent gains in office markets, contacts still
described it as "a tenants' market," with leases containing higher-than-normal
improvement allowances and rent abatements.
Manufacturing activity continued to increase. Producers of heavy equipment (construction,
agricultural, and mining) again reported considerable ongoing strength in production,
new orders, and backlogs. One contact suggested that tax incentives set to expire
at the end of the year may be pulling ahead orders for heavy equipment. New
orders for heavy trucks were "at extremely strong levels" and production was
constrained by shortages of engines and other parts. Machine tool makers said
that new orders increased further from very high levels. Shipments of cement
and gypsum wallboard continued to rise, and industry contacts said that some
firms had added capacity, or planned future additions, to keep up with demand.
Some specialty steel products were said to be in short supply. More generally,
however, demand for domestically produced steel eased somewhat recently, due
in large part to an increase in imports and softening demand from the auto industry.
Light vehicle sales nationwide were said to be "tepid" in early November, and
inventories were rising again. As a result, one producer indicated that fourth-quarter
production schedules probably will be cut.
On balance, lending activity increased slightly from our last report. On the
household side, some lenders reported an uptick in mortgage loan applications
as long-term interest rates remained historically low. There were no changes
reported on standards and terms for household loans, and credit quality continued
to improve. Demand for business loans increased slightly. One large bank reported
that its October increase in commercial loan volumes was one of the strongest
this year. In addition, commercial credit line usage increased. Still, overall
lending remained well below expectations. There were no reported changes on
standards and terms for business loans, and lenders said that credit quality
was good and largely unchanged.
Reports of higher input costs persisted and wages continued to increase at a
slightly faster pace, but retail price pressures remained largely subdued. Contacts
reported that prices for some materials were decreasing. Notably, steel prices
were reported to have declined from relatively high levels, and lumber prices
also fell in recent months, alleviating cost pressures on homebuilders. Still,
many materials prices remained elevated. The number of firms that were able
to pass higher input costs along to their business customers continued to rise,
although the price increases appeared modest. Some restaurants were said to
be raising menu prices to offset higher food costs. Still, price increases for
final consumer goods remained largely contained.
Harvest was nearing completion in Illinois, Indiana, and Iowa, but still lagged
in Michigan and Wisconsin, especially for corn. Corn and soybean harvests for
most District states were likely to approach or set record highs, and concerns
about storage of the bumper crops persisted. Precipitation replenished depleted
soil moisture levels in parts of the District, but also delayed field work and
boosted the moisture content of grain stored outside. Fertilizer prices have
increased substantially which, along with higher fuel costs, have tempered gains
in farm income, even as government payments provided a boost. Soybean rust,
recently discovered in the South, has become a major concern in the District,
with planting decisions likely to heavily favor corn over soybeans next year.
Livestock producers have benefited from lower feed costs and continued to make