|Skip to content
Economic activity in the Seventh District increased further in December, and contacts were cautiously optimistic about the outlook for 2011. Consumer spending rose more than expected, and business spending continued to increase at a steady pace. Manufacturing production also increased, while private construction remained weak. Credit conditions continued to improve. Cost pressures rose, but there was limited pass-through to downstream prices. Higher prices for agricultural commodities boosted farm revenues.
Consumer spending increased in December, as holiday retail sales exceeded those of a year ago. Retailers pointed to sales and promotions, rising consumer confidence, and some pent-up demand as potential reasons for better than expected holiday retail sales. Discretionary spending was up this holiday season--apparel, jewelry, and electronics accessories were particularly strong, while big-ticket electronics and furniture performed slightly better than a year ago. In contrast, auto dealers reported that sales held steady in December despite an increase in showroom traffic. Retailers, in general, expressed a positive outlook for 2011, expecting stable, moderate growth in sales in the first half of the year with the potential for spending to accelerate later in the year.
Business spending continued to increase at a steady pace in December. Farmers bought equipment before the end of the year to minimize their 2010 taxes. Several retail and manufacturing contacts reported plans to increase outlays for equipment and structures in 2011. Inventory rebuilding leveled off with both manufacturers and retailers indicating that inventory levels were in a comfortable range given the current pace of sales. Hiring of permanent employees remained limited, although a number of manufacturing contacts reported plans to increase their workforces in the coming year. Several continued to note, however, that finding workers with the right skills remained a problem. Temporary hiring continued at a steady pace, with a large staffing firm reporting stable growth in billable hours. In addition, temporary-to-permanent job transitions were noted to be inching up for professional workers.
Construction and Real Estate
Construction activity was weak in December. Although it edged somewhat lower, the elevated inventory of unsold homes continued to constrain new residential construction. Builders reported a decline in signed contracts and a slight increase in contract cancellations. Contacts also noted that credit was difficult to obtain for refinancing or new construction in neighborhoods where foreclosures and short sales are putting downward pressure on transaction prices and appraisal values. Private nonresidential construction was little changed in December. However, several construction contacts reported negotiations with automakers that are planning to renovate or expand a number of assembly plants in 2011. Although vacancy rates remained elevated, there were some reports of improvement in commercial real estate conditions. In particular, commercial subleasing activity was noted to have increased as pricing continued to be attractive. Public construction, driven by highway and bridge work, was again strong.
Manufacturing production improved again in December. New orders were solid and order backlogs increased substantially. In general, contacts expressed a positive outlook for growth in manufacturing next year. Several manufacturers of tubes, hydraulics, and other fluid power products noted that activity had returned to its previous peak levels of 2008, and was expected to increase further in the coming year. The fabricated metals, automotive, and heavy equipment sectors were also expected to remain strong sources of growth. A contact reported that global steel consumption was likely to reach an all-time high in 2011. In addition, contacts noted that pent-up demand remains in the motor vehicles sector, with the average age of both light and heavy vehicles still rising. Demand for heavy trucks, in particular, was expected to be even stronger than previously anticipated. In contrast, a contact in the appliance industry noted that shipments were weaker than expected in the fourth quarter, but were still higher than the prior year.
Banking and Finance
Credit conditions continued to improve in December. Corporate credit spreads for a number of large firms in the District were slightly improved even as market interest rates were increasing. Although demand for liquid assets remained elevated, several contacts noted a substantial increase in risk appetite, which, in particular, benefitted equity markets. The profitability of financial firms increased despite tighter interest rate margins, as loan quality continued to improve. Core loan demand from middle market firms remained limited, as these businesses continue to hold large amounts of cash on their balance sheets. However, contacts noted more inquiries for loans to finance merger and acquisitions as well as an end-of-year increase in demand for small business loans. Consumer credit demand was stronger than expected. Financial market participants were cautiously optimistic in their outlook for financial and economic conditions in 2011, although a few questioned the sustainability of recent improvements, as they expected business and household deleveraging to continue for some time.
Prices and Costs
Cost pressures increased in December, but limited pricing power again constrained pass-through to downstream prices. Retailers reported that, on balance, wholesale prices edged up further, although there were some large increases in wholesale apparel prices. Most retailers were accepting lower profit margins with pass-through limited to increases in delivery and other small surcharges. Commodity prices, notably for oil, steel, rubber, and lead, increased. However, contacts thought that only a limited and gradual pass-through of higher materials prices would take place. Wage pressures remained moderate.
Net farm income was higher than a year earlier. Crop insurance helped stabilize revenues in areas where there had been disappointing yields. There were, however, reports that some farmers were taking losses because they earlier had oversold their crop production on futures markets at lower prices. Agricultural land values and farmland cash rental rates for the next growing season increased sharply. Demand for crops remained strong in December, with a notable boost from increased exports to Asia. Crop inventories remained low compared with the high level of demand. Prices for corn, soybeans, and wheat rose during the reporting period. Input costs for crop farms were steady so that margins continued to improve. Hog and cattle prices also increased; while milk prices were generally lower, pressuring the margins of dairy producers.