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The Seventh District economy continued to expand at a modest rate in January and February, though it lost some momentum from late last year. Growth in consumer spending was in line with national averages, but below most retailers’ expectations. Housing and construction activity slowed slightly more than the normal seasonal downturn. Manufacturing activity remained at robust levels, but reports of change in activity were mixed. Lenders continued to tighten credit standards for consumer loans while competition was forcing them to ease standards for business loans. Labor markets remained very tight and wage pressures continued to mount, although productivity gains were reportedly keeping pressure off prices.
Retail sales in January and February were moderately above year-ago levels, but slightly below most retailers’ expectations. Post-holiday sales did well in January but results were mixed in February. Many contacts felt that severe winter weather may have hampered sales in some areas. Apparel sales, both men’s and women’s, continued to outpace overall gains and home electronics sales reportedly rebounded from a somewhat soft holiday season. While promotional activities were used by some merchants to deal with excess stock, most felt that inventories were in line with sales expectations. One large retailer indicated that early spring sales were strong and cited new spring fashions, favorable weather, and customers being “in a buying mood” as contributing factors. However, another major department store chain described February sales in the Midwest as “lackluster” with home appliance sales notably weak. Overall, however, most retailers felt that post-holiday and early spring sales were doing well, with Midwest sales about in line with those of the nation.
Overall construction activity fell off slightly more than is normal for January and February, but most contacts reported that markets remained strong. New home construction and sales were adversely affected by the relatively harsh winter weather through much of the District. Most builders experienced a greater-than-seasonal decrease in single-family home sales while noting that the decline was “nothing to worry about.” However, home builders in eastern Michigan expressed concern over a sharp drop in permits so far this year. Builders' associations in two of the District’s largest metro areas reported that condo and loft renovation activity in the central cities remained very strong, with one stating that the residential construction market was “the best in the last 10-15 years.” Commercial construction activity was strong in the first part of the year, mainly in suburban areas. Cement dealers reported that demand remained high and most were anticipating this strength to carry over into the spring in practically every building category--infrastructure, residential, commercial and industrial.
Manufacturing activity generally remained high in the District, though some signs of slowing were reported. Responses to purchasing managers’ surveys for January and February were mixed, with some suggesting a modest pickup in activity and others indicating a slowing pace of expansion, especially in western Michigan. An analyst for the steel industry noted that, while steel demand remained strong in January and February, its forward momentum appeared to be gone. A machinery equipment producer reported that orders for the first quarter were up from a year ago, but much less than expected given the relative strength in the economy. Most of this company’s growth in orders was accounted for by the aerospace industry. A maker of electrical components for industrial usage stated that the unexpected strength they experienced last quarter had subsided. An agricultural equipment manufacturer noted that, while demand remained strong, production increases were constrained by the company’s reluctance to add permanent workers. A major producer of home furnishings reported that demand was strong in January and February and showed no signs of softening. Several contacts in the heavy-duty truck industry noted continued improvement in truck orders. However, the industry is benefitting from a return to seasonal buying patterns that were absent last year when backlogs were already high.
Conditions in the banking industry seemed to be divided by customer segment in the early part of the year--with standards being tightened on the consumer side and eased on the business side. Most banks contacted reported that consumer demand remained strong but year-over-year gains in lending were smaller than previous months as a result of tightening standards. One banker noted that approval rates on consumer loans had dropped from 50 percent late last year to 20 percent so far this year. One large bank noted a switch by consumers to home equity loans that seemed to be driven by debt consolidation. Growth in business loans was reported by most bankers to be greater than on the consumer side. While most bankers indicated that industrial loans were primarily driven by equipment purchases, one stated that high production volumes were pushing some manufacturers to seek working capital loans. However, a small bank noted a drop-off in merger and acquisition loans since the beginning of the year. While one small bank reported strong C&I loan demand, growth had slowed in recent months largely because their two largest customers had pulled back their borrowing. Several bankers attributed some of the slowdown in their business lending to the emergence of alternative sources of funds. Virtually every bank contacted indicated that fierce competition was causing margins to narrow and concessions to be given in order to make business loans.
The District’s labor markets changed little since our last report, remaining very tight with total employment growth lagging that of the nation. Respondents to purchasing managers’ surveys from around the District suggest that the slow decline in manufacturing employment continued through the first two months of 1997. Several contacts indicated that the tight labor markets may be restraining the region’s economic expansion. The average unemployment rate in the five District states ended the year at a seasonally adjusted 4.2 percent and there is no evidence suggesting any significant slackening in the labor markets in January or February. Shortages persisted in the technical fields (engineering and information technology) and one contact reported that building contractors in Michigan had resorted to recruiting at competitors’ construction sites. Several contacts indicated that the upward pressure on wages noted in our last report had persisted. While wage pressures were reported to be broad-based across occupations, they were most severe at the upper end of the wage scale. One contact at a national staffing firm argued that any wage gains were being offset by increased productivity. Moreover, there were no reports of any discernible movement in prices as a result of labor cost increases.