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The Seventh District's economic expansion picked up some momentum in April and May, despite significant shortages of labor. Virtually every economic sector continued to benefit from the extraordinary pace of construction activity. Consumers were buying appliances and other durables to stock their newly purchased homes; manufacturers were building earth-moving and other construction-related equipment; and bankers were busy meeting mortgage origination and commercial real estate loan needs. The District's labor markets tightened considerably since our last report and accounts of worker shortages became more frequent. Favorable weather in the Midwest allowed spring planting to make rapid progress in recent weeks while hog prices rose due to a seasonal decline in marketings.
Overall consumer spending increased moderately in April and May, with sales results exceeding most retailers' expectations. A few national chains indicated that sales results in the Midwest were stronger than in other regions, with one asserting that it was the strongest in the country. Some items were selling better than others, but the strength was reported to be broad-based. Sales of furniture, electronics, appliances, and home improvement goods continued to benefit from robust housing activity in the region as well as warm weather. Apparel sales also benefitted from the warm weather, according to some contacts, with notable strength in men's and young men's sportswear. Strong light vehicle sales in May surprised some observers, and one contact noted considerable strength in the luxury segment. On the other hand, sales of auto parts (tires, batteries, etc.) and some auto services (such as body repair work) were softer than at this point last year. One contact blamed the mild weather in the Midwest, noting that there were fewer weather-related fender benders. Overall retail inventories were "in good shape" and there was no discernible change in promotional activity.
Housing and Construction
Construction activity remained robust in April and May, boosted by a pickup in business construction. A supplier of construction materials indicated that shipments to commercial builders were up roughly 10 percent from last year while shipments to homebuilders were flat, but still very strong. Most contacts suggested that development of light industrial space (warehouses, etc.) was the strongest segment on the commercial side. Retail and office development remained strong, particularly in suburbs of some of the District's larger metropolitan areas. There was office tower development in some center cities as well, with ground having been broken for a 65-story office tower in downtown Chicago. The housing market may have softened somewhat in May, after exceptional strength earlier in the year. However, it remained very strong according to most contacts, with year-to-date sales levels and construction activity well above last year. Homebuilders throughout much of the region remained very active with one reporting that a "Parade of Homes" drew record levels of traffic though models, resulting in record levels of sales contracts. There was particular strength in the "move-up" segment of the market, according to this contact. One of the largest realtors in the District reported that April sales of existing homes set yet another monthly record and May's results were expected to be comparable. The brisk housing activity led to a pickup in home price appreciation this spring. Multiple bids on existing properties became more frequent, providing sellers with more leverage. Most realtors indicated that average prices in May were up about 5 percent from last year.
Manufacturing activity remained very high in April and May and might have gained some momentum from our last report. This strength was nearly universal across industry segments. Producers of heavy equipment and appliances were the beneficiaries of the strength in construction industries. One producer of heavy/agricultural equipment and consumer products noted that demand for heavy construction equipment, as well as lawn and garden products, was particularly high and inventories were lean. New orders for agricultural equipment softened somewhat as a result of declining commodity prices. Steel production remained very high, in part due to strong demand from the makers of construction equipment. Capacity from minimills continued to come on stream and imports from east Asia began to reach the coasts; however, one analyst suggested that this increased supply was satisfying unmet demand and had not put a dent in domestic production. Steel prices were generally flat and the pricing environment remained weak. However, steel producers were successful in pushing through very modest price increases on some construction-related products. Automobile makers reported that production remained high and sales were strong, leading some analysts to increase their sales forecasts for the year. However, demand for light vehicles was again boosted by heavy use of incentives, and the pricing environment was still weak for most models. (At the time of our report, it was unclear how much production might be curtailed by strike activity in the auto industry.) One notable exception to the generally strong manufacturing picture was the high-tech electronics and electronic components industry, which was still suffering the ill effects of the "Asian Contagion." Production in this industry was down as were new orders and prices. One contact was concerned that conditions were not likely to improve any time soon. There were no new reports of raw materials shortages, and prices for raw inputs remained flat.
Banking and Finance
Lending activity in the District remained very strong in April and May, with little change in momentum or asset quality. On the consumer side, overall lending activity was very strong and asset quality was said to be improving slightly. Though the refinancing boom was past its peak, new mortgage originations remained "surprisingly" strong. One contact indicated that delinquencies were down and consumer credit quality improved recently. On the business side, lending activity remained very high and competition was still intense. Several contacts mentioned a pickup in commercial real estate lending activity with one District lender suggesting that this strength was "reminiscent of the late 1980s." According to most bankers contacted, intense competition for quality business loans continued to put pressure on pricing but, as in previous reports, had not led to a lowering of standards. As a result, overall asset quality on business loans remained very high.
The region's labor markets tightened significantly in April and May amid signs of broad-based labor shortages and continued strong demand for workers. The average seasonally adjusted unemployment rate for Seventh District states dropped to a very low 3.3 percent in April, a full percentage point below the national average. Initial unemployment claims through May were well below the levels experienced in the region
for the same period in each of the last 7 years. The volume of help-wanted advertising in local newspapers and hiring plans surveys suggested that demand for labor in the Midwest remains higher than for the nation as a whole and above last year. Worker shortages were broad-based, though information technology workers and skilled trades occupations were more frequently cited as having been in short supply. While general wage pressures were subdued, the tight labor markets have led to increased wages in some occupations. There were several reports of increasing wages at the lower end of the pay scale, including some clerical occupations. There were also more frequent reports of increased employee turnover, particularly in lower skilled jobs, while one analyst noted that employers continue to "reach into their bag of tricks" to keep higher skilled workers in place by using longer-term incentives, such as stock options and profit-sharing.
District agricultural bankers reported that cash rental rates paid by farmers registered a year-over-year increase of 5 percent this spring, about half the percentage gain that occurred in farmland values. Recent weather in the Midwest was ideal for planting corn and soybeans. As of the first week in June, corn planting in District states was nearly finished, while soybean planting ranged from two-thirds complete in Illinois to 90% in Iowa. The current prospects for a large fall harvest have put downward pressure on farm-level corn and soybean prices. Corn exports continue to lag year-earlier levels and Midwest soybean producers face renewed international competition from the large and just-completed South American harvest. In contrast, District hog producers benefitted from stronger hog prices in May due to a seasonal decline in marketings and some pickup in demand from the start of the spring barbeque season.