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The Seventh District economy continued to expand in March and April, with some reports suggesting that growth may have slowed slightly. Consumer spending remained strong, although some pockets of softness were reported. Demand for new and existing homes eased modestly, although most contacts still described the housing market as healthy. Production remained near capacity in some manufacturing sectors, but softness endured in other key industry segments. Loan demand remained solid, and lenders reported that asset quality on both business and consumer loans was good overall. Employers in the District again struggled to find and retain workers, and there were a few new reports of intensifying pressure on employment costs. Dry soil conditions persisted in many areas, but spring planting proceeded at a rapid pace.
Consumer spending in March and April was largely in line with retailers' optimistic expectations, as consumers remained very confident about the economy. The strength was not universal, however, as a few merchants noted soft sales, high inventories, and increased promotional activities. Discount stores appeared to fare better than general department stores. Sales of apparel, seasonal items, home and garden goods, electronics, and consumables were reported to be strong. Most national chains noted that sales growth remained strong in the Midwest, although not as strong as on the coasts. Many contacts noted that unfavorable weather hampered sales of traditional spring items, but they expected to recoup any lost sales as the weather improved. A contact in the casual dining business reported that growth remained strong nationwide. Reports on light vehicle sales in the District were mixed. Some contacts noted continued strong demand, especially for luxury models, while others indicated that sales were down substantially. One large dealer group, noting a drop off in showroom traffic and service orders, said that the "mood" of their customers had changed in recent months.
Construction and Real Estate
Residential construction remained relatively strong, according to builders, but two national reports showed softening in the Midwest from a year ago. A national survey of homebuilders showed a notable drop-off in its Midwest housing activity index in April, and a government report indicated that the region's housing starts were down sharply in March. Most of the weakness in the housing starts, however, was concentrated in multifamily units. Contacts were quick to point out that the multifamily segment was much more volatile than single-family starts. Still, neither participants in the national survey nor our contacts in the District suggested that the new home market was weak. Sales of existing homes slowed somewhat in the first quarter of 2000 from a year ago in some areas. However, realtors noted that average days on the market were down slightly and the ratio of selling-to-asking price remained very high, indicating continued strength in the market. Commercial construction remained fairly strong, although contacts suggested that interest rate increases are of greater concern on the business side than on the residential side. A report from one of our largest metro areas suggested that hotel development plans were being delayed by financing concerns. Lenders nationwide have grown cautious of the amount of new space that has already been developed in recent years and have tightened standards and terms, according to this report.
Overall manufacturing activity was again strong in March and April, but results were mixed by industry segment. There was no ambiguity in the auto sector, however, as the industry remained "red hot" according to contacts. Nationwide, sales of light vehicles were higher in the first quarter of 2000 than any other quarter on record. Demand for office furniture was up significantly from last year and backlogs were at record levels, according to one manufacturer. Production was nearing capacity in the steel industry as last year's huge inventory overhang has been worked down. Demand for machine-cutting tools, buoyed by increasing global demand, was reported to be strong and improving. Producers of construction materials (wallboard and cement) were running nearly "full out" as excess demand was being satisfied by increasing imports. Wallboard prices were reported to be down about 6 percent from December, but remained nearly 11 percent above year-ago levels. The demand for heavy equipment was mixed, as the soft agricultural equipment sector improved somewhat while new orders for heavy trucks fell off "sharply" from a year ago. Input costs remained relatively flat for most manufacturers, as did output prices, as many companies continued to fight for market share in their respective industries.
Banking and Finance
Bankers reported that loan demand remained strong and overall growth was more or less steady. For many smaller community lenders, loan demand was not the problem, but funding those loans was. Some agricultural and community lenders continued to fund loans through borrowing, still unable to attract sufficient deposits. Several bankers noted a surge in home equity lines of credit, partly offsetting slow refinancing activity. A contact at a large money center bank noted that consumers' credit usage was increasing, but that they were paying down their balances faster and overall consumer credit quality was improving. Demand for commercial and industrial loans remained robust, while a few contacts reported that commercial mortgage lending activity had slowed somewhat from last year. One banker noted that banks were still lending to existing customers that wanted to expand, but were turning away new customers seeking funding for speculative commercial building projects. Commercial credit quality was generally described as good and steady, but one banker added that even banks that had relaxed lending standards "(weren't) being punished because the economy is so good."
Employers in the Midwest continued to struggle to find and retain workers as the region's labor markets remained much tighter than the nation as a whole. Shortages of workers persisted in practically all areas, industries, and occupations. Seventy percent of respondents to a March survey of Michigan retailers reported that overall customer service was suffering as a result of worker shortages. Contacts at smaller and community banks noted that wage competition from national banks with a presence in their areas made it increasingly difficult to retain workers, especially part-time tellers. One contact noted that health care companies were using signing bonuses more frequently to "raid" their competitors. Another contact noted that benefit cost increases were significant, particularly for prescription coverage, and a nationwide staffing service in one of the District's largest metro areas reported that wages had increased roughly 15 percent from the beginning of the year. Most contacts, however, suggested that broad-based employment cost increases remained modest and steady.
Beef cattle and hog prices were a bright spot for District farmers in recent weeks. During the first half of April, hog prices were 70 percent higher than a year earlier while beef cattle prices were up 10 percent. A report released by the USDA at the end of March indicated that hog numbers were down from year-ago levels in each District state except Iowa, which registered a small increase. Though recent rains improved soil moisture conditions, some areas in the District remained quite dry. However, the dry conditions enabled corn planting to proceed at a pace considerably quicker than normal through April 24. A recent USDA survey indicated that the number of acres planted to corn or soybeans in the District will be about the same as last year, and that farmers will modestly reduce the acreage planted with genetically modified seed.