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Reports from Seventh District contacts suggested modest expansion in economic activity in April and May. Consumer spending generally remained sluggish, but there were reports of strengthening in a few segments. Construction and real estate reports were again mixed. Manufacturing activity continued to pick up, although the improvements were modest. Overall loan demand was mixed, with businesses remaining reluctant to borrow. Labor demand appeared to improve further in recent weeks. Generally, wage and price pressures remained subdued. Unseasonable weather seriously disrupted crop planting in some areas. Increases in District farmland values in the first quarter were the strongest in several years, but bankers reported that farm credit conditions deteriorated for the second consecutive quarter.
Consumer spending generally remained sluggish in April and May, but there were reports of strengthening in a few segments. Retailers reported that sales results in the Midwest were generally flat, which was in line with or slightly below national averages. Pharmacy items, household goods, and toys were said to be selling well, while poor weather hampered sales of some seasonal items such as gardening supplies and sporting goods. Discount stores continued to outperform general merchandisers, and one contact noted that customers were only willing to buy aggressively discounted goods. Light vehicle sales in the District were generally slower than elsewhere in the nation, but remained fairly strong, according to one contact. Entertainment spending appeared to be improving in the District. Reports from casual dining contacts indicated that sales were generally better in April and May, and movie ticket sales were said to be "very strong." Reports from tourism- and travel-related industries were mixed. Some areas of destination noted an increase in tourism, while others reported a decrease; and a contact with one national airline said that leisure travel was strong, but business travel was very weak. There were a few reports of firming prices in entertainment industries, but overall price pressures at the retail level remained subdued.
Construction and Real Estate
Reports on construction and real estate activities were again mixed in April and May. Sales of existing homes picked up, according to many realtors, and home price appreciation remained strong. Sales of new homes were not as strong in most areas. But some builders in the Chicago area suggested that they may have underestimated the strength of demand for new homes, particularly in the suburbs, and offered too little product. On the commercial side, reports suggested that the rise in office vacancy rates continued to slow. However, most contacts were not expecting any measurable improvement in office markets until the end of this year. A contact in the Detroit area did note an increase in office leasing activity, adding that most deals were for small spaces of 10,000 square feet or less. The upward trend in light industrial vacancies was reportedly slowing in many areas, easing the downward pressure on rents. Despite higher vacancies, development of build-to-suit light industrial space remained fairly strong in some areas.
Overall manufacturing activity generally improved modestly, but the gains were uneven across industry segments. Light vehicle sales nationwide continued to be strong through the end of May, and inventories remained lean. Some industry analysts suggested once again that incentive spending may ease in coming months, as automakers move to restore profitability. A contact with one large telecommunications equipment producer said that the industry had bottomed and was in the "recovery mode." Inventories were very lean, according to this source, and "the stage was being set for a good round of profits by the end of the year." New orders and shipments for materials such as steel and gypsum wallboard generally remained strong. New orders for heavy trucks continued at high levels as customers sought to buy ahead of EPA regulatory changes scheduled to take effect October 1. Demand for construction and agricultural equipment was said to be improving for some producers, although sales were still below year-ago levels. Recent increases in steel prices were said to be sticking, while announced price hikes for gypsum wallboard had to be delayed because of competitive pressures. The pricing environment for most other manufactured goods remained weak.
Banking and Finance
Bankers generally indicated that overall loan demand was a little soft, but steady in April and May. Demand for residential mortgage loans was down from late last year, but remained more resilient than many bankers had expected. Some contacts reported a slight pickup in refinancing activity toward the end of May as interest rates decreased, and new originations were reportedly "holding up." Credit card volumes were said to be little changed in recent months, but remained below year-ago levels. Most contacts reported little change in consumer credit quality, although a few noted slight improvements in delinquency and bankruptcy rates. Business lending activity was generally described as sluggish. Most contacts reported that demand for business loans was soft, with volumes flat-to-down in April and May. One banker said that while current growth in volumes was "quite weak," the number of deals in the pipeline was picking up. Many bankers suggested that business customers remained wary of borrowing for large capital investments. The deterioration in business loan quality continued to abate, according to most contacts.
Labor markets were again relatively soft in the District, and little changed from our last report. Demand for workers continued to improve slightly "day by day and week by week," according to one contact. Broad based wage pressures remained subdued. However, rising costs of workers' compensation and health insurance remained a concern for most contacts.
District farmers have had a difficult spring planting season, leading one contact in central Illinois to observe "what we have is called a mess!" Unseasonably cold and wet weather in the eastern Corn Belt seriously disrupted the planting schedule. Normally, almost all of the corn and soybean crops would be planted by the Memorial Day weekend. But this year, in Indiana only about 40 percent of the corn and 20 percent of the soybeans were in the ground. Progress in Illinois was somewhat better, but still far short of normal. Contacts in central Illinois reported as much as 30 percent of the corn crop had to be replanted. Planting also was behind schedule in the northern Corn Belt, but not as seriously as in the south and east. In contrast, Iowa's farmers were progressing on schedule, as the wet spring was a welcome relief to the very dry soil conditions earlier in the year. Except in Iowa, crop emergence was also far behind normal. Contacts indicated that corn not in the ground by the end of the first week in June likely will not be planted. And unlike last year, unplanted corn acreage probably would not be shifted into soybeans; instead contacts observed that this year a larger proportion of farmers would elect to leave the land fallow and collect crop insurance. Farmland values in District states at the end of March were up 3 percent from the end of December and 6 percent above a year ago. All five states registered a quarter-to-quarter increase in farmland prices for the first time in two years. At the same time, agricultural credit conditions deteriorated in the first quarter as rural bankers reported lower rates of farm loan repayment, higher rates of loan renewals and extensions, and increased collateral requirements.