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Reports from Seventh District contacts suggested that the pace of the region's economic recovery remained slow in June and July. Reports on consumer spending became more mixed in recent weeks, as sales results varied widely by retail segment. The demand for housing remained very strong, while conditions in nonresidential construction and real estate were still soft. The recovery in manufacturing was uneven across industry segments. Overall lending activity was buoyed by strong demand for residential mortgages, while business loan demand remained low. Labor market conditions were mixed across the District, and employers were reluctant to take on new hires. Crop conditions in the Midwest have varied widely but, on average, appeared substantially less positive than a year ago.
Reports on consumer spending continued to be mixed but, on balance, demand appeared to have softened slightly. Some chain stores noted an improving trend in sales while others reported that results fell short of their plans. Most merchants said that consumers continued to spend on promotion items, and discounters again reported stronger sales results than general merchandisers. A large District auto group reported that sales were softer than anticipated in June. Sales picked up somewhat in early July with the reintroduction of zero-percent factory financing deals, though consumer response was less enthusiastic than last fall. A contact in casual dining indicated that nationwide industry sales had weakened since Memorial Day, and were down from a year ago. The softness was widespread across regions, although the Midwest was said to be weaker than most. Theater and cinema ticket sales were again strong, and one contact noted that this is "one of the best years in the company's history." This is one of the few areas where price increases have stuck with little resistance from consumers. Tourist travel in the region was flat from a year ago, and our contacts universally reported that Fourth of July weekend travel was very good. With few exceptions, significant competitive pressures reportedly kept prices in check.
Construction and Real Estate
Construction and real estate activities were again mixed by market segment, with the residential market remaining very strong and softness persisting on the nonresidential side. Existing home sales were up from a year ago, according to realtors in most areas, and price appreciation remained very strong. The market was said to be very active with listings keeping up with sales. The market for new homes was robust in most areas as well. A contact with one state builders association reported that "every single builder that I've spoken with is busy." A common complaint among homebuilders was the lack of land suitable for development. One contact warned that the rising cost of land was making it increasingly difficult for builders to offer homes that are affordable to first-time buyers. However, sales of luxury homes remained moribund according to both realtors and builders. Nonresidential activity was again relatively slow. Office vacancy rates continued to rise, but at a slower rate. Landlords were said to be offering more generous concessions up front, but the downtrend in rents appeared to moderate further. Contacts described commercial leasing activity as "trend less" and "stagnant."
Reports from our manufacturing contacts suggested that the pace of recovery remained uneven across industry segments. Automakers reported that nationwide light vehicle sales had picked up and were "brisk" in July. The pricing environment remained very competitive, and some producers brought back zero percent financing offers to entice customers into showrooms. Due to strong sales, light vehicle production was up from a year ago and inventories were said to be at or near desired levels. A steel industry analyst indicated that there was a steady increase in steel production, as new orders were strong and inventories for some products remained lean. This contact also noted that prices for sheet steel products were still moving higher, but profitability for the industry remained elusive. A producer of gypsum wallboard forecast that 2002 would be the second best year ever for the industry's shipments, despite continuing weakness in nonresidential construction. Conditions in heavy equipment sectors were mixed, but generally softer than in our previous report. Manufacturers of heavy trucks noted that production slots were full through October, and they were no longer accepting orders for units equipped with engines that do not meet new EPA regulations scheduled to take effect October 1. Truck production is expected to drop off markedly after October, reflecting weak demand associated with substantial uncertainty over the costs of buying and operating the new engines. Demand for construction and mining equipment remained soft, but contacts did note some recovery in the demand for agricultural equipment. Reports from toolmakers were also mixed, with some contacts noting continued pessimism, while others saw "a light at the end of the tunnel."
Banking and Finance
Overall lending activity appeared to pick up modestly, buoyed by a resurgence in mortgage refinancing. On the household side, nearly all of our bank contacts noted a big increase in applications for mortgage refinancing in recent weeks, with one referring to it as "refi mania." At the same time, strong home sales kept the demand for new originations robust as well. Reports on credit card usage were mixed, but generally indicated a moderate increase in volumes. Business loan demand remained sluggish, but contacts suggested that activity "was bottoming out." A contact with one large bank said that there remained "a hesitancy on the part of businesses to commit to capital expenditures." Credit quality on both household and business loans was reportedly unchanged, as were standards and terms for loans. Contacts from nearly all sectors of the economy suggested that the costs of most types of insurance coverage continued to rise. A large insurer based in the Midwest recently announced its second double-digit increase this year in homeowners rates, a move it blamed on increasing claims against property insurance.
Reports on labor market conditions were mixed, and contacts noted that employers were still reluctant to hire workers. With regard to the demand for staffing services in the Chicago area, one contact stated "I would have said two months ago there was a turnaround, but in the last month it has evaporated." There were a few reports of new layoffs in the District, especially in manufacturing. Contacts in some areas, however, noted a seasonal pickup in demand for light industrial and construction workers, as well as project managers. Wage pressures remained subdued, but contacts continued to report increases in non-wage labor costs, particularly for insurance.
Corn and soybean crop conditions varied widely across the District as of mid-July. Hot temperatures and scattered rainfall left many areas short of soil moisture as crops were entering the critical reproductive stage. Crop conditions in Iowa and Wisconsin were better than those in Illinois and Indiana. More generally, crop conditions in the major corn and soybean producing states appear much less favorable at this stage of the season than a year ago. At the same time, demand remained strong, resulting in higher cash prices for corn and soybeans in the past month. While this was a positive for crop farmers, it had a decidedly negative impact on the District's livestock and dairy farmers, who are experiencing considerable pressure on profit margins.