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Reports from Seventh District contacts generally suggested that economic activity remained soft in October and early November. Consumer spending softened somewhat in recent weeks, weighed down by lower light vehicle sales. Home sales remained robust, while nonresidential activity was again weak. Manufacturing activity remained relatively weak. In a familiar refrain, lending activity was again strong on the consumer side and soft on the business side. Labor markets remained fairly slack, and demand for new workers was said to be very soft. As the fall harvest neared completion, crop production forecasts were increased slightly for the District, though output was still expected to be down from a year ago.
Consumer spending weakened further in October and early November, due in part to softening light vehicle sales in the District. Retailers generally indicated that sales results in the Midwest were fairly weak, though mostly in line with lowered expectations. Sales of food and consumables again were said to be stronger than for other goods, particularly big-ticket items such as appliances and electronics. Apparel sales picked up modestly when temperatures dropped but, on balance, remained soft. Inventories reportedly were in line with lowered sales expectations, yet one retailer noted that "stores will be prepared to start discounting goods if necessary" during the holiday shopping season. One contact in casual dining said that sales picked up slightly during October, but had since softened again. Auto dealers from around the District reported that the slower pace of showroom traffic and sales continued through mid-November. Dealers' inventories rose as sales weakened but were not deemed to be excessive. Tourism travel and spending remained relatively flat across the District. Reports indicated that there was little change in the retail pricing environment.
Construction and Real Estate
Construction and real estate activity was slightly more mixed in October and early November than in our previous report, according to contacts. On balance, residential real estate and construction markets were described as "strong" and/or "active," but demand may have softened slightly in recent weeks. Most realtors and builders said that they expect 2002 sales totals to fall modestly short of 2001 levels, but as one contact put it, "you can't have a record year every year." A few contacts indicated that potential homebuyers were becoming more hesitant to "get off the fence," with a few actually backing out of deals recently. Overall, nonresidential activity remained soft. Many of our contacts noted that more businesses were making inquiries about space, but, again, not many deals were being closed. Office vacancy rates remained relatively high in most areas, and downward pressure on rents persisted. A few contacts in the Chicago area said that rents would remain under pressure through 2003, due to both weak demand and a host of development plans in the pipeline. Softness persisted in the demand for light industrial space in much of the District, while interest for retail space remained mixed.
Manufacturing activity in the District remained relatively weak through mid-November. According to automakers, nationwide demand for light vehicles remained relatively soft during the first two weeks of November, much like in October. Inventories were moving up but were said to be in "fair" shape. One automaker reported that while the company was locked into its fourth-quarter production schedule, it was "clearly looking at possible reductions" in the first quarter of 2003, though no changes had been made yet. One contact suggested that the softening demand was partly a "payback" from very strong sales earlier in the year but said that less generous incentives may have also played a role. A major producer of heavy equipment said that its customers' capital expenditure plans hadn't improved at all, and new orders were "surprisingly weak." A contact with one large producer of telecommunications equipment said that the whole telecom industry was "shell-shocked." In contrast, a producer of machine tools noted that orders were slowly increasing, as were requests for price quotes from potential buyers. The strong housing market continued to buoy production of gypsum wallboard, though demand from nonresidential construction sources remained weak. With very few exceptions, manufacturers continued to report having very little pricing power in their markets.
Banking and Finance
Loan demand was again characterized by strength on the household side and softness on the business side. Household lending continued to be driven by refinancing activity. One lender noted that refinancing hit a lull in early October, when long-term mortgage interest rates rose slightly but had returned to "mania" levels by the end of the month. Standards and terms on most household loans were said to be unchanged, although there were some reports that lenders were looking more closely at auto loans. Contacts indicated little change in consumer loan quality, but one said that it was "a bit shakier, on average." Business loan demand remained soft, and many lenders said they saw "no light at the end of the tunnel." Business loan volumes were reported to be flat to down from the previous reporting period. According to one banker, "businesses aren't doing anything--no spending, no capital expenditures, no hiring." Another described loan demand for furniture, fixtures, and equipment as "virtually nonexistent." The quality of banks' commercial loan portfolios was mixed, but contacts generally expressed disappointment that it had not yet improved.
Demand for labor in the District remained very soft through mid-November, though there were fewer reports of mass job cuts. After reporting some fairly significant increases in orders during the summer months, a contact with one large staffing firm said that the recovery in temporary help services "stalled" during the fall. Contacts in a wide array of industries indicated that they were hiring only to replace workers who leave, and retailers generally suggested that they would be hiring less holiday help than in previous years. There were several reports that job postings were drawing significantly more applicants than last year, even for relatively low-paying jobs. With soft labor markets, the vast majority of contacts said that broad-based upward wage pressures remained subdued.
The District's corn and soybean harvests neared completion in mid-November, slowed by precipitation, especially in Wisconsin. The latest USDA report raised forecasted corn output for District states from what was anticipated in October. Still, corn production is expected to be down slightly from last year. Similarly, the soybean forecast was raised from October's, though production is still expected to be down more than 5 percent from a year ago. Crop conditions varied widely, with better yields in the northern and western parts of the District and poor yields in the southern and eastern parts. Reflecting these differences, grain elevators near high-yield areas have had to use outside storage, while business at elevators near low-yield areas has been limited, as nearby farmers have stored crops on their farms.