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After a modest but abrupt slowdown in late February, economic activity in the
Seventh District showed few signs of improvement in March and early April. Many
contacts suggested that the February slowdown resulted from heightened uncertainty
preceding the war with Iraq. The war itself appeared to have only a limited
impact on economic activity and had yet done little to change the overall level
of uncertainty in the economy. Auto dealers, some other retailers, and realtors
noted that customer traffic slowed in the first few days of the war but quickly
rebounded. Manufacturers and bankers said that the war was perhaps the latest
reason that many businesses continued to put off capital spending, hiring, and/or
borrowing. Progress in the war helped bring down oil prices, though many businesses
were still struggling with higher input costs and very little pricing power.
Although drought worries have waned, agricultural concerns lingered as farmers'
cash flows were hampered by delayed government payments, and dairy operations
struggled with low milk prices.
Overall consumer spending was weak in March and early April. Retailers indicated
that sales results in March generally met their conservative expectations, although
they continued to use heavy discounting to move merchandise. Inventories were
said to be in line with sales, as merchants remained vigilant in controlling
stocks. District auto dealers reported that light vehicle sales improved in
March from low February levels and were a little better than expected given
the war. However, showroom traffic slowed in early April despite a new round
of manufacturers' incentives. Light vehicle inventories were generally high,
and most dealers reported that they were ordering fewer units from manufacturers.
Tourism-related activities were flat to down in most areas, although one contact
indicated that hotel occupancy rates in Chicago were up from a year earlier.
One major theater chain noted that ticket sales were off about 10 percent from
year-ago levels, which this contact said was "partly a product-driven decline."
Businesses across the region remained very cautious about their spending and
hiring plans. Most contacts indicated that there has been no change in economic
conditions that would warrant an increase in capital expenditures, and many
continued to delay planned upgrades and expansions. However, some businesses
were "sitting on cash," which one contact said could boost capital spending
quickly once aggregate demand picks up. The hiring environment remained very
weak in most areas as well. Though the majority of business contacts suggested
that payrolls were relatively unchanged in recent weeks, reports of layoffs
continued to outnumber reports of new permanent hires. Demand for temporary
help also remained very weak, although one large staffing services firm said
that year-over-year growth rates had stabilized in March after several months
of steady declines. With margins being squeezed by increasing cost pressures
and a lack of pricing power, businesses from across the region continued to
focus on cutting costs as a means to improve profits.
Construction and Real Estate
Overall conditions in real estate and construction softened slightly since our
last report. Realtors said that existing home sales were still strong but may
have leveled off in recent months, while builders suggested that sales and construction
of new homes slowed somewhat in March. However, some of the slowdown was weather
related as very cold temperatures in much of the District made it difficult
for builders to break ground. One builders group also suggested that potential
homebuyers were rushing to lock in historically low mortgage interest rates
before they begin to rise, a trend that favored existing and nearly complete
spec homes. Nonresidential real estate activity was stagnant in most of the
District. Demand for office space remained very weak, and most contacts suggested
that vacancy rates continued to rise, albeit slightly. Commercial realtors in
a few areas noted some increase in leasing activity, but it was driven by lease
renewals and "tenants shuffling around," rather than new demand. However, one
contact in the Chicago area reported a sharp increase in the number of office
property tours compared with a year ago, though this had not yet led to any
net absorption. As a result of continuing weak demand, most contacts have again
pushed back their forecasts for a recovery in the office markets. There was
little change in light industrial or retail activity, but there were a few reports
of a pickup in demand for large-scale projects in the health-care, pharmaceutical,
and federal government sectors.
Manufacturing activity in the District softened slightly in late February and
March, partly due to slower auto production. Nationwide light vehicle sales
rebounded modestly in March, from February's low levels. However, inventories
remained high, and second-quarter light vehicle production plans were down from
both first-quarter and year-ago levels. Demand for heavy equipment was still
soft in most segments, although a weaker dollar helped boost demand according
to one producer. While conditions in the heavy truck industry generally remained
weak, a manufacturer of heavy truck engines noted that demand firmed somewhat
in the first quarter, leading the company to boost production. A large manufacturer
of home appliances said that shipments in the first quarter were down slightly
from a year earlier. Many small manufacturers indicated that production and
new orders remained weak. However, a few in the packaging materials and tool
and die industries reported steady volumes, and one in paper products even planned
to expand its workforce.
Banking and Finance
Overall lending activity appeared to slow slightly in March and early April.
Household loan demand softened somewhat. Many bankers said that refinancing
activity remained robust but had slowed from the torrid pace earlier in the
year. Some lenders also noted that credit card volumes and auto loan demand
had tapered off. Standards and terms on household loans were largely unchanged,
but overall credit quality may have slipped somewhat. There were a few new reports
of increases in delinquencies and defaults, particularly on home-equity and
mortgage loans. Business loan demand remained weak, with some lenders describing
the market as "stagnant" and "lacking energy." Most bankers said that overall
commercial loan volumes were flat to down slightly. However, one large bank
reported that demand picked up in March, with at least some of the increase
due to existing customers expanding their businesses. Standards and terms for
commercial loans were largely unchanged. Reports on business loan quality were
mixed but generally suggested a slight improvement. One contact noted a rise
in charge-offs related to fraud, and several indicated that banks continued
to add to their loan-loss reserves.
Prices and Employment Costs
Contacts continued to report increases in some input costs, but an intensely
competitive pricing environment helped to keep broad-based price pressures in
check. Manufacturers again saw increases in energy, steel, aluminum, and petroleum-based
input costs. Agricultural contacts also noted rising fuel and nitrogen costs,
though many farmers had previously locked in lower prices. Employment costs,
outside of health insurance premiums, remained largely subdued in recent weeks.
There were no new reports of upward pressure on wages. In fact, one temporary
help contact said that many employers were pushing across-the-board pay cuts
to contain costs. Few businesses were able to pass along input cost increases.
Rather, many suppliers of goods and services indicated that their customers
(including large manufacturers and retailers) continued to exert pressure on
them to reduce prices, putting a further squeeze on margins. Contacts suggested
that retail competition remained intense, and most were using more and steeper
discounts to move merchandise.
With spring planting under way in some areas, drought concerns have been mitigated
by recent precipitation across much of the District. However, with soil moisture
reserves low, timely rains will be more essential for good yields this year.
Cattle prices remained high, while hog prices were lower than a year ago. The
adverse impact of dropping milk prices on dairy farmers has spread to their
suppliers, as accounts payable were increasing at an "alarming" rate. To generate
cash, some dairy farmers were selling their cows and renting their land. In
areas that had poor yields last year, there were reports of farmers being unable
to pay off their operating lines of credit. Cash flows were also hurting from
delayed government payments due to changes in federal programs. All of these
factors have resulted in more demand for operating loans. Even so, farmland
values have increased because of continued demand from investors and recreational
users, in addition to urban pressures and land exchanges for tax purposes.