November 26, 2003
Federal Reserve Districts
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Summary. Seventh District economic activity improved modestly again in October and early November. Consumer spending softened slightly from the late summer pickup, but was still stronger than earlier in the year. Business spending generally continued to increase, and firms were again adding temporary workers. Housing markets remained very robust, and weak commercial real estate markets showed a few signs of recovering. Manufacturing activity continued to rise, with several key industries again seeing strong new orders. Overall lending activity was relatively flat. Upward price pressures at the retail level remained largely subdued, but more producers reported increasing leverage over pricing. As the harvest neared completion, District corn yields were up from a year ago while soybean yields were down substantially. However, higher agricultural prices helped soften the impact on net farm income.
Consumer Spending. Reports on consumer spending were mixed. Retailers said that sales softened slightly in October and early November, but some said weather may have hampered sales. Inventories were generally in line with sales expectations, though one merchant noted that they were trending on the high side. Expectations for the upcoming holiday shopping season were mixed. Some merchants are expecting little improvement from last year, but the majority of retail contacts are anticipating a stronger season. District auto dealers said that light vehicle sales weakened since our last report. According to one dealer, "sales were good, now they're just average." Many dealers had re-stocked their lots in September and October after a strong sales surge during end of model-year clearance events. Most dealers were comfortable with current stocks, but some were concerned that softer sales may leave them with more vehicles than they would like. Tourism activity was largely unchanged from our last report.
Business Spending. Business spending appeared to increase again in October and early November. The temporary help services industry continued to improve markedly. One large firm has recorded several sequential weeks of strong growth in worker assignments, as well as increases in average hours per assignment. This firm said that the industry was "unambiguously" in the midst of a recovery. Moreover, many contacts suggested that the pickup in temporary help demand was widespread across industries, occupations, and regions. Still, on the whole, many of our business contacts suggested that firms remained reluctant to add permanent hires, although more were considering it. Capital spending plans have changed little in recent months. While many businesses continued to talk about capital expansion, much of their spending was again for repair, maintenance, and replacement of existing equipment.
Construction/real estate. Residential real estate markets remained very robust; and while generally weak, commercial markets showed some signs of firming. Many contacts said that low mortgage interest rates continued to drive prospective homebuyers to view properties. The first-time-buyer segment was still strong, and contacts in some areas said that the luxury segment was picking up as well. By contrast, contacts in a few areas said that the middle market had softened somewhat. On balance, commercial real estate activities remained soft, but there were isolated reports of improvement in some segments. A large office property holder in Chicago said that the number of property showings and leases in process increased significantly in October and November, after falling off during the summer. According to this contact, many prospective tenants were speculating that the office market was "near the bottom," and were trying to lock in leases before rents began to rise. Indeed, rents have stabilized in many areas. However, tenant improvement costs were described as "huge" by one contact, and still increasing. There were also a few reports of firming demand for light industrial space, though here too, vacancies remained elevated and pricing was weak.
Manufacturing. Overall manufacturing activity continued to rise in October and early November. A contact with one large producer of household appliances said that shipments continued to pick up, buoyed by strong housing activity and inventory rebuilding by retailers. Nationwide demand for light vehicles reportedly firmed in November, following soft sales in September and October that left inventories higher than desired, and prompted some automakers to raise incentives again. District automakers reported no major changes to fourth quarter production schedules. Orders for medium-duty trucks remained strong, and one contact said that new orders for heavy trucks increased as freight volumes picked up. In addition, many trucking firms were said to be making long-delayed purchases of replacement rigs. Orders for other heavy equipment, particularly construction equipment, were up as well. Machine tool makers reported increased orders with one reporting that his firm was "busier than at any other time in the last five years." Contacts said that domestic demand for steel products was generally flat, but domestic producers were satisfying a greater proportion of that demand. Strong housing activity nationwide continued to boost gypsum wallboard shipments, which one industry contact said will likely set a new record in 2003.
Banking/finance. Overall, lending activity changed little in recent weeks. Household lending was mostly flat, though one banker noted an increase in home equity lending. Mortgage refinancing applications remained well below levels reached earlier in the year, while new originations were fairly strong. One lender said that intense competition for a dwindling pool of potential mortgage borrowers was squeezing margins. Consumer credit quality was said to be improving with declines in both delinquencies and defaults. Commercial loan demand remained weak and loan volumes were relatively flat. One banker said that merger and acquisition activity continued to rise from low levels, which this contact said was evidence of a general pickup in economic activity. Overall business credit quality also improved modestly.
Prices/costs. Upward price pressures generally remained subdued, though more firms reported improvement in pricing power. Producers of steel and some heavy equipment announced price increases from low levels. Prices for gypsum wallboard increased in recent months, but were generally flat from a year earlier. By contrast, a large manufacturer of home appliances indicated that prices continued to decline, primarily because of import competition. Contacts again said that rising energy, insurance, and employee benefits costs were pressuring margins. Reports provided little evidence of widespread price increases at the retail level as merchants continued to use heavy discounts to move merchandise.
Agriculture. With the harvest nearly complete, corn yields have exceeded expectations, while soybean yields are coming in below previously lowered expectations. Some farmers who had overestimated soybean yields ended up pre-selling a larger-than-desired portion of their crop at lower prices. As a result, these farmers did not fully benefit from the recent rise in spot soybean prices. However, crop insurance payouts will help offset some of the lost income. Corn prices were relatively flat, but higher ethanol production provided an outlet for farmers to sell corn at a better return. Many farmers were able to leave crops in the field longer to dry, which helped offset higher costs of drying after harvest. Contacts suggested that some farmers were sharing farm equipment to trim capital costs. Farmland values and rental rates continued to rise. Concerns about loan repayments were alleviated somewhat by rising agricultural prices and government loan programs. Drought conditions persisted in the western portion of the District.