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The Seventh District economy continued to expand at a moderate pace around
the turn of the year. Consumer spending remained relatively soft, but business
spending continued to pick up. Construction and real estate activity experienced
a typical seasonal lull. Manufacturing output was steady at robust levels, and
new orders were still strong. Bankers said that demand was down somewhat for
household loans, but up slightly for business loans. High input costs persisted,
but retail price pressures were largely subdued. The farm sector continued to
profit from sales of bumper crops and relatively stable livestock prices.
On balance, consumer spending was again fairly soft in December and early January.
Most retailers said that holiday sales were at the low to mid range of their
expectations, as a strong finish to the shopping season largely offset a relatively
weak start. Sales of electronics, jewelry, and entertainment goods (movies,
books, music, etc.) were strong, while sales of appliances were weaker. Apparel
sales picked up as the weather cooled in the region. Merchants also suggested
that solid increases in gift card purchases will likely boost January's sales
results. District auto dealers reported better-than-average light vehicle sales
in December, although results varied greatly by make and model. Light vehicle
inventories remained somewhat bloated. Some dealers noted a slight pickup in
service and body shop sales from weak levels. Tourism and travel was mixed,
as contacts in Wisconsin and Illinois reported increases from the previous year,
but those in Michigan noted declines.
Business spending continued to increase modestly. Most firms surveyed indicated
that they planned to increase capital outlays in 2005 from 2004 levels. Of those
that planned to increase spending, most had already begun to place orders for
those outlays. The remaining firms said they would begin placing orders in the
first half of the year. Airlines suggested that business travel held up in December,
especially on international routes. With regard to hiring, temporary help firms
reported a normal seasonal slowdown in December's orders. Still, year-over-year
growth remained solid. Demand for professional and technical workers was said
to be stronger than other categories, while it was weaker for office and clerical
workers. Fees for temp-to-perm conversions and permanent placements continued
to rise. Outside of the temporary help industry, fewer contacts reported new
permanent hiring, but fewer also indicated that they were laying off workers.
Reports on construction and real estate activity were mixed. Realtors and builders
in many areas noted a typical seasonal slowdown in December, while some reported
a slight pickup in activity during the first week of January. Nonresidential
activity also experienced a seasonal lull during December. Despite a slowdown
in leasing activity last month, some office markets saw significant net absorption
for the fourth quarter as a whole. However, contacts in the Chicago area said
that the office market remained soft, with little net absorption. In general,
office rents remained under downward pressure, though one contact reported that
landlords in a "smattering of markets" were able to increase rents modestly
in the fourth quarter after several years of decreases. Leasing and construction
of light industrial space picked up somewhat and retail activity remained strong.
Manufacturing output was relatively steady in December, at high levels. Steel
production was solid, although producers reported a slight slowdown in December.
However, worldwide demand for steel products remained strong and contacts expected
production to increase in coming months. Machine tool makers indicated that
new orders and shipments were strong, with one firm adding that business was
"the best it has been in years." Production of heavy equipment remained strong
in December. One producer of heavy capital equipment indicated that production
and shipments in December were buoyed by expiring tax incentives; looking ahead,
this company's order backlogs had eased and its inventories were slightly higher.
One contact in the heavy truck industry noted that "the window to replace the
fleet before the 2007 change in environmental regulations is closing," with
order books already filled for the first half of 2005. Trailer orders were reportedly
strong as well. Nationwide light vehicle sales exceeded expectations in December,
which helped bring inventories down to more desirable levels. However, inventories
were still high and some automakers cut their production plans for the first
Overall lending activity was slightly softer in December than during the previous
reporting period. On the consumer side, one large bank reported slower growth
in revolving credit, and many other banks said that mortgage lending had decreased.
Margins continued to be squeezed, especially for mortgages. Standards and terms
on the household side were largely unchanged, and quality was stable in most
areas at good levels. On the business side, lending was still sluggish, although
some bankers reported very slight increases in loan volumes. A contact with
one large bank, however, noted a pickup in loan applications in the pipeline,
which may boost volumes in coming months. Margins were still thin on business
loans, standards and terms were largely unchanged, and loan quality continued
Overall cost and price pressures remained in check at the end of 2004. Broad-based
wage gains remained very modest, though increases were greater for workers in
professional and technical occupations. Manufacturers reported that materials
cost pressures eased somewhat toward the end of the year, but were still intense.
Moreover, input costs were not expected to decline much further in the first
quarter, and some were even expected to rise again. Some retailers plan to increase
prices on selected merchandise (notably appliances and toys) to offset cost
increases. However, many contacts said that the retail environment remains too
competitive to increase prices substantially.
Agricultural contacts reported that farmers were upbeat. Net farm income jumped
last year as a result of profitable livestock operations and record corn and
soybean harvests, much of which was forward-contracted at unusually high prices.
Farm income was also supported by federal loan deficiency payments, which are
tied to spot market prices. The biggest problem reported was the slow movement
of crops stored in the open air, which can be damaged by precipitation. Yet
few storage facilities were under construction, which one contact thought was
due to the large increases in steel costs. Farmland prices again moved higher
amidst continued strong demand from non-farm investors and recreational buyers.