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Economic activity in the Seventh District continued to expand at a moderate pace during October and early November. In general, spending by both consumers and businesses continued to increase at a modest pace. Hiring expanded further in most locations and industries. Residential construction and real estate activity was little changed or down from the previous reporting period, while growth in commercial activity slowed. The manufacturing sector expanded again, and growth firmed in some sectors. Mortgage demand was down, while commercial lending activity growth continued to slow. Cost and price pressures remained firm in October and early November. The corn and soybean harvests in the District were both expected to be the second largest ever. Crop storage was at a premium, due in part to continued transportation issues.
Consumer spending continued to increase modestly in October and early November. A general merchandise retailer in Iowa said that sales were running above plan, noting that a recent cold spell helped boost sales of clothing and alternate heating sources, such as wood and corn pellet stoves. Retailers in Michigan reported an improved sales climate, and an industry analyst said that sales in Illinois were "on target." Retail inventories in the District were at or below desired levels. District auto dealers said that sales remained slow during the early weeks of November, and one worried that there would be little pick up in the near term. A restaurant chain said that sales in the Midwest continued to increase but at a slower pace than earlier in the year. Fall tourism activity in the District was up modestly from last year.
Business spending and hiring continued to expand at a gradual pace. In general, District firms maintained their earlier plans to increase capital spending. Contacts reported little change in overall labor market conditions, with employment continuing to increase in many locales and in a wide range of sectors. One exception was in the auto industry: several small suppliers reduced employment in recent weeks, and two automakers noted restructuring plans that include plant shutdowns and cuts in both salaried and hourly workers. Staffing services firms said that demand picked up steadily again in all District states except Michigan. One staffing firm reported that demand for office and clerical workers was growing faster in recent months, as businesses sought to add more contingent staff. Contacts noted a continued tightening in labor markets, with recruiting for some skilled trades becoming more difficult.
Construction and real estate activity was mixed by both location and market segment. Most respondents indicated that residential activity was unchanged from the previous reporting period, although there were some references to slowing and no reports of activity picking up. Many contacts expected residential activity to weaken in the next year, with one from the Chicago area saying, "The single-family home building craze seems like it is slowly coming to a close." Commercial construction and real estate activity continued to expand steadily, though some contacts felt the pace of growth in the District lagged the pace in the rest of the country. Industrial development in Indiana picked up in recent weeks. In the office market, activity in the Chicago suburbs continued to be brisk, and some developers were offering fewer concessions to close deals; but in the central business district, contacts were concerned about overbuilding. Construction contractors reported no outright materials shortages, though some had to expand their search for some products such as siding.
Manufacturing activity continued to expand in October and early November, with some sectors reporting a strengthening in demand. Orders for construction equipment improved further, led by sales of large machinery. Toolmakers noted strong orders growth, with most contacts expecting the strength to persist into at least early next year. Conditions in the steel industry were said to be "very strong," with high demand from many industries. Steel inventories were below desired levels. Growth in cement shipments continued to be strong, helped in part by the boost in construction activity due to unseasonably warm weather. Orders for heavy trucks ebbed and flowed around very strong levels. Contacts in the agricultural equipment industry anticipated that demand would soften in the fourth quarter. Automakers reported that U.S. light vehicle sales in early November were below their expectations and basically unchanged from October. Still, they expected sales to pick up in response to a new round of incentives. Light vehicle production plans were left unchanged.
Lending activity moderated further. Bankers reported declines in applications for both home-purchase and refinancing mortgages. Mortgage credit quality was in good shape and delinquencies remained low, though one banker said home equity loan delinquencies had ticked up again. Commercial lending continued to expand, though at a pace that was slower than earlier in the year. One banker said that businesses' use of their credit lines remained well below historical norms. Contacts noted that competitive pressures continued to lead to easier standards and terms and to narrower spreads for commercial loans. In addition, a Chicago-area banker said that excess capacity in mortgage lending continued to squeeze margins in that line of business. Demand for agricultural loans picked up during the fall months.
Price and cost pressures remained firm in October and early November. Prices of most oil-based materials increased. Prices of wallboard, cement, steel, and many other construction materials also rose. New or additional fuel surcharges continued to be reported for a broad range of products and services, and one contractor noted, "We've had fuel surcharges tacked on to all kinds of invoices." Cost pressures were expected to persist into next year, and one commercial developer was budgeting for building expenses to increase much faster than they had in "a few years." Contacts said they were able to pass on at least part of the higher costs, though some were only able to do so after a time lag. Retail prices increased modestly. One Iowa retailer felt that customers were offering little resistance to energy-related price increases. Wage gains held relatively steady in most industries.
The 2005 corn and soybean harvests were expected to be larger than any prior harvest with the exception of last year's bumper crop. Corn and soybean cash prices seemed to stabilize in the District, as transportation of crops improved somewhat. Still, contacts indicated there continued to be a shortage of rail, barge, and trucking capacity. With crop storage facilities full, corn was being stored on the ground, including as much as 20 percent of the Iowa corn harvest. Net farm income was expected to be lower than last year, but no problems were anticipated outside of the areas that had been hit hard by the drought.