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Economic activity in the Seventh District continued to expand at a moderate pace during January and February. Spending by both consumers and businesses increased again. Labor market conditions improved modestly. Manufacturing activity remained strong. Residential construction and real estate activity softened, while commercial real estate activity increased at a slow pace. Mortgage demand was down, but the expansion in commercial lending gained some momentum. Cost and price pressures remained firm in January and February. Warmer weather allowed some field preparation for spring planting, but the lack of moisture in portions of the District kept farmers cautious.
Consumer spending continued to increase modestly in January and February. Retailers said that sales in January were boosted by gift card usage; one retailer noted that customers often spent more than the card was worth. Sales in February were said to be "decent" and "at or above expectations." Apparel sold well. Retail inventories were at or slightly below desired levels. Some hardware stores were hurt by the lack of snowfall in the region. In contrast, some restaurants reported that the good weather helped their business; overall, area restaurants reported very strong growth in sales compared to a year earlier. Auto dealers said that sales of new vehicles were soft, but light truck sales were showing surprising resilience to high gas prices. Tourism strengthened in the District, with bookings in some areas running ahead of a year ago.
Business spending and hiring expanded again. For the most part, District firms were holding to their existing plans to increase capital spending. The strongest reports came from toolmakers, which planned to expand capacity through purchases of both plant and equipment. In contrast, contacts in steel, trucking, and rail shipping maintained relatively cautious capital spending budgets. Trucking activity was brisk in January then slightly softer in February. Overall labor market conditions improved modestly. Employment increased for manufacturers of heavy equipment and fabricated metals, while retail employment was steady. A few firms noted that they were outsourcing some information technology work abroad. Staffing services firms reported that temporary hiring increased steadily again in most areas in the District, though Detroit continued to experience stagnant demand. No major layoffs were reported.
Construction and Real Estate
Construction and real estate activity was mixed by both location and market segment. Residential activity continued to slow from record levels. Builders in Michigan said that all segments were slow, while contacts in Wisconsin reported that sales of mid-priced homes were particularly sluggish. The supply of existing homes for sale was growing, as was the number of spec homes on the market. New home prices were holding steady, and builders were not passing along higher materials costs. Existing home prices were soft. Commercial construction and real estate continued to expand at a slow pace. One contact in the Chicago area suggested that development was being restrained by higher construction costs. Commercial vacancy rates were generally stable.
Manufacturing activity remained strong during January and February. Demand for heavy equipment continued to be robust. Sales of mining equipment remained solid, and one contact expressed concern that the sector would run into production constraints in the coming months. Construction equipment orders increased again, albeit at a slower pace than last year. Still, order backlogs for construction equipment remained high. Based primarily on the strength in heavy equipment production, activity in fabricated metals industries remained solid, and order backlogs were growing. The steel sector continued to record strong production. Steel inventories were low; one contact said, "Service centers are showing impressive restraint and ordering just what they need." Heavy- and medium-duty truck orders were brisk, reflecting in part the pre-purchase of trucks before new EPA standards go into effect at the beginning of next year. One industry analyst expected 2006 order books to be full by May, at which time orders would fall off precipitously. Nationwide, light vehicle sales fell during February; however, one contact noted that an increase in fleet sales cushioned the decline. Vehicle inventories were said to be high, which, according to one contact, would likely hold back production in the coming months.
Banking and Finance
Lending activity moderated further. Bankers noted additional declines in applications for both home-purchase and refinancing mortgages. Use of existing home equity lines of credit remained stable, but one bank in Michigan said it had seen a decline in demand for new home equity loans; some customers were withdrawing their applications because appraisals showed that they did not have as much equity in their homes as they had expected. Mortgage spreads were down and pricing was said to be "aggressive," with a steady number of lenders chasing a smaller number of borrowers. Reports on mortgage credit quality were mostly favorable, though there was a noticeable rise in delinquencies and foreclosures in parts of Michigan dominated by the auto industry. Commercial lending continued to expand in January and February, and at a slightly faster pace than in the previous reporting period. Both loan volume and business use of existing credit lines picked up. A banker in Michigan said that demand was increasing for leveraged buyout financing. Commercial credit quality was in good shape, with low ratios of non-accruing loans and charge-offs.
Prices and Costs
Price and cost pressures remained firm in January and February. Prices for plastics and other petroleum-related products continued to increase, and copper, cement, gypsum wallboard, and paint prices all were up since the last report. Spot steel prices stabilized at high levels, though one contact said that contracted prices continued to move higher. Several contacts reported stable fuel costs. As a result, there were no reports of new fuel surcharges, and a few large firms said that they had begun to obtain reductions in surcharges. Price reports at the retail level were mixed. A regional retail chain said that customers were less resistant to price increases and that it had no problem passing along cost increases. In contrast, another retailer had not seen any upward pressure in prices of national brands. Wage increases generally held steady.
Sentiment in the agricultural sector was cautious, with many farmers making purchases only as needed. Unseasonably warm January weather aided field preparation in the District. However, the persistent lack of moisture this winter is leading farmers in Illinois and Iowa to plan for an extended drought. For example, some farmers switched their crop insurance coverage to protect more against yield losses than price declines. Relatively high input costs for corn did not induce many farmers to deviate from their normal corn and soybean rotations. Fertilizer costs appeared to peak and have started to come down in some areas. Corn and soybean prices were up from year-ago levels, leading farmers to forward contract more of the 2006 crop than they have done in past years. A contact reported that the prices for corn offered by ethanol producers were better than the prices offered by grain elevators.