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Economic activity in the Seventh District continued to expand at a modest pace in April and May. Consumer spending and business outlays rose at rates similar to those reported earlier in the year. Changes in labor market conditions were mixed by industry and location. Residential construction and real estate activity declined further in most areas, while nonresidential construction expanded slightly. Conditions in manufacturing were little changed from the past reporting period. Household lending declined while business lending increased at a slower rate than in previous months. Energy costs rose significantly, but on balance other prices increased at a steady rate. Wage increases were similar to those in the previous reporting period. Corn and soybean planting recovered from early weather delays, and by the end of May crop progress was normal by seasonal standards.
Consumer spending continued to increase at a gradual rate. Retailers said that sales in April were soft due to the early Easter and bad weather but then picked up in May. Electronics were selling well, while housing-related items, such as gardening and home décor, were soft. One industry analyst noted a dichotomy between the solid results at luxury retailers and the weakness at discounters. Inventories were in line with desired levels. Vehicle dealers reported steady sales overall. Fuel efficiency remained an important concern of vehicle buyers, with consumers opting for smaller engines or economy cars. A restaurant chain reported a solid increase in sales but added that results for quick-casual were better than sit-down restaurants. Tourism was down slightly in Michigan in relation to last year, and contacts were concerned that high gas prices would lead to further declines in travel during the summer season.
Business spending rose again in the District. Capital spending increased at a modest rate. There was one report of a new investment project from a packaging materials manufacturer, while the majority of contacts suggested their capital outlays were continuing to rise according to previous plans. Truck freight loadings declined modestly. Changes in labor market conditions were mixed by industry and location. Toolmakers, a pharmaceutical company, and a retailer indicated they were adding workers, while a construction materials manufacturer and a homebuilder reported layoffs. A contact in Rockford, Illinois noted a decline in commercial construction jobs after two big development projects were recently completed. An analyst in Illinois revised down a forecast for job growth this year, noting some softer demand in professional and business services. Billable hours for temporary placements in low-skilled positions declined slightly, while growth in hours for professional and technical workers was steady. A staffing firm said it expected these trends to continue in the next few months, but it was getting "some signals" that its large customers were planning to add more temps later this year.
Construction and Real Estate
Residential construction declined again in most areas. Inventories of speculative new homes were being slowly worked down throughout the District, but existing homes for sale remained high. Foreclosures increased in Indiana and Michigan. Nonresidential construction expanded slightly from a year ago. A developer from Indiana said that commercial building was strong, with petrochemical, highway, and large retail at the forefront. Additionally, in some locations the medical segment was strong, however there was concern that the segment could soon become overbuilt. Industrial development was sluggish, and retail building was slowing in some areas. Pre-cast concrete components were in short supply.
Conditions in manufacturing were little changed compared with the previous reporting period. A steelmaker said the market was "relatively calm" though a bit slower than in February and March. Steel inventories continued to move lower, and one contact remained confident that they would be down to desired levels by the end of the second quarter. Manufacturers of machine tools and equipment parts said they were "very, very busy" with sales growth in the mid-single digits. Demand for some agriculture machinery was also strong, particularly for products purchased by big farms. Contacts said that sales of heavy equipment were unchanged between May and April, but in general demand continued to step down from the highs of last year. New truck orders from domestic shippers remained weak, in part reflecting the increased costs of operating equipment that meets the new engine emissions requirements. However, industry analysts said that, after numerous temporary plant shutdowns in April, backlog-to-build ratios had moved from very low levels up into range that suggested heavy truck production would stabilize. An automaker thought that light vehicle inventories were "well in hand" and that vehicle production could be a positive contributor to GDP in the second half of the year. Contacts said that shipments of wallboard and cement continued to be held back by the weakness in residential construction.
Banking and Finance
Lending activity was steady from the previous reporting period. Mortgage applications for home purchases and refinancing both declined. New home equity credit issuance continued to decrease, but outstanding balances were little changed. Mortgage delinquencies edged up further during May. One contact said that banks in areas with high foreclosures were trying to work with troubled borrowers to avoid forcing them into foreclosure, and in some instances bankers were forgiving portions of the loan balances of distressed borrowers who were able to sell their home themselves. Business lending rose at a slower pace than in previous months. Standards and terms for commercial loans were little changed, and pricing remained competitive. Business loan quality was "deteriorating slightly on the edges," but one contact in Michigan said that there were "surprisingly few problems," given the weakness in the auto industry.
Prices and Costs
Outside of energy, nonwage price pressures and overall wage increases were similar to those in the previous reporting period. Almost every contact noted higher fuel costs. A retailer said that higher fuel prices had not yet affected their wholesale prices but expected they would eventually. Raw materials prices were generally steady or down: spot steel prices were flat, while scrap prices were down. Wallboard prices fell. At the consumer level, there were reports of increases in restaurant prices, while hotel room rates were stable. A few contacts noted concerns that the minimum wage increase would result in higher labor costs. A staffing firm reported that it was increasing its pay rates at a slower pace, but its billing rates rose at a steady pace.
After a slower-than-usual start due to cold and rain, corn and soybean planting in the District picked up during the reporting period; corn and soybean planting even surpassed typical progress in most areas by the end of May. Western Iowa experienced the worst delays as recent precipitation caused flooding, prevented fieldwork, and led to some replanting. The weather did not cause any noticeable shift from previous planting intentions regarding corn versus soybeans. Reports on crop conditions were mixed, ranging from "stunted" to "excellent." Corn and soybean prices rose from late April to the end of May, as expectations developed that a dry start to the summer might lower yields in the Corn Belt. There were indications of tight supplies of corn in areas where ethanol plants began production. Milk and hog prices moved higher, while cattle prices were lower.