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Economic activity in the Seventh District remained sluggish in July and August. Consumer spending was flat and labor market conditions weakened. Residential construction declined and nonresidential construction showed further signs of slowing. Manufacturing activity was steady. Consumer lending was little changed, while there was some growth in business lending. Cost pressures from material and energy prices remained elevated, while wage pressures continued to be low. The condition of corn and soybean crops improved.
Consumer spending was little changed since the previous reporting period. Although the boost from federal tax rebates subsided, the back-to-school season and increased discounting and promotions sustained retail sales. Spending on automobiles remained slow. Consumers continued to tighten their budgets and bargain shop, trading down to lower priced brands and fast-food restaurants and reducing spending on discretionary items such as furniture and apparel. Gasoline consumption rose as gas prices fell. Contacts indicated, however, that travel remained local, to the detriment of tourist destinations far removed from metropolitan areas. Light vehicle sales remained low, although demand for smaller cars stayed strong. Several contacts noted a slight positive impact on sales from General Motor's employee discount pricing program.
The pace of business spending slowed from the previous reporting period. Several contacts reported delaying or postponing capital spending projects given reduced levels of activity in their industry or uncertainty over near-term prospects. For instance, a manufacturing contact put off plans to replace capacity from older plants they had shut down with newer facilities. In contrast, another contact noted that investment in emerging technologies, especially "green" energy, had increased. Labor market conditions in the District weakened further in July and August. The District rate of unemployment rose substantially in July. Contacts reported additional lay-offs in the automotive and financial services industries, and job growth continued to be weak in construction, retail trade, and business services. In addition, a staffing firm reported that billable hours for professional services such as IT, engineering, finance, and accounting declined from the previous reporting period. The demand for skilled labor in manufacturing, however, remained strong and shortages of such workers continued to be reported. A pharmaceutical manufacturer reported strong growth in new hires.
Construction and Real Estate
The pace of construction slowed from the previous reporting period. Residential construction declined at a faster rate in July and August. A contact noted that activity was now so low that some residential builders had shifted toward small-scale commercial projects. The lack of demand for new construction was attributed to both the inability of potential buyers to secure credit or sell their existing home and substitution into the existing home market due to the continued decline in their relative price. Project delays and cancellations persisted, and credit remained tight for new developments. However, absorption rates of residential housing improved. Residential rents declined in some areas of the District. Nonresidential development and construction showed further signs of slowing during the reporting period. Construction of retail outlets, in particular, was mentioned as being very weak, and several contacts expressed concern about overbuilding in the sector. The availability of financing for commercial projects also continued to be of concern. Contacts cited fewer equity investors and tighter lending standards by banks as factors delaying existing projects and limiting new developments.
Manufacturing activity in the District was steady this reporting period. Business conditions, in general, were solid for energy and commodity manufacturers. Demand for heavy machinery used in sectors such as oil and gas extraction, mining, and agriculture remained strong. Export-oriented industries also continued to do well despite a recent slowing in demand from Europe, rising transportation costs, and the recent appreciation of the dollar. Activity remained robust in the domestic steel and specialty metals-related industries. There were also reports of strength in demand from contacts in the food and pharmaceutical manufacturing industries. However, the demand for residential construction equipment remained weak, and there was additional softening in sales of commercial construction equipment. Demand also remained soft for manufacturers with close ties to housing, such as the home appliance industry. Automakers reported that the domestic vehicle market remained weak in July and August, especially for larger vehicles, and additional production cuts were planned for slow-selling larger products.
Banking and Finance
Credit market conditions in the District tightened from the previous reporting period. The volume of consumer credit was little changed, despite a decline in approval rates due to continued tightening in lending standards. Mortgage originations remained low and foreclosures continued to rise in some areas of the District. However, a contact in this industry expressed the opinion that the recent federal housing stimulus bill had aided FHA lending. Refinancings and home equity loans were little changed in July and August. Nonetheless, a contact reported eliminating nearly all home equity products due to secondary market tightening. Some growth was reported in business loan demand, particularly for commercial and industrial loans to small and middle market businesses. Still, several banks noted they were closely monitoring the creditworthiness of business customers. Concerns about the residential and commercial real estate markets persisted and greatly limited the availability of credit for construction loans from banks.
Prices and Costs
Despite some recent declines, commodity, food, and energy prices were again cited by contacts in various industries as contributing to elevated input costs. Shortages and tight supplies were also noted for certain metals and energy products. Input costs were also reported to be boosted by the imposition of fuel surcharges, credit card transaction fees, and higher wholesale prices for retailers. There were also several reports of pass-through of these higher costs to downstream prices, albeit to a very limited extent for industries such as residential construction and retail trade. In the financial sector, several contacts in the mortgage industry reported pressure on margins for residential mortgages from recent pricing increases in the secondary market. Wage pressures remained limited outside of skilled labor positions that continue to experience shortages.
Crop conditions improved in the District as sufficient moisture remained from earlier rains to offset dry weather in August. Replanted fields may boost soybean production above current published estimates. Contacts reported that corn and soybean fields were at least two weeks behind the typical stages of development, making crop yields more vulnerable than usual to an early frost. Concerns about risks for 2009 grew as farmers faced higher planting costs while having fewer options to lock in prices for their crops. These circumstances have led parties in transactions to more fully investigate the financial health of their counterparties. Hay supplies improved with new cuttings, and pastures were in good shape. Corn and soybean prices fell during the reporting period. However, livestock producers still struggled with high feed costs. Hog producers benefited from higher hog prices. Lower corn prices eased margins for several ethanol producers reducing delays and allowing some new plants to start production.