|Skip to content
The pace of economic activity in the Seventh District moderated in July and August. Nonetheless, contacts remained cautiously optimistic that it would strengthen again as we near the end of the year. Manufacturing production growth slowed and private construction decreased, while consumer spending increased and business spending continued at a steady pace. Credit conditions improved slightly. Price and wage pressures were limited, while agricultural prices moved higher.
Consumer spending increased from the previous reporting period. Retail sales excluding autos were up in August influenced by state sales tax holidays and heavy discounting on back-to-school items like clothing. Contacts noted that higher and lower-end retailers fared well, with middle-end retailers continuing to see customers trading down to lower priced alternatives. Auto sales rose in July as increased incentives spurred demand, but sales leveled off in August. Dealers continued to report that inventories were lower than desired, particularly for the most popular Ford, GM, and Chrysler models. In addition, warmer weather in late summer boosted travel and tourism activity in the District.
Business spending continued at a steady pace in July and August. Inventory rebuilding was less widespread than earlier in the year, but was ongoing in several industries. Capital spending plans were largely unchanged, although merger and acquisition activity was reported to have picked up in manufacturing. The pace of hiring moderated, but manufacturing, information technology, and healthcare were exceptions to this trend. Contacts indicated that firms were increasingly engaging in replacement hiring for entry-level positions as they promote from within to address mid-level turnover. Demand for temporary and contract labor, while a bit weaker than during the previous reporting period, remained strong. Several contacts also noted a mismatch between the skills of the large number of unemployed workers and the types of available jobs.
Construction and Real Estate
Construction activity decreased from the previous reporting period. Residential building remained minimal despite the fact that unsold inventory has fallen considerably in recent months. Both new and existing home sales declined, with foreclosed homes coming onto the market at a heightened pace. A contact noted that downward pressure on new home prices had likely bottomed out due to the fact that builders were refraining from reducing prices below costs, as many had done earlier in the year. Refinancing activity picked up as mortgage rates moved lower, but contacts continued to report that new mortgage credit remained tight for many borrowers. Private nonresidential construction was again constrained by elevated vacancies and declining commercial rents. Contacts also noted, however, an increase in inquiries and redevelopment projects of vacant commercial space. In contrast, public construction increased with activity concentrated in transportation infrastructure and healthcare-related projects.
Manufacturing production growth slowed from the previous reporting period. Contacts indicated it was difficult to gauge the extent of the recent softening as July and August, in general, tend to be slower. In a positive sign, several metals manufacturers indicated that orders and inquiries had begun to firm in recent weeks. Manufacturers of construction materials and household goods reported declines in shipments, with the exception of household appliances where inventory continued to be rebuilt in the aftermath of the recent rebate programs. The transportation industry remained a source of growth with auto and heavy truck production holding steady. Demand for heavy equipment increased considerably as rental companies rebuild inventories following greater than expected demand this past spring. Export activity was also robust, with heavy machinery and autos leading the way. Demand from developing economies in Asia and South America continued to be strong, but contacts also noted that demand from Europe had improved considerably in recent months.
Banking and Finance
Credit conditions improved slightly from the previous reporting period. Corporate credit spreads edged lower and business loan demand was steady, driven mostly by refinancing and acquisition activity. On the other hand, demand for liquidity remained high with greater uncertainty over the economic outlook, regulation, and the political landscape restraining the supply of credit. Contacts indicated, however, that demand for distressed commercial properties continued to be strong. Banking contacts again noted that fierce competition was leading to greater flexibility in pricing and terms and greater availability of business loans. Consumer loan availability also increased, particularly for auto loans and credit cards. Bank loan quality continued to slowly improve, and lower loan loss provisions contributed to higher bank earnings.
Prices and Costs
Price and wage pressures continued to be small in July and August. Pricing power and pass-through of cost pressures to downstream prices were limited. Commodity prices firmed, but only a few contacts reported significant increases in material costs. Similar to the previous reporting period, wage pressures increased only modestly. However, several contacts expressed concern over the prospect of rising healthcare costs in the coming year.
Crop conditions were better than a year ago in much of the District. Corn and soybean crops continued to develop ahead of last year's pace, setting the stage for an early autumn harvest. However, alternating periods of excess precipitation and intense heat sapped the potential for record yields in many areas, and the incidence of diseased soybeans increased in Iowa. Preliminary yield reports were lower than anticipated, but the harvest was still expected to be a "good" one. A rally in corn and soybean prices during the reporting period prompted additional selling ahead of crop deliveries. Stocks were adequate to meet demand, but some poor quality corn required blending before it could be sold. Revenues in the livestock sector improved as dairy, hog, and cattle prices increased. In addition, a major recall of eggs produced in Iowa lowered supplies.