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The rate of growth of economic activity in the Seventh District picked up in late November and December. Contacts were generally optimistic about the economic outlook for 2012, but many also expressed concern about potential weakness in demand from abroad, particularly from China and Europe. Consumer spending increased, while business spending was steady. Manufacturing production increased. Construction was again subdued, although conditions in real estate markets improved slightly. Overall, credit conditions were little changed from the last reporting period. Wholesale price increases slowed, but there was some further pass-through to the retail level. Corn, soybean, and cattle prices increased, while milk and hog prices decreased.
Consumer spending continued to increase in late November and December. Compared to last year's holiday season, store traffic volumes were up significantly while nominal spending was up only moderately as consumers reportedly were making more shopping trips and aggressively bargain hunting to obtain the lowest prices. Several contacts noted an increase this year in online shopping and a greater prevalence of flexible and low-cost shipping options. Traditional holiday retail items such as electronics, sporting goods, hobby items, music, books, toys, and apparel all sold well. Contacts additionally reported more spending on luxury items this year. Auto sales increased since the last reporting period. Dealers reported that showroom traffic volumes were up, and many expected sales to continue to improve further in 2012. Importantly, contacts cited a continued boost from replacement demand in light of the record high average age of vehicles in the U.S.
Business spending was steady in late November and December. Contacts reported that inventory levels were generally in-line with sales, although inventory rebuilding continued in the auto industry in the aftermath of the supply chain disruptions earlier in the year. Capital investment plans were largely unchanged, with several manufacturers moving ahead with planned increases in capacity. Hiring remained selective, but the majority of contacts indicated plans to increase employment next year. A staffing firm noted slower growth in billable hours and below-average seasonal hiring in office and clerical positions. However, they also indicated that permanent placement activity continued to increase for industrial positions. Manufacturers again cited difficulties in attracting job candidates with ideal skill sets in technical fields such as engineering. Many of these firms indicated that they would rather postpone hiring a candidate until economic conditions improve to a point that would clearly warrant them doing so.
Construction and Real Estate
Construction activity was subdued in late November and early December, but there was some improvement in overall real estate conditions. Builder showroom traffic picked up slightly, although in general residential real estate market conditions remained depressed as foreclosed properties continued to put downward pressure on prices and single-family construction remained at low levels. In contrast, multi-family construction continued to be an area of strength. The number of residential leases being signed increased from the previous reporting period and rents rose. Nonresidential construction was also up moderately with the strongest gains in Class A properties. Contacts noted greater demand for both industrial and healthcare facilities. In addition, commercial real estate conditions improved slightly with commercial rents stabilizing and a decline in the available amount of sublease space.
Manufacturing production increased in late November and December. Contacts in the manufacturing sector were more optimistic for 2012 given the pace at which their order books are filling through the first quarter. Auto production increased over the reporting period. However, some contacts still are concerned about the ability to ramp up production much further over the near-term because auto suppliers may be approaching capacity constraints. Demand for heavy equipment remained strong, led by robust activity in the energy and agriculture sectors. Exports also continued to be a source of strength, although slower growth in China and Europe was noted to have held back sales at some firms. In the steel sector, inventories at service centers remain near desired levels, and given the continued strength in the auto, energy, machinery, and mining sectors, steel production was expected to increase in the first quarter of 2012.
Banking and Finance
Credit conditions were little changed during the reporting period. Corporate funding costs, while variable, were largely unchanged on balance. Liquidity remained relatively scarce in the high yield debt markets. Banking contacts indicated that business loan demand continued to be subdued, with the exception of some large multinational mining corporations. Businesses utilization of credit lines was only up a bit. Because lenders continue to see their clients' balance sheets growing stronger, they speculated that uncertainty about future business conditions was restraining the demand for credit. However, contacts also noted that some larger manufacturers are making loans to sub-tier suppliers out of retained earnings, thus reducing these suppliers' typical demand for credit from financial institutions.
Prices and Costs
Cost pressures eased in late November and early December. While pressure on costs remained from commodities such as steel and food, it moderated significantly for cotton and energy goods. Pass through of elevated material costs to consumers continued. Wage pressures remained moderate, with contacts noting that annual increases in wage and non-wage benefits were largely in-line with last year's increases.
Farm income for 2011 was higher than in 2010; and farmland values and cash rental rates were reported to be higher once again. After falling initially during the reporting period, corn and soybean prices rose in the last half of December. More generally, crop prices fell during the harvest period. However, most crop deliveries involved sales at pre-harvest prices, as many end users found it necessary to ensure sufficient supplies prior to the harvest. In contrast, for those who didn't pre-sell, more of their crop ended up being put into storage. Milk and hog prices fell during the reporting period, while cattle prices increased. Still, export demand helped keep prices for both dairy and meat products higher than they were at the end of 2010. Input costs have risen for the coming planting season.