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The Seventh District's expansion appeared to slow modestly in September and early October as consumer demand moderated. Retail sales were below what most retailers had expected and reports from District auto dealers became mixed. Construction and real estate activity slowed on the residential side, but most contacts indicated that the market was still "healthy." Manufacturing activity was steady at very high levels of production. Overall loan demand remained strong, despite some softening on the consumer side related to slowing in mortgage lending. Labor markets appeared to tighten further and reports of intensifying wage pressures became more frequent. The fall harvest was proceeding rapidly thanks to dry weather, and yields were turning out better than many had anticipated. District hog farmers reduced the size of their breeding herds relatively more than farmers in other states.
Overall consumer spending slowed in September and early October, with sales results falling below most merchants' expectations. Many contacts suggested that warmer-than-usual temperatures negatively impacted sales of seasonal items and apparel. Some retailers, however, noted an exceptional pickup in sales of men's apparel. Home-related items (electronics, appliances, furniture, etc.) remained some of retailers' strongest selling items. Despite slower-than-expected sales, inventories were described as being at or slightly below last year's levels, and there were no reports of increased promotional activities. Most retailers, citing unwavering consumer confidence, were very optimistic about the upcoming holiday shopping season. Reports on District light vehicle sales were mixed with some dealers indicating that sales remained strong, while one large District auto group reported that "October (sales) slowed up, hard." This contact also noted that for the first time in a long time they will not be taking manufacturers' full allotment of new vehicles.
Construction and Real Estate
Overall construction activity slowed modestly as both the residential and business segments showed some signs of softening. Realtors reported that existing home sales had peaked and were decreasing slightly, as buyers became concerned about interest rate increases. A realtor in one of the District's largest metro areas reported that year-to-date sales through September moved roughly even with 1998's results, after running ahead of last year's sales pace through August. One contact reported that in recent months there had been a discernible increase in condominium purchases by investors who planned on either renting the units out or turning them around quickly for a profit. This contact suggested that this was holding down rents on two-bedroom apartments in the market. Growth in commercial construction slowed modestly, but remained robust. One contact noted a slowing in retail development even as vacancies in this segment continued to decrease. Office vacancies also remained very low in most metropolitan areas, but rental rates were not rising as fast as some analysts had expected.
The auto industry continued to lead the way as overall manufacturing activity remained very strong in September and early October. Automakers expected sales nationwide to remain strong in the fourth quarter, which kept production steady at very high levels in recent months. Inventories were generally lean, notably for some passenger car models. Despite continued strong sales, pricing power remained soft for the auto industry with very little increase in sticker prices and continued heavy use of incentives. The steel industry continued to rebound from 1998's difficulties. The inventory overhang resulting from record imports late last year has been worked down as prices continued to firm and new orders remained strong. Demand for consumer durables, such as small appliances and lawn equipment, was strong although one contact noted a "gentle, gentle" softening in demand for appliances. Production of heavy trucks remained robust, but industry contacts noted that inventories were building and could lead to slower production in the coming months. Demand for construction equipment was reported to be strong, but softening somewhat, and new orders for farm machinery remained very weak. Producers of construction materials reported that new orders remained very strong as these industries continued to run near capacity.
Banking and Finance
Overall lending activity remained strong in recent months, although some slowing was noted on the consumer side. Home refinancing activity has dropped off precipitously as mortgage interest rates increased. Refinancing applications at one large money center bank, which earlier in the year accounted for nearly 80 percent of total mortgage applications, fell to 11 percent in recent weeks. At the same time, lenders reported that home equity lines of credit were increasing. One bank noted improved consumer loan quality resulting from the bank's efforts to tighten standards in recent months. On the business side, most contacts indicated that loan volume continued to rise steadily and demand remained strong. One bank noted a pickup in sizable lines of credit to firms with international exposure, who are hedging against Y2K-related problems that may develop abroad. Standards and terms for business loans remained unchanged for the most part, although one bank did report some tightening of standards.
Labor markets remained tighter than the nation as a whole in September and early October amid more frequent reports of intensifying wage pressures and increases in non-wage labor costs. Contacts in industries ranging from casual dining, automobile dealerships, and temporary help agencies reported that wage pressures were intensifying. One staffing service firm indicated that wages were up 10 to 20 percent "across the board since July." This contact reported that the company had to absorb this increased cost for existing orders, but was passing it along to new customers. In addition, a few contacts reported that non-wage labor costs, particularly for health insurance, were rising noticeably. Demand for workers remained strong across industry sectors with the exception of manufacturing, where some pockets of softness continued. A large shipping firm suggested that the dearth of truck drivers, and potential drivers, was leading to softer demand for heavy trucks. Increasing layoffs and upward-trending unemployment rates were reported in a few of the less-diversified, highly industrialized metropolitan areas, especially those highly reliant on farm machinery production.
The fall harvest was moving rapidly throughout the District in mid-October and was well ahead of the average pace thanks to dry weather. The favorable weather also helped lower fall expenses by reducing the amount of natural gas required to dry grain for storage. However, the dry weather also hurt pasture conditions in Indiana and Illinois. Several agricultural bankers reported that yields were better than expected, contributing to tight storage availability in some areas. One grain elevator near Sioux City, Iowa had already placed several thousand bushels of corn on the ground as of mid-October. The Hogs and Pigs report released near the end of September confirmed the industry is in a liquidation phase that began three months earlier. District states registered an especially sharp decline in the size of the breeding herd. The number of breeding animals dropped 20 percent in Illinois and Wisconsin, was down 11 percent in both Indiana and Iowa, and declined 8 percent in Michigan. In comparison, states outside the District reported an aggregate decline of 6 percent in the size of the breeding herd. The value of U.S. agricultural exports is projected by the USDA to increase 2 percent during fiscal year (Oct.-Sept.) 2000. However, gains are expected to be marginal for District farmers because an increase in the export value of soybeans, meal, red meats, and dairy products will likely be offset by a decline in the export value of corn and soybean oil.