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Economic activity in the Seventh District slowed further in December, in part due to severe winter weather adversely impacting virtually all economic sectors. Retailers reported that brutal weather kept store traffic down and, with few exceptions, holiday sales fell below merchants' expectations. Builders and Realtors also cited the weather as contributing to a general slowdown in construction and real estate activity. Recent softening in the auto industry contributed to a further slowing of the District's overall manufacturing activity. Lenders reported moderating growth in business loan volumes while many noted a discernible increase in mortgage refinancing applications. Labor markets, while remaining very tight, appeared to ease somewhat as 2000 drew to a close, alleviating some worker shortages and wage pressures. With the notable exception of heating costs, price pressures appeared to ease slightly as economic conditions softened. Many contacts noted a discernible drop in both consumer and business confidence since our last report. Contacts were more optimistic after the Federal Reserve's unexpected rate cut in early January, but remained cautious in their business expectations for the first half of the year.
Consumer Spending
Overall retail sales were very sluggish in the Seventh District through December, contributing to one regionally-headquartered retailer announcing it was going out of business and a few others announcing store closings. Retailers with a national presence suggested that sales in the Midwest fell below the nation's "disappointing" results, as brutal winter weather gripped the region and discouraged shoppers from leaving their homes. With a few exceptions, both discounters and department stores reported lackluster year-over-year sales results. Preliminary reports indicated that nearly 60 percent of respondents to a survey of small retailers in Michigan had fewer shoppers over this holiday season than last year, and an even greater share reported slower sales. Regionwide, cold-weather items (outerwear, auto batteries, etc.) were selling well, and there were reported shortages of some items such as snow throwers, shovels, and sleds. However, sales of electronics, home decorating items, and men's apparel were said to be slow. Contacts reported that shipments of consumer-related durables were fairly strong in December, but one transportation company noted that an increasing share of their business was picking up excess inventory from big-box retailers and returning it to the manufacturers. Contacts also indicated that the region's auto sales were slower than the national average, with demand for domestic nameplates much softer than foreign nameplates. There were a few indications that price pressures at the retail level may have eased somewhat recently. Retailers generally reported that the economic environment necessitated greater price cutting this holiday season, and a contact in casual dining noted that a planned price increase was "put on the back burner" as the economy slowed. However, home heating bills rose sharply in December and may have contributed to slower growth in spending on other consumer goods and services.
Construction and Real Estate
Overall construction and real estate activity appeared to soften further in December, but contacts suggested this may have been largely due to inclement weather. Store closings by major retailers were expected to free up millions of square feet of space in the region in the first half of 2001. While this was a source of concern for some real estate contacts, others were looking at it as an opportunity. Consumer traffic was generally low at the stores being closed and freeing the space up for new tenants may reinvigorate many strip malls, according to some analysts. On the residential side, sales of new and existing single-family homes were again relatively soft, but Realtors and builders were quick to point out that sales remained at high levels. In addition, contacts noted that severe weather may have discouraged many would-be buyers from house hunting in December. By contrast, development of multifamily residences remained very strong in the Milwaukee and Chicago downtown areas.
Manufacturing
Manufacturing activity slowed further in recent weeks with virtually every segment showing signs of softening. Even the auto industry, the region's star performer in recent years, was sluggish. Nationwide, December's light vehicle sales for domestic nameplates were significantly below year-ago levels, with particular softness in passenger cars. With weaker sales and sales expectations, as well as excessive inventories, automakers were planning "significant" downtime for some assembly plants in the first quarter. New orders for heavy equipment continued to slow substantially across practically all categories, but inventories were said to be in good shape due to earlier production cutbacks. December shipments of gypsum wallboard were below a year ago, and prices continued to erode. Demand for steel products, while still strong, softened somewhat, and foreign competition continued to put a strain on domestic producers. One industry analyst suggested that conditions in December were the worst for domestic steel producers since the early 1980s. According to this contact, unprecedented downward price pressures, due in large part to a flood of imports, forced some companies to file for bankruptcy and has left very few domestic steel producers "economically viable." Lower steel prices, however, translated into lower input costs for producers of other manufactured goods, including office furniture. In contrast to other industries, demand for office furniture remained strong, despite modest softening in new orders toward the end of 2000.
Banking and Finance
Overall lending activity remained strong in the District, but not quite as robust as in early 2000. Growth in business loan volume continued to slow in late December according to most contacts, despite strong demand from small and medium-sized businesses. Overall quality on business loans generally was described as good, but many bankers were "keeping their eyes on" specific industries (especially retail and manufacturing) for any signs of deterioration. Business credit standards may have tightened further in recent weeks, and one lender suggested that some loans approved a year ago would have "zero chance of being approved now." On the household side, lending activity was mixed. Some bankers reported a notable decrease in new mortgage originations as 2000 drew to a close. Contacts were unclear, however, as to whether this drop was due to deteriorating market conditions or simply to harsh weather conditions. At the same time, many lenders noted increased refinancing activity as fixed-rate mortgage interest rates continued to move lower. Several contacts expressed optimism that refinancing activity would pick up further in the first quarter. Some banks, particularly smaller ones, again reported difficulty in attracting deposits to fund loans. With recent stock market volatility, a few lenders were anticipating a boost in deposits as investors were expected to seek less risky investments. However, one analyst suggested that funds that fled the stock market found their way into other investment vehicles, but not into bank deposits.
Labor Markets
Labor markets generally remained very tight in the Seventh District, although there were increasing reports that some slack may have developed. After falling more or less steadily for three straight years, initial claims for unemployment insurance benefits rose dramatically above seasonal trends in November and December. Many of these claims were the result of layoffs in manufacturing industries. Some retailers announced that layoffs were in the offing, but most industry analysts were confident that these workers would be quickly reabsorbed. Some service industries that had difficulty attracting workers in the past reported greater success in the last few weeks of 2000. Staffing agencies indicated that new orders for temporary help softened toward the end of December, although one agency noted that clients weren't sending workers back, they just weren't placing new orders for additional help. Contacts suggested that wage pressures appeared to ease modestly as a result of softer demand for workers. Additionally, in contrast to our previous reports, there were no further reports of intensifying pressure on non-wage employment costs.
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