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Overall economic activity in the Seventh District was sluggish in June and July, and signs of any pickup in price inflation were generally absent from contact reports. Consumer spending in the Midwest was softer than in some other regions, and consumers appeared to be opting for less expensive goods and services. The availability of office space continued to increase in many areas as demand waned, while housing market activity remained relatively robust. While some key manufacturing industries have made substantial progress in working down excessive inventories, production remained very weak. Lending activity was mixed as household loan demand continued strong, particularly for mortgage credit, while businesses remained very cautious. Employers were finding it increasingly less difficult to hire and retain workers in most areas, and wage pressures subsided further. Crop conditions were generally less favorable than last year, and crop prospects and prices were expected to be particularly sensitive to weather developments for the remainder of the growing season.
Consumer spending generally softened in June and July, and many retailers were lowering sales expectations for the fall. Many contacts noted that consumers were opting to purchase less expensive goods and services. A casual dining contact suggested that customers were "trading down the menu," a large chain of specialty home items reported that shoppers were "buying at the lower end of the product line," and discount chains continued to outperform general merchandisers. Several contacts suggested that sales results in the Midwest were not as strong as some other regions. Some stores were said to be canceling orders and there were reports that more retailers did not want to take delivery of merchandise, asking shippers to warehouse the items on trailers. One contact with a large trucking company suggested that there was "lots of inventory in the pipeline," and many retailers were planning on heavier use of in-store promotional and discounting activity in coming months. While some merchants were gearing up for "tax rebate" promotions, a contact with one large national chain did not expect a significant increase in sales, but added "we do want to get our share" of whatever boost the industry may get. Light vehicle sales in the District were softer in June and July, and appeared to be weaker than national results. Contacts indicated that the tourism and travel industry was actually benefiting from the economic slowdown as more of the region's pleasure travelers opted to stay closer to home. On the other hand, less business travel resulted in higher hotel vacancy rates in at least one major metro area, and airline bookings for the third quarter were "not looking good" according to one contact.
Construction and Real Estate
Real estate and construction activity was mixed in June and July. Building owners and commercial real estate contacts reported that office vacancy rates were increasing and the amount of sublease space coming back on the market (which is not reflected in vacancy rates) also continued to rise. With more space available in virtually every metro market, some landlords in softer markets began offering concessions, such as free months or upgraded amenities. Many landlords, however, were holding the line on rents with some noting that the demand was not there, regardless of price. Most contacts suggested that decisionmakers were reluctant to make long-term commitments until it was clear that overall economic activity was picking up. While leasing activity was down notably, sales of office buildings picked up in the Chicago and Indianapolis markets toward the end of the second quarter. Development of "big box" retail space continued virtually unabated, according to contacts, despite slower growth in consumer spending in recent quarters. The residential construction and real estate market continued to show remarkable resiliency in the face of slower economic activity and increasing joblessness. Most contacts reported that both new and existing home sales were off slightly from last year, but remained at high levels. This strength was generally attributed to very attractive mortgage interest rates. Virtually all of the builders and realtors contacted suggested that there was some slackening demand for higher-priced homes. Realtors in several markets noted that the number of listings increased in May and June, and homes that were "priced right" continued to sell quickly, often with multiple bidders.
Overall manufacturing activity remained very weak, but contacts reported substantial progress in working down excessive inventories in some key industry segments. Nationally, light vehicle sales were relatively strong, although below last year's historic highs, and manufacturers were generally "happy" with inventories of both passenger cars and light trucks. The pricing environment remained competitive, however, and incentive spending picked up as automakers were reluctant to sacrifice market share to foreign nameplates. Steel production continued to "bump along the bottom" but may have picked up modestly in July, according to one industry analyst. Contacts noted that the industry's inventory correction was at or near completion, as inventories on the docks and those held by customers were at very low levels. A contact with a large maker of telecommunications equipment reported that excessive inventories had been worked down and should be at desired levels by the end of August. Despite continued weak orders, this contact had a "gut feeling" that the industry will begin recovering in the fourth quarter, although not at the strong rates of growth realized in 1999 and early 2000. By contrast, new orders for heavy trucks and heavy equipment continued to move lower in year-ago comparisons. The robust housing market helped keep shipments strong for gypsum wallboard makers, but the industry continued to be plagued by overcapacity resulting from large amounts of capacity that came on line over the last few years. Due in part to softness in office markets, shipments of office furniture were off sharply from last year, and one industry analyst suggested that 2001 will show the sharpest decline in shipments for the industry since records were first tallied in the early 1970s.
Banking and Finance
Overall lending activity remained slow, as businesses remained very cautious in their borrowing and spending decisions. Business lending activity was generally described as "soft" and "sluggish." There were a few new signs of deteriorating quality in some banks' commercial loan portfolios, much of it related to conditions in the manufacturing sector. One lender noted a rise in "watch/problem" loans, while others reported adding to their loan loss reserves. This was to be expected, according to one banker, who said that twice as many of his customers were reporting losses on their balance sheets as last year. In contrast, one lender noted that demand from small and medium-sized businesses was "better-than-expected," while another suggested that venture capital activity was picking up and was expected to continue to do so through the third quarter. Household lending activity was best described by one contact as "holding up." Resilient strength in mortgage lending continued to surprise most bankers, despite some moderation in refinancing activity. Credit card borrowing picked up modestly and consumers were paying off less of that debt each month, according to one contact. There were mixed reports on consumer loan quality with some banks indicating that consumer defaults were decreasing (partly as a result of the refinancing activity) while others suggested that delinquencies were increasing.
Demand for workers in the District softened further in June and July as firms tightened staffing to improve earnings, and most signs pointed toward continued soft demand in coming months. Many contacts reported less difficulty finding and retaining workers as the broad-based labor shortages of recent years had subsided. Manufacturing payrolls continued to decrease and layoff announcements remained prevalent throughout the District. Reports suggested that demand for financial, real estate, and legal professionals diminished in recent weeks as business deal-making activity slowed. Another report indicated that some employers were canceling or significantly curtailing fall recruiting activities at college campuses in parts of the District. At the same time, indexes of help-wanted advertising in local newspapers and surveys of hiring plans suggested that employers were reluctant to add to their payrolls early in the third quarter. While slacker labor markets helped ease wage pressures, reports continued of significantly higher health and other insurance costs.
Crop conditions in the Seventh District generally were less favorable than last year, when timely rainfall led to near record high crop production. The west and northwest portions of the District had been most seriously affected by an early wet spring, followed by damaging hot, dry weather recently. Crop conditions deteriorated sharply during the first three weeks of July, driving grain prices higher. Scattered rainfall in late July, however, eased the stress on crops in some areas, pushing prices back down before very hot and dry conditions returned at the end of the month. Crop prospects, and prices, will remain especially susceptible to weather vagaries for the remainder of the growing season.