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On balance, economic activity in the Seventh District slowed further in September and early October. Reports indicated that the tragic events of September 11 had an immediate negative impact, but many related business disruptions had been alleviated by the weekend. Consumer spending continued to soften, with sales of nondurable goods doing better than sales of most durable goods and services. Residential construction and real estate markets slowed some, but low mortgage rates kept buyers in the market. Commercial real estate markets weakened noticeably, with businesses becoming more uncertain about investment plans. Manufacturing activity continued to slow, and increased business caution further dampened capital expenditures. Lending activity was mixed, with demand for business loans falling and mortgage refinancing surging. Labor demand softened and there were few reports of intensifying upward wage pressures. There were virtually no reports of upward price pressures and several reports of falling transaction prices. Most contacts were satisfied with their current inventory levels. The fall crop harvest was generally progressing well, with good yields reported in the southern and eastern parts of the District, though there were indications of "spotty" and "disappointing" yields in the north and west.
Consumer Spending
Consumer spending was somewhat softer in September and early October, after temporarily dropping off significantly during the period immediately after September 11. Contacts noted that by late September and early October, fundamental economic factors--rising unemployment and falling stock prices adversely, and low inflation and interest rates positively--affected retail sales more than terrorist fears. Sales results of discount stores continued to outperform those of department and specialty stores, and in some cases the spread widened. One contact reported that retailers were canceling or delaying orders for the holiday season. Promotional activity was generally slower, though there were some reports of small retailers boosting advertisements. In general, sales of nondurable goods were better than sales of durable goods, but there were exceptions. While clothing sales were soft, appliance sales were beginning to see year-over-year gains, excluding a few days after September 11. District vehicle sales have been very strong since automakers announced zero percent financing programs in late September; one dealer reported that 35-50 percent of their September sales came in the last weekend of the month. Contacts in the casual dining industry reported that activity in the District was weak. Spending on services, such as air travel, hotels, auto repair, and rental cars, generally was weak, though business at a District movie theatre chain was described as "steady." Contacts in the air travel industry reported that passenger load factors were below normal, but up from when air travel initially resumed in mid-September. One contact at a regional airport indicated that load factors on flights at smaller airports were in worse shape than those at larger ones. There were no reports of inflationary price pressures on the retail level. Most contacts reported that consumers were increasingly price conscious and there were many reports of price discounts.
Construction and Real Estate
Real estate and construction activities generally softened notably in the weeks after September 11. Office vacancy rates continued to rise in most areas and rents were said to be flat to declining. Reports of anxiety among occupants of some of Chicago's trophy office properties became more frequent. According to one contact, "more than one" tenant of a prominent office tower in the city were looking to leave the building, for fear of losing workers left skittish by the World Trade Center attacks. Some tenants noted that workers in high-rise buildings were less productive because of security distractions. One hotel operator reported that vacancy rates were rising and many room bookings had been lost since September 11, including 30 percent of the company's convention business. Vacancy rates were also said to be rising on industrial properties in some areas, and there were scattered reports of light industrial projects being put on hold. Contacts in commercial real estate reported that their clients had become decidedly more pessimistic since September 11. Residential activity also slumped immediately after September 11, but picked up later in the month as low mortgage interest rates kept buyers in the market. One Chicago-area realtor indicated that traffic through existing homes had picked up to about 85 percent of early September levels; however, according to other District contacts, traffic through new models had not picked up to the same extent. Both realtors and builders noted that demand remained soft for high-end homes, and may have softened further.
Manufacturing
Activity at District manufacturers continued to weaken in September and early October, and there was no mention of bottoming as there had been in our previous Beige Book report. Contacts generally reported that orders and shipments were down by double-digit percentages from a year earlier. Reports almost universally indicated that the events of September 11 had an immediate negative impact, but the extent and length of that impact varied. Contacts reported some supply chain disruptions due to increased security at U.S. borders, but as the problems eased in a few days, none had any plans to increase inventories to prevent any future potential shortages. In the week following September 11, nationwide light vehicle sales dropped around 50 percent, but zero percent financing programs by domestic automakers contributed to a sales surge late in the month that continued into early October. Contacts were unsure whether the incentives were only taking sales away from future months, rather than generating new sales, though one noted, "We are planning for the worst, hoping for the best." There were some reports of rental car companies reducing their fleets and orders for new vehicles. Plant shutdowns on September 11 and subsequent delays in receiving parts from Canada and Mexico led to significantly larger-than-planned vehicle production losses. Heavy truck sales continued to languish, but it was difficult for contacts to determine how much the tragedies on September 11 affected sales. Steel shipments and production were down significantly, with production declines larger in the Midwest than the rest of the nation. Orders for machine tools declined and one industry contact noted, "This is the worst business environment I have seen in my 29-year career." Shipments of heavy machinery continued to fall, with somewhat larger declines seen following September 11. Construction equipment suffered the most, while farm equipment demand was flat and demand for coal mining equipment was solid. A representative from one equipment maker in the District lamented that the overwhelming uncertainty in the current economy was "the enemy of capital spending." Contacts reported that prices for most manufactured products, materials, and inputs were down.
Banking and Finance
Overall lending activity was mixed in recent weeks, as uncertainty about the near-term economic outlook increased. Bankers suggested that business lending slowed as firms appeared to be putting major decisions on hold. In addition, reports indicated that some businesses were weighing future capital spending against increased investment in security. Loan officers at some banks were reportedly "spending more time combing through existing accounts than mining for new business." Commercial loan quality deteriorated further in recent weeks, but there were no reported changes in standards and terms for business loans. On the household side, mortgage refinancing activity surged in recent weeks as homeowners took advantage of lower interest rates. One banker noted that refinancing activity was near record levels and would most likely exceed them in coming weeks. Demand for new mortgages was reportedly mixed, but relatively strong. One lender stated that "if you have the need, there is no better time" to take out a mortgage. Credit quality continued to deteriorate slightly, with delinquencies increasing on many types of loans, including mortgages and home-equity loans.
Labor Markets
Labor markets softened further after September 11. Year-over-year increases in initial unemployment insurance claims surged in the weeks following the attacks. Tourism and travel firms in some larger metro areas were quick to trim payrolls as business fell off significantly after September 11. One aircraft engineering firm in the District has sharply cut back its hiring needs and has begun laying off workers. Some reports suggested that retailers' fall hiring will be slower than in recent years as expectations for the holiday shopping season weakened. At least one national retail chain was already reported to be shedding workers. Some high-tech services firms continued to lay off workers and at least one also cut top executives' pay. There were reports of automakers shedding or considering layoffs of some white-collar workers in a new attempt to cut costs. A national survey showed that fourth-quarter hiring plans of Midwest employers were the lowest since 1994. There were no reports of intensifying upward pressure on wages.
Agriculture
Soybean and corn harvests were progressing rapidly in District states. Harvest in the southern and eastern reaches of the District neared completion. The USDA's October 12 Production Report revised upward (from September) estimated soybean and corn production in District states. The soybean harvest was expected to be up more that 4 percent from last year while corn production was expected to be down about 3-1/2 percent. Some District contacts were surprised by the upward revisions. They noted that, as expected, the "best crops" were in the southern and eastern portions of the Corn Belt. However, recorded yields were dropping off sharply as the harvest moved north and west. They expected that average yields would fall below the latest USDA estimates. Most crop prices at the farm gate remained at low levels--corn slightly above a year ago and soybeans well below a year ago. Beef and pork prices weakened recently. However, milk prices were at or near their highest levels in a decade.
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