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Economic activity in the Seventh District remained soft through October and mid-November. Consumer spending was modest ahead of the holiday shopping season, and some retailers were already discounting merchandise to attract shoppers. Construction activity slowed in recent months, with weakening reported in both residential and nonresidential segments. Conditions in manufacturing industries continued to soften, despite relatively strong light vehicle sales. Home refinancing activity remained very strong, but demand for business loans was said to be waning. Joblessness continued to rise with the slowing economy, and near-term hiring plans were lowered. The fall harvest lagged behind the pace of recent years, but as of mid-November was nearing completion under ideal weather conditions.
Retail spending was mixed, but generally soft, through October and mid-November as consumers remained value-conscious. Again, discounters reported stronger sales results than general merchandisers. Home entertainment, home improvement, automotive, and toys were said to be sales leaders at retail outlets. Contacts reported that some merchants were aggressively discounting merchandise to get a jump on holiday sales. One large District auto group reported that light vehicle sales were very strong in October, but fell in November, due in part to very lean inventories. Eating and drinking places noted erratic sales results, "day to day and week to week." Weak business spending was hurting midweek restaurant sales, while longer waits at airports were said to be bolstering sales at eateries inside the terminals. To boost traffic, some restaurants were adding lower-priced choices to their menus which, along with consumers' recent tendency to "trade down" the menu, resulted in lower average check prices. Business travel generally remained weak, but reports on conventions were mixed. Contacts in some areas reported several event cancellations and lower attendance, while others said there were no cancellations and strong attendance. There were no new reports of intensifying price pressures at the retail level, and one contact indicated that fuel surcharges on some transportation services were discontinued because of moderating oil prices.
Construction and Real Estate
Overall construction and real estate activity remained relatively weak through October and mid-November. On the residential side, sales of both new and existing homes were reportedly softer than a year earlier. Contacts reported that sales of lower-priced homes were more resilient than higher-priced homes, due primarily to lower interest rates. Builders' expectations for the near term appeared to be mixed. In some areas, builders were concerned that housing inventories were too low. In others, builders who earlier in the year were anxious to sign contracts to secure scarce home sites with developers, were seeking to get out of these contracts in November. Nonresidential activity was nearly universally soft. Office vacancies continued to rise in most areas and rents were reported to have softened further. The large inventory of sublease space on the market forced landlords to become more flexible in traditional lease agreements. Hotel occupancy rates remained below a year ago, which kept downward pressure on room rates. There were scattered concerns that strong big-box retail development may have outpaced demand in recent months.
Manufacturing activity softened in October and November, as production and new orders in many industries continued to weaken. However, spurred by heavy incentives, light vehicle sales nationwide topped 21 million units (seasonally adjusted annual rate) in October, a near record month for the industry. Despite extended incentives, sales slowed notably in November and were expected to ease further in December. Many analysts believed that strong sales in the fourth quarter of this year would result in weaker sales next year. Production of heavy equipment, including trucks, slipped further as new orders remained weak. One contact suggested that equipment dealers were "spooked" and continued to draw down inventories. Businesses also continued to work down steel inventories. With steel prices still well below a year earlier, one industry analyst argued that the industry was near bankruptcy. A machine tool contact also noted further softening, but this firm had seen an increase in requests for quotes. Demand for telecommunications and other high-tech equipment remained very weak, with one contact noting that businesses were very cautious and reluctant to spend money.
Banking and Finance
Overall lending activity remained sluggish, despite very strong mortgage refinancing activity. Mortgage interest rates dipped to new lows in late October/early November, spurring record levels of refinancing activity, according to contacts. Bankers noted that many consumers were taking this opportunity to consolidate loans, resulting in relatively weaker demand for other types of household loans such as home-equity, personal, and credit card loans. Lenders also reported that demand for new mortgage originations was fairly soft. Consumer credit quality continued to deteriorate with delinquencies rising across loan categories, and personal bankruptcies were said to be increasing as well. Insurance companies noted increased demand for nearly all types of policies, particularly life insurance, following the September 11 tragedies. On balance, business loan demand remained soft. One banker noted slightly increased consolidation activity in some manufacturing industries. In general, however, loan demand was being held down by businesses' reluctance to expand. Bankers credited low interest rates with keeping some companies profitable, but overall business loan quality continued to deteriorate, with one lender suggesting that most of the difficulties were concentrated in large corporations.
Labor markets continued to slacken through mid-November, with weakness in nearly all industries and occupations. Initial unemployment insurance claims remained well above year-ago levels in all District states, as did continuing claims. In addition to furloughing workers, firms were also seeking to cut labor costs by eliminating or significantly curtailing employee training and related travel. After struggling in recent years to find qualified help, one company was offering some workers sabbaticals (at substantially lower pay) in hopes of still having them on its payroll when business eventually picks up. Retailers reported greater success in meeting their more modest holiday staffing needs than in recent years. A national survey showed that first quarter 2002 hiring plans of employers in the Midwest were the lowest since the early 1980s. Especially weak hiring was expected for manufacturing industries. There were no new reports of intensifying pressure on wages or other employment costs.
The soybean and corn harvests were nearly complete by mid-November. The remaining harvest in the northern portions of the District, while lagging behind that of recent years, was progressing rapidly in unseasonably favorable weather conditions. Corn and soybean prices at the farm gate remained below year-ago levels as of mid-November, but had moved up modestly from a month earlier. Beef and pork prices continued to weaken from both month- and year-ago levels. Milk prices remained high by recent standards, although the October average slipped from the recent high in September. Milk production in the District declined again in October, more than offsetting an aggregate increase in the 15 other major milk producing states.