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Economic activity in the Seventh District continued to expand at a modest pace in September. Consumer spending and business outlays continued to rise. Labor market conditions were mixed by industry and location. Residential construction declined further, while the pace of nonresidential development was generally steady. Manufacturing expanded at a similar pace as in the previous reporting period. Household lending declined, while business lending edged higher. Overall wage and cost pressures were similar to those in the previous reporting period. The corn and soybean harvest was running ahead of the normal pace and a record corn crop was almost assured.
Consumer spending continued to increase at a gradual rate. The back-to-school shopping season ended on a positive note after getting off to a slow start. Retailers were cautious about the upcoming holiday season. One retailer said that it will keep lighter-than-normal inventories because of uncertainty about this year's holiday shopping season. Auto dealers reported flat to modestly improving sales during late August and September. Several dealers noted that used car sales have outperformed new car sales in recent months. A national restaurant chain said sales were increasing at a slower rate than earlier in the year. Tourism activity expanded at a modest rate.
Business spending rose again in the District. Current capital outlays increased slightly from the previous reporting period. Overall, contacts indicated that their capital spending plans for 2008 called for modest gains over expected spending in 2007, and few firms budgeted cutbacks. Freight hauling ran above seasonal norms during September, but one shipper said the first days of October were soft. Changes in labor market conditions were mixed by industry and location. Tool manufacturers continued to try to expand their payrolls, though several said they were struggling to find qualified workers. A trucking firm began to offer mileage guarantees and more generous time-at-home policies in order to attract drivers. Retailers in Illinois were cautious in hiring, and many planned to use a greater-than-normal proportion of temporary workers during the upcoming holiday season. A staffing firm reported that billable hours in District states continued to decline modestly from year-ago levels, and it expected this trend to persist in the near-term.
Construction and Real Estate
Residential construction and home sales continued to weaken in most areas of the District. Contacts said that tightening credit for jumbo mortgage loans has contributed to the declines in local housing markets. Builders added price discounts and incentives, though one said the strongest incentives were aimed at potential buyers of mid-range homes. Showroom traffic became more sporadic throughout the District. Builders' cancellations began to edge up again, with many customers forced to withdraw from contracts after failing to sell their own home. Construction material shortages abated because of the slowdown in building. Looking ahead, a contact from Wisconsin projected building conditions in the area would be little changed until the end of 2008. The pace of nonresidential development continued to be steady. One contact reported concern about the decrease in absorption rates from last year. In the Chicago area, office rents increased from the last reporting period, and in the suburbs office vacancy rates rose. Contacts from across the District noted that the recent volatility in financial markets has decreased the financing available for nonresidential development projects.
Manufacturing expanded at a similar pace as in the previous reporting period. Manufacturers in a number of industries continue to report strong demand from abroad; this included producers of machine tools, heavy equipment, and steel. Domestic demand for agriculture machinery continued to be robust, and shipments of mining and oil and gas extraction equipment remained strong. In contrast, sales to domestic customers of other heavy equipment, particularly construction machinery, continued to trend lower, and one analyst said there was heightened uncertainty about the outlook for both residential and nonresidential construction. There was some moderation in sales of machine tools to domestic customers, though as one contact described it, the pace of activity was still "wild." Automakers maintained modest expectations for light vehicle sales; one noted that the slowdown in housing markets was a significant risk for the industry, even bigger than rising oil prices. One automaker said that additional production cuts were likely at the end of this year or early next. Steel producers described domestic demand as soft but stable; still, one steelmaker noted that domestic producers were gaining market share because foreign producers were cutting back their shipments to the U.S. and opting to sell in markets with relatively stronger prices. Steel inventories continued to move lower. Capacity utilization of gypsum wallboard continued to fall, and one contact expected declines to continue into 2008, coinciding with a protracted decline in homebuilding.
Banking and Finance
Household lending declined modestly on balance. Applications for home equity lines of credit were down notably and lines outstanding were lower as well. One banker attributed the trend to both moderating home prices and tighter credit standards. Demand for mortgage refinancing was stable as most borrowers faced higher rates. New mortgage originations continued to trend lower, and lenders were tightening standards and approving fewer applications. Mortgage credit quality deteriorated modestly as delinquency rates for both first and second mortgages increased. Business lending edged higher. One bank noted that its customer base has been "utterly unaffected" by credit market dislocations. Business credit quality remained favorable overall, however quality deteriorated for homebuilders. Standards and terms of commercial loans were little changed. One bank said it was disappointed in the results of its efforts to increase pricing on its loans in the wake of recent credit market disruptions.
Prices and Costs
Overall wage and cost pressures were similar to those in the previous reporting period. Manufacturers indicated that input costs were generally stable. One said they were "not happy" about the price of oil and that some suppliers have been considering, but not yet implementing, energy surcharges. A steelmaker expected steel prices to stabilize in the coming months. Wallboard prices continued to fall in line with the decline in residential construction. In contrast, a toolmaker said it was able to implement price increases. A nationwide retailer said wholesale prices were moving higher but it was limiting the passthrough to consumers; and a restaurant chain said it had not implemented any price increases during the reporting period. A staffing firm reported that its pay rates rose at a steady pace.
Harvesting in the District was ahead of the normal pace at the end of the reporting period, and a record corn crop is almost assured. Contacts reported above-average, though not record, corn and soybean yields in Iowa and Illinois. Yields in Indiana, Michigan, and Wisconsin were less affected by a summertime drought than had been anticipated by some observers. With soybeans drying too fast, many farmers reversed the normal order and harvested soybeans before corn. Transportation and storage problems emerged due to the size and speed of the harvest. The problems were compounded by movement of crops harvested in 2006. In addition, currently, cash prices for both corn and soybeans are enough lower than futures prices that farmers have a big incentive to store crops until 2008. Rail and truck transport has been slow when available, and storage bins reported that labor was in tight supply. Large export sales helped boost corn and soybean prices during the reporting period. Milk and cattle prices were up; hog prices were down, as meatpackers have been cutting back their purchases in the spot market.