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Overall economic activity in the Seventh District continued to increase moderately in December and early January amid signs of increasing wage pressures. Holiday retail sales gains came in above last year's lackluster results but fell short of many retailer's earlier expectations. Housing and construction activity picked up at the end of 1996, and manufacturing activity increased at a modest rate. Bankers and other lenders reported that demand for both business and consumer loans remained strong but showed little or no signs of increasing. The District's labor markets tightened further with many contacts reporting increasing wage pressures across the board. Agricultural reports show hog production was still behind year-ago levels, but many observers were skeptical.
Consumer Spending
Most contacts reported that consumer spending gains in December were better than last year, but performance was mixed. Some retailers that met holiday sales targets reported using heavier-than-normal sales promotions, both before and after Christmas, to do so. However, other retailers went into the season with conservative sales targets and, as a result, had lean inventories which may have limited sales gains. For the most part, retailers experienced strong apparel sales, while electronics and home appliance sales remained relatively soft. One major retailer noted that increased debt levels may have made consumers reluctant to purchase big-ticket items. Inventories were considered by most merchants to be in good shape during the holiday period, which limited the need for unplanned price discounting and resulted in improved profit margins compared to a year ago. Overall, the region's holiday sales results were described as "OK" or at least in line with results in other regions, but fell short of earlier expectations. Several retailers stated that post-holiday sales have been in line with their holiday sales pace.
Housing and Construction
Housing activity picked up moderately in December and early January, on a seasonally adjusted basis, and other construction activity continued to increase at a modest pace. New housing construction rebounded slightly from a short-lived slump earlier in the fall, with many contacts pointing to lower mortgage interest rates and strong labor markets as causes for consumer optimism. One home builders' association in Michigan described the market as "steady, strong" and noted that builders were optimistic heading into the new year. Another association in Wisconsin pointed to increased membership as a sign of increased activity. This contact also noted that advertising was down in the association's monthly publication, stating that building supply producers didn't need to buy advertising space, since they were already selling all that they could produce. Several realtors reported that sales of existing homes remained strong but may be off slightly from very high levels. Commercial construction activity continued to increase moderately with sources pointing to the suburban areas as particularly strong. One contact reported that construction of "category-killers" (strip malls anchored by large electronics or office/computer retailers) continued to be robust in Indiana. There were no reports of materials shortages and, with the exception of volatile lumber prices, few reports of upward cost pressures.
Manufacturing
Manufacturing activity at the end of the year changed little from the pattern of moderating growth that had been evident over the previous few months (aside from any disruptive effects from recent auto strikes.) Purchasing managers' indexes from across the District indicated flat to slightly increased overall activity in December compared to a more widespread, albeit slow, expansion in earlier months. A major appliance producer reported that shipments of their core products had again slowed toward the end of the year, after a brief uptick in October. An industry analyst noted that heavy construction equipment ended the year strong, due in large part to the strength in nonresidential construction. A major producer of machine tools reported that customer orders slowed in December and backlogs in some plants had eased. However, one of their plants that mainly supplies equipment to the auto industry reported that backlogs remained high. Steel producers noted that demand remained strong, with bookings solid into the second quarter. In addition, a metal fabricator reported strong demand through the end of 1996 with no sign of weakening in the near term.
Banking
Lending activity continued to be strong around the District in December and early January, but most financial institutions reported little or no growth in loans. On the commercial side, several banks noted that lending was being driven largely by mergers and acquisitions, which was widely dispersed among industries. One large bank contact stated that aggressive lending targets were exceeded last quarter, and some loans were shifted to the first quarter. However, one bank reported that loan volumes were bolstered by lowering credit standards and price, although overall credit quality remained relatively strong. A small bank noted an uptick in commercial loans in December due to short-term lending to auto distributors for carrying unplanned inventory, which would be cleared out in January. As a result, the bank's lending activity in January is expected to be down. Several other small banks characterized lending activity as sluggish. On the consumer side, credit card usage continued to rise in December. Other forms of consumer loans were also strong, but growth was modest compared with credit card lending. Most banks reported that mortgage lending (excluding refinancing) remained relatively strong but growth performance was varied, with some local markets showing declines and others showing increases.
Labor Markets
Labor markets in the Seventh District continued to tighten amid more widespread reports of increasing wage pressures. Unemployment rates continued a downward trend through November (latest month available) from already very low rates. Several temporary help agencies reported that employers, after several months of stonewalling, were beginning to raise wages in December to attract qualified help. One agency contact described clients as "finally realizing that they had to loosen the purse strings if they wanted to fill a position" and another reported that "employers were upping their offers across the board." One labor market analyst reported that requests for a state-sponsored occupational wage survey were unusually high, a sign that the analyst felt indicated employers were preparing to raise their offers. All those contacted described wage increases as very modest but broad-based across occupations, except in those occupations where shortages (and wage increases) have persisted for some time. The shortage of accounting professionals noted in our last report intensified, while that of skilled construction occupations appears to have eased.
Agriculture
Agricultural analysts were surprised by a recent report that showed hog production continued to be behind year-ago levels. The report noted that hog numbers were down 3.5 percent from a year ago and the lowest in 6 years. Moreover, it suggested that the number of sows likely to give birth during the six months ending May will be down 1 percent. The reported cuts were especially large among District states; down 8.5 and 5.5 percent, respectively. The cuts imply that this year's rise in meat production will be somewhat smaller. However, many observers are skeptical of the reported cuts. The industry continues to undergo enormous structural change, adding to the larger estimating errors that have become apparent in recent reports. And other signs, such as a sharp cut in the number of sows shipped to packing plants and strong producer earnings, suggested that an expansion was already underway.
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