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The Seventh District economy continued to expand, although some key industry segments softened somewhat. Consumer spending became more mixed than in our previous report and merchants were more cautious about the upcoming holiday season. Housing activity remained exceptionally robust in the region while business construction appeared to slow moderately. Manufacturing activity continued at high levels, but some key industry segments--notably steel and agricultural equipment--were clearly adversely affected by events abroad. Lenders reportedly tightened standards on select loans, commercial real estate particularly, but credit availability was a non-issue for most contacts. Labor markets remained very tight in virtually all locales, despite a decrease in manufacturing employment. District farmers continued to be affected by low grain and hog prices.
Consumer Spending
Reports from retailers became increasingly mixed over the last six-to-eight weeks, with overall sales results generally coming in at or below merchants' expectations. Sales at discounters and value-based retailers appeared to be stronger than at middle-market national chains. Fall apparel sales were slower than anticipated in September, partly due to warm weather, but picked up in October as temperatures dropped. One large national retailer reported that sales of some big-ticket items (such as furniture, appliances, and home electronics) were slow while other merchants reported strong sales of the same items. Inventories were reported to be in good shape, although there were reports of greater-than-normal use of promotions, such as one-day sales, for this time of year. One contact indicated that the normal pre-Christmas order backlogs and shipping delays had yet to materialize. A large District auto group reported that light vehicle sales at their dealerships were slow in September, partly as a result of stock market volatility, but had picked up significantly in October. This contact also noted that October's sales strength was broad-based across makes and models.
Housing and Construction
Overall construction activity remained very brisk in September and October with the residential side continuing to benefit from very low mortgage interest rates. District homebuilders indicated that sales of new homes were very strong in September, and a national survey of builders suggested that October's normal seasonal slowdown in the Midwest did not materialize. Despite strong sales, most builders noted that traffic through models had slowed recently. Existing home sales in September continued to surpass most realtors' expectations and showed few, if any, signs of slowing in October. Stock market volatility reportedly led to some lost sales of higher-priced homes, both new and existing. While commercial building remained strong, some projects were being scaled back as a result of more conservative lending practices on the part of investors. Speculative office space in some suburban areas was reported to be slightly overbuilt and contacts suggested that it may take some lessors longer than anticipated to reach their expected absorption. One contact, noting that "builders will build until they run out of money," suggested that any tightening of standards would simply bring construction activity back to a more sustainable level.
Manufacturing
Manufacturing activity was mixed in some key industries, but the sector generally remained strong. Effects of the economic turmoil in East Asia continued to adversely impact the District's producers of steel and agricultural equipment. Steel imports surged in the summer and early fall, leaving regional producers with bloated inventories, softer orders, and little pricing leverage. Industry contacts noted that domestic steel producers had filed trade cases with the federal government, but wouldn't expect any relief until the spring. Complicating matters for steel producers was softening domestic demand and increased industry capacity. Depressed food commodity prices, due in large part to dwindling demand from East Asia, continued to dampen demand for agricultural equipment, leading some producers to curtail production plans for the fourth quarter. The recently passed farm bill should help lessen the adverse impact on these producers. On the other hand, automakers were anticipating strong light vehicle sales in October, despite some pullback in marketing costs (incentives). Inventories were reported to be good to slightly lean, and production picked up modestly. Automakers were optimistic that they will be able to pull back further on the use of incentives in the fourth quarter. Demand for heavy trucks remained very strong as lean inventories and high backlogs kept producers running near capacity, although one contact noted a slight increase in canceled orders. Strength in the housing and construction industries continued to boost manufacturers' sales of heavy construction equipment, wallboard, and small appliances.
Banking and Finance
Lending activity remained strong, but was uneven on the business side. Overall business lending remained brisk, although demand softened in some segments according to contacts. Some businesses, particularly large companies, were scaling back expansion plans as well as merger and acquisition activity. On the other hand, loan demand from small businesses was reported to be flat, but very strong. Commercial real estate lending slowed somewhat as some investors waited for stability to return to the financial markets. Several lenders indicated that there was some tightening of terms and standards for commercial real estate loans. These contacts also suggested that this was generally done by institutions that earlier had compromised standards slightly as a result of intense competition. The tightening, according to these contacts, simply brought the market back to more prudent practices. On the consumer side, lenders reported that activity remained very high, due in large part to low interest rates. Mortgage interest rates continued to trend downward over the reporting period and this has helped maintain strength in new originations as well as refinancing activity. More than one lender suggested record refinancing activity, with one referring to the recent surge as the equivalent of the "1,000 year flood." There appeared to be little change in lenders' attitudes toward consumer loans. Most retailers, auto dealers, and realtors reported no discernible tightening of lending standards, although a regional homebuilder noted that at least one lender was increasing scrutiny of "B and C class" borrowers. District banks also noted an increase in deposits, with some attributing the pickup to investors' flight from volatile stock markets.
Labor Markets
The District's labor markets remained very tight and labor shortages persisted, despite a recent increase in the unemployment rate. September's average unemployment rate for District states crept up to 3.7 percent, from August's 3.5 percent, still well below the national average. Total employment growth remained positive and initial unemployment claims through mid-October continued at the very low levels experienced in recent years. Manufacturing employment, on the other hand, has been trending downward since April after nearly a year of expansion that mirrored overall job growth. A few of the region's major manufacturers, most notably producers of agricultural equipment, announced layoffs in response to softening demand for their products. Construction employment also was trending downward, although skilled construction professionals were still cited as being in very short supply in most areas. There is little evidence to suggest that the turmoil in the stock market recently has had an impact on financial services employment in the region. Jobs in financial services continued to rise at roughly twice the rate of overall employment (year-over-year) in the Midwest's financial capital, Chicago. There were no new reports of intensifying wage pressures.
Agriculture
District farmers continued to be affected by low grain prices as the fall harvest proceeded. The corn harvest was halfway finished by mid-October, well ahead of the normal pace, while the soybean harvest was a closer-to-normal 75 percent complete. Farmers selling grain out of the field were aided by a minor price rally during the first half of October. While corn and soybean prices are likely past the harvest-time lows, they remain more than 20 percent below levels of a year ago. Agricultural creditors indicated that, after a few good years, most farmers will be able to withstand this year's low prices, but some could falter if soft prices continued well into 1999. A USDA survey indicated District hog numbers were up 5 percent from last year as of early September, well above the average increase for the U.S. However, low prices (in part the by-product of large production gains) have prompted cuts in the District breeding herd and farrowing intentions for this fall relative to last year. Dairy farmers continued to benefit from high milk prices and low feed costs.
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