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The Seventh District economy remained strong in October and November, although pockets of softness persisted. Retailers were generally satisfied with Thanksgiving weekend sales results as traditional gift items sold well. Home sales remained strong and builders' expectations for the new year were buoyed by Federal Reserve actions to cut interest rates. Manufacturing activity was generally high despite further softening in some key industry segments. Bankers remained somewhat cautious amid continued strong demand for both business and consumer loans. Midwest labor markets were much tighter than the nation as a whole and retailers were finding it harder to fill seasonal positions than a year ago. District farmland values dropped slightly during the third quarter, the first quarterly decline since 1986. Hog producers again sustained losses from sharply lower prices while dairy farmers continued to benefit from high milk prices.
Consumer Spending
Retailers reported that sales were generally in line with their expectations going into the holiday season. Contacts indicated that traffic through retail outlets was very heavy over the Thanksgiving weekend. Sales were good, but were not in line with the heavy traffic, suggesting to some contacts that many customers were simply browsing rather than buying. Contacts with a national presence generally reported that sales gains in Midwest stores were slightly better than the rest of the nation. Items cited as selling well included seasonal and traditional gift items (such as toys, novelty apparel, shirts and neckties for men, robes for women, etc.) while winter apparel languished on the shelves as a result of unseasonably warm weather. Overall inventory levels were reported to be in line with sales expectations and only one contact noted a greater-than- normal increase in promotional activity. District auto dealers reported that sales remained strong, despite a normal seasonal slowdown.
Housing and Construction
Overall housing and construction activity was generally robust in October and November. A national survey of homebuilders suggested that November sales in the Midwest region increased substantially from October and ran well ahead of year-ago results. Homebuilders' optimism was also buoyed by Federal Reserve actions to cut interest rates, leading to much higher sales expectations for the coming six months. Realtors reported that sales of existing homes remained very strong in October and November. Contacts noted that the normal seasonal slowdown in sales failed to materialize this year and, in some cases, actually increased noticeably. A large realtor in the Chicago metro area indicated that existing home prices continued to appreciate in the 5 percent to 7 percent range as a result of the very active market. Apartment space remained tight in most areas and rents were reported to be increasing slightly, yet there was no noticeable change in building activity in this market. Nonresidential activity also remained robust although there were a few more reports of large projects, particularly in office and hotel developments, being scaled back. Some contacts indicated that the less ambitious plans were not entirely unwelcome at this point in the business cycle.
Manufacturing
Manufacturing activity generally remained strong in the District, although some key industries softened further. Strong national sales kept manufacturers of light vehicles producing at very high levels in October and November, and new orders remained strong, particularly for light trucks. Pricing remained very competitive for light vehicles and incentives were expected to remain high into the first quarter of 1999. Producers of construction and mining equipment reported continued strong sales and new orders as well as inventories that were generally in line with sales expectations. Production of and new orders for heavy trucks were also strong, although reports of canceled orders (some with substantial deposits) persisted. However, producers of agricultural equipment continued to "take it on the chin," according to one contact. Cutbacks in production resulted from an increasingly pessimistic sales outlook and high inventory levels. Contacts in the steel industry also remained pessimistic. Softer new orders and very high inventories led to production cutbacks, with one contact reporting that capacity utilization in the industry had fallen to around 80 percent and was perhaps still slipping. The pricing power of producers in both the steel and agricultural equipment industries remained very soft as a result of dwindling demand.
Banking and Finance
Overall lending activity was similar to that noted in our last Beige Book report. Consumer lending was moderately stronger, again buoyed by strength in housing markets. Both new originations and refinancing activity continued at a strong pace as mortgage interest rates remained at very low levels. Terms and standards on consumer loans were reported by nearly all contacts to be unchanged in November. Commercial lending activity was also reported to be brisk. Contacts suggested that recent interest rate cuts by the Federal Reserve and prime rate cuts by commercial banks had reassured some commercial borrowers who were concerned about the availability of credit. While most bankers indicated that business loan demand increased moderately, terms and standards were generally tightened somewhat for most types of business loans. Small companies were less likely to see changes in the terms and standards for loans than were larger borrowers.
Labor Markets
Labor markets remained very tight in the District and much tighter than the nation as a whole. A national survey of hiring plans indicated that employers in the Midwest remain the most optimistic of any region in the country about their hiring and expansion plans. The only reported source of labor market softness was in the manufacturing sector, particularly in durable goods. Seventh District producers of agricultural equipment cut back production and laid off some workers recently, and contacts suggested that further cuts could be in the offing. In contrast, employers in the construction and trade industries, both wholesale and retail, were very optimistic about their staffing levels heading into the new year. Skilled construction workers remained in short supply as a result of the extraordinary strength in housing markets. Retailers reported that finding holiday help was more difficult than last year, and the hiring plans survey indicated fewer than normal layoffs in both the wholesale and retail trade sectors. There were no new reports of intensifying wage pressures although a few contacts suggested that moderately rising health care insurance costs may exert additional pressure on overall employment costs.
Agriculture
The region's corn and soybean harvest was nearly complete by late November, with only a few farmers left finishing up in their fields. Available storage space for grain was reported to be tight in some areas, but the extent to which it was necessary to temporarily store grain on the open ground has not matched earlier concerns. Grain prices moved higher in the first half of November, yet remained well below year-earlier levels. Anecdotal reports indicated that tight farmer holding of grain and additional export sales contributed to the seasonal price gains.
District hog producers continue to sustain losses. Cash hog prices in the Midwest trended lower and in late November were 60 percent below a year earlier. The sharp price decline was spurred by record-large hog marketings and tight packer capacity. In contrast, dairy farmers continued to benefit from record-high milk prices.
A survey of agricultural bankers in the Seventh District indicated that farmland values registered a decline of 1 percent during the third quarter, the first such decline since 1986. Moreover, a majority of the respondents expect another decrease during the fourth quarter. Bankers also stated that the pace of loan repayments was slower than a year ago and that requests for loan renewals and extensions were up. Although bank contacts indicated that most of their farm borrowers are in good financial shape and able to weather the current downturn, they expressed concern over the financial performance of hog producers and the duration of low commodity prices.
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