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Reports from Seventh District contacts generally suggested that economic activity remained soft toward the end of 2002. Consumer spending again was relatively soft, and many retailers expressed disappointment with holiday sales results. Business spending was also sluggish, and capital expenditure plans for the new year were said to be "cautious." Activity in the District's housing markets was relatively brisk, but nonresidential activity remained weak. Softness persisted in the manufacturing sector, but there were some reports of improvement in a few key industry segments. Refinancing activity continued to drive household borrowing while softness persisted in business loan demand. Upward pressure on wages and retail prices generally remained subdued, though contacts continued to express concern over rising health-care costs. Farmland values in District states were on pace to show the largest year-over-year gain since 1997.
Consumer spending remained generally soft in December. Holiday sales results were largely in line with most of our contacts' conservative plans. However, a large freight company in the District said the firm's big retail customers were "not very happy with the outcome" of the holiday shopping season. A contact in Michigan added that there were "no glowing reports" from small retailers either. Retail inventories were said to be in line with sales expectations for the start of the new year, as merchants kept their stocks leaner during the holidays than they had in previous years. Auto dealers in the region reported that new vehicle sales were weak early in December, but noted "a flurry of activity" after Christmas as consumers sought to take advantage of generous year-end incentives. Dealers' new vehicle inventories decreased modestly from November's levels, but were said to be slightly higher than desired. Used car sales reportedly softened during the month, but body shop and seasonal service receipts, which had been soft, picked up with the onset of winter weather. Cinema ticket sales continued to "do very well" in December, while casual dining sales were said to be mixed and "hard to read."
Contacts reported that overall business spending was sluggish in December, and that plans for the new year were "cautious." One large staffing services firm noted that demand for temporary help, particularly from manufacturing and light industrial clients, had softened toward the end of 2002. Another contact said that orders for temporary workers in Michigan had become "stagnant" in December, after showing some improvement in the fall. Business travel was said to be flat, but one contact reported that demand for trade show space in the region was good. Most contacts suggested that there was little change in business capital spending at the end of 2002. One banker summed up the general sentiment of contacts, saying that businesses were "paralyzed" by apprehension despite very favorable lending rates and terms. While many reports suggested that capital spending plans for 2003 are relatively weak, contacts indicated that those plans could change quickly once demand picks up.
Construction and Real Estate
Once again, construction and real estate activity was relatively strong on the residential side and soft on the nonresidential side. Sales of both new and existing homes slowed somewhat toward the end of the year but remained strong. Homes at the lower end of the market continued to outsell those in the upper price ranges in most areas. Some reports suggested that the number of housing units on the market increased modestly toward the end of 2002 but none of our contacts felt that inventories were excessive. Looking forward, both builders' and realtors' groups were expecting sales in 2003 to decrease slightly from 2002 but remain at high levels. There was little change in nonresidential activity according to contacts. Office vacancy rates were fairly stable in most metro areas, as space demands remained weak. One exception was Chicago's office market, where vacancy rates continued to creep up in the fourth quarter, while effective rents moved down. Chicago is one of the very few markets in the nation where a significant amount of office space is still under construction. Thus, many real estate professionals don't expect vacancy rates in the Chicago market to peak until 2004.
Manufacturing activity was again relatively soft in December, but there were increasing reports of improvement in key industry segments. Demand for light vehicles nationwide surged at the end of the year, which helped bring inventories down from November's excessive levels. This prompted at least one automaker to increase first-quarter production plans, albeit slightly. A large producer of telecommunications equipment reported a modest recovery in most of their product lines. This contact added that demand in the high-tech sector was a microcosm of the overall economy, with strength on the consumer side and weakness on the business side. Producers of machine tool parts noted that requests for price quotes and sales picked up slightly in December. In contrast, manufacturers of heavy equipment reported little improvement as 2002 drew to a close. A contact with one large producer of gypsum wallboard suggested that production slowed notably in December, mostly due to weakness in commercial construction markets.
Banking and Finance
Favorable financing rates continued to buoy household lending activity, while business loan demand remained soft. Strength on the consumer side was again driven by mortgage refinancing activity. One lender in the District indicated that growth in mortgage lending was limited only by the bank's capacity to process applications. Contacts said that there was little discernible change in consumer loan standards or quality in December. Bankers generally indicated that business loan demand remained soft. One large bank reported an uptick in small business loans and another noted a modest increase in applications for business credit lines (although customers were reluctant to draw on them). However, contacts suggested that these isolated increases may have been due to shifts in market share rather than a general improvement in loan demand. Bankers contacted reported no change in business credit quality.
Prices and Employment Costs
Upward wage pressures remained subdued and largely unchanged in December. However, many contacts suggested that increasing health insurance costs were further stressing their bottom lines. Employers more frequently were shifting portions of these increases to their workers in an effort to contain costs. There were a few reports from manufacturers of rising input costs (such as for steel, packaging, and electronics), but increases in output prices were said to be constrained by fierce competition. Fierce competition reportedly kept prices in check at the retail level, as most retailers reported deeper discounting this holiday shopping season than a year earlier.
According to our survey of rural bankers, farmland values in District states in the third quarter of 2002 increased an average of nearly 7 percent from a year earlier, and were on pace to show the largest year-over-year gain since 1997. Farmers in the western and northern portions of the District have benefited from bumper crops and markedly higher corn and soybean prices. However, adverse weather in much of Illinois and Indiana reduced crop output and contributed to increased financial stress on portions of the industry in those states.