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Economic activity in the Seventh District expanded in March, but at an even more sluggish pace than in the previous reporting period. Consumer and business spending softened. Labor market conditions weakened in general, although they continued to vary by industry and location. Residential and nonresidential construction slowed, as did manufacturing outside of export-oriented businesses and the steel industry. Consumer lending declined, but business lending remained strong. There were more reports of difficulty in obtaining credit, and these were not limited to the real estate market. Cost pressures from rising material and energy prices increased from the previous period, while wage pressures remained low. Corn prices set new records, while soybean prices declined from recent highs.
Consumer spending in the District was sluggish in March. Higher energy prices and poor weather contributed to weaker retail sales overall, despite reports of continued strength in the demand for luxury items. A Michigan contact noted that tourism and business travel were slow in March, with a negative effect on retail activity as a result. However, an Illinois contact reported that hotel business remained strong, in part due to foreign demand from business travelers and the favorable exchange rate. Sales of automobiles varied across the District, but, overall, remained weak in March. Tighter auto loan standards were reported to be having an effect on vehicle demand. Dealers reported only a limited impact on inventory levels from the ongoing American Axle strike. Activity in service departments and sales of auto parts were sustaining business for many dealers.
The pace of business spending was down slightly from the previous reporting period. A heavy machinery manufacturer reported further investment in research and development and in capacity. In contrast, contacts in the automotive and financial services industries reported reducing capital expenditures. Overall, employment conditions in the District weakened, with Michigan continuing to lag behind the other District states. Information technology, sales, and health care remained bright spots for hiring, while the manufacturing, construction, automotive and financial services industries continued to report weak labor demand. The demand for skilled and professional workers remained strong, and shortages of such workers continued to be reported. Staffing firms' billable hours were stable and their job advertising activity was strong. However, these firms have recently experienced some slowing in new placements, and one contact noted that small to mid-size clients were delaying annual commitments in light of concerns over near-term economic prospects.
Construction and Real Estate
The pace of construction in the District slowed from the previous reporting period. Existing projects were moving forward, but new projects were being delayed or cancelled. Residential development and construction continued to fall, although the rate of decline slowed in some District states. Excess inventory continued to be reported in some areas of the District in both homes and condominiums. Housing demand remained weak, apart from some gains in high-end and custom-built homes. However, inquiries were reported to have increased in March, particularly among first-time home buyers. Several contacts reported that lower prices for existing single-family homes were pressuring margins on new and spec homes, as builders found they needed to reduce prices in order to move inventory. Residential rents were stable. Nonresidential development and construction grew slowly in March, reflecting infrastructure projects such as roads, hospitals, and churches as well as restaurants, gas stations, and hotels. Office and retail construction growth remained steady for most of the District; however, contacts in some District states reported excess capacity in these sectors and indicated that vacancy rates were rising.
Manufacturing activity continued to grow in the District, but at a weaker pace in March. Demand for most forms of heavy equipment declined, but demand for aircraft and energy extraction and mining equipment continued to be robust. Manufacturers in several industries again reported strength in exports. Domestic steel production continued its strong growth, aided by advantageous terms of trade. Soft demand continued to affect manufacturers with close ties to residential housing. For example, one contact in the building materials industry reported plans to implement work force reductions and was delaying plans for adding capacity. Automakers reported that sales in the early part of the year were slightly above expectations, but expressed concern that higher gasoline prices would reduce demand going forward. Several contacts noted that the American Axle strike was beginning to adversely impact their business. A contact reported that layoffs in the automotive industry were slightly lower than expected in March; however, an auto supplier reported plans to move from two shifts to one at an Illinois plant in the near future.
Banking and Finance
Credit market conditions in the District were variable in March, but were little changed overall from the previous reporting period. Consumer loan demand continued to decline. Lenders tightened standards on loans to households with continued concerns about loan quality. Home equity loans were steady, while home equity lines of credit declined. Mortgage refinancing activity increased substantially. However, mortgage originations remained low and standards continued to tighten, with contacts reporting that lending was concentrated among low-risk borrowers and conforming mortgage products. Business loan demand remained strong, particularly for commercial and industrial loans. However, standards continued to tighten, and concerns about the commercial real estate sector limited the availability of credit to this market. A contact in this industry reported continued unwillingness on the part of traditional lenders to finance new projects. In addition, contacts in retailing reported financing difficulties, because banks were tightening standards on existing lines of credit.
Prices and Costs
Costs rose for a variety of inputs from the previous reporting period, including energy-related products and raw materials such as metals and cement. Several contacts reported that rising diesel fuel prices were leading some small trucking firms to go out of business and others to reduce activity as fuel surcharges were insufficient to cover costs. A contact in the construction industry reported that wallboard prices had declined to the degree that they no longer covered production costs. Many contacts cited the rising price of steel as a significant factor in their costs. Wage pressures were limited outside of the skilled labor positions that continue to experience shortages. A staffing firm reported some recent softening in pay rates for temporary services employment. In contrast, a construction contact cited union wage contracts and a manufacturing contact indicated health care as factors boosting their respective labor costs.
During March and early April, corn prices climbed to new highs (in nominal terms) while soybean prices retreated from recent highs. Contacts reported that these price developments may result in a smaller decline in corn planting and a more modest increase in soybean acres this spring than had been anticipated. For both corn and soybeans, substantially higher input costs, including premiums for crop insurance, have increased breakeven prices for the current growing season. Furthermore, farmers found it more difficult to engage in forward contracts, as grain elevators faced margin calls due to higher futures prices. Winter snows and recent cool weather and precipitation delayed field preparations for planting in much of the District, though applications of fertilizer this past fall should partially compensate for the delay. Lower milk, hog, and cattle prices combined with higher feed costs reduced margins for dairy and livestock producers. Hog operations seemed to be hit hardest. There were some reports that depleted cash reserves were creating a demand for loans, but that lenders were not willing to meet this demand.