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Economic activity in the Seventh District was sluggish in June. Consumer spending was mixed and labor market conditions weakened some, although they continued to vary by location. Residential construction declined further and nonresidential construction showed signs of slowing. Manufacturing activity weakened slightly. Consumer lending declined, while business lending was stable. Cost pressures from rising material and energy prices remained high, while wage pressures continued to be low. Flooding and cool weather further set back crop conditions in June, although they improved toward the end of the month and in early July.
Consumer spending was mixed since the previous reporting period. Federal tax rebates and increased discounting boosted retail sales, but spending on automobiles slowed. Consumers continued to tighten their budgets in response to higher food and energy prices. Spending on discretionary items such as furniture, apparel, and electronics decreased and gasoline consumption fell, while food service sales were flat. Higher fuel prices discouraged travel, leading to a slowdown in tourism. Tourism was also adversely affected by inclement weather and flooding in some areas of the District. Light vehicle sales were lower; contacts reported that General Motor's sales incentives helped buffer the decline in June. Higher demand for fuel efficient cars left dealers in short supply of these vehicles and with higher inventory levels of trucks and SUVs.
On balance, the pace of business spending was little changed from the previous reporting period. A large manufacturer of heavy equipment is increasing capacity at two of its Illinois plants in what marks its first significant increase in capacity in the state in twenty years. Labor market conditions in the District weakened some, with Michigan exhibiting a larger decline due to developments in the automotive industry and Iowa experiencing a small drop due to the impact of the recent flooding. Lay-offs were reported in the automotive and financial services industries. A contact in retail trade noted that increases in the minimum wage for several District states in July were reducing the demand for new hires. The demand for skilled labor remained strong and shortages of such workers continued to be reported. In addition, a staffing firm reported that billable hours were relatively stable from the previous reporting period.
Construction and Real Estate
The pace of construction slowed slightly from the previous reporting period. The decline in residential construction continued in June, and accelerated in some parts of the District. In general, prices continued to fall, although one contact noted some improvement in lower-tier prices. Absorption rates of residential housing remained low and many builders continued to report an excess of inventories, particularly for spec homes. Showroom traffic slowed; and although financing inquiries increased, many potential buyers were still finding it difficult to either obtain a mortgage or sell their existing home. Credit also remained tight for new developments. Nonresidential development and construction showed signs of slowing. The rising cost of road building materials and tightening government budgets restricted the growth of infrastructure construction. Construction of retail outlets slowed further and several contacts expressed concern about overbuilding in the sector. The availability of financing for new commercial projects continued to tighten.
Manufacturing activity in the District weakened slightly from the previous reporting period. Demand for heavy machinery for oil and gas extraction and mining remained strong. However, contacts reported continued weakness in the demand for residential construction equipment as well as some recent softening for nonresidential construction and agricultural equipment. Demand also remained soft for manufacturers with close ties to housing, such as the home appliance industry. Cut-backs were reported in the production of ethanol; several already-idle plants are being kept off line and a few additional plants have been shut down. Export-oriented industries continued to do well, but contacts noted a recent slowing in the pace of growth, particularly in demand from Europe. Activity remained strong in the domestic steel industry, and a contact in the pharmaceutical industry reported continued strength. Automakers reported domestic sales were lower in June and early July. Contacts also noted an acceleration of the shift in demand toward smaller vehicles, and that sales declines had spread to previously popular segments such as crossover vehicles. Accordingly, production cuts were planned for larger less fuel efficient vehicles.
Banking and Finance
Credit market conditions in the District tightened from the previous reporting period. Funding costs rose amid renewed volatility in financial markets. Consumer loan demand continued to decline as lenders further tightened standards. Higher interest rates have reduced the demand for both mortgage originations and refinancings. A contact in the home loan industry noted that risk pricing guidelines for FHA lending set to go into effect in July will likely tighten the mortgage market further. Business loan demand was steady, particularly for commercial and industrial loans. However, a contact noted unwillingness on the part of banks to engage in unsecured business lending. In addition, concerns about the residential and commercial real estate markets limited the availability of credit for construction loans from banks.
Prices and Costs
Costs remained high for a variety of inputs. Increases in commodity, food, and energy prices were again cited by contacts in various industries. There were also several reports of pass-through of these higher costs to downstream prices. The rate of growth in steel prices flattened, but prices remained elevated. The scrap market remained tight with some producers struggling to get materials. One contact noted, however, that inventories at steel service centers were lean in part due to anticipation of a possible future decline in prices. Transportation costs were boosted by fuel surcharges, and retailers reported raising their prices in response to higher wholesale prices. A contact in the service station business reported pressure on margins from higher costs from credit card transaction fees. Wage pressures remained limited outside of the skilled labor positions that continue to experience shortages and the impact of new state minimum wages on the retail trade industry.
Flooding compounded the problems of already slower-than-normal corn and soybean planting in the District. Planting delays due to excess precipitation continued to affect every state in the District except Michigan. Crop insurance and other disaster programs likely will offset much of the economic loss to farmers. The corn acreage expected to be harvested this fall dropped more for the District than for the U.S., while for soybeans it increased relatively less. Although crop development lagged that of a year ago by 2 to 3 weeks, warmer and drier weather toward the end of June and in early July improved crop conditions in the District. Corn and soybean prices were higher at the end of the reporting period, but remained below their recent nominal records. Grain elevators and farmers faced higher needs for liquidity to cover futures positions, resulting in constraints on sales of future crops. Milk and cattle prices climbed, while hog prices fell. Livestock operators continued to struggle with rising feed costs, which have led some hog farmers to reduce their breeding stock.