August 7, 1996
Summary
The Seventh District economy continued to expand through
June and July at a slightly slower rate than in our last report.
Retail sales growth was positive but continued to lag that of the
nation. Residential housing activity lost some momentum, but overall
construction activity continued to increase. The manufacturing
sector, bolstered by strong demand for durable goods, expanded in
June and July but showed some signs of slowing toward the end of the
period. Banking activity remained strong, while several financial
institutions noted a continued rise in delinquency rates. Despite
tight labor markets and continued strength in the economy, there was
little evidence of accelerating increases in wages or other input
costs. Grain prices fell as crop conditions improved and cuts in
livestock production eased concerns about tight grain supplies.
Retail sales
Retail sales continued to increase in year-over-year
comparisons, but the growth rate slowed slightly from June to July.
Several large retailers noted that sales growth in the District
remained below their national averages. Slower-than-expected sales
gains resulted in some unintended inventory buildup, most notably in
electronics and seasonal items, such as air conditioners and lawn
and garden equipment. One retailer described demand for summer goods
as "nonexistent". Most retailers, however, reported that inventories
were in good shape and much better than at the same time last year.
Auto dealers reported that sales were strong and that showroom
traffic remained high.
Housing/Construction
Growth in the housing industry lost some of
its momentum in June and July but most contacts noted that the
market remained very strong. Several home builders and realtors
reported that activity had picked up from May's weather-induced
slump, but not as much as anticipated. Shortages of skilled labor
and some building materials hindered contractors' efforts to make up
lost time in many areas. A few metro areas were reporting inventory
buildup, but most contacts noted that builders were not concerned
and were not using incentives to clear inventories. Most builders
and realtors reported that the first-time buyer segment remained
robust. Contacts in some of the District's largest metro areas
reported that office vacancy rates continue to fall and may be at a
level that could spur new construction. A realtor in one of these
areas noted that several large projects were already underway and
that "this is the best office market (he's) seen in 5 1/2 years".
Manufacturing
Most District manufacturers reported strong demand
and lean inventories heading into the third quarter, while upward
pressure on costs remained constrained. Purchasing managers' surveys
indicated modest expansion through June and early survey returns
showed that the expansion continued in July--but at a slightly
slower rate: Survey results from one major metropolitan area
indicated slowing production growth from June to July with some
inventory building; new orders, however, remained quite strong.
Appliance and machinery producers reported that demand was being
buoyed by the continued strength in housing and construction
activity. Auto suppliers noted that production was at capacity and a
shortage of parts was hindering light truck assemblies. Several
steel analysts indicated that orders were still strong and
inventories remained lean at every level.
Despite the continued increase in activity, there was little evidence of acceleration in price increases. While costs of some inputs continued to drift upward, several producers indicated that they were unable to pass along these increases to final goods purchasers. However, steel producers reported some success in getting their July price increases to stick.
Banking
Banking activity remained strong through much of July,
although several financial institutions reported a continued rise in
delinquencies. Most District contacts noted that business lending
was the most vigorous segment of the banking market. One major bank
reported its strongest business lending month of the year in June
and indicated that this strength had continued into July. Several
banks noted a modest scaling back in consumer and mortgage lending,
but one large bank could find no let up in demand from its "high
quality" customers. Many contacts expressed concern about rising
delinquency rates for consumer and retailer loans, but viewed the
increases to be within normal credit performance standards.
Labor markets
Labor markets remained tighter in the District than
in the nation as a whole despite relatively slower job growth. The
rebound in manufacturing employment noted in our last report was
short-lived. Contacts from around the region and purchasing
managers' surveys suggested flat to slightly reduced manufacturing
payrolls in June and July. Shortages in professional and technical
occupations persisted; shortages were particularly severe in the
construction industry, where inclement weather in May and early June
delayed many projects.
Wage pressures remained subdued despite the very tight labor markets. However, some employers reported enhancing benefits packages to attract and keep workers, especially in the construction industry.
Agriculture
Corn and soybean prices fell sharply after hitting new
highs in mid-July. Crop conditions across District states were
mixed, but overall were rated slightly below normal as of the end of
July. Late plantings and subnormal temperatures have increased the
risk of damage from an early frost this year. Nevertheless, recent
rains and forecasts of favorable weather through early August--a
critical period for plant development--have buoyed District crop
prospects. Updated reports showing surprisingly large cuts in
livestock and dairy production--especially in District states--have
added to the decline in crop prices. Sudden sluggishness in grain
exports also eased earlier concerns about tight grain supplies this
summer.