October 15, 2003
Seventh District economic activity continued to show signs of modest improvement in late August and September. However, many businesses wanted to see a longer period of firming in demand before committing to hiring, expanding capacity, or inventory building. Consumer spending was stronger than earlier in the year, but sales results were mixed by retail segment. Business attitudes appeared to improve further, yet spending and hiring plans remained cautious. Construction and real estate activities continued to be characterized by strong residential markets and weak commercial markets. Manufacturing activity continued to expand. Bank lending remained relatively soft. There were only small changes in the price and cost environments. Early harvest results suggest that corn output will be at least average, but that soybean output will be well below average.
Consumer spending
Consumer spending in August and September still appeared to be
stronger than earlier in the year, although reports were mixed.
Retailers said that sales generally exceeded expectations, as
consumers continued to purchase deeply discounted merchandise.
Inventories were leaner than expected as a result. Still, most
merchants were not confident enough about sales prospects to boost
inventories in the near term. While apparel sales generally remained
sluggish, there was a sharp rise in sales of baseball-related
apparel in the Chicago area. By contrast, a contact in casual
dining indicated that food service sales remained soft. District
auto dealers said that light vehicle sales fell from August to
September, and seemed softer than the national trend in both months.
With weaker sales, dealers continued to curb light vehicle orders
and draw down inventories. Many dealers also noted that service
sales slowed in September after picking up toward the end of summer.
Business spending
Business attitudes continued to improve, although spending and
hiring plans remained cautious. Several contacts noted that businesses
were seeing better earnings, but much of the improvement resulted
from cost containment rather than revenue gains. One contact suggested
that firms want to see several periods of stronger revenue growth
"in their rearview mirrors" before they commit to capacity expansion
and permanent hiring. Most capital equipment spending continued
to go toward the maintenance, repair, or replacement of existing
stock. On the hiring side, contacts with temporary help firms
reported a seasonal pickup in worker orders; for one national
firm, this was the first seasonal boost in three years. The jump
in worker assignments was particularly evident in the light industrial
and office/clerical categories. Several contacts suggested that
the bulk of new temporary hiring was done by small employers rather
than large. Still, most businesses remained very reluctant to
add permanent full-time help, although there were a few reports
of increasing worker hours.
Construction and Real Estate
As has been true for some time now, District real estate markets
were strong on the residential side and weak on the commercial
side. New home sales were again robust, with one contact's comment
that "business is great" generally summing up builders' sentiment.
Sales of first-time-buyer and trade-up homes continued to drive
the market, although there were a few reports of a pickup in the
luxury segment. Traffic through builders' annual "Fall Parade
of Homes" was very high in most areas, leaving builders more optimistic
that new home sales will remain strong well into the fall. Existing
home sales were also very strong in most parts of the District.
Commercial activities appeared to slow somewhat. Some contacts
said that the number of office property tours and prospects fell
recently, after picking up through the summer. On balance, office
vacancy rates were flat in the third quarter, and rents remained
under downward pressure. Light industrial vacancies remained elevated
and there were some concerns that big-box retail space was overdeveloped.
Manufacturing
Manufacturing activity continued to expand in late August and
September. Nationally, light vehicle demand exceeded some automakers'
expectations over the summer months, which helped bring inventories
down to desired levels sooner than anticipated. Despite stronger
sales, automakers did not report any changes to production schedules.
A leading producer of home appliances said that shipments picked
up in recent months as distributors replenished depleted inventories.
Some heavy equipment industries were seeing a "pretty good recovery,"
according to one contact, and even though inventories were rising,
the inventory-to-sales ratio continued to decline. Medium-duty
truck dealers were also said to be rebuilding inventories, helping
to boost shipments in September. Some producers of machine tools
noted increases in price quotes, new orders, and shipments. Moreover,
one contact suggested that the increase in demand for machine
tools was coming from customers across a wider range of industries.
Despite little change in demand, domestic steel production improved
modestly as imports continued to fall.
Banking and Finance
Overall lending activity remained relatively soft, although bankers
reported slight increases in both household and business loan
demand. Residential refinancing activity increased somewhat from
its summer lull, but remained well below the peak reached in June.
One banker said that margins on mortgage loans were being squeezed
as firms that had built up "a huge mortgage lending infrastructure"
competed for a smaller pool of potential borrowers. Some contacts
also noted modest increases in home equity and credit card volumes.
Household loan quality was reported to be largely unchanged. Business
loan demand remained very soft on balance, though there were scattered
reports of improvement in some segments. A few bankers noted increased
lending to small businesses, and one saw a pickup in middle-market
lending. For the most part though, large corporate borrowers remained
on the sidelines. Business credit quality was said to be improving,
and there were no changes reported for standards and terms.
Prices and Employment Costs
On balance, there was little change in the pricing and cost environments.
Manufacturers of some products said that a weaker dollar enabled
them to raise output prices from very low levels. However, producers
of other goods attempted to push through price increases with
limited success. Many retailers indicated that the long trend
toward steeper discounts may be coming to an end, with one adding
that "prices simply can't go much lower." Business contacts continued
to report that higher energy and insurance costs were squeezing
profits. To keep the rise in employment costs down, more employers
were planning to shift higher health insurance premiums to their
workers. In addition, several contacts reported that firms continued
to limit and/or delay merit pay increases.
Agriculture
Crop conditions generally stabilized during September after deteriorating
during August due to heat and lack of precipitation. In eastern
portions of the District, however, harvesting was running behind
average since fields were too wet and crops were maturing late.
Corn yields across the District were coming in close to normal
or above, but soybean yields were mostly below normal. Widespread
spraying for aphids kept soybean yields from falling more, but
boosted input costs. On balance, expectations for farm income
have been reduced, potentially stressing farmers' cash flows and
thus generating concerns about loan repayments. As a result, slower
capital expenditures in farming are expected for the District,
except for repairs. Nonetheless, strong competition between farmers
and nonfarm investors persisted, driving farmland values and rental
rates higher. With less development in some areas, there are signs
that the role of tax-deferred exchanges in pushing up land values
has begun to slow.