September 4, 2013
The pace of economic activity in the Seventh District improved in July and August, and contacts generally expected moderate growth for the rest of the year. Growth in consumer and business spending picked up. Manufacturing production increased, as did construction. Credit conditions tightened some. Cost and wage pressures were modest. Abnormally dry weather hurt crop prospects in many areas of the District, but to a much lesser degree than during last year's drought.
Consumer Spending
Growth in consumer spending picked up a bit in July and August. Non-auto retail sales increased modestly, with sales of luxury and housing-related items such as furniture, appliances, plumbing-related hardware, and flooring improving. Compared with last year, retail contacts expected a slight increase in back-to-school sales with a high level of promotional activity. Auto sales rose, and continued to outpace growth in non-auto retail sales. Dealers reported an increase in demand across all vehicle segments, but especially for fuel-efficient cars and light trucks. Used vehicle sales remained strong. Several dealers indicated that they expect leasing and sales activity to pick up further in the fall, boosted in part by still-elevated replacement demand.
Business Spending
Growth in business spending increased some in July and August. Contacts reported moderate investment in equipment and software and structures as well as a small increase in merger and acquisition activity. In contrast, inventory investment decreased, as manufacturing and retail contacts indicated a reluctance to increase inventories at the current pace of sales. Labor market conditions softened a bit. The pace of hiring slowed, with some contacts noting layoffs in recent weeks. Manufacturers and retailers, in particular, indicated that if they needed to add labor, they were more likely to boost hours or temporary and part-time hiring than expand their existing full-time workforce. Nonetheless, overall contacts reported an increase in their hiring plans for the remainder of the year. Demand for skilled workers remained relatively strong, particularly for finance, healthcare, engineering, accounting, and information technology occupations; and contacts again noted shortages of qualified truck drivers and workers in some skilled manufacturing and construction trades.
Construction and Real Estate
Construction and real estate activity increased further in July and August. Demand for residential construction grew steadily, as multifamily construction remained strong and single-family homebuilders reported an increase in showroom traffic. New single-family construction remained concentrated in infill areas, but an industry contact noted a number of homebuilders are planning new developments slated to begin later this year. In residential real estate markets, home sales, prices, and rents all continued to rise. Contacts speculated that recent increases in mortgage rates had stimulated home sales, as buyers attempted to make purchases before rates rose further. Several also noted that a limited supply of existing homes currently on the market had pushed home prices higher, and that residential rents in some areas were now back above their pre-recession peaks. Nonresidential construction grew at a more modest pace, again in large part reflecting the ongoing expansion of the auto industry. Commercial real estate conditions continued to improve, as rents rose slowly and vacancies fell. In particular, leasing activity for specialty food stores was noted to be strong.
Manufacturing
Manufacturing production increased in July and August. Steel output continued to grow at a moderate pace. In addition, specialty metal manufacturers reported an increase in orders, particularly from the auto and aerospace industries. The auto industry continued to be a source of strength for District manufacturing. In addition, a contact indicated that demand for heavy and medium-duty trucks is likely to increase over the remainder of the year in anticipation of new emission standards in 2014. Demand for construction equipment, construction materials, and household appliances continued to strengthen with the recovery in the housing market. However, overall demand for heavy equipment remained soft, hampered by weak export demand and a reduction in mining activity.
Banking and Finance
Credit conditions tightened some over the reporting period. Several financial market participants expressed concern about the impact of changing perceptions regarding monetary policy on long-term Treasury yields and equity markets. Net corporate borrowing costs were up slightly as benchmark interest rates rose. Banking contacts cited a modest reduction in overall business loan demand, but noted continued steady growth for commercial and industrial loans in the middle market. Contacts involved with commercial real estate finance indicated that the recent rise in interest rates was likely depressing some commercial investment. In contrast, consumer loan demand continued to increase, particularly for auto lending. Mortgage lending also rose, with new originations beginning to outpace refinancing activity for some banks.
Prices and Costs
Cost pressures were modest in July and August. Contacts noted an increase in some commodity prices, such as those for metals like steel, copper, and aluminum. A few also cited higher energy costs, particularly for fuel and natural gas. In contrast, prices paid for some building products such as lumber moved lower. Retailers again reported mostly small increases in wholesale prices; and, overall, pass-through to downstream prices was limited. Wage pressures were also modest, although many contacts again noted rising healthcare and other benefit costs.
Agriculture
Dry weather affected crop conditions in much of the District during the reporting period, lowering expectations for crop yields. Soybeans especially needed rain in order to fill out pods. Some of Iowa once again faced drought conditions. Nonetheless, corn and soybean conditions remained much better than they were during the drought last year. There were even parts of the District that received adequate moisture and should have above normal yields. Indeed, corn and soybean prices decreased on both spot and futures markets. There were also reports that less of this year's harvest than usual was pre-sold. Milk, hog and cattle prices declined from the prior reporting period, with livestock producers benefiting from falling feed costs. District milk production once again outpaced the levels of a year ago.