March 6, 2002
Reports of Seventh District economic activity through mid-to-late February were mixed, but the overall tone was more positive than earlier in the year. Consumer spending remained mostly soft in the region, though there were some signs of strength in a few sectors. Real estate and construction activities were again mixed, with continuing vigor on the residential side and softness on the business side. Manufacturing activity was generally weak, but there were more frequent reports of increasing production and new orders. Lending activity appeared to increase modestly, with firming loan demand from businesses. Labor markets slackened modestly, with most contacts saying that the worst of the region's job losses had passed. There were no new indications of intensifying pressure on wages or prices at the retail level.
Consumer Spending
Reports on consumer spending through mid-February were mixed, but
generally indicated relatively weak spending. Several contacts reported
that sales results in the Midwest were softer than in other regions.
One discount retailer noted that sales of staples and discounted
items remained strong, but sales of discretionary merchandise were
softer. Entertainment spending was mixed. With favorable weather
said to be helping consumers get out and about, theater revenues
were reported to be up between 5 percent and 10 percent so far in
2002. But sales results at casual dining restaurants remained generally
soft, with one industry contact saying that conditions were "hard
to read." Regional auto sales also were said to be mixed, but generally
weaker than late last year. Reports on tourism and travel varied.
A contact with one airline reported strong load factors, and said
the company was planning to add 7 percent or 8 percent to its flight
capacity, mainly through increased domestic flights. At the same
time, United Airlines announced publicly that on April 1 it would
be calling back 1,200 of its recently furloughed flight attendants,
over one-third of whom are based in Chicago. Other contacts, however,
suggested that tourism and travel in the region was softer than
they had expected. Signs of intensifying pressure on retail prices
were virtually nonexistent, as most contacts said that customers
remained very value conscious.
Construction and Real Estate
Reports from real estate and construction contacts were also mixed;
residential activities generally remained brisk, while nonresidential
activities were slower. Low mortgage interest rates continued to
buoy existing home sales in the region. A contact with one of the
largest independent real estate companies in the District said that
January home sales were a record for the month and remained strong
in February. Home price appreciation was said to be slowing somewhat
from the very strong rates realized over the last few years. New
home sales and starts were down modestly from a year earlier, but
builders remained busy according to most contacts. Both realtors
and builders indicated that first-time buyer and trade-up homes
sold well, while high-end sales remained weak. Apart from some over-building
in the downtown Chicago condo market, contacts reported that inventories
of new residential units were normal to slightly low for this time
of year. Nonresidential building and leasing activities were again
soft. Office vacancies continued to increase in most metro areas,
though there were some isolated reports of decreases. Landlords
were more proactive in securing leases by offering more generous
incentives and lowering rental rates. Light industrial vacancy rates
were also increasing in most areas, albeit at very modest rates.
Development of new retail space remained fairly strong in some areas,
but contacts noted that the number of projects in pipelines was
falling, as a generally softer economy led some retailers to postpone
or cancel expansion plans.
Manufacturing
Manufacturing activity remained generally weak, but reports of increased
production and new orders became more frequent. Many contacts said
that with inventories very lean, the worst for the manufacturing
sector was over. Light vehicle sales nationwide were robust again
in January and through mid-February, exceeding most analysts' expectations.
With continued strong sales and lean inventories, General Motors
recently announced increases in both its production estimates for
the first quarter and its sales forecast for the year. Domestic
production of steel increased in January from very low levels. Steel
inventories continued to fall, according to one industry analyst,
and prices strengthened from very weak levels. New orders for construction
and consumer equipment decreased considerably in the first quarter
of 2002, but industry contacts noted that dealer sales were stronger
than expected in January and February. Pending changes in environmental
standards likely prompted the surge in new orders for heavy trucks
in January. Several contacts indicated that more restrictive emission
standards and heavy fines for noncompliance, scheduled to take effect
October 1, would pull new orders ahead into the first three quarters
of this year. One contact with a large producer of telecommunications
equipment suggested that there were more signs that the industry
was "in the initial stages of a recovery," and noted that inventories
were so low that restocking will take place even before a pickup
in demand.
Banking and Finance
Overall lending activity appeared to pick up modestly in January
and February, with a few reports of firming demand for business
loans. Buoyed by favorable mortgage interest rates, residential
refinancing activity remained brisk, and contacts in some markets
indicated that demand for new originations was picking up. Applications
for home-equity loans and lines of credit were said to be increasing
in some areas as well. Most contacts indicated that consumer delinquency
rates were stable, and there was no discernible change in standards
and terms for household loans. Reports of business loan demand were
mixed, in contrast to the negative anecdotes of the past several
months. Some bankers noted a "real pickup" in overall demand in
January, while others said it remained soft. Even within the same
major metro area, one contact reported a pickup in commercial real
estate borrowing, as another said it was weaker. Industrial lending
generally remained weak, but a contact with one large bank in central
Indiana reported an increase in lending to manufacturers, who were
investing in both inventories and capital equipment. Most lenders
indicated that business loan quality stabilized somewhat in January
and February, and banks that had been building their loan loss reserves
were doing so at a slower rate.
Labor Markets
Labor markets continued to slacken in the Seventh District, but
most contacts indicated that the demand for labor was stabilizing.
One industry analyst said that the number of mass layoffs had slowed,
but idled workers were finding it more difficult to secure work.
A contact with a large staffing agency said that total billable
hours and revenues rose early in 2002, after sinking throughout
2001. This contact also noted that most of the company's regional
managers, who at this time last year "saw no end in sight" to the
industry's doldrums, expressed confidence in a rebound in the second
half of this year. Contacts in some industries have said that the
general economic slowdown has helped improve worker productivity
as turnover rates have decreased and managers were learning to "manage
better" during lean economic times. There were no new reports of
intensifying pressure on wages, but contacts continued to express
concern over rising health insurance costs.