April 23, 2003
After a modest but abrupt slowdown in late February, economic activity in the Seventh District showed few signs of improvement in March and early April. Many contacts suggested that the February slowdown resulted from heightened uncertainty preceding the war with Iraq. The war itself appeared to have only a limited impact on economic activity and had yet done little to change the overall level of uncertainty in the economy. Auto dealers, some other retailers, and realtors noted that customer traffic slowed in the first few days of the war but quickly rebounded. Manufacturers and bankers said that the war was perhaps the latest reason that many businesses continued to put off capital spending, hiring, and/or borrowing. Progress in the war helped bring down oil prices, though many businesses were still struggling with higher input costs and very little pricing power. Although drought worries have waned, agricultural concerns lingered as farmers' cash flows were hampered by delayed government payments, and dairy operations struggled with low milk prices.
Consumer Spending
Overall consumer spending was weak in March and early April. Retailers
indicated that sales results in March generally met their conservative
expectations, although they continued to use heavy discounting
to move merchandise. Inventories were said to be in line with
sales, as merchants remained vigilant in controlling stocks. District
auto dealers reported that light vehicle sales improved in March
from low February levels and were a little better than expected
given the war. However, showroom traffic slowed in early April
despite a new round of manufacturers' incentives. Light vehicle
inventories were generally high, and most dealers reported that
they were ordering fewer units from manufacturers. Tourism-related
activities were flat to down in most areas, although one contact
indicated that hotel occupancy rates in Chicago were up from a
year earlier. One major theater chain noted that ticket sales
were off about 10 percent from year-ago levels, which this contact
said was "partly a product-driven decline."
Business Spending
Businesses across the region remained very cautious about their
spending and hiring plans. Most contacts indicated that there
has been no change in economic conditions that would warrant an
increase in capital expenditures, and many continued to delay
planned upgrades and expansions. However, some businesses were
"sitting on cash," which one contact said could boost capital
spending quickly once aggregate demand picks up. The hiring environment
remained very weak in most areas as well. Though the majority
of business contacts suggested that payrolls were relatively unchanged
in recent weeks, reports of layoffs continued to outnumber reports
of new permanent hires. Demand for temporary help also remained
very weak, although one large staffing services firm said that
year-over-year growth rates had stabilized in March after several
months of steady declines. With margins being squeezed by increasing
cost pressures and a lack of pricing power, businesses from across
the region continued to focus on cutting costs as a means to improve
profits.
Construction and Real Estate
Overall conditions in real estate and construction softened slightly
since our last report. Realtors said that existing home sales
were still strong but may have leveled off in recent months, while
builders suggested that sales and construction of new homes slowed
somewhat in March. However, some of the slowdown was weather related
as very cold temperatures in much of the District made it difficult
for builders to break ground. One builders group also suggested
that potential homebuyers were rushing to lock in historically
low mortgage interest rates before they begin to rise, a trend
that favored existing and nearly complete spec homes. Nonresidential
real estate activity was stagnant in most of the District. Demand
for office space remained very weak, and most contacts suggested
that vacancy rates continued to rise, albeit slightly. Commercial
realtors in a few areas noted some increase in leasing activity,
but it was driven by lease renewals and "tenants shuffling around,"
rather than new demand. However, one contact in the Chicago area
reported a sharp increase in the number of office property tours
compared with a year ago, though this had not yet led to any net
absorption. As a result of continuing weak demand, most contacts
have again pushed back their forecasts for a recovery in the office
markets. There was little change in light industrial or retail
activity, but there were a few reports of a pickup in demand for
large-scale projects in the health-care, pharmaceutical, and federal
government sectors.
Manufacturing
Manufacturing activity in the District softened slightly in late
February and March, partly due to slower auto production. Nationwide
light vehicle sales rebounded modestly in March, from February's
low levels. However, inventories remained high, and second-quarter
light vehicle production plans were down from both first-quarter
and year-ago levels. Demand for heavy equipment was still soft
in most segments, although a weaker dollar helped boost demand
according to one producer. While conditions in the heavy truck
industry generally remained weak, a manufacturer of heavy truck
engines noted that demand firmed somewhat in the first quarter,
leading the company to boost production. A large manufacturer
of home appliances said that shipments in the first quarter were
down slightly from a year earlier. Many small manufacturers indicated
that production and new orders remained weak. However, a few in
the packaging materials and tool and die industries reported steady
volumes, and one in paper products even planned to expand its
workforce.
Banking and Finance
Overall lending activity appeared to slow slightly in March and
early April. Household loan demand softened somewhat. Many bankers
said that refinancing activity remained robust but had slowed
from the torrid pace earlier in the year. Some lenders also noted
that credit card volumes and auto loan demand had tapered off.
Standards and terms on household loans were largely unchanged,
but overall credit quality may have slipped somewhat. There were
a few new reports of increases in delinquencies and defaults,
particularly on home-equity and mortgage loans. Business loan
demand remained weak, with some lenders describing the market
as "stagnant" and "lacking energy." Most bankers said that overall
commercial loan volumes were flat to down slightly. However, one
large bank reported that demand picked up in March, with at least
some of the increase due to existing customers expanding their
businesses. Standards and terms for commercial loans were largely
unchanged. Reports on business loan quality were mixed but generally
suggested a slight improvement. One contact noted a rise in charge-offs
related to fraud, and several indicated that banks continued to
add to their loan-loss reserves.
Prices and Employment Costs
Contacts continued to report increases in some input costs, but
an intensely competitive pricing environment helped to keep broad-based
price pressures in check. Manufacturers again saw increases in
energy, steel, aluminum, and petroleum-based input costs. Agricultural
contacts also noted rising fuel and nitrogen costs, though many
farmers had previously locked in lower prices. Employment costs,
outside of health insurance premiums, remained largely subdued
in recent weeks. There were no new reports of upward pressure
on wages. In fact, one temporary help contact said that many employers
were pushing across-the-board pay cuts to contain costs. Few businesses
were able to pass along input cost increases. Rather, many suppliers
of goods and services indicated that their customers (including
large manufacturers and retailers) continued to exert pressure
on them to reduce prices, putting a further squeeze on margins.
Contacts suggested that retail competition remained intense, and
most were using more and steeper discounts to move merchandise.
Agriculture
With spring planting under way in some areas, drought concerns
have been mitigated by recent precipitation across much of the
District. However, with soil moisture reserves low, timely rains
will be more essential for good yields this year. Cattle prices
remained high, while hog prices were lower than a year ago. The
adverse impact of dropping milk prices on dairy farmers has spread
to their suppliers, as accounts payable were increasing at an
"alarming" rate. To generate cash, some dairy farmers were selling
their cows and renting their land. In areas that had poor yields
last year, there were reports of farmers being unable to pay off
their operating lines of credit. Cash flows were also hurting
from delayed government payments due to changes in federal programs.
All of these factors have resulted in more demand for operating
loans. Even so, farmland values have increased because of continued
demand from investors and recreational users, in addition to urban
pressures and land exchanges for tax purposes.