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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a modest pace in July and August. Only a few contacts reported impacts on real economic activity from recent financial market developments, though a number said the developments had led them to lower their expectations for the rest of the year. Consumer spending and business outlays continued to rise. Labor market conditions were mixed by industry and location. Residential construction declined further in most areas, while the pace of nonresidential development was generally steady. Manufacturing expanded at a slower pace. Household lending declined, while business lending was flat. Overall wage and cost pressures were similar to those in the previous reporting period. The District was poised for a record corn crop, although first dry weather and then storms hurt corn and soybean conditions.

Consumer Spending
Consumer spending continued to increase at a gradual rate. One retailer noted a sluggish start to the back-to-school shopping season compared to last year but thought the slowness reflected a later start to the school year in many districts. Furniture sales were up slightly from a year ago. A discount shoe retailer noted sales declines owing to a falloff in store traffic. Inventories were generally in line with desired levels. Vehicle sales in central Indiana were slower than usual in early August and generally little changed from July. One dealer said that vehicle shoppers were not talking about the recent financial market volatility in their decisionmaking, but the dealer thought it would be some time before the full impact is felt. Tourism activity in Michigan picked up slightly in August compared with earlier in the summer, however most contacts were pessimistic about the outlook for the rest of the year.

Business Spending
Business spending rose again in the District. Capital expenditures continued to increase in line with previous plans for modest gains. A large biofuel plant came on line in northern Indiana, and an analyst noted that the wallboard industry continued to add capacity on net. In contrast, a health care provider cancelled plans for a strategic expansion. Freight hauling was little changed from the previous period. Commercial electricity sales were strong, though one utility marked down its expectations for the rest of the year. Changes in labor market conditions were mixed by industry and location. An analyst in Illinois reported modest job growth overall, with gains at professional business service firms and manufactured goods exporters offsetting losses at retailers and construction firms. Employment declined in Iowa on balance. An engineering firm planned to add staff in southeast Michigan, while a software developer was hiring in Indiana. In contrast, mortgage brokers announced layoffs in several locations. A staffing firm reported that bookings in the past six weeks were below expectations, in part because some large customers were holding back hiring in response to heightened uncertainties surrounding the recent developments in financial markets.

Construction and Real Estate
Both residential construction and home sales continued to fall in most areas of the District. A Chicagoland homebuilder reported that it has seen its steepest decline in construction since the early 1990s. One homebuilder in Michigan projected its activity to be slow for the next two to four years. Builders' cancellations began to taper off from high levels. Price discounts and incentives continued to grow for potential homebuyers. The pace of nonresidential development was generally steady. One contact from Michigan reported concern about the potential for overbuilding of medical offices. Office and industrial vacancies were steady or improving in many District cities, and office rents moved higher. Contacts generally noted that the recent volatility in the financial markets currently has had little effect on the demand for nonresidential space but has restricted developers' ability to obtain financing for projects.

Manufacturing expanded at a slower pace than earlier in the year. Manufacturers in a number of industries, including machinery and machine tools, reported strong demand from abroad; steel producers began exporting regularly for the first time. Domestic demand for agriculture machinery continued to run higher than was expected at the beginning of the year, and shipments of mining and oil and gas extraction equipment remained strong. In contrast, sales to domestic customers of other heavy equipment, particularly construction machinery, continued to trend lower, and one contact in the industry was not expecting much of a turnaround. Domestic machine tool sales slowed in August, though contacts were waiting to see how September turned out before getting concerned that this trend would persist. New heavy truck orders in the US were weaker than expected, with one analyst pointing to a larger-than-expected impact from the slowdown in housing as a key factor. An automaker said that nationwide sales were running below expectations in August, and vehiclemakers planned cuts in production for the fourth quarter. A steel producer said domestic business conditions seemed soft, though the seasonal lack of business at this time of year made it difficult to judge the true strength of demand. Steel inventories continued to move lower and were at desired levels. Shipments of gypsum wallboard continued to fall, and one contact expected declines to continue into 2008.

Banking and Finance
Household lending declined modestly. Applications for home mortgages continued to trend lower, and lenders were tightening standards and approving fewer applications. Consumer credit quality deteriorated modestly; delinquency rates for both first and second mortgages increased. Foreclosures increased in every state in the District except Illinois. A banker in Indiana noted that title companies were requiring mortgage brokers to settle via wire transfer rather than by check. Several contacts in the auto industry said that it was becoming more difficult to underwrite auto loans for borrowers with less-than-perfect credit. Business lending was little changed in most areas. Business credit quality remained favorable. Standards and terms of commercial loans tightened somewhat, and lenders have been adding back protective covenants. Spreads on bank loans widened, and one bank said it sent a message to its loan officers that they should be able to get broader spreads in the current market environment. Small- and medium-sized banks reported little impact from recent financial market developments, though one large bank in the District changed its lending practices after having problems securitizing some of its loans.

Prices and Costs
Overall wage and cost pressures were similar to those in the previous reporting period. Almost every contact noted the high level of energy prices; diesel prices moved up, boosting operating costs for farmers. Commercial construction contacts reported increases in structural material costs. A toolmaker reported plans to increase its catalog prices early next year, adding that it was confident those prices would be in place for some time because material price volatility had fallen. A specialty steel producer indicated that nickel prices were down significantly since the start of the year, but it would not have an impact on their final prices for a while because of the lead times in their business. Retailers in Michigan suggested that price increases were more modest, though food and beverage prices continued to rise noticeably. A staffing firm reported that its pay rates rose at a steady pace.

Crop conditions fared poorly with dry weather earlier in the reporting period and too much precipitation later. Recent storms damaged fields across the District, trimming yields. Only corn in Illinois and Iowa and soybeans in Iowa were in better shape than a year ago. Nonetheless, the District was poised for a record corn harvest, because farmers had planted more corn at the expense of soybeans. Grain storage construction increased, but not enough to alleviate concerns about storage and transportation issues at harvest. Corn prices declined in July but recovered in August. Soybean prices were lower at the end of the reporting period. Milk prices increased, while hog and cattle prices were little changed on balance. Ethanol and hog operations continued to expand. There were reports of higher prices for farmland at Iowa auctions.

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Last update: September 5, 2007