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Federal Reserve Districts

Seventh District - Chicago

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The Seventh District economy continued to expand moderately in September and the first three weeks of October. Growth in consumer spending remained a little slower than earlier in the year and price inflation at the retail level generally remained subdued. Nonresidential building activity was again robust and sales of both new and existing homes remained resilient. Manufacturing activity was decidedly mixed, and the pricing environment for most manufactured goods remained very soft. Overall lending activity picked up recently as household borrowing showed signs of a modest rebound. The District's labor markets remained very tight, and concerns over rising health insurance costs were expressed more frequently. The fall harvest progressed rapidly during October, with increased production by District farms contributing significantly to an expected record output for both corn and soybeans.

Consumer Spending
Retail spending remained somewhat softer than earlier in the year, but was said to be meeting most retailers' generally low expectations. National chains reported that sales gains in the region were approximately at the national average. Cooler weather was credited with boosting sales for both men's and women's apparel. Appliances and electronics were again cited as selling particularly well. Retail inventories were said to be slightly high, and most contacts noted more promotions and slightly higher discounting. Regional auto sales were better than a year ago and inventories were under control. One dealer group noted that out-the-door vehicle prices were down, as higher incentives more than offset higher market interest rates. September was one of the strongest sales months for casual dining in a long time, according to an industry contact, though early October appeared to be a little slower. This contact also noted some softening in high-end dining and definite slowing at the lower end. With the exception of higher fuel costs, price inflation at the retail level remained subdued. While there were few reports that higher energy prices were having an impact on consumer spending, many contacts felt that first quarter 2001 sales could be affected as higher home heating costs bite into consumers' pocketbooks.

Construction and Real Estate
Overall construction activity was strong again in September and early October. Nonresidential building generally remained robust, but contacts indicated that there were some signs that activity may slow in coming months. Contacts suggested that most nonresidential segments (office, highway, and light industrial) remained strong with no discernible shift in momentum. Development of retail space in central Indiana was said to be very strong. However, some local economic development officials in the area reported that site and/or utility rate inquiries fell off significantly in recent months, a sign that one contact felt may be a precursor of slower development in coming months. Contacts generally reported that residential activity was still very good, but off slightly from the same period last year. Homebuilders indicated that both building activity and sales were slightly lower than at this point last year, but remained strong. Realtors suggested that sales of existing homes were mostly meeting their "realistic market expectations," though falling short for their goals of year-over-year increases. Contacts acknowledged that increasing sales would be very difficult after three straight very good years. Median home prices continued to show healthy gains from a year ago, but higher-priced homes, where product differentiation is more apparent, were said to be appreciating more rapidly than lower-priced homes

Manufacturing activity was mixed in September and most of October. Light vehicle sales nationwide remained very strong, which buoyed production, but inventories were slightly high and producers continued to spend heavily on incentives, particularly on 2000 models. Some contacts hinted that light-vehicle production may slow in the fourth quarter of 2000 or early in 2001. New orders for office furniture continued to increase, and one large producer was able to push through price increases for the first time in five years. Production of heavy equipment was said to be off slightly, the result of soft new orders and some inventory building. An increase in imports led to slower domestic steel production and a softer pricing environment in recent months, even as steel consumption remained at an all-time high. A major producer of gypsum wallboard reported that the company's nationwide shipments (year-to-date through September) were flat from last year, but suggested that industry-wide shipments may have been down slightly. Wallboard prices were off substantially, however, as industry capacity increased and capacity utilization rates decreased. New orders for heavy trucks were very weak and industry contacts reported that they were running out of backlog. With a sizable inventory overhang for both new and used trucks, industry analysts were wondering if this is a one-year downturn, or if it will last for two or three years. With the exception of increases reported by office equipment producers, the pricing environment remained very soft for manufacturers, and many contacts reported lower output prices.

Banking and Finance
Overall lending activity remained solid in recent weeks as household lending picked up modestly. Bankers reported that refinancing and home equity lending increased in recent weeks, as did credit card lending. One contact said that some customers who had taken out mortgages early in the year were recently taking advantage of lower fixed-rate mortgage rates. Overall consumer loan quality was said to be good and improving, as defaults were down. Business lending remained strong and there were few signs of waning demand. Business lending standards remained tighter than earlier in the year, and overall loan quality was reportedly good. One bank did note a slight deterioration in business portfolio quality, adding that it was structural and not cyclical. A large insurance firm in the District reported that the pricing environment was "finally" firming and that premiums and profits were increasing. These premium gains were the first in well over two years, according to this contact.

Labor Markets
Labor markets remained very tight as the average unemployment rate for District states, which had been trending up, showed a slight decrease in September for the first time in six months. Employment growth in the region continued to be constrained by worker availability and remained well below the national average. According to a recent survey in Michigan, a significantly smaller share of small businesses reported higher employment levels in recent months than they had for the same months in 1997-99, suggesting that the very tight labor markets may have prevented small businesses from expanding. However, some contacts reported having more success in finding workers. One contact noted that retention rates were improving in the casual dining industry, and a large freight hauling company added that the company was "actually getting applications" from potential truck drivers. There were few reports of intensifying pressure on wages, but health insurance costs remained a concern. Many businesses were planning some form of change to their benefit plans (higher deductibles, tiered employee contribution rates, alternate choices, etc.), but very few were considering discontinuing coverage altogether since competition for employees remained so intense.

The fall harvest progressed rapidly during October with favorable weather conditions across the District. However, the lack of rain exacerbated low soil moisture conditions in portions of the District's western region, which hampered the development of fall planted crops, and imposed further stress on pasture land. October's corn and soybean production in District states (just under 50 percent of the U.S. total) was expected to be up 6 percent and 5 percent, respectively, from a year ago, according to the USDA's forecast. Such gains would be somewhat smaller than for the nation as a whole, but, nonetheless, would contribute to an expected record output for both crops. Milk production continued at high levels in District states, with September output up 16 percent from a year ago. The District's apple crop, grown primarily in Michigan, was expected to be about 23 percent lower than an unusually large 1999 crop, in contrast to a slightly larger crop nationally.

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Last update: November 1, 2000