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Federal Reserve Districts


Seventh District--Chicago

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Summary

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Full report

The Seventh District economy continued to expand at a moderate pace from late October through mid-November. Consumer spending remained relatively soft, but business spending continued to pick up. Construction and real estate activity was largely the same as at the time of our last report. Manufacturing continued to be robust, with contacts reporting further gains in production, new orders, and backlogs. Bankers said that demand increased slightly for both household and business loans. High input costs persisted, but retail price pressures were largely subdued. Agriculture prospects remained strong, with bumper corn and soybean harvests.

Consumer spending
Consumer spending remained relatively soft from late October through mid-November. Retailers generally indicated that sales nationwide were coming in at the lower end of their expectations, with the Midwest softer than other regions. However, some said that store traffic and sales of seasonal merchandise picked up as temperatures cooled. Despite stronger job growth and higher consumer confidence, merchants' expectations for the holiday shopping season remained somewhat cautious. Retail inventories were said to be in line with sales plans. Many restaurants, from quick-casual to high-end, noted stronger sales during the reporting period. One property manager noted that restaurants were benefiting from a general upswing in shopping center traffic. District auto dealers said that light vehicle sales were relatively soft in early November, which was in line with expectations, and that inventories were slightly high. Once again, tourism and related spending was reported to be a bit above year-earlier levels.

Business spending
Business spending continued to increase and more firms appeared to be hiring. Many businesses reportedly boosted outlays for production machinery, office equipment, and computers. Still, contacts again suggested that a large portion of capital outlays was devoted to replacing outdated or worn equipment and/or cost-saving technologies, rather than expanding productive capacity. Business travel and advertising continued to rise modestly. With regard to hiring, one large temporary help firm indicated that new orders increased significantly in October and early November after falling off in September. This firm, and others, noted that demand for temporary workers was strong across industry and occupational categories. In addition, temp-to-permanent placement fees continued to rise. Outside of temporary help firms, reports of additional permanent hiring became more frequent, particularly from manufacturers.

Construction/real estate
On balance, there was little discernible change in real estate and construction activity in recent months, as some slowing in housing markets was offset by a slight strengthening on the nonresidential side. Though reports were mixed, Realtors and builders generally indicated that housing markets remained strong even though sales were a little slower than earlier in the year. However, a contact with one builders' association suggested that most homebuilders were expecting mortgage interest rates to rise next year, heightening uncertainty among many of them. Commercial construction and real estate activity continued to increase slightly. Despite recent gains in office markets, contacts still described it as "a tenants' market," with leases containing higher-than-normal improvement allowances and rent abatements.

Manufacturing
Manufacturing activity continued to increase. Producers of heavy equipment (construction, agricultural, and mining) again reported considerable ongoing strength in production, new orders, and backlogs. One contact suggested that tax incentives set to expire at the end of the year may be pulling ahead orders for heavy equipment. New orders for heavy trucks were "at extremely strong levels" and production was constrained by shortages of engines and other parts. Machine tool makers said that new orders increased further from very high levels. Shipments of cement and gypsum wallboard continued to rise, and industry contacts said that some firms had added capacity, or planned future additions, to keep up with demand. Some specialty steel products were said to be in short supply. More generally, however, demand for domestically produced steel eased somewhat recently, due in large part to an increase in imports and softening demand from the auto industry. Light vehicle sales nationwide were said to be "tepid" in early November, and inventories were rising again. As a result, one producer indicated that fourth-quarter production schedules probably will be cut.

Banking/finance
On balance, lending activity increased slightly from our last report. On the household side, some lenders reported an uptick in mortgage loan applications as long-term interest rates remained historically low. There were no changes reported on standards and terms for household loans, and credit quality continued to improve. Demand for business loans increased slightly. One large bank reported that its October increase in commercial loan volumes was one of the strongest this year. In addition, commercial credit line usage increased. Still, overall lending remained well below expectations. There were no reported changes on standards and terms for business loans, and lenders said that credit quality was good and largely unchanged.

Prices/costs
Reports of higher input costs persisted and wages continued to increase at a slightly faster pace, but retail price pressures remained largely subdued. Contacts reported that prices for some materials were decreasing. Notably, steel prices were reported to have declined from relatively high levels, and lumber prices also fell in recent months, alleviating cost pressures on homebuilders. Still, many materials prices remained elevated. The number of firms that were able to pass higher input costs along to their business customers continued to rise, although the price increases appeared modest. Some restaurants were said to be raising menu prices to offset higher food costs. Still, price increases for final consumer goods remained largely contained.

Agriculture
Harvest was nearing completion in Illinois, Indiana, and Iowa, but still lagged in Michigan and Wisconsin, especially for corn. Corn and soybean harvests for most District states were likely to approach or set record highs, and concerns about storage of the bumper crops persisted. Precipitation replenished depleted soil moisture levels in parts of the District, but also delayed field work and boosted the moisture content of grain stored outside. Fertilizer prices have increased substantially which, along with higher fuel costs, have tempered gains in farm income, even as government payments provided a boost. Soybean rust, recently discovered in the South, has become a major concern in the District, with planting decisions likely to heavily favor corn over soybeans next year. Livestock producers have benefited from lower feed costs and continued to make a profit.

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Last update: December 1, 2004