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Federal Reserve Districts


Seventh District--Chicago

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The Seventh District economy continued to expand at a moderate pace in January and early February. A number of contacts reported that the auto industry was weighing down activity in other sectors of the regional economy. Consumer spending was again generally subdued, and business spending continued to increase modestly. Reports on construction and real estate were mixed by location and market segment. Manufacturing output was relatively steady, but at high levels. Household loan demand was reported to be flat, while business loan demand generally expanded modestly. Overall cost and price pressures remained in check. District farmers formulated their planting decisions against a backdrop of large increases in seed, fertilizer, and energy costs, as well as lower crop prices than a year earlier.

Consumer Spending
Consumer spending was again generally subdued in January and early February. Only one large discount retailer noted "solid" sales that met expectations, while other retail contacts characterized sales as "soft" or "flat." Apparel and home-related goods, like tools, paint, and decorations, sold well, while sales of electronics were noticeably weak. One retailer in Iowa reported poor sales of weather-related goods, but noted that the unseasonably warm weather had an upside: low heating bills should leave area consumers with more cash to spend in March and April. Light vehicle sales in the District picked up some in February, but a Chicago-based dealer noted that sales in the area continued to trail those in the rest of the nation. Vehicle inventories were said to be high, with one dealership declining allocations for their three largest locations in January and February. A large restaurant chain reported that sales at Midwest restaurants were increasing more slowly than in previous months. Overall tourism activity in the District was similar to a year ago.

Business Spending
Business spending continued to increase modestly. Several contacts reported that they held to their capital spending plans, which call for moderate increases. One large bank noted that businesses have been borrowing for inventories and equipment. Business air travel was said to be "strong" on international routes, and the mix on domestic routes had moved more toward business travelers. Hiring continued at an equal or slightly faster pace than in the previous reporting period. A Chicago job board reported modest increases in job postings. Several manufacturing companies said that they are in the process of hiring some additional workers, and one temporary help provider noted "relatively strong" demand from manufacturers. Workers in health care, sales, accounting, and finance were all in demand. Overall, business sentiment was said to be positive, though many contacts qualified the level of optimism as "guarded" or "cautious."

Construction and Real Estate
Reports on construction and real estate were mixed by location and market segment. Residential activity picked up in many places during January, with one homebuilder in Chicago reporting a record month for its sales. In contrast, one contact in Michigan said that residential activity had been soft and thought it would remain so for the rest of the year. High-end home sales in Wisconsin were reported to be stronger than low-end home sales. Apartment vacancies were mixed, with tighter markets in Milwaukee and more openings in Indianapolis. Commercial development was reported to be quite active in many places. A contact in Indiana said that people wanted to close deals before interest rates moved higher. However, a contact in Michigan noted that development there was slow, adding, "The auto industry is really hurting us now." Rents for commercial space were steady, although a contact in Des Moines said that many incentives were still being offered.

Manufacturing
Manufacturing output was relatively steady in January and early February, but at high levels. Steel production continued its solid pace with most markets experiencing good demand. Driven by strong demand for steel from overseas, imports of steel products into the U.S. have begun to decline. Inventories for steel products were characterized as "a bit high." Machine tool makers indicated that orders and shipments were strong, with orders in mid-February the best in many years. A representative from an aerospace company said that higher oil prices were actually helping the sales of new, more fuel-efficient planes. Production of heavy equipment remained strong in January, although there were reports of order inflows slowing a bit. The strength in heavy machinery was supported by demand for mining and construction equipment. In addition, production of heavy-duty trucks strengthened further in January. One industry analyst predicted high rates of heavy-truck production in 2005, although difficulties obtaining tires and some specialty steel products may limit output. Also, a tool manufacturer indicated that a truck engine producer was paying above-market prices in order to guarantee a supply of parts. In the light vehicle market, inventories were well above desired levels for many market segments, and production in the first quarter has been scaled back.

Banking and Finance
Overall lending activity was little changed from the previous reporting period. Household loan demand was reported to be flat during the past month, although mortgage lending improved in January after being soft in December. A contact at one large bank noted that households have shown a lot of interest in variable rate and shorter-term mortgages. There were no reported changes in consumer credit quality or standards and terms for household loans. More than one contact observed that business customers were borrowing with some hesitation, nonetheless business loan demand generally expanded modestly. Almost all contacts reported strong demand for equipment loans, and one large bank noted a pick-up in M&A activity. Several bankers commented that the competitive environment for business loans was putting pressure on margins and may be narrowing risk premiums. There were no reports of changes in business loan quality.

Prices and Costs
Overall cost and price pressures remained in check. Wage gains remained modest overall, though mixed by occupation and industry. A temporary help services firm said there was no pressure on their billing rates, while an airline enacted new labor agreements that cut wages for many of its employees. Health insurance costs were a concern for many contacts. Manufacturers reported that material costs, outside of oil-related products, continued to ease early into 2005. A few contacts said they increased prices in response to higher material or labor costs, but by and large price pressures were muted. An area auto dealer noted more rebate programs in February than in January, but added that the givebacks were still down from last year. Retailers reported no unusual discounting activity. An airline noted that domestic yield declines were abating and international yields were increasing.

Agriculture
Farmers in the District were making their planting decisions against a backdrop of large increases in seed, fertilizer, and energy costs, as well as much lower crop prices than a year ago. Accordingly, cash flow projections were down for this year. Proposed cuts in government payments had also added greater uncertainty to the outlook for farm income. Farmers responded by evaluating ways to cut costs, such as pooling resources and changing tillage practices. Contacts expected at least some shifting of acres planted this spring from soybeans to corn due to relative yields, government payments, and the threat of Asian soybean rust.

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Last update: March 9, 2005