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Federal Reserve Districts


Seventh District--Chicago

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Economic activity in the Seventh District weakened in September, and contacts reported heightened concern about the economic outlook. Consumer spending declined and labor market conditions remained weak. Residential construction continued to decline and nonresidential construction to slow. Overall, manufacturing moved lower, although activity varied by sector. Credit conditions tightened further. Cost pressures from material and energy prices remained elevated, while wage pressures continued to be low. The crop harvest was off to a slow start, but yields generally appeared in line with historical averages.

Consumer Spending
Consumer spending declined in September, as households continued to tighten their budgets and trade down to less expensive brands. Accordingly, discount stores saw small increases in sales, while retailers in areas such as home improvement and clothing experienced declines. Similarly, a contact in the fast-food industry reported slightly higher-than-expected demand. Light vehicle sales declined, although demand for more fuel efficient vehicles, especially among passenger cars, held up better. Several dealers cited higher sales due to General Motor's end-of-month incentives; these incentives also resulted in some reduction in elevated light-truck inventories. Auto contacts also reported that consumers were concerned about the cost and availability of credit, and that this had resulted in a decline in credit sales.

Business Spending
The pace of business spending slowed from the previous reporting period. Several contacts reported delaying or postponing hiring plans or capital spending projects given the high level of uncertainty surrounding the economic outlook. Others noted that they have been carefully monitoring expenditures and receivables, relying more on maintaining existing equipment than purchasing new capital and paying down debt instead of spending financial resources. However, this sentiment was not uniform--notably, capital expenditures by manufacturers of heavy machinery continued unabated. Labor market conditions in the District were little changed, and continued to be mixed by sector. The demand for skilled labor in manufacturing, healthcare, and some professional services remained strong, and a contact in agriculture noted that labor was more difficult to hire for this year's harvest. In contrast, employment in the automotive and financial services industries continued to decline, although some financial contacts reported that they were trying to recruit workers who had last their jobs at other firms. Lastly, staffing firms reported a decline in demand for their services given hesitancy by clients to engage in longer-term contracts.

Construction and Real Estate
Construction activity remained sluggish in September. Residential construction continued its steady decline. Project delays and cancellations persisted and credit remained tight for new developments. Increases in foreclosures were cited by contacts as an impediment to sales of non-foreclosed homes and in reducing the inventory of new and existing unsold homes. Mortgage originations remained at low levels due to tight credit standards and a slight increase in mortgage rates in late September after a decline earlier in the month. However, contacts noted a slight increase in activity among first-time home buyers due in part to the tax credits included in the recent housing bill. Nonresidential development and construction continued to slow. Contacts cited modest improvement in infrastructure spending but ongoing weakness in retail and industrial construction. Furthermore, contacts noted an increase in vacancy rates for retail properties and a rise in office sublease space. Cancellations and delays of commercial projects were again reported as the availability and cost of financing continued to be of concern.

Manufacturing
Manufacturing activity in the District slowed in September. Activity weakened slightly in the domestic steel industry. Demand continued to be soft for medium- and heavy-trucks and for manufacturers with close ties to housing, such as construction equipment and materials and home appliances. Aviation manufacturing contacts noted a negative impact from the Boeing strike as well as some recent softening in demand. However, demand for heavy machinery used in sectors such as oil and gas extraction, mining, and agriculture remained strong. Manufacturers of pharmaceuticals and energy infrastructure and related products also reported strong activity. In addition, export-oriented industries continued to perform well. Exporters noted that demand had shifted from Europe to developing countries whose terms of trade with the U.S. remained favorable. Automakers reported further declines in sales in September, and contacts noted some pending plant closings in the District.

Banking and Finance
Credit market conditions in the District tightened in September as liquidity was impaired by concern over increasing credit risk. Banks reported that access to funds in inter-bank and deposit markets had been limited in recent weeks, leading to increased utilization of alternative sources of funds including the discount window and the brokered CD market. Furthermore, banks reported increasing their cash holdings and shortening the maturity of their assets as a contingency against deposit withdrawals following reports of bank closings elsewhere in the country. This, in combination with ongoing de-leveraging was further reducing credit availability. Accordingly, some non-financial contacts expressed reservation over the future availability of bank credit lines. Other financial market participants reported that increases in volatility and credit risk were boosting borrowing spreads in short-term money markets and in the markets for longer-term debt, even for investment-grade companies. Liquidity was also poor in the secondary markets for commercial and residential mortgages. Several contacts reported increasing difficulty and higher costs of obtaining funds through the commercial paper market. Higher credit costs at the financing arms of automakers were making it more difficult for dealers to obtain credit to finance inventories.

Prices and Costs
Despite recent declines in spot markets, contacts in various industries again cited elevated input costs from various metals, food, and energy. Several contacts mentioned higher utility costs and fuel surcharges. In contrast, the price of steel and scrap metal declined. However, a contact noted that the lengthy period of high steel prices had pressured many customers' profit margins. More generally, pass-throughs of higher costs to downstream prices continued, with some greater impact now being seen on prices in retail trade. Wage pressures remained limited outside of skilled labor positions that continue to experience shortages.

Agriculture
The District harvest started slowly, lagging behind last-year's pace by two to three weeks. Farmers remained concerned about the potential impact of frost on the yields of replanted soybeans. Corn and soybean prices declined, but volatility remained high over uncertainty about how this summer's floods and late planting would affect the harvest. Early reports about the harvest indicated that corn and soybean yields were in a range close to average. Heavy precipitation in September helped crops mature, but also contributed to relatively high levels of moisture in harvested crops, requiring additional outlays to pay for drying. Cooperatives began to buy 2009 crops; however, few farmers were willing to sell at quoted prices. The spreads between futures and cash prices for crops were higher than in the past due to expected increases in transportation costs. Contacts suspected that demand for crops stalled during the summer as prices hit nominal highs and world demand slowed. In addition to crops, prices for milk, hogs, and cattle also fell.

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Last update: October 15, 2008