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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District improved marginally in September and October. Most contacts reported that the decline in economic activity had ended, and many remained cautiously optimistic for a recovery over the remainder of 2009. Business spending and consumer spending excluding autos decreased at a slower rate, and business and consumer expectations improved. Manufacturing activity showed some further signs of firming. Residential real estate conditions continued to improve, while commercial real estate conditions worsened. Credit conditions, while still tight, also further improved. General and agricultural price pressures were mixed, while wage pressures were minimal.

Consumer Spending
Consumer spending decreased from the previous reporting period. Auto sales were considerably lower in September after conclusion of the cash-for-clunkers program, but contacts indicated a pickup in activity in early October. Used vehicle sales were steadier through September helping to offset some of the decline in new vehicle purchases. Auto dealers reported that vehicle inventories remained low, but that they were comfortable with the level of stocks. Retail sales excluding autos decreased at a slower rate than during the previous reporting period. Consumers continued to spend mostly on necessities, but the decline in spending on luxury goods slowed. Recent trends of higher personal saving rates and trading down to lower-priced brands were expected to continue to hold back sales, but their impact was seen as easing. Retailers reported maintaining low inventories; however, contacts also indicated that expectations for sales during the holiday season had improved. With customers still price sensitive, retailers also noted efforts to improve customer service and the shopping experience in order to attract new business.

Business Spending
The decline in business spending slowed in September and early October, and the outlook for future spending improved. Some inventory rebuilding took place in the manufacturing sector, and contacts generally expected this to continue through 2009. Trucking shipments increased, although the level of activity remained low. In a sign of rising business confidence, several contacts also noted an increase in merger and acquisition activity. Tentative signs of increased interest in structures investment were reported, and some projects that had been put on hold earlier in the year were being re-priced with the possibility of moving forward later this fall. Higher credit standards remained an issue, however. For example, a contact reported facing much higher equity requirements and much less favorable terms than in the past. In addition, a contact reported that equipment investment by his firm was likely to remain on hold despite attractive prices until their labor force adjustments had ended. Labor market conditions remained weak with hiring limited outside of healthcare, education, and information technology. However, the rate of job loss continued to slow as did reductions in hours. Furthermore, a large staffing firm indicated that billable hours had increased in recent weeks, particularly in the manufacturing sector.

Construction and Real Estate
Construction activity in the District increased slightly in September and early October. Residential construction inched up, but a contact noted that most of the building was on existing developments. Credit remained tight for residential developers. Residential real estate conditions also improved with home sales increasing and housing inventory coming down. Contacts noted higher affordability and the nearing end of the first-time home buyer tax credit as drivers. However, the availability of financing continued to be a concern for potential home buyers. Public nonresidential construction was strong with road building and repair accounting for most of the activity. In contrast, private nonresidential construction declined, reflecting both weak demand and restrictive credit conditions.
Commercial construction was particularly weak. Commercial real estate conditions deteriorated again, as prices fell further and vacancy rates increased. Contacts reported that lower absorption of retail and office construction would likely cause vacancy rates to continue to rise. Downward pressure on commercial rents also intensified and subleasing activity increased with more tenants seeking to renegotiate their leases.

Manufacturing activity in the District was slightly improved in September and early October. Lean inventories and stronger demand from the auto sector led to an increase in demand for steel. A contact in the steel industry reported that previously idle capacity would be brought back on as a result, although it would take time to do so. Other metals-related manufacturers also reported small gains. Automakers expected demand to slowly improve over the rest of the year and maintained plans to increase production. The surge in sales in July and August allowed them to favorably alter their product mix and manage inventories. Automotive suppliers also benefitted from the increase in auto production; however, several contacts noted that orders past the fourth quarter were shaping up to be weaker, while others expected demand to increase slowly over the next six months. The latter pointed to strong demand from Asia, Mexico, and Europe as reason for cautious optimism. The decline in sales of heavy equipment flattened out and order flows improved with demand from Asia particularly strong in recent months. Manufacturers with ties to housing also noted a leveling out in the decline in activity in their industries.

Banking and Finance
Credit conditions, while still tight, further improved in September and early October. Credit spreads narrowed, and net corporate funding costs continued to decline. Banking contacts reported an increase in deal discussion, although loan demand remained weak. Asset quality improved and showed some signs of stabilizing at current low levels. In general, contacts expected credit to ease going into 2010 for businesses and consumers. However, several pointed out that lenders' balance sheets remain constrained and capital preservation and loan loss provision continue to restrict the flow of credit. Small businesses, in particular, still experienced very tight credit markets. Deteriorating commercial real estate conditions were again a concern, although a banking contact noted that they had some success in modifying loans so that cost savings could be passed on to tenants. Liquidity in the secondary mortgage market was also raised as a concern with the end of the Fed's agency security purchase program nearing. Financial contacts were more inclined to be pessimistic about the outlook for the beginning of 2010, pointing to the end of stimulus measures as well as weak labor and housing markets.

Prices and Costs
Price pressures were mixed in September and early October. Several contacts noted an increase in prices for materials like steel and paper. Some increase in energy prices was also reported, although a contact noted that very high levels of stored natural gas will likely lead to lower heating costs this winter. Pass-through of cost pressures to downstream prices was minimal, as contacts indicated pricing power remained limited. In contrast, downward price pressures were reported in the construction and retail industries as well as in food prices. Wage pressures were not significant, with most firms holding current wage levels.

Harvesting the District's large corn and soybean crop will take longer than normal due to delays from wet weather in addition to the late maturity of the crops. Early reports indicated lower than expected yields for corn and some issues with quality. Soybean yields were in line with expectations for a record crop. With old supplies drawn down and new supply slowed coming out of the fields, corn prices moved up throughout the reporting period, benefitting those farmers who could deliver corn. In contrast, soybean prices were lower in early October than at the start of September. Livestock prices recovered some from summer lows, but were still well below the levels of a year ago. Purchases by the U.S. Department of Agriculture provided some support for hog prices. However, there were reports of unpaid feed bills and bankruptcy negotiations for hog operations; and a contact indicated that some nearly new hog facilities sat empty. Government payments helped smaller dairy operators, but were a relatively minor factor for large dairy operations that continued to operate underwater. The ethanol industry benefited from higher sugar prices which reduced competition from substitutes for corn-based ethanol.

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Last update: October 21, 2009