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Federal Reserve Districts

Seventh District--Chicago

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Overall, economic activity in the Seventh District weakened in April and May. Consumer spending decreased and the pace of business spending slowed. Construction activity continued to be weak, although residential real estate conditions showed some improvement. Both manufacturing activity and labor market conditions deteriorated further. Credit conditions improved, but remained tight for some firms. Downward pressure on prices and wages diminished. Wet weather delayed planting of both corn and soybeans in the District.

Consumer Spending
Consumer spending decreased from the previous reporting period. Retail sales fell, with households remaining focused on necessities and holding back spending on luxury and big-ticket items. Inventories were indicated to be very low in anticipation of sluggish sales. Auto dealers reported a small increase in sales in recent weeks as a result of incentives and promotions, but not a large enough pickup to completely offset the drop in vehicle demand earlier in the reporting period. Inventories remained high, and several dealers indicated that they continued to be concerned with obtaining floor plan financing. In contrast, used car sales were stronger and service department activity was robust. Contacts also expressed the belief that although the closing of dealerships will likely weigh heavily on Chrysler and GM in the near term, it would improve the long-term profitability of both the companies and their dealers. In addition, a contact noted that many of the affected dealerships had already significantly reduced their operations.

Business Spending
The pace of business spending slowed in April and May. Several contacts reported postponing capital expenditures until economic activity improves, which most saw taking place near the end of this year. In contrast, a contact noted that many of his retail customers had resumed renovation and expansion plans they had put on hold last year when credit conditions first tightened. Labor market conditions in the District continued to deteriorate. Job losses in professional services were noted to have increased, and additional layoffs were reported in manufacturing, most notably in the auto sector. In addition, a contact noted that some local government entities had cut back on hiring due to budget constraints. Some contacts again indicated trying to avoid layoffs and retain skilled labor by further reducing hours per worker. A staffing firm reported that billable hours had stabilized in recent weeks. However, hiring remained low outside of education, healthcare, and technical fields such as engineering and information technology, and contacts indicated that most firms remained cautious about expanding their work forces.

Construction and Real Estate
Overall, construction activity in the District remained weak. Residential construction was minimal, and housing inventory remained elevated. However, residential real estate conditions improved some from the previous reporting period. Several contacts reported increases in showroom traffic and sales in both the single and multi-family markets driven by recent declines in prices and mortgage rates. Sales were concentrated in lower priced homes reflecting what a contact indicated was a trend toward smaller, high amenity houses. Refinancing also continued to be strong, although some potential borrowers were finding it difficult to qualify for loans due to losses in home equity. Nonresidential construction declined further, with previous areas of strength such as infrastructure and healthcare weakening. Property values and rents also declined, as vacancy rates and available sublease space increased, particularly in the office and retail sectors. Industrial construction activity also was weak, with one contact noting cancellation of a substantial amount of his business from automotive suppliers. In addition, developers again cited limited credit availability. A contact indicated that while funds were available for investment in distressed real estate, lending for new projects remained limited.

Manufacturing activity in the District weakened, with only pharmaceuticals, power generation, and defense-related aerospace experiencing strength in demand. Exporters reported that the demand from abroad was weak apart from Asia. Steel service center inventories remained lean, although several manufacturers noted that their distributors were still working through their higher-priced inventories. Other metals-related industries also noted weak conditions, although some contacts indicated that the pace of decline in activity had leveled off. Reports from contacts with exposure to the auto industry were particularly negative. Several automotive and other manufacturing contacts reported planning to continue to make use of temporary production shutdowns through the rest of the year. In contrast, automakers indicated that sales in May, while low, were above expectations and that inventories were at desirable levels. Manufacturers of heavy trucks and machinery cited further weakness in demand. Contacts also noted that elevated inventories were putting pressure on distributors, and that the decline in rental business and a robust used equipment market was contributing to fewer sales of new equipment. Manufacturers with ties to housing indicated that activity continued to be soft. However, a contact in the home appliance industry noted recent signs of stabilization in the pace of decline.

Banking and Finance
Credit conditions in the District improved in April and May, but remained tight for some firms. Financial market contacts indicated an increased appetite for risk on the part of investors. Merger and acquisition interest from abroad was noted to have increased, and private equity was indicated to be more available with deals being made in the industrial and real estate sectors. Furthermore, a contact reported that financing costs for a number of area corporations had improved substantially since the previous reporting period. Banking contacts indicated that the tightening of standards had abated, but uncertainty over further price declines in real estate markets and the resolution of the GM and Chrysler bankruptcies limited lending to these sectors. Contacts also expressed concern about commercial real estate, noting that declining values and downward pressure on rents was leading to requests for renegotiation of loans by property owners. With many of these loans coming due for refinancing between now and 2011, there was also concern about their quality. A contact cited as evidence of this fact recent ratings downgrades and increases in CMBS spreads.

Prices and Costs
Contacts again reported closely monitoring their costs. However, downward wage pressures were less prevalent during this reporting period as contacts indicated firms were instead containing labor costs by reducing workers' hours or by cutting their labor forces. Prices declined further for inputs such as steel. Energy prices increased, but a contact noted that gas stations have not been able to pass on all of the recent increase to fuel prices. More generally though, materials prices were little changed during this reporting period. This stability occurred despite the view of some contacts that prices had not fallen as much as had been expected given the sharp decline in activity in sectors such as manufacturing and construction.

Wet fields forced delays in planting during April and May in the District, particularly in Illinois and Indiana. By the end of the reporting period, farmers had planted over half of their corn acres. Still, corn planting was behind the typical pace except in Iowa. Soybean planting was behind as well. Also, the emergence of corn and soybean plants lagged normal rates across much of the District. Lower milk, cattle, and hog prices and higher costs for feed worsened the income prospects for livestock producers. Hog farmers had an especially difficult spring due to the large drop in hog prices after the H1N1 virus (swine flu) scare. However, hog prices had recovered some by the end of the reporting period. Fertilizer sellers booked losses as farmers held back on purchases in anticipation of recent wholesale price declines showing through downstream.

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Last update: June 10, 2009