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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District expanded at a moderate pace during July and early August, with most reports suggesting a similar pace of expansion as in the previous reporting period. Consumer spending continued to increase modestly, and business spending expanded again. Overall labor market conditions were little changed, with small gains in employment on net. Residential construction and real estate activity declined again in most areas, while the pace of new commercial construction continued to be solid. Manufacturing activity remained strong. Mortgage lending declined, while commercial lending expanded, albeit at a slightly slower pace than in the previous reporting period. Nonlabor input cost pressures remained firm in July and early August, and there were reports of stronger pressures on retail prices and wages. Corn and soybean conditions improved as above-average precipitation reduced the area of the District affected by drought. Expectations were for a "good, but not great," harvest.

Consumer Spending
Consumer spending continued to increase modestly in July. Retailers in Illinois and Iowa said sales growth was a bit faster than in June, while a credit card processing service for Michigan retailers said results were "very weak." High gasoline prices reportedly dampened spending again in the District, both by squeezing budgets and by leading shoppers to make fewer trips to the store. Retail inventories were at desired levels. Promotions generally followed the typical seasonal patterns; however, some retailers expanded back-to-school promotions to include other products, notably consumer electronics. Auto dealers reported that sales have picked up in the past six to eight weeks, led by demand for higher-gas-mileage vehicles. New vehicle inventories were said to be above desired levels. A large restaurant chain said that sales in the Midwest were up slightly from last year, but gains in the Midwest were weaker than in other regions. Tourism in Michigan was running below a year ago, though some contacts suggested that it had picked up in recent weeks.

Business Spending
Business spending and hiring expanded again in the District. For the most part, capital spending continued to increase at similar rates as in the previous reporting period. A banker noted that the increases in their lending to firms in the District were consistent with a modest rise in capital expenditures. Overall labor market conditions were little changed, with small gains in employment on net. Factory employment ticked up, led by growth at toolmakers, while employment at retailers, hotels, and banks was little changed. A local internet job posting business said that growth in listings remained positive and it had seen no signs of slowing. Shortages of skilled manufacturing workers persisted, and there were continued reports of difficulty in filling engineering job openings. A temporary help services provider said that demand growth in the District moderated; while orders from large firms remained steady, demand from smaller businesses was softer.

Construction and Real Estate
Residential construction and real estate activity declined again in most areas. Homebuilders noted that the slowdown cut across all segments of the market, though some contacts pointed to the high-end market as particularly sluggish. Nonetheless, builders in Michigan said that the rate of the decline had tapered off some, and builders in Wisconsin said they were "pleasantly surprised" with traffic through model homes. With regard to future activity, contacts in southeast Michigan noted that some development projects had been cancelled recently and that other developers are delaying new construction as they wait for existing inventories to sell. Contractors in Wisconsin were said to be requiring larger upfront payments to ensure that their projects are not cancelled. The pace of new commercial construction continued to be solid. Contacts in several areas noted that the commercial segment has been "pretty resilient." A developer in the Chicago area said that net absorption of office space continued at high rates. However, a contractor in suburban Milwaukee reported that they were working off backlogs faster than expected.

Manufacturing activity remained strong during July and early August. Sales of heavy equipment continued to be solid, led by demand from the mining and energy sectors. Some mining equipment was said to be sold out through 2008. Orders for construction equipment related to nonresidential projects remained solid, and one analyst predicted only a slight moderation in growth for next year. Farm tractor sales were down modestly from a year ago. Heavy-duty truck production continued to be strong, though contacts were expressing concern about what will happen to demand in 2007 when stricter emission standards are in place. Toolmakers reported strong order growth; tool production was running at high capacity utilization rates, and overtime was up at some facilities. Steel producers reported strong demand growth from most markets, though some softening was expected. Inventories at steel service centers increased and were slightly above desired levels. A wallboard producer said shipments softened in recent weeks, but production continued at high rates. Appliance shipments continued to slow.

Banking and Finance
Lending activity moderated further. Bankers noted further declines in mortgage applications for purchases, though refinancing perked up as customers looked to lock in low fixed-rate mortgages. One contact said that demand for home-equity loans continued to decline because homeowners were seeing less home price appreciation. Household credit quality remained in good shape with stable delinquency rates. Commercial lending continued to expand, but at a slightly slower pace than in the previous reporting period. One banker noted that business lending in the District lagged behind other parts of the country. Leasing activity picked up at a Chicago-area bank. Commercial lending conditions continued to be competitive and interest rate margins were narrow. Commercial credit quality remained in good shape, and some metrics even improved.

Prices and Costs
Nonlabor input cost pressures remained firm in July and early August, and there were reports of stronger pressures on retail prices and wages. Almost all contacts reported higher energy costs. One manufacturer said that they and their suppliers were "irritated" that energy costs had not eased yet, and a retailer said that higher energy costs have now become fully factored into their cost structure as their long-term contracts had expired during the past three to six months. Other materials prices were increasing as well, including copper, concrete, and wallboard; but lumber and scrap steel prices declined. Price increases at the consumer level were modest, though a mid-sized retailer in Iowa said they had improved their margins despite higher cost pressures. Apartment rents in Illinois increased, and a contact in Wisconsin said landlords had increased flexibility to raise rents. Wage pressures picked up overall, most notably in professional and technical positions.

Above-normal rains fell in late July and August, which reduced the area of the District classified as under drought conditions to the western edge. Corn and soybean conditions improved since the last reporting period, despite a July heat wave. Expectations for the corn and soybean harvest were revised up, leading to lower crop prices than in the previous reporting period. Overall, reports suggested that corn and soybean yields will be "good, but not great," in the District. Farmers and elevators expanded storage capacity based on expectations for higher corn prices next year. Notably, the pace of ethanol expansion has boosted forecasts of the demand for corn and raised concerns about long-term cost pressures on competing uses of corn, particularly feed. Hog and cattle prices continued to rise.

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Last update: September 6, 2006