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Seventh District--Chicago

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The Seventh District economy continued to expand at a moderate pace in late February and March, though activity was lagging in Michigan. Consumer spending was again generally subdued, while business spending continued to increase. Reports on construction and real estate activity were mixed by location and market segment. Manufacturing activity continued at solid levels in many industries, though weakness persisted in light vehicle production. Lending activity picked up slightly from the previous reporting period. There were more frequent reports of price increases throughout the supply chain, but overall cost and price pressures were modest. District farmers' crop plans for 2005 included an increase in corn acreage and a decrease in soybean acreage from last year.

Consumer Spending
Consumer spending was again generally subdued in late February and March. Retailers reported that sales in the Midwest were weaker than in other parts of the country, in part because cold weather reduced the demand for spring merchandise. Some reports suggested that sales of jewelry and apparel were stronger than other categories. New vehicle sales rose slightly in March. One dealer in the Chicago area credited the pick-up to their aggressive promotional efforts in response to manufacturer-to-dealer incentives. Inventories remained high, and dealers were selective in their ordering. Used vehicle sales were said to be gaining momentum. A large restaurant chain reported that sales in the Midwest were stronger than expected, with all market segments showing decent growth. Tourism was mixed by location, with contacts in Michigan reporting a sluggish pace of spending and others in Illinois reporting more positive conditions.

Business Spending
Business spending continued to increase. Reports on capital spending were generally favorable: one pharmaceutical company said they were sticking to their "healthy" investment plans, and a toolmaker was looking to add equipment. Reports on freight hauling were generally strong, though one analyst noted some slowdown in trucking during the first quarter. Labor market conditions continued to improve. A number of manufacturers said that they were hiring additional workers; the few reports of cutbacks were concentrated in the auto industry. Staffing firms reported modest growth in demand for temporary workers; one noted that the growth in their fees from permanent placements was stronger than their growth in billings for temporary workers.

Construction and Real Estate
Reports on construction and real estate activity were mixed by location and market segment. The residential market continued to be solid in most of the District, though reports suggested weakness in Michigan and Indiana. A builder in Indiana noted that permits and home construction were down from a year ago and expressed concern that some spec units were not selling; nonetheless, the contact remained optimistic for the rest of the year. Commercial real estate markets continued to be active in the Chicago area but were very slow in Michigan. Commercial vacancy rates were generally stable, with some improvement in suburban Chicago. Rents for commercial space were relatively steady.

Manufacturing activity continued at solid levels in many industries, though weakness persisted in the light vehicle sector. Light vehicle production continued to slow and one analyst said that the industry was pondering deeper production cuts later in the year. The cuts already in place have strained the financial conditions of many suppliers. By contrast, strong demand has strained capacity in the heavy truck industry, with shortages of axles, tires, and roller bearings holding back production. One industry analyst thought that customers may be delaying ordering because backlogs were so high. Production and shipments of other heavy equipment rose further; orders eased slightly but remained at very strong levels, and many producers revised their forecasts for 2005 upward. A telecommunications equipment maker reported solid demand, as did contacts in the tooling industry. In the steel industry, one contact noted stable conditions: "The market is not robust, but it is not bad." Steel inventories had been worked down some but remained a little high.

Banking and Finance
On balance, lending activity picked up slightly from the previous reporting period. Business loan demand improved further, and one contact added that there was "good momentum" for commercial banking going forward. District bankers reported strong demand for financing equipment purchases and inventory building, and one in Chicago noted a pick-up in mergers among small- and medium-sized firms. Business credit quality was generally stable at good levels. Household loan demand was relatively steady during March. Demand for home-purchase mortgages was better than earlier in the year. A contact at a large bank attributed part of the increase to "fence sitters" jumping into the market before rates moved higher. By contrast, demand for mortgage refinancings was quite weak. Consumer credit quality was generally good. One banker noted an up-tick in delinquencies but did not view the increase as a significant concern. Contacts reported that spreads for most loan types had narrowed, and margins had shrunk due to competitive pressures.

Prices and Costs
There were more frequent reports of price increases throughout the supply chain, but overall cost and price pressures were moderate. A number of manufacturers noted higher prices for inputs such as resins and plastics, but steel prices appeared to stabilize somewhat. Manufacturers reported some success raising the prices for their products to cover higher costs. Furthermore, some heavy equipment makers and one construction materials producer thought they could raise prices enough to boost profits. At the retail level, reports of price increases were still sporadic, but they outnumbered the reports of price declines. Virtually all contacts noted higher energy costs. Fuel surcharges were imposed and accepted for many freight hauling activities. Wage gains remained modest, though health insurance costs continued to be a concern for many contacts.

Corn planting has begun and will shortly kick into high gear across the District. Moisture levels remained at least adequate for almost the entire District. According to the USDA's initial forecasts, corn acreage in District states was expected to increase a little over 1 percent from a year ago, and soybean acreage was expected to decline about 1 percent. Both of these forecasts were a little above the expectations for the nation. Corn and soybean prices rose during late February and early March before dropping again, but the price increases triggered sales from the large stocks in storage. The soybean price increases were large enough to cause some farmers to increase planting and forward-contract soybeans. A contact reported that most farmers are "crossing their fingers" about soybean rust, although some were increasing insurance coverage. Concerns about higher fuel and fertilizer costs continued. Farmers were also disappointed that higher gasoline prices had not lead to higher ethanol prices. With higher rents and interest rates, bankers expressed concern about cash flows, especially for large operations.

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Last update: April 20, 2005