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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District remained weak in January and February. The expectation of most contacts was for economic activity to remain weak into late 2009 before slowly beginning to recover in 2010. Consumer spending, construction, and manufacturing activity continued to decline, and labor market conditions deteriorated further. Credit conditions remained tight. Price and wage pressures tilted toward the downside. Most key agricultural prices decreased during the reporting period.

Consumer Spending
Consumer spending continued to soften. Retailers reported that sales were slow, with apparel, big-ticket, and luxury items experiencing the largest declines. Discount stores and fast-food restaurants fared better than their higher-priced counterparts. A contact noted that inventory reductions were likely to be substantial for the first quarter. Auto dealers reported slight increases in showroom traffic and sales, particularly for used vehicles. Nonetheless, their expectations for overall vehicle sales moved lower. Auto dealers also noted that service center activity continued to be strong, while vehicle inventory levels remained elevated and new orders were down substantially.

Business Spending
The pace of business spending continued to weaken. Contacts reported that they were trying to control costs by closely monitoring expenditures and by reducing inventories.  Furthermore, contacts in several industries cited cuts in annual capital expenditure budgets as well as delays in the timing of capital spending. Labor market conditions in the District deteriorated. A contact noted that the longer the duration of the current downturn, the more plant closings and permanent layoffs will replace the temporary measures of rotating shifts and reducing hours now being employed to lower output but still retain labor. Additional layoffs were reported across a wide variety of industries. Hiring activity remained low, outside of lower-end retail companies, healthcare, environmental related businesses and highly skilled professionals in financial services and information technology.  In addition, a staffing firm reported a sizeable reduction in billable hours from the previous reporting period.

Construction and Real Estate
Construction activity in the District weakened further from the previous reporting period. Residential construction continued its steady decline, with housing demand remaining low, particularly for higher priced homes. Few mortgage originations reflected new purchases, and even the recent boom in refinancing activity began to ebb with the rise in mortgage rates in recent weeks. A contact also noted that tighter secondary markets for mortgages and credit standards along with lower home values have resulted in a much higher rejection rate of applications during the recent refi boom relative to a year ago. Downward pressure on prices and rents continued. One contact expressed the belief that the processing period for new foreclosures will likely run its course by year's end, potentially easing that influence on inventories and prices. Nonresidential development and construction also weakened, with the exception of the healthcare sector. Contacts expected a very limited impact on construction from the recent fiscal stimulus bill for 2009, with a small boost to activity more likely in 2010 or 2011. Several contacts reported that commercial property values were declining along with rents as vacancy rates continued to rise, particularly in the retail sector. The availability and cost of financing remained a concern for residential and commercial developers, with additional cancellations and project delays reported.

Manufacturing activity in the District continued to decline from the previous reporting period.  Production and new orders were reported to have weakened further, and several manufacturers reported aggressively liquidating inventories purchased during last year's surge in material prices. Activity in the domestic steel industry improved slightly from a very weak December. A contact noted that service center inventories remain low, suggesting a quick turnaround for the industry when demand improves. Other metals-related industries noted weakening conditions. Mining activity was reported to have declined substantially, with a subsequent drop in the demand for heavy mining equipment also reported. The demand for heavy trucks and construction machinery, construction materials, and housing-related items such as appliances declined further.  A contact noted that more overseas customers were not accepting delivery on shipments of heavy machinery, as financing in other countries for purchases was falling through. Several contacts expressed concern over a further weakened state of the auto industry. Inventories of light vehicles remained elevated, and sales in February were likely to be much lower than even January's depressed pace.  In contrast, contacts reported strength in demand for large agriculture equipment and pharmaceutical products.

Banking and Finance
Credit conditions remained tight. Bank lending decreased from the previous reporting period and loan performance deteriorated as business bankruptcies in the District increased. Contacts in the banking industry reported increases in the fees and pricing for credit to riskier applicants, but stressed that credit remains available for well-qualified borrowers. The auto and commercial real estate sectors were noted to be of particular risk. Several contacts in the financial sector reported that high volatility and illiquidity in some asset markets continued to limit investment activity by banks, hedge funds and private equity firms. Strains on bank balance sheets continued to be seen by contacts as limiting credit availability. The demand for liquidity remained high, but borrowing spreads decreased as elevated counterparty risk concerns eased some from the previous reporting period. Conditions in the commercial paper and corporate bond markets were noted to have improved significantly. In contrast, illiquidity in the auction-rate securities market and the secondary market for jumbo residential mortgages were raised as concerns.

Prices and Costs
Contacts reported closely monitoring margins given ongoing declines in the demand for their goods and services. In general, material prices declined in January and February. There were a few reports of firms continuing to try to pass on last year's higher material prices; but, for the most part, the input price declines that were showing through leaned toward price reductions. Contacts in the construction industry cited expected increases in the price of cement as a concern. Gasoline prices also increased from the previous reporting period, but contacts noted that pass-through had been minimal and that fuel surcharges from the previous year had disappeared in recent weeks. The low cost of fuel was also reported to be showing through to other energy prices, including electricity. Heavy discounting continued in retail trade, where margins remained tight. Wage pressures also continued to tilt toward the downside, with several contacts alternatively noting pay freezes or reductions in non-wage compensation.

Most agricultural commodity prices fell since the previous reporting period. Crop prices moved down and were substantially lower than a year ago. Farmers continued to store more corn and soybeans than last year given the current lower prices. Farmland cash rents and input costs for crop production have not decreased as much as crop prices, so farmers faced added pressures in making plans for 2009. Some farms may incur significant losses, even at cash prices above the triggers of the government safety net. Spring planting intentions remained somewhat uncertain, though shifts toward soybeans and away from corn are likely to occur. Hog prices increased, but dairy and cattle prices declined from the previous reporting period. Even with recent below normal precipitation in some areas, almost the entire District had plentiful levels of ground water heading into the spring.

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Last update: March 4, 2009