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Seventh District--Chicago

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Economic activity in the Seventh District increased in December. Contacts expected activity to continue to rise into 2010, although the pace of recovery was likely to be moderate. Consumer spending increased, while business spending was little changed. Manufacturing improved, but construction remained weak. Commercial real estate conditions deteriorated, but residential real estate activity continued to pick up. Credit conditions improved marginally. Price pressures increased for raw materials, while wage pressures were minimal. Prices for soybeans, wheat, milk, and hogs moved higher, while corn and cattle prices moved lower.

Consumer Spending
Consumer spending increased in December. The holiday shopping season was better than a year ago, particularly for sales of clothing, toys, gift cards and entertainment items. Customers remained price sensitive, and there were considerably more specials and promotions this year as retailers were willing to accept lower margins to attract consumers. Inventories declined from their already low levels, and contacts indicated that some stores were starting to run out of items in high demand. Sales of consumer durables and luxury items remained weaker, but contacts also reported greater optimism that demand was building for big-ticket items like household appliances. Early in December, auto sales were at the same pace as the previous reporting period, but then picked up later in the month. Contacts noted that GM dealer incentives put in place to clear discontinued inventory by year-end boosted sales of Pontiacs and Saturns.

Business Spending
Business spending was little changed from the previous reporting period. Most contacts expected to maintain their current level of capital expenditures in 2010, noting that sales and capacity utilization had yet to improve enough to justify higher expenditures on plant and equipment. Furthermore, a manufacturing contact noted that equipment capacity was not a problem in his industry; but with the deep cuts to the labor force over the past year, workers would be the greater need to meet projected growth. Current labor market conditions continued to be weak, although the volume of large layoffs declined and some permanent hiring was reported. Several contacts noted an increase in the demand for temporary workers. In addition, a large staffing firm reported that billable hours increased, particularly from the manufacturing sector and larger businesses. In contrast, permanent hiring continued to be low. A recruitment firm indicated that the transition from temporary to permanent hiring will likely take longer than following recent downturns as employers are remaining particularly conservative in their hiring plans coming out of this recession.

Construction and Real estate
Construction activity remained weak in December. Residential development picked up slightly for single-family homes, but remained at a low level for condominiums and townhomes. Contacts indicated that builders were being cautious, working off existing undeveloped lots and planning to maintain low levels of spec homes. In contrast, sales continued to increase. The extension and expansion of the federal homebuyer tax credit contributed to higher sales, although a contact noted that it was having a smaller impact than expected on the single-family market. In the multifamily market, many sales were driven by steep price discounts. Demand continued to be weak for nonresidential construction, although a contact indicated that interest had increased from his manufacturing, particularly automotive-related, customers. Commercial real estate conditions deteriorated further. Vacancy rates and subleasing activity increased putting additional downward pressure on rents.

Manufacturing activity improved in December. Manufacturers with ties to the auto industry noted further improvement in demand. In addition, exporters, particularly those to Asia, continued to do well. In general, contacts noted that order books were filling up for the first quarter of 2010, and many expected to see a further uptick in production in the coming months. While overall activity remained low, pending changes to EPA emissions standards continued to benefit manufacturers of medium and heavy-duty trucks and parts; although this was seen as quickly waning going into 2010. Contacts generally expected that the gradual improvement in activity since last summer would continue into 2010. For instance, a contact noted that his business was likely to benefit from the fact that several large customers had freed up funds for capital expenditures put on hold in 2009. However, some contacts expressed doubt as to whether the current pace of recovery was sustainable. For example, a contact indicated that his customers were unlikely to increase their orders until their own sales had improved for a considerable period.

Banking and Finance
Credit conditions improved marginally in December. Credit spreads narrowed; and even with longer-term yields increasing, net corporate funding costs for a number of District firms declined. Banking contacts reported little change in business loan demand with continued low utilization of credit lines and most C&I lending going to refinance or pay off existing debt. Contacts did, however, indicate an uptick in financing for mergers and acquisitions as well as investment in distressed real estate. In contrast, small businesses continued to report difficulty in obtaining bank credit. Declines in asset quality showed further signs of leveling off and, outside of commercial real estate, were expected to improve in 2010. Consumer loan demand increased slightly, with credit card receivables ticking up and low mortgage rates continuing to stimulate mortgage lending. Charge-off and delinquency rates were reported to be better than expected, and several contacts expected to see further improvement in 2010.

Prices and Costs
Price pressures increased for raw materials in December. Contacts indicated that lead times were rising as supplier capacity had yet to be fully brought back on-line while foreign and domestic demand continued to improve. Many expected a further round of commodity price increases to ensue in the first quarter of 2010. Recent tax increases were also indicated to be putting pressure on wholesale prices of items like cigarettes and soft drinks. However, pass-through of cost pressures to downstream prices was small on balance, as contacts indicated pricing power remained limited in many industries. Wage pressures were minimal, although union wage increases were noted by some construction contacts as putting additional pressure on costs.

Some farmers still had corn in the field when snows blanketed the ground in December. The weather also prevented much of the normal fall tillage and fertilizer application. Still, corn and soybean yields were above average throughout the District. Furthermore, storage of the crop has not been a problem, since end users, especially ethanol plants, kept buying grain as it was harvested. Even with increased drying costs, corn prices were high enough for returns to approach breakeven; and with soybean prices moving higher, most farmers should more than cover their costs for soybeans. Wheat, milk, and hog prices also increased, whereas corn and cattle prices decreased from the previous reporting period. The reduced number of dairy cows helped boost milk prices. Some small dairy operations or those that raise their own feed were able to avoid further losses. Smaller dairy producers continued to benefit from government payments that larger producers had tapped out. Hog farms also drew closer to breakeven, but cattle operators faced pressures made worse by very cold temperatures which required the consumption of extra feed.

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Last update: January 13, 2010