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Seventh District--Chicago

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Economic activity in the Seventh District continued to increase in January and February, though at a pace not quite as strong as during the previous reporting period. Nonetheless, contacts' expectations for growth in 2011 improved. Consumer spending increased at a slower pace, while the pace of business spending was steady. Manufacturing production expanded at a more moderate pace, and construction was again subdued. Credit conditions continued to improve. There was some pass-through of higher commodity prices to downstream prices, and District farmers continued to benefit from higher prices for agricultural commodities.

Consumer Spending
Consumer spending increased in January and early February, but at a slower pace than during the previous reporting period. Promotions and sales continued to drive spending, but retailers also noted signs of improving consumer demand, including an increase in sales of luxury goods such as jewelry. Sales of some big-ticket items like electronics and appliances also improved after weaker than expected holiday sales. The pace of auto sales held steady at a relatively high level. Dealers remained optimistic pointing to pent-up demand in some market segments, improvement in the availability of auto financing even for lower quality borrowers, and increases in demand for new and luxury vehicles.

Business Spending
Business spending continued at a steady pace. Contacts reported some additional strength in demand for equipment coming from agriculture and the energy industry. Spending on structures was more limited, but contacts also expected it to increase slightly over the course of the year. Inventories were little changed, although some manufacturers and agribusinesses were increasing stocks in anticipation of higher commodity prices. Retailers indicated that inventories remain in a comfortable range given the current pace of sales. Hiring picked up some. Manufacturers continued to add to payrolls, but again cited difficulty in filling certain skilled positions. Retailers also noted plans to increase hiring. A large staffing firm reported solid growth in billable hours for both industrial and office and clerical positions. They also noted that both temporary-to-permanent job transitions and direct hiring of permanent employees inched up further.

Construction and Real Estate
Construction activity was again subdued. However, contacts anticipated an uptick in residential construction in 2011, particularly for multi-family properties where apartment builders were receiving financing and development contracts for new construction. In addition, single-family home construction, especially in uncompleted existing subdivisions, was also expected to begin to slowly increase. Activity in the residential real estate market was up slightly, and the pace of foreclosures slowed. Home prices were little changed, while residential rents were reported to be rising. Private nonresidential construction was flat, but builders noted a slight pick-up in activity for both office and industrial properties. Commercial real estate conditions continued to slowly improve. Contacts indicated that vacancy rates were flattening out, but some downward pressure on commercial rents remained.

Manufacturing production expanded at a more moderate pace in January and early February. Orders, however, continued to be strong, and backlogs were noted to be rising. Several contacts also indicated that suppliers were facing challenges in keeping up with demand, particularly for industrial metals and heavy machinery. The steel, automotive, and heavy equipment industries continued to be sources of strength. A contact reported that active capacity in the steel industry was nearly fully utilized, but steelmakers remained cautious about bringing back on line currently idle capacity. Manufacturers of fabricated metals also reported strength in production and new orders. An automaker noted that sales had been better than expected in January, and an increase in production plans for the first half of the year may be needed as inventories remain lean. Demand for heavy machinery and trucks increased, with rental companies adding to fleets and end-user demand also on the rise. A building supplies manufacturer indicated that shipments currently were down, but that they expected an increase in shipments this year for the first time since 2005. A contact in the home appliance industry also reported lower shipments in January, but expected a bounce back in February.

Banking and Finance
Credit conditions continued to improve in January and early February. With market interest rates rising, financing costs increased, but corporate credit spreads for a number of large firms in the District were slightly improved. Competition for commercial and industrial loans continued to be fierce, and contacts noted an increased presence of large banks in small business lending. Demand for business and consumer credit increased. Much of this continued to be refinancing of existing debt, but core loan demand was noted to be slowly rising. Credit line utilization also picked up, as working capital needs increased. While delinquencies remained elevated, loan quality continued to improve, albeit at a slower pace than during the previous reporting period. Several contacts noted that the banking sector seems to be on its way toward balance sheet repair with earnings improving, and may be starting to turn the corner on lending. Credit availability is beginning to improve for most loan types, although the bulk of lending is still going to the most high quality borrowers.

Prices and Costs
Cost pressures increased in January and early February. Manufacturing contacts noted that increases in prices for industrial metals, such as copper and steel, and other raw materials were beginning to be passed on to customers. Prices for agricultural commodities like corn, wheat, dairy, hogs and cattle also moved higher, as did most energy costs, although ample supply continued to hold the price of natural gas at historically low levels. Contacts cited a combination of strong global demand, particularly from Asian markets, and tight supplies as factors behind the recent rise in commodity prices. Retailers reported higher wholesale prices, and expected that some pass-through would be necessary this year to avoid further squeezing margins. The construction industry, however, continued to experience downward pressure on prices despite higher raw material costs. Contacts also noted higher costs from increases in state corporate taxes and unemployment insurance, while wage pressures remained moderate.

Last fall's harvest ended up being smaller than previously estimated. Moreover, stocks of corn were lower than predicted. Input costs for crop production moved up over the winter. District crop farmers were, however, in a strong financial position, as most of the fall harvest had been sold at high prices. Corn and wheat prices increased during the reporting period, while soybean prices changed little. More acres of corn are expected to be planted this year than last. Farmers reportedly also planned to expand acres under tillage a bit by clearing fence rows and wooded acres. Margins for dairy and livestock producers strengthened as dairy, hog, and cattle prices rose more than feed costs did.

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Last update: March 2, 2011