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Seventh District--Chicago

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Economic activity in the Seventh District continued to increase in February and March. However, contacts' optimism was tempered by elevated uncertainty surrounding recent global events. Consumer and business spending increased. Manufacturing production expanded, though construction was again subdued. Credit conditions continued to improve. There was some further pass-through of higher commodity prices to downstream prices. Expectations were for more corn and fewer soybean acres to be planted in the District this spring relative to last year.

Consumer Spending
Consumer spending increased from the previous reporting period. Consumers continued to be drawn toward promotional items, now in part because they are dealing with the impact of higher food and energy prices on household budgets. The expiration of manufacturers' incentives contributed to a slight decline in auto sales in March. Auto dealers reported inventories were relatively low given the recent strength of sales. Contacts noted that potential production disruptions stemming from the events in Japan and the effects of rising gas prices on demand add a good deal of uncertainty to the outlook for the auto sector. Some dealers have already seen a shift in sales from new trucks to more fuel efficient vehicles.

Business Spending
Business spending continued to increase in February and March. Inventories were little changed, overall, although a few contacts indicated increasing their inventories of raw materials in anticipation of further price increases in the coming months. Capital expenditures continued as planned with several manufacturers noting equipment purchases and other efficiency improving investments. Merger and acquisitions activity picked up some. Hiring increased with contacts adding both temporary and permanent employees. Job postings also increased, and manufacturers reiterated the difficulty in finding appropriately skilled workers. A large staffing firm reported solid growth in billable hours and a substantial increase in permanent placement and recruiting activity. Furthermore, a recruiting firm noted that small business' hiring plans are beginning to show signs of improving.

Construction and Real estate
Construction activity was again subdued in February and March. Single-family homebuilders indicated that the spring building season was likely to be slower than previously anticipated. They also reported a drop in the contract conversion rate. Buyers appear to be waiting for home prices to stabilize from their recent declines and the availability of financing remains a concern. In the multifamily sector, several contacts reported developing strength in the rental market and a corresponding pick-up in conversions of condominiums into apartments. Nonresidential construction slightly improved. Contacts reported greater activity in both the institutional and industrial sectors, including from the healthcare and automotive industries. Commercial real estate conditions were marginally better with commercial rents flattening out and small improvements in vacancy rates.

Manufacturing production continued to expand in February and March. Activity in the steel, auto, and heavy equipment sectors remained strong. Several contacts reported significant current order backlogs and firming second-quarter order books. Capacity utilization in these industries has increased, but ample idle capacity remains available. For example, a contact in the steel industry noted that active furnaces are operating at high rates of utilization while idled furnaces are expected to be brought back on-line only slowly this year given the high costs of reactivation and uncertainty in the outlook. Lead times continued to lengthen as supply chains were stretched further for some parts. In addition, concerns, and a great deal of uncertainty, were expressed about the potential impact of the Japanese disaster. Contacts expected that supply chain disruptions would take place, although it was too early to tell their full extent. Auto suppliers reported that shortages are most likely to occur first in parts such as electronics, as well as for parts that were already in short supply like tires. Some domestic suppliers have already seen increases in demand for their products as a result. Automakers reported that dealers' vehicle inventories were lean enough to make them consider adding shifts at existing plants; but if parts shortages arise, production schedules may be pared back now and made up as necessary later in the year.

Banking and Finance
Credit conditions continued to improve in February and March. Banking contacts indicated that the business loan pipeline was still not robust, but that there were some areas of growth in manufacturing, food processing, and healthcare. Competition continued to be fierce for high-quality commercial and industrial loans (both large and small) leading to more aggressive terms and pricing. In addition, bank and non-bank investment in commercial real estate assets was also noted to be increasing. Consumer lending was little changed from the previous reporting period. Mortgage applications decreased and those made were primarily for purchase, as refinancing slowed with a rise in mortgage rates. Several contacts raised concerns about the impact that uncertainty surrounding the future of Fannie Mae and Freddie Mac and the regulatory environment were having on mortgage credit availability.

Prices and Costs
Cost pressures rose in February and March. Wage pressures remained moderate, but raw materials prices increased. The most notable increases were for steel and other industrial metals, but the prices of plastics, paints, resins and cotton also rose. Fuel and transportation surcharges were also noted to be rising. Pass-through to downstream prices was moderate, however. Retailers indicated that they were trying to limit raising prices, though pass-through was noted to be increasing, particularly for food and energy-related items. In contrast, several manufacturing contacts reported an increase in pricing power, with less pushback from customers in accepting higher prices. Commercial builders have been able to pass along minimal price increases to offset some of their higher raw material costs, although residential builders have not been able to do so.

Contacts predicted normal timing for the start of planting this year, and that fields were in good enough shape so that planting should proceed quickly. Ground moisture across the District is sufficient for a good start to the crop year, although some areas do not have adequate subsoil moisture to weather dry spells. More corn and fewer soybean acres were expected to be planted this year. Corn, soybean, and wheat prices were volatile, but on net edged lower during the reporting period. With stocks lower than a year ago, contacts saw the potential for upward pressure on corn and soybean prices in coming months. Moreover, feed mills have been actively seeking alternatives to blend into livestock rations. Milk prices continued to rise. Hog and cattle prices moved higher, with premiums being offered to attract the delivery of more animals for slaughter.

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Last update: April 13, 2011