The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed July 27, 2011

Federal Reserve Districts

Seventh District--Chicago

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

Economic activity in the Seventh District continued to expand slowly in June and early July. Contacts expressed heightened uncertainty about the economic outlook given recent weaker-than-expected demand as well as the ongoing fiscal issues in the U.S. and Europe. Consumer and business spending edged up. Manufacturing production continued to expand at a steady pace while construction remained flat. Credit conditions again improved modestly, despite increased volatility in financial markets. Commodity prices remained elevated, and there was further pass-through of these costs to prices downstream. After a late start to planting, crop conditions began to return to normal, but dryness and above-average temperatures were concerns for farmers in parts of the District.

Consumer Spending
Consumer spending picked up some in June and early July. Consumers took advantage of retailers' efforts to clear inventory through early summer promotions. Spending on apparel and accessories increased as did expenditures on household goods like power equipment and lawn and garden items. In contrast, auto sales edged lower in June, as incentives decreased and showroom traffic declined; sales then improved moderately in early July. Small passenger cars and pickup trucks continued to account for most new vehicle sales. Inventories of small passenger cars remained lean due to continued supply disruptions for Japanese vehicles and higher demand for domestically produced small cars. Demand for used vehicles remained strong, and with used car inventories relatively low, prices rose further.

Business Spending
Business spending also edged up from the previous reporting period. Inventory investment decreased, but expenditures for equipment and structures increased. Several manufacturers reported plans to expand capacity, with a number of projects set to break ground in the District this fall. Renovation of retail facilities picked up further. In addition, contacts reported an increase in spending on research and development. Hiring continued at a slow pace, with many manufacturers reiterating the difficulty in finding appropriately skilled workers. On balance, however, labor market conditions weakened, as a number of private and public sector layoffs were reported and unemployment ticked up in the District. Furthermore, a large staffing firm reported a decline in billable hours.

Construction and Real Estate
Construction activity remained subdued in June and early July. Construction of new single-family homes slowed, while the construction of apartment buildings increased. Residential real estate conditions remained weak. The spring and early summer season saw a slight uptick in new home sales in the District, which, according to contacts, tends to be a leading indicator of the sales volume for the remainder of the year. In addition, although more potential homebuyers are qualifying for mortgages, contacts noted that downward pressure on existing home prices continues to restrict the availability of credit for new single-family construction. In contrast, nonresidential construction edged up with continued strong demand for industrial facilities, particularly from the automotive sector, partially offset by continued weakness in office and retail construction. Commercial real estate conditions also improved, albeit moderately. Vacancy rates edged lower, with net absorption stabilizing in the retail segment and rebounding in the office market.

Manufacturing production continued to expand at a steady pace from the previous reporting period. Automakers indicated that production was recovering from the Japanese supply chain disruptions in the second quarter. Auto inventories remain relatively low, but given recently lower sales, contacts reported that production would likely recover less sharply than previously expected. A contact in the auto supply industry noted that production losses from the Japanese disasters had been smaller than anticipated, but that efforts to work around supply disruptions resulted in increased expenses for labor, logistics, and parts, putting pressure on suppliers' margins. Capacity utilization in the steel industry reached its highest point since 2008; additional capacity is being added, but at a slow rate. In addition, contacts reported that steel service center inventories are tight. Several manufacturers of industrial metals reported increases in orders as well as significant backlogs in June; however, a few also noted slower activity in recent weeks. Despite some softening in demand from Asia and Europe, overall demand for heavy trucks and equipment continued to be strong, driven by fleet replacement and robust activity in the mining sector. In contrast, shipments of household appliances declined.

Banking and Finance
On balance, credit conditions improved modestly in June and early July. Funding costs and liquidity tightened marginally and volatility increased in a number of financial markets. In addition, contacts expressed concern about the negative consequences that a potential sovereign default would have on financial markets. Credit availability continued to improve, though standards remained tight for many borrowers. Competition among lenders for the highest-quality customers has been stiff, lowering the cost of capital for these borrowers. Business loan demand was steady. Businesses continue to mostly refinance existing debt, though a contact noted that increasingly such deals were also beginning to include an expansionary element. Consumer loan demand improved, with the pace of deleveraging by consumers slowing somewhat. The rate of improvement in both business and consumer loan quality reportedly flattened out.

Prices and Costs
Cost pressures remained elevated in June and early July. Food prices continued to rise, while prices for energy and some industrial metals, like steel, declined. Despite these recent declines, prices for many commodities remain elevated, and contacts indicated that fuel surcharges and shipping costs have yet to come down. Many wholesale prices also continued to rise, with pass-through of these higher costs to the retail sector picking up from the previous reporting period. Wage pressures, however, remained moderate.

There were mixed changes in crop conditions throughout the District. A small percentage of acres along the Missouri River were lost to flooding. Though there was some concern about recent above-average temperatures, contacts still see the potential for good to excellent corn and soybean yields this fall, contingent upon favorable weather for the rest of the summer. Historically low stocks of corn and soybeans have put a premium on delivery commitments before harvest. On balance over the reporting period, cash prices for corn, wheat, and cattle were down while prices for soybeans, milk and hogs prices moved higher; all of these prices, however, remained above the levels of a year ago. Livestock operations faced margin pressure from high feed costs. Some elevators were under financial pressures due to expanded margin calls on their contracted positions as well as higher costs for planned input purchases for next year's crop.

Return to topReturn to top

Previous Atlanta St. Louis Next

Home | Monetary Policy | 2011 calendar
Accessibility | Contact Us
Last update: July 27, 2011