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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a modest pace during January and early February. Consumer spending and business outlays and hiring all rose at rates similar to those recorded late last year. Residential construction and real estate activity declined further in most areas. Nonresidential construction expanded at a slower pace than in the previous reporting period. Manufacturing activity continued to be sluggish for most of January, but activity firmed in recent weeks. Household lending moderated further, while commercial lending remained at solid rates. Overall, nonwage price pressures were little changed, and wage increases were similar to those in the previous reporting period. Corn and soybean prices moved up, hurting the margins of livestock and dairy producers.

Consumer Spending
Consumer spending continued to increase at a gradual rate. Retailers said the latest year-over-year comparisons were boosted by the growing popularity of holiday gift cards and their redemptions in January. The most notable area of strength continued to be electronics, with particularly strong demand for flat-screen TVs. Valentine's Day sales were solid. Inventories were in line with desired levels. Vehicle dealers reported generally steady sales between January and early February. Several contacts noted that light trucks were regaining market share from more fuel efficient cars. A restaurant chain said that sales were stronger than expected in January, though activity was slower in February, in part due to inclement weather. In contrast, cold and snowy weather stimulated winter-sport tourism activity in Michigan.

Business Spending
Business spending and hiring rose again in the District. Capital spending increased at solid rates. A retailer reported increased outlays to renovate existing stores. Steel forgers were reportedly expanding capacity significantly. Employment continued to increase gradually on net. A staffing services firm reported steady growth in billable hours. The demand for manufacturing workers was mixed by industry. Toolmakers were trying to increase staffing, but found it difficult to find qualified workers, and a pharmaceutical firm noted a significant increase in job openings. In contrast, auto suppliers and vehicle manufacturers continued to lay off workers. Retailers and banks said they were holding employment steady at current levels. A labor market analyst in Illinois expected solid growth in employment to carry forward through 2007, with the strongest gains in business services and health care.

Construction and Real Estate
Residential construction continued to fall, both from a year ago and from the last reporting period. Some of the recent weakness reflected weather-related disruptions. However, one Chicago-area developer thought there has been little change in the underlying trends. Builders reported a large supply of unsold, speculative homes on the high end, while the supply of spec homes in other segments of the market was edging down. An industry analyst said the number of existing homes on the market was declining as well, in part because homeowners were pulling their listings in order to wait for more favorable market conditions. A contact from Chicago reported that condo developers were waiting to pre-sell a substantial portion of units before starting construction on new projects. According to one analyst, over three-fourths of builders in the Chicago-area were adding non-price incentives, the highest percentage the contact had seen. In contrast, home prices in the Des Moines area were appreciating faster than one contact expected. Nonresidential construction expanded from a year earlier, albeit at a slower pace than in the previous reporting period. Office construction in downtown Chicago was particularly strong, and the development of health care facilities was robust in many areas. A contact in Indiana said a number of speculative "big box" warehouses were under construction, and that net absorption in those properties was strong. Office rents were increasing in Chicago, but remaining flat in the Detroit area. Commercial vacancy rates were little changed.

Manufacturing activity continued to be sluggish for most of January, but activity firmed in recent weeks. A steelmaker reported some signs of increases in activity, including inquiries for large orders; the contact expected a solid level of demand in the first quarter but "no frenzy." Steel inventories remained high but were starting to move lower. A forging company noted that high inventories at service centers led the centers to cut back ordering, but direct orders from final customers continued to flow. Manufacturers of machine tools and equipment parts reported a noticeable pickup in demand during February, and the U.S. market for heavy equipment improved a bit from the end of last year. But contacts thought that domestic demand for heavy equipment overall had peaked about a year ago. Furthermore, there were new signs of weakness in the highway and coal mining segments, though demand for farm tractors continued to increase in response to high crop prices. Production of heavy-duty trucks remained solid. However, production was expected to tail off starting in late February, as manufacturers work through the supply of engines they had stockpiled before stricter emissions requirements took effect at the start of the year. Industry analysts lowered their forecasts for trailer sales, noting that some shippers were delaying purchases and some large retailers were cutting capital expenditures. Automakers indicated that light vehicle sales in February were running below plan but said they had not adjusted their assembly schedules in response. The weakness in residential construction continued to damp sales of wallboard, and one supplier said it had shortened its workweek and cut back on overtime.

Banking and Finance
Household lending activity moderated further from the previous reporting period, while commercial lending continued at solid rates. Mortgage applications for home purchases declined, following what one contact believed was a weather-induced blip up around the change of the year. Applications for refinancing continued to be low. Demand for new home equity loans decreased, while outstanding balances were flat. Delinquency rates on mortgages and home equity loans remained at low levels overall, although there was a noticeable deterioration in the sub-prime segment. Retail deposit growth slowed. Business lending was mixed by loan type: asset-based lending to middle market customers was strong; equipment leasing activity continued to show solid increases; while commercial real estate lending was steady. Commercial lending conditions continued to be competitive, and interest rate margins were narrow.

Prices and Costs
On balance, nonwage price pressures were little changed, and overall wage increases were similar to those in the previous reporting period. Raw materials prices were little changed at high levels. However, most contacts expected to see declines as the year progressed. Some manufacturers in sectors where demand was strong, such as toolmaking, were able to pass along the high costs, while others, such as auto suppliers, said they were pressured to keep prices low. Retailers in Michigan reported smaller increases in prices, while a restaurant chain said higher poultry costs were leading to higher average ticket prices. A temporary help firm reported steady increases in billing rates for most of the District. A manufacturer was budgeting a higher increase in its merit-pool this year but said the increase was in line with its improved performance.

Corn and soybean prices rose in late January and February, both reaching the high levels relative to years. Farmers still planned to plant more corn and fewer soybean acres this year. Some, however, reconsidered their allocations as soybean seed costs moved lower and specialized soybean varieties for trans-fat free oils were earning higher premiums. Farmers showed interest in expanding their acreage, generating higher demand for both the purchase and rental of farmland. With regard to the upcoming growing season, one contact noted that the relatively late cold weather during the reporting period diminished the risk of pest problems. Higher feed costs hurt the net income of livestock and dairy operations, leading to some exits from the industry. Distillers grains from ethanol plants did not provide relief from high feeding costs, in part because of shipments going outside the District.

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Last update: March 7, 2007