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Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a moderate pace during June and early July, though activity in Michigan lagged. Consumer spending increased modestly during June, as did business spending and hiring. Construction and real estate activity was quite brisk in much of the District. The manufacturing sector continued to expand at a solid pace. Mortgage lending kept pace with home sales, while commercial loan demand increased modestly. Overall cost and price pressures remained moderate. The drought expanded and has now affected all of the District' states, contributing to a rise in corn and soybean prices.

Consumer spending
Consumer spending increased gradually during June. One area retailer attributed most of the pick-up to better weather during the month, adding that consumers seemed more focused on buying "needs-based" goods rather than discretionary items. Apparel sales were said to be strong. Retail inventories were slightly higher. Auto sales in the District increased in line with national trends, though one contact thought the new employee discount marketing programs did not benefit sales in the Detroit area as much as in other areas. One auto dealer in northern Indiana said sales in early July slowed to a more average pace. Tourism spending continued to increase steadily, with reports of increased demand for hotel rooms in Chicago and Michigan.

Business spending
Business spending continued to expand at a modest pace. Several contacts noted that they had increased capital spending as planned, and others reported that the investment climate remained positive. Trucking volumes held steady through the end of the second quarter. One trucking contact said that an inventory correction among their retail customers had restrained activity, but overall conditions in the shipping industry remained good. A Wisconsin utility reported a rise in power demand during the first six months of the year. Labor market conditions improved slightly overall, but conditions varied by location and industry. Job markets in Wisconsin and Indiana were better than those in Michigan. Hiring in the banking, trucking, and distribution industries reportedly increased. By contrast, layoffs were reported by pharmaceutical and auto-supply firms.

Construction/real estate
Construction and real estate activity was quite brisk in many of the District' markets during June and early July. Residential real estate markets remained active, with reports of more homes going on the market in Milwaukee and a solid pace of condo conversions in Chicago. Homebuilders in Wisconsin added incentives to help boost interest in some new properties. One homebuilder noted a decline in sales in metro Detroit but stronger activity in Indiana and Illinois. The news on commercial real estate was more positive than that of the previous reporting period. Contacts described commercial activity as "busier than normal" and "fast paced." However, activity in Michigan was slower than elsewhere in the District, and there were reports of weakness in office markets in a number of locations. Commercial occupancy rates and rents were stable on balance, though one contact was adding incentives to attract new clients to some properties.

Manufacturing activity continued to expand at a solid pace in the District during June and early July. Automakers reported a slight pick-up in sales in the first two weeks of July and expected sales for the month to be higher than June. Light truck sales were stronger than car sales, and one contact felt that the new incentives were offsetting consumers' concerns about higher gas prices. Industry contacts revised up their sales forecasts for the year, but left production plans unchanged. Toolmakers reported a solid sales pace in June, and one added that early indications suggest that sales in July will be strong as well. Office furniture producers reported solid growth in domestic sales. Activity in the heavy equipment market continued to be brisk, with production increasing and backlogs remaining high. One contact in the industry noted that sales of construction equipment remained very healthy, though retail sales of small tractors had declined slightly in the U.S. and Europe, perhaps because of drought conditions. Tire shortages were still limiting production of heavy equipment and heavy-duty trucks, though one contact said that a major tire maker was increasing capacity for large tires, potentially easing that constraint.

Lending activity generally continued to increase during June and early July. Demand for home-purchase mortgages was solid. Refinancing was mixed by location, with a Chicago bank reporting a modest pick-up and a Michigan bank reporting little change. The mix between adjustable-rate and fixed-rate mortgages was stable. Business loan demand continued to increase modestly, led by strength in commercial real estate loans. Nonetheless, several bankers said that competitive pressures were lowering margins on commercial lending and resulting in easing standards and terms for such loans. Business credit quality remained in good shape with many firms flush with cash. One exception was the auto-supply industry, where many banks expressed concern about the financial health of their customers. One analyst reported that venture capital in the Chicago area increased for the first time since 2000, adding that there was "renewed excitement and enthusiasm" for investing in local technology start-ups.

Overall cost and price pressures remained moderate. Higher material costs were noted for energy, resins, and some construction materials. Firms most directly affected by higher energy costs, such as those in trucking and air travel, said that they were able to offset most of the higher costs through surcharges and fare increases. However, one trucker noted that shippers who tried to raise rates too aggressively had lost customers. Manufacturers of heavy equipment, wallboard, and tools reported a new round of price hikes, though a heavy equipment maker reported some resistance to its increases. Reports of retail price increases outnumbered the reports of decreases. New car prices fell, not only for retail customers but also for corporate fleets. Wage gains remained modest overall, except in some skilled professions with shortages. With regard to costs for benefits, a large health insurance firm in Michigan announced plans to implement the smallest premium increase in a decade.

Crop conditions deteriorated in most of the District, contributing to a rise in corn and soybean prices. The drought expanded and deepened, despite some rainfall in early July. Illinois continued to be hit hardest, though at least part of each state in the District experienced drought conditions. In Iowa, crop development has been quite good, but some areas are at risk if they do not receive timely rains. District bankers were apprehensive about some farmers' poor risk management, especially with respect to inadequate crop insurance. Dairy farms generally did well in the reporting period, as milk prices increased. Livestock producers remained profitable overall, though cattle feeders were pressured by lower prices for cattle.

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Last update: July 27, 2005