The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed January 18, 2006

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 at a moderate pace during December. In general, spending by both consumers and businesses increased at a modest pace. Employment expanded further in most locations and industries. The manufacturing sector expanded again, with the pace of growth firming in some industries. Residential construction and real estate activity tapered off, while commercial real estate activity increased at a slower pace than in the previous reporting period. Mortgage demand was down, and the expansion in commercial lending continued to slow. Cost and price pressures remained firm in December. Farmers expressed concern about the lack of snowfall in the District, which deepened worries about spring soil moisture levels and contributed to a shift in planting intentions from corn acres to soybean.

Consumer Spending
Consumer spending continued to increase modestly in December. Most District retailers said that holiday sales recorded low single-digit increases from last year and that these gains generally were in line with their expectations. The only exceptions were retailers in Michigan, who said that sales increased less than planned. Electronics and luxury items, such as jewelry and furs, sold well. All retail contacts noted strong growth in sales of gift cards. Retail inventories were at desired levels. Auto dealers in northern Indiana reported a pickup in demand in December, while dealers in Wisconsin said that sales remained slow. A restaurant chain said that sales in the Midwest increased at a faster rate than in the previous reporting period.

Business Spending
Business spending and hiring expanded at a gradual pace again. District firms continued to increase capital spending. Most were purchasing new machines and equipment to increase productivity, though one heavy machinery supplier reported new plans to expand its factory space. Dry goods shipping remained strong after improving markedly in the third quarter. Overall labor market conditions changed little: Employment continued to increase in many locales and in a wide range of sectors. Shortages of truck drivers and skilled manufacturing workers persisted. One manufacturer said that it was refocusing on training current workers to fill higher-skilled job openings rather than recruiting new workers. Staffing services firms reported that temporary hiring picked up steadily again in most areas in the District, though Detroit continued to experience stagnant demand. In contrast, layoffs were reported by some auto suppliers, pharmaceutical makers, and retailers, and one bank said that it was considering staffing reductions in mortgage underwriting.

Construction and Real Estate
Construction and real estate activity was mixed by both location and market segment. Residential activity was gradually slowing from record levels. One Chicago-area homebuilder noted that suburban homes were taking longer to sell and that builders were increasing incentives to close deals, while a Realtor in Wisconsin reported taking a less aggressive stance on list prices. Commercial construction and real estate continued to expand, but at a slower pace than in the previous reporting period. Activity picked up in Indiana, Wisconsin, and mid-Michigan, but was flat in the Chicago area. Office vacancy rates fell in Indiana but were steady at high levels in Chicago and southeast Michigan.

The manufacturing sector strengthened in December. Nationwide light vehicle sales picked up at the end of the year, and one contact noted that the gain did not reflect a boost in fleet sales to achieve end-of-year sales goals. Vehicle production plans for the first quarter called for a small increase in output from the same period last year. Orders and production of heavy trucks rose in December. Activity in the construction equipment industry continued at a brisk pace. Industry participants were optimistic about the outlook for 2006, saying that strong demand for nonresidential building would offset any slowdown in housing. Demand for farm tractors bottomed out. Construction and agriculture equipment inventories were at desired levels. District toolmakers reported solid orders growth and expressed confidence about the outlook for 2006. Conditions in the steel industry continued to be strong, with growth in orders across several end-user markets. Steel inventories were below desired levels, and they were being rebuilt.

Banking and Finance
Lending activity moderated further. Bankers noted declines in applications for both home-purchase and refinancing mortgages. Usage of home equity lines of credit remained stable. Reports on mortgage credit quality were mostly favorable, though one Chicago-area banker expressed concern that home equity loan delinquencies continued to drift up. Commercial lending continued to expand in December, though at a pace that was slower than earlier in the year. One banker said that business use of credit lines remained well below historical norms. Commercial credit quality was in good shape, with a smaller share of non-accruing loans and charge-offs than earlier in the year. Contacts noted that competitive pressures in commercial lending persisted, but they did not report a further easing in standards and terms or a narrowing of interest rate spreads.

Prices and Costs
Price and cost pressures remained firm in December. Several contacts noted lower fuel costs. Still, some contacts said that diesel prices had not come down as much as other fuel prices, and one shipper said that fuel surcharges remained very common. In addition, prices for plastics and other petroleum-related products increased further. Sugar, copper, aluminum, and corrugated cardboard prices all were up since the last report. Finished steel prices stabilized at high levels, though scrap prices fell. Carpet prices declined some after spiking in the fall. A retailer said that it was budgeting for a larger increase in its cost of goods sold in 2006 than it experienced in 2005. Reports on wages were mixed but generally suggested some intensifying pressures. A staffing firm said that clients were growing more likely to increase wage offers to find workers for certain high-skilled jobs. A number of hiring managers reported that they were planning larger increases in salaries for both new hires and existing workers compared with 2005. In contrast, trucker wage gains reportedly slowed, despite persistent labor shortages.

Farmers stored as much of the 2005 harvest as possible, which contributed to higher corn and soybean prices in December and helped ease crop transportation problems. Farmers responded to high diesel prices by reducing the number of trips required for each field. For example, many invested in no-till equipment, which does not require the fields to be plowed before planting. A lack of snowfall raised concerns about potential moisture conditions this spring and complicated planting decisions for many District farmers. Farmers currently intend to plant relatively more soybean acres versus corn, though some thought that further corn price increases would moderate the shift. With stable hog prices and higher cattle prices, livestock producers generally at least covered their costs of production. There were mixed signals regarding farmland values, with more contacts reporting that values have stopped rising and leveled off.

Return to topReturn to top

Previous Atlanta St. Louis Next

Home | Monetary Policy | 2006 calendar
Accessibility | Contact Us
Last update: January 18, 2006