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Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a slow pace in December and early January. Consumer spending was mixed, and business spending plans were mostly unchanged. On balance, labor market conditions softened slightly, though they continued to vary by industry and location. Residential construction continued to decline, and nonresidential construction showed signs of slowing. Modest expansion continued in manufacturing, with export-oriented businesses continuing to do very well. Credit standards tightened further, but business lending remained strong. Material cost pressures increased from the previous period, while wage pressures declined. Farmers planned to plant more soybeans and less corn this spring; and soybean and corn prices both continued to move higher.

Consumer Spending
Consumer spending continued to be mixed, with slower retail sales in some areas of the District and slight increases in others. Retailers attributed weakness in sales to the sluggish housing market and rising energy prices. Sales of luxury items, winter accessories, and consumer entertainment goods performed well, while consumer electronics, toys, and clothing sales were weaker. Auto dealers in the District reported mixed results and thought that many consumers were continuing to delay purchases in anticipation of lower prices. That said, they also reported that end-of-year manufacturer close-out offers and incentives boosted sales of passenger cars and crossovers. Vehicle inventories continued to decline to more comfortable levels. Tourism activity declined in December with a slight rebound in early January; one contact noted that leisure travel was weaker than usual because of inclement weather and cost-conscious consumers.

Business spending
Overall, the pace of business spending was little changed from the last reporting period. A manufacturing contact reported delaying capital spending and a bank reported that tightening profit margins and concerns over future losses from real estate loans would likely slow their pace of branch expansion in the coming year. Labor market conditions softened slightly in the District. The manufacturing and construction industries showed the largest declines in employment, and some weakness was reported in retail trade and financial services. However, the demand for skilled and professional workers remained strong. Furthermore, with the exception of the mortgage industry, staffing firms reported stability in billable hours relative to the previous reporting period. They also noted, however, that their clients’ uncertainty about economic conditions in the coming year was limiting the long-term demand for their services.

Construction and Real Estate
Residential construction and home sales in the District declined in December and early January. Contacts continued to report tightening of credit availability. Construction of spec homes and showroom traffic also continued to slow, and cancellations of residential construction projects edged up in Illinois, Wisconsin, and Michigan. Residential rents came under pressure as homes were put up for rent after failing to sell; some developers also were reported to be considering converting existing construction projects to rental properties. However, an Illinois contact reported that housing demand had increased slightly for low-tier value homes and that in the mid-tier market, home prices had leveled out and time-on-the-market had stabilized. Still, contacts projected that building conditions would be weak into 2009. Nonresidential development and construction in the District slowed from the previous reporting period. Nonresidential rents were steady or down slightly. In addition, there were reports of both cancelled and delayed projects and an increase in vacant retail space, a segment of the market that had been strong recently. In contrast, contacts reported some strength remained in infrastructure, commercial and industrial construction.

Manufacturing growth was relatively stable compared with the previous reporting period, and manufacturers remained upbeat about prospects for 2008. Manufacturers in several industries reported continuing strength in the demand for exports and that the falling dollar had enabled them to increase their prices. Domestic steel production continued to move ahead, supported in large part by a moderation in imports. Demand for aircraft and energy extraction and mining equipment continued to be robust, but demand fell further for manufacturers with strong ties to residential housing. Automakers reported that light vehicle sales were a bit better than expected, although there was some further weakening in the demand for light trucks. Previously announced layoffs at assembly plants were expected to begin in January, and these likely would have repercussions in employment for parts suppliers.

Banking and Finance
Credit market conditions remained tight in December with some reported improvement in early January. Volatility remained a concern and lending in the real estate market remained weak. Mortgage originations and home equity loans and lines of credit declined as tighter lending guidelines went into effect; however, refinancing activity increased moderately. Contacts reported that defaults and delinquencies on mortgages, credit cards, and auto loans in the District were not deteriorating. They also noted that lenders were developing methods to improve upon or implement more risk-based pricing as a way to insure better loan quality going forward. Business loan demand remained strong despite elevated borrowing costs and tighter credit standards. However, uncertainty concerning economic conditions in the coming year limited the demand for long-term borrowing. Large commercial banks reported downward pressure on profits as competition held up deposit rates and internal financing costs remained high. In addition, bankers expressed concern about how further declines in real estate prices combined with a slowing economy might affect loan quality and profit margins.

Prices and Costs
Manufacturers indicated that input costs rose from the previous reporting period, particularly for inputs affected by the higher price for oil. Contacts generally reported an inability to pass on cost increases; notable exceptions were in export-related industries and in retail food products, where higher wholesale prices were being passed on to consumers. The slowdown in construction led to further declines in wallboard prices. There were reports of increases in prices for ready-mix concrete and structural steel; but contacts speculated that these might be temporary, if, for example, commercial building activity continued to slow. Wage pressures remained limited outside of a few sectors that continue to experience shortages of skilled labor. That said, contacts cited union wage increases in the construction industry as a factor boosting building costs for new homes and a staffing firm reported that their clients were willing to accept higher prices in exchange for greater flexibility in the duration of employment contracts.

During the reporting period, in nominal terms, soybean prices rose to record levels and corn prices reached their highest levels since 1996. District farmers currently anticipate planting more acres of soybean and fewer acres of corn this spring, but were structuring their orders with suppliers in ways that will allow easier acreage adjustments based on future price movements. Hog prices rebounded, but were still below the prices of last year. In contrast, milk and cattle prices dipped, but remained above the prices of a year ago. Delivery dates on farm tractor or combine orders were difficult to book for 2008. Farmland rents moved higher along with commodity prices.

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Last update: January 16, 2008