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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District contracted further in March, but the pace of decline slowed from the previous reporting period. Consumer spending improved some and the pace of business spending was little changed. Construction and manufacturing activity continued to be weak, and labor market conditions deteriorated further. Credit conditions remained tight for many firms. Price and wage pressures tilted toward the downside. Agricultural prices were mixed, as prices for major crops moved up while livestock prices moved down.

Consumer Spending
Consumer spending improved slightly in March. Retailers reported that promotions and discounts had a small, positive impact on sales as customers remained price conscious. Sales performance varied widely across categories of goods, with luxury and big-ticket items continuing to decline while necessities, fast-food, and consumer electronics fared better. Contacts also noted retailers remained cautious in ordering due to their desire to keep inventories lean. Auto dealers, for example, continued to hold back on orders to keep vehicle inventory levels in line with the low level of sales. However, dealers also noted an increase in showroom traffic and stronger sales toward the end of March on the basis of expanded incentive programs and the ability of a larger number of potential buyers to qualify for financing. Furthermore, contacts noted that the recent decision by GMAC to expand retail credit and ease wholesale finance charges should help support sales and inventories. Nonetheless, contacts still reported that, on balance, floor-plan financing remains difficult to obtain and poses a major challenge for dealerships.

Business Spending
The pace of business spending was little changed in March. Contacts generally reported that they were limiting capital expenditures given uncertainty over the near-term outlook. However, reports from industries that have been less affected by the current downturn, such as fast-food and pharmaceuticals, indicated that capital expenditures were continuing as planned. Labor market conditions in the District continued to deteriorate. Additional layoffs were reported, although several contacts again indicated that they were trying to avoid layoffs and retain skilled labor by using reductions in hours. Hiring activity remained low outside of the healthcare and pharmaceutical industries; but a contact noted that even in the former, hours have been reduced for non-patient related staff. In contrast, a contact cited some hiring in response to the boom in mortgage refinancing activity in March. A staffing firm reported a slower pace of decline in the use of their services; however, the typical seasonal pick-up in activity had not taken place for them as firms were cautious to expand their work force at this time.

Construction and Real Estate
Construction activity in the District remained weak. Residential construction was minimal, as housing inventory in the District remained elevated. However, several contacts noted an increase in showroom traffic in recent weeks. Few mortgage originations reflected new purchases, but declining mortgage rates renewed the boom in refinancing. Contacts also reported higher demand for home equity loans, but declining home values and tighter credit standards limited the availability of credit. Nonresidential development and construction declined from the previous reporting period, although contacts reported a slight increase in public infrastructure activity. Contacts also noted that demand for refinancing of existing projects was on the rise. Property values were declining sharply, as vacancy rates and available sublease space continued to increase in the District, particularly in the retail sector. Contacts also reported a decline in rents as landlords were granting tenant requests to renegotiate leases in order to avoid vacancy. Residential and commercial construction contacts both cited limited credit availability for new projects as the primary reason for an increasing number of project delays.

Manufacturing activity in the District continued to fall, but the pace of decline slowed in March. Activity in the domestic steel industry improved slightly from the previous reporting period, but remained very low. Other metals-related industries also noted weak business conditions. The demand for aircraft, heavy trucks and equipment and appliances declined. Exporters noted a further broad-based weakening of demand from abroad. Several manufacturers reported increases in deferral requests and cancellations of orders, some of which were attributable to the deteriorating credit condition of customers. In contrast, several contacts reported a reduction in inventory pressures. A contact also cited continued strength in demand for pharmaceutical products. Automakers reported further plans to cut back on production in order to control inventories. However, they were optimistic about the late-March surge in sales and the number of direct support programs being put in place by governments around the world. Uncertainty over the state of the domestic automakers and tight credit conditions remained a drag on auto suppliers. Contacts were hopeful of the impact of the government's recent assistance to the industry, but liquidity remained a concern for Tier-2 and Tier-3 suppliers.

Banking and Finance
Credit conditions remained tight for many firms. A contact indicated that corporate financing costs had moved lower after peaking in early March, but remained above where they were in early February. Banking contacts noted that the pullback on capital expenditures by firms waiting to see signs of a recovery continued to limit loan demand. Credit availability for smaller businesses remained low given the difficulty in meeting covenants due to weak economic conditions. In contrast, a contact indicated that requests from auto dealers and suppliers for amendments to loan covenants had leveled off in recent weeks. Consumer loan quality was also noted to have deteriorated, with payment delinquency on the rise and requests for loan modifications higher in March. Contacts were optimistic about the Fed's Term Asset-backed Loan Facility restoring credit availability for auto loans. However, a contact expressed concern about the possible addition of legacy commercial mortgage backed securities to this facility given rapidly deteriorating loan quality in this sector.

Prices and Costs
In general, input prices declined in March. Notably, the prices of steel and scrap both declined. However, contacts noted increases in oil-derived goods and in concrete, although the latter increase was less than had been expected. Price declines continued in retail trade, particularly for apparel, but the squeeze on margins was less as the rate of wholesale price increases slowed. A contact noted that retail promotions and discounts are likely to continue into the spring. Wage pressures continued to tilt toward the downside, with several contacts noting pay cuts or freezes and reductions in non-wage compensation. However, a staffing firm reported that downward pressure on pay rates had moderated in recent weeks.

Relative to 2008, farmers in the District intend to plant fewer acres of corn and slightly more acres of soybeans this year. In recent weeks, much of the District received above average moisture, delaying field work. Fertilizer applications were already behind due to the late harvest last fall and the high cost of fertilizer which led farmers to delay planting decisions. However, fertilizer and other input costs have since fallen, helping farmers obtain credit for the upcoming crop season. Corn prices edged up during the reporting period, while soybean prices dipped before recovering. Farmers continued to own a lot more corn and soybeans than a year ago. Milk, hog, and cattle prices were lower. The dairy situation was described as "ugly" by a contact, with low milk prices triggering the Milk Income Loss Contract program. Extra hogs and cattle headed for slaughter, which pressured markets for meat, although lower feed costs helped offset lost revenues for livestock producers.

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Last update: April 15, 2009