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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District expanded at a moderate pace during late August and September. Consumer spending continued to increase modestly, and business spending expanded again. Labor market conditions were little changed, with small gains in employment on net. Residential construction and real estate activity declined again in most areas, while nonresidential construction advanced at a steady pace. Manufacturing activity expanded again, though at a modestly slower pace than in the previous reporting period. Mortgage lending declined, while commercial lending increased at a slightly slower rate than in the previous reporting period. Nonenergy price pressures and overall wage increases held steady. Corn and soybean harvests in the District were delayed by cool and rainy weather in September, and early results indicated mixed yields relative to a year ago.

Consumer spending
Consumer spending continued to increase modestly in August and September. Retailers said back-to-school sales were within their expectations but "nothing stellar." Cool weather reportedly helped apparel sales in some areas. Retailers thought that lower gasoline prices had only a modest impact on their sales. Retail inventories were at desired levels for general merchandisers, but a furniture retailer said it was running down its inventories because its suppliers were well stocked and able to fill orders quickly. Auto dealers reported that sales trends have changed little in recent weeks; Big Three vehicles lagged behind foreign nameplates and high-gas-mileage vehicles continued to sell well. Tourism in Michigan was running similar to a year ago after a small pick-up in recent weeks.

Business spending
Business spending and hiring expanded again in the District. For the most part, capital spending continued to increase at similar rates as in the previous reporting period. Trucking volumes were up slightly over a year earlier, though one contact said customers have been tentative and saw a chance of stronger activity in the fourth quarter. Overall labor market conditions were little changed, with small gains in employment on net. Manufacturing employment was mixed by industry. Auto manufacturers and suppliers laid off workers, while toolmakers increased employment. A contact in Rockford reported that a number of warehouses serving retailers were significantly increasing employment. A local internet job posting business said that job advertising continues to be robust. Shortages of skilled manufacturing workers persisted. A temporary help services provider said that demand growth in the District during the third quarter was a bit stronger than the second quarter, led by a pickup in Illinois and Wisconsin.

Construction/real estate
Residential construction and real estate activity declined again in most areas. Homebuilders observed sluggish demand in all market segments, and a Chicago-area builder said high-end properties have been taking noticeably longer to sell. However, a contact in the Milwaukee area said traffic through model homes was holding up well. Builders in southeast Michigan reported a number of project cancellations. New home prices were steady to down, and several builders were adding free upgrades to help sell homes. A contact in Michigan noted that list prices of existing homes were being reduced as well. Nonresidential construction expanded at a steady pace. However, net absorption of office space slowed and neared zero in many parts of the District, which a Chicago-area contact attributed to the return of sublease space into the market. Looking forward, a few contacts said that the development pipeline looked slower than average and that some projects were delayed for budget reasons.

Manufacturing activity expanded again in late August and September, though the pace of expansion was a bit slower than in the previous reporting period. Sales of large- and medium-sized heavy equipment continued to be strong, but overall order backlogs dipped below recent highs and deliveries of machines used in home construction have fallen below year-ago levels. Sales of high-tech equipment were growing well, with demand spread across cell phones, cellular infrastructure, and defense communication equipment. A specialty steel producer reported robust order growth and said that it was picking up new customers that had been having trouble filling orders with their existing supply base. Toolmakers reported continued strong order growth. One toolmaker added that it had not seen any weakening in its oil-related business since crude prices have declined, and another noted that demand from foreign firms has been strong. Heavy-duty truck production and sales were at record levels. Net orders continued to fall, but the decline was within expectations since production capacity was booked through the end of the year, when new emission standards go into effect. Demand for medium-duty trucks was driven by orders from truck dealers, as analysts report that end-users were "clueless" about the new emission standards. Light vehicle manufacturers forecast steady or slightly slower sales for the rest of the year, though one expected lower gasoline prices and higher equity prices to support demand. A steelmaker noted that vehicle production cuts were starting to show through in weakening orders for flat-rolled steel and growing inventories at steel service centers.

Lending activity moderated further. Bankers noted continued stagnation in mortgage applications for home purchases but said that refinancing activity firmed between August and September. One bank indicated that slower home price appreciation was restraining demand for new home equity loans. Home equity credit line balances declined further, though demand for closed-end loans ticked up. Household credit quality remained in good shape in most places with stable delinquency rates on mortgages and home equity loans; the exception was in Michigan, where delinquency rates moved higher. Commercial lending continued to expand but at a slightly slower pace than in recent reporting periods. Bankers in the Chicago area noted that customers remained upbeat about business conditions and were increasing their demand for financing, while bankers in Michigan reported little loan growth. Commercial lending conditions continued to be competitive and interest rate margins were narrow. One banker noted that competitive pressures were spreading into second-tier lending, such as small business loans collateralized with personal assets. Commercial credit quality remained in good shape, which one Detroit-area banker attributed to the reluctance of lending officers to loan funds to problem industries.

Nonenergy price pressures and overall wage increases were similar as in the previous reporting period. Several contacts reported recent declines in energy costs, but a manufacturer said their suppliers were waiting to make sure energy prices stabilized before passing along the cost reductions. An appliance manufacturer said the cost environment remained "unfavorable," due to high materials prices. Construction materials costs were stabilizing at high levels. There were no reports of significant changes in price movements at the retail level. Wage increases continued at similar rates as in the previous reporting period.

Corn and soybean harvests in most of the District were delayed by continued precipitation and unseasonably cool weather. The weather also inhibited crops from drying in the fields, forcing farmers to use energy-intensive, mechanical drying. Early reports on corn and soybean yields indicated mixed results around the District, as extensive cloud cover late in the growing season hampered crop development. Net crop receipts decreased across the District. Contacts expressed concern about cash flows for grain farmers given higher operating costs for the crop year overall, though the recent decline in energy prices has been a positive factor, especially by reducing the cost of drying grain. Hog prices declined in September, while cattle and dairy prices increased.

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Last update: October 12, 2006