The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed November 29, 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 expanded at a modest pace during October and early November. Consumer spending continued to increase at a gradual rate, and business spending expanded again. Overall labor market conditions were little changed, with small gains in employment on net. Residential construction and real estate activity continued to decline in most areas, while nonresidential construction was steady on balance. Manufacturing expanded at a modest pace. Lending activity moderated further. Overall, nonwage price pressures eased a bit, while overall wage increases were similar as in the previous reporting period. Prices for corn and soybeans rose, as this year's yields turned out to be smaller than were expected in September.

Consumer Spending
Consumer spending continued to increase at a gradual rate in October. Retailers said Halloween sales were "positive," and one contact thought this boded well for the holiday shopping season: "If they'll spend at Halloween, just think how much they'll spend at Christmas!" Nonetheless, retailers were said to have taken a conservative approach to inventories. Restaurant sales were higher than expected over the past six to eight weeks; one contact suggested that lower gas prices helped support demand. Auto dealers reported that sales remained relatively steady in recent weeks, though showroom traffic was soft. Tourism was similar to a year ago.

Business Spending
Business spending and hiring rose again in the District. For the most part, capital spending continued to increase at similar rates as in the previous reporting period. A toolmaker reported plans for further capacity expansions in 2007, a restaurant chain increased its planned outlays for renovations, and a manufacturer noted continued strong levels of spending on high-tech equipment. Overall, labor market conditions were little changed, with small gains in employment on net. Manufacturing employment was mixed by industry. Toolmakers increased employment but noted continued shortages of skilled workers. In contrast, an automaker said that the planned reductions in their workforce were running ahead of their targets. A temporary help services provider said that billable hours growth in the District was a bit softer, but the firm's outlook was favorable as forward orders had maintained their previous trends.

Construction and Real Estate
Residential construction and real estate activity continued to decline in most areas and market segments. One notable exception was the Milwaukee area, where homebuilders reported high traffic through model homes and strength in the construction of upper-end homes. One contact said that lot sales were soft and that some people who already owned lots were waiting for construction costs to come down before building. Nonresidential construction was steady on balance: new development was flowing at a steady pace, and there were few reports of project cancellations. A contact in Michigan reported strong demand for medical space, while net absorption of office space in Chicago slowed. Commercial rents were creeping up in Indianapolis, but flat in Michigan and Illinois.

Manufacturing activity expanded at a modest pace in October and early November. Sales of large- and medium-sized heavy equipment continued to grow at solid rates. Demand for equipment related to nonresidential construction was expected to expand at a slower rate in 2007, while demand for smaller equipment used in home construction was expected to decline further. Manufacturers of machine tools and equipment parts reported continued strong order growth in most market segments outside of motor vehicles. One partmaker noted that demand was led by the electronics and semiconductor industry. Another toolmaker noted that its exports continued to grow faster than the rest of its business. Light vehicle manufacturers reported softer sales nationwide. They indicated that there was little room to alter production plans for the fourth quarter but cuts in the first quarter schedules were possible. A steelmaker noted that vehicle production cuts continued to show through in weaker orders for flat-rolled steel, but other segments of the steel market were slowing as well and were expected to remain sluggish through the first quarter. Steel production in the Midwest was said to be slowing more sharply than in the rest of the nation. Steel inventories moved further above desired levels. Wallboard shipments fell, and capacity utilization in the industry declined.

Banking and Finance
Lending activity moderated further. Bankers noted continued stagnation in mortgage applications for home purchases. But refinancing activity firmed in October and early November as lower interest rates stimulated demand. Demand for new home equity loans declined further, but the usage rate of existing credit lines ticked up. Household credit quality generally remained in good shape: delinquency rates on mortgages were stable, but delinquencies on home equity loans edged up. Retail deposit growth slowed, as some depositors sought higher returns in money market accounts. Business loan demand was flat. Lending for equipment and inventories remained steady, but real estate lending leveled off following a period of solid gains. A banker in the Chicago area said that institutional real estate investors remained active, though there had been some slowdown by smaller investors. Commercial lending conditions continued to be competitive and interest rate margins remained narrow. One banker noted that commercial real estate borrowers were starting to seek interest-only and other alternative loan structures. Commercial credit quality remained in good shape, with steady ratios of non-accruing loans.

Prices and Costs
On balance, nonwage price pressures eased a bit, while overall wage increases were similar as in the previous reporting period. Several contacts reported continued declines in energy costs, and a few transportation firms had begun rolling back surcharges. Prices for hot rolled and scrap steel declined, and wallboard prices also fell. In contrast, toolmakers reported further price hikes, and many food prices increased as well. There were no reports of significant changes in price movements at the retail level. One automaker increased discounting, and incentive activity was expected to increase further as inventory levels remained high. Wage increases continued at similar rates as in the previous reporting period. A temporary help firm noted that wages for high-skilled positions were moving "appropriately" higher, but their customers were reluctant to increase wages for lower-skilled positions, even though these jobs were getting a bit more difficult to fill.

Most farmers completed their harvest during the reporting period. Corn and soybean yields were at least average, though not as good as expected last reporting period. Corn and soybean prices increased to substantially higher levels than a year ago. Many farmers held grain off the market as they waited for prices to move even higher. Contacts indicated that more farmers than usual already had locked in prices for the next growing season and some were writing contracts for even farther in the future. Ethanol production kept rising, but some plans for new plants and expansions of existing facilities have been postponed or put on hold. In some cases, construction delays stemmed from the lack of availability of equipment for the plants. In other cases, investors reassessed the feasibility of their plans based on the rapid increase in ethanol supply and zoning issues. Livestock and poultry operations were hurt by higher feed costs. In addition, District dairy producers struggled with low milk prices.

Return to topReturn to top

Previous Atlanta St. Louis Next

Home | Monetary Policy | 2006 calendar
Accessibility | Contact Us
Last update: November 29, 2006