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Seventh District - Chicago

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The Seventh District economy expanded at a moderate rate in March and April, regaining some of the lost momentum noted in our last report. Retail sales remained above year-ago levels but results varied by retailer and product line. Residential housing activity picked up slightly from a weather-related slump early this year and business construction remained strong. Manufacturing activity increased from earlier in the year despite several auto plants being idled by strikes. Business lending remained strong while reports on consumer credit were mixed. The District's labor markets remained very tight with continued shortages, but there was no new evidence of upward wage pressures. Cool, wet weather conditions slowed early field work on farms while lagging inventories and growing export prospects buoyed hog prices.

Consumer Spending
Retail sales in March and April generally continued to run above a year ago, although results varied by retailer and product line. National chains described regional sales results as being about at or somewhat below those in other parts of the country. In Michigan, shopping mall traffic was described as fairly brisk, and a survey of retailers showed March sales continuing to gain momentum from a temporary slump at the start of the year. Continued strength in apparel sales was reported by most retailers in the District, while abnormal weather was cited as temporarily slowing sales of Spring merchandise (sporting goods, lawn and garden equipment, etc.) One large regional chain noted that sales of big-ticket items, such as furniture, had increased from earlier this year. A large national retailer reported some improvement in sales of consumer electronics but added that this segment remained in a down cycle. Most contacts noted that inventories were in very good shape, resulting in less need for sales promotions and discounting. Sales at District auto dealers were reported to be steady for most models but robust for light trucks and luxury automobiles in the first quarter. One analyst, however, reported that a survey of dealers indicated slowing sales in April.

Housing and Construction
Overall construction activity remained robust in the District with housing rebounding slightly from a deeper than seasonal dip earlier in the year. Residential construction remained strong in each of the District states with the exception of Iowa, where a builders' association noted that building activity picked up in March and April after a period when price discounting was used heavily to work off unintended inventory. Builders in some areas suggested that strength on the residential side was concentrated in multifamily construction and building permit reports show substantial year-over-year increases in multifamily units in both February and March. Single-family activity had become spotty through much of the District with many contacts pointing to softening in the higher end of the market. Sales of existing homes were reported to be off slightly from last year's levels but, again, still strong. One large realtor, noting that his company's sales were down about 10% from this time last year, stated "I certainly don't see my salespeople sitting around crying in their beers." Builders and suppliers reported that the commercial segment of the market, most notably suburban industrial construction, remained very strong in April.

Manufacturing activity picked up moderately during March and early April, displaying few adverse effects yet from scattered auto-related strikes. Production and new order components of purchasing managers' surveys from across the District increased from already expansionary levels in February. One District steel producer reported that the company's order books were full through the second quarter. A large producer of earth-moving equipment reported an increase in orders, and a major producer of agricultural equipment noted increasing orders from abroad, particularly eastern Europe. Strong sales through the first quarter boosted production at auto makers and suppliers through much of the District. Strikes are idling plants which make some of the most popular (and profitable) models, but most contacts had yet to feel any discernible effects from these strikes. There were few reports of new upward price pressures. One major steel producer reported that the costs of some raw materials and energy were declining slightly, and while steel prices were up slightly, they are expected to fall due to new capacity coming onstream in the next few months and a surge in imported steel.

Overall lending activity remained strong in March and April, but the strength was not even across markets, and it was unclear if total activity was picking up or leveling off. Most bankers contacted indicated that business lending continued to be the major source of strength. One rural contact pointed out an increased demand for loans from light industry in rural areas while noting difficulty in attracting deposits to fund their loan demand. A contact at a large Indiana bank reported that business lending remained strong but noted that an uptick in interest rates had some of their customers rethinking large capital and real estate investments. Competition remained intense and many banks lowered credit standards to make business loans. On the consumer side, reports from financial contacts were mixed. Mortgage lending became spotty in the District, with some banks reporting increased lending activity and others reporting a decrease. One large issuer of credit cards reported that charge-offs hit a new high in the first quarter. This company, which had been very aggressive, was tightening credit standards slightly and cutting back on their marketing campaign considerably. Another less aggressive issuer reported that their charge-off rates were lower than a year ago and planned no changes in their promotional activities. One large retailer noted that store credit card delinquencies, which had flattened out earlier this year, increased sharply in March. Overall asset quality at District banks, however, was reported to be good.

Labor Markets
Labor markets across the Seventh District remained very tight in April amid signs of further tightening. This was most evident in Indiana, where the unemployment rate had fallen nearly one full percentage point since the beginning of the year. Overall employment growth in District states still lagged the nation but many contacts regard this as a labor supply problem. A national survey of hiring plans showed that employers in the Midwest had the highest hiring expectations of any region in the country. Manufacturing employment, which had been trending downward since December 1995, appeared to have changed course early this year and more recent evidence suggested that job growth may have accelerated in April. Employment components of purchasing managers' surveys from across the District were significantly higher than February and temporary help agencies reported increased orders from the industrial sector in April. An analyst in the Chicago area noted that hiring in trade industries, both wholesale and retail, had leveled off recently while a survey of Michigan retailers suggested continued increases in their payrolls. Information technology workers were most often cited as being in very short supply. There were no new reports of upward pressure on wages, and strikes in the auto industry center around non-wage issues.

Farmers in District states expect to plant more corn and soybean acreage this year but fewer acres will be devoted to vegetables. Cool temperatures and wet conditions delayed early field work again this year, especially in Iowa. Improved weather conditions since mid-April permitted several areas to catch-up the last two weeks. About 18 % of the intended corn acreage in District states had been planted as of April 26, slightly above the average pace of the past five years. The number of hogs on farms continued to be below year-ago levels and producer surveys point to only modest expansion through this summer. Growing environmental restrictions geared mostly toward very large producers appeared to be undercutting the expansion that most analysts were expecting. Simultaneously, foreign demand for U.S. pork has increased significantly with the recent outbreak of a disease that has halted pork shipments out of Taiwan.

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Last update: May 7, 1997