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Seventh District - Chicago

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Economic conditions in the Seventh District remained very similar to those cited in our last report, according to most contacts. Retail sales picked up in recent weeks as colder weather set in, and most contacts expected the holiday season to be good. Construction and housing activity remained strong, buoyed by low interest rates and readily available funds. Strong new orders continued to keep the District's manufacturing industries running near capacity. Overall lending activity remained robust, though there was some softening noted on the business side in some areas. Labor markets were still very tight, yet wage pressures remained subdued. Farmland values continued to rise, while farm credit conditions were mixed. Contacts throughout the District indicated that there was no immediate impact resulting from the financial turmoil in Southeast Asia.

Consumer Spending
Overall consumer spending by market segment was mixed heading into the holiday season, though the onset of colder weather has helped increase sales in recent weeks. Most contacts reported that same-store sales gains were running in the low single digits over last year and one described results as "ho-hum." One retailer suggested that sales strength varied by market segment, with discounters showing the most strength, luxury stores strengthening, and middle-market merchandisers doing okay. Overall apparel sales were generally described as "on plan," having picked up as colder weather arrived in late October and early November. Cold weather also boosted sales of seasonal items. A few of the major chains reported strengthening sales of big-ticket items, such as electronics, appliances, and furniture. Inventories were reported to be in better shape than at the same time last year and, as a result, none of the merchants contacted were planning on increasing promotional activities. Most retailers were expecting a good holiday sales season, while their major concern continued to be the availability of seasonal workers. District dealers noted some softening in auto sales, while light trucks were reported to be selling well.

Overall construction activity remained strong and most contacts reported that conditions were nearly the same as a month or two ago. One large realtor in the Chicago metropolitan area noted that resale strength continued to surprise on the upside. Sales had picked up throughout the third quarter and, by October, were off last year's very high levels by only 1 percent on a year-to-date basis. This contact pointed to low mortgage interest rates and the availability of funds as key drivers of the market. The downtown housing market in Chicago continued to boom, led by strength in condo conversions. Existing home sales tapered off in Michigan, according to one contact, who pointed to the unseasonably cold weather as a contributing factor. New home construction in the state had also slowed from last year's very high levels, but to "a much more comfortable pace for everyone," according to one analyst. Commercial construction activity remained very strong in most of the District, yet there were some reports of slowing growth. Several contacts indicated that the pricing and availability of funds continued to make commercial developments attractive.

Reports on manufacturing activity were essentially the same as in our last report -- production levels remained very high, new orders continued to be strong, inventories were lean, and upward price pressures were subdued. Steel producers are expecting 1997 to go down as a record shipment year. Despite new capacity coming on stream recently, the industry continues to operate near capacity and order books are full through the end of the year. The strength in steel demand was broad-based, with notable orders coming from the construction and plant and equipment segments. Producers of heavy equipment (land-moving, agricultural, heavy trucks, etc.) were very optimistic heading into the new year with domestic shipments picking up and exports to Canada strengthening. New orders remained strong and the general feeling among contacts was that inventories were slightly low and backlogs high. One large producer of agricultural and construction equipment reported that the company was at capacity and running "all out." Automobile manufacturers indicated that overall demand remained strong and was holding steady. One automaker reported that its inventories were lean, but industry-wide stocks were generally at desired levels. The pricing environment remained very competitive in most manufacturing industries. Despite strong demand and plants operating near capacity, prices of most steel products were below last year's levels. Automobile manufacturers reported that new model sticker prices were flat and they were using more incentives than they anticipated a few months ago.

Overall lending activity remained strong in October and early November, though there was some slowing of growth reported on the business side. Most contacts reported that business lending continued to increase, but growth fell below some lenders' expectations. One large bank reported an uptick in merger and acquisition activity. There was reportedly no change in asset quality of business loans. On the consumer side, falling mortgage interest rates have prompted a mini-boom in refinancing activity in recent weeks. Rates on 30-year fixed-rate mortgages dropped below 7.5 percent in the region, the lowest level since early 1996. Personal bankruptcies stabilized over the last two months, but at high levels.

Labor Markets
The District's labor markets remained very tight, with few new reports of intensifying wage pressures. The general consensus among contacts was that there was little discernable change in labor market conditions in October and the first half of November. Most retailers continued to express concerns about the availability of holiday help. Small businesses were becoming increasingly creative in their recruiting efforts. One contact noted that small businesses in one metro area were recruiting in nearby rural communities where labor markets were not as tight. An analyst in Wisconsin reported that a small manufacturer (100 employees) was planning on closing its plant in a tight labor market area and reopening in Milwaukee's central city, in hopes of being able to find workers at reasonable wage rates. The practice of temporary help firms recruiting through state employment agencies was becoming more widespread. The few new reports of intensifying wage pressures were confined to areas where severe worker shortages existed in occupations particular to those areas.

Our latest survey of agricultural bankers found that farmland values continued to rise in most areas of the District this summer, culminating in an average gain of 7 percent for the year ending October 1. The bankers expected gains to continue this fall and winter because of stronger demand to acquire land, both among farmers and nonfarmer investors. Agricultural credit conditions varied across the District but, in general, appeared to have tightened somewhat. Farm loan demand was up from year-earlier levels in most areas. However, the funds available for making farm loans tightened, partly reflecting "higher-than-desired" loan-to-deposit ratios at many banks. Farm loan repayment rates slowed somewhat, especially in areas hard hit by the squeeze on dairy earnings.

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Last update: December 3, 1997