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Seventh District--Chicago

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Economic activity in the Seventh District remained sluggish in April and May. The quick end to major military operations in Iraq had not yet brought the boost in economic activity that many contacts had expected. However, most were optimistic about prospects for stronger growth in the second half of the year. Consumers and businesses remained cautious about spending in recent weeks. Housing markets were still robust, but there was little improvement in nonresidential construction and real estate activity. Manufacturing activity was again weak with few signs of strengthening. Lenders reported another surge in residential refinancing activity, while business lending was still weak. Generally sluggish economic conditions further limited increases in prices and wages. Above average rainfall delayed spring planting for many farmers, but it also helped alleviate drought-like conditions in much of the District.

Consumer Spending
Overall, consumer spending remained soft in April and May, though reports were mixed. Most retailers indicated that sales were in line with their expectations, but cooler-than-normal temperatures in much of the District may have dampened sales of seasonal items and apparel. Restaurant sales increased marginally after the war, but one contact said that sales gains were less than expected. Tourism remained fairly steady and hotel occupancy rates improved slightly in some areas. Theater ticket sales were relatively soft in April, but picked up modestly in May with the release of some highly anticipated movies. Auto dealers in the District said that new car sales weakened in May, and showroom traffic was "spotty" despite high incentives. Light vehicle inventories continued to rise and many dealers reported cutting back orders. Service and parts sales were also said to be lagging.

Business Spending
Businesses remained very cautious about their spending and hiring, even after the war. Capital spending was again weak, and there was little evidence that firms were ready to boost investment just yet. Most contacts cited slow revenue growth and a limited need to replace information technology and other equipment as the primary factors holding back capital expenditures. We continued to hear that many businesses had funds earmarked for capital outlays, but most had not yet released them. Spending on services such as advertising and business travel also remained soft. Hiring plans appeared more cautious in May. The vast majority of temporary help industry contacts said that new orders fell in recent weeks. One large firm said that year-over-year growth in billable hours, which had been slowing since the beginning of the year, turned negative in May, and an expected seasonal pickup did not occur. While softness in labor demand was broad-based, retail trade and manufacturing were said to be weaker than other industries. There appeared to be little forward-looking business spending taking place, with one contact saying that decision-makers were only spending "what was necessary to keep the lights on." At the same time, there were fewer reports that firms were planning further spending cuts.

Construction and Real Estate
Construction and real estate activity was again strong on the residential side and soft on the nonresidential side. On balance, home sales remained robust. Realtors said that the resale market was still "very active," and many continued to realize year-over-year sales increases through May. Home price appreciation, while still solidly positive, slowed in some areas. New home sales generally remained strong, though builders' reports were mixed as were contacts' expectations for home sales in coming months. Nonresidential activity remained relatively slow, but there were a few reports of modest improvement in some segments. Office vacancy rates appeared to have topped out in most areas, while rents look to have bottomed. Requests for office property showings increased in some metropolitan areas, though these had not yet translated into positive net absorption. Vacancy rates and rents for industrial properties also stabilized somewhat in April and May, and one contact suggested that industrial vacancy rates will start coming down by the end of the summer. Retail activity was also relatively stable, although a few contacts noted that the number of big box plans in the pipeline had slowed.

Manufacturing activity generally was still weak in April and May. Automakers said that light vehicle sales nationwide slowed in May and inventories remained high. Heavy equipment sales remained below year-ago levels, although one industry analyst suggested that some dealers were rebuilding their rental fleet inventories, and used equipment sales were "higher than they have been in a while." Steel shipments slowed early in the second quarter after holding fairly steady in the first quarter. Gypsum wallboard production was off slightly from high levels last year. Reports from tool producers were mixed, but generally indicated relatively soft demand. One industry contact said that the number of price quote inquiries continued to rise, but this had yet to lead to an increase in orders. A leading producer of home appliances reported that an inventory adjustment by dealers led to a drop in shipments in April. However, this contact said that shipments bounced back in May and demand was firming.

Banking and Finance
Lending activity was again robust on the household side and weak on the business side. Thirty-year fixed-rate residential mortgage rates continued to fall, leading to another wave of refinancing activity. One bank reported that its mortgage applications increased by 40 percent in the last three weeks of May, with refinancing accounting for nearly 90 percent of the rise. Another suggested that many households were taking advantage of refinancing to pay down other debt, which was limiting growth in credit card volume. Standards and terms on household loans were largely unchanged, as was overall credit quality. Business lending remained weak with overall loan volumes flat. Many large businesses continued to take advantage of favorable lending conditions to refinance or restructure existing debt, and a few lenders noted some merger and acquisition activity. But demand for new investment loans was described as "lackluster" and "lacking energy." Standards and terms on commercial loans were largely unchanged, while credit quality was said to be improving modestly. Bankers suggested that the quick war brought a palpable sense of relief to many of their business customers, but a general aversion to risk persisted among many decision-makers.

Prices and Employment Costs
Generally sluggish economic conditions continued to limit upward pressure on prices and wages. Businesses noted increases in the cost of some inputs, such as energy, metals, and beef, as well as higher state tax burdens. However, contacts said that weak demand and fierce competition left them with little leverage over output prices. Producers of heavy equipment and gypsum wallboard attempted to push through price increases with limited success. But retailers and auto dealers reported using steeper discounts on more products in recent months. Upward wage pressures were virtually nonexistent in most industries. In fact, contacts reported that many firms were instituting wage freezes, and/or limiting or delaying merit increases.

Above-average rains in May across most of the District delayed completion of planting, forced some replanting, and shifted acres from corn to soybeans. However, recharged moisture levels have improved the outlook for both corn and soybean yields. The discovery of a single cow in Canada with "mad cow disease" disrupted cattle markets, but did not have a major impact on cattle prices. Hog prices continued to rise in May, and surpassed year-earlier levels. Dairy operations were again struggling with very low milk prices. Contacts said that low interest rates and the new tax law may release some pent-up demand for farm machinery if harvest prospects remain favorable. Renewing agricultural operating loans has become "tougher" for farmers who had low yields last year, especially if their planting was delayed this year. One contact said that federal farm program checks will help boost income, and "buffer the pain" experienced by some farmers in harder hit areas.

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Last update: June 11, 2003