The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed September 3, 2003

Federal Reserve Districts

Seventh District--Chicago

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

Seventh District economic activity improved in late July and the first few weeks of August, with contact reports suggesting that gains, while modest, were broad based. The power "blackout" of mid-August forced many Michigan businesses to close for a day or two, but contacts were confident that any lost production and/or sales would be quickly recouped. More generally, both consumer and business spending picked up in late July and August, though households and firms remained cautious. Home sales rose as buyers rushed to lock in interest rates, while commercial real estate markets remained weak. Manufacturing activity also increased slightly, with widespread improvements in key industry segments. Overall lending activity slowed, as mortgage applications dropped sharply. Prices firmed for some producer goods and services, but fierce competition kept retail prices in check. Little precipitation in late July and early August lowered expectations for the corn and soybean harvest, dampening hopes of expanded capital spending by farmers and boosting the likelihood of an increase in operating loan renewals and extensions.

Consumer Spending
Consumer spending firmed in late July and the first few weeks of August, although many contacts (retailers, auto dealers, restaurateurs, etc.) indicated that gains in the Midwest again lagged the rest of the nation. Retailers were generally pleased with sales results and said that back-to-school promotions have been very successful. Inventories were mostly in line with sales expectations, and at least one national retailer was planning to boost year-over-year stocks in anticipation of stronger sales ahead. Entertainment spending was mixed. One contact in casual dining said that sales were "okay," but the industry did not see an expected boost from tax rebate checks. Ticket sales for one regional theater chain were down from a year ago, though our contact indicated that the decline reflected product offering more than consumer demand. District auto dealers said that light vehicle sales picked up in late July, particularly in the last few days. Showroom traffic and sales slowed in early August, but recent trends suggest that consumers have been waiting until the end of the month to buy, believing that is when they will get a better deal. Several dealers noted an increase in service sales. Tourism spending was generally flat in most of the region, although it seemed to improve in the Chicago area.

Business Spending
While most firms remained cautious, business spending appeared to pick up slightly. Labor demand was still soft, but was said to be firming in some areas and industries. Reports of manufacturing layoffs became less frequent in recent weeks, and there were even scattered reports of increased hiring. One large temporary help firm noted that the number of workers on assignment was flat through mid-August, but average hours on assignment edged up, rising to the highest levels in four or five years. A smaller staffing services firm also noted "a trickle" of direct hire orders over the last two months, something that this firm had not seen in two years. Capital spending remained soft, although we continue to hear reports of spending for maintenance, repair, and replacement of equipment. While many business contacts noted a general improvement in economic conditions, they suggested that capital spending would remain subdued until cash flow improved. Reports on other business spending (such as for advertising and travel) were mixed.

Construction and Real Estate
Home sales rose in much of the District in July and early August, while commercial real estate markets remained weak. Realtors and builders in some areas said that July was a "barn-burner month" for home sales, with many reporting all-time sales highs for the month. Several contacts said that rising mortgage interest rates helped boost home sales as potential buyers rushed to close deals, fearing rates would move higher. A few contacts noted that traffic and sales activity slowed modestly in mid-August, but they did not think it was the start of a trend. Realtors and builders were still optimistic about prospects for the fall, as long as interest rates did not rise substantially further. Commercial real estate activities remained soft, and contact reports suggested that markets had not changed much in recent weeks. Demand for office space was still weak. One contact attributed the softness to slow job creation, stating "if tenants aren't adding bodies, they don't need more space." With the lack of payroll employment gains, many property holders again pushed back their timetable for a recovery in office markets.

Seventh District manufacturing activity picked up modestly in July, with gains broad based across key industry segments. Automakers said that light vehicle demand was solid through mid-August with sales nationwide running ahead of July's pace, and just below a year earlier (which was an exceptional month). While many in the industry expect demand to remain firm, inventories were still slightly high and automakers had not changed production schedules. A major appliance manufacturer reported that shipments were strong in July and off to a good start in August. Producers of heavy trucks and equipment noted an increase in new orders and production in July. Contacts in the machine tool industry said that new orders had firmed, and that the increase in demand was widespread. Domestic steel makers benefited from a sharp drop in steel imports, which some contacts attributed to a weaker dollar.

Banking and Finance
Overall lending activity appeared to slow somewhat, due in large part to a drop in mortgage lending. Many bankers noted a sharp decline in mortgage refinancing activity as interest rates on 30-year fixed-rate mortgages rose by more than 100 basis points since mid-June. Mortgage applications for new purchases edged down, but held at high levels. Bankers noted that more homebuyers were opting for variable rate mortgages. Margins on mortgage loans narrowed in July and August, as competition for a smaller pool of potential borrowers intensified. Overall credit quality on household loans was good, with little change from our previous report. On the business side, some bankers indicated that loan demand firmed in recent weeks, albeit slightly. For the banks that saw improvement, the gains were generally in the small and middle-market business segments. One lender said that business loan volumes should begin to rise in the third and fourth quarters as businesses "emerge from survival mode." Overall business loan quality was still good, and some bankers indicated that the number of loans on watch lists continued to trend down.

Prices and Costs
Some manufacturers (including steel, gypsum wallboard, and heavy equipment producers) suggested that firmer demand was allowing them to raise prices and/or trim discounts. Over the last few years, prices had been eroding more or less steadily for many manufacturers due to a combination of weak demand, a strong dollar, and intense competition. Manufacturers of a few consumer durables, such as appliances and light vehicles, said that product prices continued to slide. Fierce competition kept retail prices in check, as many retailers continued to use steep discounts to move merchandise. Some manufacturers said that natural gas prices were raising the costs of production, and consumers faced rising prices at the gas pumps. One national dining chain also suggested that increases in state and local taxes were squeezing profits. Contacts suggested that wage gains continued to moderate, but higher benefits costs (particularly for health insurance) kept overall employment costs rising.

Crop conditions have deteriorated in much of the region, which has lowered expectations for corn and soybean yields. The lack of timely moisture in most areas stressed crops, although the region escaped prolonged extreme heat. Soybeans were also stressed by aphids, forcing additional spraying to prevent further yield losses. A later frost could give crops much needed time for improved yields, especially in the eastern portions of the District where planting delays were longest. Given lowered yield prospects and higher input costs, most farm balance sheets are not expected to improve this year, and some may worsen. As a result, contacts anticipate increased operating loan extensions and renewals this winter. Moreover, a hoped-for increase in capital spending by farmers is now unlikely.

Return to topReturn to top

Previous Atlanta St. Louis Next

Home | Monetary Policy | 2003 calendar
Accessibility | Contact Us
Last update: September 3, 2003