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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a moderate pace during April. Spending by both consumers and businesses increased at rates similar to those in the last report. Overall labor market conditions were little changed, with small gains in employment on net. Manufacturing activity remained strong. Residential construction and real estate activity softened. Demand for commercial real estate space continued to expand, however the pace of new commercial construction slowed. Mortgage demand was down, while the expansion in commercial lending continued at a slower pace than in the last report. Nonlabor input cost pressures intensified in April and May, while increases in retail prices and wages were similar to the previous reporting period. Contacts reported that planting went well in most of the District and that the growing season was off to an excellent start.

Consumer Spending
Consumer spending continued to increase modestly in April and May. Retailers in Illinois and Indiana reported that sales were up modestly from a year earlier, while those in Michigan said that sales have been "inconsistent." Apparel sold well, helped by favorable weather in the region. Demand for lawn and garden items and electronics increased as well. High gasoline prices have reportedly dampened spending growth; one contact in the Chicago area said that fewer people were willing to drive to the city for weekend shopping trips. Retail inventories were at desired levels. Auto dealers said that sales of new Big 3 vehicle sales were down but sales of foreign nameplates were up. Domestic new vehicle inventories were above desired levels. Dealers reported that service activity had softened, due to the slower pace of new vehicle sales in recent months. A restaurant chain reported slower year-over-year gains in sales. Tourism was steady in the District, though pre-booking activity was sluggish.

Business Spending
Business spending and hiring expanded again. For the most part, capital spending continued to increase at similar rates as in the previous reporting period. One retail chain said that their purchases of high-tech equipment were unchanged from a year ago but that their overall capital spending had increased modestly. A manufacturing contact reported that the increase in their capital spending was occurring offshore. Freighthauling continued to expand overall, though one contact noted softer growth in shipments to discount retailers. Business travel to Chicago was up noticeably, helped by a large number of conventions. Overall labor market conditions were little changed, with small gains in employment on net. One contact in Illinois characterized the growth in hiring as balanced between high- and low-wage jobs. Factory employment ticked up. Shortages of skilled manufacturing workers persisted, and one contact noted that manufacturing firms were holding job fairs after abandoning the practice several years ago. A temporary help firm said that labor demand in the District increased modestly again, but noted that they had seen some weakening in billable hours growth nationwide in the past two weeks.

Construction and Real Estate
Construction and real estate activity was mixed by both location and market segment. Residential activity continued to slow from high levels in most areas. Contacts in Iowa and Michigan said that the demand for higher-priced homes had slackened most. Most builders and real estate agents indicated that the supply of new and existing homes for sale was growing and that homes were staying on the market longer. In addition, new home construction and other residential development activity slowed in most areas. Demand for commercial real estate space continued to expand, however the pace of new commercial construction slowed. A commercial contact in Chicago said: "Lots of money is still available for real estate, but most of it is going after existing buildings. Rents are too low to justify new construction." Commercial vacancy rates were little changed overall. One contact, however, expressed concern about the potential for overbuilding of large distribution centers in Indiana. Net absorption of office space in Chicago continued at a solid pace, and demand was broad-based. Contacts in Indiana reported strengthening demand for industrial space.

Manufacturing activity remained strong during April and May. Demand for heavy equipment continued to be solid, driven by mining, energy, and construction demand. In contrast, orders of agricultural equipment weakened, and one industry analyst expected sales to be down slightly for the year. Heavy-duty truck orders have begun to tail-off, largely because order books are full for 2006 and there are no more spots to pre-purchase trucks before new EPA standards go into effect at the beginning of next year. Industry analysts said medium-duty truck order books for 2006 had filled by the end of May and expected orders to fall off precipitously. Revenues and order backlogs were up for many toolmakers, and brisk quoting activity suggested continued strength going forward. The sentiment of the toolmaking industry was "ecstatic," according to one contact. Steel producers reported further growth in demand from all markets; the strongest demand was for plate steel for oil pipelines. Steel inventories were below desired levels. Wallboard production continued to edge up closer to full capacity.

Banking and Finance
Lending activity moderated further. Bankers noted additional declines in mortgage applications for both purchases and refinancing. Demand for home-equity loans weakened as well, which was attributed to slower increases in home values. Mortgage spreads remained tight, though one bank saw a marginal widening in recent weeks. Reports on household credit quality were favorable, with mortgage delinquencies remaining low; delinquencies on home equity loans stabilized after an uptick earlier in the year. Commercial lending continued to expand, but at a marginally slower pace than earlier in the year. Most of the slowdown was in commercial real estate loans. Use of existing credit lines picked up, and one contact said that they saw a rise in the number of requests to increase the existing credit lines. One contact noted some slackening in the competitive pressures to ease standards and terms on commercial loans and added that margins had stabilized. Still, there were some concerns that loan pricing was not adequately reflecting risk. Commercial credit quality remained in good shape, on balance.

Prices and Costs
Nonlabor input cost pressures intensified in April and May, while increases in retail prices and wages were similar to the previous reporting period. Almost all contacts reported higher energy costs. The ability to pass these cost increases on to customers varied. Many manufacturers expressed concern about other materials prices, noting gains in the cost of zinc, copper, and carbide. Steel prices increased further since the last reporting period, and one contact said that steelmakers were making up for some of the pricing restraint they had shown at the start of the year. A construction industry analyst noted that uncertainty about material costs has made it more difficult to decide on pricing strategies for projects. Price reports at the consumer level were mixed. Retailers generally reported a competitive pricing environment, though a few noted that they had increased some prices. Hotel room rates were up, while new vehicle prices were flat to slightly lower.

Planting proceeded smoothly in most of the District, though rains delayed activity or forced some replanting, mostly in Indiana. However, southern Iowa still needed more moisture to fully recover from drought. Some farmers switched to planting corn rather than soybeans. At the end of May, the progress of corn and soybean crops was excellent, creating the potential for "record busting yields if the weather cooperates." Plans for additional biofuel plants in the District were announced during the reporting period. Cow and calf ranchers avoided the operating losses seen at cattle feedlots, since calf prices were better than feeder cattle prices.

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Last update: June 14, 2006