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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 slow pace in January and February. Consumer spending slowed, but business spending plans were mostly unchanged. On balance, labor market conditions were stable, though they varied by industry and location. Residential construction continued to decline, while growth in nonresidential construction showed further signs of slowing. On balance, manufacturing continued to expand modestly, with strong gains in export-oriented and metals-related businesses but weakness among firms with close ties to the housing market. Credit standards tightened further, but business lending remained strong. Pressures from rising material costs increased from the previous period, while wage pressures remained low. Soybean and corn prices rose further, and heavy snow cover could lead to difficult planting conditions in the spring.

Consumer Spending
Consumer spending in the District slowed in January and February. Retail sales were adversely impacted by weather conditions, higher energy prices, and slower income growth. Sales at discount stores and wholesale outlets performed well, while spending on luxury and other discretionary items slowed. Retailers maintained lower inventory levels and placed fewer advance orders in anticipation of softer sales in the coming months. Auto dealers in the District reported sluggish sales, though some noted increases in showroom traffic volumes and used car sales in February. Activity in service departments was higher as consumers were looking to delay purchases, and dealers' inventory levels were at normal seasonal levels. Tourism activity was stable in February, with one contact noting a slight reduction in traffic due to the weather.

Business Spending
The pace of business spending was little changed from the previous reporting period. A commercial real estate firm reported that despite current credit conditions they were proceeding with capital spending projects. In addition, a contact in the domestic steel industry noted that his firm was investing heavily in capacity as the strength of demand was pushing production to capacity constraints. Overall, employment conditions in the District were stable; most of the declines that were reported reflected typical seasonal movements. Staffing firms reported stability in billable hours and an increase in job advertising activity. The demand for skilled and professional workers remained strong, while the manufacturing and construction industries continued to show weakness. A contact noted that the seasonal decline in construction employment may last longer than usual given the declines in residential construction, and that previously announced layoffs in the automotive industry had yet to take full effect.

Construction and Real Estate
Residential construction in the District declined in January and February. Contacts continued to report falling demand and tightening credit availability. In terms of sales, contacts noted that inquiries were up in February, particularly in the market for low and mid-tier value homes and among first-time home buyers. However, only a small portion of this increase was matriculating into sales. Construction of spec homes declined and cancellations and delays of residential construction projects increased. Residential rents stabilized as vacancy rates moved lower, although excess inventory continued to be reported in some areas of the District. Nonresidential development and construction in the District also showed signs of slowing from the previous reporting period, with the retail sector accounting for much of this decline. However, infrastructure development remained strong. Financing difficulties were also reported in the nonresidential market. A contact noted that financed projects were proceeding forward, but projects with pending financing were being delayed or cancelled.

Manufacturing growth was stable compared with the previous reporting period. Demand for heavy equipment such as aircraft, cranes, and energy extraction and mining equipment continued to be robust. Manufacturers in several industries again reported strength in the demand for exports. Domestic steel production continued to move ahead, aided by advantageous terms of trade. A contact reported that the domestic steel industry was operating very close to full capacity and that steel shortages were becoming likely. Demand continued to be soft for manufacturers with close ties to residential housing such as household appliances and fixtures, though one producer of upscale fixtures reported that sales were up slightly in February. Automakers reported soft light vehicle sales in late January and early February, but that these sales were in line with expectations. Contacts in the auto industry also expressed concern about how the current credit situation would affect margins going forward with customers becoming more price sensitive, funding for auto loans becoming more difficult, and the possibility that the credit quality of customers would decline.

Banking and Finance
Credit market conditions deteriorated in February from January. Consumer loan demand declined as lending standards tightened. Consumer loan quality in the District moved incrementally lower. Mortgage originations were down as were home equity loans and lines of credit for all but the lowest-risk borrowers. Refinancing activity increased substantially in late January, but began to slow in February. Contacts reported that the increase in refinancing was concentrated among conforming and fixed-rate loans to prime borrowers; other borrowers still faced difficulties in refinancing. Business loan demand remained strong despite tighter credit standards. Commercial and industrial loans were up, but general uncertainty surrounding the residential and commercial real estate markets was seen as limiting the availability of credit to those markets. Despite rising standards and higher spreads in the commercial real estate market, several contacts expressed the opinion that growth opportunities remained, especially in infrastructure development, and that nontraditional lenders were entering selectively into the market.

Prices and Costs
Costs rose for a variety of inputs from the previous reporting period. In manufacturing, there were reports of increases in materials prices for metals, cement, and energy-related products as well as transportation costs such as ocean freight. A construction contact reported that shortages of steel were driving up the cost of raw materials like nails, staples, and screws. Contacts outside of the construction and retail industries generally reported that they were passing on these cost increases to their customers. Wage pressures remained limited outside of the skilled manufacturing trades and sales positions that continue to experience shortages of available labor. However, a construction contact cited previously negotiated union wage increases as a factor holding up costs. In addition, a staffing firm reported that their small to mid-size clients were willing to accept higher prices in exchange for greater flexibility in the duration of employment contracts. Several manufacturers and a staffing firm noted that healthcare costs were rising.

Key agricultural commodity prices rose again in January and February. In nominal terms, soybean prices set new daily records, and corn prices approached record levels. District farmers expected heavy snow cover to create wet and somewhat difficult planting conditions this spring. Increases in corn-specific input costs, particularly fertilizers, continued to move planting intentions towards soybeans and away from corn. Higher feed costs lowered the net income of livestock, dairy, and poultry operations. A contact noted that the slaughter of sows and cows increased, leading to delays in deliveries to packing plants. Hog prices were higher, and cattle prices were about the same as the previous reporting period; milk prices moved lower but remained well above the prices of a year ago. Farm tractor and combine orders were reported to extend into 2009, with 2008 production runs already sold out. Contacts also reported that farmland values were bid higher during the period, mostly reflecting demand by farmers as opposed to residential or commercial developers and other investors.

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Last update: March 5, 2008