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Seventh District--Chicago

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Economic activity in the Seventh District expanded in April and May, but at a slower pace than in the previous reporting period.  Consumer spending was sluggish, and labor market conditions weakened some, although they continued to vary by industry and location.  Residential construction showed signs of stabilizing and nonresidential construction steadily increased.  Manufacturing activity weakened slightly, but business conditions remained solid.  Consumer lending declined, while business lending remained strong.  Cost pressures from rising material and energy prices increased significantly from the previous reporting period, while wage pressures remained low.  Delays in planting crops led to expectations of small losses in yield.

Consumer Spending
Consumer spending remained sluggish in April and May.  Higher food and energy prices coupled with a weakening labor market in some areas of the District limited consumer demand.  Retail sales were steady, but margins were squeezed for many retailers as low pricing power combined with higher wholesale prices created a tough business environment. Gasoline sales were down as was tourism and business travel.  As a result, activity in the hotel and food service industries weakened considerably. Light vehicle sales also slowed, although inventory levels remained at comfortable levels.  Dealers observed that the composition of demand was increasingly shifting toward smaller, fuel efficient cars and used vehicles as consumer budgets tightened and gasoline prices continued to move higher.  Several contacts in this industry also mentioned a decline in auto loan quality in recent months.

Business Spending
The pace of business spending was little changed from the previous reporting period.  However, several manufacturing contacts reported plans to take advantage of more favorable terms of trade and avoid rising transportation costs by bringing back production from overseas.  Employment conditions in the District weakened slightly, with Michigan and Wisconsin exhibiting larger declines.  The demand for labor was weak in the construction, retail trade, and hotel and food service industries. Lay-offs were reported in the manufacturing, automotive, and financial services industries.  Professional and business services and health care remained bright spots for hiring, and the demand for skilled labor remained strong as shortages of such workers continued to be reported.  Staffing firms' billable hours were stable from the previous reporting period.  However, a contact in this industry continued to report unwillingness on the part of small to mid-size clients to agree to longer term contracts due to the uncertainty surrounding the current business environment. 

Construction and Real Estate
The pace of construction stabilized from the previous reporting period.  The decline in residential construction slowed in April and May for much of the District, and several contacts expressed the belief that it may be approaching a bottom for the Midwest.  Absorption rates of residential housing remained low, but began to increase in many areas as cancellations declined and prices showed signs of stabilizing.  However, credit availability for new developments remained tight, and many builders continued to suffer losses on existing projects. Demand slowly returned to some markets as inquiries were reported to have increased, particularly among first-time home buyers.  However, many potential buyers were finding it difficult to obtain a mortgage.  Nonresidential development and construction steadily increased outside of Michigan, reflecting mostly major infrastructure projects.  Several contacts noted that declining credit availability for medium- and large-scale projects, such as hotels, was significantly reducing the project pipeline and would be limiting growth going forward. 

Manufacturing activity in the District weakened slightly from the previous reporting period; but, overall, business conditions remained favorable.  Activity continued to be robust in the domestic steel industry.  Production was running near full capacity and contacts in several downstream industries reported limited availability of steel-related materials.  Demand for heavy machinery in areas such as large-scale agriculture, oil and gas extraction, mining, and aircraft also remained strong.  Export-oriented industries continued to flourish, with many contacts citing advantageous terms of trade. However, demand continued to be soft for manufacturers with close ties to residential housing, particularly the building materials and home appliance industries. Automakers reported domestic sales were below expectations as price discounts were insufficient to move larger vehicles.  Contacts in the auto industry also expressed concern about falling consumer confidence and the fact that activity was approaching levels not seen for over twenty-five years. Production cuts have been implemented, and it was reported that lost production from the recent American Axle strike would not be made up.

Banking and Finance
Overall, credit market conditions in the District were little changed from the previous reporting period.  Consumer loan demand continued to decline and lenders marginally tightened standards.  Loan quality, however, appeared to be stabilizing.  Home equity loans increased and home equity lines of credit were flat, although both remained below levels typical for the current pricing environment.  Mortgage refinancing decreased and mortgage originations were low, and contacts reported that lending remained concentrated among fixed-rate and conforming mortgage products.  Business loan demand increased slightly, particularly for commercial and industrial loans.  However, concerns about the commercial real estate sector and the inability of banks to syndicate these loans continued to limit the availability of credit to this market. 

Price and Costs
Costs rose substantially for a variety of inputs from the previous reporting period.  Rising costs for commodity and energy inputs were cited by contacts in numerous industries, and there were several reports of pass-through of the higher costs to other prices.  A contact in the financial services industry noted that many commodity traders were extending positions out to five years in anticipation of even higher commodity prices. Many contacts cited the rising price of steel and related metals as a significant factor in their costs, with one manufacturing contact noting that steel surcharges had surpassed the base material costs.  Retailers reported that they were finding it more difficult to limit the pass-through of higher wholesale food and energy prices to consumers.  Rising fuel prices were also reported as contributing to higher transportation costs and a reduction in labor mobility.  Conversely, a contact in the construction industry reported that wallboard prices had declined to the degree that they no longer covered production costs.  Wage pressures were limited outside of the skilled labor positions that continue to experience shortages and a report of union wage demands from some skilled trades in the construction industry. 

Wet and cool weather resulted in widespread planting delays during April and May. Nonetheless, by the end of the reporting period corn planting was nearing completion and soybean planting was well underway. As a result, the emergence of corn and soybean plants was behind the normal pace in most of the District. However, contacts expected relatively small losses in yield, though some ground will require replanting. On the plus side, high levels of subsoil moisture provide some insurance against drought this summer. Corn prices drifted lower during the reporting period, while soybean prices picked up again. These price movements and high input costs for corn held back the shift toward extra corn acres. Milk, cattle, and hog prices increased. Margins of livestock producers remained tight due to rising feed costs, which also were reported to be causing producers to pare back herds.

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Last update: June 11, 2008