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Federal Reserve Districts

Seventh District--Chicago

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Economic activity in the Seventh District declined in October and early November, and contacts expressed concern over the potential length of this downturn. Consumer spending decreased and labor market conditions weakened; residential and nonresidential construction both declined; and manufacturing activity moved lower. Credit conditions remained tight, but improved in some markets. Cost pressures from material and energy prices eased, and wage pressures continued to be low. There were further delays in corn harvesting due to precipitation. Corn, soybean, milk, hog, and cattle prices all fell during the reporting period.

Consumer Spending
Consumer spending decreased in October and early November, as households continued to tighten their budgets. Retailers reported declines in sales, particularly for big-ticket items, as the response to discount pricing promotions was seen as sluggish. Fast-food restaurants and discount stores continued to fare better than their higher-priced counterparts. Contacts expressed concern that the holiday shopping season would be weak. Gasoline sales fell despite the decline in prices, and tourism activity in the District was lower. Auto dealers reported lower demand for luxury vehicles as well as continued weakness in sales of less fuel efficient vehicles. Service center activity picked up as car owners chose to maintain or repair existing vehicles instead of buying new ones. Contacts also indicated that credit for consumer auto loans remained tight, with an increasing number of banks tightening standards or exiting the business.

Business Spending
The pace of business spending declined from the previous reporting period. Several contacts reported delaying or postponing hiring or capital spending projects. Others noted greater caution given the high level of uncertainty surrounding the economic outlook. Labor market conditions in the District also weakened. Layoffs were reported in several industries, and covered both hourly and salaried workers. Some of these job cuts were in progress while others were planned for the future. Further weakness in the demand for labor was expected in retail trade, transportation and warehousing, temporary help, and professional services. Manufacturing, construction, and financial services employment remained weak but were expected to see smaller declines going forward. Contacts also noted a reduction in hours worked. Staffing firms reported a decline in demand for their services. However, the demand for skilled labor remained strong.

Construction and Real Estate
Construction activity declined in October and early November. Residential building continued its steady decline. Project delays and cancellations persisted and credit remained tight. Housing prices continued to fall and residential rents softened in some parts of the District. Contacts reported low levels of showroom traffic and that prospective home buyers consisted mostly of first-time and other buyers who were unencumbered by the need to sell an existing home. However, several contacts noted that inventories of unsold new homes had declined some from their recent highs. Mortgage originations and refinancings were down due to tightening credit standards, an increase in mortgage rates, and declining home equity as well as other factors weighing on housing demand. Nonresidential development and construction also declined, with several contacts reporting a weaker outlook than in September. Slowing activity was cited for public works, office, retail, and industrial construction. Cancellations and project delays were again reported. Furthermore, several contacts noted downward pressure on commercial rents and an uptick in vacancy and sublease space. The availability and cost of financing also continued to be of concern for developers.

Manufacturing activity in the District declined from the previous reporting period. However, contacts noted that inventories continued to be at comfortable levels. Activity weakened substantially in the domestic steel industry. Contacts in the lake freighter industry have taken boats out of service early due to lack of demand for raw materials for the steel industry. Demand also softened for construction machinery, medium- and heavy-trucks, and for manufacturers with close ties to housing, such as building materials, home appliances and furnishings. In contrast, manufacturers of heavy machinery used in sectors such as oil and gas extraction and mining continued to report strong activity, although one manufacturer noted that "the steam is coming out of these markets." Production of pharmaceuticals and medical goods remained a source of strength. Aviation manufacturing contacts noted that even though the Boeing strike had ended some lingering negative effects of the walkout on production may remain. Exporters reported that demand from Europe continued to slow, and that demand in emerging markets such as China was also weaker. Automakers noted an uptick in sales in November from their low levels in October. Contacts in several industries expressed concern over the effect of a possible failure of one of the automakers on demand for their products. Most contacts reported little impact of tighter business credit on their own operations. However, several contacts noted reports of difficulties faced by others in their industries including exporters, suppliers, smaller firms, and the automakers.

Banking and Finance
Credit conditions in the District continued to be tight, but improved in some markets. Though the cost of funds for banks and other financial institutions remained elevated, it improved from September. The FDIC's debt guarantee program and Federal Reserve lending were said to have improved liquidity in the interbank market. Banking contacts noted a decline in business loan demand as nonfinancial firms were deleveraging. They also indicated that credit line utilization had stabilized after a brief spike in September, and that the increased coverage of FDIC insurance had slowed deposit outflows. A contact in commercial real estate finance reported that loan quality had begun to deteriorate, and that banks were tightening standards while non-bank credit availability was decreasing. In addition, the secondary markets for commercial as well as nonconforming residential mortgages were noted to have tightened further. Conditions in the commercial paper market were noted to have improved, although one contact stated that difficulties were starting to appear for nonfinancial firms. Contacts also indicated greater liquidity in the credit default swap market, but that the net cost of capital had increased as credit risk continued to boost borrowing spreads.

Prices and Costs
Material and energy prices moderated from the previous reporting period. Several contacts noted declines in gasoline, steel, and scrap prices. In contrast, price increases were reported for concrete, plastics, and shipping containers. Fuel surcharges also continued to be of concern as the price of diesel fuel remained elevated. Contacts also reported that despite recent declines in raw materials prices, some costs remained elevated due to contracts signed earlier in the year. Wage pressures were limited, with some downward impetus reported. Pass-through of previous input price increases to downstream prices continued; albeit to a lesser degree, with several contacts in retail trade lowering prices in response to weaker demand.

The soybean harvest finished in the District, but the corn harvest experienced delays due to precipitation, especially in Iowa. Soybean yields were down from a year ago, although overall output was higher due to the shift in acreage planted toward beans. Conversely, corn yields were up, but reduced acreage resulted in lower overall output. Much of this year's corn and soybean harvest had already been sold ahead at profitable prices, with most of the rest going into storage instead of being sold at today's lower prices. With little interest in selling crops today, the spreads between futures and cash prices declined. The ethanol industry was squeezed by lower prices for ethanol, with some firms also facing cost pressure due to corn purchased under earlier contracts at elevated prices. A major ethanol producer filed for bankruptcy protection, creating uncertainty for farmers with contracts to sell corn to the firm in the future. Milk, hog, and cattle prices moved lower, and there were concerns about bankruptcies in the livestock industry.

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Last update: December 3, 2008