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Seventh District--Chicago

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Economic activity in the Seventh District declined further in December, with contacts noting lower consumer and business confidence. Consumer spending decreased and labor market conditions weakened. Construction declined, and manufacturing activity moved lower. Credit conditions remained tight, but improved in some markets. Contacts reported increased concern with expenses given declining economic activity and rising uncertainty over the economic outlook. In agriculture, field work was limited in December by bad weather.

Consumer spending
Consumer spending decreased in December. Despite heavy discounting, retailers reported declines in sales, particularly for clothing and big-ticket and luxury items such as electronics, appliances, and jewelry. However, discount stores fared better than their higher-priced counterparts. Tourism activity in the District also slowed, with hotel occupancy down in December. Auto dealers again reported declining sales, while service center activity continued to be robust. Sales were sluggish for Detroit three nameplate vehicles. According to some of our contacts, this weakness reflected the uncertainty surrounding the future of these automakers. However, several contacts indicated that the recent declines in gas prices had stimulated demand for light trucks. Dealers were also reportedly closely monitoring inventory to avoid paying end-of-year fees on unsold vehicles.

Business spending
The pace of business spending declined further from the previous reporting period. Several contacts reported scaling back or putting on hold capital spending plans given the uncertainty surrounding the economic outlook. Labor market conditions in the District also weakened. Layoffs were reported in financial services and several manufacturing industries, including a number of automotive suppliers. Several manufacturing contacts also noted reductions in hours worked. The government, education, and healthcare sectors continued to expand employment. However, growth in the latter two also began to show signs of slowing in parts of the District. The demand for skilled labor remained strong, but a contact noted that many applicants lacked the skills necessary to fill available jobs. Recruitment activity stabilized in December after declining sharply in November.

Construction and Real estate
Construction activity declined in December. Residential building continued its steady decline. Developers remained cautious to expand inventory levels given persistent weakness in showroom traffic and elevated cancellation rates. Several contacts noted excess capacity in the condo market. Mortgage applications rose significantly, particularly for refinancing, spurred by declining mortgage rates. Mortgage originations continued to be low with many potential borrowers unable to meet the more stringent lending standards put in place in 2008. Nonresidential construction also declined. The availability and cost of financing continued to be of concern for commercial developers, with additional cancellations and project delays reported. Contacts noted elevated vacancy rates, increases in sublease space, and continued downward pressure on commercial rents.

Manufacturing activity in the District decreased from the previous reporting period with several contacts reporting lower orders and production cuts. Activity in the domestic steel industry slowed further as production was scaled back amid declining demand. However, a contact noted that a future increase in demand may come from service centers where inventories remained low in December. Other metals-related industries also noted softening conditions. Demand weakened further for heavy machinery and medium- and heavy-trucks. A contact noted that agricultural equipment dealers were able to offer spring delivery dates on farm equipment that had been previously fully booked into 2009, as cancellations increased and exports waned. Exporters reported that demand from abroad continued to slow. A few contacts reported tight credit conditions negatively impacted the demand for their products. In addition, a contact noted that some manufacturers have begun to ask for deposits on orders to reveal the true extent of future demand for their products.

Banking and Finance
Credit conditions in the District remained tight. The demand for liquidity continued to be high in December. Credit risk concerns persisted and borrowing spreads remained elevated. Banking contacts reported continued weakness in loan demand, as nonfinancial firms reevaluated capital spending plans given the uncertainty surrounding the economic outlook. Consumer auto lending remained tight, but a group of regional credit unions and GMAC both announced efforts to revive lending during the reporting period. Liquidity in the secondary residential mortgage market was noted to have improved after the Federal Reserve's announcement of its intent to purchase agency debt and mortgage-backed securities. Loan quality continued to be of concern for residential real estate loans. Contacts also noted retail trade and firms with heavy exposure to volatile commodity prices as sources of potential risk to quality. In addition, several contacts in commercial real estate finance pointed to potential further deterioration in quality as variable interest rate loans come due for refinancing this year.

Prices and Costs
Contacts reported increased concern with expenses given declining economic activity and rising uncertainty over the economic outlook. Despite recent further declines in material and energy prices, some contacts continued to report pressure on costs remained. However, others noted the benefits of lower food and energy prices on margins. In retail trade, downward pressure on prices intensified during the holiday shopping season, leading to tighter margins as retailers were unable to pass on increases in costs from wholesale prices. Wage pressures were limited. However, several contacts noted that firms were choosing to freeze or cut pay instead of laying off workers to lower labor costs. In addition, contacts also reported that firms were reducing or eliminating elements of non-wage compensation.

Fall field work was limited in December by the weather. In addition, farmers had an incentive to wait until the spring as fertilizer prices began to fall from very high levels. A portion of farmers had already locked in fertilizer orders at high prices, but some only put down modest deposits. Corn and soybean prices rebounded toward the end of the reporting period, after declining into December. Even so, farmers tended to hold onto crops rather than sell them. At current crop prices and given higher input costs for corn planting, District farmers favored planting more soybean acres and fewer corn acres this spring. Farmers were considering other options for planting rotations as well, in case corn and soybean prices failed to move higher. Contacts expected more renegotiations to lower cash rental rates, since 2009 net farm income was expected to decline from 2008. Operating loans remained available for agriculture to meet higher demand due to increased input costs from a year ago. Hog prices edged up in December, which, combined with lower feed costs, allowed for an improvement in margins. Milk and cattle prices were down.

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Last update: January 14, 2009