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Seventh District--Chicago

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The pace of economic activity in the Seventh District picked up some in September. However, contacts continued to note uncertainty about the economic outlook and expressed concerns about recent financial market developments. Consumer spending was moderately higher and business spending increased slightly. Manufacturing production picked up, while construction was little changed. Credit conditions again tightened. There was further pass-through of elevated wholesale prices to the retail level. Corn, soybean, wheat, milk, and hog prices decreased, while cattle prices increased.

Consumer Spending
Consumer spending was up moderately in September. Auto sales were higher, due in part to increased incentives. On balance, non-auto retail sales were essentially flat, though there were considerable differences in sales growth across types of goods. For instance, spending on electronics and appliances was up, while spending on furniture and apparel was down. Sales of luxury goods continued to show some strength, and sales in the lower price ranges of essential goods like personal care items and groceries also rose. Retailers' outlook for consumer spending remained very uncertain; and several contacts indicated that lower consumer confidence and spending fatigue after heavier-than normal-promotions during the back-to-school season had made them less optimistic about the upcoming holiday season.

Business Spending
Business spending increased slightly in September. Several manufacturing and construction contacts reported purchasing equipment, with the incentive to take advantage of a higher level of accelerated tax depreciation set to expire at year-end adding to the expected benefits of expanding capacity and improving efficiency. A few manufacturers who anticipated stronger demand also reported building inventories of raw materials now due to concerns about potential long lead times for these inputs in the future. In contrast, retailers were closely monitoring inventories, and some were paring them back. Hiring remained slow. A staffing firm noted slower growth of billable hours for staffing and professional services. In contrast, shortages of qualified candidates were reported in healthcare, information technology, engineering, and skilled manufacturing trades. These were most problematic in manufacturing, and many manufacturers indicated that they were addressing the shortfalls through training programs (including cross-training) for new and existing employees. Looking ahead, a recruitment firm indicated that many employers have lowered their expectations for staffing needs in the coming year. Retail contacts expected minimal seasonal hiring this holiday season, and instead planned to lengthen the workweek for permanent workers.

Construction and Real Estate
Construction activity was again subdued in September. Residential real estate conditions remained weak; builders reported very little new single-family home construction and showroom traffic remained steady at a low level. Mortgage refinancing, however, picked up with the recent declines in mortgage rates. Nonresidential construction was little changed, on balance. Contacts noted an increase in industrial demand, in particular from manufacturing and distribution clients, whereas demand from the retail sector leveled off. Commercial real estate conditions improved slightly, with vacancy rates edging down, rents stabilizing, and incentives to attract new tenants increasing. Subleasing activity also rose, with contacts noting an increase in seasonal demand for short-term sublets in strip malls.

Manufacturing production rebounded in September, with new orders and order backlogs increasing. Demand for heavy equipment was strong, led by robust activity in the construction, energy, and mining sectors. Contacts attributed much of the pick-up in construction equipment to replacement of dealer rental fleet inventory, which they expect to continue moving forward. Demand for heavy and medium-duty trucks also increased. Auto production was higher in September, reflecting rebuilding of inventories. District auto suppliers reported that recent orders had exceeded expectations along with concerns of being able to meet any additional demand in the near-term. Capacity utilization in the steel industry remained elevated. Production of industrial metals was up, while manufacturers of consumer products reported some softening. Activity for food processors continued to be robust. Contacts were cautiously optimistic about near-term prospects, pointing to continued gains in productivity, strength in demand from Asia and Brazil, and increased sales to local manufacturers looking to shorten their supply chains in the aftermath of the disruptions caused by the Japanese disasters in the spring. However, they remained concerned about the global economic outlook, with several noting a reluctance to expand capacity given elevated uncertainty.

Banking and Finance
Credit conditions tightened further in September. Volatility in financial markets remained elevated, although it was lower than in August. Corporate funding costs edged higher, particularly for financial firms, even though benchmark interest rates moved lower. Banking contacts noted softer business and consumer loan demand, as clients were pulling back on spending in light of increased risks coming from Europe and the weakness in U.S. economic activity. Most lending activity was still in the form of refinancing, which picked up with lower long-term interest rates. In another positive sign, contacts noted an increase in M&A activity among middle-market firms, even with the increase in spreads and lower liquidity in the high yield and term loan markets.

Prices and Costs
Raw materials prices declined, but continued to put pressure on costs in September. Prices for industrial metals like copper and steel eased further, but contacts again reported extended lead times for specialty metals as well as some shortages. Energy prices were also lower, and fuel surcharges began to decline. Conversely, retailers indicated that wholesale price pressures intensified, with food prices still elevated and prices for cotton-based goods rising. While some retailers continued to absorb some of these higher costs in their margins, pass-through to downstream prices increased. Wage pressures remained moderate.

Harvest conditions varied across the District. Some parts were experiencing a slower-than-usual harvest due to late planting or fall rains that degraded crop quality. Other portions of the District were experiencing a fairly normal harvest. Corn and soybean yields appeared to be lower and more variable than a year ago. Nonetheless, yields were adequate to replenish inventories to levels that eased worries about shortages. Inventories also were boosted over the summer by lower exports and reduced usage of crops for livestock feed. Corn and soybean prices did back off during the reporting period; however, a sizeable portion of the crop had been sold prior to this decline. Lower prices for feedstocks provided relief to livestock operators. Prices for milk and hogs declined while cattle price rose; all three remained above the levels of a year ago. Farmland values and cash rental rates continued to rise in the District.

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Last update: October 19, 2011