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Federal Reserve Districts

Seventh District--Chicago

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The pace of economic activity in the Seventh District moderated in October and early November. While contacts generally were cautiously optimistic about the economic outlook, many also expressed concern over the increasingly risk adverse business environment. Consumer spending increased, while business spending was steady. Manufacturing production also increased, with growth leveling off over the reporting period. Construction was again subdued, although nonresidential construction increased slightly. Credit conditions were little changed. Wholesale price increases slowed, but there was some further pass-through to the retail level. Corn, soybean, and cattle prices were up from early October, while milk and hog prices were down.

Consumer Spending
Consumer spending increased in October and early November. Retailers reported moderate sales growth with consumers responding to an increase in promotions during the reporting period. Contacts expected retailers to use extended promotional periods and heavy discounting in an effort to keep traffic volumes steady over the upcoming holiday shopping season. Auto sales also increased in October, but the sales pace slowed in early November. Dealers indicated that consumers may be waiting to see what end-of-the year deals will be offered; they also were concerned that recent stock market volatility would weigh on consumer confidence and willingness to spend.

Business Spending
Business spending was steady in October and early November. Several manufacturers said that they were reluctant to build inventories, as the elevated uncertainty surrounding the European and Asian economies had led them to take a "hand-to-mouth" attitude towards ordering. In contrast, contacts generally reported moving ahead with planned purchases of equipment and software. Most, however, indicated that hiring plans remained limited. Labor market conditions deteriorated, with some additional layoffs announced and unemployment in the District edging higher. In addition, growth in billable hours continued to moderate for staffing and professional services, although one staffing firm noted that permanent placements were increasing offsetting some of the decline in the demand for temporary workers.

Construction and Real Estate
Construction activity was again subdued in October and early November. Residential real estate conditions remained depressed. Builders reported very little new single-family home construction, and showroom traffic was steady at a low level. Multi-family construction was stronger in comparison. Nonresidential construction increased moderately. Contacts cited continued growth in the industrial sector and an uptick in demand for medical and professional office space, while retail construction remained very slow. Commercial real estate conditions were little changed on balance with only a slight decline in vacancy rates reported.

Growth in manufacturing production increased further in October before leveling off in early November. Demand for heavy equipment remained strong, led by robust activity in the energy sector. Contacts expected the growth in demand for equipment to moderate going forward, but also noted that the need to replace aging capital would continue to boost demand into next year. Manufacturers of specialty industrial metals also reported greater activity, driven in large part by the auto sector and exports. Auto production in the District continued to steadily improve, although the recent flooding in Thailand was reported to have challenged supply chains and impeded the recovery of dealer inventories of Japanese vehicles. Several contacts cited concerns that going forward moderately higher production levels would begin to strain capacity in the supply chain. In contrast, capacity utilization in the steel industry decreased, and orders coming into service centers were described as spotty. Furthermore, manufacturers of household appliances and construction materials reported declining demand.

Banking and Finance
Credit conditions were little changed on balance during the reporting period. Volatility in equity markets remained elevated, and some additional flight to quality further boosted the demand for Treasury debt. Contacts noted the bankruptcy filing of MF Global Holdings Ltd. was disruptive for the company's former clients, with missing funds and uncertainty about the status of their futures and options positions limiting their ability to manage risk. Corporate funding costs generally edged lower as spreads narrowed relative to low benchmark interest rates. Banking contacts indicated that business loan demand continued to be muted by clients' reluctance to take on growth-oriented projects due to economic and political uncertainty. In addition, the lower liquidity in high yield and term loan markets did not seem to be causing much substitution of leveraged financing from bond and syndicated loan markets into individual bank loans. Business loan quality was noted to be stabilizing, with little additional improvement expected in the near-term.

Prices and Costs
Cost pressures remained elevated, even though raw materials prices declined further in October and early November. Steel prices, in particular, moved lower over the reporting period. Contacts again reported extended lead times for specialty metals. In addition, tires were reported to be in shortage, with a contact indicating tight supplies are likely to persist until new plants come on-line in 2013. Wholesale price increases slowed, but cost pressures remained elevated for food, fabrics, diesel fuel, and shipping. Retailers reported they were absorbing most of these higher costs in their margins, but some pass-through to downstream prices continued. Wage pressures remained moderate.

The corn and soybean harvests were running ahead of pace in the District, though yields were coming in below trend. For the District as a whole, more bushels of corn were harvested than a year ago, but soybean production was down. Crop storage on farms increased, as many farmers are expecting to sell their crops for higher prices in the future. This higher farm storage has led to relatively lighter supplies at grain elevators for this time of year, and end users, including ethanol plants, faced the prospect of higher prices. Corn, soybean, and cattle prices were up from early October, while milk and hog prices were down. With the exception of soybeans, these prices were up from last year, boosting farm incomes. There was another surge in farmland values and cash rental rates for the District.

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Last update: November 30, 2011