Federal Reserve Bank of Chicago
Summary of Economic Activity
Economic activity in the Seventh District increased slightly over the reporting period and contacts expected little change in activity in the coming year. Manufacturing demand rose moderately; consumer spending, employment, and construction and real estate activity increased slightly; business spending was flat on balance; and nonbusiness contacts saw no change in economic activity. Prices rose rapidly, wages were up modestly, and financial conditions tightened slightly. Farm income expectations for 2026 were unchanged.
Labor Markets
Employment rose slightly over the reporting period and contacts expected a similar pace of hiring over the next 12 months. Contacts largely reported stable labor market conditions, continuing to characterize the environment as low-hire, low-fire. That said, there were some areas of growing labor demand, particularly in manufacturing where contacts at temporary employment agencies said hiring had increased recently and some manufacturing contacts noted difficulty in hiring skilled workers. Wages and benefits costs both rose modestly. While overall wage growth was at a similar rate as the prior period, one metals manufacturer said they had to increase the frequency of their wage increases to keep up with market trends.
Prices
Prices rose rapidly overall in April and early May and contacts expected a moderate pace of growth over the next 12 months. Producer prices increased at a strong pace. Nonlabor input costs rose rapidly overall, led by higher costs for inputs whose supply chains are linked to the conflict in the Middle East. Contacts highlighted increased prices for energy, shipping, and raw materials like steel and chemicals. One manufacturer reported successfully passing on higher material and shipping costs to customers. Consumer prices also rose rapidly, with many contacts citing higher gasoline prices as the main driver. One retail industry analyst said tariff refunds resulting from the recent Supreme Court ruling were unlikely to lead retailers to lower prices.
Consumer Spending
Consumer spending rose slightly overall during the reporting period. Nonauto retail spending edged up. Sectors with solid growth included apparel and computers. Sales were also robust for some businesses that cater to higher-income consumers such as landscaping and golf simulators. Leisure and hospitality spending increased slightly. Spending at fast food restaurants picked up. Population centers in the District saw demand in the hospitality sector increase slightly. New light vehicle sales ticked up. Dealers noted that higher gas prices were leading consumers to pay more attention to fuel economy in showrooms. Meanwhile, used light vehicle sales increased moderately. Several contacts expressed concern that higher gas prices would cut into discretionary spending.
Business Spending
Business spending was flat on balance in April and early May. Capital expenditures were unchanged, but contacts expected a slight increase in outlays over the coming year. Several contacts across industries reported that uncertainty over the economic outlook had led their customers to slow or pause capital spending, though they observed that data center investments appeared to be unaffected. Demand for truck transportation decreased slightly. Freight rates rose significantly in line with rapid increases in fuel prices and many contacts reported their suppliers were introducing freight surcharges. Retail inventories outside of autos were comfortable, vehicle stocks were unchanged at a low level, and manufacturing inventories were a little low.
Construction and Real Estate
Construction and real estate demand increased slightly overall. New residential construction edged down and home renovation activity remained soft. Contacts said that new home buyers were choosing cheaper options for cabinets, countertops, and other home complements. Residential real estate demand increased modestly, helping to make up for a slow early-spring selling season. Contacts thought sales growth was being held back in part by economic uncertainty and potential buyers facing lower real incomes due to tariffs and higher energy prices. Home prices were up overall. Nonresidential construction increased slightly. Most growth continued to come from data center and government infrastructure projects. Otherwise, contacts noted some reluctance to start projects because of higher energy prices and elevated uncertainty. Commercial real estate activity increased slightly, led by stronger sales in the government, medical, and education sectors. Vacancy rates declined some for small retail spaces.
Manufacturing
Manufacturing demand increased moderately in April and early May. Chemicals, plastics, and rubber production increased slightly. Primary metals wholesalers and manufacturers reported a modest uptick in demand, driven in part by the defense sector and customers supporting data center construction. Fabricated metals production was flat on balance, with contacts reporting stronger orders from the defense industry but a decrease in sales to the agricultural, automotive, and residential construction industries. Machinery sales rose moderately. One contact in heavy machinery reported that data center construction was driving sales, and that equipment fleet rental rates had risen as a result. Auto production was flat on balance, though some contacts saw the potential for supply chain problems, including for semiconductors and petroleum-based products, to curtail production in the future. Heavy truck production rose slightly.
Banking and Finance
Financial conditions tightened slightly overall in April and early May; while bond values increased a bit, equity values rose significantly, and volatility fell, business and consumer loan rates were up and terms tightened. Contacts gave varying reports on the direction of business loan demand, which was flat overall. Business loan quality edged down and rates rose modestly. One contact reported some concern about the potential for loan quality deterioration in the EV-related auto space. Consumer loan demand decreased modestly, in part due to lower auto loan volumes. Credit card and home loan activity was stable. Consumer loan quality decreased modestly. Several contacts noted elevated uncertainty over the future direction of short run interest rates.
Agriculture
Expectations for 2026 District farm income were little changed over the reporting period. Although weather conditions and crop planting varied across the District, planting was largely on schedule and most crops were off to a good start. Fertilizer and fuel prices remained elevated. One contact reported buying diesel "hand to mouth" instead of by the truck load due to elevated prices and uncertainty about future prices. A modest number of acres switched from corn to soybeans, as corn requires more fertilizer. Contacts indicated fertilizer costs would be a greater concern in the fall and winter if higher prices persist as that is when prices tend to be locked in for the subsequent growing season. Corn, soybean, and wheat prices rose. Dairy prices generally increased, cattle and hog prices were flat, and egg prices decreased.
Community Conditions
Community, nonprofit, government and other nonbusiness contacts reported little change in economic activity over the reporting period, though they expressed rising concerns about higher prices related to the conflict in the Middle East. State and municipal contacts worried about a downturn in revenues if consumers curtailed discretionary spending to accommodate higher prices for gas and other necessities. Small business intermediaries reported greater uncertainty on the part of their clients, who were increasingly reluctant to take on debt to start or grow their businesses. Social service organizations said that local funders were adapting to changes and delays in federal funding by encouraging grantees to collaborate to more efficiently with one another to meet community needs, even as contacts also noted an increase in the "newly needy."
For more information about District economic conditions visit: https://chicagofed.org/cfsec.