Federal Reserve Bank of Chicago
Summary of Economic Activity
Economic activity in the Seventh District increased slightly in July and early August, and contacts expected a similar pace of increase over the next 12 months. Manufacturing demand rose modestly; employment was up slightly; consumer spending and construction and real estate activity were flat on balance; business spending declined slightly; and nonbusiness contacts saw no change in economic activity. Prices rose moderately, wages rose modestly, and financial conditions tightened slightly. Farm income expectations for 2026 improved some.
Labor Markets
Employment rose slightly over the reporting period, and contacts expected a similar pace of hiring over the next 12 months. Contacts generally saw little change in labor market conditions on balance. One contact in state government said the layoff rate remained low, and a contact in leisure and hospitality noted little turnover in workers. There were some reports of job growth, including from employment placement agencies which saw a slight increase in demand for manufacturing workers. There were also a few reports of tightening labor market conditions. In the truck transportation industry, a contact noted a pullback in the supply of drivers after recent changes in federal regulations. And in certain skilled trades, such as electricians, wage increases were large. Outside of the trades, wages and benefits costs were both up modestly.
Prices
Prices rose moderately overall in July and early August, and contacts expected a similar pace of increase over the next 12 months. Producer prices rose modestly. Nonlabor input costs were up modestly, which was slower than the moderate pace in the last report. Contacts reported price increases in raw materials, energy, and shipping, with many contacts in manufacturing and construction noting that shippers continued to add fuel surcharges to their invoices. Consumer prices rose moderately. One retail industry analyst expected some retailers to use tariff refunds to offset freight surcharges or offer promotions.
Consumer Spending
Consumer spending was flat on balance over the reporting period. Nonauto retail spending was unchanged overall. Contacts said more consumers were trading down to lower cost options and noted sales increases at discount stores and warehouse clubs. For example, a furniture retailer indicated that an increasing number of higher-income customers were shopping at discount furniture stores. Meanwhile, spending on leisure and hospitality decreased on net. While hotel room demand was up, contacts said restaurant traffic had slowed because of higher food and gas prices. New light vehicle sales held steady. Some dealers were surprised by how resilient demand was in light of elevated consumer uncertainty and higher prices driven by limited supply. However, other dealers expressed concern about decreased sales to small businesses, which historically precedes weakness in the overall vehicle market.
Business Spending
Business spending decreased slightly in July and early August. Contacts noted a small decline in their capital expenditures, though expectations for spending over the coming year were for a small increase. There were some reports of new capital purchases, often to replace or repair existing equipment. Demand for truck transportation increased slightly and rates edged up. Retail inventories were comfortable overall. Some contacts said that orders for the holiday season were lower than last year, in part due to higher confidence in the supply chain and in part because of uncertainty about how strong sales would be. Manufacturing inventories were a little high. A few manufacturing contacts reported shortages or long lead times for metals such as aluminum, copper, and steel.
Construction and Real Estate
Construction and real estate demand was flat on balance over the reporting period. Residential construction was unchanged, with contacts noting that higher costs, notably for land, were putting a damper on single-family homebuilding. Multifamily construction remained soft. Starts of many permitted multifamily projects were postponed due to higher costs and tighter credit conditions. Residential real estate activity decreased slightly, and a contact indicated that recent sales were limited to move-in-ready homes. Prices and rents both increased slightly. Nonresidential construction was unchanged. Data center and other mega-site construction projects remained the main centers of activity. As one contact put it, "without data centers, construction would be in a recession." Commercial real estate activity rose slightly. Demand strengthened in the industrial sector and remained strong for big box warehouse space.
Manufacturing
Manufacturing demand increased modestly in July and early August. Primary metals industry contacts reported a slight increase in sales from an already high level, driven in part by orders from equipment manufacturers. Fabricated metals production increased modestly on balance, with growth in a variety of sectors, including defense. Machinery sales also rose modestly due to stronger orders from the defense sector. Auto production ticked up and production of heavy trucks increased slightly.
Banking and Finance
Financial conditions tightened slightly in July and early August. Bond values edged down, while equity values rose moderately. Volatility was flat on net and at a low level. Business loan volumes increased slightly, with one contact reporting greater M&A activity. Business loan quality edged down, rates increased modestly, and terms were unchanged. Consumer loan volumes decreased modestly, with contacts attributing this in part to high interest rates across the board. Demand for residential mortgages was soft. There was an uptick in consumers making only the minimum payment on their credit cards, but overall consumer loan quality and terms were flat. Several lenders reported elevated consumer uncertainty due to the conflict in the Middle East, and many expressed uncertainty about the direction of interest rates.
Agriculture
District farm income expectations for 2026 improved some from a low level over the reporting period. Crops were in good shape for the most part, though some areas were stressed due to heavy rains and flooding. Still, yields for corn and soybeans were expected to be close to record levels. Corn, soybean, and wheat prices increased as domestic and international demand strengthened. Strong demand for biofuels led to higher production of ethanol and biodiesel. Egg and hog prices were up from the prior reporting period, dairy prices fell, and cattle prices decreased further. District cattle producers faced additional challenges after a key meat packing plant abruptly closed. Although diesel prices rose, there were reductions in many fertilizer prices, which could help farmers when they turn to preparing for next year.
Community Conditions
Community, nonprofit, and state and municipal contacts saw no change in economic conditions over the reporting period. Contacts highlighted continued price pressures related to the conflict in the Middle East and mixed labor market conditions, with some having difficulty hiring but others cutting back on hours. Overall, state government contacts reported strong sales and income tax revenues. Small business intermediaries noted that service-oriented businesses were struggling to pass on cost increases to customers, leading some to cut back on hours or be more cautious about growth plans. In contrast, intermediaries noted resilient outlooks among manufacturing clients, and some firms introduced training programs for new workers to increase staffing. Nonprofit organizations reported that private donations were holding steady given stability in the equity markets.
For more information about District economic conditions visit: https://chicagofed.org/cfsec.