Federal Reserve Bank of Chicago
Summary of Economic Activity
Economic activity in the Seventh District was flat on balance in late August and September, and contacts expected a slight pace of increase in the coming year. Manufacturing demand rose modestly; employment was up slightly; consumer spending was flat on balance; construction and real estate activity and business spending declined slightly; and nonbusiness contacts saw no change in economic activity. Prices rose moderately, wages rose modestly, and financial conditions tightened modestly. Farm income expectations for 2026 were down slightly.
Labor Markets
Employment rose slightly over the reporting period, and contacts expected a similar pace of hiring over the next 12 months. As in the prior report, labor market conditions were little changed overall. There were some signs of increased demand for labor, including from manufacturing contacts, who noted difficulty finding skilled workers and trouble retaining existing ones. There were also some signs of easing labor demand. A contact at a temporary employment placement agency reported uneven demand for workers across manufacturing subsectors, and a manufacturing contact said that layoffs at nearby plants had led to more applications for their open positions. In the administrative and professional services sectors, contacts noted greater ease in hiring. In addition, one contact in business services commented that productivity gains from AI adoption allowed their company to reduce employment through attrition. A retail industry contact expected holiday hiring to be at or below last year's level. Wages were up modestly but benefits costs grew moderately. Several contacts noted large increases in quotes for health insurance.
Prices
Prices rose moderately overall in late August and September, and contacts expected a similar growth rate over the next 12 months. There was a moderate increase in producer prices on net. Nonlabor input costs also grew moderately, with contacts reporting price increases across a variety of categories. Raw materials and equipment costs rose, notably for lumber and metals. Contacts reported that the cost of energy was up as well, with contacts highlighting higher prices for diesel and oil. Shipping costs moved higher, and a consultant for the transportation industry noted that higher diesel prices were largely being passed on to shippers via surcharges. Consumer prices rose moderately.
Consumer Spending
Consumer spending was unchanged on balance over the reporting period. Nonauto retail spending was flat. Contacts were generally pleased with the back-to-school season, noting especially good results in the return-to-college segment, which boosted sales of electronics and furniture. In contrast, grocery sales were down. Forecasts for holiday sales call for modest growth, similar to last year. Leisure and hospitality spending increased slightly, led by a pickup in demand at restaurants and hotels. Light vehicle sales were down slightly, but were better than expected, and contacts noted continued willingness by customers to make purchases despite overall affordability concerns. Mid-size and hybrid models remained most popular, with some dealers indicating that high gas prices were more of a factor in vehicle choice than in the last reporting period.
Business Spending
Business spending decreased slightly in late August and September. Capital expenditures decreased modestly, though expectations for expenditures in the coming year improved. Contacts mostly reported making purchases to replace old equipment. Demand for truck transportation was flat, but rates increased moderately, in part due to tight capacity. Retail inventories were unchanged at a comfortable level, while manufacturing inventories were a little low. Manufacturing contacts reported longer lead times for some metals, like copper alloys, and difficulty sourcing others, like steel and aluminum components.
Construction and Real Estate
Construction and real estate activity decreased slightly. Residential construction declined a bit overall, with contacts pointing to higher mortgage rates and elevated economic uncertainty as reasons for weaker demand. Some homebuilders were offering more generous promotions on new single-family homes. Residential real estate demand decreased slightly, while prices ticked up. Rents increased slightly, helped by healthy demand for townhomes. Nonresidential construction was unchanged, but activity remained at a robust level. Contacts indicated that megaprojects were crowding out capacity for other projects. An equipment distributor said that tech companies had tried to buy all the available electrical equipment for their data center developments, but that suppliers had pushed back because of commitments to other projects. Commercial real estate activity was unchanged overall, though office leasing in government, medical, and higher education spaces increased. Prices and vacancy rates were unchanged. In the retail sector, low availability and high demand for prime space pushed up rents and led some existing tenants to move to other spaces. Otherwise, rents were unchanged.
Manufacturing
Manufacturing demand increased modestly in late August and September. Primary metals manufacturers and wholesalers reported a slight increase in demand on top of an already high level, driven in part by defense spending. One contact said that while mills have not yet run into capacity constraints, continued high demand from megaproject construction could lead to future capacity issues. Fabricated metals production rose slightly, driven by higher demand from the defense and construction sectors. In the machinery industry, sales increased moderately, while auto and heavy truck production were both flat on balance.
Banking and Finance
Financial conditions tightened modestly in late August and September. Bond values fell, equity values were unchanged, and volatility was flat. Business loan demand increased slightly, while loan quality declined slightly overall. One contact noted stress for some clients in the manufacturing and food and beverage industries related to cost increases and supply disruptions. Business loan rates increased modestly overall, while loan terms were unchanged. In the consumer sector, loan demand increased slightly. Loan quality deteriorated slightly, rates increased modestly, and terms were flat.
Agriculture
Expectations for 2026 District farm income edged down over the reporting period, which included the start of harvest. Heavy rains in much of the District slowed the harvest and were expected to lower yields for corn and, especially, soybeans. Farmers also were expected to spend more on fuel to dry bushels, compounding the effect of high energy prices on the costs of harvest. Corn and soybean prices again moved higher, with reports of premiums for current deliveries. Wheat and egg prices were higher, while cattle, hog, and most dairy prices declined. In parts of the District, crop insurance wasn't expected to make up for lost income. Even so, some contacts expected farmers to replace equipment after holding off doing so in recent years.
Community Conditions
Nonbusiness, government, and other community contacts reported steady economic conditions in late August and September, although price pressures weighed on future outlooks. State government contacts noted continued resilience in tax revenues. However, small business contacts were experiencing a more stressed environment. Businesses explored ways to cover operating expenses as higher costs, late payments from clients, and lower discretionary spending by customers eroded margins. As membership dues and other revenues trended lower, nonprofit organizations looked for ways to cut expenses, including by combining positions or reducing office space.
For more information about District economic conditions visit: https://chicagofed.org/cfsec.