Bloomberg News

U.S. Federal Reserve Beige Book: Chicago District (Text)

July 18, 2012

The following is the text of the Federal Reserve Board’s Seventh District-- Chicago.


Summary. Economic activity in the Seventh District continued to expand at a moderate pace in June and early July, although once again the pace of growth slowed from the previous reporting period. Growth in consumer spending further moderated, while business spending increased at a steady pace. Manufacturing production increased at a slower pace, and construction activity continued to improve. Credit conditions improved slightly on balance. Commodity prices moved lower, and wage increases remained moderate. The prospects for the District’s corn and soybean crops deteriorated, and crop prices moved higher.

Consumer spending. The pace of growth in consumer spending further moderated in June and early July. Retailers cited lower consumer confidence, a weaker customer response to promotions, and extreme summer heat as the main contributors to the lower sales pace. However, some exceptions were noted. Demand for luxury goods remained stronger by comparison, and sales of clothing, furniture, and home furnishings improved. In addition, the hot weather sparked sales of swimming pools, fans, and air conditioning units. Auto sales also improved, driven in large part by fleet sales and an increase in manufacturers’ incentives on new fuel efficient vehicles. Inventory levels were little changed, but some auto dealers indicated that they were adjusting their inventory mix to include more fuel efficient vehicles in order to meet increased demand.

Business spending. Business spending continued to increase at a steady pace in June and early July. Inventories were generally reported to be at comfortable levels, and most contacts indicated that capital expenditures were proceeding as planned. Auto dealers reported facility upgrades and a number of manufacturers indicated they were purchasing new equipment. That said, many contacts had become more cautious about future spending decisions, pointing to the heightened uncertainty surrounding the federal fiscal environment and the upcoming November elections. Labor market conditions were little changed on balance. Part-time hiring increased on par with seasonal norms in retail trade, although permanent workforces decreased slightly. Manufacturers reported only moderate gains in employment, but several did note increasing the hours of their existing workforce. A staffing firm reported weaker demand from the manufacturing, transportation, and business services industries but an increase in the growth rate of billable hours in the construction and financial services industries.

Construction/real estate. Construction continued to increase in June and early July. Multi-family residential construction remained an area of strength, particularly apartments, but single-family construction also increased. Residential real estate conditions continued to improve, with home prices and rents both edging up. A contact noted a rise in short sales as a side effect of lenders increasingly looking to avoid the still drawn out foreclosure process. Demand for nonresidential construction also rose. Contacts reported several new hotel and office projects as well as a pick-up in warehousing, industrial, and infrastructure building activity. Commercial real estate conditions were little changed overall. Vacancy rates remained elevated for retail and office properties. Contacts expected that it would take a while for the pace of absorption to pick up significantly despite an increase in capital available for the purchase of commercial properties.

Manufacturing. Manufacturing production increased at a slower pace in June and early July. The auto sector remained a source of strength. Several auto suppliers noted an increase in research and development activity, as automakers were shifting responsibility for new product design and development away from their in-house operations. Outside of the auto industry, conditions were mixed. Capacity utilization in the steel industry edged lower; and while metals manufacturers indicated that orders continued to increase, they also noted that growth had softened some from the robust pace earlier in the year. Exports to Canada and Mexico continued to increase, but exporters noted a decline in demand from Europe and China. Demand for heavy equipment was steady, but a few contacts noted that it may soon be slowing. While freight traffic continued to be strong, the demand for heavy trucks was expected to be flat into next year in advance of the next round of changes in emissions standards. The lower price of natural gas was noted to have slowed activity in the industry, as natural gas demand lagged available supply. Contacts indicated that orders from the defense industry further weakened in anticipation of additional defense spending cuts in the coming fiscal year.

Banking/finance. Credit conditions improved slightly on balance from the previous reporting period. Demand for longer term financing continued to increase. Credit spreads edged up, but market interest rates declined so that net corporate funding costs were essentially flat. There was steady growth in refinancing and lending for capital replacement, but limited loan demand for other purposes. Middle market firms were the primary source of loan growth. Larger firms were said to have been more significantly impacted by the weakening European economy and have scaled back their borrowing accordingly. Banking contacts also noted that uncertainty over the effects of potential fiscal policy actions on both demand and costs was reducing their customers’ demand for credit. In contrast, consumer loan demand increased moderately, particularly for auto loans and mortgage refinancing.

Prices/costs. Cost pressures decreased in June and early July. Energy prices were noticeably lower. Other commodity prices also decreased, with contacts pointing to steel and lumber as examples. Lead times for some specialty metals remained extended, however. Wholesale price pressures eased, particularly for clothing. Wage pressures continued to be moderate. Manufacturing contacts reiterated having difficulty filling open positions for high-skill trades.

Agriculture. Extreme heat and drought conditions spread across most of the District, stressing both crops and livestock. Forecasts made in June called for possibly record crops of corn and soybeans; now it appears the District’s harvest will likely be below average, with little prospect for improvement and plenty of downside risk. The corn crop is in the most danger of further damage, as plants entered a critical stage of development with insufficient moisture. Corn and soybean prices moved sharply higher, and wheat prices also rose. Hog prices were higher, cattle prices were little changed, and milk prices moved lower. With higher costs and the outlook for a decline in revenue, insurance coverage may provide an important safeguard for many farmers this year. Insurance coverage is widespread for corn and soybeans, but is less prevalent for some other products. Furthermore, several years of higher-than-usual farm income have left many operations in a better position to absorb losses this year.

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