WASHINGTON (MNI) – The following is the latest Beige Book’s
Sventh District assessment of economic activity, published
Wednesday:
SEVENTH DISTRICT – CHICAGO
Summary
Economic activity in the Seventh District expanded at a moderate
pace in July and early August, with the pace of growth once again
slowing from the prior reporting period. Contacts reported heightened
concern regarding the risks to the economic outlook, notably the U.S.
fiscal situation and weaker growth in Europe and Asia. Business spending
increased at a slower pace, while consumer spending growth picked up
some. Growth in manufacturing production moderated further, while
construction activity continued to slowly increase. Credit conditions
were again slightly improved. Smaller anticipated corn and soybean
harvests due to the ongoing drought pushed crop prices higher and raised
the cost of feeding livestock, with some pass-through to wholesale
prices already taking place.
Consumer spending. The pace of growth in consumer spending
increased slightly in July and early August due in large part to heavy
discounting by retailers to clear inventory space for back-to-school
items. Store traffic was similar to last year at this time; however,
retail contacts noted that the recent increases in gas prices were
leading to less discretionary spending. Sales of summer clothing and
other seasonal items remained strong. Sales of big-ticket items such as
furniture again were weak, although sales of electronics improved some.
Auto sales were little changed from the prior reporting period and
dealers reported that inventories were beginning to creep up.
Business spending
Growth in business spending slowed from the prior reporting period.
Inventories were generally reported to be at comfortable levels.
However, retailers remained cautious in their back-to-school and holiday
season ordering and manufacturers also expressed a desire to tightly
manage their inventories. Capital expenditures on software and equipment
were proceeding as planned, but contacts cited a greater degree of
restraint in new spending projects. Labor market conditions were little
changed on balance. Hiring remained selective in most industries, with
demand comparatively stronger for skilled manufacturing and construction
workers, information technology specialists, and engineers. Several
manufacturers reported transitioning temporary employees into permanent
positions, and a staffing firm reported an increase in demand from the
manufacturing sector.
Construction/real estate. Construction activity continued to
increase at a slow but steady pace in July and early August.
Multi-family construction remained an area of strength, and residential
single-family construction increased slightly. Homebuilders noted that
credit was still tight for residential projects, with lenders continuing
to require large equity commitments before extending financing. Demand
for nonresidential construction also continued to gradually increase.
Industrial building and highway projects rose further. Elevated office
and retail vacancy rates remained a drag on new commercial construction,
but contacts indicated that demand for office space was slowly
improving. That said, a commercial real estate broker noted that
companies lack the confidence to make long-term real estate commitments,
as many continue to negotiate for contracts with opt-out provisions
after two to three years into their lease agreements.
Manufacturing
Growth in manufacturing production slowed further over the course
of July and early August, with contacts expecting this slower rate of
growth to persist throughout the second half of the year. In the steel
industry, capacity utilization fluctuated some during the reporting
period, but was roughly unchanged on balance. Metals manufacturers noted
continued volatility in their customers’ orders, as many were closely
monitoring their inventory levels. The auto industry continued to be a
source of strength for manufacturing. Demand for heavy equipment also
remained solid, with rental fleets continuing to expand. Manufacturers
of household goods and building materials reported that activity had
picked up some, although it remained at low levels. The coal mining
industry, however, was a notable exception, as the low price of natural
gas has resulted in the substitution of natural gas for coal in
electricity production. Exporters noted weaker demand from Europe and
Asia, but continued strength from other parts of the world like Mexico.
Banking/finance
Credit conditions gradually improved over the reporting period.
Credit spreads and volatility moved lower and increased competition led
to downward pricing pressure on small business loans. Business loan
demand continued to be mostly from small and middle market firms and for
the purpose of refinancing existing debt as opposed to financing capital
expenditures. Banking contacts reported that many of their customers are
waiting to assess the impact of the upcoming election on tax and
healthcare policies. Consumer loan demand was steady. Mortgage
refinancing continued to increase and contacts noted the greater
availability of sub-prime loans for used autos. With overall loan growth
flattening out in recent months, a banking industry contact noted that
some banks are investing in municipal bonds as a way to increase their
earnings.
Prices/costs
Cost pressures were mixed in July and early August. Prices fell for
a number of commodities but rose for materials like steel and lumber.
Gasoline prices moved higher and shipping costs were also noted to have
risen. Retailers reported that the spike in agricultural commodity
prices resulting from the drought, particularly its impact on higher
feed costs, was already starting to be passed through to wholesale
prices. Wage pressures continued to be moderate, although several
contacts cited upward pressure on healthcare costs.
Agriculture
The drought has substantially reduced expected yields for corn and
soybeans, although the impact varied considerably across the District.
Scattered rains near the end of the reporting period helped revive
soybeans to some degree; however, with the exception of some
late-plantings, the precipitation was too late to improve yields for
most of the corn crop. Crop insurance and higher prices will partially
offset lost revenue. However, some farmers face the prospect of having
to buy corn at market prices after selling ahead more than they will
likely harvest. Livestock pastures are in poor shape as well, and fields
with low corn yields were being chopped for silage to feed livestock.
With feed costs high, livestock operations cannot cover their costs of
production, and operators have reduced their herds accordingly. Hog and
cattle prices were down from the prior reporting period, while dairy
prices were up as milk production dipped.
** MNI Washington Bureau: 202-371-2121 **
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