April 25, 2007 Federal Reserve Districts Seventh District--Chicago

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Economic activity in the Seventh District continued to expand at a modest pace between mid February and early April. Consumer spending and business outlays and hiring all rose at rates similar to those reported earlier in the year. Residential construction and real estate activity declined further in most areas, while nonresidential construction was unchanged from the previous report. Manufacturing activity firmed from the last reporting period. Household lending increased and the pace of commercial lending remained at a solid rate. Overall, nonwage price pressures were little changed and wage increases were similar to those in the previous reporting period. Corn and soybean prices came down from recent highs, as the number of acres expected to be planted in corn this spring was the highest in a generation. Consumer Spending Consumer spending continued to increase at a gradual rate. Retailers said that March sales improved from a relatively weak February, although one contact noted that an early Easter probably contributed to this stronger showing. Unfavorable spring weather hurt sales of garden and outdoor equipment. Inventories rose in line with the usual seasonal build-up for the spring and summer selling seasons. Vehicle dealers reported slower sales overall and that rising gasoline prices were shifting the mix of sales towards more fuel efficient vehicles. One contact also reported that the weak housing market was causing consumers to pare back on the monthly payments they were willing to make when financing a new vehicle. Business Spending Business spending and hiring rose again in the District. Capital spending increased at a solid rate. A steel forging company noted that capital spending in its industry remained "pretty heavy" and that most firms were adding some capacity. Even with a declining residential sector, more wallboard capacity was being added this year, causing one producer to express concerns about further declines in utilization rates. Employment continued to increase gradually on net. Staffing firms reported continued small declines in billable hours in the Midwest, but that direct-hire and temp-to-perm hire activity remained very strong. The demand for manufacturing workers was mixed by industry. Wallboard producers were increasing hiring to staff the new plants coming on line. In contrast, auto suppliers and vehicle manufacturers continued to lay off workers. Retailers and banks said they were holding employment at current levels. Construction and Real Estate Residential construction declined again in most areas. In Indiana, a contact noted that many residential projects had been put on hold recently. Inventories of unsold high-end homes continued to be elevated. An industry analyst said the number of existing homes on the market was up relative to last year, especially in Michigan. Housing market traffic was increasing in the District as a whole, but contacts thought that converting this traffic into sales would likely be more difficult than usual. For example, an analyst from Chicago reported that home builders and sellers continued to offer incentives to attract buyers. Nonresidential construction remained stable from a year earlier. A developer from Chicago said that commercial rental rates and vacancy rates were little changed over the last quarter. Manufacturing Manufacturing activity firmed compared with the previous reporting period. A steelmaker reported steady demand in a "fairly good market." Although steel inventories remained somewhat elevated, they have been moving lower and contacts expected that stocks would be down to desired levels by the end of the second quarter. Manufacturers of machine tools and equipment parts reported solid demand, led by the aircraft, energy, defense, and medical sectors. Demand for some farm machinery was also strong. But contacts said that domestic demand for heavy equipment overall - which they think peaked about a year ago - may have softened further in recent weeks. A major equipment producer put their retailers on "managed distribution" in order to lower inventories at the retail level. New truck orders from shipping companies remained weak, in part reflecting the increased costs of operating equipment that meets the new emissions requirements that took effect at the start of the year. The increased costs appear to be in the range of six to ten cents per mile. Industry analysts also said that trailer orders continued to be disappointing. One positive note for the truck producers has been increasing export demand, especially from Australia and Mexico. An automaker reported that the April selling rate is running below program, with cars performing a bit better than trucks. The weakness in residential construction continued to damp sales of wallboard with one producer characterizing that they are "bumping along the bottom." Banking and Finance Lending activity increased a bit from the previous reporting period. Mortgage applications for home purchases rose and applications for refinancing increased to the highest level since the fall of 2005, reflecting borrowers' desire to move from adjustable-rate to fixed-rate loans. Use of existing home equity credit lines continued to increase, but issuance of new home equity loans decreased. Overall mortgage and home-equity delinquency rates were little changed from the previous reporting period. One contact noted that they were continuing to tighten requirements on household loans. Business lending rose in most areas of the District except Michigan, where demand was described as "lackluster." The largest increase in demand was for C&I loans, while commercial real estate lending was more subdued. C&I credit quality was little changed at favorable levels, but a few contacts reported a modest deterioration in the quality of commercial real estate loans. Prices and Costs On balance, both nonwage price pressures and overall wage increases were similar to those in the previous reporting period. Raw materials prices were generally steady at high levels, although several contacts noted that certain metals prices were rising because of increased costs for nickel. A contact in Indiana said that higher cost for metals had lead to an increase in nonresidential construction prices in the past few weeks. Most manufacturers continued to indicate that they were able to pass along higher costs, while others, particularly auto suppliers, said they were pressured to keep prices low. Staffing services firms reported faster increases in pay rates for high-skilled positions while pay rates for low-skilled positions were remained flat. Agriculture Corn and soybean prices retreated in March and early April from very high levels earlier in the year. Contacts indicated that the acreage planted in corn this spring would be the largest in a generation. Recent cold weather and wet fields in parts of the District delayed planting; continued poor weather may prompt some farmers to switch acres from corn to soybeans. Higher milk and cattle prices helped dairy and livestock producers, in addition to lower feed costs. Hog prices were lower, though hog operations remained profitable. Farmers reported facing delays in receiving new farm machinery because dealers were low on inventories, and prices went up for used machinery. Cash rents for available land were dramatically higher than a year ago. Competition in farm credit markets has been keeping borrowing rates down. 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