the Seventh Federal Reserve District – Chicago.
Consumer spending. Retailers reported flat sales. Higher food and energy prices caused
consumers to make fewer shopping trips and purchase fewer discretionary items.
Auto sales edged up, as higher demand for passenger cars offset a slight decline in trucks and
SUV sales. Auto dealers reported that inventory levels of small passenger cars were
impacted due to high demand for fuel efficient vehicles and production disruptions in Japan.
Dealers of Japanese vehicles expect that supply problems will continue to have an effect
the remainder of the year.
Business spending. Contacts indicated that capital expenditures were proceeding,
with some manufacturers reporting a slight increase in capacity. Labor market conditions
improved with continued strength in manufacturing, where contacts again cited a
shortage of qualified applicants for highly skilled trades. A large staffing firm reported that
billable hours ticked up and permanent placement activity increased. However,
demand for temporary workers softened in some industries, such as finance.
Construction/real estate. Single-family home construction was constrained by distressed
properties in the resale market. However, existing home sales picked up, lowering the
ventory of unsold homes. In the multifamily sector, residential rents rose further, and credit
has become increasingly more available for the purchase of apartment buildings.
Banking/finance. Corporate funding costs in the District decreased, and contacts noted that
corporate credit market liquidity remains ample. Banking contacts reported an increase
in business loan demand. Although much of this involved refinancing of existing debt,
contacts noted they were seeing more new commercial and industrial loans in the pipeline. Credit
availability, however, remained an issue for small business borrowers. Larger banks have
recently returned to small business lending, but community banks who have traditionally
serviced this segment remain impaired.
Prices/costs. Food and energy prices ended mostly lower, as did prices for steel, copper,
and other industrial metals. Despite the recent declines, commodity prices remain elevated, and
surcharges for fuel and metals increased significantly. Retailers reported they were unable to
pass along recent increase in wholesale prices, trying to compensate for higher commodity costs
by increasing promotions and discounts. Retail contacts also noted that margins were tight,
particularly for grocery stores, and further cost increases would likely be passed along.
Based upon this information, we recommend small businesses plan for moderate
improvement. Expect nonstop pressure by consumers to find the “best buy” which could
result in profit margin challenges.