Federal Reserve’s Beige Book notes cautious optimism about the Chicago economy

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The decline in economic activity in the Chicago area has ended and many businesses remain cautiously optimistic for the remainder of 2009, according to the Federal Reserve’s Beige Book.

The Federal Reserve’s beige book is a summary of economic activity gathered from the Fed’s 12 districts. The beige book, noted for the color of the report’s cover, is published eight times a year.

Economic activity “improved marginally” in the Chicago district during September and early October, according to the report. Business and consumer spending, excluding vehicle purchases, decreased at a slower rate, and credit conditions improved but remain tight. Manufacturing activity showed more signs of “firming,” the report noted.

“We are improving in the sense that we are probably stabilizing a lot of things that have been in free fall,” assured Adolfo Laurenti, deputy chief economist for Mesirow Financial Holdings Inc.

The steel industry is experiencing an increase in demand due to lean inventories and strong demand from the auto sector, the report noted. One contact in the industry told the Federal Reserve that previously idle capacity would be ramped back up as a result but that it would take time to do so. Automakers and auto suppliers were helped by the Cash-for-Clunkers program, but some suppliers said that fourth-quarter orders are “shaping up to be weaker.” Automakers, however, expect demand to slowly improve the remainder of the year and are maintaining plans to increase production.

“The best news that we’re seeing right now is coming from manufacturing,” Laurenti said.

Laurenti believes that even people who have avoided splurging may do so during the holiday season. Companies will need to restock their shelves after the holiday boom, although he said he’s not sure if the product demand will be sustained or will fade at the beginning of the new year.

The Beige Book said health care, education and information technology experienced “notable” hiring.

“There has been a dearth of skilled workers for these positions even before the recession,” said Fred Hoch, president of the Illinois Technology Association, a trade association for information technology industry.

The Fed reported that the rate of job loss and reduction in hours worked continued to slow.

However, Bill Hummer, chief economist for Wayne Hummer Wealth Management, expects the unemployment rate to remain around 9 percent in Illinois through next year. It is currently 9.9 percent in the state and 9.6 percent nationwide.

“Employers are cutting payrolls to preserve profit margins and that’s not likely to change too soon,” he said.

Though higher credit standards are still a challenge, Laurenti said it’s a good time for businesses to look for merger and acquisition opportunities. Though there’s not much capital available, if a company is financially positioned to buy, it can probably buy companies at a very cheap price right now, he said.

Residential real estate conditions continued to improve in September and October, with home sales increasing and housing inventory coming down, according to the report. Commercial real estate conditions, however, worsened.

An increase in energy prices was reported, although a Fed business contact noted that “very high levels of stored natural gas will likely lead to lower heating costs this winter.”

Agricultural price pressures were mixed, according to the Beige Book, and early reports indicate a lower-than-expected corn yields. Harvesting the Chicago district’s corn and soybean crop will take longer than normal due to wet weather and late maturity of crops.