All posts by Scott Brave

Updated Forecasts of Seventh District GSP Growth

Several years ago, the Chicago Fed began providing estimates of annual gross state product (GSP) growth for each of the five states in the Seventh Federal Reserve District.1 The U.S. Bureau of Economic Analysis (BEA) releases annual GSP data for the prior year each June. This post discusses GSP projections for 2015 and presents an alternative forecasting model using quarterly GSP data from the BEA.2

The 2015 Growth Picture

To provide context for our projections, we first take a brief look at the main indicators of our model. Figure 1 shows annual U.S. gross domestic product (GDP) growth and GSP growth aggregated across the five states in the Seventh District from 2005 through 2014. Actual GSP data for 2015 will not be released for another month. However, we can get a sense of what this data is likely to show by comparing the recent histories in the figure. While growth in the Seventh District has lagged behind the nation in recent years, it has tended to follow a similar trend over longer periods. The U.S. maintained an annual growth rate of around 2.4% from 2014 to 2015, providing a reasonable starting point for our estimate of District growth in 2015.

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The Chicago Fed’s Midwest Economy Index (MEI) then provides a useful link between national and regional growth that can give us a sense of the likely persistence of the recent shortfall between District and national growth. As figure 2 shows, the MEI indicated that the Midwest economy experienced growth that was somewhat above trend in the first half of 2015 and slightly below trend in the second half. Additionally, the relative MEI dipped below zero in the third quarter, suggesting that Midwest economic growth was further below its trend than national growth was in the second half of the year. Though the MEI does not explicitly pertain to GSP growth, historically a zero value for the index has been roughly consistent with 1.5% annual GSP growth for the District. In light of this, both the MEI and relative MEI suggest that District GSP growth in 2015 likely rebounded from its 2014 rate of 1.1% to somewhat above its trend rate of 1.5%, but still below the national growth rate of 2.4%.

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Finally, we turn to annualized quarterly growth of state real personal income over 2015which provides an indication of how state-specific factors may have affected District GSP growth in 2015. Figure 3 shows that both Illinois and Michigan experienced strong income growth in the first quarter of 2015. Though the District states generally experienced weak income growth in the second quarter in comparison with the national average, growth rates in the remaining quarters of 2015 were of similar magnitudes to the national rate. Taken together, these data suggest some likely variation in GSP growth rates across the District states, but for the most part, they are consistent with the MEI and U.S. GDP growth data in figures 1 and 2.

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Forecasts for 2015

Our forecasts for 2015 combine the information in the indicators discussed in the previous section to arrive at an estimate of annual GSP growth for the District states and the District as a whole. Since 2011, the Chicago Fed has used the following statistical model to estimate annual GSP growth:

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This model explains the annual GSP growth rate of each Seventh District state as a function of national GDP growth, regional economic conditions as captured by the monthly MEI and relative MEI, and state-specific conditions (specifically, quarterly real personal income growth and annual GSP growth in the previous year).3 We aggregate state projections into a District-wide forecast using each state’s respective share of nominal District GSP.

Figure 4 shows for each District state and the entire District their respective historical GSP growth (blue bars), in-sample fits (orange lines) of GSP growth obtained from our statistical model, and 2015 out-of-sample projections (green lines). With the exception of Iowa, the model predicts an increase in the GSP growth rate for the Seventh District states, as well as the District as a whole. Interestingly, this seems out of line with the national GDP data and the MEI and relative MEI data discussed earlier. It is of note, however, that for 2014 the model also estimated higher GSP growth than what was realized for each state.

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Motivated by our model’s recent shortcomings, we developed a similar model estimated using the experimental quarterly GSP data recently published by the BEA. Figure 4 also contains projections of annual GSP growth (red bars) obtained from this new model. At the time of writing, these data were available through the third quarter of 2015. To obtain a GSP growth projection for all of 2015 with these data, we need only estimate the fourth quarter’s value. Using the new statistical model to obtain this estimate and combining it with the data from the first three quarters, we arrive at an alternative forecast for 2015.

Figure 4 clearly shows a large difference between our two forecasting models. As table 1 further demonstrates, the projections from our new quarterly model (Q4 forecasted column) are below those of our original annual model in every instance, and often by quite large magnitudes. For the District as a whole, our quarterly model predicts more modest GSP growth of 1.6%, compared with 2.5% as forecasted by the annual model. This estimate from our quarterly model is also in line with the previous evidence suggesting growth was slightly above the historical trend of 1.5% but below the national growth rate of 2.4% for 2015.

Table 1. Annual GSP Growth Forecasts for 20154

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To illustrate the sources of the discrepancy between our model forecasts, we plot in figure 5 the annualized quarterly GSP growth data from the BEA (blue bars) for 2015, including our fourth quarter estimates (red bars) and fitted values from the model (orange lines). It is important to note that both our annual and quarterly models use the same 2015 data for the variables that they share in common, with the exception of the three quarters of GSP data that we have for 2015. These data show sharp contractions in GSP for every District state (with the exception of Illinois) in the first quarter. More than anything else, this feature of the quarterly data is the dominant source of the discrepancies between our annual and quarterly model projections. The model fits in figure 5 make this clear, as they demonstrate very large negative residuals in the first quarter and only small misses in the other quarters, reflecting the fact that the declines in GSP in the first quarter are not consistent with the indicators in our statistical model.

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It is possible that the quarterly GSP data for 2015 will be revised upon the release of the annual figure next month. As noted previously, our model predicts weak first quarters for the District states, but not nearly as dramatically as what has been released by the BEA thus far. Considering the apparent inconsistency between the quarterly data and the model, we also generate a forecast for 2015 that uses the fitted values for the first three quarters of 2015 GSP growth instead of the quarterly data. These projections, presented in the Q1–Q4 forecasted column of table 1, are larger than the quarterly model’s estimates using the quarterly values for 2015, but are still below those of the annual model. Moreover, these projections suggest that at 2.0%, District GSP growth improved in 2015 and was closer to the national average, but still below it.

Conclusion

We will continue to monitor the performance of both our annual and quarterly forecasting models. However, based on the results presented here, we intend to report annual GSP growth rates for each District state from our new quarterly model combined with the available quarterly data for the 2015 forecast (as presented in the Q4 forecasted column in table 1). From now on, we will continue to report estimates from this model as long as the quarterly data from the BEA make it possible to do so.

  1. The Seventh District comprises parts of Illinois, Indiana, Michigan and Wisconsin, as well as all of Iowa.
  2. The quarterly GSP data provided by the BEA is still in an experimental phase. For more information, visit https://www.bea.gov/regional/index.htm.
  3. The model is explained in more detail in Brave and Wang (2012).
  4. To allow for “like-for-like” comparisons among District forecasts, we aggregate state-specific annual forecasts to the District level using annual nominal GSP shares. The 2015 projections were aggregated using the 2014 shares.

Seventh District Update, April 2015

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in March, and contacts expected growth to continue at a similar pace over the next six to twelve months.
  • Consumer spending: Growth in consumer spending remained moderate. Non-auto retail sales increased modestly, while auto sales increased substantially.
  • Business Spending: Overall, inventory levels were comfortable, though steel service center inventories were exceptionally high. The pace of capital spending picked up some and employment grew moderately.
  • Construction and Real Estate: Demand for residential construction grew slightly. Home prices increased, residential rents held steady, and housing inventories remained near historic lows. Nonresidential construction activity ticked up and commercial real estate activity increased modestly.
  • Manufacturing: Growth was again moderate. The auto and aerospace industries remained a source of strength and most specialty metals manufacturers reported solid order books. However, capacity utilization in the steel industry decreased, and sales of heavy machinery and heavy trucks grew slowly.
  • Banking and finance: Credit conditions improved some. Financial market volatility stabilized and credit spreads declined slightly. Business and consumer loan demand both continued to grow.
  • Prices and Costs: Cost pressures were little changed overall. Energy prices were up slightly, but remained low. Metals prices declined. Retail prices were little changed. Wage pressures increased slightly, while non-wage pressures declined slightly.
  • Agriculture: High stocks of corn and soybeans and slower export growth put downward pressure on most crop prices. Higher output pushed down milk prices, hog prices fell because so many were brought to market, and cattle prices were up as herds are being rebuilt.

The Midwest Economy Index (MEI) was unchanged at +0.49 in February. The relative MEI rose to +0.45 in February from +0.36 in January. February’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update, March 2015

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in January and early February, and contacts expected growth to continue at a similar pace over the next six to twelve months.
  • Consumer spending: Growth in consumer spending remained moderate. Lower energy prices benefitted retail sales, though not as much as some were hoping. The pace of new light vehicle sales held steady, while sales of used vehicles increased.
  • Business Spending: Overall, inventory levels were comfortable, but delays at west coast ports led some manufacturers to increase inventories as a precaution. Both the pace of capital spending and the pace of hiring slowed somewhat, though spending and hiring plans grew steadily.
  • Construction and Real Estate: Demand for residential construction was little changed. Home prices and residential rents both increased, while home sales held steady. Nonresidential construction and commercial real estate activity increased moderately.
  • Manufacturing: Growth was again moderate. The auto industry remained a source of strength. Steel demand grew steadily, and demand for heavy machinery and heavy trucks both picked up.
  • Banking and finance: Credit conditions improved on balance. Equity markets moved higher and volatility declined. Business and consumer loan demand both increased.
  • Prices and Costs: Cost pressures were little changed overall. Delays at west coast ports led some contacts to use higher cost supply routes. Wage and non-wage costs changed little on balance.
  • Agriculture: Corn, soybean, wheat, hog, cattle, and milk prices were all lower. Input costs for spring planting remained elevated, leading some to purchase lower quality seeds to reduce costs. Some marginal ground will be used as pasture or for hay production instead.

Led by continued strength in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.67 in December from +0.43 in November. However, the relative MEI fell to +0.21 in December from +0.70 in November. December’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update, January 2015

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in December, and contacts expected growth to continue at a similar pace in 2015.
  • Consumer spending: Growth in consumer spending remained moderate. Holiday sales slightly exceeded expectations and light vehicle sales increased steadily.
  • Business Spending: Inventories were generally at comfortable levels and capital expenditures and spending plans continued to rise. Hiring increased and contacts expected job growth to continue in the coming year.
  • Construction and Real Estate: Demand for residential construction was little changed. Home prices and residential rents both increased, while the pace of home sales slowed. Nonresidential construction and commercial real estate activity increased moderately.
  • Manufacturing: The auto, aerospace, and energy industries remained a source of strength, though demand for energy production inputs was expected to slow. Steel production grew steadily, while demand for heavy machinery grew slowly.
  • Banking and finance: Credit conditions were little changed on balance. Market volatility stabilized and equity markets moved higher. Business loan demand was steady and consumer loan demand increased in line with expectations.
  • Prices and Costs: With the exception of falling energy prices, cost pressures were little changed. Wage pressures continued for skilled workers, but were less pronounced for unskilled workers. Non-wage labor costs changed little on balance.
  • Agriculture: Corn and wheat prices rose during the reporting period, while soybean prices were flat. Low crop prices led farmers to focus on minimizing costs instead of maximizing output in 2015, and ethanol margins compressed with the drop in oil prices.

The Midwest Economy Index (MEI) increased to +0.52 in November from +0.36 in October, remaining above average for the eighth straight month. The relative MEI rose to +0.72 in November from +0.35 in October, reaching its highest value in three years. November’s value for the relative MEI indicates that Midwest economic growth was moderately higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update, December 2014

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in October and November. Contacts expressed optimism for the coming year, but were concerned about weakening foreign growth and the possibility of another severe winter.
  • Consumer spending: Growth in consumer spending was moderate. Non-auto retailers had a positive outlook for the holiday season and auto sales and leasing activity remained strong.
  • Business Spending: Inventories were at comfortable levels, capital expenditures and spending plans continued to rise, and actual hiring and hiring plans continued to increase at a moderate pace.
  • Construction and Real Estate: Residential construction rose, and home sales picked up more than expected. Nonresidential construction and commercial real estate activity increased moderately.
  • Manufacturing: The auto, aerospace, and energy industries remained a source of strength. Steel production grew steadily, while demand for heavy machinery grew slowly. Manufacturers of construction building materials reported an increase in shipments.
  • Banking and finance: Credit conditions were little changed on balance. Equity market volatility increased in mid-October and then declined. Business loan demand was mixed, and consumer loan demand increased.
  • Prices and Costs: Energy and steel prices declined, but transportation costs increased for many contacts. Retail prices were little changed. Wage pressures continued for skilled workers, but were less pronounced for unskilled workers. Non-wage labor costs changed little.
  • Agriculture: The District harvest was behind, but yields should still set records. Corn, soybean, wheat, and cattle prices moved up, while milk and hog prices declined.

The Midwest Economy Index (MEI) decreased to +0.36 in October from +0.46 in September, but remained above average for the seventh straight month. The relative MEI moved down to +0.33 in October from +0.43 in September. October’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update, October 2014

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in September, and contacts maintained their optimistic outlook for the rest of the year.
  • Consumer spending: Consumer spending was led by continued strength in auto sales. Non-auto spending increased slightly, as growth picked up for discretionary spending categories. Retail contacts generally expected that holiday sales would be up slightly relative to a year ago.
  • Business Spending: Capital expenditures and spending plans increased, as a number of manufacturing contacts reported plans for expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover.
  • Construction and Real Estate: Residential and nonresidential construction increased. Growth in home sales and prices slowed somewhat, while vacancies ticked down and leasing of industrial buildings, office space, and retail space all increased.
  • Manufacturing: The auto, aerospace, and energy industries remained a source of strength. Demand for steel increased and demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for ag and mining machinery.
  • Banking and finance: Credit conditions were mixed. Equity market volatility increased and corporate bond spreads widened, even as business and consumer lending increased.
  • Prices and Costs: Energy costs declined, while steel and aluminum prices increased. Retail prices were down slightly as contacts reported more generous sales promotions. Overall, wage pressures were modest, and non-wage labor costs changed little.
  • Agriculture: Overall crop conditions were very good and the District should see record corn and soybean harvests. The huge anticipated harvests pushed down corn and soybean prices.

The Midwest Economy Index (MEI) decreased to +0.55 in August from +0.63 in July, but remained above average for the fifth straight month. The relative MEI edged down to +0.26 in August from +0.31 in the previous month. August’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Gross State Product Growth and the Midwest Economy Index

In August 2014, the U.S. Bureau of Economic Analysis (BEA) published prototype quarterly estimates of gross state product (GSP). In releasing this quarterly supplement to its existing semiannual releases of annual GSP, the BEA noted that the availability of higher-frequency information on state output should help researchers to better understand national and regional business cycles.

In this blog entry, we take another look at the GSP data for the five states of the Seventh Federal Reserve District to see how they compare with the Midwest Economy Index (MEI) produced by the Chicago Fed.1 We find that the MEI is highly correlated with the new quarterly GSP data; moreover, the MEI remains timelier as an indicator of the Midwest business cycle because it is released on a monthly basis.

In 2011, the Chicago Fed began providing four times a year estimates of annual gross state product growth for each of the five states in the Seventh Federal Reserve District2 as an accompaniment to its MEI release.3 Using the forecasting model underlying these estimates and the BEA’s new quarterly GSP data, we extend our annual projections to include quarterly GSP growth. Below, we present what we’ve forecasted for each District state through the first half of 2014.

The MEI and GSP growth

The MEI is a weighted average of 129 state and regional indicators that measure growth in nonfarm business activity. Two separate index values are constructed, the MEI (providing an absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (providing a relative value), which presents a picture of the Midwest’s economic conditions relative to the nation’s.

Both indexes are business cycle indicators capturing deviations in growth around a historical trend. MEI values above zero indicate growth above a Midwest historical trend, and values below zero indicate growth below trend. For the relative MEI, a positive value indicates that Midwest growth is further above its trend than would typically be suggested based on the current deviation of national growth from its trend, while a negative value indicates the opposite.

Together, the MEI and relative MEI provide a picture of the Seventh District’s state economies that is closer to being in real time than does the BEA’s GSP data. To see this, consider figure 1, which plots the MEI and the year-over-year gross domestic product (GDP) growth for all five District states combined using the BEA’s annual and quarterly data. The correlation here is quite striking, with the major difference being that the MEI is often released six months to a year (or more) in advance of the quarterly or annual GSP data.4

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Forecasting annual and quarterly GSP growth

By exploiting the historical correlation between annual GSP growth in each of the five District states and the MEI, we have been producing quarterly estimates of annual GSP growth since 2011. The statistical model we use to explain the annual growth in GSP for each Seventh District state is shown below.

The model succinctly summarizes the historical relationships between national (real GDP growth), regional (MEI and relative MEI), and state-specific (lagged GSP and state real personal income growth) factors driving each Seventh District state’s annual GSP growth since 1979.

We use a similar model applied to quarterly data to assess how well we can predict growth in the BEA’s new quarterly estimates of GSP. Before we do so, we review the annual GSP growth model. The regression coefficients estimated for our annual model using data through 2013 are listed in table 1. Each coefficient represents the “effect” of an input on GSP growth. For example, a 1% increase in real U.S. GDP growth leads to about a 0.5% increase in GSP growth on average across the     Seventh District states (first row of the table).

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The historical fit of our annual model varies across the five District states, as seen in their root mean-squared errors (RSME) (next to last row of the table). To put these deviations in perspective, we generated figure 2, which plots the actual annual GSP growth for each state, as well as GDP growth for the United States (blue bars), against the fitted values from the regression (red lines). The model does quite well at predicting Illinois’s and Wisconsin’s GSP growth rates, which tend to be less volatile and more closely resemble U.S. GDP growth. Its worst fit is for Iowa’s GSP growth rate, largely because it does a poor job of capturing fluctuations in agricultural conditions.

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We now extend our analysis using the BEA’s quarterly GSP data. To predict GSP growth for the first and second quarters of 2014, we estimate a “bridge equation” for each District state linking current and previous values of the monthly MEI and relative MEI to its quarterly annualized GSP growth, where the number of monthly lags spans both the current and previous quarters.5 We also include the current and previous quarters’ state real personal income growth and the previous quarter’s annualized GSP growth. We estimate the model on data from 2005 through 2013 and then project forward two quarters.

Figure 3 displays the quarterly regressions’ fitted values (red lines) against actual quarterly annualized GSP growth (blue bars). As our model did with the annual GSP data, it fits quite well for the majority of District states’ GSP growth rates. The green lines in the figure denote the forecasts for the first and second quarters of 2014. We project declines in GSP growth for District states in the first quarter that are largely offset by second quarter growth—consistent with U.S. data. The green lines in figure 2 depict similar annual forecasts for the entirety of 2014.

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Our 2014 forecasts

Table 2 shows our complete projections for District states’ 2014 GSP growth rates. Our annual growth projections suggest that Illinois’s growth rate will be closer to the District average in 2014, at around 2%. We project Michigan and Wisconsin to grow at above-average annual rates, while we project below-average growth for Indiana and Iowa. However, our quarterly model projections through the first half of 2014 suggest some downside risk to our annual Michigan and Wisconsin forecasts and upside risk for our annual Indiana and Iowa forecasts.

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As we’ve seen from tables 1 and 2, each state’s forecast is affected differently by the five inputs to our model. To further illustrate this point, we break down each state’s projected GSP growth rates into the expected contributions from national, regional, and state factors in table 3. National factors represent the effect of national GDP growth on our state GSP growth forecasts. Regional factors capture the roles played by the MEI and relative MEI, while state factors incorporate the effects of state real personal income growth, as well as the idiosyncratic dynamics of each state’s GSP growth.

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State and national factors have played a dominant role so far in 2014, but not every District state is projected to share equally in the national second quarter rebound from the slow start to the year. Regional factors have increased in importance over the course of the year; and with both the MEI and relative MEI showing above-trend growth so far in the third quarter, they are likely to continue to do so in the second half of 2014.

As we work to merge our annual and quarterly forecasting models, we will be reporting both annual and quarterly annualized estimates of District states’ GSP growth in conjunction with the MEI. These projections following the third release of national GDP data are available at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.

 

 

  1. This blog entry serves as an update to a previous Chicago Fed Letter examining GSP growth and the MEI, available at www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cfldecember2011_293.pdf.
  2. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. The MEI and our GSP forecasts are for the entirety of each state that lies within the District.
  3. Our estimates of annual GSP growth are made available following the third release of national gross domestic product (GDP) data for each quarter at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.
  4. The 2014 release schedule for the MEI and the quarterly GSP growth forecasts can be found at www.chicagofed.org/mei.
  5. A similar model linking quarterly annualized U.S. GDP growth and the Chicago Fed National Activity Index is described in an article available at www.chicagofed.org/webpages/publications/chicago_fed_letter/2010/april_273.cfm.

Seventh District Update, July 2014

By Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Growth in economic activity remained moderate in June and contacts maintained their optimistic outlook for the rest of the year.

Consumer spending: Consumer spending increased in June, but the overall pace of growth remained modest. In most cases, retail sales met or fell slightly below expectations. Light vehicle sales rose as consumers continued to enjoy favorable incentives and credit conditions.

Business spending: Business spending continued to grow at a moderate pace in June. Capital expenditures and spending plans continued to increase, with expenditures still concentrated on industrial and IT equipment. Hiring picked up and hiring expectations continued to increase, with the gains more pronounced in the service sector than in manufacturing.

Construction and real estate: Construction and real estate activity increased at a moderate pace in June. Residential construction increased, but home sales declined modestly. Nonresidential construction strengthened considerably and commercial real estate activity continued to expand.

Manufacturing: Manufacturing production continued to grow at a moderate pace in June. The auto, aerospace, and energy industries remained a source of strength for the District. Steel service centers reported improving order books, as did many specialty metal manufacturers. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.

Banking and finance: Credit conditions improved moderately. Corporate financing costs decreased further. Business lending increased, with contacts noting a pickup in demand for financing of equipment and commercial real estate. Growth in consumer loan demand was steady.

Prices and costs: Cost pressures increased, but remained modest. Energy costs remained elevated. Competition put downward pressure on retail prices, but wholesale prices changed little, compressing margins. Wage pressures increased, primarily for skilled workers. Non-wage labor costs were little changed.

Agriculture: The District’s corn and soybean crops made up ground as favorable weather helped plants emerge more quickly than the five-year average. Corn, soybean, wheat, milk and cattle prices moved down, while hog prices moved higher as disease affected supplies.

Led by improvements in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.41 in May from +0.11 in April, reaching its highest level since December 2013. However, the relative MEI remained negative for the third straight month, after edging down to –0.38 in May from –0.36 in the previous month. May’s value for the relative MEI indicates that Midwest economic growth was moderately lower than would typically be suggested by the growth rate of the national economy.

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Growth in economic activity in the Seventh District was moderate in April and May. Although contacts were expecting a stronger pick-up in growth, they maintained their optimistic outlooks for the remainder of the year.

Consumer spending: Growth in consumer spending increased slightly, but overall remained modest. Several retail contacts reported higher than normal inventories in anticipation of stronger summer sales. Light vehicle sales decreased slightly.

Business Spending: Business spending grew at a moderate pace, led by higher capital expenditures on equipment and software. Hiring plans changed little from the previous period.

Construction and Real Estate: Growth in construction and real estate activity picked up. Residential construction increased, while nonresidential construction continued to expand at a slow pace. Contacts also noted improvement in residential and commercial real estate markets.

Manufacturing: Manufacturing production continued to grow at a moderate pace. Capacity utilization in the auto and steel industries increased as production levels rose. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.

Banking and finance: Credit conditions improved slightly. Corporate financing costs decreased. Business lending increased, driven by commercial and industrial loan demand from small businesses. Growth in consumer loan demand remained modest.

Prices and Costs: Cost pressures increased, but overall were modest. Energy and transportation costs remained elevated. Contacts reported lingering shipment delays of goods and raw materials from the harsh winter weather earlier in the year. Wage pressures rose slightly and non-wage pressures rose moderately.

Agriculture: Corn and soybean planting progressed quickly after precipitation and cool temperatures slowed fieldwork earlier in the spring. Corn and wheat prices were lower, while soybean prices drifted higher. Livestock prices remained well above the levels of a year ago, although hog prices moved lower.

The Midwest Economy Index (MEI) increased to +0.12 in April from –0.04 in March. However, the relative MEI decreased to –0.23 in April from –0.13 in the previous month, remaining negative for the second consecutive month. April’s value for the relative MEI indicates that Midwest economic growth was somewhat lower than would typically be suggested by the growth rate of the national economy.

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Growth in economic activity in the Seventh District picked up in March, and contacts generally maintained their optimistic outlook for 2014.

Consumer spending: Growth in consumer spending increased slightly in March, but remained modest. Sales of winter-related items were stronger than normal, while other sales categories, in particular light vehicles, picked up as the weather improved.

Business Spending: Growth in business spending increased to a moderate pace in March. Growth in capital spending picked up. The pace of hiring increased, and while hiring plans decreased slightly, they remained positive.

Construction and Real Estate: Growth in construction and real estate activity was modest in March. Although conditions improved, residential construction and real estate contacts reported that adverse weather continued to restrain growth. Demand for nonresidential construction grew at a moderate pace and commercial real estate activity continued to expand.

Manufacturing: Growth in manufacturing production increased from a mild to moderate pace in March, with contacts from a number of industries reporting increased activity. The auto, aerospace, and energy industries remained a source of strength. Auto and steel production recovered from the weather-related slowdown, while demand for heavy machinery remained soft.

Banking and finance: Credit conditions were again little changed on balance over the reporting period. Corporate financing costs decreased slightly, as bond spreads narrowed. Banking contacts reported moderate growth in business loan demand and modest growth in consumer loan demand.

Prices and Costs: Cost pressures were mild. While energy and transportation costs remain elevated, they were lower than during the previous reporting period. Wage pressures were slightly lower and non-wage pressures moderated.

Agriculture: The slow arrival of spring-like weather delayed fieldwork, but farmers were generally not too worried about the delay. Soybean prices rose relative to corn. The livestock sector moved further into the black, as milk, hog, and cattle prices increased.

The Midwest Economy Index (MEI) decreased to –0.03 in February from +0.32 in January, falling below zero for the first time since June 2013. Moreover, the relative MEI moved down to –0.01 in February from +0.23 in the previous month. February’s value for the relative MEI indicates that the Midwest economy was growing at a rate consistent with national economic growth.