It appears that, along with the rest of the United States, the Chicago economy has shifted into reverse as it begins 2009.

Over the past 12 months, employment in the Windy City has fallen by over 33,000. To date, most of the job losses have been in goods-producing industries such as construction (-12,900) and manufacturing (-10,400).

However, employment in services has also shrunk, due to declines in trade, transportation and utilities, in financial activities, in professional and business services and in leisure and hospitality services.

Over the past year, the only sector to add a significant number of jobs in the Chicago area has been education and health services (+8,400).

Although house prices have not fallen as far in Chicago (-10.8%) as they have across the country as a whole, weakening employment growth and tightening credit conditions in the wake of the sub-prime mortgage crisis have reduced new residential building in the metro area by 50% year to date. This figure is considerably higher than the 33% drop recorded for the nation as a whole.

Looking forward, based on two recent surveys of current and future economic activity, the near-term prospects for the Chicago economy appear quite weak.

First, the Chicago Fed Midwest Manufacturing Index declined by 1.6% in November to 96.4. This drop can be attributed to weakness in all four regional industry sectors: automotive (-24% year over year), steel (-14.1%), machinery (-6.6%) and resources (-4.8%).

Meanwhile, according to the December 2008 Chicago Business Barometer, as set out in the Chicago Report of Kingsbury International Ltd. and the Institute for Supply Management, a general weakening of economic activity is expected in the region and in the national economy.

Based on the fact that all the major components of the Business Barometer were below 50 — and given that the "prices-paid" sub-series was close to a 60-year low — recessionary conditions in Chicago could persist into the second half of 2009.