Beige Book Report: Chicago
April 11, 2012
Economic activity in the Seventh District continued to expand at a moderate pace in late February and March. Growth in consumer spending picked up, and business spending continued to increase. The pace of growth in manufacturing production was little changed and construction activity increased. Credit conditions improved slightly. Energy prices increased, but with limited pass-through to downstream prices, and wage increases remained moderate. Soybean and cattle prices rose, while corn, wheat, milk, and hog prices decreased.
Consumer Spending
Consumer spending increased significantly in late February and March. Retailers reported unseasonably warm temperatures boosted retail sales. Because of the earlier-than-normal start to the spring shopping season, inventories of some lawn & garden, home improvement, and leisure items ended the reporting period on the lean side. Several contacts thought that the recent gains in consumer spending might dissipate over the medium-term, pointing to the temporary nature of the boost from warmer weather and concerns about the impact of higher gasoline prices on consumer budgets. Auto sales increased, with contacts noting improved availability of financing for prospective buyers with below-prime credit ratings. Dealerships continued to report some difficulty in stocking popular models because of supply-chain constraints.
Business Spending
Business spending continued to increase in late February and March. Contacts reported that inventories were generally at comfortable levels, with the exceptions in auto and consumer goods noted above. Capital spending increased steadily. Purchases of heavy equipment picked up, led by robust activity in the energy sector. An exception was the coal mining industry which a contact noted was being negatively impacted by mild weather and the cheaper extraction costs for natural gas. Several manufacturers reported spending for technological upgrades as well as moving ahead with planned increases in capacity. Contacts also noted a pick-up in building renovation and increased spending on marketing and for labor force training. Labor market conditions continued to improve. Hiring increased, although it remained selective in many industries. Manufacturing contacts continued to report difficulty in attracting job applicants with ideal skill sets, and in some cases have reduced experience requirements or increased salaries to fill open positions. A staffing firm reported an increase in demand for light industrial, office and clerical, and IT and engineering positions. However, gains in these areas were being offset by declines in others, so that on net temporary employment was little changed.
Construction and Real Estate
Construction activity increased in late February and March. Demand continued to be strong for multi-family construction, particularly apartments. That said, a few contacts questioned whether current apartment building plans would lead to overbuilding in this segment. Overall, residential real estate conditions improved slightly. Single-family construction was up some from its depressed levels, as large homebuilders have seen a solid increase in sales in the last three months. Realtors noted some increase in activity in the market for existing homes, although many buyers are still waiting for prices to come down further. Foreclosures continued to put downward pressure on prices. Nonresidential construction also increased. Contacts noted a pick-up in industrial, healthcare and infrastructure building activity. Commercial real estate conditions were mixed by segment. Vacancy rates decreased for office and industrial properties, but contacts indicated that excess retail space continues to exist, especially big box stores and strip center/mall space. Commercial rents were flat, as was the available sublease space on the market.
Manufacturing
After a strong start to the year, growth in manufacturing production leveled off in late February and March. With an increase in quoting activity and deepening order books, contacts remained cautiously optimistic that growth would pick up again in the coming quarters. The auto industry continued to be a source of strength. Automakers expected sales to continue to increase over the year, but voiced concern that it would be challenging for production to rise much further above what is already planned given the capacity constraints faced by their suppliers. Confirming this production limit, several auto suppliers reported that they have already been asked by their customers to increase capacity. Capacity utilization in the steel industry was steady, but an industry contact expected to see some acceleration in production in the near term. Demand for heavy equipment was boosted by the need to replace ageing equipment. Exporters continued to benefit from advantageous terms of trade; and despite some softening in demand from Western Europe, again reported robust orders from Asia and Latin America.
Banking and Finance
Credit conditions were slightly improved from the prior reporting period. Volatility and risk premia edged lower and concerns about European sovereign debt continued to subside. Several contacts noted an increase in risk appetite, pointing to higher demand for equities and real estate. Banking contacts indicated that business loan growth remained moderate, with their larger corporate clients continuing to cite policy uncertainty as a reason for caution in borrowing. In contrast, consumer loan growth picked up, with credit card usage increasing. Credit availability for households improved, particularly for auto loans and credit cards, where greater competition was leading to more favorable terms for borrowers. However, credit conditions remained tight for homebuilders and small businesses.
Prices and Costs
Cost pressures increased in late February and March. Contacts noted higher energy prices, particularly for gasoline, although natural gas prices remained at historic lows. Prices for chemicals, steel, and non-ferrous metals also edged up. Wholesale prices increased; however, retail contacts indicated that it had become increasingly difficult to pass on higher wholesale costs to consumers. Wage pressures increased, but continued to be moderate. Contacts expected that wage and benefit increases this year would not exceed inflation. However, a shortage of skilled manufacturing workers contributed to upward pressure on wages to attract qualified candidates as well as improved benefit packages to retain current employees.
Agriculture
Unseasonably warm weather has jumpstarted field work and corn planting in the District. There were reports of tight supplies of some agricultural chemicals, as well as some types of corn seed. Most of the District has sufficient moisture for a strong start to the corn crop. With spring planting taking place up to a month early, some corn will be harvested in August; combined with the potential of a record corn crop, concerns about corn stocks being low before the traditional harvest time diminished and corn prices moved lower. Soybean prices have risen in response to lower-than-expected harvests in South America. The increase in soybean prices relative to corn prices, as well as some acreage being removed from environmental protection restrictions, resulted in an increase in the number of acres that famers expect to plant in soybeans. Milk and hog prices decreased, while cattle prices continued to rise.