Beige Book Report: Chicago
April 17, 2013
Economic activity in the Seventh District expanded at a modest pace in March. In general, contacts remained cautiously optimistic about the economic outlook. Growth in consumer spending edged lower, while growth in business spending picked up. Manufacturing production growth slowed. Residential construction continued to rise at a moderate pace, and nonresidential construction increased slightly. Credit conditions remained favorable. Cost pressures were largely unchanged, and wage pressures remained moderate. Prices for corn, soybeans, milk, and hogs fell, while cattle prices were little changed on net.
Consumer Spending
Growth in consumer spending edged lower in March. Retailers reported higher inventory levels in part because lingering winter weather delayed the introduction of spring-related merchandise sitting in their warehouses. Some contacts indicated that the end of the payroll tax credit was having an increasingly negative effect on retail sales. Nonetheless, sales during the Easter holiday were largely in-line with expectations. Home improvement and clothing stores reported lower sales than during the previous reporting period, but discount stores noted an increase in sales of apparel. Sales of furniture and appliances also rose, buoyed by the recent upswing in the housing market. In contrast, auto sales leveled off. Dealers are still optimistic that sales will rise further year than last year, and are building inventory for the spring selling season. Used vehicle prices remained elevated, boosting trade-in values. In addition, dealers noted that customers' credit profiles continue to improve, allowing more of them to qualify for auto loans.
Business Spending
Growth in business spending picked up in March. Inventory levels increased slightly, and spending on equipment and software and on structures picked up. However, a number of manufacturing contacts reiterated that they plan to make capital expenditures this year only as necessary, delaying investments because of uncertainty surrounding the economic outlook. Labor market conditions improved slightly. Hiring continued to increase. Contacts indicated that there is still strong demand for talent in skilled professional and manufacturing jobs, and that shortages of qualified candidates remain in many of these occupations. In addition, a staffing firm reported an increase in demand for its services from the manufacturing sector. Other signs of improving labor demand also were reported, such as greater competition among employers to fill internships this year and a stronger job market for new college graduates.
Construction and Real Estate
Construction and real estate activity increased in March. Demand for residential construction rose, reflecting both continued strength in multifamily construction and an improving single-family housing market. The gains have helped buoy confidence among homebuilders. Development of single-family homes in urban areas picked up some after years of limited activity. More generally, home prices have increased for both new and existing homes, with inventories of homes for sale shrinking. Growth in nonresidential construction, particularly for smaller retail stores and in the industrial sector, continued to be moderate. Commercial real estate conditions also continued to improve, with rents increasing and vacancy rates decreasing.
Manufacturing
Growth in manufacturing production slowed in March. Several contacts speculated that the uncertainty surrounding sequestration had affected their customer's orders. However, they had yet to see much evidence of this in their shipments. That said, a contact did note that his military customers were actively seeking to squeeze out any potential inefficiencies in their supply chain in an effort to lower their costs in anticipation of tighter future defense budgets. Demand for steel was flat, and steel service center inventories were slightly above desirable levels. Specialty metal manufacturers reported declines in new orders, although backlogs remained elevated. Activity in the energy sector was mixed, with natural gas-related industries reporting stronger activity but the coal industry remaining weaker. Demand for heavy equipment was also mixed. Mining activity, particularly for coal, continued to decline. However, contacts indicated that construction equipment distributors and rental companies remain optimistic, pointing to the ongoing recovery in the housing market as a potential source of strength in the second half of the year. Demand for heavy and medium-duty trucks remained firm; and the auto industry continued to be a source of strength. Manufacturers of building materials and consumer products also noted an increase in demand with the exception of lawn and garden equipment.
Banking and Finance
Credit conditions remained favorable over the reporting period. Credit spreads and financial market volatility continued to be low. Banking contacts reported moderate growth in business lending, especially to small businesses and for the purposes of expanding and upgrading of facilities. Real estate lending also reportedly picked up. Increased competition for borrowers was noted to be putting downward pressure on pricing and loosening commercial and industrial loan standards. Consumer borrowing also rose modestly, with a further increase in auto lending reported over the reporting period. Several financial contacts noted that the recent rise in equity and home prices appear to be boosting consumer confidence and spending. That said, a financial services industry contact indicated that consumer borrowing had been lower than anticipated given recent increases in consumer spending.
Prices and Costs
Cost pressures were roughly unchanged, on balance, in March. Commodity prices were down slightly, and energy prices remained elevated. Scrap metal prices continued to decline, and a contact in the industry speculated that weaker demand from China was largely to blame. Contacts did note some upward price pressure on raw materials such as chemicals, lumber, and concrete as well as on transportation costs, but said that pass-through to downstream prices was limited. Retailers reported mostly modest wholesale price increases. Wage pressures remained moderate, although several contacts indicated increasing concern over the rising cost of healthcare. Other cost pressures that were mentioned included higher property taxes and regulatory costs.
Agriculture
Cold weather delayed field work during the reporting period, but there was little concern expressed by contacts that planting would be seriously delayed. Corn and soybean prices dropped based on expectations of a larger crop this year and current stocks that are not as tight as anticipated. Contacts indicated that the number of soybean acres should be higher than the prior year in the District, while corn acres should be lower. Farmers seemed to increase their levels of crop insurance relative to last year. Milk prices moved lower during the reporting period, but remained above the levels of a year ago. Hog prices fell and were under year-ago levels. Cattle prices moved sideways during the reporting period, but were below the levels of a year ago. Some livestock producers were reportedly taking advantage of low long-term interest rates by refinancing and lengthening the maturity of their debt.