Beige Book Report: Chicago
October 16, 2013
The rate of growth in economic activity in the Seventh District slowed a bit in September. Contacts remained generally optimistic, but several expressed concern about the potential impact of a protracted federal government shutdown. Growth in consumer and business spending was modest. Manufacturing production and construction continued to grow at a moderate pace. Credit conditions changed little on balance. Cost and wage pressures remained mild. Corn and soybean yields were higher than expected, contributing to lower crop prices.
Consumer Spending
Consumer spending grew modestly in September, falling short of retailers’ expectations. Auto sales increased at a slower pace, but dealers noted continued strength in demand for used vehicles and in the fuel-efficient passenger car and light truck segments. Non-auto retailers reported that back-to-school spending was less than last year. However, sales of electronics and home-related items such as furniture, appliances, building materials, and gardening supplies remained stronger. Retailers expected holiday season spending to be similar to last year.
Business Spending
Growth in business spending flattened out in September. Inventories remained at comfortable levels according to most retailers and manufacturers. However, a few noted low inventories of used vehicles and at steel service centers. Growth in capital spending slowed slightly, though contacts reported an increase in productivity-enhancing investments to structures, equipment, and information technology as well as workforce training. The pace of hiring edged lower. Manufacturing contacts noted layoffs in several mining-related industries, and reported cutting back on overtime. Retailers indicated that seasonal hiring plans were about the same as last year, and a staffing agency reported a slight reduction in billable hours. In contrast, contacts continued to report plans to increase employment over the remainder of the year. Demand remained strong for skilled and experienced workers, with many such positions still difficult to fill. Several manufacturing contacts also noted difficulty in finding and retaining entry-level workers.
Construction and Real Estate
Construction and real estate activity continued to increase in September. Demand for residential construction grew moderately, with single-family homebuilding increasing at a steady pace and multifamily construction softening somewhat. Many contacts worried that higher interest rates could lead builders to cut back on new development projects. Sales of new homes continued to increase as inventories remained low, although growth was not as strong as in previous months. Real estate contacts noted that increasing competition for listings among brokers had pushed commission rates lower. Nonresidential construction grew modestly, as contacts noted an improvement in the outlook for industrial building. Commercial real estate activity continued to expand, although vacancy rates, particularly in the retail sector, remained elevated.
Manufacturing
Growth in manufacturing production decreased slightly in September. The auto and aerospace industries were again a source of strength for District manufacturing. Steel production and capacity utilization were steady, with an increase in domestic demand for steel primarily met by a rise in imports. Specialty metal manufacturers reported lower shipments, but remained optimistic for the fourth quarter as order books filled. Demand for heavy equipment continued to be soft, although orders picked up some. Contacts also cited an improving outlook for the industry, driven by an expected recovery in export demand and domestic construction. Manufacturers of construction materials and household appliances experienced a slight decline in demand, but remained optimistic about the recovery in the housing market. Manufacturing contacts, in general, remained cautiously optimistic for the remainder of this year and 2014, but several expressed concern about the confidence of their customers amid the federal government shutdown.
Banking and Finance
Credit conditions changed little on balance over the reporting period. Financial market participants noted an increase in market volatility with heightened uncertainty surrounding recent monetary and fiscal policy actions. Banking contacts again noted competitive pressures for commercial and industrial loans, with narrowing spreads and easing standards. Some also expressed concern about the potential deterioration of underwriting standards for these loans. In addition, several contacts cited a modest increase in demand for commercial real estate lending. Consumer loan demand was steady, with a decrease in mortgage lending and an increase in auto lending. Purchase and refinance mortgage activity declined with contacts citing higher interest rates, although increasing home prices led to a modest increase in home-equity lending.
Prices and Costs
Cost pressures changed little in September. Overall, commodity prices were down slightly. Prices for metals such as steel, copper, and aluminum edged lower. In contrast, contacts reported increases in prices for building materials such as asphalt and concrete as well as for some energy prices. Retailers again noted a slight increase in wholesale prices, although few were able to pass them along to their customers. Wage pressures remained mild, while non-wage labor costs increased. A number of contacts voiced concern about the uncertainty surrounding future employer and employee healthcare costs. In addition, several reported changing their health insurance enrollment periods this year in order to match the deadlines of the Affordable Care Act.
Agriculture
Although this year’s drought affected the harvest, corn and soybean yields in parts of the District were higher than expected in September. In fact, a contact reported that the local harvest would be the best in four years. Soybean yields were more variable than and not as favorable as corn yields. In the areas affected by drought, subsoil moisture and genetic advances in seeds reduced yield losses. Rains in September slowed harvesting, even damaging some crops that were mature. Crops harvested and sold early brought a premium due to low crop stocks prior to harvest. Since then, corn prices have dropped relatively more than soybean prices. With much of the harvest still unsold, farmers will store more of the crop in the hope of better selling opportunities over the winter. Milk and cattle prices increased from the previous reporting period, while hog prices decreased. Livestock producers continued to benefit from lower feed costs. Fruit crops bounced back strongly from last year’s devastating freeze, leading to lower prices.