Beige Book Report: Chicago
January 15, 2014
The rate of growth in economic activity in the Seventh District increased in late November and December, though the overall pace was still moderate. Furthermore, contacts were more optimistic about 2014 than they were during the previous reporting period. Growth in consumer and business spending picked up to a moderate pace. Manufacturing production growth was solid, while construction activity increased modestly. Credit conditions loosened slightly. Cost pressures were up slightly, but remained mild. Corn, soybean, and milk prices increased some, while hog prices moved lower and cattle prices were little changed.
Consumer Spending
Growth in consumer spending picked up to a moderate pace in late November and December, with holiday sales modestly exceeding expectations. Total holiday spending was lower this year, though contacts indicated that improving consumer confidence and falling unemployment boosted retail activity in many areas. Luxury goods continued to sell better than non-luxury discretionary items. Severe winter weather, while reducing store traffic in some locations, spurred sales of winter-related items. Contacts also noted a negative impact on late holiday sales as some customers were hesitant to use debit and credit cards after a data security breach at a large national retailer. Light vehicle sales moved up in the District, with mid-size sedans, larger SUVs, and pick-up trucks some of the strongest-selling segments.
Business Spending
Business spending also picked up in late November and December. Inventories remained at comfortable levels for most retailers. Auto dealers continued to report that they were keeping inventories slightly higher than normal in anticipation of increased demand in the coming months. Manufacturer's inventories were somewhat lean. Growth in capital expenditures picked up slightly, led by spending on structures; examples included grocery stores, automobile dealerships, and expansions at auto supplier plants. Contacts also reported investing in equipment, information technology, and vehicles. Capital spending plans for the next six to twelve months declined slightly, and a few contacts noted plans to either pay down debt or halt further expansion after significantly ramping up capital expenditures in previous years. The pace of hiring picked up, as did expectations of future hiring. A staffing firm reported continued growth in demand, with improvement in both industrial and professional sectors. Many contacts noted continuing strength in demand for skilled and experienced workers, with positions often difficult to fill in engineering, technology, accounting, and other technical occupations. Several contacts also reported difficulty retaining skilled workers because of improving job and income prospects in the labor market.
Construction and Real Estate
Construction and real estate activity increased modestly in late November and December. Demand for residential construction continued to expand, with strong growth again in the multifamily sector. Contacts expected that record low vacancy rates for apartments would continue to boost new multifamily construction over the coming year. Home sales, prices, and rents all rose, though the slow foreclosure process continued to impede existing home sales. Contacts noted an increase in the number of single-family homes purchased for rental or investment purposes. Demand for nonresidential construction remained modest, but picked up some from the previous reporting period. Commercial real estate activity also improved, with vacancies declining and rents increasing. Contacts noted especially strong growth in high-end retail and investments in income generating properties.
Manufacturing
Manufacturing production growth was solid in late November and December. Contacts were generally optimistic about the outlook for manufacturing in 2014, pointing to expected strength in the auto, aerospace, and energy industries. The auto and aerospace industries in particular were a source of strength for the District in the second half of 2013. Low steel service center inventories continued to boost the demand for steel, and contacts noted that demand for other industrial metals also increased. Manufacturers of construction materials reported a moderate increase in demand as the housing market continues to improve. Increasing construction also led to some improvement in the demand for heavy equipment, though the overall level of activity remained soft. Demand for heavy- and medium- duty trucks was down following the pull-forward of spending earlier in 2013 in response to new EPA emissions standards. Manufacturers of durable consumer products and recreational vehicles also expected to see faster growth in 2014, with wealth gains from the rising stock market and home prices boosting demand.
Banking and Finance
Credit conditions loosened slightly over the reporting period. Equity markets continued to rise, with investors' risk appetite increasing according to financial market contacts. Corporate borrowing spreads narrowed, especially in the high-yield debt market. In addition, banking contacts reported increased competition from local and regional banks was leading to downward pressure on pricing and looser and fewer covenants in deal structures for both small and middle market firms. Aggressive lending in the institutional leveraged loan market was also cited, increasing debt-to-equity multiples. Business loan demand improved, with higher utilization of lines of credit and an increase in borrowing for purchases of equipment and to tenants looking to purchase properties that they were currently leasing. However, contacts noted some softness in loan demand from agricultural and mining firms. Household loan demand was more mixed, with a decrease in mortgage refinancing and a slight increase in auto lending. Furthermore, contacts indicated that tight lending standards remain a barrier to new mortgage finance.
Prices and Costs
Cost pressures increased slightly over the reporting period, but remained mild. Contacts reported increases in commodity prices, in particular for cement, concrete, brick, natural gas, steel, and other industrial metals. Overall, wage pressures were down slightly, though several contacts indicated rising wage pressures for skilled workers. Non-wage labor costs also increased, with a number of contacts reporting higher healthcare premiums.
Agriculture
Corn and soybean prices moved a bit higher over the reporting period, but remained well below their levels of a year ago. Current prices for corn will not cover expected costs for 2014 production, whereas soybean prices would. This may lead to increased soybean planting in the spring. Farmers continued to store crops in anticipation of future price increases. In some locations, however, there was an incentive to sell corn sooner, in part because of an increase in demand for ethanol production, which has returned to profitability. Hog prices moved lower, while cattle prices were little changed. Milk prices edged up, and there was evidence of some expansion in District dairy herds. Parts of the District remained in a drought, which makes the timing of spring precipitation more critical. In addition, there was less fertilizer application last fall due in part to cleaner water regulations.