Beige Book Report: Chicago
March 5, 2014
Growth in economic activity in the Seventh District slowed in January and February, as severe winter weather affected activity in a number of sectors. The modest pace of growth to start the year tempered contacts' expectations only somewhat, as most generally maintained their optimistic outlook for 2014. Growth in consumer and business spending slowed. Manufacturing production growth and construction activity were modest. Credit conditions were little changed on balance. Cost pressures remained generally mild, though extreme temperatures caused energy prices to spike. Prices for corn, soybeans, and livestock were up slightly.
Consumer Spending
Growth in consumer spending slowed to a modest pace in January and February. Some retail categories initially benefitted from the poor winter weather, in large part reflecting increased outlays for necessities. However, retail contacts said that once necessary items were purchased, the persistent bad weather led to declining customer traffic and sales. Auto dealers also noted that the weather contributed to lower showroom traffic and sales. However, some contacts pointed to wavering consumer confidence as an alternative reason for lower auto sales. Many dealers expected incentives to increase in the near-term in an effort to rejuvenate sales.
Business Spending
Growth in business spending also slowed to a modest pace in January and February. Inventories remained at comfortable levels for most retailers and manufacturers. Growth in capital spending slowed somewhat, while plans for future capital expenditures edged higher. Several manufacturing contacts reported plans to purchase new equipment to increase capacity. Contacts in the manufacturing, banking and finance, and retail sectors reported plans for expansion, either by building or buying new structures or through mergers and acquisitions. The pace of hiring slowed, as did expectations of future hiring, though expectations for the coming year remained positive. A staffing firm reported continued growth in demand for its industrial services, despite some weather-related closures. In contrast, growth in demand for its professional services weakened. A banking contact noted an increase in layoffs due to declining mortgage refinancing. Many contacts noted continuing strength in the demand for skilled workers, with positions often difficult to fill in engineering, information technology, accounting, and other technical occupations.
Construction and Real Estate
Construction and real estate activity again increased modestly in January and February. However, the pace of growth slowed over the reporting period, with homebuilders reporting that the unusually cold weather had added to costs and led to construction delays. The weather also affected home sales, as several contacts indicated that the cold had dampened new buyer activity. Overall, however, the housing market continued to improve slowly, with home prices and residential rents rising modestly. Real estate brokers noted that the supply of homes for sale remains low, and many homes continue to be purchased with cash because lending standards remain tight. In addition, several contacts indicated that the continued limited availability of new construction financing has kept new home inventories near record lows. Nonresidential construction grew slowly, with one contact noting that industrial building activity had paused in recent weeks. Commercial real estate activity ticked up, as vacancies declined and rents rose. Niche, high-income properties remain a source of strength for the sector, particularly for restaurants and office buildings.
Manufacturing
Manufacturing production growth slowed to a modest pace in January and February, as unusually bad winter weather dampened the demand for manufactured goods and disrupted supply chains. However, manufacturing contacts remained optimistic, generally believing that overall economic conditions remained positive. The auto industry remained a source of strength for the District, even with a weather-related slowdown in sales. The weather also had a significant effect on the demand for steel, though contacts were preparing to meet any pent-up demand that developed during the reporting period. The severe weather conditions also affected the production and transportation of goods. For example, a steel industry contact reported that there were seven days in the last six weeks where his firm could not send shipments, a first in his thirty-five years of experience. Steel service centers reported reduced demand, while specialty metal manufacturers cited mixed but overall modest growth in new orders. Manufacturers of construction materials noted fewer shipments because of the weather, but continued to have a positive near-term outlook for the housing market. Demand for heavy machinery remained soft, as weakness in the mining and agricultural industries overshadowed increasing strength in the construction and energy industries.
Banking and Finance
Credit conditions were little changed on balance over the reporting period. Equity market volatility increased and corporate bond spreads widened some. Banking contacts reported slow but steady growth in business loan demand, but greater demand for purchases of equipment and owner-occupied real estate. Activity in the leveraged loan market picked up, with contacts noting increased competition from commercial finance companies and greater demand on the secondary market. Agricultural contacts reported that banks were helping farms restructure costs for the coming season to shore up margins. However, in some cases troubled farmers were forced to search for new lenders when denied credit. Growth in consumer loan demand remained modest, again led by the relative strength of auto lending. Contacts noted moderate downward pressure on pricing and standards across a variety of loan categories.
Prices and Costs
Cost pressures remained mild overall. However, the severe winter weather pushed up prices for energy commodities, creating supply shortages and disruptive price spikes in some areas, especially for propane and natural gas. For instance, a contact reported that a grain elevator withdrew its propane from storage and resold it for home use. Another business contact reported that because homes have priority in natural gas delivery, her company faced a supply shortage and was forced to shift its production schedule. Other producers chose to delay production rather than pay high prices. Most contacts expected energy markets to return to normal once warmer weather arrives. Prices for cement, drywall, lumber, copper, and rare earth metals rose. Prices for steel, scrap, and iron ore were lower even though the winter weather interrupted shipments. Wage pressures edged up, and were stronger for skilled workers. Many contacts indicated that non-wage labor costs increased because of higher healthcare premiums.
Agriculture
Severe winter weather disrupted the flow of agricultural products between farms and markets during the reporting period. Crops that were sold stayed on farms longer than intended as transportation problems delayed shipments. Contacts also reported shortages of trucks and drivers to deliver inventories from the large harvest last fall. Demand for crops has been better than expected, particularly for corn, pushing inventories lower and prices higher. Soybean prices drifted up as uncertainty regarding the harvest in South America weighed on markets. Concerns about high costs for land rentals were also widespread. Livestock producers reported improving bottom lines driven by higher prices for milk, hogs, and cattle combined with lower feed costs. However, some hog farms reported losses of young pigs because of disease. Dairy producers have seen a boost in demand from exports.