Beige Book Report: Chicago
April 16, 2014
Growth in economic activity in the Seventh District picked up in March, and contacts generally maintained their optimistic outlook for 2014. Growth in consumer and business spending increased. Growth in manufacturing production was moderate, while growth in construction and real estate activity was modest. Credit conditions were little changed on balance. Cost pressures remained mild. Corn, soybean, milk, hog, and cattle prices moved higher.
Consumer Spending
Growth in consumer spending increased slightly in March, but remained modest. Sales of winter-related items, such as clothing and snow removal equipment, were stronger than normal, while other sales categories picked up as the weather improved. Retail contacts noted that the colder weather had likely created some pent-up demand as customers delayed purchases of spring- and summer-related items. Light vehicle sales increased since the last reporting period, spurred by new products, increased incentives, and higher showroom traffic levels as the weather improved. Dealers also reported higher activity levels in their service and parts departments because of winter-related maintenance. However, some retailers expected that higher utility bills during the winter months would negatively affect household spending.
Business Spending
Growth in business spending increased to a moderate pace in March. Inventories remained at comfortable levels for most manufacturers. Retailers expanded their inventories despite some weather-related delivery delays. Growth in capital spending picked up. Several contacts reported new spending on equipment and information technology, along with investment in structures. The pace of hiring increased, and while hiring plans decreased slightly, they remained positive. A staffing firm noted a slight increase in demand for their industrial services, but a continuing decrease in demand for their professional services. A number of manufacturers and some retailers reported capacity expansions along with attendant hiring or plans to hire. Demand remained strong for skilled workers, with positions often difficult to fill in engineering, information technology, accounting, and other technical occupations. Contacts cited an increasing willingness on the part of firms to train workers, where shortages exist, through in-house training, tuition reimbursement, or partnerships with local high schools and community colleges.
Construction and Real Estate
Growth in construction and real estate activity was modest in March. Although conditions have improved since the last reporting period, contacts reported that adverse weather continued to restrain growth. A decline in single-family construction was offset by growing demand for new apartment projects as residential rents continued to increase. Home sales and new listings declined, though brokers attributed this primarily to cold weather and were optimistic that activity would improve during the coming months. Several contacts cited high unemployment and restrictive lending standards as barriers to more robust growth. Demand for nonresidential construction grew at a moderate pace, with several contacts noting that industrial building activity had picked up substantially. In addition, contacts expected an increase in public construction resulting from the impact of harsh winter weather on infrastructure. Commercial real estate activity continued to expand, as vacancies ticked down and rents rose. Growth was concentrated in central business districts with high-end office space.
Manufacturing
Growth in manufacturing production increased from a mild to moderate pace in March, with contacts from a number of industries reporting increased activity. The auto, aerospace, and energy industries remained a source of strength for the District. Auto and steel production recovered from the weather-related slowdown, with overtime hours increasing to make up for earlier lost production. In addition, a steel industry contact noted that capacity utilization had returned to its expected level. Specialty metals manufacturers shared in the overall improvement of conditions, with many contacts reporting an increase in new orders and order backlogs. Manufacturers of consumer goods and construction materials also indicated increased demand. In contrast, demand for heavy machinery grew at a slow and steady pace, buoyed by the construction, transportation, and energy sectors, but weighed down by weakness in mining. A number of exporters reported that growth in demand from China was slower than expected, although growth picked up in Europe and Japan.
Banking and Finance
Credit conditions were again little changed on balance over the reporting period. Corporate financing costs for a number of District firms decreased slightly, as bond spreads narrowed. Banking contacts reported moderate growth in business loan demand, mostly driven by purchases of equipment. The leveraged loan market remained active with steady deal flow. Contacts noted continued competitive pressure on structure and pricing for commercial and industrial loans. Growth in consumer loan demand was modest, with a slight uptick in demand for home equity lines of credit and continued strong growth in auto lending.
Prices and Costs
Cost pressures remained mild. While energy and transportation costs continue to be elevated, prices were lower than during the previous reporting period. Prices for nickel, aluminum, steel, and cement rose, and fell for copper and scrap steel. Retailers reported little change in prices, with the exception of some rising prices for foodstuffs. Wage pressures were slightly lower overall but mixed across industries. Overall, non-wage pressures moderated even while contacts continued to report concern about higher healthcare premiums.
Agriculture
The slow arrival of spring-like weather delayed fieldwork. However, concerns about a delayed start to planting were muted, especially in Illinois and Indiana where 2013 crops performed well after being planted late. The mood among farmers improved as crop prices increased enough from winter lows that breakeven outcomes now seem possible. Hence, there has been more forward contracting of crops than a year ago to manage risk. Higher soybean prices still support a shift in planting intentions toward soybeans and away from corn, but not as much as earlier this year. Fertilizer costs decreased from a year ago, and seed costs were flat. The livestock sector moved further into the black, as milk, hog, and cattle prices increased. Given lower numbers of hogs and cattle available to market, animals were fed longer in order to gain additional weight. Although hog operations were still battling a virus that killed many piglets, there were signs that the worst had past.