Beige Book Report: Chicago
June 4, 2014
Growth in economic activity in the Seventh District was moderate in April and May. Although contacts had been expecting a stronger pick-up, they generally maintained their optimistic outlook for 2014. Consumer and business spending both increased. Gains in manufacturing production remained moderate and growth in construction and real estate activity continued to be modest. Credit conditions improved slightly. Cost pressures increased, but were modest. Corn, wheat, and hog prices moved lower, while soybean, milk, and cattle prices increased.
Consumer Spending
Growth in consumer spending increased slightly in April and May, though the overall pace of growth remained modest. Contacts suggested that higher utility bills and low consumer confidence had a negative effect on retail sales. Nonetheless, they were cautiously optimistic, citing favorable responses by consumers to recent promotional activity. Several contacts also reported higher than normal inventories in anticipation of stronger summer sales. Sales of building materials, garden supplies, and clothing improved with the weather, while sales of electronics and some other big-ticket items failed to meet expectations. Light vehicle sales decreased slightly, while dealers' service and parts departments remained active.
Business Spending
Business spending continued to grow at a moderate pace in April and May, led by higher capital expenditures on equipment and software. Forward-looking capital spending plans also picked up. Although contacts reported that expenditures were primarily for replacement of existing capital, a number indicated that they were expanding capacity and IT infrastructure as well, particularly in the construction and real estate industries. In addition, contacts in the auto and energy industries reported increased capital spending to meet environmental regulations. Inventories remained at comfortable levels for most manufacturers, and there was some desired stockbuilding by retailers. Hiring plans changed little from the previous period. However, a staffing firm reported increased demand for temporary manufacturing workers, and several contacts said they had added part-time workers. Demand remained strong for skilled workers, with firms again reporting willingness to spend on training.
Construction and Real Estate
Growth in construction and real estate activity picked up, but remained modest in April and May. Contacts attributed the increase in activity to more favorable weather conditions, and expected moderate growth for the remainder of the year. Demand for both single- and multi-family residential construction improved. Existing home sales rose slowly, but real estate contacts expected activity to pick up as inventories return to levels that are more normal. Home prices and residential rents grew moderately. Demand for nonresidential construction expanded at a slow pace. Public construction activity was modest, but one contact noted some increase in infrastructure spending on bridges and schools. Office building remained weak. Contacts continued to note strength in industrial building and some areas of retail construction, particularly grocery stores. Demand for commercial real estate improved, as leasing of industrial buildings and office space increased.
Manufacturing
Manufacturing production continued to grow at a moderate pace in April and May. The auto, aerospace, and energy industries remained a source of strength for the District. Capacity utilization in the auto and steel industries increased as production levels rose. In addition, auto suppliers reported plans to add capacity as vehicle production adjusts to more stringent fuel efficiency requirements. Demand for steel fully recovered from the impact of earlier winter weather-related production disruptions, though an industry contact noted that the late thawing of parts of the Great Lakes hindered transportation of raw materials and that service center inventories remained somewhat low as a result. Furthermore, weak demand abroad combined with higher prices in the US spurred a spike in steel imports. Specialty metals manufacturers continued to share in the moderate growth, with several reporting an increase in new orders and order backlogs. Demand for heavy machinery grew at a slow but steady pace; output was buoyed by construction machinery, but weighed down by global weakness in mining. A slow start to the growing season raised concerns that pressure on farm incomes would weigh on demand for agriculture machinery. Manufacturers of construction materials reported an increase in demand as the weather improved, though not as much as some had hoped.
Banking and Finance
Credit conditions improved slightly from the prior reporting period. Equity market volatility decreased, as did corporate financing costs for a number of District firms. Business lending increased, driven by demand for commercial and industrial loans from small businesses. Banking contacts again noted competitive pressure on structure and pricing for traditional and leveraged business lending, particularly from nonbank financial institutions. Investor purchases of commercial property rose, though some contacts expressed concern that the increase was not supported by underlying demand. Growth in consumer loan demand remained modest, with the utilization of credit card lines and the demand for auto loans both increasing. Some banking contacts also noted a slight pick-up in mortgage refinancing activity with the recent decline in interest rates, even as new mortgage originations decreased. Mortgage brokers reported that it remains difficult for many potential borrowers to obtain residential mortgages.
Prices and Costs
Cost pressures increased, but overall were modest. Commodity prices rose, and contacts noted higher prices for building materials and industrial metals. Energy and transportation costs remained elevated. Contacts reported lingering shipment delays of goods and raw materials from the harsh winter weather earlier in the year. A steel industry contact noted that the resulting supply chain disruptions contributed to the increase in steel prices. Retailers reported higher wholesale prices, particularly for food items such as meat and dairy. However, pass-through to downstream prices remained limited. Wage pressures rose slightly. Non-wage labor costs also increased, as contacts continued to express concern about rising healthcare premiums.
Agriculture
Corn and soybean planting progressed quickly after precipitation and cool temperatures slowed fieldwork earlier in the spring, though planting in Michigan and Wisconsin was still lagging. Cold soil temperatures are still a concern; some contacts reported that the corn crop was in good shape but that the emergence of soybeans was behind average. Moisture levels were at least adequate for planting throughout the District, although parts of Iowa remained in drought. Corn and wheat prices were lower, while soybean prices drifted higher. Livestock prices remained well above the levels of a year ago, although hog prices moved lower. High milk prices encouraged the expansion of dairies, and high cattle prices appear to be leading to some new entrants into the livestock business. Farm machinery was readily available after several years of waiting lists for purchases.