Beige Book Report: Chicago
July 16, 2014
Growth in economic activity remained moderate in June and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending both increased. Growth in manufacturing production and construction and real estate activity was moderate. Credit conditions continued to improve. Cost pressures increased some, but remained modest. Corn, soybean, wheat, cattle, and milk prices were down, while hog prices were up.
Consumer Spending
Consumer spending increased in June, but the overall pace of growth remained modest. Reports were mixed, but in most cases, retail sales met or fell slightly below expectations. Retailers cited the abnormally wet weather and higher food and energy prices as factors likely restraining consumer spending; for example, a grocery contact noted that consumers were substituting toward lower quality cuts of meat in response to rising prices. Contacts also noted that the restrained consumer spending had led to increased promotional activity, crimping retail margins. In spite of the setbacks, contacts remained optimistic for the remainder of the year. Light vehicle sales rose as consumers continued to enjoy favorable incentives and credit conditions. Auto dealers reported that activity in service and parts departments increased because of vehicle recalls.
Business Spending
Business spending continued to grow at a moderate pace in June. Capital expenditures and spending plans continued to increase, with expenditures still concentrated on industrial and IT equipment. A number of contacts--especially automotive suppliers--again reported expanding capacity. Inventories remained at comfortable levels for most manufacturers and retailers, though some auto dealers reported that shortages of certain popular models were hindering sales. Hiring picked up and hiring expectations continued to increase, with the gains more pronounced in the service sector than in manufacturing. Demand remained strong for skilled workers, particularly for professional and technical occupations and skilled manufacturing and building trades. A number of manufacturing contacts reported investing in labor-saving equipment or employee training because of the challenge in finding skilled workers. In contrast, a construction contact noted that builders are unwilling to invest in training workers until demand is stronger.
Construction and Real Estate
Overall, construction and real estate activity increased at a moderate pace in June. Both single- and multi-family residential construction expanded. Builders reported continued strength in high-income urban markets but a slight decline in new suburban contracts. Several contacts also indicated that improved credit conditions were making it easier to finance new projects. On a similar note, real estate contacts indicated that access to mortgage credit has improved. Nonetheless, home sales declined modestly over the reporting period, while rents and prices were somewhat higher. Both builders and realtors noted that higher prices and mostly stagnant incomes have weighed on affordability and held back a broader pick up in housing markets. Demand for nonresidential construction strengthened considerably, with contacts citing an increase in industrial, infrastructure, and retail projects. Commercial real estate activity continued to expand, as vacancies ticked down and rents rose. Leasing of industrial buildings, office space, and retail space all increased.
Manufacturing
Manufacturing production continued to grow at a moderate pace in June. The auto, aerospace, and energy industries remained a source of strength for the District. Steel service centers reported improving order books, as did many specialty metal manufacturers. In addition, a scrap metal contact noted large inflows from demolitions, which tend to be a leading indicator of future new construction. Manufacturers of construction materials reported steadily increasing production and demand. Demand for heavy and medium duty trucks grew moderately, as transportation volumes rose. Demand for heavy machinery continued to grow at a slow but steady pace, with some improvement noted by contacts in domestic and European markets. Construction machinery again was a positive while the global weakness in mining continued to weigh on demand. Contacts reported that lower demand and increasing inventories had led some heavy machinery producers to reduce capacity.
Banking and Finance
Credit conditions improved moderately from the prior reporting period. Equity market volatility decreased further, as did corporate financing costs for a number of District firms. Business lending increased, with contacts noting a pickup in demand for the financing of equipment and commercial real estate. Contacts also reported an uptick in leveraged lending for dividend recapitalizations and strategic acquisitions. Banking contacts continued to cite competitive pressure on structure and pricing for traditional and leveraged business lending, particularly from nonbank financial institutions willing to take on higher credit risk. Growth in consumer loan demand was steady over the reporting period, with an increase in applications for credit cards, continued growth in auto lending, and an uptick in mortgage originations and home equity lending.
Prices and Costs
Cost pressures increased, but remained modest. Overall, industrial metals prices changed little, although contacts noted some increases in steel, copper, and nickel prices. Energy costs remained elevated. Competition put downward pressure on retail prices; with little change in wholesale prices, there was some compression in retail margins. Contacts again reported cost pressures for retail meat and dairy items, as wholesale prices for both remained elevated. In addition, a contact noted that shortages were driving up leather prices. Wage pressures increased, primarily for skilled workers. Non-wage labor costs were little changed.
Agriculture
The District's corn and soybean crops made up ground after a late start to planting as favorable weather helped plants emerge more quickly than the five-year average. The consensus among contacts was that the corn and soybean crops were in excellent shape, but were unlikely to set records when harvested because of the late plantings. Corn, soybean, and wheat prices moved down during the reporting period. More farmers than a year ago took advantage of the spring rally in crop prices to lock in a profit on a larger portion of their expected harvest. Hog prices moved higher as disease affected supplies. Farmers received lower prices for milk and cattle, yet these prices remained well above levels necessary to cover the costs of production.