Beige Book Report: Chicago
October 15, 2014
Growth in economic activity in the Seventh District remained moderate in September, and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions and cost pressures changed little on balance. Corn and soybean prices fell as a big harvest got underway, but milk, hog, and cattle prices increased.
Consumer Spending
Growth in consumer spending remained moderate in September, led by continued strength in auto sales. Lower gas prices spurred sales of larger vehicles, especially light trucks, and consumers continued to take advantage of low lending rates and easing loan standards. Several auto dealers also noted that leasing activity had finally returned to pre-recession levels. Non-auto retail spending increased slightly, as growth picked up for discretionary spending categories in recent weeks. Retail contacts generally expected that sales in the upcoming holiday season would be up slightly relative to a year ago.
Business Spending
Business spending also continued to grow at a moderate pace in September. Inventories remained at comfortable levels for most retailers and manufacturers. Non-auto retailers reported adding more to their holiday season inventories than they did last year. Capital expenditures and capital spending plans steadily increased, with expenditures primarily going toward replacing IT and industrial equipment. A number of manufacturing contacts, especially auto suppliers, reported that demand was strong enough to justify expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover. Many manufacturing contacts added hours to meet increased demand. Holiday hiring began, and retailers plan to hire slightly more holiday workers than last year. Demand remained strong for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. Contacts again mentioned expanding internal training programs to address worker shortages and an increased willingness to pay higher wages. A staffing firm reported strong order books, but noted that improving labor market conditions in the District were leading to increased difficulties finding qualified workers.
Construction and Real Estate
Construction and real estate activity also increased moderately over the reporting period. Residential construction continued to expand in both the single- and multi-family markets. An industry contact noted that with homebuilders beginning to exhaust their existing inventories of vacant in-fill lots, single-family construction might slow in some areas of the District until planned projects start to come online. Builders also noted improved availability of financing for new projects, but indicated that difficulties in finding skilled labor have often delayed construction. Home sales were somewhat lower, and growth in home prices and residential rents slowed. Real estate contacts expected sales to return to normal levels in the coming months, pointing to recent increases in online and open-house traffic. Nonresidential construction increased, driven in large part by demand for industrial and office buildings. Automotive parts manufacturers, in particular, remained a source of demand for industrial buildings. Commercial real estate activity continued to expand, with contacts noting strong demand for medical office buildings. Vacancies ticked down, rents rose, and leasing of industrial buildings, office space, and retail space all increased.
Manufacturing
Manufacturing continued to grow at a moderate pace in September. The auto, aerospace, and energy industries remained a source of strength for the District. Light vehicle production increased as manufacturers built up inventories in anticipation of continued growth in sales. Demand for steel steadily increased and most specialty metal manufacturers’ order books continued to fill. Led by the U.S. market, demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weaker demand for agricultural and mining equipment. Slowing demand has led some agricultural machinery manufacturers to start offering incentives such as extended warranties, low interest rate loans, and special financing to help dealers sell used equipment. Manufacturers of construction materials reported a modest increase in demand, but still were disappointed in the slow pace of improvement in the housing market. Utility contacts reported that weather-adjusted load growth was flat over the reporting period.
Banking and Finance
Credit conditions were mixed in September. Financial market participants noted slightly tighter financial conditions, pointing to an increase in equity market volatility and widening corporate bond spreads. In contrast, banking contacts cited looser conditions, with business and consumer lending both increasing. Business loan demand for equipment and commercial real estate financing rose, as did utilization of credit lines for working capital. Banking contacts also noted that despite elevated acquisition multiples, their clients continue to seek opportunities for mergers and acquisitions; this was especially the case for large corporations with ample cash balances. Consumer loan demand increased, with contacts citing some additional growth in credit card lending, continued strong growth in auto lending, and an uptick in mortgage lending.
Prices and Costs
Cost pressures changed little on balance over the reporting period. Energy costs declined. Steel and aluminum prices increased. A contact noted that supply constraints in the Midwest pushed up the local price for aluminum to a new high relative to benchmark spot prices. A number of manufacturers expected to be able to raise prices, especially those in the auto industry, where capacity is increasingly constrained. Retail prices were down slightly as contacts reported more generous sales promotions. Meat and dairy prices remained elevated, though contacts did not report price pressures for other grocery items. Overall, wage pressures were modest, but a number of contacts again reported moderate wage pressures for skilled workers. Non-wage labor costs changed little from the previous reporting period. Many contacts reported passing some of their higher health care costs on to employees in the form of higher co-pays or deductibles.
Agriculture
Overall crop conditions were very good at the start of the harvest. The District should see record corn and soybean harvests. Early results indicated yields for corn and soybeans would range from above-average to record-high levels. The huge anticipated harvests pushed down corn and soybean prices. Crop income was lower than a year ago as higher yields were insufficient to offset lower prices. Crop insurance will cover some of the lost income, but farmers already are planning to trim costs for next year, particularly spending on farm equipment and other capital purchases. Corn farmers helped bid up cattle prices, with the intention of using the abundant harvest as feed for their own cattle production rather than selling it. Hog and milk prices were higher as well, contributing to expansions in output of these commodities.