Beige Book Report: Chicago
June 3, 2015
Growth in economic activity in the Seventh District remained moderate in April and early May, and contacts expected growth to continue at a similar pace over the next six to twelve months. Consumer spending, business spending, and manufacturing production all grew moderately, while construction and real estate activity increased at a somewhat slower pace. Credit conditions improved some. Cost pressures generally changed little, with low prices for most raw materials and a slight increase in wages. Overall, crops prices fell and livestock prices rose.
Consumer Spending
Growth in consumer spending was moderate in April and early May. Contacts reported strong sales in the restaurant, entertainment, and sporting goods sectors, while the seasonal pickup in home furnishings and lawn and garden equipment came in as expected. Relatively slower growth persisted in apparel and food and beverages. Sales at high-end and discount stores were stronger than at traditional middle-market stores. New and used vehicle sales continued at a strong pace, and the pace is expected to persist through 2016. Despite recent increases, relatively low gas prices continued to shift the sales mix from cars to light trucks and SUVs.
Business Spending
Growth in business spending remained moderate. Most manufacturers and retailers reported comfortable inventory levels. Exceptions included steel service centers, where stocks remained elevated because of the large volume of imports in the beginning of the year, and auto dealers that sell high volumes of cars, where inventories were elevated because of the shift in demand towards light trucks. The pace of capital spending picked up somewhat and plans for the next six to twelve months continued to indicate steady growth in expenditures. Outlays were again primarily for replacement of industrial and IT equipment, though many contacts also reported spending for capacity expansion. Of those currently expanding capacity, most reported that increased demand was motivating the increase, though many also said the increase was a by-product of replacing obsolete equipment with newer capital. Employment growth picked up some since the last reporting period and contacts continue to expect moderate growth over the next 6 to 12 months. Many contacts said it was becoming more difficult to retain employees. In addition, a staffing firm reported steady demand for its services, with ongoing difficulty filling openings with qualified workers. Contacts continued to indicate that demand was strongest for skilled workers, particularly for many occupations in professional and technical areas and in skilled manufacturing and building trades.
Construction and Real Estate
Construction and real estate activity increased modestly on balance over the reporting period. Demand for residential construction ticked up across all sectors, but some contacts questioned whether the strong pace of multi-family construction can be sustained. Pent-up demand from the winter weather resulted in a modest increase in home sales despite a tight supply of new listings, particularly in the entry-level single-family market. Residential rents and home prices were up slightly. Nonresidential construction activity was somewhat higher, driven by demand for industrial buildings and offices. Commercial real estate activity grew at a strong pace, particularly in urban centers and select suburbs. Contacts reported that new hotel and office developments in downtown Chicago were forcing retailers to relocate, and that in the best locations retail rents and occupancy rates were at all-time highs.
Manufacturing
Manufacturing production continued to grow at a moderate pace in April and early May. The auto industry remained a source of strength for the District, with contacts citing improvements in the labor market and low gasoline prices as bolstering demand. Growth in the aerospace industry also remained strong. Capacity utilization in the steel industry picked up from the previous period as imports slowed. However, steel service centers' order volumes remained low. Specialty metals manufacturers reported slight gains in new orders, with the exception of those supplying the oil and gas industry, who continued to experience slowing orders. Sales of heavy trucks grew steadily, supported by low diesel fuel prices and improvements in the overall economy. Demand for heavy machinery continued to grow slowly, with steady demand for construction machinery offset by weak demand for agricultural and mining equipment. Manufacturers of construction supplies again reported slow but steady growth. Contacts across sectors with significant overseas exposure noted that the strong dollar was hurting sales.
Banking and Finance
Credit conditions continued to improve over the reporting period. Financial market volatility remained low and credit spreads declined slightly. Contacts reported a small uptick in business loan demand and credit line utilization from both small and large firms. Middle market loan demand was weaker, especially from those in the oil and gas industry, although demand for owner-occupied commercial real estate and equipment financing remained strong. Consumer loan demand flattened, except for mortgage originations, which increased slightly. Mortgage rates increased over the reporting period, leading to a decline in mortgage refinancing volume. Multiple contacts cited low home equity loan utilization as evidence that consumers are continuing to deleverage. Pricing competition for prime and super prime auto loans remained strong amid steady auto loan demand. Consumer credit quality improved slightly.
Prices and Costs
Overall, cost pressures changed little in April and early May. Energy prices were up slightly, but remained low. Steel and other primary metals prices also remained low, and retail prices were little changed. Food prices overall continued to decline slightly, and price increases for fresh meat and dairy products cooled somewhat. Wage pressures increased slightly. Some retail contacts noted higher minimum wages as well as the planned wage increases by major retail chains, while contacts across industries reported a willingness to raise wages when necessary to attract workers as well as to retain their most productive employees. Wage pressures continued to be more pronounced for high skilled workers than for low skilled workers.
Agriculture
Corn and soybean planting proceeded rapidly, exceeding the pace of last spring. The emergence of corn and soybean plants was generally ahead of the five-year average. Although precipitation has been adequate for most of the District, there were drought conditions in some parts of Wisconsin. The good start to the year raised expectations of a big fall harvest and helped push corn and soybean prices lower. Strong production pushed milk prices lower, yet some dairy product prices were higher, especially butter. Hog prices increased from their recent lows, as supplies became tighter due to a seasonal decline in production. Cattle prices remained high. Poultry flocks, especially egg layers in Iowa, were hit hard by bird flu, and egg prices increased in response.