Beige Book Report: Chicago
July 15, 2015
Growth in economic activity in the Seventh District was moderate in late May and June, with the pace of advance appearing to be a bit slower than during the previous reporting period. Consumer spending, business spending, and manufacturing production all grew at moderate rates, while construction and real estate activity increased modestly. Credit conditions were little changed. Cost pressures were also little changed, as prices for most raw materials remained low and wage growth remained limited. Wet weather reduced farmers' expectations for crop yields.
Consumer Spending
Growth in consumer spending continued at a moderate pace. Retail sales slowed slightly in late May but then appeared to strengthen in June. Contacts reported a pickup in sales of apparel and outdoor sports equipment, while slower growth persisted in the food and beverage sector. The cool, rainy weather hurt sales of lawn and garden equipment, power equipment, and air conditioning units. High-end retailers continued to outperform lower-end stores. New and used vehicle sales strengthened further, leading dealers to revise up their expectations for sales in 2015. The strong demand also led to an increase in average transaction prices, particularly for used vehicles. The product mix continued to shift away from cars and toward trucks.
Business Spending
Growth in business spending remained moderate. Most manufacturers and retailers reported comfortable inventory levels, though inventories remained elevated at steel service centers because of large volumes of imports earlier in the year and dealers' stocks of light trucks were lower than desired because of stronger-than-expected demand. The pace of capital spending was little changed, as were spending plans for the next six to twelve months. The majority of contacts reported that outlays were primarily to replace industrial and IT equipment, and spending for capacity expansion pulled back some. Several contacts in Illinois expressed concern that the state budget impasse was slowing business expansion and that non-profit service providers were particularly concerned about their future funding. Hiring and hiring plans were little changed. Labor demand was again strongest for skilled workers, particularly for many occupations in professional and technical areas, sales, and in skilled manufacturing and building trades.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Most builders reported steady demand for residential units, and noted that new construction was primarily concentrated in urban areas. Home sales, home prices, and residential rents all increased modestly and contacts expected the slow pace of growth to continue over the next 12 months. Nonresidential construction activity also increased modestly, driven primarily by demand for industrial buildings. Commercial real estate activity increased moderately. Vacancies declined and the availability of sublease space ticked down.
Manufacturing
Manufacturing production continued to grow at a moderate pace in late May and June. Growth in the auto industry remained strong, while growth in most other manufacturing industries was more modest. Sales of heavy trucks rose steadily, while sales of heavy machinery changed little, with steady demand for construction machinery offset by weak demand for agricultural and mining equipment. Capacity utilization in the steel industry picked up some, but remained low, with demand growing more slowly than expected. Specialty metals manufacturers reported a steady pace of new orders, with stronger results for those primarily serving the auto industry and weaker bookings for those primarily serving the heavy machinery and oil and gas industries. Manufacturers of construction supplies again reported slow but steady growth.
Banking and Finance
Credit conditions were little changed over the reporting period. Financial market volatility was slightly higher, while credit spreads declined marginally. Business loan demand and pricing were flat. The commercial real estate market was an exception, with multiple contacts reporting growth and some expressing concern that the market was overheating. Consumer loan demand was little changed on balance. Mortgage and refinancing activity was steady. Contacts continued to report that competitive pricing for prime auto loans was leading to lower spreads as well as further expansion of sub-prime auto lending. The credit quality of borrowers continued to improve across loan categories and contacts reported that delinquencies were at a post-recession low.
Prices and Costs
Overall, cost pressures were subdued in late May and June. Energy prices remained low, as did prices of steel and other primary metals. Most retail prices changed little. On balance, food prices continued to decline, especially for pork and fresh produce, though beef and dairy prices increased some. Overall wage pressures were again modest, though they remained stronger for occupations where contacts were having difficulty filling openings. A staffing firm reported that wage growth picked up some, and that impending minimum wage increases would likely force their clients to further increase wages in order to maintain the premium that they pay in order to attract talent. Non-wage costs showed little movement.
Agriculture
Widespread rains saturated fields across much of the District, damaging crops and restricting fieldwork. Planting extended longer than normal and the emergence of soybeans was behind the five-year average. In contrast, corn planting finished and plants emerged before the rains hit. Corn, soybean, and wheat prices rose as yield expectations declined. High water levels on the Mississippi River stalled the loading and shipping of grain barges. Both higher feed costs and lower prices for hogs, milk, and cattle led to tighter margins for livestock producers. Egg prices remained elevated, as bird flu continued to hurt production. In addition to the large number of deaths, poultry houses were taking longer than expected to clean facilities and prepare for replacement birds.