Beige Book Report: Chicago
September 2, 2015
Growth in economic activity in the Seventh District remained moderate in July and early August, and most contacts expect activity to rise at a similar pace over the next 6 to 12 months. Growth remained moderate for consumer spending, business spending, and manufacturing production, while construction and real estate activity continued to increase at a modest pace. Credit conditions were little changed. Cost pressures also were about the same as during the last reporting period, with prices for most raw materials remaining low and limited wage growth. Downstream, there was little change in retail prices. The condition of the corn and soybean crops was uneven across the District, with record yields possible in some areas and low yields likely in others.
Consumer Spending
Growth in consumer spending continued at a moderate pace over the reporting period. Spending on discretionary items such as sporting goods, entertainment, general merchandise, and apparel generally increased at a faster rate than spending on necessities such as food and beverages. New and used vehicle sales continued to be strong. Vehicle transaction prices moved up further, increasing dealer profitability. Relatively low gas prices continued to cause a shift in consumer preferences toward light trucks.
Business Spending
Growth in business spending remained moderate in July and early August. Most retailers and manufacturers reported comfortable inventory levels, though stocks remained slightly elevated at steel service centers because of the large volumes of imports over the past year. Some retail contacts said they planned to carry lower-than-normal inventories of winter-related items because of forecasts that a strong El Niño effect will raise temperatures this winter. The pace of capital spending remained moderate. While a declining number of contacts reported spending for expansion, there were increased reports of mergers and acquisitions. Hiring and hiring plans also grew at a moderate pace. Labor demand was again strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. A staffing firm reported declining revenues, which they attributed primarily to moves by their clients toward hiring more permanent workers and toward more outsourcing.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction ticked up, with building primarily concentrated in urban single-family markets. Residential rents, home prices, and home sales all increased slightly, while home affordability was little changed. Demand for nonresidential construction edged up. Commercial real estate activity again increased moderately, with growth spread broadly across the retail, industrial, and office segments. Commercial rents were up slightly, while commercial vacancy rates moved down and availability of sublease space was little changed. Contacts reported particularly strong demand in urban areas, but noted that both the demand for and quality of buildings in suburban markets have shown improvements as well.
Manufacturing
Manufacturing production continued to grow at a moderate pace in July and early August. Growth in the auto and aerospace industries remained strong, with greater-than-expected gains in auto sales. Trucking firms' fleet expansions led to a moderate increase in heavy truck production. Growth in most other manufacturing industries was more limited. Capacity utilization in the steel industry remained low, as demand grew only slightly, and inventories at steel service centers remained elevated. Steel imports were still at high levels, though contacts expect that recently filed trade cases will slow the pace of imports going forward. On balance, specialty metals manufacturers reported mild growth, with those primarily serving the auto and aerospace industries seeing strong growth while those primarily serving the oil and gas industry experienced declining orders. Demand for heavy machinery was flat, as steady growth in construction machinery was offset by declines in agricultural machinery. 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 increased, while credit spreads and leverage remained largely unchanged. New loan demand from small businesses weakened, though credit line utilization ticked up. Middle- market loan demand increased, driven primarily by recapitalization. Commercial real estate lenders continue to be concerned that valuations are too high, leading some to put limits on the size of loans they will make for financing new purchases. Consumer credit demand increased slightly, with an uptick in applications from lower quality applicants. Demand for mortgage funds increased with rising home prices, though there was downward pressure on mortgage rates as competition among lenders picked up. Auto loan demand remained strong, and one contact reported pressure to extend loan terms in response to already low spreads and highly competitive pricing.
Prices and Costs
Cost pressures were again subdued in July and early August. Energy prices remained low, along with prices of steel and other primary metals. Most retail prices changed little, with firms that did report price increases most likely citing increased demand for their products as opposed to rising costs. Wage pressures remained mild and were generally stronger for higher-skilled occupations. However, many contacts that paid workers near the minimum wage reported increasing wage pressures and greater difficulty finding workers. A staffing firm reported accelerating wages, though much of the ramp-up appeared to be because of a shift in the occupation mix toward higher-skilled workers. Non-wage costs declined slightly as fewer contacts reported pressures from benefits.
Agriculture
The condition of the corn and soybean crops was uneven across the District, with record yields possible in some areas and low yields likely in others. Nationally, yield expectations moved higher, contributing to lower corn and soybean prices. Corn and soybean producers who locked in prices during the rally earlier in the summer should be able to break even on a portion of their output, but most others likely would not cover input costs if they end up selling their harvest at current prices. Wheat prices were also down. Hog prices were flat, dairy prices moved up, and cattle prices moved down. Poultry houses started to receive birds to replace those culled because of the influenza outbreak earlier this year, but the recovery has been slow, so contacts expect egg and turkey production to remain lower than normal for the rest of the year. Egg prices increased again.