Beige Book Report: Chicago
October 14, 2015
Growth in economic activity in the Seventh District slowed to a more modest pace in late August and September, but most contacts expected growth to pick up somewhat over the next 6 to 12 months. Gains in business spending were moderate, but growth in consumer spending, manufacturing production, and construction and real estate was slower. Credit conditions were little changed. There was also little change in raw materials and retail prices, and limited wage and non-wage cost pressures. Corn and soybean crop conditions improved some as the harvest began, while the profitability of crop operations ranged from substantial losses to break-even.
Consumer Spending
Growth in consumer spending slowed to a more modest pace over the reporting period. Retail sales were little changed overall, with contacts reporting higher sales of gift items and jewelry, flat food and beverage sales, and lower apparel, furniture, and appliance sales. Contacts in the tourism industry in Michigan reported strong summer traffic, with higher overall spending than last year. Both new and used light vehicle sales continued to be strong. Vehicle transaction prices continued to rise, though at a slower pace, as manufacturers increased incentives. Relatively low gasoline prices continued to cause a shift in sales toward light trucks.
Business Spending
Growth in business spending remained moderate in late August and September. Most retailers indicated that inventories were at comfortable levels, while many manufacturers reported an undesirable increase in their inventory-to-sales ratio. Steel service center inventories remained especially elevated. Strong sales kept motor vehicle dealer inventories low, particularly for light trucks. The pace of current capital spending remained moderate, but many contacts reported a slowdown in planned capital outlays. Expenditures were primarily focused on replacing industrial and IT equipment, though spending on transportation equipment picked up. Spending for expansion was relatively limited, and a number of manufacturing contacts reported delaying major equipment purchases because they expect weaker demand in the future. The pace of hiring also remained moderate, but hiring plans slowed some. Labor demand continued to be strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. One contact indicated that the construction of a new facility took longer than expected and was over budget because of a shortage of skilled trade workers. A staffing firm again reported flat revenue growth.
Construction and Real Estate
Construction and real estate activity increased modestly, on balance, over the reporting period. Demand for residential construction was little changed. One contact noted a decrease in traffic and new contracts in suburban markets, but said that the value of homes has continued to increase for prime locations in the Chicagoland area. Residential rents increased modestly, while home sales, home prices, and home affordability were little changed. Most nonresidential construction contacts also reported little change in demand, though one contact reported moderate increases for retail and office spaces. Commercial real estate activity continued to increase moderately. Growth was widely distributed across the retail, industrial, and office segments, and contacts noted increasing demand for both for-sale and for-lease properties. Commercial rents picked up, while commercial vacancy rates and availability of sublease space decreased slightly. Contacts, however, noted that lenders appeared cautious, possibly in response to the increased volatility in the financial markets.
Manufacturing
Manufacturing production growth slowed to a more modest pace in late August and September. While the auto, heavy-duty truck, and aerospace industries continued to experience solid gains, most other industries saw limited growth. Demand for steel remained weak and capacity utilization fell to one of its lowest points for the year. Steel imports were down some, but still high. On balance, specialty metals manufacturers reported weaker demand: The only indications of strength came from suppliers of the auto and aerospace industries, while those primarily supplying the oil and gas industry reported especially weak orders. In addition, a number of specialty metals manufacturers indicated that their backlogs had declined unexpectedly over the reporting period. Weak demand for agriculture and mining machinery continued to be a drag on the heavy machinery industry, leading to layoffs at some producers. 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 declined slightly, but remains high relative to recent history. Small business loan demand increased, primarily in the manufacturing and transportation sectors. Business loan quality continued to improve even though contacts noted that difficulty finding high-quality lending opportunities was resulting in some looser credit standards. Consumer credit demand and loan quality increased slightly over the reporting period. One contact reported expanding credit lines to existing customers and lower quality borrowers. Mortgage loan demand increased marginally and origination quality remained strong. Auto loan demand remained strong, and contacts again highlighted a trend of extending loan terms in response to already low spreads and highly competitive pricing.
Prices and Costs
Cost pressures remained subdued in late August and September. Energy and steel prices declined, while the prices of other primary metals remained low. Most retail prices and prices charged by upstream producers were little changed. Those firms reporting price increases were more likely to cite stronger demand or increased pricing power than higher costs. Wage pressures remained mild overall but were generally stronger for higher-skilled occupations relative to lower-skilled occupations. There were a few reports from manufacturers of 5 to 10 percent across-the-board wage increases, but most contacts said their wage increases were to compensate individuals who demonstrated high productivity. Growth in non-wage costs remained subdued.
Agriculture
The condition of the District's corn and soybean crops improved some over the reporting period. Relative to last year, crop conditions were better in Iowa and Wisconsin, mixed in Michigan, and worse in Illinois and Indiana. Harvesting was somewhat behind the normal pace, especially for corn, which was maturing late. Overall, yield reports suggest that the corn harvest won't reach last year's record level, while the soybean harvest may surpass last year's record. Corn prices moved up and were higher than a year ago, while soybean prices moved down and were lower than a year ago. Because of a wide range in yields and differing rental arrangements, the profitability of crop operations ranged from substantial losses to just breaking-even. Wheat prices recovered some, as did milk prices. Hog and cattle prices were lower. Poultry operations continued to rebuild from the avian influenza outbreak, and egg prices eased as production recovered. Producers, however, were concerned about a repeat outbreak as the fall migration of wild birds began.