Beige Book Report: Chicago
December 2, 2015
Growth in economic activity in the Seventh District continued at a modest pace in October and early November. Gains in construction and real estate were moderate, while growth in consumer and business spending remained modest. In contrast, there was little change in the level of manufacturing production. Credit conditions were about the same as during last reporting period. Raw material and most retail prices were little changed. Wage pressures remained limited. District corn and soybean harvests exceeded expectations, and most agricultural commodity prices fell.
Consumer Spending
Growth in consumer spending continued at a modest pace in October and early November. Overall, non-auto retail sales continued to increase at a modest pace. Traditional retailers reported mixed views and greater uncertainty surrounding holiday sales this year relative to last year, while internet retailers expected sales to increase at a faster rate. New and used light vehicle sales remained strong, and leasing activity increased noticeably. Low interest rates and extended loan terms continued to support increases in light vehicle demand. Relatively low gasoline prices reinforced an ongoing shift in the mix of light vehicle sales toward light trucks, lifting average transaction prices.
Business Spending
Growth in business spending slowed to a more modest pace in October and early November. Most retailers and manufacturers indicated that their inventories were at comfortable levels. Current capital spending slowed and now appears in line with the modest plans for capital outlays that contacts have reported for a while. Current expenditures were primarily focused on replacing industrial and IT equipment, though spending on structures picked up. Auto suppliers continued to report plans to expand capacity, with attendant hiring and capital spending to follow suit. Overall, though, the pace of hiring slowed notably, particularly for non-auto-related manufacturers, and hiring plans remained modest. Staffing firms reported slower activity, with one firm noting a widespread decline in orders across industries and skill types. That said, labor demand continued to be strongest for skilled workers, especially in many professional and technical occupations, sales, and skilled manufacturing and building trades. Several contacts reported having trouble finding skilled labor and that turnover rates were higher than desired.
Construction and Real Estate
Growth in construction and real estate activity picked up to a moderate pace over the reporting period. Demand for residential construction increased moderately for both single-family and multi-family homes, in both urban and suburban markets. Multiple real estate contacts noted that after rising throughout most of 2015, home sales have slowed and the pace of home price growth has diminished. Contacts indicated that growth in home values would likely remain low until the recently added inventories of homes-for-sale are absorbed during the spring selling season. Commercial real estate activity continued to increase moderately. Growth was again widely distributed across the retail, industrial, and office segments, and contacts noted increasing demand for both for-sale and for-lease properties. Commercial rents increased slightly, while commercial vacancy rates and the availability of sublease space continued to decline.
Manufacturing
Manufacturing production growth slowed to near zero in October and early November, with several contacts indicating that it feels as if manufacturing is in a recession. Although the auto industry continued to experience solid gains, most other industries saw limited growth or reported declines in activity. Auto industry contacts expect sales and production levels for next year to be about equal to this year's totals. Capacity utilization in the steel industry declined, and specialty metals manufacturers reported weaker demand. Exporters continued to indicate that soft global demand and the stronger U.S. dollar were dampening new orders. Weak demand for agriculture and mining machinery continued to be a drag on the heavy machinery industry. In contrast, transportation activity continued to increase at a modest pace.
Banking and Finance
Credit conditions were little changed on balance over the reporting period. Financial market volatility increased slightly, but remained lower than in recent months. Loan demand from large and middle market firms fell; however, contacts noted a slight uptick in small business lending. Consumer loan demand increased slightly, with multiple contacts citing strong demand for auto loans. Mortgage lending standards loosened slightly. In particular, one contact noted a shift towards non-conforming loans and more competitive pricing.
Prices and Costs
Cost pressures remained subdued in October and early November. Steel prices declined, while the prices of other primary metals and energy remained low. Prices charged by upstream producers generally were little changed; downstream, most retailers reported stable pricing, though grocers reported downward pressure on prices. Wage pressures were subdued for most occupations. However, wages were up for workers in higher-skilled occupations, where contacts indicated personnel have become increasingly hard to find, particularly in health care, scientific, and technical industries. In addition, contacts reported that minimum wage initiatives were putting upward pressure on wages for lower-skilled positions. Some contacts indicated they were reducing benefits in order to contain labor costs and avoid increasing their own prices. A staffing firm continued to report moderate wage increases. Growth in non-wage costs ticked up, and many contacts described uncertain and unpredictable increases in health insurance costs.
Agriculture
The condition of the District's corn and soybean crops improved further in October and early November. A record harvest is anticipated for soybeans; corn yields, however, are down from last year. The District's harvest progressed quickly, which reduced crop processing costs for most producers. Corn, soybean, and wheat prices all fell, and some operators reportedly were storing more of their harvest on their farms in the hope of an increase in prices down the road. Even with these declines, crop prices remained high by international standards, holding back export demand. Overall, crop operations faced somewhat better prospects than previously expected due to higher-than-anticipated yields and lower-than-expected costs. Nonetheless, contacts continued to be concerned about an increasing number of crop operations coming under financial stress over the coming year. Hog and cattle prices fell over the reporting period, while milk prices remained at levels too low to cover production costs.