Beige Book Report: Chicago
January 13, 2016
Economic activity in the Seventh District continued to increase at a modest pace in late November and December, but contacts were optimistic that growth would pick up some over the next 6 to 12 months. Consumer and business spending, construction, and real estate activity all rose at modest rates while gains in manufacturing production picked up to a more moderate pace. Financial conditions tightened slightly. Both price and wage pressures remained subdued. Farm incomes declined as the large harvest pushed product prices down faster than input costs.
Consumer Spending
Growth in consumer spending continued at a modest pace over the reporting period. Contacts reported stronger sales in the home improvement, general merchandise, hobby, and entertainment sectors, but weaker sales of apparel and food and beverages. Low farm income was reported to be hurting retail activity in rural parts of the District. New and used light vehicle sales remained strong. Low gasoline prices continued to shift the mix of sales from cars to light trucks. Contacts expect sales to remain strong in 2016, though there was some disagreement as to whether the sales pace would be higher or lower than in 2015.
Business Spending
Growth in business spending remained modest in late November and December. Most retailers indicated that inventories were at comfortable levels, though warm weather led to higher-than-desired inventories of seasonal clothing and light truck inventories were reportedly tight. Steel service center inventories remained elevated. Current capital spending and plans for future outlays both picked up some, but remained modest. New spending was primarily for replacing industrial and IT equipment, though there was some pickup in outlays for capacity expansion. The pace of hiring remained slow, though more contacts noted plans to increase their workforces over the next 6 to 12 months than in the previous reporting period. Demand continued to be strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. Contacts, however, also cited some pickup in demand for lower-skilled labor, particularly production workers. A staffing firm again reported flat growth in billable hours.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction edged up, with improvement reported in both the single and multi-family markets and across urban and suburban areas. Residential rents, home sales, and home prices increased slightly. Demand for nonresidential construction rose modestly. A number of contacts reported growth in the office segment, while one noted that demand for automotive manufacturing construction remained high. Although commercial real estate activity slowed some, it remained strong and broad-based across the retail, industrial, and office segments. In Chicago, a contacted indicated that the supply of commercial space continued to tighten because construction of new buildings had been slow and older, smaller buildings are being converted into residential space or hotels. Commercial rents increased slightly, while commercial vacancy rates and the availability of sublease space decreased a bit.
Manufacturing
Gains in manufacturing production picked up to a moderate pace in late November and December. Growth remained strong in the auto and aerospace industries and picked up slightly in most other industries. Overall demand for steel remained weak, pushing capacity utilization lower and reducing import volumes. On balance, specialty metals manufacturers reported little change in demand, with suppliers to the auto and aerospace industries still seeing strong orders, while those producing primarily for the oil and gas industry continued to experience weakness. Soft demand for agriculture and mining machinery remained a drag on the heavy machinery industry.
Banking and Finance
Financial conditions tightened slightly on balance over the reporting period. Financial market contacts noted greater illiquidity in the bond market. In addition, a contact in commercial real estate financing reported a decline in interest from institutional investors amid concern that the commercial real estate market was overheated. In contrast, contacts continued to report strong competition for commercial and industrial loans, and one contact indicated that growth in online lending (also known as peer-to-peer or marketplace lending) was contributing to the competition. Growth in small and middle-market business loan demand slowed slightly. Consumer loan demand was little changed, though contacts continued to note strong activity in the auto market. Demand for credit card debt ticked up as usage increased and payment volume decreased. Residential mortgage demand was little changed. Contacts in the agriculture sector noted that lower farm incomes this year have made agricultural financing more important, but also harder to get.
Prices and Costs
Cost pressures continued to be subdued in late November and December. Commodity prices remained low. Retail prices were little changed, with the exception of higher overall motor vehicle transaction prices (some of which may be the result of the shift in sales mix toward larger, more expensive vehicles). Prices charged by upstream producers were also little changed. Those firms reporting upstream price increases were more likely to cite increased demand than rising costs. Wage pressures remained mild overall, but were generally stronger for management and professional and technical occupations. In general, growth in non-wage costs also continued to be subdued, though some contacts reported sizeable increases in healthcare costs.
Agriculture
District farm incomes declined as the large harvest pushed product prices down faster than input costs. Most contacts expect that farmers will face tighter (and possibly negative) margins this year. Many farmers are holding on to much of their corn and soybean harvest in the hope that prices will go up before they need to sell them to fund 2016 operations. Many are also waiting on purchasing inputs in the hope that seed and fertilizer prices decline further. One contact reported that more farmers are testing fields for nutritional deficiency before applying fertilizer in an effort to reduce input costs. Dairy, egg, hog, and cattle prices moved lower, although cattle prices rallied some toward the end of the reporting period.