Beige Book Report: Chicago
March 02, 2016
Economic activity continued to increase at a modest pace in January and early February. Consumer and business spending, construction, and real estate activity all rose at modest rates, while manufacturing production grew at a moderate pace. Financial conditions tightened some. The turmoil in financial markets also led contacts to express greater uncertainty and more pessimism about the pace of growth over the next 6 to 12 months. Both price and wage pressures remained subdued. Crop farmers continued to cut capacity after a year of low incomes.
Consumer Spending
Growth in consumer spending remained modest, and the pace of growth slowed some over the reporting period. Sales in the general merchandise, hobby, and jewelry sectors were stronger while sales in the apparel and food and beverage sectors were weaker. Contacts expressed disappointment in the extent to which lower gas prices and improvements in the labor market were translating into sales growth. They suggested that some households were working off debt instead of spending and that the increase in financial market volatility had made consumers more reluctant to spend. The pace of sales of new and used light vehicles slowed some but remained strong and exceeded dealers' expectations. Increased leasing over the reporting period contributed to the strong sales numbers. Low gasoline prices continued to shift the sales mix from cars to light trucks.
Business Spending
Growth in business spending remained modest in January and early February. Most retailers indicated that inventories were at comfortable levels, though some auto dealers reported shortages of popular models, and inventories of heavy trucks were higher than desired. Steel service center inventories declined some but remained elevated. Contacts expect steel inventories to return to normal levels sometime in the second quarter of 2016. Several contacts expressed concern that the State of Illinois's fiscal problems would affect future activity, though they did not indicate any impact on current hiring or spending decisions. In contrast, a number of contacts noted that heightened financial market and international uncertainties had led them to hold off on making planned capital expenditures until they were more certain about economic conditions. Despite these comments, growth in current capital spending and plans for future outlays picked up some over the reporting period, though it remained modest for both. The reported pace of hiring picked up some, but remained slow overall. There also was a pickup in the number of contacts saying they planned to increase workforces over the next 6 to 12 months. Demand continued to be strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. Staffing firms again reported flat growth in billable hours and difficulty filling orders at the wages employers are willing to pay.
Construction and Real Estate
Construction and real estate activity increased modestly on balance over the reporting period. Residential construction expanded modestly, with growth concentrated in the single-family market and spread across urban, suburban, and rural areas. Home sales, home prices, and residential rents all inched up over the reporting period. Nonresidential construction contacts reported little growth on balance, with a slowdown in industrial construction demand and little improvement elsewhere. In contrast, demand for existing commercial real estate space continued to grow robustly, with only a bit of a slowdown from the average pace over the past couple of years. The market for for-lease properties was particularly healthy and was broad-based across the retail, industrial, and office segments. One contact noted that the slow pace of nonresidential construction combined with strong demand for commercial and industrial space was creating concern about space shortages. Indeed, contacts continued to raise concerns that the strong growth may be creating a price bubble.
Manufacturing
Gains in manufacturing production continued at a moderate pace in January and early February. Growth remained strong in the auto and aerospace industries, but was slower in most other industries. Demand for steel picked up some. Specialty metals manufacturers reported a slight pickup 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. Demand for heavy trucks slowed some, while demand for medium trucks held steady, spurred by consistent growth in construction. Manufacturers of construction materials also continued to report slow but steady increases in sales.
Banking and Finance
On balance, credit conditions tightened some over the reporting period. Contacts reported that concerns about slower global economic growth, especially in China, led to declines in equity markets, wider spreads for asset-backed securities, and an increase in financial market volatility. Business loan demand grew slightly over the reporting period and loan pricing remained extremely competitive. Contacts reported an increase in demand for commercial real estate loans and an improvement in commercial real estate loan quality. Overall, consumer credit demand grew slightly and loan quality was little changed. Growth in demand for autos loans remained strong, with ongoing support from longer-term loans for new vehicles and from an increase in subprime loans for used vehicles. Contacts in the agriculture sector noted that lower farm incomes last year have led to a greater reliance on loans to finance operations and that repayment rates have deteriorated.
Prices and Costs
Cost pressures continued to be subdued in January and early February. Energy and metals prices remained low. Retail prices changed little, with the exception of higher average overall motor vehicle transaction prices, which reflect in part the shift in sales mix toward larger, more expensive vehicles. Nonretail contacts also reported little change in prices over the reporting period, with those firms reporting higher prices more likely to cite increased demand than rising costs. Wage pressures remained mild overall and were generally stronger for management and professional and technical occupations. A staffing firm reported that the minimum wage increase in Michigan had led to wage increases for workers whose wages are generally priced at some premium over the legislated minimum. In general, growth in non-wage costs also continued to be subdued, though some contacts reported sizeable increases in healthcare costs.
Agriculture
Crop farmers continued to cut capacity following another year of low incomes coupled with unexpectedly small declines in input costs. There were reports of major downsizings of large operations and of some farms going out of business. Farmers are also cutting capacity by purchasing cheaper but lower-yielding seeds and by selling machinery. Correspondingly, prices for used farm machinery are low because of plentiful supply. Corn, soybean, and wheat prices moved higher during the reporting period, but remained quite low compared to their five-year averages. Dairy, egg, hog, and cattle prices were up from the prior reporting period, but remained low.