Beige Book Report: Chicago
April 13, 2016
Growth in economic activity in the Seventh District picked up to a moderate pace in late February and March, and contacts expressed renewed optimism about the outlook for growth over the next 6 to 12 months. Business spending and manufacturing production increased moderately, while consumer spending and construction and real estate activity grew at a modest pace. Financial conditions improved some. Price and wage pressures tightened, but remained mild overall. Crop prices rose and input costs declined, but not by enough to appreciably improve farmers' earnings prospects.
Consumer Spending
Growth in consumer spending maintained a steady, modest pace over the reporting period. Contacts reported stronger sales in the furniture, restaurant, and tourism sectors, and weaker sales in the electronics and appliances, sporting goods and toys, and food and beverage sectors. Retailers again expressed disappointment that lower gas prices and improvements in the labor market were not providing more of a boost to consumer spending. In contrast to the national data, District dealers generally reported that the pace of sales of new and used light vehicles picked up some and remained strong, and that leasing activity further accelerated.
Business Spending
Growth in business spending rose to a moderate pace in late February and March. Most retailers indicated that inventories were at comfortable levels, though the mild weather left excess stocks of winter-related items and some auto dealers reported undesirably high inventories of certain models. Most manufacturers reported comfortable inventory levels, and contacts said that steel service center inventories had declined to normal levels for the first time since last winter. Some contacts in the financial industry reported that fiscal issues for Illinois and Chicago are becoming major headwinds for their small business clients' strategic decisions. Current capital outlays and plans for future outlays picked up to a more moderate pace. Outlays were primarily for replacing equipment and there was no increase in the number of contacts expanding capacity. Hiring also picked up to a more moderate pace, as did the number of contact saying they planned to increase their workforces in the future. Demand continued to be strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. A number of manufacturers reported more difficulty finding quality entry-level workers and that they were using additional tools to retain current workers, such as reviewing pay more frequently in order to reward their best workers more regularly. A staffing firm 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 slightly on balance over the reporting period. Residential construction edged up, with growth concentrated in single-family markets and in urban areas. Residential rents and home prices rose slightly. A contact in the Chicago area noted that real estate activity was stronger in the central city neighborhoods than in outer-city neighborhoods and the suburbs. Demand for nonresidential construction was little changed, and contacts again highlighted weak demand for industrial construction. Commercial real estate activity rose moderately, with healthy gains in both the for-sale and for-lease markets and particularly strong activity in the retail segment. Commercial rents and availability of sublease space rose modestly, while commercial vacancy rates were little changed.
Manufacturing
While manufacturing production rose at a modest rate early in the reporting period, growth increased to a moderate pace by the end March. Activity remained strong in the auto and aerospace industries and picked up in most other industries. Demand for steel was steady, but contacts expected production to pick up some in the coming months because service centers' inventories have finally declined to desired levels. Most specialty metals manufacturers reported an increase in orders in March after a slow start to the year, with contacts serving the defense industry reporting particularly strong orders. Soft demand for agriculture and mining machinery continued to weigh on the heavy machinery industry, though one contact indicated that the drag from the oil and gas industry was abating. That said, manufacturers primarily serving the oil and gas sector reported adjusting their product offerings toward other industries. Manufacturers of construction materials continued to indicate slow but steady increases in sales, in line with the improvements in the housing market.
Banking and Finance
Overall, financial conditions improved some over the reporting period. Equity markets regained much of their losses from the previous reporting period and volatility subsided. Business loan demand improved marginally; loan pricing remains competitive while volumes declined slightly. Contacts indicated that commercial real estate loan demand remains strong. Consumer loan demand was little changed, on balance. Credit card utilization rates increased, though balances remained steady. Residential real estate loan demand declined some, while auto loan volumes continued to grow steadily.
Prices and Costs
Cost pressures tightened some in late February and early March, but remained mild overall. Most energy and metals prices increased, but remained low. Retail prices changed little, on balance. However, the food and beverage sector continued to experience lower pricing, particularly for meats, while average overall motor vehicle transaction prices moved higher, partially because of the shift in sales towards larger, more expensive vehicles. Nonretail contacts also reported little change in prices over the reporting period; those firms reporting higher prices were equally as likely to cite rising costs as increasing demand for the reason behind the price changes. Wage pressures remained mild overall and were generally stronger for management and professional and technical occupations, though there was an increase in the number of contacts who reported raising wages for low skill entry-level workers. Growth in non-wage costs also remained mild.
Agriculture
Spring arrived early in much of the District, allowing fieldwork to begin. Corn, soybean, and wheat prices moved up, and fertilizer prices and land rents moved down. However, these changes were not large enough to appreciably improve crop farmers' earnings prospects. Cattle prices edged higher, while hog and dairy prices were somewhat lower. The drop in dairy prices was large enough that many operations now face losses unless they had made forward contracts at higher prices.