July 13, 2016
Growth in economic activity in the Seventh District continued at a modest pace in late May and June, and contacts expect growth to remain modest over the next 6 to 12 months. The pace of growth in most sectors was unchanged from the previous reporting period: business spending and manufacturing production grew at modest rates, consumer spending rose moderately, and construction and real estate activity increased slightly. Developments in the banking and finance sector were mixed. Cost pressures were also unchanged, remaining mild. Farmers' earnings prospects remained weak, but improved somewhat with a rally in soybean prices.
Consumer Spending
Growth in consumer spending continued at a moderate pace over the reporting period. Retailers reported sales growth in the apparel, furniture, leisure, and hospitality sectors while sales declined in the general merchandise and food and beverage sectors. A contact in Michigan noted that hotel occupancy rates and revenues were outperforming expectations. Purchases of new and used light vehicles continued to be robust, and leasing activity remained strong. Average motor vehicle transaction prices again moved higher as the mix of sales continued to shift toward larger, more expensive vehicles and because of greater demand for high-tech options.
Business Spending
Growth in business spending remained modest in late May and June. Retail inventories were generally at desired levels and were slightly higher in anticipation of continued gains in sales. Manufacturing inventories were generally at desired levels as well, though stocks at steel service centers remained slightly low, and inventories of heavy-duty trucks were elevated. The pace of current capital expenditures remained modest, while expectations for future spending declined. Current outlays were primarily for updating IT and industrial equipment, though some capacity expansion was occurring, with an increasing number of such reports coming from manufacturing firms. The pace of hiring continued at a modest rate, and there was an uptick in expectations for future hiring. Many contacts indicated that the labor market continues to tighten. Demand remained strong for skilled workers, particularly for many professional and technical occupations, and contacts also reported an increase in demand for sales and production workers. Staffing firms again reported flat growth in billable hours and difficulty filling orders at the wages employers are willing to pay. Demand for electricity was little changed, while demand for transportation services declined slightly.
Construction and Real Estate
Construction and real estate activity increased slightly on balance over the reporting period. Residential construction was little changed, with the strongest reported growth coming in the multi-family segment and in suburban locations. That said, one builder in the Chicago area reported higher inventories of unsold new homes in suburban areas. Home sales increased across most markets and locations, while price growth varied by segment: prices rose strongly for homes under $250,000, were up moderately in the $250,000 to $500,000 segment, and rose slowly for homes priced above $500,000. Demand for nonresidential construction increased slightly, with growth concentrated in industrial construction. One contact reported a pickup in the number of large projects entering the bidding process. Commercial real estate activity rose modestly across market segments, with healthy gains reported in the for-lease market. Commercial rents were little changed, while vacancy rates and availability of sublease space decreased somewhat over the reporting period.
Manufacturing
Growth in manufacturing production remained modest in late May and June. Activity continued to be strong in autos and aerospace, but remained weaker in most other industries. Growth in steel demand picked up, as service centers continued to build inventories after a year and a half of trying to pare back stocks. Steel contacts were optimistic that demand for domestically produced steel would continue to grow with the help of anti-dumping rulings that have imposed very high duties on some imports (particularly from China and Japan) over the next five years. Specialty metals manufacturers reported slight declines in orders on balance: strong demand from auto and aerospace manufacturers was offset by declining demand from other industries, particularly oil and gas. Heavy machinery manufacturers reported little change in demand overall, with poor results in the agriculture and mining segments offsetting stronger demand from construction. Demand for heavy-duty trucks was weak, while steady growth in construction boosted demand for medium duty trucks and construction materials.
Banking and Finance
Developments in the banking and finance sector were mixed over the reporting period. Financial market participants reported a significant increase in volatility, driven primarily by the United Kingdom's vote to exit the European Union. Business loan volume grew slightly, which one contact attributed primarily to refinancing activity. Contacts noted little change in asset quality, though there was some deterioration in the agriculture and metals portfolios. Loan pricing remains competitive. Overall, consumer credit demand grew slightly and loan quality improved. Contacts reported that the low interest rate environment has persisted longer than expected, resulting in greater-than-expected mortgage refinancing volume. Loan-to-value ratios for mortgages decreased and credit quality improved. Demand for auto loans was little changed.
Prices and Costs
Cost pressures were unchanged and remained mild in late May and June. Most energy and metals prices were flat and remained low. Retail prices and prices at upstream firms also were flat on balance. Wage pressures were steady overall, with greater pressure for high-skilled occupations than low-skilled occupations, though there was an increase in the number of reports of plans for wage increases for entry-level workers. Non-wage labor costs were little changed.
Agriculture
Prices for corn and soybeans rallied through the reporting period, though corn prices gave back all of their gains in the second half of June. The price gains led more farmers to lock in prices for the fall harvest, though the increases were not enough to change contacts' expectations that farm incomes will be weak this year. Corn and soybean plants were generally in good shape in most of the District, though contacts said that if the hotter- and drier-than-normal weather persisted much longer, yields could drop. Margins for dairy and beef producers continued to be tight because of low prices. Hog producers, on the other hand, were doing better because of higher-than-expected prices.