Beige Book Report: Chicago
September 7, 2016
Growth in economic activity in the Seventh District picked up to a moderate pace in July and early August, and contacts expect growth to remain moderate over the next six to twelve months. Business spending and manufacturing production grew at a moderate rate, construction and real estate activity increased slightly, and consumer spending was little changed. Financial conditions improved modestly and cost pressures continued to be mild. Forecasts for a record harvest pushed down crop prices, weighing further on farm income expectations.
Consumer Spending
Growth in consumer spending slowed notably over the reporting period with most segments reporting little change in sales in spite of an increase in the intensity of promotions. Contacts also expected growth in back-to-school sales to be much slower than last year. The tourism industry continued to perform well, with moderate increases in room rates and revenues, even as room supply increased. Sales of new and used light vehicles slowed some, but remained strong, as dealers continued to outperform their expectations for the year. Motor vehicle sales incentives were a bit more generous than during the previous reporting period. In addition, one contact indicated that fleet sales were helping to maintain the strong overall sales pace.
Business Spending
Growth in business spending picked up to a moderate pace in July and early August. Retail inventories were somewhat higher than desired because of softer sales, while manufacturing inventories were generally at desired levels. Current capital expenditures picked up to a moderate pace, as did expectations for future spending. The increase in outlays was primarily for replacing industrial and IT equipment. Spending on expansion declined some, particularly among manufacturing firms. Hiring continued at a modest rate, though contacts expected it to strengthen to a moderate pace in the next six to twelve months. Many contacts noted that the labor market continues to tighten. Demand remained strong for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. Contacts also indicated that competition was growing for lower-skilled workers. Staffing firms again reported no change in billable hours and difficulty filling orders at the wages employers are willing to pay. Demand for electricity increased slightly, led by residential and large industrial customers. Shipping volumes again declined.
Construction and Real Estate
Construction and real estate activity increased slightly on balance over the reporting period. Residential construction increased slightly, with growth primarily coming in the single-family segment. The overall pace of home sales also picked up slightly, with the strongest reported growth in the single-family segment in urban locations. Activity varied by price range: sales grew strongly for homes under $250,000, picked up a bit for homes between $250,000 to $500,000, but changed little for homes over $500,000. Home prices rose slightly overall, though prices of homes above $500,000 declined. Demand for nonresidential construction picked up some. One contact noted that while demand for private construction is growing in most segments, public construction is at historically low levels. Commercial real estate activity increased slightly, particularly in the for-lease market and retail segment. Commercial rents inched up, vacancy rates decreased a little, and the availability of sublease space changed little.
Manufacturing
Growth in manufacturing production picked up to a moderate pace in July and early August. Activity continued to be strong in autos and aerospace, and increased in most other industries. Growth in steel demand was steady, and declining imports (reflecting in part recently imposed duties on steel imports for some countries) helped domestic producers gain market share. Heavy machinery manufacturers reported moderate declines in demand resulting from dealer inventory reductions and a large supply of used equipment. Demand for specialty metals increased slightly on balance with results depending on the industry supplied: auto and aerospace demand was steady, while demand from the heavy machinery and oil and gas industries continued to be very weak. Manufacturers of construction materials again reported slow but steady growth in shipments, in line with the pace of improvement in construction.
Banking and Finance
Financial conditions improved modestly over the reporting period. Financial market participants noted higher equity prices and low levels of volatility. One contact indicated that impending regulatory changes for institutional money market mutual funds had led to large withdrawals from the funds, pushing up short term interbank lending rates. Loan demand from small and middle market businesses grew modestly, and one contact said that there was a good pipeline of new business loans. Another contact noted increased interest from transportation firms in borrowing for capital expenditures. Demand for commercial real estate loans ticked up. Consumer loan demand increased slightly. Lower mortgage rates led to increases in mortgage originations and refinancing, and residential loan quality improved slightly. Credit card balances were little changed. Auto loan demand continued to be strong, but lenders expressed concern that the current pace of sales was unsustainable.
Prices and Costs
Cost pressures were unchanged, remaining mild in July and early August. Most energy and metals prices were flat and stayed low. Retail prices changed little, on balance. Wage pressures were steady overall, with greater pressure for high-skilled occupations than for low-skilled occupations. Non-wage labor costs were little changed.
Agriculture
Already low expectations for farm incomes deteriorated over the reporting period as the potential for a record national harvest pushed prices down further. District corn and soybean growing conditions were better than a year ago (with the exception of Michigan), and the U.S. Department of Agriculture (USDA) forecasted near record yields for corn and soybeans for most District states. Corn and soybean prices moved lower, although soybean prices remained above last year's level. Strong supplies also resulted in declines for wheat, egg, dairy, hog, and cattle prices. The USDA announced limited purchases of dairy and egg products to help address excess supplies.