Beige Book Report: Chicago
March 01, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District picked up to a moderate pace in January and early February, and contacts expected activity to continue rising at a moderate pace over the next six to twelve months. Employment, wages, business spending, and manufacturing production all grew at moderate rates, consumer spending increased modestly, and construction and real estate activity rose slightly. Financial conditions were little changed, prices increased modestly, and farm incomes improved slightly.
Employment and Wages
Employment growth picked up to a moderate rate over the reporting period, and contacts expected it to continue to rise at a moderate rate over the next six to twelve months. Contacts continued to indicate that the labor market is tight and that they are experiencing difficulty filling positions at all skill levels. A staffing firm again reported little change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. Wage growth remained at a moderate pace. Some contacts noted larger wage increases for high-skilled occupations, while a number indicated that they raised wages nearly equally for all employees. Many contacts also reported rising healthcare costs.
Prices
Overall, prices rose modestly in January and early February. Despite reports of heavy promotional activity, retail prices generally increased modestly. Most metals prices rose again, and an increasing number of firms reported that rising materials costs were leading them to increase their prices.
Consumer Spending
Growth in consumer spending remained modest over the reporting period, with sales results weaker than expected. Contacts reported stronger sales in the food and beverage, health and personal care, and general merchandise sectors and weaker sales in the apparel, grocery, and e-commerce sectors. Light vehicle sales slowed somewhat, but the pace was still strong and incentives remained aggressive. Used vehicle sales held steady.
Business Spending
Growth in business spending continued at a moderate pace in January and early February. Most retailers indicated that inventories were at comfortable levels. Manufacturing inventories were also at desired levels overall, though steel service center inventories were very low. Capital expenditures grew at a moderate pace, and contacts expected that pace to continue over the next six to twelve months. Outlays were primarily for replacing industrial and IT equipment, though there was an increase in the number of firms reporting spending for expansion.
Construction and Real Estate
Construction and real estate activity increased slightly on balance over the reporting period. Residential building increased slightly, with growth concentrated in the single-family segment and in urban locations. Home sales increased modestly, while home prices increased slightly. Demand for nonresidential construction edged up, with growth concentrated in the industrial and infrastructure sectors. The pace of commercial real estate activity continued to be robust and even quickened some, with growth in both the for-sale and for-lease segments. One contact noted that banks continue to be conservative about lending in the sector. Commercial rents, availability of sublease space, and commercial vacancy rates were little changed.
Manufacturing
Manufacturing production again grew at a moderate pace in January and early February. Growth was widespread across sectors, and even picked up for some long-struggling sectors. Specialty metals manufacturers reported increased shipments and steady growth in order books. Demand for steel remained modest, but there were early signs of a pickup as steel service centers began to replenish low inventories. Heavy machinery manufacturers reported an increase in sales overall, with slow but steady improvements in construction demand outweighing weak agricultural demand. Manufacturers of construction materials also reported slow increases in shipments, in line with the modest pace of improvement in construction. Activity in the autos and aerospace sectors slowed some but remained at a high level.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Market participants again reported steady growth in equity prices and low volatility. Loan volumes to middle-market businesses increased slightly, which contacts attributed to refinancing in anticipation of higher interest rates rather than an increase in underlying demand. Contacts reported low delinquency rates, with the exception of the energy and agriculture sectors. Consumer loan demand was little changed overall, though one contact reported an increase in auto loans. An auto dealer also expressed concerns that standards were loosening further for sub-prime auto financing. Credit card volume was steady and delinquencies were up a bit.
Agriculture
Prospects for farm income in 2017 improved slightly in January and early February, although the agricultural sector continued to operate under stress. Futures prices moved up enough so that – given expected costs – some corn and most soybean operations could lock in small profits for 2017. With profit margins looking to be higher for soybeans than for corn, contacts expected a shift in the mix of planting this year, with one reporting an attendant pickup in sales of soybean seeds. Cattle, dairy, and hog operations all benefitted from price increases.