Beige Book Report: Chicago
April 19, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District continued at a moderate pace in late February and March, and contacts expected activity to continue rising at a moderate pace over the next six to twelve months. Employment, wages, and manufacturing production grew at moderate rates, while prices, business spending, and construction and real estate activity increased modestly. Consumer spending was flat, financial conditions were little changed, and lower crop prices put further stress on the agricultural sector.
Employment and Wages
Employment growth continued at 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. The labor market remained tight. Contacts indicated that they were experiencing increased difficulty filling low-skilled positions, though higher-skilled workers were still in highest demand. Some contacts reported a greater willingness to accept less-qualified applicants. Staffing firms again reported little change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. One staffing firm indicated that they were no longer taking orders from clients in any industry offering wages of less than $11 per hour. Wage growth continued at a moderate pace. High-skilled occupations were more likely to be given wage increases, though there were more reports of increases for production workers as well. A number of contacts reported a rise in healthcare costs.
Prices
Prices again rose modestly overall in late February and March. Retail prices increased slightly, though one contact noted that higher freight costs have not yet been passed on to consumers. Metals prices were little changed overall.
Consumer Spending
Consumer spending was flat in late February and March, though contacts expected the pace of sales to pick up in the second quarter of 2017. Contacts noted that above-average temperatures benefitted sales of home improvement items and building materials at the expense of their seasonal businesses. E-commerce activity continued to grow strongly. Our District contacts reported a slightly higher sales pace of new light vehicles despite less generous incentives, with the sales mix continuing to shift toward light trucks. Used vehicle sales also increased.
Business Spending
Growth in business spending slowed to a modest pace in late February and March. Most retailers indicated that inventories were at comfortable levels, though light vehicle inventories were slightly high. Manufacturing inventories were also at desired levels overall, with the exception of stocks at steel service centers, which continued to be low. Growth in capital expenditures slowed to a modest pace, but contacts expected moderate growth 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 on structures.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction rose moderately in recent weeks, and homebuilders also noted that inquiries were up compared with this time last year. Activity was the strongest in the single-family segment. Home sales increased slightly overall. Demand varied by price range, with strong increases for homes under $250,000, modest gains in the $250,000 to $500,000 price range, and a modest decline in demand for homes over $500,000. Demand for nonresidential construction increased slightly, with growth concentrated in the retail, industrial, and office sectors. The pace of commercial real estate activity increased only a little overall, and the gains were limited to the for-lease segment. That said, a number of contacts reported signs of slowing activity, particularly in the retail segment. Commercial rents, availability of sublease space, and commercial vacancy rates were little changed.
Manufacturing
Manufacturing production again grew at a moderate pace in late February and March. Growth was widespread and conditions in some long-struggling sectors improved again. Demand for steel increased to a moderate pace and was stronger than expected. Growth was led by demand from the energy sector and steel service centers, which were in the process of replenishing low inventories. Specialty metals manufacturers also reported higher sales to the energy sector, though contacts noted that efficiency gains in the sector over the last couple of years have resulted in a notable decline in sales volume per barrel of oil produced. Demand for heavy trucks increased moderately. Manufacturers of construction materials continued to report slow increases in shipments, in line with the modest pace of improvement in construction. Activity in the auto and aerospace sectors was unchanged, but remained at high levels.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Market participants reported that equity prices are high and that volatility remains low. Business loan demand increased slightly, with growth concentrated in the small business segment. Loan standards were about the same and asset quality remained high. Consumer loan demand increased slightly. Auto loan demand picked up some, but quality deteriorated slightly. Contacts also reported an increase in credit card spending and that the pace of residential mortgage originations was unchanged.
Agriculture
Lower crop prices put further stress on the agricultural sector. Prices of corn, soybean, and wheat all fell during the reporting period. With profit margins looking to be higher for soybeans than for corn, demand for soybean seeds was high. Recent rains delayed the start of corn planting in portions of the District. Additional delays could hurt yields, and, because soybeans are planted later in the season, could further shift the crop mix toward soybeans. Expectations of low incomes for 2017 led to lower farmland values and cash rents for cropland compared with last year. However, land values for higher quality ground and recreational tracts were steady on balance. Milk and hog prices were lower, while egg and cattle prices moved up. Expectations of falling milk prices and rising feed costs led more dairy operations to lock in margins.