Beige Book Report: Chicago
May 31, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District slowed to a modest pace in April and early May. Respondents' outlooks for growth over the next 6 to 12 months also pulled back some, but remained positive on balance. Employment, business spending, and manufacturing production grew at a moderate rate, while construction and real estate grew modestly and consumer spending decreased slightly. Prices rose modestly. Conditions were little changed in the financial and agricultural sectors.
Employment and Wages
Employment growth remained at a moderate rate over the reporting period, and contacts expected it to continue at this pace over the next six to twelve months. Contacts continued to report that the labor market was tight and that it was difficult to fill positions at any skill level. Hiring was focused on professional and technical, sales, and production workers, and there was an increase in the number of contacts hiring sales and production workers. A staffing firm that primarily supplies manufacturers with production workers reported an increase in billable hours after more than a year of little change. Wage growth was modest overall, with increases more likely for high-skilled occupations. That said, a manufacturing firm that was expanding raised wages for unskilled workers 10% and noted a significant improvement in retention and the quality of applicants. A number of contacts reported a rise in benefits costs.
Prices
Prices again rose modestly overall in April and early May. That said, retail prices changed little in general, though prices fell some at grocery stores. Materials costs were generally little changed over the reporting period, though a number of contacts noted that prices of many commodities were higher than they were six months ago.
Consumer Spending
Consumer spending decreased slightly overall in April and early May. Non-auto retail sales levels were flat, with strong growth in e-commerce balancing out declines for brick and mortar stores. Nevertheless, contacts continued to expect stronger sales in the summer months. Sales of new light vehicles slowed some, and automaker and dealer contacts reported that they had revised down expected sales for the calendar year. In contrast, contacts reported an increase in sales of used vehicles.
Business Spending
Growth in business spending picked up to a moderate pace in April and early May. Many retailers indicated that their inventories were slightly elevated, while a number of auto dealers thought their stocks were much too high. Manufacturing inventories were generally at desired levels, with the exception of those at steel service centers, which continued to be low. Growth in capital expenditures picked up to a moderate pace, and contacts expected growth to continue at a moderate pace over the next six to twelve months. Outlays were primarily for replacing industrial and IT equipment. Shipping volumes increased slightly.
Construction and Real Estate
Construction and real estate activity increased modestly on balance over the reporting period. Residential building rose moderately, led by growth in the single-family segment. The pace of home sales was little changed, but prices increased moderately, as multiple contacts reported a limited supply of homes. Demand for nonresidential construction increased slightly, with improvements concentrated in the industrial sector. The pace of commercial real estate activity also increased slightly, with gains in both the for-lease and for-sale segments. Contacts in the Chicago area believed that the market was cooling some, while a contact in West Michigan indicated that the market was the strongest it has been for some time. Commercial rents edged up, as vacancy rates and the availability of sublease space decreased a bit.
Manufacturing
Manufacturing production again grew at a moderate rate in April and early May, and growth was widespread across sectors. Demand for steel continued to grow at a moderate pace, as contacts reported strong demand from auto manufacturers and improving demand from the energy and heavy machinery industries. Heavy machinery manufacturers themselves reported increased demand, led by the energy sector. Specialty metals manufacturers also reported growing order books, and contacts highlighted new orders from the defense and energy sectors. Manufacturers of construction materials continued to report slow increases in shipments, in line with the pace of improvement in construction. Production in the auto and aerospace sectors was unchanged, but remained at high levels.
Banking and Finance
Banking and financial conditions were largely unchanged over the reporting period. Financial market participants reported stable market conditions and low volatility. Business loan demand was up slightly, credit quality remained strong, and contacts reported declining delinquencies in the oil and gas sector. Consumer loan demand was steady on balance, though credit quality declined slightly. Residential mortgage activity increased, with contacts noting more originations and home equity loans. One contact said that the low supply of homes for sale was leading to increased interest in home construction loans. Credit card volume was steady, though delinquencies ticked up. Auto loan demand declined slightly.
Agriculture
The outlook for crop income was unchanged through April and early May despite wet weather slowing planting in much of the District. Corn and soybean planting was behind the pace of a typical year, and in some areas wet- and cold-spells killed crops that had already been planted. Corn and soybean prices were up slightly. Incomes for dairy farmers deteriorated a bit on balance. Some dairy operations in the District scrambled to find alternative buyers after new restrictions on imports of ultrafiltered milk into Canada cut demand for U.S. milk. Incomes for hog and cattle operations improved as prices increased in spite of ample supply. Michigan fruit growers faced increased uncertainty after a major freeze potentially damaged their plants.