Beige Book Report: Chicago
July 12, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District picked up to a moderate pace in late May and June and respondents' outlooks for growth over the next 6 to 12 months also improved some. Prices rose modestly. Employment, business spending, and manufacturing grew at moderate rates, while consumer spending and construction and real estate activity increased modestly. Conditions were little changed in the financial and agricultural sectors.
Employment and Wages
Employment growth continued at a moderate rate over the reporting period, and contacts expected it to continue at that pace for the next 6 to 12 months. Contacts indicated that the labor market was tight and that it was generally harder to fill high-skilled positions than low-skilled positions. Hiring was focused on professional and technical, sales, and production workers, and there was an increase in the number of contacts hiring sales workers. A staffing firm that primarily supplies manufacturers with production workers reported a slight decline in billable hours. Wage growth was modest overall, with increases more likely for high-skilled occupations. A number of contacts with union workers reported wage increases that were well above inflation. Many contacts said that the cost of benefits increased.
Prices
Overall, prices again rose modestly in late May and June. Retail prices increased slightly, with the exception of gasoline and food prices, which declined a bit. Materials costs were little changed overall and freight costs were up slightly.
Consumer Spending
Consumer spending increased modestly over the reporting period. Non-auto retail sales were up modestly, with growth in the building materials, gardening equipment, food and beverage, and personal care segments. Tourism and entertainment contacts reported that the seasonal pickup in activity was proceeding as expected. The pace of auto sales changed little on net, with reports of a pickup in May followed by a slowdown in June. Used-vehicle sales were steady. Contacts indicated that low fuel prices continued to shift the vehicle mix toward light trucks and away from cars. Low fuel prices also helped spur increased sales of recreational vehicles.
Business Spending
Growth in business spending remained at a moderate pace in late May and June. Retail inventories generally were at comfortable levels, although stocks appeared high for certain models of autos. Manufacturing inventories were at comfortable levels overall, though inventories at steel service centers remained low. Growth in capital spending continued at a moderate pace, and contacts expected growth to continue at that pace for the next 6 to 12 months. Outlays were primarily for replacing industrial equipment, IT equipment, and renovating structures, though there was an increase in the number of contacts reporting spending for expansion. Demand for electricity was little changed and shipping volumes increased slightly.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction increased slightly across home types and locations. Home sales increased a bit and house prices increased modestly on balance. Demand varied by price range, with strong demand and tight inventories for homes under $500,000 and modest demand and abundant inventories for houses over $500,000. Nonresidential building changed little. A highway construction contractor in Illinois reported that they would stop work on all state-funded projects at the beginning of July because the state does not have a budget and that they have already laid off some workers who were preparing for new projects. The pace of commercial real estate activity remained strong and even picked up a bit, led by gains in the industrial sector. Activity was especially strong in West Michigan, and a contact there reported that activity had increased moderately over the reporting period. Commercial rents edged up, as vacancy rates and the availability of sublease space decreased slightly.
Manufacturing
Manufacturing production continued to grow at a moderate rate in late May and June. Growth in steel production remained at a moderate pace, as increased demand from the energy and machinery industries offset softer demand from the auto industry. Heavy machinery manufacturers themselves reported increased demand, driven by the energy and mining sectors, particularly from overseas customers. Heavy truck manufacturers also reported a pickup in demand. Sales for specialty metals manufacturers increased overall, with greater demand coming from the aerospace, energy, and defense sectors. That said, some contacts noted that recent growth had been uneven, which raised concerns about future sales prospects. Production in the auto sector declined some, but remained at a solid level.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Financial market participants noted that volatility continues to be low. Business loan demand ticked up overall, and there was little change in loan standards or quality. Contacts reported an increase in demand for capital equipment and real estate loans. Demand for consumer loans was little changed on balance. Home loan volume rose faster than the usual spring seasonal pattern and pricing was little changed. Home loan quality remained strong. Demand for auto loans decreased slightly and there was no notable change in quality.
Agriculture
The agricultural sector continued to operate under stress in late May and June, with reports of some crop and dairy operations exiting or filing for bankruptcy. Crop conditions and maturity lagged that of last year's bumper crop, but the overall harvest is still expected to be around trend. Contacts expected a smaller corn harvest than last year, but there is a small chance that the soybean harvest will be larger because the wet spring led some farmers to switch acreage from corn to soybeans. Hog prices moved up, but cattle prices dropped. Milk prices were lower, which contributed to mounting losses for many dairy operations.
For more information about District economic conditions visit: www.chicagofed.org/publications/cfsbc