Beige Book Report: Chicago
September 6, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District slowed to a modest pace in July and early August, and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment, consumer spending, business spending, and manufacturing production all grew at modest rates, while construction and real estate activity increased slightly. Wages and prices rose modestly. Conditions were little changed in the financial sector and worsened some in the agricultural sector.
Employment and Wages
Employment growth slowed to a modest rate over the reporting period, and contacts expected it to continue at that pace over the next 6 to 12 months. Contacts indicated that the labor market was tight and reported difficulty filling positions at all skill levels. Hiring was primarily focused on professional and technical, sales, and production workers, though there was an increase in the number of contacts hiring management and administrative workers. A staffing firm that supplies firms with IT workers said growth was strong, while a staffing firm that primarily supplies manufacturers with production workers reported a slight decline in billable hours. Wage growth was modest overall, with wage increases more likely for high-skilled occupations. Many contacts said that the cost of health insurance had increased.
Prices
Overall, prices again rose modestly in July and early August. Retail prices increased slightly, with the exception of grocery prices, which were flat after a period of steady declines. There were multiple reports of rising prices for older used cars. Many manufacturers noted an increase in raw materials costs. One manufacturing contact indicated that persistent rail delivery delays were forcing them to use more costly modes of transportation.
Consumer Spending
Consumer spending increased modestly over the reporting period. Non-auto retail sales rose slightly, led by improvements in the furniture, building materials, food and beverage, and health and personal care segments. Grocery store sales were little changed overall, though contacts reported that there was growth in delivery and pickup services. Auto dealers across the District reported a moderate increase in sales. The vehicle mix continued to shift from cars to light trucks, led by increased sales of crossover vehicles. The pace of used vehicle sales was up modestly on balance.
Business Spending
Growth in business spending slowed to a modest pace in July and early August. Retail inventories were slightly higher than desired. Manufacturing inventories were at comfortable levels overall, though a surge in steel imports led to elevated inventories at service centers. Growth in capital spending slowed to a modest 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.
Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction increased modestly, with growth concentrated in the single-family segment and suburban locations. Home sales increased modestly overall, with contacts across the District indicating that low inventories of single-family starter homes were holding back growth. Growth varied by price point, with a slowdown in sales of homes under $250,000 and a pickup in sales of homes over $250,000. Growth also varied by location, with reports of a moderate increase in the Chicago area and a slight slowdown in the Detroit area. Home prices were up slightly overall. Nonresidential construction was little changed, though one contact noted decreasing demand from automotive suppliers for building new manufacturing facilities. Commercial real estate activity remained strong, edging up further on balance over the reporting period. Commercial vacancy rates declined slightly and both commercial rents and the availability of sublease space changed little.
Manufacturing
Manufacturing production growth slowed to a modest pace in July and early August. Steel production grew modestly (with increases in both domestic and international demand), and heavy machinery picked up some as well, with contacts from both sectors reporting increased demand from the energy sector. Sales for specialty metals manufacturers increased a bit, with contacts highlighting growth in the energy, aerospace, and defense sectors. Manufacturers of construction materials reported slow but steady growth in line with the pace of improvement in the construction sector. Demand for heavy trucks increased moderately, while demand for autos declined slightly.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Financial market participants noted that equity prices remain high and volatility remains low. Business loan demand slowed some, particularly from middle-market firms. The slowdown led to reports of increased competition between banks for customers and greater pressure on loan pricing and terms. In spite of lower volumes overall, contacts reported increased demand for capital equipment loans. Consumer loan demand increased slightly on balance. Demand for home and auto loans increased slightly and quality for both was little changed.
Agriculture
A lack of rainfall in July and early August hurt crops in much of Iowa and parts of Illinois and Indiana. Crop conditions and maturity lagged that of last year's bumper crop, to the point that contacts expected the corn harvest to be below trend and the soybean harvest to be at about trend. Corn and wheat prices fell, while soybean prices were flat. Given current prices, some operations will be able to make crop insurance claims and take advantage of government support programs. Dairy prices moved higher, reportedly easing losses for dairy operations. Hog and cattle prices were down, but prices were still high enough for many operations to be able to turn a profit. In addition, contacts expected that the opening of a pork processing plant in Michigan would lead to greater demand for hogs in the region.
For more information about District economic conditions visit: chicagofed.org/cfsbc