Beige Book Report: Chicago
November 29, 2017
Summary of Economic Activity
Economic activity in the Seventh District increased slightly in October and early November, but contacts expected growth to accelerate to a moderate pace over the next 6 to 12 months. Employment and manufacturing production increased modestly, while consumer spending, business spending, and construction and real estate activity increased slightly. Wages rose modestly and prices rose slightly. Financial conditions were little changed. Crop yields were below last year's record.
Employment and Wages
Employment growth continued at a modest pace over the reporting period, and contacts expected it to continue at that rate over the next 6 to 12 months. Contacts continued to indicate that the labor market was tight and reported difficulty filling positions at all skill levels. A manufacturing firm reported turning down business because it was unable to find qualified workers. To address the challenge of finding qualified workers, firms reported that they were raising compensation, increasing advertising for positions, and training less-qualified new hires. Hiring was focused on professional and technical, sales, and production workers. That said, a staffing firm that primarily supplies manufacturers with production workers reported little change in billable hours. Wage growth remained modest overall. Contacts raising wages were more likely to do so for select roles than for all workers. Wage increases were more prevalent for professional and technical, sales, and production workers. There was also a notable increase in the number of firms reporting wage increases for management positions.
Prices
Overall, prices increased slightly in October and early November. Retail prices were little changed for most categories of spending. A number of contacts again reported increases in costs for raw materials, particularly construction materials. Most firms reported rising benefits costs.
Consumer Spending
Consumer spending increased slightly over the reporting period. Non-auto retail sales were up slightly, with gains reported in the furniture, electronics, entertainment, and food and beverage sectors, but declines reported in the apparel sector. A contact noted that Halloween sales were stronger than expected and that this was a positive indicator for the holiday season. New light vehicle sales in the District moved down. One dealer indicated that the decline was concentrated in the high-end segment. Used vehicle sales were little changed.
Business Spending
Business spending increased slightly in October and early November. Retail and manufacturing contacts indicated that inventories were generally at comfortable levels. Capital spending increased slightly, and contacts expected spending to increase modestly over the next six to twelve months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures, though there was again an increase in the number of contacts reporting spending for capacity expansion. Demand for residential, commercial, and industrial energy was flat, as a slight increase in the number of commercial hook-ups was offset by improvements in customers' energy efficiency. Demand for transportation services increased moderately.
Construction and Real Estate
Construction and real estate activity increased slightly on balance over the reporting period. Residential construction edged higher. In the low-priced single-family segment, contacts indicated that few large-scale developments were in progress, and that only large developers with good credit were undertaking these projects. Home sales were flat in recent weeks as low inventory levels in the starter home segment continued to constrain sales. There were reports that starter homes were receiving multiple offers and closing well above asking prices. In contrast, sales of high-priced homes lagged. Home prices edged higher overall, but varied by price level: prices increased noticeably for homes under $250,000, modestly for homes between $250,000 and $500,000, and were down slightly for homes over $500,000. Nonresidential construction increased slightly, with growth spread across market segments. Commercial real estate activity also increased slightly and was at a strong level. That said, demand for large brick and mortar retail space continued to fall from an already low point. Commercial rents and vacancy rates edged lower, but the availability of sublease space edged higher.
Manufacturing
Growth in manufacturing production continued at a modest pace in October and early November. Activity in the auto and aerospace sectors picked up slightly. Steel production was little changed but remained at a healthy level. Demand for heavy machinery increased steadily, with growth spread across the construction, mining, and utilities sectors. One contact indicated that exports to Canada were artificially high as stricter regulations on emissions that begin in 2018 pulled sales into late 2017. Order books for specialty metals manufacturers increased modestly, with growth spread across a wide variety of sectors. Manufacturers of construction materials continued to report slow but steady increases in shipments, in line with the pace of improvement in construction.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Market participants noted that volatility continued to be low. Business loan volume was flat and loan quality was unchanged. Consumer loan volume was also little changed on balance. Demand for both home and auto loans edged down, with contacts noting an uptick in delinquencies in auto loan payments. An auto dealer reported that credit had tightened noticeably for buyers with credit scores at the lower end of the subprime category. Credit card volume increased slightly and quality was unchanged.
Agriculture
Crop yields in the District were below last year's record. Widespread rains slowed the harvest, but helped areas that had been experiencing drought conditions. With both corn and soybean prices lower than a year ago, farm revenues were expected to be down. Contacts indicated that some crop operations would be unable to cover their expenses, which led to a deterioration in agricultural credit conditions and spurred sales of assets to cover losses. In some cases, higher livestock income helped offset crop losses. Hog and cattle prices moved up during the reporting period, leading to plans for expanded production. Milk prices were lower, but cheese prices stayed high.
For more information about District economic conditions visit: chicagofed.org/cfsbc